Wednesday, 12 December 2018

Guidance released on MLI-synthesized tax treaty texts

On 14 November 2018, the OECD released guidance on the development of synthesized texts to clarify the impact of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) on existing tax treaties. The OECD also released a Secretariat note clarifying the entry into effect rules for the MLI. The OECD announcement on the new guidance notes that the MLI currently covers 84 jurisdictions and that it will enter into effect on 1 January 2019 for 47 tax treaties that have been concluded among the 15 jurisdictions that have deposited their MLI acceptance or ratification instruments thus far.

Synthesized texts
The “synthesized text” for a tax treaty that will be modified by the MLI (a “covered tax agreement”) is intended to be a single document that includes the following:

The text of the covered tax agreement, including the text of relevant amending instruments;
The elements of the MLI that affect the covered tax agreement as a result of the MLI positions taken by the contracting jurisdictions; and
Information on the dates on which the MLI’s provisions will be effective in each contracting jurisdiction.
The guidance sets forth a recommended approach for preparing synthesized texts, as well as some sample language that could be used in synthesized texts. It aims to ensure that governments that wish to clarify the interpretation and application of their covered tax agreements can produce synthesized texts in a consistent way. The OECD also recommends that third parties that prepare synthesized texts, such as publishers and advisors, follow the same guidance.

Entry into effect of MLI
The Secretariat note responds to a question that had arisen based on the English text of article 35(1)(a) of the MLI, specifically, on when the MLI will have effect for purposes of taxes withheld at source if the later of the entry into force dates for two contracting jurisdictions is on 1 January of a calendar year. Based on the logical interpretation of the article, the intentions of the negotiators of the MLI and the equally authentic French text of the article, the note concludes that the MLI can have effect for withholding tax purposes as from the same date as the later of the entry into force dates for two contracting jurisdictions. In other words, if the later entry into force date is 1 January 2019, the MLI will have effect for events that give rise to withholding taxes that occur on or after 1 January 2019.


Tuesday, 11 December 2018

The Netherlands' Secretary of Finance announces new tax ruling practice

On 22 November 2018, the Dutch State Secretary of Finance released a letter announcing significant changes to the tax ruling practice that would apply as from 1 July 2019. The new measures relate to transparency, the procedure and the content of rulings of an international nature (“international tax rulings”). International tax rulings include rulings granted by the APA/ATR (advance pricing agreement/advance tax ruling) team, as well as those granted by the local competent tax inspector.

Information on rulings currently is exchanged between tax authorities under EU rules and the Netherlands’ tax treaties. However, due to an increased emphasis on transparency, the State Secretary has announced that an anonymized summary of all international tax rulings will be made publicly available (modelled on the Belgian practice). It should not be possible to trace any summary back to a specific taxpayer, and the government will safeguard taxpayers’ privacy and confidentiality of personal data. The Ministry of Finance will continue to publish an annual report on the policy on international tax rulings and other rulings.

The State Secretary’s letter focuses on the centralized coordination of the tax ruling process. While the actual procedure for obtaining an APA/ATR will not change, the new process will focus on aligning the process of granting international tax rulings that are not dealt with by the APA/ATR team with rulings that are issued by the APA/ATR team. Qualifying rulings will need two signatures, with the second signature made by a member of the new International Tax Certainty Team, which should enhance the quality of international tax rulings and unify policy.

Content of ruling
The third pillar of the State Secretary’s new approach to international tax rulings relates to the actual content of rulings, as follows:

Rulings no longer will be granted to companies with insufficient economic nexus in the Netherlands. To obtain a ruling, the relevant functions, risks and assets of an activity for which advance certainty is requested must be in the Netherlands, which goes beyond the existing limited minimum substance criteria. Clear guidance is expected to be published on the economic nexus criterion.
Ruling requests that are made for the specific purpose of saving Dutch or foreign taxes will no longer be taken into account.
Rulings will not be granted if the relevant transactions involve entities established in noncooperative jurisdictions (i.e. included on the EU list) or a low-tax jurisdiction (listed jurisdictions with a (statutory) corporate income tax rate below 9%).
 Effectively, the new approach will limit the situations in which a ruling will be granted.

The maximum term for new rulings will be five years, although the term may be extended to 10 years in exceptional circumstances, with an intermediate reassessment after the initial five years (currently, rulings typically are granted for 10 years). Finally, the State Secretary announced a predefined format for all international tax rulings.

The State Secretary of Finance stated in his letter that, due to the preparations needed for implementation of the new approach, the intention is to have the ruling practice be effective on 1 July 2019.


Monday, 10 December 2018

Israeli tax authority issues transfer pricing guidance on entity classification and safe harbor ranges

The Israeli Tax Authority (ITA) on September 5 published two circulars setting forth its approach to classification and transfer pricing methods that are appropriate for use in connection with certain intercompany transactions between an Israeli entity and related parties abroad that are part of a multinational group.
Source & more info: PwC

Mandatory transfer pricing documentation requirements proposed in Bulgaria

On 5 November 2018, Bulgaria’s Ministry of Finance proposed mandatory transfer pricing documentation requirements. The proposed rules are part of the draft changes to the Tax and Social Security Proceedings Code, published on the ministry’s website. Public comments on the draft are due by 5 December 2018. If adopted, the law would apply to transactions entered into on or after 1 January 2019.

Current documentation framework
Bulgarian taxpayers currently are subject only to a general obligation to prove the arm’s length nature of their transactions with related parties (controlled transactions) during a tax audit. The rules apply to both domestic transactions (between two Bulgarian companies) and cross-border transactions. There is no mandatory term to prepare the transfer pricing documentation before a tax audit.

The content of the documentation is provided in the transfer pricing manual (an administrative rather than legal document) published on the National Revenue Agency’s website. The documentation consists of a master file (which provides general information about the taxpayer’s group) and a local file with a transfer pricing analysis of the taxpayer’s controlled transactions.

What’s new under the proposal?
Starting from 2019, taxpayers would be obliged to prepare the local transfer pricing file every fiscal year if (i) net sales revenue exceeds BGN 16 million, or (ii) the net book value of assets as of 31 December of the prior year exceeds BGN 8 million. Entities not liable to corporate income tax (CIT) or subject to alternative taxes under the CIT Act would be exempt from this requirement.

The local file would be prepared for transactions exceeding certain annual monetary thresholds (BGN 400,000 for goods, BGN 200,000 for services/intangibles/financial assets, and loan transactions in excess of BGN 2 million in loan principal or BGN 100,000 in interest payments). Documentation of controlled transactions with natural persons (except sole traders) is not mandatory.

Entities that are part of a multinational group also would have to provide a transfer pricing master file for the respective year.

The local file would have to be prepared by 31 March of the following year, whereas the master file would be required by 31 March of the next following year (i.e. for 2019, the local file would be requried by 31 March 2020 and the master file would have to be available locally by 31 March 2021.)

The rules also explain how to update the benchmark studies.

The draft does not include a requirement that taxpayers submit the transfer pricing files to the tax authorities. Transfer pricing documentation (both the local file and the master file) would be kept by the local taxpayer and provided to the revenue authorities upon request.

The proposed documentation requirements include sanctions for noncompliance. The level of the fines would depend on the size of the transactions involved and whether the offense is a repeat offense, among other factors.

Comments and next steps
The draft law is a logical consequence of the increased interest in transfer pricing matters and a natural follow-up to Bulgaria’s declared willingness to implement the elements of the OECD/G20 BEPS project domestically. Parliament is likely to approve this proposal in the coming months, possibly with some small changes after consideration of the public comments.

The proposed documentation requirements would impose an additional administrative burden on taxpayers. However, the new rules have a cost-benefit rationale. Transfer pricing compliance covers material businesses and transactions, reflecting higher potential tax risks. This approach makes sense, keeping in mind the size of the Bulgarian economy and its income tax rates.

Taxpayers can expect higher scrutiny during transfer pricing audits. Preparation of the transfer pricing files will help businesses to manage the risk of transfer pricing adjustments and, consequently, reduce the risk of penalty interest and sanctions.

In practice, some situations often lead to transfer pricing adjustments and substantial tax assessments. That is the case when businesses are in a loss-making position or when large amounts of service fees (such as management fees or interest charges) are charged within a group. Taxpayers in these situations should prioritize the preparation of their transfer pricing files.

The proposed rules follow international standards, and will provide more clarity to Bulgarian taxpayers on the way they prove the conformity of their intercompany pricing with the market levels. The rules also can provide guidance for taxpayers that are not required to prepare transfer pricing documentation and/or that have controlled transactions below the statutory thresholds.

Source: Deloitte

Thursday, 6 December 2018

Ireland’s Finance Bill 2018 includes two key ATAD provisions

Ireland's Finance Bill 2018 sets out the proposed legislative changes required to implement many of the budget day announcements made on October 9.
Source & more info: PwC