On 2 June 2020, the US Trade Representative's office announced the initiation of investigations against countries, including India, for imposing or considering a digital tax that may affect American companies. Some countries at the forefront are Austria, Brazil, Czech Republic, European Union, India, Indonesia, Italy, Spain, Turkey, and the United Kingdom.
Investigations were launched under section 301 of the 1974 Trade Act. The section allows the US President to unilaterally impose tariffs or other trade restrictions on foreign countries.
Earlier in December 2019, France's unilateral measure of digital services tax was considered a discriminatory burden on US commerce following which additional duties of up to 100% were levied on certain products imported from France.
The Philippine House of Representatives has introduced a House Bill to plug loopholes related to digital service taxes. These tax administration measures were introduced in order to better capture the value created by the digital economy and have the likes of Netflix, Google, Facebook, and Lazada 'pay their fair share.'
The Bill proposes to make 'network orchestrators' such as Grab and Angkas withholding agents for income taxes, while network orchestrators for lease services and electronic commerce platforms would be made withholding agents for VAT. The Bill requires that those who render digital services must do so through a resident agent or a representative office in the Philippines.
The Bill clarifies that services rendered electronically in the course of trade or business are liable to the value-added tax (VAT). Services such as digital advertising by internet giants such as Google, Facebook, and subscriptionbased services such as those of Netflix and Spotify, are subject to VAT, the explanatory memorandum notes.
The Czech Republic deposited the MLI with the OECD and will enter into force on 1 September 2020. A list of 52 tax treaties is designated as Covered Tax Agreements to be amended through the MLI. Except for Germany, all neighboring countries bordering the Czech Republic have already ratified the MLI.
Representatives covering a total of 94 jurisdictions now have signed the MLI, and instruments of ratification, acceptance, or approval covering 47 jurisdictions have been deposited with the OECD.
However, the governmental proposal indicates that the Czech Republic will only adopt the minimum standard of Principal purpose test for the prevention of treaty abuse and the rule allowing for effective resolution of disputes by mutual agreement
On June 17, Poland proposed a new tax regime referred to as the 'Estonian solution.' Estonia has Europe's most transparent tax system with the adaptation of the pass-through status for companies and taxation of profits only on distribution. The aim is to boost private sector investment and jobs by passing the tax from the company to the owners.
Under the proposed regime, companies are not required to pay corporate income tax on their earnings if reinvested in the business, i.e., not paid out to shareholders. The event of taxation is shifted to 'the distribution of profits' from 'the earning of profits.'
The tax exemption is envisaged for 4 years but may be extended. Eligible SMEs should:
- Employ at least three persons; and
- Only have a natural person as a shareholders or partner
- Annual turnover should be below PLN 50 million (€11 million)
Effective from 1 January 2024, dividend payments to low-tax jurisdictions and in certain abusive situations shall be subject to conditional withholding tax in the Netherlands following the letter to Lower House of Parliament from the Deputy Minister of Finance. The taxes shall be levied on payments to countries with a corporate tax rate of less than 9% and those on a European Union blacklist even if the Netherlands has an income tax treaty with these countries.
The Netherlands government has taken several measures to curb tax treaty shopping structures and targeting flows to Tax Haven countries. The Senate adopted a similar conditional withholding tax on interest and royalties on December 17, 2019, which shall be effective as of 2021.
However, it is ambiguous as to how this withholding tax measure could override bilateral treaty agreements on dividend withholding tax.
Australia - The Australian Taxation Office (ATO) published highlevel guidance on the impact of COVID-19 on transfer pricing, on 19 June 2020
The ATO published this guidance in order to help navigate businesses through the economic impacts of COVID-19 and changing relatedparty arrangements. The guidance outlines the evidence and analysis that taxpayers should maintain to support their transfer pricing positions, including where they have applied (or are applying) for an Advance Pricing Arrangement.
Assessing the economic impacts of COVID-19 on transfer pricing arrangements
ATO has emphasized on gathering evidence to support any changes to, or impacts on, the business as a result of COVID-19 and advised the taxpayers to document the same. Certain parameters to assess the economic impact of COVID-19 on TP arrangements listed by the ATO are:
- Function, Asset and Risk profile of the Australian entity before and after COVID-19;
- Economic circumstances, where the actual economic impacts of COVID-19 on the Australian operations including a broader analysis of how the relevant industry has been affected;
- Changes in contractual obligations between the Australian entity and its related parties;
- Evidence of the impact (if any) of COVID-19 on the specific product and service offerings of the Australian entity and how this has affected the financial results; and
- Evidence of changes in business strategies as a result of COVID-19.
Supporting the arm's length nature of transfer pricing outcomes
The ATO has acknowledged that using comparable analysis may not reliably support arm's length outcomes of continuing transfer pricing arrangements impacted by COVID-19, more so in the short term. In such scenarios, the ATO has sought to understand the financial outcomes that would have been achieved by the taxpayer, sans the impact of COVID-19, which would include:
- A detailed profit and loss analysis showing changes in revenue and expenses, with an explanation for variances resulting from COVID-19 or analysis of budgeted (pre- COVID-19) versus actual results;
- Details of profitability adjusted to where your outcome would have been if COVID-19 had not occurred – this should consider all factors that have a positive or negative impact on your profits and should be supported by evidence. An example of such evidence would be canceled order requests to demonstrated reduced sales revenue;
- Rationale and evidence for any increased allocation of costs or a reduction of sales (and subsequent changes in operating margins) to the Australian entity, taking into consideration its function, asset, and risk profile;
- Evidence of any government assistance provided or affecting the Australian operations.
The guidance provides clarity to taxpayers with respect to the changes and measures they can undertake on their transfer pricing arrangements to dampen and mitigate the adverse effects on their businesses.
Additionally, w.r.t. ongoing APAs, the ATO is encouraging taxpayers to proactively engage as soon as the taxpayer becomes aware of any breach of the critical assumptions/ terms related to APA or is certain that the breach of terms is likely to occur.
Saudi Arabia: The General Authority of Zakat and Tax (GAZT), Saudi Arabia issues the second edition of the TP Guidelines on 1 June 2020
The second edition of TP Guidelines was published by Saudi Arabia pursuant to the first edition that was issued in March 2019. The TP Guidelines clarify the applicability of the arm's length principle irrespective of the material threshold and encourages taxpayers to refer OECD guidelines in case of ambiguity in the TP guidelines applicable to Saudi Arabia.
Certain salient features of the TP Guidelines are as summarized below –
- TP Guidelines clarify that there is no materiality threshold for the applicability of the arm's length principle. Every transaction entered into by related parties shall be governed by the TP provisions and is expected to be at arm's length.
- The TP Guidelines provide that in order to identify related persons, w.r.t. effective control, the facts, and circumstances should be effectively evaluated to determine if the same results in effective control. Though control via governance, funding, and business creates an impression of 'effective control,' the same needs to be evaluated and demonstrated otherwise. The onus lies on the taxpayer to demonstrate the nonexistence of effective control.
- Regular monitoring of a controlled transaction to avoid a scenario wherein the arm's length principle is not satisfied during reporting in commercial accounts should be adopted by taxpayers.
- The TP Guidelines define 'De facto owner of intangibles' to mean the person who is in control of the DEMPE functions, involved in significant decisions, and manages and bears the respective risk. Thus, it can be regarded as the 'economic owner' of the intangibles.
- Provides guidance w.r.t CbC report: If the ultimate parent entity (or surrogate parent entity) is not required to file CbC report as it does not exceed the threshold limits in its jurisdiction, there is an exemption provided to the companies in Saudi Arabia from the filing of CbC report even if the threshold of SAR 3.2 billion is met.
- As per Article 14(B) of the transfer pricing bylaws taxpayer is required to file disclosure form for controlled transactions within 120 days of the end of the taxpayer's Financial Year (i.e., deadline of the filing of tax declarations). It was clarified that even though the deadline for filing the tax declaration is exceeded, there would be no exemption granted for disclosure form pertaining to controlled transactions.
- 'Limited' and 'reasonable' assurance engagements both shall be accepted by GAZT in respect to the Chartered Accountant's Certificate (TP Affidavit) if the same is issued by a licensed auditor in Saudi Arabia
Keeping in cognizance of the current challenges faced due to coronavirus (COVID-19) pandemic, the Federal Inland Revenue Service (FIRS) provided relief to the companies regarding the filing of Income Tax returns. A onemonth extension of the due date was provided for companies with respect to transfer pricing returns, and in case of companies with year-end of 31 December, the said companies would be required to file their Income Tax return by 31 July 2020 without any interest or penalty levied.
As per the Income Tax (Transfer Pricing) Regulations, 2018 'connected person' is required to file its statutory transfer pricing returns within six months from the company's accounting year-end (i.e., companies having 31 December as year-end, the transfer pricing return was required to be filed by 30 June 2020). However, as transfer pricing returns are an integral part of annual companies' income tax, the deadline for the same has been extended to 31 July 2020.
Serbia: Implications of coronavirus (COVID-19) pandemic on business operations as well as tax and transfer pricing obligations
The ongoing situation due to coronavirus (COVID-19) pandemic worldwide and its impact on the business operations of the company has given rise to several practical and tactical transfer pricing issues. Though the Serbian Ministry of Finance has not issued any specific guidance, taxpayers need to analyze the potential challenges and evaluate the impact on their respective business operations. Few key points which may be kept in mind by the taxpayers are –
- While most of the companies face challenges due to the COVID-19 crisis, some found new opportunities giving rise to unexpected profits. Thus, future tax analysis must consider the factual circumstances of the situation. The tax period would include the calendar year 2020 and potential tax period after 2020 depending on the speed of recovery of the national and global economy;
- In respect to the 'entrepreneur/ principal model' structure, the central entrepreneur or principal company bears the economic risks, owns the valuable intellectual property, and gets rewarded residual profit of the MNE. In such scenarios, the taxpayers would be required to carry out a thorough analysis to determine the facts and circumstances of each limited risk situation before concluding any transfer pricing adjustment;
- The contractual agreement also plays a vital role in the current situation and contractual obligation such as the force majeure clause, limiting the parties' obligations in a situation beyond their prediction or control should be assessed. Whether COVID-19 can be considered as a force majeure event and can the loss due to COVID-19 be measured appropriately is also a matter of concern for companies;
- Transfer pricing analysis considers and compares the situation of the company with the other third party comparable companies. Thus, the analysis of steps taken by the third party in a comparable situation shall also solve many concerns of the companies.
Amongst several issues faced by the companies during the present situation, special attention to the past transfer pricing documentation and statements with authority should be taken into account before arriving at any conclusion. Especially, the fact that the limited-risk entities should be entitled to losses occurred due to COVID-19 should be assessed thoroughly.
The financial results of comparable companies in order to conduct benchmarking analysis for the year under consideration shall have a huge impact while analyzing the arm's length principle. The taxpayers await guidelines from the Serbian Ministry of Finance to resolve the doubts of the companies by either postponing the deadline for transfer pricing documentation for 2020 until financial year data is available for 2020 or to change the requirement to calculate transfer pricing adjustment on an annual basis.
In 2008, a Finnish company (taxpayer) established a subsidiary in Belgium and transferred an intra-group unsecured loan amounting to EUR 223.5 million with interest in exchange of shares of the newly set up subsidiary due to internal restructuring of the Group. It was agreed that the return on investment would be recovered basis the target limit achieved through the operations of the Belgium entity.
It was observed that the taxpayer performs all significant functions, assumes significant risks, and uses significant funds for the intragroup financing activity, whereas the subsidiary does not undertake any functions pertaining to the group financing. It was indeed a company performing normal financial management, payment, and reporting services that received market-based compensation based on operating costs. Basis the above facts, the tax authorities proposed a TP adjustment considering the re-characterization of the related party transaction.
While deciding the matter following observations were outlined by the Court:
- The subsidiary company had indeed become a creditor of the taxpayer due to restructuring of the group finances;
- The tax authorities had recharacterized the legal transactions between the taxpayer and its subsidiary basis section 31 of the Tax Procedure Act. However, the said section does not entitle the tax authorities to do so;
- Further, tax authorities also did not allege that due to such recharacterization, there was a tax avoidance by the company.
Court briefly explained Section 31 which states "When making a transfer pricing adjustment in accordance with subsection 1, it is generally not possible to interfere with the cash flows between the parties to an intra-group transaction, but only with the pricing or other terms used in the transaction identified as having occurred between them".
Considering the above facts of the case, the Court held that the tax authorities were not entitled to make any TP adjustment basis the re-characterization of the related party transaction. Taking a cue from the co-ordinate bench ruling, it also clarified that reclassification is permitted under exceptional circumstances as per the OECD TP Guidelines; however, it is not possible in accordance with the Finish domestic law.
Poland: Expenses pertaining to intra-group services are 'functionally related' to support service rendered
The taxpayer is engaged in providing support services to its group entities, which are remunerated at cost plus a market mark-up. Cost base allocated to each service receipt includes cost pertaining to purchased services in order to determine the remuneration to the taxpayer. The issue under consideration was whether such cost of purchased service could be included in the cost base, which formed the Company's tax revenue.
Article 15, paragraph 11, point 1 of the Polish Corporate Income Tax Act (limiting costs on intra-group services) explains that there should be a correlation between the cost and the provision of services to have a 'functional relationship.' Considering that such costs build the value of support services provided, they are directly related to the support services rendered.
In light of the above, the Court was of the view that in case of shared service centers, the cost of purchased services are 'functionally related' to support services provided and should constitute the cost base for the purpose of remuneration. Further, the costs incurred by the taxpayer were neither artificially nor economically unjustified, which could give rise to any form of restriction.
The taxpayer is a Danish production company engaged in Packaging and Processing Solutions. Its main activity includes generating production plants that are utilized in the production and packaging of all kinds of ice-cream. The taxpayer was incurring losses at the EBIT level for the period 2005- 2009. The tax authorities proposed a TP adjustment as it could not verify the arm's length nature of the related party transactions basis the TP documentation submitted.
Following observations were made during the proceedings of the case:
- TP documentation was defective as it did not include comparability analysis;
- With regard to the profits made by the taxpayer during the year into consideration, there was no factual information which provided reasons to demonstrate that the industry in which the taxpayer operated was more severely affected by the financial crisis in 2008 and 2009 as compared to the comparables;
- There were no extraordinary circumstances observed during the period from 2005 to 2009, which justified the low earnings of the taxpayer.
The Court relying on the ruling by SC (Microsoft judgment) held that TP documentation incapable of providing sufficient basis to determine the ALP of the related party transaction shall be equated with a lack of documentation giving rise to TP adjustment due to considerable deficit in the EBIT. It also held that wherein companies are comparable in terms of functions, assets, and risks, the mere fact that some of these comparables were from countries paying lower wages than Denmark did not exclude them from the database analysis. Further, it upheld the decision of tax authorities and treated the taxpayer as the tested party under TNMM instead of the associated enterprises citing reasons of insufficient reliable information.
As per the recently published regulations, the due date to file transfer pricing report is the 6th month after the fiscal year-end, whereas the Master File should be filed by the 12th month after the fiscal year-end. However, due to ongoing pandemic, the deadlines for filing of transfer pricing studies (filed with an affidavit on Form 2668) and Master File reports are being extended for the period as outlined below -
|December 2018 to May 2019||July 2020|
|June 2019 to November 2019||August 2020|
|December 2019 to April 2020||October 2020|
The regulations include rules pertaining to the determination of transactions to be reported and requisite information pertaining to each of them. Some of the details required to be reported by the taxpayers are –
- Cross border transactions between Argentine residents and foreign-related parties
- Transactions between Argentine residents and independent parties located in 'non-cooperating' jurisdictions or 'low or no tax' jurisdictions
- Import and export transactions conducted with independent parties for values exceeding ARS 10 million (approximately USD 143,000) per tax year
As per various media reports, the UK's tax authority, Her Majesty's Revenue and Customs (HMRC) is discussing a proposal to make online marketplaces responsible for collecting VAT on sales by overseas sellers into the UK, with effect from 1 January 2021. The move comes in view of the long-standing demand by local UK businesses who are at a pricing disadvantage against overseas sellers who are not usually registered under UK VAT laws.