The Turkish government on 5 December 2019, passed a law to introduce the following new taxes:
Digital Services Tax:
This tax would be imposed on gross revenues generated from services provided in Turkey, which would include:
- Digital advertising services
- The sale of all kinds of audio, visual, and digital content on the digital medium (including computer programs, applications, etc.) and provision of streaming services
- Services for the provision and operation of digital media in which users may interact with each other (including platforms enabling the sale of goods or services among users)
- Intermediary services provided in the digital environment for the above services
Revenues from such services would be taxed @7.5% (The president may alter the tax rate within the range of 1% to 15%).
However, businesses whose gross revenue in Turkey is less than USD 3.5 million or global gross revenue is less than USD 837.6 million would be exempt from the Digital Tax. This tax has come into effect from 1 March 2020, and it’s the highest Digital Services Tax Rate imposed among European Union members.
A tax rate of 2% (The president may alter the tax rate within the range of 1% to 4%) on gross revenues from the provision of lodging services by hotels, motels, holiday resorts, etc. including food, drinks, entertainment services, etc. in relation to such lodging services on the premise.
It has come into force from 1 April 2020.
Digital Services Tax:
Despite an increased likelihood of a long-term multilateral solution by the OECD and concerns raised by the US Government in respect of similar proposals in France, UK announced a Digital Tax @2% on online revenues generated by large multi-national corporations (MNCs) derived from the provision of a social media service, a search engine or an online marketplace to UK users.
The MNCs mainly affected would comprise Facebook, Google and Amazon. The tax was introduced amidst criticism for paying very little tax on the large revenues which these MNCs generate in the UK. The aforesaid digital service tax has come in force from 1 April 2020.
The UK government, in its Budget 2020, announced a new stamp duty surcharge on the purchase of homes in the UK by non-UK residents @2% from April 2021. Buyers who become UK residents after their purchase may become eligible for a refund of surcharge.
The new surcharge, affecting non-UK taxpayers buying a property in England, will be in addition to the existing stamp duty charge for properties, as well as the additional 3% levy on the purchase of second homes or buy-to-let properties, leaving many with a sizeable tax bill.
The Spanish Tax authorities have announced the Tax Control Plan for 2020, underlined the government's objective of emphasizing tax enforcement. By introducing the Tax Control Plan 2020, special attention will be given to the fulfillment of the documentation and information obligations regarding transfer pricing, including the analysis of the assessment of functions, assets, and risks contained in the documentation.
The Spanish Tax authorities will implement a new transfer pricing risk analysis system, which will be based on information available on inter-company transactions that the authorities obtained through the OECD/G20 Base Erosion Profit Shifting (BEPS) project as well as disclosure requirements mandated by the European Union. The primary sources of information will include automatic exchanges of information, country-by-country reporting, unilateral agreements, tax audits, prior advanced price agreements, mutual agreement procedures, etc. The renewed plan will allow the Tax authorities to conduct a better risk analysis through the development of indicators, indexes and models, and the identification of high fiscal risk behavior patterns.
Further, the key areas outlining the government's priorities for tax enforcement in 2020 include valuation of intragroup transfer of assets, especially, intangibles; deductions that could significantly erode the tax base, such as payment of royalties or intragroup services and activities carried out by entities characterized as low risk having a significant economic presence (e.g., those in manufacturing and distribution activities), taxation of new, highly digitized models, financial transactions and attribution to permanent establishments.
Spanish Tax authorities are focusing on scrutinizing transfer pricing positions of companies domiciled in Spain and carrying out cross border transactions. The execution of a new transfer pricing risk analysis system based on information obtained through the implementation of the BEPS project and other mandatory disclosure requirements shall compel taxpayers in Spain to re-examine their existing transfer pricing policies and take corrective actions to mitigate scrutiny risk. It will bring about greater transparency and prevent tax evasion by MNEs.
On 4 March 2020, Hong Kong's Inland Revenue Department announced that Hong Kong and China have entered into an arrangement for automatic exchange of CbC reports, which would apply retrospectively to the accounting periods beginning on or after 1 January 2018 (i.e., those ending on or after 31 December 2018). Based on this, Hong Kong entities having ultimate parent entities in China would be absolved from filing CbCR in Hong Kong.
However, Hong Kong entities must make a filing via the CbC online portal on or before 31 March to inform the Inland Revenue Department about such relief.
Although Mainland China and Hong Kong had signed the Comprehensive Double Taxation Agreement enabling automatic exchange of information, there was no agreement for the exchange of CbCR. Therefore, theoretically, Hong Kong subsidiaries whose ultimate parent entity resided in Mainland China were still required to file CbCR. With the exchange of CbCR in place, taxpayers in Hong Kong can simply notify the tax department of their revised position as they are now relieved from their filing obligation. This will provide administrative relief to Hong Kong taxpayers of China-based reportable groups. However, there will be a need to review current transfer pricing positions and maintain proper documentation (Master and Local files) before Tax authorities obtain any additional data through the enhanced exchange mechanism.
The BEPS Action 13 report included a requirement that a review of the CbC reporting minimum standard must be completed by the end of 2020. In line with the same, OECD had released a public consultation document (comprising 3 Chapters) on review of CbC Reporting and invited public comments on the draft by 6 March 2020. The draft sought inputs on various questions regarding the implementation and subsequent operation of the BEPS Action 13, along with the scope and contents of the CbCR. The OECD has now published the public comments received on the draft
Some of the primary concerns raised by stakeholders include:
- It is premature to make Action 13 changes before the result of Inclusive Framework's ongoing work on the digital economy project is known;
- Any attempt to make CbCR information public, for several reasons, including that the reports contain commercially sensitive data has been opposed;
- Adoption of one standardized format and secure arrangements for sharing of CbC reports;
- In general, businesses have a concern that any change to the reporting requirements that need additional information should not impose a disproportionate compliance burden.
- CbC reporting should not rewrite accounting standards (which are audited) or establish a new standard on top of accounting standards as it would only increase complexity without ensuring consistency across taxpayers;
- On the appropriate and effective use of CbC reports, it is essential to note that the OECD is involved in developing a CbCR Tax Risk Evaluation & Assessment Tool ('TREAT'), which will aid the Tax authorities in reading and interpreting CbCRs. In this regard, stakeholders opined that until the tax administrations are experienced in effectively handling and using the CbCRs, some of the proposed changes could be overwhelming and potentially burdensome.
2020 CbC Review consultation document is of particular importance in India since the current transfer pricing assessment cycle (i.e., for FY 2016-17) is the first cycle for which CbCR and master file compliances were introduced. In this regard, even though the Indian Tax authority has clarified that the CbCR information should not be used as a substitute for a detailed transfer pricing analysis, however, the possibility of drawing reference from such information on record cannot be completely ruled out. OECD's view on the extent of allowing changes in reporting requirements would need to be assessed from India's perspective since Indian master file requirements deviate to some extent from the standard requirement prescribed by the OECD.
Swedish Tax Agency: Characterizes PUMA Group's Swedish entity as a routine distributor; Rejects intra-group pricing
Facts of the Case:
|Taxpayer||Puma Nordic AB ("Puma Sweden")|
|Income Tax Years||20 15-2017|
|Ownership Structure||Wholly owned subsidiary to the German parent company "Puma SE", selling sports products under the brand "PUMA".|
|Business Profile||The company operates as a distributor of Puma branded products in the Swedish market.|
|Related Party Transactions||
a. Purchase of goods from the Group's sourcing company; and
b. Payment of license fee to Puma SE for access to the Group's marketing portfolio.
|Pricing model||Puma Sweden pays a cost-based fee for the products to the Group's sourcing company as well as a license fee based on sales to external customers to PUMA SE for the use of the PUMA brand and related marketing material.|
|Transfer pricing position adopted by the taxpayer||Puma Sweden was characterized as a full-fledged distributor exposed to all significant risks in respect of its distribution operations. The inter-company transactions were demonstrated as arm's length using the CUP/CUT method.|
|An issue raised by the tax authority||The applied transfer pricing model resulted in continuous losses for Puma Sweden, which were justified arguing that the entity was a risk-bearing distributor. Further, Puma Sweden was contractually obliged to create local value for the brand and was not entitled to any compensation for marketing expenses as per the Group's International Marketing Agreement.|
Decision of the Swedish tax Agency (STA):
On examination of a variety of documents (including inter-company agreements, group policy documents, transfer pricing analyses, etc.), the Swedish tax Agency made the following observations:
- Puma Sweden conducts its primary functions upon the strategies and directions of PUMA SE. It is neither involved in any decisions concerning product development, sourcing, design, nor in the overall marketing strategy.
- Based on the information from the group's annual report and the transfer pricing documentation, STA identified the following key value drivers for Puma Group and assessed the corresponding risk tied to the critical value driver:
- building a strong international brand (Brand risk) and
- designing and developing a new product (Product Risk)
- STA found that brand risk and product risk, even though contractually is assumed by Puma Sweden as per the inter-company agreements, the actual conduct of the Swedish entity showed that it did not have the actual capacity to assume these economically significant risks. The people employed by Puma Sweden were in sales, marketing, warehousing, and logistics functions. Whereas, Puma SE employed the key people with knowledge and capabilities to make strategic decisions on product design, manufacturing, and marketing globally. The fact that Puma Sweden had local marketing know-how was, according to the STA, not sufficient to deem Puma Sweden capable of assuming significant market risks since all decision-making functions were with the Puma SE.
- The only assets owned by Puma Sweden, therefore, were customer lists, inventory, sample, etc. akin to any routine distributor. Puma SE, on the other hand, was identified as the owner of all intellectual property rights relating to Puma products, including copyrights, trademarks, patents, models, designs, concepts, and ideas. STA also questioned the consistent losses incurred by the distributor (Puma Sweden), given it was precluded from selling any other product. The STA argued that an independent dealer would have either negotiated lower purchase prices or considered switching to other products or in the extreme discontinued operations. The lack of freedom to have done any of these indicated that the entity was not entrepreneurial or capable of bearing economically significant risks.
- Based on the aforementioned evidence, the STA concluded that Puma Sweden was a routine distributor performing less strategic and complex functions vis-à-vis its AEs. Thus, it should not have borne the outcome (operating loss) of such risks. Therefore, applying the Transactional Net Margin Method ("TNMM") by aggregating the two key inter-company transactions and comparing it to margins earned by comparable independent distributors was regarded as the most appropriate analysis.
Puma Sweden has stated that they would most likely appeal the decision to the Swedish Administrative Court.
The case study re-emphasizes the need to conduct a robust Function, Asset and Risk analysis and re-examine if the same matches with the actual conduct of the parties involved or contractual terms in intra-group transactions. Taxpayers need to maintain robust documentation that projects the actual conduct of its operations and ensures consistency in statutory filings to avoid adjustments on account of concealment and tax evasion. Therefore, the need of the hour for the MNEs is to re-align their existing transfer pricing policies with value creation-based on substance and the actual conduct of the parties.
On the background of the COVID-19 pandemic and its rising cases around the world, the Finance Ministry of Malaysia has exempted certain types of face masks from levy of import duty and sales tax to make them accessible to the weaker sections of the society.
[excerpts from CNBC]