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Direct Tax

The US will soon issue the results of 301 investigations

[Excerpts from Business Standard, 20 November 2020]

The U.S. Trade Representative in June started investigations into the moves of at least 10 countries, citing Section 301 of the U.S. Trade Act of 1974, which allows it to retaliate for trade practices it deems unfair. The U.S. will soon issue the results of probes into Austria, Italy, and India’s decisions to tax local revenue of internet companies such as Facebook Inc., which could pave the way for retaliatory tariffs, people familiar with the situation said. Determinations on the three countries are due because all of them have instituted so-called digital services taxes -- or levies on local sales of companies such as Alphabet Inc.’s Google.

Plans for an international digital-tax agreement brokered by the Organization for Economic Cooperation and Development have been delayed until at least summer 2021 after it became clear the initial deadline of reaching a deal this year wouldn’t be met. The goal had been to replace an individual country’s digital taxes with a global plan, but it’s unclear how quickly a deal can be reached.

Argentina’s ‘Wealth tax’ bill approved in the lower house

[Excerpts from Buenos Aires times, 19 November 2020]

Lawmakers in Argentina’s lower house approved a bill that will see the nation’s wealthy citizens slapped with a one-off capital levy on assets.

The so-called ‘wealth tax,’ backed by President Alberto Fernández’s government, will see individuals with more than USD 2.3 million in assets make an ‘Extraordinary Solidarity Contribution.’ State coffers are running low amid the coronavirus pandemic, and officials are hoping the tax could rake in upwards of USD 3 billion.

According to estimates, the levy will affect between 9,000 and 12,000 of Argentina’s richest citizens. The onetime contribution will affect individuals whose declared assets exceed 200 million pesos and runs at a progressive rate of up to 3.5% for assets in Argentina and up to 5.25% on assets and goods outside the country.

Swiss government approves new law governing tax treaties

[Excerpts from MNE Tax, 11 November 2020]

Switzerland’s Federal Council, agreed to significant amendments to the laws relating to tax treaties. The new legislation would apply provided the applicable tax treaty does not contain any deviating provisions. The new law would stipulate how mutual agreement procedures in tax treaties are to be carried out at the national level. Moreover, the new law contains the key points on withholding tax relief based on international agreements, as well as criminal provisions in connection with relief from withholding taxes on capital income.

Transfer Pricing

Denmark: High Court re-emphasizes the importance of detailed documentation analysis while rejecting discretionary adjustment made by the tax authority1


  • Ecco Sko A/S (the taxpayer) was a holding company of Ecco Group involved in a shoe manufacturing business and undertaking all phases of shoe production;
  • The taxpayer has purchased as well as sold goods from/ to group entities;
  • The taxpayer has prepared documentation and benchmarked inter-company sale transactions using the Comparable Uncontrolled Price (CUP) Method by comparing the prices charged to the related party vis-à-vis unrelated party. Further, intercompany purchase transaction was benchmarked by adopting the Resale Price Method (RPM) wherein gross profit margin was compared;
  • Additionally, the taxpayer has submitted another documentation to the tax authority (SKAT) in response to various questions raised under Transfer Pricing scrutiny;
  • Tax authority disregarded the documentation of taxpayer and made the adjustment as under:
    • For a purchase transaction, tax authority adopted a higher price of the unrelated party as CUP;
    • For sale transaction, the tax authority adopted the Transactional Net Margin Method using the subsidiary as the tested party
  • The National Tax Court upheld the judgment of lower authorities.

The decision of the Danish Western High Court (High Court)

  • On the inadequacy of Transfer Pricing Documentation, High Court verified the facts and held that documentation submitted by the taxpayer is sufficient as a basis for assessing whether the arm’s length principle is complied with or not. Therefore, it cannot be equated with a lack of documentation.
  • In relation to the purchase of goods transaction, the High Court observed that the taxpayer has already documented the fact to justify higher prices from a related party. The taxpayer has mentioned that the group entity applied the ‘injection method’ to manufacture the shoe whereas third party manufacturers used the ‘cemented method’ in which the upper part of the shoe is glued to the sole. Since ‘cemented method’ requires much lesser investment, prices are quite lower. Therefore, the High Court upheld the purchase transaction of the taxpayer at arm’s length.
  • In relation to the sale of goods transaction, High Court observed the differences in functions performed, risks assumed, and assets owned by the tested party and external entities and held that tax authority has not taken into consideration such analysis, quality assurance factor, local conditions and business strategies. Moreover, the tax authority has wrongly included few cloth manufacturing entities in comparable companies set to compare the margin with the tested party (shoe manufacturer).
  • Therefore, the High Court rejected the addition made by the tax authority and deleted the adjustment

USA: Tax Court ruled in favor of IRS by allowing the adoption of comparable profit method over comparable uncontrolled transaction method in case of royalty payment2

On 18 November 2020, the United States Tax Court partly ruled in favor of the Internal Revenue Service (IRS) and confirmed the USD 9 Billion reallocation of income to Coca-Cola from its foreign manufacturing affiliates for the period 2007-09.


  • Coca-Cola US (the taxpayer) owned the logo, brand name, secret formulas, and other necessary Intellectual Property (collectively known as IP) to manufacture and distribute the beverage;
  • The taxpayer has licensed its foreign manufacturing affiliates (supply points) the right to use this IP to produce concentrate in order to sell it to third party bottlers. Subsequently, these third party bottlers produce finished beverages for sale to distributors throughout the world.
  • Supply points compensated the taxpayer under the formulary apportionment method agreed in 1996 while settling the taxpayer’s case for the period 1987-1995.
  • The tax authority observed that 1996 agreement did not cover the transfer pricing methodology to be used post- 1995. Therefore, it held that the intercompany transaction did not reflect the arm’s length principle.
  • The tax authority adopted the Comparable Profit Method (CPM) to determine how much the supply points should have paid the taxpayer for using its IP. Further, the tax authority concluded that supply points were essentially wholly-owned contract manufacturers executing the steps in the beverage production process, and therefore, independent bottlers were appropriate comparables for CPM analysis.
  • Applying CPM, IRS determined the ratio of operating profit to operating assets for six supply points of taxpayer between 94% to 215%. Against this, the interquartile range of independent bottlers were 7.4% to 31.8%. Therefore, IRS re-allocated the excess income of supply points to the taxpayer.

The taxpayer’s proposed approach and views of the tax authority

Against the above addition, the taxpayer proposed three alternate Transfer Pricing methods to justify the arm’s length nature of the transaction. We have summarized these alternative methods and rejection reasons of the tax authority as under:

Approach Analysis by taxpayer Reason of rejection by the tax authority
Alternative 1 – Comparable Uncontrolled Transaction Method In this method, operations of Supply points were compared with fast-food franchisee companies. Tax authority rejected the proposed method basis following reasons:
  • Fast-food franchisee companies cannot be compared with beverages company;
  • There were differences on account of a long term supply contract, territorial exclusivity, management’s responsibility of fast food master franchisee, etc.;
  • Analysis of taxpayer did not include data of unrelated party involving the transfer of trademark, secret formula and other IP.
Alternative 2 – Residual Profit Split Method
  • In this method, the taxpayer estimated the value of non-routine intangibles of supply points;
  • The estimate was based on capitalized advertising costs less amortization, rather than on external market bench-marks

Tax authority rejected the proposed method basis following reasons:

  • Lack of consensus on whether the costs of advertising can be capitalized into an intangible asset and asset’s useful life;
  • Such an asset would have no value to an unrelated party because an unrelated party could not use the asset without infringing taxpayer’s trademarks;
  • The taxpayer owned all important IPs and not the supply points.

Alternative 3 – Unspecified Method

It was based on a fee structure mainly used to compensate hedge fund managers.

Tax authority found that this method compensates taxpayers only for asset management services and not for the use of taxpayer’s IP by supply points.

In view of the above, the Court ruled in favor of IRS and upheld the adjustment after allowing certain adjustment.

Sri Lanka: Issues Transfer Pricing disclosure form and its corresponding guide for AY 19-2033

In accordance with Regulation 6 of the Transfer Pricing Regulation introduced in December 2018, taxpayers who have entered into a controlled transaction with an AE exceeding LKR 200 million are required to submit a Transfer Pricing Disclosure Form along with Return of Income.

With this background, the Inland Revenue Department has published the transfer pricing disclosure form to be used for the assessment year 2019/2020. The form is also accompanied by a guide that aims to address FAQs and provides illustrative guidance regarding the contents of the form.

The Form requires the taxpayers to provide information in the following format:

Column I
Column II
Associated Enterprise
Column III
TP Methodology
Column IV
Arm’s Length Price
Category of Transaction Name of Associated Enterprise TP Method Comparable Price/Range
Amount of Transaction (in LKR) Associated Enterprise’s Tax Identification Number (TIN) Profit Level Indicator AL Range - Max
(In case of loans) Amount of principal Country of Residence Price/Profit Margin/Rate AL Range - Med
(In case of loans) ending balance Criteria of Associated En-terprise Tested Enterprise AL Range - Low

Indirect Tax

Spain to slash VAT on health masks to 4%

Amidst the COVID-19 pandemic, Spain is the latest country to announce a reduction in the sales tax rate on masks, with a substantial reduction in the VAT rate from 21% to 4%. The Budget Minister also announced that the Spanish government will ensure that such VAT reduction results in a lower price for the consumer and not higher profits for businesses.

[excerpts from the online edition of Reuters]

The UK publishes guidance on the movement of goods between Great Britain and Northern Ireland

In view of Northern Ireland remaining under the UK VAT regime but the EUVAT rules on goods applicable to it under the Northern Ireland Protocol, the UK’s Her Majesty’s Revenue and Customs (HMRC) has published guidance on the movement of goods between Great Britain and Northern Ireland from 1 January 2021. Under the obligations in the Protocol, import VAT will be due on goods that enter Northern Ireland from Great Britain (England, Scotland and Wales). The same will also broadly apply to goods entering Great Britain from Northern Ireland. A few key guidances have been captured below:

VAT on goods sold between Great Britain and Northern Ireland

VAT will continue to be accounted as it is currently on goods sold between Great Britain and Northern Ireland. This means that the seller of goods will continue to charge its customers VAT and should show this on its invoices. However, the seller will not be able to claim this back as input VAT.

If the customer receives an invoice from the seller showing that VAT has been charged, it may use this as evidence in order to reclaim the VAT as input VAT, subject to the normal rules.

VAT on goods sold from Great Britain, transported via Northern Ireland, to an EU member state

The seller will be liable to account for the import VAT and zero-rating the goods on export to the EU. The VAT charged will be accounted for as output VAT on the UK VAT return by the seller. The seller will not be able to claim this back as input VAT.

VAT on goods sold to Great Britain from an EU member state via Northern Ireland

Where goods are sold and moved via Northern Ireland to Great Britain from a VAT-registered business in an EU member state, including the Republic of Ireland, the seller will be liable to account for the import VAT to HMRC. The EU business will have to register with HMRC and account for the VAT on a UK VAT return. The UK customer will be able to reclaim the VAT as input VAT, subject to the normal rules.