Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘double taxation’

Double Tax disputes: Draft EU Directive

The Council of the European Union has proposed a draft EU Directive, to be in effect by June 30 2019, that would resolve double taxation disputes between Member States.  A summary of the Draft Directive is provided, as well as referenced herein.

This proposal is based upon the foundation of the Union Arbitration Convention (90/436/EEC) re: cross-border tax disputes.

Key points:

  • 3 years, from first notification, to file a complaint by the taxpayer
  • Each competent authority (CA) acknowledges receipt within 2 months
  • Additional 3 months by CA’s to request additional information, by which the taxpayer has 3 months to provide
  • Approx. 6 months later, CA’s decide to accept or reject the complaint; or a CA can decide to resolve unilaterally by which the Directive is terminated
  • Taxpayer may appeal per national rules a rejection of the complaint
  • CA’s try to resolve issue within 2 years, which may be extended by 1 year
  • Upon taxpayer’s request, an Advisory Commission shall be established where the complaint is rejected by not all of the relevant CA’s, or a failure by CA’s to reach agreement.  This request can be denied by a Member State on a case by case basis where a question of dispute does not involve double taxation.
  • Advisory Commission = Chair, 1-2 representatives of each CA, and 1-2 independent persons by each CA
  • Advisory Commission to adopt a decisions within 6 months
  • CA’s may, alternatively, set up an Alternative Dispute Resolution Commission instead of the Advisory Commission; this commission has freedom of techniques to settle
  • Professional secrecy standards are prescribed
  • Advisory or Alternative Commission opines in 3-6 months
  • CA’s shall agree within 6 months of the opinion on how to resolve the complaint; they can decide on a decision that deviates from the opinion or be bound by the opinion
  • Final decision does not constitute a precedent
  •  (Redacted) decision is published and maintained in an online central repository
  • Evaluation of process by June 30, 2024 and issue a report

As the key point summary infers, there are many provisions in the Draft Directive, requiring a proactive effort by the taxpayer and relevant CA’s.  The Directive can be reviewed via the attached link:

http://data.consilium.europa.eu/doc/document/ST-9420-2017-INIT/en/pdf

EU dispute resolution: time for your voice to be heard

The European Commission has recently released a public consultation on improving double taxation dispute resolution mechanisms, with comments accepted through 10 May 2016.  It is a process / Best Practices approach to enact future efficiencies.  A summary story and consultation links are provided for reference:

http://ec.europa.eu/taxation_customs/common/consultations/tax/double_tax_dispute_en.htm

http://ec.europa.eu/taxation_customs/resources/documents/common/consultations/tax/survey_consult_doc_double_tax_en.pdf

Highlights:

  • Double or multiple taxation by EU Member States is recognized as a barrier to operate freely across borders.
  • A legislative proposal is expected by the end of 2016, following the comment period.
  • The Mutual Agreement Process (MAP) currently is not bound to reach a solution.
  • The EU Arbitration Convention (re: transfer pricing cases and permanent establishment profit attribution) is acknowledged as a current process, but limited in scope.
  • The last such public consultation (2010) resulted in an arbitration provision, although it has not been mandated in double tax conventions.
  • Stakeholders’ views are requested on the relevance of removing double taxation, EU objectives and proposed solutions.

This document is pivotal in establishing practical and efficient EU dispute resolution mechanisms ongoing, and all interested parties should submit thoughtful input.

The proposal, as noted, would only be effective between EU Member States, not between one Member State and another non-EU jurisdiction or between non-EU jurisdictions.  The EU has been a strong proponent in leading global best practices in the post-BEPS environment.  Therefore, global consistency of the EU approach is also encouraged, especially by countries having no such dispute mechanism.  

Additionally, other  countries’ need to rethink sovereignty arguments in trying to evade / negate the effect that such transparent measures would have on their ability to address local tax practices.  

 

 

 

 

 

 

Singapore: TP comments

The Inland Revenue Authority of Singapore (IRAS) has issued a consultation paper requesting comments on a revision to their transfer pricing (TP) guidelines.  The particular questions for which comments are requested, no later than 24 September, consist of the following:

  • Challenges in preparing TP documentation contemporaneously
  • Difficulties in obtaining group and entity information in Annex A of the paper
  • Examples of low-risk documentation areas
  • Frequency of documentation updates

A link is provided for reference to the consultation paper:

http://www.iras.gov.sg/irashome/uploadedFiles/About_IRAS/Public_Consultation/pconsult_IT_Transfer%20Pricing%20Documentation_2014-09-01.pdf

Key observations:

  • TP documentation to be organized in alignment with the OECD master file and local entity reporting methodology.
  • TP documentation not applicable for routine services with a 5% safe harbour mark-up
  • Inadequate TP documentation will lose the support of IRAS in MAP discussions to resolve double taxation.
  • Annex A provides additional requests for group information that may be the source of requested comments, including:
    • Worldwide organization chart
    • Group’s business models and strategies
    • Profit drivers, including a list of legal ownership for intangibles
    • Supply chain activities and functions
    • Business relationships among all related parties
    • Group’s transfer pricing policies for all types of transactions between related parties
    • Consolidated group financial statements

Singapore is a jurisdiction (and there may be many more) that is reviewing the OECD’s Action Plan country-by-country reporting template and forthcoming comments as a base upon which to expand TP reporting.

Multinationals will need to capture every country’s additional legislative requirements arising from the OECD’s Action Plan.  The additional complexity, cost and time will place a further constraint upon the ability to provide information perceived to be directly relevant for every jurisdiction around the world.  Additionally, the threat of lack of support for the MAP process via a determination of inadequate TP documentation (if legislated into law) will increase the risk of double taxation and TP appeals worldwide.

All interested parties should take time to submit comments prior to the 24 September deadline.

 

 

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.

APAs, MAP, Self-Assessment: Vietnam update & Best Practice ideas

Vietnam has recently adopted regulations on Mutual Agreement Procedures (MAP) and Advance Pricing Agreements (APAs), with additional transfer pricing measures.    A link to the informative summary prepared by KPMG is provided as reference:

http://www.internationaltaxreview.com/Article/3319685/Vietnam-Getting-up-to-speed-in-Vietnam.html

Key Highlights:

  • The APA negotiation and conclusion procedures, consisting of five steps, is expected to take nine months from submission to a concluded APA.
  • Formal guidance has been issued for MAP implementation.
  • Related party transaction disclosure is to be submitted with 2014 tax returns, based on a self-assessment process with contemporaneous documentation to effectively shift the burden of proof to the tax authorities.

Re: Best Practices, transfer pricing opportunities and documentation requirements, by Vietnam as well as all other countries, should be mapped to formulate new audit defense strategies, cooperative compliance ideas and transfer pricing governance guidelines.

In today’s volitive transfer pricing environment, a member of every multinational company’s global tax department should have responsibility for a real-time assessment of all new developments, thereby providing a significant value-add for legal structuring, debt financing, transfer pricing documentation, and audit defense strategies to avoid double taxation.  To the extent such resources are not being focused, a cost/benefit analysis of missed opportunities may be helpful to achieve additional Best Practice methodologies.

 

 

TEI comments – OECD BEPS Action 2: Hybrid Mismatch Arrangements

Tax Executives Institute, Inc. (TEI) has provided comments on the OECD BEPS Action 2 proposal addressing hybrid mismatch arrangements.  The submission is referenced at the following link:

http://www.tei.org/Documents/TEI%20Comments%20-%20OECD%20BEPS%20Action%202%20Hybrids%20-%20FINAL%20to%20OECD%201%20May%202014.pdf

Some key highlights of Submission:

  • Some suggested solutions are overly broad and administratively unworkable.
  • The comments are not limited to hybrid arrangements that are inappropriate or abusive.
  • Simultaneous adoption by countries is encouraged, versus a question of adoption and / or timing of adoption by countries.
  • Double taxation issues, with Competent Authority requests, may increase.
  • A “bottoms-up” approach, applying only to instruments held between related parties, is recommended, using a 50% or greater rule for related parties.
  • For deductible payments not included in “ordinary income” of the holder’s jurisdiction, the term “ordinary income” should be expanded.
  • Further clarification could be provided by delineating how two countries that simultaneously apply their domestic anti-hybrid instruments can coordinate their application.
  • The impact on financial accounting in application of the hybrid rules should be considered.
  • Recommended rules for hybrids will not always produce uniformity due to differing tax systems (i.e., worldwide or territorial).
  • An anti-abuse rule adopted by the OECD should only apply in narrowly targeted axes of abuse, with strict bright line tests.
  • Bilateral tax treaties are not a tool to address legal tax planning adopted by various countries.

TEI’s excellent comments provide further insight into this significant, and broad, proposal.  Accordingly, they should be reviewed to understand complexities of adopting a complex rule without increasing risks of double taxation, with increased pressures on the Competent Authority process.

Australia draft TP ruling: need for comment

The Australian Taxation Office (ATO) has issued a draft transfer pricing law introducing subjective provisions that would be enforced via self-assessment.  PwC has provided relevant details in the following link:

http://image.edistribution.pwc.com/lib/fe9813707560007f73/m/1/Australia-ATO+draft+ruling+-reconstruction+of+transactions+04252014.pdf

Key Aspects of Ruling:

  • Transactions would be reconstructed, with various exceptions
  • Self-assessment mechanisms are required, based on consistency with 2010 OECD Transfer Pricing Guidelines, for three exceptions:
  1. Form is inconsistent with substance
  2. Independent entities would have instead entered into other transactions that differ in substance from the actual transactions
  3. Independent entities would not have entered into commercial or financial relations at all
  • The taxpayer needs to hypothesize what independent entities behaving in a commercially rational manner would have done.  If different from the actual transactions, identification of the arm’s length conditions must be based on what the independent entities would have done
  • Thin capitalization reconstruction provisions are included in the self-assessment analysis
  • Comments are due by 30 May 2014

All interested parties should review this ruling, including the Appendix that does not form part of the binding ruling.  There are many reasons why the draft ruling will be difficult to implement by multinationals and the ATO, primarily due to the subjective content and process of hypothesizing.  Additionally, double taxation issues should be addressed re: reconstructed transactions and corresponding adjustments, as well as alignment and intent of the OECD provisions cited.

 

 

 

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