Technology, considered as a factor of production, has virtually been adopted in all sectors of the economy in order to enhance productivity, enlarge market reach, and reduce operational costs. The adoption of technology is demonstrated by the spread of broadband connectivity in businesses, which in almost all countries of the Organisation for Economic Co-operation and Development (“OECD”) is universal for large enterprises and reaches 90% or more even in smaller businesses.
By Ramon Tomazela Santos (Partner, Mariz de Oliveira e Siqueira Campos Advogados)
The government intends to exempt only those entities that provide legal advice.
The suspension of DAC 6 reporting obligation applies both to domestic and cross-border tax arrangements.
India’s Union Budget for the fiscal 2020-21 was announced in February 2020 and the tax proposals, after undergoing some important changes, were approved by the Indian Parliament and received Presidential assent on March 27, 2020. With this, the annual exercise of amending India’s tax law was completed, and the tax changes are effective from April 1, 2020.
On the tax front, some significant amendments have been made – such as widening the scope of digital tax, abolition of dividend distribution tax, more stringent tax residency rules for non-resident Indians etc.
We have analyzed here the key international tax changes impacting non-residents (MNEs and others having Indian business or nexus).
The Guidance notes that it is unlikely that the COVID-19 situation will create any changes to an entity’s residence status under a tax treaty.
On February 11, 2020, the OECD released its Final Report, Transfer Pricing Guidance on Financial Transactions, (Final Guidance), which was simultaneously incorporated into the OECD Transfer Pricing Guidelines. With respect to inter-company loans, the new Chapter X of the Transfer Pricing Guidelines is not limited to considerations for interest rate pricing, but also includes a framework for assessing the instrument’s accurate delineation as debt. Going forward, taxpayers with lenders or borrowers in OECD countries should consider this new guidance and augment their documentation accordingly. Below are some of the items that these taxpayers should consider to offer a proactive defense of potentially scrutinized areas.
Chapter X is intended to provide guidance for OECD countries that choose to apply accurate delineation under Chapter 1 to determine debt characterization for federal income tax purpose. Para 10.12 of Chapter X includes a list of characteristics that “may be useful indicators” of the accurate delineation of advances of funds, including but not limited to a fixed repayment date, the obligation to pay interest, and enforcement rights of the lender. Taxpayers should ensure that inter-company loans have robust and legally binding agreements that articulate these relevant characteristics. These characteristics should also be emphasized in the loan documentation both in terms of form and substance. In other words, the taxpayer should make sure behavior is aligned and well documented such that these characteristics are not just labels/descriptions. Robust documentation on these characteristics and associated behaviors may be a general best practice even in the context of alternative debt characterization frameworks.
Debt Capacity Analysis
Chapter X suggests that a borrower’s ability to bear the amount of debt, based on good faith projections, is also an important consideration for debt characterization. It provides a specific example wherein an economic analysis demonstrates that a borrower would be unable to service the purported loan, in which case, the maximum amount that the borrower could service would be treated as debt for federal income tax purposes and the remainder would be recharacterized.
An economic analysis, such as a cash flow analysis presenting the projected ability to make ongoing payments and repay (or refinance) the principal, can be useful to avoid such recharacterization.
Chapter X notes that business strategies are a consideration for accurately delineating financial transactions and implies that the context of the financing (e.g., business purpose, industry standards) can have bearing on debt characterization. An example describes an entity that takes out a ten-year intercompany loan for short-term working capital needs, even though the multinational group usually addresses working capital needs using a one-year revolver. In this example, the borrower’s ten-year loan could be recharacterized as a one-year revolver, with the corresponding interest rate adjusted accordingly.
Taxpayers documenting intercompany loans should consider including a description of the context and business purpose of the loan to support the appropriateness of the purported characterization. Adding this detail could be especially important if the loan at issue differs from the general business policy or the terms of third-party debt of the multinational.
To accurately delineate a financial transaction, Chapter X highlights the necessity of a functional analysis to document the functions performed, assets used, and risks assumed by the parties. This largely entails a description of the decision-making process that both the lender and borrower undertook in deciding to enter into the subject transaction, given reasonable alternatives. For a lender this could mean analyzing the borrower’s creditworthiness and for the borrower this could mean supporting that a specific debt amount was optimal given their funding needs and financial standing. Crucially, if the lender is deemed to not be the entity that makes financing decisions (e.g., if these are made by a central treasury group), guidance suggests that the lender could be entitled to no more than a risk-free return.
While it is our experience that documentation on financial transactions has historically been “light” on functional analysis, the new guidance stresses the importance of the functional analysis for both accurate delineation and pricing.
Chapter X notes that the impact of implicit support should be a matter of judgment based on factors such as the relative importance of the entity to the multinational group. To the extent that an interest rate (or guarantee fee) is tied to a specific credit rating, taxpayers should consider documenting how implicit support was considered and the reasons why the assumed impact of implicit support (or lack thereof) is appropriate.
While Chapter X does not set specific documentation expectations, the above are some of our takeaways on how taxpayers can augment their documentation in light of the new financial transactions guidance.
The Government is introducing from April 1, 2020, a new two percent digital services tax on the revenues earned by certain digital businesses.
By Géry Bombeke (Partner, Baker McKenzie, Brussels)
Global law firm White & Case LLP has hired Will Smith as a partner in the firm’s London office.
Emily Clark has joined corporate law firm Travers Smith LLP as head of tax.
Comments must be received by May 27.
The new treaty will be effective from January 1, 2021.
Julia McCullagh has joined BDO LLP’s London office as Partner, International Corporate Tax.
The Budget proposes to restrict net interest expense deductions to 30% of earnings for assessment years starting January 1, 2021.
The reports highlight how well these jurisdictions are implementing BEPS Action 14 minimum standard on making tax treaty dispute resolution more timely, effective, and efficient.
International Tax Authority informs BVI Constituent Entities, that are part of Multinational Entity Group, that it will soon be ready to receive filings for CbC reporting.
The report would include CbC financial filings for the information, including profits, taxes, employees, and tangible assets – that these corporations already provide to the IRS on an annual basis.
The corrections are effective on February 19, 2020, and apply from December 6, 2019.
The definition of “significant global entity” to include members of large business groups headed by private companies, trusts, partnerships, investment entities, and individuals.
The OECD analysis shows that Pillar Two could raise a significant amount of additional tax revenues.
The report contains guidance on how the accurate delineation analysis applies to the capital structure of an MNE within an MNE group.
Comments must be received by March 6, 2020.
The “safe harbour” issue is included in the list of remaining work, but a final decision on this issue will be deferred until the architecture of Pillar One has been agreed upon.
Between 2019-2020, HMRC secured GBP 480 million through DPT investigations.
The webcast will be held on January 31, 2020, at 14:00-15:00 (CET).
The BEPS MLI will enter into force for these two countries on May 1, 2020.
The deadline for filing country-by-country reports and master files is December 10-23, 2020.
The BEPS MLI will enter into force for Liechtenstein on April 1, 2020.
The tax treaty applies from January 1, 2020.
The revised transfer pricing reporting threshold for 2020 is DOP11,552,402.
The additional interpretative guidance contains complete set of guidance concerning the interpretation and operation of BEPS Action 13 issued so far.
The OECD on December 23, 2019, released additional interpretative guidance on country-by-country (CbC) reporting.
The guidance is aimed at providing greater certainty to tax administrations and MNE Groups on the implementation and operation of CbC reporting requirement as culminated from the OECD’s work on base erosion and profit shifting (BEPS) Action 13.
It is clarified that, under the BEPS Action 13 minimum standard, the automatic exchange of CbC reports filed under local filing rules is not intended.
The December 23 document contains complete set of guidance concerning the interpretation and operation of BEPS Action 13 issued so far. The document will continue to be updated.
In addition, a summary of CbC reporting notification requirements in BEPS Inclusive Framework member jurisdictions has been posted on the OECD website. The summary is aimed at helping MNE Groups in complying with notification requirements in different jurisdictions where they have constituent entities.
By Professor William Byrnes (Texas A&M University School of Law)
The OECD will hold a public consultation meeting on December 9.
French Finance Minister, Bruno Le Maire, termed the US’ proposed action as unacceptable.
The Commission may bring the cases before the Court of Justice of the EU if Austria and Ireland do not act by February 1, 2020.
The tax treaty and Protocol implement the BEPS minimum standards to tackle tax planning strategies that exploit gaps and mismatches in tax rules.
Earlier in July 2019, the US Trade Representative opened an investigation into whether the French DST is discriminatory in nature and harms US’ interests.
The tax treaty will enter into force after both countries have completed their respective internal procedures.
Comments must be received by December 16, 2019.
The paper highlights the marked rise in corporation tax receipts and corporate profitability since 2014.
Any proposed tax must be levied on profits and not revenue, Amazon’s Vice President (Global Tax), Kurt Lamp, said.
Comments must be received by December 2.
The protocols contain an anti-abuse clause.
The additional interpretative guidance will help MNE Groups in avoiding common errors made in preparing CbC reports.
Comments must be received by November 12, 2019.
For Denmark the BEPS MLI will enter into force on January 1, 2020.
By Ricardo Rendón (Partner, Chevez, Ruiz, Zamarripa y Cía, S.C., Mexico)
On September 8, 2019, the Executive Branch of the Mexican Government submitted to the Congress Tax Reform for 2020, which includes key tax changes to the country’s tax law primarily inspired by the OECD’s base erosion and profit shifting (BEPS) project.
By Catherine O’ Meara (Partner, Matheson, Dublin)
The Irish Government recently published a Transfer Pricing Rules Feedback Statement, which confirms that changes to the country’s transfer pricing rules and their implementation are forthcoming.
The rulings practically resulted in over 50 percent and in some cases up to 90 percent of those companies’ accounting profit being tax exempt.
According to the statistics, transfer pricing cases continue to take more time with average time being approximately 33 months (30 months in 2017).
Comments must be received by October 4, 2019.
Gurría also described the delivery of the OECD’s BEPS package in 2015 as one of the two “big bang” developments that transformed the global tax landscape in recent years.
Japan and Peru have “in principle” agreed to conclude a tax treaty.
Amazon is a major UK employer and currently employs over 27,500 UK people. The company said that this number would increase to over 29,500 this year.
The tax authority is considering whether to appeal the decision.
The review reveals that countries have largely adopted their domestic CbC reporting rules in line with the BEPS Action 13 minimum standard.
The proposals would be included in Finance Bill, 2019 and, if enacted, would apply for chargeable periods commencing January 1, 2020.
Mandatory binding arbitration clause is included in the tax treaty protocols to resolve tax treaty disputes.
The BEPS MLI will enter into force in both countries on December 1, 2019.
While members of the Inclusive Framework on BEPS did not yet agree on the conclusions, they committed to work together to deliver a final report in 2020, with an update in 2019
Members of the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) today adopted a work plan setting out a process for reaching a new global agreement on addressing tax challenges posed by the digital economy.
The work plan explores the technical issues relating to digital economy taxation to be resolved through the two main pillars.
The first pillar will explore potential solutions for determining where tax should be paid and on what basis (nexus), as well as what portion of profits could or should be taxed in the jurisdictions where clients or users are located (profit allocation).
Three proposals have been articulated in particular: the user participation proposal, the marketing intangibles proposal, and the significant economic presence proposal.
These proposals allocate more taxing rights to the market jurisdictions in situations where value is created by a business activity through (possibly remote) participation in that jurisdiction that is not recognized in the current framework for allocating profits, the report notes.
Further, these proposals contemplate the existence of a nexus in the absence of physical presence, contemplate using the total profit of a business, contemplate the use of simplifying conventions (including those that diverge from the arm’s length principle) to reduce compliance costs and disputes, and would operate alongside the current profit allocation rules, the report adds.
The second pillar pertains to the design of a system to ensure that MNEs pay a minimum level of tax. This pillar would provide countries with a new tool to protect their tax base from profit shifting to low or no-tax jurisdictions, and is intended to address remaining issues identified by the BEPS project.
The report confirms that members of the Inclusive Framework on BEPS agree that any rules developed under this Pillar should not result in taxation where there is no economic profit, nor should they result in double taxation.
While members of the Inclusive Framework on BEPS did not yet agree on the conclusions to be drawn, they committed to continue working together to deliver a final report in 2020 aimed at providing a consensus-based long-term solution, with an update in 2019, the report notes.
The work plan was approved during the May 28-29 plenary meeting of the Inclusive Framework on BEPS, which brought together 289 delegates from 99 member countries and jurisdictions and 10 observer organizations.
OECD Secretary General Angel Gurría said: “Important progress has been made through the adoption of this new ‘Programme of Work,’ but there is still a tremendous amount of work to do as we seek to reach, by the end of 2020, a unified long-term solution to the tax challenges posed by digitalization of the economy.”
“Today’s broad agreement on the technical roadmap must be followed by a strong political support toward a solution that maintains, reinforces, and improves the international tax system. The health of all our economies depends on it.”
The author is Alex Hunter, Editor, TP News. He oversees and updates the publication and also regularly writes news stories about transfer pricing and international tax law. Alex is reachable at firstname.lastname@example.org
On July 4, 2018, Hong Kong’s Inland Revenue Department passed the country’s final Inland Revenue (Amendment) (No. 6) Bill 2017, (the Amendment Bill).
This Amendment Bill (which became law on July 13, 2018) specified the documentary requirements from a transfer pricing perspective and also introduced measures to address various recommendations under BEPS Action Plans.
Austria proposes to impose a five percent digital tax to close tax loopholes and ensure that large digital corporations are called to account.
For Georgia the BEPS MLI will enter into force on July 1, 2019.
Armenia has newly joined the OECD’s Inclusive Framework on base erosion and profit shifting.
For Ireland, the BEPS MLI will enter into force in May 2019.
Hong Kong Inland Revenue Department has clarified that starting from April 2019, the Department will not accept voluntary filing of a country-by-country (CbC) report for an accounting period ended on or before March 31, 2018.
The treaty protocol provides for a low withholding tax rate of five percent for royalty and interest payments. An arbitration clause is also included to increase legal certainty for taxpayers.
The Commission is looking into five tax rulings issued by the Dutch tax authority to Nike group companies in the Netherlands between 2006 to 2015.
In India, the 2016 Finance Act introduced a three-tiered transfer pricing documentation regime with a view to aligning the Indian transfer pricing documentation rules with Action 13 of the OECD’s base erosion and profit shifting (BEPS) project.
Accordingly, Indian subsidiaries of multinational groups were required to comply with new “master” and “local” files requirements and a new country-by-country reporting requirement from the 2016-17 financial year.
The treaty will be effective from April 1, 2019.
By Anas Salhieh (Senior Tax Executive, Al Tamimi & Company, Riyadh, Saudi Arabia)
Saudi Arabia’s General Authority for Zakat and Income Tax has published for public comments draft transfer pricing bylaws as part of the Kingdom of Saudi Arabia’s commitment to the OECD’s base erosion and profit shifting (BEPS) project.
The new anti-abuse measures entered into force on January 1, 2019.
The BEPS MLI will enter into force for Singapore on April 1, 2019.
Gibraltar must recover unpaid taxes of around EUR100m from companies that benefited from the corporate tax exemption regime for interest and royalties as well as from the five tax rulings.
In the 2015-16 income year, the estimated tax gap for large corporate taxpayers was 4.4 percent, as compared to 5.8 percent tax gap in the 2014-15 income year.
The OECD has made 60 jurisdiction-specific recommendations on issues such as improving the timeliness of the exchange of information and ensuring that exchanges of information are made with respect to preferential tax regimes that apply to income from intellectual property.
By Elizabeth Sidi (Senior Tax Consultant, PwC, Bulgaria)
Bulgaria is introducing new interest limitation rules and a new controlled foreign corporation regime from January 1, 2019.
Important process of ratifying the BEPS MLI is on. In 2019-2020, the provisions will come into effect, says Akhilesh Ranjan.
The legislation is intended to enter into force in July 2019.
According to IMF Chief Christine Lagarde, governments should figure out a world-wide answer on tax.
The legislation seeks to incorporate the OECD’s proposals under Action 5 of the base erosion and profit shifting (BEPS) project, on countering harmful tax practices, as well as the new EU substance requirements.
On November 27, 2018, Ireland’s Finance Minister Paschal Donohoe announced the details of a Competent Authority Agreement between Ireland and Malta (Agreement). The clear aim of the Agreement is to end what is referred to as the “Single Malt” tax structure.
France and Germany urged the EU Council to adopt the proposed digital services tax by March 2019.
By Bram Markey (Director, Transfer Pricing, PwC Belgium)
The Belgian tax authority has issued a draft Circular on the 2017 update to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
Qatar is the 85th jurisdiction to sign the BEPS Convention, which now covers nearly 1,500 bilateral tax treaties.
An arbitration clause is included in the new tax treaty to resolve double taxation disputes.
The majority of the Board of Directors’ meetings must be held in Mauritius, or the executive management of the company must be regularly exercised in Mauritius.