Direct Tax
Global Anti-base Erosion (GloBE) Proposal – A strong response to the multinational companies’ practice of shifting profits to low/no tax jurisdictions!!
Recently, the Organization for Economic Cooperation & Development (OECD) released a public consultation document on GloBE Proposal under Pillar II before closing the window for stakeholders to submit their comments on Unified Approach under Pillar I. Pillar II is a more structured/well-researched proposal to achieve minimum global taxation. The questionnaire is inclined more towards determining the feasibility of using financial accounts for tax purposes.
Our Knowledge on GloBE Proposal
The GloBE Proposal calls for development of coordinated rules that may avoid the shifting of profits by multinational companies, resulting into no/low taxes. This would be achieved by requisite amendments in domestic tax laws as well as tax treaties which are as follows:
| Domestic Tax Laws |
Income Inclusion Rule
|
Allows countries to tax income from overseas branches/controlled entities if
such income was not subject to a minimum effective tax rate.
|
|---|---|---|
|
Undertaxed Payment Rule Denies
|
Denies a deduction or grants source based taxation for payments made to
related parties if such payments were not subject to a minimum effective tax
rate.
|
|
| Tax Treaties |
Switch-over Rule
|
Allows countries to switch from exemption to credit method when profits
attributed to a permanent establishment/derived from immovable property
(not forming part of PE) are not subject to a minimum effective tax rate.
|
|
Subject to Tax Rule
|
Grants or denies tax treaty benefits if an item of income was not subject to
tax at a minimum rate.
|
Way Forward
The OECD has done a great job while drafting the GloBE proposal as this would ensure that multinational companies in the digital economy and beyond would end up paying a minimum rate of tax. The main objective of this proposal is to provide all the stakeholders involved the necessary tools to fight shifting of profits by multinational companies to low/no tax jurisdictions. One of the key propositions of this proposal, i.e., using financial accounts would entail problems for different countries as each country would have different methods to determine items of income and expenditure leading to gross complexities. To tackle such a situation, it would be imperative for the OECD to provide for clear and constant list of inclusions and exclusions in respect of items of income and expenditure so that financial accounts across the globe could be arrived at basis common accounting principles.
Another important aspect is the determination of a minimum rate of tax to be borne by the multinational companies. The OECD should come out with concrete factors for determination of the minimum rate of tax payable by multinational companies to avoid unnecessary clashes amongst countries across the globe. It is to be seen how this proposal would be implemented on a real-time basis by countries across the globe. It would also be interesting to see whether the OECD, along with all the stakeholders involved, provides for a tax credit mechanism to avoid double taxation.
Transfer Pricing
Ireland’s Finance Bill 2019 provides transfer pricing related legislative changes
On 17 October 2019, Ireland’s Department of Finance released Finance Bill 2019 which provides for legislative changes to tax laws effective from accounting periods beginning on or after 1 January 2020. Transfer pricing-related key developments vide Finance Bill 2019 are summarised below:
a. Aligning transfer pricing laws with 2017 OECD transfer pricing guidelines
Finance Bill 2019 has proposed to align transfer pricing laws of Ireland with OECD transfer pricing guidelines (issued on 10 July 2017) and other guidelines relating to Intangibles/ Transactional Profit Split Method
b. Applicability of Transfer Pricing Regulations to small and medium-sized enterprise
Finance Bill 2019 has indicated that Transfer Pricing Regulations may apply to small and medium-sized enterprises where”
- Aggregate consideration for related party transactions exceed EUR 1 million; or
- Value of transaction relating to acquisition/ disposal of asset is more than EUR 25 million.
However, it is proposed that small enterprise shall be exempt in preparation of Transfer pricing documentation.
For this purpose, small enterprise means an enterprise having:
- Less than 250 employees; and
- Either an annual turnover less than EUR 50 million or assets worth less than EUR 43 million
This is an annual test and applied at the group level.
Medium enterprise means an enterprise having:
- Less than 250 employees but more than 10 employees; and
- Either annual turnover is less than EUR 50 million but more than EUR 2 million; or
- Assets less than EUR 43 Million but more than EUR 2 million.
c. New transfer pricing documentation requirements Finance Bill 2019 has introduced compliances relating to Master file and Local file in case consolidated turnover of Group exceeds the prescribed threshold:
| Particulars | Threshold – Consolidated Group Turnover |
|---|---|
| Master File | EUR 250 million |
| Local File | EUR 50 million |
Further, it is proposed that documentation needs to be prepared on a contemporaneous basis, i.e., latest by filing annual corporate tax return. Accordingly, for a fiscal year ending on 31 December 2020, documentation needs to be prepared on or before 23 September 2021.
d. New transfer pricing penalty provisions
Finance Bill 2019 has proposed following penalties for noncompliances as under:
| Particulars | Penalty amount |
|---|---|
| Failure to provide information/ documentation within prescribed time | EUR 4,000 |
| Failure to provide local file documentation within prescribed time | EUR 25,000 + EUR 100 per day |
e. Extending transfer pricing rules to non-trading transactions
Finance Bill 2019 has proposed to extend transfer pricing law to non-trading transactions as well along with existing applicability to trading transactions.
f. Extending transfer pricing rules to capital transactions
Finance Bill 2019 has proposed to extend Transfer pricing rules to capital transactions from 1 January 2020 in case the quantum of transaction exceeds EUR 25 Million.
g. Grandfathered arrangements
Existing Irish transfer pricing rules allows exemption for certain arrangements/transactions entered into before 1 July 2010. Finance Budget 2019 has proposed to remove such exemption.
UAE: Frequently Asked Questions (“FAQ’s”) released relating to Country-by-Country Reporting (“CbCR”) in UAE
UAE had issued the Cabinet Resolution No. 32 of 2019 (the “Resolution”) on Country-by-Country (“CbC”) Reporting on 30 April 2019. For further details on CbC Reporting-related regulations in UAE, refer our tax alert Click here.
On 16 October 2019, the Ministry of Finance of UAE released list of 25 Frequently Asked Questions (“FAQs”) to address the concerns of tax payers in relation to CbC Reporting.
FAQs have been divided in 3 groups as under:
- FAQs relating to general CbC Reporting consideration
- FAQs relating to CbC Reporting filing
- FAQs relating to CbC Reporting notification
Few of the important clarity provided by the recently released FAQ’s are summarised hereunder:
| Questions | Answers |
|---|---|
| Can the OECD guidance on CbC Reporting be used to interpret the UAE CbC Reporting Legislation? | The OECD guidance on the implementation of CbC Reporting can be used to interpret the UAE CbC Reporting legislation to ensure a consistent and standard approach to CbCR across all implementing countries. However, if there is a conflict, the UAE CbC Reporting legislation takes precedence. |
| Duration for which CbCR should be kept by reporting entity in UAE? | The effective records should be kept by a CbC Reporting Entity for 5 years following the date on which the CbC Report is submitted to the Ministry of Finance. |
| When do the CbC Reporting requirements come into effect in the UAE? | CbC Reporting requirements come into effect for financial years starting on or after 1st January, 2019. Accordingly, for the financial reporting year starting on 1st January 2019 and ending on 31 December 2019, CbCR must be submitted latest by 31 December 2020. |
| What currency should be used for CbC Reporting purposes? | If separate entity statutory financial statements are used as the basis for reporting, all amounts should be translated to the stated functional currency of the MNE Group. The average exchange rates for the year should be used for currency conversion. The applied rates should be stated in the Additional Information section (Table III) of the CbC Report. |
| In which language should the CbC Report be submitted in the UAE? | The CbC Report should be submitted in English. |
Further, it has been mentioned that more specific guidance on completing CbC Reporting, filing of detailed CbC Reporting form, and filing of the CbC Reporting notification in the UAE shall be provided soon.
The FAQ’s provided by the Ministry of Finance of UAE would help the taxpayers in effectively complying with the CbC Reporting related compliance in UAE.
Thailand: Transfer Pricing disclosure form
Thailand’s tax authority has released a disclosure form to be filled by the taxpayers in order to provide certain Transfer Pricing related information for the fiscal year beginning on or after 1 January 2019. The disclosure form is required to be filled by taxpayers having revenues of more than THB 200 million (apprx USD 6.6 million) for the accounting year. The said form is required to be submitted within 150 days from the end of the accounting year. Following information to be provided in disclosure form as under:
- List of related parties
- Quantum of related party transactions – Separate details
to be provided for
- cross-border transaction and domestic transaction
- income and expenses transactions
- Classification of expenses transaction (such as transactions relating to purchase of raw materials, goods, land, building and equipment, royalties, management technical services, commission fee, and interest expenses)
- Consolidated financial information
- Business restructuring-related information
- Details in relation to sales, distribution, and transfer of intangibles between group entities.
Costa Rica amends Transfer Pricing Documentation related regulations
On 13 November 2019, Costa Rica’s tax authority released a new resolution laying down new guidelines for Transfer Pricing Documentation in relation to Master File and Local File compliances. With the new guidelines, the old resolution (2017) has been repealed.
The new resolution require taxpayers carrying out transactions with related companies to maintain documentation justifying their intercompany transactions in lines with independent party. The said documentation must be prepared based on OECD’s BEPS Action Plan 13.
Important details to be covered are as below:
| Details relating to Master File | Details relating to Local File |
|---|---|
| a. Corporate structure | a. Administration structure of the local entity |
| b. Group administration structure | b. Identification and documentation of other controlled transactions that may directly or indirectly affect the price of those transactions |
| c. Document showing the chain of suppliers of goods and services | c. Reasons as to why a multiyear analysis is applied |
| d. List of the main markets | d. Audited financial statements of the previous three years |
| e. Group intangibles | |
| f. Intragroup services | |
| g. Financing | |
| h. Description of the restructuring carried out during the last five years | |
| i. A chart showing the total number of employees for each country | |
| j. A copy of the statement of consolidated income for the most recent period |
Indirect Tax
Kenya imposes VAT on import of services by unregistered person
The Kenyan government has amended their Value Added Tax (VAT) law to levy VAT under reverse charge mechanism on the import of taxable services by persons otherwise not registered under the VAT regime. It remains to be seen whether the government intends to enforce this provision against individuals who are not involved in business and commerce.