Following the footsteps of France, another EU member nation, Italy, has approved a new tax to be levied on large tech companies, thus straining its relations with the US. The new tax shall come into force on 1 January 2020. This tax is similar to the digital tax levied by France earlier this year, which has already attracted severe criticism from the US. The new tax, as approved by Italy, would impose tax at the rate of 3% on technology companies earning more than USD 831 million on a global scale including at least USD 6 million in Italy.
US had earlier condemned France’s act of imposing digital services tax on US based tech companies, citing discriminatory reasons. Several countries across the globe, along with the OECD, have been engaged in devising new ways to capture large tech companies having a large user base worldwide within the purview of local tax net. It is to be seen how this new tax introduced by Italy impacts the tech companies and what action does US take to counter such a measure by Italy.
The US had earlier proposed that companies could opt out of part of the OECD’s global tax revamp for the time being. The US had urged the OECD to include an optional safe harbour rule which would allow companies to opt out of Pillar I of the OECD’s global tax overhaul. It is pertinent to note that Pillar I would change some of the tax rules and agreements that determine when a company is taxable in a country and how much tax it pays in the said country.
Although, it was confirmed by the US that discussion on the safe harbour proposal won’t be a pre-requisite for US participation in an OECD meeting to be held sometime in January 2020. In this regard, the OECD has warned the US that the safe harbour proposal would delay the effort to get global consensus on its global tax overhaul plan. However, the US would take a final decision in this regard, i.e. whether to make Pillar I an optional safe harbour rule or a mandatory rule once the architecture of Pillar I becomes clear.
Chinese scientists have been working on a system to use artificial intelligence that would make it almost impossible to evade taxes. Over the last three years, about 300,000 government tax inspectors have been assisting an AI system that analyses big data to detect tax evasion, which may otherwise prove very difficult for human inspectors to identify. It is believed that the new AI system can flag more than 95 per cent of the offences, including some of the new tactics which are unfamiliar to most human inspectors. However, there could be a delay in introducing the new AI system given the unfavourable economic climate and the number of companies that rely on informal deals with local tax authorities to lessen their tax burden.
The new AI system has been embedded in the very heart of the Golden Tax System, the software which is used by China’s top tax office i.e., the State Taxation Administration. According to the scientists working on this project, the government has not yet approved a full-scale launch of the system, however, this system has been tested in pilot programmes in the country's economic powerhouses in the east. AI powered system to nab tax evaders would be quite a milestone in itself. If that is the case, then it is to be seen whether all countries, especially, developing countries, would try their hand in a similar concept to efficiently and cost effectively nab the tax evaders.
The tax ruling4 (‘The Ruling’) issued by Taiwan’s Ministry of Finance provides guidance to MNEs carrying out one-time transfer pricing adjustment in order to align its transfer price with arm’s length price. The Ruling shall apply to related party transactions undertaken from fiscal year starting 01 January 2020.
Requirements to be fulfilled before undertaking onetime transfer pricing adjustment:
- One-time transfer pricing adjustment to be undertaken prior to closure of the accounting year.
- Before undertaking related party transactions, the related parties should have an agreement in place specifying the transaction terms and factors that could affect the transfer price.
- The adjustment shall be reflected not only in the books of the taxpayer but also, in the books of the counter-party to the transaction.
- Accounts payables and/or receivables resulting on account of one-time transfer pricing adjustment undertaken, should also be accounted for in the books.
After undertaking one-time transfer pricing adjustment, the taxpayer is required to pay the requisite taxes or claim refund of taxes, if any, arising on account of the adjusted transfer price.
Compliance requirements arising from the aforesaid adjustment with respect to cross-border transfer of tangible goods is as follows:
- Disclose, by way of an import declaration, the adjustment detail along with proforma invoices and value declaration forms as per provisional price
- Deposit payable to Taiwan Customs before inspection and release of goods, is made based on the provisional price.
- Within one month of the end of the relevant fiscal year, the taxpayer has to submit an application along with relevant documents with the Customs. Based on the documents submitted, the dutiable value is assessed in order to determine whether the taxpayer has to pay or seek refund of the relevant duties, taxes and fees collected by the Customs.
- In case the taxpayer fails to submit the application, the Taiwan Customs shall directly assess the dutiable value independently.
The application and documents submitted with the Taiwan Customs shall include the related-party transaction agreement undertaken, commercial invoices, reasons or methodologies for determining the transaction price, proof of corresponding adjustment made by counter parties and the actual result following the TP adjustment.
Compliance rules to be adhered to by the taxpayer (while undertaking one-time transfer pricing adjustment) in case of transactions other than imported goods is as follows:
a. Business Tax (VAT)
The VAT return filed for the previous fiscal year shall be submitted along with details of transfer pricing adjustment, sales made during the year and corresponding tax payable/ receivable. Any additional amount accounted for (as a result of one-time transfer pricing adjustment) resulting in increase in sales5 to be issued by way of Government Uniform Invoice. In case of reduction in price, such reduction should be treated as sales discount and a credit note to that effect should be raised.
b. Commodity Tax
For the purpose of filing the commodity tax return, onetime transfer pricing adjustment declaration along with relevant supporting documents in support of the commodity tax payable in the last month of the reportable fiscal year, should be submitted to the local National Tax Bureau office.
c. Income Tax6
In case of any adjustments made w.r.t. non-tangible goods which are subject to withholding tax, payment or refund of taxes should be made as per the relevant tax provisions. The income tax return filed by the taxpayer should be accompanied by copy of the executed agreement, documents supporting that the adjustment has bee made by the counterparty as well along with documents supporting the relevant tax adjustments made. The documents submitted should further be substantiated with reasons for undertaking adjustment along with the adjusted result.
The aforementioned provisions appear to be a respite for the taxpayer (i.e. Taiwanese entity) wanting to align their transfer price with the market conditions.
As per the notification released by the Thai Revenue Department (‘TRD’) in November 2019, taxpayers whose total annual operating revenue for accounting period starting from 01 January 2019 is at least THB 200 million or more, are required to submit transfer pricing disclosure form. The transfer pricing disclosure form shall disclose relationships between related parties along with the value of related party transactions.
Further the custom value of imported goods should also reflect royalties, payment of management fees, technical service in case the terms prescribed under the customs regulation are fulfilled.
Audit by Customs Department
Till now the primary source of information used for identifying importers undertaking related party transactions has been the withholding tax returns7 and self-assessed VAT returns8 filed by the taxpayers. In order to scrutinize the importers and assess the impact of related party transactions on the customs value of goods, reliance is placed on the data available from the aforementioned primary source as well as the importers’ information available with the customs authority.
Beginning 2020, based on the transfer pricing disclosure form submitted to TRD, the Thai Customs Department would be able to get holistic information with regards to the related party transactions undertaken by the taxpayers. In view of the information available on hand, the customs authority may assess the related party transactions undertaken by the importer, which could further lead to increased inspections arising due to custom valuation discrepancies. Thus any deviation from the cost of purchase declared in the transfer pricing disclosure form vis-a-vis the total declared customs value on import declaration, could attract penal implications (penalty being imprisonment as well as a penalty ranging between 50% to 400% of the customs duty shortfall). Similarly, disclosure of any payment made towards royalty and/or other intercompany payments made to overseas related parties could be questioned from the viewpoint as to whether such payments could be considered for the purpose of inclusion in custom valuation. Further, the customs may seek for additional evidence for comprehensive reviews.
In view of the information to be furnished in the transfer pricing disclosure form, the taxpayers need to revisit transfer pricing arrangements (including intercompany payment agreements, advance pricing agreements) undertaken especially those affecting the custom value of imported goods, to avoid discrepancies and unfavourable assessment.
Australian Taxation Office issues compliance approach for related party derivative arrangements and total return swaps
Final version of Schedule 2 – ‘Related Party derivative arrangements’ – to Practical Compliance Guide 2017/4 (‘PCG’) was issued by the Australian Taxation Office (‘ATO’) on 27 November 2019. Schedule 2 sets out the ATO compliance in order to cater with taxation issues pertaining to crossborder related party financing arrangements and related transactions.
Schedule 2, effective 01 January 2019, shall apply to existing as well as new related party derivative arrangements. The said schedule shall also apply to total return swaps whether entered into with related parties or not.
Taxpayers subject to the 2019 Reportable Tax Positions9 (RTP) disclosures must disclose their PCG risk classification. The PCG enables taxpayers to assess their compliance risk in a colour coded form viz. green (low risk) to red (high risk). However the PCG risk assessment shall not apply to the following:
- To members of groups containing an Authorized Deposittaking Institution (ADI); and
- An Australian securitization vehicle
All taxpayers including banking and capital markets and insurance entities (which do not contain an ADI in the group) and financing entities shall be subject to the PCG. The taxpayers would have to analyse and score not only foreign derivative transactions entered into with a related party for hedging a financial transaction but also total return swaps.
There would be 14 specific risk indicators (pertaining to cross-border related party derivative arrangements used to hedge or manage the economic exposure of a company or group) which would enable the taxpayers to assess the risk of ATO compliance activity relating to deductibility of payments, liability of withholding tax, transfer pricing rules, including the reconstruction provisions and application of the general anti-avoidance rule (Part IVA of the Income Tax Assessment Act 1936).
Based on the self-assessment performed by the taxpayers in relation to the related-party derivatives, the taxpayers filing RTP Schedule will be required to disclose their risk assessment as part of the questions under Category C of that schedule.
It is pertinent to note that the high risk assessments performed under the draft PCG shall not necessarily indicate that the transaction is not at arm’s length.
Taxpayers affected in light of the new guidance would have to reconsider their arrangements and related documents. Further taxpayers in the high risk zone could expect intervention by the ATO, questioning the positions taken in the past.
Draft law was introduced by the German Federal Ministry of Finance (‘MoF’) on 10 December 2019, in order to implement the European Union anti-tax avoidance directive. The revised draft includes not only section 1 i.e. Foreign Tax Code (‘FTC’) but also covers amendments to the General Tax Code (‘GTC’) which pertains to the taxation of cross-border transactions. The draft law was issued in order to align the German transfer pricing rules with the Organisation for Economic Cooperation and Development’s (OECD) base erosion and profit sharing (BEPS) project.
Certain important aspects of the German transfer pricing rules have been elucidated as below:
a. Related parties: Definition of related parties has expanded to include entities to whom non-voting shares have been issued or voting agreements have been entered into. Furthermore, close relationship established through close strategic and professional coordination within a network would also constitute as related parties.
b. Function and Risk Analysis and transfer pricing method: As per the memorandum issued, the MoF proposes to do away with the current hierarchy of transfer pricing methods, to give more emphasis on the actual conduct of business rather than the contractual terms and determine if the business transactions undertaken are deemed comparable based on the functional and risk analysis. Also adoption of interquartile range is proposed while concluding the benchmarking analysis.
c. Intangibles: Based on the OECD guidelines, Section 1, para 3 of FTC defines the term ‘intangibles’. The draft law also proposes to implement the concept of DEMPE (development, enhancement, maintenance, protection and exploitation of intangibles) in German tax laws. However guidance on certain aspects such as income allocation associated with the performance of these functions, when to apply profit split method and criteria for profit allocation, treatment of losses or how the sale of intangibles would be dealt with between the parties involved is awaited.
d. Price adjustment clause: Newly introduced section 1b of FTC applicable to business transactions pertaining to intangibles, proposes to undertake income adjustment to be made in the 8th year (wherein deviation of 20% in relation to the arm’s length price vis-a-vis actual profit development made during the first 7 years of conclusion of transaction), in case of significant deviation of the transfer price from the arm’s length price. The aforementioned price adjustment clause provides the following exceptions to this rule:
- To produce evidence to support the volatility of the circumstances causing the deviation;
- Sufficient proof is produced stating that appropriate consideration would be received in light of uncertain future developments; and
- License/IP transfer agreement stating basis for compensation (i.e. whether revenue based or profit based).
The aforementioned clause would have significant impact, considering that the arm’s length nature of the transactions pertaining to intangibles is demonstrated through databases.
e. Transfer of functions: The proposed draft has amended the valuation rules for transfer of assets. The draft proposed to permit individual valuation of the assets being transferred instead of transfer package valuation under certain conditions. Acceptable valuation methods shall be used for valuing transfer packages.
f. Financial transactions: The proposed draft shall apply to interest payments made by the German taxpayers. The arm’s length interest rate shall be determined basis which the group could obtain financial assistance in the open market. The draft law also proposes that creditworthiness of the group shall apply unless the borrower’s creditworthiness is better than the group. Further intragroup financing activities would be remunerated on a cost plus basis.
g. Master file: The draft law proposes to reduce the turnover threshold for preparation of master file from EUR 100 million to EUR 50 million. However the draft law does not specify any due date or reference to specific event (i.e. filing along with annual tax returns) for electronic filing of master file.
h. Advance Pricing Agreements (APAs)10: The draft law, restricted in nature, has laid down certain criteria that must be met before an APA can be applied for. The draft law proposes to increase the APA application fees from EUR 20,000 to EUR 30,000. Reduction in fee could be expected if the APA follows a coordinated bilateral or multilateral tax audit.
The proposed draft shall be effective in a phased manner as follows:
- Amended section 1, 1a, and 1b shall apply from financial year 2019-20 onwards;
- Change in threshold value for of master file documentation shall apply for fiscal year beginning after 31 December 2020. The due date for filing master file electronically shall be communicated through separate decree; and
- Amended provision for filing an APA shall apply for the first time after the draft law comes into effect.
The draft law proposed intends to align the German transfer pricing policies with OECD’s BEPS project recommendations. In light of the amendments suggested, it is expected that more companies would qualify as related parties thereby widening the scope for applicability of transfer pricing provisions. Further the revised APA provisions aim to achieve certainty in cross-border transactions and avoid international disputes.
4. Ruling No. 10804629000 issued on 15 November 2019
5. Except for transactions pertaining to purchase of offshore services or export of services or goods by the Taiwan entity
6. Companies filing income tax return who have undertaking one-time transfer pricing adjustment, should comply with the regulations set forth by Article 43-1 of the Income Tax Act and Taiwan TP Assessment Rules
7. Form P.N.D. 54
8. Form P.P. 36
9. Disclosure made with respect to self-assessment of risk rating for related party financing arrangement
10. Section 89a of GTC
With effect from 1 January 2020, the VAT rules for EU crossborder supplies of goods have been amended. The said rules are expected to resolve the issues faced in cross-border B2B and B2C transactions between EU member states.