Worldwide Tax News
The High Court of Delhi recently ruled on whether the structure of a transaction may be disregarded for transfer pricing purposes on the basis of not being commercially rational. The case involved two related appeals by Denso India Ltd. (Denso), a company engaged in the manufacture and sale automotive electronic products.
For the assessment years 2002-03 and 2003-04, Denso used the transaction net margin method (TNMM) to determine the transfer prices for all its controlled transactions, which included transactions that involved purchasing materials from an associated enterprise in Japan that had acquired the materials from an associated Japanese manufacturer. In auditing Denso's returns, the transfer pricing officer accepted the TNMM for all transactions except the materials purchases, for which the officer determined the comparable uncontrolled price (CUP) method must be used. In applying the CUP method, the officer also determined that there was no commercially rational basis for Denso to purchase the materials indirectly through the associated Japanese intermediary and that the comparable prices used must be those where the materials are purchased directly. This resulted in a transfer pricing adjustment, which Denso appealed.
In its decision, the High Court sided with the tax authority and rejected Denso's appeals. According to the Court, importing materials through an intermediary would normally be a commercial decision that would not be questioned by the tax authorities. However, the tax authorities may disregard the structure of a transaction if its form differs from its substance, or when the form and substance of the transaction are the same but the arrangements differ from those that would have been adopted by independent enterprises behaving in a commercially rational manner. Because Denso was unable to provide a reasonable commercial explanation, the recharacterization of the transaction structure is allowed.
Click the following link for the full text of the decision.
On 5 February 2016, Venezuela published Resolution No. 022 in the Official Gazette. The resolution, issued by the Ministry of the People's Power for Banking and Finance, sets a 2.5% special contribution payable by insurance and reinsurance companies, companies engaged in prepaid medicine for health plans, risk managers, and companies that finance insurance fees or premiums.
The special contribution is to finance the Superintendence of Insurance Activity, and is to be paid monthly based on the taxpayer's net income from premiums, interest and related fees.
Estonia's government has reportedly approved a proposal to increase the country's value added tax (VAT) registration threshold from EUR 16,000 to EUR 25,000 as part of efforts to reduce the administrative burden on smaller companies. The legislation to amend the VAT Act for the change is expected in the near future.
Liechtenstein Reaffirms Commitment to Implement BEPS Measures including CbC Reporting and Changes in the IP Regime
On 4 March 2016, the Liechtenstein government published a release reaffirming its commitment to implement measures based on guidelines developed as part the OEDC BEPS Project. In particular, the release states that the government has instructed the tax administration to prepare a consultation report for a number of BEPS measures, including:
- Country-by-Country reporting requirements with an annual group revenue threshold of EUR 750 million;
- Transfer pricing documentation requirements for large enterprises (Master File/Local File); and
- The transition of the IP regime to the modified nexus approach.
Legislation for the changes is to be drafted and submitted to parliament later in 2016.
On 3 March 2016, Switzerland's Council of States (upper house of the Federal Assembly) approved legislation that would strengthen the value added tax (VAT) rules for foreign suppliers. The changes include a VAT registration threshold of CHF 100,000 in worldwide sales for all foreign suppliers of services in Switzerland (currently that threshold is for Swiss sales) and abolishing the exemption for imported low-value goods. While the changes would potentially affect all foreign suppliers, they are mainly targeted at large online retailers, such as Amazon.
The legislation must now be reconciled with a version passed by the National Council (lower house) and will enter into force on 1 January 2017 at the earliest.
The social security agreement between Quebec, CA and Romania entered into force on 1 March 2016, and generally applies from that date. The agreement, signed 19 November 2013, is the first of its kind between Quebec and Romania, although a social security agreement between Canada and Romania was signed in 2009 and is in force.
According to an update from Irish Revenue, the tax information exchange agreement with Dominica entered into force on 22 September 2015. The agreement, signed 8 July 2013, is the first of its kind between the two countries and is in line with the OECD standard for information exchange. It applies for criminal tax matters on the date of its entry into force, and for other matters for tax periods beginning on or after that date.
On 1 March 2016, French President Francois Hollande signed the law ratifying the pending protocol to the 1966 income and capital tax treaty with Switzerland. The protocol, signed 25 June 2014, amends the final protocol to the treaty concerning the exchange of information. It is the fourth protocol to amend the treaty.
The protocol will enter into force once the ratification instruments are exchanged, and will generally apply for any calendar year or fiscal year beginning on or after 1 January 2010.
According to a joint statement published 27 February 2016, officials from Iran and Switzerland have agreed to begin negotiations for a protocol to the 2002 income and capital tax treaty between the two countries. The protocol is to amend Article 26 (Exchange of Information) to bring it in line with the OECD standard for information exchange. It will need to be finalized, signed and ratified before entering into force.
OECD Publishes Discussion Draft on Changes to OECD Model Tax Convention concerning Pension Funds Residence
On 29 February 2016, the OECD published a discussion draft on changes to Articles 3 (General Definitions) and 4 (Resident) of the OECD Model Tax Convention and the associated commentary concerning the tax residence of pension funds. The changes were included as a next step in the final report for Action 6 of the OECD BEPS Project (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances). The draft changes are meant to ensure that a pension fund is considered a resident of the State in which it is constituted for the purposes of tax treaties.
Click the following link for the discussion draft. Comments are due by 1 April 2016.