International Tax Review - September

International Tax Review

FORUM ITR’s Leading Women in Tax LEADERSHIP Explaining taxation US TAX REFORM The end of inversions www.internationaltaxreview.com

September 2018

SEPTEMBER 2018

The new tax function Building a culture of no surprises

TRANSFER PRICING Employees and value creation CRYPTOCURRENCY Tax collections to soar in future VAT REFORM From IGP to VAT unity in Luxembourg

M SPE al C ta IA :T L h FE isl e bl ATU an oc R d kc E ha in

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PLUS:

Editorial EDITORIAL

Even ITR has a soft side

8 Bouverie Street London EC4Y 8AX UK Tel: +44 20 7779 8308 Fax: +44 20 7779 8500 Anjana Haines anjana.haines@euromoneyplc.com

Managing editor

Editor Joe Stanley-Smith joseph.stanley-smith@euromoneyplc.com Sub-editor

Annette Gray

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Josh White josh.white@euromoneyplc.com Reporter

Freelance reporter

Ivan Castano

João Fernandes jfernandes@euromoneyplc.com

Production editor

Margaret Varela-Christie margaret.varela-christie@euromoneyplc.com

Head of business development

Business development executives

Raquel Ipo raquel.ipo@euromoneyplc.com Paul Ptaschne paul.ptaschne@euromoneyny.com Jack Avent jack.avent@euromoneyplc.com

Subscriptions manager

Editorial director Tom Young Managing director Timothy Wakefield Divisional director

Danny Williams

Editorial board Keith Brockman

Daniel Lange

Manitowoc Foodservice

Deloitte

Stephan Eilers

Jeffrey Michalak

Freshfields Bruckhaus Deringer EY Sarah Fahy

Peter Nias

Sony

Pump Court Tax Chambers

James Fuller

John Peterson

Fenwick & West

Baker McKenzie

Richard Goldberg

Dominic Robertson

Independent

Slaughter and May

© Euromoney Trading Limited, 2018. The copyright of all editorial matter appearing in this Review is reserved by the publisher.

No matter contained herein may be reproduced, duplicated or copied by any means without the prior consent of the holder of the copyright, requests for which should be addressed to the publisher. Although Euromoney Trading Limited has made every effort to ensure the accuracy of this publication, neither it nor any contributor can accept any legal responsibility whatsoever for consequences that may arise from errors or omissions, or any opinions or advice given. This publication is not a substitute for professional advice on specific transactions.

Directors David Pritchard (Chairman), Andrew Rashbass (CEO), Colin Jones, Sir Patrick Sergeant, Andrew Ballingal, Tristan Hillgarth, Imogen Joss, Tim Collier, Kevin Beatty, Jan Babiak, Lorna Tilbian

t International Tax Review we strive to bring you cutting-edge, in-depth analysis of the most important tax topics of the day.

This issue of the magazine is no different, as we look at topics ranging from new US tax reform guidance to value creation from a transfer pricing perspective and tax issues in one of the most exciting sectors of the investment world right now: cryptocurrency.

After outing myself as an indirect tax geek in last month’s column, I’m pleased to say that we have not one but two examinations of Luxembourg’s hotly anticipated new VAT regime – and my own analysis is online at www.internationaltaxreview.com.

But what I’m particularly pleased to bring you in this month’s issue of our magazine is two features on the more human side of tax directors’ jobs. ITR is read by tax practitioners at the pinnacle of their profession, and for the majority of you this means that you are managers.

Therefore I’m very pleased to introduce two ‘soft skills’ features, both of which draw heavily on the experience of heads of tax from some of the world’s biggest companies, including some who were present at our first Leading Women in Tax Forum in London, which was held over the summer (see page 15).

Interpersonal skills are of course important for managing a tax department. But as the tax world has evolved, it’s more and more common for tax functions to be interwoven with other teams within large companies.

Communication is key for this, as the feature on page 18 shows.

It’s a bumper issue for hearing from tax directors, as our cover story shows,

Joe Stanley-Smith

As the tax world has evolved, it’s more common for tax functions to be interwoven with other teams within large companies. and we’re really glad to be so close to the market and writing about so many of the issues which affect our readers.

In addition to our features, we have our regular columns from Keith Brockman, who is taking a deep dive into the OECD’s dispute resolution plans, and Giles Parsons, who wonders whether all the fuss over taxation of the digital economy is really worth it.

And, of course, we also have international updates this month from 24 different countries.

Joe Stanley-Smith Editor, International Tax Review joseph.stanley-smith@euromoneyplc.com

International Tax Review is published 10 times a year by Euromoney Trading Limited.

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September 2018

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CONTENTS September 2018 Volume 29 Number 7 COVER STORY 26 The new tax function Building a culture of no surprises In-house tax functions are becoming more proactive in how they deal with tax and transfer pricing risks.

Anjana Haines collects the view of tax directors on establishing a culture of no surprises.

DIGITAL 31 Cryptocurrencies Cryptocurrency taxes to soar amid tighter rules Cryptocurrency cannot be ignored. Ivan Castano speaks to lawyers and companies in the sector who believe tax collections could soar tenfold by 2023 as governments introduce regulations to expand the tax base and the market gains traction.

SPECIAL FEATURE 33 VAT EVENTS 15 Women in Tax

From IGP to VAT unity – a story of VAT

The importance of working together

Thierry Charon and Olivier Coulon of Loyens & Loeff take to the stage to discuss a tempestuous year for indirect tax in the financial and insurance sectors.

International Tax Review’s Leading Women in Tax Forum in London shone a spotlight on how building inclusive teams, empowering others and using your network can create an environment where everyone can thrive. Anjana Haines shares some highlights from the day’s discussions.

TRANSFER PRICING 20 Value creation TP: Employees trigger value creation within MNEs Gautier Ciresa, transfer pricing manager at Technicolor, explains why employees are the true indicator of value creation within MNEs and how to determine their impact in a transfer pricing analysis.

SPECIAL FEATURE 37 Malta Malta: The blockchain island As a small island, Malta has positioned itself as one of the most established regulatory bodies worldwide, write Nicky Gouder and Luana Scicluna of ARQ Group.

LEADERSHIP 18 Communicating tax How leaders communicate tax to the non-tax world A key role of heads of tax in large organisations is to be the ‘ambassador’ for tax, raising its profile and providing advice around opportunities and risks, writes Sandy Markwick, head of the Tax Director Network at Winmark. Being effective in this capacity requires advanced communications skills.

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US TAX REFORM 24 Inversions The end of the US inversion boom Danaher Corporation’s Jim Ditkoff talks to Josh White about what the end of the inversion era means for US businesses.

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03 Brockman brief 04 People 06 News analysis 41 International updates 55 The GP Surgery 56 Tax Relief

THE BROCKMAN BRIEF

Dispute resolution: OECD collaboration The tax treaty dispute resolution process is a critical and significant issue for multinational organisations and the OECD, which has invited taxpayers to be an integral part of the oversight process.

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he OECD, pursuant to the aspects of BEPS Action 14 concerning mutual agreement procedures (MAPs) undertakes a peer review and monitoring process, and is in process of gathering input for adherence to the minimum standard requirements for MAPs. The minimum standard principles include accessibility to the MAP process, ensuring that domestic administrative procedures are not an obstacle for MAP access, and having countries implement Article 25 (mutual agreement procedures) of the OECD Model Tax Convention in good faith. Additionally, there are best practices advocated that complement the minimum standard principles.

Taxpayers are invited to complete questionnaires to assist in this peer review process, and are encouraged to be proactive in this effort to provide a win-win opportunity for OECD collaboration.

OECD peer reviews are conducted in two stages. In this case, stage 1 includes evaluation of the Action 14 minimum standard for Inclusive Framework members, while stage 2 is a follow-up process monitoring the initial recommendations provided.

The current stage 1 peer reviews of Argentina, Chile, Colombia, Croatia, India, Latvia, Lithuania and South Africa are in process, with comments due by August 24 2018. The questionnaire consists of three sections addressing the accessibility of MAPs or obstacles thereto, clarity and availability of MAP guidance including commentary, and implementation of MAP agreements including reasons why an assessed jurisdiction did not implement the MAP agreement.

Recently enacted tax legislation in many countries is becoming more subjective in principle and application, with the potential for disagreement and the incidence of double taxation increasing between the taxpayer and relevant jurisdictions. As a consequence, there is an expectation that the MAP process will become more active with requests to resolve disputes in accordance with the relevant standards and treaty language. Accordingly, the minimum

Keith Brockman is the VP Global Tax at Manitowoc Foodservice. His previous role was international tax director at Mars. He is also a lecturer, frequent speaker and the author of the Strategizing Multinational Tax Risks blog. In his regular ITR column he provides a practical analysis of some of the more challenging recent developments for corporate taxpayers, looking at how in-house professionals can mitigate new risks and identify effective solutions in an evolving environment. standard requirements of BEPS Action 14 are especially critical in the near future, for both taxpayers and tax administrations.

The battle against double taxation sometimes seems to be one that is rarely won, in terms of timing and/or ultimate taxation by only one jurisdiction with an offset by the other. One obstacle in this debate is new legislation that enacts denial of a deduction in that jurisdiction (i.e. interest) and yet is fully taxed in the other relevant jurisdiction. There may be a limitation, timing lag and/or total non-deductibility without carryover provisions (and double taxation) that is imposed by the sovereign right of a jurisdiction.

Unfortunately, some jurisdictions may choose to exercise their unilateral and sovereign right to exact their “fair share of tax”.

Additionally, legislation may proactively be drafted to avoid the benefits of treaty protection, and thus the MAP (i.e. the UK’s diverted profits tax).

Notwithstanding the current obstacles and roadblocks, taxpayers should seek to provide comments to the OECD in the questionnaire process to achieve more efficient methods of accessing MAPs to resolve issues, as taxpayers and tax administrations will gain certainty and efficiencies going forward. Additionally, OECD should be applauded in its proactive efforts to seek collaboration and taxpayer input.

The OECD is welcoming comments on the future of mutual agreement procedures

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September 2018

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People

People Dentons hires new senior counsel

Cooley hires new tax partner

Dentons has hired Siamak Mostafavi as a senior counsel in its Paris office.

The former Jones Day partner specialises in structured finance, capital market transactions and related derivatives.

Mostafacvi will join fellow new recruit Julien Bacus, who joined earlier this year as a partner in the Dentons banking and finance group in Paris.

Alexander Lee has joined as a tax partner in Cooley’s Los Angeles office.

The former McDermott Will & Emery tax partner specialises in national and global transactional tax matters. Lee also has a wealth of experience advising clients ranging from global companies and small start-ups.

Jonathan Ivinson joins King & Spalding in Switzerland King & Spalding has added a new partner to its Swiss tax practice in the form of Jonathan Ivinson, who joins the firm’s Geneva office from Akin Gump Strauss Hauer & Feld.

His practice focuses on the planning and implementation of investment and asset holding structures for clients including trusts, high net worth individuals and multinational corporations. He also advises on family offices and family wealth advisory matters.

Avalara goes public on the NYSE Tax software company Avalara began trading on the New York Stock Exchange (NYSE) on June 15.

The provider of cloud-based tax compliance automation has a $1.36 billion initial market cap, and a proposed maximum aggregate offering price of $181.1 million.

The company serves more than 20,000 customers and generated revenues of $213.2 million in 2017, up 27% from 2016.

Alvarez & Marsal Taxand adds new senior directors in Denver and New York Alvarez & Marsal Taxand, an affiliate of the global firm Alvarez & Marsal, has announced it will be hiring Jon de Jong in Denver and Louis Mancini in New York, bolstering the firm’s global tax practice.

De Jong, who will be a senior director, brings more than 20 years of global M&A tax advisory experience in both strategic and private equity investments.

Mancini, who will also be a senior director, joins from PwC in New York, where he served as a director in the firm’s M&A tax practice.

Deloitte announces senior promotions in New Zealand Deloitte has promoted two new partners and three new directors: Bart De Gouw, Hadleigh Brock, Bronwyn Baird, Jamie Hall and Muhammad Cajee.

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Morrison & Foerster expands New York tax practice with new partner Anthony Carbone has joined Morrison & Foerster’s New York office, bringing with him a wealth of experience on business restructuring, insolvency, private equity, M&A and fund formation practices.

Carbone’s role involves advising on tax planning strategies and the tax implications on various business and investment transactions globally. His practice covers all forms of leveraged buyouts, restructuring, reorganisations, M&A and other different types of investment transactions.

He commonly represents clients such as investment banks, private equity funds, deals sponsors, commercial banks, real estate, hedge funds, venture capital, acquiring and target companies and management groups.

Carbone joins from Willkie Farr & Gallagher’s New York office.

Duff & Phelps adds new European head of transfer pricing in London Duff and Phelps has added Ted Keen as managing director and head of the firm’s European Transfer Pricing practice in London.

Keen joins the firm with more than twenty years of experience advising clients on transfer pricing matters in the US and UK, with a focus in the life sciences, hightech, natural resources, and financial services industries.

Stroock hires special counsel in New York Private wealth lawyer Shifra Herzberg has joined Stroock as special counsel in its New York office.

Before joining Stroock, Herzberg was of counsel at Greenberg Traurig. She specialises in estate planning, estate administration, and business succession planning.

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Charles Russell Speechlys adds two partners in Luxembourg Charles Russell Speechlys has hired Jean-Baptiste Beauvoir-Planson (above) as a corporate law partner, and promoted Yacine Diallo to partner, in its Luxembourg office.

Beauvoir-Planson, a lawyer, adds 12 years of corporate law practice to Charles Russell Speechlys’ Luxembourg office. He focuses on private equity houses, multinational companies, and private clients on their inbound and outbound investments.

Diallo specialises in cross-border holdings, financing strategies, international tax structuring, providing assistance for private equity houses and real estate funds on their fund raising structures, and advising family offices and private clients on wealth management structures.

Philippe Freund joins Fieldfisher in London Philippe Freund has joined Fieldfisher’s London office as a partner in the tax disputes and investigations team.

The former barrister at Joseph Hage Aaronson specialises in European law and UK income and capital taxes. He provides cross-border strategic advice and coordinates tax lawyers across Europe on contentious tax matters.

Artur Braga joins WZ Advogados in Brazil Artur Braga has joined WZ Advogados as a partner in the firm’s Sao Paulo office.

Braga comes with 20 years of experience at EY, specialising in domestic and international tax consulting in the accounting firm’s Brazil and New York offices.

Thirteen tax partner promotions at Baker McKenzie Baker McKenzie has announced a batch of promotions effective from July 1, taking its total number of new tax partners in 2018 to 13.

Across all departments, there have been 67 new partnership promotions globally so far this year.

People

The firm’s global tax team promotions will benefit its offices in: Singapore, Sydney, Moscow, London, New York, Mexico City, Chicago and Bogota.

The London office gained two new partners through the July promotions; Jessica Eden and David Jamieson. Eden trained at Herbert Smith Freehills and has been with the firm since 2013.

She specialises in tax investigations and disputes. Jamieson was an associate at Berwin Leighton Paisner before joining the firm in 2012 and is skilled in indirect tax and cross-border transactions.

Simone Bridges was promoted to partner in the Sydney office in July. She specialises in indirect tax, cross-border tax issues and managing controversy for multinationals. Bridges has also been listed in International Tax Review’s Women in Tax Leaders guide for two years in a row.

Kirill Vikulov became a partner in the Moscow office in the July promotions. He has been with the firm since 2007 and before joining the firm was a tax consultant at PwC. Vikulov has advised on tax issues for major oil and gas projects and focuses on providing tax advice for M&As.

David Campkin leaves BBC for Perform Group David Campkin has joined Perform Group as tax senior manager after almost 21 years at the BBC. In his new role, Campkin will be primarily responsible for DAZN, Perform Group’s live sports service.

Campkin worked as group tax director at the BBC since March 1997, a role in which he was responsible for global tax (corporate tax and sales taxes) for the BBC Group. Before that, he worked at KPMG as tax consultant.

Deloitte hires Colin Forbes in Ireland Colin Forbes has been made a partner at Deloitte in Ireland and will become part of the firm’s tax leadership team.

Forbes, who works in the global employer services division, has more than 20 years of experience advising clients on a range of issues including: employment tax, equity remuneration matters, global mobility taxation and foreign direct investment.

Loyens & Loeff partner is new chairman of Dutch Association of Tax Advisors Bartjan Zoetmulder, a tax partner at Loyens & Loeff, has been appointed as the chairman of the Dutch Association of Tax Advisors.

Zoetmulder succeeds Maurice de Kleer, who had reached the maximum three years of presidency.

Zoetmulder is a tax partner in Loyens & Loeff’s Amsterdam office, where he has worked in the investment management group since 2003. His focus was on the Dutch and international real estate markets, advising European, American and Asian real estate investors and project developers. He possesses an in-depth knowledge of diverse tax areas regarding cross-border transactions and real estate investments.

Alvarez & Marsal Taxand and Tax Technologies establish a strategic partnership Alvarez & Marsal Taxand (A&M Taxand) has entered into a strategic partnership with Tax Technologies to enhance its services to clients.

The US partnership is intended to bolster the streamlined support, centralised tax data management and industry expertise that A&M Taxand provides to its clients. The software designed by Tax Technologies is designed to produce accurate tax results through automating calculations, simplifying analyses, streamlining reporting and centralising tax data for future uses.

Robert De La Rue joins RSM RSM has appointed Robert De La Rue as a tax partner in Chelmsford, UK to strengthen its regional and national tax practice.

De La Rue joins RSM from Jardine Motors Group (JMG) where he has been the group head of tax for the past three years. He previously held roles with Informa, EY, Grant Thornton and HMRC.

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Transaction Square and TransPrice Tax Advisor enter into a strategic partnership in India TransPrice Tax Advisor has entered into a strategic partnership with Transaction Square with the aim of combining their capabilities and serving as a holistic tax firm.

Andrey Grachev to head Eversheds Sutherland’s Russia tax practice Andrey Grachev, an experienced attorney who works on domestic and international tax structures, has moved to Eversheds Sutherland.

Before his appointment, Grachev served as director of tax and legal at KPMG Russia and CIS, and has also collaborated with the Ministry of Economic Development of the Russian Federation.

Grachev, who wrote articles for ITR during his time at KPMG, is well-versed in matters including tax litigation and dispute resolution, tax due diligence, and assessment of tax implications of various transactions.

Miranda promotes Maria Figueiredo Maria Figueiredo has been promoted to partner at Miranda & Associados.

Figueiredo has been with Miranda since 2006.

Her expertise lies in Portuguese and international taxation, areas in which she provides commercial and disputes advice to clients from the oil and gas and energy sectors, as well as in relation to real estate, banking and finance and M&A transactions.

Figueiredo’s practice is intrinsically cross-border and she is head of tax for Timor-Leste.

RSM adds new leader for growing European region RSM has appointed Gregor Schmidt as the firm’s new European regional leader.

Following the firm’s expansion into Bulgaria, as well as mergers in Germany, the Netherlands, Northern Ireland, Poland, Ireland and Great Britain, Schmidt will continue to drive the firm’s global strategy within Europe.

Before joining RSM, Schmidt was at RSM’s German member firm as chief operating officer in 2012 before becoming chief officer of strategy, markets and communications in 2016, where he played a key role in in the merger of RSM’s German firms.

Additional reporting by World Tax researchers Connor Hussey, Lovy Mazodila and Lucy Songi

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News analysis

US TP rules saved from disaster as court withdraws judgment Anjana Haines

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he US Ninth Circuit Court’s withdrawal of its July 24 decision in Altera has prevented US transfer pricing rules from going into meltdown – for now.

The ruling in Altera had threatened to change the way transfer pricing is done in the US after going in favour of the Internal Revenue Service, taking the US off the historic and long-standing arm’s-length standard in the transfer pricing regulation at issue (section 482).

“The Opinions filed July 24 2018 are hereby withdrawn to allow time for the reconstituted panel to confer on this appeal,” the withdrawal notice stated in regards to the Altera ruling.

The U-turn happened after Judge Susan Graber replaced deceased Judge Stephen Reinhardt, who died in March before the court’s opinions were issued, but had voted in favour of the IRS before his death. Judge Graber was only assigned the case last week – after the opinions were announced.

Nevertheless, the change in the panel means the court will have to discuss the merits of the case once again.

James Fuller, tax partner at Fenwick & West, described the announcement as “very big news because the Ninth Circuit’s decision was just plain wrong”.

Douglas Stransky, partner at Sullivan and Worcester, said it was “good news” for Intel-owned Altera.

Transfer pricing lawyers and multinational corporations, both of which will be impacted by the case regardless of the ultimate decision, are closely watching what happens next, once the Ninth Circuit Court has reviewed the case.

Although the case only affects $80 million of Altera’s income, the stakes of the case are high. Alphabet, Apple, Facebook and others are at risk of losing several billion dollars to additional tax payments if Altera loses. In addition to this, a decision against Altera could alter the US TP standards and potentially create chaos for companies worldwide.

The ‘most reversed court in the world’ Sticking with its reputation as the “most reversed court in the world”, according to Stransky, the Ninth Circuit Court’s July 24 decision overturned the US Tax Court’s 2015 ruling in favour of Altera (Altera Corp. v. Commissioner).

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The original ruling in Altera would have turned the US transfer pricing regime on its head

This is not the first time this court has reversed its decision in a transfer pricing matter concerning cost-sharing arrangements. The same sequence of events took place in the Xilinx case. The US Tax Court decided in favour of the company, a decision which was then overturned by the Ninth Circuit Court, before the Ninth Circuit then reversed its own decision to find in favour of Xilinx.

While the two cases are similar, there are some differences. The Xilinx case was over two conflicting provisions in the section 482 regulations. However, the Altera dispute is over the entire regulations and its consistency with the arm’s-length standard and the commensurate-with-income (CWI) principle, as well as whether the Treasury adequately followed the Administrative Procedures Act (the AP Act) in the rulemaking process.

In Altera, the matter goes back to USbased Altera Corporation’s related-party costs-sharing agreement with its Cayman Islands subsidiary, Altera International, for the 2004-2007 tax years.

The IRS took issue with Altera’s failure to share stock-based compensation (SBC) costs with its subsidiary, claiming that this exclusion from the arrangement violated 2003 regulations that required these costs be shared (section 482 regulations).

However, when the dispute reached the US Tax Court, it issued a unanimous opinion in favour of Altera, saying the IRS had not clearly explained how it had verified that the implementation of the arm’s-

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length standard under section 482 was analysed against transactions priced between unrelated parties to ensure it complied with TP standards.

The other aspect that led to the IRS’s defeat was the Treasury’s failure to comply with the AP Act when consulting on and issuing the regulations. All tax regulations, whether issued under a specific grant of authority or under the general authority of section 7805(a), have to undertake a notice and comment period in line with the AP Act. Where the court finds that the rulemaking process is not based on reasoned decision-making and supported by evidence in the administrative record, the regulations can be invalidated.

The US Tax Court said the IRS had acted in an “arbitrary and capricious manner” in issuing the section 482 regulations.

“When tax regulations are promulgated, they have to follow the AP Act,” explained Stransky. “In this particular case, the IRS didn’t take into account any of the comments.”

The tax authority’s appeal against the US Tax Court’s ruling in Altera led to the Ninth Circuit Court issuing its opinions on July 24, but the circumstances around its decision were unusual.

Decisions from beyond the grave Judge Stephen Reinhardt, who was one of three judges appointed to the Altera case, died in March 2018. But before his death he had written his opinion on the case in favour of the IRS. Judge Sidney Thomas agreed with Reinhardt, while Judge Kathleen O’Malley said the initial US Tax Court decision was right.

Judge Reinhardt died before the opinions were issued, and when the 2-to-1 decision was published in favour of the IRS it created shock and outrage among transfer pricing professionals, who had all expected the opposite.

Before the withdrawal notice, had Altera requested that the case be reheard, the rehearing could not have taken place with the same judges. In the absence of the third judge, the technology company could have requested the rehearing to take place in front of the entire court, consisting of nine judges.

“In such a situation, it wouldn’t have mattered if one judge had passed away

News analysis

because now you would have nine justices on the case,” said Stransky.

UK’s planned 17% corporate tax rate may not happen

Changing the course of TP standards Nevertheless, the Ninth Circuit Court agreed with the IRS’s argument that it is the agency that administers and polices transfer pricing and therefore knows what an arm’s-length standard is. The court, in general, agreed, saying the AP Act had not been violated.

“If you look at the factors that are set forth in the AP Act, and you look at what the US Tax Court said about having to do to follow the AP Act, the Ninth Circuit disregarded those rules and said that because the IRS knows what it is doing, it deferred to the IRS,” Stransky said. “You can only defer to the agency if the agency has followed the reasoned-decision making standard set forth in the AP Act.” The opinion was “simply wrong,” Stransky added. “How can a court simply defer to an agency when there is a specific law that tells you exactly what you are supposed to do when you promulgate a regulation to ensure it meets the reasoned decision-making standard?” he questioned.

“The IRS didn’t tell people that’s what it was doing and then argued in the Ninth Circuit that in fact that’s what it was doing all along. That’s not only against the AP Act and all that it stands for, it’s just plain unfair in administering the law. The dissent pointed all this out,” Fuller agreed.

Further, the way the court’s opinion addressed the issue really would have “screwed up the world of transfer pricing”, Fuller added. “It would have taken the US off the arm’s-length standard,” he said, stressing that this principle is “the historic approach to transfer pricing in the US and elsewhere”.

Stransky believes that if the case is reheard by the Ninth Circuit Court, the court will reverse its prior opinion and find that the AP Act was violated and therefore the regulation at issue is in fact invalid.

If the Ninth Circuit’s review goes against Altera, the corporation can request to have the case heard before the Supreme Court, but it is uncertain whether the Supreme Court would take up the case while three other cases are being heard before the US Tax Court under the Administrative Procedures Act concerning different regulations.

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Josh White

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tax director at a multinational tech company and several tax advisers expect the UK government to quietly drop its plan to cut the corporate tax rate to 17% in a move that could slow the ‘race to the bottom’ trend.

Speaking to International Tax Review, the tax director said the plan to cut corporate tax from 19% to 17% by 2020 may not happen because of the country’s political circumstances and Brexit, which may lead to a need for more tax revenue and a broader tax base. In addition, the falling popularity of the Conservative Party among the electorate could lead to the opposition Labour Party coming into power and raising the rates. But it’s hard to see how the Conservative government could quietly drop this measure should it need to before the next general election on May 5 2022.

It may be that the government is keeping its cards close to its chest ahead of the final phase of Brexit negotiations in October. Prime Minister Theresa May might want to avoid an unpopular policy of corporate tax rate rises just as old divisions over the EU are splitting the Conservative Party. But this is not the only reading. “[The policy change on the tax rate] reflects neither the current political disarray nor any lack of business-friendliness on the part of a future government,” George Bull, senior partner at RSM, told ITR. “I see it as a hard-nosed recognition that tax receipts will have to increase,” Bullstressed. “As there is no proof that reducing UK corporation tax rates increases tax revenues here, there seems to be no fiscal case for going ahead with that reduction.”

The OECD calculates that the global average effective rate for corporations has fallen to 23%, and Europe now has the lowest average rate in the world at 18%.

If the UK does abandon its lower tax rate, the country might become one of the few exceptions to the worldwide trend of falling rates. This may be due to

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the fact that the rates have already reached the lowest point. So it may just be a question of how else the British government can improve matters for business.

Sam Dumitriu, the Adam Smith Institute’s (ASI) head of research, suggested that the shift away from the lower rate could cost the government more than the revenue raised. “The tax cut is a key part of the government’s economic strategy, and dropping this policy would be a bad sign for business just as we’re set to leave the European Union,” Dumitriu said. “It would reduce the credibility of the government if they don’t stick to this.”

However, Dumitriu did concede that the UK’s gradual reduction to a 19% corporate tax rate has made Britain a more competitive place for business. “It’s much more attractive to locate your IP and other assets in the UK than it was in the past,” he said. The decision by McDonald’s to transfer its IP to the UK is evidence of this.

By contrast, the Institute for Public Policy Research (IPPR), a centre-left think tank that has long argued that the government’s fiscal strategy would fail in terms of growth and fairness, says a retreat on tax cuts is good in principle.

Grace Blakeley, researcher at IPPR, said this “shows that the austerity narrative is drying up”, but stressed that the government needs to increase the rates of corporation tax much more and, more importantly, widen the base.

A costly U-turn The trouble may be that a U-turn on the planned corporate tax cuts now could be costly to businesses that have been planning in the expectation of a lower tax burden in 2020. This is bad news enough, let alone the prospects of a tax hike to 26% under a Labour government.

“Of course, companies have reflected the 17% rate in their financial statements and some would face immediate accounting tax charges if a rate change was announced in the Autumn Budget,”

News analysis

said Bill Dodwell, senior policy adviser at the Office of Tax Simplification.

“Given that the Chancellor needs to find £20 billion [$26 billion] to support UK health services, there is a case for raising a small part of this from business,” he continued. “However, business would want to see greater investment too as part of any package.”

Stuart Adam, senior economist at the Institute for Fiscal Studies (IFS), explained that the change of plan would hit businesses that have accounted for the 17% rate when making investment projections. But he stressed that the U-turn on the tax cut would mostly hit investments with low returns.

“If I was considering whether to undertake a particular investment, a 2% difference in tax wouldn’t matter if the returns were big enough,” Adam told ITR. “If the rate is a lot higher, I’m not going to go ahead unless the returns are massive.”

Stability and clarity necessary Companies are not that concerned if the tax rates do not fall further than 19%, however. With Brexit looming, many would prefer a tax environment that offers stability and clarity. This view has not changed since former Chancellor George Osborne announced the tax cut in the 2016 budget.

At the time, PwC ran a survey and found that there was little support among British business for yet another reduction in the rate. At the time Kevin Nicholson, head of tax at PwC, said that businesses believe there should be more focus on the taxes that generate the most revenue such as national insurance contributions and VAT. “Businesses are less concerned about the headline corporate rate than they are about the effective tax take,” James Anderson, head of the European tax practice at Skadden, Arps, Slate, Meagher & Flom, said. “There are still some less attractive elements in the UK tax system

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for investment, for example, the capital allowance regime that is to be contrasted to a mix of accounts-based depreciation, faster write-offs and basis step-up opportunities in other jurisdictions.”

As the UK reduced its corporate rate, the government closed off some of the capital allowances available in the past. This has reduced what businesses can deduct when it comes to interest expenses and tax losses.

Likewise, Dodwell suggested the UK could rethink tax incentives as the country prepares to leave the EU. “The UK has less favourable investment reliefs than many European economies – with lower tax relief for investment in tangible assets,” Dodwell, who is the former head of tax at Deloitte, told ITR. “We are one of only two economies that doesn’t offer tax relief on goodwill or customer-related intangibles.

Investing in government systems and in replacing EU grants would help.”

September 2018

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News analysis

Domino’s Pizza case ‘encouraging’ for MNEs expanding into India business smoothly within the country and allows new entities to set-up a business in India without a PE concern.

“Tax reliefs and benefits are most yearned for by foreign entities while entering a market,” Nangia said. “The judgment establishes the fact that if an entity operates through another entity in India, then it shall be considered to be a legally and economically independent entity.”

However, Purandare warned that while this ruling offers a certain degree of clarity in terms of taxation of the franchise model, the possibility of the revenue authorities appealing to the High Court against this judgment cannot be ruled out.

Josh White

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oreign multinationals can expand their brand presence in India through a franchise agreement without suffering a higher tax burden imposed on permanent establishments (PE) following the Domino’s Pizza case.

Several tax advisers told International Tax Review that the ruling by the Mumbai bench of the Income-Tax Appellate Tribunal in favour of the US multinational sets a precedent for the taxation of the franchise model and is, therefore, good news for franchises of foreign brands that already operate across India. In addition, the decision will be encouraging to foreign companies wanting to expand into the country via a franchise agreement, but have refrained because of the tax risks.

“The ruling provides clarity on the controversy surrounding franchises’ constituting a PE in India,” Rajesh Gandhi, partner at Deloitte Haskins & Sells in Mumbai, told ITR. “It will ease their fears of the tax administrative and compliance burden in India.”

“It will also provide some more flexibility to parties to structure their franchise arrangement.”

In the case, the Income Tax Department argued that Jubilant Food Works, the Indian franchisee of Domino’s Pizza, was a dependent agent permanent establishment (DAPE) of the US company and that the latter had exclusive rights over its brand and pricing. But the tax tribunal ultimately rejected this argument, taking into consideration Article 5 of the US-India double taxation agreement (DTA).

“Most of India’s tax treaties have a similar scope and definition of the term PE,” Gandhi said. “Hence this ruling can also act as a precedent for other franchisees from non-US jurisdictions and will therefore have a much wider application.”

Jairaj Purandare, chairman of JMP Advisors, agreed, noting that the ruling takes into consideration the provisions of the US-India tax treaty and holds that none of the clauses relating to dependent agent are fulfilled (i.e. authority to conclude contracts or securing orders for the US entity, habitually maintaining a stock of goods on behalf of the US entity, etc.). “Most of the tax treaties generally have clauses relating to maintaining a stock of goods or negotiating/concluding contracts or securing

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The future of India’s PE standards The ruling, which concerns permanent establishment issues, is good news for taxpayers

orders. Hence, treaty relief may be available in most cases, subject to the facts of each franchise model,” he said.

Under the master franchise agreement (MFA), the Indian franchisee pays Domino’s Pizza International royalties and franchising fees in exchange for certain rights. The US company gets 3% royalties on Indian sales and charges a fee for every new store opened in the country, while it has no control over business operations.

Not only did the tribunal hold that the franchise fee should be treated as a royalty, it also said that the franchise owners were not DAPEs by default. The MFA does not mean the foreign company can be treated as if it is located in Mumbai as a result. This entitles Jubilant Foods to continue paying tax at 10% and not 40%.

“It’s important to note that the relationship between the foreign franchiser and the Indian franchisee has to be on a principalto-principal basis and the franchise agreement should capture the relevant facts appropriately,” Maulik Doshi, SKP Business Consulting’s senior executive director of TP, told ITR. An MNE may have rights over the brand in such a case, but the Indian master franchisee is still responsible for its own profits and losses. If the court had ruled in favour of the tax authority, the company would have faced the threat of a steep levy on its receipts.

Suraj Nangia, partner at Nangia Advisors, said the tribunal’s decision encourages foreign entities to carry on

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Whether or not the precedent set in this DAPE case holds for other foreign companies may depend more on international trends, rather than on the decisions of national courts.

While the ruling in the Domino’s Pizza case does not pose any risk for India to change its PE standards, the Indian government has been taking steps to broaden the PE definition in light of the multilateral instrument (MLI). This could well mean changes for foreign companies covered by tax treaties with certain jurisdictions.

“This move is toward the bid to promote the ‘source taxation’ rule which India has consistently been following,” said Gandhi.

A country’s tax treaty network can determine a lot about how foreign companies operate in the jurisdiction and what rates their activities will face.

Although the Domino’s Pizza case can act as a precedent franchisees from non-US jurisdictions, this may be about to change as India renegotiates many of its 93 tax treaties following the MLI. While DTAs with, for example, the UK, the Netherlands, Singapore and Cyprus may be affected by any treaty amendments, jurisdictions like the US will sit outside the scope of the MLI. “The US tax treaty may not have been of much relevance, however, going forward the tax treaty would play an important role as the local law has been amended,” Doshi said. “Going forward MNEs would have to ensure that they do not fall within the expanded definition of the PE before executing a transaction in India.”

News analysis

Investors in Spanish tax lease system at risk of state aid reclaims Joe Stanley-Smith

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pain may be forced to claw back huge sums from investors who have benefitted from its tax lease system following a ruling from the European Court of Justice. A final pending judgment from the General Court of the EU is likely to confirm the ECJ’s position.

In yet another state aid judgment involving the maritime industry, the ECJ backed the European Commission’s initial 2013 decision that the tax regime applicable to certain finance lease agreements for the purchase of ships constitutes illegal state aid.

The court’s July 25 verdict systematically deconstructed the General Court of the EU’s (GC’s) ruling from December 2015. Several financial institutions will be affected by the ruling, including Banco Santander.

“The General Court’s decision a few years ago was more surprising than the one we had now,” Borja Escriva de Romani, partner at Deloitte Legal in Spain, told International Tax Review.

The ECJ is perfectly entitled to overrule the General Court when it deems it necessary, and also did so in December 2016 in another Spanish case, World Duty Free Group.

“After the ECJ’s landmark judgment in the Spanish World Duty Free case, handed

down some 18 months ago and in which case the General Court was also corrected, the present judgment should not come as a surprise,” said Sjoerd Douma, professor of international and European procedural tax law at the University of Amsterdam.

This latest case concerns the Spanish tax lease system (the system) that was discontinued in 2012. It has since been replaced by a regime that complies with EU fair competition rules, but the benefits that investors gained under the old system are likely to be under threat as the EC will push Spain to recover them, as it has done in previous state aid cases.

However, this process will not start until the General Court re-rules on the matter, which has now been handed back down by the ECJ. “The General Court, to which the case is referred back, should now examine this,” said Douma.

Economic interest groupings The case arose following several complaints about the system, which critics said allowed shipping companies to buy vessels built in Spanish shipyards for 20%-30% less than those built abroad.

This was possible because of an innovative structure put together by a bank involving an economic interest grouping (EIG, or

Agrupción de Interés Económico, AIE, in Spanish), in which the bank and investors would purchase shares.

The system combined five Spanish tax measures to allow the EIG to benefit from early and accelerated depreciation before ships were even completed under the Spanish tax system.

This depreciation “generated significant tax losses for the EIG, which due to the EIG being transparent for tax purposes, were deductible from the investors’ own revenues pro rata to their shares in the EIG”, said a client newsletter from PwC’s state aid working group.

“The scheme was based on a tax advantage, which is accelerated tax depreciation, and there is no tax recapture,” said Escriva.

“As a general rule you would expect a recapture, but this structure allowed to generate tax losses and allocate them to the investors, and there was no recapture due to the tonnage tax.”

“The resolution is now suggesting it is a selective arrangement because it has only been entered into for the purposes of vessel financing.”

The EC’s problem with the EIG scheme is that it was selective, and that it conferred an advantage without justification.

“What matters is whether a taxation rule which possibly confers an advantage on a company or group of companies actually makes sense,” said Douma. “In other words, it should be justified in other grounds than the wish to confer such an advantage.”

Progression of the case

The shipping and shipbuilding areas have been affected by several state aid rulings

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The European Commission (EC) first brought action against Spain in 2013, deciding on July 17 that the system was “partially incompatible” with the internal market.

As often happens in the shipping/shipbuilding industry – which several EU member states wish to bolster domestically through tax incentives – the EC had received several complaints about the system.

However, on December 17 2015 the General Court annulled the EC’s decision.

Following this, the EC appealed to the ECJ, leading the latest ruling.

The question now is how much money Spain will have to reclaim from investors.

There had been studies into how much could be clawed back by Spain, but that these were halted after the 2015 General Court ruling.

September 2018

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News analysis

US Treasury sets the record straight on Section 965 “It is important that they continue to listen to taxpayer feedback on the questions the new rules raise and the challenges they create,” LeSage said. “Not only so that these rules fairly represent Congressional intent, but also so that taxpayers and their advisers can comply with them.”

Several months after the TCJA came into force and the effects of the Trump tax plan are still unfolding week by week, keeping taxpayers and tax advisers on their toes. The US Treasury and the IRS still have a lot of work to do to satisfy the demands for certainty.

Josh White

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he US Treasury Department and the Internal Revenue Service (IRS) have proposed new regulations on the payment of the repatriation rates as part of US tax reform.

The US Treasury and the IRS released proposals on August 1 for how to clarify the rules on the repatriation tax rates for different companies. The guidance will affect US shareholders with direct or indirect ownership in certain specified foreign corporations (SFCs).

Section 965 (the section) imposes a onetime tax on the deferred foreign earnings and profits of some US-owned foreign corporations as part of the shift to a partial participation system. The section has introduced a dual system where a 15.5% rate applies to earnings from cash assets and 8% applies to non-cash assets. But this has brought a new level of complexity for companies.

One of the proposals is to ignore transactions after November 2 2017, in order to focus on post-1986 foreign earnings. This would “reduce the taxpayer’s liability imposed by reason of section 965, even if such future actions are otherwise respected” under the Internal Revenue Code (IRC), says the new guidance.

“The choice of a November 2, 2017, measurement date reflects an intent to impose a transition tax on a snapshot of earnings as of a date that coincides with the introduction of the Act in Congress,” the guidance says.

Taxpayers are still anxious for certainty over the future of the US tax code. These proposals are just a part of trying to settle the system that has been put in place since January 2018.

What’s on the drawing board?

Section 965 was drawn up to create incentives to shift profits back to the US by raising barriers to abuse and creating favourable rates for businesses. The success of the reforms depends more on what guidance and regulations are put forward than on anything else. Without guidance, the taxpayer has to speculate.

“Companies are being forced to anticipate future tax guidance in their analysis,” Dan Lange, Deloitte’s global tax leader, told ITR. “Uncertainty in the tax law does cause a slowdown in determining the tax effects of certain transactions.”

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Taxpayers still need more guidance The tax community has been waiting for guidance on several aspects of US tax reform before acting

The transition tax requires taxpayers to include the accumulated foreign earnings of controlled foreign corporations (CFCs), and other foreign companies with a 10% domestic shareholder, as SFCs. The proposed guidance clarifies that US shareholders of deferred foreign income corporations (DFICs) and real estate investment trusts (REITs) can make the payments over eight years, while the exact rules for USowned partnerships have yet to be decided.

“Eight percent of the REIT section 965 amounts in each taxable year in the five-taxable year period beginning with the taxable year the amount would otherwise be included,” according to the guidance. “Fifteen percent of the REIT section 965 amounts in the first year following the five year period.”

How such assets are defined will determine companies’ net tax liability. So the IRS is planning to focus on how multinationals classify assets as cash or non-cash in order to detect any attempts to redefine assets to gain an unwarranted tax advantage.

Andrew Bernard, managing director at Andersen Tax in Philadelphia, explained why the section has been controversial among some tax professionals.

“Section 965 in particular has a very broad anti-abuse rule that really shuts down any real planning and the notices that have been issued by the IRS have confirmed this,” Bernard told ITR. Bernard stressed that the TCJA was drafted in a month and a half, with little input from business or independent economic analysis. While LeSage pointed out that the US tax authority has been engaging with taxpayers as part of its efforts. This is essential for compliance.

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What’s still missing is clear guidance on two key parts of US tax reform: the base erosion anti-abuse tax (BEAT) and the global intangible low-taxed income (GILTI) rules. Until the US issues proposals on the BEAT and the GILTI rules, these measures will continue to look like blunt tools for complex problems.

“For many taxpayers the main effort so far has been to understand and apply the new law to their existing facts,” Jeffrey LeSage, Americas vice chairman – tax at KPMG, told International Tax Review.

“We’ve been seeing some activity that I believe can be traced to the new law, ranging from some increased capital investment to an uptick in M&A and stock repurchases.”

“We’ll see more of those types of activities as opportunities present themselves and as business leaders gain a better understanding of the law’s overall impact on their enterprises,” he explained.

At the same time, the revenue service has been working hard to clarify the implications of the new rules, but most some tax advisers were already clear about the difficulties the Tax Cuts and Jobs Act (TCJA) raises for the delicate work of tax planning.

If the Trump tax plan works as intended, the sums repatriated could be immense.

Citigroup estimates that US companies have more than $2.5 trillion in capital held overseas, and the joint committee on taxation estimates that the repatriation rates will generate nearly $340 billion in tax revenue over the next decade.

This is why US Treasury Secretary Steven Mnuchin sees US tax reform as “a historic opportunity for American companies”. Even so, the short-term impact may be felt more in the compliance arena as US businesses adjust to the new terrain.

News analysis

How Shell manages its Dutch dividend withholding tax Josh White

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he Netherlands is set to abolish the dividend withholding tax, but it may come too late for Royal Dutch Shell if the EU takes state aid action.

The Dutch government will abolish the 15% dividend withholding tax on January 1 2020, while it lowers the corporate tax rate to 21% and institutes a conditional withholding tax on outbound intra-group royalties, interest and dividends by 2021.

International Tax Review contacted Royal Dutch Shell for comment on the plan: “Foreign shareholders of Dutch listed companies bear the majority of the dividend withholding tax.”

“This creates a hurdle in the free access to large capital markets and international capital providers for Dutch companies,” Shell said. “This is particularly an issue for relatively large companies in relatively small countries that are more dependent on international capital providers.”

“Dutch businesses are largely dependent on foreign capital markets when it comes to the financing of their activities, and access to these capital markets without restrictions is thus of great importance,” the company added.

Heico Reinoud, partner and co-head of tax at Dentons Boekel in Amsterdam, suggested the Dutch government doesn’t want to give potential foreign investors the perception that a low tax rate is the only reason to move assets to the country.

“The Netherlands is striving to remain attractive through a full participation exemption on dividend and capital gains, a branch exemption, a 7% effective tax rate for the IP patent box, as well as an extensive and beneficial tax treaty network,” Reinoud said.

As the withholding tax regime is phased out, Dutch companies will likely see their access to foreign capital markets expand – but this could depend on the new conditional withholding tax rate being put in place. The government has yet to declare the exact figure, but it could well be a more competitive rate.

structure, merge its parent companies into one operation and headquarter the business in the Netherlands.

“Shell was faced with the choice of locating its new headquarters in the Netherlands or in the United Kingdom,” the company explained. “The issue was that the Netherlands levies dividend withholding tax and the United Kingdom does not.”

Before the merger, Shell was listed as two separate corporations on the stock exchanges of the UK and the Netherlands.

As the company unified its structure, the majority of Shell’s shareholders were based in the Netherlands but a significant minority were UK-based.

The move to the Netherlands would have obliged British shareholders to pay a Dutch levy on their dividends. The UK has no withholding tax on such distributions but doesn’t allow shareholders to offset the cost of withholding taxes levied in other jurisdictions. This threatened to hold back the merger until British shareholders could be convinced of the plan’s benefits.

The Anglo-Dutch company created a new structure with the approval of Belastingdienst, the Dutch tax authority, whereby its shares were divided into Ashares and B-shares, which would qualify for different tax treatments. A-shares were subject to Dutch dividend tax, while B-shares would be distributed via a dividend access trust based in Jersey to a British subsidiary.

“No tax is levied on dividends from Bshares, provided that they are paid via the socalled dividend access mechanism,” the company explained. “This solved the problem for the shareholders in the British parent company and made it possible for Shell to unify in one headquarter location.”

The arrangement put British shareholders at ease and the reorganisation went ahead as planned. Although the dividend access mechanism was intended as a shortterm solution, the Dutch tax authority granted the renewal of the structure in 2015 when Shell bought out British Gas.

State aid threat In recent months Shell has faced allegations it avoided up to €7.5 billion ($8.7 billion) in Dutch withholding tax since 2005. Dutch Labour MEP Paul Tang said the European Commission will launch a full state aid investigation into Shell’s tax affairs.

“The probability that the European Commission will go after this tax arrangement with Shell is huge,” Tang told the Dutch newspaper Touw on June 18. “With European law in hand, this construction can be reversed.”

Shell responded: “The dividend access mechanism is fully in line with the tax laws and regulations in the Netherlands. The right to levy dividend withholding tax on dividends paid to shareholders in the former British parent company has never existed in the Netherlands.”

“The effect of the dividend access mechanism was simply that this situation continued after the combination of the parent companies,” the company added. “We have always been transparent about the dividend access mechanism in our annual reports.”

As the end of the dividend levy approaches, Shell might only need this structure in place if the conditional withholding regime is implemented in the same way. But this might not protect it from financial harm if the Commission is intent on finding a new state aid case.

Two structures, one company Shell has advocated abolishing the dividend withholding tax since it reorganised its business in 2005. The Anglo-Dutch company’s aim was to simplify the existing

Shell’s tax arrangements could come under attack from a state aid perspective

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September 2018

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News analysis

Wayfair: Foreign-based companies at risk of US state tax exposure Joe Stanley-Smith

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oreign companies need to examine the potential consequences of the US Wayfair case as states consider hunting for more tax dollars abroad, say tax advisers.

The Wayfair case, which was released on June 21, sent shockwaves through the US tax system. It means US states will be able to collect sales taxes from out-of-state sellers, overturning a decades-old Supreme Court decision in Quill, which stated the opposite.

Although the case is specific to the US, there is little clarity over whether states could attempt to assert taxing rights over foreign-based companies. This is raising concern among big businesses that sell into the US or have US-based operations.

Baker McKenzie’s David Pope, a state and local tax partner in the New York office, said he has received a “substantial” number of enquiries from non-US based clients on Wayfair’s impact.

“Multinational businesses that previously took the position that they did not have ‘nexus’ (a jurisdictional requirement to be subjected to a state’s tax) due to a lack of physical presence may no longer solely rely on such a position in jurisdictions that enact or have enacted laws similar to South Dakota’s,” he told International Tax Review.

Steve Wlodychak, EY’s state and local tax policy leader, added that he is also worried about the ruling’s potential impact on his foreign-based clients.

“I actually, personally haven’t fielded many questions from foreign companies on the impact of the Wayfair ruling on state sales tax collection but I am trying to get the word out and in a theoretical sense they should be very, very concerned,” he told ITR. The difficulty, of course, for states attempting to collect taxes from remote foreign companies, is enforcement.

As countries including Australia, Japan, New Zealand, Norway, South Africa and South Korea, among others, as well as EU member states, found out when introducing destination-based taxation for VAT or GST, it is difficult to force foreign companies to comply.

The US Federal Constitution allows states to pursue taxpayers in other states under the “full faith and credit” clause, but Wlodychak said the principle doesn’t really extend to foreign companies.

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South Dakota’s case against online merchant Wayfair will have a big impact on the US tax system

But Wlodychak warned that foreign companies, particularly affiliates of large multinationals that have a presence in the US, should be “very concerned” because “states could use ‘affiliation’ concepts to seek recovery of the sales taxes that should have been collected and not paid.”

Will foreign sellers benefit from tax treaty protection?

The physical presence requirement, which was the subject of the Wayfair case, is similar to the permanent establishment concept in most tax treaties. However, US tax treaties do not generally apply to state indirect taxes, confirmed two Big 4 advisers.

The US-Switzerland tax treaty (1996), for example, stipulates: “The existing taxes to which the Convention shall apply are: a) in Switzerland: the federal, cantonal and communal taxes on income (total income, earned income, income from property, business profits, etc.).”

However, it makes no reference to US state sales tax, only referencing federal income taxes imposed by the Internal Revenue Code and excise taxes on insurance premiums.

Some states do have areas of legislation relating to sales into their borders from outside of the US however.

Washington, for an example, provides an exemption for items “in import or export commerce”. Kent Johnson, partner and national leader for indirect tax services

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in KPMG’s state and local tax practice, said this “generally includes items shipped from outside the US directly to retail consumers in Washington if the property remains in the stream of import until delivery to the customer”.

But Johnson expects that states without a specific carve-out for foreign sales will seek to apply their nexus standards to both domestic and foreign sellers that make sales to consumers in the state.

In the future, countries could seek to amend their tax treaties with the US to prevent states from claiming taxing rights over companies based within their borders.

Particularly for countries that do not apply the destination principle for indirect tax purposes, this would be an effective way of preventing double taxation – if the US agreed to such changes.

“One suggestion – and I might be committing treason here in the US – is for foreign negotiators of tax treaties to seek to expand the ‘permanent establishment’ concept to state taxes too,” said Wlodychak. However, this might go in the opposite direction of what the European Union member states are trying to do under the OECD BEPS proposals and the concept of ‘place of presence’ in the digital economy, he noted.

For an examination of the risk of retroactive sales tax exposure resulting from the Wayfair decision, visit: bit.ly/wayfairretro

Events | Women in Tax

The importance of working together International Tax Review’s Leading Women in Tax Forum in London shone a spotlight on how building inclusive teams, empowering others and using your network can create an environment where everyone can thrive. Anjana Haines shares some highlights from the day’s discussions.

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very step towards greater equality will benefit businesses, clients and solicitors alike. In the UK, women now outnumber men practising as solicitors, according to figures from the Law Society.

But the picture is not as bright when considering the number of women partners in the Americas.

In 2005, the percentage of women partners working in law and accountancy firms in the Americas was 12.8%. At that time, this was significantly less than in American corporations at around 18% and US Congress at 21%. In 2017, the percentage of women partners had only grown to around 18%. It’s also worth noting that of the S&P 500 companies, women held only 5% of CEO positions as of January 2018.

Symbolising the significance of being a woman partner at a firm in 2005, one panellist tells her story. “When I made partner in 2005, my best friend sent me a bracelet with a key as my new proverbial ‘key to the men’s room’, which I have worn for you all today,” she says. “All joking aside, all of the firms have made great progress in the area since then but we are nowhere near a healthy balance of women in leadership. It’s no secret, a balanced leadership group is simply good business.”

It’s becoming more common for men to realise that working with a women offers some great opportunities for them, especially when it comes to their skillsets, say panellists.

However, for many women who are seen as experts in their field of work, or who lead a team of tax professionals, the image they want to project is split into two aspects.

“The image you want to create of yourself to others is of a beautiful swan gliding across the water, while you are frantically paddling underneath to keep it altogether and stay afloat,” says one tax director.

“It’s also important that a team paddles together too. Outwardly, a team should also look like a graceful swan,” adds another.

This comparison between tax professionals’ hectic work lives and the gliding swan is much more than just a reflection of a person or their team. It’s about presenting oneself as someone who is in control and capable of doing the job.

“Ideally, you don’t want to show yourself as someone who is paddling frantically because this can sometimes erode the trust of others in you to do the job – but that also doesn’t mean you don’t show your vulnerabilities,” says the tax director who shared the analogy, which was repeated throughout the day.

“You just need to show your confidence to your team and all stakeholders. It’s also important to learn from your mistakes,” she adds.

Empowering others All leaders have numerous internal and external stakeholders and using an appropriate leadership style is key to success.

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September 2018

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Events | Women in Tax

One tax director says her mantra is to make tax user-friendly and solutions-driven. This sometimes involves mentoring and coaching people across the company. Training other people in the organisation on certain tax rules or basic tax matters can empower others to deal with certain matters. It helps everyone and develops mutual respect, say panellists from Travers Smith, Intermediate Capital Group, Lloyds Development Capital and ConvaTec. While tax expertise is important, developing a team of subject matter experts ensures leaders can focus on leading. Panellists also extolled the benefits of ensuring teams are diverse in terms of their abilities and expertise areas.

“Naturally, the more diverse your team is, the better success your team is likely to have. It could give you a competitive advantage,” says one panellist.

“As a leader you’re the person that needs to use judgment, develop a strategy, have the vision and understand commercial relevance. As a manager, you have a multitude of issues to deal with,” adds another panellist. “It’s also important to recognise good work. You should advocate for the people who are doing a great job – this is a really important aspect of leadership.”

Key aspects of the modern tax director role, say panellists, are to: • Sell the vision; • Delegate well; • Innovate often; • Empower others; • Overcome resistance (part of this is also being a good negotiator); • Build strategic relationships; • Focus on the customers; and • Listen very actively.

But, it’s not always possible to gain these skills alone.

Mentoring schemes are growing in popularity and can offer some welcome guidance.

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There are good and bad mentor scenarios, however. Formal mentorships, where a mentee is assigned to a mentor, can be good, but only if there is good chemistry between the two individuals.

Informal mentoring relationships can also be helpful, and can be struck with individuals outside of the workplace.

“These informal arrangements can allow you to be more open, honest and relaxed in the situation. This can often mean a relationship that has more chemistry,” says one tax director who prefers this option.

Nevertheless, while a leader may have strategic responsibilities and receive guidance on their development, it’s also important for all individuals to be able to grow within the business and bring growth to it too. That may be, for example, from new ideas.

One tax director says she relies on her network and talking to people to come up with ideas. Other tax directors agree that it’s not possible to survive without a network. The broader the network, the more advantageous that is to progression, they say, advising that it’s good to take some time out of the week or month to review and nurture these professional networks.

“See networking as something you do as part of your day job – as opposed to something you do after 5pm,” says one tax director.

“If you see networking as part of your job, you will be able to achieve this.”

Building and using your network A tax director’s network is not just about what it means to them, but what they mean to their network.

“Having a good network that you are able to nurture and maintain can lead to job opportunities you could not have expected via the traditional routes of career progression and recruitment,” says one speaker among the panel of women from Aptis Global, Co-op, Vectura and Sophos Group.

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Events | Women in Tax

In one example, a tax director tells the audience about how her network helped her when she faced an unexpected situation.

“I had informed my manager of becoming pregnant, and I received an unexpected response,” she began.

“My manager said he was shocked that a female talent like myself would ruin her career by having a child. I quit the job while pregnant with no plans for the next step,” she says. “However, while pregnant, a client approached me to offer me a job when I was ready to come back to work. This opportunity allowed me to develop a career in a niche area of tax and work my way up the career ladder.”

“All my job opportunities have come from my network. I have never had to apply for a job in the traditional way over my 35-year career,” she continues.

“I have had so many jobs because people knew who I was, where I was and what I was good at”, she adds.

“It’s all about the network,” she advises delegates. “You need to build your network, talk to your peer group, and be very careful to build your network across continents with all of your stakeholders.

When thinking about the next job, it’s important to think about how you can put yourself in the position that makes you the most obvious candidate when that type of role comes up. Let people know what interests you. Always play to your strengths.”

Several tax directors also talked up the importance of digital networking and maintaining a coherent online presence.

Global businesswomen

What would you tell your younger self?

Panellists said: • “Savour the moment” – Life goes so quickly. If there is something you are enjoying, take the time to enjoy it.

• “Let go of the guilt” – Whether it’s family life, or something else, feeling guilty is utterly pointless and destructive.

• “If something is scary and terrifying, what is the worst that can happen? If you want to climb a mountain, do it” – Just give it a go.

• “When you are there, be there in that moment”.

• “Bring your heart to the game” – It’s only tax, but what matters at the end is the relationships and the friends you make.

• “Don’t be so critical of yourself” – A women will normally only apply for a job if she has 100% of the skills, whereas a man will apply for the same role even if he only matches 50% of the requirements.

• “Live the life you want to live and take career opportunities that come your way that match your lifestyle because you only have one life.”

• “Come out of your comfort zone, confront your fears. Don’t let fear stop you from achieving your goals and your ambitions.”

• “Don’t compare yourself to others.”

Most tax directors have a global aspect to their role at the very least. As the world becomes smaller, many individuals find themselves working with people from different countries. When working across countries and time zones, the challenge of developing a team and establishing trusting relationships can be tough.

Trust is crucial in a global and transparent community. When those face-to-face conversations don’t happen easily, it can be very difficult to build that cohesive group and team, speakers note.

They suggest that building clear goals and objectives, sharing ideas and plans and continuously sharing progress can help.

A team that brings together native and non-native speakers is another challenge tax leaders often face. Getting to know each other across a global, and often virtual, team can be tricky too.

• “Don’t put people on pedestals. Everyone is human.”

Taking the time to do some research, speak to people, and understand the cultural differences to determine how a person may perceive a piece of communication is an important step in this process, says one tax director. “You have to invest time to understand this.”

In conclusion, the speakers believe that empowerment firstly comes from within. When a women believes in her strengths to do her job, she will naturally grow her skills and empower others along the way.

An account of the technical discussions at the Leading Women in Tax forum will follow in the October issue of International Tax Review.

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September 2018

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Leadership | Communicating tax

How leaders communicate tax to the non-tax world A key role of heads of tax in large organisations is to be the ‘ambassador’ for tax, raising its profile and providing advice around opportunities and risks, writes Sandy Markwick, head of the Tax Director Network at Winmark. Being effective in this capacity requires advanced communications skills.

I

t is a paradox of corporate management that the skills required of effective leaders – members of executive committees or functional heads – are not the skills that helped them get there in the first place. As executives become more senior, it is their strategic input and holistic view of the organisation that is increasingly valued over specialist functional skills.

The focus for heads of tax shifts away from the core compliance and reporting to being a ‘business partner’ to colleagues across the organisation. Tax technical skills take a back seat to managing the team and communicating with multiple stakeholders.

Successful communication is a two-way process and involves effective listening and learning, as well as delivering messages. As with all good ambassadors, the head of tax requires diplomacy, an ability to appreciate the perspectives of others and ‘eyes and ears’ to be aware of what others do and say about tax.

Heads of tax need to deliver messages that cut through considerable complexity. With tax enjoying a central position in large organisations, which cuts across business units and functions, heads of tax have an additional challenge of adapting messages to multiple audiences internally, as well as externally.

Within the organisation, the tax function may need to work with colleagues in human resources over pay-as-you-earn (PAYE) or global mobility matters; with IT to ensure financial data can be extracted from enterprise resource planning (ERP) systems; with the legal team when it comes to litigation; or with corporate communications colleagues about external messaging.

From a cross-border perspective, heads of tax may choose to submit explanatory information in table 3 of their organisation’s country-bycountry report

Meanwhile, the tax function will also be working closely with commercial teams to provide advisory services to support business models and new product launches. Tax needs to persuade business unit leaders of the value in involving tax in, for example, external contractual discussions or plans for restructuring or M&A. Tax should highlight risks and opportunities behind proposals consistent with the company’s risk appetite, without being an obstacle.

Key to gaining the attention of colleagues towards matters of tax – and then retaining it – is to show how tax is directly relevant to them; how it affects their customers, their competitiveness, their products and more. A divisional CFO might not care about the intricacies of loss relief, per se, but will likely care and understand it in term of cash flow acceleration.

Speaking in tax technical terms is usually not the best way to get your message across

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Leadership | Communicating tax

Key to gaining the attention of colleagues towards matters of tax is showing them how it is relevant to their customers, competitiveness or products

Perhaps the most important internal stakeholder for heads of tax is the board. Statutory requirements such as the senior accounting officer regime and the need for large businesses to publish ‘tax strategies’ have helped focus boards’ attention on tax. The challenge now is to reinforce the message to ensure that the tax strategy is embedded into the business.

For most heads of tax, opportunities to formally present to the board are limited to short contributions to board papers at the audit and risk committee and, perhaps, brief presentations. Input into board papers is more commonly indirect, via the CFO’s report to the board, which might include an update on effective tax rates, cash tax, penalties and consultancy fees. It might also include details of what tax is currently working on and levels of tax risk being managed/observed.

More informal interaction with non-executive directors can provide valuable perspectives based on their experiences at a range of other companies.

Outside the organisation, the head of tax has multiple audiences too. Most obvious among these stakeholders are tax authorities. In the UK, this will include regular calls and meetings with the customer relationship manager (CCM). This person will have the technical skills to understand tax structures, but not necessarily the required understanding of the commercial drivers in business nor the decision-making processes in large companies.

From a cross-border perspective, heads of tax may choose to submit explanatory information in table 3 of their organisation’s country-by-country report. A narrative to support raw data will help anticipate questions which might otherwise arise.

The profile of other external stakeholders will depend to a large extent on the nature of the business, but will likely include some balance of tax audit partners, investors, consumers, clients, government agencies and regulators, the press, campaign groups and policymakers.

Investor communications are those most likely to follow a planned schedule, particularly among large publicly listed companies. With each reporting cycle, the head of tax commonly works with investor relations colleagues on press releases, FAQs or Q&A documents around tax and transfer pricing matters.

Such documents will attempt to anticipate questions that might be asked and provide responses and relevant background information for the relevant spokesperson. It is common for the head of tax to be present at investor presentations or briefings in case any specific tax questions arise.

Practical tips for communication • Keep it short and simple. Use laypersons’ term and avoid jargon, acronyms and legislative section numbers. Be careful not to assume knowledge of tax on the part of non-tax colleagues.

Make messages relevant and memorable.

• Be proactive in asking colleagues about their aims. Develop the empathy to understand your audience and their concerns. Then distil and pitch messages to ensure the intended target receives what they need to know to act on it.

• Test external messages with non-tax people internally first to see if they understand them as intended.

• Get involved – invite yourself if necessary – as much as you can in non-tax discussions across the business as that is often where the most value can be added. Show yourself as someone with commercial awareness and a reasonable appetite for risk. Be seen to provide solutions to challenges. Don’t just highlight problems or present obstacles or prioritise the perfect tax-technical answer.

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September 2018

19

Transfer pricing | Value creation

TP: Employees trigger value creation within MNEs Gautier Ciresa, transfer pricing manager at Technicolor, explains why employees are the true indicator of value creation within MNEs and how to determine their impact in a transfer pricing analysis.

“T

here is no wealth but men” – this aphorism by the 17th century French economist and philosopher Jean Bodin, claiming that humans are the true source of wealth for nations, has become the new keystone explaining the value creation process within multinational enterprises (MNEs).

Without stating it explicitly, Actions 8 to 10 of the OECD’s BEPS package (the new OECD developments) reinstate the human resources (HR) factor and its actions at the core of the value creation mechanism within a multinational corporation.

The ability of empowered employees to commit their company toward success or failure becomes the main trigger for generating profit or loss. Consequently, the HR function must be seen as the main pillar entrenching the taxable base in the territories in which the MNE operates. This overshadows the other elements so far considered as value creation indicators in the transfer pricing analysis. Thus, assets and costs should now be contemplated as mere consequences deriving from prior controls and decisions made by employees.

However, this primary role played by employees in transfer pricing analysis is not obvious when reading the new OECD developments. Moreover, no direct consequences can be clearly drawn from it. This startling absence creates practical difficulties in understanding and defining the employees’ actions.

Multiform and multidimensional, the decision process and the control employees have over risks are extremely difficult to circumscribe within a MNE, making any satisfactory implementation of the 2017 OECD transfer pricing guidelines (OECD guidelines) illusory. Transcending the usual scope of the transfer pricing analysis, controls and decisions should instead be contemplated in their hierarchical, functional and temporal entirety.

Regardless of these deficiencies, the new OECD developments pave the way for new perspectives in terms of profit allocation between jurisdictions, commending employees as the key source of value creation within a MNE.

How HR triggers value creation The OECD has made the alignment of taxation and economic substance the common thread of its BEPS project to ensure that “profits are taxed where economic activities take place and value is created”. This principle is even stronger in terms of intangible assets and is inscribed in the development, enhancement, maintenance, protection, exploitation (DEMPE) analysis.

Value creation by employees can only be contemplated in its entirety from a hierarchical, functional and temporal point of view.

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Although the OECD guidelines used to encourage MNEs to fairly remunerate their subsidiaries carrying out significant functions, bearing the main risks and using the main assets (including financial assets), they now urge them to contemplate control over risks and decisions as preliminary requisites for any entity entitled to the residual profit (i.e. above its routine remuneration). These two notions are intrinsically related (sometimes referred to as ‘control’ in this article).

Pursuant to section 1.65 of the OECD guidelines, control over risk involves: • The capacity to make decisions to take on, lay off, or decline a risk-bearing opportunity; and • The capability to make decisions on whether and how to respond to the risks associated with the opportunity.

In this context, the transfer pricing analysis that is limited to the company’s functions, risks and assets is no longer satisfactory to grant a significant return on investment per jurisdiction (i.e. overtaking the (low) risk-free return). The recognition of an extra (human) soul is now necessary to benefit from the residual profitability.

Entities belonging to a MNE are now expected to demonstrate their independence and ability to conduct business by exercising an upstream and effective control over the functions creating value and the related risks. As an illustration, the new OECD developments (incorporated in section 1.103 of the OECD guidelines) state that an entity “which lacks the capability to control the risks associated with investing […] would not be entitled to no more than a risk-free return”.

Although this change may not seem tremendous at first sight, it is a major conceptual breakthrough in transfer pricing, making the employees the original source of value creation within a MNE. Without clearly asserting it, this overshadows other indicators of value creation that used to be dominant in the standard transfer pricing analysis. Thus, assets and costs should now be considered as mere consequences deriving from the prior decision and control by an MNE’s employees. From now on, any value (or loss) is created because of a thoughtful decision made by empowered employees.

Hence, transfer pricing specialists should refer to the HR function as the original matrix for allocating profits (or losses) within jurisdictions. Therefore, the static analysis of the consequences of the employees’ actions has been replaced by a more dynamic interpretation of its upstream manifestation to explain value creation.

A relevant approach in a changing economic environment Weighting employees as the primary element generating value is rather logical in this evolving economic environment. This approach is only a response to the lack of ageing fiscal norms unsuitable to our contemporaneous world. More open, digital, and fed with intangible assets, the current world economy eases the shift of taxable basis.

In this context, the new proposed norms commend an MNE’s employees as the new territorial pillar for value creation. Although the recent developments related to digital economy taxation is likely also to consider demand as part of the value creation process, this is not the focus of this article.

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Transfer pricing | Value creation

How do you determine the value creation of each employee?

In a world being exponentially flooded by technologies, it is quite a shift to return to the human elements to determine value creation.

Not only can the human capital materialise value creation, it also has the benefit of not being directly moveable, in comparison with other factors such as assets. This HR factor lessens the temptation of moral hazard for an MNE, less able to influence the cross-border movements of its employees.

It is worth noting that this prevailing HR factor in the value creation mechanism is not limited to transfer pricing and is spreading across the entire scope of international taxation, including the nexus approach for patent boxes or holding companies.

It is even more striking as far as permanent establishment rules are concerned, where the “significant people functions” approach has already been considered since 2010 (see the OECD’s report on the attribution of profits to permanent establishment). It is worth noting that transfer pricing and permanent establishment are two sides of the same coin: both concern how to fairly allocate profit among territories.

Finally, and even more importantly, it is unfortunate that quantitative analyses based on HR (through appropriate indicators) are not recommended as official methodologies for sharing profit within a MNE. Worse still, the pending OECD developments relating to the profit split method (revised guidance on the application of the transactional profit split method, BEPS Action 10, section C.5.3) surprisingly continue to focus on the consequences deriving from the actions taken by employees (costs, assets, etc.) as proposed allocation keys to split profit, instead of directly focusing on HR itself.

This startling reluctance to promote employees as the key element of the value creation process may be explained by the real struggle to understand and demarcate its action within a MNE, considering the existing tools. This new paradigm creates fundamental issues, which are difficult to overcome, practically speaking.

Practical deadlock: the control is widespread Barely noticeable consequences It is rather startling to notice that the human role (and its related consequences) is not clearly stated and exploited in the new OECD developments, as far as transfer pricing is concerned.

Firstly, employees are barely mentioned. In contrast, the notion of legal entity (having control) is ubiquitous. This constant personification of the legal entity leads to misjudging the leading role played by the HR factor and unfortunately draws the attention away from this key area.

Then, the new OECD developments do not give the impression to take into account the consequences of the critical role played by HR in the value creation process. A brief glimpse into the new documentation requirements is sufficient to realise that the usual annual static analysis is favoured over key HR information.

It is worth pointing out that one of the rare proposals of Action 13 (local report), which focuses on HR, aiming at providing a “description of the individuals to whom local management reports” has not even been picked up by the French legislator in the new version of Article L13AA of the French Tax Code. This example underlines the limited awareness of most authorities about the leading role played by HR in the transfer pricing analysis.

Many of the problems corporations face relate to how they can reasonably estimate any employee’s capacity to exercise control. To better understand this problem, the control element must be contemplated in a tri-dimensional way: • Hierarchical; • Transversal; and • Temporal.

The hierarchical dimension of control From a pure hierarchical angle, what does control and decision mean? They are generally sinuous and diluted, navigating from operational employees to top management, passing and/or expending through numerous intermediaries, including regional functional managers and executive/investment committees. These persons are often scattered in different jurisdictions, further to the group’s operational, not tax, constraints. Among these entangled decision centres, how is it reasonably possible to isolate the scope of control of each individual?

The OECD recommendations remain scarce, for it is indicated that “if multiple associated enterprises are identified that both exercise control and have the financial capacity to assume the risk, then

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Transfer pricing | Value creation

the risk should be allocated to the associated enterprise or group of associated enterprises exercising the most control” (OECD guidelines, section 1.98).

However, this raises the question of whether the strategic hierarchical decisions hold more weight that the (daily) operational risk controls. The OECD guidelines (section 1.66) only exclude the extreme cases of “formal approval” as “insufficient to demonstrate control over risk” but remain silent on more common and complex situations involving various intermediary levels of supervision/decision.

Also, is it relevant to consider whether the executive management (the CFO along with direct collaborators), as the ultimate centre of control of the legal entities of a MNE, become the unique recipient of the residual value created across the MNE. Or, on the contrary, whether this executive management is a default cost centre (charged back through management fees), given the lack of clarity to assess the tangible outcome deriving from its action. Nevertheless, it is obvious that the critical choices for the group in terms of investments, capital allocation, restructurings, projects and customers selections, originate from the executive management.

These questions clearly point out the struggles TP managers face to determine the hierarchical control within a MNE.

Tying the entire success/failure of an intangible asset to one or a few specific departments within a legal entity is a simplistic answer to an equation with thousands of unknown variables.

controlled by most employees who influence, at different levels, the overall result. Again, it is extremely difficult to accurately define the scope of control of each single employee.

Tying the entire success/failure of an intangible asset to one or a few specific departments within a legal entity is a simplistic answer to an equation with thousands of unknown variables. It is illusory to consider a group as a sum of silos of clearly identified employees, having control over 100% of the result generated by a specific intangible (if we can primarily isolate this outcome, which is another debate not covered here).

The control capacity of an employee is then systematically partial/relative and can only be contemplated by considering the entire scope of its functions within the MNE in a more granular way (similar to the hierarchical scope mentioned above).

The difficulty increases when it comes to defining the control capacity of an entire legal entity. The latter is rarely a homogeneous whole, but rather a geographical recipient, gathering employees of different functions/levels, depending on circumstances and the entire organisational coherence of the group.

The temporal dimension of control Finally, there is often a time discrepancy between decision-making and outcomes.

If certain operational actions can have a direct influence over an enterprise’s results, other actions require time and produce outcomes over the medium or long term. Yet, one of the most difficult tasks faced by transfer pricing specialists (in the DEMPE analysis mainly) is to contemplate the control over time, since the DEMPE analysis is focused on the short term. For instance, brand awareness as well as a disruptive technology is built over time and does not depend on actions only taken during the fiscal year. Therefore, it is necessary to consider the employee’s action over time and abolish the standard short-term analysis to take into account all the past efforts.

Key takeaways This may be explained by the original estimate in transfer pricing, which traps the analysis in binary schemes of main entrepreneurs/routine entities. This extreme situation prevents MNEs from documenting the singularity and strong granularity of the decision/control over risks mechanism within a MNE, fading/ strengthening through hierarchy (top-down or bottom-up). A hierarchical level rarely owns the full powers of control and is, at best, an approximate barycentre.

The transversal dimension of control In addition to the hierarchical dimension, the employees’ capacity to control remains extremely difficult to determine through the transversal dimension.

For instance, pursuant to the new OECD developments, the value of a brand in a group directly depends on its employees’ ability to control/carry out the main functions/risks/assets related to the DEMPE analysis. This literal interpretation would assume the inclusion of most employees, whose localisation is widespread in different jurisdictions. Indeed, brand awareness cannot only be explained by the marketing expenses incurred by a legal entity, but by a significant number of factors such as quality of past work, product success, revolutionary technology, etc. It is then

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Based on the above-mentioned elements, it appears that employees, as an empowered HR function binding the MNE, have become the key for explaining the value creation process within a MNE. Nevertheless, this conclusion should be even more obvious in the OECD guidelines and become the focal point for reformers of the international tax system. In this context, two takeaways can be put forward.

Firstly, value creation by employees can only be contemplated in its entirety from a hierarchical, functional and temporal point of view.

Therefore, resorting to the traditional (and annual) transfer pricing methods between a few legal entities appears to be vain in a complex environment staging multiple centres of decision/control. This conclusion commends the profit split analyses that have a broader scope.

Secondly, value creation analysis should be massively orientated towards the HR relations within a MNE (working from HR databases) and materialise in appropriate indicators to document the unequal control capacity of each employee. The main challenge is defining a global system that would enable a multinational to weigh the hierarchical/functional/geographical and temporal features of each employee and limit the temptation of asymmetrical information and moral hazard. There is little doubt that employee remuneration, corrected from the above-mentioned difficulties, is the cornerstone of this model.

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US tax reform | Inversions

The end of the US inversion boom Danaher Corporation’s Jim Ditkoff talks to Josh White about what the end of the inversion era means for US businesses.

O

ne of the key arguments for the US tax reform was that the country’s tax system needed an overhaul to address the issue of corporate inversions. In a rare display of bipartisanship, US President Donald Trump’s tax plan complements the Obama administration’s regulations to restrict inversions.

When the US corporate rate was 35%, it made sense for some American businesses to expatriate cash and other assets to a low-tax jurisdiction. Some US companies, including Accenture, Medtronic, and Tyco, used inversions to shift their tax base to an offshore location through an acquisition. This involved the company swapping its legal domicile with a smaller foreign business. In short, the taxpayer retains the profitable operations in the US with a much lower effective tax rate in a faraway land.

“I would be surprised to see many more inversions of US companies after the Tax Cuts and Jobs Act (TCJA),” says Jim Ditkoff, who was the senior vice president of tax and finance at global conglomerate Danaher Corporation and now serves the company as a senior tax adviser. “Inversions are expensive from a tax perspective, both to the shareholders and to the company.”

“Even before the enactment of the TCJA, the anti-inversion rules made the cost of most inversions prohibitive,” he explains.

“But the benefits of inversions, chiefly the ability to repatriate lowtaxed foreign profits with no US tax cost and freedom from Subpart F, sometimes made the exercise worthwhile, especially if the shareholders were largely tax-indifferent institutions.”

The US Treasury Department and the Internal Revenue Service (IRS) issued the final anti-inversion regulations on July 11 2018. But these regulations go back to the 2002 moratorium on such transactions when the US began looking to regulatory reform for answers.

Former president Barack Obama’s administration drew up the new rules for corporate M&A deals and expatriation transactions.

As Latham & Watkins informed its clients in a recent alert, the prior guidance to the regulations made it clear that the rules would recognise many foreign holding companies as domestic operations and treat them as such for tax purposes.

Since the TCJA came into force, US businesses have faced the triple threat of a 35% transition tax on foreign earnings without tax credits, the base erosion anti-abuse tax (BEAT) and the global intangible low-taxed income (GILTI) rules. This combination would make any taxpayer flinch.

The costs of inverting There are still advantages to offshoring certain assets, but the incentive to onshore foreign earnings has been raised. No longer

There is no reason why an inverted company cannot create or expand US operations to enjoy the new 21% US tax rate.

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These companies got nothing in return for the TCJA’s Section 965 transition tax. will it be so appealing for US companies to relocate to a low-tax country by merging with and becoming a subsidiary of a smaller foreign company.

“The ability to repatriate low-taxed foreign earnings tax-free under the TCJA certainly undercut one of the key attractions of inversions” Ditkoff says.

“While the Mercks and Googles of the world claimed to have lots of cash ‘trapped’ overseas, most US multinationals with real manufacturing operations overseas had no problem repatriating foreign earnings with no incremental US tax even before the TCJA,” he adds.

The corporate inversion transaction was once a very popular restructuring option, with 47 companies undertaking inversions between 2004 and 2014. McDermott International was the first company to undergo an inversion, to Panama, back in 1982, and a stampede followed in 1990 with 84 taxpayers inverting over the next 27 years.

The two most popular destinations for inversions were Bermuda and Ireland, with a combined total of 40 inversions from 1994 to 2017. Yet a bipartisan consensus soon emerged that the inversions were ‘unpatriotic’ and bad for the American economy. Obama called the transactions “insidious”, while Trump called them “disgusting”.

An uninverting prospect?

Danaher Corporation was one of the American companies that did not choose to invert to manage its tax burden. Instead, it focused on operating efficiency and making high returns for shareholders.

Danaher has made use of its profits in the domestic market, manufacturing in the US and exporting more goods to foreign markets than it imports. As a result the company has foreign earnings, but it does not have vast assets ‘trapped’ in overseas accounts.

Meanwhile, other manufacturing businesses underwent inversions to make better use of billions of dollars ‘trapped’ in offshore accounts. But Ditkoff suggests that the inversions were unnecessary in many cases.

“The companies with the highest amounts of trapped cash, like Apple, Google, Merck, etc., obviously did not invert, while many manufacturing companies who should have been able to repatriate foreign cash with little or no residual US tax liability did, in fact, invert,” he adds.

“Other companies likely placed a higher emphasis on saving taxes,” he explains, which is why Danaher did not pursue an inversion. “While some of them did achieve a lower effective tax rate than Danaher, few of them have achieved a higher return to shareholders.”

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US tax reform | Inversions

Inversions used to be the name of the game for US taxpayers

There may have been few reasons to repatriate funds to the US historically, and this has only just changed with the TCJA. However, the blend of US tax reform and anti-inversion rules are not going to change the fortunes of companies that underwent inversions in the past.

“There is no reason why an inverted company cannot create or expand US operations to enjoy the new 21% US tax rate, which was the principal corporate tax benefit of the TCJA while continuing to enjoy the benefits that caused the company to invert in the first place,” Ditkoff says.

Short-term pain, long-term gain The anti-inversion rules have come in just as the US Treasury and the IRS have set out to clarify Section 965. The section imposes a one-time tax on the deferred foreign earnings and profits of some US-owned foreign corporations as part of the shift to a partial participation system. This has brought a new level of complexity for companies.

The section has introduced a dual repatriation system where a 15.5% rate applies to earnings from cash assets and 8% applies to non-cash assets. But this may mean higher costs for companies that have low reserves of offshore cash or other assets.

“It was always possible for all but a handful of US companies with foreign operations to repatriate foreign earnings with no

incremental US tax,” Ditkoff says. “So these companies got nothing in return for the TCJA’s Section 965 transition tax.”

“Remember that Section 965 also taxes unrepatriated preenactment foreign earnings and profits in excess of cash balances held overseas, albeit at a lower rate,” he stresses. “So some US multinationals will be paying Section 965 taxes that actually exceed the amount of their unrepatriated foreign cash.”

At the same time, the GILTI rules may push some companies to seek out new inversions. Controlled foreign companies (CFCs) which pay little to no tax on manufacturing operations or their foreign base company sales income will likely take a hit from US tax reform.

“So a CFC with untaxed manufacturing income in Singapore has seen its US tax rate increase from 0% to the 10.5% GILTI tax rate under the TCJA, while a CFC with untaxed foreign base company sales income has seen its US tax rate on Subpart F income decline from 35% to 21%,” Ditkoff says.

This is why Ditkoff suggests that there will still be inversions, but the number of such transactions will be much lower than in the past.

The costs of inverting have been raised significantly, and it’s not going to be worthwhile for taxpayers facing the brunt of GILTI’s 10.5% rate.

Many US taxpayers may be willing to take a short-term hit for the sake of long-term gains. The height of the corporate inversion may have passed, but the overhaul of the US tax system will mean new opportunities for tax planning in the future.

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The new tax function Building a culture of no surprises

In-house tax functions are becoming more proactive in how they deal with tax and transfer pricing risks. Anjana Haines collects the view of tax directors on establishing a culture of no surprises.

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hile some of the fundamental elements of tax functions continue to involve reporting, compliance, risk, controversy management, and audit defence, there is another layer of activity emerging within corporate tax teams.

Tax directors are changing their approach to deciding what kind of person should be employed and how their teams should be structured as the tax function’s role in the business changes. The evolving demands and the external tax risks is also altering views on when and how outside advisers should used.

Bipin Balakrishnan, director of tax and customs at General Motors in Singapore, tells International Tax Review that of the elements that have been added to his job, one area in particular that has gained a lot of traction is policy, where the tax function is contributing much more than before.

“There is commonality between different functions now, and that is increasingly and actively being done by the tax function, which also goes into public policy and giving more input to tax legislative formation,” he says.

Another change is the increased connectivity between different functions, where tax is increasingly and actively playing an important role in driving coordinated decision making.

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In the automotive sector in particular, the pace of disruption and change that is altering the work of tax teams, according to Balakrishnan. “We now have electric vehicles, the framework around the storage and distribution of the electric charge, autonomous vehicles and rideshare. In this context, tax is now evolving to not just support business decisions but, in many cases, taking a lead role in actually defining the way the company will achieve some of its business objectives.”

The other thing that has really affected tax functions is the need to keep pace with the overall business and determine value contributions at the group level.

Ultimately, the tax function has shifted from a traditional support function to becoming a key part of the company that drives initiatives and has a seat at the table on business decisions.

For Audrey Low, senior vice president of group tax at the Development Bank of Singapore (DBS), the tax function will continue to be responsible for tax compliance work as well as the robust management of tax risks and exposures. Above all, a clear tax strategy is crucial. “We adopt a clear tax risk management framework that promotes transparency, fairness and accountability,” she says.

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Cover story

Setting a template Bhavin Shroff, head of tax for South East Asia and India at Nomura Singapore, says senior management usually sets the tone and risk appetite each tax professional in each region can undertake through its tax governance framework. Agreeing with Low, he says that each firm’s tax framework should be aligned with their own corporate ethics and then should be the guiding light. “One example of a tax strategy statement could be that: ‘We strive to pay our fair share of taxes in the countries we operate and we shall adhere to their laws in letter and in spirit’. It is essential for a tax manager to manage the tax function in line with this framework.”

However, tax directors speaking at ITR’s Leading Women in Tax Forum London (WiT London) warned that while a clear tax strategy is important, the transparent business model is essential too.

“There needs to be alignment between the transfer pricing model and the business operating model,” said one corporate tax manager at the June event, which is covered in more detail on page 15. “Pre-BEPS, many people talked about tax models and tax advantage models, but this language cannot be used anymore. You have to talk about business operating models.”

It’s crucial that everyone in the business understands the business model and tax policies. “Everyone should live by these, with regular testing to ensure this is happening. Having policies written down but not working by them will create tax or audit risks,” the tax manager warned.

This potential for unwanted attention from tax authorities, the media and other external stakeholders is the main driver in the changing attitudes of tax teams.

Shroff says there has been a complete shift in the mind-set of the tax function from being “reactive” to “proactive” on tax audits.

The expectation from senior management is that all potential tax issues should be identified and mitigated in advance of an audit.

Shroff adds that this has put a lot more expectation on tax directors and professionals.

In the past, “if we would have a tax audit for any company, then we would go to senior management and update them about the outcome once the order was received. However, now the tax function has to be more proactive and the new norm is a ‘culture of no surprises’”, he says.

High-pitched tax assessments and controversy For governments, there is an ever-increasing focus on bridging the fiscal deficit gap, and much of that involves collecting more taxes. This fiscal deficit has led to a trust deficit between the taxpayer and tax collectors that, in some instances, can lead to highpitched tax assessments.

“In terms of area of litigations, we are seeing the largest amount of controversies around transfer pricing,” says Shroff. “That’s partly because it’s not a perfect science. If we are adopting a cost plus 10% margin, the tax office wants cost plus 20 – that’s one easy area for them to start a controversy.”

The numbers in many audits and litigation matters are huge, causing significant cash flow issues. Add to this the audit and litigation processes that can take months, years or even decades to conclude.

In terms of reducing these tax controversies, companies are looking at having strong documentation and adopting various programs such MAP, APAs and safe harbour.

Transfer pricing disputes are increasing worldwide as countries try to gain a portion of the tax take from a sale or service. In the UK, for example, revenue authority HMRC’s yield from transfer pricing disputes is up almost 4% to £1.68 billion ($2.2 billion) in 2017/18 compared to the previous year, but the average time it takes to resolve a TP dispute has risen from 18 months in 2013 to more than 30 months today.

Jeremy Everett, senior tax counsel at Kim & Chang who previously managed teams at GE and Doosan Group, believes companies will increasingly turn to APAs to ensure transparency and predictability, particularly in Asia.

The key to getting APAs right is being transparent and open with the tax authority when negotiating them. But APAs are not easy. Unilateral APAs, for instance, can lead to more double taxation, although bilateral APAs may help mitigate this.

Changes in the global and domestic tax rules and requirements have increasingly transformed the way the in-house tax function operate.

While APAs can offer a business tax certainty, they can sometimes take years to negotiate. When the process can take a long time – sometimes even as long as nine years, in one case mentioned by a tax director at WiT London – you need to question whether APAs are right.

Increasing tax authority engagement on APAs would be helpful, tax directors at WiT London said, but a problem with this is that competent authorities are under-resourced.

But Everett, who previously managed teams at GE and Doosan Group, expects that the APA and MAP processes will become more streamlined and require less time on average as tax administrations devote additional resources to their competent authority teams.

Apart from the core functions, assets and risk (FAR) analysis, benchmarking of the arm’s-length price and documentation, now there is an enhanced focus on the interplay of transfer pricing and other taxes, i.e. GST, withholding tax, etc.

Balakrishnan firmly believes that attention on indirect taxes will continue to increase. “While several jurisdictions are moving towards a streamlined indirect tax framework (such as India) the complexities continue. Tax functions need more focus on transactional taxes with the strategic importance of indirect taxes and customs increasing.”

The Korean National Tax Service (NTS) has already become much more aggressive in examining VAT issues under audit, Everett notes, perhaps in part to make up for a decrease in collections from TP assessments resulting from an increase in bilateral APAs. “This will inevitably result in an increase in VAT-related litigation,” he says.

However APAs, MAPs, and advance rulings in indirect tax and customs are helping companies avoid, mitigate and manage controversies, allowing them to get more certainty and have a dialogue with the authorities, which used to be tougher.

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Another deleterious effect of drawn-out audits is reputational damage. For Shroff, one of the guiding principles of managing reputational risk is the ‘newspaper test’. “If a particular strategy or product that one is working upon were to be a front page news item, would you be able to defend it? Hence, one needs to provide tax sign-offs with that end in mind.”

“Having said this, the changes in the global and domestic tax rules and requirements have increasingly transformed the way the in-house tax function operate, certainly relative to the time when I first joined the financial services industry 10 years ago,” Low says.

Changing tax rules The most recent major driver of uncertainty and complexity is US tax reform. To manage it, tax directors have spent a lot of time interpreting the rules and modelling their impact, then determining how to include these estimates impacts into the business plan.

“The best we can do is plan and manage the numbers,” one Asiabased tax director said.

“Working through the myriad tax rules and regulations and their local and global complexity, requires getting a certain element of certainty,” adds Balakrishnan.

But US tax reform is not the only headache.

“BEPS initiatives and CbCR mean an increase of work for the in-house tax function in the next few years,” says Low. “Whilst we have completed our first year of CbCR, there is still some way to go in terms of refining the process. Not just in terms of data gathering, but also validation and anticipating how tax authorities may use the data in performing their high-level transfer pricing assessment for which CbCR was intended for.”

The Dutch government plans to shed light on the country’s 2017 exchange of CbC information in the last quarter of 2019, Erik Jenne, a spokesman at the Dutch tax authority, told ITR’s sister publication TP Week. Other European countries are beginning to process country-by-country data too, but at varying speeds, according to finance ministries contacted by TP Week. Ireland and Germany say they will have details early next year.

“Whilst many [MNE] groups have spent considerable time understanding the requirements to prepare their CbC reports, some tax authorities will be considering the data for the first time when they receive reports via exchange,” write Alison Lobb and Christa Silverthorne of Deloitte in an article for TP Week. “It is permissible for tax authorities to ask further questions based on the CbC data. Therefore, a potential next step for MNEs is to consider the types of questions that might arise from the CbC data.”

Dealing with data and technology

How do you teach AI to measure the value of fixed assets like penguins?

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In today’s world of robotic process automation (RPA) and artificial intelligence, tax professionals would be unwise to ignore these new technologies.

“What we have done is implement a limited amount of RPA tools that are available to us like UiPath, etc.,” says Shroff. “These programs are now enabling us to substantially increase our efficiency – something that used to take us several days we can now do in just 15 minutes because technology is so easy to use and efficient.”

“I think this is one aspect that needs to be leveraged more and more as we progress on this technology path,” he adds.

Time savings are not the only benefits of RPA technology. It also provides an insight into the bigger picture, allowing individuals to spend their time on analysis and adding value.

“Take out all the mundane and routine work, and you are then working on strategic projects, you are working on risk management and strategic aspects like that, which add a lot of value,” says Balakrishnan. “But, how do you get to that? You get to that because you have the data available, you have done the analysis, you are able to find out what the trends are, and what the areas of focus should be – something that the tax function did not have the time for in the past.”

It’s taken years to reach a point where technology can be used for tax reporting. The head of tax at a UK-headquartered multinational that specialises in attractions and visitor experiences says she has struggled to find a specific tax technology solution and that would allow her company to move away from its spreadsheet-based structure.

“We looked at alternatives to [a spreadsheet] to make the process a lot easier and to get us a lot better information for analysis. We have been through this process a few times over the past eight years, looking at what is available for us in the tax reporting space,” she says. In the past, she struggled to find a half-way solution between a spreadsheet and specialist tax reporting software.

However, fast-forward a decade and opportunities are emerging. “We have recently started the conversations again about what

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Cover story

Speaker profiles Bipin Balakrishnan

Audrey Low

Director and counsel of tax and customs, General Motors

Senior vice president, group tax, DBS

“

“

When I was finishing law school, I considered and did a full analysis of what the different aspects of law were that I could go into – algorithms and all that. Then, I finally decided to go into what may be the best – tax.

But really, I kind of fell into tax.

What really drew me to it was the complexity, though. As a trained lawyer, to be able to really look at what the different aspects of a particular field of law are is an exciting prospect. Tax gave me enough to research, and dive into – and Indian tax law is very, very complex!”

Bhavin Shroff

The reason I chose tax as my profession is that back in the old days when life was much simpler, and you graduated with your accounting degree, you would naturally chose to join a Big 4 firm’s audit or tax practice. I didn’t feel much for vouching, so I chose tax.

Being a tax professional resonates with me as the subject itself allows me to provide solutions to problems for my clients. And what keeps me excited today is this intricate interaction between tax law, policy intentions, and how they apply to real-life situations.”

Jeremy Everett

Head of tax, South East Asia and India, Nomura Singapore

Senior tax counsel, Kim & Chang

“

“

Tax as a profession was more by chance than by choice. Over the last 18 years, I have fallen in love with this subject.

The past 16 years I have been practising tax in India. Over the last two years, I have been in a regional role looking after tax for South East Asia. It’s not at all monotonous and every new change brings in a new challenge. I like translating the tax technical into implementable solutions for the company. That keeps me excited and motivated!”

is available in the tax reporting space, and what is emerging is that there is now something in the middle, such as RPAs that are not specific to tax but can help with tax reporting,” she says.

The challenge now is moving from RPAs for tax reporting to tools that assist in tax compliance too.

“What we have found is that around general ledger codes, the robotic tools available won’t get us any further than the ledgerlinking tools used by the Big 4 firms. That’s because the data in our ledgers isn’t broken down into the level of detail we would need for tax. The manual process cannot be eliminated yet.”

Secondly, on fixed assets, finding a solution is even tougher. The ideal for some tax directors is being able to have technology that can interrogate fixed asset additions, and then have the AI learn from these additions to automatically decide whether it is going to be qualifying or non-qualifying.

“We have looking into the technology available in this area, but the first stumbling block we have come across is the nature of our fixed assets spend,” says the UK tax director. “The way the AI works is that it learns from the type of spends we have got from fixed assets that you incur on a regular basis and it works out where it needs to put those. When you have a business as diverse as ours, where we have things like penguins, various different fish and sharks on the fixed asset registrar, it’s very difficult for that piece of software to learn what those various items are. So, for the moment, we are too far away from finding that useful.”

But it’s not all bad news. After many years of waiting for a solution, tax directors believe tax technology is now progressing quick-

I was studying accounting and I didn’t want to go into audit. I knew that the only two things in life that are certain are death and taxes, so I figured there was job security in that. But I have to admit that I was naive in terms of not fully understanding what I was getting into. However, I have learned to love it as time has progressed. It is the creative aspects of it that attracted me the most.”

ly enough. “We have looked at what’s out there over a number of different years, but this year is the first time that I have felt that, perhaps not right now, but in the future we are going to get to a point where we can make use of technology that we haven’t been able to do before,” the tax director says.

In the past, the role of in-house functions was largely enabled by people and by processes. “With increasing changes and complexities in business operating models, an in-house tax function needs to change the way it operates whether by embracing the use of technology, or just being comfortable engaging with business on difficult conversations to solve for the challenges of today and the future,” says Low. This brings us back to the tax function’s strategy, and how that can be further refined and fit for purpose for the tax function of the future. Technology is not the only answer.

The right blend of person With a higher burden of responsibility on tax functions, the busiest tax environment in years and companies becoming more global in their operations, some directors are working harder than ever before.

“I essentially have two shifts in my job: a day shift with my colleagues in Asia, and then a night shift with my colleagues in the west,” said one head of tax in Asia. “A lot of the discussions among the tax teams are on tax accounting and tax reporting, particularly during a time when we are due to close the books and announce the results. Essentially, we are working 24/7 in that period.”

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With such a tough challenge, finding the right blend of experience and attitude in a prospective employee is crucial. Everett says that while each corporate tax team has to adapt to its own situation, one thing all tax functions have in common is the precious headcount and the need to make wise recruitment decisions.

According to Everett, where the tax team may be very lean, sometimes consisting of just three or four people, having an expert in every field of tax becomes a luxury some cannot afford.

“You want people who have a broad understanding of various tax issues, both indirect and direct,” he says. “You can’t have somebody that only does M&A, or government advocacy, or transfer pricing.”

In contrast, some tax directors speaking at WiT London felt having a transfer pricing expert in the tax function is essential.

What’s changed in the past 18 months for one in-house tax director is the hiring of a transfer pricing manager. “In the past, some in-house tax teams would not have had the capacity for an in-house transfer pricing manager, but this is now an area where most tax teams require an expert because of all of the changes that are taking place, such as the BEPS measures and audit and litigation risks,” said one tax director.

The focus is definitely more on transfer pricing because of BEPS, says one tax director, estimating that TP makes up about 70% of their workload.

Beyond TP skills, tax directors are increasingly valuing project management skills.

“It’s all good to have the technical skills,” says Low. “But when you are in-house and have to operationalise tax policies, engage with business in order to get them on board and see it

Advisers needed to feel the pain of the tax director and also have some upside when things work out well.

through from end-to-end, the days of playing just the tax advisory role are over. Effective implementation requires stakeholders to have a lot more skin in the game and project management is an important skillset in making that happen.”

Knowing what you want is quite different to what is available in the talent pool, however. With accounting firms moving towards more specialisms, the problem is that in-house directors are unable to find the right skillset for an industry role, which requires someone with an all-round skillset, or has the ability to develop that skillset, who can multi-task and do transfer pricing, audit defence, tax accounting, etc.

Although many tax directors often look to recruit individuals that have Big 4 experience, finding the right individual is becoming ever harder.

“The first three or four years in a Big 4 accounting firm is spent largely doing compliance work,” explains Everett. “So that’s laying the basic foundation in terms of tax accounting, preparation of tax returns, etcetera – but that’s not enough. So then they evolve in different ways – they start engaging in tax planning, tax due

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diligence, tax audit defence, and some are assigned to a transfer pricing group. I think in general, [when I was at Doosan and GE] I preferred people who may not have been assigned specifically to the transfer pricing group because – unless I was looking for that dedicated transfer pricing person – I wanted to make sure they had developed other tax skills in a balanced way before they become so highly specialised.”

“Then, I would rely on outside service providers for deep transfer pricing expertise.”

Having skin in the game With some tax functions having to work with such a small team, the outside adviser becomes a welcome extension. In some cases, tax directors have described their external advisers as “partners” in the business, rather than just advisers.

To help a tax director to effectively manage its service providers and convey very clear expectations when appointing an adviser, it is important for the tax team to have a firm grasp of the strengths and weaknesses of the business’s tax strategy.

“I would say that when I choose an adviser, I begin with the end in mind. And, what is the end? The end, I believe, is defending your positions under tax audit and, if necessary, into the courts,” says Everett, recalling his time working in-house. “That means that we didn’t opinion shop or go with the firm that gave us the lowest fee quote. When we hired a firm to write an opinion letter, we choose the firm we thought was in the best position to defend the issues under audit or in the appeal process – whether a MAP or the court.”

“On the other hand, we sought firms that were known for tax litigation when seeking opinions on VAT issues, provincial real estate tax issues, and other technical tax positions,” he adds. “But a bigger task was ensuring our service providers were in complete alignment with us and devoting their best resources until the very end – with a good outcome resulting.”

“In essence,”, continues Everett, “Advisers needed to feel the pain of the tax director and also have some upside when things work out well.” As many tax directors tell ITR, advisers must have “skin in the game and commit to very high ethical standards”.

Other times, the nature of work drives decisions when considering service providers.

“For tax compliance work in countries where we don’t have country tax personnel, we would engage the services of a Big 4,” she says. “We would typically work with one global service provider because we look to a holistic perspective and insights from a central team. But we do work with other Big 4 [firms for reasons such as] local market intricacies and this works out well as we don’t have a large global footprint.”

“As for tax advisory matters, it’s always good to work with a firm that is globally connected. Because we are headquartered in Singapore, we prefer to work with the Singapore office of a Big 4 firm that has a strong financial services practice and international tax capabilities that meet our needs.”

Regardless of whether the tax is recruiting for in-house tax experts or outsourcing, every tax directors faces the same challenge: manage costs, as well as value and risks to the organisation, and most importantly to be prepared for it all.

Disclaimer: The views expressed in this article are those of the individuals and do not reflect the views of the companies.

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Digital | Cryptocurrencies

Cryptocurrency taxes to soar amid tighter rules Cryptocurrency cannot be ignored. Ivan Castano speaks to lawyers and companies in the sector who believe tax collections could soar tenfold by 2023 as governments introduce regulations to expand the tax base and the market gains traction.

“I

t is clear that regulators around the world are introducing more comprehensive and more expansive regulation for cryptocurrencies and initial coins offerings,” says Daniel Winters, president of Global Tax Accountants in New Jersey. “The US Securities and Exchange Commission has issued over 100 subpoenas on ICOs [initial coin offerings] and the federal government recently formed a task force to increase cooperation for money laundering and financial crimes including from digital currency.”

While tax authorities in Australia, Canada, the Netherlands, the UK and US turn their attention to cyber criminals and the tax threats posed by cryptocurrencies, South Korea, Japan are being seen as the pioneers of how to tax cryptocurrency. China, India and Russia, however, are going in the opposite direction as they continue to ban cryptocurrencies.

Winters, who says client demand for cryptocurrency advice is soaring, believes the nascent digital currency market – valued at $295 billion at press time – will continue to thrive, fuelling global tax gains.

“I would not be surprised if collections rose at least 10 times in the next five years,” he predicts. “Cryptocurrencies are creating dramatic wealth and can be life-changing events for those who have the guts to make risky decisions now and cash out later.”

William (Bill) Brock, who heads WH Brock And Associates in Chicago, agrees. He adds that a recent forecast that said US investors will owe the US Internal Revenue Service $25 billion for 2017 cryptocurrency capital gains was on the money.

“Institutional money is going to flow in this year,” he says.

“Now there is a correction but many people are seeing this as the time to buy.”

As tax liabilities soar, especially for newly minted millionaires, Brock is advising clients to shift funds to Puerto Rico where they can save a whopping 90% from corporate and individual tax exemptions in the commonwealth island, compared to the tax rates in the US. “If they move to Puerto Rico, businesses can negotiate a 4% versus 37% [US mainland tax rate] under Act-20,” Brock notes. “I am

urging businesses, especially crypto consulting and trading firms, to move at least a third of their operations to Puerto Rico.”

Low compliance Despite the expected surge in tax revenues, compliance remains extremely low as investors seek ways to avoid taxes through offshore reporting and other alternatives.

“There are a lot of projects that have taken the position that their company is offshore, that they are not an EU or German project, etcetera, and you can’t take that at face value,” says Jonathan Van Loo, who recently founded Belcher, Smolen & Van Loo law firm. “This is stripping the base” alongside millions of small day traders who are seen flouting taxes until authorities crack down more severely.

That said, 80% or more of US businesses “are compliant or at least trying to comply in some way,” Van Loo notes, adding that the EU and Asia Pacific (where the bulk of the cryptocurrency growth is coming from) follow the US closely.

Countries are increasingly grappling over how to tax digital cash. The US is said to have the most advanced framework, despite criticism that its guidelines are unclear and limited in scope.

“The American Bar Association and the American Institute of Certified Public Accountants have requested further guidance about cryptocurrency tax issues from the IRS for four years,” says Winters. “They have not said anything to assist the accounting, finance and legal professions. They are focusing on tax evasion and money laundering and just scaring people.”

India also surprised the market in July after Income Tax Department Deputy Director MK Pandey revived fears that the government could soon slap an 18% GST on trading gains from internet money or 12% on services.

One is liable to be taxed if “one has offered profits generated out of transactions in cryptocurrency for taxation in any year,” Pandey reportedly said, adding that investors will have to provide their and their families’ unique crypto ‘wallet IDs’ in any local or foreign exchange.

“Cryptocurrencies are creating dramatic wealth and can be life-changing events for those who have the guts to make risky decisions now and cash out later.” – Daniel Winters, president of Global Tax Accountants in New Jersey

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Awanish Rajan, CEO of Indian-owned cryptocurrency derivatives bourse Idap, expects India will eventually tax cryptocurrency similarly to commodities trading in which capital gains are taxed at 10% to 20%.

“India is very unclear. Government staff and bureaucrats are confused about crypto, but I think we will [see] something in the next few months,” says Rajan, whose exchange is currently pursuing a $17 million ICO. Although Rajan resides in India, Idap is based in Estonia where the government has been rushing to lure cryptocurrency capital into its jurisdiction through generous taxes and other investor incentives.

“Tax is very low, at 10% for crypto start-ups if you distribute dividends, but if you use your earnings to grow the company, you don’t pay,” Rajan says.

Following investment giant Blackrock’s announcement that it is exploring entering the cryptocurrency space, Rajan said other institutional investors are about to follow suit, injecting billions and encouraging regulators to enact crypto-friendly regulations.

“Regulation is going to follow the big money,” adds Rajan.

How to tax cryptocurrency Authorities should start taxing cryptocurrency at the point of sale, Rajan says, as taxing traders has so far been difficult. “It is very difficult to tax crypto because so many people are swapping from coin to coin and that makes [income] tracking complicated. Authorities should begin with the merchants, taxing all bitcoin purchases.”

Meanwhile, in crypto-friendly Japan, which is rapidly becoming the world’s largest trading market, authorities announced new provisions to require workers earning cryptocurrency to settle taxes if they exceed JPY 200,000 ($1,800), Bitcoin.com reported, citing unnamed sources from the National Tax Agency (NTA).

On the upside, however, the NTA said it is making progress on a new automated tax calculation and return framework to simplify and bolster proceeds. And automation is needed.

“The smart way to go about this is to think of ways to make it easier for people to comply automatically,” says Van Loo, adding that Japan is making the greatest headway in that regard – an innovation the US should follow. “Maybe they think they need Congress approval,” he says of the US’s apparent foot dragging on automation so far. “But if the crypto market gets bigger they will.

The government’s stance is very ambivalent. They don’t want to quash it or encourage it [crypto].”

Van Loo and others said South Korea could come up with its first tax guidelines soon.

Despite recent exchange probes and back-and-forth over whether it may eventually ban cryptocurrency, the Asian country remains a major and growing trade hub.

“South Korea could easily come up with a good system although the bar is not very high,” says Van Loo. He noted such a framework should more thoroughly be able to tax the cryptocurrency commerce and trading/investment space. It should also include [cryptocurrency] mining and other services sectors and ICO air drops or bounties that reward traders for investment commitments or promotional activities.

“If they come up with a comprehensive framework that would be light years ahead of any country,” says the expert, adding that he expects more ambitious regulations to come in the near to medium term.

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It is very difficult to tax crypto because so many people are swapping from coin to coin and that makes [income] tracking complicated.

Authorities should begin with the merchants, taxing all bitcoin purchases.

Awanish Rajan, CEO of Idap

Overcoming the obstacles Authorities face a string of challenges to lift tax proceeds, however.

A key one is the rapid growth of privacy cons like Monero and PIVX, which have been slammed for allegedly helping criminals launder money and finance other illicit activities, more so than Bitcoin, which runs on a public and fully visible, ‘open source’ blockchain.

Underscoring this concern, the US, Canada, UK, Australia and the Netherlands recently launched the J5 task enforcement alliance to boost collaboration in the first major international effort to nab criminals using cryptocurrencies. Nations face big challenges cracking privacy coins, say observers.

“Governments can regulate fiat on-ramps [the centralised exchanges that provide a gateway between regular and digital cash] all they want but with the emergence of truly anonymous digital cash it won’t matter because the bad guys will still be doing what they want,” Winters says.

Enacting legislation requiring income tax transactions with all digital coins, regardless of any privacy features, could tackle the problem, said the expert.

However, whether countries will actually manage to curb these currencies “is like figuring out how to get rain to bounce back into the skies,” Winters adds. Tougher bank regulation – as most funds are laundered through banks – would also be a solution, he says.

If cryptocurrencies become too much of a threat, governments could move to extinguish them.

“They could just tax them out of existence with a 60% tax on gross proceeds from tokens,” says Van Loo. “If it doesn’t like something, the government [referring to the US] can introduce taxes to ensure economic viability, like excise taxes, that make some transactions unfeasible or impossible.”

“They could also ban the exchanges.”

Providing greater visibility through encrypted and immutable records, blockchain holds the promise to help authorities combat tax evasion. However, hardly anyone knows how to use it.

“Blockchain is so massive that authorities don’t have the capacity to analyse it all,” concludes Van Loo. “We are going to need many experts and probably robots to make sense of all these massive data operations.”

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Special features | VAT

From IGP to VAT unity – a story of VAT Thierry Charon and Olivier Coulon of Loyens & Loeff take to the stage to discuss a tempestuous year for indirect tax in the financial and insurance sectors.

T

he year 2017 was a turbulent one for the financial and insurance sectors, with no less than four decisions of the European Court of Justice (ECJ) on the VAT exemption for independent group of persons (IGPs).

The long-awaited latest decision, dated September 21 2017, limited the scope of the VAT exemption to IGPs whose members carry on an activity of public interest. This outcome, feared by many, called for a quick reaction.

Act one: The IGP mechanism – a perfect fit?

The IGP mechanism provides for a VAT exemption for the supplies of services by IGPs, which carry out activities that are VAT exempt or outside of VAT’s scope, for the purpose of rendering their members the services directly necessary for the performance of said activities. The mechanism further requires that the IGPs claim from their members the exact reimbursement of their share of the expenses, and that the use of the VAT exemption be not likely to cause distortion of competition.

The rule, enshrined in Article 132(f) of the EU VAT Directive, allows entities fulfilling the conditions to share costs amongst themselves while benefitting from a VAT exemption. The

mechanism is of particular importance for group of companies which do not benefit from an input VAT deduction right, as the sharing of costs would otherwise lead to substantial amounts of non-deductible input VAT. The benefits derived from the use of the IGP exemption explain the heavy reliance on this mechanism by the financial, insurance and fund sectors, notably in France and Luxembourg. In Luxembourg, the IGP exemption was especially relied upon by the fund industry due to the increased need of substance caused by recent tax developments, which often requires fund structures to share resources, such as employees and office spaces, leading to the application of incremental and non-deductible input VAT. The IGP mechanism nevertheless came under scrutiny by the ECJ in 2015, through no less than four applications (cases C-274/15; C-616/15; C-326/15; C-605/15).

The first decision of the ECJ, in Commission v. Luxembourg (C-274/15), led to much debate as the view of the ECJ, whereby “the allocation to the IGP, by one of its members, of expenses incurred by that member in his name but on behalf of the IGP is a transaction which falls within the scope of VAT” (case C-274/15, paragraph 83) threatened the majority of cost-sharing agreements concluded in Luxembourg.

VAT for financial services has been a tumultuous arena during the past year

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Special features | VAT

VAT exemption to the territory of one member state. More importantly, France’s proposal impinged on the EU Commission’s right of legislative initiative.

In the absence of consensus, France, together with Italy, vetoed any agreement regarding the original four quick-fixes.

Thierry Charon Loyens & Loeff 18-20, rue Edward Steichen L-2540 Luxembourg Tel: +352 466 230 thierry.charon@loyensloeff.com www.loyensloeff.com

Act three: The VAT group – a perfect replacement?

Thierry Charon co-heads Loyens & Loeff’s VAT, customs and international trade practice group in the Benelux region. Thierry specialises in VAT, customs, excise duties, international trade, real estate and transfer pricing matters. He counsels clients active in the real estate and finance sectors in Luxembourg, Belgium and across Europe and international organisations and foundations.

He is the chairman of the European VAT Club and is a member of the European Commission’s VAT Expert Group (composed of individuals with the requisite expertise in VAT and organisations representing businesses and tax practitioners which can assist in the development and implementation of VAT policies within the EU) and of other global and Luxembourgish associations specialised in the tax, legal, funds and banking industries. He is recognised as a leading indirect tax expert by International Tax Review and Legal 500 EMEA and as an expert in tax law by the Best Lawyers guide (2017).

Yet, the remaining three decisions are the ones that brought the coup de grâce. Faced with many interesting questions, the ECJ limited its analysis to the scope of the VAT exemption. By concluding in paragraph 50 of case C-616/15 that “supplies of services which do not directly contribute to the carrying on of activities in the public interest, […] but to the exercise of other exempt activities, in particular in Article 135 thereof, cannot be covered by the exemption […],” the ECJ effectively ruled out the use of the IGP mechanism by the financial, insurance and fund sectors.

Act two: A tumultuous ECOFIN meeting VAT was high on the agenda of the EU Economic and Financial Affairs Council (ECOFIN) held on June 22 2018, as ministers of the 28 EU member states were notably due to agree on four shortterm fixes, also called quick-fixes, to the current VAT regime.

The Bulgarian finance minister expected that the short-term fixes would be “acceptable to all delegations in substance”. That was, however, until France’s request to add a fifth fix, providing for an umbrella exemption to address the ECJ’s decisions ruling out the use of the IGP for the financial, insurance and fund industries.

In substance, France called for an amendment of Article 137(a) of the VAT Directive to provide an option for member states to allow that IGPs that pool their services and share costs between their members benefit from a VAT exemption, even in the financial and insurance sectors.

The proposed amendment was given a cold reception from the EU Commission, which argued that the fifth fix would not only harm the functioning of the internal market, but also the freedom of establishment due to the limitation of the applicability of the

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France’s cavalier attitude comes as no surprise, considering the importance of the IGP for French banks. In Luxembourg, where the financial industry – notably the investment funds – also relied on the IGP, the government went down an alternative route by introducing a bill aiming for the adoption of the VAT group.

The VAT group Article 11 of the VAT Directive indeed allows member states to “regard as a single taxable person any persons established in the territory of that member state who, while legally independent, are closely bound to one another by financial, economic and organisational links”.

The main advantage of the VAT group lies in the treatment of the transactions between members of the group, as such transactions – being virtually carried out within a single taxable person – are deemed to fall outside the scope of VAT. The main purpose of the use of an IGP, i.e. the avoidance of incremental and non-deductible input VAT created by the sharing of costs, can therefore be reached through the setting up of a VAT group. The analogy, however, does not go much further.

A comparison of the IGP and VAT group In spite of their similar objective, the IGP and VAT group mechanisms do not share many features.

Firstly, the IGP does not require its members to share financial, economic and organisational links. This flexibility is however undermined by the limitation of the VAT exemption to the sharing of costs directly necessary for the performance of activities which are exempt or outside the scope of VAT. To the extent companies share financial, economic and organisational links, the VAT group therefore appears to be more flexible, in that the activities of its members are irrelevant.

Second, the VAT group is limited to the territory of a single member state. Although the question remains debated, it seems that nothing precludes the trans-border use of the IGP mechanism.

Third, the use of a VAT group leads to the artificial creation of a single VATable person, encompassing its members. This circumstance has two practical impacts: i) the VAT group becomes the only interlocutor with the VAT authorities, and a single set of VAT returns is to be filed; and, more importantly, ii) members of the VAT group are jointly held liable for the VAT debt of the group.

This last feature will potentially have a chilling effect and may constitute a potential hurdle for the setting up of a VAT group for specific sectors.

Finally, the use of a VAT group may lead to detrimental consequences for structures that include foreign branches. Indeed, while transactions between a head office and its branch should fall outside the scope of VAT, the setting up of a VAT group will

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Special features | VAT

virtually seclude the head office from its foreign branch, bringing said transactions within the scope of VAT.

Olivier Coulon

The VAT group in Luxembourg

18-20, rue Edward Steichen L-2540 Luxembourg Tel: +352 466 230 olivier.coulon@loyensloeff.com www.loyensloeff.com

In Luxembourg, the law on VAT groups, recently adopted, features interesting elements.

Firstly, and in line with the VAT Directive, the law requires that members of the VAT group share financial, economic and organisational links.

The requirement for a financial link to exist will be met between entities sharing, directly or indirectly, links of controls, to be analysed in light of Article 1711-1 of the Commercial Company Law of 1915, and to be assessed by an auditor or a certified public accountant. According to a report by the Commission on Finance and Budget, the reference to the rules governing the use of consolidated accounts aims at facilitating the understanding of the criterion. This reference to the Commercial Company Law seems to implicitly restrict the use of the VAT group to commercial companies, therefore excluding any type of taxable persons which would not fall within its scope. Yet, Article 11 of the EU VAT Directive refers to “any persons”. This autonomous VAT concept is arguably larger than the one relied upon by the Luxembourg legislator. On the other hand, the bill does not require that members qualify as VAT taxable persons, in line with ECJ case law, notably case C-85/11, paragraph 46.

The other requirements are less problematic. The economic link will exist between persons whose activity is similar, complementary or interdependent, or where a member of the group carries out an activity for the benefit of other members. The organisational link refers to a common direction, a cooperation in the organisation of the members’ activities, or the existence of a controlling power of a single person – a definition directly borrowed from the Belgian rules.

Second, setting up a VAT group remains an option. This flexibility is nevertheless undermined by three factors: (i) the obligation to opt in for at least two years; (ii) the limitation of the membership to a single VAT group per person; and (iii) the obligation for all the persons fulfilling the conditions to join the VAT group. The latter restriction is subject to an exception, carved out for a member which would not intervene in the production and distribution chain, and whose absence in the group would not lead to an undue tax advantage for the VAT group or said member.

These rules simply aim to prevent tax evasion and avoidance.

The original draft of the law also provided for the obligation to exclude the member carrying out an activity which, because of its nature, is not specific to the group’s activities and is normally not performed within a company which carries out a comparable activity, to the extent however that the inclusion of said member in the VAT group leads to a distortion of competition. The State Council nevertheless pointed out the provision as unclear – a euphemism – and called for its amendment. In its most recent draft, the provision was removed altogether.

Finally, the objective of administrative simplification fails to convince. Indeed, while a single set of VAT returns will be filed by the VAT unity, the drawing up of such returns will require the preparation of VAT returns for each member, to be then consolidated in a single file. In addition, and despite the opinion of the VAT Committee laid out in Working Paper 948 on April 11 2018, members of the VAT group will receive an auxiliary VAT

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Loyens & Loeff

Olivier Coulon works as an associate for the Loyens & Loeff’s VAT, customs and international trade practice group. He advises clients on indirect tax matters, especially VAT, customs, excise duties and registration duties. Olivier particularly advises clients on VAT in the framework of financial and real estate transactions.

Olivier also focuses on matters of international trade, such as export control and trade – including financial – sanctions. He is a regular contributor to www.worldtradecontrols.com, and publishes in dedicated international journals.

Before joining Loyens & Loeff, Olivier worked for an international law firm located in Brussels. He has been a member of the Brussels Bar since 2014.

number, alongside the one granted to the VAT group itself. These auxiliary numbers will be used by the members in their transactions with third parties, and European sales lists will remain to be filed separately for each member. Intra-group transactions will also have to be documented.

An imperfect substitute At this stage, the VAT group appears to be a partial solution to the applicability of VAT on the sharing of costs between members of a group.

The requirement that the members share financial links, coupled with the limitation of the membership to a single VAT group per person, entails less flexibility for the constitution of the group, and may well lead to exclusion of specific types of structures from the benefit of the VAT group.

In addition, the co-liability of the members for the VAT debt of the group will constitute a hurdle that many may refuse to cross.

Act four: The end?

Released almost a year ago, the ECJ’s decisions on the IGP still echo today. However impactful the decisions may be, France appears to be firmly committed to spearheading a group of member states – including Luxembourg – in favour of the adoption of an amendment of the VAT Directive. Other member states remain against such a modification.

Considering the importance of its financial, insurance and investments fund sectors, Luxembourg could not afford to wait for a potential amendment of the VAT Directive. The government’s move towards the adoption of the VAT group will be welcomed by many, despite the potential hurdles that some structures will face in the setting up of their VAT group.

At this stage, one would have difficulties asserting that the story has come to an end. There may well be more acts to add to this tale.

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Special features | Malta

Malta: The blockchain island As a small island, Malta has positioned itself as one of the most established regulatory bodies worldwide, write Nicky Gouder and Luana Scicluna of ARQ Group.

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rom asset registration to the financial industry, iGaming and blockchain-based platforms, jurisdictional innovation has always been securing Malta’s economy and allowed the country to specialise in niches that the majority is sceptical of.

Blockchain and cryptocurrency regulations will likely repeat that success and create a safe space for operators in these industries to function.

On July 4 2018 the Maltese Parliament approved three bills establishing the first regulatory framework for blockchain, cryptocurrency and distributed ledger technology (DLT). Although there were countries that had passed legislation in relation to initial coin offerings (ICOs), Malta is the first country to provide a regulated environment for operators in the blockchain, cryptocurrency and DLT space.

The first law, known as the Malta Digital Innovation Authority Act, establishes the Malta Digital Innovation Authority (DIA) and certifies DLT platforms. This law focuses on internal governance arrangements and outlines the duties and responsibilities of the DIA to certify DLT platforms to ensure credibility and provide legal certainty to users wishing to make use of a DLT platform.

The second law, known as the Innovative Technology Arrangement and Services Act, deals with DLT arrangements and certifications of DLT platforms. This bill is primarily concerned with the setting up of exchanges and other companies operating in the cryptocurrency market.

The third law is known as the Virtual Financial Assets Act and establishes the regulatory regime governing ICOs, cryptocurrency exchanges, wallet providers, etc.

The brave new world of cryptocurrency is surrounded by a number of questions and ambiguities. This is only to be expected given its relative infancy and the speed with which it is evolving and gaining ground.

Cryptocurrencies are generally categorised as follows: • Coins – these are cryptocurrencies that are designed specifically to be used as a means of payment. These have a similar use as fiat money, however they would be digital instead of physical.

• Investment tokens – these tokens are similar to equities, debentures or derivatives. They grant rights to a form of return, similar to dividends in the case of equities.

Malta is aiming to become a leader in cryptocurrency by creating a sound regulatory environment for virtual financial assets and distributed ledger technology

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September 2018

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Special features | Malta

Nicky Gouder ARQ Group Ewropa Business Centre, Level 3 – 701 Dun Karm Street, Birkirkara, BKR 9034 Malta Tel: +356 2549 6000 ngouder@arqgroup.com

Nicky Gouder, tax & private clients partner of ARQ Group, completed his Association of Chartered and Certified Accountants (ACCA) course in 2010. Following that, he specialised in taxation and completed a diploma in taxation offered by the Malta Institute of Taxation in 2011 and read for the advanced diploma in international taxation provided by the Malta Institute of Management. He also graduated in business management from the University of Malta in 2007.

Nicky is specialised in international taxation with a focus on domestic legislation and has significant experience in handling a wide portfolio of local and international clients operating in various industry sectors.

He is also very much involved within the investment migration industry and advises a number of clients on residence and citizenship opportunities both in Malta and beyond, and participates in a number of international conferences discussing migration issues.

He is also a lecturer of the advanced taxation module for the Association of Chartered Certified Accountants course provided through the Malta Institute of Accountants and participates in a number of tax conferences both on a domestic and international level.

He is one of the three founding partners of the Capstone Group, which was set up in 2010 and specialises in accountancy, tax, audit and advisory.

Nicky is also a member of the Society of Trust and Estate Practitioners (STEP) and the Investment Migration Council (IMC).

• Utility tokens – these are tokens used to access goods and services offered in the platform of the issuer who has a contractual obligation to exchange these tokens with a good or service or allowing the use of the platform offering various services or goods.

• Hybrid – these would have the characteristics of two, or all, of the above.

Income tax A central issue in this unfolding debate, crucial in terms of exactly how regulation is to be established and enforced, is how our current tax regimes should factor in cryptocurrencies. Do these need to be radically reinvented or are there fundamental doctrines and concepts in tax law that can, without being stretched too far, be applied pragmatically to the crypto space?

Accepting cryptocurrencies as a means of payment does not change the way businesses’ taxable profits are calculated.

However, when cryptocurrencies are used as tokens and their holders are involved in cryptocurrency exchanges, the tax implications are likely to become more complex.

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Many jurisdictions are using the working principle that cryptocurrencies can ultimately be treated as “intangible property” and that therefore general tax principles applicable to property transactions could also be applied to cryptocurrency exchanges.

If such a transaction results in a gain or profit, then how are taxation rules, particularly Maltese tax law in this case, best applied?

The first aspect that must be established is whether the gain resulting from a crypto exchange is of a capital or income nature.

Although the Maltese Income Tax Act contains no provisions on how to differentiate between income and capital, there is a significant body of case law that provides a basis on which to classify a gain as capital or income with some confidence.

A rather clichéd but extremely effective analogy that is often used is that of a fruit-bearing tree, where the tree represents the capital property and the fruit is the business income resulting from that asset. However, it is well known in tax circles that some ambiguity can arise when seeking these classifications and very often specific cases are not clear-cut. This is where the question of intent becomes all-important, that is, the intention at the time the transaction took place, and this remains one of the leading tests used by regulators and courts to decide whether any form of revenue is income or capital in nature.

In general terms, proceeds will be income in nature if the assets were acquired with the intention of selling it at a profit.

However, if the asset is acquired and held with the intention of producing further income from that asset then it is treated as capital in nature.

The “badges of trade” are widely accepted indicators to help determine the intention and nature of a transaction. These include the quantity and nature of the goods; the incidence of transactions; supplementary work on the asset being sold; and the interval of time between when the asset was acquired to when the asset was sold. Also of note is the method of acquisition and disposal, because an asset acquired through inheritance or as a gift is less likely to be the subject of trade.

As with any other transaction, this framework can be applied to gains resulting from cryptocurrency transactions to classify this as income or capital and it is this assessment that will determine the applicable tax rules.

A person buying and selling cryptocurrencies on a significant scale by investing significant sums of their own and/or other people’s money, and also investing considerable amounts of time and energy is very likely to be considered as trading.

Just like trading in bonds, company shares or commodities, cryptocurrency transactions considered to be of an income nature are taxable in terms of the Income Tax Act, which includes a blanket provision requiring gains or profits derived from transaction of an income nature to be taxed, irrespective of the type of asset.

On the other hand, if the gain is derived from a capital transaction this would only be taxed if it arises from an asset listed in Article 5 of the Maltese Income Tax Act. This list, however, is clearly specified in the Act and is limited to transfers of immovable property, securities, intellectual property, beneficial interest in a trust and partnership. Therefore, if the capital gain in question is derived from an asset that is not listed in Article 5, no tax will apply.

Until new models are presented, the current “income vs. profit” rules for determining the taxability of gains in this sphere

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Special features | Malta

remain the determining factor. This awareness should guide any individual or business entering the crypto space and inform their decisions in this regard.

Luana Scicluna ARQ Group Ewropa Business Centre, Level 3 – 701 Dun Karm Street, Birkirkara, BKR 9034 Malta Tel: +356 2549 6000 lscicluna@arqgroup.com www.arqgroup.com

VAT Although there are no provisions in the Maltese VAT Act that deal with cryptocurrencies, as an EU member state Malta can rely on the EU VAT Directive.

In terms of the EU Directive, cryptocurrencies are treated as follows: • Income received from mining activities will generally be outside the scope of VAT on the basis that the activity does not constitute an economic activity for VAT purposes because there is an insufficient link between any services provided and any consideration received.

• Income received by miners for other activities, such as for the provision of services in connection with the verification of specific transactions for which specific charges are made, will be exempt from VAT under Article 135(1)(d) of the EU VAT Directive as falling within the definition of “transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments”.

• When cryptocurrencies are exchanged for fiat money, no VAT will be due on the value of the cryptocurrencies – charges made over and above the value of the cryptocurrencies for arranging or carrying out any transactions in cryptocurrency will be exempt from VAT under Article 135(1)(d) as outlined above.

The European Court of Justice (ECJ) issued a judgment ruling in October 2015 that the exchange of traditional currencies for units of the ‘bitcoin’ virtual currency are not subject to VAT. In this case David Hedqvist, a Swedish national, requested a preliminary decision from the Swedish Revenue Law Commission to establish whether VAT should be paid on the purchase and sale of bitcoin. Following a commission ruling that bitcoin should be exempt from VAT, the Swedish Tax Authority appealed to the Supreme Administrative Court, submitting that the transactions that Hedqvist intended to effect were not covered by the exemptions in the VAT Directive. After referring to the ECJ, it was decided that transactions to exchange traditional currencies for units of bitcoin and vice versa constitute the supply of services for consideration within the meaning of the VAT Directive. However, the ECJ also held that the transactions are exempt from VAT under the provision concerning transactions relating to ‘currency, bank notes and coins used as legal tender’. This is a key ruling, since it not only obliged member states to exempt transactions

Just like trading in bonds, company shares or commodities, cryptocurrency transactions considered to be of an income nature are taxable in terms of the Income Tax Act.

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Luana Scicluna, head of tax at ARQ Group, is specialised in international taxation and has considerable experience on corporate restructuring projects and succession planning. She assists several local and international clients with handling their tax affairs in Malta and provides advice on the tax implications of a wide range of transactions.

Luana is an accountant by profession, concluding her bachelor of accountancy (hons) at the University of Malta in 2009, following which she furthered her studies in taxation through a diploma in taxation offered by the Malta Institute of Taxation and an advanced diploma in international taxation offered by the Chartered Institute of Taxation (UK).

Luana is also a lecturer at the Malta Institute of Taxation and participates in a number of Maltese and international tax conferences.

relating to ‘currency, bank notes and coins used as legal tender’, but it also defined bitcoin as a currency, rather than a commodity.

This judgment dealt with currency exchange transactions.

Nevertheless, in all instances, VAT will be due in the normal way from suppliers of any goods or services sold in exchange for cryptocurrency or fiat currencies. The value of the supply of goods or services on which VAT is due will be the value of the cryptocurrency at the point the transaction takes place.

What’s next?

It appears that that certain parameters are now being established and ground rules acknowledged, as various jurisdictions are setting out clearer rules of engagement with this sector.

The G20 Summit held in Argentina last March issued a clear statement that cryptocurrency is a key area, with many leaders and industry experts agreeing that effective regulation is needed sooner rather than later to prevent money-laundering, tax evasion and other financial crimes. Beyond this consensus, however, countries are taking a decentralised approach to the issue and views on cryptocurrency regulation can differ from state to state.

Guidelines are expected to be issued by the Maltese Tax Authorities to clarify the tax treatment of cryptocurrencies both from an income tax and VAT perspective – we are hopeful that these would answer questions such as how the taxable profit or gain on a cryptocurrency exchange is determined, whether any crypto transactions would fall outside the scope of Maltese tax, what happens in the case of losses, what records need to be kept and what would need to be reported to the Maltese Tax Authorities. The coming months will tell whether common strands will begin to emerge in the tax treatment of cryptos between countries, particularly among EU member states.

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International updates Albania Albania changes law on building tax

Dorina Asllani Ndreka, Eurofast Global

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n November 2017, through Law 107, the Albanian Parliament introduced fundamental amendments, thus changing the methodology on which the payment of the tax on buildings was based.

The building tax is a local tax that is calculated, administered and collected by the local authorities. The new methodology has been applicable since April 1 2018.

Since the institutions and the public bodies envisioned by the law are not yet established, the tax instalment payments will begin later, once the local authorities are ready. This will not affect the payments, since this is an annual tax that can be paid at any time during the year.

The building tax is payable by individuals, physical or legal persons (either domestic or foreign), owners, users of the immovable property concerned, or persons that have applied for legalisation, in the territory of the Republic of Albania. The tax applies irrespective of the level of use of those buildings, unless otherwise provided by this law. The previous calculation of the tax was done on the basis of the building’s surface area.

In order to apply the newly established methodology, several legal institutions and administrative bodies are being created.

The ‘fiscal cadastre’ is the central registry of the real estate database that serves the purpose of administering the immovable property tax. The General Directorate of Property Tax is a budgetary public legal entity, subordinate to the Finance Ministry.

In cases where the taxpayer wants to appeal the level of the tax applied, he/she must address the appeal not to the mayor (which was the case in previous provisions), but rather to the local body in charge of tax appeals, whose decision may further be brought in front of the court.

The law provides for several exceptions from the tax on buildings: • State and local government properties that are used for non-profit purposes; • State-owned properties that, through a decision of the council of ministers, are transferred to the administration of state-owned public companies; • Residential buildings used by a leasing tenant whose lease has not been liberalised since the communist regime;

• Social housing owned by municipalities; • Buildings owned by legal or physical entities, which – under agreements with municipalities – are used by the latter for social housing; • Buildings used by religious communities for their activities; • Four or five-star accommodation structures, such as hotels/resorts, that have a special status as defined by the relevant tourism legislation, and whose brand names are registered trademarks that are internationally known; • Residential buildings of persons who benefit from social or old age pensions, when the family consists only of pensioners; • Residential buildings of persons who benefit from social aid; and • Cultural buildings, which are under temporary or permanent protection, during the period of the protection, according to the legislation in force for cultural monuments and/or cultural heritage.

The buildings’ tax base is the value of the building, calculated in accordance with the methodology and procedures established by the decision of the council of ministers.

The buildings’ tax rate is applied as a percentage of the tax base: • 0.05% for a building used for construction; • 0.2% for a building used for economic activity; and • 30% of the respective tax rate for the entire construction site, in cases where the developer has a construction permit but has failed to complete the construction according to the deadline set in the construction permit.

The local government units have started the process of tax calculation according to the new methodology, making the exemptions and deductions according to the provisions of the law. During the coming months, the administration of property tax by local government units and the respective registry will be consolidated, with the aim of having a full and automatic system of administering this tax by the following year.

The new calculation methodology for this tax provides flexibility for local government units in determining the value of buildings. We advise clients to seek assistance in determining the impact of the new tax legislation and to ensure their compliance with the new law.

Dorina Asllani Ndreka (tirana@eurofast.eu) Eurofast Global Tel: + 355 (0) 42 248 548 Website: www.eurofast.eu

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Argentina Tax treaty developments in Argentina

Ignacio Rodríguez, PwC

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n July 5 2018, the Argentine Foreign Affairs Ministry announced the entry into force of the amendment protocol to the double tax agreement (DTA) between Argentina and Brazil. According to the official announcement, the revised DTA entered into force on July 29 2018, being applicable to withholdings for payments made from January 1 2019 or taxable events that occur in fiscal years commencing from that date.

Meanwhile, on July 4 2018, the Chamber of Deputies ratified the DTA between Argentina and the United Arab Emirates (UAE), which now needs the approval of the Chamber of Senators to be passed into law and continue the ratification process.

Double taxation treaty between Argentina and Brazil The amendment protocol introduced relief on withholding tax on payments of interest, royalties, technical assistance services and dividends. However, the most important feature is that it abolishes the exemption method to avoid double taxation, replacing it with the foreign tax credit method. It also includes other provisions aligned with the OECD Model Tax Convention and the BEPSorientated provisions.

Interest Domestic Argentinian tax law generally subjects interest payments on related-party loans to a foreign beneficial owner to a 35% withholding tax rate. However, under the amended tax treaty, interest payments on such loans paid to Brazilian beneficiaries should now be subject to a maximum withholding tax rate of 15%.

Royalties Under the amended protocol, royalties and technical assistance payments made to a Brazilian beneficial owner should now find relief from domestic taxation being subject to maximum income tax withholding at a rate of 10% or 15%, as the case may be.

Note that under domestic Argentine tax law, royalties may be subject to withholding tax rates as high as 31.5%, whereas under Brazilian domestic tax law, royalty payments from Brazil to Argentina are subject to 15% withholding tax.

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International updates Treaties now generally tend to follow the OECD model. However, there are some deviations from that model. One example is the listing of technical assistance services in Article 12 on royalties, considering the rendering of independent services that entail the provision of non-registrable knowledge through any means as a royalty payment.

Dividends Under Argentine domestic law, dividend payments are at present subject to a 7% withholding tax – to be increased to 13% for profits generated in fiscal years beginning on or after January 1 2020. An ‘equalisation tax’ of 35% will also still transitionally apply on profits generated in fiscal years beginning before December 29 2017 until they are fully distributed. The protocol establishes a 10% maximum withholding rate on the gross amount of the dividend for payments made to shareholder residents in the other contracting states holding a stake of at least 25% for a period of at least one year, which includes the dividend payment date. In all other cases, a 15% maximum withholding rate applies.

Other particular features Some other particular features the treaty provides are as follows: • The new title and preamble to the treaty clearly state that it seeks to prevent tax avoidance; • A new permanent establishment (PE) clause addressing a commissionaire arrangement and similar strategies, as well as making PE exclusions subject to a preparatory or auxiliary condition; • A new clause addressing taxation of capital; • The protocol includes a limitation of benefits (LoB) clause. Although these LoBs may be relaxed and some relief may be provided by the relevant contracting state under certain specific circumstances, they are clearly aligned with prevailing global trends (e.g.

BEPS) and mainly aimed at avoiding treaty-abuse practices and double nontaxation situations; • Treaty benefits are also recognised when income is assigned by a resident of a contracting state to a PE located in a third country, but only to the extent the taxation level in that third state is at least 60% of that which should have applied in the residency state; and • Although it repeals the exemption method available in the original DTA, it will reduce withholding taxes at source and may allow exporters of services to compute foreign tax credits, which has been an issue negatively affecting competitiveness in cross-border transactions between Argentina and Brazil.

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Double taxation treaty between Argentina and the UAE On November 3 2016, in the city of Dubai, UAE and Argentina signed a DTA. After more than one and a half years, the Argentine Chamber of Deputies approved the text that will be now passed to the Chamber of Senators to be formally ratified.

The subsequent exchange of instruments of ratification will make it effective as of January 1 of the year following such ratification process.

Among other things, the treaty introduces relief on withholding on payments of (i) interest, 12% (ii) royalties and technical assistance services, 10%, and (iii) dividends, 10% or 15% (which may pose a reduction in Argentina in corporate income taxes for the fiscal years 2020 onwards).

As with the Argentina-Brazil DTA, this DTA also includes an LoB clause.

Ignacio Rodríguez (ignacio.e.rodriguez@ar.pwc.com), Buenos Aires PwC Tel: +54 11 4850 6714 Website: www.pwc.com/ar

Australia Changes to corporate residency guidelines and other international tax developments

Eddie Ahn, DLA Piper Australia

Australian residency for companies – updated ATO guidelines On June 21 2018, the Australian Taxation Office (ATO) released updated guidelines on the corporate residency test in Taxation Ruling TR 2018/5 and Draft Practical Compliance Guidelines PCG 2018/D3.

Under Australian income tax law, a company incorporated outside of Australia will be an Australian tax resident where it carries on business in Australia and either: • Has its central and management control (CMaC) in Australia; or • Has its voting power controlled by shareholders who are Australian residents.

Importantly, in the updated guidelines, the ATO states that a company that has its CMaC in Australia will also be considered to carry on business in Australia. It is not necessary for the actual trading or investment activities of the

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company to take place in Australia. Thus, the act of management or control in Australia will, of itself, be sufficient for the company to be considered an Australian resident.

The ATO states that CMaC will ordinarily reside with the directors of the company, but this will not always be the case (e.g. where the directors simply ‘rubber stamp’ the decisions of the real decision maker). Ultimately, the location of the CMaC will be a question of fact, requiring an analysis of the nature of the company’s business, its activities and decision-making structure.

Taxation reform of stapled structures – integrity measures for transitional rules Under the transitional rules in the proposed tax changes to ‘stapled structures’ (released in May 2018), certain stapled structures are able to continue to access the concessional 15% managed investment trust withholding tax rate in respect of cross-staple rental payments for either 15 years (for approved economic infrastructure projects) or seven years (for other existing projects).

On June 28 2018, the Australian government released a consultation paper on proposed integrity measures for these transitional rules, under which the transitional rules would only be available where: • For projects eligible for the seven-year period, the cross-staple rental payments are consistent with the non-arm’s length income rule (i.e. market pricing); and • For projects eligible for the 15-year period, the cross-staple rent payments either: • Are in accordance with existing rent calculation methodology for the project (for existing projects); or • Do not result in more than 80% of the taxable income of the project being allocated to the asset entity (for new projects).

Multinational integrity measures – expansion of significant global entity definition Since 2015, in response to the OECD’s BEPS Action Plan, Australia has introduced various integrity measures and reporting obligations for multinationals, such as the Multinational Anti-Avoidance Law, diverted profits tax and country-bycountry reporting requirements.

These measures generally only apply to entities that meet the ‘significant global entity’ (SGE) definition, being: • A global parent entity with annual global income of A$1 billion ($738 million) or more; or

International updates • A member of a group of entities that are consolidated for accounting purposes and the global parent entity of that group has annual global income of A$1 billion or more.

On July 20 2018, the Australian government released draft legislation to extend the definition of the SGE to cover members of groups headed by proprietary companies, trusts, partnerships and investment entities. The existing SGE definition only includes groups headed by listed companies or private companies required to prepare general purpose financial statements.

Accordingly, a wider range of entities could now fall within the definition of a SGE and be subject to the various integrity measures and reporting obligations for multinationals; for example, companies that are majority-owned by large private equity or other investment funds.

These changes are proposed to apply from July 1 2018.

Eddie Ahn (eddie.ahn@dlapiper.com) DLA Piper Australia Tel: +61 2 9286 8268 Fax: +61 2 9286 8007 Website: www.dlapiper.com

Bosnia and Herzegovina BH’s Republic of Srpska issues rulebook on tax adviser licence

Dajana Topic, Eurofast Global

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lmost 10 years after the adoption of the Law on Tax Consultancy, on February 14 2018 the Ministry of Finance adopted the ‘rulebook’ on tax advisers’ licences (rulebook), which then entered into force on February 22 2018.

The rulebook prescribes conditions and procedures for obtaining a tax adviser’s licence and for the registration of tax agencies. As a result, tax consulting services may be provided by individuals or legal entities. Individuals may acquire a licence once they have completed a tax programme and passed an exam as prescribed by the rulebook.

The tax adviser exam can be taken by a candidate who meets the following requirements: • Holds a university degree in the field of economics or law; and • Has at least five years of experience in the field of tax.

The candidate must pass an examination in the following areas:

• Administrative and tax procedures; • The basis of the tax system and tax policy of Bosnia and Herzegovina, Republic of Srpska, Federation of Bosnia and Herzegovina and Brcko District; • The basis of accounting and auditing; • Commercial law; and • Public finances and financial law.

Among other duties, a tax adviser’s role includes: • Providing expert assistance in tax issues; • Representation before tax and judicial authorities in tax administrative procedures, tax disputes, appeals before the Constitutional Court of Bosnia and Herzegovina and the Human Rights Court in Strasbourg; and • Acting as a court expert in front of public authorities.

Based on the rulebook, the Ministry of Finance of the Republic of Srpska will establish and maintain registers on tax advisers, tax consulting agencies and other tax professionals.

Since the fiscal sector and taxation in Bosnia and Herzegovina is becoming more complex, the adoption of this rulebook is expected to bring numerous benefits to both taxpayers and tax authorities.

Dajana Topic (dajana.topic@eurofast.eu), Banja Luka and Sarajevo Eurofast Global Tel: +387 51 961 610 Website: www.eurofast.eu

Canada Québec sales tax amendments targeting digital supplies John Leopardi and Aideen Brennan, Blake, Cassels & Graydon

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n June 12 2018, the proposed amendments to the Act respecting the Québec Sales Tax (QSTA) targeting the digital economy and e-commerce businesses received Royal Assent. These amendments, which were first announced in the March 2018 Québec budget, are in response to the growth in e-commerce transactions and the difficulties this poses for the collection and remittance of the Québec sales tax (QST). The Québec government has stated that the amendments will level the competitive playing field between Québec-resident and nonQuébec-resident businesses. They do this by ensuring that certain businesses with

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neither a physical presence (permanent establishment) or a significant presence (carrying on a business) in Québec are, as businesses with a physical or a significant presence in Québec, required to register for QSTA purposes, and to collect and remit QST. As a result of the passage of these amendments, certain non-Québec-resident suppliers who supply incorporeal movable property or services to individuals over a threshold amount will now be required to register for QSTA purposes, and to collect and remit QST (of 9.975%). This obligation will further extend to corporeal movable property in the case of non-Québec-resident suppliers registered in Canada for goods and services tax/harmonised sales tax (GST/HST) purposes.

In addition, the registration, collection and remittance obligation will extend to operators of digital platforms that control the key elements of supplies of incorporeal movable property or services made by the non-Québec-resident suppliers.

The amendments are to take effect as of January 1 2019 for non-Québec-resident suppliers with no physical or significant presence in Canada who are not registered in Canada for GST/HST (including operators of digital platforms that facilitate supplies of incorporeal movable property or services of such suppliers); and as of September 1 2019 for non-Québec-resident suppliers who are registered in Canada for GST/HST (including operators of digital platforms that facilitate supplies of incorporeal movable property or services of all other types of non-Québec-resident suppliers).

At the time of announcement there had been concern expressed as to the extra-territorial scope and constitutionality of the Québec government’s proposed amendments: notably, given that under subsection 92(2) of The Constitution Act (1867) a provincial government’s legislative authority is constitutionally limited to direct taxation within the province.

The recent decision by the Supreme Court of the US in Wayfair v South Dakota, regarding a state’s ability to enact legislation requiring out-of-state online retailers to collect and remit sales tax on sales to customers in the state, may be of interest as it concerns the boundaries between provincial and federal authority.

In Wayfair, the Supreme Court overturned the long-standing precedents set in Bellas Hess (1967) and Quill (1992), which had established that a business must have a physical presence in a state for that state to require the business to collect sales tax. In its reasoning, the Supreme Court remarked that the expansion of e-commerce had “increased the revenue shortfall

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International updates faced by states seeking to collect their sales and use taxes” and that the physical presence rule “puts both local businesses and many interstate businesses with physical presence at a competitive disadvantage relative to remote sellers”.

It remains to be seen, if and when called to pronounce themselves on the QST amendments, how willing Canadian courts will be to expand a province’s authority to tax businesses outside of the province, and whether in rendering a decision they will be content to water-down, or will instead completely do away with, the physical and/or significant presence requirement (having permanent establishment, or carrying on a business, in the province). Such decisions would likely have an impact on the Canadian federal government, which is presently studying the issue of whether a new digital tax regime is necessary in Canada, and which may ultimately decide to introduce similar amendments in respect of the GST/HST. John Leopardi (john.leopardi@blakes.com), Montreal, and Aideen Brennan (aideen.brennan@blakes.com), Vancouver Blake, Cassels & Graydon Tel: +1 514 982 5030 and +1 604 631 3337 Website: www.blakes.com

Chile Update on preferential tax regimes Santiago López and Ignacio Núñez, PwC Chile

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ince 2003, the characterisation of a preferential tax regime in Chile was entrusted to a fixed blacklist of 39 tax haven jurisdictions based on the OECD report of 1998, ‘Harmful Tax Competition: an Emerging Global Issue’, and its 2000 update. The aforementioned blacklist was issued by the Chilean Ministry of Finance (Decree 628 of 2003) and was relevant regarding certain international transactions, triggering the application of special rules when such transactions were performed involving a tax haven (i.e. long arm capital gain rules, thin capitalisation rules, royalty payments and remuneration for services).

Tax Reform Law 20.780 of 2014 introduced Article 41, letter H to the Chilean Income Tax Law, setting new criteria in order to determine whether a preferential tax regime was characterised for Chilean tax matters. According to such provision, a jurisdiction or territory would be deemed

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as having a null or preferential tax regime, when at least two of the following requirements were met: (a) its effective tax rate for foreign income is less than 17.5%; (b) the jurisdiction has not entered into an agreement with Chile for the exchange of information for tax purposes; (c) legislation of the jurisdiction does not provide for transfer pricing rules, which substantially comply with OECD recommendations; (d) the jurisdiction does not have the conditions to be considered as compliant or substantially compliant with OECD international standards in matters of transparency and exchange of information for tax purposes; (e) the jurisdiction maintains preferential tax regimes that do not follow OECD standards; and/or (f) the jurisdiction only impose taxes on domestic source income. Article 41, letter H allows taxpayers to apply before the Chilean Internal Revenue Service for a specific pronouncement, confirming whether a jurisdiction would be deemed as having a preferential tax regime as per the requirements set forth above.

Henceforth, since 2014, Chile has held two different rules in order to determine whether a jurisdiction would be deemed as having a preferential tax regime: one that provided a specific list of tax havens, and another that required an analysis of the requirements listed above.

Law 21.047 of November 23 2017 indirectly repealed the blacklist established by the Ministry of Finance and, as of December 1 2017, the characterisation of a preferential tax regime was entrusted solely to Article 41, letter H. The Chilean Internal Revenue issued a preliminary list of possible preferential regimes in December 2017 (Resolution 124 of 2017) that included 150 preferential tax regimes. In July 2018, an updated list was issued by the tax authority (Resolution 55), reducing the list from 150 to 147 preferential regimes. Uruguay and Panama were excluded from the list, as both jurisdictions signed the Convention on Mutual Administrative Assistance in Tax Matters (MAAT) and introduced amendments to their internal tax legislation following BEPS recommendations.

The preferential tax regimes list is expected to be updated periodically, at least once a year, according to the Chilean Internal Revenue Service. This matter should be closely monitored as countries continue to adapt to new standards and trends on international taxation and transparency.

Santiago López (santiago.lopez@cl.pwc.com) and Ignacio Núñez (ignacio.nunez@cl.pwc.com) PwC Chile Tel: +56 229400556 Website: www.pwc.cl

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China Details of personal income tax reform released; VAT and corporate income tax support for innovation activities Khoonming Ho and Lewis Lu, KPMG China

Details of personal income tax reform released On June 29 2018, China’s Parliament, the National People’s Congress (NPC), released the full text of proposed amendments to China’s individual income tax (IIT) law (draft IIT bill). Public comments were sought up until July 28 2018. The upshot of the proposed changes is to reduce the tax burden on lower earners, reduce the relative preferences for foreign nationals under the existing IIT law, give greater recognition to personal circumstances and expenses in the IIT calculation, and introduce anti-avoidance provisions. The changes to personal deductions and tax brackets would take effect in part from October 2018, and the rest of the changes from January 2019.

Key amendments in the draft IIT bill include: • A new tax residence rule: At present, foreign nationals are treated as Chinese tax residents after one year of continuous presence in China. A continuous absence of 30 days in the year, or non-continuous absences of 90 days in the year, will be sufficient not to be regarded as resident.

This is complemented by a further special concession, under which foreign nationals working in China will only be subject to China tax on their worldwide income after five years of continuous residence in China. It is now proposed that the oneyear test will be lowered to 183 days, and the existing five-year concession, which is set out in the implementation rules of the IIT law, may be abolished. The latter point is yet to be confirmed. These changes would have important implications for the taxation of the income of foreign nationals that is sourced outside China; • The introduction of general anti-avoidance rules (GAARs): Such rules, modelled on those in the corporate income tax (CIT) law, would allow the tax authorities to adjust taxable income relating to asset transfers not at arm’s length, avoidance using offshore tax havens, and other artificial tax-motivated arrangements; • The consolidated taxation of earned income: Four categories of income, cov-

International updates ering salaries and wages, professional services, author’s remuneration and royalties, will be consolidated and subject to progressive tax rates. Tax residents will transition from monthly filing to annual filing for such income. Existing categories of business income will be incorporated into this comprehensive income category, or a new ‘income from operations’ category, depending on their nature. Income from operations, interest income, dividends, leasing income, asset transfer gains, and other income will still be taxed separately, on a monthly basis, at separately prescribed rates; • Adjustments to income tax brackets: Comprehensive income is to be subject to the already existing progressive tax rates of 3% to 45%, though the seven brackets are now calculated on an annual as opposed to monthly basis. To relieve burdens on low earners the 3%, 10% and 20% brackets are widened, and the 25% bracket is narrowed. The subsequent 30%, 35% and 45% brackets kick in at the same income levels as before. ‘Income from operations’ will, as at present, be subject to progressive tax rates from 5% to 35%, though low earners are supported with entry to the 35% bracket starting at RMB 500,000 ($74,000) rather than the present RMB 100,000; and • Enhanced tax deductions: The personal deduction, taken against comprehensive income, will now rise to RMB 5,000 per month from RMB 3,500 for Chinese nationals and RMB 4,800 for foreign nationals, as at present. There is also an increased number of deductions to reflect personal circumstances including expenditures on dependent children’s education, continuing education, serious illness medical treatment, housing mortgage interest and rentals. These complement the existing deductions for social security contributions (which cover basic pension insurance, basic medical insurance, unemployment insurance, and housing fund contributions). They also complement the more recent deductions provided for private health insurance and pension insurance. The latter one is still being piloted.

VAT and corporate income tax support for innovation activities At an executive meeting of China’s State Council on April 25 2018, Premier Li Keqiang announced that China would allow the research and development (R&D) super deduction bonus, for corporate income tax (CIT) purposes, in relation to R&D payments made to overseas service providers.

This has now been put into effect.

Under the super deduction, a 150% deduction (i.e. a 50% bonus deduction) is

available for eligible R&D expenses. This rises to a 175% deduction for science and technology small and medium enterprises (SMEs). Up until recently no super deduction was allowed in respect of R&D payments made to overseas service providers. Under the new Cai Shui (Circular) 64, issued on June 25 2018, 80% of the amount of such outbound payments can now qualify for the super deduction. This reflects the 80% cap that already existed for payments to domestic outsourced R&D service providers.

However, a further limitation also exists that the super deduction for the outbound payments may only be enjoyed to the extent that they do not exceed two-thirds of the total qualifying R&D expenses incurred within China.

The technical contracts entered into for the outsourcing R&D activities must be registered with local science and technology administration where the domestic consignor is located. The new treatment applies retroactively from January 1 2018.

In the VAT space, China’s State Council (i.e. cabinet) had announced in March 2018 a one-off refund of excess input VAT credits, accumulated over a specific period of time, for enterprises engaged in advanced manufacturing and R&D activities, as well as electrical grid operators. The entitlement to claim refunds of excess input VAT credits has long been a source of challenge for businesses, particularly those in the early stage of development or investment, as they typically must carry forward excess input VAT credits for offset against output VAT, in order to use them. The entitlement to a VAT refund had already been available for certain industries, such as integrated circuits, aircraft production and certain fuel supply businesses, though restricted to certain regions. The expansion of such treatment is consequently very welcome.

The particulars of the new treatment were set out on June 27 2018 in Cai Shui (Circular) 70. It has been specified that the following taxpayers are covered: • Enterprises in 10 key areas set out under the ‘Made in China 2025’ plan, including those engaged in manufacturing for new generation information technology, aerospace equipment, marine engineering equipment and high-tech ships; • High and new technology enterprises, advanced technology services enterprises and science and technology SMEs; and • All electrical grid companies with appropriate transmission or supply qualifications.

The refundable excess input VAT credits will be calculated as the taxpayer’s excess input VAT amount at the end of the previous period, multiplied by the refundable proportion. The refundable

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amount is limited to the taxpayer’s excess input VAT amount as at the end of 2017.

It should be noted that the provincial taxation and finance authorities will determine lists of taxpayers eligible for the refund and the refundable amount for the taxpayers. The refunds will be processed by the end of September 2018.

Khoonming Ho (khoonming.ho@kpmg.com) and Lewis Lu (lewis.lu@kpmg.com) KPMG China Tel: +86 (10) 8508 7082 and +86 (21) 2212 3421 Website: www.kpmg.com/cn

Cyprus New alternative investment funds legislation

Maria Nicolaou, Eurofast

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n July 10 2018, the Cyprus Parliament approved the new alternative investment fund (AIF) legislation which will replace the existing law and which enables, for the first time, the establishment of registered alternative investment funds (RAIF) in Cyprus. This is a major advancement in the field as it will substantially reduce the time and cost involved in establishing an AIF in Cyprus.

The details of the law will become available once the legislation is published in the government’s Official Gazette, at which point the law will also come into effect.

From the information available, the following criteria and characteristics in relation to RAIFs are expected: • Funds will not be regulated by CySEC. Supervision will be at the level of the registered fund manager; • Appointment of local depository; • No minimum capital requirements; • Can be either open or closed ended; • Has the option for an umbrella structure; • Addressed at professional and/or wellinformed investors; • Can be structured as a common fund, investment company (variable or fixed capital), or limited partnership; • CySEC will register all RAIFs in a register of RAIFs; and • Within one month of receipt of all required documents in accordance with the directive, the CySEC will inform applicants in writing of its decision to accept or reject an application.

In addition to the introduction of RAIFs, the new provisions in the Cyprus tax legislation mentioned below have also been introduced in relation to investment funds:

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International updates • No permanent establishment will be deemed to arise in Cyprus in the case of investment into Cyprus tax-transparent funds by non-resident investors and/or in the case of management in Cyprus of non-Cyprus investment funds. As a result, income earned on such investments will be taxed in the country of residence of the investor; • Introduction of a special mode of taxation at the rate of 8% and a minimum annual tax payable of €10,000 ($11,700), subject to specific criteria, for certain employees and executives of investment fund management companies.

This new mode of taxation will be available for a total period of 10 years; and • Persons who are both Cyprus tax resident and Cyprus domiciled will be subject to a special defence contribution at a rate of 17% (instead of 3%, which has been applicable to date) on profits deemed to be received from Cyprus investment funds.

Maria Nicolaou (maria.nicolaou@eurofast.eu) Eurofast Tel: +357 22 699 224 Website: www.eurofast.eu

European Union Public country-by-country reporting in the EU off the tracks, for now

Bob van der Made, PwC

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uring a debate at the European Parliament in mid-April 2018, a representative from the Council of the European Union confirmed to members of the European Parliament (MEPs) that there were “unresolved political issues” which prevented agreement at the council on the European Commission’s April 2016 pending proposal for public country-by-country reporting (public CbCR). The two largest parties in the European Parliament, the EPP (Christian Democrats) and the S&D (Social Democrats), asked the council to unblock the negotiations on the proposal for public CbCR. This was generally understood to be the last chance to reach a deal as Austria, which holds the six-monthly rotating EU Council presidency from July 1 to December 31 2018, and could drive discussions in the council forward, is not in favour of the commission’s proposal. Germany’s new Federal Finance Minister Olaf Scholz said in June 2018 that the German government needed more time and he also coun-

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selled caution about the Commission’s proposal and hinted at following a tax-centric approach instead.

Indeed, one of the thorniest political issues surrounding the Commission’s protracted 2016 draft directive is its legal base, which has divided the EU’s member states as well as the EU’s institutions from the start. Both the legal services of the European Parliament and the European Commission have taken the formal view that there is no conflict in the Commission’s choice of the legal basis for its proposal, since the draft public CbCR directive in their opinion is a tax transparency financial reporting tool, and not a fiscal matter as such, which would require unanimity voting in the Council (giving each of the EU-28 individual member states a right to veto the proposal). The Council’s legal service however does not agree with its counterparts at the Parliament and the Commission.

Members of the European Parliament have expressed their discontent with the now prolonged impasse around public CbCR, arguing that some EU member states are using the legal basis issue as a pretext to delay any meaningful negotiations on this file.

EU Tax Commissioner Pierre Moscovici indicated in April 2018 that a deal would probably not be reached within the Juncker Commission’s mandate which ends on October 31 2019.

Bob van der Made (bob.vandermade@pwc.com) PwC | EU public affairs-Brussels (tax | tax administration consulting) Tel: +31 6 130 96 296 Website: www.pwc.com/eudtg

Germany DEMPE analysis for CUP studies Yves Hervé and Philip de Homont, NERA Economic Consulting

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n this article, discussing a series of transfer pricing (TP) economic and regulatory technical challenges and solutions for global multinationals, Managing Director Yves Hervé and Associate Director Philip de Homont focus on the use of DEMPE analysis to identify economic ownership and substantiate comparable uncontrolled price (CUP) studies.

In TP audits around the world, tax authorities are starting to use the development, enhancement, maintenance, protection, and exploitation of intangibles

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(DEMPE) concept that was recently established by the OECD. In particular, tax authorities stipulate that local entities in their geographies have conducted DEMPE functions for intangibles that they license from group companies and that, therefore, the royalty should be lowered – or disregarded entirely.

This development requires a new approach by taxpayers, both for setting their IP remuneration and for TP documentation and tax audit situations. One challenge is that, while DEMPE is becoming ubiquitous, the definition offered by the OECD is very open.

NERA has established a procedure to address the open points of the DEMPE analysis. Our method follows a combination of qualitative economic reporting that shows how these functions are exercised, and quantitative analysis of the relative importance of these functions. Over the past year, NERA has performed several DEMPE studies in tax audits and for TP studies, and applied the results to calculate profit splits or defend benchmarking studies of comparable licence agreements. In all cases, it was key to analyse the economic underpinning of the concrete DEMPE functions in order to see the overall value creation contribution.

In the first case, we were asked to defend a CUP analysis for a trademark licence agreement between a licensor in the US and a licensee in Mexico. For the audit period, which predated the new OECD guidelines, the Mexican tax authorities challenged the CUP studies and demanded a DEMPE analysis.

NERA analysed the facts and could show that the US company developed the brand originally and performed strategic management to enhance the brand (e.g. periodical rebranding activities and concepts for new online distribution channels).

It also provided guidance for local marketing activities (e.g. branding material) and centrally registered the trademarks. On the other hand, the local licensor performed local marketing activities and exploited the brand value to generate sales.

In the next step, the insights of the DEMPE analysis were used to test if this contribution split is similar to contracts between unrelated third parties (i.e. we reviewed the functions and responsibilities assigned in third-party contracts). Many brand licensing contracts demand the licensee to perform certain marketing activities under the strategic guidance of the licensor.

NERA demonstrated that the selected CUP benchmarks were comparable in the functional split between licensor and licensee.

In a second project, NERA performed a DEMPE study to support a profit split analysis and measure contributions of two

International updates entities to the joint creation of valuable technologies.

A multinational group had acquired an Austrian company, and soon started to use both the umbrella brand of the group and the company’s previous name. In the next TP audit, tax authorities started to question the brand royalty, stipulating that the value was primarily due to the local brand and that the international umbrella brand was essentially worthless.

NERA proceeded to undertake an interview-based survey of internal experts.

Qualitatively, it was possible to establish the various forms of contributions to the respective brands, such as platform intangibles, trade fair exhibitions, and rebranding initiatives. More importantly, following a rigorous selection of interviewees, we collected a substantial number of responses.

The analysis showed that the value was indeed derived from the combination of umbrella and local brands; the market-facing experts could identify the contribution of the umbrella brand in detail.

This allowed the establishment of a profit split methodology based on the relative contribution to the intangibles, and ultimately showed that the trademark royalty for the umbrella brand was arm’s length.

Yves Hervé (yves.herve@nera.com) and Philip de Homont (philip.de.homont@nera.com) NERA Economic Consulting Tel: +49 69 710 447 502 and +49 69 710 447 508 Website: www.nera.com

Hong Kong Hong Kong introduces new transfer pricing regime Lewis Lu and Curtis Ng, KPMG China

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n July 2018, transfer pricing (TP) legislation – Inland Revenue (Amendment) (No 6) Bill 2017 (BEPS Bill) – was passed in Hong Kong. This represents one of the biggest changes to Hong Kong tax in recent years. Many of the provisions within the BEPS Bill will have retrospective effect from the year of assessment 2018/19. The notable amendments to the initial proposal are: • Domestic transactions are excluded from the TP scope provided that certain conditions are fulfilled; and • Documentation thresholds have been relaxed to alleviate the burden on smaller Hong Kong businesses of proving their compliance with the arm’slength principle.

The BEPS Bill codifies the arm’slength principle as the fundamental TP rule in Hong Kong. The Inland Revenue Department (IRD) is empowered to adjust profits/losses where a transaction between two related parties is not carried out under normal commercial terms that would have been undertaken between independent persons.

The BEPS Bill has introduced various provisions covering deeming provisions on intangibles, valuation of trading stock, penalties and non-compliance, dispute resolution mechanisms, advance pricing arrangements (APAs), and specific provisions relating to permanent establishments (PEs).

In the case of a PE, TP rules will apply to any non-resident who has a PE that carries on a trade, profession or business in Hong Kong. The BEPS Bill provides guidance on how profits should be attributable to a PE. The income/loss attributable to a PE will be determined by treating the PE as a separate and distinct entity and by adopting the so-called ‘authorised OECD approach’. Further guidance by the IRD will be issued.

Taxpayers will be required to provide tax authorities with additional information, so it is expected that the IRD will also be asking challenging questions that may lead to substantial tax adjustments and potential double taxation. It is important that Hong Kong corporate taxpayers revisit their TP policies, and their positions with respect to their value chains and related-party transactions to ensure that these remain appropriate.

annually. The new tax will not apply to vacant properties held by persons other than developers. The new measures will need to be approved by the Legislative Council before they become law. Unlike most taxes, the new tax does not aim to produce revenue. It is intended to encourage developers to release residential units more quickly into the market and address concerns about the spiraling cost of real estate in Hong Kong.

The degree of impact the measures will have will depend on the detailed arrangements, which have not yet been released.

There are certain issues that would need to be addressed that include how the term ‘developers’ is defined, the treatment of intra-group transactions, and how occupation is to be measured and policed. Draft legislation is expected to be introduced that hopefully will address these matters.

Lewis Lu (lewis.lu@kpmg.com) and Curtis Ng (curtis.ng@kpmg.com) KPMG China Tel: +86 (21) 2212 3421 Website: www.kpmg.com/cn

India Authority for advance rulings (AAR) rules on permanent establishment (PE) and income characterisation

Rakesh Dharawat and Rishi Kapadia, Dhruva Advisors

Hong Kong proposes a vacancy tax on empty new flats In June 2018, the Hong Kong government proposed a new vacancy tax on vacant properties. The aim of the vacancy tax is to encourage property developers to release more flats and prevent them from hoarding newly built flats in Hong Kong.

Hong Kong has continued to be one the world’s least affordable housing markets, as property prices continue to soar despite cooling measures introduced by the Hong Kong government. High housing prices have long been a sore point with the public, but strong demand means the property market continues to rise.

The vacancy tax is targeted at newly built flats and will apply where properties remain unoccupied for six months in any year. A grace period will apply for the first 12 months after obtaining an occupation permit. It is proposed that the tax will be levied at the rate of 200% of the property’s annual rental value, calculated by reference to market rates as determined by government assessors.

Developers will be required to submit a report on the status of their properties

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itigation in respect of when a non-resident has a PE in India has always been a contentious issue. Despite several years of jurisprudence on the subject, the gap between the taxpayers’ and the revenue authority’s position on this subject is still quite wide. This is reflected in a recent ruling of the AAR on certain questions raised

by MasterCard Asia Pacific (MAPL).

MasterCard Asia Pacific (a Singapore resident) carried out transaction processing and payment-related activities across several countries for its global customers through a worldwide network. It inter alia entered into agreements with banks and financial institutions in India (customers) under which it received transaction processing fees, and assessment fees for building and maintaining a network and other ancillary revenues. It also had a subsidiary in India called MasterCard India Services (MISPL).

The key factors considered in the ruling, and the conclusions drawn by the AAR based on such factors are summarised in Table 1.

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International updates The AAR also held that functions performed, assets deployed, and risks undertaken (FAR) by MISPL were not fully captured in its FAR profile and hence a further profit attribution could be considered.

While determination of a PE is a factual exercise, the ruling throws light on critical aspects to be considered for evaluating the existence of a PE. This ruling may have far reaching implications for business models/arrangements where a substantial part of business is carried through digital/ecommerce platforms without any significant human intervention. One may also expect this ruling to be taken in further appeal to the High Court. While the ruling of the AAR is binding only on the applicant, nonetheless, the taxpayers would need to critically assess the impact of this ruling on their business models/arrangements.

Rakesh Dharawat (rakesh.dharawat@dhruvaadvisors.com) and Rishi Kapadia (rishi.kapadia@dhruvaadvisors.com) Dhruva Advisors Tel: +91 22 6108 1000 Website: www.dhruvaadvisors.com

Italy Mid-term update on direct and indirect taxation topics

Gian Luca Nieddu and Barbara Scampuddu, Hager&Partners

Bitcoin: Direct taxation aspects By replying to a request for advance ruling the Italian Revenue Agency has clarified some tax aspects on virtual currencies, and more specifically on the so-called bitcoins held by individuals outside their business activity.

For income tax purposes the same general rules regulating conversion operations of traditional currencies apply to conversion operations of virtual currencies.

As a consequence, the spot sale of virtual currencies – i.e. the transaction that provides for an immediate exchange of a currency against another one – lacking speculative purposes does not give rise to taxable income.

However, other income is generated if a currency sold originates from withdrawals from electronic wallets, with an average deposit in terms of counter-value of more than €51,645.69 ($60,000) for at least seven consecutive working days in the tax period (under Section 67 [1c-ter] and [1ter] of the Italian Tax Code [TUIR]) and in the event of forward sales.

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Table 1 Factors

Conclusions

Fixed place PE • MasterCard interface processors (MIPs) owned by MISPL were placed at the customer’s location; • The processing of transactions took place through the MasterCard Worldwide Network, which comprises MIPs, transmission towers, leased lines, cables, nodes, internet and application software; • The preliminary functions were undertaken by the Bank of India, whereas the processing and settlement was carried out outside India; and • Functions and risks that were earlier conducted overseas were now conducted by MISPL.

• MAPL has a fixed place PE in India because of the presence of MIPs; • The AAR also ruled that the use of the MasterCard network for substantial transaction processing functions like authorisation, clearance and settlement would constitute a fixed place PE because it was secured, maintained and managed by MAPL. Further, the application software embedded in the network was owned and controlled by MAPL. Again, MIPs that are part of the network were at the disposal of MAPL. Thus, the MasterCard network constitutes a fixed place PE for MAPL in India; • The premises of the banks constitute a fixed place PE for MAPL in India; and • MISPL also constitutes a PE for MAPL in India.

Service PE • MAPL’s employees visited India from time to time for obtaining customer feedback, etc.

• Employees of MAPL visiting India for business meetings constitutes a service PE in India.

Dependent agent PE (DAPE) • Marketing support activities were performed by MISPL for MAPL.

• MISPL constitutes a DAPE of MAPL in India on account of ‘habitually securing orders’ wholly for MAPL.

Income classification • A licence to use trade marks and marks was granted by MAPL to its customers in India.

Customers were also using software as well as intellectual property in MIPs and the network.

The counter-value in euro of the average deposit of virtual currency is to be calculated according to the reference exchange rate as of January 1 of the tax period. Given that there is no official daily price to be applied to the exchange rate between the virtual currency and the euro at the beginning of the tax period, according to the Italian Revenue Agency, the exchange rate obtained from the internet site on which the virtual currency has been purchased or, if missing, of the internet site on which the most transactions occur, can be used. The average deposit must be verified with regard to the total wallets held by the taxpayer, regardless of their type (paper, hardware, desktop, mobile, or web).

In order to determine any contingent capital gains/capital losses from wallet withdrawals that exceed the above average deposit, the purchase cost must be used; furthermore, the currencies purchased most recently are deemed to be the first ones to be sold.

Income from transactions on the FOREX market and from CFDs (contract for difference) with virtual currencies also

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• A portion of the fees received by MAPL would be classified as royalty under the India-Singapore tax treaty.

constitute other income under Section 67 (1c-quater) of the TUIR. Individuals resident in Italy holding virtual currencies abroad (or in Italy but outside the circuit of resident intermediaries) are subject to the duty of tax reporting and, hence, required to fill out the ‘RW’ field in their tax return.

Finally, virtual currencies are not subject to IVAFE – imposta sul valore dei prodotti finanziari, dei conti correnti e dei libretti di risparmio detenuti all’estero (Italian tax on the value of financial assets held abroad), since this tax applies to bank deposits and bank accounts only (Italian Revenue Agency, reply to the request for advance ruling 956-39/2018).

Tax credit for R&D Tax credit for research and development (R&D) under Section 3 of Decree-Law 145/2013 does not apply in connection with costs borne by companies belonging to the same group for the acquisition (even if through a licence) of intangible assets (technical and industrial property rights relating to an industrial or biotechnological invention, etc.). In regard to this matter,

International updates companies linked by a shareholding control or affiliated relationship under Section 2359 of the Italian Civil Code are considered as belonging to the same group.

The limitation applies to intra-group transactions from the tax period as at July 14 2018, “also in relation to the calculation of eligible costs to be allocated to tax periods relevant for the calculation of the comparative average”.

For acquisitions in previous tax years the following applies: The part of the cost of purchase corresponding to the expenses previously allocated to the Italian company as a result of its participation in R&D projects relating to the purchased goods is not considered as eligible cost.

VAT and electronic invoicing The Italian Revenue Agency provided various clarifications on the duty of electronic invoicing. Please note the following: • All those identified for tax purposes only, but not resident in Italy, are not required to issue electronic invoices; they may, however, receive electronic invoices, despite their right to obtain a paper copy of the invoice upon request; • In order to comply with the provisions on electronic invoicing that will generally enter into force as of January 1 2019 (or are already effective as of July 1 2018 for sales of vehicle fuel and gasoline outside road fuel stations and for public procurement subcontractors), in the event of deferred invoicing, reference must be made to the date of document issuance and not to the transaction execution date; and • The duty to issue electronic invoices through the interchange system (SdI) refers to those working with the procuring entity or, in the course of the execution of the procurement contract, those who are the actual recipients of subcontracts (i.e. directly procure a part thereof) or are subcontractors (i.e. perform services to the contractor due to a contractual duty and as such are reported to the procuring entity jointly with the tender identification code (CIG) and/or the single project code (CUP); however, those who sell goods to a customer without being directly involved in the principal procurement and are not required to report to the public procuring entity and to provide the CIG and/or the CUP (e.g. all those who provide goods to the contractor without knowing how such goods will be used, since they may be used in part for a public and in part for a private procurement) are excluded from the new invoicing obligations (Italian Revenue Agency, newsletter 13, July 2 2018).

Case-law: Tax residence The Italian Constitutional Court ruled as follows: “…individuals registered with the registry of residents are deemed resident in any case and, thus, are subject to tax in Italy under the formal criteria contained in Section 2 of DPR 917/1986; further to the above, this means that the transfer of the residence abroad is irrelevant for tax purposes, as long as the residence is not deleted from the residents’ registry of an Italian municipality, since such registration is preclusive of any further assessments (Italian Constitutional Court 677/2015, 14434/2010, 9319/2006)”.

Basically, the Italian Constitutional Court does not seem to attribute much importance to the provisions contained in the double taxation agreements. This means that an individual relocated abroad, who forgot to register with the Italian registry of Italians living abroad (AIRE), will continue to be deemed resident in Italy (Italian Constitutional Court, order 16634, June 25 2018).

Gian Luca Nieddu (gianluca.nieddu@hager-partners.it) and Barbara Scampuddu (barbara.scampuddu@hagerpartners.it) Hager&Partners Tel: +39 02 7780711 Website: www.hager-partners.it

Luxembourg Luxembourg releases bill to implement ATAD I Bernard B David and Edouard Authamayou, Deloitte

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he bill that would implement the EU Anti-Tax Avoidance Directive I (ATAD) into Luxembourg law was published on June 20 2018. The bill contains provisions on controlled foreign companies (CFC), interest deduction limitations, exit taxation, hybrid mismatches within the EU and general anti-abuse rules (GAARs). It also would amend the domestic law definition of a permanent establishment (PE). This article will focus on the CFC, interest deduction limitation and PE measures.

CFC rules Broadly, the CFC rules would ratably reallocate undistributed income of a 50%owned direct or indirect subsidiary or PE (in an EU member state) to the Luxembourg tax net where the actual corporate income tax (CIT) paid on the CFC’s profits is lower than 50% of the

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CIT that would have been paid in Luxembourg.

The CFC income inclusion would be limited to income attributable to significant people functions (SPF) carried out in Luxembourg in relation to the assets owned and risks undertaken by the CFC. Interestingly, the CFC rules would apply only after the application of the existing transfer pricing (TP) rules; the interaction of the two rules is unclear and further guidance is expected.

Luxembourg’s decision to limit the CFC income inclusion is positive as it demonstrates Luxembourg’s full alignment with the OECD TP principles that already are largely reflected in domestic legislation without materially affecting the country’s position as a prime holding jurisdiction.

Interest deduction limitation rules Under the proposed rules, a taxpayer’s borrowing costs always would be deductible to the extent of its taxable interest revenues and other economically equivalent taxable revenues. The deduction of any excess, defined as ‘exceeding borrowing costs’ (EBC), would be restricted to 30% of the taxpayer’s taxbased earnings before interest, tax deductions, and amortisation (EBITDA). This would be computed by adding back to total net revenues the EBC, depreciation and amortisation, but excluding exempt income and economically related expenses.

The bill includes all of the reliefs available in the ATAD 1, except the possibility to compute the EBC and the EBITDA at the level of a tax-consolidated group. The interaction of the interest deduction restrictions with Luxembourg’s ‘recapture rules’ (which temporarily allow the deduction of expenses financing a shareholding but require an add-back of those expenses when the shareholding is sold at a gain) must be clarified to ensure that the EBC deduction restriction does not exceed the 30% ratio described above. Loans issued before June 17 2016 would fall outside the scope of the interest deduction limitation rules provided they are not modified after that date. It is unclear whether any or only certain modifications to a grandfathered loan would bring the loan within the scope of the new rules.

PE provisions The bill generally would recognise the existence of a PE only if the taxpayer’s activity represented a participation in ‘general economic life’ in the other state.

Under the bill, a taxpayer could be asked to provide a confirmation from the foreign tax authorities that a PE existed. This provision is intended to put an end to conflicts of interpretation with respect to the

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International updates existence of a PE under the provisions of a tax treaty. The practicalities of the proposed new requirement would need to be further analysed.

The Luxembourg Parliament now must debate and vote on the proposed measures.

Bernard B David (bdavid@deloitte.lu) and Edouard Authamayou (eauthamayou@deloitte.lu) Deloitte Website: www.deloitte.lu

FYR Macedonia FYR Macedonia re-extends period for preferential VAT rate applications on first sale of residential buildings

Elena Kostovska, Eurofast Global

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n 2009, as an anti-crisis measure, the FYR Macedonian government introduced the possibility to apply for the preferential VAT rate of 5% on the first sale of residential buildings. While initially planned to be in force until the end of 2011, the application period has already been extended twice: the first time in late 2011 whereby its validity was prolonged until the end of 2015, and the second time in July 2015 when it was prolonged for three more years.

The third renewal was adopted in June 2018 and, with it, the measure will continue to apply until the end of 2023.

By way of background, with this measure, the first sale of residential buildings before they are first occupied and within five years of their completion, is subject to the reduced VAT rate of 5% (instead of the standard rate of 18% which was applied before 2009). To be eligible for this reduced VAT rate, the building must be used for residential purposes. In the case of a mixed-purpose building, a proportional VAT application is enforced – the portion of the building to be used for residential purposes will be levied with 5% VAT while the rest of the building will be levied with the standard 18% rate.

This further extension of the preferential VAT regime is expected to provide yet another impetus for the booming residential construction sector.

Elena Kostovska (elena.kostovska@eurofast.eu), Skopje Eurofast Global Tel: +389 2 2400225 Website: www.eurofast.eu

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Malta Extension to Malta’s tax treaty network Donald Vella and Mark Galea Salomone, Camilleri Preziosi

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n June of this year, Malta concluded treaties with the Federal Democratic Republic of Ethiopia and the Republic of Botswana for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (DTAs).

This followed the conclusion of a treaty with the Principality of Andorra as well as the coming into force of the treaties concluded with Azerbaijan and the Socialist Republic of Vietnam, earlier this year.

The tax treaty residence concept with respect to individuals in both DTAs sees no deviation from the OECD Model Convention. With respect to persons, other than individuals, the place of effective management or the place of incorporation is the key factor in determining residence. When a person is deemed to be a resident of both Malta and the other respective contracting state, the place of effective management will determine where such a person will be deemed to be resident for the purposes of the DTA. The DTA with Botswana additionally provides that when the place of effective management cannot be established, the contracting states will settle the question through mutual agreement.

With respect to the permanent establishment (PE) concept, specifically project PEs, the DTAs are broadly similar. While under both DTAs a PE is to also comprise a building site, construction or installation project if lasting longer than six months, the DTA with Botswana also includes supervisory activities linked to such projects within its scope. Moreover, the latter DTA also includes within the scope of the definition, the furnishing of services by an enterprise through employees or other personnel engaged by the enterprise for such purpose if carried out for a period aggregating more than six months within any 12-month period.

Dividends paid by an Ethiopian resident company to a Malta resident beneficial owner are to be taxed in Ethiopia at a maximum of 5% of the gross dividends.

Dividends paid by a Botswana resident company to a Malta resident beneficial owner, will be taxed at (a) a maximum of 5% of the gross dividends when the beneficial owner of such dividends owns at least 25% of the company paying the dividends; or (b) a maximum of 6% in all other cases.

With respect to dividends paid by a

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Maltese resident company in such circumstances, Malta does not generally charge withholding taxes.

Interest paid to a resident in the other contracting state that is the beneficial owner, may be taxed in the contracting state in which it arises at the maximum rates of 5% (Ethiopia DTA) or 8.5% (Botswana DTA) of the gross amount of the interest.

According to the DTA with Ethiopia, royalties paid to the beneficial owner, resident in the other contracting state are taxable in the contracting state in which they arise at the maximum rate of 5% of the gross amount of the royalties. On the other hand, the Botswana DTA provides that royalties in such circumstances may be taxed at a rate of 5% of the gross amount of royalties in respect of the use or the right to use, industrial, commercial or scientific equipment, and 7.5% in all other cases.

Although the DTAs have not yet come into force they nevertheless serve as a step forward in promoting investment between Malta and the relevant jurisdictions. They also signal Malta’s strong commitment to further minimising instances of double taxation in cross-border matters.

Donald Vella (donald.vella@camilleripreziosi.com) and Mark Galea Salomone (mark.galeasalomone@camilleripreziosi.com) Camilleri Preziosi Tel: +356 21238989 Website: www.camilleripreziosi.com

New Zealand Beneficial ownership public register under discussion Brendan Brown and James Horner, Russell McVeagh

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he New Zealand government is consulting on measures that would require the reporting of details of beneficial ownership of companies and limited partnerships on a public register. The measures would not apply to trusts, for which more onerous tax reporting obligations have already taken effect.

An international trend towards greater transparency for corporate ownership structures has emerged in recent years. The UK, for example, introduced in 2016 a publicly accessible register administered by Companies House that, with some exceptions, records certain details of ‘persons with significant control’ of companies and limited partnerships. There are other examples in other jurisdictions. In light of these developments, the New Zealand Ministry of

International updates Business, Innovation and Employment (MBIE) is undertaking public consultation in relation to the existing transparency of ownership structures that include New Zealand companies and limited partnerships.

The MBIE has released a discussion document, entitled ‘Increasing the Transparency of the Beneficial Ownership of New Zealand Companies and Limited Partnerships’, on which it seeks public comment. The document canvasses a number of proposals requiring New Zealand companies and limited partnerships to record, update and disclose information relating to the natural persons who ultimately own or exercise control over them. The MBIE’s preferred option at the moment, which bears some similarities to the UK system, is that these entities are required to provide certain information about the controlling individuals to the Registrar of Companies. That information would then be publicly available on the Companies Office online register.

The main objective of the proposals is to prevent the misuse of New Zealand corporate structures, and to supplement existing regulatory regimes that apply to certain activities but not necessarily to the legal entity. For instance, New Zealand’s antimoney laundering and counter-financing of terrorism regime was extended with effect from July 1 2018 to impose due diligence and reporting obligations on a wider range of organisations, but these extended obligations may not capture information about New Zealand corporate entities that are not trading and do not engage with an entity with reporting obligations.

The discussion document provides some early detail as to some of the key design features of the proposals. The proposed formulation of who may be considered a ‘beneficial owner’ is wide reaching. The prescriptive limbs capture individuals owning more than 25% of a corporate entity, or holding or controlling more than 25% of the voting rights in a company. In addition, individuals who exercise control over the entity through close personal and family relationships, or contractual arrangements, or a power to appoint and remove directors, general partners or senior managers and also those who hold senior management positions, may be required to have their interests recorded and details disclosed.

The beneficial owner definition, as proposed (albeit in early draft form) may impact on the efficacy of some legitimate arrangements. Custodian shareholders are sometimes used by individuals or groups of individuals who want their financial interest in an entity to remain private, although if caught by the beneficial owner definition, details relating to those individuals may be required to be disclosed.

The MBIE has also released a discussion document, entitled ‘Publication of Directors’ Residential Addresses on the Companies Register’, which discusses whether directors (and shareholders) should have their residential addresses published on the Companies Register, as is presently required in New Zealand. This second paper assumes the introduction of a requirement for directors of New Zealand companies to have a unique director identification number. At this stage, the MBIE is proposing to allow directors (and shareholders) to elect to have an address for service published as opposed to their residential addresses. The MBIE is also seeking public submissions on this discussion document.

Although these proposals are in their preliminary stages, the indication is that there will be changes ahead in respect of the public availability of beneficial ownership information for New Zealand companies and limited partnerships (and certain other corporate information).

Brendan Brown (brendan.brown@russellmcveagh.com) and James Horner (james.horner@russellmcveagh.com) Russell McVeagh Tel: +64 4 819 7748 Website: www.russellmcveagh.com

Poland Tax exemption for new investments

Bartosz Głowacki, MDDP

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rom 1 July 2018, Poland became one special economic zone (SEZ) with extensive tax exemptions available. Since the early 90s, taxpayers have been able to benefit from public aid in the form of the income tax exemption that applies to profits earned in SEZs. Most of the exemptions resulted from qualifying expenses relating to new investments and increases in employment, but only within very specified locations.

Nowadays, taxpayers do not have to start or move their businesses to dedicated areas (SEZs) or ask to extend that area for the purpose of a given investment.

Under the new law, a taxpayer can apply for a decision granting tax exemption on profit derived from new investments. The decision remains valid for 10 years and cannot be extended beyond 15 years. The period depends on the region in which the new investment is to be made.

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The decision will specify the period for which it is valid, as well as the scope of business within which the taxpayer may operate, and the conditions the taxpayer will have to meet in order to be entitled to the tax exemption. These include: • Number of employees and minimum employment period; • A minimum value of qualifying expenses and at the same time the maximum amount that will be taken into consideration when setting a limit for public aid; • The area in which the new investment is to be made; and • The deadline for fulfilling the new investment, after which the expenses will no longer qualify for public aid.

If the requirements mentioned in the decision ultimately are not met, the permit will be cancelled and the tax exemption abolished. The latter will have retroactive effect and the taxpayer will have to return all the public aid (the amount of the tax exemption) received under the decision.

Investors wishing to begin new business interests in Poland are strongly advised to take the new law into account, as the tax exemption available may substantially increase the rate of return of the investment.

In terms of the numbers involved: assuming that a large entrepreneur taxpayer makes an investment in a region where the public aid intensity is 35%, the limit for qualifying expenses is €40 million ($45.7 million). Thirty-five percent of that €40 million is public aid in the form of income tax exemption, which means, that taxable profit of up to around €74 million will be corporate income tax-exempt. Note that very large investments (more than €50 million) will be discussed individually.

Bartosz Głowacki (bartosz.glowacki@mddp.pl) MDDP, Poland Tel: +48 (22) 322 68 88 www.mddp.pl

Serbia Serbian arm’s-length interest rates for 2018

Zvezdana Radulovic, Eurofast

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he Ministry of Finance of Serbia has adopted the ‘rulebook’ on arm’slength interest rates for 2018 (Official Gazette of the Republic of Serbia, No 18/18). The new rulebook applies when determining corporate income tax in 2018, while when determining the income

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International updates tax for 2017, the interest rates to be used are those prescribed in the 2017 version of the rulebook (Official Gazette of the Republic of Serbia, No 21/17).

Interest rates deemed to comply with the arm’s-length principle for 2018 are provided below.

For banks and financial leasing providers: • 3.10% on short-term loans in RSD; • 4.10% on long-term loans in RSD; • 3.19% on loans in EUR and RSD loans indexed in EUR; • 2.45% on loans in USD and RSD loans indexed in USD; • 3.12% on loans in CHF and dinar loans indexed in CHF; • 3.70% on loans in SEK and RSD loans indexed in SEK; • 1.15% on loans in GBP and RSD loans indexed in GBP; and • 3.33% on loans in RUB and RSD loans indexed in RUB.

For other companies: • 5.84% on short-term loans in RSD; • 5.58% on long-term loans in RSD; • 3.10% on short-term loans in EUR and RSD loans indexed in EUR; • 3.42% on long-term loans in EUR and RSD loans indexed in EUR; • 12.97% on short-term loans in CHF and dinar loans indexed in CHF; • 8.21% on long-term loans in CHF and dinar loans indexed in CHF; and • 4.41% on short-term loans in USD and dinar loans indexed in USD. Zvezdana Radulovic (zvezdana.radulovic@eurofast.eu) Eurofast Tel: +381 11 324 14 84 Website: www.eurofast.eu

South Africa Proposed international tax amendments

Anne Bennett, Webber Wentzel

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roposed changes to the Income Tax Act, contained in the 2018 draft Taxation Laws Amendment Bill (DTLAB), were released for comment on July 16 2018. This update focuses on certain international tax-related proposals.

Foreign trusts with South Africaresident beneficiaries The South African Revenue Service (SARS) has previously unsuccessfully

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attempted to broaden the controlled foreign corporation (CFC) rules to target structures involving South Africa (SA)resident beneficiaries of foreign discretionary trusts that hold a majority stake in one or more foreign companies. There are no such proposed changes to the CFC rules in the DTLAB, but it does include amendments aimed at ensuring that certain foreign dividends and foreign capital gains derived by such trusts will not qualify for any type of tax exemption when distributed to SA resident beneficiaries.

Treaty relief and secondary adjustments Since January 1 2015, a secondary adjustment under South African transfer pricing rules has been deemed to be a dividend in specie distributed by the South African taxpayer. Dividends in South Africa are subject to 20% dividends tax unless treaty relief applies. Despite this characterisation, SARS has been adamant that secondary adjustments are penalty provisions and do not qualify for treaty relief. Although many of South Africa’s tax treaties do not explicitly include secondary adjustments in the definition of ‘dividend’ in the dividend article, some do. Article 10(3) of the treaty between South Africa and Ireland, for example, includes in the dividend definition “any income or distribution assimilated to income from shares by the laws of the contracting state of which the company paying the income or making the distribution is a tax resident”.

To prevent taxpayers from arguing that this type of wording clearly entitles them to treaty relief, SARS is proposing that the definition of dividend in the Income Tax Act (which refers to amounts transferred by a South African company in respect of shares in that company) be changed so as to explicitly exclude secondary adjustments. A secondary adjustment will still be deemed to be a dividend, but only for dividends tax purposes. It can no longer (in SARS’s view) be argued to be “a distribution assimilated to income from shares” for treaty purposes. In addition, SARS is seeking to ensure that the administrative requirements for claiming treaty relief are framed in a way that will make it impossible for taxpayers suffering secondary adjustments to comply with them.

These proposals are likely to result in criticism not just from the South African companies affected but also from some of South Africa’s tax treaty partners which could justifiably argue that these amendments are deliberate attempts to negate treaty provisions negotiated in good faith.

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Broadening of CFC ‘high tax’ exemption No income will be imputed from a CFC if that CFC is subject to an aggregate amount of foreign tax which is at least 75% of the amount that would have been payable had the CFC been tax resident in South Africa. The 2018 budget referred to the possibility of dropping the 75% to a lower percentage, given that South Africa’s company tax rate of 28% is now high by global standards.

Disappointingly, no change has been made in this context in the recent proposed amendments.

Anne Bennett (anne.bennett@webberwentzel.com) Webber Wentzel Tel: +27 11 5305886 Website: www.webberwentzel.com

Spain Inheritance agreements under Spanish inheritance tax: Worth anticipating the taxable event?

Pedro Fernandez and Alvaro Checa, Garrigues, Taxand Spain

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ithin the law of succession there are mainly two different systems for the devolution of the estate. On the one hand, civil law countries usually follow the direct accrual of the estate system whereby legal successors acquire the estate directly from the decedent either immediately upon death or upon their acceptance. On the other hand, common law countries generally follow the indirect devolution of the inheritance through an intermediary system whereby the estate is transferred to the personal representative, executor or administrator whose duty is to ascertain the estate, pay the deceased’s debts, administer the estate and then distribute the surplus among the persons entitled to the estate by will or the rules of intestate succession.

This difference between private law systems explains why in some countries, generally civil law countries, the taxpayer under an inheritance is the heir whereas in other countries, normally common law countries, the taxpayer is not the heir but the intermediary, who pays taxes before passing on the estate. Spain, as a civil law country, follows the direct accrual upon acceptance system and therefore the heir is liable to tax under inheritance tax rules.

In general terms, a non-tax resident is only liable to inheritance tax in Spain in so far as he/she receives Spanish-sourced

International updates assets, regardless of the tax residency of the deceased. Further complexity in Spain derives from the fact that each of the 17 regions has powers to enact its own inheritance tax laws. For this purpose, the Spanish legislator has established complicated connecting factor rules for the purpose of determining the regional applicable law both for purely domestic and cross-border inheritances.

In past years, there has been competition among Spanish regions, which has resulted in a race to the bottom. More than half of the regions in Spain (Madrid, Catalonia, Balearic Islands, Canary Islands, Valencia, Murcia, Cantabria, Castilla-La Mancha, Extremadura, Galicia, la Rioja, Ceuta and Melilla) have introduced tax breaks for inheritance and gift tax, some of them even up to 99.9%.

Although the European Court of Justice has decided against the discrimination between non-tax residents and tax residents under inheritance and gift tax in Spain, the prevailing situation still discriminates among tax residents depending on the above-mentioned connecting factors and regional tax laws. In the existing political environment, there is a possibility that a minimum effective taxation could be imposed in all regions.

Foreign holders of Spanish-based assets could cautiously think about transferring their assets in order to enjoy the existing rules. However, in most regions, tax breaks are only available for inheritances and not for gifts, which may imply considerable taxation for the donee. Furthermore, the donor may also be liable to tax on the capital gain accrued under personal income tax. Such capital gain would not be taxable if the transfer was characterised as mortis causa.

There is however another way. Under Spanish private law some regions have their own succession laws, whose origins are older than the era of codification, and which allow inheritance agreements.

Under these contracts, it is possible to transfer a part of the estate during the life of the testator, and such transfer according to the Spanish tax administration would qualify as a mortis causa transfer.

According to EU Regulation 650/2012, a foreigner habitually resident in Spain may enter into an inheritance contract either when he/she is habitually resident in a Spanish region which foresees these contracts (e.g. Catalonia, Balearic islands, Aragon, Galicia, and so on) or, regardless of his/her region of residence, because the relevant national law does (possibly Erbverzichtsvertrag under German and Swiss law). The same would of course apply in relation to Spanish assets if he/she were not resident in Spain and his/her country of residence allowed inheritance agreements.

In the field of succession tax, substantive law is still king, and the way individuals have chosen to transfer their assets under private law will determine the taxable event and will thus be respected by the tax authorities.

Pedro Fernandez (pedro.fernandez@garrigues.com) and Alvaro Checa (alvaro.checa@garrigues.com) Garrigues, Taxand Spain Website: www.garrigues.com

Switzerland New guidelines that allow for deducting equity incentive programme expenses in Swiss statutory accounting Renaat van den Eeckhaut and David Wigersma, Deloitte

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he Federal Tax Administration has issued a new circular letter (number 37A), which confirms the existing practice of the majority of cantons for the deductibility of equity incentive expenses. This move is expected to unify the approach of different cantonal tax administrations. This being said, some tax administrations do not agree with certain provisions of the circular letter, notably with the provision related to the deductibility of expenses for shares.

This update gives a short overview of different situations and the guidelines contained in the circular letter.

Own shares purchased by the employing entity At purchase, the shares are booked as own shares in the statutory accounts at the acquisition price. When the shares are granted to employees the following applies: • The difference between the acquisition cost of the shares and the fair market value (FMV) at share delivery to the employee is considered a deductible expense or reportable income; and • If the shares are delivered to the employee at a reduced price, the difference between the FMV and the price paid by the employee is considered a deductible expense.

Despite the rules published in the circular letter, some tax administrations do not deem the expense as being deductible if the employee is not allowed to choose between the delivery of shares or a lumpsum cash payment.

Employee participation in the parent company If the employee is not directly participating in the employing entity’s capital but rather in the equity of the parent company, the following applies: • The difference between the price (at arm’s length) paid for the shares by the employing entity to the parent company and the purchase price paid by the employee is a deductible expense at the level of the employing entity in the majority of cantons.

Accruals for share awards If shares are subject to vesting periods (i.e. awards are granted that entitle the employee to receive shares if certain conditions are met at the end of the vesting period), the expenses incurred from such shares are typically accrued. The circular letter confirms the deductibility of such accruals.

Deloitte’s view It is recommended that companies check whether their existing accounting and recharge mechanism is in line with the rules as set out in the new circular letter.

Depending on the specific equity incentive scheme, there might be additional room to optimise the way costs are allocated and deducted. We strongly recommend applying for a ruling with the competent cantonal tax authority, as some authorities do not agree with all of the provisions of the newly issued circular letter.

Renaat van den Eeckhaut (rhvandeneeckhaut@deloitte.ch) and David Wigersma (dwigersma@deloitte.ch) Deloitte Tel: +41 58 279 6986 and +41 58 279 9260 Website: www.deloitte.ch

Turkey Turkey introduces new exceptions on FX loans

Share creation by the employer through capital increase If new shares are created by means of a capital increase, such shares can be generated by booking the new shares against a liability for employee benefits. As a result, the difference between the FMV and the price paid per share by the employee will be accounted for as an expense, deductible in most cantons.

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Burçin Gözlüklü and Ramazan Biçer, Centrum Consulting

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he Turkish Cabinet released a decree on January 25 2018 to restrict foreign exchange loans. Thus, as of May 2 2018, the use of foreign currency loans from

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International updates abroad has fallen under the conditions of foreign exchange income.

Accordingly, those who have no foreign exchange income will not be able to use loans from residents whether abroad or in Turkey.

As we discussed in a previous article, the Turkish government has been revisiting FX loan restrictions, introducing new exceptions for FX loans from abroad.

What are the new exceptions?

The Central Bank of Turkey has recently amended the circular on the movement of capital and provided a new exception regarding the FX loans of Turkish subsidiaries of foreign companies.

Fully owned Turkish subsidiaries of foreign companies will be able to obtain FX loans from other group companies resident abroad without being subject to the FX borrowing restrictions.

In this regard, direct or indirect control of Turkish subsidiaries will not change the outcome, and such Turkish companies will be able to receive FX loans from their parent companies or sister companies.

However, they must provide the company’s share ownership documents to the intermediaries (e.g. banks) as the transactions are concluded.

Conditions required for group companies to benefit from the FX loan exception To benefit from this new exception, the following conditions must be met: • The borrowing party must be a Turkish subsidiary of a foreign company; • The Turkish subsidiary must be directly or indirectly 100% controlled; • Full ownership can be proved by providing certain required documents (e.g. trade registry records); and • The requested documents must be submitted to the intermediary financial institution.

Other exceptions introduced Public institutions, in line with their obligations determined by an international agreement, will be able to extend FX loans to their affiliates in Turkey.

For example, if a public institution obtains an FX loan from an international organisation (e.g. World Bank) and the agreement allows, then that institution will be able extend FX loans to the affiliates without FX restrictions.

However, if there is a loan limit set out in the international agreement, the amount of FX loan to be made available by the public institutions to their affiliates cannot exceed the loan limit determined in the agreement.

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Final evaluations Under the existing legislation, FX loans with a balance of more than $15 million granted to residents in Turkey have no restrictions and Turkish companies can freely obtain such loans.

If the amount of FX loan is less than $15 million, certain restrictions apply. If none of the exceptions are applicable, a Turkish company will not be able obtain an FX loan from abroad unless it has sufficient FX income.

However, this rule has been abolished for companies solely owned by foreign companies under the new amendment, and FX loans from group companies resident abroad will be regarded as being within the exceptions.

Thus, fully owned Turkish subsidiaries of foreign companies will be able to obtain FX loans without being subject to restrictions.

Burçin Gözlüklü (burcin.gozluklu@centrumauditing.com) and Ramazan Biçer (ramazan.bicer@ centrumauditing.com) Centrum Consulting Tel: +90 216 504 20 66 Website: centrumauditing.com

US Inbound New York State Bar Association report on BEAT Jim Fuller and David Forst, Fenwick & West

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n a previous column we identified a number of issues associated with the base erosion and anti-abuse tax (BEAT) that operates under certain circumstances to reduce or deny the benefit of certain deductible payments made by a US taxpayer to a related foreign person. Since the writing of that column, the New York State Bar Association (NYSBA) issued a report on the BEAT and made a number of observations and recommendations. We highlight a few here.

The NYSBA has suggested that the Treasury should consider not treating payments as base eroding payments if they are made pursuant to certain transactions that are effectively conduit transactions. An example situation would be where a US person acts as a ‘waystation’ for transactions between two foreign related parties in a shared services context. Of course, existing anti-conduct principles could be applied even in the absence of any regulatory action, but it certainly would be helpful for regulations to confirm that conduit

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arrangements that are not fundamentally base eroding do not raise BEAT concerns.

The BEAT rules do not include the cost of goods sold (COGS) as base eroding payments, and Congress expressed a clear intent that COGS should not be treated as base eroding payments. Certain commentators, including the NYSBA, have observed that under certain circumstances COGS may include the value of intellectual property connected with the sale. The NYSBA stated that it does not recommend that the Treasury writes regulations limiting the scope of the COGS exception to payments that include the value of intellectual property. The report noted that Congressional intent was clear that COGS should not be treated as base eroding payments. Indeed, any such regulation would be contrary to Congressional intent.

The NYSBA recommended that the services cost method (SCM) exclusion be construed to mean that the actual cost element of SCM services be excludable from base erosion payments, irrespective of whether a markup on such services is charged (for example, because the foreign country’s transfer pricing law requires a markup). This is a fair reading of the statute and Congressional intent, since in our view the exclusion focuses on the nature of the services performed and not the precise amount charged.

The NYSBA points to a possible statutory ambiguity regarding whether the base erosion percentage of any net operating loss (NOL) is determined with respect to the year of its origination or the year of its utilisation. The NYSBA said it believes that the correct grammatical read of the statute is that modified taxable income for the year is calculated without the relevant amount of NOL deduction allowed for the same year (therefore irrespective of the year in which the base erosion percentage of such NOL is determined). This reading also funds support from the context of the statute.

The NYSBA also recommended that the Treasury carve out an exception for payments made by a US shareholder to its controlled foreign corporation (CFC) when the payment is Subpart F income to the CFC. Jim Fuller (jpfuller@fenwick.com) and David Forst (dforst@fenwick.com) Fenwick & West Website: www.fenwick.com

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THE GP SURGERY

Taxation of the digital economy – is it even worth it?

I don’t know if it is because of my age, or not using social media much, or because I have spent more than 30 years advising companies that actually manufacture physical goods and sell them to customers, but I don’t really understand the current enthusiasm on the part of the OECD, the EU and governments to investigate ways to change the taxation of the ‘digitalised’ economy.

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f course, I recognise that recent developments in technology have increased the speed of communication and data analysis, and that individuals and machines can now share data remotely, but most businesses supply goods or services to customers in essentially the same way as they did in the past, and the commercial transaction creates taxable income, to which the accepted principles of domestic and international taxation apply.

What am I missing and what is the technology that is so urgent and important that the international organisations and governments are rushing to devise new rules for?

The EU impact assessment refers to an increase in the number of information and communication technology companies in the list of the largest companies by market capitalisation, but ‘technology’ by itself does not appear to be the issue. The activities of some on the list, which produce physical goods or software, or provide a faster method of buying physical goods, do not seem to be the subject of proposed new taxes. The target is only those whose business is in social media and who derive some value, whether directly commercialised or not, from exchanges of information with users or ‘prosumers’ as we now are supposed to call them.

While this class of company may be new and have many participants, it does not replace or alter the essential economy that most businesses, large and small, work within.

Nevertheless, it has become the focus of international and domestic policy debate. We should bear in mind that corporate income tax is generally less than 10% of fiscal revenues, and the incremental revenue from this small subset of technology companies is, while unquantified, unlikely to be material in any context. It seems legitimate to ask whether this effort is justified.

The rush to tax of the digital economy now appears to have gained its own momentum, and no doubt there will be proposals for international action to address the issue, whatever the level of tax that may be raised. We can look forward to interim measures that, like many temporary taxes, may

Giles Parsons worked as an in-house professional at American multinational Caterpillar for more than 20 years, setting its tax policy and coordinating its tax services. Before that, he spent nearly 10 years at PwC. He is the also the chair of the European direct tax committee at the Tax Executive Institute (TEI). In this column, he draws upon his experience to give his perspective on today’s pressing tax issues, and answer questions from readers. become permanent and are designed to be outside of international tax treaties, but because of the dominant market position of the targeted companies could well be passed on to consumers and so miss their target. The long-term solution, if the EU proposal is any indication, will create new PEs and alter the current balance between source and residence, and is therefore likely to have significance much wider than the digitalised context.

Whatever the outcome is, international investors and their tax directors will have to wait for a long time for any increased certainty about taxation.

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Not another international tax collaboration initiative…

September 2018

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Because tax doesn’t have to be taxing. A less-than-serious look back at some of the quirkier tax stories from the past month.

Eels, badger hair and anvils are off the American menu

Sharp suits for Sean’s Accountants

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Your secrets are safe with me, Mr Bond

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t’s not often that accountants make the showbiz news for anything other than a tax avoidance scandal, but a quirky payment method by James Bond star Sean Connery caught Tax Relief’s eye.

Meg Simmonds, an archivist for Eon Productions, revealed in July that there are “virtually no” Bond costumes

from the 1960s. She said this is because Connery, who played the iconic spy from 1962 to 1967, and again in 1971 and 1983, kept most of his suits for himself.

For keepsakes? For nostalgia? Well, not quite.

In an auction for the coat that Connery wore in Dr No, Simmonds found out that the

vendor was in fact Connery’s accountant, leading several news outlets to conclude that 007 was paying his accountant in sharp suits.

The Connery family has made the news on tax issues on more than one occasion, so it’s unlikely that this small revelation will leave them shaken… or stirred.

Bishop bangs bag burglar

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soon-to-be partner at Big 4 firm PwC took down an alleged burglar – while dressed as a bishop.

Max Lixingstone-Learmouth was taking part in a world-record attempt relay race when he heard someone shout “stop that man” at a suspected handbag thief, who he chased down over 100 metres before pinning him against a wall with his crosier.

“It’s not your day if you’ve been run down by a bishop,” Livingston-Learmouth told the man, who must have felt that God was not quite on his side that day.

Tax Relief recommends that next time he finds himself being chased down by a member of the clergy he runs in a straight line, rather than diagonally.

PwC’s security team get ready for a day guarding the office

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September 2018

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ile E Coyote will feel his chances of catching the Road Runner are getting even worse if a new round of 10% US tariffs on Chinese imports are imposed as planned in September.

The list includes a range of bizarre products including, unfortunately for the hapless cartoon character, anvils.

Here are some of the more interesting items on the list: • Badger hair for shaving brushes • Human hair • Manure spreaders • Bovine semen • Live eels, carp and other fish • Shark fins • Baseball gloves • Stroboscopes • Anvils and portable forges • Magnifying glasses