Can the policing of cross border transactions within an international group to be a target of the tax authorities’ attention and in what ways?
Tax (2nd Edition)
Within the policy of surveillance of cross border transactions, Spain signed, on the 7th of June 2017, the multilateral Agreement to implement measures related to the Tax Treaty to avoid BEPS signed by the OECD/G20. These measures affect bilateral agreements signed in order to avoid double taxation and they imply a multilateral initiative to fight against evasion and international tax fraud.
Likewise, and because cross border transactions are the weak link of Value Added Tax, Spain is studying different alternatives to palliate such a problem.
Brussels is preparing a pile of Directives with the goal of controlling the de-taxation of e-commerce and face the VAT fraud plots and plans to enforce them in the next years. This regulatory offence will not only increase the information obligations of international corporate groups but will also clarify the chaos that the taxation of cross border transactions implies nowadays, by instituting the payment of VAT at destination.
Transfer pricing (“TP”) aspects related to pricing of related party transactions (including cross-border transactions within a multinational group) represent one of the key focus areas in tax audits conducted by Romanian tax authorities. TP documentation prepared in accordance with specific Romanian TP documentation requirements is expected to be already available (for certain taxpayers) or provided within certain deadlines specified by the regulations. Scrutiny of the tax authorities is related not only to the content of the TP documentation but also in relation to substance of the related party transactions (e.g., we have observed challenges of the functional and risk profile of the entities, challenges in terms of compliance with specific Romanian TP requirements of the benchmarking analyses). The number of TP adjustments resulting from audits concluded by the Romanian tax authorities has increased significantly in the last period.
Cross border transactions, specifically the transfer pricing associated with those transactions, is an area of focus for the ATO. This is manifested in a number of ways, through:
- taxpayers being required to disclose their cross border transactions and transfer pricing (for example, the requirement for some taxpayers to complete the international dealings schedule in the annual tax return and the requirement for SGEs with a taxable presence in Australia to provide general purpose financial statements);
- compliance and enforcement activity (e.g. risk reviews and audits) focused on cross border transactions and transfer pricing; and
- the ATO issuing guidance on its compliance approach to various cross border transactions and transfer pricing issues and what the ATO sees as risk factors which will attract the allocation of compliance resources. For example, “Practical Compliance Guidelines” have been issued in respect of intra-group financing transactions and the use of offshore marketing or procurement hubs.
More generally, the taxation of multinational enterprises has been the subject of political attention, with the Australian government introducing a DPT and a Multinational Anti-Avoidance Law (MAAL) (which targets arrangements designed to avoid the creation of a permanent establishment or other taxable presence in Australia, discussed further in question 10 below) in response to public sentiment that multinationals are not paying their “fair share” of tax in Australia.
When a company is facing a tax audit, the tax agent is immediately requesting the local file relating to the transfer pricing (TP) policy of the group and the annual tax forms 2257 relating to TP, as well as any ruling granted by the FTA. However, no significant increase in TP's tax reassessments has been noted yet: the FTA agents still tend to ground these tax reassessments on the theory of the abnormal management act, rather than on specific TP provisions.
This situation may change in a near future when the FTA will exploit the recent TP data collected from the taxpayers.
The CRA has over the last 15 years devoted significantly greater internal resources to transfer pricing audits, which are initiated virtually as a matter of course when the CRA becomes aware of non-arm’s length transactions involving non-residents. The CRA is increasingly aggressive in challenging intercompany transactions, with a particular focus on inbound and outbound royalty payments and inventory transfers, transfers of technology to low-tax jurisdictions, and the payment of management and guarantee fees by Canadian taxpayers. Transfer pricing penalties assessed by the CRA have increased dramatically in the last 5 years.
In 2016 Canada became a signatory to the Multilateral Competent Authority Agreement to implement the OECD’s transfer-pricing documentation requirements and country-by-country reporting. Consistent with the OECD recommendations, the Income Tax Act now requires country-by-country reporting for multinational enterprises with annual revenues exceeding €750 million in the preceding taxation year.
There are several factors indicating that the tax authority has increased its scrutiny of intragroup transactions. The number of tax inspectors specialized in transfer pricing has increased importantly, which has resulted in a higher number of transfer pricing audits. Also, new reporting requirements with regard to certain cross-border transactions have been introduced by law during the last several years. Most notably, Belgium has implemented into national law the transfer pricing documentation requirements in accordance with BEPS Action 13 (Law of 1 July 2016). These requirements will allow the tax authority to better monitor intragroup cross-border transactions.
Yes, when performing an audit, the Bulgarian tax authorities check all tax issues within the scope of said audit including the policing of cross border transactions within an international group.
Usually the tax authorities examine the distribution of dividends, fees paid for law added value services, transfer pricing issues. The Bulgarian tax authorities usually strictly examine who is the beneficial owner of the income.
Yes. Cross border transactions are a prime target of the IRS – in both IRS examinations and in cases that are litigated. International aspects of transactions are closely scrutinized. Transfer pricing is a very large target with all intercompany sales, services and licensing transactions reviewed closely by IRS examination teams. Typically, the first question an IRS examination team will ask is to review a taxpayer’s transfer pricing studies. Other targeted areas are those where companies are moving intellectual property or activities out of the United States. The IRS has challenged cost sharing arrangements, valuation of pre-existing intangibles and allocation of royalty income, in such recent cases as Veritas Software Corp. v. Commissioner, 133 T.C. 297 (2009), nonacq., Amazon v. Commissioner, 148 T.C. No. 8 (2017), 3M Co. v. Commissioner, T.C. No. 5816-13. In addition, cross border intercompany restructurings and attempted repatriations to bring back cash to the United States are often targets as in BMC Software, Inc. v Commissioner, 780 F.3d 669 (5th Cir. 2013).
The IRS has also waged its attack on cross border transactions by regulation. In a series of recent pronouncements, the IRS has attempted to prevent certain cross border transactions by attacking, for example, cross-border reverse triangular reorganizations (“Killer B” transactions) under IRC section 367(b) regulations (T.D. 9526), outbound transfers of foreign goodwill and going concern value under regulations that modify IRC sections 367(a) and 367(d) (T.D. 9803)(currently under review by the U.S. Treasury Department for possible modification or withdrawal), inversion transactions under IRC sections 7874 and 367 regulations (T.D. 9761), and the treatment of certain interests in corporations that are debt as equity (T.D. 9790) (currently under review by the U.S. Treasury Department for possible modification or withdrawal).
Some types of operations and deals that refer to money payments abroad can be the target of the tax authorities` attention.
An example of such an operation is the payment of passive income (dividends, royalties, or interest) using reduced rates established by double tax treaties of Ukraine. In this case, the issue that could be additionally checked by fiscal authorities, is the beneficiary status of the recipient of the payable income. The main point to be determined is if the non-resident recipient of income is not a conduit company. Another type of transactions to that are targeted by tax authorities are supply transactions between related parties. Such operations shall be deemed controlled, and the deal price should comply with “the arm's length” principle. Formation of the value of the products or services shall be marketable.
Operations are also risky in case of dealing with companies that are residents of countries from blacklisted jurisdictions or blacklisted companies (LLC, LLP, SLP, etc).
Most companies in Cyprus operate internationally and the tax authorities do not target such companies.
Cross border transactions have been a target in tax audits for many years. The use of intermediary entities by exporters/importers in Ecuador to shift income to other jurisdictions (traditionally tax havens) has been a widespread practice among taxpayers. This type of planning is currently considered aggressive if the activity lacks economic substance. Today, transfer pricing rules regulate this type of transactions. Other transactions such as related party foreign financing have been banned by penalizing interest payments as nondeductible.
International tax planning and avoidance has a high public profile in the UK. The UK has been an active and vocal supporter of the OECD and BEPS project since its inception and has actively implemented BEPS recommendations. The UK was ahead of the BEPs process with the introduction, in 2015, of the Diverted Profits Tax, to claw back any profits that have been shifted to avoid tax. Furthermore, the UK had the arbitrage legislation since about 2005. So attention has been paid to cross-border transactions for a long time.
Yes, we have noted an increase of focus in cross border transactions. This is particularly so from foreign tax authorities. We have seen an increasing amount of requests for information under the Income Tax Act 2010, our tax information exchange agreements and under the relevant EU Directives.
Lately, cross-border transactions within international groups of companies have come under increasing scrutiny from the tax authorities. Transfer prices between related entities are thoroughly assessed, to make sure that they are consistent with the arm’s length principle (see 9. below). Offshore entities are closely inspected as well, and may be considered a Swiss resident if their effective place of management is in Switzerland (see 7. above).
Yes. One of the fields the ITA has been focusing on in cross-border transactions relates to group restructurings and implementation of changes to business models, most commonly following an acquisition of an Israeli target company. The ITA will typically examine whether such restructurings, the impact of which may reduce taxable profits in Israel, have a business purpose and legitimate and economic substance beside the main purpose of tax avoidance. A particular area of focus is the appropriate transfer price of intellectual property of newly acquired Israeli companies that is transferred to its non-Israeli affiliates post-acquisition.
In addition, the ITA tends to carefully examine claims for reduced rates of withholding based on double tax treaties and is sensitive to treaty shopping. Prior to determining eligibility for treaty benefits with respect to related party cross-border transactions (such as reduced rates on royalty or interest payments), the ITA will check if the entity claiming relief is resident both “legally and factually” in the treaty country and the is the beneficial owner of the income. In conducting the examination, the ITA applies general beneficial ownership and “economic substance” doctrines.
Following a recent amendment to the tax law that would deem certain inter-company financing arrangements and guarantees from Israeli companies to non-Israeli related parties as dividends or other income, we expect the ITA will execute heightened scrutiny on these matters in the future.
Italian tax authorities tend to have a strict approach and are also usually keen on verifying cross-border transactions of companies of multinational groups. Particularly, the challenges most often raised by the tax authorities are the following:
- Assessment of tax residence of foreign holding companies. In these cases, the tax authorities challenge the residence status of the foreign entity claiming that, on the basis of an analysis of all facts and circumstances, it shall be considered tax resident of Italy because its main object or place of management (see answer No. 7 above) are to be located in Italy.
- Existence of an Italian permanent establishment. In these cases, the tax authorities claimed that the Italian operations of the foreign company determined the existence of an Italian permanent establishment and taxed them accordingly.
- Transfer pricing.
- Denial of the treaty WHT rates due to lack of beneficial ownership condition and denial of dividend WHT exemption in case of abuse of Parent Subsidiary Directive.
Yes. In the context of the implementation of the BEPS, the approach of the Tax Authorities on cross-border transactions occurs mainly in the areas of transfer pricing, aggressive tax planning and Country-by-Country.
The KRA has been increasing its scrutiny of multinational enterprises operating in Kenya, primarily through the review of transfer pricing policies in relation to cross-border related party transactions. There have also been a number of high profile transfer pricing disputes relating to multinational enterprises which have demonstrated the increased focus on cross border transactions. In addition, the KRA has been continuously developing internal capacity on transfer pricing and it currently has very competent revenue officers who undertake transfer pricing audits and reviews.
As noted under paragraph 7 above, an entity can be deemed to be resident in Kenya if the management and control of the entity is exercised in Kenya. The KRA has increased focus on foreign entities to determine whether their management and control is exercised in Kenya.
On 8th February 2016, Kenya signed the Amended Convention on Mutual Administrative Assistance in Tax Matters (the Convention) but has not ratified it yet. Kenya is also a participating jurisdiction in the inclusive framework of the OECD BEPS project. As the Convention forms the basis of multilateral and bilateral competent authority agreements in tax administration, it is expected that once Kenya ratifies the Convention, cross-border transactions within an international group will be in even sharper focus.
The Polish tax authorities are focused on limiting tax optimization structures with the use of cross-border transactions and international structures. In addition, during the tax authorities’ audits, the tax authorities very often check, in great detail, transactions concluded by Polish entities with foreign related parties. This specifically relates to Polish taxpayers’ purchases of intangible services and financing arrangements.
Yes. Cross border transactions within an international group have been one of the most important focus in the enforcement of Japanese tax law. Typically, pricing or profit allocation as to intra-group transactions is scrutinized based on Japanese transfer pricing regulations. Also, cross-border intra-group transactions are frequently scrutinized in terms of Japanese withholding tax (i.e., if there is any failure to withhold applicable withholding tax), consumption taxes (i.e., if there is any failure to report input tax by the foreign affiliate even if it has no PE in Japan) or thin-capitalization and earnings-striping rules (i.e., if the Japanese affiliate takes interest deduction in excess of these regulations). Moreover, cross-border reorganization or recapitalization transactions was a significant focus of the enforcement, as seen in certain two Japanese tax tribunal and court cases (the IBM case and the Universal Music case), where the Japanese tax authority tried to disallow the tax consequences achieved by the parties that are consistent with the individual provisions of Japanese tax law, by invoking certain general anti-avoidance statute applicable to closely-held corporations.
The Dutch tax authorities do not have special attention for cross border transactions within international groups.
In line with the BEPS Action Plan, Mexican tax authorities are particularly concerned with base-eroding practises. Consequently, in the case of cross border transactions, they tend to focus on transactions between related parties, corporate reorganisations and similar operations conducted by multinationals.
In this regard, tax audits with respect to such operations tend to focus on the adequate compliance with transfer pricing rules (arm’s-length transactions), the (non)deductibility of certain expenses, or the actual existence of double taxation when the parties involved claim treaty benefits. For instance, parties that claim treaty benefits are required to comply with certain formal tax obligations under Mexican law in order to evidence that they actually qualify as residents in terms of the corresponding double taxation agreement and as such, that they are in fact entitled to the relevant tax benefits.
Moreover, concerning transaction between related parties in which treaty benefits are claimed, Mexican tax authorities could request a sworn affidavit (executed by the foreign resident’s legal representative) stating the existence of double taxation and identifying the statutes or provisions under foreign law that cause it.
Furthermore, taxpayers in Mexico could be bound to file informative returns in relation to their transaction with related parties or concerning their participation in offshore structures (they could even be subject to country-by-country based on CRS).
The Norwegian tax authorities consider transfer pricing and cross border transactions a field of great priority. The tax authority’s focus has been on for example intragroup financing arrangements, intra-group services and business restructurings and group organisation. Cases where the tax authorities are of the opinion that the transaction is not in compliance with the arm’s length principle are subject to extensive assessments. The signals from the OECD and the EU with respect to focus areas have great attention in this field.
Cross-border transactions within an international group of companies are a main focus during tax audits exercised by the tax authorities in Germany. In particular, transfer prices and the related documentation are often challenged by the tax authorities. If the documentation requirements are not met, the tax authorities are in principle authorized to estimate the respective prices which in almost all cases will lead to a higher tax liability.
Ordinary tax audits usually encompass VAT, CIT and withholding taxes. In case of ordinary tax audits, cross-border transactions within international groups always play an important role for tax authorities. Usually, increased attention is devoted to re-organizations, transfer pricing issues and other transactional details, such as debt-push down structures.
There are separate tax audits on wage tax and social security contributions and on stamp duty issues.