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Approved Changes (3)


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Indian Tribunal Holds Government Approved Rates may Not be Used as Transfer Pricing Benchmark for Royalty Payments

The Mumbai Income Tax Appellate Tribunal recently issued a decision concerning whether a royalty payment rate agreed to with the Indian government can be used as a comparable uncontrolled price benchmark for transfer pricing purposes. The case involved India-based Sara Lee TTK Ltd, (TTK), a company engaged in the business of manufacture and sale of household and personal care products.

In 1995, TTK entered into an agreement with Dutch company Buttress B.V. for the use of know-how, formulas, and trademarks for the manufacture, packaging and sale of the product Brylcreem, according to which a royalty at a rate of 5% on net sales was paid. At the time, India had not yet introduced its transfer pricing regime (introduced 2001), although approval of the agreement was needed from the Indian Department of Industrial Policy and Promotion (DIPP) and the Reserve Bank of India (RBI), which TTK obtained and subsequently extended in 2002.

In 2003, TTK entered into a new trademark licensing agreement with Buttress B.V. and obtained approval from DIPP and RBI for the payment of royalty at the same 5% rate. Given that the transfer pricing regime was in place at that time, TTK used the approved 5% rate as the benchmark in its transfer pricing analysis, and contended that the payment was at arm's length. However, the transfer pricing officer found that under the new agreement the royalty was only for the use of trademark without transfer of know-how and that the 5% rate was too high, and as a result, restricted the royalty payment to 1%.

Further, on appeal by TTK to the tax authority, the tax authority found that TTK had not carried out a proper benchmark analysis and that the rate approved by DIPP and RBI was not a sufficient benchmark. TTK was then required to furnish comparable license agreements, but the agreements provided were found to be lacking since important details were blacked out and the agreement were not related to any Indian company. The case then made its way to the Mumbai Tribunal.

Regarding the use of the approved 5% rate as a benchmark, the Mumbai Tribunal sided with the tax authority. The tribunal held that the approval of the rates are granted for the ease of doing business and come from legislation or policy that are not in relation to the determination of arm's length price. Further, the Tribunal held that it is mandatory that TTK independently benchmark its international transactions with independent comparables to arrive at the arm's length price, which TTK had not done at any stage in this case. However, regarding the determination that the royalty was only for the use of trademark under the new agreement, the Tribunal found that the transfer pricing officer had not properly reviewed the relevant clauses of the agreement to make that determination.

As a result, the case is to be referred back; TTK is to provide a proper benchmark analysis; and after giving adequate opportunity to TTK, a decision is to be given in accordance with India's transfer pricing rules.  


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Philippines Lifts Field Audit Suspension

The Philippine Commissioner of Internal Revenue Caesar R. Dulay has issued Revenue Memorandum Circular (RMC) 91-2016, which lifts the suspension on field audit and field operations effective 1 September 2016. All field audit and other field operations of the Bureau of Internal Revenue relative to examinations and verifications of taxpayers' books of accounts, records and other transactions had been ordered suspended by the Commissioner under RMC No. 70-2016 on1 July 2016.

Click the following link for RMC No. 91-2016.

United Kingdom

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UK Publishes Guidance on Worldwide Disclosure Facility

UK HMRC has published guidance on the new Worldwide Disclosure Facility, which was launched on 5 September 2016 along with a new Digital Disclosure Service for registration purposes. The facility is in relation to the UK's adoption of the OECD Common Reporting Standard (CRS) and allows taxpayers to come forward and disclose a UK tax liability that relates wholly or in part to an offshore issue, including unpaid or omitted tax relating to:

  • Income arising from a source in a territory outside the UK;
  • Assets situated or held in a territory outside the UK;
  • Activities carried on wholly or mainly in a territory outside the UK; and
  • Anything having effect as if it were income, assets or activities of a kind described above.

The facility will be open until 30 September 2018, after which new penalties under the Requirement to Correct obligation will apply (previous coverage).

Click the following links for the Worldwide Disclosure Facility guidance and the Digital Disclosure Service.

Proposed Changes (1)


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Legislation to Implement Amendments of the EU Directive for the Automatic Exchange of Tax Rulings Submitted to Dutch Parliament

On 1 September 2016, legislation was submitted to the Dutch parliament for the implementation of the amendments made by Council Directive (EU) 2015/2376 to the EU Directive on administrative cooperation in the field of taxation (2011/16/EU) concerning the automatic exchange of cross border tax rulings and advance pricing agreements (APAs). With the amendments, the Netherlands will begin the automatic exchange of information on tax rulings and APAs from 1 January 2017. Information will also be exchanged on the following rulings and APAs issued prior to that date:

  • Rulings and APAs issued, amended or renewed between 1 January 2012 and 31 December 2013, if still valid on 1 January 2014; and
  • Rulings and APAs issued, amended or renewed between 1 January 2014 and 31 December 2016.

For the exchange of past information, the Dutch implementation includes the option provided in the Directive to exclude the exchange of information on rulings or APAs issued, amended or renewed before 1 April 2016 if the annual net revenue of the relevant companies is less than EUR 40 million. However, this does not apply for rulings or APAs issued to companies conducting mainly financial or investment activities.

Treaty Changes (6)


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Belgium Issues Draft Circular on Tax Consequences of Asset Transfers between a Head Office and PE under Tax Treaty Article 7 (Business Profits)

On 5 September 2016, the Belgian Ministry of Finance released a draft circular on the interpretation of Article 7 (Business Profits) of the Belgian Model Tax Treaty. The circular covers the fundamental differences between Article 7 of the OECD Model Convention as it reads before and after 2010. In particular, the circular examines the tax consequences of the transfer of an asset between the head office and the permanent establishment of a business, or vice versa, including several examples and potential approaches.

The draft circular is available in French and in Dutch. Comments on the draft may be submitted to no later than 3 October 2016.

Hungary-United States

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SSA between Hungary and the U.S. has Entered into Force

On 6 September 2016, a notice from the U.S. Social Security Administration was published in the Federal Register announcing the entry into force of the social security agreement with Hungary on 1 September 2016. The agreement, signed 3 February 2015, is the first of its kind between the two countries and generally applies from the date of its entry into force.


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Kyrgyzstan to Negotiate Tax Treaty with Japan

According to a release from the Kyrgyzstan Ministry of Economy, Kyrgyzstan officials met with officials from Japan on 29 August 2016 to discuss strengthening bilateral cooperation in the areas of trade and investment, including the negotiation of an income and capital tax treaty. Any resulting treaty would need to be finalized, signed and ratified before entering into force, and once in force and effective, would replace the 1986 tax treaty between Japan and the former Soviet Union, which Japan continues to apply in respect of Kyrgyzstan.

Maldives-Untd A Emirates

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Tax Treaty between Maldives and U.A.E. under Negotiation

Officials from the Maldives and the United Arab Emirates held the first round of negotiations for an income tax treaty on 28 to 31 August 2016. Any resulting treaty would be the first of its kind between the two countries, and must be finalized, signed and ratified before entering into force.

Portugal-Belize-B Virgin Isl-Guernsey-Saint Kitts and Nevi-Turks Caics

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Portugal Approves Pending TIEAs with Belize, the British Virgin Islands, Guernsey, Saint Kitts & Nevis, and Turks and Caicos Islands

On 1 September 2016, Portugal's Council of Ministers approved the pending tax information exchange agreement with the following jurisdictions:

  • Belize - Signed 22 October 2010 and will enter into force 30 days after the ratification instruments are exchanged;
  • British Virgin Islands - Signed 5 October 2010 and will enter into force 30 days after the ratification instruments are exchanged;
  • Guernsey - Signed 9 July 2010 and will enter into force 30 days after the ratification instruments are exchanged;
  • Saint Kitts and Nevis - Signed 29 July 2010 and will enter into force once the ratification instruments are exchanged; and
  • Turks and Caicos Islands - Signed 21 December 2010 and will enter into force once the ratification instruments are exchanged.

The agreements are the first of their kind between Portugal and the respective jurisdictions, and are in line with the OECD standard for information exchange. Each agreement will generally apply from the date of its entry into force.

Ukraine-United Kingdom

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Ukraine Clarifies Taxation of Royalties under Tax Treaty with the UK

Ukraine's State Fiscal Service (SFS) recently published guidance letter No. 18373/10/26-15-14-06-04-29, which clarifies that taxation of royalties paid by a Ukraine resident to a UK resident. According to the letter, the standard withholding tax rate on royalties paid from a Ukraine to a non-resident is 15% under domestic law. However, under Article 12 (Royalties) of the 1993 income and capital tax treaty with the UK, the Ukrainian payer (tax agent) may apply an exemption, provided that:

  • The UK resident is the beneficial owner of the royalties and is subject to tax in respect of the royalties in the UK; and
  • The UK resident has provided proof of residence issued by the UK competent authority to the tax agent (including Ukrainian translation).

The letter also references the provision in Article 12 that the benefit of the exemption will not apply if the main purpose or one of the main purposes of any person concerned with the creation or assignment of the rights in respect of which the royalties are paid was to take advantage of the benefit by means of that creation or assignment.


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