Worldwide Tax News
On 7 June 2017, Council Directive (EU) 2017/952 of 29 May 2017 was published in the Official Journal of the European Union. The Directive amends the Anti-Tax Avoidance Directive (EU) 2016/1164 as regards hybrid mismatches with third (non-EU) countries, and also expands upon the hybrid mismatch rules in general (previous coverage). EU Member States generally have until 31 December 2019 to transpose the new rules into their national laws and regulations, although the new reverse hybrid mismatch rules do not need to be transposed until 31 December 2021.
India Establishes New Transfer Pricing Safe Harbor Thresholds including for Low Value-Adding Services
India's Central Board of Direct Taxes has announced a new safe harbor regime, which replaces the regime issued in 2013. The revised safe harbor regime, which is optional for taxpayers, provides threshold margins, mark-ups, and rates for certain transactions with foreign associated enterprises, including a new category for the receipt of low value-adding intra-group services.
With respect to the receipt of low value-adding services, a safe harbor mark-up of 5% is allowed on transactions up to INR 100 million (inclusive of mark-up), provided that an accountant has certified:
- The method of cost pooling,
- The exclusion of shareholder costs and duplicate costs from the cost pool; and
- The reasonableness of the allocation keys used for allocation of costs to the assessee by the overseas associated enterprise.
Low value-adding services are defined to include services that are performed by one or more members of a multinational enterprise group on behalf of one or more other members of the same multinational enterprise group and:
- Are in the nature of support services;
- Are not part of the core business of the multinational enterprise group, i.e., such services neither constitute the profit-earning activities nor contribute to the economically significant activities of the multinational enterprise group;
- Are not in the nature of shareholder services or duplicate services;
- Do not require the use of unique and valuable intangibles nor lead to the creation of unique and valuable intangibles;
- Do not involve the assumption or control of significant risk by the service provider nor give rise to the creation of significant risk for the service provider; and
- Do not have reliable external comparable services that can be used for determining their arm’s length price.
The new rules also provide that low value-adding services may not include the following services:
- Research and development services;
- Manufacturing and production services;
- Information technology (software development) services;
- Knowledge process outsourcing services;
- Business process outsourcing services;
- Purchasing activities of raw materials or other materials that are used in the manufacturing or production process;
- Sales, marketing and distribution activities;
- Financial transactions;
- Extraction, exploration, or processing of natural resources; and
- Insurance and reinsurance.
The categories for the provision of services covered by the safe harbor regime are generally the same as the prior regime, although the thresholds have been revised. The applicable thresholds for the provision of services are as follows:
- Software development services - margin of at least 17% for transactions up to INR 1 billion; 18% for transactions up to INR 2 billion;
- Information technology-enabled services - margin of at least 17% for transactions up to INR 1 billion; 18% for transactions up to INR 2 billion;
- Knowledge process outsourcing services up to INR 2 billion - 24% if employee cost to operating expense is at least 60%; 21% if employee cost to operating expense is between 40% and 60%; 18% if employee cost to operating expense does not exceed 40%;
- Contract research and development services wholly or partly relating to software development - margin of at least 24% for transactions up to INR 2 billion; and
- Contract research and development services wholly or partly relating to generic pharmaceutical drugs - margin of at least 24% for transactions up to INR 2 billion.
The safe harbor thresholds for other transactions under the regime include the following:
- Manufacture and export of auto components - margin of at least 12% for core auto components and 8.5% for non-core auto components;
- Advancing of intra-group loans in Indian rupee - interest rate of at least the one-year marginal cost of funds lending rate of State Bank of India as on 1 April of the relevant previous year, plus 175 to 625 basis points depending on credit rating of associated enterprise (plus 425 basis points if credit rating not available and aggregate amount of all loans advanced to associated enterprises does not exceed INR 1 billion);
- Advancing of intra-group loans in a foreign currency - interest rate of at least the six-month London Inter-Bank Offer Rate of the relevant foreign currency as on 30 September of the relevant previous year, plus 150 to 600 basis points depending on credit rating of associated enterprise (plus 400 basis points if credit rating not available and aggregate amount of all loans advanced to associated enterprises does not exceed equivalent of INR 1 billion); and
- Providing corporate guarantee - commission or fee declared of at least 1% per annum on the amount guaranteed.
Click the following link for Notification No. 46/2017, which prescribes the new safe harbor regime rules. The new rules are in force and effective from 1 April 2017 and will remain in force for three years, i.e., for years of assessment 2017-18 to 2019-20.
Israeli Court Holds IP Transaction Amounts to Transfer of Entire Business Operations in Microsoft Transfer Pricing Dispute
The Israel Tax Authority has announced a "precedent-setting" ruling of a Central District Court issued 6 June 2017 concerning whether an IP transaction following a share transaction was a simple sale of IP or rather a transfer of entire business operations. The case involved Israel-based start-up Gteko Ltd., which was acquired by Microsoft Corporation in 2006 through a USD 90 million share acquisition. After the share acquisition, Microsoft hired all of the Gteko staff and eight months later acquired Gteko's IP assets for USD 26.6 million.
Following the transactions, the IP acquisition was challenged by the Israel Tax Authority. The Tax Authority argued that the IP transaction was significantly undervalued and in fact constituted a sale of the entire business operations of Gteko for which the USD 90 million for the shares was an accurate market value. Gteko argued that the acquisition of the IP assets was appropriately priced and that the higher price paid for the Gteko shares reflected the value of the company plus a premium for the synergies resulting from Gteko becoming part of Microsoft's operations.
In its decision, the Court found in favor of the Tax Authority. The Court rejected the argument that the higher consideration paid for the shares was justified based on resulting synergies and found that the true value was actually transferred in the IP transaction. In particular the Court looked at the value of Gteko's employees hired by Microsoft. Despite an argument that employees cannot be considered property transferred as part of a transaction, the Court held that the employees represented a transfer of a significant function of great economic value in connection with the IP, which was reflected in the consideration for the shares. Further, this economic value was not diminished at the time of the IP acquisition and should be subject to tax. As a result of the decision, Microsoft owes over ILS 100 million (~USD 28.3 million) in taxes.
On 9 June 2017, the OECD announced the third batch of countries that will undergo review as part of the Mutual Agreement Procedure (MAP) peer review and monitoring process for implementation of the minimum standard developed under BEPS Action 14. The third batch includes the Czech Republic, Denmark, Finland, Korea, Norway, Poland, Singapore and Spain. In connection with the reviews, the OECD is seeking input from taxpayers regarding their experience with the MAP process in the respective countries.
The Canada Revenue Agency (CRA) has announced that an arrangement on the exchange of Country-by-Country (CbC) Reports was signed between Canada and the U.S. on 7 June 2017. The arrangement provides that pursuant to the exchange provisions of the 1980 income and capital tax treaty between the two countries, CbC Reports will be exchanged between the CRA and the IRS for fiscal years beginning on or after 1 January 2016. Reports will be exchanged within 15 months following the end of the reporting fiscal year, although for the first fiscal year, reports will be exchanged within 18 months.
The arrangement text was not yet published at the time of writing, but will likely be published on the IRS Competent Authority Arrangements webpage in the near future.
According to an update to the OECD's list of signatories, the Cook Islands deposited its ratification instrument for the OECD-Council of Europe Convention on Mutual Administrative Assistance in Tax Matters as amended by the 2010 protocol on 29 May 2017. The Convention, signed by the Cook Islands on 28 October 2016, will enter into force for the country on 1 September 2017 and will generally apply from 1 January 2018.
On 8 June 2017, the Czech Senate approved the law for the ratification of the pending protocol to the 2008 social security agreement with Japan. The protocol, signed 1 February 2017, is the first to amend the agreement and will enter into force on the first day of the third month following the exchange of the ratification instruments.
The Hong Kong government announced on 8 June 2017 that an agreement has been signed with Ireland for the automatic exchange of financial account information in tax matters. Under the agreement, Hong Kong and Ireland will automatically exchange information on accounts held in their respective jurisdiction by tax residents of the other jurisdiction based on the OECD Common Reporting Standard (CRS).
The announcement also notes that the Government plans to extend the application of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters to Hong Kong, with an amendment bill for this purpose to be introduced into the Legislative Council in late 2017.
While speaking at a recent conference, U.S. Treasury deputy international tax counsel, Henry Louie, explained the reasons the U.S. decided not to sign the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) (previous coverage). According to Louie, one of the main reasons is that U.S. tax treaty policy is already consistent with most of the provisions of the BEPS MLI, including existing savings clauses, provisions for the taxation of transparent entities, limiting benefits for investors in third states, etc. Treasury also has concerns with the BEPS MLI PPT/LOB provisions and mandatory arbitration provisions, which Treasury supports, but finds to be lacking. Lastly, Louie noted that it is possible that the U.S. could sign the BEPS MLI in the future, but that given the issues and procedure involved in getting such an instrument through the Senate, there may be no advantage over just amending individual tax treaties bilaterally.