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Direct Tax

Amendments to the tax regime of Russian Federation for IT companies

[Excerpts from Mondaq, 17 August 2020]

In order to make the IT industry more attractive and encourage carrying out activities for the design and development of electronic component base products and electronic (radioelectronic) products, the president of the Russian Federation has signed a federal law. The law proposes the following amendments to the current tax code:

  • Reduction of insurance premium rate from 14% to 7.6% from 2021
  • Reduced income tax rate from 20% to 3% from 2021
  • Exemption from value added tax (VAT) for IT and Digital Companies The above benefits would be available to IT companies subject to a set of conditions, one of them being that the proportion of proceeds from the sale of services for the development and adaptation of computer programs is at least 90% of the total income of the company for the specified period.

These amendments would support the IT industry of Russia and help leave behind recognized countries such as India and Ireland, which are considered the most loyal to the IT industry in the world's community

Spain mulls to introduce Digital Services Tax and Financial Transaction Tax

[Excerpts from JD Supra, 19 August 2020]

Recently the Spanish Congress tabled two new tax bills, namely Financial Transactions Tax (commonly referred to as the 'Tobin Tax') and the Digital Services Tax (commonly referred to as the 'Google Tax'), which are awaiting approval from Senate in September 2020.

Tobin Tax: it will be an indirect tax of 0.2% on the amount of the purchase and sale of shares in Spanish companies with a market capitalization of more than EUR 1 billion as of 1 December of the year prior to the acquisition. However, this tax may not be levied on the acquisition of one's own shares, primary market operations (IPOs), transactions necessary for the operation of market infrastructure, etc

Google Tax: It is a 3% tax on digital services (including online advertising, intermediation between companies and individuals, and the sale of user data) involving users located in Spain, provided the turnover of that entity in the previous calendar year exceeded EUR 750 million, of which at least EUR 3 million corresponds to digital services provided in Spain. However, there is a set of digital services to which the Google Tax would not apply.

If both the bills pending before the Senate are passed, the same would be effective post three months its publication in the Official State Gazette of Spain.

Singapore's Finance Ministry proposes introduction of Tax Avoidance Surcharge and strengthening GAAR

[Excerpts from Withersworldwide, 22 July 2020]

Singapore's Finance Ministry had published the draft Income Tax (Amendment) Bill 2020 with the main objective of introducing a surcharge on tax avoidance arrangements and strengthening general anti-avoidance provisions (GAAR).

The draft bill proposed a new Section 33A to the Income Tax Act with an intention to deter tax avoidance arrangements. Such an amendment would increase the number of tax audits and additional assessments as well as bring more companies under the scanner of Singapore Tax Authorities engaged in such tax avoidance activities.

Further, the draft bill also proposes a surcharge equal to 50% of the amount of tax imposed on the person u/s 33A, which would be payable within one month to the Tax Authorities irrespective of any appeal or objection filed in that regard.

Transfer Pricing

Australia: Finalized rules on thin capitalization and draft rules on outbound interest-free loan between related parties

ATO released final rules and guidelines for the Arm's Length Debt Test for thin capitalization

[TR 2020/ 4 and PCG 2020/7, August 2020]

On 12 August 2020, the ATO released the final Taxation Ruling TR 2020/4 (Income tax: thin capitalization – the Arm's Length Debt Test) and Practical Compliance Guideline PCG 2020/7 (replacing the draft PCG 2019/ 03) in relation to the Arm's Length Debt Test for thin capitalization purposes.

The final guidance on thin capitalization is retrospectively applicable to income years commencing on or after 1 January 2019. The final guidance has emphasized the following:

  • Arm's Length Debt Test is one of the tests available to establish an entity's maximum allowable debt amount for thin capitalization;
  • Further, this test focuses on identifying the notional amount of debt a business would reasonably be expected to have, and an independent commercial lender would reasonably be expected to lend.

Some of the important points for Arm's Length Debt Test are as under:

  • The taxpayers are required to determine the Arm's Length Debt Test (ALDT) basis for the commercially reasonable position of stand-alone Australian business.
  • The taxpayer may use the fair market value of assets for performing ALDT analysis.
  • Further, taxpayers are expected to maintain appropriate documentation to justify as to how they arrived at arm's length debt amount
  • While rules are required to conduct ALDT, it could be different from arm's length capital structure for transfer pricing purposes.
  • Additionally, Practical Compliance guidance provides ATO's approach to Arm's Length Debt Test and risk assessment framework for the taxpayer to self assess its level of risk.

ATO released draft rules on outbound interest-free loans between related parties

[PCG 2017/4DC2, August 2020]

On 12 August 2020, the ATO released draft rules PCG 2017/4DC2 on the interest-free loans between related parties, which provides key factors to be considered when determining transfer pricing risk for the outbound interestfree loans by the Australian taxpayer to its foreign related parties.

Draft rules stated that an interest-free outbound loan would be considered 'high risk' from a transfer pricing perspective. To prove otherwise, evidence of one of the following shall be needed:

  • A zero-interest rate is an arm' s-length condition of the loan.
  • The loan is in substance, an equity contribution.
  • Independent entities would not have entered into the actual loan and would have entered into an equity funding arrangement.

The ATO has recommended undertaking the following preliminary analysis to conclude whether an interest-free loan is akin to equity contribution such as:

  • Rights of the lender (voting rights, contingent returns, or other rights);
  • No set repayment date;
  • Degree of subordination to existing debt;
  • The borrower's ability to borrow interest-free loans from third-party lenders on commercial terms.

Basis the above factors/analysis, ATO may indicate a pricing risk scoring table to rate the interest-free loan out of a 10 scoring system (10 being the highest risk). To reduce the score of 10 points, the taxpayer needs to demonstrate certain factors.

Tanzania: Tanzania Revenue Authority published a new Transfer Pricing Guidelines

[Tanzania Transfer Pricing Guidelines, July 2020]

Tanzania Revenue Authority (TRA) published the Transfer Pricing Guidelines, 2020 (the Guidelines) in line with the Tax Administration (Transfer Pricing) Regulations (2018) (TP Regulations). The Guidelines contain illustrations and simplified examples of the procedures to be followed in the determination of arm' s-length prices.

Some of the important discussions covered in the guidelines are:

Functional analysis – A comprehensive guidance on Functional, Assets and Risk (FAR) Analysis for intra-group transactions has been provided along with guidance on a few specific functions such as procurement, financing, management, and sales and marketing. Further, guidance has mentioned that FAR analysis needs to be tabulated and summarized, indicating responsible entity, performance score (High/Medium/Low) against such function or risk.

Tested Party – The guidelines have confirmed a selection of a foreign tested party where sufficient and reliable data is available. Such significant data may comprise of financial statements, employee profile, registration information of intangibles, organization chart, etc. of the foreign tested party.

Transfer Pricing Methods and corresponding adjustments – The guidelines have provided various illustrations for the adoption and application of transfer pricing methods.

Time limit to file TP documents – TP Regulation provides that where the transactions with associates exceed 10 billion Tanzanian shillings, Transfer Pricing documents are required to be submitted at the time of filing income tax returns. The guidelines have allowed such a person to seek an extension to submit transfer pricing documentation for not more than 30 days.

Intra-group services – In relation to intra-group services, the guidelines dealt with three questions to be analyzed in detail viz (1) Whether intra-group services have been rendered (2) Whether provision/availing of such service has conferred an economic benefit or commercial value to the business that enhances its commercial positions (3) Whether intra-group charges are at arm's length.

Intra-group financing – The guidelines recognize intra-group financial transactions issues such as whether the transaction gives rise to a loan (accurate delineation and recognition of the actual transaction), size of the loan as well as nature/extent of interest deduction that are allowed. In determining the arm's length rate of interest for an inbound or outbound loan transaction, the guidelines provide that certain factors relating to loan transactions need to be analyzed such as quantum, currency, security/ guarantee (if any), creditworthiness of a borrower, actual delivery/ utilization of loan, etc.

Our Comments

Tanzania Revenue Authority has attempted to provide extensive guidance on complex issues (including intra-group services and financing, DEMPE, etc.) and is also aggressive in scrutinizing the intra-group transactions of taxpayers. In fact, it also provides the taxpayer with an option to enter into an Advance Pricing Agreement (unilateral/ bilateral/ multilateral) with tax authorities. However, the practical implementation of this guidance by taxpayers as well as tax authority remains to be seen. At the same time, Tanzania's authority is yet to evolve on certain other transfer pricing issues such as outstanding receivable/ payable, guarantee, etc.

France: Annual transfer pricing return filing deadline extended

[General Directorate of Public Finance, June 2020]

On account of the COVID-19 pandemic, the French tax administration has extended the deadline to file the corporate tax return. In line with the same, the tax authority has indicated to extend the deadline to file an annual transfer pricing return since which is due within six months from the deadline of filing the corporate tax return.

Therefore, the revised deadline for tax and transfer pricing return is as under:

Financial year ending Revised Tax Return deadline Revised Annual Transfer Pricing Return deadline
Financial year ending on 31 December 2019, 31 January 2020, and 29 February 2020 31 December 2020 30 June 2021
Financial year ending on 31 March 2020 31 January 2021 31 July 2021

Notably, France's tax administration requires the companies with an annual gross turnover or gross assets to or exceeding EU 50 million or that hold or are held by a legal entity that satisfies the EU 50 million threshold to mandatorily file an annual transfer pricing return, which includes element typically included in documentation report such as information about group and taxpayer, intra-group transactions crossing a certain threshold, etc.

Philippines: Requires Transfer Pricing information return from the taxpayer

Revenue Memorandum Circular (RMC) 76-2020, July 2020

Philippine Bureau of Internal Revenue (BIR) issued Revenue Regulations No. 19-2020, which requires taxpayers to submit transfer pricing return and certain other information along with their annual corporate tax return. This mainly aims to implement disclosure of related party transactions and achieve the application of the arm's length principle.

The regulation is effective from 25 July 2020 and will apply to the current and subsequent taxable years. This reporting requirement applies to both domestic and foreign transactions and to both a reporting entity and a related party.

The following information is required to be submitted:

  • Name, address and Tax Identification Number of the related party;
  • Nature and amount of transactions, amount of outstanding balance at year-end, terms and conditions of transactions, whether secured/ guaranteed, provision of doubtful debts;
  • Business overview of group and taxpayer along with the name, legal status, and country of tax residence of each related party, functional profile;
  • Separately categorized into transactions with the parent, entities with joint control or significant influence over the entity, subsidiaries, associates, joint ventures in which the entity is a partner, key management personnel of the entity or its parent, and other related parties;
  • Certified true copies of relevant contract/agreement or proof of transaction;
  • Certified true copy of Advance Pricing Agreement, if any;
  • Withholding tax details and proof of payment;
  • Any other documentation.

The failure to comply with the above requirements regulation may result in penalties (including fines and/or imprisonment).

Indirect Tax

Call for UK government to extend VAT cut to the sports industry

[excerpts from The Telegraph UK]

The sports and physical activity sector in the United Kingdom has asked the government to extend the benefit of reduced VAT granted to the tourism and hospitality industry. The lockdown imposed in view of the COVID-19 pandemic has impacted the sector significantly with a substantial reduction in revenues, even down to zero in some cases.