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Approved Changes (6)

Australia

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ATO Second Commissioner Speaks on Transfer Pricing Focus

The Australian Taxation Office (ATO) has published the welcome address and opening remarks delivered by acting Second Commissioner, Jeremy Hirschhorn at the Tax Institute National Transfer Pricing Conference in Sydney on 14 August 2019. The address covers transfer pricing as a key focus for the ATO and includes the following with respect to recent focus areas and advice to transfer pricing professionals:

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Focus areas

If I just touch quickly on a few of our recent focus areas, where we have been quite overt about what is acceptable compliance risk in publishing PCGs.

Related party loans continue to be used by Australian taxpayers, and we have made great inroads in addressing taxpayers who have sought to achieve artificial transfer pricing benefits through these arrangements. For example, we have brought about $80 billion in previously high risk related party loans into low risk or 'green zone' arrangements, and expect this to increase as we resolve existing issues.

Marketing hubs continue to be a key focus area. But again, by working actively with taxpayers to resolve these matters we are seeing a positive impact of our hubs strategy on reducing the use of these arrangements to reduce tax in Australia. It's a matter of public record that BHP will now be paying their full Australian tax on their Singapore hub, and that their on-going arrangements are in line with our 'green zone' set out in our guidance materials. This was a significant development in our marketing hubs strategy; as one of Australia's major taxpayers this sends a strong signal to taxpayers with similar arrangements in that industry, as well as to the emerging oil and gas industry.

More recently we have also signalled to the market our focus on inbound supply chains. We observed a race to the bottom in terms of the profit landed in Australia and realised we had to intervene with expected returns. Not only was this inappropriately reducing Australian tax, but also clogging up our APA processes with ambit claims, adversely affecting taxpayers with genuine prices seeking certainty.

Transfer mis-pricing traps

I thought I would briefly set out some of the transfer mis-pricing traps that we see in practice:

  • pricing a contractual arrangement that does not reflect what is happening in reality
  • entering into transactions or restructures against the best interests of the Australian entities, for example:
    • entering into a worse transaction with a related party than could be obtained with a third party (or in fact was previously in place with a third party)
    • contractually artificial allocations of risk and reward that would never occur in the real world
      • I describe this as the "kidney donor" approach to transfer pricing: just because you can point to someone living a full life on dialysis, this doesn't support a proposition that someone would remove their own kidneys and go on dialysis in order to transfer the risks and rewards of their kidneys to someone else
  • transferring intellectual property to a related party just before it becomes commercially viable at a significant discount to what it would be worth
  • an optimistic use of one methodology, with no cross-checking against other methodologies
  • ultimately transfer pricing disputes are resolved by judges – history would show they are concerned with real world pragmatism and have little time for convoluted methodologies or expert witnesses; it has been said that the reason for having expert witnesses in transfer pricing cases is to ensure that the other sides are also disregarded
  • pricing a transaction which would never take place with a third party
  • failing to take into account the bargaining power that the group would have with a notional third party if it were to enter into that transaction (a version of the "orphan" approach) – in the real world, a Coles pays less per square metre than the florist
  • when the price is bad (or there is a change in transfer pricing legislation), changing the story not the price.

In relation to the last point, and at the risk of bluntness, some transfer pricing documentation and supporting information we receive reads more like a historical novel than a well-researched biography: some of the characters are real, but there is a lot which seems to come from the imagination of the author. In short, we often find that the glossier the report, the worse the price.

Being wise not clever

So if I think then about 'what does a wise advisor do?' well it's really the flipside of some of these things.

A person providing wise advice:

  • understands the big picture of where channel profit is being landed around the world (especially untaxed profits)
  • looks at whether the transaction makes commercial sense and, if it does not, does not simply price a non-commercial transaction
  • looks at multiple methodologies to see if the price makes sense
  • where the price is bad, changes the price, not the story
  • understands the ATO's risk assessment frameworks
  • seeks greater certainty – particularly where transfer pricing is part of their "tax infrastructure" (i.e. it is material to their fundamental tax profile), rather than a fringe issue.

Be a transfer pricing professional

To conclude, I just want to reiterate that what you do is really important – you are a critical part of the operation of the tax system in Australia. What you do matters, not just to your clients, but to confidence in the tax system as a whole.

We are encouraged by the increased and positive engagement from taxpayers and their advisors over the past few years to address transfer pricing issues upfront.

I encourage everyone during each of the sessions today to think about how they can be a wise transfer pricing professional.

08-16-2019

Myanmar

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Myanmar Clarifies Tax Procedures for Transitional Period for Change in Fiscal Year

Myanmar's Ministry of Planning and Finance has issued Notification 64 of 5 August 2019, which clarifies the tax procedures for the transitional period for the change in the standard fiscal year from the 12-month period ending 31 March to the 12-month period ending 30 September. For tax purposes, the change was implemented for banks, financial institutions, and state-owned enterprises from 1 October 2018 and will be implemented for all taxpayers from 1 October 2019. With the implementation, there is a six-month transitional period from 1 April to 30 September.

For the calculation of corporate income tax for the six-month transitional period, Notification 64 provides that the tax due will be determined as follows:

  • Total income for the six-month period is reduced by expenses incurred for the period, except for depreciation, interest, and donations;
  • The total net income is multiplied by 2 to determine average annual income;
  • The average annual income is adjusted for (reduced by) allowable depreciation and interest payments made for the period;
  • The adjusted average annual income is reduced by donations, subject to the 25% of net income limit; and
  • The result is multiplied by the applicable corporate tax rate, which is then divided by 2 to determine the corporate tax payable for the six-month period.

Notification 64 also explains how the exemption thresholds for different taxes are applied for the transitional period, which includes the following based on the exemption thresholds provided in the 2018-2019 Union Taxation Law:

  • Exemption from corporate income tax for SME's if the total income for the six-month period multiplied by 2 is less than or equal to MMK 10 million and the six-month period falls within the first three years of commencing operations;
  • Exemption from capital gains tax if the total value of capital assets sold or transferred during the six-month period multiplied by 2 is less than or equal to MMK 10 million;
  • Exemption from commercial tax if the total sales for the six-month period multiplied by 2 are less than or equal to MMK 50 million; and
  • Exemption from specific goods tax if the total sales for the six-month period multiplied by 2 are less than or equal to MMK 20 million.

Lastly, it is provided that the tax return for the six-month transitional period is due three months after the period ends.

08-16-2019

Taiwan

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Taiwan Issues Notice on Tax Refund for Replacement of Vehicles

Taiwan's National Taxation Bureau of the Central Area issued on 13 August 2019 a notice on the tax refund for the replacement of old vehicles to reduce air pollution.

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For Profit-Seeking Enterprises Scrapping Old Large Vehicles and Buying New Ones, the Commodity Tax Refund for the New Vehicles Should be Included in the Income Tax Return of the Acquisition Year.

(Taichung News) The National Taxation Bureau of the Central Area, (NTBCA) said that in order to speed up the replacement of old large vehicles in order to prevent air pollution, the Government has amended Article 12-6 of the Commodity Tax Act, such that anyone who scraps old large vehicles and purchases new ones must meet certain conditions in order to apply for a reduced tax refund. The refund amount is up to NT$400,000 per vehicle.

The Bureau stated that the amendment of Article 12-6 of the Commodity Tax Act came into effect on June 15, 2019. From August 18, 2017 to December 31, 2022, those who scrap stage 1~3 (diesel vehicle pollutant emission standards) of large passenger vehicles, large trucks, large passenger-cargo cars, substitute buses, large special vehicles (including tractors), and who then purchase new large vehicles and complete the new license plate registration  may apply for a tax refund for the new large vehicles. The manufacturer or importer shall apply for a tax refund with the National Taxation Bureau or the Customs Office at the place of import within six months from the day when the old large vehicle was scrapped or the day when the new license plate registration for the new large vehicle was completed, whichever occurs later. After verification and approval, the tax refund shall be paid by direct transfer or by mailing a check to the actual purchaser of the new car (that is, the actual owner of the vehicle who purchased the new car).

The Bureau especially wants to remind the public that the tax refund for the actual purchaser of the new car is in the nature of a government subsidy. A profit-seeking enterprise receiving a subsidy should incorporate the subsidy into its annual income amount of the acquisition year according to Article 24 of the Income Tax Act. Any necessary costs and expenses can be recognized.

For more information, you are welcome to call our toll-free telephone number: 0800-000321. NTBCA will serve you with all sincerity.

(News offered by Ms. Shu-Chuan Lin, Revenue Officer, Third Examination Division, National Taxation Bureau of the Central Area, M.O.F. Tel: 04-23051111 ext. 7311.)

08-16-2019

Ukraine

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Ukraine Clarifies VAT Treatment of Advertising Services Provided to a Non-Resident

The Ukraine State Fiscal Service has published guidance letter 3678/6/99-99-15-03-02-15/ІPK of 7 August 2019 on the VAT treatment of advertising services supplied to a non-resident. The letter concerns the placement by a Ukraine resident of a non-residents trademark on the Ukraine resident's premises.

The letter clarifies that as per Section 185 of the Tax Code, the supply of services is subject to VAT if the place of supply is in Ukraine. Further, as per Section 186.3 of Article 186 of the Tax Code, the place of supply of advertising services is the place where the recipient of the services is registered as an economic entity or, in the absence of such place, the place of residence or domicile. Based on this, the advertising services involving the placement of a trademark for a non-resident is not considered supplied in Ukraine and therefore not subject to VAT.

These place of supply rules also apply for other services provided to non-residents, including consultancy, engineering, legal, accounting, auditing, and actuarial services.

08-16-2019

Venezuela

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Venezuela Introduces Tax Exemption for Agricultural Sector

Venezuela has introduced a new tax exemption for qualifying individuals and companies in the agricultural sector, including harvesting, threshing, storage, etc., as well as activities in the livestock, forestry, fisheries, and aquaculture sub-sectors. To qualify for the exemption, the main requirement is that 100% of the amount of tax exempted must be reinvested into R&D, improvement of productivity, or capital goods used for the exempted activity. For this purpose, the investment plan and sworn statements on investments made must be submitted and the related income, costs, and expenses must be separately recorded. Where certain costs and expenses are common to both taxable and exempt activities, they must be distributed proportionally. In addition, any loss generated from an exempt activity may not be set off against taxable income in any fiscal year.

The exemption applies from 1 January 2019 to 31 December 2023.  

08-16-2019

Zimbabwe

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Zimbabwe Finance Bill (No. 2) 2019 Approved in Parliament

The Zimbabwe Parliament has reportedly approved the Finance (No. 2) Bill 2019. Some of the main measures include the following:

  • The individual income tax brackets are set as follows for employment income in ZWD per month:
    • up to ZWD 700 - 0%
    • over ZWD 700 up to 3,000 - 20%
    • over ZWD 3,000 up to 10,000 - 25%
    • over ZWD 10,000 up to 20,000 - 30%
    • over ZWD 20,000 up to 30,000 - 35%
    • over ZWD 30,000 - 40%
  • Where any part of a person's taxable employment income is earned in a foreign currency, the following brackets in USD apply:
    • up to USD 70 - 0%
    • over USD 70 up to 3,000 - 20%
    • over USD 300 up to 1,000 - 25%
    • over USD 1,000 up to 2,000 - 30%
    • over USD 2,000 up to 3,000 - 35%
    • over USD 3,000 - 40%
  • The rules for Special Economic Zones tax incentives are amended so that companies producing products for the domestic market are not eligible;
  • The interest rate out outstanding tax debts is increased from 10% to 25%;
  • The application of the Intermediated Money Transfer Tax (2% tax on mobile money and electronic financial transactions) is amended as follows
    • the single transaction amount cap is increased from ZWD 500,000 to ZWD 750,000, with a flat tax of ZWD 15,000 levied on transactions that meet or exceed the cap;
    • the scope of the definition of a “financial institution” is expanded to include an operator of mobile money transfer platform and mobile money transfer agents; and
    • the transaction amount under which the tax is not levied is increased from ZWD 10 to ZWD 20;
  • New mineral royalty rates are set for gold:
    • 2% for gold produced by small-scale miners;
    • 3% for gold produced by other miners if the gold produced by them is sold at a time when its price is below USD1,200 per ounce
    • 5% for gold produced by other miners if the gold produced by them is sold at a time when its price is above USD 1,200 per ounce
  • Mineral royalties are made deductible for tax purposes; and
  • Several changes are made in relation to the restoration of the Zimbabwe dollar as the reference currency instead the U.S. dollar, with certain exceptions.

The Bill must be published in the Official Gazette to enter into force and the measures will generally apply from 1 August 2019, except for the deduction of mineral royalties, which is to apply from 1 January 2020. Additional details will be published once available.

08-16-2019
Treaty Changes (4)

Costa Rica-Untd A Emirates

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Costa Rica Approves Pending Tax Treaty with the UAE

On 12 August 2019 Costa Rica's President Carlos Alvarado approved the draft law for the ratification of the pending income and capital tax treaty with the United Arab Emirates. The treaty signed, 3 October 2017 (previous coverage), is the first of its kind between the two countries and will enter into force 30 days after the ratification instruments are exchanged and will apply from 1 January of the year following its entry into force.

08-16-2019

Czech Rep-Mongolia

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SSA between the Czech Republic and Mongolia Signed

Officials from the Czech Republic and Mongolia signed a social security agreement on 20 May 2019. The agreement is the first of its kind between the two countries and will enter into force on the first day of the month following the month in which the ratification instruments are exchanged.

08-16-2019

Kazakhstan-Uzbekistan

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Protocol to Tax Treaty between Kazakhstan and Uzbekistan in Force

The protocol to the 1996 tax treaty between Kazakhstan and Uzbekistan reportedly entered into force on 20 October 2018. The protocol, signed 23 March 2017, is the first to amend the treaty and includes the following changes:

  • Article 2 (Taxes Covered) is amended in respect of both countries;
  • Article 3 (Definitions) is amended with respect to the definitions of "Kazakhstan" and the terms "enterprise of a Contracting State" and "enterprise of the other Contracting State";
  • Article 4 (Resident) is amended to provide that in cases where a person, other than an individual, is considered resident in both Contracting States, for the purpose of the treaty it will be considered resident in the Contracting State in which its place of effective management is located;
  • Article 5 (Permanent Establishment) is amended to update provisions regarding Service PEs and Agent PEs, and add provisions regarding the creation of a PE as a result of collecting insurance premiums or insuring risks in a Contracting State;
  • Article 7 (Business Profits) is amended with the addition of provisions regarding the deduction of royalties, fees, and similar payments for the use of patents and other rights in determining the income (profits) of a permanent establishment;
  • Article 9 (Associated Enterprises) is amended with respect to corresponding adjustments;
  • Article 10 (Dividends) is amended with the addition of the provision that the benefits of the Article will not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the shares or other rights in respect of which the dividends are paid was to take advantage of the Article by means of that creation or assignment;
  • Article 11 (Interest) is amended with respect to the withholding tax exemption where the beneficial owner is the Central Bank of either Contracting State and other financial institutions owned by either State, and removes the sentence that fines for late payments are not deemed to be interest for the purposes of this Article, and updates the provision regarding when interest is deemed to arise in a Contracting State;
  • Article 12 (Royalties) is amended with respect to the provision regarding when royalties are deemed to arise in a Contracting State;
  • Article 13 (Capital Gains) is amended to provide that gains from the alienation of shares deriving more than 50% of their value directly or indirectly from immovable property situated in a Contracting State may be taxed in that State;
  • Article 21 (Other Income) is amended with expanded provisions regarding cases where business is carried on through a PE;
  • Article 26 (Exchange of Information) is replaced to bring it in line with OECD standards for information exchange;
  • Article 27 (Assistance in the Collection of Taxes) is replaced with expanded provisions;
  • Article 27-1 (Limitation on Benefits) is added, which provides that the provisions of the treaty do not prevent a Contracting State from the application of the provisions of its domestic law and measures against tax avoidance or evasion; and
  • Article 28-1 is added, which contains provisions for making changes and additions to the treaty.

The protocol applies from 1 January 2019.

08-16-2019

United Kingdom-Ireland

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UK Publishes Synthesized Text of Tax Treaty with Ireland as Impacted by the BEPS MLI

UK HMRC has published the synthesized text of the 1976 tax treaty with Ireland as impacted by the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). The synthesized text was prepared on the basis of the reservations and notifications (MLI positions) provided by the United Kingdom and Ireland on the date of deposit of their MLI ratification instruments. The authentic legal texts of the respective treaties and the MLI take precedence and remain the legal texts applicable

The provisions of the MLI are effective for the Ireland-UK treaty:

  • with respect to taxes withheld at source on amounts paid or credited to non-residents, where the event giving rise to such taxes occurs on or after 1 January 2020;
  • in the UK, from 1 April 2020 for corporation tax and from 6 April 2020 for income tax and capital gains tax; and
  • in Ireland, with respect to all other taxes levied by Ireland with respect to taxable periods beginning on or after 1 November 2019.

Article 16 of the MLI has effect with respect to this treaty for a case presented to the competent authority of a Contracting State on or after 1 May 2019, except for cases that were not eligible to be presented as of that date under this treaty prior to its modification by the MLI, without regard to the taxable period to which the case relates.

The provisions of Part VI (Arbitration) of the MLI have effect with respect to this treaty with respect to cases presented to the competent authority of a Contracting State on or after 1 May 2019. The provisions of Part VI (Arbitration) of the MLI may also apply to a case presented to the competent authority of a Contracting State prior to 1 May 2019 to the extent that the competent authorities of both Contracting States agree that it will apply to a specific case.

Click the following links for the synthesized text of the 1976 Ireland-UK tax treaty.

08-16-2019
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