The U.S. Department of the Treasury released the "Second Report to the President on Identifying and Reducing Regulatory Burdens", the Indian Tax Administration issued draft rules for master file and Country-by-Country reporting, the Parliament in Singapore passed an Income Tax Amendment Bill 2017, the Cambodian Ministry of Economy and Finance issued transfer pricing regulations, and the new adoption of Form 232 requires related party transaction disclosure in Spain.
Amazon's Luxembourg Business Becomes European Commission's Latest Illegal State Aid Target
On October 4, 2017, the European Commission ("EC") issued its state aid ruling against U.S. based multinational, Amazon, ordering it pay approximately €250 million in back taxes, plus interest, to Luxembourg. In arriving at its decision, the EC referenced an advanced pricing agreement ("APA") between Amazon and Luxembourg issued in 2003 and extended in 2011. The EC claims that the APA gave Amazon selective tax benefits, resulting in Amazon paying significantly less tax than local companies subject to the same tax rules. Per the terms of the APA, Amazon's European operating entity would pay a royalty to a related Luxembourg holding company for an exclusive license to the holding company's intellectual property. The EC concluded that the royalty neither reflected "economic reality" nor satisfied the arm's-length standard.
This is not the first time that the EC has targeted a large U.S. multinational company for receiving what was determined to be illegal state aid. As reported in the September 2016 Transfer Pricing Times, the EC issued its largest transfer pricing related state aid ruling against Apple, ordering the company to pay €13 billion in back taxes and interest to Ireland. More than a year later, and well past the EC's collection deadline of January 3, 2017, Ireland has still yet to recover any of the back tax that it was ordered to collect from Apple. On October 4, 2017, the same day as the latest Amazon/Luxembourg ruling, the EC referred Ireland to the European Court of Justice for its failure to collect from Apple. From a transfer pricing perspective, the common theme amongst these state aid cases is that the EC is not t in agreement with how the targeted firms have aligned profits with people functions.
U.S. politicians have previously expressed concerns over the EC asserting itself as a supra-national tax authority and have questioned whether U.S. multinationals are being unfairly targeted. In May 2016, four U.S. senators from the Senate Finance Committee wrote a letter to the U.S. Secretary of the Treasury to voice concerns over the EC's transfer pricing related state aid investigations (a summary of this letter is available in the May 2016 Transfer Pricing Times).
It remains to be seen how the U.S. will react to the EC's latest ruling on Amazon. Fiat and Starbucks are other notable multinationals that have been involved in illegal state aid rulings. The EC is also conducting ongoing investigations on McDonald's and GCF Suez.
Further information on the European Commission's press release on the Amazon decision is available here.
Further information on the European Commission's press release on its decision to refer Ireland to the Court of Justice is available here.
Section 385 and 367 Likely to be Impacted by New Administration
On October 4, 2017, the U.S. Department of the Treasury ("Treasury") released the "Second Report to the President on Identifying and Reducing Regulatory Burdens" ("Second Report") which contains recommendations on actions to eliminate or mitigate burdens imposed on taxpayers by eight recent tax regulations issued during the prior administration.
The Second Report was prepared rel="noopener noreferrer" in response to Executive Order 13789, which called for Treasury to review significant tax regulations issued after January 1, 2016, and identify and provide recommendations for regulations that impose an undue financial burden on U.S. taxpayers, add undue complexity to the U.S. federal tax laws, and/or exceed the statutory authority of the Internal Revenue Service ("IRS"). As an initial response, Treasury identified eight tax regulations for further review in a memo dated June 22, 2017. This Second Report expands upon the first with further detail on Treasury's conclusions. Included in the Second Report were measures to revoke, replace and/or modify parts of both the Final 385 Regulations and the Final 367 Regulations, both of which could have significant implications for companies with certain types of intercompany transactions.
Regarding the Final 385 Regulations, the Second Report states that Treasury and the IRS are "considering a proposal to revoke the documentation regulations as issued," and replace the existing rules with ones that are "substantially simplified and streamlined." Separate from the documentation rules, the regulations regarding debt recharacterization remain unchanged, as Treasury noted that it expects tax reform will likely address the problems that these regulations were meant to address and render them obsolete.
For the Final 367 Regulations, Treasury noted that commenters requested transfers of foreign goodwill and going concern value be eligible for exceptions "in circumstances not ripe for abuse." In the Second Report, Treasury agreed with commenters that an exception to the Final 367 Regulations might be justified. This would include circumstances with "limited potential for abuse and administrative difficulties, including those involving valuation." Treasury expects to propose a formal revision in "the near term."
See our full overview of the likely changes to 385 and 367 here.
India-Draft Released on Master File Implementation and Country-by-Country Reporting
On October 6, 2017, the Indian Tax Administration issued draft rules for master file and Country-by-Country ("CbC") reporting addressing and implementing the recommendations discussed in the Organization for Economic Co-operation and Development's rel="noopener noreferrer" ("OECD") Base Erosion and Profit Shifting ("BEPS") Action 13 Final Report ("Action 13 Report"). The Action 13 Report recommends a three-tiered approach to documentation including a master file, a local file, and a CbC reporting template.
While India's draft is largely in line with the OECD's recommendations for CbC reporting, there are a few notable differences with respect to the master file requirements. In particular, a master file is required for any Indian taxpayer that is part of a multinational group with prior year turnover greater than INR 5 billion (~USD 77M), regardless of the jurisdiction of the parent entity, provided one of the following criteria is met: a) total intercompany cross-border transactions are above INR 500 million (~USD 7.7M); or b) total value of intercompany cross-border transactions related to intangible property exceed INR 100 million (~USD 1.5M). While the Action 13 Report did not set thresholds for master file filing requirements, these thresholds are relatively low compared to those of other countries. These lower thresholds mean some multinationals may only have a master file filing requirement in India, and nowhere else. In addition, taxpayers should note that the Indian master file is more detailed than what is outlined by the OECD and as such, there may be necessary modification and additions to be made to align a standard master file with the Indian requirements.
Further information rel="noopener noreferrer" on India's draft rules for Master file and CBCR filing is available here.
Singapore-Amendments to the Singapore Income Tax Act ("ITA") from a Transfer Pricing Perspective
On October 2, 2017, an Income Tax (Amendment) Bill 2017 ("Bill") was passed by the Parliament in Singapore, containing significant changes from a transfer pricing perspective for Singapore taxpayers.
The arm's length principle has long been legislated in Section 34D of the ITA, which supplemented pre-existing anti-avoidance provisions. The new Bill results in significant changes to the ITA with respect to Section 34D and complements the revised transfer pricing guidelines that were released by the Inland Revenue Authority of Singapore ("IRAS") on January 12, 2017 (the "Guidelines").
Key changes introduced by the Bill are as follows:
Mandatory transfer pricing documentation: This now legislates a requirement to prepare contemporaneous transfer pricing documentation with effect from the Year of Assessment ("YA") 2019 onwards for Singapore taxpayers with turnover in excess of SGD 10 million (~USD 7.3 million). It appears that the existing thresholds for preparation of documentation will continue to apply in the meantime although that remains to be confirmed.
Increased penalties for non-compliance: an increased penalty regime has also been introduced to encourage compliance with the documentation requirements by taxpayers. This includes an increased penalty of SGD 10,000 (~USD 7,300) and the imposition of a 5 percent surcharge on the full amount of any transfer pricing adjustments (even if no tax arises as a result of the adjustment). The surcharge may be waived by the Commissioner in full or part, but this would be entirely discretionary.
Increased powers to enforce the arm's length principle: the revised Section 34D emphasizes the necessity for taxpayers to consider whether their related party arrangements are commercially reasonable in the first place. Taxpayers should consider whether independent parties would enter into such arrangements at all, or on the same terms and conditions. This extends the power of the IRAS to reconstitute related party transactions if the form of such transactions is considered by the IRAS to be misaligned with substance.
In summary, whilst the penalties themselves may not be as stringent in comparison with certain other jurisdictions, there will be much more significant consequences for taxpayers in Singapore for non-compliance going forward. These developments reflect the stated intention of the IRAS to be fully BEPS-compliant, and to ensure that Singapore taxpayers are ready for the increasing transparency, substance and documentation requirements under the OECD’s BEPS action plans.
The increased powers for the IRAS to reconstruct related party arrangements along the value chain could have far reaching implications for multinational taxpayers in Singapore, if those powers are exercised by the IRAS in practice. Therefore, taxpayers would be well advised to not only ensure that they are fully compliant with the documentation requirements in Singapore but also to assure themselves that their related party arrangements reflect substance over form and will stand up to increased scrutiny in the future.
Cambodia Issues Transfer Pricing Regulations
On October 10, 2017, the Cambodian Ministry of Economy and Finance issued Prasak No. 986. MEF.P. ("Prasak 986") to combat perceived transfer pricing abuses and loss of tax revenue in the country's state budget.
Cambodia has been relatively slow to focus on transfer pricing and is now seeking to bridge the gap with its Asian neighbors (including China, Vietnam, Malaysia and Indonesia) in respect of transfer pricing documentation rules and a more structured audit process. However, it is has not yet signaled an interest in the Action 13 Report’s three-tier documentation program or other BEPS initiatives more generally.
Prasak 986 regulates that Cambodian enterprises that have transactions with related parties must comply with new compliance requirements consisting of:
Annual transfer pricing declaration form, to be submitted together with the annual declaration on tax on profit; and
Annual transfer pricing documentation, to be submitted upon request by the General Department of Taxation or local tax authorities.
Prasak 986 is effective from the signing date of October 10, 2017, with no clear indication of the first fiscal year to be applied. However, considering many Cambodian enterprises have fiscal years ending 31 December and the annual corporate tax filing deadline is 3 months from fiscal year end, the assumption is that both the transfer pricing form and documentation should be completed by March 31, 2018.
Failure to comply with the above requirements would lead to:
Transfer pricing adjustments, which would result in additional tax;
Tax penalties, which range from 10% to 40% of the additional tax for violations of the Law on Tax (LOT) according to Article 133 of the LOT, plus an interest charge of 2% on late payment; and/or
A law suit filed by the local tax administration against enterprises for charges stipulated under the LOT.
It is likely that an extension may be granted to prepare documentation given this is the first year of implementation. Nonetheless taxpayers with operations in Cambodia are advised to review their transfer pricing policies and begin the process of preparing documentation for March 31, 2018 (for companies with calendar year-ends) in case such an extension is not granted.
New Form 232 Requires Related Party Transaction Disclosure in Spain
Order HFP/816/2017 was published in the Spanish Official Gazette at the end of August approving new Form 232. The adoption of this form is retroactive to tax years beginning in 2016. Given the timing requirements for filing, this means that many firms with tax years ending in December will be required to file this form electronically in November. The disclosure requirements are similar, but not identical to those reported on Form 200, so taxpayers will want to make sure they’ve met the new disclosure requirements.
Transactions that must be disclosed on Form 232 include:
- Transactions with related entities which are (when aggregated by type) in excess of €250,000
- Certain types of transactions with related entities which are (when aggregated by type) in excess of €100,000, including:
- Real estate transactions
- Intangible transactions
- Business transfers
- Transfers of shares to tax havens or transfers of shares that are not traded on regulated markets
- Transactions between entities and personal income tax payers where the person (or their spouses, children, or parents) own at least 25 percent of the entity.
- Transactions with one related party where the total transaction volume represents more than 50 percent of the revenue of one party to the transaction, irrespective of the other thresholds above.
- Transactions with entities tax resident in jurisdictions that have been blacklisted by Spain, regardless of amount involved.
There are also certain conditions where assignment of intangible assets to related party entities to realize patent box benefits may result in disclosure requirements.
As was true for Form 200, exceptions apply to intragroup transactions occurring within a Spanish tax consolidated group. Form 232 (which is only available in electronic format) must be filed within 11 months after the end of the tax year it is addressing, meaning that firms with tax years ending December 31, 2016 will need to file this form by the end of November.