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Direct Tax

Germany and Pakistan deposit their instrument of ratification for the Multilateral BEPS Convention

[Excerpts from OECD, 18 December 2020]

With 95 jurisdictions currently covered by the MLI, Germany and Pakistan have deposited their instrument of ratification for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (Multilateral Convention or MLI).

Ratification by Germany and Pakistan now brings to 59 jurisdictions that have ratified, accepted or approved it. The Multilateral Convention will become effective on 1 January 2021 for over 600 treaties concluded among the 59 jurisdictions, with an additional 1200 treaties to become effectively modified once the MLI will have been ratified by all Signatories.

EU member states agree on new tax transparency rules on digital platforms

[Excerpt from European Union, 4 December 2020]

The European Commission welcomes the recent compromise reached by the Member States to extend EU tax transparency rules to digital platforms, making sure that those who make money through the sale of goods or services on platforms also pay their fair share of tax. This follows the proposal made by the Commission in July as part of the Action Plan for fair and simple Taxation Supporting the Recovery Search. The agreed proposal on administrative cooperation (DAC 7) will ensure that the Member States automatically exchange information on the revenues generated by sellers on digital platforms, whether the platform is located in the EU or not. This will not only allow national authorities to identify situations where tax should be paid but will also reduce the administrative burden placed on platforms, which often have to deal with several different national reporting requirements. The proposal also strengthens and clarifies the rules in other areas in which the Member States work together to fight tax abuse, for example, through joint tax audits.

Argentina Senate passes ‘Millionaire tax’ for COVID-19 relief

[Excerpt from the economic times, 5 December 2020]

Argentina’s Senate passed a tax on about 12,000 of the country’s richest people to pay for coronavirus measures, including medical supplies and relief for the poor and small businesses. The government of President Alberto Fernandez hopes to raise 300 billion pesos (USD 3.75 billion) with the one-off levy, which earlier passed the Chamber of Deputies with 133 for votes to 115 against

Under the scheme -- also dubbed the ‘millionaire’s tax’ - people with declared assets greater than 200 million pesos will pay a progressive rate of up to 3.5% on wealth in Argentina and up to 5.25% on wealth outside the country. Of the proceeds, 20% will go to medical supplies for the pandemic, another 20% to small and medium-sized businesses, 15% to social developments, 20% to student scholarships and 25% to natural gas ventures.

Transfer Pricing

OECD TP Guidance: Impact of COVID -19 pandemic on Transfer Pricing


OECD issued TP guidance providing clarification and support to both taxpayers and tax administrations as they evaluate and administer the application of transfer pricing rules for periods affected by the COVID-19 pandemic. The priority issues identified and covered under guidance are as follows:

Comparability analysis: The impact on the pandemic would vary depending on the economically relevant characteristics of the accurately delineated transaction. Industry reports assessing the effect of the pandemic on respective industries may be relied upon in ascertaining the arm’s length nature of an enterprise’s TP policy implemented for FY 2020. The taxpayer could also compare the budgeted financial results to those actually achieved to approximate the specific effects of COVID-19 on revenues, costs, and margins in order to set their transfer price. Other alternate approaches could include price adjustment mechanisms in controlled transactions, which may provide for flexibility while maintaining an arm’s length outcome, the inclusion of loss-making companies that suffered losses particularly in periods affected by COVID-19, addressing economic conditions as pre and post-pandemic period in order to assess the material effects of the pandemic that were evident in a particular period.

Losses and allocation of COVID-19 specific cost: Allocation of nonrecurring/ extraordinary losses to an AE could prove to be a point of dispute. The taxpayers need to delineate such costs from the transaction based on the risks assumed by the parties to the intercompany agreement.

One also needs to understand as to how such costs would be treated by independent parties while determining the arm’s length price. Allocation of losses in case of limited risk distributor would be a point for consideration. A limited risk distributor is averse to market risk or bears limited risk as compared to a full-fledged or normal risk distributor. However, post-pandemic, one needs to assess whether any market risk was assumed on account of a change in risk management functions and hence should be allocated losses. Caution also needs to be exercised while modifying arrangements under these conditions, particularly in the absence of clear evidence that independent parties in comparable circumstances would have revised their existing agreements or commercial relations. Lastly, invoking of force majeure clause would depend on the conduct of parties and economic circumstances of the commercial arrangement in determining whether, at arm’s length, a party would decide to invoke a force majeure clause.

Government assistance programs: Impact of government assistance programs related to COVID-19 need to be evaluated w.r.t. controlled transactions while comparing their effects with those of other pre-existing assistance programs. In a case where the government assistance is an economically relevant characteristic, the said information should be included as a part of the documentation to support the transfer pricing analysis. Caution needs to be exercised on how independent parties would allocate government assistance and how it would impact the arm’s length outcome.

Accounting treatment of government assistance especially w.r.t the tested party and comparables applying different accounting standards, should be considered while performing a comparability analysis under Resale Price Method (RPM), Cost Plus Method (CPM), or Transactional Net Margin Method (TNMM).

Advance Pricing Agreement (APA): Taxpayers would face challenges while negotiating APAs under current economic conditions resulting from COVID-19. It is recommended that existing APA terms should be upheld and maintained unless cancellation or revision of APA is warranted on account of breach of critical assumption. Considering the effect that the pandemic has had on the operational, economic and market conditions (which forms the basis of critical assumption), breach of the critical assumptions is likely to occur. It is encouraged that taxpayers and tax administrators should adopt a flexible and collaborative approach to minimize delay while negotiating APAs that cover FY 2020, taking into account the current economic conditions.

Our Comments

Undertaking relevant adjustments while undertaking economic analysis as a consequence of COVID-19 will not be an easy task at hand for the taxpayers due to the unique nature of problems faced by different industries. The guidance provided by OECD will help avoid undue transfer pricing litigation between the taxpayer and Indian tax authorities. On the APA front, the guidance will help the tax authorities to adopt a more flexible approach while dealing with the taxpayers concerning re-negotiating of concluded APAs already or ones that are in process.

Australia: An updated guidance on Advance Pricing Agreements (APA) released by the Australian Tax Office (ATO)

On 3 December 2020, the ATO released an updated Practice Statement Law Administration (PSLA) 2015/4 on APAs. The guidance aids ATO staff who handle and review APAs. It also enables taxpayers to understand the internal review and approval process followed by the ATO. Some of the key updates that will interest the taxpayers evaluating the APA program is listed below:

  • As per the ‘Mutual expectations’ stated in Section 5 of the PSLA, ATO expects the taxpayers to be transparent in their dealings and furnish the requisite information in a timely manner. In case the mutual expectations are not met, the ATO will consider withdrawal from the APA;
  • The updated guidance indicates an entry for profit-makers whose transfer pricing risk has been assessed as low in accordance with Practical Compliance Guidelines (PCG) 2019/1 on the transfer pricing issues related to inbound distribution arrangements;
  • Along with APA, the ATO shall concurrently deal with collateral issues (i.e., issues separate to transfer pricing) such as potential application of Part IVA, the Multinational Anti-Avoidance Law1 (MAAL) and the Diverted Profits Tax2 (DPT). In the absence of the collateral issued being resolved, the ATO shall not proceed with APA. Application of DPT to covered transactions shall be specifically looked into by the APA team. The APA team shall also consider inserting a clause addressing the DPT into the final APA agreement in case requested by the taxpayer;
  • Further clarity is provided on the various internal ATO workshops and Quality Assurance (QA) panels that are held during the APA process, including clarification of the roles of the meeting participants.

Any disagreement between the APA team leader and the QA panel’s recommendation during the negotiation of the APA can be escalated to the APA team’s Assistant Commissioner for resolution by the APA team leader. Thus, the APA team has autonomy in the negotiation of APAs, which may help taxpayers obtain a quicker resolution to the negotiations.

Our Comment

Issuance of such guidance will be welcomed by the taxpayers in Australia who are already in the APA process or planning to file an APA application. This will bring out certainty on the timeframe within which the APA process can be concluded and also transparency in the process adopted by the tax authorities at all the levels of APA negotiations. It will be helpful if the Indian tax authorities can issue a similar guideline. This will significantly reduce the turnaround time for finalizing of APA and in turn, foster confidence amongst the taxpayers.

Malaysia: Introduction of Transfer Pricing measures in Finance Bill 2020

The Minister of Finance tabled the 2021 Budget on 6 November 2020. This was followed by the release of the Finance Bill 2020 that has proposed to include the following transfer pricing related amendments to the Income Tax Act (ITA), 1967. The proposed measures shall be effective from 1 January 2021.

  • Penalties for failure to furnish transfer pricing documentation (new Section 113B): The proposed amendment recommends introducing a penal provision for failure to furnish the contemporaneous transfer pricing documentation in a timely manner (typically within 30 days of a written notice of request from the Inland Revenue Board).
  • Authority to disregard structures in a controlled transaction (Section 140A): Rule 8 of Income Tax (Transfer Pricing) Rules 2012 proposed to be inserted in the ITA authorizes Director General of Inland Revenue (DGIR) to disregard and re-characterize any structure adopted w.r.t. controlled transaction if:
    1. The economic substance of the transaction differs from its form; or
    2. The form and substance are the same, but the arrangement differs in entirety when compared to independent players operating in similar commercial constraints. The actual structure deters the DGIR from determining an appropriate transfer price.In case where the DGIR has disregarded the structure, an appropriate adjustment shall be made (by DGIR) to the structure, which reflects arm’s length dealing by independent parties having regard to the economic and commercial reality.
  • Surcharge on transfer pricing adjustment: The subsection 140A(3C) inserted in ITA allows Internal Revenue Board (IRB) to impose a surcharge of not more than 5% on any transfer pricing adjustment made on all tax audit and investigation cases, whether taxable or not.

Vietnam: Update in Transfer Pricing rules

On 5 November 2020, the government issued a new TP Decree No. 132/2020/ ND-CP (Decree 132) to replace the existing Decree No. 20/2017/ND-CP (Decree 20) and Decree No. 68/2020/ ND-CP (Decree 68). Decree 132 took effect from 20 December 2020 and is applicable for the tax year 2020 onwards.

Key highlights of Decree 132 are listed as follows:

Applicability: Transfer Pricing provisions shall apply to taxpayers paying Corporate Income Tax (CIT) that have related party transactions (RPTs). The application of revised provisions could be extended to foreign contractors as well.

Arm’s length range re-defined: The standard arm’s length range is 35th to 75th percentile derived from a set of at least five independent comparable companies (as per Decree 20, the lower bound of the range was 25Th percentile). The proposed transfer pricing adjustments are to be made to the median value where the results of the taxpayer fall outside the arm’s length range. Thus, taxpayers need to revisit their transfer pricing policies/ positions for the tax year 2020 onwards in order to align their benchmarking analysis and mitigate transfer pricing risks.

Use of database: Decree 132 validates the use of commercial and public databases for performing benchmarking analysis by both taxpayers and tax authorities. However, the Decree allows the tax authority to use secret comparables (internal database of the government) to make a TP adjustment where the taxpayer is not compliant with the relevant requirements of the Decree.

Enhanced Country-by-Country Report (CbCR):

  1. Vietnamese ultimate parent company having group consolidated turnover of VND 18,000 billion shall file CBCR within 12 months from the end of the relevant fiscal year;
  2. Vietnamese tax authorities shall obtain CbCR from the respective overseas jurisdiction through automatic exchange of information (AEOI) where the foreign ultimate parent entity of Vietnamese subsidiary is obligated to file CbCR in its jurisdiction, or the foreign ultimate parent entity nominates another entity (surrogate entity) to file the report on its behalf in the surrogate entity’s jurisdiction. However, local filing is requested in case there is no competent authority agreement between Vietnam and the respective jurisdiction or there being a systematic failure of the exchange mechanism.
  3. Taxpayers shall notify the Vietnamese tax authorities on or before the fiscal year-end date of the ultimate parent company in advance where:
    1. One entity is designated by the ultimate parent company to undertake local filing in case of multiple subsidiaries in Vietnam; or
    2. Provide information viz. name, tax code, the jurisdiction of the ultimate parent or the surrogate parent, if applicable.

Relaxation of interest deductibility cap rules:

  1. The cap is increased to 30% (from 20% under Decree 20) of total net operating profit before interest, tax, depreciation, and amortization;
  2. The cap calculation for interest expense is on the net amount, i.e., after offsetting interest expense with interest income. The offset of interest income against interest expense was not addressed in Decree 20;
  3. Non-deductible interest expense can be carried forward for a period of five (5) years provided that the interest expense of the future years does not exceed the 30% cap;
  4. Certain government assistance loans are exempt from this interest limitation rule. Decree 132 akin to decree 20 does not provide clarity for applicability of interest deductibility cap for the interest that has been capitalized and not expensed out.

Other updates:

  1. Definition of related parties is broadened to include cases related to capital transfers and loans between enterprises and individuals that manage and control such enterprises or individuals under one of the relationships as prescribed in the Decree. Since the said transactions qualify as related party transactions, the transactions will have to be meet the arm’s length principle;
  2. The Decree allows an overseas entity to be selected as a ‘tested party’ for benchmarking purposes, depending on the facts of the case;
  3. Decree 132 does not specify the deadline for submitting the TP documentation at the request of the tax authority in the event of a tax/transfer pricing audit shall be in accordance with the Law on Inspection;
  4. Decree provides relief to taxpayers from preparing the TP documentation who are engaged in related party transactions with domestic entities provided the taxpayer and related parties have the same CIT rates, and none of the parties enjoy tax incentives.

Australian Federal Court in Glencore’s case lays down approach on ‘re-construction’ of transaction


Cobar Management Pty Ltd (CMPL), an Australian company, owned and operated a mine in Australia. CMPL was acquired by Glencore International AG (GIAG) in late 1990s. CMPL entered into its first contract to sell all of its copper concentrates to GIAG in 1999. The pricing was based on a marketrelated arrangement wherein the Treatment and Copper Refining Charges (TCRC) deduction was based on 50% benchmark/50% spot TCRC. A new agreement was entered in February 2007 (for the years 2007 to 2009) wherein the pricing was based on price sharing agreement/quotational period optionality with back pricing. The TCRC deduction was fixed @23%, along with the deduction for freight and insurance costs. These changes were significant, involving the introduction of a new methodology for pricing. In particular, the alterations affected significant changes to the respective risks of the parties.

Contentions of the Commissioner: Commissioner was of the view that CMPL has received less compensation from the sale of its copper concentrate for the period 2007 to 2009 as a result of the amended terms agreed in February 2007. The Commissioner’s contention was that the original intercompany agreement between Glencore and its Swiss distribution affiliate should be considered instead of the amended contract in 2007. The Commissioner argued that the key terms agreed under the amended agreement cannot be considered at arm’s length and therefore, alleged that the excess profits were shifted to GIAG.

Decision by Single Judge Federal Court: Federal Court furnished the ruling in favor of the taxpayer, stating that the arm’s length price shall be determined based on the form of the actual transaction entered into rather than re-structuring the transaction. The Federal Court also stated that the Commissioner erred in establishing the missing link between arm’s length conditions and profit outcome before computing the adjustment. The Commissioner also erred in questioning the motive of the taxpayer basis, which the transaction was undertaken by applying laws of General Anti Avoidance Rules (GAAR). The Federal Court further stated that the Commissioner erred in presuming that the different pricing mechanism with the AE would have been a profitable proposition.

Decision by Full Federal Court: The matter was further contested in Full Federal Court by the Commissioner of Taxation. The Full Federal Court dismissed the appeal and upheld the decision on the Federal Court. It highlighted that the Commissioner is empowered to substitute a different methodology to determine the arm’s length price of the transaction. However, the Commissioner has no power or authority to substitute terms of a contract where those terms are not seen as defining the consideration received. The Commissioner focused on retaining the contractual terms and did not seek additional information on comparable third party contracts entered into by CMPL. Further, the taxpayer also succeeded in demonstrating the reliability and reasonableness of the pricing mechanism adopted. While doing so, the taxpayer evaluated and made rational judgments while determining the terms of the arrangement. The Court held that while comparable contracts identified by the Commissioner cannot be ruled out completely and could be referred to while establishing the arm’s length nature of the transaction.

However, the Court was also cognizant of the practical difficulties faced by both the taxpayer and the Commissioner in finding evidence and predicting how arm’s length dealings shall be undertaken by independent parties.

The Court further held that restructuring of a transaction could be undertaken only if the economic substance of the transaction differs from its form or in a case where the form and substance of the transaction are the same, the arrangements made in relation to the transaction differ significantly from those which would have been adopted by independent enterprises behaving in a commercially rational manner. Apart from the aforementioned, it must also be noted that OECD guidelines should be referred to in order to obtain more clarity rather than narrowing down its interpretation.

Our Comments

The key learnings from this case law and the way forward in the context of the re-construction of the transaction have been summarized below:

  1. Provisions of re-construction/recharacterization of the transaction should be applied by the tax authorities only after the exceptions outlined in the law are reasonably and appropriately satisfied.
  2. It is critical for the taxpayers to lay importance on the substance and form of the transaction while entering into inter-company arrangements as well as preparing transfer pricing study reports.
  3. OECD guidelines should be used as a reference point by the taxpayers and tax authorities and should not be interpreted too strictly/narrowly.
  4. Appropriate fact-finding by the tax authorities at lower levels will significantly improve the quality of transfer pricing assessment and appeals on issues that are complex and subjective in nature.

1. The MAAL is part of the government's efforts to combat tax avoidance by multinational companies operating in Australia. The MAAL has been established to ensure that multinationals pay their fair share of tax on the profits earned in Australia.

2.The DPT aims to ensure that tax paid by significant global entities reflects their activities in Australia and prevent the diversion of profits offshore

Indirect Tax

Supply chain disruption in the UK due to Brexit

[Excerpts from Independent]

With the end of the transition agreement of Brexit with effect from 31 December 2020, the EU businesses are now required to register under the UK VAT law. Many EU businesses have expressed their unwillingness to undertake the said registration, which will result in increased compliance costs for them. This has resulted in disruption in supply chains with transport vehicles stuck on border posts due to inadequate paperwork.