Latest news from international tax and transfer pricing

Australian Parliamentary Inquiry into Multilateral Instrument

The Australian Federal Parliamentary Joint Standing Committee on Treaties (the Committee) has commenced an inquiry into the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). The MLI gives effect to the tax treaty recommendations contained in the Organisation of Economic Co-operation and Development (OECD)/G20 Base Erosion and Profit Shifting (BEPS) Reports published on 5 October 2015.

As part of the Inquiry, the Committee has released a National Interest Analysis which sets out comments regarding the application date of the MLI. Specifically, it notes the date on which the provisions of the proposed MLI takes effect to modify Australia’s affected bilateral tax treaties will vary. Timing is contingent upon completion by other treaty parties of their domestic processes for ratification. The earliest dates on which the provisions of the MLI could take effect in Australia are:

  • In respect of withholding taxes, on income derived on or after 1 January 2019.
  • In respect of all other taxes, for income years commencing on or after 1 July 2019.
  • In respect of the mutual agreement procedure (Article 16) and mandatory binding arbitration (Articles 18 to 26), generally after the proposed treaty enters into force for each of the parties.

Following its entry into force, the MLI will modify those bilateral tax treaties that have been notified as ‘Covered Tax Agreements’ by both Australia and bilateral tax treaty partners that are parties to the MLI.

The Committee, which has invited submissions by 8 September 2017, is due to table its report by 6 December 2017.

No further appeal in major transfer pricing decision

The taxpayer has discontinued its application for special leave to appeal to the High Court against the decision of the Full Federal Court in Chevron Australia Holdings Pty Ltd v Commissioner of Taxation [2017] FCAFC 62. In this case, the Full Federal Court found for the Commissioner in relation to the arm’s length pricing on an intragroup, cross-border debt under the transfer pricing provisions. Refer to the May edition of TaxTalk Monthly for a background of the Full Federal Court’s decision.

In the Government’s response to the withdrawn appeal, it states initial estimates of the Australian Taxation Office (ATO) are that the Chevron decision will bring in more than AUD10 billion of additional revenue over the next ten years as a result of transfer pricing of related party financing alone.

Australia signs CbC report exchange arrangement with USA

On 1 August 2017, Australia and the United States of America (USA) signed a bilateral Competent Authority Arrangement, which sets out the rules and procedures to exchange Country-by-Country (CbC) Reports.

NZ Government’s final decisions on proposals to tackle BEPS

The New Zealand (NZ) Government has announced its final decisions on proposals to tackle base erosion and profit shifting (BEPS). The new measures announced aim to:

  • Stop foreign parents charging their NZ subsidiaries high interest rates to reduce their taxable profits in NZ.
  • Stop multinationals using artificial arrangements to avoid having a taxable presence in NZ.
  • Ensure multinationals are taxed in accordance with the economic substance of their activities in NZ.
  • Counter strategies that multinationals have used to exploit gaps and mismatches in different countries’ domestic tax rules to avoid paying tax anywhere in the world.
  • Make it easier for NZ Inland Revenue to investigate uncooperative multinational companies.

It is expected that these measures will be included in a tax bill to be introduced by the end of 2017, and will be enacted by July 2018. For further information, refer to PwC NZ’s Tax Tips Alert, which also highlights several key aspects of the Multilateral Instrument recently signed by the NZ Government.

Hong Kong SAR Government previews forthcoming BEPS legislation

On 31 July 2017, the Hong Kong SAR Government released its consultation report on measures to implement the BEPS minimum standards into the Hong Kong Inland Revenue Ordinance. The report gives a strong indication of the contents of the legislation that now will be put to the Legislative Council – either as part of a BEPS Bill before the end of 2017 (covering transfer pricing, dispute resolution, and CbC reporting), or via a MLI Bill by mid-2018. Refer to PwC Global’s Tax Insights for further information.

OECD and BEPS developments

The OECD has released a report on Neutralising the Effects of Branch Mismatch Arrangements (BEPS Action 2). The report identifies five basic types of branch mismatch arrangements and sets out recommendations for improvements to domestic law.

The Global Forum on Transparency and Exchange of Information for Tax Purposes has also released the first ten outcomes of a new and enhanced peer review process, aimed at assessing compliance with international standards for the exchange of information on request between tax authorities. Ireland, Mauritius and Norway received an overall rating of ‘compliant’. Australia, Bermuda, Canada, Cayman Islands, Germany and Qatar were rated ‘largely compliant’. Jamaica was rated ‘partially compliant’.

In other OECD developments:

  • The Platform for Collaboration on Tax (a joint initiative of the International Monetary Fund, OECD, United Nations and World Bank Group) is seeking public feedback on a draft toolkit for dealing with the taxation of offshore indirect transfers (the sale of an entity owning an asset located in one country by a resident of another). The taxation of offshore indirect transfers has increasingly become a practice by which some multinational corporations seek to minimise their tax liability. Comments are due by 25 September 2017.
  • The OECD has released public comments received on the draft contents of the 2017 Update to the OECD Model Tax Convention. 
  • Nigeria has signed the MLI and Common Reporting Standard (CRS) Multilateral Competent Authority Agreement to tackle international tax avoidance and evasion.

UK’s HMRC issues updated draft guidance on corporate interest restriction

The United Kingdom’s (UK) Her Majesty’s Revenue and Customs (HMRC) is seeking comments on a second tranche of draft guidance about the UK Government’s corporate interest restriction rule, which applies from 1 April 2017. The rule aims to restrict a group’s deductions for interest expense and other financing costs to an amount which is commensurate with its activities taxed in the UK, taking account of how much the group borrows from third parties. This latest tranche of draft guidance reflects the updated legislation published on 13 July 2017. Comments on the draft guidance are due 31 October 2017.

Luxembourg proposes IP tax regime

On 4 August 2017, Luxembourg’s Finance Minister introduced a bill for a new Intellectual Property (IP) regime. The proposed regime would be a new beneficial tax regime based on the ‘modified nexus’ approach. The proposal is meant to attract investment while complying with new European Union and international tax standards. In particular, as far as IP regimes are concerned, it would comply with the conclusions reached in the OECD’s BEPS report on Action 5, related to the substantial activity requirement. If enacted, the provisions of the bill would take effect in the tax year 2018, and apply in parallel with the former Luxembourg IP regime. Refer to PwC Global’s Tax Insights for further information.