Tax Talk
Global Developments

Direct Tax

Switzerland and France signed an agreement on the taxation of frontier workers

Amongst a series of measures ushered by the French government, France has reached new agreements with Switzerland that deal with the issues revolving around frontier workers. On 13 May 2020, both countries signed an agreement with regards to taxation of frontier workers who are currently working from home due to the disruption caused by the COVID-19 pandemic.

The agreement lays down that the days spent working from home due to the pandemic measures would be deemed to be spent in the state (i.e., France or Switzerland) where the frontier workers would have actually carried out the work had such measures not been imposed.

The agreement shall be applicable to working days beginning from 14 May 2020 to 31 May 2020 and would automatically get extended until the end of the following calendar month until such measures are relaxed in either of the states or if such an agreement is jointly terminated by both the countries.

Brazil proposes new digital tax on revenue

In line with the other European nations and OECD CEPS Action plan 1, Brazil, on 4 May 2020, proposed a Progressive Digital Tax. The revenue from the following activities will be subject to digital tax:

• Advertising to Brazilian users;
• Making available a digital platform that permits users to interact with the objective of the sale of goods or services directly between such users if one user is located in Brazil;
• Sale of advertisements targeted on users located in Brazil collected from a digital platform or generated by such users.

Such tax would apply to entities domiciled in Brazil as well as abroad (provided global revenues exceed BRL 3 billion, and its gross revenue in Brazil exceeds US$ 100 million). The rate of tax varies from 1%, 3% and 5% depending on the revenue.

The Brazilian Authorities have proposed to apply the revenue from these taxes towards the national fund for technological and scientific development.

Mauritius government introduces new COVID-19 levy

On 15 May 2020, the Mauritius government passed COVID-19 (Miscellaneous Provisions) Bill. Amongst various measures enacted in the legislation, COVID-19 Levy was imposed to be paid by profitable employers who have benefitted from the Wage Assistance Scheme (WAS) during the COVID-19 period, from 23 March 2020 to 1 June 2020.

It would be imposed on companies, individuals, and resident societies that have benefitted from the Wage Assistance Scheme (WAS) during the COVID-19 period, from 23 March 2020 to 1 June 2020. It is payable over a period of 2 years. Such a levy would be calculated and limited to the lower of:

• 15% of the employer’s tax adjusted income; or
• Amount of financial support received

New progressive tax rates for individual income tax purposes introduced by the Egyptian government

On 7 May 2020, law 26 of 2020 was announced by the Egyptian government to introduce new progressive tax rates for individual income tax purposes. The new law would be applicable from 1 July 2020 with respect to income related to employment income. For other types of income such as business income, income from independent professional activities, income from immovable properties, etc., it would be applicable from 1 July 2021 onwards.

The amended income tax rates range from 0%-25% depending on the slab/ range of income an individual falls in. Moreover, the Egyptian government also increased the annual personal exemption from EGP 7,000 to EGP 9,000.

Republic of Korea and the Czech Republic deposit their instrument of ratification for the multilateral BEPS

On 13 May 2020, the Czech Republic and Republic of Korea (South Korea) deposited their instruments of ratification for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) with the OECD’s Secretary-General.

The MLI for both these countries would come into force on 1 September 2020. With 94 jurisdictions currently covered by the MLI, the above ratification by the Czech Republic and South Korea would now bring the number of jurisdictions that have been ratified, accepted or approved to 47.

Transfer Pricing

Sweden – Administrative Court of Appeal ruled for transfer pricing treatment of Intellectual Property

Recently, Sweden Administrative Court (The Court) issued a transfer pricing ruling. We have provided a summary of the ruling as under:

A Swedish company was involved in the development and sales of real-time visualization tools and held significant Intellectual Property (IP), which was acquired by a US company in 2013. The tax authority alleged that after the acquisition of the Swedish company, the US company also transferred the right to return from exploiting IP. Therefore, the Swedish company should be remunerated for such a transfer of IP.

Contentions by the tax authority

• The US company was responsible for decision making for marking, sales strategies, contracts with customers, pricing and product development, etc. and therefore, the US company borne all material risks related to IP.
• Post-acquisition, the Swedish company’s role was restricted to product development on behalf of the US company.
• Placing reliance on press releases, interviews with the company representative, messages to shareholders, the group consolidated reports, etc. the tax authority contended that the US company decided the strategic direction of IP.

Contentions by the Swedish company

• The US company had only been given a license to use and sell the IP developed for which the Swedish company had been remunerated at arm’s length royalty.
• Importantly, it was argued that key employees (including the previous owner) who were involved in product development (before acquisition) were still the employees of the Swedish company (post-acquisition). Thus, there was no transfer of IP to the US company.

Ruling by Court

• Transfer of IP was neither apparent from agreement nor from the actions of companies.
• Considering the role of the previous owner of Swedish company (who had a key role in IP development) and the fact that they are still the employees of Swedish company post-acquisition, it is unlikely that IP could be transferred without the owner.
• Only limited importance could be given to press releases, interviews, and messages to shareholders since such documents generally exaggerate to generate positive market effects.
• Therefore, basis the agreement entered into between companies and arguments put forth by the taxpayer, the court concluded that the right to IP was not transferred to US company.

Finland’s Supreme Administrative Court adjudges transfer pricing ruling, in favor of the taxpayer

Recently, Finland Supreme Administrative Court (The Court) issued a transfer pricing ruling in the case of Finland vs A Oy (Case No. KHO:2020:34). We have provided a summary of the ruling as under:

A Finnish subsidiary operated as the marketing and sales company of a multinational group in Finland. The company’s operations had been unprofitable every year between 2003 to 2011, while the overall group figures were profitable. Finnish subsidiary purchased products directly from intra-group contract manufacturers wherein the group adopted modified cost-plus TNMM considering contract manufacturers as the tested party.

Finland tax authority considered sales company (instead of the contract manufacturer) as a tested party and made an adjustment on the following grounds:

• In an independent transaction, the sales company would have agreed to continue only upon receiving related pricing aid or other equivalent support, such as subsidy, or credit, as an adjustment.
• Benchmarked profitability for manufacturing companies could not be used with sufficient reliability to assess the situation of the sales company in relation to the longterm losses of the sales company’s operations

While deciding the matter, the court held the following:

• The loss incurring nature of the sales company did not in itself indicate that the company had failed to collect a service fee or other consideration from another group company.
• The tested party is a company for which reliable data can be found for the most closely comparable transactions. After considering the functional analysis by both the sales company and the group’s contract manufacturers, the court concluded that the appropriate tested party was the contract manufacturer (which the group had selected as the tested party in its transfer pricing documentation) and not the sales company.
• The court held that tax authorities could not prove that the taxpayer’s transfer pricing diverged from the group’s transfer pricing documentation or that the independent companies referred to in the group’s transfer pricing documentation were not comparable.

Therefore, the court ruled in favor of the taxpayer.

Turkey - A Draft Communique providing details on updated transfer pricing documentation requirements

On 24 February 2020, Turkey had published a Presidential Decree whereby it amended the country’s Transfer Pricing Regulations. The Draft indicated that Turkey would follow requirements of OECD BEPS Action 13, i.e., three-tier documentation as under:

• Local File – A transfer pricing report as per the existing transfer pricing documentation requirements in Turkey, which must be prepared by the tax return deadline and submitted upon request. While ‘large’ corporates are required to prepare documentation for both international as well as domestic transactions, companies operating in the free zone are required to prepare a report for its domestic transactions. Contents are broadly in line with OECD requirement.
• Master File – Applicable to the entities that are part of multinational groups with net sales and assets greater than TRY 500 million (i.e., approximately USD 73 million). The contents of the Master File is in line with the OECD master file. The first Master file compliance would be required to file for the tax period of 2019.
• Country-by-Country (CbC) report – All the entities that are part of multinational groups with consolidated annual revenue of at least EUR 750 million in the previous fiscal year are required to file CbCR. The format is substantially similar to the OECD format. The first CbC report would be required to be filed for the tax year 2019, and the deadline for that will be 31 December 2020.

Poland’s new tool for Transfer Pricing Risk Assessment

A new transfer pricing risk assessment tool has been introduced by the Polish Government, which requires the taxpayers to provide relevant information for 2019 to Poland Transfer Pricing Tax Authority by the end of September 2020. This tool will further help the tax authority to have a bundle of information on controlled transactions. The form will include general information about the taxpayer, including financial indicators (such as operational margin, gross profit margin, return on assets, and return on capital, etc). We have summarized key features of this tool as under:

1. Categorization of controlled transaction:
   • The taxpayer should categorize the controlled transaction as per the list provided by the Ministry of Finance, which includes different categories/ sub-categories of manufacturers, distributors and service providers.
   • The taxpayers are required to provide information on financial transactions, intangible transactions, and business restructuring transactions, including but not limited to the nature of the transaction, quantum, etc.
   • Importantly, transactions that are below threshold (for Polish Transfer Pricing Documentation requirement) should also be categorized. Further, companies who are exempt from the Transfer Pricing Documentation requirement are also required to provide this information.
2. Compliance with arm’s length principle:
   • The taxpayers are required to provide a summary of the transfer pricing methods used and the resulting analysis of the comparable transaction.
   • Importantly, when the tested party is not a Polish taxpayer, the above information should be provided for a foreign tested party.

The Swedish Tax Agency has updated its tax guidance on financial transactions by adopting guidelines published by the OECD.

In February 2020, the OECD published final guidelines on financial transactions. The detailed guideline carries instructions for the application of transfer pricing principles for financial transactions.

While adopting these, it stated that prior to the OECD guidance, there was no specific guidance determining the arm’s length price for financial transactions. Thus, the OECD report shall be considered as clarification, and the same may be considered for transactions entered into prior to this guidance as well.

However, the Swedish Tax Agency has clarified that OECD’s guidance on guarantee transactions will not be applied retrospectively owing to the position taken by Swedish case law previously

Indirect Tax

EC proposes deferring the implementation of new EU VAT rules for e-commerce

The new VAT rules for e-commerce trade between the European Union (EU) nations was to be implemented from 1 January 2021. However, in view of the difficulties being faced by businesses due to the COVID-19 pandemic, the European Commission (EC) has proposed their deferral to 1 July 2021. These new rules include mechanisms such as One-Stop-Shop (OSS) VAT returns for B2C e-commerce sellers, the online marketplace to be deemed as a supplier, etc. for facilitating cross border e-commerce between the EU nations and simplifying the compliance burden in relation to such transactions