In Brief from International Taxation [May 2020]

In the first half of April, the OECD published the tax transparency compliance reports for eight jurisdictions and the comments on draft legislation on model rules for the collection of information. The US IRS proposed adjustment of regulation on hybrid arrangements and published the list of FAQ on the TP documentation standard which has to be fulfilled to avoid a net adjustment penalty. The CJEU gives the opinion that the Gibraltar is not within the scope of the PSD and the EU members states are not required to extend the benefits of this directive to a Gibraltar Companies. What is new in the area of international taxation in France, Russia and Denmark?

Recent OECD publications

On 6 April 2020, the OECD announced the publication by the Global Forum on Transparency and Exchange of Information for Tax Purposes of peer review reports assessing eight jurisdictions’ compliance with international standards on tax transparency and the exchange of information upon request. The new compliance reports are now available for Brunei Darussalam, Macau, Peru, Switzerland and Tunisia (these jurisdictions are classified as largely compliant) and for Barbados, Liberia, and the Seychelles (which are rated as partially compliant). All reports that have been issued up today are available on the OECD website. Further, on 15 April 2020, the OECD published the responses on a public consultation of draft Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy. The model rules aim to increase transparency and allow jurisdictions to collect information on the transactions of platform sellers and their realized income. The comments are available through the OECD website and can be downloaded in a zip file.

US: guidance on hybrid arrangements and FAQ on TP documentation standard

On 8 April 2020, the US Treasury Department and the Internal Revenue Service (IRS) published proposed regulations that adjust hybrid deduction accounts to take into account earnings and profits of a controlled foreign corporation that are included in income by a US shareholder. The proposed regulations affect US shareholders of foreign corporations and persons that make payments in connection with certain hybrid arrangements. They will be effective 60 days after publication in the Federal Register. On 14 April 2020 the US IRS also posted on its website a list of frequently asked questions (FAQs) discussing the standards that transfer pricing documentation must satisfy to avoid a net adjustment penalty under Internal Revenue Code (IRC) section 6662 which applies when net transfer pricing adjustment exceeds the lesser of USD 5 million or 10% of the taxpayer’s gross receipts.

CJEU clarification of EU PSD to Gibraltar

On 2 April 2020, the Court of Justice of the European Union (CJEU) issued its decision in case C-458/18 (GVC Services) that Bulgaria was permitted to deny under the EU parent-subsidiary directive (PSD) a withholding tax exemption on dividends distributed by a Bulgarian company to a parent company in Gibraltar. In the considered issue a Bulgarian incorporated and resident company wholly owned by a company incorporated and resident in Gibraltar distributed a dividend to its parent company and did not withhold tax on the distribution. The Bulgarian tax authorities considered that withholding tax was due, and the case was further litigated before the Bulgarian courts. The PSD requires a withholding tax exemption to be applied where certain criteria are met, including that both the dividend payer and dividend recipient have a legal form as listed in the annex to the directive, and both entities are subject to corporate income tax in an EU member state. From the perspective of EU law, the UK is responsible for Gibraltar’s external relations, and as regards the UK, the annex requires a company to be “incorporated under the law of the UK.” Under UK domestic law, however, a Gibraltar incorporated company is not regarded as being incorporated under UK law, nor is a Gibraltar company considered to be subject to UK corporate income tax. The CJEU’s decision makes it clear that Gibraltar is not within the scope of the PSD, and, it may be assumed so also for the merger directive, and interest and royalties directives. As such, the CJEU does not require EU member states to extend the benefits of these directives to a Gibraltar company.

New tax guidelines of French tax

On 30 March 2020, the French tax authorities published draft guidelines addressing the scope and calculation of the French digital services tax (DST). The new draft guidelines are available for public consultation until 23 May 2020. The 3% DST on annual revenue derived from (i) intermediary services provided by an digital interface and (ii) targeted advertising services was enacted by the French parliament on 11 July 2019.

The guidelines provide a clear definition of taxable services, further contains a non-exhaustive list of a services that could be included in the marketplace category as well as the list of items included in the intermediation category. The guidelines clarifies that only services provided in France within a particular year are taxable. The guidelines also discuss other issues, such as turnover thresholds, and they modify the way in which tax representatives of foreign group entities should report the DST.

Further, on 15 April 2020 the French tax authority issued amendment of guidelines on new rules on intra-group dividends and capital gains on intra-group share sales, and addressed the consequences on the scope of the tax-consolidated group of the withdrawal of a state from the European Union or the European Economic Area.

Clarification of tax aspects of intra-group services in Russia

On 2 March 2020, the Ministry of Finance (MoF) issued Guidance Letter no. 03-03-06/1/7868 regarding the methods to be used to determine the charges on intra-group services provided to a Russian company by another member of a multinational enterprise (MNE) group. The MoF explained that the expenses may be deducted for corporate income tax purposes if they are economically justified, documented and are incurred for the purpose of carrying out business activities aimed at income generation. Once it is determined that an intra-group service has been rendered, it is necessary to determine whether the amount of the charge is in accordance with the arm’s length principle and whether a direct method or an indirect method may be applied.

Denmark further postpones implementation of ATAD CFC rules

On 15 April 2020, the Prime Minister informed the president of the parliament that as a result of the Covid-19 crisis a number of legislative proposals have to be postponed. Amongst the proposals that are postponed is law proposal (L48) transposing into Danish legislation the CFC rules in line with the European Union Anti-Tax Avoidance Directive (EU) 2016/1164 (2016) (ATAD Directive). This means that the implementation of this final part of the ATAD directive will be delayed for the third time. It is unclear when the legislation will be decided on by the parliament, but it is not expected to happen before the next parliamentary year.

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