Worldwide Tax News
Brazil Clarifies Tax Treatment of a Branch of a Foreign Company
Brazil has published Private Ruling 351 of 29 June 2017, which clarifies the tax treatment of branches (subsidiaries) in Brazil of foreign legal entities, and in particular, a foreign legal entity that is a non-profit. The ruling includes that branches of non-resident in Brazil are to be treated the same as resident companies. As such, a branch in Brazil of a foreign non-profit will be entitled to the same tax exemptions provided to a resident non-profit legal entity, and are only required to pay the 1% contribution for the social integration program (PIS).
Colombia Publishes Draft Decree on New Transfer Pricing Regime
Colombia's Ministry of Finance has published a draft decree for public comment that sets out detailed requirements for the country's new transfer pricing regime, which was introduced as part of Law No. 1819 of 2016 (previous coverage). The period for comment runs from 11 to 25 August 2017.
One of the main aspects of the new regime is the introduction of the three-tiered documentation requirements developed as part of BEPS Action 13. The requirements as set out in the draft decree are summarized as follows:
The Local and Master file requirements apply for Colombian resident companies that carry out transactions with foreign related parties or related parties located in a free zone, as well as permanent establishments of non-residents in Colombia that carry out such transactions. The general threshold for Master and Local file preparation is gross equity of at least UVT 100,000 (~USD 991,000) as of the last day of the respective year or gross revenue of at least UVT 61,000 (~USD 605,000) in the respective year. However, even if the thresholds are not met, the requirements may still apply with respect to transactions with non-residents located, resident or domiciled in non-cooperating jurisdictions with low or no taxation or preferential tax regimes.
The required content of the Local file is somewhat in line with Action 13 guidelines and is an extension of prior transfer pricing study requirements. The main elements of the Local file are as follows:
- Executive Summary, describing the scope and purpose of the study, the content, and the conclusions reached;
- Functional analysis, including details of the activities or transactions with economic impact, the functions performed, the assets used, and the risks assumed by the parties involved;
- Market analysis, to the extent that it is relevant to assess the arm's length conditions of transactions carried out by the taxpayer; and
- Economic analysis, detailing each of the types of operation carried out, parties involved, methods used, comparable information, adjustments made, etc., as well as additional information in relation to financing operations, intangibles, and commodity transactions.
The Local file must be prepared in Spanish, although documentation issued in a foreign language may be submitted, including information on comparable foreign companies, which may be English. A translation of any non-Spanish documentation may be requested.
The Master file is in line with the Action 13 guidelines and may be prepared in English, although a Spanish translation may be requested. The required content of the Master file includes:
- Organizational structure corresponding to the organization of the MNE group, including the legal structure and the percentage of ownership, as well as the geographical location of the group entities;
- Description of the business of the MNE group, including main factors generating profit, description of the supply chain for top five products/services and any amounting to more than 5% of sales; a list and description of important service agreements (other than R&D) and related policy for allocating costs; description of key markets; brief functional analysis regarding entity contributions to value creation; and descriptions of the main business restructurings, acquisitions, and divestitures that occurred during the fiscal year;
- Intangibles of the MNE group, including an overview of the group's overall strategy with respect to development, ownership and operation of intangibles, including the main R&D centers; a list of intangibles important for transfer pricing purposes and the legal owners; a list of significant intangibles agreements concluded between associated companies, including cost sharing agreements, research service agreements, and licensing agreements; an overview of the group's policies on transfer pricing in relation to R&D and intangibles; and an overview of any relevant transfers of intangible rights made between associated companies during the fiscal year;
- Intercompany financial activities of the MNE group, including an overview of how the group is financed, including agreements with significant unrelated lenders; identification of group members that provide centralized funding for the group, including country of incorporation and effective management of these entities; and a general description of the group's transfer pricing policies with respect to financing agreements between associated enterprises; and
- Financial and fiscal positions of the MNE group, including annual consolidated financial statements of the group for the fiscal year concerned; and a list and brief description of unilateral advanced pricing agreements (APA) and other relevant agreements (rulings).
Both the Local file and the Master file are to be submitted electronically. The service for the local file will be based on the existing service for submitting transfer pricing documentation, while a new service is being developed for the Master file (to be completed by March 2018).
The Country-by-Country (CbC) reporting requirements apply for fiscal years beginning on or after 1 January 2016 for Colombian ultimate parent entities of MNE groups meeting a consolidated group revenue of UVT 81 million (~USD 803 million) in the previous year, as well as local constituent entities designated to file (surrogate parent). The requirement to submit may also apply for non-parent local constituent entities (or permanent establishments) when the following conditions are met:
- The local entities jointly have a share of at least 20% of the consolidated revenue of the MNE group;
- The ultimate parent has not submitted a CbC report for the year in its jurisdiction of residence that will be exchanged with Colombia, which effectively means one of the following standard secondary filing conditions is met:
- There is no legal requirement for the ultimate parent to submit a CbC report in its jurisdiction;
- There is no agreement for the exchange of CbC reports with the ultimate parent's jurisdiction; or
- There is a systemic failure for exchange, and the local entity has been notified of this failure by the Colombian tax authority; and
- The UVT 81 million group revenue threshold is met in the previous year.
If there is more than one entity or permanent establishment that would be required to submit a CbC report locally, one may be designated to submit. If no entity or permanent establishment is designated, the one with the largest asset value in Colombia as at the end of reporting fiscal year is responsible for submission.
The requirement to submit locally will not apply, however, if a surrogate parent entity has been designated in another jurisdiction, has submitted a CbC report, and certain other conditions are met, including that the report will be exchanged with Colombia and tax authorities have been notified. Further, local filing requirements will not apply when the CbC reporting threshold of the ultimate parent's jurisdiction has not been met.
All member entities of an MNE group resident in Colombia must notify the tax authority on whether they are the ultimate parent or designated surrogate parent, and if neither, must provide notification of the identity and residence of the reporting entity for the group.
With respect to submission, the draft decree only provides that the method, format, terms, and conditions for both the notification and the CbC report will be established by the government.
In addition to the Action 13 documentation requirements, the draft decree also includes several other provisions regarding transfer pricing requirements. These other provisions are briefly summarized as follows:
- Requirements for the submission of the transfer pricing informative return, which includes an overview of controlled transactions, the relevant parties, the amounts, the methods used, etc.;
- New procedures for entering into APA's, including application process, implementation, and monitoring;
- Requirements for commodities transactions, including that that comparable uncontrolled price method must be used and specific documentation/records must be maintained;
- Rules for intra-group services, including that proof of delivery must be provided in order to deduct the related costs/expenses, and that the taxpayer must be able to demonstrate the commercial need for the service, that independent parties would pay for the service, etc.;
- Rules for cost sharing agreements, including the need to detail costs incurred, benefits received, method of allocation and adjustments, etc.;
- Rules for corporate restructurings, including that taxpayers must identify the purpose of a restructuring, identify the related assets, functions, and risks, describe the potential benefits, and provide information on other aspects of a restructuring; and
- Rules regarding the arm's length range for financial indicators.
Although published for comment, the summary of the draft decree indicates that it is not under consultation. Therefore, the final version is not expected to change much, if at all.
Note - UVT (tax value unit or unidad de valor tributario) for 2016 is COP 29,753 (~USD 9.91 December 2016). For 2017, the UVT value is COP 31,859 (~10.73 USD August 2017).
UK Updates Guidelines on CbC Reporting including Master/Local File Requirement
On 15 August 2017, UK HMRC announced updated guidelines on Country-by-Country (CbC) reporting. The UK CbC reporting requirements apply for accounting (reporting) periods beginning on or after 1 January 2016 for MNE groups meeting a EUR 750 million consolidated revenue threshold in the previous period. The CbC reporting regulations were first published in February 2016 (previous coverage), and were amended in March 2017 in order to comply with EU requirements and the latest OECD guidelines (previous coverage).
The updated guidelines provide a full overview of the requirements. Some of the key updated guidance is in relation to the CbC report and notification submission, including:
- CbC reports submitted in the UK must be filed online through a secure HMRC portal using the prescribed XML schema (OECD format) - the registration service will be available soon;
- Voluntary (parent surrogate) filing in ultimate parent's jurisdiction may serve to relieve the local (secondary filing) requirement, provided that the report will be exchanged with HMRC (notification of the entity, jurisdiction, and filing date must be provided to HMRC);
- CbC Notifications must be sent to HMRC by the end of the reporting period for each period covered by a CbC report, with the initial extension to 1 September 2017 for the first year (only one entity needs to submit notification, provided that all required information is included);
- CbC notifications should include:
- Which entity (including the unique taxpayer reference or equivalent) in the MNE group will file the CbC report and where;
- Whether exception A or B applies for a UK entity that would otherwise be required to file: exception A applies when the required CbC information is included in a CbC report already received by HMRC, and B applies when information is included in a report filed in a jurisdiction that will exchange with HMRC; and
- The names and unique taxpayer references of all of the MNE group’s entities that are tax resident in the UK, are UK permanent establishments of overseas group entities, or are UK partnerships.
- HMRC prefers the notification to be on a spreadsheet and sent to the dedicated mailbox which has been set up for this purpose – firstname.lastname@example.org, although a paper notification may be sent to: HMRC CbCR Notifications, Room 806, 8th Floor Dorset House, Stamford Street, London, SE1 9PY.
Another important update in the guidance is in respect of Action 13 Master and Local file requirements. The guidance simply states that HMRC requires that transfer pricing documentation be retained to support the arms-length pricing, and that such documentation should be proportionate to the size and complexity of the transactions or business involved and should be the same as that specified in Annexes I and II (Master file and Local file) of the Action 13 report. Beyond this, the CbC guidance only references the HMRC guidelines on transfer pricing documentation, which currently does not mention Master/Local file. It is possible that additional updates to the guidance will be published to reflect the new Master/Local file requirement.
EU Commission Publishes Draft Report on Economic Valuation Techniques in Transfer Pricing
The European Commission has published a draft report on the use of economic valuation techniques in transfer pricing, which was adopted by EU Joint Transfer Pricing Forum during their meeting held 22 June 2017. The draft report is a working paper prepared for discussion purposes.
1. Chapter VI and IX of the OECD Transfer Pricing Guidelines ("TPG") recognise economic valuation techniques as useful for determining the transfer pricing consequences of a transfer of intangibles, rights in intangibles or the transfer of a business/part of a business.
2. The objective of this report is to build a bridge between general practice of economic valuation and transfer pricing. It is therefore addressed to both, valuation experts having to apply their expertise in the context of transfer pricing and transfer pricing practitioners who are faced with the application of economic valuation techniques.
3. It is important to highlight that when using economic valuation techniques for transfer pricing purposes, the principles set out in the TPG should be fully considered and the techniques should be adjusted accordingly. This paper is particularly relevant for the application of the guidance in the revised Chapter VI of the TPG as well as with regards to the application of the guidance in Chapter IX of the TPG. Chapter VI notably provides guidance relating to the determination of cash flows attributable. Chapter IX notably provides guidance relating to the sale of assets as part of a restructuring.
Costa Rica and the U.A.E. Conclude Tax Treaty Negotiations
According to recent reports, officials from Costa Rica and the United Arab Emirates concluded negotiations with the initialing of an income tax treaty on 4 August 2017. The treaty will be the first of its kind between the two countries, and must be signed and ratified before entering into force.
Tax Treaty between Egypt and Saudi Arabia has Entered into Force
The income tax treaty between Egypt and Saudi Arabia entered into force on 1 July 2017. The treaty, signed 8 April 2016, is the first of its kind between the two countries.
The treaty covers Egyptian individual income tax, tax on profits of legal entities, tax withheld at source, and supplementary taxes. It covers Saudi Zakat and income tax, including the natural gas investment tax.
The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services in a Contracting State through employees or other engaged personnel for the same or connected project for a period or periods aggregating more than 6 months within any 12-month period.
- Dividends - 5% if the beneficial owner is a company directly holding at least 20% of the paying company's capital; otherwise 10%
- Interest - 10%
- Royalties 10% (exemption if paid to government)
The following capital gains derived by a resident of one Contracting State may be taxed by the other State:
- Gains from the alienation of immovable property situated in the other State;
- Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State; and
- Gains from the alienation of shares or other rights representing a participation in the capital of a company resident in the other State.
Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.
Both countries apply the credit method for the elimination of double taxation.
The treaty applies from 1 January 2018.
U.S. Court Upholds IRS Application of Principal Purpose Test for Discretionary Treaty Benefits
On 14 August 2017, the U.S. District Court for the District of Columbia found in favor of the IRS in a summary judgment concerning whether the IRS was justified in not granting discretionary benefits under the Swiss-U.S. tax treaty. The case involved Swiss-domiciled Starr International Company, Inc. (Starr), once the largest shareholder of American International Group (AIG). Starr was originally based in Bermuda and relocated to Ireland before relocating to Switzerland. In 2007, Starr petitioned the IRS for discretionary treaty benefits on dividends received from AIG for the year as provided under Article 22(6) (Limitation on Benefits) of the U.S.-Swiss treaty. However, the IRS denied the request and Starr appealed the decision, claiming that the IRS had abused its discretion in denying the benefits (previous coverage).
In coming to its decision, one of the main factors reviewed by the Court was the standard that should be applied in relation to the discretionary benefits that may be provided as per the provisions of Article 22(6), which includes that a person not entitled to the benefits of treaty pursuant to the other provisions Article 22, may, nevertheless, be granted the benefits of the treaty if the competent authority of the State in which the income arises so determines after consultation with the competent authority of the other Contracting State.
Starr attempted to argue that in applying the provisions of Article 22(6), discretionary benefits should only be denied in cases of treaty shopping involving a resident of a third country, which in the case would mean that the benefits should have been granted. However, the Court rejected this argument and determined that the standard for determining whether the discretionary benefits can be made available under Article 22(6) is whether the establishment, acquisition, or maintenance of the person seeking the benefits under the treaty, or the conduct of such person’s operations, has or had as one of its principal purposes the obtaining of benefits. In this regard, the Court also determined that Starr did have a principal purpose of obtaining treaty benefits during its relocations, and as such, the IRS was justified in not granting discretionary benefits.