Strategizing International Tax Best Practices – by Keith Brockman

Author Archive

Inconsistent (tax) terminology adds to confusion

The inconsistent use of (tax) terminology in drafting / enacting legislation and communicating issues re: perceived tax abuse, developing specific/targeted/general anti-avoidance rules (SAAR, TAAR, GAAR), anti-abuse rules, etc. promotes subjectivity, uncertainty, and misguided perceptions in trying to understand complex legal and technical international tax laws and regulations.

The recently drafted anti-abuse rule in the EU Parent-Subsidiary Directive (attached link for reference) is designed as a minimum standard to be adopted by EU Member States.  Article 1, paragraph 4 of the Directive states “This Directive shall not preclude the application of domestic or agreement-based provisions required for the prevention of tax evasion, tax fraud or abuse.”  This language should be compared to other tax legislation that introduce additional subjectivity and confusion with undefined and misunderstood terminology.

http://register.consilium.europa.eu/doc/srv?l=EN&f=ST%2016633%202014%20INIT

Subjective terminology that accompanies undefined verbiage as a basis for tax laws and regulations, such as anti-avoidance / abuse rules, further complicates comprehension, application, interpretation, and assessment of complex international tax rules.

The phrases “tax evasion” and “tax fraud” clearly set forth bright legal lines for definition and enforcement, whereas inherently subjective phrases of “tax avoidance,” “aggressive tax planning,” “intent of Parliament”, “tax abuse,” and similar terminology result in additional uncertainty for deciphering the true intent of significant tax legislation.

It would be beneficial to recognize the inherent inconsistencies of terminology applied in tax laws and regulations, and commence inclusion of verbiage and definitions that provide clarity promoting consistent application, implementation and enforcement of international tax guidelines.

Category:

OECD / UN, Transfer Pricing

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Slovakia joins interest limitation parade

Slovakia joins the march of others, including Germany and S. Africa, that have adopted EBITDA limitations for interest deductions.  Slovakia limits interest to 25% of EBITDA, with no carryovers allowable.  The 2015 tax amendments also extend transfer pricing rules to domestic related party transactions, as well as potential loss of future benefits for net operating loss carryovers.

EY’s Global Tax Alert summarizing these changes is included for reference:

Click to access 2014g-cm4890-slovak-parliament-approves-2015-tax-amendments.pdf

BEPS continues to focus on interest deductions and limiting or allocating such deductions based on the premise that they are a base eroding mechanism that should not be fully deductible.  However, such limitation introduces a mismatch of the related party’s interest income that is not similarly limited, thereby increasing the incidence of unfair taxation.  This argument is contrary to the hybrid entity mismatch rules whereby a deduction is not allowable for income that is not includible, or limited in the case of a double deduction situation.  Accordingly, BEPS seeks not only to create a neutral result for a deduction and the related income, but BEPS disallows the tax benefits of common intercompany financing arrangements while (unfairly) retaining domestic benefits for full taxation of related party interest income to increase the country’s domestic fisc.  

Countries that have adopted EBITDA limitations will not be incentivized to change such legislation for the final OECD BEPS guidelines re: interest, thereby causing further complexity, a potential lack of global consistency and avenues of deviation for BEPS implementation.

MNE’s operating in such countries should review the financial and tax impact of the new rules, noting this will be a significant trend in the future that changes the manner in which debt financing is structured in the worldwide organization.

Category:

Transfer Pricing

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CbC reporting: Spain is 2nd

The Spanish Treasury has announced that a Country-by-Country (CbC) reporting obligation will be included in the new Regulations, expected to be adopted in the first half of 2015 and effective on 1/1/2016.  This announcement follows an earlier decision by the UK to adopt CbC reporting for UK headquartered companies, also effective as of 2016 (refer to 12 December 2014 post).

The Spanish CbC reporting template is expected to mirror the OECD BEPS proposal to ensure alignment.

Best Practice notes:

  1. Timing: The OECD Guidelines are expected to include CbC reporting for the 2016 tax year, with one year provided to provide such documentation due to differing tax years of subsidiaries, timing of statutory reports, etc. upon which the relevant information is based.  The UK and Spanish CbC reporting are also focusing on 2016, although no date has been yet prescribed for providing the documentation to the tax authorities.  The dates legislated into law by the countries may precede the OECD suggested timeline.
  2. Coordination of CbC and TP documentation: If there are perceptive gaps or issues that are to further explained and referenced in the transfer pricing documentation, the date for providing contemporaneous TP documentation may be earlier than the CbC reporting date.  Therefore, planning should start now to take into consideration that not enough time may be available in 2017 to coordinate both sets of reports effectively.
  3. CbC definitions:  Ideally the UK, Spain and other countries adopting CbC will use consistent definitions for the items to be reported for global consistency.  To the extent there are different definitions, additional complexity, time and cost will be incurred by MNE’s.
  4. Items to report for CbC: At an early stage, it appears that the UK and Spain are adopting identical items for reporting purposes.  However, it is expected that some countries will use the OECD Guidelines as a base upon which other “wish list” items are to be included, resulting in further complexity.
  5. Sharing of CbC information: The first countries to adopt CbC reporting may share such information as a means of transparency with other tax authorities.  Therefore, it is expected that all countries may have access to this information very quickly irrespective of their domestic laws.

Category:

OECD / UN, Transfer Pricing

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TEI’s comments: OECD BEPS Actions 10 and 14

Tax Executives Institute, Inc. (TEI) recently published comments re: OECD BEPS Action 10, addressing Low Value-Adding Intra-Group Services, and Action 14 re: Dispute Resolution Mechanisms.  The comments elicit practical considerations, including worldwide consistency, in their well written and reasoned responses.  Although many individuals/organizations have provided comments, TEI’s submissions merit required reading and thoughtful consideration. Links to TEI’s comments are included for reference:

Click to access TEI%20Comments%20BEPS%20Action%2010%20-%20Low%20Value%20Added%20Services%20-%20FINAL%20to%20OECD%2013%20January%202015.pdf

Click to access TEI%20Comments%20BEPS%20Action%2014%20-%20Dispute%20Resolution%20-%20FINAL%20to%20OECD%2015%20January%202015.pdf

Key comments re: Action 10, Low Value-Adding Services

  • Non-global implementation will diminish the intended value of this initiative.
  • A “rebuttable presumption” should replace the “benefits test” for low value -added services.
  • Exclusion of corporate senior management’s services is complex; it may be easier to include such services.
  • A mark-up % of 0-5% should replace 2-5% for flexibility and reflecting cost contribution arrangements.
  • Any percentage within the safe harbour range should be allowable.
  • Guidance should be issued re: coordination of Action 10 and Action 13 re: transfer pricing documentation.
  • Reference to the OECD’s previous work on safe harbours has been omitted, for no stated reason.
  • The safe harbour should be available if the taxpayer’s method is different in another jurisdiction (i.e. APA’s, non-OECD alignment).

Key comments re: Action 14, Dispute Resolution Mechanisms

  • Published MAP guidelines and procedures are welcome, although redacted settlements would also reveal legal basis for outcomes,  and may be used as precedent for taxpayers.
  • KPI’s should be established.
  • Monitoring the MAP process is an excellent proposal suggested in the report.
  • A global dispute resolution mechanism and mandatory binding arbitration should be developed, with arbitration available as a pre-MAP appeal avenue.
  • Deadlines for Competent Authority (CA) requests should be in place, along with penalties for CA if they do not respond timely.
  • Maintaining confidentiality is critical and should be a primary focus, especially for countries initially adopting this process.
  • Transparency of independency for Competent Authorities would improve confidence in the process.
  • Taxpayers should participate in face-to-face meetings to facilitate the process, and a simplified process should initiate MAP assistance.
  • Precluding taxpayers from using MAP, directly or indirectly giving up their rights, is not acceptable.
  • Binding arbitration provisions and/or use of a domestic or treaty-based anti-abuse rule should not preclude MAP.
  • Tax, interest and penalties should be suspended during the MAP process.

The comments on Action 14 are especially critical, as dispute resolution will be a critical factor in ensuring that the BEPS guidelines legislated into law will have consistent, fair and transparent processes to resolve disputes timely and effectively.

Category:

OECD / UN

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S. Africa’s BEPS incentivized interest rules

S, Africa’s new interest limitation on related party debt, approximating 40% of EBITDA, is effective as of 1/1/2015.  The new rules are prescribed prior to the OECD BEPS Action 4 Guidelines re: interest limitations.  Disallowed interest is carried over indefinitely, subject to the subsequent year’s limitation.

PwC’s guidance is provided for reference:

Click to access pwc-south-africa-introduces-interest-deduction-limits-debts-owed.pdf

As countries aggressively enact BEPS incentives with unilateral legislation, the premise of worldwide consistency for new OECD guidelines diminishes virtually daily.  New legislation also reduces the country’s further incentive to change such legislation to align with final OECD guidelines.

As S. Africa’s new rules demonstrate, there should be a BEPS champion/team in place at MNE’s to capture such changes worldwide and measure such impacts upon the global organization.  Additionally, future strategic planning should consider current BEPS initiatives, and unilateral legislation that has been passed, to measure tax efficiencies of current and future debt structures.

Category:

Transfer Pricing

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Comments re: OECD BEPS 14: Dispute Resolutions

The OECD has released comments received in response to BEPS Action Item 14: Make Dispute Resolutions More Effective. These comments are valuable in understanding these important mechanisms that could minimize potential double taxation and increase certainty in a timely manner, as well as comprehend its significant impact on other current BEPS Guidelines that are being drafted such as Action Item 6: Treaty Abuse re: subjective tests being proposed such as the Principal Purpose Test (PPT).

Unfortunately, mandatory arbitration, as well as consistent consideration and application of the MAP procedure, are ideals that will not be realized, due in part to countries not wanting to give up their control and concept of sovereignty.  As the BEPS guidelines, and unilateral country legislative actions, become more complex and subjective, the dispute resolution process increases its vital importance exponentially.  Therefore, it is in everyone’s interest to make these mechanisms work efficiently and consistently in a transparent environment.

The link to the respective comments are included for reference:

Click to access public-comments-action-14-make-dispute-resolution-mechanisms-more-effective.pdf

Category:

OECD / UN

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Ireland GAAR: New rules

Ireland’s new Finance Bill has introduced a new General Anti-Avoidance Rule (GAAR), effective as of 23 October 2014.

The GAAR rule provides that where a taxpayer enters into a transaction, the tax authority may invoke the GAAR rule if it would be reasonable to consider that it is a “tax avoidance” transaction resulting in a tax advantage.  Accordingly, any reduction in tax payable is disallowed, in addition to a 30% surcharge.

PwC’s recent summary of Ireland’s tax developments is included for reference, including the GAAR rule on page 20:

Click to access 2014-pwc-ireland-budget-finance-bill.pdf

Key observations:

  • No time limit for raising a GAAR assessment.
  • A “protective notification” procedure is provided, protecting the taxpayer from the surcharge.
  • The taxpayer is obliged to furnish all documentation pertaining to the transaction along with an opinion as to why they believe the transaction does not fall within the GAAR provisions.

The GAAR rules are imposing additional arenas of uncertainty, dependent on the subjective interpretations and conclusions of the tax administration.  For Ireland, there is no time limitation and significant penalties are imposed for such assessments.

Due diligence procedures should be provided as an internal governance process to identify and review GAAR rules, domestic and/or treaty application, and possible avenues of appeal for transactions that may be affected.  (Note, details of the EU Parent-Subsidiary Directive GAAR provisions are provided in the 11 December, 2014 post)

Category:

Tax Risk Management, Transfer Pricing

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UK Diverted Profits Tax: Conference notes

The UK Diverted Profits Tax (DPT) Conference on 13 January, sponsored by the Oxford University Centre for Business Taxation, was presented to a packed audience.  Attendees represented news agencies, advisors, tax executives as well as other countries, including Australia.

The speaker panel was inclusive of the following presenters that provided excellent thoughts for discussion:

  • Philip Baker QC, a barrister and QC practising from Field Court Tax Chambers.
  • Michael Devereux, Director of the Oxford University Centre for Business Taxation, Professor of Business Taxation and Professorial Fellow at Oriel College, Oxford.
  • Paul Morton, Head of Group Tax at Reed Elsevier Group plc.
  • Heather Self, Partner at Pinsent Masons.
  • Mike Williams, Director of Business and International Tax at HMRC.

A few statements from the panelists offer some background on this debatable issue:

Philip Baker: The DPT is a Targeted Anti-Avoidance Measure.

Michael Devereux: This may represent an overlay of economic substance over existing international tax rules, and there is a debatable point if the UK treatment should depend on the incidence of income / tax inclusion somewhere else.

Paul Morton: A very real, and complex, set of facts were presented showing that countries’ initiatives may result in a tax burden that exceeds 100% of the income without adequate recourse to avoid double taxation.

Heather Self: Practical aspects, from a MNE perspective, of the proposal were presented, supplemented by comments in her 19 December article of Tax Journal.  One of the conclusions in her article states: “This measure will make BEPS more difficult to achieve, and it risks a whole raft of unilateral measures being introduced by other countries.”

Mike Williams: The DPT proposal has alot of political commitment; it is consistent with EU law and treaty obligations; the UK is trying not to tax beyond its fair share of profits; loan exclusions probably do not go far enough and to combat aggressive tax planning, why wait another year.

Comments also addressed the aggressive effective date of April 2015, noting this timeline is in advance of the final OECD BEPS guidelines and there is very little time for reasoned comments and review between now and April.

This initiative has drawn the attention of many countries, anxious to examine the potential benefits it would add to their economy.  Accordingly, it is imperative to track this proposal, its effective date, implementation and a “Follow the Leader” approach in other jurisdictions.

Category:

Transfer Pricing

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TEI Comments: BEPS Item 6 – Preventing Treaty Abuse

Tax Executives Institute, Inc. (TEI) has issued follow-up comments in response to the OECD public discussion draft on 21 November 2014, in addition to its prior comments on 8 April 2014 on the first discussion draft.  The latest comments are referenced herein:

Click to access TEI%20Comments%20-%20BEPS%20Action%206%20-%20Follow%20Up%20Work%20on%20Treaty%20Abuse%20-%20FINAL%20to%20OECD%208%20January%202015.pdf

Key observations:

  • The Principal Purpose test remains highly subjective and susceptible to unpredictable interpretations, therefore TEI opposes including this test in the OECD model treaty.
  • Jurisdictions should adopt an administrative appeal process if the Principal Purpose test is asserted.
  • A treaty incorporating a Limitation on Benefits provision (LOB provision) and a Principal Purpose test may deny benefits if the LOB test is satisfied and the benefit is denied under the Principal Purpose test.  The LOB provision should be the primary (objective) tool rather than one part of a two-part treaty abuse test.
  • The Principal Purpose test may result in benefits not recorded on audited financial statements due to its uncertainty.
  • Transition relief and prospective arrangements should be included in the final guidelines.

TEI’s comments should be reviewed to understand the myriad issues proposed to combat treaty abuse.  Additional uncertainty, accompanied by appeals of such assessments, will be the likely result of the proposal as currently drafted.

Category:

OECD / UN

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Singapore’s (expanded) TP Guidelines

The Inland Revenue Authority of Singapore (IRAS) has published an expanded Transfer Pricing (TP) e-Tax Guide (linked herein for reference) that consolidates the four previous TP guides.  The Guidance adheres to the TP arm’s length principle, while expanding required disclosures in alignment with the OECD BEPS objectives.

Click to access etaxguide_Transfer_Pricing_Guidelines_(Second_Edition)_2015_01_06.pdf

Key observations:

  • IRAS will adjust profits upwards for understated profits, although no mention is made of downward adjustments.
  • IRAS welcomes discussions to discuss difficulties in applying the arm’s length principle.
  • Contemporaneous TP documentation = on or before the tax return due date.
  • Group level TP documentation includes an organization chart of all related parties transacting with the Singapore taxpayer, the group’s business models and strategies, profit drivers including a list of intangibles and legal owners, business activities and functions of each group member with relevant supply chains, business relationships among related parties and group financial statements for the lines of business involving the Singapore taxpayer.
  • Entity level documentation includes a list of related parties to whom the local management reports for its operations, number of employees in each department, business models and strategies, contracts/agreements apart from detailed functional and benchmark analyses.
  • TP documentation exceptions include in-country related party transactions, routine services charged at cost + 5%, APA agreements or de-minimis stated thresholds for transactions and services between related parties.
  • Collaborative engagement methodologies are outlined for the Transfer Pricing Consultation program, by which TP methods and documentation of selected taxpayers will be reviewed.  Examples of high risk transactions are included in Section 7.5
  • Unilateral APAs are not accepted.
  • APA rollback years are acceptable, generally limited to 2 years.
  • MAP and APA methodologies are stated, including factors when IRAS will discontinue the MAP or APA process.
  • Section 16 summarizes updates and amendments of the TP Guidelines.

These guidelines should be reviewed, especially the new TP documentation guidelines as other countries in the APAC region and elsewhere will monitor and possibly adopt similar guidelines.

Category:

Transfer Pricing

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UK Diverted Profits Tax: Parliamentary debate

The UK Diverted Profits Tax proposal (refer to 12 December 2014 post) will become effective in April, 2015.  The Parliament debate sheds light on the intentions for such tax, as well as the assumptions (true or false) underlying this initiative.

The debate clarifies that such “tax” is not meant to be a tax that meets the definition of a tax for double tax treaty purposes, therefore it is subject to domestic legislation and not overridden by its treaty network.  This rationale therefore leads to the premise that it may not qualify as a tax subject to a US Foreign Tax Credit, resulting in a double “tax” situation regardless of the nomenclature.  Additionally, the Mutual Agreement Procedure (MAP) provided for in a double tax treaty would not be available for recourse.

The tax is aggressive in its timing, ahead of the final OECD proposals and in contrast to other initiatives for which the UK is awaiting final BEPS guidance.  The debate highlights the cynicism about the OECD process, thus providing a rationale for unilateral legislation sooner vs. later.  Additionally, this proposal was discussed as a Targeted Anti-Avoidance Rule (TAAR), which is in addition to the EU and UK General Anti-Avoidance Rules (GAAR).

Most importantly, a diverted profit tax situation involves an initial recharacterization assessment by HMRC, requiring payment by the taxpayer, with appeals to follow later – a “Pay Now, Talk Later” approach.

The clock is ticking and time is winding down with alot of questions remaining unanswered.  The debate is provided for reference:

http://www.publications.parliament.uk/pa/cm201415/cmhansrd/cm150107/halltext/150107h0001.htm

It is very useful to review the Intent of new laws to form a better understanding for the formation of such initiatives, as well as comprehension into the foresight of drafters re: possible appeals by the European Commission and/or European Court of Justice.

Category:

Transfer Pricing

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Japan’s tax reform proposals, including BEPS initiatives

EY has provided a concise summary of Japan’s tax reform proposals, including the limitation for a participation exemption of dividends that are deductible by the payor in alignment with OECD BEPS initiatives and matching the recent change in the EU Parent-Subsidiary Directive.  As Japan, and other countries, enact tax reforms that include OECD BEPS initiatives, it is imperative to review legal structures and potential impacts of such changes, including BEPS reforms.

Trends are also developing as countries follow similar changes of other countries, eager to adopt a “Follow the Leader” approach if it may attract additional tax revenues and economic growth.

EY’s Alert is included herein for reference:

On 30 December 2014, Japan’s coalition leading parties released the 2015 Tax Reform Outline (Outline). The Outline includes both favorable proposals, such as a corporate tax rate reduction and unfavorable proposals, such as lowering an annual net operating loss (NOL) deduction limitation. A tax reform bill will be prepared based on this Outline. The bill will be submitted to the Diet and enacted by the end of March 2015. This Alert summarizes key provisions relevant to multinational corporate taxpayers.

Corporate tax rate reductions
The national corporate tax rate will be reduced to 23.9% from 25.5% for taxable years beginning on or after 1 April 2015.
The local enterprise tax rate applicable to income base will be reduced to 6% from 7.2% for taxable years beginning on or after 1 April 2015.
The combined national and local effective corporate tax rate will be reduced to 32.11% from the current 34.62%.1
A further rate cut is planned in a 2016 tax reform, which would make the combined effective tax rate 31.33%.
The Government is planning to lower the combined effective tax rate to below 30% over several years.
Amendment to NOL deduction and carryover period
A 65% limitation for an annual NOL deduction (compared to the current 80%) is proposed for taxable years between years beginning on or after 1 April 2015 and years beginning on or before 31 March 2017. A further reduction to 50% will apply to taxable years beginning on or after 1 April 2017.
The current 9-year carryover period is extended to 10 years for NOLs incurring for taxable years beginning on or after 1 April 2017.
Small and medium enterprises (SMEs)2 are eligible for a 100% NOL deduction and a 9-year/10-year NOL carryover period.
A special rule will apply to a newly established corporation and a corporation emerging from bankruptcy, which allows a 100% NOL deduction for a seven-year period.
Amendment to domestic dividend received deduction (DRD) rule
The proposed new DRD rates apply to domestic shareholders holding 33.33% or less interest in a Japanese distributing company as follows:3
Ownership percentage
Current
Amendment
At least 25% and 33.33% or less
100%*
50%
More than 5% and less than 25%
50%*
5% or less
20%
* The amount of interest expense allocable to the acquisition cost of stocks will be reduced from the amount of DRD.

For insurance companies, the applicable DRD rate for stocks owned 5% or less will be 40%.
Reduction in income tax base (local enterprise tax)
Local enterprise tax consists of three elements – capital, value added and income. While the total combined tax revenues are intended to remain unchanged, income base percentages over a total enterprise tax are expected to be reduced from the current 75% to 62.5% and 50% for 2015 and 2016, respectively.
Amendment to research and development (R&D) tax credit
The R&D tax credit limitation4 will be reduced from the current 30% to 25% of national corporate tax liability of a taxable year.
A new R&D tax credit limitation of up to 5% of national corporate tax liability will be introduced for special experiment and research expenses.
The carryover of unused creditable amount will be repealed.
International taxation
The proposal will change the effective tax rate from the 20% or less to less than 20% when determining a foreign tax haven subsidiary status.
A 95% participation exemption for dividends paid by a foreign subsidiary will no longer be available for dividends that are deductible in the country where the foreign subsidiary is located.
Consumption tax
The second phase of the consumption tax rate increase (from 8% to 10%) will be postponed for 18 months to 1 April 2017.
Provision of digital services (e.g., e-books, internet-delivery of music, advertisement, etc.) provided by a foreign person to Japanese customers will be subject to consumption tax from 1 October 2015. For business to consumer transactions, the foreign service provider will be required to register as a taxable entity and file consumption tax returns. For business to business transactions, a reverse-charge mechanism will be introduced, which requires a Japanese service recipient to declare taxable sales and related tax due on its consumption tax return.
Endnotes
1. Some local jurisdictions impose higher local inhabitant and enterprise tax rates than the standard rate. The current combined national and local effective tax rate applicable to a corporation located in Tokyo area with capital of more than JPY100 million is 35.64%, and this will be reduced to 33.1% based on the Outline.

2. An SME is generally defined as an entity with capital of JPY100 million or less. An entity that is wholly owned by a shareholder whose capital amount is JPY500 million or more is excluded from the SME regime.

3. Shareholders who hold more than 33.33% interest are eligible for a 100% DRD.

4. The change is only for the base credit portion. For additional information, see EY Tax Alerts, Japan releases 2012 tax reform outline, dated 15 December 2011 and Japan’s tax reform outline announced, dated 4 October 2013.

Category:

Tax Risk Management

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BEPS Action 7 / PE: TEI’s comments

Tax Executives Institute, Inc. (TEI) has provided comments in response to OECD’s BEPS Action 7: Preventing the Artificial Avoidance of PE Status.

Click to access TEI%20Comments%20-%20OECD%20BEPS%20Action%207%20PE%20-%20FINAL%20to%20OECD%2023%20December%202014.pdf

Key observations:

  • Changes to the definition of a Permanent Establishment (PE) are more welcome in the Model Convention, as recommended, rather than modifying the official commentary.
  • Continued focus on physical presence in the general definition of a PE is commended.
  • “The Discussion Draft generally views commissionaires as structured “primarily” to permit MNEs to erode the tax base of the State of sale.” However, there is no mention of the legitimate arrangements for which they are used.
  • Four amendments are proposed, each of which would likely eliminate the commissionnaire arrangement and increase uncertainty.
  • The new paragraph 6, broadening the definition of an independent agent, is vague and problematic.  This change may result in a subsidiary being a dependent agent of the parent in a limited risk distributor situation, resulting in PE of the parent.
  • The proposed anti-fragmentation rules for a PE exception are subjective and increase uncertainty.
  • The Authorized OECD Approach (AOA) for determining a PE’s profits are complex and uncertain.
  • There are no transition periods or grandfathering provisions for implementation of the new PE definition.

TEI’s commentary is well written and poses practical arguments that should be considered by the OECD.  Accordingly, it is a document that should be required reading for all tax practitioners involved in transfer pricing.  The proposed changes will also affect other aspects of transfer pricing and BEPS Actions that will be finalized this year.

Category:

OECD / UN, PE, Transfer Pricing

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Denmark: (Super) GAAR?

The General Anti-Avoidance Rule (GAAR) has received a status of prominence during 2014, and continues its subjective and complex override provisions in domestic law that are interwoven with treaty provisions.

Denmark has proposed a (Super) GAAR, trumping the EU Parent-Subsidiary Directive, EU Interest-Royalty Directive, EU Merger Directive and Danish double tax treaties.  Notwithstanding its current status as a “proposal,” Denmark’s intent is clearly shown to provide an umbrella rule, evidently overriding the respective treaties, providing that a “main purpose” rule which achieves tax advantages would be used to disallow respective tax benefits of the transaction(s).  The proposed rule would be effective by 01 May, 2015.

PwC’s Insight has provided a brief summary of the proposal:

Click to access pwc-denmark-introduce-gaar-double-tax-treaties-directives.pdf

GAAR continues to be “the elephant in the room,” highly visible although the rules and appeal avenues are distinct and arbitrary for every country.  Some countries have GAAR rules, along with specific / targeted anti-avoidance rules (SAAR / TAAR).  Thereby, tax uncertainty and the risk of double taxation increases, dispute resolution (if available) avenues are further stressed, and arbitration measures may not be available.

With respect to arbitration, it should be adopted by every country to achieve mutuality with taxpayers, however some countries have expressly stated that they do not want to give up their control / sovereignty.  Unfortunately, OECD has not aggressively pursued this remedy for multilateral agreement.

Category:

OECD / UN, Tax Risk Management, Transfer Pricing

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Korea: Accumulated earnings tax/reforms

EY’s latest Tax Alert has summarized the effect of Korea’s new tax proposals, provided herein for reference.

Key observations:

The accumulated earnings tax will require a review of Korean entities for which equity capital exceeds the KRW 50 billion threshold, as well as recognizing the revised 2:1 debt to equity ratio and the deadline for filing the report for international transactions. 

On 2 December 2014, Korea’s National Assembly passed 2015 tax reform proposals, 1 which were enacted into law on 23 December 2014. A new proposal regarding capital gains tax on income from trading financial derivatives was introduced in a separate package and is also now enacted. This Alert summarizes key features of the new laws.

Corporate accumulated earnings tax
A new corporate accumulated earnings tax will be imposed on excess cash accumulated by large corporations whose equity capital exceeds KRW 50 billion (US$49 million) and corporations that are members of an enterprise group with restrictions on mutual investment.2

The corporation may apply one of the two methods in calculating the accumulated earnings tax. Method A computes a 10% tax on 80% of adjusted taxable income3 reduced by amounts spent on investment on tangible and intangible assets, salary increases, dividends and certain qualified capital redemptions. Method B calculates the 10% tax on 30% of adjusted taxable income reduced by amounts spent on salary, dividends and certain qualified capital redemptions.

The new law will be effective for taxable years beginning on or after 1 January 2015 and before 31 December 2017.

Increase in the debt to equity ratio
Under the new law, the debt to equity ratio is revised to 2:1. This change will become effective for fiscal years beginning on or after 1 January 2015. However, the debt to equity ratio applicable to financial institutions will remain unchanged from the current 6:1.

Capital gains tax on income from trading financial derivatives
The new law, as part of the Individual Income Tax Law, imposes a 20% tax on gross capital gain reduced by KRW 2.5 million (US$2,300). The Enforcement Decree however has reduced the rate to 10%. Financial institutions such as brokerage firms are required to report details of financial derivative transactions on a quarterly basis to a tax office. This law will be effective as of 1 January 2016.

Tax refund claim period extended from three to five years
Under the new law, the current three-year refund claim period is extended to five years from the date of the statutory filing due date.

Failure to submit data on international transactions with foreign related parties
The new law imposes a penalty not to exceed KRW 100 million (US$95,000) on the failure to timely file a report of international transactions with foreign related parties.

Extended statute of limitation period on tax evasion involving cross-border transactions
The statute of limitation period is extended to 15 years for cross-border tax evasion matters. The amendment becomes effective for the first tax assessment made after enactment of the law.

Increased penalties on tax evasion involving cross-border transactions
Under the new law, a new penalty is imposed on non-filers or the underreporting of income derived by cross-border transactions. The rate is 60% of the amount of the tax evasion and it becomes effective for taxable years beginning on or after 1 January 2015.

Endnotes
1. See EY Global Tax Alert, Korea announces 2015 tax reform proposals, dated 28 August 2014.

2. A Korean conglomerate with assets of more than KRW 5 trillion (US$5 billion).

3. Adjusted taxable income means taxable income plus additions such as dividend received deduction, interest on tax refund, depreciation expense on current year fixed asset acquisition minus corporate income tax, reserves, net operating loss, excess donation expense over a deduction limitation.

Category:

Transfer Pricing

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