International Tax Bulletin Foreign Tax & Tax Research Division
JANUARY 2020 VOL.1, ISSUE 1
LATEST DEVELOPMENTS ON TAXATION OF DIGITALISED ECONOMY
In the last week of January 2020, the meeting of G20/OECD Inclusive Framework (IF) was held in Paris to decide the future course of action for finalising the time lines and action plan for the work related to addressing tax challenges arising from digitalization of economy. The meeting was attended by nearly 350 delegates from 122 jurisdictions. The main agenda of the meeting was the finalization of documents – Outline of the Architecture of a Unified Approach on Pillar One Issues, Progress Note on Pillar Two and Statement by the OECD/G20 Inclusive Framework on BEPS on the Two Pillar Approach to Address the Tax Challenges arising from Digitalisation of the Economy.
In the meeting the Inclusive Framework agreed that the Unified Approach will be the basis for a new nexus and new profit allocation rules. A key discussion at the meeting was the U.S. safe harbour proposal which would mean that multinational enterprises could elect whether to be subject to the new nexus and profit allocation rules. Many countries expressed concerns about the feasibility of such an approach, but the IF agreed that the final decision will be taken after other elements of the consensus-based solution have been agreed upon. The Inclusive Framework members will carry out further work on the feasibility of the proposal. The progress note on Pillar Two gave an update on the technical work that had been carried out by the OECD Working Parties on the various element of the proposal.
The documents will be discussed in upcoming G20 Finance Ministers and Central Bank Governors Meeting that will be held on February 22-23, 2020 in Riyadh, Saudi Arabia.
RESOLUTION OF BAPA & MAP
Swiss delegation led by Mr. Ronny Rosenblatt paid a courtesy call to Chairman, CBDT, Mr. P.C. Mody on 8th January 2020
A two-member delegation of the State Secretariat of International Finance (SIF), Switzerland, visited India for bilateral Mutual Agreement Procedure (MAP) and Advance Pricing Agreement (APA) case discussions with the Indian delegation during 7th to 9th January, 2020. The 3-day meeting was productive and resulted in resolution of 1 BAPA case and 7 MAP cases.
During 20th to 24th January, 2020, India hosted a 5-member delegation from Her Majesty’s Revenue & Customs (HMRC), United Kingdom at New Delhi. The two delegations discussed a large number of MAP and APA cases during the week-long meeting and successfully resolved 3 APAs and 10 MAP cases. In addition, 1 concluded APA was revised to change the terms of the APA to accommodate changed economic circumstances and another APA was closed as the two sides could not reach an agreement.
Transfer pricing cases involving adjustments on Advertisement, Marketing, and Sales Promotion expenses (‘AMP expenses’) are fiercely litigated in Indian courts. A distinctive feature of the above meeting between Competent Authorities of India and UK was resolution of a MAP case involving AMP adjustments. It is the first time that a MAP was resolved wherein a part of the AMP adjustments were retained.
SYNTHESIZED TEXTS OF INDIA’S TAX TREATIES AND MLI
India is developing synthesized texts of its tax treaties and Multilateral Instruments (MLI) to facilitate the interpretation and application of the treaties as modified by the MLIs. India has prepared 13 synthesized texts till the end of January 2020, and hosted them on the official website of the Income Tax department.
The treaties for which synthesized texts have been prepared are Australia, Austria, Finland, Ireland, Japan, Lithuania, Montenegro,Poland, Serbia, Singapore, Slovak Republic, UAE, and UK. All synthesized texts contain provisions that are minimum standards of MLI, viz preamble and Principal Purpose Text (PPT). PPT is an anti-abuse provision. Other clauses vary from treaty to treaty depending upon whether the clauses of MLI have been ratified by both India and the treaty partner.
NEWS AT A GLANCE (Source: IBFD)
MULTI-COUNTRY TAX ACTION AGAINST INTERNATIONAL TAX EVASION: JOINT CHIEFS OF GLOBAL TAX ENFORCEMENT
As announced on 23rd January 2020, Australia, Canada, the Netherlands, the United Kingdom (UK) and the United States (US), known as the J5, has undertaken a globally coordinated day of action to tackle the facilitation of offshore tax evasion that week across Australia, Canada, the Netherlands, the UK and the US. The action occurred as part of a series of investigations in multiple countries into an international financial institution located in Central America, whose products and services are believed to be facilitating money laundering and tax evasion for clients across the globe. The J5 brings together leaders of tax enforcement authorities from Australia, Canada, the Netherlands, the UK and the US. This is the first major operational activity of the J5 and leaders have expressed that this would be the first of many.
Montenegro ratifies MAC On 23 December 2019, Montenegro ratified the multilateral Convention on Mutual Administrative Assistance in Tax Matters, as amended by the 2010 protocol.
Ukraine approves anti – BEPS legislation
The Ukrainian Parliament approved legislation to introduce several anti-BEPS measures including rules for resolving cross-border disputes through Mutual Agreement Procedure (MAP), and thin capitalisation rules and introduces Controlled Foreign Corporation (CFC) rules.
Bahrain joins MCAA for CbCR
Bahrain joined the Multilateral Competent Authority Agreement (MCAA) on the automatic exchange of Country-by- Country reports (CbC MCAA) in December 2019.
Cyprus & Saudi Arabia ratify MLI
Cyprus & Saudi Arabia have deposited their instruments of ratification of Multilateral Instrument (MLI) in Jan, 2020. MLI convention will enter into force with respect to both countries from 1 May, 2020.
E – Commerce platforms – Italy clarifies reporting obligations
The Italian Tax Authorities (ITA) have published Law Principle No. 1/2020 of 21 January 2020 providing clarifications on reporting obligations for e-commerce platforms introduced by Law Decree No. 34 of 30 April 2019. It establishes, until 30 December 2020, special reporting obligations for taxable persons facilitating, through the use of an electronic interface such as an online marketplace, platform, portal or similar means, distance sales of imported goods or distance sales of goods within the European Union.
According to the implementing rules, the notion of “facilitating” entails that the platform plays a role in the determination of the general conditions applicable to the transactions carried out through the platform, the collection of the price of the goods sold; and/or the management of orders received and the delivery of goods sold. Given this framework, the ITA clarified that the provision of management software that merely enables the creation and management of web stores does not in itself trigger the reporting obligations at issue, unless it allows the software supplier to have part in one of the aforementioned activities.
ATO ISSUES TAX ALERTS ON NEW ARRANGEMENTS AND STRUCTURES THAT LEAD TO BEPS
As per OECD guidelines, returns from use of intangible assets should be allocated to entities of a group on the basis of Development, Enhancement, Maintenance, Protection and Exploitation (‘DEMPE’) of the intangibles. The Australian Taxation Office (ATO) has released Taxpayer Alert TA 2020/1 in January alerting about new structures used to colour DEMPE functions. One of the illustrations relates to how an Australian company may enter into a contract with a foreign Associated Enterprise (AE) to provide relevant services in respect of new intangibles and get remunerated on a cost-plus basis. Even though most of the DEMPE functions for older intangibles are performed by the Australian company, it formally reduces its DEMPE functions in respect of older intangibles as they are intrinsically linked to the new intangibles. The AE is shown to perform some management activities although it does not have sufficient assets or experienced staff etc., and in substance all DEMPE activities are performed by the Australian company. In such a scenario, the cost-plus remuneration of the Australian company does not reflect the FAR of the Australian company in connection with the new intangibles, or the connection between the existing and new intangibles. Thus, the transactions between these entities do not reflect arm’s length conditions for the purposes of the Australian transfer pricing rules. Other illustrations on intangibles and Cost Contribution Arrangement (CCA) structures are also discussed in the alert.
This newsletter is for information purposes only and is not purported to be the official position of the CBDT or the Government. It is not meant to be cited or relied upon in any official or legal communication.