Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘double tax treaties’

Saudi Arabia: Virtual PE

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:

http://www.ey.com/Publication/vwLUAssets/Saudi_Arabian_tax_authorities_introduce_Virtual_Service_PE_concept/$FILE/2015G_CM5642_Saudi%20Arabian%20tax%20authorities%20introduce%20Virtual%20Service%20PE%20concept.pdf

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.

Vietnam introduces anti-treaty shopping rules

A draft circular, released by the Ministry of Finance, introduces rules that would enable Vietnamese tax authorities to deny tax treaty benefits.  A substance-over-form principle would be used for those transactions concluded solely to achieve a tax benefit (i.e. the main purpose of an agreement is to obtain treaty benefits) and for which the benefit is not received by the beneficial owner.

Beneficial ownership benefits may be challenged if the applicant:

  • Has the obligation to distribute more than 50% of the income to another entity,
  • Only has business activities consisting of asset ownership or the right to generate income,
  • Has an amount of assets, business scale or employees not commensurate with the income received,
  • Does not have control or power over the assets of has low risks for such assets or income,
  • Has a back-to-back arrangement for lending, royalties or technical services with a third party,
  • Is resident of a country which has no, or a low, income tax, or
  • Is an intermediary solely for the purpose of accessing treaty benefits.

The Circular is presently in draft form, although the concept of “Beneficial Ownership” should be reviewed in every legal structure to determine potential risks and consequences.  This action in Vietnam is also mirrored by efforts of the OECD and other countries to restrict treaty benefits for certain activities.  For example, the UK has recently released rules enabling public disclosure of beneficial owners having ultimate ownership of the respective entity (refer to 1 Nov. post).

Note that the proposed tests for beneficial ownership are primarily objective, thus holding company structures, and their respective Articles of Association, should be reviewed in preparation for revised rules of “Beneficial Ownership.”

http://www.auschamvn.org/editor/assets/PwC%20Vietnam%20Newsbrief%20-%20Draft%20Circular%20on%20treaty%20shopping%20provisions_EN.pdf

OECD Country MAP Profiles & Statistics – Valuable tools

http://www.oecd.org/ctp/dispute/countrymapprofiles.htm

http://www.oecd.org/ctp/dispute/mapstatistics20062011.htm

The links provide reference to the OECD Country MAP Profiles and MAP Statistics 2006-2011.  The OECD MAP content provides valuable information that should be included as an integral component of audit risk strategies.

The Country MAP Profiles provide the following content for OECD member countries, in addition to Argentina, People’s Republic of China, Russia, and South Africa:

  • Competent Authority contact information
  • Organisation of the Competent Authority
  • Scope of MAP & MAP Advance Pricing Arrangements (APAs)
  • References to domestic guidelines and administrative arrangements
  • MAP request content, timelines, fees and documentation requirements
  • Provisions on tax collection, penalties and interest pending outcome of the MAP process
  • Other dispute resolution mechanisms, and
  • Links to websites for the relevant jurisdiction.

The MAP Statistics include information on MAP inventories, cases initiated, completed, withdrawn, and average cycle time.  These statistics are provided for the OECD member countries and some non-OECD economies.  This information is very helpful in reviewing the trend of MAP filings in relevant jurisdictions.  There were 3,838 open MAP cases by OECD member countries at the end of 2011, with an average completion time of 25 months.

The OECD Forum on Tax Administration (FTA) convenes later this year to discuss Best Practices for improving MAP: refer to prior post 27 June 2013.

With the increase of transfer pricing controversies that are inherently complex and subjective in nature, MAP is a tool that is being used more frequently worldwide.  Examples of Best Practices to strategize MAP are provided for insight:

  • Document domestic and bilateral/multilateral avenues of appeal upon commencement of an audit to facilitate advance planning.
  • Review Double Tax Treaties for relevant Arbitration provisions that are providing an impetus for some jurisdictions to finalize negotiations.
  • Determine the interplay of domestic appeals (informal settlement, formal Appeals, Court filings, etc.) with MAP early in the audit process.
  • Outline deadlines for domestic appeals, MAP and other bilateral/multilateral tools (i.e. EU Arbitration Convention)
  • Develop a pro-forma multilateral calculation to strategize solutions minimizing double taxation.
  • Ensure MAP and other appeal strategies are integrated in the Tax Risk Framework.

    OECD Map with accession (green) and discussion...

    OECD Map with accession (green) and discussion (pink) countries added (Photo credit: Wikipedia the relevant jurisdictions)

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