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Approved Changes (2)

India

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Indian Court Rules CUP as Best Transfer Pricing Method for Software Services

The Mumbai Income Tax Appellate Tribunal has recently ruled on whether the use of the comparable uncontrolled price (CUP) method or the transactional net margin method (TNMM) is better in regard to software services.

The case involved an Indian subsidiary that provided software services to its U.S parent company. In determining the appropriate transfer price, the subsidiary chose the CUP method comparing to the hourly rate charged by major Indian software companies. They then made adjustments to account for certain commercial considerations, including scale, risk factors and size of operations, and determined that the actual hourly rate charged to the parent company was at arm's length.

When the tax authorities audited the subsidiary's tax return, they determined that the TNMM would be more appropriate than the CUP method and new comparables were selected. When applying the different method, it was found that the subsidiaries profit margin was lower than the average comparable margins and a transfer pricing adjustment was made. The change in method and adjustment was appealed by the subsidiary and the case was eventually heard by the Mumbai Tribunal.

In its decision, the Tribunal sided with the subsidiary in terms of which method was more appropriate. The court held that no valid evidence or reason was given by the tax authorities for not using the CUP method, and stated that the CUP method should be preferred as long as there are sufficient comparables. However, the Tribunal disallowed the subsidiaries downward adjustments as not being justified. As a result, an adjustment was still made, but was significantly reduced.

Ukraine

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Ukraine Clarifies New Transfer Pricing Reporting Requirements and Penalties

Ukraine's State Tax Service has issued guidance clarifying the country's transfer pricing reporting requirements and related penalties. The rules were amended by legislation approved on 28 December 2014 as part of the 2015 Budget, and are generally effective 1 January 2015.

Submission of Transfer Pricing Documentation upon Request

The deadline for the submission of primary transfer pricing documentation upon tax authority request is 1 month from the date of request. Prior to the new rules, the deadline was 2 months for large taxpayers and 1 month for all other taxpayers.

Transfer Pricing Reporting Penalties

The new rules include the requirement that a transfer pricing report must be included when filing the annual corporate tax return. The penalties for failing to comply include:

  • A penalty of 100 minimum wages (~USD 5,800 2015) for failure to file or delayed filing of the transfer pricing report; and
  • A penalty of 5% of the value of any controlled transaction not included in the transfer pricing report

These penalties also apply for failing to report controlled transactions that occurred in 2014 or failing to report all transactions, with the minimum wage based on the wage set 1 January 2014.

Controlled transactions executed 1 September 2013 to 31 December 2013 must also be reported. Failure to report all transactions will result in a penalty of 100 minimum wages as set on 1 January 2013, but the penalty of 5% of the transaction value will not be imposed.

Proposed Changes (1)

United States

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Invest in Transportation Act of 2015 Introduced in the U.S. Senate

On 16 April 2015, Senators Rand Paul and Barbara Boxer formally introduced their proposed Invest in Transportation Act of 2015 in the U.S. Senate. The legislation provides for a reduced tax rate on repatriated foreign earnings, with the resulting tax revenue transferred to the Highway Trust Fund.

The reduced tax rate would be 6.5%, and would only apply to foreign earnings repatriated that exceed the average amount of repatriated earnings of a company in previous years. Only foreign income earned in 2015 or prior years would qualify. Companies would have up to five years to complete the transfer, but must begin the transfer in the first year.

Additional provisions include that at least 25% of repatriated foreign earnings must be used for increased hiring, wages and pensions, R&D investment, environmental improvements, public-private partnerships, capital improvements, and/or acquisitions.

Spending on R&D, increased hiring, and capital improvements would only count toward the 25% requirement if it does not supplant already-planned funding. However, that restriction would not apply if a company can show that it has increased spending in those areas by at least 25% in the five-year period compared with the previous five-year period.

None of the repatriated earnings may be used for increased executive compensation, increased dividends or stock buybacks for three years after the end of the program. In addition, any company undergoing a corporate inversion within 10 years after participating in the program would be required to repay the difference between the tax amount resulting from the reduced rate and what the result would have been had the standard rate applied. Interest would also apply on the amount owed.

Click the following link for a copy of the bill as introduced.

Treaty Changes (3)

Italy-Mexico

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Protocol to the Tax Treaty between Italy and Mexico has Entered into Force

On 16 April 2015, the protocol to the 1991 income tax treaty between Italy and Mexico entered into force. The protocol, signed 23 June 2011, replaces Article 25 (Exchange of Information) bringing it in line with the OECD standard for information exchange. The protocol also amends the name of the Italian competent authority, changing it to the Ministry of Economy and Finance.

The protocol is the first to amend the treaty, and applies from the date of its entry into force.

Japan-Latvia

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Tax Treaty between Japan and Latvia under Negotiation

According to a recent release by the Latvian government, negotiations for tax treaty with Japan are underway. Any resulting treaty will be the first of its kind between the two countries, and must be finalized, signed and ratified before entering into force.

Additional details will be published once available.

Russia-Singapore

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New Tax Treaty between Russia and Singapore under Negotiation

According to recent reports, officials from Russia and Singapore met 7 to 9 April 2015 to begin negotiations for a new income tax treaty. Any resulting treaty must be finalized, signed and ratified before entering into force. Once in force and effective, the new treaty would replace the 2002 income tax treaty between the two countries, which is currently in force.

Additional details will be published once available.

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