With tax audit and dispute 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.
With the G20 Leaders’ endorsement of the Organisation for Economic Co-operation and Development’s (OECD) 13 final reports under its Action Plan on Base Erosion and Profit Shifting (BEPS) in November 2015, it’s now up to individual countries to update their tax treaties and translate the proposals into their domestic law. Some jurisdictions, like the United Kingdom and the European Union, have jumped ahead and already introduced BEPS proposals, while the timing and degree of take-up of the proposals by other countries remains to be seen.
With the world’s international tax regimes in flux and tax authorities under pressure to increase collections, the potential for tax disputes is rising and expected to swell into an avalanche of controversy in the years to come. Transfer prices are at the core of many OECD BEPS Action Plan items, and so it seems a spike in the number disputes in this area is inevitable. In this environment, international companies are advised to keep up with the latest BEPS developments related to transfer pricing so they can monitor and manage the implications.
In light of the changing tax landscape, tax professionals with KPMG in Australia are considering how to assess risk and prepare for potential controversy. Their new report on the topic highlights several key themes:
Read the report by KPMG in Australia.
Australia’s multinational anti-avoidance integrity law (MAAL) – which aims to protect Australia’s tax base from multinational entities seeking to avoid a taxable presence in and attribution of business profits to Australia – was introduced in a bill1 in the Australian Parliament on 16 September 2015.
Intended to have effect from 1 January 2016, the MAAL will apply to significant global entity taxpayers that obtain tax benefits through schemes that were entered into for a ‘principal purpose’ of enabling the taxpayer to obtain a tax benefit in Australia or to reduce one or more of their foreign tax liabilities. The MAAL also doubles the tax penalties applicable to significant global entities for scheme benefits obtained in income years starting on or after 1 July 2015.
The Australian Taxation Office (ATO) has released guidance2 on how the ATO will apply the MAAL, including the conditions needed for the MAAL to apply, circumstances in which the ATO considers that the MAAL would not apply, and the meaning of key elements, including ‘principal purpose’.
Before 1 January 2016, taxpayers are advised to consider whether the MAAL could apply to their structures and how this would affect their operations. As the ATO’s guidance notes, taxpayers considering restructuring their operations should do so cooperatively with the ATO.
The ATO is helping taxpayers who are determining whether they fall within the scope of the new MAAL provisions or considering restructuring their operations. Professionals with KPMG Legal and Tax Services Australia are assisting some multinational clients in their discussions with the ATO.
1 Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015.
2 Law Companion Guideline LCG 2015/2, which will become a public ruling when the MAAL receives royal assent.
In Finanzamt Linz,3 the Court of Justice of the European Union (CJEU) concluded that the Austrian rules, under a group taxation regime, allow an Austrian parent company to deduct amortization of goodwill resulting from the acquisition of a domestic subsidiary. However, the CJEU found the rules deny this tax benefit for participations in EU subsidiaries and thus are in breach of the freedom of establishment principle.
Austrian tax law
Under the Austrian group taxation regime, when an Austrian parent companies acquire a holding in a domestic subsidiary that becomes a member of the group, the parent may benefit from a goodwill amortization in the form of a tax deduction. This tax deduction may not be claimed if a holding in a non-resident company is acquired under the same conditions because Austrian tax law only allows the amortization of goodwill for participations in group companies that are fully taxable in Austria.
Issue referred to the CJEU
The Austrian Administrative Supreme Court referred questions to the CJEU, and the CJEU found that granting goodwill amortization only in respect of newly acquired holdings in resident companies constitutes an undue tax advantage that hinders Austrian parent companies from exercising their freedom of establishment by deterring them from acquiring subsidiaries in other EU member states. The CJEU concluded this could not be justified in the Austrian tax system.
Austria has already taken steps to repeal the benefit of the goodwill to resident companies, for acquisitions from 1 March 2014 (transitional rules allow the goodwill amortization to be continued under certain conditions).
Read the article.
3 C-66/14 (6 October 2015).
A tax amnesty program4 in Brazil (known as ‘PRORELIT’) allows taxpayers to resolve certain federal tax debts that accrued before 30 June 2015, except federal tax debts that are subject to installment payments. Applications for the program must be submitted before 30 September 2015.
To participate, taxpayers made a cash payment of at least 43 percent of their outstanding consolidated tax debt as accrued through 30 June 2015. The remaining 57 percent of the debt may be ‘settled’ with net operating losses (NOL).
New disclosure obligations
Brazil also introduced a potential new tax filing obligation (known as ‘DLPAT’), which requires Brazilian companies to report the following transactions conducted in the prior fiscal year that resulted in exclusion, reduction or deferral of taxes:
The DLPAT filing appears to be an attempt to increase tax revenue in Brazil. Some believe that it may also be in response to the OECD’s BEPS Action 12 (Mandatory Disclosure Rules), even though Brazil is not a full member of the OECD.
4 Introduced in Provisional Measure MP 685/2015. In Brazil, a Provisional Measure is an ‘act’ issued by the president, with the authority of law until later approved by Congress. A Provisional Measure is effective as from its date of publication for 60 days, and it may be extended for an additional 60-day period (for a total of 120 days) on a request from Congress.
With China’s rapidly developing economy, taxpayers’ business activities are increasingly dynamic and distinct. This is creating uncertainty over how the tax law may apply to specific business transactions, and taxpayers face a lack of clarity on a rising number of tax issues.
The Chinese tax authority is considering how to reduce the tax risk caused by this uncertainty. In the current tax levy and administration system, the taxpayer may apply for a specific interpretation from the tax authority on the application of tax law for the specific tax issue. In October 2015, the Chinese State Administration of Taxation issued a notice to further strengthen the administration on requests for replies on specific tax matters.
Further information: David Ling
The Supreme Administrative Court in November 2015 issued a decision in a case concerning application of the ‘abuse of law’ concept to intra-company reorganizations. The case concerned a claim for the deductibility of interest on a loan provided by a related party for financing the purchase of the ownership interest in companies acquired from the related party.
The decision involved the merger of a creditor with acquired companies. The ‘Czech’ part of the restructuring consisted of several phases, one of which was the establishment of a financing and holding arrangement in the Netherlands and Luxemburg. This plan involved ‘hybrid financing’ – interest on a loan was treated as deductible in one country but as a tax-exempt dividend in the country in which the interest was received.
For Czech tax purposes, the taxpayer claimed that the taxable profit generated by the successor company from its business activities was reduced by the amount of interest expense associated with a loan related to the acquisition.
The Supreme Administrative Court agreed with the tax authority’s position concerning the ‘abuse of law’ standard relating to interest on the loan. The court explained that it generally did not dispute the methods of financing, whether by debt or equity ownership interests, in completing a merger. However, the court stressed that such transactions must be made for clear economic and justifiable reasons – and not just for tax purposes. A substantial portion of the decision examined the economic grounds of the intracompany transaction, with the court finding that the reasons presented by the taxpayer were neither sufficient nor economically or rationally justifiable.
According to the court, the restructuring at issue did not lead to a change in the overall ownership structure, a new acquisition, integration of management, or reduction of operating expenses.
The court found that the merger resulted in the indebtedness of a thriving business without any economic grounds. Other facts, such as the conditions for the loan, only helped the court determine that there were not sufficient economic reasons for the restructuring – but that there were tax reasons.
The court concluded that, in the context of the abuse of a right to deduct interest for tax purposes, compliance with the thin capitalization rules might only be relevant in cases of economically justifiable intragroup financing.
The decision highlights the tax administration’s increasing tendency to examine intracompany restructuring processes in more detail. Taxpayers involved in such transactions need to consider all associated risks and carefully document their business reasons before undertaking any reorganization.
The European Commission (EC) decided that Luxembourg and the Netherlands granted selective tax advantages to two multinational corporate entities. As such, these ‘tax advantages’ are illegal under European Union (EU) state aid rules. The EC concluded that the tax rulings granted by the tax authorities in Luxembourg and in the Netherlands artificially lowered the tax paid by the companies in the respective jurisdictions.
The EC release explains that tax rulings – comfort letters issued by tax authorities to give a company clarity on how its corporate tax will be calculated or on the use of special tax provisions – are ‘perfectly legal’. However, the two tax rulings under investigation endorsed ‘artificial and complex methods’ to establish taxable profits for the companies. The EC concluded that this did not reflect ‘economic reality’ because it set transfer prices for goods and services sold between companies of the two corporate groups that did not correspond to market conditions. The EC stated that because of the tax rulings, most of the profits of one multinational corporation were shifted abroad, to jurisdictions where they were not taxed, and the other corporation only paid taxes on underestimated profits.
The EC further explained that tax rulings cannot use methodologies, no matter how complex, that establish transfer prices with no economic justification and unduly shift profits to reduce the taxes paid by the company. It would give that company an unfair competitive advantage over other companies (typically small and medium enterprises) that are taxed on their actual profits because they pay market prices for the goods and services they use.
The EC ordered Luxembourg and the Netherlands to recover the unpaid tax from the corporations, with the amounts to be recovered ranging from 20 to 30 million Euros for each company. It also means that the companies can no longer continue to benefit from the advantageous tax treatment granted by these tax rulings.
Other investigations continue
The EC release also states that the EC will continue to pursue its inquiry into the tax rulings practices in all EU member states, and that existing formal investigations into tax rulings in Belgium, Ireland and Luxembourg are ongoing.
These decisions further show the EC’s determination to use the state aid rules alongside the other initiatives in its Tax Action Plan to tackle aggressive tax planning and tax avoidance that harms the competitiveness of the EU’s internal market. Once the full text of the decisions is published, we will gain a clearer understanding of the EC’s approach in applying the state aid rules to tax rulings.
The European Commission (EC) reported that it has updated the consolidated version of the lists of third countries for tax purposes from the EU member states, reflecting changes in assessments of the tax ‘good governance’ standards of these third countries, as well as providing revisions to national lists.
The EC’s release notes that the consolidated list is part of the EU’s external agenda against corporate tax avoidance. The EC aims to introduce more transparency into national listing processes across the EU, while encouraging third countries to engage with EU member states on tax good governance matters.
EU member states are being encouraged to re-examine their national listings to determine that they are correct and up-to-date. The ultimate goal is to develop a common EU approach, giving EU Member States “collective strength in addressing risks to their tax bases and provide greater legal certainty for businesses and international partners.”
The EC discussions with the EU member states are expected by 2016 to provide for a broader strategy against external risks of tax avoidance.
Read the EC release.
Until now, most tax fraud verdicts rendered by the French criminal courts have concerned cash businesses or frauds committed by individuals. In the most famous recent verdict, rendered in April 2015, a wealthy heiress and her tax adviser were both sentenced to prison.
In November 2015, the highest French criminal court took a step further by convicting a taxpayer of tax fraud for the creation of a permanent establishment in France.5 The taxpayer had set up a Tunisian company that, together with its shareholdings and other activities, was actually managed from France.
The multiplication of such decisions and fraud findings by the criminal courts is raising concerns that such rulings may ultimately affect the executives or tax managers of large multinationals. Until now, these individuals have been protected by the necessity for the courts to find an element of intent to commit the offense. This is more difficult in large organizations in which the decision-making power is diluted and often located outside of France. However, due to the publicity surrounding such proceedings, the French tax authority could be tempted to use criminal prosecution as an additional means of pressure against large organizations.
Further information: Audrey-Laure Illouz
FIDAL6 (an independent law firm that KPMG member firms work with on a regular basis in France)
5 See C.Cass. crim., 12 November 2015, no. 14-82.241, 4810.
6 FIDAL is an independent legal entity that is separate from KPMG International and its member firms.
The European Commission recently published new rulings, the OECD published its base erosion and profit shifting (BEPS) final reports, and many countries are reviewing and reinforcing their transfer pricing rules – and France is no exception.
Tax professionals in France are observing certain recent trends regarding transfer pricing. In particular, the French tax authorities seem to be seeking more taxes from multinational corporations, and there is a general feeling that individual taxpayers are paying more and more in taxes to the government – while large corporations are not ‘paying their fair share’ of taxes.
Other transfer pricing-related trends include the following:
Transfer pricing survey
Against this background, and given the increasing pressure on multinational groups, FIDAL7 (an independent law firm that KPMG member firms work with on a regular basis in France) is conducting a survey to better understand the current perceptions, practices, expectations and constraints of businesses in the area of transfer pricing.
If you have business interests in France and would like to take part in the survey, you can access FIDAL’s survey below. FIDAL has confirmed that all answers to the questionnaire will be processed anonymously.
Further information: Anne-Laure Goetzinger
7 FIDAL is an independent legal entity that is separate from KPMG International and its member firms.
Hong Kong’s status as a ‘non-cooperative tax jurisdiction’ – as designated by the European Commission (EC) – has been revised. In October 2015, the EC updated a webpage regarding non-cooperative tax jurisdictions and removed Hong Kong from this list.
In June 2015, the EC published its first list of non-cooperative tax jurisdictions. The sole criterion to be on this list was that at least 10 EU Member States considered the jurisdiction as non-cooperative. At that time, 10 EU Member States – including Italy, Portugal, and Spain – listed Hong Kong as a non-cooperative tax jurisdiction.
Since then, Hong Kong has signed income tax treaties with Italy, Portugal and Spain. Following Spain’s removal of Hong Kong from the Spanish national list of non-cooperative tax jurisdictions, the EC removed Hong Kong from its consolidated list of non-cooperative tax jurisdictions in October 2015.
Given the recent entry into force of the tax treaty with Italy, Hong Kong is expected to aim for its removal from Italy’s national list also.
The Karnataka High Court held in KBD Sugars & Distilleries Ltd. that unabsorbed losses of an amalgamating company can be set off against the income of the amalgamated company under provisions of the Income-tax Act, 1961. The court found the losses pertain to the amalgamating company as a whole, and not of a particular unit or division of that amalgamating company.
Read the article.
The Mumbai Bench of the Income-tax Appellate Tribunal held that an assessing officer cannot ‘mechanically’ refer a taxpayer’s international transactions to a transfer pricing officer for a determination of the arm’s length price. First the assessing officer independently conclude that the taxpayer did not determine the arm’s length price or did not maintain appropriate documents based on statutory provisions.
In DCIT v. Tata Consultancy Services Ltd.,8 the tribunal further held that no transfer pricing adjustment can be made in instances when the taxpayer enjoys the benefit of a ‘tax holiday’ or when the tax rate of the related party’s country of residence is greater than the tax rate in India. In other words, there cannot be a transfer pricing adjustment when tax avoidance is not possible.
8 ITA no. 7513/2010.
The Central Board of Direct Taxes (CBDT) issued two new guidance items relating to transfer pricing cases: one item on case selection and a second item on the use of multi-year data.
A new instruction9 replaces guidance from 2003 for assessing officers and transfer pricing officers regarding the administration of transfer pricing assessments. The guidelines, which are generally for international transactions, specify that cases selected for transfer pricing assessment are not to be selected for scrutiny based on the value of international transactions reported by the taxpayer, but are to be selected based on risk parameters.
The CBDT published final rules for the use of range and multiple year data on 19 October 2015 that provide clarification on various areas but also bring into play areas that may result into disputes. The new guidance finalizes draft rules released in May 2015, for computing the arm’s length price of international transactions or ‘specified domestic transactions’ undertaken on or after 1 April 2014. As proposed, the rules related to the availability of range and use of multiple-year versus single-year data.
9 Instruction No. 15/2015 (16 October 2015).
Under Italy’s new ‘tax ruling’ system10 that will apply to the start of 2016, taxpayers can request a tax ruling from the tax authorities as to the tax treatment of a transaction or an interpretation of the tax laws.
The new system includes new classifications for tax rulings:
The new system revises the timing for a taxpayer to file a tax ruling application and the time period for the tax authorities to respond. The new system also provides rules for when a request for a tax ruling is mandatory and when a tax ruling is option. For example, a taxpayer must request a tax ruling in certain situations when anti-avoidance measures would be involved. However, a tax ruling is no longer mandatory in situations concerning safe-harbor conditions and the controlled foreign corporation rules.
10 The new system reflects changes made by Legislative Decree no. 156.
The Italian Council of Ministers on 29 September 2015 adopted a decree to extend, by 2 months, the Italian voluntary disclosure procedure that took effect 2 January 2015. The voluntary disclosure program is now extended to 30 November 2015. The decree also grants a deadline to 31 December 2015 for completing the voluntary disclosure application with the summary report and the necessary bank and corporate documents.
A legislative decree that sets rules allowing for legal certainty in dealings between the tax authority and taxpayers includes new provisions that were effective 2 September 2015, and other measures that will apply beginning 1 October 2015. Included in the provisions are definitions of certain terms, including ‘tax avoidance’, and rules on the statute of limitations for assessment of income tax and value added tax (VAT).
The new provisions do not provide an exhaustive list of transactions subject to the anti-avoidance test, and the rules apply to all taxes – income tax and other direct taxes – but not customs duties. Taxpayers may seek an advance ruling from the tax authority as to whether their transactions fall under the abuse of law provisions.
Large taxpayer program
A new tax compliance regime is introduced that aims to increase communication and cooperation between the tax authority and certain large taxpayers (those with annual turnover of 10 billion Euros or more). This voluntary regime allows for a continuous exchange of information and is intended to reduce tax litigation. For example, the new system allows taxpayers to reach an agreement with the tax authorities as to potential tax risks before submission of the tax return. It also provides an expedited advance ruling request process.
The Court of Appeals Arnhem-Leeuwarden in July 2015 rendered a judgment in a case concerning a claim for deduction of value added tax (VAT) charged on costs that a company’s pension fund ‘recharged’ to the group entities for which it operated the pension plan.
The appellate court found that the recharging of costs must be regarded as payment for VAT-able services that a company pension fund provides to the employer and that VAT on costs directly allocable to the VAT-able service could be deducted. As a result, the ruling seems to have broadened the entitlement to recover input tax for pension funds.
The Dutch tax authorities have appealed this decision to the Supreme Court.
A Ministry of Finance decree published on 11 November 2015 provides follow-up guidance concerning advanced tax rulings issued by the Dutch tax administration.
Adopted in July 2014, an amendment to the European Union (EU) Parent-Subsidiary Directive addresses mismatches resulting from hybrid financing and involves the inclusion of an anti-hybrid provision. Under this amendment, the EU member state of the parent company must tax any profit distributions that the parent company receives from its subsidiary in another EU member state, to the extent that the profit distribution is deductible by the subsidiary. In addition, a second amendment was adopted in January 2015 that involves a general anti-abuse provision. The EU member states must implement these measures before 1 January 2016.
The November 2015 decree provides follow-up information concerning the period during which advance tax rulings can be modified. Because of the expected adoption and implementation of the amended EU Parent-Subsidiary Directive into Dutch law, certain advance tax rulings would no longer be valid. Specifically, this would affect rulings on the absence of:
There are no transitional provisions. Accordingly, as of 1 January 2016, it would be necessary, in certain situations, for the foreign entity or direct member performing a ‘linking function’ to possess ‘sufficient substance’, or the advance tax ruling would effectively cease to apply.
However, the November 2015 decree provides certain relief if the taxpayer:
The decree also states that because there is no provision for transitional rules, dividend distributions from or disposals of the substantial interest or the proceeds from the membership rights in a cooperative, for the period from 1 January 2016 to the date when the substance requirements are met, would be subject to tax (subject to applicable treaty provisions). Therefore, the subject advance tax rulings would not immediately cease to apply on 1 January 2016.
The European Commission (EC) asked the Netherlands to amend the limitation on benefits (LOB) clause in the Dutch-Japanese tax treaty, which entered into force on 1 January 2012.
The EC believes that, on the basis of previous cases (e.g. C-55/00 Gottardo, C-466/98 Open Skies), a member state concluding a treaty with a third country cannot agree to better treatment for companies held by shareholders resident in its own territory than for comparable companies held by shareholders who are resident elsewhere in the European Union/Eastern Economic Area (EU/EEA). Similarly, a member state cannot agree to better conditions for companies traded on its own stock exchange than for companies traded on stock exchanges elsewhere in the EU/EEA.
However, under the current terms of the LOB clause, some entities are excluded from the benefits of the tax treaty. This means that they suffer higher withholding taxes on dividends, interest and royalties received from Japan than similar companies with Dutch shareholders or whose shares are listed and traded on ‘recognized stock exchanges’, which include certain EU and even third-country stock exchanges.
The Commission’s request takes the form of a reasoned opinion. In the absence of a satisfactory response within 2 months, the Commission may refer the Netherlands to the Court of Justice of EU.
Read the EC press release.
Tribunal of Independent Tax Experts (TRIBUTE) was recently established as a permanent international tribunal of unofficial arbitration for the resolution of tax disputes. TRIBUTE is supported by the United Nation’s Permanent Court of Arbitration in the Peace Palace at The Hague.
TRIBUTE is a facility to resolve tax disputes arising under bilateral and multilateral tax treaties, investment or trade treaties, the European Arbitration Convention, domestic laws or contractual arrangements. It is an interface between authorities and experts. In some cases, it is also open for taxpayers. TRIBUTE offers an alternative to Mutual Agreement Procedures (MAP), which sometimes do not work or lead to results.
TRIBUTE can help expedite dispute resolution by delivering a reasoned opinion from recognized experts within one week for a fee of approximately USD $ 30.000. TRIBUTE has a neutral, non-commercial and transparent position, and it offers a public list of available top-level experts from which the parties can choose.
With countries beginning to implement the Organisation for Economic Co-operation and Development’s (OECD) proposals on base erosion and profit shifting, international disputes are expected to rise, and TRIBUTE could play a valuable role in resolving them.
New Zealand’s Inland Revenue released a ‘tax avoidance revenue alert’ concerning employee share schemes. Because employee share scheme benefits are taxed when the shares are acquired, the Inland Revenue is concerned about arrangements that fix an early acquisition date so that subsequent increases in the shares’ value are not taxable.
The policy for taxing employee share benefits is that they are substitutable for salary and wages (and bonuses) and are taxed in the same way. The revenue alert focuses on certain employee share purchase arrangements, for example:
Inland Revenue considers that these arrangements are designed primarily to avoid tax because, in both cases, the values of the shares at acquisition are artificially reduced.
The revenue alert was issued in advance of a review of the tax rules that is expected to occur in 2016. There is also a current proposal to collect tax on share benefits from employers.
Nigeria’s tax authority, the Federal Inland Revenue Service, has incorporated into its tax audit procedures certain recommendations proposed by the Organisation for Economic Co-operation and Development under its base erosion and profit shifting (BEPS) project.
For example, the tax authority is scrutinizing transactions between Nigerian subsidiaries and their foreign related parties, especially those related parties located in ‘tax-friendly’ jurisdictions. The aim is to determine that these entities actually provide the services as contracted, and are not simply a ‘letter box’ company.
Other developments in Nigeria reflecting the BEPS proposals include the following:
On 5 October 2015, the Organisation for Economic Co-operation and Development (OECD) issued a final package of reports in connection with its Action Plan to address Base Erosion and Profit Shifting (BEPS), as well as a plan for follow-up work and a timetable for implementation.
The OECD’s BEPS Action Plan, which was launched in July of 2013 and endorsed by the G20, includes 15 key areas for identifying and curbing aggressive tax planning and practices and modernizing the international tax system. The OECD delivered interim reports on 7 of the 15 action items in September 2014. Those reports were consolidated with the remaining 2015 deliverables to produce the final set of recommendations for addressing BEPS.
Many countries have already adopted or are poised to adopt changes to their international tax systems based on the OECD recommendations.
OECD – Treaty-related MAP statistics for 2014 reporting periodThe Organisation for Economic Cooperation and Development (OECD) released annual statistics on the mutual agreement procedure (MAP) caseloads of all its member countries and of non-OECD economies that agreed to provide such statistics for the 2014 reporting period.
The OECD release explains:
Improving the effectiveness of dispute resolution mechanisms was an integral component of the work on BEPS and was the aim of Action 14 of the OECD’s base erosion and profit shifting (BEPS). A principal outcome of the work on Action 14 is the commitment by OECD and G20 countries to a minimum standard for resolving treaty-related disputes. As part of this standard, countries have agreed to report MAP statistics through an agreed reporting framework. This reporting is expected to provide a tangible measure of the effects of the implementation of the minimum standard.
MAP statistics for later periods will include additional information and reports from non-OECD economies countries that do not currently report MAP statistics to the OECD.
Taxpayers in Poland must transmit data pursuant to a request from the tax authorities in a unified format – the ‘standard audit file’ – as of 1 July 2016. To satisfy this new requirement, taxpayers may need to modify their accounting systems and revise their bookkeeping rules.The new format will give tax authorities easy access to accounting data of taxpayers who maintain accounting records using computer software. The new rules for transmitting data by means of the standard audit file will be mandatory for ‘large taxpayers.’ Small and medium-sized businesses (generally, taxpayers that employ fewer than 250 workers) may elect to transmit their data by means of the standard audit file. As of July 2018, the rules will apply to all business taxpayers.
Amendments11 to Spain’s general tax law took effect on 12 October 2015. The new rules include changes to the limitation period for tax audits and other tax procedural provisions.
11 Law 34/2015 (21 September 2015).
The Organisation for Economic Cooperation and Development (OECD) announced that Uganda has signed the OECD multilateral convention on mutual administrative assistance in tax matters.According to the OECD release, the agreement provides for all forms of administrative assistance in tax matters, including:
Uganda is the eighth African country to sign the agreement.
HM Revenue & Customs (HMRC) published a brief setting out the tax agency’s position following the UK Supreme Court’s decision in the Anson case concerning US limited liability companies (LLC).
The brief describes how HMRC intends to interpret the decision as follows:
HMRC appears to be interpreting the Anson decision narrowly, with the aim of maintaining the status quo. The brief suggests that HMRC will not question LLCs when they have been treated in a certain way unless a taxpayer seeks to claim double tax relief under an Anson-style argument, which will then be considered on a case-by-case basis. It also suggests that taxpayers have the ability to establish either an opaque or transparent LLC.
It is unlikely that the brief will be the last word on this issue given the questions it raises, not least as to how it stands up against the decision itself. Legislation may be enacted in the future to remove any doubt.
UK groups need to review the LLC agreements of their US LLCs to see if they are worded in the same way as the US LLC agreement in Anson. If so, they may need to consider the tax implications if the particular US LLC was to be treated as transparent for UK tax purposes. For directly held US LLCs, the UK resident company would be subject to corporation tax on its share of the US LLC’s profits. Additional UK tax could be payable when the UK company has not already paid US tax on the profits and/or if the measure of profits for UK tax purposes is greater than for US tax purposes. When there could be additional UK tax, it may be worth considering unwinding or restructuring the arrangement.
KPMG in the UK submitted a series of views and recommendation to HM Revenue & Customs in response to the tax authority’s consultations on improving large business tax compliance. Responses to the consultation, summarized below, reflect the comments made during conversations with large businesses but ultimately represent the views of KPMG in the UK.
KPMG in the UK broadly supports the UK government’s objectives to embed best practice tax compliance across the large business population. However, certain changes to the proposals are required to ensure they are not overly burdensome for business.
The proposed Code of Practice is a step toward embedding the cooperative compliance approach. KPMG in the UK believes the code should be reciprocal and include a statement of principles between large businesses and HMRC that both parties can agree to and by which the HMRC is prepared to be bound.
Relationship between HMRC and business
Relationships with Customer Relationship Managers (CRM) are key to delivering certainty for large businesses. In the experience of KPMG in the UK, the majority of large businesses are willing to engage with HMRC proactively, but there are instances where this is not reciprocated. Again, KPMG in the UK strongly believes the proposed Code of Practice should be reciprocal and should also bind HMRC to certain behavior. The Code of Practice is an opportunity to enhance and build on the cooperative compliance approach, setting commitments and expectations for both HMRC and businesses alike.
Approach to tax planning
Common to both the tax compliance strategy and Code of Practice proposals is the requirement for businesses to disclose and commit to expectations on their approach to tax planning. The current proposals refer to the ‘spirit of the law’, a subjective phrase that creates uncertainty. KPMG in the UK recommends referring to commercial drivers and economic substance, which would be more in line with the principles underpinning the Organisation for Economic Co-operation and Development’s base erosion and profit shifting (BEPS) project.
KPMG in the UK understands that HMRC has identified only two or three businesses that it expects to be the subject of special measures. Therefore about 99.9 percent of the large business population should be unaffected.
KPMG in the UK supports the need for HMRC to respond robustly to the very small minority that persist in highly aggressive avoidance or otherwise refuse to play by the rules. However, in order to protect the vast majority of compliant taxpayers, the thresholds for special measures must be narrowly targeted. Broadly, subject to developing this narrow approach, KPMG in the UK agrees with both strands of the proposals and recommends they be invoked only after authorization at the most senior level within HMRC, the Tax Assurance Commissioner and with judicial oversight for strand B, which would otherwise involve administrative discretion to deny a legislative safeguard.
In October 2015, HM Revenue & Customs (HMRC) published its latest estimates of the UK ‘tax gap’ – that is, the difference between the actual amount of tax collected and the amount that HMRC believe should be collected in theory. This latest estimate for the 2013/14 tax year shows that although the overall estimate of 34 billion British pounds (GBP) remains unchanged from 2012/13, the gap has fallen as a percentage of total tax due (from 6.6 percent in 2012/13 to 6.4 percent in 2013/14). This is part of a longer-term trend, with the gap as a percentage of overall liability having gradually declined from 8.4 percent in 2005/6 (the earliest year for which estimates are available).
As well as the headline figures, HMRC published its detailed analysis in a 77-page document that is based in comprehensive and robust methodologies that harness various sources of data. Such well-researched and robust data is key to effectively measuring progress, but there are important limitations, not least of which is the fact that the data is – by its nature – historical. Also bear in mind that the figures reflect what HMRC believes should have been due for 2013/14 under the prevailing legislation at the time but does not attempt to look forward or consider what the outcome would be if policies and rules were changed.
The figures suggest that there is scope for the gap to close further and for the tax take to increase as a result. The figures also provide an indication of trends over time. For example, corporate tax avoidance now accounts for GBP 1 billion of a total of GBP 2.7 billion of overall avoidance, down by almost half from a total of GBP 5 billion in 2010/11 – a clear reflection of the wider change in corporate attitudes in the past few years.
What the figures cannot tell us is how recent changes, and those that are coming (e.g. as a result of the Organisation for Economic Co-operation and Development’s base erosion and profit shifting (BEPS) project), might affect taxpayer attitudes and behaviors and, ultimately, government receipts. While the tax gap figures are an important part of the picture, they need to be accompanied by ongoing dialogue on tax issues and, ideally, wider behavioral and economic analysis of current and future changes.
The U.S. Court of Appeals for the Second Circuit affirmed a US Tax Court opinion and a federal district court judgment in appeals heard in tandem concerning application of the ‘economic substance doctrine’ to transactions involving foreign tax credits.
The Tax Court, having considered the effect of foreign taxes in the pre-tax analysis, denied the claimed foreign tax credits as lacking economic substance but allowed interest expense deductions for the loan associated with the transactions.
The federal district court held that the economic substance doctrine applied to transactions involving foreign tax credits generally and that foreign taxes were to be included in calculating pre-tax profit.
Further information: Sharon Katz-Pearlman
The US Court of Federal Claims rejected a taxpayer’s claim for a refund because the claim was submitted after the 10-year limitation period for filing the claim had expired.
In 1996, a Belgian subsidiary of the taxpayer issued 20-year debentures to the taxpayer and certain of its U.S. subsidiaries. Interest payments were made on the debentures from 1997 through October 2001. The Belgian subsidiary, however, did not pay Belgian withholding taxes on the interest payments, because it believed the payments to be tax-exempt.
In 2001, Belgian tax authorities issued a notice of adjustment to the taxpayer for the tax years 1996 through 1998. The notice provided, in part, that the debenture interest payments made between 1997 and 2001 were subject to Belgian withholding tax at the statutory rate of 25 percent. The taxpayer submitted a written protest to the tax authorities objecting to the assessment of withholding tax on the payments.
In January 2002, the taxpayer and the Belgian tax authorities reached an agreement regarding the dispute. The taxpayer agreed to pay withholding tax at the rate of 15 percent on all interest paid from 1997 through 2001. It then made two payments to the Belgian authorities in January 2002 and August 2002 that satisfied the total amount of the taxes due.
On 15 May 2009, the taxpayer filed an amended consolidated US income tax return for the 2002 tax year, in which it claimed refunds of 1,416,740 US dollars in foreign tax credits attributable to the withholding taxes it had paid pursuant to the agreement with the Belgian tax authorities.
Court supports IRS’ rejection of claims for earlier years
The IRS allowed the taxpayer’s refund claims for the years 1999, 2000, and 2001, but it disallowed the claims for 1997 and 1998.
The IRS found that the 1997 and 1998 refund claims had not been filed within the 10-year limitations period provided in section 6511(d)(3)(A) – the taxpayer should have filed its 1997 refund claim on or before 15 March 15 2008, and its 1998 refund claim on or before 15 March 2009, in order for those claims to be timely.
The taxpayer filed suit in the Court of Federal Claims, seeking to recover a total refund of USD 825,846 attributable to the foreign tax credits for its 1997 and 1998 Belgian withholding taxes. The court agreed with the government.
Further information: Sharon Katz-Pearlman
The revised transfer pricing guidelines in the Organisation for Economic Co-operation and Development’s (OECD) reports on Actions 8–10 of its Action Plan to address base erosion and profit shifting (BEPS) are somewhat ambiguous and lack consensus on attributing value to functions, but they could still work if effective dispute resolution methods are in place, Carol Doran Klein of the US Council for International Business said on 15 October 20115.
During a speech at a transfer pricing conference in Toronto, Klein, who spoke in a personal capacity, said that although the business sector was “very disappointed” with the initial discussion draft, the final report is a “substantial improvement.”
“The transfer pricing guidance is at the heart of the BEPS process, and unless there are fundamental changes to the international tax system which are not currently proposed, the transfer pricing rules are the linchpin that will hold the system together,” Klein said. “We need to make the arm’s length standard work, and the critical question is, can we, and have the BEPS reports advanced that goal?”
Klein highlighted areas that still lack guidance and clarity. For example, the guidelines are supposed to ensure that transfer pricing outcomes are aligned with value creation, but the final report indicates more agreement about what doesn’t create value than what does.
Klein said dispute resolution is a “critical element” to resolve some of the problems in the revised transfer pricing guidance, especially considering that the number of disputes will likely increase as governments and taxpayers transition to a post-BEPS project world.
Klein welcomed several elements of the minimum standard on dispute resolution in the OECD’s final report on Action 14, including its recommendation that:
Klein is pleased that several countries are agreeing to mandatory binding arbitration, which the business sector supports as a way to resolve disputes. However, a significant number of countries remain resistant to the mechanism. Without an effective way to resolve disputes with those countries, there will be double taxation and a disincentive for people to invest when they are unsure how disputes would be resolved.
Further information: Sharon Katz-Pearlman
The IRS Advisory Council released to the IRS Commissioner its annual report for 2015 with tax administration recommendations.
An overarching recommendation is that the IRS needs sufficient funding to operate efficiently and effectively, provide timely and useful guidance and assistance to taxpayers, and enforce current law in order to maintain the integrity of and respect for the US voluntary tax system.
As noted in an IRS release (dated November 18, 2015), other recommendations concern:
The IRS Advisory Council is an advisory group to the entire tax agency. Its primary purpose is to provide an organized public forum for the Commissioner, senior IRS executives and representatives of the public to discuss relevant tax administration issues.
Timothy McCormally, a director in KPMG’s Washington National Tax, currently serves as a member of the IRS Advisory Council.
A US district court granted the government judgment for 40,000 US dollars (USD) in foreign bank account report (FBAR) penalties less any payments it received. However, the court also held that the government’s conduct in assessing those penalties was arbitrary and capricious, and therefore any interest, late fee, or other assessment that the government has attempted to add on is void.
In particular, the court that the Internal Revenue Service (IRS) disclosed no adequate basis for its decision to assess the penalties until it was forced to as a result of the litigation. Even after the litigation began, the IRS refused to disclose the evidence on which it now relied to demonstrate the basis for its decision to impose the penalties. With respect to the penalty for one of the years at issue, the IRS broke its own promise not to impose a penalty until the taxpayer had an opportunity to respond to its proposed assessment.
As a result, the court directed the IRS to treat the FBAR penalties as if they were first assessed on the date of the court’s order.
Further information: Sharon Katz-Pearlman
A taxpayer must comply with Internal Revenue Service (IRS) summonses issued against it in the ongoing transfer pricing audit of the company’s 2004–2006 tax years, a district court has held, despite the court’s own admission to being “troubled” by the involvement of a private firm in the audit.
In the order granting enforcement of the summonses, the court weighed the testimony of a senior transfer pricing adviser engaged by the IRS Large Business and International Division, against what the court termed the “speculations” of the taxpayer and acknowledged the heavy burden the company faced. Ultimately, the court found that the taxpayer had “entirely failed to meet its burden of proof necessary to prevent the enforcement” of the summonses.
The taxpayer argued that the IRS’s engagement of the transfer pricing adviser was in contravention of the Internal Revenue Code and required the consent of Congress. The judgment says the court was “troubled” by the adviser’s level of involvement in the audit. The ability of the IRS to “farm out” legal assistance to a private law firm “is by no means established by prior practice.”
While the taxpayer failed to prove that the summonses were in bad faith or for an improper purpose, the case may lead to further scrutiny by Congress.
On the pivotal question of whether the summonses would allow the adviser to unlawfully take testimony in contravention of the IRC (section 7602), the court pointed out the taxpayer’s admission that the firm’s attorneys are permitted to examine the company’s books and records, formulate questions to ask witnesses under oath, attend interviews, and “even ask questions via notepad so long as it is the IRS lawyer who speaks the words.”
The court said there is nothing in section 7602 preventing the IRS from taking this a step further by having the contractor ask a question while an IRS lawyer conducts the interview.
Further information: Sharon Katz-Pearlman
The IRS’s Large Business & International Division (LB&I) announced major changes to how it will approach large and midsize businesses. At the 17 September 2015 Tax Executives Institute/Internal Revenue Service financial services conference in New York City, LB&I Commissioner Doug O’Donnell and Financial Services Industry Director, Rosemary Sereti outlined a proposed migration from the IRS’s heavy reliance on enterprise-wide coordinated industry case (CIC) examinations to an environment in which LB&I will apply a more nuanced approach to identifying and addressing compliance risks.
LB&I intends to design and deploy multi-faceted campaigns to identify and address key compliance risks—crafting a range of treatments precisely tailored to address the perceived compliance risk. The risk identification that will drive this new concept of operation will be heavily based on data analytics drawn from a range of sources and evaluated centrally by specialized LB&I staff.
The IRS and Treasury released the first quarter update to the 2015-2016 priority guidance plan, noting the addition of five guidance projects that have already been completed. The original plan, released in July 2015, contained 277 projects that are priorities for allocation of the resources during the twelve-month period from July 2015 through June 2016 (the plan year).
The plan represents projects the IRS and Treasury intend to work on actively during the plan year and does not place any deadline on completion of projects. Projects on the 2015-2016 plan will provide guidance on a variety of issues important to individuals and businesses, including international taxation, health care, and implementation of legislative changes.
Further information: Sharon Katz-Pearlman
Following a recent review of 63 international training practice units that are available on the IRS website, legal counsel Jasper L. Cummings, Jr. (Alston & Bird LLP) concluded that the practice units do not reveal much about the law, but they demonstrate a great confidence in the ability of non-specialist agents to conduct audits of international transactions, both of individuals and of large corporations.
The IRS Large Business and International Division (LB&I) created the practice units to guide its examiners in reviewing foreign and cross-border transactions. The practice units aim to supplement or replace checklists but have many characteristics of checklists. Practitioners may be able to use them to see where agents are headed. In fact, the LB&I’s aim in releasing the documents is to give the public “a line of sight into how the IRS in the enforcement stage is thinking about particular types of transactions.”
There is some evidence that the units are prompting agents to look into transactions that might previously have been left unexamined.
Practice units involving particularly unusual issues or treatments include units covering:
Each practice unit contains an ‘effective tax rate overview’ section that explains the effect of the particular transaction on a worldwide affiliated group’s effective tax rate for financial accounting purposes and sometimes explain the opposite effect of an audit adjustment. These discussions seem to be designed to alert the agent to the economic importance of the particular issue to the taxpayer and to the government.
Further information: Sharon Katz-Pearlman
The IRS recently released two new practice units: one on the licensing of intangible property (IP) from a US parent to its foreign subsidiary and the related transfer pricing implications, while the second addresses deemed royalty income. Practice units are IRS training aids intended to describe for IRS agents leading practices for specific international and transfer pricing issues and transactions.
Licensing of intangible property
The practice unit on licensing of intangible property explains that many U.S. businesses have developed valuable IP that is essential to their business operations and may be the main source of enterprise value. As these U.S. businesses expand globally to become multinational enterprises, they often transfer their IP to related foreign entities. These IP transfers can take several forms (e.g. sale, license, contribution to equity, in conjunction with a cost sharing agreement).
This IRS practice unit focuses only on transfers of IP by license. Specifically, it looks at the use by a controlled foreign corporation (CFC) of a licensed intangible property owned by a US parent corporation and considers whether the CFC paid an arm’s length amount for use of the intangible property.
The practice unit provides a summary of potential issues and sets out a road map for the IRS examiner to follow in developing the facts in the case.
A second practice unit concerns the treatment of deemed annual royalty income under section 367(d).
The Internal Revenue Service official responsible for managing the agency’s national partnership issue practice group emphasized that the new partnership audit regime enacted by Congress will only make it easier for the IRS to assess tax from partnership-level adjustments – it won’t change the difficulty of the actual audits.
In remarks made at an oil and gas tax conference in Houston on 20 November 2015, William H. Wilson Jr., a manager in the IRS Partnerships and Tax Equity and Fiscal Responsibility Act (TEFRA) Issue Practice Group, said the new partnership audit regime will mean that “the processing issues eventually will get resolved and go away as we shift the burden – I suppose you could say – to the partnership. But we’ll still have regular audit issues.”
The regime affects all partnerships, although those that are widely held, including all publicly traded partnerships (PTP), are generally unable to elect out.
One remaining issue is the audit treatment of section 743(b) adjustments when there is a large discrepancy between the amounts reported on the partners’ Schedules K-1 and the amount reported on the PTP’s Form 1065.
Further information: Sharon Katz-Pearlman
The IRS has released an advanced version of notice on a ‘proposed revenue procedure’ that would update existing IRS guidance on the administrative appeals process for cases docketed in the U.S. Tax Court (known as ‘docketed cases’).
Reasons for updated guidance
Notice 2015-72 [PDF 29 KB] explains why the updated guidance is needed. Since the existing guidance (Rev. Proc. 87-24) was issued in January 1987, the IRS has been reorganized several times and the volume of tax court cases has increased. The IRS also has adopted new policies and procedures to more efficiently manage its workload, and the new guidance would help manage the flow of docketed cases between the offices of IRS Appeals and IRS Chief Counsel.
Proposed revenue procedure
The notice says the proposed revenue procedure would not “materially modify” the current practice of referring docketed cases to Appeals for settlement (currently followed in “the vast majority of cases”). Rather, the proposed revenue procedure would aim for docketed cases to be “handled consistently nationwide.” It also would allow for consideration of cases governed by IRS National Office rulings in employee plans and exempt organizations.
Also, the proposed revenue procedure would:
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.
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