US treasury offers relaxations with respect to tax residency rules amidst COVID-19 international travel restrictions
The IRS (Inland Revenue Services) as a relief offers some relaxations as regards its tax residency rules due to travel disruptions caused by the coronavirus pandemic.
The relaxations allow individuals to choose a period of 60 uninterrupted calendar days beginning from 1 February 2020 to 1 April 2020, which would not be taken into account for the purpose of determining the residency of such individuals or foreign corporations under domestic laws.
It further provides that certain US business activities conducted by a nonresident alien or foreign corporation will not be counted for up to 60 consecutive calendar days in determining whether the individual or entity is engaged in a US trade or business or has a US permanent establishment.
It must be noted that the aforementioned relaxation shall apply only if those activities would not have been conducted in the United States but for travel disruptions arising from the COVID-19 emergency.
Amidst various measures taken by countries across the globe for addressing tax-base erosion and profit shifting practices, the Russian Ministry of Finance has sent an official request to the Finance Ministry of Cyprus for amending withholding tax rate on dividends as well as interest income for non-residents. The proposed amendments to the tax treaty are as follows:
- The withholding taxation rate on dividends under Article 10 of the tax treaty will be increased to 15% (which is the equivalent of the withholding tax rate applicable to dividends under Russian domestic law). Currently, applicable DTT rates vary from 5% to 10%, depending on the fulfillment of investment criteria.
- Article 11 of the tax treaty will be amended to introduce withholding taxation of outbound interest payments at a 15% rate. Currently, such cross-border interest payments are exempt from withholding taxation under the DTT.
Cyprus is expected to reply by 15 June 2020. However, should Cyprus refuse to introduce the requested changes, the tax treaty will be terminated unilaterally, and outbound payments made from Russia will be subject to domestic law regulations
Capital Value Tax (CVT) is a tax levied on the capital value of specified assets such as Modaraba Certificates, shares of listed companies, etc. which is payable on the acquisition by every individual, association of persons, firm or company acquiring such an asset.
Previously, a CVT of 0.02% was payable on the purchase value of the Modaraba certificates, any instrument of redeemable capital, and a CVT of 0.01% was payable on shares of listed companies.
However, the Pakistan Stock Exchange announced the abolition of such CVT vide notification, stating that from 19 April 2020, CVT would not be payable to the Federal Government on the purchase of the aforesaid assets.
Thailand, along with twelve other countries are on the watch-list of the European Union (EU) for not having formally signed and submitted the related instruments of ratification of the Convention on Mutual Administrative Assistance (MAC). MAC provides for both exchanges of taxpayer information, either upon request or automatically, and for assistance in the collection of monies or assets that happen to be within the supporting country’s jurisdiction for the settlement of taxes due in other cooperative jurisdictions.
All states, whether members or nonmembers having trade and economic relations with EU member states, are expected to provide mutual support and assistance in the cross-border administration and collection of taxes by signing and ratifying the said convention on MAC before 31 August 2020 and 31 August 2021, respectively.
Countries failing to sign and ratify the MAC before the deadlines would be placed on the EU blacklist and labeled as a ‘non-cooperative jurisdiction for tax purposes.’ Accordingly, it may face serious investment implications between non-compliant countries and their EU counterparts, and companies and investors residing in EU member states would also incur substantial reputational risks for investing in such countries.
On 27 March 2020, Hong Kong released revised guidance on the taxation of the digital economy. The highlights are summarized below:
- It sets out about the key-value creators of an e-commerce business, confirms that data generated and gathered in the course of an e-commerce transaction, as well as direct and indirect network effects, shall be understood as key-value creators.
- It also provides practical guidance on how to determine the locality of profits in the context of e-commerce transactions, i.e., the location of core operations as a test of the source.
- Regarding the question of whether a non-Hong Kong resident person has a PE in Hong Kong, the guidance provides that, in the context of e-commerce, the decisive criterion may be whether the activities of a fixed place of business form a significant part of the e-commerce business as a whole or whether they go beyond preparatory or auxiliary activities.
Further, the guidance has mentioned that the Authorized OECD Approach will be adopted in attributing profit to a PE in the context of e-commerce. The guidance provides for a two-step analysis, i.e., 1) use functional and factual analysis to hypothesize the PE as a distinct and separate enterprise; and 2) apply the arm's length principle to the hypothetical enterprise in accordance with the OECD Transfer Pricing Guidelines.
Since intangible assets would be an important profit driver, it would be essential to identify which entity economically owns the intangibles.
The IRS has published new FAQs describing best practices and common mistakes in preparing transfer pricing documentation to help taxpayers to prepare improved documentation and to decrease the number of issues selected for examination and improve the examination efficiency for issues selected.
The US transfer pricing documentation rules [IRC § 6662(e)] provide for three types of penalties in the event of a substantial or gross valuation misstatement. The FAQs focus only on the net adjustment penalty [§ 6662(e) (1)(B)(ii)] levied when net transfer pricing adjustment exceeds relevant dollar thresholds.
Under '6662(e) documentation' requirements, the taxpayer is required to select and apply a method in a reasonable manner, maintain sufficient documentation thereof, and promptly provide such documentation to the IRS. The documentation must also be assessed for adequacy and reasonableness to avoid any penalty implications.
The FAQs are summarized below:
Additional benefit(s) that taxpayers will derive on maintaining robust documentation
It will allow the examining agent to rely on the taxpayer's analysis of functions, risks, intangibles, value drivers, etc., saving both the taxpayer and the IRS' time in examining low-risk transfer pricing issues thereby facilitating more efficient transfer pricing risk assessments and examinations for both taxpayers and examiners.
How can 'self-assessment' help to anticipate questions and prepare better 6662(e) documentation?
IRS encourages taxpayers to conduct a 'self-assessment' of the potential indicators of transfer pricing noncompliance so that they can anticipate and proactively address concerns the IRS might raise. The assessment can include an analysis of the parameters used (e.g., comparable companies), comparison of PLI, and address potential inconsistencies, proactively evaluating how system profits are shared between related parties and addressing whether such allocations are reasonable based on each party's contributions.
What is IRS's guiding principle in establishing arm's prices were charged in intercompany transactions:
The guiding principle, according to the IRS, is to ensure taxpayers are complying with § 482 and the regulations thereunder. The IRS also recognizes that it may be difficult to find direct and close comparables in all situations. In such cases, the IRS recommends making adjustments to compensate for the imperfect comparability.
What are some areas the IRS has identified in transfer pricing documentation reports that could benefit from improvement
The IRS has provided some indicative areas; however, the IRS also highlights that these areas do not provide a safe harbor for further examination and a more complex transaction will require greater detailed analysis. The indicative areas provided by the IRS are:
- Industry and company analysis sections of the report should be clear and provide context for related party transactions
- Functional analysis narratives should be robust and link facts to analysis
- Risk analysis should be consistent with intercompany agreements
- Support for best method selection must be provided, as well as the reason for rejecting specified methods
- Analysis should be provided to support the PLI conclusion
- Complete comparability analysis should be provided
- The impact of differences in risks or functions between the tested party and the comparable companies should be provided
- Detailed well-reasoned support for proposed adjustments to the application of a specified method should be provided
What are some features of useful transfer pricing documentation reports?
The IRS highlights various features such as an explanation of the data used, general business risks of the transaction, detailed descriptions of how these risks are allocated, allocation of profit, analysis of special business circumstances that may have affected profitability, and description of challenges faced, etc.
Can you provide an example of a presentation of a company's intercompany transactions that would be a helpful summary for examiners to use in risk assessment?
The IRS recommends making transfer pricing documentation more user-friendly, which will help in the IRS's review and assessment. e.g., providing a summary of information about intercompany transactions at the beginning.
The FAQs released by the IRS reflect their experience during the transfer pricing examination wherein the transfer pricing documentation maintained by the taxpayers was found to be inadequate. The FAQs also provide an insight into the expectations of the IRS from taxpayers, which would help the taxpayers in preparing improved and consistent documentation.
The IRS has emphasized certain qualitative aspects that would be expected in the documentation. In light of the above, taxpayers who prepare standard documentation merely from a compliance perspective would be at a higher risk of a detailed examination.
These FAQs would serve as a reference in light of the current COVID-19 situation wherein taxpayers may not be able to comply with their transfer pricing policies, and therefore, maintaining robust documentation would be crucial.
Under the present APA regulations in New Zealand, companies are expected to discuss the APA breaches with the Inland Revenue of New Zealand and to disclose the implication of these breaches on the validity of the APA prior to filing an annual compliance report. In light of the COVID-19 pandemic, the Inland Revenue of New Zealand has permitted companies to undertake commercial business decisions that may have arm's length implications, which are different than the outcome agreed in the APA without having to notify of any such deviation to the Inland Revenue. These breaches (or potential breaches) would be addressed in the annual compliance report when it is filed. Under this relief, Inland Revenue will review the annual compliance reports in due course and keeping in mind the implications of COVID-19 for the business.
In the current situation, the pricing of transactions according to the ordinary circumstances may not be possible, and intimating each deviation would have been administratively inconvenient. It will be important to see whether the other jurisdictions also release similar guidance.
Indonesia has released new APA regulations, which would be effective from 18 March 2020.
Simplification of the application process
The taxpayer can file the application for APA directly without filing extensive information during the pre-filing process.
Validity of APA
Bilateral and unilateral APAs will both be viable for a period of five years instead of three / four years under the old regime. Further, rollback has also been made applicable, provided the facts and conditions remain the same, and certain other conditions are met.
Annual compliance reports are no longer necessary, however, the authorities can evaluate the APA and discuss the implementation of the APA, obtain further information, and review the business activities of the taxpayer.
APAs can be extended for one consecutive period if the facts and circumstances remain the same, and if other conditions are met. The new regulations also reflect additional administrative requirements and deadlines as well as guidance on the application of transfer pricing methodologies.
With the introduction of rollback and extension of validity of the APA, the new regulations will get the Indonesian APA regime in line with the regulations prevalent in the majority of the jurisdictions. It will enable more companies to opt for APA in Indonesia. However, no annual compliance may lead to a risk on the certainty of the APA since adverse remarks on the evaluation of the APA by the authorities may lead to tax exposure for multiple years.
Some of the countries which have extended due dates are provided below -
|Bermuda||The Country-by-Country (CbC) reports for periods ending between 26 March 2019 – 31 May 2019 are to be submitted no later than 31 May 2020. The submission deadlines for reporting periods ending after 31 May 2019 have not been changed.|
|Hong Kong||A reportable group required to file a notification in relation to CbC reporting for an accounting period ended between 31 December 2019 and 29 February 2020 (that were earlier due within 3 months of the accounting period end), may file the notification on the portal on or before 1 June 2020.|
|Malaysia||CbC reports that were due on 31 March 2020 or 30 April 2020 are now due 15 May 2020. The same deadline will apply for CbC notifications.|
|Denmark||The Danish transfer pricing rules require companies to prepare transfer pricing documentation contemporaneously, which must be ready no later than at the time for submission of the tax return. With the extension for the due date of filing of the tax return, the deadline for preparing the transfer pricing documentation for FY 2019 for most companies is 1 September 2020.|
|Poland||The due date for filing transfer pricing return has been extended until September 2020 for tax years started after 31 December 2018 and ended before 31 December 2019.|
|Thailand||The due date for filing Transfer Pricing disclosure form for the accounting period ended between 3 November 2019 to 03 April 2020 is extended to 31 August 2020.|
Given the cash crunch being faced by most businesses due to the disruptions caused by the COVID-19 pandemic, United Kingdom’s Her Majesty’s Revenue and Customs (HMRC) has announced a VAT deferment plan for VAT payments due between 20 March 2020 and 30 June 2020. Businesses opting for this plan have time till 31 March 2021 to pay their VAT dues for the said period without any interest and penalty. However, this plan does not cover VAT payable on imports, and businesses still need to file their returns on time.