The Italian Budget has enacted a 3% web tax, and a new PE definition based on economic, vs. physical, presence.
The Tax is due by the buyers of the above services unless the supplier declares in the invoice that it has not reached the threshold of 3,000 transactions in the calendar year.
The PE definition goes beyond the OECD’s intent, and will certainly lead to additional disputes in Italy and other countries developing such a subjective measure that also attracts double taxation.
EY’s global tax alert provides additional details as reference.
India’s Ministry of Finance has issued draft guiding principles for determining the place of effective management (POEM). The Finance Act of 2015 contained provisions providing for the significant change in determining POEM, to be effective April 2016. The guidelines have a comment period until 2 January 2016; a link to the guidelines is provided:
The guidelines present subjective determinations of determining POEM based on substance over form and a recurring annual test. There are presumptions, such as location for a majority of Board meetings, with exceptions based on facts and circumstances.
As drafted, the new guidelines present increased uncertainty for multinationals having any operations or services with Indian residents, thus this latest report should merit high priority due to the April 2016 effective date, as well as brief period provided for comments.
Kuwait’s Department of Inspections and Tax Claims (DIT) has introduced its interpretation of a Virtual Service PE, notwithstanding its nonconformity with the physical presence standard and its double tax treaties in accordance with OECD’s Model Convention.
Unfortunately, this concept is not new in the Middle East and it is hoped that other countries will not follow this breakaway interpretation.
EY’s Global Tax Alert provides additional details into this development:
- The Virtual Service PE concept takes into account only the duration of the contract itself.
- Work extending beyond the tax treaty threshold of 183 days will be presumed to have created a Service PE.
- The DIT takes the position that a nonresident is deemed to have a PE in Kuwait, particularly, if the following conditions are met:
- A nonresident furnishes services to an entity in connection with the latter’s activity in Kuwait.
- The period during which such services are rendered according to the contract, exceeds the threshold period under the applicable tax treaty.
The immediate implication of the DIT’s current approach to a “Virtual Service PE” is that the applicability of tax treaty-based income tax exemptions with respect to cross-border services has become highly uncertain.
Accordingly, all legal agreements and provision for services to Kuwait (disregarding the physical standard) should be reviewed for potential disputes based on a Virtual Services PE argument. Practically, it may also be difficult to obtain tax treaty relief from double taxation.
Saudi Arabia’s Department of Zakat and Income Tax (DZIT) has issued internal guidelines defining a creative concept of Permanent Establishment (PE) that is not aligned with its legislated tax law, double tax treaties, OECD or UN Model Conventions.
This new approach may affect treaty-based withholding tax exemptions, as well as refunds. Saudi Arabian customers may apply the domestic withholding tax rate as a result, thereby requiring the non-resident to apply for a tax refund.
EY’s Global Tax Alert provides additional details about this latest development:
The PE definition, and related legislative thresholds, are being aggressively contested by various countries in an effort to capture additional taxes that have been paid in other jurisdictions. However, such provisions usually have no offsetting adjustment for simultaneous relief from double taxation. It is expected to see this trend continue, at least partially incentivized by OECD’s BEPS Acton Plans that have yet to be finalized.
The PE pursuits should be closely monitored, with the expectation that assessments will be issued and further appeals will be necessary to fairly address the issue within the intended legal context of that jurisdiction.
The European Commission published a package of tax transparency measures on 18 March 2015. The press release and other documents, linked herein for reference, include a tax transparency communication, Council Directive re: automatic exchange of information and Q and A’s of the comprehensive package. Significant initiatives are included in this package addressing corporate tax avoidance and harmful tax competition in the EU, key components of which are highlighted. http://europa.eu/rapid/press-release_IP-15-4610_en.htm http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transparency/com_2015_136_en.pdf http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transparency/com_2015_135_en.pdf http://europa.eu/rapid/press-release_MEMO-15-4609_en.htm Press release:
- The concepts of tax evasion, corporate tax avoidance, “pay their fair share,” aggressive tax planning and abusive tax practices are summarily stated, although corollary concepts for avoidance of double taxation and effective dispute resolution are noticeably absent.
- Tax rulings will be automatically exchanged every 3 months.
- Feasibility of public disclosure of certain tax information of MNE’s will be examined.
- The EU Code of Conduct on Business Taxation will be reviewed to ensure fair and transparent tax competition within the EU.
- The Savings Tax Directive is proposed to be repealed to provide efficiencies and eliminate redundant legislation in the Administration Cooperation Directive.
- Next steps: The tax rulings proposal will be submitted to the European Parliament for consultation and to the Council for adoption, noting that Member States should agree on this proposal by the end of 2015, to enter into force 1/1/2016.
- Common Consolidated Corporate Tax Base (CCCTB) proposal will be re-launched later this year.
Tax Transparency proposal:
- Existing legislative framework for information exchange will be used to exchange cross-border tax rulings between EU tax authorities.
- The Commission will develop a cost/benefit analysis for additional public disclosure of certain tax information.
- The tax gap quantification will be explored to derive more accuracy.
- The global automatic exchange of information for tax rulings will be promoted by the EU.
Council Directive (amending Directive 2011/16/EU) re: automatic exchange of information:
- Mandatory automatic exchange of basic information about advance cross-border rulings and advance pricing agreements (APAs).
- Article I definition of “advance cross-border ruling:
- any agreement, communication, or any other instrument or action with similar effects, including one issued in the context of a tax audit, which:
- is given by, or on behalf of, the government or the tax authority of a Member State, or any territorial or administrative subdivisions thereof, to any person;
- concerns the interpretation or application of a legal or administrative provision concerning the administration or enforcement of national laws relating to taxes of the Member State, or its territorial or administrative subdivisions;
- relates to a cross-border transaction or to the question of whether or not activities carried on by a legal person int he other Member Sate create a permanent establishment, and;
- is made in advance of the transactions or of the activities in the other Member State potentially creating a permanent establishment or of the filing of a tax return covering the period in which the transaction or series of transactions or activities took place.
- Automatic exchange proposal is extended to valid rulings issued in the 10 years prior to the effective date of the proposed Directive (Article 8a(2)).
- In addition to basic information exchanged, Article 5 of the Directive should provide relevant authority for the full text of rulings, upon request.
- EU central repository to be established for submission of information by Member States.
- Confidentiality provisions should be amended to reflect the exchange of advance cross-border rulings and APAs.
Q and A’s:
- Corporate tax avoidance, as explained, undermines the principle that taxation should reflect where the economic activity occurs.
- Standard/template information for the quarterly exchange of information includes:
- Name of taxpayer and group
- Issues addressed
- Criteria used to determine an APA
- Identification of Member States most likely to be affected
- Identification of any other taxpayer likely to be affected
- Commission could open an infringement procedure for Member States not following the disclosure obligations.
- Domestic tax rulings are exempt.
- The EU could be a global standard setter of tax transparency.
- The EU Code of Conduct criteria are no longer adequate, and it lacks a strong enough mandate to act against harmful tax regimes.
The EU Tax Transparency Package is required reading for all MNE’s and other interested parties, as it is an ambitious effort to provide globally consistent procedures for the exchange of tax rulings/APAs. Additionally, it is interesting to note the EU’s aggressive actions and timing in its efforts to align, as well as expand, the OECD’s efforts to address BEPS Action Items. These actions are also intended to be a standard for global setting in the new era of international tax transparency. As a Best Practice, the 10-year look-back provision for rulings implies that MNE’s should have a similar central database for prior, and future, cross-border rulings. Additionally, this automatic exchange is another element of consideration prior to formally requesting a tax ruling.
Tax Executives Institute, Inc. (TEI) has provided comments in response to OECD’s BEPS Action 7: Preventing the Artificial Avoidance of PE Status.
- 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.
OECD has published the “only” response received for its work on BEPS Action 7 (Artificial Avoidance of PE Status) from a Chartered Accountant in India, outlining strategies that may result in the artificial avoidance of PE status re: base erosion and profit shifting. The comment discusses a few measures generally adopted by multinationals to avoid PE in the source jurisdiction. The link is provided herein for reference:
The examples, and short references to the comments, detail the following “artificial measures” to avoid PE:
- “Preparatory and auxiliary activities” exception: processing of goods exception may require review as “auxiliary” in character
- Agent PE: local entity appointed as “agent” acting on behalf of foreign multinational, high threshold of definition restricting tax authorities
- Independent Agent: activities of Principal, multiple Principals
- Professional service provider: definition requires substantial amendment
- PE definition and “permanency”: developing a “negative list” category re: performance of activities in source countries
- Income attribution and transfer pricing: Broaden PE scope/lower PE threshold, electronic commerce reference
As PE is a hot topic that is being undertaken by the OECD, this comment should be reviewed, especially due to the fact that it is the only response received.