Honduras Issues Transfer Pricing Law

Honduras issued the Transfer Pricing Law through Decree No. 232-2011 dated on December 10th, 2011 that establishes the regulations applicable to individuals or business entities that have related party transactions. The key considerations of these new regulations are the following: The regulations will apply to any transaction between associated enterprises involving goods, services, or intangible assets.
Source: Ernst & Young

European Commission commences consultation on double non-taxation

On 29 February 2012, the European Commission (the Commission) announced that it commenced a fact-finding public consultation in order to establish evidence concerning double non-taxation, both within the European Union (EU) and in relation to non-EU countries. The Commission encourages members of the public to provide factual examples of cases of double non-taxation on cross-border activities that they have encountered or have knowledge of. In order to encourage participation by those who may have insight into real-life exploitation of double non-taxation by companies, anonymous contributions will be accepted.
Source: Ernst & Young

Finnish investment fund is entitled to Dutch dividend withholding tax refund

On March 9, 2012, a Dutch Court of Appeal issued an important decision about the refund of Dutch dividend withholding tax withheld on Dutch portfolio dividends received by a Finnish tax-exempt investment fund.

Source: pwc

APA's introduced in India

The Finance Minister presented the Indian Finance Bill 2012 in the Parliament on March 16, 2012. Significant amendments in the transfer pricing ("TP") regulations have been proposed in the Finance Bill.

Introduction of Advance Pricing Agreement ("APA")

In recent times, taxpayers in India have been confronted with large scale litigation in TP. Keeping the same in mind, Government has introduced APA provisions in the Finance Bill 2012. The Finance Minister mentioned in the budget speech that introduction of APA can significantly bring down TP litigation and provide tax certainty to foreign investors.

Source: PKN

Exposure draft of law granting Commissioner taxing power under Australia's tax treaties

Earlier today, the Assistant Treasurer released its Exposure Draft (ED) on a proposed retrospective amendment to Australia’s transfer pricing rules.
As foreshadowed in the Assistant Treasurer’s press release of 1 November 2011, the objective of the ED is to allow the Commissioner to issue transfer pricing assessments under the Associated Enterprises or Business Profits Articles of Australia’s Double Tax Agreements (DTAs) in addition to the Commissioner’s existing ability to raise transfer pricing assessments under Division 13 of the Income Tax Assessment Act.
The ED introduces a new section of the Income Tax Assessment Act - Division 815 - which will apply from 1 July 2004. This new Division introduces the concept of a ‘transfer pricing benefit’.

Source: pwc

Germany publishes first official draft on separate entity approach for permanent establishments and other amendments to transfer pricing legislation

On 5 March 2012, the German Ministry of Finance published an official draft for the "Jahressteuergesetz 2013" ("Annual Tax Law 2013") that contains various amendments on major German tax regulations, including Section 1 of the Foreign Tax Act ("FTA") that is the core section on transfer pricing matters.
The aim of the expected adjustments to Section 1 of the FTA is an approximation of German transfer pricing regulations towards the OECD standard as well as the harmonization of the attribution and distribution of profits in cross-border transactions for different types of investment (e.g. corporation, partnership, permanent establishment).

Source and more info: pwc

La viñeta de El Economista

UK government publishes additional draft CFC legislation

On February 29, 2012, the UK government published an update and draft legislation as part of UK controlled foreign corporation ("CFC") reform. The documents provide additional proposals to simplify the gateway test and extend the application of the finance company exemption. These proposals are in addition to the draft legislation published on December 6, 2011 and January 31, 2012.

Source and more info:  pwc

OECD recommends action on international tax loopholes

Aggressive tax planning – untaxed income, multiple deductions and other forms of international tax arbitrage - is a growing concern for all governments.
OECD’s new report Hybrid Mismatch Arrangements: Tax Policy and Compliance Issues describes arrangements that exploit national differences in the tax treatment of instruments, entities or transfers to deduct the same expense in several different countries, to make income “disappear” between countries or to artificially generate several tax credits for the same foreign tax.
The report, which draws from the OECD Directory on Aggressive Tax Planning, concludes that these arrangements generate significant policy issues in terms of tax revenue, competition, economic efficiency, fairness and transparency. It notes that concerns about distortions caused by double taxation also apply to double non-taxation.
Anecdotal evidence shows that billions of dollars in tax revenues are at stake. New Zealand settled cases involving 4 banks for a combined sum exceeding NZD 2.2 billion. Italy recently settled a dozen cases involving hybrids for an amount of approximately EUR 1.5 billion. In the United States, the amount of tax evaded in 11 foreign tax credit generator transactions has been estimated at USD 3.5 billion.
“The OECD strives to eliminate double taxation and other obstacles to cross-border trade and investment,” said Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration. “At the same time, we are working hard to make sure that there are no tax loopholes between tax systems that would allow some taxpayers to gain an unfair competitive advantage over others”.
Source and more info. OECD         Full Report

Indian Tribunal upholds important transfer pricing principles on characterisation and rewards for selling activity

In a recent ruling for an Indian software multinational (the taxpayer), the Income-Tax Appellate Tribunal of India (the Tribunal) concluded that the taxpayer's UK subsidiary was not merely undertaking marketing activities. The Tribunal held that the UK subsidiary should be characterised as a distributor on the basis of its agreement with the taxpayer, selling efforts, market and credit risks and overall business strategies. Furthermore, the Tribunal held that the reward has to be determined with regard to return on sales rather than a mark-up on value added expenses (marketing and selling expenses).

Source and more info: pwc

Spain Supreme Court decision: Swiss principal has Spanish PE through its subsidiary in Spain

Many multinationals companies, including pharmaceutical, life science and medical device companies are using Swiss principal companies to manufacture and distribute their products. In this regard, tax executives of these companies are careful in setting up these structures to avoid having permanent establishments outside of Switzerland for their principals. That is why the recent case below should be of interest to tax executives using such structures.
On January 12th, 2012, the Spanish Supreme Court delivered its decision on a case concerning a Swiss principal company that manufactured and distributed its products in Spain through a Spanish subsidiary. The Supreme Court upheld the decision of the lower courts and concluded that the Swiss company had a Permanent Establishment in Spain to which all the Spanish sales should be allocated.

Source and more info: pwc

La viñeta de El Economista

European Commission launches consultation on double non-taxation

On February 29, 2012, the European Commission ("Commission") launched a public “fact-finding” consultation on the double non-taxation of companies within the European Union ("EU") and in relation with non-EU countries. This development and other recent developments in Europe regarding tax harmonization and state aid matters may have significant impact on the tax position and tax strategy of US multinationals with European operations.

Source and more info: pwc

Publicadas las Directrices del Plan Anual de Control Tributario para 2012

Resolución de 24 de febrero de 2012, de la Dirección General de la Agencia Estatal de Administración Tributaria, por la que se aprueban las directrices generales del Plan Anual de Control Tributario y Aduanero de 2012.

Incluye como puntos de especial atención por parte de la Administración Triburia:

"Utilización abusiva de precios de transferencia en operaciones de reestructuración  empresarial, especialmente por las grandes empresas, cuando se aprecien discrepancias  entre el modelo de negocio supuestamente implantado por la entidad y el realmente  establecido, con particular atención a la posible transferencia de activos intangibles al  exterior.Junto al control específico de estas operaciones, por un lado, se impulsará la aplicación correcta de la normativa sobre precios de transferencia en el marco del Foro de Grandes Empresas, y por otro, se fomentarán los acuerdos previos de valoración (Advance Price Arrangement o APAs) en cuanto se configuran como un instrumento de prevención del fraude que elimina los riesgos fiscales derivados de la política de precios de transferencia de las empresas.

          (...)

1. Acreditación indebida de gastos financieros, sobre todo intragrupo, con la finalidad de reducir o eliminar bases imponibles que deben tributar en España.

2. Compensación anticipada o irregular de bases imponibles negativas generadas, especialmente, fuera de España.

3. Utilización de estructuras opacas y entramados societarios para ocultar el verdadero titular de rentas, actividades, bienes o derechos.

4. Prácticas que persigan el doble aprovechamiento fiscal de pérdidas o gastos de personas jurídicas, en particular, mediante el uso de entidades o instrumentos híbridos.

5. Aplicación indebida del régimen establecido en el capítulo VIII del título VII de la Ley del Impuesto sobre Sociedades en las operaciones de reestructuración empresarial.

6. Utilización indebida de fundaciones y otras entidades sin ánimo de lucro o parcialmente exentas para desviar rentas procedentes de actividades económicas y minorar así su tributación."

Public comments received on the discussion draft on the definition of “permanent establishment” in the OECD Model Tax Convention

On 12 October 2011, the OECD Committee on Fiscal Affairs released for public comment a discussion draft on the definition of “permanent establishment” in the OECD Model Tax Convention. The OECD has now published the comments received on this discussion draft, which can be downloaded by clicking on the links below. The OECD is grateful to the commentators for their input. Working Party 1 of the Committee on Fiscal Affairs has discussed most of these comments at its February 2012 meeting and will continue the discussion of the comments received at its next meeting in September 2012.

• British Private Equity & Venture Capital Association (BVCA)
• Bundessteuerberaterkammer KdöR (German Federal Chamber of Tax Advisers) 
• Business and Industry Advisory Committee to the OECD (BIAC)
• Chartered Institute of Taxation (CIOT)
• CMS 
• Confédération Fiscale Européenne
• Confederation of British Industry's (CBI)
• Confederation of Swedish Enterprise 
• Crowe Horwath, Rome 
• Deloitte LLP (London)
• Deloitte Belastingadviseurs B.V. (Netherlands) 
• Deloitte & Touche LLP (Singapore)
• DLA Piper Italy
• European Business Initiative on Taxation (EBIT)
• European Private Equity & Venture Capital Association (EVCA)
• Fédération Bancaire Française (FBF)
• Gárate, Cristián (ProTax)
• ICON Wirtschaftstreuhand GmbH
• IFA Grupo Mexicano, A.C. 
• Institut der Wirtschaftsprüfer in Deutschland e.V. (IDW) 
• International Bar Association – Tax Committee (IBA)
• International Bureau of Fiscal Documentation – Research Staff (IBFD)
• International Chamber of Commerce – Taxation Commission (ICC) 
• Investment Management Association (IMA)
• Japan Foreign Trade Council – Accounting & Tax Committee (JFTC)
• Kim & Chang
• Loyens & Loeff N.V.
• Mancilla Rendón, Enriqueta & Astudillo Moya, Marcela 
• Nitikman, Joel
• Olsen, Knut 
• Pirola Pennuto Zei & Associati
• PwC 
• REPSOL
• Ronge, Eleonore
• Siemens
• Software Coalition
• Taxand
• Tax Executives Institute, Inc. (TEI) 
• Tax Faculty - The Institute of Chartered Accountants in England and Wales (ICAEW)
• Treaty Policy Working Group (TPWG)
• United States Council for International Business (USCIB)
• VDMA
• WTS Steuerberatungsgesellschaft mbH

Source: OECD

Currency exchange gains on loans to which the anti-base erosion rules apply are tax exempt

On February 24, 2012, the Dutch Supreme Court issued an important decision about the tax treatment of currency exchange gains on loans to which the anti-base erosion rules of article 10a Dutch Corporate Income Tax Act ("CITA") 1969 apply ("tainted loans"). The case concerned a Dutch company which realized a currency exchange gain on a tainted loan. The Supreme Court ruled that such currency exchange gains are not taxable.

Source: pwc

2011 UN Double Tax Treaty Model Update soon available

According to the press release, the 2011 Update of the UN Double Tax Treaty Model will be published on March 15, 2012 in the website.

Response to the OECD’s discussion draft on Article 5 (Permanent Establishment) the OECD Model Tax Convention

On 12 October 2011, the OECD released a public Discussion Draft entitled "Interpretation and Application of Article 5 (Permanent Establishment) of the OECD Model Tax Convention".  The Discussion Draft proposed a number of changes affecting the application of the treaty rules which deal with the circumstances in which a taxable presence or “permanent establishment” may be created.

PwC’s response to the discussion draft is set out in this bulletin.

Landmark court case on the treatment of inter-company loans‏ in The Netherlands

The Dutch Tax Authorities frequently take the position that if a borrower – on a stand alone basis – would not have been able to enter into a third party loan, the same inter-company loan can be re-characterised into capital on the basis of paragraph 1.65 of the OECD Guidelines. Interest paid by a borrower on such a loan is therefore not deductible.
This position is especially brought forward in cases in which the Dutch Tax Authorities feel that a group company (typically a Dutch based borrower) is too thinly capitalised and as “excessively” funded with (group) debt. However, a Dutch Supreme Court case of 25 November 2011 makes clear that this position taken by the Dutch Tax Authorities may not be correct.

Source and more info: PKN

Recent Developments at the OECD

Effective February 1, 2012, Pascal Saint-Amans was appointed head of the OECD’s Center for Tax Policy and Administration (CTPA). Saint-Amans first joined the OECD in 2007 as the head of CTPA’s International Cooperation and Tax Competition Division.

In an interview with a Bloomberg BNA correspondent following the announcement of his appointment, Saint-Amans listed his top priorities as transfer pricing, engagement with non-OECD economies, and tax policy analysis. Saint-Amans discussed his plan to move “back to the basics” with OECD tax policies, conceding that transfer pricing regulations in particular may be overly complicated. Further, he reiterated the need to ease the way for non-OECD member countries to implement OECD transfer pricing standards (see previous story). Saint-Amans noted that the OECD guidelines were developed with input from emerging economies, and the March OECD Global Forum on Transfer Pricing will provide an opportunity to engage non-OECD countries on transfer pricing issues. Of particular note is that Brazil, with a much different perspective on transfer pricing in many regards (e.g., fixed margin versus arm’s length approach), will be participating as a member of the steering committee at this forum.

In Saint-Amans’ view, it remains possible for the OECD to maintain the arm’s length standard, but it must be adaptable for non-member emerging economies. As an example, the adoption of new transfer pricing regulations in Russia has removed any significant impediments to joining the OECD, at least when it comes to transfer pricing. China too, while distant from the OECD on the political front, has been actively engaged in transfer pricing discussions.

Finally, Saint-Amans touched upon his desire to emphasize tax policy studies in order to better advise governments upon request or to enhance capabilities to internally analyze such issues.

In other OECD developments, the Forum on Tax Administration (“FTA”) released a report entitled “Dealing Effectively with the Challenges of Transfer Pricing” upon the conclusion of its meetings held in Buenos Aires on January 18-19, 2012. The report, which focuses on practical administration issues regarding transfer pricing and, more specifically, transfer pricing audits, was based on written submissions and consultations with fifteen different national tax administrations. Initial survey results revealed that, on average, countries settle transfer pricing disputes in 540 days, suggesting room for improvement. The report aims to provide best practices for quality administration and voluntary compliance based on trust between tax administrations and large business taxpayers. To reach these end goals, the report outlines the following recommendations to tax authorities at each of the key stages of a transfer pricing audit:

• The pre-requisite to a successful audit is effective risk assessment. Tax administrators should focus on selecting the right cases, allowing them to use resources in a more targeted manner.
• It is best start to an audit or inquiry with early communication. Employing a collaborative approach to fact finding with the taxpayer is key.
• Good governance, with regular oversight by a senior level administrator and an agreed upon project plan, can add to consistency and timeliness.
• Maintain momentum through the audit by carefully focusing IDRs and constructively using advisors. Per the example of several countries, the development of alternative dispute resolution systems should also be considered.
• It is important to know when the fact finding stage has concluded and a decision point has been reached. The entire audit process should ensure that the decision to litigate versus negotiate is based on the individual facts and circumstances of a case and an objective set of procedures.

The remainder of the report takes up Pascal Saint-Amans’ key issue of transfer pricing and developing countries. Although developing countries have become more aware of transfer pricing issues, many of these countries do not currently have the resources to monitor and assess cross border transactions made by multinational entities. The FTA report stresses the need to develop tools to assist these countries in identifying the key areas of improvement within their transfer pricing regimes and developing expertise to administer an effective transfer pricing policy. The FTA is already in the process of planning a conference to share knowledge across OECD and non-OECD countries to assist in addressing this need.

A copy of the entire report is available from the OECD’s website http://www.oecd.org/dataoecd/53/11/49428070.pdf?contentId=49428071.

Source: Ceteris Transfer Pricing Times Volume IX, Issue 2‏