Direct Tax
CBDT issues clarification on the applicability of the Most Favoured Nation (MFN) clause in the tax treaties
[Excerpts from the economic times, 3 February 2022]
The Central Board of Direct Taxes (CBDT), in a circular, said that Lituania and Columbia became members of the Organisation for Economic Co-operation and Development (OECD) after signing the tax treaty with India, and therefore, these treaties could not be applied to all countries. It said unilateral decrees issued by these countries (France, Switzerland and the Netherlands), stating that they could avail low tax applicable due to the MFN was merely a reflection of the understanding of the respective countries and did not affirm India’s position in this matter. The CBDT said that India reserves its right to apply withholding tax at the rates prescribed under the respective tax treaties and treaties with Columbia, Slovenia and could be subject to common interpretation.
UAE announces corporate tax rate of 9%, to be effective from 2023
[Excerpts from the New Indian Express, 31 January 2022]
The United Arab Emirates will be introducing a federal corporate tax on business profits for the first time, the Ministry of Finance announced. The news represents a significant shift for a country that’s long attracted businesses from around the world thanks to its status as a tax-free commerce hub. Businesses will be subject to the tax from 1 June 2023.
The country’s statutory tax rate will be 9% for taxable income exceeding AED 375,000 ($102,000), and zero for taxable income up to that amount “to support small businesses and startups,” the ministry said, adding that “the UAE corporate tax regime will be amongst the most competitive in the world.”
Transfer Pricing
OECD releases the latest edition of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations7
On 20 January 2022, the OECD released the 2022 edition of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (TP Guidelines).
In the new TP Guidelines, released after a span of five years, the OECD has consolidated the following three reports developed over the last couple of years to the 2017 TP Guidelines.
- The report, Revised Guidance on the Transactional Profit Split Method, was approved on 4 June 2018. This report has replaced the Guidance in Chapter II, Section C (paragraphs 2.114-2.151) found in the 2017 TP Guidelines and Annexes II and III to Chapter II. This Guidance aims to clarify when the Transactional Profit Split Method is the Most Appropriate Method (MAM) to apply. It also explains how the Profit Split Method should be applied and includes several examples illustrating the principles discussed.
- The report Guidance for Tax Administrations on the Application of the Approach to Hard-to-Value Intangibles, approved on 4 June 2018, has been incorporated as Annex II to Chapter VI. This Guidance is intended to help tax administrations in applying the approach to Hard-to-value Intangibles (HTVI) under the Base Erosion and Profit Shifting (BEPS) Action 8. The Guidance contains three main components: (i) an outline of principles underlying the application of the HTVI approach; (ii) a number of examples clarifying the application of the HTVI approach; and (iii) specifics on the interaction between the HTVI approach and access to the mutual agreement procedure.
- The report Transfer Pricing Guidance on Financial Transactions, adopted on 20 January 2020, has been incorporated into Chapter I (new Section D.1.2.2) and in a new Chapter X. This was the first specific Guidance from the OECD focused on transfer pricing aspects of financial transactions, and it includes illustrative examples. The Guidance covers the accurate delineation of financial transactions, in particular with respect to capital structures of multinational enterprises. The Guidance also addresses specific issues related to the pricing of financial transactions such as treasury functions, intra-group loans, cash pooling, hedging, guarantees, and captive insurance.
Apart from the above consolidation, the OECD has made consistency changes to the rest of the TP Guidelines to align with the added reports.
Our Comments
In a global economy where MNEs play a prominent role, Transfer Pricing continues to be high on the agenda of the taxpayers and country’s tax administrations.
The OECD transfer pricing guidelines, first issued in 1995, analyze and illustrate various methods and principles for satisfying the arm’s length requirements and are intended to guide the resolution of transfer pricing issues.
The OECD, since then, has been updating the TP Guidelines to align with the global business and economic scenarios. The previous update to the TP Guidelines in the 2017 edition included substantial changes related to the 2015 OECD BEPS action plans, including aligning transfer pricing outcomes with value creation and transfer pricing documentation and country-by-country reporting.
Indirect Tax
1% cut in retail sales-and-use tax in Washington state
[Excerpts from Redmond Reporter]
Kent Democratic Senator Mona Das, has proposed a bill that would reduce the sales tax by 1% across the Washington state. The state sales-anduse tax would be reduced from 6.5% to 5.5% under the proposed Senate Bill 5932. Furthermore, the said tax cut is expected to go into effect on 1 January 2023 and would apply to the sales-anduse tax currently levied on items and services categorized under the state constitution’s definition of retail sale. It would not affect the local government’s sale-and-use tax.
HMRC urges VAT registered businesses to sign-up for Making Tax Digital for VAT before 1 April 2022
[Excerpts from HMRC Press Release]
Businesses have been reminded to take steps to prepare for Making Tax Digital for VAT before it becomes mandatory for all VAT registered businesses from 1 April 2022. Part of the overall digitalization of UK Tax, Making Tax Digital for VAT, is designed to help businesses eliminate common errors and save time managing their tax affairs.
UK VAT cut on energy bills
[Excerpts from Bloomberg]
In a bid to defuse the growing cost-ofliving crisis in Britain, Prime Minister Boris Johnson’s government is resurrecting the proposal to eliminate VAT from energy bills. Eliminating the 5% VAT could save a typical household almost 100 pounds ($134) a year from April. Prime Minister Johnson had previously dismissed the move as a “blunt instrument” .