Global Transfer Pricing Update: November 2019
Multinational companies are operating in an environment of unprecedented complexity. The rising volume and variety of intercompany transactions and transfer pricing regulations, coupled with increased tax authority collaboration across borders present both risks and opportunities. Our transfer pricing updates will provide you with the latest transfer pricing issues and developments worldwide that may affect your business.
Australian Federal Court agrees with taxpayer in court challenge to transfer pricing adjustments
The Federal Court of Australia has ruled in favour of Glencore Investments Pty Ltd in respect of an appeal. The Australian Tax Office has appealed the court’s ruling. The elementary transfer-pricing lesson that emerges from this case is that, unless the terms of arrangements are such that either the substance does not match the form, or contracting parties acting independently would not have entered into them, the arrangements should be respected by tax authorities and no reconstruction should be attempted.
British Virgin Islands publishes Economic Substance Rules
The Rules provide additional guidance and explanatory notes to assist with the interpretation of the Economic Substance (Companies and Limited Partnerships) Act 2018 (ESA) that was passed into law in December 2018. The ESA imposes economic substance requirements on BVI companies and limited partnerships with legal personality (LPs) that are engaged in “relevant activities,” unless they are considered non-resident for the purposes of the ESA.
India: Secondary adjustment law amended
India introduced secondary adjustments in transfer pricing cases in the Finance Act 2017, to ensure that cash profits of the taxpayer are in line with the tax profits following a primary adjustment (i.e. transfer pricing adjustment). On 30 September 2019, a notification was issued regarding amendments to the secondary adjustment provisions.
The changes remove anomalies and clarify the compliance and computational aspects of the secondary adjustment provisions, particularly those arising following.
The new notification seeks to clarify the compliance aspects of cash repatriation (in particular following the conclusion of an advance pricing agreement with the tax authorities or a resolution reached under a mutual agreement procedure in an applicable tax treaty) and the calculation of notional interest. It should facilitate compliance by taxpayers and minimize the possibility of litigation resulting from ambiguities in the law.
New Zealand transfer pricing simplification measures aim to reduce compliance costs
New Zealand Inland Revenue has implemented a range of simplification measures that intend to lower compliance costs in situations perceived to have low transfer pricing risks:
- Small value loans: From 1 July 2019, in the absence of a readily available market rate for a debt instrument with similar terms and risk characteristics, Inland Revenue considers 3.25% as broadly indicative of an arm’s length rate. Transactions priced in accordance with this simplification measure are likely to be considered to qualify as a "low transfer pricing risk" according to Inland Revenue and, hence, no further benchmarking is required.
- Small wholesale distributors: Inland Revenue considers a weighted average earnings-before-interest-tax-and-exceptional-items (EBITE) ratio of 3% or greater as broadly indicative of arm’s length for foreign-owned wholesale distributors with an annual turnover of less than NZD 30 million. Such distributors within the prescribed annual turnover are likely to present a low transfer pricing risk and no benchmarking support will be required to validate an arm’s length rate.
- Low value-adding intragroup services: Inland Revenue has adopted the OECD simplification measure for qualifying low value-adding intragroup services with a total value below NZD 1 million per annum. That is, "qualifying services" may be priced at a cost plus a 5% mark-up without having to provide benchmarking support.
Norway Budget 2020 amends interest expense deduction limitation rules, R&D incentives
Two of the key proposals included in Norway’s budget for 2020, presented by the Ministry of Finance on 7 October 2019, are amendments to the interest expense deduction limitation rules and the Norwegian research and development (R&D) incentive scheme.
Norway’s interest expense deduction limitation rules are extended to included interest expense on external (third party) debt in addition to interest expense on debt from related parties.
The interest limitation applies to net interest expenses exceeding 25% of the company’s taxable EBITDA. There are two exemption to the interest limitation rules applying:
- De minimis rule for groups with net interest expense in Norway not exceeding NOK 25 million.
- The company, or the Norwegian part of the group, qualifies for one of two “equity escape” clauses.
- The ratio between the company’s equity and its total balance sheet is at least as high as the overall equity ratio for the consolidated group; or
- The equity ratio between the total consolidated equity of the Norwegian entities within the group is at least as high as the equity ratio for the entire consolidated group.
Turkey – Draft Digital Services Tax Bill submitted to parliament
A draft digital services tax (DST) bill was submitted to the Turkish parliament on 24 October 2019 in an attempt to grapple with the challenges faced by the country in taxing the digital economy. The provisions in the draft bill are in line with DST initiatives by other countries and generally follow the framework of the final report on action 1 of the OECD BEPS project (“Addressing the Tax Challenges of the Digital Economy”).
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