Direct Tax

Inclusive Framework Members continue countering harmful tax practices

Excerpts from oecd.org dated 6 February 2024

Jurisdictions continue to make progress in addressing harmful tax practices through the implementation of the international standard under BEPS Action 5. This progress is evident in the release of new results on preferential tax regimes and substantial activities in no or only nominal tax jurisdictions.

Preferential tax regimes

At its October 2023 meeting, the Forum on Harmful Tax Practices (FHTP) reached new conclusions on four regimes as part of implementing the BEPS Action 5 minimum standard on harmful tax practices. The regimes in Hong Kong (China) and the United Arab Emirates were found to be not harmful and two regimes in Albania and Armenia have now been abolished.

With the conclusion of this work, the total number of regimes reviewed by FHTP has now reached 322, with over 40% of those regimes being (or in the process of being) abolished. A breakdown of the outcomes of the FHTP’s work is set out below:

Outcomes of the review of preferential tax regimes by the OECD Forum on Harmful Tax Practices

Total number of regimes: 322

Source: OECD (2024) Harmful Tax Practices - Peer Review Results on Preferential Regimes

Annual monitoring of substantial activities in no or only nominal tax jurisdictions

As part of the standard on substantial activities requirements in no or only nominal tax jurisdictions, the FHTP undertakes an annual monitoring exercise to assess whether the standard operates effectively in practice. This exercise started in 2021 and the FHTP has now agreed on the conclusions for the third monitoring year.

Recommendations for substantial improvement were made for one jurisdiction (Anguilla) and four jurisdictions (Anguilla, the Bahamas, Barbados and the Turks and Caicos Islands) had areas where a need for focused monitoring was identified. No issues were identified for Bahrain, Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man and Jersey. The FHTP also concluded that since the introduction on 1 June 2023 of its corporate income tax rate of 9%, the United Arab Emirates is now no longer a no or only nominal tax jurisdiction.

Transfer Pricing

Accurate delineation of the actual transactions – Risk: Guidance issued by HMRCs6

His Majesty's Revenue & Customs (HMRC) has published new guidance on setting out the ‘6-step process for analyzing risk (‘the 6 step process’) within Chapter I of the OECD TP Guidelines (TPG) . Through the guidance, HMRC has made an attempt to clarify on the 6-step process and importance of analyzing risk in the transfer pricing analysis. Though the guidance focuses on risk and specifically on the 6-step process, it is clarified that it should not be interpreted that delineation of risk as having more significance than the functions and assets. It is clarified that the preliminary focus of the guidance is delineation of the controlled transaction and not pricing.

HMRC’s further clarifies that Chapter I of the TPG, is focused on economically relevant characteristics and the accurate delineation of the controlled transactions. This guidance focuses on risk and related functions, but this should not, in practice, be considered in isolation from the assets and related functions.

The 6-step process identifies economically significant risks associated with controlled transactions with specificity and determines whether the contractual assumption of those risks aligns with the parties' relevant functions, specifically their conduct, capability, and capacity to exert control over the risks, and financial capacity to assume them.

HMRC’s attempt to clarify on the following comments raised with respect to scenarios where reallocation of risk is not warranted:

Whether other parties’ reward for contributions to control of risk should never include a share of the upside or downside of that risk:

TPG states that delineation of the controlled transactions basis the contractual risks resolves the concern. The last step of the 6-step process illustrates scenarios of how price contribution to risk control by companies not assuming that risks in a way that entails taking a share in the risk outturn.

Only Profit Split Method can be the appropriate TP Method:

It is further clarified that the interpretation of Step 6 does not state any general rule as to whether a particular TP methodology might result in a share of the upside or downside of a risk to a party following the allocation of that risk, only that this question should be dealt with in accordance with guidance in other chapters about the selection and use of such a TP methodology.

HMRC clarifies that although it is not possible to provide comprehensive guidance that determines how to reward contributions to control risk in all cases.

However, this guidance attempts to flag different instances for risk assessment as it plays an important role in determining the ALP of the controlled transactions requires analysis of its economically relevant characteristics based on the following:

  • The contractual terms of the transaction;
  • The functions performed by each of the parties to the transaction, taking into account assets used and risks assumed, including how those functions relate to the wider generation of value by the MNE group;
  • The characteristics of property transferred or services provided;
  • The economic circumstances of the parties and of the market in which the parties operate;
  • The business strategies pursued by the parties.

Apart from the above delineation process, it is imperative to conduct the risk assessment by following a 6-step process as defined in the guidance:

  • Step 1: Identify specific economically significant risks.
  • Step 2: Contractual assumption of risk: Determine how specific economically significant risks are contractually assumed by the associated parties under the terms of the transaction.
  • Step 3: Functional analysis to determine which entities control risks: Determine through a functional analysis how the associated enterprises that are parties to the transaction operate in relation to the assumption and management of the specific, economically significant risks, and in particular, which enterprise or enterprises perform control functions and risk mitigation functions, which enterprise or enterprises encounter upside or downside consequences of risk outcomes, and which enterprise or enterprises have the financial capacity to assume the risk.
  • Step 4 and 5: Consistency between contract and allocation of risk: Consider whether the contractual assumption of risk is consistent to conduct of parties, specifically by reference to whether the party assuming a risk exercises control over the risk and has the financial capacity to assume the risk. Where the party assuming risk does not control the risk, or doesn’t have the financial capacity to, reallocate the risk.
  • Step 6: Pricing the transaction, taking account of risk allocation: The actual transaction, as accurately delineated, should then be priced taking into account the financial and other consequences of risk assumption, as appropriately allocated and appropriately compensating risk management functions.

Given the above, MNEs should examine their economically significant risks to see whether risk control actions, including third-party contributions, are appropriately recognized, analyzed, and recorded. MNEs should also ensure that systems are in place to document ongoing risk control operations, including who performs them, which entity employs them, and their capability and capacity to do so.

Indirect Tax

Thailand extends EV incentives to large commercial vehicles

Excerpts from various sources

Thailand's National Electric Vehicle Policy Committee (EV Board) has expanded its EV support and promotion efforts to large commercial vehicles such as trucks and buses, thereby complementing the EV 3 and EV 3.5 measures. The schemes originally focused on passenger vehicles.

The support will come in the form of a special tax deduction granted to companies eligible under this scheme and will be effective until 31 December 2025. Companies buying vehicles manufactured domestically will be able to deduct expenses of 2 times the actual price of the vehicles without a price ceiling being set. For the purchase of imported vehicles, the deduction will be equal to 1.5 times the actual price of the vehicles.

The EV Board has also approved financial support to promote the domestic manufacturing of battery cells for EV and Energy Storage Systems (ESS).

South Africa commences preferential trade under AfCFTA

Excerpts from various sources

On 31 January 2024, South Africa commenced trading under the African Continental Free Trade Agreement (AfCFTA), enabling South African companies to export duty-free or reduced duties to 12 African countries.

More countries are expected to implement AfCFTA in 2024, with the aim of enabling the free flow of goods and services across the 55 Member Countries and 8 Regional Economic Communities.

Ghana imposes emission tax from 1 February 2024

Excerpts from various sources

From 1 February 2024, Ghana has implemented a levy on carbon dioxide equivalent emissions from specified sectors like construction, manufacturing, mining, and oil & gas, and combustion emissions from motor vehicles at specified rates.