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Approved Changes (2)

United Kingdom

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Factsheet on HMRC and Multinational Corporations Published in Response to Criticism of Google's Tax Deal with the UK

On 9 February 2016, the UK HMRC published a factsheet on HMRC and multinational corporations. The factsheet is in response to the criticism received regarding the recent agreement Google reached with HMRC to pay a total of GBP 130 million in back taxes. The factsheet covers recent successes, recent changes, HMRC’s approach to multinational corporations, and transparency.

Regarding the Google deal in particular, the factsheet includes the following.

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The Google enquiry

On 22 January 2016, Google announced that it had reached agreement with HMRC to pay an additional amount of £130 million in corporation tax and interest, as a result of HMRC’s investigation which started in 2010. This sum is over and above the tax that they have paid for past years (or would pay for the current period were it not for HMRC’s enquiry). The current tax charge that Google took in its accounts increased significantly from 2012, when the company first disclosed that it was under enquiry and made a provision for additional tax.

Some commentators have applied Google’s group profit margin to its sales to UK customers and estimated that Google’s UK corporation tax is equivalent to an effective tax rate of around 3% on the group’s profit’s arising in the UK.

This calculation does not reflect how tax law works.

Under international tax rules, Corporation Tax applies to profits created from economic activities carried on in the UK, not to profits from sales to customers in the UK. Many elements contribute to a multinational business’s economic activity and thus generate the profits, including the work that staff do, the technology driving and used by the business, intellectual property and other assets as well as where those assets are developed and actively managed.

In accordance with our published guidelines on resolving disputes, HMRC has taxed all of Google’s profits chargeable to tax in the UK for the period in question, at the full statutory rate of tax.

There has been media speculation about what other European tax authorities are doing regarding Google. We can’t comment on enquiries carried out in other countries, or on media speculation about them. So far, there has been no public confirmation that other countries have concluded enquiries with Google, either by agreement or by litigation. HMRC is satisfied that our enquiry has secured all the tax that is due in the UK.

Ministerial involvement

HMRC is responsible for the conduct of enquiries. Government Ministers are not informed of the progress of enquiries and play no part in agreeing the amount of tax to be paid by any taxpayer. This is an important separation between policy, for which Ministers are accountable, and the administration of that policy, which is the responsibility of the Commissioners of Revenue and Customs.

We only informed Ministers of the outcome of the Google enquiry after it was concluded, and we only told them information that was in the public domain or that Google intended to make public.

Permanent establishment

The definition of a permanent establishment is set by international treaty law. These rules are complex, but they set out the level and type of activity that a company resident in Country A would need to undertake in Country B in order for Country B to have taxing rights over profits arising from that activity.

Some media reports have suggested that HMRC did not look into Google’s assertion that its Irish company did not have a permanent establishment in the UK.

Although we cannot go into details of the enquiry into Google (see the Transparency section for the legislative reasons), it is wrong to suggest that HMRC does not take into account all relevant factors when making sure multinationals pay the tax due under the law.

The conclusion of HMRC’s enquiries means that Google is paying the full tax due in law on profits that are chargeable to tax in the UK.

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Click the following link for the full factsheet on the UK.Gov website.

United States

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U.S. IRS Publishes Practice Units on Dividends or Interest from CFCs, Outbound Transfer of Stock, and Pricing of PCT in CSA Acquisition of Subsequent IP

The U.S. IRS has recently published three international practice units, including:

International practice units are developed by the Large Business and International Division of the IRS to provide staff with explanations of general international tax concepts as well as information about specific transaction types. They are not an official pronouncement of law, and cannot be used, cited or relied upon as such.

Click the following link for the International Practice Units page on the IRS website.

Proposed Changes (2)

Australia

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Legislation on Australia's GST Treatment of Cross-Border Transactions Submitted to Parliament

On 10 February 2016, the Tax and Superannuation Laws Amendment (2016 Measures No. 1) Bill 2016 was submitted to the Australian House of Representatives. The Bill includes measures concerning the goods and services tax (GST) treatment of cross border transactions, including:

  • Expanding the scope of GST to cover cross border digital supplies and other imported services when supplied by non-residents to Australian consumers (B2C); and
  • Amending the GST Law to minimize compliance costs for supplies made by non-residents to Australian businesses (B2B).

B2C Digital Supplies and other Imported Services

The main aspects of the new rules include:

  • Suppliers must register and account for GST when supplying digital products and other imported services if the standard GST registration threshold is met (AUD 75,000 annual supplies) and the recipient is:
    • An Australian resident;
    • Not registered for GST; and
    • If registered for GST, the acquisition was not made for the purpose of an enterprise;
  • If the supply is made via an electronic distribution platform, the liability for the GST may shift to the operator of the platform rather than the supplier; and
  • Suppliers liable for GST may opt to be a limited registration entity, which includes simplified registration and reporting requirements, but does not provide for input tax credits.

The types of supplies that would be covered by the changes and subject to GST include consultancy, accountancy and legal services; financial and insurance services; telecommunication and broadcasting services; online supplies of software and software maintenance; online supplies of digital content (movies, TV shows, music, e-books etc.), digital data storage; and online gaming.

The changes are to apply for supplies made on or after 1 July 2017.

B2B Supplies

One of the main changes regarding GST for B2B supplies is a change in the test for determining whether a non-resident carries on an enterprise for GST purposes in Australia (indirect tax zone - ITZ), which is changed from being based on the tax definition of a permanent establishment to being based on Australia's modern treaty practice. Under the revised test, an enterprise of an entity will be considered carried on in the ITZ if an employee or agent of the entity in the ITZ carries on the enterprise, and:

  • The enterprise is carried on through a fixed place in the ITZ;
  • The enterprise has been carried on through one or more places in the ITZ for more than 183 days in a 12-month period; or
  • The entity intends to carry on the enterprise through one or more places in the ITZ for more than 183 days in a 12-month period.

In relation to the above, when the supplier is a non-resident and a supply is not made through an enterprise carried on in the ITZ, it will be considered a disconnected supply and the GST liability shifts to the recipient via reverse charge. These changes will result in fewer cases where a non-resident will be required to register and account for GST.

Other changes regarding B2B supplies include:

  • For supplies of goods installed or assembled, the import of the goods and the installation and assembly of goods are treated as separate supplies for the determination of whether a supply is connected with the ITZ;
  • The GST-free treatment of supplies made to non-resident entities is maintained for certain supplies that are made to non-resident recipients but provided to particular entities in the ITZ; and
  • An uplift factor is introduced for determining the value of taxable importations as an alternative to calculating the actual transport, insurance and ancillary costs.

The changes are to apply for tax periods that commence from the second quarterly tax period starting after the Bill receives Royal Assent.

Click the following links for the Tax and Superannuation Laws Amendment (2016 Measures No. 1) Bill 2016 and the Explanatory Memorandum.

Russia

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Russia Publishes Draft List of Jurisdictions without Adequate Information Exchange for CFC Profit Exemption Purposes

The Russian Federal Tax Service recently published  a new draft list of jurisdictions that do not have adequate tax information exchange with Russia, which affects the Russian tax exemption for controlled foreign company profits. Under Russian law, an exemption from tax is provided for the profits of CFCs meeting certain conditions (previous coverage), unless the CFC is resident in a listed jurisdiction. The list includes 137 jurisdictions that have either not entered into an agreement for information exchange with Russia, or have not responded adequately to information exchange requests.

Compared with the list issued in October 2015 (previous coverage), jurisdictions removed from the list include Austria, Israel, Lebanon, Malta, Switzerland, the UK and certain Caucasus regions. Jurisdictions added include Greenland, Guam, Puerto Rico, Taiwan and the U.S. Virgin Islands.

Once finalized, the list is to apply from 1 April 2016.

Treaty Changes (3)

Armenia-Sweden

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Tax Treaty between Armenia and Sweden Signed

On 9 February 2016, officials from Armenia and Sweden signed an income tax treaty. The treaty is the first of its kind directly between the two countries, although the 1981 income and capital tax treaty between Sweden and the former Soviet Union had applied in respect of Armenia, but was terminated.

The treaty will enter into force after the ratification instruments are exchanged. Additional details will be published once available.

Australia-Brunei-Canada-Chile-Japan-Malaysia-Mexico-New Zealand-Peru-Singapore-United States-Vietnam

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Trans-Pacific Partnership Agreement Signed

On 4 February 2016, officials from Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam signed the Trans-Pacific Partnership trade agreement. The agreement includes a number of measures regarding trade, including reductions of trade barriers, IP protections, a mechanism for dispute settlement and others.

The agreement will need to be ratified by all 12 countries and the ratification instruments deposited before entering into force. However, if not ratified by 4 February 2018, ratification by just six countries representing at least 85% of the GDP of all signatories will be required for it to enter into force. The Government of New Zealand is acting as the depositary for the agreement.

Click the following link for the full text of the Trans-Pacific Partnership agreement and related information.

Chile-Netherlands

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Protocol to the SSA between Chile and the Netherlands to Enter into Force

The protocol to the social security agreement between Chile and the Netherlands will enter into force on 1 March 2016, according to an announcement from the Dutch government. The protocol, signed 15 June 2005, is the first to amend the agreement.

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