Direct Tax

Important tax-related measures introduced in Sweden's Budget Bill for 2022

[Excerpts from orbitax, 23 September 2021]

On 20 September 2021 Budget Bill for 2022 was introduced in Riksdag. Some of the important tax-related measures discussed were as follows:

  • The introduction of a specific limitation rule that would disallow the offset of prior-year losses, following a change in ownership, where it can be assumed that the primary reason for the change in ownership was to take advantage of the losses. This will enter into force from 1 May 2022 but apply retroactively for changes in ownership from 11 June 2021.
  • The introduction of a modernized withholding tax on dividends paid to foreign persons, including a standard rate of 30% and rules to prevent fraud and abuse, which will replace the current coupon tax with effect from 1 January 2024, although rules regarding approved intermediaries would apply from 1 July 2023.
  • The repeal of the advertising tax from 1 January 2022.

Brazil Temporarily Increases Financial Transactions Tax Rates to Fund Welfare Program for COVID-19

[Excerpts from orbitax, 20 September 2021]

  • The Brazilian government has announced that President Jair Bolsonaro issued Decree No. 10,797 on 16 September 2021, which provides a temporary increase in the financial transactions tax (IOF) rate to fund the expansion of the Auxílio Brasil welfare program.
  • The program provides aid for Brazilians impacted by the COVID-19 pandemic. With effect from 20 September to 31 December 2021, the decree increases the IOF daily rates on credit transactions from 0.0041% to 0.00559% for legal entities, which equates to an increase in the annual rate from approximately 1.50% to 2.04%.
  • For individuals, the decree increases the IOF daily rates from 0.0082% to 0.01118%, which equates to an increase in the annual rates from approximately 3.0% to 4.08%.

Algeria joins Global Forum on Transparency and Exchange of Information for Tax Purposes

[Excerpts from OECD, 1 September 2021]

  • Algeria joins the international fight against tax evasion by becoming the 163rd member of the Global Forum on Transparency and Exchange of Information for Tax Purposes.
  • Like all other members, Algeria will participate on an equal footing and is committed to combatting tax evasion through the implementation of the internationally agreed standards of transparency and exchange of information for tax purposes – both exchange of information on request and automatic exchange of information.
  • As a member of the Global Forum, Algeria will also participate in the Africa Initiative, a program of work launched in 2014 to support domestic revenue mobilization and the fight against illicit financial flows in Africa through enhanced tax transparency and the exchange of information.

Transfer Pricing

Singapore releases 6th edition of its Transfer Pricing Guidelines

The Inland Revenue Authority of Singapore (IRAS) has issued its 6th edition of Transfer Pricing Guidelines (TPG) on 10 August 2021. There are significant updates in relation to the guidance on the TP documentation including, detailed explanation relating to guidance on Advance Pricing Agreement (APA) and Mutual Agreement Procedures (MAP) for preventing and resolving TP disputes, clarifications on financial transactions and transactions relating to services and guidance on the application of the arm's length principle and TP documentation requirement under Cost Contribution Arrangements (CCA), etc.

Though there is no significant deviation from the previous edition, the 6th edition includes various updates and guidance in additional areas as listed in the table below:

Part I – Transfer Pricing Principles and Fundamentals

Section 5 - The Arm's Length Principle
Berry Ratio and Value-added cost

Introduced value-added cost plus mark-up as a Profit Level Indicator (PLI) while enhancing the guidance on the application of Berry Ratio. Similar to the Berry Ratio, value-added cost plus mark-up relies on the presumption that the value of the functions performed is proportional to the operating expenses and not to sales.

Section 6 - Transfer Pricing Documentation

In Appendix B of this section, IRAS has compiled the frequently asked questions (FAQs) regarding the preparation of TP documentation and provided guidance to help taxpayers comply with the TP documentation requirements. The guidance is largely in relation to the following key areas:

  • Date of disclosure of documentation to substantiate if it is maintained on a contemporaneous basis.
  • Guidance on preparing organizational holding structure along with the guidance on business description disclosure (along with business structure, business model and strategy, industry and economic conditions and contribution of business in overall value chain).
  • The manner in which the description of the transactions between the taxpayer and its related party shall be disclosed.
  • TP analysis shall include reasons and basis for selecting the transfer pricing method, tested party or tested transactions and comparable companies, etc.
  • Documentation of events that affected the business performance significantly, for instance, if the business made a loss or suffered a lower profit margin compared to the comparable companies or competitors.

Part II – Transfer Pricing Compliance (erstwhile II- Transfer Pricing Administration)

Section 7 - Transfer Pricing Audit by IRAS

Renamed ‘Transfer Pricing Consultation’ to ‘Transfer Pricing Audit’, this reflects a more focused approach that IRAS will adopt to ensure TP compliance.

Section 8 - Surcharge and Penalty

The new update conveys additional clarifications on the rigorous compliances pertaining to the arm's length standard for the application of upward TP adjustment and imposition of penalties and surcharges by the IRAS. The new section lays down circumstances in which IRAS may grant partial or full remission of 5% TP surcharge on tax adjustments.

The update also encourages taxpayers to be cooperative; demonstrate responsive behavior with a good compliance record; and initiate voluntary disclosure of transactions, which are not at arm's length, with the possibility of full or partial remission of the surcharge on such voluntary adjustments.

Furthermore, full remission may be granted to taxpayers making self-initiated retrospective upward adjustments within two years from the filing due date of tax returns and before the receipt of the IRAS' query, audit or investigation.

Part III – Dispute Prevention and Resolution (erstwhile II- Transfer Pricing Administration)

Section 10 - Preventing and resolving transfer pricing disputes

This section explains MAP and APAs in greater detail and sets out the benefits, expectations and compliance rules. Additional guidance on arbitration and circumstances under which IRAS will not accept an APA application have been provided.

IRAS will not accept an APA application where the proposed transaction is not carried out for bona fide commercial reasons or involves a scheme that has the avoidance or reduction of tax as one of its main purposes.

IRAS may also reject the MAP or APA application in certain circumstances wherein the taxpayer has inadequate TP documentation, or the taxpayer does not comply with the arm's length principle, or related party transaction is under ongoing audit or investigation. If the MAP or APA application is rejected, then the IRAS will explain the reasons to the taxpayer, and the taxpayer may seek alternative remedies under the relevant domestic tax law or other options to manage its TP risks. IRAS has also compiled the FAQs regarding the APA application.

The IRAS provides an option to the taxpayer to resolve the dispute through 'arbitration' (subject to availability of such provisions under the DTAA) in cases where the IRAS and relevant foreign tax administration are unable to resolve the TP dispute under a MAP within a certain period of time (typically two to three years).

Part IV- Other Matters (erstwhile Part III – Other Issues)

Section 14 - Related party services

Guidance on the benefit test and shareholder activities – In using the benefit test, additional guidance is provided on the treatment of cost for shareholder activities and duplicate services, which is in line with the OECD TPG11.

Mark-up on low value-added services - Further, 5% profit mark-up under the OECD simplified approach12 for low value-adding intra-group services will also be considered to be at arm's length in addition to the existing list of routine support services (i.e., Annexure C of Singapore TPG). However, taxpayers applying the OECD simplified approach are not exempt from preparing TP documentation, unlike the exemption available for preparing TP documentation for routine support services listed in Annexure C.

Section 15 - Related party financial transactions

The update provided guidance on the arm's length principle for the related party financial transactions relating to loans, cash pooling, hedging, and transaction relating to the guarantee and directs the taxpayers to take guidance from Chapter X of the OECD TPG13.

The IRAS emphasized various economic relevant characteristics, which shall be analyzed and may serve as pivotal indicators in determining whether a purported loan shall be considered a loan.

Furthermore, in order to reduce the compliance burden for taxpayers with multiple related party loans, taxpayers can choose to determine the arm's length interest rate for comparable loans on an aggregate basis using the comparability factors listed in the guidance.

Section 17 - Cost Contribution Arrangements(CCA)

Introduced guidance on how to apply the arm's length principle to a CCA, which is parallel with the OECD TPG four-step framework:

  • Determine participants in the CCA.
  • Determine a participant's share of expected benefits from the CCA.
  • Determine the arm's length value of each participant's contribution to the CCA.
  • Determine the allocation of CCA contributions to each participant according to its share of expected benefits.

Furthermore, it also lays out the tax treatment and TP documentation requirement for a CCA.

Our Comments

Since its first edition published in 2006, IRAS has periodically revised its TP guidelines to keep up with the ever-evolving global TP landscape and international tax developments. The revised guidelines clearly showcase IRAS’ focus on enforcing compliances with much more rigor by providing better clarity and reference to the taxpayers.

11. Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations published by the Organisation for Economic Cooperation and Development (OECD).

12. The specific guidance relating to the OECD simplified approach for low value-adding intragroup services is provided in Chapter VII of the 2017 OECD TPG.

13. The specific guidance relating to financial transactions are included in OECD TPG 2017 as Chapter X.

Indirect Tax

Imposition of VAT on digital transactions

[Excerpt from The Economic Times]

The Philippines' lower house of Congress has approved the imposition of 12% VAT on digital transactions in the country. This will require foreignbased digital service providers to assess, collect and remit VAT on the transactions that go through their platform.