In Brief from International Taxation [January 2021]

Reports on exchange of financial account information and guidance on the transfer pricing implication of the COVID-19 pandemic were published by the OECD. ECOFIN expressed their support for the implementation of DAC 7. Divided distribution by Gibraltar companies to eligible Luxembourg entities will be subject to dividend withholding tax as of 1 January 2021. The French Supreme Administrative Court ruled on the interpretation of tax treaties and PE concept. New PE rules were introduced also in Denmark. Other interesting news refers also to tax changes in Portugal, Belgium or US.

OECD: Guidance on transfer pricing implications of the COVID-19 pandemic

On 18 December 2020, the OECD released Guidance on the transfer pricing implications of the COVID-19 pandemic. The guidance focuses on how the arm’s length principle and OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations apply to issues that may arise or be exacerbated by the COVID-19 pandemic. The guidance focuses on four priority issues: comparability analysis, losses and the allocation of COVID-19 specific costs, government assistance programs, and advance pricing agreements (APAs). The guidance represents the consensus view of the 137 countries participating in the G20/OECD Inclusive Framework on BEPS. For more information about this topic, read our article.

OECD: Review reports relating to exchange of information

The Global Forum on Transparency and Exchange of Information for Tax Purposes announced the publication of the first peer review report on the automatic exchange of financial account information. According to the global forum’s announcement, 88% of jurisdictions engaged in automatic exchange since 2017-18 were deemed to have satisfactory legal frameworks in place. In the second stage, the effectiveness of automatic exchanges in more than 100 jurisdictions will be assessed. Based on the announcement, information on 84 million financial accounts worldwide, covering total assets of around EUR 10 trillion, was automatically exchanged between jurisdictions during 2019; and since 2009, additional tax revenue of EUR 107 billion (an increase from the EUR 102 billion reported in 2019) has been identified through voluntary disclosure programs, offshore tax investigations, and related measures.

ECOFIN: Support for the implementation of DAC 7

An updated Draft Council Directive amending Directive 2011/16/EU on administrative cooperation in the field of taxation (DAC 7) was published on 25 November 2020 by the Council of the European Union following the agreement reached by member states at the technical level. The proposed directive, also known as DAC 7, would extend the scope of the existing provisions on exchanges of information and administrative cooperation between the member states by requiring digital platforms to collect and report information on the income realised by sellers offering certain services.

The draft directive was discussed at the Economic and Financial Affairs Council (ECOFIN) on 1 December 2020 and ministers confirmed their support. It is expected to be formally approved and adopted by the end of January 2021. Once adopted, EU member states would be required to publish any domestic law, regulations, and administrative provisions necessary to comply with the directive by 31 December 2022, and the rules would apply from 1 January 2023.

Luxembourg: No participation exemption for dividend distribution by Gibraltar entities

On 1 December 2020, the Luxembourg tax authorities released a circular indicating that, as from 1 January 2021, the provisions transposing the EU parent-subsidiary directive (PSD) into Luxembourg law will no longer apply to companies incorporated in Gibraltar with respect to eligible Luxembourg entities. In contrast, a dividend exemption could apply if the dividends are distributed by a non-resident company subject to an income tax comparable to the Luxembourg income tax (known as the “subject to tax test”).

US: Defence bill includes a beneficial ownership reporting requirement

Based on an approved defence spending authorisation bill by the House of Representatives and the Senate, certain business entities are obliged to report their beneficial owners to the Treasury Department’s Financial Crime Enforcement Network (FinCEN). The reporting of beneficial owners would be required at the time the company is formed and when ownership changes. Information submitted to FinCEN would be kept confidential and protected under the highest information security standards. Criminal and civil penalties would apply to wilful violations of the reporting requirements and to the unauthorised disclosure or use of beneficial ownership information. The Treasury Department would be required to issue regulations implementing the reporting provision no later than one year after the date the legislation is signed into law. The reporting requirement would take effect on the effective date of those regulations.

France: New ruling on PE concept

On 11 December 2020, the French Supreme Administrative Court (Conseil d’Etat) gave its decision in the case regarding whether an Irish-resident company has a permanent establishment in France under Article 2(9) of the France – Ireland Income Tax Treaty (1968), which is similar to the PE provision of the OECD Model Convention before the 2017 update. Firstly, the Court ruled that the notion of dependant agent permanent establishment (DAPE) includes French companies that routinely decide on transactions systematically endorsed by a non-resident company, even though the French company does not formally conclude contracts in the name of the non-resident company. This interpretation is in line with paragraphs 32.1 and 33 of the Commentary on Article 5 of the OECD Model (resulting from the 2003 and 2005 updates, respectively). In the case at hand, the Court ruled that lower judges misinterpreted the DAPE notion and thus annulled their decision. Secondly, the Court officially ruled that tax treaties may be interpreted in the light of an OECD Commentary published after they were concluded (ambulatory interpretation). Under previous case law, the OECD Commentary could be used as a means of interpretation only if it were published before the relevant treaty was concluded.

Belgium: Adjustments to Interest Deduction Limitations and Anti-Abuse Provisions

On 4 December 2020, Belgium proposed adjustments to the interest deduction limitations and anti-abuse provisions with respect to the jurisdictions included in the EU list of non-cooperative states. The measures apply as from the year 2021. Anti-Abuse provisions were implement for countries falling under the EU-list of non-cooperative states and concern the non-deductibility of costs, the application of controlled foreign company (CFC) provisions without the application of the control and taxation test, and the non-application of the participation exemption. In that respect, Belgium companies will not have the possibility to prove that the relationship with a company established in a non-cooperative state is not based on tax motives.

Denmark: Amendments to PE rules, deductibility of losses and requirements for TP documentation

The parliament has enacted a bill that amends the corporate income tax rules in respect of permanent establishments (PEs), the deduction of final losses in foreign subsidiaries and requirements for transfer pricing (TP) documentation. The rules are effective from 1 January 2021. The Danish PE definition was brought into line with Article 5 of the OECD Model (2017). The adjustment aims to ensure that companies with cross-border activities cannot artificially organise themselves in a way that avoids creating a PE in a country in which they operate.

The changes regarding the deductibility of final losses incurred by foreign subsidiaries aim to bring Danish legislation into line with EU law. The determination of whether a loss is final must be made based on the rules applicable in the country in which the subsidiary is located.

Lastly, the prepared TP documentation must be submitted to the tax authorities no later than 60 days after the expiry of the deadline for submission of the information form.

Portugal: New levies on digital services

On 19 November 2020, the Portuguese government published Act no. 74/2020, which introduces two new levies relating to cinematographic and audio-visual activities. Firstly, exhibition levy of 4% on the price paid for audio-visual commercial communication included in video-sharing platforms. The exhibition levy will be due by advertisers on income realised in Portugal. Secondly, annual levy of 1% on income of providers of subscription video-on-demand services. The levy will be due by service providers on relevant income realised in Portugal associated with subscriptions or occasional transactions for video-on-demand services. An exception is provided for service providers with low turnover (less than EUR 200,000 of annual relevant income) or with low audience (less than 0.5% of active subscribers). The Act will enter into force 90 days after the date it was published, i.e. on 17 February 2021.

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