DFK International Tax Committee Newsletter May 2017

/ Group News

Dear Friends,

Greetings and my warm wishes!

International tax has been an exciting subject of constant change at every stakeholder’s level.

Governments always came with new legislative changes to what they see as tax leaks, Tax citizens always came up with new structures, Tax Experts always came up with legal alternatives and Media always came up with summaries of tax happenings around the world.

Keeping up with all that is happening in the international tax arena around the world is a real challenge. Through this International tax newsletter, we provide you select analysis of tax news and happenings around the world. We have covered select legislative changes, treaty news, some important case laws and some interesting tax news. The objective is to cover the globe so that we all are well informed of the happenings.

I am also happy to update that preparations have started for the full-day international tax seminar at our forthcoming Annual conference in July. Variety of topics has been chosen to discuss the latest happenings in international tax to be presented by our colleagues drawn from different countries. Like you all, I am eagerly looking forward to it as well!

I am delighted to bring out next DFK International tax newsletter covering latest updates on international tax and transfer pricing. The coverage has been selected from various happenings across the world. This is the second issue in 2017 and we will follow this up with four more issues before end of 2017.

It has been the constant endeavour of the International Tax Committee to improve the conference content and delivery to make it more interesting to DFK members. Towards this end, the committee deliberates over phone meetings and face-to-face meetings to understand what our members are looking for and what would provide value to enhance their tax practice.

Committees and newsletters in an association like DFK are made with efforts of volunteers and I thank all of them who have helped to put through this issue. At ITAX committee, we remain committed to provide the best of learning and collaborative experience to our DFK colleagues on ITAX matters. I hope you will find the variety of news and case digests interesting and useful. On behalf of the ITAX committee and its chairman Ryan Dudley, I wish you all happy reading and we remain to receive your comments and suggestion for any improvement

Once again, happy reading and see you all in July!

Ragunathan Kannan, K Vijayaraghavan & Associates (KVA), CA. India

DFK International has a new guideline that sets out professional standards expected of DFK members in relation to the facilitation and promotion of tax avoidance. To download the guideline, click here or visit the members site.

The German Ministry of Finance (BMF) has issued the final version of the Administrative Principles on the Profit Attribution to Permanent Establishments (Administrative Principles). The Administrative Principles include details and clarifications concerning the application of the Authorized Organization for Economic Co-operation and Development (OECD) Approach (AOA) as required by Section 1, subsection 5 of the Foreign Tax Act (FTA) and the Regulation for the Profit Attribution to Permanent Establishments (PE Regulations).

The Administrative Principles have an indirect impact on the taxpayer as they reflect application guidance for the German tax authorities only unlike the legal provision in the FTA and the PE Regulations which have a direct binding impact on the taxpayer. The Administrative Principles represent the typical third element in the German tax legislative process. Although not binding to the taxpayer, the Administrative Principles, as additional support for the interpretation and illustration of the legal provisions, are of significant importance for the taxpayer in practice.

It should however, be noted that the final version of the principles only contains minor variations from the draft version.

In the Administrative Principles, the German Tax Authorities describe in detail, their perspective of the correct application of the above-mentioned attribution rules by means of examples and associated calculations including certain definitions for terminologies used in the German law, the PE regulations and the Administrative Principles.

For the attribution of assets, etc. to a PE respectively to the remaining enterprise, the structure of the Administrative Principles is that first a basic principle is defined, then deviations from the basic principle are further explained and alternative principles are established to solve cases of doubt in line with the Administrative Principles.

The new PE regulations including the Administrative principles address certain key aspects concerning where they deviate from the previous guidelines such as:

  • Significant people functions independent of hierarchy and formal decision making competency and basic attribution rules for assets.
  • Additional attribution rules for intangible assets
  • Attribution of participations and investments
  • Assumed Contractual Relationships (“Dealings”)
  • Attribution of endowment capital
  • Additional transfer pricing documentation requirements for Pes

The three-tier structure of the domestic AOA implementation results in the following step-by-step application:

  • Section 1, subsection 5 FTA is fully applicable for financial years beginning after 31 December 2012.
  • The PE Regulation (auxiliary calculation, endowment capital, liabilities, financing expenses, etc.) applies for financial years beginning after 31 December 2014.
  • Accordingly, the Administrative Principles apply as a clarification of the PE Regulation for financial years beginning after 31 December 2014.

With the implementation of the AOA into domestic law and the finalization of the Administrative Principles as application guidance for the German tax authorities, higher scrutiny is to be expected in future tax audits of PEs. This is particularly true given the changing international regulatory landscape with a significantly lower threshold to establish a PE. Hence, taxpayers should consider the following:

  • For existing PEs, one should perform an AOA review to examine whether the PE profit determination complies with the German PE Regulations for all financial years beginning after 31 December 2012.
  • To manage exposure of potential double taxation, a special focus should be put on situations where the German PE regulations deviate from the OECD regulations. It might be helpful to discuss in advance any identified potential double taxation risk with the respective tax authorities.
  • The comprehensive documentation requirements demand the timely implementation of efficient processes to ensure proper attribution decisions can actually be made (to the extent possible for a taxpayer), for the preparation of the auxiliary calculation and the transfer pricing documentation. The underlying attribution decision including the function and risk analysis should be documented carefully and contemporaneously for tax return preparation purposes of the PE. This should support the taxpayer in a future tax audit to assign the burden of proof to the German tax authorities as well as to limit the room for interpretation with respect to the underlying attributions.
  • In addition, the establishment of internal policies and guidelines with respect to internal dealings and the profit determination for the PEs including the governance of the documentation processes and responsibilities is advisable.

On March 6, 2017, President Trump issued a revised Executive Order (“Order”), which restricts the admission to the United States of certain individuals from one of six designated countries for 90 days. As of the effective date of this newly issued Order, the prior Executive Order will be revoked. The new Order was issued to address some of the concerns raised by the original Executive Order and subsequent litigation. Among other things, the newly issued Order removes Iraq from the list of designated countries, clarifies that US Lawful Permanent Residents (“green card” holders) from the six banned countries will be exempt from the travel restrictions, as well as dual nationals.

In addition to the new Executive Order, U.S. Citizenship and Immigration Services (USCIS) announced that it will temporarily suspend Premium Processing for all H-1B Petitions filed on or after April 3, 2017. Premium processing is a service offered by USCIS that allows for some application types to be adjudicated on an expedited basis.

The new executive order lays emphasis on the following aspects:

  • Foreign nationals of the six designated countries who are outside the United States on the effective date of the order did not have a valid visa will not be eligible to travel to the US for an initial 90-day period.
  • Non applicability to citizens or nationals of the six designated countries who are:
    • Dual US citizens
    • Lawful Permanent Residents of the US
    • Foreign nationals admitted or paroled into the US after the effective date of the Order
    • Foreign nationals already granted asylum or refugee status in the US before the effective date of the Order
    • Dual nationals so long as they are traveling on a passport issued by a non-designated country
    • Individuals currently in the United States.
  • Suspension of the Visa Interview Waiver Program (VIWP), which may require that more individuals attend in-person interviews. Suspension of the VIWP may increase delays and costs to obtain visas to enter the United States.
  • Additional security screening standards developed in the coming weeks are likely to add significant cost and time delays to visa applications.
  • The suspension affects all I-129 petitions seeking H-1B classification, including extensions, amendments, change of employer, cap exempt petitions and FY18 Cap subject lottery cases.
  • Canadian landed immigrants who hold passports from one of the designated countries are eligible to apply for a visa, and a waiver, in Canada.
  • Any prior cancellation or revocation of a visa that was solely based on the prior Order shall not be the basis of inadmissibility for a future immigration benefit.
  • USCIS will continue to process pending naturalization and permanent residence applications from citizens of one of the designated countries.
  • Provisions have been made for individuals to apply for a waiver of the travel ban.

While this newly issued Executive Order more clearly lays out those who are impacted and those who are exempted from the travel ban, it still restricts the ability to travel to the US for many foreign nationals. For instance, even those foreign nationals from designated countries who meet the criteria for visa issuance but whose visas expire after the effective date will likely be impacted as it has not yet been made clear whether the U.S. Department of State will re-issue visas to those individuals.

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The US Tax Court came forward with a ruling in favor of Amazon US in respect of TP adjustments amounting to $8.3mn and $225mn for 2005 and 2006 made by IRS on account of transfer of intangible assets required to operate Amazon’s European website business to its Luxembourg subsidiary.

In 2005 and 2006, Amazon.com, Inc., and its domestic subsidiaries (“Amazon US”) transferred to Amazon Europe Holding Technologies SCS (“AEHT”), a Luxembourg subsidiary, the intangible assets required to operate its European website business. The IRS determined deficiencies in taxpayer’s Federal income tax of $8.3 mn and $225 mn for 2005 and 2006 respectively, arising from substantial transfer pricing adjustments on account of transfer of intangible assets which were made by reallocating income from Amazon US from AEHT.

The two main issues to be settled by the court were:

  • The amount of AEHT’s Buy in obligation; and
  • The volume of costs properly treated as Intangible Development Costs. (IDC’s)

Facts of the case
Amazon.com, Inc began its operations as an online retailer in 1995 through Amazon.com and related websites. Amazon’s initial operations were strictly restricted to trading services. Eventually, Amazon allowed third party vendors to sell their products on the portal through a branch of their business named Marketplace.

Amazon initially expanded its business in Europe with wholly owned subsidiaries in UK, France and Germany. In 2004, Amazon US formed AEHT, the Luxembourg headquarters entity that would serve as the holding company for all of the European businesses. Amazon Luxembourg would perform various functions essential to operation of the European businesses including holding title to the inventory sold in Europe, licensing Amazon’s intellectual property, housing the servers, and maintaining call centers.

In a series of transactions in 2005 and 2006 Amazon US transferred to AEHT three groups of intangible assets:

i.software and other technology required to operate its European websites, fulfillment centers, and related business activities;
ii.marketing intangibles, including trademarks, tradenames, and domain names relevant to the European business; and
iii.Customer lists and other information relating to its European clientele.

The Buy-in Payment
While the taxpayer reported a buy in payment to be amortized over seven years assuming each group of tangible assets to have a seven year useful life valued separately under the “Comparable Uncontrolled Transaction” (CUT) method, the IRS contended that the transferred property had an indeterminate useful life, and it had to be valued, not as three distinct groups of assets, but as integrated components of an operating business and Discounted Cash Flow (DCF) methodology needed to be allied in this respect.

The court’s viewpoint
The Court noted that as per the regulations, the buy-in payment represented compensation solely for the use of preexisting intangibles, whereas the compensation for subsequently developed intangible property was covered by future cost sharing payments, whereby each participant payed its ratable share of ongoing IDCs. The Court thus noted that adjustments are permitted only to ensure that

i.an arm’s-length buy-in payment is made for preexisting intangible property; and
ii.each participant pays its appropriate share of ongoing IDCs.

The Court firstly held that Revenue’s expert, by assuming a perpetual useful life, had failed to restrict his valuation to the “pre-existing intangible property” that Amazon US actually transferred to AEHT in 2005.

The Court further held that the value of subsequently developed intangibles had been improperly included in the buy-in payment. The Court observed that Amazon’s projections for the European business were based on extremely high growth rates that Amazon had achieved in the past, which could be sustained only through constant innovation, including innovations concerning new products and services.

The Court also rejected Revenue’s arguments that adoption of a business enterprise valuation was supported by the “aggregation” principle wherein the preexisting intangibles and subsequently developed intangibles were improperly aggregated or the “realistic alternatives” principle wherein the court was of the opinion that the cost sharing elections, which was explicitly made available to the taxpayers would be rendered meaningless.

The Court observed that for comparison of intangibles involved in controlled and uncontrolled transactions, both intangibles must be “used in connection with similar products or processes within the same general industry or market” and must have “similar profit potential.” The Court thus agreed with taxpayer that the CUT method provides the best method for determining the fair market value of all three species of intangible property, however, proceeded to make certain adjustments under CUT method.

Marketing Intangibles
Amazon used CUT method for determining ALP of marketing intangibles using licensing information reported in ktMINE database, which includes 15000 intangible agreements and allows user to conduct customized search. Amazon’s expert identified 6 comparable agreements with royalty rates ranging from 0.125% to 1% of sales, and selected the median of these rates, or 0.59%, as his base rate, which was then reduced to reflect a volume discount.

The Court also observed that the European Subsidiaries also owned and operated the physical infrastructure supporting the European websites. This entailed complete responsibility for the warehouses, inventory, and fulfilment. The ultimate value of the European Portfolio hinged on the European Subsidiaries’ ability to fulfil Amazon’s promise of fast and accurate delivery.

Customer Information
The customer information that Amazon US made available to AEHT consisted of data regarding European retail customers who had transacted with the European Subsidiaries before May 1, 2006. This data included names, email addresses, phone numbers, credit card information, and purchasing history. By making this information available to AEHT, Amazon US in effect was referring its existing European customers to AEHT and furnishing it with certain information about them.

Consequently, the Court determined ALP for customer information based on average spend by customers referred by other websites taking period of 10 years.

With respect to the cost sharing payments, the Court noted that the T&C category costs included mixed costs. The Court also noted taxpayer’s argument that on treatment of 100% of T&C costs as IDC, AEHT’s future cost sharing payments would be so large as to produce a negative buy-in payment under income method analysis.

Stock Based Compensation
The CSA defined IDCs to “include all direct and indirect costs (including Stock-Based Compensation Costs)” relating to intangible development. The parties elected to take into account “all stock-based compensation in the form of stock options in the same amount, and as of the same time, as the fair value of the stock options reflected as a charge against income” in either party’s financial statements. However, the taxpayer questioned the validity of this regulation.

Accordingly, the Court held that stock-based compensation was correctly included in the cost pool and CSA’s claw back provision was not yet operative.

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Europe​

The OECD and the International Monetary Fund have submitted to the Group of Twenty (G-20) nations a report on improving tax certainty for businesses.

The report follows a global survey of more than 700 large, multinational businesses and a survey of 25 advanced nation tax administrations. The report highlights several reasons for heightened concerns about tax uncertainty, including updates to the international tax rules proposed in the base erosion and profit shifting (BEPS) recommendations.

The report highlights that, in the context of international taxation, inconsistencies or conflicts between tax authorities on their interpretations of international tax standards (such as on transfer pricing) is one the most important sources of tax uncertainty. Additionally, the report identifies issues associated with dispute resolution mechanisms as an important driver of tax uncertainty as well as inconsistent implementation of the BEPS recommendations.

The report outlines numerous solutions to enhance tax certainty in international tax matters including dispute prevention and early issue resolution programs, robust and effective international dispute resolution procedures and updated tax treaties.

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The European Commission has approved proposals for reductions to France’s octroi de mer tax, which is levied on goods imported to France’s outermost regions and locally produced goods.

The proposed scheme provides for reductions of the tax for a specific list of products produced locally in the regions.

All outermost regions, including the French ones, have been granted special regional aid status in the Treaty on the Functioning of the European Union. Under the regional aid guidelines, operating aid can be authorized to compensate for additional costs attributable to one or several of the permanent structural disadvantages faced by these regions and cited in the Treaty.

The scheme will remain in force until the end of 2020. The French authorities will carry out an evaluation of its effectiveness by the end of 2017.

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The Cypriot Tax Authorities (CTA) have announced their intention of withdrawing the Minimum Margin scheme (the MMS) with effect 1 July 2017.

The MMS refers to intra-group financing arrangements falling within the ambit of the policy for obtaining and granting of loans from and to related parties as per the correspondence dated 4 July 2011 between the Tax Committee of the Institute of Certified Public Accountants (ICPAC) of Cyprus and The Commissioner of Tax of Cyprus.

As indicated above, the intention of the CTA is to withdraw the MMS with effect as from 1 July 2017. At the same time, the CTA plan to introduce detailed transfer pricing legislation (at least for intra-group financing activities) based on the OECD transfer pricing guidelines.

If the MMS is withdrawn during the 2017 tax year, it means that taxpayers will have to calculate the taxable margin based on two different set of rules.

It is certain that a very large number of taxpayers will be affected by these changes. It is therefore recommended that taxpayers undertake a review of their existing financing arrangements and structures in order to assess the impact of the changes and timely take corrective actions in an attempt to ensure their conformity with the new framework.

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On 13 March 2017, the Icelandic Government published new Rules on Foreign Exchange (the Rules) in the Law and Ministerial Gazette, effective the following day, 14 March 2017. With the new Rules, the restrictions on foreign exchange transactions and cross-border movement of domestic and foreign currency have largely been lifted. In general, households and businesses will no longer be subject to the restrictions that the Foreign Exchange Act placed on, among other things, foreign exchange transactions, foreign investment, hedging, and lending activity.
Furthermore, the requirement that residents repatriate foreign currency has been lifted.

These are the items that have had the greatest impact on households and businesses since the capital controls were introduced in 2008. With the amendments, foreign investment by pension funds, funds for collective investment (UCITS), and other investors in excess of the maximum amounts provided for in the Foreign Exchange Act, which until now have been subject to explicit exemptions by the Central Bank, are now authorized transactions.

The reason to the Government is now undertaking the above-mentioned amendments to the Rules is said to be that the risk of the imbalance of payments that could cause monetary, exchange rate, or financial instability has diminished significantly in the past year.

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Australia​

The Australian Government has announced that the tax office has assessed AUD2.9m (USD2.2m) in tax liabilities against a group of seven multinational companies.

The Australia Tax Office (ATO) is currently auditing 59 multinational corporations and hundreds of other companies to determine whether they are compliant with Australia’s taxation laws, including the new Multinational Anti-Avoidance Law (MAAL).

The ATO expects to conclude at least seven major multinational audits before the end of June, with four of these investigations covering e-commerce and three the energy and resource industries.

The MAAL came into effect on January 1, 2016. It applies to multinationals operating in Australia with global revenues of more than AUD1bn, and requires companies that “avoid” taxes to pay back double what they owe, plus interest.

To know more: click here

New Zealand has introduced a new tax bill into Parliament to help modernize the administration of taxes.

The Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Bill contains proposals relating to collecting employment and investment income information.

The proposals will help Inland Revenue to ensure that people are on the right tax code and receiving any entitlements correctly. The Bill also contains proposals to modernize the taxation of employee share schemes.

Employee share schemes are arrangements where companies provide shares or share options to their employees as part of their remuneration.

Changes proposed in the Bill include new rules to ensure the tax treatment of employee share schemes is consistent with other forms of employment income. This includes providing a deduction for the employer for the cost of shares in line with other forms of remuneration.

Also, the Bill includes a proposal to add five new charities to the list of donee organizations eligible for tax benefits. These are Byond Disaster Relief New Zealand, Flying for Life Charitable Trust, Médecins Sans Frontières New Zealand Charitable Trust, Tony McClean Nepal Trust, and Zimbabwe Rural Schools Library Trust.

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The Australian Government has introduced legislation to implement new tax breaks designed to encourage sensible risk-taking and investment in innovative companies.

The Treasury Laws Amendment (2017 Enterprise Incentives No.1) Bill 2017 was introduced on March 30, and forms part of the Government’s National Innovation and Science Agenda.

The Government will reform the company loss rules to relax the “same business test” (SBT). It said this test can prevent companies from claiming past year losses as a tax deduction where they have changed their business.

The legislation will introduce a “similar business test” for losses made in the 2015-16 and future income years. This new test will be based on a range of factors, and is intended to be more flexible and easier to satisfy. The “no new transactions or business activities” aspect of the SBT will also be removed.

The Bill also amends the intangible asset depreciation rules, to allow owners of those intangible assets which currently have a statutory effective life to self-assess the life of their assets. Bringing the tax life in line with the economic life of the asset will increase the depreciation benefits and decrease the cost of investment in these assets.

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On 9 February 2017, the Australian Government introduced a Bill into Parliament implementing the following measures:

  • Australia’s DPT to allow the Australian Taxation Office (ATO) to impose a penalty tax rate of 40% on diverted profits, which applies in respect of income years commencing on or after 1 July 2017 to significant global entities (SGEs – companies which are members of groups with global revenue of AU$1 billion or more)
  • Incorporation of the changed Organization for Economic Co-operation and Development (OECD) transfer pricing guidelines (CTPG) into Australia’s tax law from 1 July 2016: these arose from Base Erosion and Profit Shifting (BEPS) Actions 8 to 10 and are intended to ensure transfer pricing (TP) outcomes better reflect value creation in global supply chains.

The DPT is particularly relevant for multinational businesses with transactions and value chains involving associated entities in overseas jurisdictions where the effective tax outcome is less than 80% of Australia’s corporate tax rate, i.e., 24%.

Affected businesses will need to consider the impact on global supply and value chains, to identify risks and prepare for possible ATO queries.

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Asia

India’s Cabinet on March 20 approved legislation crucial for the implementation of the goods and services tax from July 1.

Lawmakers approved The Central Goods and Services Tax Bill 2017 (The CGST Bill); The Integrated Goods and Services Tax Bill 2017 (The IGST Bill); The Union Territory Goods and Services Tax Bill 2017 (The UTGST Bill); and The Goods and Services Tax (Compensation to the States) Bill 2017 (The Compensation Bill).

The four Bills were approved earlier by the GST Council – formed of state and central government negotiators – after 12 intensive meetings held in the last six months.

The CGST Bill provides for rules on the taxation of supplies of goods or services within a state (intra-state supplies); the IGST Bill covers the same for supplies between states (inter-state supplies), and the UTGST Bill covers the rules on intra-Union Territory supplies.

Last, the Compensation Bill provides for compensation to the states for the loss of revenue arising from the implementation of the goods and services tax, in place of the current multitude of indirect taxes, for a period of five years.

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The EU and the Association of Southeast Asian Nations (ASEAN) have agreed to take new steps toward resuming region-to-region trade talks.

The commitment was made in a joint statement issued after a meeting between the ASEAN Economic Ministers and the EU Trade Commissioner on March 10, 2017.

The ministers have asked their senior economic officials to “develop a framework encompassing the parameters of a future ASEAN-EU free trade agreement, and to report back to the next AEM-EU Trade Commissioner Consultations.” They also agreed to organize expert meetings in new areas of cooperation such as public procurement, e-commerce, and simplifying trade for small- and medium-sized enterprises.

Negotiations on an EU-ASEAN trade agreement originally started in 2007.

However, the EU began to pursue the talks in separate settings with individual members of ASEAN as of 2009. The EU has concluded bilateral trade agreements with ASEAN members Singapore and Vietnam, but these agreements have yet to be ratified.

Negotiations are underway with Indonesia and the Philippines, and with Myanmar for an investment-only agreement.

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On 6 February 2017, the Saudi Arabian cabinet formally approved the Intergovernmental Agreement (IGA) between Saudi Arabia (KSA) and the United States (US) to improve international tax compliance and implement the Foreign Account Tax Compliance Act (FATCA).

The IGA and related implementing regulations will reduce the burden for financial institutions and remove some of the implementation issues faced by KSA financial institutions, including the legal impediments related to data protection and reporting restrictions.

Under the IGA, KSA based financial institutions will be treated as compliant with FATCA and should not be subject to a 30% withholding tax on US source income and gross proceeds, unless a financial institution fails to meet the requirements set out in the IGA and KSA implementing regulations.

The IGA, signed on 15 November 2016, requires financial institutions to report US Reportable Accounts to the local Competent Authority, the Saudi Arabian tax administration, General Authority for Zakat and Tax [GAZT]. In case of noncompliance with the IGA requirements, GAZT may subject the relevant financial institutions to penalties.

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On 12 January 2017, China’s State Council released Guofa [2017] No. 5 (Circular 5) to provide additional guidance on market access and utilization of foreign capital.

Circular 5 contains 20 actions related to active utilization of foreign capital, creation of an excellent business environment and optimization of government services.

Some of the key favorable actions include opening additional market access to select service industries, motor etc.; revising the current catalogue of priority industries for foreign investments, prioritizing substantial land use and allowing foreign multinational corporations to carry out centralized foreign exchange fund management function.

Circular 5 clearly indicates China’s determination of moving up in the supply chain and its objective of encouraging high value-add services, R&D and high-end manufacturing. Companies in the encouraged industries may consider expanding investments into China.

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On 12 January 2017, the Inland Revenue Authority of Singapore (the IRAS) released revised transfer pricing guidelines (the 2017 TP Guidelines). Key features include more guidance on the arm’s length principle and emphasis on risks, additional information requirements to be included in transfer pricing (TP) documentation, changes to the Mutual Agreement Procedure (MAP) and Advanced Pricing Arrangement (APA) programs and the introduction of an indicative margin or “safe harbor” for related party loans.

The 2017 TP Guidelines provide greater details relating to Actions 5, 13 and 14 – minimum standards under the Organization for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project, which Singapore has committed to implement. The IRAS clarifies that where the taxpayer is the ultimate parent company of a Singapore multinational enterprise (MNE), CbCR filing may be required in addition to the TP documentation.

The 2017 TP Guidelines will become effective immediately.
Taxpayers should continue to adhere to the guidance, including maintenance of contemporaneous TP documentation in line with the additional information requirements and new emphasis on risks, and monitor future changes to the transfer pricing framework in Singapore.

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America

Canada’s Northwest Territories will introduce a sugary drinks tax in 2018-19.

In his 2017-18 Budget address, Finance Minister Robert McLeod said that the Government intends to introduce the tax in 2018-19 but will “take the time during the upcoming fiscal year to ensure our approach is as effective as possible.”

The tax would act as a price incentive to discourage the consumption of sugary drinks that are linked to health issues such as obesity and diabetes.

There have previously been calls for a federal tax on sugar-sweetened and artificially-sweetened drinks.

In March 2016, the Standing Senate Committee on Social Affairs, Science, and Technology recommended that the Government “assess the options for taxation levers” for reducing consumption of such drinks. In addition, industry body Dietitians of Canada has called for the application of an excise tax of at least 10-20 percent on sugar-sweetened drinks.

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Honduras enacted Decree No. 170-2016 (the Tax Code), which entirely replaces the previous tax code published in 1997 and its amendments.

One of the key changes introduced by the new Tax Code is the shift from a tax system based on worldwide taxation to one based on territoriality. As a result, Honduran-source income only will be subject to local taxation. It includes a chapter on the rights of taxpayers, new penalties, new statutes of limitations and an amnesty program.

The tax authorities now have the obligation to verify that transactions between Honduran companies with related non-Honduran resident companies or Honduran companies operating under a special regime (e.g., Free Trade Zone) comply with current transfer pricing regulations.

The Tax Code expressly states that Honduran companies are not required to provide a transfer pricing study regarding their transactions with related Honduran companies that are not established under a special regime.

The Tax Code includes an amnesty program to file tax returns (e.g., monthly, quarterly, and annual) and information returns. Filing and payment can be made free of penalties, surcharges and interest for taxes incurred up to 31 October 2016.

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Africa​

In delivering the 2017 Budget Review on 22 February 2017, the South African Minister of Finance proposed amendments to the policy governing the export of intellectual property (IP).

Further proposals were also made to lift the “loop structure” restrictions which currently prohibit residents from holding any South African asset indirectly through a nonresident entity, provided transactions are at arm’s length.

Following the Minister’s announcement, Exchange Control Circular No. 8/2017 released on 1 March 2017 contains more detail in relation to the “loop structure” relaxation. This dispensation is in addition to the one currently applying to unlisted technology, media, telecommunications, exploration and other research and development companies.

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Kenya’s Finance Act 2016 introduced a provision for tax amnesty on foreign income with respect to any year of income ending on or before the 31 December 2016. The Kenya Revenue Authority (KRA) has now issued guidelines on the eligibility and application process for the amnesty. According to the guidelines, the application for amnesty must be submitted online through the iTax platform using form A/37B on or before 31 December 2017. The application should give a complete and accurate disclosure with respect to the assets and liabilities that resulted from the foreign income.

Physical repatriation of the asset is mandatory in order to be granted amnesty.
The tax amnesty on foreign income comes barely one year after the amnesty for rental income for landlords. This move is intended to increase the tax bracket and bring other taxpayers into the bracket to raise the tax revenues for the Government. Specifically this is intended to bring high net worth individuals with foreign incomes into the tax bracket going forward.

Overall, the guidelines will assist taxpayers who have foreign assets and income that they are willing to repatriate. The repatriation of cash and other assets should promote trade and business opportunities in Kenya.

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With effect from January 1st 2017, proposed legislation relating to a possible South African withholding tax on service fees was formally deleted and a long period of uncertainty around this issue finally came to an end.

Proposals for a withholding tax on service fees were first raised in 2013, with the release of provisions dealing with the imposition and collection of the tax. The term ‘service fees’ was defined to mean amounts received or accrued in respect of technical, managerial and consultancy services.

The proposed withholding tax was met with significant resistance. The National Treasury indicated that the withholding tax had not been designed primarily to boost tax revenues but rather to identify non-residents who might be avoiding tax liabilities (i.e. those who potentially had a taxable presence in South Africa). The prevailing sentiment was that the application of the legislation would raise significant practical issues and that it was unlikely to achieve its stated objective or even collect much revenue, given that tax treaties in place would override its application in most instances.

Following extensive lobbying, the effective date of the relevant provisions was postponed firstly to 2016, and then to 2017 before finally being repealed altogether.

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Recent International Case Updates​​

Multinational energy group Chevron has been left with an increased tax bill of $340m after losing an appeal in a landmark inter-company loan transaction case.

The decision will bolster the efforts of the Australian Taxation Office [“ATO”] to crack down on profit-shifting through hundreds of billions of dollars of related-party loans by multinationals.

Background:
(i) Chevron Australia Holdings Pty. Ltd. [“CAHPL”] was established as the Australian holding company of the Chevron Group of Companies following the merger between Chevron Corporation [“CVX”] and Texaco Inc.
(ii) Chevron Texaco Funding Corporation [“CFC”] was established in the group as a United States wholly owned subsidiary of CAHPL. CFC was to lend funds to the Australian parent i.e. CAHPL at about 9% which would enable CAHPL to acquire Texaco Australia Pty. Ltd. [“TAPL”]
(iii) The decision pertains to audits concluded over five income tax years from 2004 to 2008.
(iv) CFC raised funds in the United States through issuance of commercial paper at a rate of about 1.2%. CFC was backed by a guarantee from its ultimate American parent.
(v) A “Credit Facility Agreement” was entered into between CFC and CAHPL on 06 June 2003 for on-lending the funds so raised to CAHPL at an interest rate of 9%. The funds were received by CAHPL in two tranches aggregating to US$ 2.5 bn. received in equivalent Australian dollars.
(vi) Evidence showed that the decisions as to the return of capital, the raising of funds in the United States and the debt level of CAHPL were made by officers of Chevron Treasury, in particular the Treasurer of Chevron and a director of CFC, including the extent to which subsidiaries were financed by debt or equity.
(vii) CAHPL’s debt level of US$ 2.5 billion was chosen because it was the most tax efficient corporate capital structure and gave the best after tax result for the Chevron Group as objective of the Group was to obtain the lowest cost of funding to the group for external borrowings.

The ruling:

  • The Court observed that there were no financial or operational covenants in the agreement that might have bound CAHPL to conduct its business in a particular way. Neither any security was provided by CAHPL nor any guarantee was issued by Ultimate parent company i.e. Chevron US.
  • The Federal Court upheld the observations of the primary judge that“If the property had been acquired under an agreement between independent parties dealing at arm’s length with each other, I find that the borrower would have given such security and operational and financial covenants and the interest rate, as a consequence, would have been lower.
  • The transaction should pass the test of “arm’s length standards” as if the entities were “independent”, not in the sense of a stand-alone entity, as argued by Chevron, but “independent of each other” in a given transaction.
  • “Substance over Form” finds its place in this decision. Federal Court saw that the conditions operating between CAHPL and CFC, if they were independent of each other would not include the direction by Chevron Treasury of the officers of both for the benefit of the group as a whole.
  • CAHPL seeking to borrow for five years on an unsecured basis with no financial or operational covenants from an independent lender, in order to act rationally and commercially and conformably with the interests of the Chevron group to obtain external funding at the lowest possible cost consistently with any relevant operational considerations, it would do so with Chevron providing a parent company guarantee, if such were available.
  • In the light of the evidence as to Chevron’s policy concerning external funding and its willingness to provide a guarantee to achieve that end the above, is the natural and commercially rational comparative analysis when one removes the controlled conditions operating between CAHPL and CFC and replaces them with the condition of mutual independence. In the circumstances, there would have been a borrowing cost conformable with Chevron’s AA rating, which, on the evidence, would have been significantly below 9%.
  • CAHPL contended that it had a rating of BB+ and as a standalone company, severed from the financial strength of its ultimate parent and corporate group, CAHPL could not secure a loan fro an amount equivalent to US$ 2.5 billion at the rate obtained by its subsidiary with the backing of the ultimate parent. Furthermore, any cross-border corporate guarantee, if obtained by CAHPL, would have attracted a guarantee fee which would have further added to the operating cost of CAHPL.
  • The Court made a crucial find considering the transaction in its entirety and the money trail, which is worthy of mention
    “The borrowing cost of CAHPL would have been less than it was under the Credit Facility; thus CAHPL’s deductions against operating revenue would have been less, and operating profit conformably greater. There would, however, have been a reduced inflow of (non assessable) dividends. If one looks to the whole income year and compares the profits of CAHPL in the two scenarios one may not see a difference in amount of profits, although the two amounts would be differently formulated. In the actual transaction the profits are made up of lower (assessable) operating profit and higher (non-assessable) dividend income from CFC. In the hypothesised transaction the same level of profits are made up of higher (assessable) operating profit and lower (non- assessable) dividend income from CFC. There is, however, no mandate or requirement to look at the profit position of CAHPL only at year end.”

Conclusion:
Central to the entire judgment are the words and phrases “property”, “consideration” and “might reasonably be expected to have been given or agreed to be given”.

This decision would have ramifications to MNCs around the world and will lead to many sleepless nights for finance heads across the globe. Chevron will more likely than not, will have to re-think the implications on its US$ 42 billion currently in place. It is also anticipated that the ATO will shortly release “detailed guidance to help companies with related party loans comply with Australia’s transfer pricing rules”.

Critical interpretation by the Court has been that presence of an associated enterprise in a transaction should not distort “amount of profits” which might have been expected to accrue, did not accrue. The word “profit” in the transfer pricing provisions is used in a more generic sense than “taxable income”. The focus of the transfer pricing provisions is the tax effect of a “dealing” not the overall “income” of a taxpayer.

One may take a position that tax administrations cannot step into the shoes of the businessmen, however, here, Court has depersonalized the agreement so as to make it, hypothetically, between independent parties dealing at arm’s length, but not so to alter the underlying international transaction.

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by Ragunathan Kannan, DFK ITAX Member, K Vijayaraghavan & Associates (KVA), CA

Dear Friends,

Greetings and my warm wishes!

International tax has been an exciting subject of constant change at every stakeholder’s level.

Governments always came with new legislative changes to what they see as tax leaks, Tax citizens always came up with new structures, Tax Experts always came up with legal alternatives and Media always came up with summaries of tax happenings around the world.

Keeping up with all that is happening in the international tax arena around the world is a real challenge. Through this International tax newsletter, we provide you select analysis of tax news and happenings around the world. We have covered select legislative changes, treaty news, some important case laws and some interesting tax news. The objective is to cover the globe so that we all are well informed of the happenings.

I am also happy to update that preparations have started for the full-day international tax seminar at our forthcoming Annual conference in July. Variety of topics has been chosen to discuss the latest happenings in international tax to be presented by our colleagues drawn from different countries. Like you all, I am eagerly looking forward to it as well!

I am delighted to bring out next DFK International tax newsletter covering latest updates on international tax and transfer pricing. The coverage has been selected from various happenings across the world. This is the second issue in 2017 and we will follow this up with four more issues before end of 2017.

It has been the constant endeavour of the International Tax Committee to improve the conference content and delivery to make it more interesting to DFK members. Towards this end, the committee deliberates over phone meetings and face-to-face meetings to understand what our members are looking for and what would provide value to enhance their tax practice.

Committees and newsletters in an association like DFK are made with efforts of volunteers and I thank all of them who have helped to put through this issue. At ITAX committee, we remain committed to provide the best of learning and collaborative experience to our DFK colleagues on ITAX matters. I hope you will find the variety of news and case digests interesting and useful. On behalf of the ITAX committee and its chairman Ryan Dudley, I wish you all happy reading and we remain to receive your comments and suggestion for any improvement

Once again, happy reading and see you all in July!

Ragunathan Kannan, K Vijayaraghavan & Associates (KVA), CA. India

DFK International has a new guideline that sets out professional standards expected of DFK members in relation to the facilitation and promotion of tax avoidance. To download the guideline, click here or visit the members site.

The German Ministry of Finance (BMF) has issued the final version of the Administrative Principles on the Profit Attribution to Permanent Establishments (Administrative Principles). The Administrative Principles include details and clarifications concerning the application of the Authorized Organization for Economic Co-operation and Development (OECD) Approach (AOA) as required by Section 1, subsection 5 of the Foreign Tax Act (FTA) and the Regulation for the Profit Attribution to Permanent Establishments (PE Regulations).

The Administrative Principles have an indirect impact on the taxpayer as they reflect application guidance for the German tax authorities only unlike the legal provision in the FTA and the PE Regulations which have a direct binding impact on the taxpayer. The Administrative Principles represent the typical third element in the German tax legislative process. Although not binding to the taxpayer, the Administrative Principles, as additional support for the interpretation and illustration of the legal provisions, are of significant importance for the taxpayer in practice.

It should however, be noted that the final version of the principles only contains minor variations from the draft version.

In the Administrative Principles, the German Tax Authorities describe in detail, their perspective of the correct application of the above-mentioned attribution rules by means of examples and associated calculations including certain definitions for terminologies used in the German law, the PE regulations and the Administrative Principles.

For the attribution of assets, etc. to a PE respectively to the remaining enterprise, the structure of the Administrative Principles is that first a basic principle is defined, then deviations from the basic principle are further explained and alternative principles are established to solve cases of doubt in line with the Administrative Principles.

The new PE regulations including the Administrative principles address certain key aspects concerning where they deviate from the previous guidelines such as:

  • Significant people functions independent of hierarchy and formal decision making competency and basic attribution rules for assets.
  • Additional attribution rules for intangible assets
  • Attribution of participations and investments
  • Assumed Contractual Relationships (“Dealings”)
  • Attribution of endowment capital
  • Additional transfer pricing documentation requirements for Pes

The three-tier structure of the domestic AOA implementation results in the following step-by-step application:

  • Section 1, subsection 5 FTA is fully applicable for financial years beginning after 31 December 2012.
  • The PE Regulation (auxiliary calculation, endowment capital, liabilities, financing expenses, etc.) applies for financial years beginning after 31 December 2014.
  • Accordingly, the Administrative Principles apply as a clarification of the PE Regulation for financial years beginning after 31 December 2014.

With the implementation of the AOA into domestic law and the finalization of the Administrative Principles as application guidance for the German tax authorities, higher scrutiny is to be expected in future tax audits of PEs. This is particularly true given the changing international regulatory landscape with a significantly lower threshold to establish a PE. Hence, taxpayers should consider the following:

  • For existing PEs, one should perform an AOA review to examine whether the PE profit determination complies with the German PE Regulations for all financial years beginning after 31 December 2012.
  • To manage exposure of potential double taxation, a special focus should be put on situations where the German PE regulations deviate from the OECD regulations. It might be helpful to discuss in advance any identified potential double taxation risk with the respective tax authorities.
  • The comprehensive documentation requirements demand the timely implementation of efficient processes to ensure proper attribution decisions can actually be made (to the extent possible for a taxpayer), for the preparation of the auxiliary calculation and the transfer pricing documentation. The underlying attribution decision including the function and risk analysis should be documented carefully and contemporaneously for tax return preparation purposes of the PE. This should support the taxpayer in a future tax audit to assign the burden of proof to the German tax authorities as well as to limit the room for interpretation with respect to the underlying attributions.
  • In addition, the establishment of internal policies and guidelines with respect to internal dealings and the profit determination for the PEs including the governance of the documentation processes and responsibilities is advisable.

On March 6, 2017, President Trump issued a revised Executive Order (“Order”), which restricts the admission to the United States of certain individuals from one of six designated countries for 90 days. As of the effective date of this newly issued Order, the prior Executive Order will be revoked. The new Order was issued to address some of the concerns raised by the original Executive Order and subsequent litigation. Among other things, the newly issued Order removes Iraq from the list of designated countries, clarifies that US Lawful Permanent Residents (“green card” holders) from the six banned countries will be exempt from the travel restrictions, as well as dual nationals.

In addition to the new Executive Order, U.S. Citizenship and Immigration Services (USCIS) announced that it will temporarily suspend Premium Processing for all H-1B Petitions filed on or after April 3, 2017. Premium processing is a service offered by USCIS that allows for some application types to be adjudicated on an expedited basis.

The new executive order lays emphasis on the following aspects:

  • Foreign nationals of the six designated countries who are outside the United States on the effective date of the order did not have a valid visa will not be eligible to travel to the US for an initial 90-day period.
  • Non applicability to citizens or nationals of the six designated countries who are:
    • Dual US citizens
    • Lawful Permanent Residents of the US
    • Foreign nationals admitted or paroled into the US after the effective date of the Order
    • Foreign nationals already granted asylum or refugee status in the US before the effective date of the Order
    • Dual nationals so long as they are traveling on a passport issued by a non-designated country
    • Individuals currently in the United States.
  • Suspension of the Visa Interview Waiver Program (VIWP), which may require that more individuals attend in-person interviews. Suspension of the VIWP may increase delays and costs to obtain visas to enter the United States.
  • Additional security screening standards developed in the coming weeks are likely to add significant cost and time delays to visa applications.
  • The suspension affects all I-129 petitions seeking H-1B classification, including extensions, amendments, change of employer, cap exempt petitions and FY18 Cap subject lottery cases.
  • Canadian landed immigrants who hold passports from one of the designated countries are eligible to apply for a visa, and a waiver, in Canada.
  • Any prior cancellation or revocation of a visa that was solely based on the prior Order shall not be the basis of inadmissibility for a future immigration benefit.
  • USCIS will continue to process pending naturalization and permanent residence applications from citizens of one of the designated countries.
  • Provisions have been made for individuals to apply for a waiver of the travel ban.

While this newly issued Executive Order more clearly lays out those who are impacted and those who are exempted from the travel ban, it still restricts the ability to travel to the US for many foreign nationals. For instance, even those foreign nationals from designated countries who meet the criteria for visa issuance but whose visas expire after the effective date will likely be impacted as it has not yet been made clear whether the U.S. Department of State will re-issue visas to those individuals.

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The US Tax Court came forward with a ruling in favor of Amazon US in respect of TP adjustments amounting to $8.3mn and $225mn for 2005 and 2006 made by IRS on account of transfer of intangible assets required to operate Amazon’s European website business to its Luxembourg subsidiary.

In 2005 and 2006, Amazon.com, Inc., and its domestic subsidiaries (“Amazon US”) transferred to Amazon Europe Holding Technologies SCS (“AEHT”), a Luxembourg subsidiary, the intangible assets required to operate its European website business. The IRS determined deficiencies in taxpayer’s Federal income tax of $8.3 mn and $225 mn for 2005 and 2006 respectively, arising from substantial transfer pricing adjustments on account of transfer of intangible assets which were made by reallocating income from Amazon US from AEHT.

The two main issues to be settled by the court were:

  • The amount of AEHT’s Buy in obligation; and
  • The volume of costs properly treated as Intangible Development Costs. (IDC’s)

Facts of the case
Amazon.com, Inc began its operations as an online retailer in 1995 through Amazon.com and related websites. Amazon’s initial operations were strictly restricted to trading services. Eventually, Amazon allowed third party vendors to sell their products on the portal through a branch of their business named Marketplace.

Amazon initially expanded its business in Europe with wholly owned subsidiaries in UK, France and Germany. In 2004, Amazon US formed AEHT, the Luxembourg headquarters entity that would serve as the holding company for all of the European businesses. Amazon Luxembourg would perform various functions essential to operation of the European businesses including holding title to the inventory sold in Europe, licensing Amazon’s intellectual property, housing the servers, and maintaining call centers.

In a series of transactions in 2005 and 2006 Amazon US transferred to AEHT three groups of intangible assets:

i.software and other technology required to operate its European websites, fulfillment centers, and related business activities;
ii.marketing intangibles, including trademarks, tradenames, and domain names relevant to the European business; and
iii.Customer lists and other information relating to its European clientele.

The Buy-in Payment
While the taxpayer reported a buy in payment to be amortized over seven years assuming each group of tangible assets to have a seven year useful life valued separately under the “Comparable Uncontrolled Transaction” (CUT) method, the IRS contended that the transferred property had an indeterminate useful life, and it had to be valued, not as three distinct groups of assets, but as integrated components of an operating business and Discounted Cash Flow (DCF) methodology needed to be allied in this respect.

The court’s viewpoint
The Court noted that as per the regulations, the buy-in payment represented compensation solely for the use of preexisting intangibles, whereas the compensation for subsequently developed intangible property was covered by future cost sharing payments, whereby each participant payed its ratable share of ongoing IDCs. The Court thus noted that adjustments are permitted only to ensure that

i.an arm’s-length buy-in payment is made for preexisting intangible property; and
ii.each participant pays its appropriate share of ongoing IDCs.

The Court firstly held that Revenue’s expert, by assuming a perpetual useful life, had failed to restrict his valuation to the “pre-existing intangible property” that Amazon US actually transferred to AEHT in 2005.

The Court further held that the value of subsequently developed intangibles had been improperly included in the buy-in payment. The Court observed that Amazon’s projections for the European business were based on extremely high growth rates that Amazon had achieved in the past, which could be sustained only through constant innovation, including innovations concerning new products and services.

The Court also rejected Revenue’s arguments that adoption of a business enterprise valuation was supported by the “aggregation” principle wherein the preexisting intangibles and subsequently developed intangibles were improperly aggregated or the “realistic alternatives” principle wherein the court was of the opinion that the cost sharing elections, which was explicitly made available to the taxpayers would be rendered meaningless.

The Court observed that for comparison of intangibles involved in controlled and uncontrolled transactions, both intangibles must be “used in connection with similar products or processes within the same general industry or market” and must have “similar profit potential.” The Court thus agreed with taxpayer that the CUT method provides the best method for determining the fair market value of all three species of intangible property, however, proceeded to make certain adjustments under CUT method.

Marketing Intangibles
Amazon used CUT method for determining ALP of marketing intangibles using licensing information reported in ktMINE database, which includes 15000 intangible agreements and allows user to conduct customized search. Amazon’s expert identified 6 comparable agreements with royalty rates ranging from 0.125% to 1% of sales, and selected the median of these rates, or 0.59%, as his base rate, which was then reduced to reflect a volume discount.

The Court also observed that the European Subsidiaries also owned and operated the physical infrastructure supporting the European websites. This entailed complete responsibility for the warehouses, inventory, and fulfilment. The ultimate value of the European Portfolio hinged on the European Subsidiaries’ ability to fulfil Amazon’s promise of fast and accurate delivery.

Customer Information
The customer information that Amazon US made available to AEHT consisted of data regarding European retail customers who had transacted with the European Subsidiaries before May 1, 2006. This data included names, email addresses, phone numbers, credit card information, and purchasing history. By making this information available to AEHT, Amazon US in effect was referring its existing European customers to AEHT and furnishing it with certain information about them.

Consequently, the Court determined ALP for customer information based on average spend by customers referred by other websites taking period of 10 years.

With respect to the cost sharing payments, the Court noted that the T&C category costs included mixed costs. The Court also noted taxpayer’s argument that on treatment of 100% of T&C costs as IDC, AEHT’s future cost sharing payments would be so large as to produce a negative buy-in payment under income method analysis.

Stock Based Compensation
The CSA defined IDCs to “include all direct and indirect costs (including Stock-Based Compensation Costs)” relating to intangible development. The parties elected to take into account “all stock-based compensation in the form of stock options in the same amount, and as of the same time, as the fair value of the stock options reflected as a charge against income” in either party’s financial statements. However, the taxpayer questioned the validity of this regulation.

Accordingly, the Court held that stock-based compensation was correctly included in the cost pool and CSA’s claw back provision was not yet operative.

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Europe​

The OECD and the International Monetary Fund have submitted to the Group of Twenty (G-20) nations a report on improving tax certainty for businesses.

The report follows a global survey of more than 700 large, multinational businesses and a survey of 25 advanced nation tax administrations. The report highlights several reasons for heightened concerns about tax uncertainty, including updates to the international tax rules proposed in the base erosion and profit shifting (BEPS) recommendations.

The report highlights that, in the context of international taxation, inconsistencies or conflicts between tax authorities on their interpretations of international tax standards (such as on transfer pricing) is one the most important sources of tax uncertainty. Additionally, the report identifies issues associated with dispute resolution mechanisms as an important driver of tax uncertainty as well as inconsistent implementation of the BEPS recommendations.

The report outlines numerous solutions to enhance tax certainty in international tax matters including dispute prevention and early issue resolution programs, robust and effective international dispute resolution procedures and updated tax treaties.

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The European Commission has approved proposals for reductions to France’s octroi de mer tax, which is levied on goods imported to France’s outermost regions and locally produced goods.

The proposed scheme provides for reductions of the tax for a specific list of products produced locally in the regions.

All outermost regions, including the French ones, have been granted special regional aid status in the Treaty on the Functioning of the European Union. Under the regional aid guidelines, operating aid can be authorized to compensate for additional costs attributable to one or several of the permanent structural disadvantages faced by these regions and cited in the Treaty.

The scheme will remain in force until the end of 2020. The French authorities will carry out an evaluation of its effectiveness by the end of 2017.

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The Cypriot Tax Authorities (CTA) have announced their intention of withdrawing the Minimum Margin scheme (the MMS) with effect 1 July 2017.

The MMS refers to intra-group financing arrangements falling within the ambit of the policy for obtaining and granting of loans from and to related parties as per the correspondence dated 4 July 2011 between the Tax Committee of the Institute of Certified Public Accountants (ICPAC) of Cyprus and The Commissioner of Tax of Cyprus.

As indicated above, the intention of the CTA is to withdraw the MMS with effect as from 1 July 2017. At the same time, the CTA plan to introduce detailed transfer pricing legislation (at least for intra-group financing activities) based on the OECD transfer pricing guidelines.

If the MMS is withdrawn during the 2017 tax year, it means that taxpayers will have to calculate the taxable margin based on two different set of rules.

It is certain that a very large number of taxpayers will be affected by these changes. It is therefore recommended that taxpayers undertake a review of their existing financing arrangements and structures in order to assess the impact of the changes and timely take corrective actions in an attempt to ensure their conformity with the new framework.

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On 13 March 2017, the Icelandic Government published new Rules on Foreign Exchange (the Rules) in the Law and Ministerial Gazette, effective the following day, 14 March 2017. With the new Rules, the restrictions on foreign exchange transactions and cross-border movement of domestic and foreign currency have largely been lifted. In general, households and businesses will no longer be subject to the restrictions that the Foreign Exchange Act placed on, among other things, foreign exchange transactions, foreign investment, hedging, and lending activity.
Furthermore, the requirement that residents repatriate foreign currency has been lifted.

These are the items that have had the greatest impact on households and businesses since the capital controls were introduced in 2008. With the amendments, foreign investment by pension funds, funds for collective investment (UCITS), and other investors in excess of the maximum amounts provided for in the Foreign Exchange Act, which until now have been subject to explicit exemptions by the Central Bank, are now authorized transactions.

The reason to the Government is now undertaking the above-mentioned amendments to the Rules is said to be that the risk of the imbalance of payments that could cause monetary, exchange rate, or financial instability has diminished significantly in the past year.

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Australia​

The Australian Government has announced that the tax office has assessed AUD2.9m (USD2.2m) in tax liabilities against a group of seven multinational companies.

The Australia Tax Office (ATO) is currently auditing 59 multinational corporations and hundreds of other companies to determine whether they are compliant with Australia’s taxation laws, including the new Multinational Anti-Avoidance Law (MAAL).

The ATO expects to conclude at least seven major multinational audits before the end of June, with four of these investigations covering e-commerce and three the energy and resource industries.

The MAAL came into effect on January 1, 2016. It applies to multinationals operating in Australia with global revenues of more than AUD1bn, and requires companies that “avoid” taxes to pay back double what they owe, plus interest.

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New Zealand has introduced a new tax bill into Parliament to help modernize the administration of taxes.

The Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Bill contains proposals relating to collecting employment and investment income information.

The proposals will help Inland Revenue to ensure that people are on the right tax code and receiving any entitlements correctly. The Bill also contains proposals to modernize the taxation of employee share schemes.

Employee share schemes are arrangements where companies provide shares or share options to their employees as part of their remuneration.

Changes proposed in the Bill include new rules to ensure the tax treatment of employee share schemes is consistent with other forms of employment income. This includes providing a deduction for the employer for the cost of shares in line with other forms of remuneration.

Also, the Bill includes a proposal to add five new charities to the list of donee organizations eligible for tax benefits. These are Byond Disaster Relief New Zealand, Flying for Life Charitable Trust, Médecins Sans Frontières New Zealand Charitable Trust, Tony McClean Nepal Trust, and Zimbabwe Rural Schools Library Trust.

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The Australian Government has introduced legislation to implement new tax breaks designed to encourage sensible risk-taking and investment in innovative companies.

The Treasury Laws Amendment (2017 Enterprise Incentives No.1) Bill 2017 was introduced on March 30, and forms part of the Government’s National Innovation and Science Agenda.

The Government will reform the company loss rules to relax the “same business test” (SBT). It said this test can prevent companies from claiming past year losses as a tax deduction where they have changed their business.

The legislation will introduce a “similar business test” for losses made in the 2015-16 and future income years. This new test will be based on a range of factors, and is intended to be more flexible and easier to satisfy. The “no new transactions or business activities” aspect of the SBT will also be removed.

The Bill also amends the intangible asset depreciation rules, to allow owners of those intangible assets which currently have a statutory effective life to self-assess the life of their assets. Bringing the tax life in line with the economic life of the asset will increase the depreciation benefits and decrease the cost of investment in these assets.

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On 9 February 2017, the Australian Government introduced a Bill into Parliament implementing the following measures:

  • Australia’s DPT to allow the Australian Taxation Office (ATO) to impose a penalty tax rate of 40% on diverted profits, which applies in respect of income years commencing on or after 1 July 2017 to significant global entities (SGEs – companies which are members of groups with global revenue of AU$1 billion or more)
  • Incorporation of the changed Organization for Economic Co-operation and Development (OECD) transfer pricing guidelines (CTPG) into Australia’s tax law from 1 July 2016: these arose from Base Erosion and Profit Shifting (BEPS) Actions 8 to 10 and are intended to ensure transfer pricing (TP) outcomes better reflect value creation in global supply chains.

The DPT is particularly relevant for multinational businesses with transactions and value chains involving associated entities in overseas jurisdictions where the effective tax outcome is less than 80% of Australia’s corporate tax rate, i.e., 24%.

Affected businesses will need to consider the impact on global supply and value chains, to identify risks and prepare for possible ATO queries.

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Asia

India’s Cabinet on March 20 approved legislation crucial for the implementation of the goods and services tax from July 1.

Lawmakers approved The Central Goods and Services Tax Bill 2017 (The CGST Bill); The Integrated Goods and Services Tax Bill 2017 (The IGST Bill); The Union Territory Goods and Services Tax Bill 2017 (The UTGST Bill); and The Goods and Services Tax (Compensation to the States) Bill 2017 (The Compensation Bill).

The four Bills were approved earlier by the GST Council – formed of state and central government negotiators – after 12 intensive meetings held in the last six months.

The CGST Bill provides for rules on the taxation of supplies of goods or services within a state (intra-state supplies); the IGST Bill covers the same for supplies between states (inter-state supplies), and the UTGST Bill covers the rules on intra-Union Territory supplies.

Last, the Compensation Bill provides for compensation to the states for the loss of revenue arising from the implementation of the goods and services tax, in place of the current multitude of indirect taxes, for a period of five years.

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The EU and the Association of Southeast Asian Nations (ASEAN) have agreed to take new steps toward resuming region-to-region trade talks.

The commitment was made in a joint statement issued after a meeting between the ASEAN Economic Ministers and the EU Trade Commissioner on March 10, 2017.

The ministers have asked their senior economic officials to “develop a framework encompassing the parameters of a future ASEAN-EU free trade agreement, and to report back to the next AEM-EU Trade Commissioner Consultations.” They also agreed to organize expert meetings in new areas of cooperation such as public procurement, e-commerce, and simplifying trade for small- and medium-sized enterprises.

Negotiations on an EU-ASEAN trade agreement originally started in 2007.

However, the EU began to pursue the talks in separate settings with individual members of ASEAN as of 2009. The EU has concluded bilateral trade agreements with ASEAN members Singapore and Vietnam, but these agreements have yet to be ratified.

Negotiations are underway with Indonesia and the Philippines, and with Myanmar for an investment-only agreement.

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On 6 February 2017, the Saudi Arabian cabinet formally approved the Intergovernmental Agreement (IGA) between Saudi Arabia (KSA) and the United States (US) to improve international tax compliance and implement the Foreign Account Tax Compliance Act (FATCA).

The IGA and related implementing regulations will reduce the burden for financial institutions and remove some of the implementation issues faced by KSA financial institutions, including the legal impediments related to data protection and reporting restrictions.

Under the IGA, KSA based financial institutions will be treated as compliant with FATCA and should not be subject to a 30% withholding tax on US source income and gross proceeds, unless a financial institution fails to meet the requirements set out in the IGA and KSA implementing regulations.

The IGA, signed on 15 November 2016, requires financial institutions to report US Reportable Accounts to the local Competent Authority, the Saudi Arabian tax administration, General Authority for Zakat and Tax [GAZT]. In case of noncompliance with the IGA requirements, GAZT may subject the relevant financial institutions to penalties.

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On 12 January 2017, China’s State Council released Guofa [2017] No. 5 (Circular 5) to provide additional guidance on market access and utilization of foreign capital.

Circular 5 contains 20 actions related to active utilization of foreign capital, creation of an excellent business environment and optimization of government services.

Some of the key favorable actions include opening additional market access to select service industries, motor etc.; revising the current catalogue of priority industries for foreign investments, prioritizing substantial land use and allowing foreign multinational corporations to carry out centralized foreign exchange fund management function.

Circular 5 clearly indicates China’s determination of moving up in the supply chain and its objective of encouraging high value-add services, R&D and high-end manufacturing. Companies in the encouraged industries may consider expanding investments into China.

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On 12 January 2017, the Inland Revenue Authority of Singapore (the IRAS) released revised transfer pricing guidelines (the 2017 TP Guidelines). Key features include more guidance on the arm’s length principle and emphasis on risks, additional information requirements to be included in transfer pricing (TP) documentation, changes to the Mutual Agreement Procedure (MAP) and Advanced Pricing Arrangement (APA) programs and the introduction of an indicative margin or “safe harbor” for related party loans.

The 2017 TP Guidelines provide greater details relating to Actions 5, 13 and 14 – minimum standards under the Organization for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project, which Singapore has committed to implement. The IRAS clarifies that where the taxpayer is the ultimate parent company of a Singapore multinational enterprise (MNE), CbCR filing may be required in addition to the TP documentation.

The 2017 TP Guidelines will become effective immediately.
Taxpayers should continue to adhere to the guidance, including maintenance of contemporaneous TP documentation in line with the additional information requirements and new emphasis on risks, and monitor future changes to the transfer pricing framework in Singapore.

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America

Canada’s Northwest Territories will introduce a sugary drinks tax in 2018-19.

In his 2017-18 Budget address, Finance Minister Robert McLeod said that the Government intends to introduce the tax in 2018-19 but will “take the time during the upcoming fiscal year to ensure our approach is as effective as possible.”

The tax would act as a price incentive to discourage the consumption of sugary drinks that are linked to health issues such as obesity and diabetes.

There have previously been calls for a federal tax on sugar-sweetened and artificially-sweetened drinks.

In March 2016, the Standing Senate Committee on Social Affairs, Science, and Technology recommended that the Government “assess the options for taxation levers” for reducing consumption of such drinks. In addition, industry body Dietitians of Canada has called for the application of an excise tax of at least 10-20 percent on sugar-sweetened drinks.

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Honduras enacted Decree No. 170-2016 (the Tax Code), which entirely replaces the previous tax code published in 1997 and its amendments.

One of the key changes introduced by the new Tax Code is the shift from a tax system based on worldwide taxation to one based on territoriality. As a result, Honduran-source income only will be subject to local taxation. It includes a chapter on the rights of taxpayers, new penalties, new statutes of limitations and an amnesty program.

The tax authorities now have the obligation to verify that transactions between Honduran companies with related non-Honduran resident companies or Honduran companies operating under a special regime (e.g., Free Trade Zone) comply with current transfer pricing regulations.

The Tax Code expressly states that Honduran companies are not required to provide a transfer pricing study regarding their transactions with related Honduran companies that are not established under a special regime.

The Tax Code includes an amnesty program to file tax returns (e.g., monthly, quarterly, and annual) and information returns. Filing and payment can be made free of penalties, surcharges and interest for taxes incurred up to 31 October 2016.

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Africa​

In delivering the 2017 Budget Review on 22 February 2017, the South African Minister of Finance proposed amendments to the policy governing the export of intellectual property (IP).

Further proposals were also made to lift the “loop structure” restrictions which currently prohibit residents from holding any South African asset indirectly through a nonresident entity, provided transactions are at arm’s length.

Following the Minister’s announcement, Exchange Control Circular No. 8/2017 released on 1 March 2017 contains more detail in relation to the “loop structure” relaxation. This dispensation is in addition to the one currently applying to unlisted technology, media, telecommunications, exploration and other research and development companies.

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Kenya’s Finance Act 2016 introduced a provision for tax amnesty on foreign income with respect to any year of income ending on or before the 31 December 2016. The Kenya Revenue Authority (KRA) has now issued guidelines on the eligibility and application process for the amnesty. According to the guidelines, the application for amnesty must be submitted online through the iTax platform using form A/37B on or before 31 December 2017. The application should give a complete and accurate disclosure with respect to the assets and liabilities that resulted from the foreign income.

Physical repatriation of the asset is mandatory in order to be granted amnesty.
The tax amnesty on foreign income comes barely one year after the amnesty for rental income for landlords. This move is intended to increase the tax bracket and bring other taxpayers into the bracket to raise the tax revenues for the Government. Specifically this is intended to bring high net worth individuals with foreign incomes into the tax bracket going forward.

Overall, the guidelines will assist taxpayers who have foreign assets and income that they are willing to repatriate. The repatriation of cash and other assets should promote trade and business opportunities in Kenya.

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With effect from January 1st 2017, proposed legislation relating to a possible South African withholding tax on service fees was formally deleted and a long period of uncertainty around this issue finally came to an end.

Proposals for a withholding tax on service fees were first raised in 2013, with the release of provisions dealing with the imposition and collection of the tax. The term ‘service fees’ was defined to mean amounts received or accrued in respect of technical, managerial and consultancy services.

The proposed withholding tax was met with significant resistance. The National Treasury indicated that the withholding tax had not been designed primarily to boost tax revenues but rather to identify non-residents who might be avoiding tax liabilities (i.e. those who potentially had a taxable presence in South Africa). The prevailing sentiment was that the application of the legislation would raise significant practical issues and that it was unlikely to achieve its stated objective or even collect much revenue, given that tax treaties in place would override its application in most instances.

Following extensive lobbying, the effective date of the relevant provisions was postponed firstly to 2016, and then to 2017 before finally being repealed altogether.

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Recent International Case Updates​​

Multinational energy group Chevron has been left with an increased tax bill of $340m after losing an appeal in a landmark inter-company loan transaction case.

The decision will bolster the efforts of the Australian Taxation Office [“ATO”] to crack down on profit-shifting through hundreds of billions of dollars of related-party loans by multinationals.

Background:
(i) Chevron Australia Holdings Pty. Ltd. [“CAHPL”] was established as the Australian holding company of the Chevron Group of Companies following the merger between Chevron Corporation [“CVX”] and Texaco Inc.
(ii) Chevron Texaco Funding Corporation [“CFC”] was established in the group as a United States wholly owned subsidiary of CAHPL. CFC was to lend funds to the Australian parent i.e. CAHPL at about 9% which would enable CAHPL to acquire Texaco Australia Pty. Ltd. [“TAPL”]
(iii) The decision pertains to audits concluded over five income tax years from 2004 to 2008.
(iv) CFC raised funds in the United States through issuance of commercial paper at a rate of about 1.2%. CFC was backed by a guarantee from its ultimate American parent.
(v) A “Credit Facility Agreement” was entered into between CFC and CAHPL on 06 June 2003 for on-lending the funds so raised to CAHPL at an interest rate of 9%. The funds were received by CAHPL in two tranches aggregating to US$ 2.5 bn. received in equivalent Australian dollars.
(vi) Evidence showed that the decisions as to the return of capital, the raising of funds in the United States and the debt level of CAHPL were made by officers of Chevron Treasury, in particular the Treasurer of Chevron and a director of CFC, including the extent to which subsidiaries were financed by debt or equity.
(vii) CAHPL’s debt level of US$ 2.5 billion was chosen because it was the most tax efficient corporate capital structure and gave the best after tax result for the Chevron Group as objective of the Group was to obtain the lowest cost of funding to the group for external borrowings.

The ruling:

  • The Court observed that there were no financial or operational covenants in the agreement that might have bound CAHPL to conduct its business in a particular way. Neither any security was provided by CAHPL nor any guarantee was issued by Ultimate parent company i.e. Chevron US.
  • The Federal Court upheld the observations of the primary judge that“If the property had been acquired under an agreement between independent parties dealing at arm’s length with each other, I find that the borrower would have given such security and operational and financial covenants and the interest rate, as a consequence, would have been lower.
  • The transaction should pass the test of “arm’s length standards” as if the entities were “independent”, not in the sense of a stand-alone entity, as argued by Chevron, but “independent of each other” in a given transaction.
  • “Substance over Form” finds its place in this decision. Federal Court saw that the conditions operating between CAHPL and CFC, if they were independent of each other would not include the direction by Chevron Treasury of the officers of both for the benefit of the group as a whole.
  • CAHPL seeking to borrow for five years on an unsecured basis with no financial or operational covenants from an independent lender, in order to act rationally and commercially and conformably with the interests of the Chevron group to obtain external funding at the lowest possible cost consistently with any relevant operational considerations, it would do so with Chevron providing a parent company guarantee, if such were available.
  • In the light of the evidence as to Chevron’s policy concerning external funding and its willingness to provide a guarantee to achieve that end the above, is the natural and commercially rational comparative analysis when one removes the controlled conditions operating between CAHPL and CFC and replaces them with the condition of mutual independence. In the circumstances, there would have been a borrowing cost conformable with Chevron’s AA rating, which, on the evidence, would have been significantly below 9%.
  • CAHPL contended that it had a rating of BB+ and as a standalone company, severed from the financial strength of its ultimate parent and corporate group, CAHPL could not secure a loan fro an amount equivalent to US$ 2.5 billion at the rate obtained by its subsidiary with the backing of the ultimate parent. Furthermore, any cross-border corporate guarantee, if obtained by CAHPL, would have attracted a guarantee fee which would have further added to the operating cost of CAHPL.
  • The Court made a crucial find considering the transaction in its entirety and the money trail, which is worthy of mention
    “The borrowing cost of CAHPL would have been less than it was under the Credit Facility; thus CAHPL’s deductions against operating revenue would have been less, and operating profit conformably greater. There would, however, have been a reduced inflow of (non assessable) dividends. If one looks to the whole income year and compares the profits of CAHPL in the two scenarios one may not see a difference in amount of profits, although the two amounts would be differently formulated. In the actual transaction the profits are made up of lower (assessable) operating profit and higher (non-assessable) dividend income from CFC. In the hypothesised transaction the same level of profits are made up of higher (assessable) operating profit and lower (non- assessable) dividend income from CFC. There is, however, no mandate or requirement to look at the profit position of CAHPL only at year end.”

Conclusion:
Central to the entire judgment are the words and phrases “property”, “consideration” and “might reasonably be expected to have been given or agreed to be given”.

This decision would have ramifications to MNCs around the world and will lead to many sleepless nights for finance heads across the globe. Chevron will more likely than not, will have to re-think the implications on its US$ 42 billion currently in place. It is also anticipated that the ATO will shortly release “detailed guidance to help companies with related party loans comply with Australia’s transfer pricing rules”.

Critical interpretation by the Court has been that presence of an associated enterprise in a transaction should not distort “amount of profits” which might have been expected to accrue, did not accrue. The word “profit” in the transfer pricing provisions is used in a more generic sense than “taxable income”. The focus of the transfer pricing provisions is the tax effect of a “dealing” not the overall “income” of a taxpayer.

One may take a position that tax administrations cannot step into the shoes of the businessmen, however, here, Court has depersonalized the agreement so as to make it, hypothetically, between independent parties dealing at arm’s length, but not so to alter the underlying international transaction.

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