Direct Tax

US FDII rules under review as potentially harmful tax regime, Treasury official says

[Excerpts from MNE Tax, 19 February 2019]

The US’s Foreign-Derived Intangibles Income (FDII) tax rules are being scrutinized by the Organisation for Economic Cooperation and Development’s (OECD) Forum on Harmful Tax Practices (FHTP) to determine if it is a harmful tax regime, the US delegate has confirmed to the FHTP. Speaking in Washington, on 14 February, at a Tax Council Policy Institute conference, Gary Scanlon, an Attorney-Advisor in Treasury’s Office of the International Tax Counsel, said that the US FDII regime, enacted in the 2017 US tax reform, has been identified as a preferential tax regime triggering the FHTP review process.

As one of the 128 member countries of the “Inclusive Framework on BEPS,” the US has agreed to be bound by the OECD/G20 Base Erosion profit shifting (BEPS) Action five minimum standards relating to preferential tax regimes that can facilitate BEPS. As a Framework member, the US has also agreed to be peer-reviewed on whether the agreed-to BEPS minimum standards are actually being implemented in the US. These peer reviews are carried out by the FHTP.

Global Minimum Tax Proposal may be premature, companies tell OECD

[Excerpts from Bloomberg Law News, 18 March 2019]

OECD is considering four proposals to address where and how multinationals are taxed. A global minimum tax proposal to rewrite international tax rules for the modern economy may be unnecessary, companies and practitioners told the OECD at a public consultation in Paris. But if the OECD does move forward with the plan, it must be simple if it is to work, according to a range of speakers from businesses, non-governmental organizations, and academia. Speakers at the 14 March event disagreed on whether a minimum tax is still needed after the advances of the Base Erosion and Profit Shifting (BEPS) project and whether the proposal would achieve its aims. The OECD is considering four ideas as it seeks a globally agreed-upon solution by 2020 to address some countries’ concerns that multinationals aren’t paying their fair share of tax, or aren’t paying it in the right places. One proposal would set a minimum global tax rate for multinationals, drawing on the Global Intangible Low Taxed Income (GILTI) regime the U.S. enacted in its 2017 tax overhaul, the OECD’s 13 February consultation paper said. If a company has subsidiaries in a jurisdiction with a tax rate below the agreed minimum rate, it would pay more tax in the jurisdiction where it is based to make up the difference.

While the other proposals being considered by the OECD would shift taxing rights to different jurisdictions, in response to concerns from some countries that they aren’t getting enough tax revenue from multinationals, this one could change how much tax companies pay—a concern that has driven the OECD’s year -long project to combat BEPS.

Transfer Pricing

Slovakia : Issues new guidelines for transfer pricing documentation1

Ministry of Finance of Slovak Republic issued the new guidelines (no. MF/019153/2018-74), with regard to the transfer pricing documentation, replacing the guidelines issued in 2016.

The new transfer pricing documentation guidelines are effective for the tax period beginning after 31 December 2017. In respect of tax period 2018, the tax authorities may request the documentation only after 1 April 2019. However, in case the documents are submitted before 30 June 2019, i.e., within the transitional period, the taxpayer has an option to decide whether to follow the guidelines issued in 2016 or the new guidelines. After 30 June 2019, the taxpayer is required to submit the documentation in line with the guidelines 2018.

Though the Guidelines 2018 recognizes three types of documentations – simplified, basic and full-scope as mentioned in the guidelines 2016, significant changes were made in respect of the criteria for determining the type of documentation that each taxpayer is required to maintain, along with the content of each type of documentation. Thus, the guidelines introduced place reliance on the documentation recommendations forming part of the OECD’s BEPS Action Plan 13.

US IRS publishes statistics on the CbCR filed by US corporations and partnerships for 20164

US IRS (Internal Revenue Service) recently published statistics of Country-by-Country Reports (CbCR) filed for 2016 based on data from Form 8975CbC Report and Form 8975 Schedule A, Tax Jurisdiction and Constituent Entity Information filed by US Corporations and partnerships. The data is divided into five tables of which the first three are classified as a major geographic region and selected tax jurisdiction; the fourth table is classified as a major industry group, geographic region and selected tax jurisdiction; the fifth table is related to an effective tax rate of multinational enterprise sub-groups. The data presented in the tables is based on the number of filers, revenues, profit, income taxes, earnings, number of employees and tangible assets in different jurisdictions. However, no specific information of a particular MNE can be inferred from the published data.

Following table shows the overall number of MNE groups and sub-groups along with the statistics :

Particulars Number of reporting MNE groups and sub-groups
Reporting Entities with Positive Profit Before Income Tax by Major Geographic Region
Reporting Entities with negative Profit Before Income Tax by Major Geographic Region
MNE sub-groups with negative income tax accrued and positive profit

With respect to India, the statistics show 593 reporting MNE groups (with 273 entities in the manufacturing sector) and 1714 constituent entities resident in the tax jurisdiction.

Sweden : Administrative guidance on relationship between TP documentation and tax penalties2

Swedish Tax Authorities (STA) issued administrative guidance on the relationship between transfer pricing documentation and tax penalties.

As per Swedish tax law, tax penalties are levied on transfer pricing adjustment at the rate of 40% of the additional tax (10% of the reduced losses). STA has clarified that maintenance of appropriate transfer pricing documentation will result in relief of potential tax penalties by half.

The said relief can be granted by the tax authorities if the following requirements in respect of transfer pricing documentation are fulfilled :

  • The documentation must comply with the provisions on content as stated in the Swedish Tax laws
  • The taxpayer must have applied the documented methods and policies in practice
  • The transfer pricing policy documented should not materially deviate from the accepted perceptions or methods for correct pricing according to the OECD TP guidelines

Furthermore, the guidance also remarked that in the situation of an incorrect assessment of correct pricing, where there is sufficient documentation, the STA will grant full exemption from the tax penalties.

Australia releases final Practical Compliance Guideline on inbound distribution arrangements3

The Australian Taxation Office (ATO) released Practical Compliance Guideline (PCG 2019/1) on 13 March 2019.


The guideline will apply to existing and new inbound distribution arrangements. This guideline outlines compliance approach to the transfer pricing outcomes associated with the following activities of inbound distributors :

  • Distributing goods purchased from related foreign entities for resale, and
  • Distributing digital products or services where the intellectual property in those products or services is owned by related foreign entities.

Assessment of Risk

The guideline outlines the ATO’s approach to assessing the risk of inbound distribution arrangements by comparing the profit outcome of taxpayer’s arrangements against profit markers, set out by the ATO for inbound distributors. The Guideline sets out a high-, medium- and low-risk-coloured zoning classification based on the Earnings Before Interest and Tax (EBIT) to sales margin achieved by the inbound distributor. The guideline has divided inbound distributors into four key industry categories :

  • 1. Life Sciences (including Pharmaceuticals);
  • 2. Information and Communication Technology (ICT);
  • 3. Motor Vehicles; and
  • 4. A General Distributor category.

Furthermore, the Life Sciences industry is divided into three sub-categories, whilst the ICT industry is divided into two sub-categories. The sub-categories are driven by the functions/activities undertaken by the inbound distributor, which the ATO considers ‘incrementally generate value’. The guideline has prescribed profit markers for each category for assessing transfer pricing risk indicating that ATO will likely contact taxpayers that are considered to fall in the high- or medium-risk zones.

The guideline also clarifies that ATO’s profit markers should not be relied on to determine arm’s length conditions, and that the Guideline will not limit the operation of law or create any safe harbour administrative concessions. Furthermore, the Advance Pricing Agreement (APA) has been suggested as a constructive way to reach agreement on the transfer pricing of inbound distribution arrangements for a fixed period of time.

Indirect Tax

UK MTD to be implemented despite failure of Brexit talks

[Excerpts from The Telegraph, 13 March 2019]

UK’s Chancellor of the Exchequer, Phillip Hammond, in his spring statement confirmed that the Making Tax Digital (MTD) measures for VAT will be implemented as scheduled with effect from 1 April 2019, even in the event of a no-deal Brexit.

[Under the MTD initiative, Her Majesty’s Revenue and Customs (HMRC) will link its system with the digital books of accounts of the taxpayers using an Application Program Interface (API) to record the ongoing and accurate projections of tax dues.]