Tax Talk
Global Developments

Direct Tax

Chinese citizens start getting taxed for their Global Income

China has started summoning its citizens residing abroad, asking them to disclose and declare their overseas income in order to pay taxes on the same at home. Such a move to tax the global income of its citizens could highly impact Chinese expats working outside China since it is the largest expat community in the world. The new rules would also subject income from dividends and property sales to tax in China. It would be a big blow to citizens working in low tax jurisdictions such as Hong Kong, where the maximum tax paid was around 15% of their salaries compared to a tax rate as high as 45% levied by the Chinese Government.

The United Kingdom to have Access to Ownership details of Companies Domiciled in Tax Havens with a linkage to the UK

In a move to detect and tackle money laundering and financial crimes, eight of UK’s overseas territories have committed to providing public access to ownership details of companies that have a link to the UK by 2023. These eight territories comprise of Anguilla, Bermuda, Cayman Islands, the Falkland Islands, Montserrat, the Pitcairn Islands, St Helena, Ascension Island and Tristan da Cunha, and the Turks and Caicos Islands. The only territory left to make such a commitment are the British Virgin Islands.

Apple wins major tax battle against EU

The American tech giant, Apple Inc., won a major battle against the European Union antitrust officials, who claimed that the company owed a tax bill of EUR 13 billion (approximately USD 14.8 billion) to Ireland.

The said case dates back to 2016 when the European Commission (‘the Commission’) asked Ireland to recover EUR 13 billion in allegedly unpaid taxes since the same constituted an illegal subsidy under the jurisdiction’s state-aid rules.

In 2020, the aforesaid decision was overturned by the General Court on the pretext that the commission had failed to meet the legal standards in proving that the tech giant was given special treatment. This decision has emboldened Margarethe Vestager, the Executive Vice President of the European Union Commission, to create new regulations for tech companies such as imposing the new digital tax to ensure that each company paid its fair share of tax.

Saudi Arabia mulls Income Tax and Asset Sales to bolster its Finances

Due to the disruption and financial instability caused by the pandemic and falling crude oil prices Saudi Arabia’s economy is set to contract by 6.8% and is accordingly accelerating the plans to sell off state assets and mulling the introduction of Income Tax.

In order to address this growing instability and shortfall in finances, the government has already taken unprecedented measures such as tripling the current VAT (value-added tax) as well as increasing import fees. This move could be a major blow to its citizens because traditionally, the Arabic Country has been tax-free for individuals with revenue from crude oil, supporting a wide range of subsidies for its citizens.

Transfer Pricing

Australia: Guidance on the treatment of JobKeeper Payments²

The ATO had released a JobKeeper Payment scheme, which is a temporary subsidy for businesses significantly affected by COVID-19. Eligible employers, sole traders, and other entities can apply to receive AUD1,500 per eligible employee per fortnight. The ATO, on 15 July 2020, issued a statement providing guidance on the treatment of JobKeeper payments. The ATO will assess the impact of the JobKeeper payment on transfer pricing arrangements, by reviewing arrangements in situations when the JobKeeper payment-

• Has resulted in a change to the transfer price paid or received by the Australian entity
• Was shown to effectively shift the benefit of the government assistance to offshore related parties.

A considerable number of businesses with different transfer pricing arrangements are potentially affected by the JobKeeper program. The authorities have also provided certain examples of how JobKeeper payments should be treated in transfer pricing arrangements. The statement indicates that the ATO expects Australian entities to retain the benefit of the JobKeeper payment received and not transfer the same to any overseas group companies.

The JobKeeper payments should not result in a reduction of the price of the service provided to the offshore related party. No reduction should be made to the cost of the service on which profit mark-up should be charged. The independent parties acting in a commercially rational manner would not be expected to share the benefit of the government’s assistance.

Malaysia released FAQs on APA treatment due to COVID-19 Pandemic³

1. New APA application
   Inland Revenue Board of Malaysia (IRBM) is currently not accepting any new APA application from businesses affected by COVID-19 until further notice since the outlook of the pandemic is highly uncertain. For businesses that remain unaffected by COVID-19, such taxpayers can still proceed with APA application.
2. Treatment of Ongoing APA
   
   • The review process of an ongoing APA application request is based on the information previously submitted to the IRBM. The proposed arm’s length range will be based on the benchmarking analysis of normal economic and market conditions, i.e., the pre- COVID-19 period.
   • IRBM does not allow any amendment or substantial updates on material changes to the ongoing application as the full impact of COVID- 19 cannot be gauged, presently.
   • Depending on the facts and circumstances of the case, the term test may be applied in order to consider the impact of COVID-19 on the proposed covered transaction. The Annual Compliance Report (ACR) will be required to be submitted annually, notwithstanding the application of the term test. Any compensating adjustment shall be made at the end of the APA covered period.
   • A taxpayer that had withdrawn an APA application may file a new APA application subject to conditions stated above.
3. Treatment of Concluded APA
   In case of breach of critical assumptions in the APA agreement in force due to COVID-19, IRBM states that the taxpayer can either revise or apply for the cancellation of the APA within a prescribed period. Further, it highlights that in the case of Bilateral APA/ Multilateral APA, any application for a revision or cancellation will be subject to further negotiation with treaty partner(s), taking into account all relevant tax jurisdictions’ APA regulations and procedure.
4. Renewal of APA
   IRBM also states that a taxpayer does not qualify for renewal if the critical assumptions in the expiring APA are no longer valid or relevant due to material changes on taxpayer’s business as a result of COVID-19 and under such circumstances it may file a new APA application or choose not to submit a new APA application.

Our Comments

In the current situation, guidance provided for MNEs looking for tax certainty is still in a grey area due to the unprecedented times amidst a pandemic. It will be interesting to observe whether other jurisdictions also release similar approaches.

Belgium releases transfer pricing circular for statutory reporting⁴

On 30 June 2020, the Belgian tax administration published a transfer pricing ‘circular’ setting out commentaries on selective topics or questions arising to taxpayers while preparing their statutory transfer pricing reporting. In this respect, a reference is made to the Belgian taxpayers’ obligation to prepare and file the transfer pricing notification Forms, Master File, Local file, Country by Country Report as implemented in the Belgian tax law based on the OECD’s BEPS Action 13. The main issues addressed by the circular include:

1. Obligation to file, deadlines and thresholds
2. Reporting obligations for a consortium, joint venture and partnership
3. Reporting obligations for non-profit organizations: although not subject to corporate tax, are still obliged to prepare and file Belgian BEPS 13 forms (if the relevant thresholds are exceeded)
4. Reporting obligations for permanent establishments: both the activities and the transactions of the head office and the permanent establishment(s) are to be reported in the Local file form (if relevant thresholds are exceeded), as these ‘dealings’ are also crossborder transactions.
5. Selected questions related to credit institutions and insurance companies
6. Reporting obligations for business restructuring, only restructurings involving the Belgian entity are subject to the reporting, while the reorganizations of the organizational or shareholding structure beyond the Belgian entity are not to be mentioned in the reporting.

Specific guidance on the content, details, and format of the information to be presented in the forms.

Our Comments

The circular appears to be aligned with the common approaches followed by professionals in tax practice and OECD guidance. The new circular also provides insight and clarity on certain topics and addresses specific questions related to different aspects of the BEPS 13 forms in particular cases. It will provide adequate guidance to complicated structures and ease reporting requirements.

Hong Kong issues Guidance on APA Procedures - releases updated regulations on APA⁵

The Inland Revenue Department (IRD) on 15 July 2020 under the Departmental Interpretation and Practice Notes No. 48 (DIPN 48) provided legislative changes in relation to the APA to streamline the APA process. Key revisions in the DIPN 48:

1. Acceptance of Unilateral APA: Hong Kong will now start to accept unilateral advance pricing agreements for intragroup transactions involving tax jurisdictions where Hong Kong does not have any treaty (i.e., double tax avoidance agreements).
2. Rollback Considered: Hong Kong will now consider requests for even rollback periods for not just unilateral cases but also bilateral and multilateral APAs. This step attempts to settle recurring issues and provide faster closure of the APA process as well.
3. Streamlined APA process:The current process is being replaced into a three-stage process along with reduced early stage documentation requirements.
   • Stage 1 (six months) - Early engagement: The submission of a request for APA early engagement six months before the proposed commencement date, setting up the APA team, preliminary discussion, submission of APA application, payment of the deposit.
   • Stage 2 (18 months) - APA application: The analysis and evaluation, further information gathering and interviews, negotiation mutual agreement with competent authorities, signing of APA, settlement of fees payable.
   • Stage 3 (ongoing) - Monitoring and compliance: Disclosure, submission of the annual compliance report, recordkeeping.
4. The coverage of APAs has been extended to include:
   • The attribution of profits to a PE in Hong Kong- a threshold of HKD 20 million business profits per year.
   • Any transactions other than the sale or purchase of goods, provision of services, and use of intangible properties- a threshold of HKD 20 million per year.
5. Fees: An APA fee would include a provision fee estimate by an independent expert that would work with Hong Kong APA office to quantify potential costs and enable better decision making.

Extended deadlines for filing of Transfer Pricing Returns in light of COVID-19⁶

Extended due dates and details of some countries are mentioned below:

Argentina

The July 2020 general resolution revises the deadlines for submitting transfer pricing studies to be filed by taxpayers or responsible parties according to the following schedule for tax periods closing:

Further, the above general resolution provides that the deadline for submitting Master files corresponding to past fiscal years (years that close in the period beginning after December 2018 and ending through August 2019 (inclusive)) are due in August 2020. Both the transfer pricing studies and Master File is based on the last digits of the taxpayer identification number.

Additionally, apart from the above special deadlines, the due date for filing the transfer pricing report is the 6^th month after the end of the fiscal year. However, the Master File needs to be filed by the 12^th month after the end of the fiscal year.

Dominican Republic

The due date for filing the transfer pricing return has been extended until 29 July 2020 as compared to the earlier date of 30 April 2020.

Poland

The deadline for submitting a statement that the transfer pricing documentation has been prepared and for providing transfer pricing information (forms TPR-C and TPR-P) stands extended pursuant to article 31z of the Anti-Crisis Shield 4.0:

1. Until 31 December 2020 – in those cases where this deadline was to expire between 31 March 2020 and 30 September 2020;
2. By 3 months - in those cases, where this deadline was to expire between 1 October 2020 and 31 January 2021.

In addition to the above, the Anti-Crisis Shield 4.0 also covers a postponement of the deadline for preparing (or attaching) to the local file a Master file until the end of the 3rd month from the day following the day, when the extended deadline expired for submitting a statement that a local transfer pricing documentation has been prepared. Thus, in the case of taxpayers, whose tax year ended is on 31 December 2019 – deadline for local file and transfer pricing documentation will be 31 December 2020, and the deadline for preparing or attaching to the Local File the master file is 31 March 2021.

Portugal

The due date for filing the transfer pricing return has been extended until 31 August 2020 as compared to the earlier due date of 15 July 2020.

Ecuador

Ecuador taxpayers can file their transfer pricing returns anytime between 10 to 28 October 2020.

Panama

The due date for filing the transfer pricing report has been extended until 30 September 2020.

New OECD country-by-country (CbC) reporting statistics offer insight into multinational group potential tax avoidance behavior

The OECD provided data of up to 4,000 multinational enterprise groups headquartered in 26 jurisdictions, operating across more than 100 jurisdictions worldwide. The corporate tax statistics are based on the CbC reporting by MNEs for 2016. The CbC reporting requires large MNEs to are required to publish crucial information regarding their profits, employees, locations, and tangible assets, where they pay their taxes and mention every country of operation. Thus, the CbC reports provide the tax authorities with information about MNEs to allow for risk assessment purposes

This new dataset includes aggregated data on the global tax and economic activities of MNEs, including profit before income tax, income tax paid (on a cash basis), current year income tax accrued, unrelated and related-party revenues, the number of employees, tangible assets, and the main business activity (or activities) of MNEs.

Preliminary insights from the above mentioned, new statistics suggest the following:

• One of the main findings of the report is that there is a distinct mismatch between the location of reported profits and the location of economic activities, like jobs, assets, and sales;
• The revenues per employee tend to be higher where statutory corporate income tax rates are zero and in investment hubs;
• On an average, MNEs in investment hubs report a higher share of related-party revenues in total revenues;
• The composition of business activity differs across jurisdiction groups, with the predominant business activity in investment hubs being ‘holding shares and other equity instruments.’

While respecting the limitations of the data and duly noting that these observations could also reflect some commercial considerations, there are indications of BEPS behavior. Ultimately this finding reinforces the debate on a need to continue the work in progress in the Inclusive Framework on Pillar 2 of the effort to address the tax challenges arising from digitalization.

2. https://www.ato.gov.au/Business/International-tax-for-business/In-detail/Transfer-pricing/Transfer-pricing-arrangements-and-JobKeeperpayments/

3. http://lampiran1.hasil.gov.my/pdf/pdfam/FAQ_APA_Treatment_Due_To_COVID19.pdf

4. https://eservices.minfin.fgov.be/myminfin-web/pages/fisconet#!/document/ea99e5c1-8ab9-4ebd-8a4e-d3229a1585ef

5. https://www.ird.gov.hk/eng/pdf/dipn48.pdf

6. https://regfollower.com/2020/08/06/extension-of-tax-compliance-due-dates-amid-covid-19-pandemic/

7. http://www.oecd.org/tax/new-corporate-tax-statistics-provide-fresh-insights-into-the-activities-of-multinational-enterprises.html

Indirect Tax

The UK announces a major cut in VAT rates for Tourism and Hospitality sectors

Tourism and hospitality are one of the worst affected sectors by the COVID-19 pandemic and the subsequent lockdowns announced by most countries. Now, as the United Kingdom slowly returns to normalcy, the UK government has slashed the VAT rates applicable in these sectors from 20% to 5%. It has been announced that the reduction in rate will be applicable for up to 6 months (until January 2021) with a view to give a boost to these sectors and kick start the economy. The reduced VAT rate of 5% will be applicable to the following:

• Food and non-alcoholic drinks served by eat-in as well as takeaways restaurants, cafes, pubs, etc.
• Accommodation in hotels, B&Bs, etc.
• Cinemas, theme parks and zoos.

[excerpts from the online edition of Mirror UK]