Direct Tax

Digital Economy Saga – US internet giants back Trump’s probe into French tech tax

Alphabet Inc’s Google, Facebook Inc and Amazon.com Inc would be testifying in Washington on Monday in support of the Trump administration’s efforts to potentially punish France for enacting a 3% tax on global tech companies with at least 750 million euros ($832 million) in global revenue and digital sales of 25 million euros in France. The relationship between Donald Trump, President of US and the largest tech companies in the US hasn’t been at the best of its terms, however, common nemesis i.e. French tech tax on US tech giants would lead to joining hands with the President for a temporary period.

According to representative of Google, the French tech tax is a sharp departure from long-established tax rules which specifically targets only certain businesses. Even the French government officials have repeatedly stressed on the fact that the tech tax intends to tax foreign technology companies.

The US is probing French tech tax which was signed into law last month and use the same as a means to introduce new tariffs or other trade restrictions. In other words, the US is intending to make an example out of France to deter other countries, such as UK, Spain, New Zealand, etc., from targeting US tech companies for meeting their tax deficits

However, recently, post a meeting with US, the French Government decided that they would refund the excess tax collected from the tech giants once the global consensus is reached.

Crypto currency – Warning Letters by Australian Tax Office to investors having 90% of retirement savings in crypto currencies

The Australian Tax Office (ATO) has issued warning letters to approximately 18,000 investors (i.e. Self Managed Super Funds) against investing over 90% of their retirement investment funds in crypto currencies or property. The ideology behind issuing such warning letters is to discourage investors from investing their retirement funds in crypto currencies as there have been cases where investors have lost huge portion of their savings by investing in crypto currencies. While, the warning letters caution the investors that they could face penalties up to AUD 4,200 (approximately, INR 2.04 lakhs) for breaching guidelines set by ATO and the respective authorities.

Tax evasion saga – HSBC Swiss Banking Unit agreed to pay USD 329 Million in Belgian Tax Settlement

HSBC Swiss Banking Unit was under investigation for allegedly assisting wealthy people dodge hundreds of millions of euros in taxes. Belgium Authorities and France began scrutinizing HSBC’s Swiss private bank after a former employee of the firm, leaked client account details to investigators. The French case culminated with HSBC agreeing to settle for over USD 329 million (or Euros 300 million).

Transfer Pricing

Hong Kong Inland Revenue Department (‘IRD’) publishes Departmental Interpretation and Practice Notes (‘Notes’) on transfer pricing

On 19 July 2019, following the enactment of transfer pricing legislation in Hong Kong, the IRD has published long-awaited Notes to provide guidance to taxpayers on transfer pricing issues as follows:

  • a. Transfer Pricing Documentation and Country-By-Country Reports
  • b. Transfer Pricing Between Associated Persons

We have provided key highlights as under:

Transfer Pricing Documentation and Country-By-Country Reports

  • OECD compliant document shall be acceptable
  • Applicability - Master file and local file documentation is required to be prepared for Hong Kong entities for accounting periods beginning on or after 1 April 2018.
  • Materiality - Taxpayer should document only material (based on prudent judgement) cross-border transactions in the local file
  • Local file to include transactions even when income or profits of a particular transaction are sourced outside Hong Kong
  • Tax return disclosure - Taxpayer is required to declare in its tax return whether it is required to prepare transfer pricing documentation
  • Thresholds for transfer pricing documentation - Legislation provides that exemption for preparation of documentation is available based on size of business of the taxpayer and quantum of related party transactions as under:

Exemption based on size of business

Particulars Annual threshold
Total revenue
<= HKD 400 Million
Total assets
<= HKD 300 Million
Employees (average)
<= 100 employees

Note: Exemption from master file and local file documentation is available only if they satisfy two out of three conditions.

Exemption based on quantum of related party transactions

Particulars Annual threshold
Transfers of property (other than financial assets and intangibles)
<= HKD 220 Million
Transactions of financial assets
<= HKD 110 Million
Transactions of intangibles
<= HKD 110 Million
Any other transactions
<= HKD 44 Million
  • i. It is clarified now that loan amount and interest on loan are both transactions in respect of financial assets. The loan transaction should be documented in the local file for the accounting period in which the loan is drawn whereas the interest payments should be included for each accounting period in which the interest is paid or received.
  • ii. Further, while determining threshold for a particular class of transactions, arm’s length amount for free of cost inter-company arrangement (ex interest free loans, free of charge for use of trademark) should be included considering notional value.
  • Transfer pricing documentation is recommended to be prepared even when taxpayers are exempt to prepare such documentation
  • Notes provide few examples for CbCR issues such as determining revenue threshold, taxpayer with dual residency and filing by surrogate parent entity.

Transfer Pricing Between Associated Persons

  • Grandfathering - Transactions entered into before commencement date of ordinance (i.e. 13 July 2018) are not subject to arm’s length principle
  • Arm’s length principle shall only apply to increase assessable profits or to decrease allowable losses
  • Arm’s length principle does not apply to domestic transactions between associated persons
  • Notes also provides guidance on practical consideration for the purpose of performing benchmarking analysis such as
    • i. Local comparables are preferred. However, in absence of availability of local comparables, foreign comparables may be accepted subject to comparability of foreign market
    • ii. Multiple year data may be used while applying Transactional Net Margin Method
    • iii. Notes allows to use full range of comparable companies as arm’s length range. However, if range includes a sizeable number of observations, interquartile range can be used to narrow the results and enhance the reliability
    • iv. Taxpayers are required to review benchmarking analysis every year, however, if no significant changes to business/controlled transactions are identified, then same benchmarking analysis can be re-used for maximum 3 years

Bulgaria introduces mandatory transfer pricing documentation

On 13 August 2019, Law1 introduces mandatory transfer pricing documentation in Bulgaria applicable for transactions entered into after 1 January 2020.

For Local file

Local file is required to be prepared by 31st March of the year following the year of the transaction and must be furnished to the tax authorities upon request during tax reviews and audits. However, mandatory documentation is not required to be prepared if taxpayer satisfies following criteria:

  • Assets value not exceeding BGN 38 million (approximately Euro 19 million) at the end of previous financial year; or
  • Annual net revenue not exceeding BGN 76 million (approximately 39 million) for previous financial year; or
  • Has personnel of less than 250 people for the reporting period.

Further, new law has prescribed materiality threshold for related party transactions and documentation should be prepared only if quantum of controlled transactions exceed such threshold as under:

Sr. No Nature of controlled transactions Amount in BGN Apprx. amount in Euro
1
Transactions relating to goods
400,000
205,000
2
Transactions relating to intra-group services/intangibles
200,000
102,000
3
Transactions relating to loan granted/received Or Accrued financial interest income/ expenses
1,000,000
Or
50,000
511,000
Or
26,000

The above thresholds are required to be calculated separately for each controlled transactions.

Additional exemptions from preparation of local file:

  • Entities that perform only domestic controlled transactions are exempt
  • Companies that are exempt from corporate taxation or those that are subject to alternative taxation under the Corporate Income Tax Act (CITA) are exempt

Master file

Taxpayers forming part of a multinational group are also required to have a master file documentation in place not later than 12 months following the deadline for the local file.

Other provisions

  • Local and master file are required to be updated on an annual basis with benchmarking studies to be updated every three years. However, identified comparable transactions need to be updated on an annual basis.
  • In case of non-compliance of local file documentation, fine of 0.5% of total value of controlled transactions may be imposed. Further, in case of non-compliance of master file documentation, fine of BGN 5,000 to BGN 10,000 may be imposed.

Argentina extends due date for submission of transfer pricing information returns

Argentina’s Federal Administration of Public Revenues (AFIP – Administración Federal de Ingresos Públicos) has extended the due date for filing transfer pricing information returns (local file, TP Form 741, TP Form 867 and TP Form 743)2.

Erstwhile, in respect of tax years that closed between December 31, 2018 and April 30, 2019, taxpayers were required to file transfer pricing information returns from day 3 to day 7 of the 8th month after the year end in accordance with General Resolution 1,122 (local file compliance rules). With release of general resolution 4538, taxpayers are required to file the said information returns from December 16 to December 20, 2019.

Brazil OECD project to align Brazil transfer pricing rules with OECD guidelines

The OECD and Brazil launched a joint project in February 2018 to compare Brazilian transfer pricing regulation with OECD transfer pricing approaches for tax purposes and analyse possibility of alignment, if any. The 15-month work programme carried out by OECD comprised of an in-depth analysis of Brazilian transfer pricing legal and administrative framework as well as its application which was structured as below:

Stage 1: Preliminary analysis of legal and administrative framework of Brazil’s transfer pricing rules

Stage 2: Assessment of strengths and weaknesses of Brazil’s existing transfer pricing rules and administrative practices and

Stage 3: Options for alignment with the OECD transfer pricing standard.

The aforesaid research analysed possible strengths and

weaknesses and explored options to align Brazil regulations with OECD transfer pricing standard. This technical analysis shall assist in decision making as to whether alignment should happen or not considering advantages and disadvantages under different options for alignment.

1. Law on Amendment and Supplementation of the Tax and Social Security Procedure Code was introduced in Issue 64 of State Gazette
2. Vide General Resolution No. 4538 (GR 4538) published in the Official Gazette on 31st July 2019

Indirect Tax

Reporting of remote sales made in Italy

The Italian tax authorities vide Implementing Decree No. 660061/2019 dated 31 July 2019 has imposed reporting obligations on remote sellers in relation to sales made by them in Italy. The obligation requirements should be applicable irrespective of whether such remote seller is a resident or not in Italy when such seller facilitates remote sales through the use of electronic interfaces. The first deadline of the said reporting obligations is 31 October 2019.

Tax Street August 2019