Latest news from international tax and transfer pricing 

Government introduces law targeting foreign investors and multinationals 

The Australian Government has introduced into Federal Parliament various Bills which seek to target foreign investors and multinationals by giving effect to a number of 2018-19 Federal Budget measures (refer to the Government’s media release for more detail). 

Specifically, Treasury Laws Amendment (Making Sure Foreign Nationals Pay Their Fair Share of Tax and Other Measures) Bill 2018, proposes a package of reforms to: 

  • improve the integrity of the income tax law for arrangements involving stapled structures and to limit access to tax concessions for foreign investors by increasing the Managed Investment Trust (MIT) withholding rate on fund payments that are attributable to “non-concessional MIT income” to 30 per cent (subject to transitional rules, applicable to fund payments made on or after 1 July 2019 in respect of the 2019-20 or later income year) 
  • modify the thin capitalisation rules to prevent double gearing structures (applicable to income years starting on or after 1 July 2018) 
  • limit access to the withholding tax exemption for superannuation funds for foreign residents (applicable to income that is derived by a superannuation fund on or after 1 July 2019, subject to transitional rules), and 
  • codify and limit the scope of the sovereign immunity tax exemption (applicable from the 2019-20 income year, subject to transitional rules). 

In addition, Treasury Laws Amendment (Making Sure Multinationals Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2018 proposes, among other things, the following: 

  • amendments to the thin capitalisation rules

The Bill proposes to require entities to align the value of their assets for thin capitalisation purposes with the value included in their financial statements. This amendment applies from 7.30 pm (by legal time in the Australian Capital Territory) on 8 May 2018, subject to a transitional rule to allow reliance on revaluations of assets made prior to that time until the last day before the start of the income year commencing on or after 1 July 2019.  

In addition, amendments are proposed to ensure that for income years beginning on or after 1 July 2019, non-ADI foreign controlled Australian tax consolidated groups and multiple entry consolidated (MEC) groups that have foreign investments or operations are treated as both outward investing and inward investing entities. Entities that are classified as both outward investing and inward investing entities are disqualified from applying certain thin capitalisation rules (e.g. the worldwide gearing test). 

  • amendments to extend the definition of Significant Global Entity (SGE) 

The expanded concept of a SGE will cover groups of entities headed by an entity other than a listed company in the same way as it applies to groups headed by a listed company and to ensure that the criteria for determining a SGE will not be affected by the exceptions to requirements applying to consolidated or materiality rules in the applicable accounting rules.  

The Bill also introduces the narrower concept of “country-by-country reporting entity” which will also apply to certain corporate tax entities that are required to lodge general purpose financial statements with the Australian Taxation Office (ATO). 

Entities that are SGEs are potentially subject to the Diverted Profits Tax, the Multinational Anti­Avoidance Law and higher administrative  penalties.  

The amendments will generally apply in relation to income years or other periods starting on or after 1 July 2018, subject to a transitional rule for the application of the higher penalties that can apply to an SGE.  

Comments from ATO on its approach to transfer pricing and other global risks 

The ATO Deputy Commissioner, Mark Konza, in a speech, discussed the future of transfer pricing covering the Diverted Profits Tax and Multinational Anti­Avoidance Law. Comments were also provided on the ATO’s bolstered ability to detect and deal with cross­border misalignment of value and tax outcomes and its future focus on transfer pricing in the pharmaceutical industry. The speech also makes comments concerning the International Compliance Assurance Programme (ICAP), its focus on the energy and resources sector (exploration expenditure, hubs (particularly marketing hubs) and related party financing including the use of derivatives to avoid interest withholding tax and cross-currency interest rate swaps), and its expectation that taxpayers will shift to using the arm’s length debt test for thin capitalisation purposes. 

US tax reform developments

To keep up to date with the latest developments, news and implications of tax reform in the United States (US), visit PwC’s dedicated website. The website is regularly updated, and brings together insights from business specialists across the globe for US inbound and outbound organisations navigating change. Some recent updates to note include: 

  • Tax reform readiness – The politics of implementation. 
  • Tax reform readiness – Implications of the Section 965 proposed regulations (the ‘toll charge’ on deemed repatriated earnings). 
  • Tax reform readiness – Understanding the Section 199A proposed regulations (the deduction for qualified business income from a trade or business operated directly or through a passthrough entity). 
  • Tax reform readiness – Do the proposed depreciation regulations provide a bonus? 
  • House Ways and Means Committee approves ‘tax reform 2.0’ bills. 
  • IRS releases draft Section 59A form for computing BEAT. 
  • IRS releases draft Section 965 forms and new election templates. 
  • IRS advises REITs on income from non-US subsidiaries, qualification rules. 
  • Preliminary highlights of the proposed GILTI regulations under Section 951A (the determination of a US shareholder’s global intangible low-taxed income (GILTI) inclusion). 

US Supreme Court decision triggers state tax consequences for US inbound companies 

Following a recent United States Supreme Court decision (South Dakota v Wayfair), states are no longer restricted from imposing sales tax collection responsibility only on entities with an in-state physical presence. The decision could have a significant impact on entities making sales into US states, and potentially imposes unique burdens and considerations for US inbound companies regarding both sales and income taxes imposed by US states. 

US Court of Appeals decision concerning transfer pricing dispute 

The US Court of Appeals for the Eighth Circuit vacated and remanded the Tax Court’s memorandum opinion in Medtronic, Inc. v. Commissioner, which had found substantially in favour of medical device manufacturer Medtronic in its transfer pricing dispute with the US Internal Revenue Service. 

OECD and BEPs developments 

The Organisation for Economic Cooperation and Development (OECD) has released updated guidance for tax administrations and multinational groups on Country-by-Country reporting (base erosion and profit shifting (BEPS) Action 13). The new guidance includes questions and answers on the treatment of dividends received and the number of employees to be reported in cases where a multinational enterprise uses proportional consolidation in preparing its consolidated financial statements and contains a table that summarises existing interpretative guidance on the approach to be applied in cases of mergers, demergers and acquisitions. 

The OECD has also released the fourth round of the BEPS Action 14 peer review reports on improving  tax dispute resolution mechanisms. The reports of Australia, Ireland, Israel, Japan, Malta, Mexico, New Zealand and Portugal contain targeted recommendations that will be followed up in stage 2 of the peer review process.  

The OECD has published new transfer pricing country profiles for Costa Rica, Greece, Republic of Korea, Panama, Seychelles, South Africa and Turkey. In addition, it has also updated the information contained in Singapore’s profile.

The OECD continues to publish and update the transfer pricing country profiles for OECD and all interested members of the  Inclusive Framework on BEPS to reflect the current state of each country legislation and practice regarding the application of the arm’s length principle and other key transfer pricing aspects 

In other developments: 

  • The OECD has released public comments received on BEPS discussion draft on the transfer pricing aspects of financial transactions. PwC’s global submission observes that while the discussion draft provides helpful and informative guidance to taxpayers and tax authorities, it also highlights areas where divergence of views of different local country tax authority interpretations may actually increase the risk of double-taxation. 
  • Saudi Arabia has signed the Multilateral (MLI) BEPS Convention. In addition, Israel and Lithuania have deposited their instruments of ratification for the MLI. 
  • The Former Yugoslav Republic of Macedonia has joined the Inclusive Framework on BEPS. 

OECD Tax Policy Reforms 2018  The OECD has released it publication ‘Tax Policy Reforms 2018’ which describes the latest tax reforms across 35 OECD members, as well as in Argentina, Indonesia and South Africa. The report identifies major tax policy trends and highlights that economic stimulus provided by fiscal policy, including to a large extent through tax policy, has become more significant. Significant tax reform packages were introduced in Argentina, France, Latvia and the United States. 

European Commission concludes that Luxembourg did not grant State aid 

The European Commission (EC) issued a press release concerning its final decision in the State aid investigation into tax rulings granted by the Luxembourg tax authorities to a Luxembourg subsidiary of the McDonald’s group related to the treatment of a branch established in the United States. The EC found that Luxembourg did not grant State aid and that Luxembourg correctly applied the Luxembourg-US tax treaty and domestic provisions.