Full Federal Court dismisses taxpayer’s appeal on transfer pricing matters

On 21 April 2017, the Full Federal Court in Chevron Australia Holdings Pty Ltd v Commissioner of Taxation [2017] FCAFC 62 unanimously dismissed the taxpayer’s appeal against the decision of the Federal Court. The Federal Court found in favour of the Commissioner and dismissed the taxpayer’s appeal against the Commissioner’s decision in relation to objections against amended income tax assessments and administrative penalty assessments.

For each of the assessments in question, the Commissioner disallowed deductions claimed by the taxpayer in respect of interest incurred on loans provided to the taxpayer by a related company resident in the United States. The amended assessments were issued to the taxpayer based on the Commissioner’s view that the interest rate applying to the loan exceeded the arm’s length rate, and thus the deductions claimed were excessive.

The dispute centred on the Commissioner’s application of the transfer pricing rules in Division 13 of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of each of the 2004 – 2008 financial years, and Subdivision 815-A of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of each of the 2006 – 2008 financial years. The Full Federal Court agreed with the approach taken by the primary Judge and held that the taxpayer did not satisfy the onus of proving that the Commissioner's assessments were excessive.

Refer to TaxTalk Monthly: November 2015 for a background to the decision of the Federal Court.

The Full Federal Court agreed that there was no reason to depart from the primary judge’s conclusion that (in the particular circumstances) an independent borrower would have included security and operational and financial covenants in the loan terms, which would have resulted in a lower interest rate than that actually charged.

In relation to cross-border guarantees, the Full Federal court accepted that it may be reasonable to expect that a taxpayer would be required to pay a fee to a parent entity for any security provided.

New Zealand proposes changes to the taxation of employee share schemes

On 6 April 2017, the New Zealand government introduced proposed changes to the taxation of employee share schemes (ESS) (Taxation (Annual Rates for 2017-18, Employment and Investment Income, and Remedial Matters) Bill). If enacted, the new law will fundamentally change the way ESS are taxed in New Zealand. Refer to PwC New Zealand’s Tax Tips Alert for further information.

US IRS releases Advance Pricing and Mutual Agreement Program Report

The United States (US) Internal Revenue Service (IRS) Advance Pricing and Mutual Agreement Program Report reveals that applications for Advanced Pricing Agreements (APAs) for 2016 decreased from the record high number of requests filed in 2015. The 2015 surge was driven by the then impending effective date of the new APA procedural requirements and higher user fees. Refer to PwC Global Tax Insights for further information.

China’s SAT issues new measures for special tax investigation adjustments and mutual agreement procedures

The Chinese State Administration of Taxation (SAT) issued a Public Notice regarding the Release of the ‘Administrative Measures for Special Tax Investigation Adjustments and Mutual Agreement Procedures’ (Public Notice [2017] No.6). The Notice, which is effective from 1 May 2017, provides rules on risk management, investigations and adjustments, administrative review and mutual agreement procedures regarding special tax adjustments, and other relevant issues. For further information, refer to PwC Global Tax Insights.

OECD and BEPS developments

Almost fifty delegates from fourteen countries and seven organisations gathered in Tbilisi for the second regional meeting of the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) in the Eastern Europe and Central Asia region. Participants discussed the status of implementation of the BEPS measures and focused on recent developments in transfer pricing and the tax treaties area, including the country by country (CbC) reporting and the tax treaty-related minimum standards.

In further BEPS-related developments, the OECD has also released the following:

·       public comments received on draft examples prepared as part of the follow-up work on the interaction between the treaty provisions of the report on BEPS Action 6 and the treaty entitlement of non-CIV funds.

·       new guidance for Automatic Exchange of Financial Account Information in Tax Matters (the Common Reporting Standard [CRS]). The guidance includes a series of additional CRS-related Frequently Asked Questions, and the second edition of the Standard for Automatic Exchange of Financial Account Information in Tax Matters.

·       further guidance to provide essential information that will give certainty to tax administrations and multinational groups on implementation of Country-by-Country (CbC) reporting (BEPS Action 13).

In other developments:

·       Belize and the Cayman Islands have joined the inclusive framework on BEPS.

·       The Canadian Revenue Agency has issued a reporting form and additional guidance for preparing CbC reporting in Canada. Refer to PwC Global Tax Insights for more information.

·       Italy has issued dates for implementation of CbC reporting. For further information, refer to PwC Global Tax Insights.

Singapore-Australia Free Trade Agreement

The Minister for Trade, Tourism and Investment tabled the agreement to amend the Singapore-Australia Free Trade Agreement and the accompanying National Interest Analysis in the House of Representatives. The review of the free trade agreement is a key plank of the Singapore-Australia Comprehensive Strategic Partnership, which was announced in 2015.

Australia – EU Free Trade Agreement scoping exercise

Australia and the European Union (EU) have successfully concluded a joint scoping exercise on a future free trade agreement between the two economies. This is a key step toward the launch of negotiations. Both sides will now work through their domestic processes to secure approval of a negotiating mandate. Refer to the media release from the Minister for Trade, Tourism and Investment for further information.

Taxes on labour income across the OECD continues to decrease

According to the latest OECD Taxing Wages report, taxes on labour income for the average worker across the OECD decreased for the third consecutive year during 2016, dropping to 36 per cent of labour costs. The decrease in the average tax wedge - the difference between labour costs to the employer and the corresponding net take-home pay - is partly explained by reforms in some countries to reduce taxes on labour income.

OECD report on technology tools to tackle tax evasion and tax fraud

The OECD has released a report which outlines some of the technology tools implemented by tax authorities to address tax evasion and tax fraud, focussing on electronic sales suppression and false invoicing. The report also discusses complementary work that tax authorities are undertaking to address the cash economy and sharing economy, which, although not types of tax evasion and fraud themselves, can facilitate it.

Solutions for common challenges in the design and operation of VAT systems

In the fourth meeting of the OECD Global Forum on Value Added Tax (VAT) on 12-14 April 2017, tax experts discussed solutions for common challenges in the design and operation of VAT systems. The OECD’s Deputy Secretary-General announced the release of the Recommendation of the Council on the Application of Value Added Tax/Goods and Services Tax (GST) to the International Trade in Services and Intangibles. This recommendation is the first OECD Act in the area of VAT and it is open to ‘adherence’ by non-OECD members. The VAT/GST Recommendation incorporates the International VAT/GST Guidelines, which were developed with the active involvement of a wide range of countries beyond the OECD and the global business community.

US tax reform principles announced by Trump Administration

The Trump Administration's principles for tax reform were released in the last week of April 2017. At a very high level, they call for lowering business tax rates in the United States (US) to 15 per cent for corporations, a move to a territorial tax system from the current US worldwide tax system, enacting a one-time repatriation tax on the foreign earnings of US companies, and moving from seven to three individual tax brackets. Refer to the TaxTalk Alert on 26 April 2017.