Worldwide Tax News
The Australian Taxation Office (ATO) has recently finalized the Local file requirements that form part of the new transfer pricing statement obligations for significant global entities, which include entities that are part of an MNE group meeting an AUD 1 billion revenue threshold in the previous year (previous coverage). While based on the Local file guidelines developed as part of Action 13 of the OECD BEPS Project, the Australian Local file requirements differ in a few ways.
One of the differences is the availability of two different Local file forms:
- A short form Local file that can be used by small taxpayers and taxpayers with immaterial related party transactions; and
- A standard (full) local file that must be used by all taxpayers not qualifying for the short form.
The required content in the short form Local file includes:
- The organizational structure, including the details of the individuals in the Australian entity, details of the people to whom they report, and where their principal offices are located;
- A description of the Australian entity's business and strategy;
- Details of any business restructuring in the current or previous year;
- Details of any intangibles transfers in the current or previous year; and
- A list of key competitors.
The required content in the standard Local file includes the content required in the short form, as well as:
- Part A - Details of all related party transactions for the year, including:
- Transaction type;
- Transaction value amount;
- Counterparty to the transactions and its jurisdiction of residence;
- Transfer pricing method used;
- Indication as to whether transfer pricing documentation has been prepared;
- Part B - Additional information for material transactions, unless specifically excluded (defined list will be issued for this purpose), including:
- Copies of underlying agreements;
- Copies of any relevant foreign APAs or tax rulings;
- Transfer pricing method used by the related party; and
- The financial Statements of the Australian entity (audited if available)
Transfer pricing documentation is not submitted with the Local file as included in the OECD Local file guidelines, such as the comparability and functional analysis, adjustments performed, etc. However, transfer pricing documentation must be prepared and available upon request in order to avoid additional penalties.
When required, the Local file, short form or standard, is due within 12 months following the year-end. However, Part A of the standard Local file may instead be filed along with the annual tax return in place of Section A of the International Dealings Schedule (IDS), which requires similar information.
According to an 8 June 2016 update from UK HM Treasury, India has committed to the initiative for the automatic exchange of beneficial ownership information, which was originally proposed by Finance Ministers from France, Germany, Italy, Spain, and the UK (G5) in April (previous coverage). To date, 41 jurisdictions have committed to exchange beneficial ownership information, although a global standard must still be developed and implemented before exchanges can begin.
According to recent reports, the Revenue Authority of Pakistan's Punjab province has sent notices to several large online advertising providers, including Google and Facebook, informing them that from 17 June 2016 sales tax at the rate of 17% must be charged and remitted for advertisements invoiced offshore that are shown specifically in Punjab. The providers are to register with the Punjab Revenue Authority directly for this purpose. In the case of non-compliance, a request will be sent to the Pakistan Telecommunication Authority to have access to the related websites blocked.
Russia Clarifies that Interim Dividends Paid in Excess of Net Profits Subject to Standard Corporate Tax Rate
The Russian Ministry of Finance recently published Letter No. 03-03-06/2/21011, which provides guidance on the tax treatment of interim dividends paid by a limited liability company (LLC) in excess of the LLC's net profit for the respective year. According to the letter, an LLC may distribute its net profits quarterly, biannually or annually. Generally, dividends received are subject to tax at a rate of 13% unless the participation exemption applies (15% withholding applies for non-residents). However, in the event an interim dividend is distributed that exceeds the LLC's net profit for the year, the excess is treated as income subject to the standard corporate tax rate of 20%.
On 9 June 2016, the U.S. Tax Court filed its memorandum opinion concerning the IRS's income allocations under section 482 between Minnesota-based Medtronic Inc. (Medtronic US) and its Puerto Rican subsidiary for the 2005 and 2006 tax years. The allocations resulted in income tax deficiencies of USD 548 million and USD 810 million for Medtronic US for the two tax years respectively. The case involved three main issues:
- Whether income related to intercompany licenses for the intangible property required to manufacture certain medical devices should be reallocated under section 482 to Medtronic US from its Puerto Rican subsidiary, Medtronic Puerto Rico Operations Co. (MPROC), for the years concerned;
- Whether Medtronic Europe, S.a.r.L. (Medtronic Europe) made arm's length payments to Medtronic US or accrued royalties in excess of arm's length to manufacture devices sold to Medtronic USA, Inc. (Medtronic US group member handling device sales), pursuant to a supply agreement among Medtronic US, MPROC, and Medtronic Europe; and
- As an alternative allocation, if the Court does not find IRS's adjustments for 2005 and 2006 to be reasonable, whether intangible property was transferred to MPROC compensable under section 367(d) during a 2002 restructuring of Medtronic's Puerto Rico operations.
In its decision, the Court generally sided with Medtronic. The Court found that Medtronic had met its burden of showing the IRS has abused its discretion by making arbitrary, capricious, or unreasonable allocations under Section 482. In general, it found that IRS's economic expert had committed several errors in the analysis of the relationship between the Medtronic US and MPROC, and the importance of the MPROC's contribution to the business.
Regarding the IRS's choice of transfer pricing method, the Court rejected the IRS’s use of the comparable profits method as the most appropriate method. However, the Court also concluded that while Medtronic's use of the comparable uncontrolled transaction method was appropriate, the royalty rates used were not at arm's length and adjustments were made to increase the rates.
Regarding the alternative allocation, the court rejected the IRS’s alternative position that intangibles were transferred under IRC Section 367(d).
Click the following link for the full memorandum opinion.
Kenya 2016/2017 Budget Presented Including a Tax Amnesty Program and VAT and Individual Income Tax Changes
Kenya's National Treasury Cabinet Secretary Henry Rotich presented the 2016/2017 Budget to the National Assembly on 8 June 2016. The main tax-related measures of the budget include:
- A tax amnesty program for taxpayers that reinvest their foreign held assets and business earnings;
- New value added tax (VAT) exemptions for garments and leather footwear procured from export processing zones, raw materials for the manufacture of animal feeds, entrance fees in national parks, commissions earned by tour operators and liquefied petroleum gas;
- Extension of the VAT exemption for petroleum products by one year (was to expire September 2016, after which standard VAT rates would apply);
- The introduction of a reduced corporate tax rate of 20% for developers of low cost housing (minimum 1,000 units per year); and
- Adjustments to the individual income tax brackets as follows:
- up to KES 134,164 - 10%
- over KES 134,164 up to 260,567 - 15%
- over 260,567 up to 386,970 - 20%
- over 386,970 up to 513,373 - 25%
- over KES 513,373 - 30%
Click the following link for the budget statement and related documents.
Poland's government has reportedly presented draft legislation that includes required amendments to domestic law to provide for the automatic exchange of various types of information, including:
- Country-by-Country reports;
- Tax rulings and APAs; and
- Financial account information under the OECD Common Reporting Standard.
The draft legislation must be approved by parliament and signed into law by the president before entering into force.
The agreement between the European Union and San Marino that provides for the automatic exchange of financial account information entered into force on 1 June 2016. The agreement, signed 8 December 2015, upgrades a 2004 agreement that ensures that San Marino applies measures equivalent to those in an EU directive on the taxation of savings income. Under the new agreement, information on the financial accounts of residents of EU Member States and San Marino will be automatically exchanged from 2017.
Officials from Israel and Russia reportedly signed a social security agreement on 7 June 2016. The agreement is the first of its kind between the two countries, and will enter into force after the ratification instruments are exchanged.
Officials from Myanmar and Singapore met on 7 June 2016 to discuss improving bilateral relations, including the negotiation of a protocol to amend the 1999 income tax treaty between the two countries. Any resulting protocol will be the first to amend the treaty, and must be finalized, signed and ratified before entering into force.