Worldwide Tax News
On 14 May 2018, Germany's Federal Fiscal Court issued a decision suspending the additional interest penalty of 0.5% per month on unpaid taxes, finding the additional interest to be unconstitutional. The 0.5% simple interest penalty applies for each full month beginning 15 months after the expiration of the calendar year for which the tax is assessed. The interest is in addition to other late tax payment penalties, and also applies in relation to tax refunds. The 0.5% rate has not been changed since 1961.
The Court found that the interest rate (0.5%) was incompatible with the general constitutional principle of equality. In particular, the Court looked at the effective 6% annual rate in relation to market interest rates, which are significantly lower. Although it has been argued in the past that low interest rates are a temporary economic phenomenon, the Court held that low rates are now of a structural and sustainable nature and therefore the 0.5% per month rate can longer be justified. Further, given the modernization of tax administration with data processing technology, considerations such as feasibility and administrative simplification can no longer justify not providing for an adjustment of the interest rate.
Based on this, the Court ordered the collection of the monthly interest suspended from the 2015 period. The decision is not final, however, as the case, and other similar cases, are still to be heard by the Federal Constitutional Court. In the meantime, taxpayers may cite the decision of the Federal Fiscal Court in objecting to an assessment of the interest.
Apple Makes First Payment for Ireland State Aid; EU Court Holds U.S. May Not Intervene in Pending Appeal
On 18 May 2018, Ireland's Department of Finance announced that Apple has made its first payment for the recovery of illegal State aid, which the European Commission determined was provided to Apple by Ireland. The first payment amounts to approximately EUR 1.5 billion, with the total amount of recoverable State aid of approximately EUR 13 billion to be paid by the end of Q3 2018. Although collection has begun, an appeal of the European Commission's decision is still pending.
In relation to the pending appeal, an order of the Court of Justice of the European Union was issued on 17 May, upholding an earlier order of the General Court that the U.S. has no right to intervene in the case. As with the General Court order (previous coverage), the CJEU order includes that the U.S. was unable to successfully establish that it has a direct interest in the result of the case.
On 15 May 2018, Italy's Ministry of Finance announced the issuance of the Ministerial Decree of 14 May 2018, which provides guidance on the application of the arm's length principle in line with the OECD guidelines. The Decree is issued in relation to the amendment in 2017 of the definition of "normal value" for the purpose of the arm's length principle under Italian law, which includes that items of income arising from intercompany transactions carried out with non-resident associated enterprises are to be determined on the basis of conditions and prices that would have been applied between unrelated parties, operating in free competition and in comparable circumstances. The Decree covers:
- The definition of associated enterprises, which includes a resident company and a non-resident company where one participates, directly or indirectly, in the management, control or capital of the other, or the same person participates, directly or indirectly, in the management, control or capital of both companies (participation of more than 50% in capital, voting rights, or profits, or dominant management influence based on equity or contractual constraints);
- The notion of comparability, which includes that:
- An uncontrolled transaction is considered comparable to a controlled transaction where there are no significant differences that affect the financial indicators used, or if there are differences, comparability adjustments can be made to eliminate or significantly reduce the impact of such differences, and;
- The economically relevant characteristics or factors of comparability that must be identified/analyzed include:
- The contractual terms of the transactions;
- The functions performed, taking into account assets used and risks assumed, including how these functions relate to the broader creation of value within the MNE group to which the parties belong;
- The characteristics of the goods sold or services rendered;
- The economic circumstances of the parties and the markets in which they operate; and
- The business strategy pursued by the parties involved;
- The allowed transfer pricing methods, including that the most appropriate method of the five standard methods of the OECD guidelines should be applied, although the traditional transaction methods and in particular the comparable uncontrolled price method are generally preferred, and that other methods may be used if it is proven that the standard five cannot be reliably applied in determining the arm's length price;
- Aggregated transactions, including that the arm's length price should generally be determined on a per transaction basis, but that transactions performed by a company may be aggregated for transfer pricing purposes if they are closely related or cannot be reliably separated;
- The arm's length range, which includes that transactions may be considered at arm's length if the financial indicators fall within a range based on multiple uncontrolled transactions, with an adjustment made if falling outside the range;
- Low added value services, including that taxpayers may apply the simplified method recommended by the OECD for determining the appropriate price for qualifying services, with a profit margin of 5% accepted on the costs of the services;
- Transfer pricing documentation, which includes that:
- Documentation must be considered suitable in all cases where it provides the information necessary to perform an analysis of the transfer prices applied, even if the method or comparables selected by the taxpayer are different from those identified by the tax authorities; and
- The presence of omissions or partial inaccuracies in the documentation that are unlikely to compromise the analysis cannot, in any case, lead to the documentation being considered unsuitable.
The Decree also includes that the Director of the Revenue Agency will update transfer pricing documentation provisions in line with international best practices and will issue further implementing provisions, considering updates of the provisions of the OECD transfer pricing guidelines.
On 18 May 2018, the U.S. IRS issued Country-by-Country Reporting News & Information Issue 2018-3 (email newsletter). The main points are reproduced as follows:
1. IRS Publishes New Content on Country-by-Country (CbC) Reporting
New content is available on the CbC Reporting pages:
- New CbC Reporting FAQs are now available.
- The Jurisdiction Status Table contains recently signed Competent Authority Arrangements for the exchange of CbC Reports.
2. IRS Releases Notification for U.S. Multinational Enterprises (MNEs) Filing Form 8975 with no U.S. Schedule A (Form 8975)
When submitting Form 8975 and Schedules A (Form 8975), filers must attach at least two Schedules A (Form 8975) to the Form 8975. At least one Schedule A should be for the United States.
A U.S. MNE group with only fiscally transparent United States business entities would not provide a Schedule A for the United States, but would provide a Schedule A for "stateless" entities.
Filers who did not submit either a U.S. or stateless Schedule A (Form 8975) will receive a letter notifying them that an amended return must be filed to ensure their complete and accurate information is exchanged.
3. IRS Advises U.S. MNEs of Procedures for Mailing Page 1 of Paper-Filed Form 8975 to the Ogden Mailbox
If a U.S. MNE files Form 8975 and Schedule A (Form 8975) on paper, the MNE should mail a copy of only page 1 of Form 8975 to Ogden to notify the IRS that Form 8975 and Schedules A (Form 8975) have been filed with a paper return.
If a U.S. MNE files Form 8975 and Schedules A (Form 8975) electronically, the filer should not mail a copy of page 1 of Form 8975 to the Ogden mailbox.
See the Instructions for Form 8975 and Schedule A (Form 8975) for further guidance.
4. IRS Issues Reminders for U.S. MNEs Amending Form 8975
If a U.S. MNE needs to amend a previously filed Form 8975 and Schedules A (Form 8975), file an amended Form 8975 and all Schedules A (Form 8975), including any that have not been amended, with an amended tax return. Use the amended return instructions for the return with which Form 8975 and Schedules A was originally filed and check the amended report checkbox at the top of Form 8975.
Note: In order to ensure the timely automatic exchange of the information on the amended Form 8975 and Schedules A (Form 8975), you should file the amended return and Form 8975 using the same method (electronically or by paper) as the original submission. For example, if the taxpayer is required to e-file an original return and needs to file an amended or superseding return, it must e-file the amended return.
On 17 May 2018, the Bahamas House of Assembly reportedly approved the Multinational Entities Financial Report Bill, 2018, which provides for Country-by-Country (CbC) reporting requirements and other measures in relation to the Bahamas' commitments as a BEPS Inclusive Framework member and its commitments for exclusion from the EU list of non-cooperative jurisdictions. With respect to CbC reporting, the Bill includes that the reporting requirement will apply for MNE groups meeting a USD (BSD) 850 million consolidated group revenue threshold. Other measures of the Bill include the removal of all preferential tax regimes for non-resident entities and the removal of ring-fencing in accordance with BEPS Action 5 (Harmful Tax Practice), as well as measures to allow for the introduction of corporate tax on income that will be prescribed by the Ministry, including on nonresident income from financial service products. Additional details will be published once available.
New Zealand's Budget 2018 was tabled in Parliament on 17 May 2018. The main tax-related initiatives of the Budget include:
- Loss ring-fencing - This initiative will help level the playing field between home buyers and investors by ring-fencing rental losses (previous coverage).
- New Model for Collection of GST on Low-value Goods - This initiative will raise more revenue from collecting GST on low-value imported goods (previous coverage).
- Research and Development Tax Incentive - This initiative will provide eligible businesses with a research and development (R&D) tax incentive that will provide a stable mechanism to incentivize increased business expenditure on R&D (previous coverage).
- Tax Compliance Activity – This initiative includes additional funding to enable Inland Revenue to increase the targeting of non-compliant customers to generate additional assessed revenue in the area of outstanding returns, and to identify legislative opportunities to increase compliance.
Click the following link for the Budget 2018 webpage, which includes links to the budget speech, a summary of the initiatives, and other information.
The Cyprus Ministry of Finance has announced the signing of an income tax treaty with Andorra on 18 May 2018. According to the announcement, the treaty is based on the OECD Model Convention and incorporates all the minimum standards of the BEPS project. Details of the treaty will be published once available.
The Hong Kong government has announced the publication of the order for the implementation of the pending income tax treaty with Saudi Arabia. The treaty, signed 24 August 2017 (previous coverage), is the first of its kind between the two jurisdictions and will enter into force on the first day of the second month following the exchange of the ratification instruments. The order will be tabled at the Legislative Council on 23 May for negative vetting.
On 16 May 2018, officials from Italy and Moldova concluded negotiations with the initialing of a social security agreement. The agreement must be signed and ratified before entering into force. An earlier agreement was signed in 2001 but was never ratified.
On 14 May 2018, the Congress of Peru approved for ratification the pending social security agreement with South Korea. The agreement, signed 1 March 2017, is the first of its kind between the two countries and will enter into force on the first day of the third month after the ratification instruments are exchanged.
On 17 May 2018, the U.S. President transmitted the pending social security agreement with Slovenia to Congress for implementation. The agreement, signed 17 January 2017, is the first of its kind between the two countries and will enter into force after the ratification instruments are exchanged.