Following the footsteps of France, Spain has approved Digital Services Tax (DST) at the rate of 3% on earnings from online adverts, sales of user data by tech companies and deals brokered on digital platforms with at least €750 million in global revenue. Earlier, France had also levied a similar tax on digital companies like Google, Facebook, etc. and the US had retaliated with additional duties on goods imported from France. As a result of this, France agreed to suspend the collection of DST until OECD reaches an agreement on a separate global tech tax by the end of 2020. On a similar footing, Spain has also expressed their desire to wait for OECD’s global tech tax and until such time, Spain would not impose DST on digital companies.
Many countries, including India who had introduced taxes on digital companies, have suspended the same until OECD’s global tech tax comes out by the end of 2020. However, given that business model of tech companies is very complex and spans across multiple countries, it would be difficult if not impossible for OECD to come out with such a tax by the end of 2020 in which case, it could be possible that the countries could lift the suspension on tax on digital companies. It remains to be seen how OECD and G20 work together on this menace in the coming months
Recently, Singapore announced its Budget for the fiscal year 2020 in which it has proposed several taxpayer-friendly amendments to boost cash flow in the economy. Some of the major amendments from a corporate perspective have been listed below:
- Companies will be granted a rebate of 25% of tax payable, capped at USD 15,000 for the assessment year 2020. This will cost them over USD 400 million.
- Companies would be allowed an automatic extension of 2 months without any interest for payment of corporate tax on estimated eligible income. However, such an application must be filed within 3 months of a company’s financial year-end.
- Companies would be allowed to carry back the unabsorbed capital allowances and trade losses of up to three immediately preceding years of assessment.
- Companies can opt to accelerate the write-off the capital costs (i.e. costs for acquiring plant and machinery and renovation incurred thereon) for the year of assessment 2021
Recently, India also announced corporate tax cuts along with several taxpayer-friendly measures to boost the economy.
It appears that not only a developing country like India but also, developed country like Singapore is facing a slow down in the economy which ultimately leads to a drop in consumption/expenditure by its citizens. It remains to be seen how both the countries will fare post corporate tax cuts in the coming months.
New World Tax Order likely to be based on political negotiations rather than economic considerations
It is already 2020, and the time for overhauling the existing corporate tax framework of multinationals is nearing as we speak. It appears that the Organisation for Economic Co-operation and Development (OECD) is no longer keen on actively engaging in a conversation with the business community on an integral basis. At this point, the OECD is more focussed on brokering a consensus between the countries' basis existing draft proposals (Pillar I & II), with specific emphasis on speeding up the process of arriving at a global consensus. Arriving at a global consensus has already assumed center stage on offering the non-market countries significant tax certainty, which is just sufficient to make them feel comfortable with surrendering a slice of their tax base to the market countries.
However, whether a consensus can eventually be reached will ultimately depend on the size of that slice. Hence, it is feared that the new world tax order is dependent on political negotiations rather than economic considerations. Accordingly, this brings up a very important question as to countries having significant clout such as the USA crush other countries, especially developing countries and thus returning to from where we started as the whole purpose of overhauling existing corporate tax framework of multinationals is defeated.
In February 2020, the Organisation of Economic Cooperation Development (OECD) issued the final transfer pricing guidance on financial transactions (the report). This report will form a part of OECD Transfer Pricing Guidance. The origin of a specific workstream for Transfer Pricing aspects of financial transactions started with an OECD/G20 BEPS initiative in September 2013, followed by final reports on BEPS Actions 4 and 8-10, which also mandated specific follow up work on this aspect. The report mainly provides guidance on the application of principles for financial transactions and specific issues relating to the pricing of financial transactions.
We have summarized below crucial aspects of the report as under:
I. Introduction and guidance on analyzing the financial transactions
The report emphasizes three factors for analyzing any financial transactions as under:
- Accurate delineation of the transactions - Accurate delineation can be used as a guiding factor to determine the balance of debt and equity funding of an entity
- Consideration of the options realistically available to each party - Each party should analyze all the options realistically available before entering into any transaction and select the option which is realistic and feasible
- Contractual terms – It is essential to analyze the contractual terms of the transaction and consider the economic substance of the transaction
In order to accurately delineate the actual transactions, the report suggests that following economically relevant characteristics should be considered:
- Contractual terms
- Functional analysis
- Characteristics of the financial product or service
- Economic circumstances
- Business strategies
II. Treasury Functions
It is essential to maintain accuracy in delineating the actual transactions and precisely determining what functions an entity is conducting rather than to rely on a general description such as ‘treasury activities.’ The treasury function may be support service to the core value creating operations.
It is also crucial to analyze if the same can be considered as intra-group services. In other situations, the treasury may perform more complex functions and, therefore, it should be appropriately compensated. Further, it is of utmost importance to identify and allocate the economically significant risks.
The report also outlines the transfer pricing considerations and methodologies to determine the arm’s length price from most common treasury activities such as intra-group loans, cash pooling, and hedging activities.
III. Financial Guarantees
The report has re-emphasized the fact that primarily it is necessary to understand the nature and extent of the obligations guaranteed and the consequences for all parties while analyzing the financial guarantees. Few important factors to be analyzed are economic benefit derived from a financial guarantee, effect of group membership, financial capacity of the guarantor, etc. Interestingly, guidance has been provided to determine the arm’s length price of guarantee by way of different methodologies such as the adoption of Comparable Uncontrolled Price (CUP), yield approach, cost approach, valuation of expected loss approach, and capital support method.
IV. Captive insurance and reinsurance
Several MNCs are aligning to form captive insurance entities for various reasons including utilizing benefits from tax and regulatory arbitrage, stabilization of premiums paid by the entities that are part of the MNE group, gaining access to the reinsurance market, mitigating market capacity’s volatility or the MNE group may consider retaining the risk within the group as it could be cost-effective. While guidance re-iterates the importance of delineating the transactions and allocation of risks, it explicitly gives significance to the following factors:
- the carrying on of the risk mitigation functions falls within the broader concept of risk management but not within that of control of risk;
- there is a difference between the specific risk being insured (the party taking the decision to insure – i.e.mitigate – or not, controls this risk; that party will usually be the insured but maybe another entity within the MNE group) and the risk taken on by the insurer in providing insurance to the insured party.
Further, when considering the transfer pricing implications of captive insurance transactions, the common issue is whether the concerned transaction is related to insurance, i.e., whether a risk exists and, if yes, whether it is allocated to the captive insurance considering the facts and circumstances. To further analyze this issue, the report has also provided a few illustrative indicators to identify if a captive insurance service provider is genuinely undertaking insurance business.
The methods for determining the arm’s length price, such as pricing of premiums, combined ratio, and return on capital, are explained.
In the end, the report provides certain factors that must be considered while determining the arm’s length price for insurance transactions such as pricing of premiums, combined ratio and return on capital, group synergy, agency sales, etc.
V. Risk-free return and risk-adjusted return
The report provides specific guidance to compute risk-free return and risk-adjusted return, which can be helpful in a situation where associated enterprises are entitled to any of these returns.
The guidance is a significant step towards establishing a global framework for financial transactions. The Indian tax authority may also consider this guidance and incorporate the same in the Indian Transfer Pricing Regulation to bring certainty while benchmarking financial transactions. While the guidance is more theory-based, its practical applications may pose certain challenges.
Swiss Tax authority (SFTA) has issued Circular updating the Safe Harbor interest rates for inter-company loan transactions effective from 1 January 2020. The parameters to be considered while opting for the safe harbor rate of interest include the type of loan, currency of the loan, and whether the Swiss entity is the borrower or the lender. We have summarized below different situations and safe harbor rates prescribed by SFTA as under:
Loan in local currency (i.e., CHF) and Swiss entity is the lender
|Source of loan||2019||2020|
|Loans finance through equity||0.25%|
|Loans finance through debt|
|a. Loans up to CHF 10 million||Actual interest plus a margin of 0.50%|
|b. Loans exceeding CHF 10 million||Actual interest plus a margin of 0.25%|
Loan in local currency (i.e., CHF) and Swiss entity is the borrower
a. For Real-estate loans
|Nature of loan||Housing and agriculture||Industry and commerce|
|Up to loan in the amount of the first mortgage (i.e., 2/3rd of the market value of the property)||1%||1.5%|
|For the remainder (lending limits of 70% for land, dwellings, privately owned flats, holiday homes, and factory property or 80% of the market value for other properties||1.75%||2.25%|
b. For operating/business loans
|Nature of loan||2020|
|Trading and production companies||Holding and asset management companies|
|Loan upto CHF 1 million||3%||2.5%|
|Loan exceeding CHF 1 million||1%||0.75%|
Loans entered in foreign currency
SFTA has also prescribed country-wise safe harbor rates for loans entered in foreign currency.
Few more important points for foreign currency loans are as under:
- In the event of loan to related parties, if safe harbor interest (as prescribed above) is lower than the respective interest rate for loans in local currency, minimum interest rate pertaining to local currency should be applied.
- If loans are re-financed with debt, an additional interest margin of 0.50% should be applied.
- In relation to the loans from related parties, the above rates can be considered as a safe harbor. Additionally, SFTA has prescribed certain additional interest margins in different scenarios.
On 18 February 2020, European Union Council updated the EU list of non-cooperative jurisdictions for tax purposes. In addition to 8 jurisdictions that were already listed such as American Samoa, Fiji, Guam, Oman, Samoa, Trinidad and Tobago, US Virgin Islands and Vanuatu, EU has decided to include 4 more jurisdictions in the list such as Cayman Islands, Palau, Panama, and Seychelles since these countries did not implement the tax reforms they had committed by the agreed deadline. This list shall be next updated in October 2020.
It is also stated that 16 jurisdictions such as Antigua and Barbuda, Armenia, Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Cabo Verde, Cook Islands, Curaçao, Marshall Islands, Montenegro, Nauru, Niue, Saint Kitts, and Nevis, Vietnam managed to implement all the necessary reforms to comply with EU tax good governance principles ahead of the agreed deadline.
Interestingly, it is learned that many of these countries have implemented/issued regulations relating to Country by Country Regulation and Economic Substance Regulations in order to comply with EU tax good governance principles.
In view of the shifting consumer preferences from CD, DVDs, and other such tangible media, around half of the states in the US have started taxing residents’ subscriptions to Hulu, HBO Now, Amazon Prime ,etc. in the past few years. As per recent reports, lawmakers in the states of Maine, Illinois, Kansas, Massachusetts, and Utah are also considering similar measures.
[excerpts from CNBC]