Owen, Christopher: Global Survey – December 2020

Archive
  • Bahrain signs BEPS MLI to strengthen its tax treaties
    • 27 November 2020, Bahrain signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS MLI), becoming the 95th jurisdiction to join the BEPS MLI, which now covers over 1,700 bilateral tax treaties.

      The BEPS MLI allows countries to integrate results from the OECD/G20 BEPS Project into their existing networks of bilateral tax treaties. The BEPS Project is designed to enable governments to close the gaps in existing international rules that allow corporate profits to be artificially shifted to low or no tax jurisdictions, where companies have little or no economic activity.

      The BEPS MLI, which became effective with respect to some treaties, will modify on 1 January 2021 about 650 treaties among the 57 jurisdictions that have have now ratified, accepted or approved the MLI. The latest countries to deposit their instruments of ratification for the BEPS MLI were Chile on 26 November and Panama on 5 November respectively. In both cases the MLI will enter into force on 1 March 2021.

      In addition, Indonesia and the Russian Federation notified in relation to Article 35(7)(a)(i) of the MLI the confirmation of the completion of their internal procedures for the entry into effect of the provisions of the MLI with respect to some of their treaties and in accordance with Article 35(7)(b) of the Multilateral Convention. Kazakhstan also made additional notifications on its covered treaties under Article 29(6) of the MLI.

      Measures included in the BEPS MLI address treaty abuse, strategies to avoid the creation of a ‘permanent establishment’ and hybrid mismatch arrangements. The BEPS MLI also enhances the dispute resolution mechanism, especially through the addition of an optional provision on mandatory binding arbitration, which has been taken up by 30 jurisdictions.

  • EC refers Belgium to CJEU over tax deductibility of alimony payments for non-residents
    • 30 October 2020, the European Commission decided today to refer Belgium to the Court of Justice of the European Union regarding its legislation on the deductibility of alimony payments from the taxable income of non-residents.

      Currently, Belgian legislation refuses the deduction of alimony payments from the taxable income of non-residents who earn less than 75% of their worldwide income in Belgium. Deduction is refused in Belgium even when the taxpayer has no significant taxable income in the State of residence, making it impossible to deduct the above payments from taxable income in the State of residence.

      The Commission said this refusal penalises non-resident taxpayers, who have exercised the right of freedom of movement of workers, because the alimony payments are deducted neither from their taxable income in their state of residence nor in Belgium as the state of employment. The legislation, it said, is therefore contrary to Article 45 TFEU and Article 28 of the EEA Agreement.

      The Court of Justice of EU has already ruled that such legislation is contrary to the freedom of movement for workers in the judgments C-169/03, Wallentin, and C-39/10, Commission v Estonia. The Commission sent a letter of formal notice to Belgium in 2016, followed by a reasoned opinion in 2019.

  • EC refers Greece to CJEU over income tax rules for businesses with foreign branches
    • 30 October 2020, the European Commission decided to refer Greece to the Court of Justice of the European Union regarding its income tax legislation, which differentiates tax treatment between business losses incurred domestically and losses in another EU/EEA state. At the same time, both categories of business profits are subject to tax in Greece.

      The Greek legislation in question, as interpreted by a Ministerial Circular, differentiates tax treatment with respect to tax loss recognition between resident taxpayers with enterprises established solely in Greece and resident taxpayers with at least part of their enterprises established in other EU/EEA States. While both business profits originating domestically and those originating in another EU/EEA state are subject to taxes in Greece, the treatment of losses incurred abroad is limited.

      The Commission said this difference in tax treatment is contrary to Articles 49(1) TFEU (in conjunction with Article 54 TFEU) and 31(1) EEA Agreement (in conjunction with Article 34 EEA Agreement) and constitutes a restriction to the freedom of establishment. The infringement procedure was initiated in 2018. A letter of formal notice was sent in 2018, followed by a reasoned opinion in 2019.

  • EC requests Luxembourg to change rules on reduction of inheritance tax
    • 30 October 2020, the European Commission sent a letter of formal notice to Luxembourg requesting that it amend its rules on taxation of inheritance comprising shares of companies. Inheritance tax is currently reduced for shares of companies established in Luxembourg, which are subject to subscription tax, but not for shares in comparable foreign companies.

      The Commission deems that these rules infringe the freedom of establishment (Articles 49 TFEU and 31 EEA) and the freedom of capital movements (Articles 63 TFEU and 40 EEA). In the absence of a satisfactory response within the next two months, the Commission may send a reasoned opinion.

      The Commission also sent a reasoned opinion reminding Spain that it should have transposed the Anti-Tax Avoidance Directive (ATAD 2) concerning hybrid mismatches into national law by 31 December 2019 (Council Directive (EU) 2017/952 amending Directive (EU) 2016/1164).

      ATAD 2 is designed to ensure that multinational companies cannot artificially reduce their obligation to pay corporate tax by exploiting differences between the tax systems of member states and those of non-EU countries ('hybrid mismatches').

      If Spain does not act within the next two months, the Commission may refer the case to the Court of Justice and request it to impose sanctions for having failed to transpose the Directive into its national law in due time.

  • France orders tech giants to pay digital service tax
    • 25 November 2020, the French Finance Ministry sent out notices to big tech companies liable for its digital service tax – a 3% levy on revenue from digital services earned in France by companies with revenues of more than €25 million there and €750 million worldwide – to pay the first instalment in December.

      The tax applies to advertising revenues from services that rely on data collected from internet users, revenues from the provision of a linking service between internet users and the sale of user data for advertising purposes. Online sales and the digital provision of digital content for buying or selling are expressly excluded from the tax.

      The tax was passed into law in July 2019 but France agreed, in January, to suspend collection of the tax while negotiations were underway for a multilateral taxation framework overseen by the OECD. However the US stepped away from the OECD process in June and no solution is now expected before mid-2021.

      Under the suspension, France proposed that companies liable for digital tax could postpone paying the first instalments due in April and October 2020, in respect of the amount of digital tax due in 2019, until December 2020. “Companies subject to the tax have received their notice to pay the 2020 instalment,” a ministry official said.

      The delay in reaching a multilateral taxation agreement has meant that a number of countries have introduced or are introducing digital services taxes on the revenue of digital companies. These include the UK, Spain, Italy and Austria. The UK's tax is in force and is due to be collected from April 2021.

      Meanwhile EU Commission President Ursula von der Leyen has confirmed that should no agreement be reached on digital taxation at the OECD by the deadline of mid-2021, the EU will introduce its own digital tax. EU finance ministers agreed in March 2019 to focus on the OECD's project and to leave the EU proposal in reserve should the OECD not manage to secure timely international agreement.

  • G20 leaders pledge to reach international tax deal
    • 22 November 2020, the leaders of the world’s 20 biggest economies again committed to work toward reaching a political agreement on revised rules for taxing multinational group income. The leaders agreed to a revised deadline of mid-2021.

      In a joint communique following virtual meetings hosted by Saudi Arabia, the G20 leaders said they welcomed the release of Pillar One and Pillar Two reports approved by the Inclusive Framework on Base Erosion and Profit Shifting (BEPS).

      “Building on this solid basis, we remain committed to further progress on both pillars and urge the G20/OECD Inclusive Framework on BEPS to address the remaining issues with a view to reaching a global and consensus-based solution by mid-2021,” the leaders said.

      In a report to G20 finance ministers, the OECD Secretariat warned that if a global agreement on taxation was not reached, the likely outcome would be a proliferation of unilateral tax measures and trade disputes.

  • Irish High Court rejects Perrigo bid to quash €1.64 billion tax assessment
    • 4 November 2020, the Irish High Court dismissed all grounds of challenge to a €1.64 billion tax assessment against Irish-headquartered drug company Perrigo, including its core claim that it had a legitimate expectation Revenue would not raise such an assessment.

      In Perrigo Pharma International Designated Activity Company v John McNamara, the Revenue Commissioners, the Minister for Finance, Ireland and the Attorney General [2020] IEHC 552, Revenue argued that a transaction involving the disposal of intellectual property (IP) in the multiple sclerosis drug Tysabri, treated in the firm’s tax returns as part of the trade of Perrigo and subject to a 12.5% tax rate, should properly have been treated as a capital transaction, taxable at 33%.

      Perrigo acquired Ireland’s Elan Pharma in 2013 by way of corporate inversion, involving foreign companies reversing themselves into Irish businesses to secure an Irish domicile and lower corporate tax rate. Eight months previously, Elan had sold Tysabri to Biogen, its partner in the drug’s development.

      Revenue said the sale should have been treated as a capital gain because Biogen paid for Tysabri with an up-front sum and the promise of future royalties depending on sales. The notice of amended assessment was raised in 2018 following an audit of Perrigo’s corporation tax returns for the periods ending December 2012 and December 2013.

      Mr. Justice Denis McDonald noted the legitimate expectation claim was based, inter alia, on a Shannon Free Trade Area tax certificate issued to Elan in 2002, backdated to 1997. It expired in 2005 but Perrigo claimed it was represented to it that existing certified activities would continue to be treated as they were during the Shannon regime.

      The judge said the certificate appeared to limit the IP rights management to the licensing, sub-licensing, distribution, research and development or similar arrangements or agreements and did not seem to extend to “outright” disposals of IP. It was clear from a Revenue letter of September 2000 that the issue of whether a particular transaction would constitute trading would be “a matter of fact to be determined after the activities have taken place”, he said.

      He also disagreed a legitimate expectation could be derived from a 2004 tax briefing document issued by Revenue or from the course of dealings between Elan, its tax advisers and Revenue officials, including a manager within Revenue’s large cases division.

      Perrigo, he noted, had not cross-examined several Revenue witnesses about their sworn evidence concerning Revenue’s approach to various tax returns by Elan, or about a 2005 compliance report concerning Elan provided by a manager in the large cases division. The manager’s evidence included that he never considered or reviewed Elan’s tax treatment of IP, the judge noted.

      On the evidence, he held the cumulative effect of tax returns over the years, combined with consequent assessments raised by Revenue, did not mean Elan, now Perrigo, had a legitimate expectation that, having bought and sold IP for many years, Revenue would not raise an assessment treating the disposal of the remaining 50% interest in the Tysabri IP as a capital gain.

      Perrigo’s claim that this was the only time Revenue had treated a Shannon certificate or an IFSC certificate holder in this way was not relevant because Perrigo had provided no detailed evidence to enable the court to compare and contrast the treatment of such certificate holders, he held.

      On the evidence, he was unable to find Revenue must have known that IP disposals formed part of the trade of Elan or that IP was treated as a stock in trade. Perrigo had not established anything in the dealings between Elan and Revenue over some two decades that could be said to give rise to any representation or legitimate expectation Revenue would not revisit the tax treatment of any individual IP disposal and, in particular, disposal of the Tysabri IP, he held.

      Additional claims that the Revenue’s audit findings letter amounted to an abuse of power were also dismissed. Taxpayers and the Revenue could examine a taxpayer’s historical transactions in the context of determining whether a particular transaction constituted part of a trade, he said.

      Perrigo disputed the assessment in its judicial review proceedings and has separately appealed it to the Tax Appeals Commissioner (TAC), which appeal had yet to be heard. McDonald J said the question of whether that disposal constituted a trading or capital transaction would have to be resolved in due course before the TAC.

      Perrigo said in a statement that no payment was required as a result of the High Court ruling, which it said it would consider appealing. If the High Court ruling is not appealed, the matter is due to go to the TAC.

      The full judgment can be accessed at https://www.courts.ie/acc/alfresco/86dfd10f-9923-44ec-9e6b-ffa8bcb0ef1c/2020_IEHC_552.pdf/pdf#view=fitH

  • Jersey delays beneficial ownership registry launch until 2021
    • 9 November 2020, the Jersey parliament approved a law to amend the Appointed Day Act for the Financial Services (Disclosure and Provision of Information) (Jersey) Law 2020 to delay implementation from 1 December to 6 January 2021.

      The Law, which was adopted on 14 July 2020 and registered on 23 October 2020, but the initially planned commencement date of 1 October 2020 gave insufficient notice in the current circumstances. The Jersey Financial Services Commission (JSFC) accordingly agreed to push back the launch date of its new registry to 1 December 2020, and has now decided to delay that by a further month.

      The postponement will give companies and foundations more time to adapt to the new process, which enacts the Financial Action Task Force (FATF) Recommendation 24 relating to the beneficial ownership of legal persons. The corresponding filing deadline for the new annual company beneficial ownership confirmation statement has also been deferred from 28 February 2021 to 30 April 2021.

      The Law supports the introduction of a new online registry system. Due to the nature of the information to be collected and held on the registry system, the Jersey Financial Services Commission (JSFC) said it was imperative that the systems were fully and extensively tested before they went live. While it was anticipated that this would be completed ahead of 1 December, the JSFC said it would be prudent to delay slightly the introduction of the Law to allow any unforeseen issues to be addressed.

      In addition, further guidance is currently under development by the Commission. This guidance will provide further assistance to industry in navigating the new registry system and interpreting the provisions of the Law. It said it would be beneficial if users were provided with additional time to properly review and consider the guidance prior to the Law coming into the force.

  • Julius Baer reaches agreement with US authorities to resolve FIFA investigation
    • 9 November 2020, Swiss bank Julius Baer announced it had entered into a three-year deferred prosecution agreement with the US Department of Justice (DoJ) to resolve an investigation into its role in corruption linked to the Federation Internationale de Football Association (FIFA).

      Julius Baer has been cooperating with the DoJ since 2015 in its investigation of alleged money laundering and corruption involving officials and affiliates of FIFA and associated sports media and marketing companies. Under the agreement, Julius Baer said it had taken a provision of USD79.7 million to be charged against its 2020 financial results. It anticipated reaching a final resolution with the DoJ shortly.

      Related enforcement proceedings in Switzerland concluded in February 2020. The Swiss Financial Market Supervisory Authority FINMA found that Julius Baer had fallen significantly short in combating money laundering between 2009 and early 2018, representing a serious infringement of financial market law. The shortcomings arose in connection with alleged cases of corruption linked to FIFA and the Venezuelan state-owned oil company PDVSA.

      During its investigation, FINMA uncovered systematic failings to comply with due diligence under the Anti-Money Laundering Act as well as violations of AML reporting requirements. FINMA arrived at its conclusion based on the sheer number of failings. Almost all of the 70 business relationships selected on a risk basis and the vast majority of the more than 150 sample transactions selected on the same basis showed irregularities over a period of several years, from 2009 to early 2018. FINMA also uncovered systematic failures in risk management at Julius Baer, which repeatedly failed to react to clear indications of possible money laundering risks or did not do so decisively enough.

      FINMA instructed Julius Baer to undertake effective measures to comply with its legal obligations in combating money laundering and rapidly finalise the measures it had already started putting in place. It further instructed the bank to change the way it recruited and managed client advisers, as well as adjusting remuneration and disciplinary policies. The board of directors was ordered to give greater attention to its AML responsibilities.

      Julius Baer was prohibited from conducting large and complex acquisitions until it was in full complies with the law and FINMA appointed an independent auditor to monitor implementation of the required measures.

  • Netflix to start declaring UK revenues to HMRC
    • 28 November 2020, US streaming entertainment service Netflix said it was to start declaring its annual revenues from British subscribers – forecast to reach £1.3 billion next year – to the UK tax authorities as of 2021. The move will add pressure on other tech giants like Google, Amazon and Facebook to stop directing revenues through overseas tax jurisdictions.

      Since launching in the UK in 2012, Netflix has channelled UK-generated revenue through separate accounts at its European headquarters in the Netherlands. According to its latest financial filing at Companies House, the firm, which has a market value of US$215 billion, made £700 million from its UK subscribers in 2018 but declared only €48 million in revenues, which it described as a services fee from the Netherlands.

      "As Netflix continues to grow in the UK and in other countries, we want our corporate structure to reflect this footprint,” said a spokesperson. “So from next year, revenue generated in the UK will be recognised in the UK, and we will pay corporate income tax accordingly."

      The French tax authorities demanded on 25 November that US tech companies including Facebook and Amazon started paying France’s new digital services tax to counter the relatively small amount paid on profits. The same day, Netflix announced it would start declaring revenues from its French subscribers locally, having already done the same for its Spanish operation.

  • Netherlands referred to CJEU over cross-border provision of pensions
    • 30 October 2020, the European Commission decided to refer the Netherlands to the Court of Justice of the European Union for its rules on the cross-border provision of pensions and the transfer of pension capital.

      The decision to refer follows the Netherlands' failure to bring its legislation into line with EU law as requested by the Commission in its additional reasoned opinion of 27 November 2019. The referral concerns three different rules in the Dutch cross-border pension tax regime.

      First, foreign service providers are required to provide guarantees to the Dutch authorities if pension capital is transferred from the Netherlands to a foreign provider or if foreign providers want to provide services on the Dutch market.

      Second, former employees also have to provide guarantees if the pension capital is transferred to a foreign service provider or if they want to buy pension services from a foreign provider.

      Third, transfers of pension capital to foreign providers by mobile workers taking up employment outside the Netherlands are tax exempt only if the foreign providers assume the responsibility for any tax claims, or the taxpayers themselves provide a guarantee.

      According to the Commission, these conditions are restrictions to the free movement of citizens and workers, the freedom of establishment, the freedom to provide services and the free movement of capital (Articles 21, 45, 49, 56 and 63 of the Treaty on the functioning of the EU (TFEU).

  • New Protocol amends Russia-Luxembourg double tax treaty
    • 6 November 2020, Luxembourg and Russia signed a protocol to their double tax agreement to significantly increase the withholding rate on dividends and interest. With effect from 2021, withholding taxes will rise from 5% to 15% on dividends and from 0% to 15% for interest payments. Russia's standard withholding tax rates on dividends and interest are 15% and 20% respectively.

      A reduced 5% withholding tax rate may nevertheless apply if the recipient of the dividend is the beneficial owner and its shares are listed on a registered stock exchange and at least 15% of the shares granting voting rights are in free float, and it directly holds at least 15% of the capital in the company paying dividends. The 5% rate will also apply on dividend payments to insurance institutions, pension funds, Central banks and the government bodies of Russia and Luxembourg.

      A reduced withholding tax rate of 5% will further apply to interest paid to listed companies meeting the criteria for the application of the reduced dividend withholding tax rate. There will be no withholding tax on interest if: the recipient of the interest payment is the beneficial owner of the payment and is a bank, insurance institution, pension fund, Central bank or government body of Russia and Luxembourg; or the interest is paid on government bonds, corporate bonds and external bond loans.

      In general, interest payments made at arm’s length by a Luxembourg company are not subject to withholding tax.

      This is the third double tax treaty revised at the request of the Russian Federation this year. A similar protocol to the tax treaty between Russia and Cyprus was signed on 8 September and to the tax treaty between Malta and Russia on 1 October. The Russian Ministry of Finance has also sent a letter to the Dutch Ministry of Finance requesting the amendment of the existing double tax treaty; negotiations between these two countries are still ongoing.

  • OECD calls for stakeholder input on BEPS Action 14 review
    • 18 November 2020, the OECD released the latest mutual agreement procedure (MAP) statistics covering 105 jurisdictions and almost all MAP cases worldwide as part of the BEPS Action 14 minimum standard and the wider G20/OECD tax certainty agenda to improve the effectiveness and timeliness of tax-related dispute resolution mechanisms.

      The 2019 MAP Statistics and the 2019 MAP awards were presented during the second OECD Tax Certainty Day where tax officials and stakeholders from over 60 jurisdictions took stock of the tax certainty agenda and discussed ways to further improve dispute prevention and resolution.

      The discussions, which took place against the backdrop of the economic effects of the COVID-19 crisis, covered a wide range of tax certainly tools, including advance pricing arrangements, the International Compliance Assurance Programme (ICAP), bilateral and multilateral MAPs and the Forum on Tax Administration’s work on benchmarking.

      The BEPS Action 14 Minimum Standard adopted in 2015 by the members of the OECD/G20 Inclusive Framework on BEPS seeks to improve the resolution of tax-related disputes between jurisdictions and includes a peer review mechanism to monitor the compliance of member jurisdictions with this minimum standard.

      With 82 jurisdictions peer reviewed and 1,500 recommendations issued, the OECD Secretariat is consulting on proposals to strengthen the BEPS Action 14 Minimum Standard. These proposals relate to all aspects of the MAP process – dispute prevention, access to MAP, resolution of MAP cases and implementation of MAP agreements – as well as to the MAP Statistics Reporting framework. The 2019 MAP Statistics showed the following trends:

      -The number of cases has kept increasing – Approximately seven MAP cases were started every day in 2019 (three transfer pricing cases and four other cases). This amounted to almost 2,700 new cases in 2019 alone (a 20% increase on 2018 for transfer pricing cases and 10% for other cases) and means the number has nearly doubled since 2016. This trend was likely to continue with no significant reduction in MAP activity expected despite the COVID-2019 crisis. It was driven by a number of factors, including increased globalisation, as well as growing confidence in and knowledge of the MAP process.

      -The number of cases closed was increasing as well, but at a slower pace. Competent authorities were able to close more cases in 2019 than in 2018, but the increase could not keep up with the increase in new cases. As a result, the inventories were increasing in the majority of jurisdictions, despite the fact that competent authorities had increased their capacity and closed approximately 50% more transfer pricing cases and 70% more other cases in 2019 than in 2016.

      -Outcomes were generally positive. Around 85% of the MAPs concluded for transfer pricing cases in 2019 fully resolved the issue (compared to 80% in 2018), which reflected an improvement in the collaborative approach taken by competent authorities. For other cases, more than 70% were fully resolved (versus 75% in 2018). As in 2018, only 2% of the MAP cases were closed without finding a mutual agreement.

      -Cases still take a long time to be resolved. On average, MAP cases closed in 2019 lasted for 25 months (31 months for transfer pricing cases, 22 months for other cases). Also, while it was not possible to estimate the time that would be necessary to close still pending cases, the data showed that more than one-fifth of the 2019 end inventory has been pending for more than four years. For some jurisdictions, the cases that were already pending before the introduction of the minimum standard represented more than 40% of their 2019 end inventory.

      This year's MAP Awards, given in recognition of particular efforts by competent authorities, saw the following winners: Japan for the shortest time in closing transfer pricing cases, ex-aequo with the UK, who also won the prize for other cases. Belgium for the smallest proportion of pre-2016 cases in end inventory and Belgium and Norway for the most effective caseload management. The collaborative award for the pairs of jurisdictions that dealt the most effectively with their joint caseload were India-Japan for transfer pricing cases and Norway-US for other cases.

  • OECD FHTP moves to enforcement stage of new economic substance rules
    • 23 November 2020, the OECD Forum on Harmful Tax Practices (FHTP) announced it would begin a move to the 'effective implementation' of its economic substance rules in January 2021 with annual compliance monitoring to ensure that entities in ‘no or only nominal tax jurisdictions’ have sufficient substance.

      The FHTP has been conducting reviews of preferential regimes since its creation in 1998 in order to determine if the regimes could be harmful to the tax base of other jurisdictions. Its current work focuses on three key areas.

      -The assessment of preferential tax regimes to identify features of such regimes that can facilitate base erosion and profit shifting (BEPS), and therefore have the potential to unfairly impact the tax base of other jurisdictions;

      -The peer review and monitoring of the Action 5 transparency framework through the compulsory spontaneous exchange of relevant information on taxpayer-specific rulings which, in the absence of such information exchange, could give rise to BEPS concerns

      -The review of substantial activities requirements in no or only nominal tax jurisdictions to ensure a level playing field.

      The FHTP said that 12 further jurisdictions – Anguilla, the Bahamas, Barbados, Bahrain, Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man, Jersey, Turks & Caicos Islands and the United Arab Emirates – all now had a legal framework for the collection and reporting of the required information on the activities and revenue of entities that was in line with the FHTP Standard.

      Its focus was therefore shifting to implementation. This will include the start of spontaneous exchanges of information on the activities and income of entities by the no or only nominal tax jurisdictions with the jurisdictions of the immediate parent, ultimate parent and beneficial owners of such entities. The FHTP is to initiate an annual monitoring process to ensure that these jurisdictions have appropriate mechanisms in place to ensure ongoing compliance with the FHTP Standard.

      The minimum standards on harmful tax practices were established by OECD and G20 nations in 2015 as a result of work on the base erosion profit shifting (BEPS) plan to encourage countries to amend or abolish rules that reduce the tax base of other countries. 137 nations have pledged to adopt laws meeting these minimum standards and have agreed to be peer-reviewed on their compliance as a condition of joining the OECD-led Inclusive Framework on BEPS.

      The FHTP’s report also said that jurisdictions were continuing to make progress in countering harmful tax practices, as contemplated in the BEPS Action 5 Minimum Standard, with the OECD/G20 Inclusive Framework on BEPS having now approved the outcomes of the 2020 reviews.

      As a result, the FHTP announced that regimes in the following 18 jurisdictions were now in line with the BEPS Action 5 Minimum Standard: Aruba, Belize, the Cook Islands, Curaçao, Dominica, Dominican Republic, Georgia, Hong Kong, Jamaica, the Maldives, Mauritius, Morocco, North Macedonia, Qatar, Saint Kitts & Nevis, San Marino, Switzerland and Tunisia.

      This year's review had resulted in significant legislative changes to 44 of the 49 reviewed regimes, with 37 redesigned or abolished, while a further seven in three countries now deemed compliant  — Jamaica, North Macedonia, and Qatar — were currently in the process of being amended. For the remaining five regimes, the FHTP has concluded that they do not currently pose BEPS risks.

      Overall, since the start of the BEPS Project, 295 regimes in 80 jurisdictions had been reviewed. Four have been found to be harmful, eight are under review and 14 harmful regimes are in the process of being eliminated or amended. According to the report, the US’s foreign-derived intangible income regime is still under review for compliance with the minimum standards for preferential tax regimes.

      The FHTP had also conducted a 2020 review of the ‘nexus approach’ for intellectual property with respect to the “third category of assets”. These assets share features of patents and copyrighted software, even if not formally patented, and can be included in the design of an IP regime provided the taxpayer is below certain revenue thresholds. The FHTP concluded that there was no need to revise the current nexus approach.

  • OECD publishes ‘Taxation and Philanthropy’ report
    • 26 November 2020, the OECD published a report highlighting policy options for the taxation of philanthropic giving. It recommends that governments should continue providing support to the philanthropic sector while taking steps to safeguard tax systems and ensure that the activities of philanthropic organisations continue to align with the public interest.

      Entitled ‘Taxation and Philanthropy’, the report reviews the tax treatment of philanthropic entities and charitable donations in 40 countries worldwide. It points out the significant impact of philanthropy – the non-profit sector represents as much as 5% of GDP in many countries – as well as the wide range of potential tax policy options countries can consider to improve the effectiveness of tax concessions for philanthropy.

      Produced in collaboration with the University of Geneva's Centre for Philanthropy, the report details the various types of favourable tax treatment countries provide to encourage philanthropy, both to donors as well as the philanthropic entities themselves, and assesses how tax incentives are and can be used to increase philanthropic activity in areas prioritised by government to raise overall social welfare.

      It points to broad support amongst countries for the provision of tax support for philanthropy, while drawing attention to emerging concerns in some countries that current practices could give a small number of wealthy donors disproportionate influence over how public resources are allocated.

      This concern was highlighted by the rise in the number of very large private philanthropic foundations established by ultra-high-net-worth individuals, who are able to channel substantial resources into the priorities of their choice, while significantly minimising their tax liabilities. While risks of abuse should be addressed, the report said this should not overshadow the overwhelmingly positive spillovers of philanthropy in general.

      "Philanthropy plays an important role in most countries, providing private support to a range of activities for the public good, and this is especially evident in the current context of the COVID-19 crisis," said Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration. "Looking ahead, governments need to strike the right balance between safeguarding tax systems while continuing to provide support to the sector."

      The report underlines important considerations for policymakers as they seek to strike this appropriate balance, and recommends that they should:

      -Reassess the activities eligible for tax support, and ensure that favourable treatment is limited to those areas consistent with underlying policy goals;

      -Consider providing tax credits rather than deductions, and fiscal caps, to ensure that tax support does not disproportionately benefit higher income taxpayers;

      -Reassess the extent of tax exemptions for commercial income of philanthropic entities, to minimise the risk of putting for-profit businesses at a competitive disadvantage.

      -Reduce the complexity of tax laws that disproportionately affect low-income donors and smaller philanthropic entities;

      -Improve oversight and boost transparency, to safeguard public trust in the sector and ensure that tax concessions used to boost philanthropy are not abused through tax avoidance and evasion schemes;

      -Reassess restrictions currently imposed on cross-border philanthropic activity.

      The Taxation and Philanthropy report can be accessed at: www.oecd.org/tax/tax-policy/taxation-and-philanthropy-df434a77-en.htm

  • OFAC issues advisory focused on the art trade
    • 30 October 2020, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued an advisory to highlight sanctions risks arising from dealings in ‘high-value artwork’ –  with “particular caution” urged for dealings in artwork worth over $100,000 – associated with persons blocked pursuant to OFAC’s authorities, including persons on OFAC’s List of Specially Designated Nationals and Blocked Persons.

      The advisory indicated that ‘Specially Designated Nationals’ (SDNs) have circumvented US sanctions through the art industry. It identified vulnerabilities including the ability of actors to discretely operate in the art market, for example by concealing identity through shell companies or third-party intermediaries, helping to hide prohibited conduct from law enforcement and regulators, and due to the “mobility, concealability, and subjective value of artwork”.

      Recent examples of sanctioned persons who have taken advantage of the art market to launder money or evade sanctions, included:

      -Lebanon-based diamond dealer and art collector Nazem Said Ahmed, suspected of laundering substantial sums of money in support of Hezbollah, a Specially Designated Global Terrorist group;

      -Sanctioned Russian oligarchs Arkady and Boris Rotenberg, who used shell companies to engage in high-value artwork transactions following the imposition of sanctions; and

      -The North Korean government, known for earning tens of millions of dollars in revenue by producing and exporting statuary to foreign nations.

      The advisory warns art galleries, museums, private collectors, auction companies, agents, brokers and other participants in the art market that they face civil liability for direct or indirect transactions with sanctioned parties. It recommends that art market participants should adopt risk-based compliance programmes to mitigate their exposure to sanctions-related violations and conduct risk-based due diligence, as appropriate.

      OFAC also clarified that it does not view statutory exemptions for “informational materials” under the International Emergency Economic Powers Act and the Trading with the Enemy Act (see 50 U.S.C. § 1702(b)(3); 50 U.S.C. § 4305(b)(4)) – commonly described as the ‘Berman Amendment’ – as applying to high-value art transactions involving SDNs or other blocked parties when the artwork functions primarily as an investment asset or medium of exchange.

  • Saudi Arabia to abolish ‘kafala’ sponsorship system in March 2021
    • 4 November 2020, the Saudi Ministry of Human Resources and Social Development (HRSD) announced that it is to abolish the foreign worker sponsorship system, also known as ‘kafala’, and replace it with a new contract between employers and employees.

      The Kingdom had been scheduled to abolish the sponsorship system during the first quarter of 2020, but the move was delayed by the onset of the coronavirus pandemic. The reforms are now scheduled to come into effect on 14 March 2021.

      The end of the sponsorship system under the Kingdom’s new Labour Reform Initiative (LRI) will give expatriate workers freedom to secure exit and re-entry visas, receive the final passport exit stamp and gain employment in Saudi Arabia without the approval of a sponsor.

      Currently more than 10 million foreign workers live in Saudi Arabia under the kafala system, which requires them to be sponsored by a Saudi employer and be issued with an exit/re-entry visa whenever they want to leave the country.

      The LRI has been launched under the National Transformation Programme (NTP) to increase the flexibility, effectiveness and competitiveness of the labour market and bring it into line with best international practice and the Saudi labour law.

      LRI activates the contractual agreement between employee and employer through digital documentation, which will contribute to reducing the disparity between the Saudi workers and the expatriates. This, said the HRSD, will increase both employment opportunities for Saudis and the attractiveness of the Saudi job market for top international talent.

      Employee mobility will allow expatriate workers to transfer between employers upon the expiry of the binding work contract without the employer's consent. LRI also outlines the conditions applicable during the validity of the contract, provided that a notice period and specific measures are adhered to.

      The Exit and Re-Entry Visa reforms allow expatriate workers to travel outside the Kingdom without requiring the employer's approval after submitting a request; the employer will be notified electronically of their departure.

      The Final Exit Visa reforms allow expatriate workers to leave the Kingdom after the end of the employment contract without the employer's consent and will, again, notify the employer electronically with the worker bearing all consequences – financial or otherwise – relating to breaking an employment contract. All three services will be made available to the public through the smartphone application (Absher) and (Qiwa) portal of the HRSD.

      The development follows the introduction last year of the Special Privilege Residency Permit (Premium Iqama), which allows all those who have ties with the Kingdom, irrespective of nationality, “to obtain a permanent or temporary residency that would grant them many privileges as well as the chance to avail of several services for themselves and their families”.

      The new legislation allows permit holders to enjoy several privileges previously extended only to Saudi citizens, such as owning real estate, renting out of properties, educational and health services, and other utilities specified in the executive regulations.

  • Swiss Federal Council approves Act on Implementation of International Tax Agreements
    • 4 November 2020, the Swiss Federal Council adopted the dispatch on the Federal Act on the Implementation of International Tax Agreements. With this proposal, the Federal Council is adapting the existing law to the changes made to international tax law in recent years.

      The total revision of the Federal Act of 1951 on the Implementation of International Federal Conventions on the Avoidance of Double Taxation (ITAIA) is designed to ensure that tax treaties can continue to be applied easily and with legal certainty in the future.

      The Federal Council proposes to supplement the existing standards with additional regulatory areas. The revision of the law stipulates how mutual agreement procedures (MAPs) are to be carried out at national level, provided the applicable agreement does not contain any deviating provisions.

      The new law also contains the key points for withholding tax relief based on international agreements, as well as criminal provisions in connection with relief from withholding taxes on capital income.

      The Federal Council clarified the bill from a content and linguistic viewpoint, ensuring in particular that the cantons are more involved in the preparation of MAPs. The Swiss Parliament is due to discuss the bill for the first time in the first half of 2021.

  • Swiss Federal Council approves tax treaty amendments with Liechtenstein, Malta and Cyprus
    • 11 November 2020, the Swiss Federal Council adopted the protocols of amendment to the double taxation agreements (DTAs) with Liechtenstein, Malta and Cyprus. The protocols implement the minimum standards for DTAs under the OECD/G20 base erosion profit shifting (BEPS) package.

      The amendments add a ‘main purpose clause’ to each tax treaty, designed to prevent a form of multinational group tax avoidance known as ‘tax treaty shopping’. The protocols also strengthen the mutual agreement procedure (MAP) for cross-border tax disputes provided for in each tax treaty.

      The MAP is available to multinational groups that are taxed on the same income by two different countries. The procedure allows the taxpayer to bring together both countries’ tax authorities to figure out which country is in fact entitled to tax the income.

      The cantons and the business associations concerned have welcomed the conclusion of the protocols of amendment. The protocols have to be ratified by the legislative bodies of the countries in question before they can come into force.

  • Swiss Federal Council brings Act and Ordinance for automatic exchange into force
    • 11 November 2020, the Swiss Federal Council approved an amended Ordinance on the International Automatic Exchange of Information in Tax Matters (AEOIO) and decided to bring it into force with effect from 1 January 2021, together with the amendment to the Federal Act on the International Automatic Exchange of Information in Tax Matters (AEOIA).

      The Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) regularly assesses domestic implementation of the standard for the international automatic exchange of information in tax matters (AEOI standard). As part of the assessment procedure, the Global Forum has presented Switzerland with recommendations, which the country will in principle implement by the end of 2020.

      Parliament had already approved the amendments to the AEIOA on 19 June 2020. These involve the repeal of the exemption clause for condominium associations and an adjustment of the applicable due diligence requirements. In addition, amounts will be stated in US dollars and a document retention obligation will be introduced for reporting Swiss financial institutions.

      With its latest decision, the Federal Council is aligning the AEOIO with the amended AEOIA. The amendments to the AEOIA and AEOIO will enter into force on 1 January 2021.

  • UAE amends laws on public notaries and inheritance
    • 9 November 2020, the United Arab Emirates’ Cabinet approved a raft of amendments to laws governing evidence in civil and commercial transactions in order to enable public notaries to do their job remotely and to enhance the digital transformation of government services.

      The term ‘notary public’ refers to those authorised by the country's judicial authorities to attest and notarise legal documents. The amendments essentially allow notaries to do their job remotely and use teleconferencing. They also provide for the use of digital signatures and documents, e-hearing minutes that document witness testimonies, as well as the decisions of judges and signed notary documents.

      Under the amendments, documents must be created and saved electronically and will be kept confidential and may not be circulated, copied or deleted from the electronic system without permission from the relevant administration of the notary public at the ministry.

      The move follows sweeping changes announced to the UAE's legal system in respect of inheritance and succession, as well as other areas affecting people’s daily lives, which are designed to make the UAE more attractive to expatriate individuals and as a destination for foreign direct investment.

      Principal among these changes is the replacement of the UAE’s Islamic forced heirship provisions with alternative measures for non-Emiratis. This means that the distribution of the estate of a non-Emirati individual can now be dealt with under the rules of their home country. Similar provisions will also apply on the division of property in the event of a divorce.

      Previously Sharia forced heirship provisions determined the division of a UAE resident individual’s assets on death unless a will was registered with the Dubai International Financial Centre wills and probate registry or Abu Dhabi Judicial Department.

      Under the new regime, the rules of the country where the deceased is a citizen should now dictate how their assets are divided, unless they have written a will. UAE real estate will continue to be distributed according to the existing UAE rules.

  • UAE announces reform of foreign ownership and investment laws
    • 23 November 2020, President of the United Arab Emirates Sheikh Khalifa bin Zayed Al Nahyan issued a new decree to amend the Federal Law No 2 of 2015 on Commercial Companies to reform the UAE’s current foreign ownership restrictions.

      Under existing UAE law, foreign shareholders are only permitted to own up to 49% of a locally-registered limited liability or joint stock company in the UAE Mainland, while a UAE national partner (sponsor) must hold the 51% majority.  100% foreign ownership is currently permitted only inside the UAE’s free zones.

      Under the new legislation, which has not yet been published, the UAE will allow 100% ownership of businesses by foreign nationals from 1 December 2020. It is likely, however, that the Department of Economic Development (DED) in their respective Emirates will retain the right to determine the level of UAE national ownership participation in businesses or companies undertaking certain activities.

  • US Tax Court rules against Coca-Cola in transfer pricing dispute
    • 18 November 2020, the US Tax Court upheld two different Internal Revenue Service (IRS) transfer pricing adjustments under section 482 of the Income Tax Regulation against US multinational beverage corporation Coca-Cola, increasing the company’s taxable income for the 2007 to 2009 years by a combined total of more than $9 billion and subjecting it to a tax bill of over $3 billion.

      In The Coca-Cola Co. v. Commissioner, 155 T.C. No. 10, the taxpayer was the legal owner of the intellectual property (IP) necessary to manufacture, distribute, and sell its beverage brands in the world. This IP included trademarks, logos, patents, secret formulas and brands.

      The US parent company licensed foreign manufacturing subsidiaries (‘supply points’), its local foreign service companies (‘ServCos’) and its independent foreign bottlers to use this IP. The contracts gave them limited rights to use the IP in performing their manufacturing and distribution functions but no ownership interest in that IP.

      During the tax years 2007 to 2009, these subsidiaries and affiliates compensated the taxpayer for use of its IP under a formulary apportionment method to which the taxpayer and the IRS had agreed in 1996 when settling the taxpayer’s tax liabilities for 1987 to 1995. Under that method, they remitted to the taxpayer dividends of about $1.8 billion in satisfaction of their royalty obligations. The 1996 agreement did not address the transfer pricing methodology to be used for years after 1995.

      On examining the 2007 to 2009 returns, the IRS determined that the taxpayer’s methodology did not reflect arm’s length norms because it over-compensated the subsidiaries and affiliates and under-compensated the taxpayer for the use of its IP. This had the effect of improperly shifting funds to various foreign operating plants in Costa Rica, Chile, Ireland, Brazil, Egypt, Swaziland, Mexico and elsewhere.

      The IRS therefore reallocated income between the taxpayer and these subsidiaries and affiliates employing a comparable profits method (CPM) that used the taxpayer’s unrelated bottlers as comparable parties. These adjustments increased the aggregate taxable income for 2007 to 2009 by more than $9 billion. Coca Cola claimed that the IRS had overstepped in its investigation of their allocation of funds by using the CPM in this case.

      The Tax Court held the IRS did not abuse its discretion under section 482 by reallocating income to the taxpayer by employing a CPM that used the subsidiaries and affiliates as the tested parties and the bottlers as the uncontrolled comparables. It also did not err by recomputing the section 987 losses after the CPM changed the income allocable to the taxpayer’s Mexican branch.

      The Tax Court considered the IRS’s use of a CPM analysis to be an appropriate, reliable, and conservative transfer pricing method for determining how much the supply points should have paid Coca-Cola for using its IP. It found that Coca-Cola’s supply points were essentially “wholly-owned contract manufacturers” executing steps in the beverage-production process, and that Coca-Cola, rather than its supply points, owned “virtually all the intangible assets needed to produce and sell” the company’s beverages.

      As a result, the Tax Court concluded that the CPM was “ideally suited” to determining Coca-Cola’s compensation for the use of its intellectual property, because the CPM would be able to determine an arm’s length profit for the supply points without needing to determine the value of Coca-Cola’s uniquely valuable intangible assets.

      The Tax Court agreed with the IRS that Coca-Cola’s independent bottlers were appropriate comparable parties for the CPM analysis, because they operated in the same industry, with similar relationships to Coca-Cola, using Coca-Cola’s intangible assets to perform similar functions.  In addition, because the Tax Court found that these bottlers generally were entitled to a higher rate of return than the supply points, the Tax Court considered the IRS’s CPM conservative.

      Applying this CPM during audit, the IRS determined that the ratio of operating profit to operating assets (ROA) for six of Coca-Cola’s seven supply points during 2007 to 2009 was between 215% and 94%.  The interquartile range of ROAs of Coca-Cola’s independent bottlers was 7.4% and 31.8%. Following the IRS reallocation of income from the supply points to Coca-Cola, the ROAs of the six supply points were between 34.3% and 20.9%.  The Tax Court noted that these ROAs remained higher than those of almost 80% of the manufacturers analysed by the IRS.

      Coca-Cola proposed three alternative transfer pricing methods – Comparable Uncontrolled Transaction (CUT) Method, Residual Profit Split Method (RPSM) and Unspecified Method – to support its contention that, in arm’s length transactions, Coca-Cola’s foreign supply points would receive most of the income that Coca-Cola derives from foreign markets.

      The Tax Court rejected all three. It described the application of the CUT method in the case as both “aggressive” and “mathematically and economically unsound”, the RPSM as “wholly unreliable”, while it noted that the Unspecified Method did not “remotely resemble any of the ‘specified methods’ for valuing intangibles under the section 482 regulations”.

      However, the taxpayer made a timely election to employ dividend offset treatment with respect to dividends paid by subsidiaries and affiliates during 2007 to 2009 in satisfaction of their royalty obligations. The IRS reallocations to the taxpayer were therefore accordingly to be reduced by the amounts of those dividends.

      Coca-Cola said in a statement: “We are disappointed with the outcome of the US Tax Court opinion, which we are reviewing in detail to consider its impact and potential grounds for its appeal. We intend to continue to vigorously defend our position.”

      The full decision can be accessed at https://www.ustaxcourt.gov/UstcInOp2/OpinionViewer.aspx?ID=12357

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