martes, 25 de julio de 2017

Switzerland: new corporate tax proposal

After rejection by popular vote of the Swiss corporate tax reform III (CTR III) package in February 2017, a Swiss governmental working group comprised of federal and cantonal members (the steering body) has been working on a revised package (tax proposal 17).

The steering body published its recommended contents on June 1, 2017 for tax proposal 17. Now the Federal Council will consider the draft proposal and is expected to publish a final proposal for parliamentary discussion by end of June 2017. New tax proposal 17 is comparable to the CTR III package. The tax reform is expected to take effect January 1, 2020.

Source & more info: PwC

lunes, 24 de julio de 2017

Vietnam introduces new restrictions on interest deductibility

Vietnam has introduced a restriction on the level of tax-deductible interest in the government’s new Decree No. 20.  The introduction of a fixed-ratio rule — which generally follows the recommendations of the OECD in its BEPS initiative — will have the effect of restricting tax-deductible interest to a percentage of EBITDA. The new rules, effective from May 1, 2017, may affect companies that have not engaged in transactions at which the BEPS rules are targeted.
Source & more info: PwC

viernes, 21 de julio de 2017

Netherlands: Supreme Court rules on deductibility of interest

The Dutch Supreme Court issued two decisions on 21 April 2017 that clarify the circumstances in which interest expense will be deductible for tax purposes. The cases involve banking group structures intended to benefit from the mismatch between the Dutch participation exemption and the rules that generally permit the deduction of interest expense on loans used to acquire participations (i.e. the “Bosal gap”).

Background
In 2003, the Court of Justice of the European Union (CJEU) ruled in the Bosal Holding case that the Dutch rules applicable at the time for the deduction of interest expense incurred on loans in relation to participations were contrary to EU law. At the time, the Dutch participation exemption prohibited the deduction of interest on loans used to finance the acquisition of a foreign participation, whereas no such limitation applied for domestic participations.
Dutch tax law was amended as from 2007 to allow the deduction of “financing interest” relating to foreign participations. Since that time, there has been a mismatch between the treatment of such interest expense (which is, in essence, deductible) and the income from qualifying participations (which is not taxable as a consequence of the Dutch participation exemption). Particularly in respect of foreign participations, this mismatch may create a risk of lost revenue for the Dutch treasury, since the profits of a foreign subsidiary generally are not taxable in the Netherlands, while the financing interest is, in principle, deductible in the Netherlands. This mismatch is referred to as the Bosal
gap.
Facts of the cases
The two cases before the Supreme Court involve the same taxpayer and essentially the same structure.
A Swiss banking group set up a tax structure in an attempt to benefit from the Bosal gap. The first case involved a structure that basically was used to acquire third-party Dutch private limited liability companies that already had earned profits in the same year as that in which they were acquired, but before the actual date of acquisition (for example, by disposing of the assets that comprised their businesses). Once the companies were acquired, their assets mainly consisted of cash. The second case involved private limited liability companies that did not earn any profits before the acquisition.
Subsequently, funding from loans that existed within the group was transferred to the acquired companies through a UK-based permanent establishment (PE) of the group’s Swiss parent company, i.e. the acquired companies became the borrowers on intercompany loans. The companies used the cash thus obtained to acquire foreign participations.
The objective of the structures was to set off the interest deductible on the loans against the profits already earned by the private limited liability companies. The interest payments were financed through dividend distributions (which were exempt under the participation exemption) by the foreign participations acquired. The Dutch tax authorities challenged the structures, resulting in several proceedings, which eventually reached the Supreme Court.
Supreme Court decisions
In the first case, the Supreme Court decided that there was an abuse of law based on the fraus legis concept, but such abuse was not found in the second case (although there was another issue, as discussed below).
If the fraus legis doctrine is applied, tax will be imposed by either disregarding a transaction or substituting the relevant transaction with another transaction. To be considered fraus legis, a legal act (e.g. a transaction) must be contrary to the aim and purpose of the tax law, and the prevailing purpose of the act must be to evade tax. The legal grounds provided in the court’s decision indicate that using the Bosal gap to evade the levying of corporate income tax, in and of itself, does not automatically lead to the conclusion that the transaction is abusive. However, abuse may exist if a deduction of interest contrary to the aim and purpose of the corporate income tax rules (as they are to be
interpreted following the Bosal decision) is taken with the definitive objective to evade tax.
The Supreme Court took exception to the fact that the interest deductions were to be offset against profits earned by the acquired companies before they became part of the group. For this reason, the court disallowed the interest deductions up to the amount of the “acquired profits.” Acquired profits for this purpose relate to profits that were earned according to the sound business practice principle, up to the time the economic risk relating to the shares in the acquired company was transferred to the acquiring company. The remaining interest payments were, in essence, deductible, since the court did not consider the deduction of these payments to be contrary to the corporate income tax rules applicable after the Bosal decision.
A separate issue existed regarding the deductibility of interest because the tax inspector had disallowed the interest deductions under article 10a of the Corporate Income Tax Act 1969. Under this statutory provision, briefly, interest is not deductible if a “tainted” legal act has been financed with a loan from a group entity. Since 2007, article 10a has applied to external acquisitions of participations, such as those at issue in these cases.
In the cases, the PE that had granted the loan to the taxpayer had raised debt capital from third parties. The relevant legislative history indicates that article 10a does not purport to restrict the deduction of interest on an internal loan from a group entity if an external loan indirectly was used to finance the internal loan, as long as the internal loan and the external loan show “parallelism” (i.e. identical characteristics). The Court of Appeal had concluded that this condition was fulfilled since the taxpayer had drawn up a statement to that effect, and the tax inspector had not properly contested the statement. The Supreme Court accepted the lower tax court’s finding and, thus, effectively
ruled that the required parallelism existed.
The Supreme Court also clarified the scope of the exception to the application of article 10a for interest on an internal borrowing that ultimately was financed by an external borrowing. In this context, it is relevant that article 10a provides for a “safe harbor” to allow a taxpayer to avoid the application of article 10a by providing evidence that either the “business motive test” is satisfied or that there is a compensatory levy. The business motive test implies that both the debt and the related legal act (in this case, the acquisition of the shares) are predominantly based on business motives. The Supreme Court’s decision clarifies that such an external loan, by definition (and, by extension, the related internal loan), complies with this test (i.e. that both the debt and the related legal act have a justifiable business motive). Therefore, article 10a is not applicable to internal borrowings that ultimately were financed by external borrowings.
The effect of the Supreme Court decision could be favorable to taxpayers because it may limit the application of article 10a.

Source: Deloitte

jueves, 20 de julio de 2017

Korea - Tribunal rules lease and maintenance fees for software constitute royalties

Korea’s tax tribunal issued a decision on 13 February 2017, ruling that lease and maintenance fees paid for the use of software constituted royalties under the 1980 Korea-US tax treaty.
The case involved a Korean company that entered into a lease and maintenance contract with a US software developer for the use of software, and paid fees accordingly. The company did not regard the payment as a royalty, so it did not deduct or pay withholding tax. As a result of a tax audit, the Korean tax authorities determined that the lease and maintenance fees paid were royalties and, therefore, assessed additional corporate income tax. The company appealed the decision of the tax authorities to the tax tribunal.
The tax tribunal agreed with the tax authorities that the lease and maintenance fees paid should be treated as royalties, subject to the 15% withholding tax rate under the treaty, for the following reasons:

  • The fees were significant, and the software was so sophisticated that the software developer either had to send its employees to install the software for the company or the installation process had to be carried out according to instructions of the software developer through video calls;
  • The lease and maintenance contract was mainly for the provision of technical support to resolve issues that arose while the company was operating the software; and
  • The software contained know-how of the developer, the core data of which was available to the Korean company. 


Source: Deloitte

miércoles, 19 de julio de 2017

Supreme Court rules that racing event creates PE in India

In a significant win for the tax authorities, India’s Supreme Court issued a decision on 24 April 2017, concluding that a car racing championship held in India created a permanent establishment (PE) for the nonresident company that sponsored the event, with the result that the income attributable to the PE was taxable in India. In its decision, the Supreme Court set out the key principles for determining when a PE is created; taxpayers should take into consideration the principles set out by the court with respect to a fixed place of business PE in India.

Facts of the case
A UK resident company (Formula One World Championship Ltd., or FOWC); the Federation Internationale de l’automobile (FIA), an international body regulating motor sports events; and Formula One Asset Management Limited (FOAM) entered into agreements, under which FOAM licensed all commercial rights in the FIA Formula One World Championship to FOWC for a period of 100 years, with effect from 1 January 2011.
On 13 September 2011, FOWC entered into a race promotion contract with an Indian company, Jaypee Sports International Ltd. (Jaypee), under which FOWC granted Jaypee the rights to host, stage and promote the Formula One Grand Prix of India event at the Buddh International Circuit in Noida for consideration of USD 40 million. On the same day, the two parties also concluded an artwork license agreement, under which FOWC permitted Jaypee to use certain marks and intellectual property belonging to FOWC for consideration of USD 1 million. Various other agreements also
were concluded between the parties to give effect to their understanding relating to racing events in India.
FOWC and Jaypee asked India’s Authority for Advance Rulings (AAR) for a ruling on whether, based on the race promotion contract, the amounts received by FOWC outside India would be considered “royalties” under article 13 of the India-UK tax treaty and whether FOWC would constitute a PE in India under article 5 of the treaty. The AAR concluded that, based on the India-UK tax treaty, the consideration received by FOWC from Jaypee was in the nature of a royalty subject to withholding tax in India, and that FOWC did not have a fixed place of business PE in India.
FOWC, Jaypee and the Indian tax authorities disagreed with the AAR ruling (all for different reasons) and brought their arguments before the Delhi High Court. FOWC challenged the aspect of the ruling that the consideration received from Jaypee should be characterized as a royalty (if the amount was not a royalty, it would not be taxable in India in the absence of a PE of FOWC in India). The Indian tax authorities filed a writ challenging the aspect of the ruling regarding the existence of a PE. The Delhi High Court reversed the findings of the AAR on both issues and held that the amount
received by FOWC from Jaypee should not be treated as a royalty, but that FOWC did have a PE in India and, therefore, the consideration it received would be taxable in India.
FOWC then appealed to the Supreme Court, arguing that it did not have a PE in India. According to FOWC, the Buddh International Circuit was not at its disposal – Jaypee was responsible for conducting the event and had complete control over it. Further, FOWC had access to the race venue for only a three-week period (two weeks before the event and one week after), so it argued there was an insufficient period of time to create the degree of permanence necessary to establish a fixed place of business PE in India.

Decision of the Supreme Court
The Supreme Court concluded that, based on the agreements with Jaypee and FIA, the Indian Formula One race venue was under the control and at the disposal of FOWC and, therefore, FOWC had a taxable presence in India under the India-UK tax treaty. As a result, the income received through the PE constituted business income, which is subject to tax in India. Under India’s Income Tax Act, Jaypee was required to deduct the relevant tax from the payments it made to FOWC, but tax had to be withheld only on the portion of income attributable to the PE.
In reaching its decision, the Supreme Court relied extensively on the commentary to the OECD model treaty on what is needed to create a fixed place of business PE (and on which the India-UK tax treaty is based) and commentaries on the OECD model by international tax practitioners and luminaries, as well as leading domestic and foreign judicial precedent in adjudicating the PE issue.
The court noted that a PE must be a fixed place of business “through” which the business of an enterprise is wholly or partly carried out. The fixed place of business need not be owned or leased by the foreign enterprise, but it must be at the disposal of the foreign enterprise in the sense that the enterprise must have some right to use the premises for the purposes of its business.
Based on this analysis, the Supreme Court held that FOWC did have a PE in India:

  • Buddh International Circuit clearly is a fixed place of business, since various races (including the Formula One Championship) are held on the track. This is the place where the commercial/economic activity of holding the race was carried out – it was a “virtual projection” of FOWC in India.
  • The fixed place was at the disposal of FOWC, and it was through this place that FOWC conducted business by exploiting commercial rights in India. The court stated that it was necessary to look at the various agreements entered into by FOWC and its affiliates as a whole to determine the “real transaction” between the parties; based on this reading, the court concluded that the entire event was controlled by FOWC and its affiliates. FOWC exercised complete control over the Buddh track and derived income therefrom (the court noted that the fact that Jaypee constructed the track and Jaypee’s ownership and organization of other events were not relevant in determining who controlled the racing event).
  • Even though the race took place over the course of only three days in the year, FOWC had full access to the circuit for the entire duration of the event (i.e. two weeks before and one week after the race). As long as the place of business is fixed, the duration of the activities must be viewed in the context of the nature of the business. The actual duration of the activities is not decisive in determining whether a PE is created, as long as the nonresident has exclusive and ongoing access to the place of business. 


Source: Deloitte

martes, 18 de julio de 2017

Greece: Authorities issue guidance on application of mutual agreement procedure

A decision issued by the Director of the Independent Public Revenue Authority (IPRA) (formerly known as the General Secretary of Public Revenue), published in the government gazette on 7 April 2017, contains comprehensive guidance on the application of the mutual agreement procedure (MAP) in Greece’s tax treaties. The decision is applicable for MAP requests filed as from the date of its publication.
The MAP was introduced in article 63A of the Tax Procedure Code in November 2016.
The MAP is a mechanism found in tax treaties that allows the competent authorities of the contracting states to engage with each other to attempt to resolve tax disputes arising under the treaty. The MAP can involve cases of double taxation, as well as cases concerning the interpretation and application of a treaty. The MAP is independent from any remedies provided under the national legislation for the resolution of tax disputes.
Greece currently has 57 tax treaties, which (except for the treaty with the UK) include MAP articles that are based on article 25 of the OECD model treaty. Before the decision of the IPRA, the MAP had been used sporadically in Greece because there were no relevant guidelines. The decision addresses all stages of the MAP process.
Source: Deloitte

lunes, 17 de julio de 2017

Germany: Federal Constitutional Court finds change-in-ownership rules partially unconstitutional

In a taxpayer-favorable decision issued on 29 March 2017 (published on 12 May 2017), Germany’s Federal Constitutional Court held that the change-in-ownership rules relating to loss carryforwards partially infringe the German constitution, and must be amended with retroactive effect.
Under the change-in-ownership rules, net operating loss carryforwards, interest carryforwards and current-year losses are forfeited if there is a “harmful change in ownership.” A direct or an indirect transfer of more than 25% (and up to 50%) of the shares in a company that has loss carryforwards results in a pro rata forfeiture of the tax loss carryforwards, and a transfer of more than 50% of the shares results in a complete forfeiture of all available carryforwards. There are three exceptions to the application of the loss forfeiture rules: (i) the intragroup restructuring exception; (ii) the built-in-gains exception; and (iii) the business continuation exception. The intragroup restructuring exception and the built-in-gains exception are applicable as from 2010, and the business continuation exception
applies as from 2016 .
The case before the Constitutional Court involved a direct transfer of between 25% and 50% of a company’s shares that resulted in a partial forfeiture of the taxpayer’s tax loss carryforwards. The court concluded that the rules violate the constitutional principle that companies should be taxed on their financial performance. The legislative intent to prevent loss trafficking by using “empty loss companies” may be an acceptable justification for an exception to this principle, but a partial forfeiture of loss carryforwards where there is a change in shareholders of between 25% and 50% is considered too broad and cannot be used to deem the taxpayer’s behavior to be abusive.
The Constitutional Court restricted its decision to transfers of between 25% and 50% of a company’s shares. The court did not provide an opinion on the constitutionality of the rule resulting in a full forfeiture of loss carryforwards following a transfer of more than 50% of the shares; therefore, this decision will have no impact on those transfers. However, it should be noted that a separate procedure on transfers of more than 50% is pending before the federal tax court.
The court also clarified that the introduction of the intragroup restructuring and the built-in-gains exceptions to the change-in-ownership rules do not affect its analysis. However, the introduction of the business continuation exception as from 1 January 2016 potentially could change the analysis, because this exception may allow the taxpayer to demonstrate the absence of an abusive intent for the share transfer. The court, therefore, limited the scope of its decision to the period from 1 January 2008 through 31 December 2015. (The decision did not address whether the change-in-ownership rules are in line with constitutional principles following the introduction of the business continuation exception.)
The Constitutional Court has asked the German legislature to draft and implement an amended change-in-ownership rule that is in line with constitutional principles by 31 December 2018, and that would apply retroactively for the period from 1 January 2008 until 31 December 2015. If the rules are not amended within this timeframe, the changein-ownership
rules for ownership transfers of between 25% and 50% of the shares in a company automatically will
become void on 1 January 2019 for the 2008-2015 period.
The court’s decision should apply for both corporate income tax and trade tax purposes. Tax assessment notices that became final in the 2008-2015 period, and that are not considered preliminary pending a decision of the Constitutional Court, should not be able to be amended based on the court’s decision. Only tax assessment notices that still are open may be affected.

Source: Deloitte

viernes, 14 de julio de 2017

Czech Republic: CbC reporting deadlines likely to be postponed

Legislative updates are in progress to incorporate the requirements of the EU directive on country-by-country (CbC) reporting and the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports into Czech domestic law. Due to delays in approving the necessary amendments, another amendment was proposed to the pending legislation on 19 May 2017 that would postpone the deadlines for complying with certain obligations with respect to the 2016 taxable period for Czech companies that are members of multinational groups that will be required to file CbC reports.
The deadline to notify the tax authorities about the ultimate parent company of the multinational group and thecompany that will complete and file the CbC report on behalf of the group (if different than the ultimate parent) is likely to be no earlier than 31 January 2018 (the original proposal was 30 September 2017). The deadline to complete the CbC report and submit it to the Czech tax authorities (for the parent and group companies for the 2016 calendar year) is likely to be no earlier than 30 April 2018 (the original proposal was 31 December 2017).

Source: Deloitte

Dbriefs Bytes - 14 July 2017


jueves, 13 de julio de 2017

PCT releases Toolkit for Addressing Difficulties in Accessing Comparables Data

The Platform for Collaboration on Tax (PCT) on June 22 released a toolkit to help developing countries address the lack of comparables for transfer pricing analyses and better understand mineral product pricing practices.

The toolkit was developed as part of the G20 Development Working Group mandate given to International Organizations under the BEPS project to help protect developing countries from base-eroding payments. In particular, the toolkit includes suggestions as to how developing countries can overcome a lack of data on comparables in a transfer pricing benchmarking study.

The initiative serves as a helpful tool in developing a coherent methodology to benchmarking studies around the globe, as well as providing support to build capacity in developing countries. However, some questions remain on its overall objective and ultimate impact.

Source & more info: PwC

Netherlands to redefine scope of dividend withholding tax act

The Netherlands Ministry of Finance published a consultation document on 16 May 2017 that details proposed changes to the dividend withholding tax (DWT) act. The document proposes to align the domestic DWT treatment of Dutch holding cooperatives with that of private limited liability companies (BVs)/public limited companies (NVs) and to expand the scope of the exemption from DWT to apply to active business structures.
The consultation document also includes proposed changes to the tax regime applicable to nonresident taxpayers in the Dutch corporate income tax act. The proposals effectively would mean that nonresident taxpayers generally would no longer be subject to Dutch corporate income tax on their Dutch-source dividend income, but only on their capital gains. To some extent, this narrowing of the tax base would be counterbalanced by the inclusion of an anti-abuse provision in the DWT act.

Source & more info: Deloitte

miércoles, 12 de julio de 2017

US Treasury to review debt reclassification, international, partnership regulations

The US Treasury Department has identified eight regulations that it states will be modified or repealed to implement an Executive Order (EO) issued by President Trump that calls for reducing tax regulatory burdens. The April 21, 2017 EO had set a 60-day deadline for Treasury to issue an interim report on regulations deemed to (1) impose an undue financial burden; (2) add undue complexity; or (3) exceed the statutory authority of the IRS.

Treasury stated that it will propose reforms ranging from streamlining problematic provisions to fully repealing the regulations. Comments are requested by August 7 on whether and how the identified regulations should be rescinded or modified. A final Treasury report recommending specific actions to mitigate the regulatory burden is due September 18.

Source & more info: PwC

Trump Administration FY 2018 budget highlights tax reform effort, as House tax reform hearings begin

The Trump Administration today released a $4.1 trillion FY 2018 budget proposal to Congress that proposes to balance the federal budget over 10 years by promoting economic growth through tax reform, regulatory relief, and infrastructure investments, and by significantly reducing federal spending. The President’s FY 2018 budget assumes “deficit neutral tax reform, which the Administration will work closely with Congress to enact.”

Source & more info: PwC

martes, 11 de julio de 2017

OECD releases latest updates to the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations

The OECD Transfer Pricing Guidelines provide guidance on the application of the “arm’s length principle”, which represents the international consensus on the valuation, for income tax purposes, of cross-border transactions between associated enterprises. In today’s economy where multinational enterprises play an increasingly prominent role, transfer pricing continues to be high on the agenda of tax administrations and taxpayers alike. Governments need to ensure that the taxable profits of MNEs are not artificially shifted out of their jurisdiction and that the tax base reported by MNEs in their country reflects the economic activity undertaken therein and taxpayers need clear guidance on the proper application of the arm’s length principle.

The 2017 edition of the Transfer Pricing Guidelines mainly reflects a consolidation of the changes resulting from the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project. It incorporates the following revisions of the 2010 edition into a single publication:

  • The substantial revisions introduced by the 2015 BEPS Reports on Actions 8-10 Aligning Transfer Pricing Outcomes with Value Creation and Action 13 Transfer Pricing Documentation and Country-by-Country Reporting. These amendments, which revised the guidance in Chapters I, II, V, VI, VII and VIII, were approved by the OECD Council and incorporated into the Transfer Pricing Guidelines in May 2016;
  • The revisions to Chapter IX to conform the guidance on business restructurings to the revisions introduced by the 2015 BEPS Reports on Actions 8-10 and 13. These conforming changes were approved by the OECD Council in April 2017;
  • The revised guidance on safe harbours in Chapter IV. These changes were approved by the OECD Council in May 2013; and
  • Consistency changes that were needed in the rest of the OECD Transfer Pricing Guidelines to produce this consolidated version of the Guidelines. These consistency changes were approved by the OECD's Committee on Fiscal Affairs on 19 May 2017.


In addition, this edition of the Transfer Pricing Guidelines include the revised Recommendation of the OECD Council on the Determination of Transfer Pricing between Associated Enterprises [C(95)126/FINAL]. The revised Recommendation reflects the relevance to tackle BEPS and the establishments of the Inclusive Framework on BEPS. It also strengthens the impact and relevance of the Guidelines beyond the OECD by inviting non-OECD members to adhere to the Recommendation. Finally, it includes a delegation by the OECD Council to the Committee on Fiscal Affairs of the authority to approve by consensus future amendments to the Guidelines which are essentially of a technical nature.

To read the full version online

Source: OECD

OECD releases the draft contents of the 2017 update to the OECD Model Tax Convention

The OECD Committee on Fiscal Affairs has just released the draft contents of the 2017 update to the OECD Model Tax Convention prepared by the Committee's Working Party 1. The update has not yet been approved by the Committee on Fiscal Affairs or by the OECD Council, although, as noted below, significant parts of the 2017 update were previously approved as part of the BEPS Package.  It will be submitted for the approval of the Committee on Fiscal Affairs and of the OECD Council later in 2017. This draft therefore does not necessarily reflect the final views of the OECD and its member countries.

Comments are requested at this time only with respect to certain parts of the 2017 update that have not previously been released for comments. These changes are as follows:

  • Changes to paragraph 13 of the Commentary on Article 4 related to the issue whether a house rented to an unrelated person can be considered to be a “permanent home available to” the landlord for purposes of the tie-breaker rule in Article 4(2) a).
  • Changes to paragraphs 17 and 19 of, and the addition of new paragraph 19.1 to, the Commentary on Article 4. These changes are intended to clarify the meaning of “habitual abode” in the tie-breaker rule in Article 4(2) c).
  • The addition of new paragraph 1.1 to the Commentary on Article 5. That paragraph indicates that registration for the purposes of a value added tax or goods and services tax is, by itself, irrelevant for the purposes of the application and interpretation of the permanent establishment definition.
  • Deletion of the parenthetical reference “(other than a partnership)” from subparagraph 2 a) of Article 10, which is intended to ensure that the reduced rate of source taxation on dividends provided by that subparagraph is applicable in the case where new Article 1(2) would have the effect that a dividend paid to a transparent entity would be considered to be income of a resident of a Contracting State because it is taxed either in the hands of the entity or in the hands of the members of that entity. That deletion is accompanied by new paragraphs 11 and 11.1 of the Commentary on Article 10.

Comments are not requested with respect to changes to the OECD Model Tax Convention that have been approved as part of the BEPS Package, were foreseen as part of the follow-up work on the treaty-related BEPS measures and/or were previously released for comments. These changes — which are released for information — include the following:

  • Changes contained in the Report on Action 2 (Neutralising the Effects of Hybrid Mismatch Arrangements), the Report on Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances), the Report on Action 7 (Preventing the Artificial Avoidance of Permanent Establishment Status) and the Report on Action 14 (Making Dispute Resolution Procedures More Effective), as well as changes developed in the follow-up work on those Actions.
  • Changes to the Commentary on Article 5 integrating the changes resulting from the work on BEPS Action 7 with previous work on the interpretation and application of Article 5. The proposals that resulted from that earlier work – which was based on the pre-2017 update version of Article 5 – were originally published in an October 2011 discussion draft, discussed at a 7 September 2012 public consultation and subsequently released in a revised October 2012 discussion draft.
  • Changes to Article 8, related changes to subparagraph 1 e) of Article 3 (the definition of “international traffic”) and paragraph 3 of Article 15 (concerning the taxation of the crews of ships and aircraft operated in international traffic), and consequential changes to Articles 6, 13 and 22. These changes also include related Commentary changes. These proposed changes were released in a November 2013 discussion draft.
  • Changes to paragraph 5 of Article 25, related Commentary changes and amendments to the “Sample Mutual Agreement on Arbitration” contained in an Annex to that Commentary. These changes are intended to reflect the MAP arbitration provision developed in the negotiation of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the Multilateral Instrument or "MLI”) adopted on 24 November 2016.
  • Consequential changes required as a result of the contents of the 2017 update described above.
Source: OECD

Costa Rica: Resolution on Master File and Local File entered into force

On April 21, 2017, the guidelines for Local File and Master File in Costa Rica, referred to as “Transfer Pricing Documentation Guidelines,” entered into force under resolution N ° DGT-R-16-2017 in the official newspaper ‘La Gaceta’.  The Resolution is effective as of its publication date.

Source & more info: PwC

lunes, 10 de julio de 2017

Court Delivers Prime Ruling for Amazon

On March 23, the United Sates Tax Court ruled in Amazon.com, Inc. & Subsidiaries v. Commissioner of Internal Revenue in favor of the taxpayer.  The IRS had argued that Amazon undervalued its intangible property (“IP”) and applied a $1.5 billion adjustment to the taxpayer’s income, but the court ruled that the IRS acted arbitrarily or capriciously in applying the cost sharing regulations.[1] The case is a major ruling in favor of corporations that hold IP abroad and may serve as a significant precedent for future transfer pricing litigation.

Background
In 2005, Amazon entered into a cost sharing arrangement (“CSA”) with its subsidiary in Luxembourg (“Subsidiary”) that permitted the Subsidiary to use pre-existing intangibles required to operate Amazon’s European website business.[2] A CSA is an agreement under which related parties agree to share the intangible development costs (“IDCs”) in proportion to their shares of reasonably anticipated benefits of the developed intangibles.  When one participant (here, Amazon) makes pre-existing IP available for the purposes of research under a CSA, that party is deemed to have transferred a property interest to the other CSA participant.  To complete the acquisition, the other participant (here, Subsidiary) must make a “buy-in payment” for the value of the IP to Amazon.
Amazon sought to act in accordance with the parameters for a CSA under the transfer pricing regulations.  Under Treas. Reg. Section 1.482-7, the Subsidiary was required to make a buy-in payment and then compensate Amazon annually for ongoing IDCs, which included research, development, marketing, and other activities relating to maintaining, improving, enhancing, or extending the intangibles.  According to the CSA, the Subsidiary would assist, by way of financial contribution only, in the ongoing development of technology required to operate the European websites and related activities.  The regulations further required Amazon to allocate the costs to the Subsidiary on a reasonable basis.  Therefore, Amazon developed a formula and applied it to allocate a portion of the costs accumulated in various cost centers to the IDCs to satisfy this criteria.[3]

During 2005 and 2006, Amazon transferred three groups of IP to its Subsidiary in a series of transactions including: the software and other technology required to operate its European websites, fulfillment centers, and related business activities; marketing intangibles, including trademarks, tradenames, and domain names relevant to the European business; and customer lists and other information relating to its European clientele.

IRS Stance
The IRS challenged the Petitioner’s buy-in payment and applied a discounted cash flow (“DCF”) methodology to value the IP.  The IRS valued the IP at $3.6 billion, which starkly contrasted Amazon’s $254.5 million valuation.[4] The cause of the disparate conclusions was the contrasting assumptions over the IP’s useful life; the IRS opined that the IP had an indefinite useful life, whereas Amazon applied a useful life of seven years.  The DCF methodology determines a value for an asset today, by discounting forecasted future earnings over its useful life.  Therefore, extending the assets’ useful life also extends its earnings, and in turn, its value.
For the annual contributions to maintain the IP, Amazon used a multistep system to allocate costs from the cost centers to IDCs.  While generally accepting Amazon’s allocation method, a contentious point in the IRS’s argument was that 100 percent of the costs captured in a cost center named Technology and Content should be allocated to IDCs.  The result of this determination was to increase the Subsidiary’s cost sharing payments by $23.0 million and $109.9 million in 2005 and 2006, respectively.
The total adjustment resulted in an estimated $1.5 billion tax bill, plus interest, for transactions in 2005 and 2006.

Amazon Stance
For the buy-in payment, Amazon contended that each group of transferred assets—the website technology, the marketing intangibles, and the European customer information—must be valued separately, and chose a transfer pricing method called comparable uncontrolled transaction (“CUT”) method to value the IP.[5] In the original cost sharing arrangement, a third-party accounting firm determined that the appropriate buy-in price was $254.5 million, to be paid over a seven-year period commencing in 2005.  An essential argument for Amazon was that the transferred intangibles had a limited useful life of seven years, which was amortized over time.  Amazon argued that the software supporting the European operations website was in a fragile state when it first established the Subsidiary, and therefore could support a finite useful life.

Decision
The court held on four points:

  • First, the IRS’s determination with respect to the buy-in payment was arbitrary, capricious, and unreasonable;
  • Second, Amazon’s CUT method, with appropriate upward adjustments in numerous respects, was the best method to determine the requisite buy-in payment;
  • Third, the IRS abused its discretion in determining that 100 percent of Technology and Content costs constituted IDCs; and
  • Fourth, Amazon’s original cost-allocation method, with certain adjustments, supplied a reasonable basis for allocating costs to the IDCs.

The court considered Amazon's expert witnesses' useful life estimates of between eight years and 20 years and concluded that the marketing intangibles did not have a perpetual useful life, but rather a life of 20 years.  In addition, the court agreed with Amazon that the IRS’s determination that all Technology and Content costs should be allocated was arbitrary and capricious, and that only about half of the costs should be allocated to IDCs.

The court's opinion rests primarily on the conclusion that the Subsidiary “assumed sole responsibility to maintain and develop the marketing intangibles,” and that it contributed to the technology improvements needed to maintain the IP’s value.  The decision was also based on Amazon's assertions that the Internet retail industry had yet to mature and that Amazon's success depended on technological assets subject to frequent market disruptions.

Source: BDO

viernes, 7 de julio de 2017

Dbriefs Bytes - 7 July 2017


Netherlands seeks comments on dividend withholding tax proposal affecting cooperatives and BVs/NVs

Draft legislative amendments to the Dutch Dividend Withholding Tax Act on the withholding tax position of Dutch cooperatives (the Consultation Document) are open for consultation from May 16, 2017, through June 13, 2017. The Consultation Document is not yet a formal legislative proposal but rather a draft proposal. The Consultation Document seeks to align the dividend withholding tax treatment of holding cooperatives with that 0f Dutch tax-resident entities with capital divided into shares (BVs/NVs).

The Consultation Document also proposes introducing a more extensive unilateral dividend withholding tax exemption in conjunction with anti-abuse rules along the lines of Action 6 of the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project.

The Dutch Ministry of Finance believes the draft proposal, if enacted, will address European Commission observations on differential treatment of cooperatives, maintain a strong fiscal investment climate, and counter international tax avoidance through the use of Dutch cooperatives in specific situations.

Source & more info: PwC

OECD releases BEPS discussion drafts on attribution of profits to permanent establishments and transactional profit splits

On June 22, 2017, the OECD released two public discussion drafts providing further guidance on the Final Reports on Base Erosion and Profit Shifting (BEPS) published in October 2015, both replacing previous drafts released on July 4, 2016 which were subject to public consultation on October 11-12, 2016.

The first discussion draft provides practical guidance on how to attribute profits to permanent establishments (PE) following the finalisation of the BEPS Action 7 report, while re-emphasising that the principles of the Authorised OECD Approach (AOA) to attributing profits to PE remain unchanged.

The second discussion draft provides revised guidance on profit split methodologies (PSM). This discussion draft links with BEPS Action 10 and serves to clarify and strengthen the guidance in Chapter II of the OECD Transfer Pricing Guidelines (TPG).

Comments on both discussion drafts are invited by September 15, 2017, with public consultations planned in November 2017.

Source & more info: PwC