Strategizing International Tax Best Practices – by Keith Brockman

Archive for August, 2014

Australia TP: Self-assessment regime

Australia’s new transfer pricing rules require that officers signing the corporate tax return must sign off for transfer pricing arrangements on a self-assessment basis.  The self-assessment process would affirm that the transfer pricing is pursuant to arm’s length consideration that would be transacted between unrelated parties.  Details of the new self-assessment regime are referenced at the attached link:

http://www.kpmg.com/AU/en/IssuesAndInsights/ArticlesPublications/tax-insights/Pages/a-new-obligation-for-public-officers-28-august-2014.aspx

Additional review of transfer pricing documentation may be required for self-assessment consideration.  The OECD BEPS proposals may also impact such reporting in the future.

 

Service fees & royalties: China’s SAT new (backward) focus

China’s State Administration of Taxation (SAT) issued an internal circular, instructing tax bureaus to review, and report, companies that have made large service fee or royalty payments between 2004 and 2013.  Tax bureaus will submit their findings to the SAT by September 15, 2014, followed by special investigations and potential tax adjustments.  The transfer pricing audit period is 10 years, thus the look-back period is within the statute of limitations.  The KPMG Tax Alert is provided for reference:

https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Documents/tp-china-aug25-2014.pdf

Key observations:

  • SAT’s commentary to the UN in April 2014 sets forth stricter guidelines for payment and deductibility than the OECD guidelines suggest (i.e., if the beneficiary is not in need of such services or the provider also benefits, then benefit by the service recipient alone is not justification).
  • Additionally, the SAT argues that the definition of shareholder services in the OECD Guidelines is too narrow.
  • Payments made to “tax haven” jurisdictions will receive special attention.
  • Economic substance in overseas entities will be reviewed.

Service fee and royalty payments are receiving global attention by tax authorities, although this retroactive review and narrow interpretation of deductible payments by the SAT will lead to additional assessments and the risk of double taxation going forward.  Multinationals should review transfer pricing documentation with respect to China, including the identification of any duplicative services as well as the benefits received from such services by major jurisdictions.

Global tax policy in 2014: EY publication

Ernst & Young (EY) has published a very informative study, based on a survey of 830 executives in 25 markets.  The second section of the publication includes analyses of tax outlooks for 38 countries, including BEPS actions.  The 38 countries highlighted in the publication include:

Australia / Austria / Belgium / Canada / Chile / China / Czech Republic / Denmark / Finland / France / Germany / Greece / Hong Kong / Hungary / India / Ireland / Italy / Jordan / Korea / Lithuania / Luxembourg / Malaysia / Mexico / Netherlands / New Zealand / Norway / Panama / Poland / Russia / Singapore / Slovakia / South Africa / Spain / Sweden / Switzerland / United Kingdom / United States / Venezuela

A link to the publication is included for reference:

http://www.ey.com/Publication/vwLUAssets/EY-the-outlook-for-global-tax-policy-in-2014/$File/EY-the-outlook-for-global-tax-policy-in-2014.pdf

The publication includes an introductory section highlighting tax rates and a 2014 tax policy outlook.  The outlook includes the following sections:

  • How countries are adjusting their corporate tax base in 2014
  • Incentives
  • Withholding taxes
  • Transfer pricing changes
  • Interest / Business expense deductibility
  • Changes to tax treatment of losses
  • Changes to CFC rules / thin capitalization

The second section analyzes 38 separate countries, addressing the following topics:

  • Tax rates
  • 2014 tax policy outlook:
    • Key drivers of tax policy changes
    • Fiscal consolidation / stimulus
    • Tax policy outlook for 2014, including political landscape, current tax policy and administrative leaders, key tax policy changes in 2013, country position on OECD BEPS Action Plan, pending tax proposals and consultations opened / closed.

This publication is especially valuable in country outlooks, including the OECD BEPS Action Plan proposals, and should be consulted to develop continued awareness of current and future trends in international taxation.

 

Ireland Code of Practice: Audit Best Practices

Irish Tax and Customs has published a comprehensive report of Best Practices to be followed by the tax authorities and taxpayers in audit inquiries.  The report includes definitions, types of audits conducted, bases of risk assessment and analytics used by the tax authorities.  The following excerpt provides a brief overview of the content, which is referenced at the link provided.

  1. 1.1  Purpose of this Code of Practice

    The purpose of this Code of Practice is to set out a clear, fair and equitable set of guidelines to be followed by Revenue, taxpayers and tax practitioners, in the carrying out of all Revenue Compliance Interventions, having regard to best practice and legislation.

    The provisions of this Code of Practice are not to be used unnecessarily to delay or obstruct the due process of the application of tax legislation by Revenue carrying out duties on behalf of the State. Taxpayers or tax practitioners acting on their behalf cannot abuse the rights recognised in this Code of Practice to avoid or delay payment of tax, interest or penalties which are correctly owed. The Code of Practice does not restrict the taxpayer’s statutory rights.

    This Code of Practice will be reviewed on an on-going basis and may be modified to reflect changes in legislation and emerging practices.

  2. 1.2  Taxes and Duties Covered by this Code of Practice

    This Code of Practice applies to Income Tax, Corporation Tax, Capital Gains Tax, Local Property Tax, Exit Taxes, VAT, Capital Acquisitions Tax, Excise Duties and Licences, Carbon Taxes, Vehicle Registration Tax, Stamp Duties, Customs Duties, Universal Social Charge, Income Levy, Domicile Levy, PRSI (both employers and employees), Health Contributions, Environmental Levy, Training Levy and includes all forms of withholding (e.g. RCT, PSWT, DWT) that apply to any of these taxes, interest in respect of such taxes and penalties.

http://www.revenue.ie/en/practitioner/ebrief/2014/no-682014.html

The publication is informative and an invaluable reference for any type of audit inquiry that is conducted.

Secondary TP adjustments: Legislation for S. Africa 2015

S. Africa has introduced a change in its legislation for 2015 addressing “secondary adjustments.”  The legislation aims to revert to a “deemed dividend”  concept of classification from the current “constructive loan” methodology.  A link explaining the legislation, in addition to the OECD definition of a “secondary adjustment” is provided for reference:

http://www.kpmg.com/ZA/en/IssuesAndInsights/ArticlesPublications/Tax-and-Legal-Publications/Pages/Additional-changes-made-to-transfer-pricing-legislation.aspx

Prior to final settlement of any audit, the effect of a “secondary adjustment” as well as a “corresponding adjustment” in another jurisdiction should be known to preserve appeal rights for that audit while avoiding double taxation.  This knowledge should be comprehended and utilized as an effective audit tool by internal tax and legal colleagues, in addition to external advisors ( who may not have multinational audit defense experience).

 

OECD report to G20: Issues re: Developing countries

The OECD has published a report (Part 1) addressing base erosion and profit shifting (BEPS) in developing countries and how these relate to the OECD/G20 BEPS Action Plan. A ranking of low, medium or high is assigned to each of the 15 Actions in Annex A re: the impact on developing countries.  Section 5 of the report highlights the primary issues to be addressed, including base-eroding payments, treaty issues, new business models and transfer pricing documentation.

Part 2 of the report, to be presented in September 2014, will (1) confirm which of the Actions are of most relevance to developing countries, (2) discuss other BEPS-related issues not in the Action Plan, and (3) address actions needed to ensure that developing countries can fully benefit from the Action Plan items and how specific BEPS actions may need to be adapted/simplified or supplemented to ensure they are effective for developing countries.

An interesting comment in the Executive Summary states: “The international nature of tax planning means that unilateral and uncoordinated actions by countries will not suffice and may actually make things worse.”  Note that recent unilateral actions by developed countries to advance BEPS initiatives would further corroborate this statement.

Additionally, it is stated that approx. 3,000 bilateral tax treaties operate worldwide, with about 1,000 of these involving developing countries.  This is a significant fact, as the OECD seeks to ultimately develop tools for countries to enact such legislation, notwithstanding the fact that it may take years to achieve global implementation.

A link to the report is provided for reference:

http://www.oecd.org/tax/part-1-of-report-to-g20-dwg-on-the-impact-of-beps-in-low-income-countries.pdf

The report is invaluable as it provides significant trends and challenges faced by developing countries, coupled with potential solutions under consideration to address such challenges.

 

Chinese GAAR: Review of a draft “Administrative measure”

The Chinese State Administration of Taxation (SAT) has released draft General Anti-Avoidance Rules (GAAR) to supplement its current GAAR legislation and Circular 2.  The draft rules, when final, will be effective for all arrangements executed after 1/1/2008, the effective date of the Corporate Income Tax Law and the Detailed Implementation Rules.  The KPMG tax alert provides relevant information for this draft guidance, which can be referenced at the following link:

http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Newsletters/ChinaAlerts/Documents/China-tax-alert-1407-19-Guidance-on-Chinese-General-Anti-Avoidance-Rule.pdf

Observations of “clarifications” to the law:

  • Shift from a “primary purpose” test to include “one of its main purposes” to obtain tax benefits.
  • Ordering rules are set forth: Domestic SAARs, Treaty SAARs, and domestic GAAR.
  • It is noted that in most recent Chinese tax treaties, there is a “Miscellaneous Rule” article reserving the right to use GAAR irrespective of treaty commitments.
  • There is not a GAAR review committee.
  • Documentation to be provided by taxpayers includes communications between the taxpayer and its tax advisors, and other parties to the transaction.
  • Documentation may also be requested directly from the tax advisors to the taxpayer.
  • GAAR adjustments include re-characterization of the arrangements, or income, deductions, tax incentives and related foreign tax credits, denial of the existence of a party to the transaction, and any other reasonable method.

This draft emphasizes the use of GAAR by tax authorities to counter perceived tax abuse and treaty shopping techniques.  There is a complex interplay between the treaty provisions, by which treaty relief may be sought, and domestic legislation whereby there is a higher possibility of double taxation.  Prior posts re: GAAR may also be searched in this blog, detailing a non-uniform burden of proof standard, high subjectively threshold and the continuing development of this anti-abuse provision by tax authorities around the world.

It is noted that the draft rules also extend documentation requests directly to tax advisors, including communications to or from the taxpayer.  This explicit provision emphasizes the importance of coordinating relevant communications between the taxpayer and all outside parties to ensure that form and substance requirements are aligned.

GAAR documentation should be considered for all transactional planning, including prior transactions for which current developments are evolving.

 

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