Direct Tax

Barbados joins OECD/G20 BEPS Inclusive Framework on BEPS on a Two–Pillar Solution on the digital economy

[Excerpts from the OECD, 12 August 2021]

Barbados joins the two-pillar plan formulated by OECD/G20 BEPS Inclusive Framework addressing the tax challenges arising from digitalization of the economy to reform the international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate, bringing the number of jurisdictions participating in the agreement to 133. The Statement, released on the 1 July 2021 and agreed by Barbados on 12 August 2021, establishes a new proposal for international tax reform based on a two-pillar package. The deal will be finalized in October 2021, complete with an implementation plan to develop model legislation, guidance and a multilateral treaty in 2022, with implementation from 2023.

OECD updates Transfer Pricing Country Profiles to reflect new kinds of financial transactions

[Excerpts from the OECD, 3 August 2021]

The OECD has published updated Transfer Pricing Country Profiles, reflecting the current transfer pricing legislation and practices of 20 jurisdictions-Angola, Argentina, Australia, Colombia, Costa Rica, Czech Republic, Denmark, India, Japan, Netherlands, New Zealand, Nigeria, Norway, Romania, Russian Federation, Slovak Republic, Spain, Switzerland, Tunisia and Turkey. These updated profiles also contain new information on countries' legislation and practices regarding the transfer pricing treatment of financial transactions and the application of the Authorised OECD Approach (AOA) to attribute profits to PEs. Updates to the Transfer Pricing Country Profiles will be conducted in batches throughout the second half of 2021 and the first half of 2022. With this first batch, the profiles for 20 jurisdictions have been updated, including three new country profiles from Inclusive Framework members (Angola, Romania and Tunisia), bringing the total number of countries covered to 60.

New EU Single Corporate Tax Rulebook (BEFIT) WillFollow OECD's Proposals for the Digitalized Economy

[Excerpts from Answer given by Mr. Gentiloni on behalf of the European Commission, 3 August 2021]

The European Commission will propose a new framework for income taxation for businesses in Europe (Business in Europe: Framework for Income Taxation or BEFIT). BEFIT will build on some of the fundamental elements of the envisaged OECD/G20 global agreement on the two pillars. The OECD reforms involve the taxation of multinational enterprises and address cases with an exclusively cross-border dimension. BEFIT will also operate in a similar context. It will address cross-border issues linked to the taxation of groups of companies. As a result, coordinated EU action, rather than disparate national measures, is an inherent element of BEFIT. The Commission will carry out broad consultations with the Member States, the European Parliament and the business in order to produce this proposal.

Kenya Enacts Direct Taxation Amendments Aimed at Widening Tax Base

[Report from IBFD correspondent Ann Ng'ang'a- Tax Consultant, Kenya, 27 August 2021]

The Kenyan government enacted several tax amendments related to direct taxation, including deeming family trust income as chargeable income, exempting the transfer of property to a family trust from capital gains tax, etc. This income will, however, be exempt if the family trust is registered. More details of the various amendments, which unless otherwise indicated, will apply from 1 July 2022 relating to direct taxation.

Transfer Pricing

Hong Kong IRD issues guidance for Transfer Pricing on account of COVID-19

The Inland Revenue Department (IRD) of Hong Kong has recently issued guidance on Transfer Pricing related issues arising from COVID-19, which is principally in line with the guidance on the Transfer Pricing Implications of the COVID-19 Pandemic (the COVID-19 Transfer Pricing Guidance) released by the Organisation for Economic Cooperation and Development (OECD).

IRD Guidance for Tax Payers concerning Transfer Pricing3

1. Limited risk-bearing entities may incur certain COVID-19 losses

The OECD guidelines recognize the possibility of limited risk-bearing entities incurring losses caused by the pandemic or being allocated specific pandemic costs, as long as these approaches are supported by an accurate delineation of the controlled transaction and a robust comparability analysis. To the extent that the risk assumed by a limited risk entity is consistent with the realization of a hazard risk caused by the pandemic (for example, the marketplace risk), the limited risk entity may be allocated a loss associated with the playing out of this risk. However, if before the pandemic a limited risk entity did not assume any particular risk, say credit risk, it may not be appropriate for it to bear the realization of such a risk during the pandemic.

2. Testing periods

Considering the divergent economic conditions in the pre or post-pandemic period and its effects on economic conditions, as a pragmatic approach, it may be appropriate to have separate testing periods vis-a-vis periods considered for price setting.

In other fact patterns, it may also be appropriate to use combined testing periods (i.e., including years impacted by the pandemic and years not affected) to improve comparability. This may be appropriate so long as the data from independent comparables can be consistently measured over a similar period.

3. Treatment of loss-making comparable companies

The use of loss-making comparable companies may be appropriate where reliability can be demonstrated (i.e., the comparable companies should assume similar levels of risk and be similarly impacted by the pandemic). Thus, loss-making comparables that satisfy the comparability criteria in a particular case should not be rejected on the sole basis that they suffer losses in periods affected by the pandemic.

4. Impact of government assistance on controlled transactions

The receipt of government assistance in itself cannot be presumed to have an impact on the price of controlled transactions. Relevant comparability analysis needs to be performed, considering economically relevant characteristics –such as the conditions imposed by the government assistance, the impact of the pandemic on the outcome of the economically significant risks, and the linkage between the type of government assistance and those risks.

5. Outcome of economically significant risks

The interplay between the COVID-19 hazard risk and other economically significant risks should be evaluated when considering risk assumptions in a particular controlled transaction. In undertaking this analysis, it may be determined that the taxpayer to a controlled transaction cannot influence the hazard risk associated with a pandemic but nevertheless assumes other risks that have materialized because of COVID-19.

6. Advance Pricing Agreement

The IRD will uphold existing Advance Pricing Agreements(APAs) unless a condition leading to the revocation, cancellation or revision of the APA has occurred. In a scenario wherein material changes in economic conditions lead to the breach of the critical assumptions, taxpayers should notify the IRD not later than one month after the breach occurs.

Our Comments

The unprecedented situation due to COVID-19 has raised many taxation issues. The Hong Kong IRD taking recourse to the Transfer Pricing Guidelines as issued by the OECD for COVID-19, has provided relevant guidance on various aspects that a taxpayer may encounter while undertaking the transfer pricing analysis in respect of the inter-company transactions and for APAs.

It is in the MNE’s interest to be proactive and start collating relevant qualitative and quantitative points that can assist them in justifying any changes in the inter-company pricing policy considering the COVID-19 pandemic. Special emphasis is required for aspects like Functional and Risk analysis, Impact on Benchmarking and APA.

3. IRD : Tax Issues arising from the COVID-19 Pandemic and The Guidance on the transfer pricing implications of the Covid-19 pandemic issued by the OECD on 18 December 2020

Indirect Tax

Changes in Texas sales tax law

[Excerpt from The Dallas News]

The Texas sales tax law will be undergoing a sweeping change from 31 October 2021, whereby municipal sales taxes on online purchases will be remitted to the city where the buyer resides rather than where the seller operates.