TAX TALK
GLOBAL DEVELOPMENTS

Direct Tax

Digital Economy Saga: Small businesses to pay digital tax in the UK and not Amazon Inc.

The UK government had announced plans for a digital services tax in 2019 amidst the ongoing global tax war for tackling tax avoidance of online companies that use complicated but legal corporate structures to cut their tax bills.

Amazon UK Services paid merely £14 million in corporate tax last year while Amazon has managed to restrict its tax bill to £61 million in the past two decades in the UK, lesser than what Marks & Spencer paid in one year alone using a legal set-up. With a view to counter this, the UK government proposed to introduce a levy on digital companies at the rate of 2% subject to fulfilment of certain conditions. However, the UK government was warned by Amazon that upon levying such as tax, the burden of the same would be passed on to the sellers by increasing the listing fees, which would, in turn, hurt small businesses in the process.

European Union packs a punch with new disclosure rules for corporate tax advisors

In the year 2019, members of the European Union enacted a law on new disclosure rules wherein corporate tax advisors are required to report specific cross-border tax arrangements, including those that could result in a tax benefit, failing which the advisers would be saddled with hefty fines and penalties.Such reported information will become part of a shared database that will be accessible to all European Union member countries to facilitate spotting of problematic tax arrangements more quickly.

However, the European Union directive has left the interpretation and implementation of these disclosure rules to the member countries. This is where the problem arises as it is not clear as to how the countries will decide who is required to report, where transactions are reported, and how the transactions used to avoid paying taxes should be disclosed, etc.

In this regard, there appears to be a mixed reaction across the corporate fraternity. Some corporates aren’t bothered about the new disclosure rules, while some fear these rules as they place them on the radar of the respective tax authorities unnecessarily.

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.

Transfer Pricing

United Arab Emirates: Key Highlights of FAQs on Economic Substance Regulations

As a step further towards aligning the local laws with the OECD inclusive framework, in April 2019, the Ministry of Finance (‘MOF’) of United Arab Emirates (UAE) released Economic Substance Regulations (‘ESR’) vide Cabinet Resolution No 31 of 2019 (Resolution).

The regulations require UAE onshore and free zone companies and other UAE business forms (collectively referred to as Licensee) that carry out any of the Relevant Activities to maintain an adequate economic presence in the UAE related to the said activities.

Relevant Activities include: Banking Business, Insurance Business, Investment Fund management Business, Lease- Finance Business, Headquarters Business, Shipping Business, Holding Company Business, Intellectual property Business (“IP") and Distribution and Service Centre Business.

With reference to the above, the Finance Ministry of UAE released a list of 41 Frequently Asked Questions (FAQs) to address the concerns of impacted entities in relation to ESR.

Key highlights of the aspects on which the FAQs are issued:

• First reportable FY and relevant Regulatory authorities;
• Scope of applicability of ESR including the exemptions;
• Points of consideration for a UAE entity to which ESR applies for demonstrating economic substance such as what is ‘adequate’ or ‘appropriate’ economic substance, need to hold board meetings in UAE, can directors be counted as employees, etc.;
• Points of consideration for a UAE entity to which ESR applies for demonstrating economic substance in case the entity desires to outsource any activity;
• What is a ‘distribution and service center’ business as referred in the regulations;
• What is a ‘Holding Company’ business and how can it demonstrate economic substance in the UAE;
• Conditions for an IP Business to be considered as ‘High Risk’ and its implications in relation to ESR;
• What is a UAE Investment Fund Management Business, a Lease-Finance business and a Headquarter business;
• Other administrative points such as notification requirements for Licensees, Economic Substance Return filing requirements, penalties for non-compliance, etc.

In addition to listing down the FAQs, the MOF has also provided useful guidance on the steps a Licensee needs to take before the end of the financial year (‘FY’) in order to meet the compliance requirements of the regulations. Basis the said guidance, a Licensee shall:

• Assess what Relevant Activities have been/likely to be performed during the financial period (applying a 'substance over form' approach);
• Assess amount and type of income earned from the Relevant Activity during the financial period;
• Conduct board meetings with a quorum of directors' physically present in the UAE and document minutes of these meetings;
• Analyze all the expenses incurred;
• Analyze and document key UAE based assets (including premises) which is connected to the Relevant Activity;
• Maintain relevant documents such as agreements and financial records supporting the assets and expenses;
• Analyze roles and responsibilities of employees towards the Relevant Activity;
• Examine relevant outsourcing agreements;
• Any other aspects that may help Licensee to demonstrate sufficient Economic Substance in the UAE for a relevant financial period.

The substance and transparency-related requirements are becoming a norm of almost all developing nations, especially those who are part of OECD inclusive framework.

The FAQ's are a welcome step to provide much needed clarity to the impacted Licensees. Now, the Licensees may look to –

1. Conduct a health-check on their operations in UAE keeping in mind requirements of the regulation
2. Take corrective steps, basis the risk areas identified during the health check
3. Provide Accurate/appropriate disclosures in the prescribed manner to meet the compliance requirement of the regulations.

Click here to read the complete set of FAQs released by the UAE Ministry of Finance.

Click here to read SKP’s alert on FAQs released by the UAE Ministry of Finance.

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.

Taiwan: Ministry of Finance amends country-bycountry report (CbCR) safe harbor rules

In line with the OECD’s final report on Action 13, Taiwan’s Ministry of Finance (MOF), in December 2019, amended the monetary threshold for filing a country-by-country report (CbCR) for Taiwan local entities vide ruling No. 10804651540, applicable retroactively from fiscal year starting 2017.

This amendment will supersede the 2017 safe harbor rule and is aimed at easing the filing compliance burden on small foreign businesses. Besides relaxation of the thresholds, a fourth test was added basis the taxpayer’s comments.

Summary of the amended CbCR safe harbor rule are tabulated below:

Our Comments

The aforementioned amendment would achieve the dual objective for Taiwan:

• To align the monetary threshold for CbCR with the OECD BEPS Action 13;
• the compliance costs for small MNE groups would be reduced

This is a progressive amendment by the Taiwan MOF as the very rationale of the introduction of the three-tier documentation vide BEPS Action 13 by the OECD was to assess the income, expenses and profits of large MNE groups and not to increase the compliance burden for small taxpayers.

Luxembourg: Introduced MAP as a mechanism to resolve transfer pricing and international tax dispute

In December 2019, Luxembourg updated its domestic tax law and adopted a tax dispute resolution mechanism to ensure legal certainty and a fairer taxation system in the EU and adopted the EU directive on tax dispute resolution mechanisms. The Luxembourg law now provides a uniform framework to resolve transfer pricing and international tax disputes in the EU with other member states.

The Mutual Agreement Procedure (‘MAP’) can be described as an amicable government-to-government dispute resolution mechanism with the competent authorities to resolve tax-treaty related disputes on a mutually agreed basis.

This framework is more efficient with respect to access to MAP regime, duration of the procedure and effective conclusion.

MAP mechanism will apply to any disputes related to income tax, withholding tax, business tax, and wealth tax related to the tax years starting from 2018 onwards.

The salient features of the new regime are as follows:

1. Coverage

• The new mechanism is not limited to double taxation issues resulting from transfer pricing adjustments, dual residences or attribution of profits to permanent establishments.
• Taxpayers may be companies or individuals who can submit the complaint to each competent authority about the interpretation and application of the EU Arbitration Convention and of intra-EU tax treaties.
• The complainant must be residents of an EU Member State for tax purposes and be directly affected.

2. Time frame, procedural aspects and remedies available:

• If the tax authorities do not resolve the dispute on a unilateral basis within six months from the date of the receipt of the complaint, they shall try to resolve the dispute under MAP regime within two years after the acceptance of the complaint.
• Subsequently, taxpayers can submit their unresolved case to arbitration. Here, the dispute will be resolved by an advisory commission which is led by a judge and composed of independent persons of standing alongside tax officials from the competent authorities.
• No later than six months after set up of an advisory commission, this panel shall deliver an opinion on how to resolve the dispute. The opinion will be binding for the authorities, unless they agree on a conflicting decision within the following six months.
• The complaint must be submitted within three years after notification of the tax assessment, tax audit report, or any other action that results or will result in a tax dispute.
• If the authorities unduly delay the procedure, the taxpayer can go to the Luxembourg courts for judicial review and for instance, appeal for a rejection of a complaint or claim for the execution of a final decision in Luxembourg.

Our Comments

MAP has been introduced in Luxembourg in order to bring an efficient and effective tax dispute resolution mechanism. It is particularly effective to manage transfer pricing disputes where double taxation occurs on account of transfer pricing adjustment in one EU Member State without any corresponding adjustment in another EU Member State. Moreover, it is more of an interpretation and application of tax treaties and the arbitration convention. It is not limited to transfer pricing and double taxation issues. This is a welcome introduction as taxpayers in Luxemburg would now be assured of an outcome within a fixed and enforceable time frame.

Malaysia: New transfer pricing audit framework

The Malaysian Inland Revenue Board, in December 2019, issued a transfer pricing audit framework that replaces the existing transfer pricing audit framework. This framework would be effective from 15 December 2019 and brief updates are enumerated below:

• Transfer pricing documentation must be prepared accurately and in compliance with the relevant provisions of Income Tax Act, 1967, Transfer Pricing Rules 2012 and Transfer Pricing Guidelines 2012;
• Years of assessment limited to up to seven years, except cases that involve fraud, willful default, and negligence;
• Taxpayers are required to respond to tax authority’s request for documents/information within 14 days, except for transfer pricing documentation, for which 30 days are allowed;
• Taxpayers are required to prepare and submit presentation slides in relation to business operations and functional analysis to the tax authorities at least seven days before the audit visit.
• Taxpayers need to respond to the audit findings issued by the tax authorities within 18 days;
• Clarification provided on voluntary disclosure and new penalty rates are introduced.

Our Comments

The 2019 TP Framework introduces tighter deadlines for taxpayers to submit documents and information to the tax authorities. These tax reforms proposed would aide Malaysian tax authorities to identify and propose improvements and additional measures to create a more progressive and effective taxation system. Accordingly, taxpayers would need to ensure that requisite documents and information in support of the justification of the TP benchmarking, which may be asked during transfer pricing audit are kept readily available.

Dutch: Introduced 2020 annual list of low-tax jurisdictions

In December 2019, the Dutch government published an annual list of low-tax jurisdictions. The updated 2020 Dutch list removes four countries, namely Belize, Kuwait, Qatar, and Saudi Arabia that were included on the 2019 low-tax jurisdiction list and added two new countries namely, Barbados and Turkmenistan.

The Dutch list of low-tax jurisdictions is an addition to the EU’s list of non-cooperative tax jurisdictions. MNE’s operating in the Netherlands and also in countries listed on the Dutch or EU list may subject to Dutch tax measures, which aimed at the prevention of tax avoidance, including controlled foreign company (CFC) rules and limits on private tax rulings.

The Dutch list of low-tax jurisdictions is comprised of all countries that, on October 1, 2019, had no profit tax or corporate income tax rate below 9%. Thus, the Dutch 2020 list includes Anguilla, Bahamas, Bahrain, Barbados, Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Isle of Man, Jersey, Turkmenistan, Turks and Caicos Islands, Vanuatu, and United Arab Emirates.

Further, countries included on the EU’s list of noncooperative tax jurisdictions are American Samoa, Fiji, Guam, Oman, Samoa, Trinidad and Tobago, US Virgin Islands, and Vanuatu.

The jurisdictions mentioned on the Dutch and EU list are relevant for the application of the Dutch CFC rules and for the Dutch tax ruling policy. If a Dutch taxpayer has a direct or indirect interest in a company or permanent establishment located in a jurisdiction listed on the Dutch or EU list, then CFC rules might be applicable in 2020. Also, under the updated Dutch ruling policy, no tax rulings will be granted if the ruling covers a direct transaction between a Dutch taxpayer and entity located in a jurisdiction listed on the Dutch or EU list.

The list will also be relevant for the conditional withholding tax on interest and royalties that will be applicable from January 1, 2021, if a Dutch taxpayer makes an interest or royalty payment to a group company residing in a jurisdiction listed on the Dutch or EU list, then the payment could be subject to 21.7% of conditional withholding tax.

Entities Qualifying as a CFC:

Based on the supplementary rules, an entity will be considered a CFC if:

1. a Dutch taxpayer directly or indirectly holds an interest exceeding 50% (in vote or value) in a foreign entity or branch;
2. the income of this entity or branch consists of more than 30% passive income; and
3. this entity or branch is tax resident in a jurisdiction listed on the EU list of non-cooperative jurisdictions (EU Blacklist) or in a low-tax jurisdiction (i.e., a jurisdiction with a statutory corporate income tax rate below 9%).

Our Comments

The Dutch list shows that the Dutch government is taking an initiative in curbing tax avoidance. The Dutch government also aims to keep the Netherlands an attractive jurisdiction for foreign investors that have substance and business motives for their investments that operate in or through the Netherlands, while fighting for channeling funds that are routed via the Netherlands to low-tax jurisdictions.

Indirect Tax

Study links VAT frauds to the EU’s current account surplus

As per data published in 2018, the world economy runs a logically impossible current account surplus with itself of USD 422 billion. The European Union’s self-surplus amounts to almost €307 billion. Now a recent study that attempted to decode this puzzle has stated that this self-surplus is largely due to over-reporting of exports by businesses to claim VAT exemption benefits. The study states that such over-reporting of exports may be resulting in VAT revenue shortfalls of up to €64 billion. Given that exporters are offered tax benefits by almost all major economies, including India, such over-reporting of exports across the board cannot be ruled out.

[excerpts from Money Control]