Welcome to the March 2016 edition of our quarterly Global Tax Disputes Update, bringing you the latest news in tax controversy around the world.
Welcome to the March 2016 edition of our quarterly Global Tax Disputes Update, bringing you the latest news in tax controversy around the world.With tax audit and disputes activity rising in almost every country, keeping up with trends and developments is more important than ever. In this edition, you’ll find briefings on key news, events and thought leadership submitted by Global Tax Dispute Resolution & Controversy professionals in KPMG member firms worldwide. Staying informed can be a crucial first line of defense as you manage your disputes around the globe.
Make sure to view our past issues of Global Tax Disputes Update.
The Organisation for Economic Cooperation and Development (OECD) reported on its February 2016 regional network meeting in Dakar, Senegal on the base erosion and profit shifting (BEPS) project.As reported in an OECD release, the event was hosted by the Senegal revenue agency (Direction Générale des Impôts et des Domaines) and focused on the BEPS reports and the recently announced inclusive framework of ‘BEPS associates’. The new framework allows all interested countries and jurisdictions to participate, on an equal footing with OECD and G20 member countries, in the remaining work on standard setting under the BEPS project, as well as on the review and monitoring of the implementation of the BEPS package.
Read the article.
The Argentine tax authorities (AFIP) updated its ‘white list’ of countries, jurisdictions and territories that are identified as cooperative for tax transparency purposes. A broader application of Argentina’s transfer pricing rules will not apply to transactions involving entities located in the countries and jurisdictions identified on the white list.Decreto No. 589/2013 (May 2013) established the process for determining when countries are considered to be ‘tax haven’ jurisdictions for purposes of a broader application of Argentina’s transfer pricing rules.The 2016 white list (Spanish) of cooperating jurisdictions identifies countries and territories that have signed tax information exchange agreements with Argentina and, thus, are considered as cooperating jurisdictions for purposes of tax transparency. The updated white list is effective 1 January 2016.Countries and territories that are not included on the white list are considered countries with low tax or no taxation — that is, tax haven jurisdictions. Thus, transactions with entities located in these countries are subject to Argentina’s transfer pricing regime.
Read the article.
On 22 February 2016, Australia’s Treasurer announced new tax compliance requirements are being imposed with respect to foreign investment applications.
Foreign investment applications will now be subject to a set of standard conditions that must be met in order for an application to be considered as not being against the ‘national interest’. Among these conditions, investors must comply with Australia’s taxation laws in relation to the proposed investment and any transactions, operations or assets in connection with the assets or operations acquired, directly or indirectly, as a result of the investment. The tax compliance obligation on the investor is not limited to its own compliance, but also extends to investors.
Other conditions require:
— complying with information requests from the Australian Taxation Office (ATO) in relation to proposed investments
— advising the ATO when investors enter into any transactions with non-residents to which transfer pricing or anti-avoidance measures in respect of Australian tax law may potentially apply
— reporting to the Foreign Investment Review Board (FIRB) annually on compliance with these conditions.
Additional conditions may be imposed case-by-case when a significant tax risk is identified. Such conditions could involve a requirement that the investor enter into advance pricing arrangements with the ATO or seek pre-transaction rulings. A failure to meet any of the conditions may result in prosecution, penalties and/or the Treasurer ultimately ordering a divestment of Australian assets.
Read the article.
Discussions in Australia seem to be moving away from tax reform. In a speech on 18 February 2016, the Treasurer emphasized the need for restraint on public expenditures.
GST off the table
At this time, goods and services tax (GST) reform has been taken off the table. There has been no action on corporate taxes. It is believed that a long-term plan of company tax reductions is needed.
Read the article.
Mergers and acquisitions outlook
Also in Australia, there appears to be increasing anxiety over the use of complex multinational structures, such as hybrids, to facilitate global investment. Companies have been observed to be wary, given likely tax reforms that could unfold both in Australia and elsewhere as a result of the Organisation for Economic Co-operation and Development’s (OECD) base erosion and profit shifting (BEPS) recommendations.
Concern over the growing differential in the Australian corporate tax rate compared to the majority of the developed world and OECD countries (with United States being an obvious exception) is also evident.
Read the article.
The Australian Taxation Office (ATO) this week issued a final version of guidelines concerning taxpayer engagements with the ATO in relation to the ‘multinational anti-avoidance law’ (MAAL) provisions, pursuant to the MAAL ‘client experience roadmap’.
The guidelines are an inducement for taxpayers potentially affected by the MAAL provisions to engage with the ATO and discuss the potential application of the MAAL to particular circumstances. The ATO is offering significant reductions of potential penalties for taxpayers who contact the ATO before 31 March 2016 and engage in such discussions.
The ATO has designated five categories of MAAL taxpayers, each with different potential penalties if the MAAL provisions are ultimately determined to apply.
Significant incentives are being offered to taxpayers to engage with the ATO as early as possible. The MAAL client experience roadmap further indicates that the MAAL provisions have a much broader scope than originally anticipated, with the number of taxpayers potentially affected by the MAAL provisions being many more than the 30 companies originally targeted.
Read the article.
The Australian Taxation Office (ATO) released its first tax transparency report, outlining for the 2013–14 year the tax information published by the ATO covering income tax of certain corporate taxpayers with total income of 100 million or more Australian dollars (AUD).
Of the 1,539 total number of companies disclosed in the ATO’s 2013–14 tax transparency report, 466 companies (30 percent) show nil taxable income and 579 companies (38 percent) show no tax payable — this information compares to the ATO guidance material that suggests that in any one year, 20–30 percent of the ASX 500 are loss-making entities.
Of the total 1,539 corporate taxpayers, 985 (64 percent) are foreign-owned entities, and 554 (36 percent) Australian public entities.
Historically, the ATO’s large market analysis has focused on annual turnover of AUD250 million and above. An annual turnover of AUD5 billion and above was viewed by the ATO as a cut-off for higher consequence taxpayers. As such, the ATO’s data-specific commentary focuses on breakdowns by the three income segments: (1) AUD100 million to AUD250 million, (2) AUD250 million to AUD5 billion, and (3) AUD5 billion and above.
Detailed sector-specific information is not available from the dataset itself. However, ATO’s data-specific commentary provides some high-level statistics, based on five sectors: (1) banking and finance, (2) manufacturing, (3) insurance and superannuation, (4) energy and resources, and (5) sales and services.
From the accompanying Tax Commissioner’s statement, there appears to be a strong inference that the ATO views some foreign-owned entities as ‘tax aggressive’. There also appears to be a significant proportion of such entities in the financial services sectors not paying any tax in Australia in the 2013–14 year (compared to the Australian public entities in those sectors). By contrast, a significantly lower proportion were nil tax-paying in the manufacturing sector. Given the recent enactment of the multinational anti-avoidance law and transfer pricing developments, it is believed that the ATO will be focusing on foreign-owned entities.
Read the report by KPMG in Australia.
Australia’s Parliament on 2 December 2015 concluded legislative action for the 2015 calendar year, with the following outcomes:
The multinational anti-avoidance rule — Australia’s de facto diverted profits tax regime — was passed by Parliament. There are two amendments that:
require the Australian businesses of multinational corporations with global income of 1 billion or more Australian dollars (AUD; 730 million or more US dollars — USD) to prepare general purpose financial statements
end an exemption for Australian-owned private companies with annual income of AUD200 million (USD146 million) or more from the public disclosure of tax return data by the Australian Taxation Office (ATO)
The country-by-country reporting regime was passed by Parliament.
Tax laws governing the ATO public disclosures of tax return data have been amended to include Australian owned private companies with annual income of AUD200 million (USD146 million) or more.
Australian businesses of multinational corporations with global income of AUD1 billion or more will be required to prepare general-purpose financial reports for years commencing on or after 1 July 2016.
Read the report from KPMG in Australia.
The special transfer pricing audit department of the Belgian tax authorities launched a new wave of transfer pricing audits in January and February 2016, and approximately 1The special transfer pricing audit department of the Belgian tax authorities launched a new wave of transfer pricing audits in January and February 2016, and approximately 150 companies in Belgium have or will receive a detailed request for information on their transfer pricing policy. This new wave of transfer pricing audits reflects a past trend in Belgium.
A report from KPMG in Belgium highlights:
Read the report from KPMG in Belgium.
The European Commission (EC) has concluded that selective tax advantages granted by Belgium under its ‘excess profit’ tax regime are illegal under European Union (EU) state aid rules. The EC’s investigation showed that the regime derogated from normal practice under Belgian company tax rules and the arm’s length principle.
The Belgian excess profit tax regime has applied since 2005, and allowed certain multinational group companies to pay substantially less tax in Belgium on the basis of tax rulings.
According to the EC release, this selective tax advantage regime benefitted at least 35 multinational entities (mainly from the EU) that now must return unpaid taxes to Belgium. The EC estimated the total amount to be recovered from the companies to be approximately 700 million euros (EUR).
The excess profit tax regime only benefitted certain multinational groups that were granted a tax ruling while ‘standalone companies’ (i.e., companies that are not part of groups) active only in Belgium could not claim similar benefits.
The EC found the regime was ‘a very serious distortion of competition’ within the EU’s single market, affecting a broad range of economic sectors. Belgium now must recover all of the unpaid tax from the multinational companies that have benefitted from the regime. The Belgian tax authorities must determine which companies have benefitted and the amounts of tax to be recovered from each company.
Read the report from KPMG’s EU Tax Centre.
The Brazilian tax authorities have revised their previous position concerning cost-reimbursement arrangements. This change could jeopardize some tax savings previously realized in cross-border transactions involving these arrangements.
In a 2012 private ruling (Ruling 08/2012), the Brazilian tax authorities concluded that Brazilian taxpayers could implement cross-border cost-reimbursement arrangements that avoided Brazilian federal taxes (i.e., withholding tax, corporate income tax, CIDE, PIS-COFINS) but that also complied with transfer pricing and tax deductibility rules.
CIDE (Contribuição de Intervenção no Domínio Econômico) is imposed on cross-border payments of royalties, in general, and certain services.
PIS-COFINS are two social contributions in Brazil—PIS (Programa de Integração Social) and COFINS (Contribuição para o Financiamento da Seguridade Social).Revised position
In a private ruling (Ruling 43/2015), it appears that the tax authorities revised their position in Ruling 08/2012. The new ruling may affect the opportunities for taxpayers to obtain withholding and CIDE exemptions, but it does not affect PIS-COFINS savings and corporate income tax deductibility savings.
In light of Ruling 43/2015, a taxpayer strategy for implementing a cost-reimbursement arrangement that involves obtaining private rulings would require a ‘breakdown’ of the ruling requests (one for withholding tax, one for CIDE, one for PIS-COFINS and one for the corporate income tax deduction). Even with reduced chances of obtaining favorable rulings on withholding tax and CIDE, tax professionals understand that requesting rulings on all of these issues still may be an effective strategy, given that the ruling process can be the first step in mounting a judicial challenge to any adverse administrative adjudication of these issues.
Read the report from KPMG’s Latin American Markets practice.
The Brazilian tax authority (RFB) has announced new criteria for identifying taxpayers that are subject to Brazil’s ‘differentiated tax monitoring’ procedure. In effect since 2005, the process involves the analysis of tax and economic behaviors of ‘large taxpayers’. Beginning in 2016, there are new parameters for determining whether a legal entity is considered to be a large taxpayer.
RFB guidance (Portaria 641, May 2015) requires the analysis of tax and economic information under the differentiated tax monitoring process to be conducted in a systematic manner, and based on:
Based on data disclosed by the RFB, tax payments made by differentiated tax monitoring taxpayers (i.e., major taxpayers) currently represent 63 percent of the total federal tax collection.
The RFB issued guidance (Portarias 1,754 and 1,755, 24 December 2015) that establishes new parameters for individuals and legal entities that will be subject to differentiated tax monitoring.
The new guidelines are based on a variety of factors or thresholds, such as the amounts of annual earnings reported in tax returns, the total value of goods declared, the amounts of wages paid, the amounts of rents received, and the value of rural property among other items.
In general, a ‘large taxpayer’ is defined as having:
Specific new criteria are also provided for individual taxpayers, and these take into consideration the value of assets and properties, and the amounts of income or rental payments received.
Read the report from KPMG in Brazil.
The Administrative Council of Tax Appeals (CARF), the final instance at the federal administrative level, resumed its trials in December 2015, after almost 8 months of suspension because of federal police investigations into corruption within the council for favoring companies (‘Operação Zelotes’). The council had several modifications in its internal regulations, among them: the prohibition of practicing law by taxpayer representatives, the reduction of the number of judges and the restructure of the chambers.
The trial session began with a speech by the CARF´s President, Mr. Carlos Alberto Barreto, who highlighted that currently ‘the biggest problem of the institution [CARF] is the question of integrity’ and that the concern is ‘not allow to happen what happened and developed within the CARF [referring to the corruption]’.
The trials were resumed with the 1st, 2nd and 3rd Panels of the Higher Chamber, final instance in CARF for discussions regarding the corporate income tax (IRPJ) and the social contribution on net profits (CSLL), as well as the ordinary chambers of the 1st and 3rd Sections.
Despite the general concern that the reforms would aim at changing the jurisprudence regarding sensitive matters (tax planning, goodwill tax benefit, PIS and Cofins tax credits) toward tax authorities’ understanding, the remaining judges from the former CARF appeared to respect the jurisprudence at the trial sessions. The newcomer judges, while still inexperienced in some procedural matters, generally showed an intention to analyze the complex cases deeply.
Link to Council website.
The First Section of Superior Court of Justice (STJ) decided that a judicial deposit could not be accepted as part of a voluntary disclosure procedure, even where the taxpayer deposits the amount due before the beginning of any collection procedure by tax authorities in Brazil.
The First and Second Panels of STJ had divergent views on the matter. Thus, the First Section, which is formed by judges of the First and Second Panels, settled the court’s understanding.
The reporting judge stated that only the full payment of the debt and the taxpayer’s disclosure were needed to access the voluntary disclosure procedure and fend off any penalty related to late or non-payment of tax.
According to the STJ judges’ understanding, the judicial deposit suspends the tax liability but it does not end the discussion regarding the tax, since tax authorities have to litigate the issue before the courts. Therefore, as far as the tax authorities are concerned, the debt is still overdue.
Link to Court website.
The Supreme Federal Court of Brazil has granted a preliminary decision in a Direct Action of Unconstitutionality (ADI No. 5464). The decision suspends the effects of 9th clause of ICMS Agreement No. 93/2015, which requires companies licensed in the National Simple Regime (Simples Nacional) to collect the ICMS (i.e. state value added tax) owing to the destination state where the final customer is located (i.e. non-taxpayer of such tax). The constitutionality of ICMS Agreement No. 93/2015 is also discussed under the ADI No. 5469 as a whole.
Link to article.
Canada and the United Kingdom have signed an agreement that provides for a clearly outlined process for the arbitration of tax disputes the Canada-United Kingdom income tax treaty.
The agreement establishes rules and procedures under paragraphs 6 and 7 of Article 23 (Mutual Agreement Procedure) of the treaty, including:
The agreement will enter into force after the two countries have notified each other that the necessary domestic steps to bring the agreement into force have been completed.
Read the report from KPMG in Canada.
The Canada Revenue Agency (CRA) announced its review of registered charities’ political activities has found substantial compliance with the rules regarding charities’ involvement in political activities. As a result, the CRA said it would conclude its political activities audit program once the remaining audits have been finalized.
The January 2016 announcement also stated that the CRA would publish an annual report on its activities as part of its commitment to provide the public with information on the regulation of charities.
Read the report from KPMG in Canada.
Law 20.899 (published in the official gazette on 8 February 2016) introduces changes that are intended to simplify Chile’s ‘attributed tax regime’ and ‘partially integrated regime’ as enacted in 2014 by Law 20.780 (also known as the ‘2014 tax reform’).
Law 20.899 provides that taxpayers that operate under the partially integrated regime and are residents in a country that has in effect a ratified income tax treaty with Chile are not subject to a surtax on imputation credits.
The new law provides a transitional rule that extends this exemption to tax treaties pending ratification, if the treaty is signed (but not ratified) prior to 1 January 2017. This transition rule is effective until 31 December 2019.
Law 20.899 also modifies Chile’s thin capitalization rules and controlled foreign corporations (CFC) rules, and clarifies the scope of the general anti-avoidance rules (GAAR).
General anti-avoidance rule
The scope of the GAAR, which came into effect 30 September 2015, is clarified. A transitional rule applies with respect to facts, acts, transactions, a conjunction or a series of transactions executed or concluded prior to 30 September 2015 — that is, the rule applies if the characteristics or elements that determine the legal consequences for tax purposes were agreed before 30 September 2015, even if they continue to produce consequences after that date.
In addition, effects after 30 September 2015 that originate from facts, acts, transactions, a conjunction or a series of transactions realized or concluded before that date are not subject to new treatment under the GAAR, unless the characteristics or elements have been modified after 30 September 2015. If there were modification, the rules would only apply to the posterior effects originating from such modification, if they are considered to be abusive.
Read the report from KPMG in Chile.
As part of a recent tax reform, Colombia’s Parliament approved special conditions for the payment of tax duties as an incentive for taxpayers to pay any arrears of their tax obligations and fees.
However, in Constitutional ruling C-743 of 2015, the Constitutional Court declared unconstitutional the articles that regulated that benefit, stating that type of aids do not contribute to the state aims for the following reasons:
The Constitutional Court pronouncement does not affect actions developed before 30 October 2015. The court ruling might discourage the government from including tax amnesty in the next tax reform law, which will be discussed in the second semester of 2016.
Read the ruling (Spanish).
On 27 January 2016, the European Commission (EC) unveiled new measures to address corporation tax avoidance. The EC presented an anti-tax avoidance package that includes two legislative proposals addressing certain anti-base erosion and profit shifting (BEPS) issues and non-public country-by-country (CBC) reporting, as well as a common approach to tax good governance toward third countries and recommendations to address treaty abuse.
According to the EC release, the proposals feature:
Collectively, these measures are intended to address aggressive tax planning, boost transparency between EU member states, and allow fairer competition for all businesses in the single market.
The proposals will be submitted to the European Parliament for consultation and to the Council for adoption by all EU member states. If approved, the proposal on CBC reporting would need to be transposed into domestic law by each EU member state by the end of 2016, and take effect as of 1 January 2017.
The EC is expected to publish a revised proposal addressing the common consolidated corporate tax base (CCCTB) initiative in the autumn of 2016, as well as a proposal on enhancing dispute resolution procedures in the summer of 2016.
Read the report from KPMG’s EU Tax Centre.
The European Commission’s working program for 2016 in the corporate tax area includes proposals on anti-corporate tax avoidance. Commissioner Moscovici presented details of the action plan in a speech on 11 January 2016.
The program includes actions relating to:
Read the report from KPMG’s EU Tax Centre.
A pilot project in the European Union (EU) allows taxable persons to obtain advance rulings on the value added tax (VAT) treatment of complex cross-border transactions. The project began in June 2013, and is now scheduled to continue until 30 September 2018.
There are 18 EU member states currently participating in this project, now that Ireland and Italy have joined the project.
Taxable persons planning cross-border transactions between two or more of the participating EU member states can ask for a ruling with regard to the VAT treatment of their transactions. A release from the EC provides a list of the VAT cross-border rulings.
Read the EC release.
The European Commission on 16 February 2016 launched a public consultation to help identify ways to facilitate dispute resolution for businesses experiencing problems with double taxation in the EU.
This issue has also been raised by the OECD as part of its base erosion and profit shifting (BEPS) project — specifically, Action 14 on making dispute resolution mechanisms more effective. Accordingly, it remains to be seen whether, and if so how, the EC will build on the work done in this area by the OECD.
Read the report from KPMG’s EU Tax Centre.
The European Commission (EC) today announced that the European Council adopted a directive aimed at improving transparency on tax rulings — including advance pricing arrangements (APA) — given by EU member states to companies concerning how certain specific taxation issues will be addressed.
As noted in the EC release, the directive requires EU member states to exchange information automatically on advance cross-border tax rulings and APAs:
The EC announcement states that the directive is in line with developments within the OECD and its work on the tax base erosion and profit shifting (BEPS) project.
Read the report.
France has modified its parent-subsidiary regime in order to comply with European Union (EU) law. Rules published on 30 December 2015 in the Amended Finance Act for 2015 generally are effective for fiscal years ending on or after 31 December 2015. However, a ‘new anti-abuse’ clause is effective for fiscal years starting on or after 1 January 2016.
Anti-abuse clause introduced
Under the revised rules, dividend distributions cannot benefit from the parent-subsidiary regime if distributed in the frame of an arrangement or a series of arrangements that is intended, as one of its main purposes, to obtain a tax advantage in contradiction with the object or purpose of the regime and that is not ‘authentic’, having regard to all relevant facts and circumstances. The Amended Finance Act specifies that an arrangement should be regarded as not ‘authentic’ if it is not set up for valid commercial purposes, reflecting the economic reality.
This new rule aims at transposing EU Directive no. 2015/121/EU of 27 January 2015 into French law. This directive includes an anti-abuse clause and modifies Directive no. 2011/96/EU of 30 November 2011 on the common system of taxation applicable to parent companies and subsidiaries of different EU member states. The measure aims to prevent distributions for which the beneficial owner is actually a resident of a non-EU country from benefiting from the participation exemption regime.
Read the report from Fidal.*
* Fidal is a French law firm that is independent from KPMG and its member firms.
The Administrative Court of Appeal of Versailles has ruled that a taxpayer who interposes a Luxembourg holding company by seeking a literal application of the double tax treaty to carry out a tax-free real estate sale constitutes an abuse of law (French general anti-avoidance rules — GAAR) by fraud, resulting in a reassessment with a penalty of up to 80 percent. The ruling considered the application of Article 4 on business profits of the France-Luxembourg tax treaty of 1 April 1958.
The France-Luxembourg tax treaty was amended in 2006 and 2014 to put an end to the double tax exemption arising from the use of interposed LuxCo structures regarding capital gains on the sale of French real estate, which took advantage of the asymmetry between Luxembourg and France domestic law in applying the double tax treaty.
In this case, the court ruled that regardless whether the LuxCo actually had a legal or economic substance, as far as the LuxCo interposition was not justified by any reason other than avoiding the taxation of the capital gain in France, the interposition itself constituted an artificial arrangement that may be reassessed based on the French GAAR.
Even though the Conseil d’Etat (French Supreme Tax Court) has already ruled that the concept of fraud is applicable to provision of a double tax treaty, it was related to a narrow concept, the beneficial owner test (Conseil d’Etat, Société Bank of Scotland, 29 December 2006).
The decision of this case is unique in that it extends the application of the French GAAR by fraud to broader double tax treaty provisions regarding business profits of enterprises.
To settle the dispute, the court relied on the principle, regularly asserted, according to which the authors of a text may never have intended to allow artificial arrangements benefiting from that text (Conseil d’Etat, Société Abbey National Treasury Services, 24 April 2012, or Société Natexis, 11 May 2015).
The artificial interposition of a company solely for tax purposes differs in any event from simple tax planning and can only be contrary to the intent of the authors of a double tax treaty.
More than ever, the use of interposed foreign holding company structure should be carefully analyzed and substantiated.
Link to main article.
The Delhi High Court held that activities of the taxpayer’s project office came under the exclusionary clause of Article 5(3)(e) of the tax treaty between India and United Arab Emirates (UAE). Accordingly, the project office did not constitute a permanent establishment (PE) under these tax treaty provisions.
As noted by the court, given that the duration of the project activities in India was less than 9 months, the taxpayer did not have an ‘installation PE’ in India under the treaty.
Further, a consultant appointed by the taxpayer was found to be an agent having ‘independent status’ and, therefore, did not constitute a ‘dependent agent PE’ of the taxpayer in India. Accordingly, no income could be attributed to the taxpayer in India.
The case is: National Petroleum Construction Co.
Read the report from KPMG in India.
India’s Authority for Advance Rulings concluded that the settlement amount received by foreign institutional investors (that had invested in the Indian company’s shares (American depository receipts)) for giving up the ‘right to sue’ the Indian company was a capital receipt. As such, this amount was not taxable as ‘income’ because it did not replace any business income.
The case is: Aberdeen Claims Administration Inc.
Read the report from KPMG in India.
The Ahmedabad Bench of the Income-tax Appellate Tribunal held that an incorrect ‘permanent account number’ (PAN) provided inadvertently does not invoke section 206AA of the Income-tax Act, 1961 because there was no intention to furnish an incorrect PAN with respect to withheld tax (or ‘tax deducted at source’, as it is referred to in India).
The case is: Oil & Natural Gas Corporation Ltd.
Read the report from KPMG in India.
Italy’s budget law for 2016 introduces significant changes relating to Italy’s corporate income tax, including changes to anti-avoidance rules involving ‘black list’ (i.e., preferential tax) jurisdictions for deductible costs and expenses, the controlled foreign company (CFC) rules, and other measures to address international tax evasion.
The anti-avoidance rule on the tax deduction of costs and expenses arising from transactions with entities resident or located in preferential tax jurisdictions has been repealed. Under the old rule, tax deduction was allowed up to the arm’s length value of costs. For any portion exceeding the arm’s length amount, it was necessary to demonstrate that there were sound business reasons behind the transaction and the transaction had actually taken place. Under the new rule, the tax deduction of costs arising from transactions with taxpayers established in a black list country will be regulated by the ordinary principles laid down in the Italian income tax code.
For CFC purposes, preferential tax regimes (i.e. tax havens) were those appearing on a black list. The CFC black list has now been abolished, and the CFC rules will apply to controlled companies resident or established in states or territories — other than those in the European Union (EU) or European Economic Area (EEA) that have an effective exchange of information with the Italian tax authorities — whose ordinary or special tax regimes set a nominal level of taxation that is less than half the level of taxation in Italy.
However, EU/EEA controlled companies may also fall within the scope of the CFC rules in certain circumstances.
Under the new rules, CFC income attributed to a resident shareholder must be subject to a level of taxation not less than the standard corporate income tax rate in Italy (currently 27.5 percent). The repealed rule set the level of taxation at not less than 27 percent.
Measures to combat international tax evasion
To combat international tax evasion, a decree to be issued by the Ministry of Economy and Finance will set the general guidelines that the Italian tax authorities must follow in order to collect information on purchases of goods and services from taxpayers, resident or established outside Italy. The Italian Revenue Agency’s director will issue implementation rules.The budget law (Law n. 208 of 28 December 2015) was passed by the Italian Parliament on 22 December 2015 and published in the Italian official gazette on 30 December 2015.
Read the report from KPMG in Italy.
The Organisation for Economic Co-operation and Development (OECD) announced that Kenya has signed the multilateral convention on mutual administrative assistance in tax matters.
The OECD announcement states that Kenya is the 12th country of the African continent to sign the agreement and the 94th jurisdiction to join. The agreement was amended in 2010 to align it to the international standard on exchange of information and enables automatic exchange of country-by-country reports under the OECD base erosion and profit shifting (BEPS) project.
Read the OECD announcement.
The European Commission announced on 3 December 2015 its decision to launch a ‘state aid’ investigation into tax rulings granted by the tax authorities in Luxembourg to a company that is a member of a US-based multinational taxpayer group.
According to a February 2015 report, in 2008-2009, the group transferred its European intellectual property and franchising rights to a Luxembourg entity — a company with branches in both Switzerland and the United States. The Luxembourg company received 3,708 million euros (EUR) in royalties during the period 2009–2013 and paid what has been described as ‘hardly any corporate income tax’ in Luxembourg for that same period.
A first tax ruling granted by the Luxembourg authorities in 2009 confirmed that the Luxembourg company was not liable for corporate tax in Luxembourg on the grounds that the profits were to be subject to taxation in the United States. This position was justified by reference to the Luxembourg-United States income tax treaty. However, according to the EC, the profits were not subject to tax in the United States.
A second tax ruling granted later in 2009 provided that income of the Luxembourg company was not subject to tax in Luxembourg even if it were confirmed that the income was not subject to tax in the United States. According to the EC, the Luxembourg tax authorities thus exempted almost all of the Luxembourg company’s income from taxation in Luxembourg.
The EC found the royalties received by the Luxembourg company were transferred internally to the US branch—a branch that did not have any real activities.
The focus of the EC investigation appears to be about the mismatch in the tax treatment of the US branch of the Luxembourg company by Luxembourg and the United States (and not so much on the justification for the allocation of the royalties received to the US branch). However, it appears that transfer pricing and profit allocation within the taxpayer group could ultimately become relevant for the state aid investigation.
This taxpayer is the fourth US multinational whose tax rulings with an EU member state have become the subject of an EU state aid investigation, reflecting the EC’s interpretation and application of the transfer pricing principle for state aid cases.
Read the report from KPMG in the Netherlands.
The government of the Netherlands announced that it will appeal the European Commission’s (EC) October 2015 decision that an advance pricing agreement (APA) concluded between a corporate taxpayer and the Dutch tax authorities qualifies as ‘forbidden state aid’. The government’s position in filing an appeal is that the Dutch tax authorities consistently apply internationally accepted methods and that the EC’s approach ‘raises a lot of questions.’
According to the Dutch government, the EC used criteria that deviate from article 9 of the Organisation for Economic Co-operation and Development (OECD) Model Income Tax Treaty (the ‘arm’s length’ criterion) and from the OECD transfer pricing guidelines that are based on article 9 of the OECD Model Income Tax Treaty. According to the government of the Netherlands, the approach used by the EC has no basis in internationally accepted principles. In its 27 November statement, the Dutch government reiterated its position that international tax avoidance must be addressed without harming the Dutch investment climate. In this respect, the Dutch government announced some new initiatives (described below).
At issue in the appeal will be whether the EC position is correct — that is, whether for state aid purposes the European Union’s (EU) principle of equal treatment can override internationally accepted OECD transfer pricing rules. If the Court of Justice of the European Union (CJEU) were to uphold the EC’s position, the question then becomes how would the CJEU interpret the state aid criteria, especially the selectivity criterion in a tax case that concerns the setting of prices for services performed between related group companies.
However, if the CJEU were to hold that the OECD transfer pricing guidelines are also the point of reference for application of the EU state aid rules, the question then becomes whether the EC has the authority within the framework of the state aid rules to monitor application of these rules in specific instances and to override judgments by the national tax authorities or national tax courts. A decision by the CJEU would likely affect the ongoing debate among EU institutions, including the EU Parliament, and the individual EU member states on the issue on tax sovereignty.
New initiatives announced
On 27 November 2015, the government of the Netherlands also announced initiatives within the framework of its ongoing effort of addressing international tax avoidance while maintaining a favorable investment climate in the Netherlands:
Read the report from KPMG in the Netherlands.
The Inland Revenue released a discussion document on implementing the automatic exchange of information (AEOI) regime. Once implemented, New Zealand financial institutions would need to report foreign account holders to countries that have also signed up for AEOI (i.e., 97 countries to date).
Inland Revenue also confirmed that it would automatically and retrospectively exchange tax rulings — including details of all private taxpayer rulings and unilateral transfer pricing rulings in effect as of 2014. Both changes were recommended as part of the Organisation for Economic Co-operation’s base erosion and profit shifting (BEPS) work.
Automatic exchange of information
The AEOI regime is modeled on the US Foreign Account Tax Compliance Act (FATCA) regime. The AEOI requirements will apply to New Zealand financial institutions from 1 July 2017, with the first reporting due in mid-2018.
Exchange of tax rulings
Inland Revenue also confirmed that it would automatically and retrospectively exchange tax rulings. Inland Revenue will share details of all private taxpayer rulings and unilateral transfer pricing rulings, in effect as of 2014. The exchange will be with countries that have signed tax agreements with New Zealand. Currently, there are over 50 tax treaties and tax information exchange agreements in the New Zealand treaty network.
This Inland Revenue treatment will mean foreign tax authorities will now have access to businesses’ commercial information provided in support of rulings. Could this have an adverse effect on the demand for rulings going forward? Some observers believe that it would.
Read the report from KPMG in New Zealand.
Following his confirmation by the Senate, Babtunde Fowler, the Executive Chairman of the Federal Inland Revenue Service (FIRS), has restructured the FIRS by redeploying 26 new directors to act as state coordinators of the different FIRS locations and as training officers to educate FIRS officials across the country. The restructuring is part of the vision of the new FIRS Chairman to increase overall tax yield accruable to the three tiers of the government.
This is similar to his success at the state level when he was the Executive Chairman of the Lagos State Internal Revenue (LIRS). During his tenure at the LIRS, he appointed account officers for individuals and companies in an effort to create a conducive environment between the tax authorities and taxpayers. He was also credited for significantly increasing the tax revenue of the state through aggressive tax collection and tax audits.
Source: “Buhari appoints New FIRS Chairman, DG Budget Office”, Channels Television, 20 August 2015 http://www.channelstv.com/2015/08/20/buhari-appoints-new-firs-chairman-dg-budget-office/ accessed 10 March 2016.
The Nigerian government largely relies on oil revenue to finance the country’s expenditure. However, due to the global decline in oil prices, the government has shifted its focus to taxes. Based on the 2016 budget, Nigeria has increased its projected tax revenue by 32 percent, compared to previous year. Therefore, tax authorities at all levels are more aggressive in tax enforcement and collection.
Some of the recent actions include:
Other tax bills include the Tax Codification Bill, 2016 and Pension Bill, 2016, recently passed into law in Kaduna state, National Security Tax proposed by the National Security Tax Bill, 2015, and the Communication Service Tax proposed by the Communication Service Tax Bill, 2015.
Read the report from KPMG in Nigeria on the Communication Service Tax Bill, 2015.
Read the FIRS release.
Tax revenue in Nigeria contributes only 7 percent to GDP (gross domestic product), whereas the recommended GDP contribution of tax collections is 15 percent. Against this backdrop, an article proposes a plan of tax amnesty to enhance tax revenue collection in Nigeria.
Read the report from KPMG in Nigeria.
The OECD has announced that on 27 January 2016, 31 countries signed the multilateral competent authority agreement (MCAA) for the automatic exchange of country-by-country (CbC) reports. The aim of the MCCA is to enable consistent and swift implementation of the CbC reporting recommendations, which arose from Action 13 of the OECD’s base erosion and profit shifting (BEPS) action plan. The OECD lists the 31 countries as: Australia, Austria, Belgium, Chile, Costa Rica, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Japan, Liechtenstein, Luxembourg, Malaysia, Mexico, Netherlands, Nigeria, Norway, Poland, Portugal, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland and United Kingdom.
The automatic exchange of CbC reports is a key part of BEPS Action 13, and it should reduce the compliance burden for multinational enterprises that might otherwise have multiple filing obligations. More countries are expected to sign up to the MCAA over the coming months, while others may rely on existing arrangements contained in bilateral tax treaties or tax information exchange agreements.
First exchanges will start in 2017–2018 on 2016 information, depending on local implementation of CbC reporting requirements. Where information fails to be exchanged, the Action 13 report provides for alternative filing so that the playing field is leveled — although again this will depend on how the OECD recommendations are implemented in each territory.
The MCCA requirements are consistent with a move by the European Commission to press for automatic exchange of CbC reports, as set out in their proposals presented on 28 January 2016, although it is noted that the Commission goes further in not precluding the future introduction of public disclosure.
Read the report.
The Ministry of Finance on 23 December 2015 announced draft guidelines of the structure and format of electronic tax records and accounting documents that would constitute a ‘standard’ tax audit file.
These draft guidelines describe the scope and data format that the tax authorities can request from large companies, as of 1 July 2016.
Read the report from KPMG in Poland.
The Ministry of Finance in a December 2015 communiqué announced that a focus for 2016 will be to address income tax avoidance with heightened emphasis on the verification of transfer pricing (i.e. prices of transactions between related parties).
Read the report from KPMG in Poland.
The Treasury Department of Puerto Rico has undertaken an aggressive campaign to collect outstanding balances in taxpayers’ accounts. While the Secretary has publicly recognized that a significant portion of the receivables in Treasury’s books may be time-barred — and thus, not enforceable — there is a clear intent to make every effort to collect taxes owed and clear these collectibles from Treasury’s records.
The tax collection process normally begins with the issuance of a tax notice to the taxpayer’s last known address. Depending on the nature of the notice, the taxpayer must respond within a certain period of time. A lack of response may deem the alleged debt enforceable — again, depending on the circumstances.
The Puerto Rican government has been strictly following the rules for how much time taxpayers have to object to tax notices and has been proceeding with collection by any legal means available, including the filing of tax liens on bank accounts. This tax collection policy can result, at a minimum, in an inconvenience for taxpayers and may significantly impair the taxpayer’s ability to operate. Thus, it is prudent to address tax notices promptly and appropriately.
Review of common tax notices
The following is a reminder of the most common notices that the Treasury Department of Puerto Rico can issue:
Notice of mathematical or clerical error: Taxpayers have 60 days, following the sending of the notice, to request an adjustment.
Notice of deficiency: The taxpayer can request a reconsideration of such deficiency and an administrative hearing within 30 days following the deposit of the notice in the mail (or within the extension of time granted by the Secretary).
Jeopardy assessment: This is a statutory instrument that the Secretary can use to safeguard tax revenue if the ordinary assessment and collection of a deficiency may be jeopardized by delay. The Secretary must mail a notice of deficiency to the taxpayer and allow the taxpayer to provide a response within 30 days following the deposit of the notice in the mail (or within the extension of time granted by the Secretary).
Certificate of tax lien: The Secretary may issue this device when a tax liability has been established and the taxpayer neglects or fails to pay within the time previously provided by the Puerto Rico Treasury. Generally, the certificate of tax lien is issued with a 30 day-notice after which the Secretary may execute the tax lien.
Read the report.
The Organisation for Economic Cooperation and Development (OECD) announced that Senegal has signed two tax agreements:
The OECD release reports that Senegal is the eleventh country of the African continent to sign the mutual assistance in tax matters agreement. This agreement provides for all forms of administrative assistance in tax matters — ranging from the exchange of information on request to spontaneous exchange or automatic exchange, and includes tax examinations abroad, simultaneous tax examinations, and assistance in tax collection.
Senegal also signed the multilateral competent authority agreement, thus becoming the 32nd jurisdiction to agree to the automatic exchange of country-by-country reports. This agreement effectively implements Action 13 of the OECD’s base erosion and profit shifting (BEPS) project.
Read the report.
The Finance Minister announced in the budget speech that a special voluntary disclosure opportunity would be made available for taxpayers who have income tax and/or exchange control liabilities relating to holdings of unauthorized assets offshore.
Details of this income tax and exchange control amnesty would be made available later in the year when the draft bills are published. Additional relief would be offered for a period of 6 months, from 1 October 2016, to allow non-compliant taxpayers to regularize their affairs.
Read the report from KPMG in South Africa.
South Africa is experiencing slow economic growth with significant downward adjustments of expected revenue collections in the next 3 years. Against this backdrop, growth and economic transformation continue and need to be key focuses of the government.
From a dispute resolution perspective, corporate taxpayers are experiencing more audits and scrutiny of their tax affairs, with a focus on transfer pricing and large private equity transactions. This in itself is not a problem. What is problematic is when the revenue authorities overstep the boundaries of the Tax Administration Act under which they operate to effectively tie up corporate taxpayers in long, protracted audits going back into prescribed years.
The attitude is that the right to request information never prescribes, and, in fact, the revenue authorities may use this information to prove that there has been non-disclosure of material facts, fraud or misrepresentation (in which case prescription does not apply). There is no case law on point yet in South Africa, and the issue will soon be decided on a constitutional law and administrative justice law basis.
View the video from KPMG in South Africa.
The government of Thailand recently issued an emergency decree providing a ‘tax audit exemption program’ that is effective and available to taxpayers beginning in 2016. The program basically provides incentives for taxpayers to regularize their tax affairs going forward, by providing protection from tax audits.
Under the program, any tax examination, inquiry, assessment, payment demands or criminal prosecution in respect of income generated prior to 1 January 2016 will be waived. Eligible taxpayers include companies and partnerships whose revenue does not exceed 500 million Thai baht (BHT; approximately 14 million US dollars — USD) for any accounting period ending on or before 31 December 2015. Thus, the program is available for many small- and medium-size enterprises (SME).
Accordingly, income tax, value added tax, specific business tax, withholding tax and/or stamp duty due by an eligible company or partnership will be exempt from audit if such taxes relate to income generated or expenses incurred in any accounting period ending on or before 31 December 2015.
Read the report from KPMG in Thailand.
Thailand’s Customs Department launched a new voluntary audit program that allows a company to approach the customs authorities and voluntarily disclose any import duty that was paid incorrectly in the past.
Under the voluntarily disclosure program, penalties will be waived. The period for the voluntary disclosure program is from 1 January to 31 December 2016.
Read the report from KPMG in Thailand.
The Supreme Court of Ukraine held that a value added tax (VAT) refund from the state budget is vested in the exclusive authority of tax and treasury authorities, and the court cannot decide to recover the VAT refund from the budget and/or order the tax and treasury authorities to remit VAT refunds to the taxpayer’s bank account. The Supreme Court is of the view that courts cannot take decisions on the matters vested in the competence of state authorities.
The Supreme Court has taken a different approach previously. Specifically, in its previous judgments, the Supreme Court clarified that taxpayer’s claims to recover VAT refunds to the bank account of the taxpayer is an appropriate mean of protection of taxpayers’ rights.
The High Administrative Court of Ukraine (HACU) continuously adheres to this approach. Specifically, in one of its recent rulings, the HACU stated that delayed amounts of VAT refunds represent a budget debt and result in unlawful inactivity of state authorities. Consequently, the HACU held that recovery of VAT refund to the taxpayer’s bank account is the most efficient mean to protect the taxpayer’s rights in disputes relating to recovery of VAT refunds.
The case is: №К/800/25376/15 dated 16 February 2016.
Tax jurisprudence can be surprising for the taxpayers and, in 2015, the Ukrainian courts appeared to be reach some unexpected positions. In a new report, KPMG in the Ukraine outlines Ukrainian judgments rendered in 2015 that are among the most interesting and important for taxpayers. Two of these unexpected decisions, summarized below, involve beneficial ownership issues and value added tax (VAT) refunds on exported goods.
Court changes approach to disputes involving beneficial owners
The High Administrative Court of Ukraine (HACU) has started focusing on the functions performed by the income recipient to receive income as part of their investigations.
Previously, the HAKU concluded that a non-resident entity that has acquired a license to use an intellectual property object and the right to grant sub-licenses to third parties qualifies as a person that has a right to receive royalties and, therefore, is to be recognized as a beneficial owner of royalty payments received from third parties under sub-licensing agreements.
However, in recent cases regarding the beneficial owner status of non-resident sub-licensors, the fact that a non-resident sub-licensor had a right to receive royalties was not enough to recognize such a sub-licensor as the beneficial owner of royalties.
In these other cases, the HACU gave special importance to the issue of significant participation of sub-licensors in earning income. The HACU ordered lower courts to investigate this issue, expressing the view that the mere right to collect royalties is insufficient for a sub-licensor to qualify as the beneficial owner of income.
Exports at a lower price does not deprive a taxpayer to VAT refund
The HACU ruled in favor of a taxpayer in a case regarding the availability of a VAT refund upon export of goods at prices below the purchase price.
The taxpayer purchased goods from local suppliers, bearing 20 percent VAT. This taxpayer subsequently exported such goods from Ukraine (zero-rated supplies) at the price that was lower than the purchase price and input VAT.
Although export prices exceeded the cost of goods purchased, the tax authorities took a view that export transactions lacked valid business purpose because of negative difference between the export price with zero VAT and purchase price plus 20 percent VAT.
The court held that the taxpayer’s pricing strategy did not constitute a violation of the law. The court noted that tax incentives relating to export of goods are specifically introduced by the government, and use of such tax incentives by a taxpayer should not be construed as unlawful profits at the expense of the government.
However, the Ukrainian jurisprudence on the issue at question is still controversial as the courts often follow the fiscal approach and disallow VAT refund in similar cases, stating that transactions intended to be profitable solely because of tax refund lack valid business purpose.
Read the report from KPMG in the Ukraine.
The European Commission (EC) launched a public consultation on 16 February 2016 to help identify ways to facilitate dispute resolution for businesses experiencing problems with double taxation in the EU. The consultation is part of the implementation of the EC’s Action Plan for Fair and Efficient Corporate Taxation, launched in June 2015.
In the Action Plan, the EC acknowledged that double taxation — by leading to economic distortions and inefficiencies — can be a serious obstacle for businesses operating in more than one member state and can thus create a negative impact on cross-border investment. While reiterating that the implementation of a common consolidated corporate tax base (CCCTB) would eliminate the risk of double taxation in the EU, the EC also acknowledged that other solutions are needed until this is agreed.
The current mechanisms (mutual agreement procedure and arbitration) provided by bilateral tax treaties entered into by member states and, specifically, by the EU Multilateral Arbitration Convention, offer relief for double taxation when it occurs but still result in lengthy procedures if agreement is not reached. The general objective of the initiative is to create a more attractive investment and business environment and to achieve greater legal certainty at a time when recent significant changes to increase tax transparency and combat tax fraud and tax evasion may contribute to an exponential increase in disputes.
The consultation focuses on improving the double taxation dispute resolution mechanisms. It is particularly aimed at gathering stakeholders’ views on:
Read the report from KPMG’s EU Tax Centre.
HMRC have recently published a number of pieces of research into taxpayer attitudes and opinions. Among these are two pieces on tax avoidance — Exploring public attitudes to tax avoidance, which examines public opinion on the prevalence and acceptability of tax avoidance and what HMRC is doing in response; and Understanding individuals’ decisions to enter and exit marketed tax avoidance schemes, which includes interviews with several people who had engaged in tax avoidance to understand why they had done so.
Exploring public attitudes to tax avoidance in 2015
The research asked members of the public their thoughts on tax avoidance, with most responding that they thought that tax avoidance was common but unacceptable. They also had varying views as to whether they thought HMRC was doing enough against tax avoidance. Interestingly, some of the survey respondents suggested that those engaged in tax avoidance could face prison sentences or criminal records, which would suggest that public awareness of the difference between tax avoidance and tax evasion is limited.
Read the full research report.
Understanding individuals’ decisions to enter and exit marketed tax avoidance schemes
The research examines why people enter into, remain in and exit tax avoidance schemes, and includes interviews with a number of previous users of such schemes. It concludes that these users fell into three categories — those who were unaware they were engaging in avoidance, those who were aware that the schemes they were using were ‘on the edge of law’, and those who were aware they were engaging in avoidance and believed it to be acceptable.
The research also highlights that users were often reassured by their trust in the promoters of such schemes, the language the promoters used to describe the schemes, and the social acceptance of tax avoidance at the time they entered into them (from 2003 to 2013). For those who knew the schemes were ‘risky’, they perceived that the consequences of an HMRC challenge did not outweigh the benefits.
Read the full research report.
The Public Accounts Committee (PAC) held a session on corporate tax on 11 February 2016, where representatives from a global software company and HMRC were quizzed by members of Parliament (MPs). This hearing is the latest development in the ongoing public debate on the taxation of multinational enterprises.
Following the company’s widely reported tax settlement, the PAC called on company executives and HMRC to give evidence as part of their enquiry. The committee members were interested to understand the breadth of the tax enquiry and the constituent parts of the tax settlement.
The executives explained the size of the UK business relative to the global market outside of the US, where value was created and why its current structure did not impact materially on the tax profile in the UK.
They emphasized the need for increased simplicity in the international tax regime and were supportive of the Organisation for Economic Co-operation and Development’s (OECD) base erosion and profit shifting (BEPS) project. On the subject of transparency, the executives explained that the information they had supplied in relation to the UK tax audit far exceeded what corporate taxpayers typically provide.
HMRC went on to explain some of the complexities around conducting a tax audit in the digital sector, which is rapidly changing and experiencing exponential growth. These factors in particular make it difficult to extrapolate results for future years in the same way as can be done for certain more mature sectors.
In responding to challenges as to the treatment of large businesses compared to other taxpayers, Jim Harra, Director General of Business Tax, confirmed that at any one time approximately 67 percent of large businesses have open enquiries with HMRC, the figure for small businesses being approximately 12 percent.
Lin Homer, Chief Executive of HMRC and Ed Troup, Tax Assurance Commissioner, who also attended the session, responded to questions on the six Commissioners and the internal governance processes around tax settlements.
As part of the session, the Committee explored the sharing of information between tax authorities and whether the UK could do more to work with other jurisdictions in tackling some of the issues particular to international tax. HMRC explained the current collaboration that goes on between the UK and five other jurisdictions to build up knowledge and expertise (the ‘E6 group’).
Ahead of the hearing, HMRC published a factsheet on their dealings with multinationals. The factsheet is intended to “help dispel myths which have arisen about how HMRC ensures compliance among multinationals”, and contains information on HMRC’s approach to ensuring that large companies remain compliant. It also highlights new measures planned for Finance Bill 2016 including the proposed requirements for large businesses to publish their tax strategies, and ‘special measures’ for those engaged in ‘aggressive tax planning’.
Read the report.
Read also a recent blog post for Responsible tax for the common good, an independent project curated by the think tank CoVi and supported and sponsored by KPMG in the UK, by Jane McCormick, Global Head of Tax at KPMG, which takes a look at the recent tax settlement debates in the media, the taxation of multinational corporations, and tax transparency.
On 28 January 2016, the European Commission (EC) unveiled a new Anti-Tax Avoidance Package. This includes two legislative proposals that address certain anti-base erosion and profit shifting (BEPS) issues and non-public country-by-country reporting (CbC), as well as a common approach to tax good governance towards third countries and recommendations to tackle treaty abuse. The new package aims to address tax abuse, ensure sustainable revenues and foster a better business environment in the internal market.
The proposals should be seen in the context of the EC’s Action Plan for Fair and Efficient Corporate Taxation, launched in June 2015 and the final recommendations issued by the OECD in October 2015 on their 15 BEPS Action Points.
There is clearly concern within the EC that the outputs of the OECD’s BEPS Action Plan could be implemented by member states in an inconsistent and divergent manner, which may not adequately tackle the problem of aggressive tax planning, leading to additional uncertainty and administrative burden for businesses. However, as acknowledged by the EC, the package goes much further than stewardship of the implementation of BEPS measures in the EU, both in terms of the approach and breadth of the proposals. For example, in terms of approach, there are specific proposals related to hybrid mismatches that focus on legal characterization of instruments and entities that do not appear to align with the OECD’s recommendations. In terms of breadth, the proposed directive contains proposals in relation to switch-over clauses, exit taxation and a general anti-abuse rule (GAAR). In addition, the EU Commissioner has stated that the EC may go further and implement public CbC reporting following an additional impact assessment.
The legislative proposals are likely to undergo changes as the political debate develops and will need approval by all member states before implementation. However, both Commissioner Moscovici and the new Dutch presidency have already expressed their intention to adopt the anti-BEPS directive before the end of the Dutch 6-month mandate, so this is expected to remain a high profile area of focus for the Read Commission.
Read the report from KPMG’s EU Tax Centre.
For insights from a UK perspective, read the report from KPMG in the UK.
The IRS has released Publication 5125 (rev. Feb. 2016), Large Business & International Examination Process, which describes the IRS Large Business and International Division’s organizational approach and beginning-to-end process for conducting professional examinations of taxpayers.
The LB&I examination process provides an organizational approach for conducting professional examinations from the first contact with the taxpayer through the final stages of issue resolution. Its compliance program takes a strategic approach to effective tax administration. Not all examinations are the same in scope, size, and complexity; therefore, portions of this publication may be more applicable to some cases than others. One example is specific guidance in the Internal Revenue Manual for taxpayers who interact with LB&I’s International Individual Compliance operation.
The LB&I examination process will be discussed at the initial engagement so that both the taxpayer and LB&I have a clear understanding of the process and expectations. The examination can be efficient if the examination team and the taxpayer work together in a spirit of cooperation, responsiveness, and transparency. There is a greater likelihood that the taxpayer and LB&I will benefit in terms of resource utilization and tax certainty when the parties have open and meaningful discussions of the issues throughout the examination process.
Link to publication.
The IRS on February 2016 announced it will make effective on May 1 2016 previously announced changes to the Large Business and International Division’s examination process that shift it toward an issue-based approach for conducting examinations.
The IRS’s Publication 5125, Large Business & International Examination Process, sets out procedures to complete examinations more efficiently to ensure that ‘the examination team and the taxpayer work together in a spirit of cooperation, responsiveness, and transparency.’ The IRS issued a draft publication in November 2014.
One controversy in the draft publication involved changes to the informal refund claim process, which stated, ‘LB&I will only accept informal claims that are provided to the exam team within 30 days of the opening conference.’ After that 30-day period, refund claims must be filed with a service center on either an amended return or a Form 843, Claim for Refund and Request for Abatement. This represented a significant change from prior policy.
‘There has been a lot of pushback on the informal claim provision when it was out in draft, and the IRS seems to hold relatively firm there,’ Michael P. Dolan of KPMG in the US said. One change to the informal claim procedure that Dolan said would be helpful to taxpayers, however, is that LB&I will not require a formal claim to be made outside the 30-day window if the issue had already been identified for examination. “That was a helpful modification,” he said, adding that he found the insertion of new language of research and expenditure claims, requiring that even when the issue is raised on exam any claim must be made formal, to be less useful.
Source: Tax Notes Today, 2016 TNT 39-5, Doc 2016-4173, dated 26 February 2016.
The Treasury Department and IRS has released for publication in the Federal Register final regulations (T.D. 9756) relating to awards of administrative costs and attorneys’ fees under Internal Revenue Code section 7430.
The final regulations reflect legislative changes made in 1997 and in 1998, and finalize — with revisions — regulations that were proposed in November 2009.
In addition to the final regulations, the IRS separately released Rev. Proc. 2016-17 as guidance regarding the recovery of administrative and litigation costs by individuals and organizations that provide pro bono representation to taxpayers.
The IRS posted seven new ‘practice units’ — the next items in a series of IRS examiner job aids and training materials intended to describe for IRS agents leading practices for specific international and transfer pricing issues and transactions. The Large Business and International (LB&I) division has now published over 100 of these practice units.
The topics of the new LB&I practice units include:
These new practice units have a release date of 19 February 2016. Text of the practice units is available on the IRS practice unit webpage.
The IRS practice units identify areas of strategic importance to the IRS, provide insight as to how IRS examiners will approach various transactions, and generally provide an understanding of the context in which an IRS examiner will approach a particular issue or transaction.
Thus, taxpayers (and their tax advisers) facing an IRS examination or concerned with issue(s) presented by these practice units will want to review the relevant practice units, so as to have a better understanding of the issues that may arise either prior to or during an examination. For instance, the IRS practice units typically provide information that can help taxpayers:
For taxpayers selected for a pending IRS examination, the practice units can provide information that may assist with preparation for the examination. For taxpayers actually under examination, the practice units may provide information that can help taxpayers respond to IRS requests.
Read the report.
The Treasury Department on February 17, 2016, released a newly revised US Model Income Tax Convention (‘2016 Model’). Last updated in 2006, the Model serves as a starting template for Treasury to use as it negotiates future tax treaties.
The preamble to the 2016 Model says it reflects technical improvements developed in the context of bilateral tax treaty negotiations, with the new provisions intended to more clearly implement Treasury’s longstanding policy of eliminating double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.
Among other things, the 2016 Model sets out provisions to encourage efficient and effective dispute resolution mechanisms between tax authorities through the use of mandatory binding arbitration.
New rules added to Article 25 (Mutual Agreement Procedures) require mandatory binding arbitration for certain disputes between tax authorities. When the competent authorities are unable to reach agreement and certain conditions have been satisfied, a case will be submitted to arbitration under the ‘last-best offer’ approach contained in a number of newer US tax treaties and treaties awaiting Senate approval.
The new procedures will take effect upon a treaty’s entry into force. Any cases that are under consideration at the time of entry into force will be subject to the new terms of Article 25. Treasury has not yet released a technical explanation to the 2016 Model.
Read the report.
In a letter to President Jean-Claude Juncker of the European Commission (EC) concerning the EC state aid investigations, US Treasury Secretary Jacob Lew expressed concerns that the EC’s ‘sweeping interpretation of the European Union (EU) legal doctrine of ‘state aid’ threatens to undermine’ current efforts to curtail corporate tax base erosion. The letter continues to report that the Organisation for Economic Co-operation and Development’s base erosion and profiting shifting (BEPS) project has produced a broad set of measures to prevent and deter international corporate tax avoidance but that the EC state aid investigations and enforcement actions appear to be inconsistent with and contrary to the BEPS project.
The letter says, ‘While we recognize that state aid is a longstanding concept, pursing civil investigations — predominantly against US companies — under this new interpretation creates disturbing international tax policy precedents…. we respectively urge you to reconsider this approach.’
The Treasury Secretary’s letter sets out the following four points:
The letter concludes with a request that the EC reconsider pursuing ‘unilateral actions and instead focus on our collective work through the BEPS project.’
Read the report.
The IRS announced that on 16 February 16 2016, the Advance Pricing and Mutual Agreement office (APMA) will begin accepting requests for bilateral advance pricing agreements (bilateral APAs) between the United States and India. This mid-February date is intended to allow taxpayers sufficient time to file their APA requests before the start of the new Indian fiscal year (1 April).
IRS release (IR 2016-13) represents an important step in strengthening ties between the two governments in the taxation of multinationals. Bilateral APAs provide greater predictability in taxation, easing the uncertainty of doing business in each country.
In January 2015, the US and Indian competent authorities jointly announced that they had reached agreement on a framework for resolving longstanding competent authority cases involving Indian-resident affiliates performing information technology-enabled services or software development services. In light of this agreement, APMA began accepting requests in March 2015 for pre-filing conferences (PFCs) for bilateral APAs between the United States and India.
The US and Indian competent authorities are reported to have resolved recently as many as 100 mutual agreement procedure cases and more are expected to be settled early this year. As a result of the competent authorities’ progress in concluding cases since that time, the US competent authority and the Indian competent authority are now ready to accept requests for bilateral APAs covering information technology-enabled services, software development services, or other issues for whose resolution transfer pricing principles are relevant.
Read the report.
The recently enacted Bipartisan Budget Act of 2015 includes major changes to the way the IRS will audit entities that are classified as partnerships for federal income tax purposes. The new rules repeal the current regime of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and generally apply to tax years beginning after December 31, 2017.
Although certain partnerships may elect out of the regime, partnerships that are required to furnish more than 100 Schedule K-1s or that have a partner that is a trust or a partnership (as is common in many organizational structures) are ineligible to make the election. Accordingly, taxpayers need to understand and consider the new rules today.
Read the report from KPMG in the US.
The US Court of Appeals for the Seventh Circuit has affirmed an order of a federal district court, directing the taxpayer to comply with an IRS summons. The Seventh Circuit rejected the taxpayer’s claim that the IRS summons was a ‘re-inspection’ of previously examined records because the tax year under examination was not the same as a previously examined year (for which the records were summoned).
The case is: United States v. Titan International, Inc., No. 14-3789 (7th Cir. February 1, 2016).
Read the report.
These articles represent the views of the authors only, and do not necessarily represent the views or professional advice of any KPMG International member firm.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
© 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.