Latest news from international tax and transfer pricing
ATO guidance materials on DPT coming soon
The Australian Taxation Office (ATO) plans to soon issue the following guidance materials to assist taxpayers understand how the Diverted Profits Tax (DPT) law (which applies from 1 July 2017) will be applied and administered:
· Law Companion Guidelines to explain how the new DPT law will apply and to clarify new concepts,
· Practical Compliance Guidelines to illustrate by way of examples the relative risk of adopting certain types of arrangements and in respect of different industry sectors, and
· Practice Statements setting out the ATO’s internal oversight framework and the process for the issue of a DPT assessment.
ATO guidance on the use of internal derivatives by multinational banks
The ATO has published Practicl Compliance Guideline PCG 2017/8, which provides guidance on the use of internal derivatives by multinational banks. The Guideline discusses the Commissioner's views on the operation and application of Australia's permanent establishment attribution rules to certain funding activities of banks. (These attribution rules are set out in detail in TR 2001/11 and TR 2005/11).
This Guideline extends the Commissioner’s practical approach to applying the arm's length principles to internal derivatives of multinational banks. It sets out the circumstances in which internal derivatives, that represent arm’s length dealings, can be used as an appropriate proxy for the purposes of allocating or attributing a bank's income (gains), expenses (losses) or profit for the purposes of the transfer pricing rules. The Guideline also provides guidance on the Commissioner’s compliance expectations for banks seeking to rely on it.
Multilateral BEPS convention signed
Australia was one of 76 countries and jurisdictions that signed, or formally expressed their intention to sign, the new Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) (the Multilateral Instrument) as part of the Organisation of Economic Co-operation and Development (OECD)/G20 BEPS Project.
The Multilateral Instrument will modify existing bilateral tax treaties of those participating jurisdictions to quickly implement the tax treaty measures developed in the course of the BEPS Project. The Multilateral Instrument contains 26 Articles dealing with a range of issues in tax treaties, including the minimum standards – and various other recommendations – of Action 6 (treaty abuse) and Action 14 (dispute resolution) and some of the other best practices of Action 2 (hybrids) and Action 7 (permanent establishments), as well as a new optional standard on binding arbitration for cross-border treaty disputes. Further details of the Articles in the Instrument are set out in PwC Global’s Tax Policy Bulletin.
Modifications to existing tax treaties will depend on choices made by both participating jurisdictions, and will require ratification of the Multilateral Instrument by both jurisdictions. The first modifications to bilateral tax treaties are expected to enter into effect in early 2018.
Australia has indicated that the Multilateral Instrument should apply to all of its existing bilateral treaties with the exception of the recently renegotiated German treaty, which now includes extensive provisions to deal with BEPS. However, not all of Australia’s treaty partners have yet signed the Multilateral Instrument (or indicated an intention to do so), or listed their treaty with Australia as one that would be covered by the Multilateral Instrument in their adoption choices. This means that, at least in the short to medium term, these treaties will not be impacted by the Multilateral Instrument. We anticipate that the Multilateral Instrument could potentially take effect in Australia from 1 January 2019 (for rules relating to withholding taxes) and 1 July 2019 (for rules relating to other taxes), subject to its ratification by Australia’s treaty partners that have also chosen to adopt the Multilateral Instrument.
For further information in relation to the issues arising from an Australian perspective, refer to PwC Australia’s TaxTalk Alert.
Other OECD BEPS developments
The OECD has released the key document which will form the basis of the peer review of the BEPS Action 6 minimum standard on preventing the granting of treaty benefits in inappropriate circumstances. Action 6 is one of the minimum BEPS standards which will be subject to peer review to ensure its timely and accurate implementation. The document includes the Terms of Reference, which sets out the criteria for assessing the implementation of the Action 6 minimum standard, and the Methodology which sets out the procedural mechanism by which the review will be conducted.
The OECD has also released a discussion draft on the BEPS Action 8 – implementation guidance on hard-to-value intangibles described in Chapter VI of the Transfer Pricing Guidelines for public comment. The Final Report on Actions 8-10 of the BEPS Action Plan (‘Aligning Transfer Pricing Outcomes with Value Creation’) mandated the development of such guidance. Refer to PwC Global’s Tax Insights for further information.
In other developments:
· The OECD has invited taxpayer input on dispute resolution peer reviews of the Czech Republic, Denmark, Finland, Korea, Norway, Poland, Singapore and Spain. This stage of these peer reviews will evaluate the implementation of the BEPS Action 14 minimum standard by seeking taxpayer input on specific issues relating to access to the mutual agreement procedure (MAP), clarity and availability of MAP guidance and the timely implementation of MAP agreements.
· Guatemala has joined the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, and the Bahamas has indicated its decision to sign the Convention.
· Djbouti (which has joined the Inclusive Framework on BEPS) and Benin have joined the Global Forum on Transparency and Exchange of Information for Tax Purposes.
NZ 2017 Budget
The New Zealand (NZ) 2017 Budget was delivered on 25 May 2017. The Budget contains various tax changes including a package of tax cuts for individuals and families and proposed changes to improve the tax treatment of black hole and feasibility expenditure for businesses. For further Budget insights and analysis, refer to PwC NZ’s Budget 2017 website. PwC NZ’s Tax Tips Alert also discusses the key features of the proposed amendments to the deductibility of feasibility expenditure and black hole expenditure.
US Tax Court says foreign refunds affect foreign tax credits even if not yet finally adjudicated
In Panagiota Pam Sotiropoulos v. Commissioner, the United States (US) Tax Court held that a United Kingdom (UK) income tax refund the taxpayer had received but was subsequently challenged by the UK tax authority must nevertheless be treated as a refund, with the result that the Inland Revenue Service (IRS) could reduce the taxpayer’s claimed foreign tax credits for the year in which the UK tax had originally been paid. The case may also be of broader interest because it arose from information that the IRS received under a tax information exchange agreement with the UK. For further information, refer to PwC Global’s Tax Insights.
Germany’s new rules to limit the deductibility of related-party royalties
Germany has enacted rules limiting the deductibility of related-party royalties. This royalty limitation rule is focused on situations in which the royalty income is taxed as part of a special patent box regime that does not meet the OECD’s ‘nexus’ approach. Refer to PwC Global’s Tax Insights for further information.
Netherlands’ dividend withholding tax proposal affecting cooperatives
The Netherlands Government has sought comments on a dividend withholding tax proposal affecting Dutch cooperatives. The Consultation Document seeks to align the dividend withholding tax treatment of holding cooperatives with that of Dutch tax-resident entities with capital divided into shares. The Consultation Document also proposes introducing a more extensive unilateral dividend withholding tax exemption in conjunction with anti‑abuse rules along the lines of Action 6 of the OECD BEPS project. Refer to PwC Global’s Tax Insights for further information.