TAX TALK
GLOBAL DEVELOPMENTS

Direct Tax

Italy planning to levy penalty on cash withdrawals for tackling tax evasion

After India imposed tax on cash withdrawals, it seems that Italy is also following suit. Italy is considering a proposal to impose penalty on cash withdrawals to discourage cash payments while tackling the menace of tax evasion which constitutes approximately 12% of Italy’s Gross Domestic Product (GDP). Fascinatingly, the cap and penalty proposal is the work of in-house business lobby of Italy.

Italy would offer consumers tax credits for settling their debts electronically while imposing penalty on cash withdrawals in excess of a monthly threshold. Small business owners along with certain politicians did not waste any time in criticizing the proposal, naming the same as a Soviet Style Proposal. Further, to intensify the war against cash withdrawals, money lenders must notify the Bank of Italy’s anti-money laundering unit of any monthly movement in excess of EUR 10,000starting from the month of September 2019.

Apple’s Win over EU’s USD 14 Billion tax bill may clear the road for overhauling global tech tax rules

In 2016, EU Competition Commissioner Vestager imposed a EUR 13 billion bill on Apple for unpaid taxes in Ireland alleging claiming illegal state aid. While, this case is pending before the European Court of Justice, it is a win-win situation for the EU Competition Commissioner. If the Court rules in the favour in her favour then Ireland may enjoy a good boost to its coffers and if the Court rules in the favour of Apple, then the question of overhauling global tech tax firms would take the centre stage and stakeholders would be compelled to aggressively push forward the global tech tax rules.

Digital Economy Saga – no major shift may be seen from existing taxing rights of the countries

Pascal Saint-Amans, the Direct of the Centre for tax policy and administration at the OECD, observed that, on a preliminary impact assessment, the countries’ existing taxing rights may not witness a significant shift on account of proposals advanced by the OECD to amend global rules for taxing digital businesses. Further, the final results of impact assessment may not see the light of the day before the end of 2019 as the stakes are too high. In the meanwhile, he requested that the countries should relax as the objective of rewriting global digital economy tax rules is not to create winners or losers.

Transfer Pricing

Australian Taxation Office releases draft guidance on arm’s-length debt test for purposes of Australia’s thin capitalization regime¹

On 28 August 2019, the Australian Taxation Office (ATO) released draft guidance, (PCG 2019/D3), outlining the ATO’s compliance approach for the use of the arm’s-length debt test (ALDT) with respect to Australia’s thin capitalization regime.

The draft guidance will have an effective date of 1 July 2019. The ATO clarifies that it assumes ‘limited circumstances’ when entities would gear in excess of 60% of net assets, and as such, it will generally view the ALDT as posing a ‘moderate’ to ‘high risk’ of non-compliance with the requirements of the thin capitalization rules. In view of the above, the draft practical compliance guidance considers that much more rigorous analysis is required when applying the ALDT as compared to the other thin capitalization tests.

Thus the draft guidance :

• Increases the analysis and documentation required to apply the ALDT.
• Specifies a more rigorous analysis than the safe harbor and worldwide gearing tests on the basis that Australian businesses outside regulated utilities would not be expected to have debt at levels greater than 60% of their net assets.
• Contains “risk zones” as white, low, and medium-high which unlike other guidance are not based on brightline financial ratios/metrics and provide very limited opportunity for low-risk ratings.

The draft guidance has specified the below-mentioned scenarios as low-risk wherein limited analysis would be required :

• 1. Inbound investors: borrowing from non-associated and purely non-related parties, without any form of parental/ associate credit support in situations where the business is purely an Australian domestic.
• 2. Outbound investors: the taxpayers are widely held ASXlisted entities which are outward investing entities (and which are not also an inward investing entity) with a publicly issued credit rating for the entire global group, and where it can be shown that the same credit rating applies to the Australian business.
• 3. Regulated utility providers in electricity and gas industries: entities with 70% or more assets with relevant Regulated Asset Base (RAB), net debt to RAB equal to or less than 70%, and cash flow from operations interest cover ratio equal to, or greater than 2.7 times.

For taxpayers falling outside the ‘low risk’ zone, a detailed approach is expected by the ATO while applying the ALDT unless ATO “white zone” sign-off has been obtained. Taxpayers are expected to invest significant time and resources to comply with the new documentation requirements outlined within the draft guidance.

SKP’s Comments

The draft practical guidance builds on the earlier guidance (TR 2019/ D2) and highlights the ATO’s views regarding the key issues of ALDT and it has outlined, in detail, ATO expectations for documentation and analysis to support the application of the ALDT. Although the draft guidance is in the form of a clarification of the existing thin capitalization legislation, it will be relevant for taxpayers with current disputes and discussions with the ATO in relation to ALDTs for prior years as well.

Federal Court of Australia rejects agreement restructuring of Glencore's agreement for copperconcentrate sale between AEs²

Name of the taxpayer : Glencore Investment Pty Ltd
Income years under consideration : 2007, 2008, and 2009

The taxpayer’s Australian group entity [Cobar Management Pty Ltd (CMPL)] is engaged in supplying copper concentrate to its Swiss group entity [Glencore International AG (GIAG)]. Up until February 2007, the offtake agreements between CMPL and GIAG were structured as “market-related” agreements. However, in February 2007, CMPL and GIAG entered into a fundamentally different form of offtake agreement, known in the copper concentrate industry as a “price sharing agreement”. The copper concentrate which CMPL sold to GIAG in the relevant years was priced by using, the official London Metal Exchange cash settlement price for copper grade “A”, averaged over “the quotational period”. A deduction was then made from the aforementioned copper reference price for treatment and copper refining charges (“TCRCs”) which, for the calendar years 2007, 2008, and 2009, were fixed at 23% of the copper reference price (as calculated) for the payable copper content of the copper concentrate.

Australian Tax Office (ATO) made TP-adjustment in respect of supply of copper concentrate by CMPL to GIAG on the premise that the “price sharing” agreement entered between the parties (agreement) differed from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the price paid by Swiss group entity did not correspond to market prices.

In appeal, the Federal Court of Australia (Court) considered the taxpayer’s submission that CMPL received a benefit by receiving payments on production, rather than having to wait to be paid until shipment of the concentrate. Thus from a cash flow and risk perspective, the adjustments made by ATO based on the hypothesis of market-related contract was incorrect. Referring to Canadian Tax Court ruling in case of Cameco Corporation³ Court stated that “...it is irrelevant to compare the extent to which the results achieved under the price sharing contract entered differed from those that would have been achieved under an alternative agreement...”

The court opined that the taxpayer had established that the prices paid by GIAG for the copper concentrate were within an arm’s length range and accordingly the taxpayer has discharged its onus by providing sufficient proof. The Court, taking cognizance of Chevron Australia⁴ ruling and OECD Guidelines Court, further opined that “It cannot be said that the entry into a price sharing contract was irrational, having regard to the benefits of such contracts and the market circumstances.”

SKP's Comments

This judgement emphasizes the fact that re-characterisation of the transaction/arrangement by tax authorities for the purpose of applying TP provisions is not warranted as long as related party transactions comply with arm’s length principle in the form and substance that were agreed between the said parties.

US appeals court sides with Amazon in $1.5 billion transfer pricing dispute⁵

Name of the taxpayer : Amazon.com, Inc.
Income years under consideration : 2005 and 2006

Amazon.com, Inc (taxpayer)., is a US-based online retailer with highly profitable intangible assets. In 2005 and 2006, Amazon restructured its European businesses in a way that shifted a substantial amount of its income from USbased entities to newly created European subsidiaries. In the course of restructuring, the taxpayer entered into a cost sharing arrangement in which a holding company for the European subsidiaries made a “buy-in” payment for Amazon’s assets. Amazon used the comparable uncontrolled transaction (CUT) method to separately value three groups of assets transferred to the European subsidiary.

During the course of assessment, the Commissioner of Internal Revenue (tax authorities) concluded that the buyin payment had not been determined at arm’s length in accordance with the transfer pricing regulations. Accordingly, the tax authorities performed their own calculation for the valuation of intangibles using discounted cash flow method.

The tax authorities sought to include all intangible assets having a value, including “residual-business assets” such as Amazon’s culture of innovation, the value of workforce in place, going concern value, goodwill, and growth options.

Aggrieved, the taxpayer filed a petition in the Tax Court challenging the valuation adopted. The tax court sided primarily with Amazon, and subsequently the Commissioner filed an appeal.

In appeal before US Court of Appeals (Ninth Circuit), the Court affirmed Tax Court’s decision in Amazon, ruling that cost sharing buy-in payments made by its European subsidiaries during 2005 & 2006 in exchange for Amazon’s transfer of intangible property, met the pre 2009 regulatory definition of an “intangible”. Thus it can be inferred that such an arrangement should not include compensation for transferred residual business assets such as workforce in place, goodwill, and going concern value.

The Court noted that the language of the (now-superseded) regulatory definition of an “intangible” is ambiguous and could be construed as including residual-business assets, however the drafting history of the regulations and other indicators of Treasury’s contemporaneous intent strongly favor taxpayer’s proffered meaning that intangibles were limited to independently transferrable assets and did not include residual business assets. Accordingly, the Court concluded that definition of “intangible” pre-2009 does not include residual business assets and is limited to independently transferrable assets.

However, in a footnote the Court has also clarified that “If this case were governed by the 2009 regulations or by the 2017 statutory amendment, there is no doubt the Commissioner’s position would be correct”.

SKP’s Comments

The taxpayer, in the course of transferring its intangible assets to the group entities, had valued its assets in accordance with the definition of ‘intangibles’ as provided in the pre-2009 regulations in the USA. However, tax authorities sought to include all intangible assets having a value, including “residual-business assets”.

The said ruling emphasized on the implementation date of amendments of TP regulations. At the same time, it highlights the risk of coverage under widened definition of ‘Intangible’, which is a matter of complexity and dispute across the globe.

Portugal approves new transfer pricing rules⁶

On 18 September 2019 Portugal introduced tax changes in various tax codes, which included significant amendment to its transfer pricing regulations. The new rules will apply as from 1 October 2019.

The changes made to the transfer pricing legislations include the below :

• 1. The new law emphasizes that the terms and conditions of all commercial or financial transactions carried out between related parties (both resident and nonresident) must be in line with the arm’s length principle. The definition of international transaction has been broadened to restructuring activities, which would include the below :
  • b. Business restructurings;
  • c. Renegotiations/terminations of intragroup agreements;
  • d. Sales/transfers of assets;
  • e. Transfers of rights to intangibles; and
  • f. Compensation for loss of profits or damages.
• 2. No hierarchy shall apply for selecting a transfer pricing method, aligning the regulation with OECD TP guidelines;
• 3. Reference of ‘other method or techniques of analysis’ was introduced in case where transfer pricing methods cannot be used due to the unique character of the transactions or due to lack or scarcity of reliable data;
• 4. ‘Large taxpayers’ are now required to prepare and submit transfer pricing documentation to the Portuguese tax authorities by the 15th day of the seventh month after the tax year end (i.e. by 15 July of the following year for taxpayers with a 31 December tax year);
• 5. Validity of Advance pricing agreements (APAs) (unilateral or bilateral) has been increased to four years (currently three years). Additionally, the terms and conditions of an APA will be exchanged with other countries under Portugal’s tax cooperation agreements;
• 6. The penalty upto EUR 20,000 has been introduced (plus 5% for each day that the failure continues) in case of failures to timely submit the Country by Country Reporting notification form.

SKP’s Comments

The amendments to Portugal’s transfer pricing rules are made in light of the recent international developments in the area (e.g. BEPS). The amendment in the law emphasizes the importance that Portuguese Tax Authorities are placing on transfer pricing.

1. https://www.ato.gov.au/law/view/document?docid=DPC/PCG2019D3/NAT/ATO/00001#P44
2. Glencore Investment Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia [2019] FCA 1432
3. Cameco Corporation v The Queen (2018 TCC 195)
4. Chevron Australia Holdings Pty Ltd v Federal Commissioner of Taxation (No 4) (2015) 102 ATR 13;
5. No. 17-72922 Tax Ct. No.31197-12
6. https://dre.pt/web/guest/home/-/dre/124793094/details/maximized?serie=I&day=2019-09-18&date=2019-09-01

Indirect Tax

Netherlands introduces VAT on e-publications

The Dutch government’s tax proposals for the calendar year 2020 have included a reduced VAT rate of 9% on electronic publications, such as books, newspapers, magazines, etc. This would remove the difference in taxation between digital and physical publications.