Direct Tax

UN Tax Committee releases 2021 version of Model Tax Convention and Commentary

[Excerpts from Orbitax News, 6 April 2022]

The 2021 version of the United Nations Model Tax Convention was recently released ahead of the 24th Session of the Committee of Experts on International Cooperation in Tax Matters, held from 4 to 7 April and 11 to 12 April 2022. This is the fifth edition of the Model Convention. The most important changes included in the 2021 version of the UN Model address concerns expressed by developing countries regarding tax treaty obstacles to the taxation of foreign enterprises on income from automated digital services and on gains on offshore indirect transfers. The 2021 UN Model also features new guidance on the application and interpretation of the definition of Permanent Establishment (PE), the concept of a beneficial owner, and the application of the Model's provisions to collective investment vehicles, pensions funds, and real estate investment trusts. This latest revision of the United Nations Model Tax Convention continues an ongoing review process intended to ensure that the contents of the Model keep up with developments, including in country practice, new ways of doing business and new challenges.

Australia to amend the law for relaxation taxes on Indian firms’ offshore income from technical services

[Excerpts from Times of India, 21 April 2022]

The Economic Co-operation and Trade Agreement (ECTA) recently signed between India and Australia includes, through an exchange of side letters, a commitment from Australia to amend its domestic tax law to “... stop the taxation of offshore income of Indian firms providing technical services to Australia.” This will greatly benefit Indian IT companies that have been impacted by a ruling by the Federal Court of Australia in 2018, which had interpreted the Articles of the India-Australia Tax Treaty and upheld the levy of tax by the Australian Tax Office (ATO) on income from certain offshore technical services provided by the Indian companies to their clients in Australia. Once this agreement under ECTA is ratified in the Australian Parliament, it will help Indian technology companies provide offshore services to their Australian clients in a seamless and cost-efficient manner.

OECD releases Stage 2 MAP peer review reports for nine jurisdictions

[Excerpts from oecd.org, 14 April 2022]

Under Base Erosion and Profit Shifting (BEPS) Action 14, jurisdictions have committed to implementing a minimum standard to improve the resolution of tax-related disputes between jurisdictions. Despite the significant disruption caused by the ongoing COVID-19 pandemic and the necessity to hold all meetings virtually, work has continued with the release today of the Stage 2 peer review monitoring reports for Andorra, Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Faroe Islands, Macau (China), Morocco and Tunisia. These reports evaluate the progress made by these nine jurisdictions in implementing the recommendations resulting from their Stage 1 peer review. They take into account any developments in the period of 1 September 2019 to 30 April 2021 and build on the Mutual Agreement Procedure (MAP) statistics for 2016-2020. The peer review and peer monitoring process results demonstrate positive changes across all nine jurisdictions, although not all show the same level of progress.

US Assistant Secretary for Tax Policy states that a two-pillar solution, reforms in GILTI and BEAT shall be the top priority of the Biden Administration

[Excerpts from US Treasury, 15 April 2022]

After GILTI and BEAT reform, the US will need to turn to the multilateral instrument for Pillar One, important pieces of which are currently being negotiated and submitted for public consultation as they become ready. Although the business community is understandably reserving judgment until the details of Pillar One become clear, we are confident that once the deal is brought to the implementation stage, the benefits to the US fisc and to US businesses will be readily apparent. Pillar One would restabilize the allocation of taxing rights in the international tax system to be sustainable and would put an end to the chaotic array of unilateral, discriminatory measures that were proliferating and can result in multiple layers of taxation. These measures currently only threaten certain sectors of the economy, but they are poised to apply more broadly, potentially escalating tariff retaliation and trade wars.

Transfer Pricing

Brazil proposes to introduce a TP system in convergence with OECD Standard

In February 2018, the tax authorities of Brazil (i.e., Receita Federal do Brasil (RFB)) and Organiation for Economic Co-operation and Development (OECD) launched a joint project to examine the similarities and divergences between the Brazilian and OECD TP approaches to valuing cross-border transactions between AEs for tax purposes.

The key benefits of aligning Brazil’s TP system with the OECD’s TP rules include the following:

  • Avoiding and eliminating double taxation, which results from the existing gaps and divergences.
  • Preventing loss of revenue due to current BEPS practices, which also creates inequality within
  • Aligning the current system, where some taxpayers are treated more favorably than others.
  • Increasing tax certainty from an international perspective.
  • Integrating Brazil in global value chains and fostering trade and investment in Brazil; and
  • Facilitating Brazil’s accession to the OECD.

A 15-month work program was carried out by the OECD jointly with RFB, which included an in-depth analysis of the Brazilian TP legal and administrative framework as well as its application. A summary of key aspects of the report11 is as follows:

  • Implement BEPS Actions 8-10 recommendations, including guidance on the accurate delineation of transactions, the framework for analysis of risk, nonrecognition of transactions and guidance on location savings and other local market features, assembled workforce, and MNE group synergies, intangibles, including hard-to-value intangibles, low value-adding intra-group services and cost contribution arrangements.
  • Implement the remaining BEPS Action 13 recommendations (i.e., the master file and the local file).
  • Restate the ALP in the primary law.
  • Change or refine elements in the system that deviate from the ALP (e.g., fixed margins, comparability issues, etc.) – see relevant sections.
  • Refine the scope as necessary by addressing issues related to the personal, material, and territorial scopes.
  • Other factors include – TP methods, comparability issues, special consideration, documentation and penalties, compliance and examination practices, etc.

The said proposal of aligning the TP system of Brazil with the OECD is a further step toward Brazil’s entrance into the OECD and will significantly affect MNEs. While there is no defined date for draft legislation yet, the OECD and RFB have suggested implementing the new TP system by 2023.

Belgium: Launch of TP Audit 2022

The Belgian tax authorities’ national TP audit team has launched the 2022 TP audit wave, accompanied by interesting changes to the TP cell’s standard approach. The summary of such changes is as follows:

  • Change in the Audit Process:
    Instead of sending the standardized questionnaire, the tax authority now initiates the audit through a request to hold a pre-audit meeting (which was only optional in the past).
  • Selection of Taxpayers:
    Companies will be selected for the new TP audit wave based on the outcome of a risk assessment analysis performed by the tax authorities’ ‘MANTRA’ software (the criteria used would be confidential).
  • Financial Transactions:
    More focus would be given to intragroup financial transactions
  • Tax Adjustments :
    For effective cash taxation further to tax audit adjustments, no tax attributes (including forward tax losses, dividend received deduction (DRD)), investment deduction, etc. may be offset against the additional taxable base resulting from an adjustment other than the current year DRD that has not yet been fully claimed. The application of the measure is limited to situations where the adjustments imposed by the tax authorities have resulted in an additional tax liability of at least 10%. It also provides for adjustments for abnormal or benevolent advantages received situations.

In light of the above actions taken by the Belgian tax authority, it would be vital for the taxpayers to review their TP policies thoroughly and maintain a robust and consistent TP documentation and analyses. Additionally, it would be important for the taxpayers to keep abreast of the applicable policies with the latest OECD guidance while entering into the financial transactions.

United States: Released Announcement and report concerning APA

The US Internal Revenue Service (IRS) recently released Announcement 2022-7, Announcement and Report Concerning Advance Pricing Agreements12. This is the 23rd report describing the experience, structure, and activities of the Advance Pricing and Mutual Agreement Program during the year. The key snippets are as follows:

  • There was an increase in APA applications filed from 121 (in 2020) to 145 (in 2021).
  • There was an increase in the percentage of APA renewals executed from 59% (2020) to 63% (2021).
  • There were 124 APAs executed in 2021, and more than half of the APAs executed in 2021 involved transactions between Non-U.S. parents and US subsidiaries.
  • While most of the transactions covered in APA’s executed in 2021 involve the sale of tangible goods or the provision of services,15% still involve the use of intangible property, which can be among the most challenging transactions in APA’s inventory.

The above statistics show that filing for APA applications again gained momentum in 2021. With changes in the tax laws related to Base erosion and profit shifting, it would be beneficial for the taxpayers to understand the nuances of the APA rules and their application in each jurisdiction.

11. Refer Page No 274, 275 and 276 of the “Transfer Pricing in Brazil – Towards Convergence with the OECD Standard” report available in the following link: https://www.oecd.org/tax/transfer-pricing/transfer-pricing-in-brazil-towards-convergence-with-the-oecd-standard.pdf
12. https://www.irs.gov/pub/irs-drop/a-22-07.pdf

Indirect Tax

Extension of sales tax exemption

[Excerpts from coinworld.com]

Virginia Governor, Glenn Youngkin, has signed a bill to extend the sales tax exemption on gold, silver and platinum bullion and legal tender coins. The State was originally granted this exemption in 2015, which was to expire on 30 June 2022. Now the exemption has been extended till 30 June 2025.

VAT hike for pubs and restaurants

[Excerpts from itv.com]

UK Chancellor, Rishi Sunak, has announced a few changes to taxation in his Spring Statement, an important one pertaining to the Hospitality sector. The VAT on pubs, restaurants and cafes is likely to return to 20%. The government had previously lowered this tax to 5% due to the pandemic, which was then increased to 12.5% in October 2021. Now, the VAT rates are set to be increased by 7.5%.

Rishi Sunak urged to slash VAT and green levies

[Excerpts from dailymail.co.in]

The UK energy bosses have requested the Chancellor to extend the warm home discounts, scrap the green levies on energy bills, cut VAT on gas and electricity and consider a deficit fund to remove 1,000 euros from the bills of the poor.