RECENT IMPORTANT DEVELOPMENTS – PART II

(A) DEVELOPMENTS IN INDIA RELATING TO
INTERNATIONAL TAX

Ratification by India of the Multilateral
Convention to implement tax treaty-related measures to prevent Base Erosion and
Profit Shifting (Press release dated 2^nd July, 2019 issued by CBDT,
Ministry of Finance)

India has ratified the Multilateral
Convention to implement tax treaty-related measures to prevent Base Erosion and
Profit Shifting (MLI), which was signed by the Hon’ble Finance Minister in
Paris on 7^th June, 2017 along with representatives of more than 65
countries. On 25^th June, 2019 India deposited the Instrument of
Ratification to OECD, Paris, along with its final position in terms of Covered
Tax Agreements (CTAs), reservations, options and notifications under the MLI,
as a result of which MLI will come into force for India on 1^st
October, 2019 and its provisions will have effect on India’s DTAAs from FY
2020-21 onwards.

(B) OECD DEVELOPMENTS

(I) OECD
announces progress made in addressing harmful tax practices (BEPS Action 5)
(Source: OECD News Report dated 29^th January, 2019)

The OECD has
released a new publication, Harmful Tax Practices – 2018 Progress Report on
Preferential Regimes, which contains results demonstrating that
jurisdictions have delivered on their commitment to comply with the standard on
harmful tax practices, including ensuring that preferential regimes align
taxation with substance.

The assessment of
preferential tax regimes is part of ongoing implementation of Action 5 under
the OECD/G20 BEPS Project. The assessments are conducted by the Forum on
Harmful Tax Practices (FHTP), comprising of the more than 120 member
jurisdictions of the Inclusive Framework. The latest assessment by the FHTP has
yielded new conclusions on 57 regimes, including:

•    Three regimes have been
  found potentially harmful (Thailand).

The FHTP has
reviewed 255 regimes to date since the start of the BEPS Project, and the
cumulative picture of the Action 5 regime review process is as follows:

The report also
delivers on the Action 5 mandate for considering revisions or additions to the
FHTP framework, including updating the criteria and guidance used in assessing
preferential regimes and the resumption of application of the substantial
activities factor to no, or only nominal, tax jurisdictions. The report
concludes in setting out the next key steps for the FHTP in continuing to
address harmful tax practices.

(II) New
Beneficial Ownership Toolkit will help tax administrations tackle tax evasion
more effectively (Source: OECD News Report dated 20^th March, 2019)

The first ever beneficial
ownership toolkit was released today in the context of the OECD’s
Global Integrity and Anti-Corruption Forum. The toolkit, prepared by the
Secretariat of the OECD’s Global Forum on Transparency and Exchange of
Information for Tax Purposes in partnership with the Inter-American
Development Bank, is intended to help governments implement the Global Forum’s
standards on ensuring that law enforcement officials have access to reliable
information on who the ultimate beneficial owners are behind a company or other
legal entity so that criminals can no longer hide their illicit activities
behind opaque legal structures.

The toolkit was
developed to support Global Forum members and in particular developing
countries because the current beneficial ownership standard does not provide a
specific method for implementing it. To assist policy makers in assessing
different implementation options, the toolkit contains policy considerations
that Global Forum members can use in implementing the legal and supervisory
frameworks to identify, collect and maintain the necessary beneficial ownership
information.

‘Transparency of
beneficial ownership information is essential to deterring, detecting and
disrupting tax evasion and other financial crimes. The Global Forum’s standard
on beneficial ownership offers jurisdictions flexibility in how they implement
the standard to take account of different legal systems and cultures. However,
that flexibility can pose challenges particularly to developing countries,’
said Pascal Saint-Amans, Head of the OECD’s Centre for Tax Policy and
Administration. ‘This new toolkit is an invaluable new resource to help
them find the best approach.’

The toolkit covers
a variety of important issues regarding beneficial ownership, including:

With 154 members, a
majority of whom are developing countries, the Global Forum has been heavily
engaged in providing technical assistance on the new beneficial ownership
requirements, often with the support of partner organisations including the
IDB. The Toolkit offers another means to further equip members to comply with
the international tax transparency standards.

The Toolkit is the
first practical guide freely available for countries implementing the
international tax transparency standards. It will be frequently updated to
incorporate new lessons learned from the second-round EOIR peer reviews
conducted by the Global Forum, as well as best practices seen and developed by
supporting organisations.

(III)
International community agrees on a road-map for resolving the tax challenges
arising from digitalisation of the economy (Source: OECD News Report dated 31^st
May, 2019)

The international
community has agreed on a road-map for resolving the tax challenges arising
from the digitalisation of the economy, and committed to continue working
towards a consensus-based long-term solution by the end of 2020, the OECD
announced on 31^st May, 2019

The 129 members of
the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS)
adopted a Programme of Work laying out a process for reaching a new global
agreement for taxing multinational enterprises.

The document, which
calls for intensifying international discussions around two main pillars, was
approved during the 28-29 May plenary meeting of the Inclusive Framework, which
brought together 289 delegates from 99 member countries and jurisdictions and
ten observer organisations. It was presented by OECD Secretary-General Angel
Gurría to G20 Finance Ministers for endorsement during their 8-9 June
ministerial meeting in Fukuoka, Japan.

Drawing on analysis
from a Policy Note published in January, 2019 and informed by a public
consultation held in March, 2019, the Programme of Work will explore the
technical issues to be resolved through the two main pillars. The first pillar
will explore potential solutions for determining where tax should be paid and
on what basis (‘nexus’), as well as what portion of profits could or should be
taxed in the jurisdictions where clients or users are located (‘profit
allocation’).

The second pillar
will explore the design of a system to ensure that multinational enterprises –
in the digital economy and beyond – pay a minimum level of tax. This pillar
would provide countries with a new tool to protect their tax base from profit
shifting to low / no-tax jurisdictions and is intended to address remaining
issues identified by the OECD/G20 BEPS initiative.

In 2015, the OECD
estimated revenue losses from BEPS of up to USD 240 billion, equivalent to 10% of
global corporate tax revenues, and created the Inclusive Forum to co-ordinate
international measures to fight BEPS and improve the international tax rules.

‘Important progress
has been made through the adoption of this new Programme of Work, but there is
still a tremendous amount of work to do as we seek to reach, by the end of
2020, a unified long-term solution to the tax challenges posed by
digitalisation of the economy,’ Mr Gurría said. ‘Today’s broad agreement on the
technical roadmap must be followed by strong political support towards a
solution that maintains, reinforces and improves the international tax system.
The health of all our economies depends on it.’

The Inclusive
Framework agreed that the technical work must be complemented by an impact
assessment of how the proposals will affect government revenue, growth and
investment. While countries have organised a series of working groups to
address the technical issues, they also recognise that political agreement on a
comprehensive and unified solution should be reached as soon as possible,
ideally before the year-end, to ensure adequate time for completion of the work
during 2020.

(IV)
Implementation of tax transparency initiative delivering concrete and
impressive results (Source: OECD News Report dated 7^th June, 2019)

International
efforts to improve transparency via automatic exchange of information on
financial accounts are improving tax compliance and delivering concrete results
for governments worldwide, according to new data released on 7^th
June, 2019 by the OECD.

More than 90
jurisdictions participating in a global transparency initiative under the
OECD’s Common Reporting Standard (CRS) since 2018 have now exchanged
information on 47 million offshore accounts, with a total value of around EUR
4.9 trillion. The Automatic Exchange of Information (AEOI) initiative –
activated through 4,500 bilateral relationships – marks the largest exchange of
tax information in history, as well as the culmination of more than two decades
of international efforts to counter tax evasion.

‘The international
community has brought about an unprecedented level of transparency in tax
matters which will bring concrete results for government revenues and services
in the years to come,’ according to OECD Secretary-General Angel Gurria,
unveiling the new data prior to a meeting of G20 finance ministers in Fukuoka,
Japan. ‘The transparency initiatives we have designed and implemented through
the G20 have uncovered a deep pool of offshore funds that can now be effectively
taxed by authorities worldwide. Continuing analysis of cross-border financial
activity is already demonstrating the extent that international standards on
automatic exchange of information have strengthened tax compliance and we
expect to see even stronger results moving forward,’ Mr Gurria said.

Voluntary
disclosure of offshore accounts, financial assets and income in the run-up to
full implementation of the AEOI initiative resulted in more than EUR 95 billion
in additional revenue (tax, interest and penalties) for OECD and G20 countries
over the 2009-2019 period. This cumulative amount is up by EUR 2 billion since
the last reporting by OECD in November, 2018.

Preliminary OECD
analysis drawing on a methodology used in previous studies shows the very substantial
impact AEOI is having on bank deposits in international financial centres
(IFCs). Deposits held by companies or individuals in more than 40 key IFCs
increased substantially over the 2000 to 2008 period, reaching a peak of USD
1.6 trillion by mid-2008.

These deposits have
fallen by 34% over the past ten years, representing a decline of USD 551
billion, as countries adhered to tighter transparency standards. A large part
of that decline is due to the onset of the AEOI initiative, which accounts for
about two-thirds of the decrease. Specifically, AEOI has led to a decline of 20
to 25% in the bank deposits in IFCs, according to preliminary data. The
complete study is expected to be published later this year.

‘These impressive
results are only the first stock-taking of our collective efforts,’ Mr Gurria
said. ‘Even more tax revenue is expected as countries continue to process the
information received through data-matching and other investigation tools. We
really are moving closer to a world where there is nowhere left to hide.’

(V) Money
Laundering and Terrorist Financing Awareness Handbook for Tax Examiners and Tax
Auditors

The OECD in June,
2019 released an update of its 2009 Money Laundering Awareness Handbook for
Tax Examiners and Tax Auditors. This update enhances the 2009 publication
with additional chapters such as ‘Indicators on Charities and Foreign Legal
Entities’ and ‘Indicators on Cryptocurrencies’ relating to money laundering. In
a separate chapter, the increasing threat
of terrorism is addressed by including indicators of terrorist financing.

The purpose of the Money
Laundering and Terrorist Financing Awareness Handbook for Tax Examiners and Tax
Auditors is to raise the awareness level of tax examiners and tax auditors
regarding money laundering and terrorist financing. As such, the primary
audience for this Handbook are tax examiners and tax auditors who may come
across indicators of unusual or suspicious transactions or activities in the
normal course of tax reviews or audits and report to an appropriate authority.
While this Handbook is not intended to detail criminal investigation methods,
it does describe the nature and context of money laundering and terrorist
financing activities, so that tax examiners and tax auditors, and by extension
tax administrations, are able to better understand how their contributions can
assist in the fight against serious crimes.

While the aim of
this Handbook is to raise the awareness of the tax examiners and tax auditors
about the possible implications of transactions or activities related to money
laundering and terrorist financing, the Handbook is not meant to replace
domestic policies or procedures. Tax examiners and tax auditors will need to
carry out their duties in accordance with the policies and procedures in force
in their country.

(VI)  G20 Osaka Leaders’ Declaration

The leaders of the
G20 met in Osaka, Japan on 28-29 June, 2019 to make united efforts to address
major global economic challenges. They stated in their declaration that they
will work together to foster global economic growth while harnessing the power
of technological innovation, in particular digitalisation, and its application
for the benefit of all.

In the declaration,
para 16, relating to tax, stated as follows:

‘16. We will
continue our co-operation for a globally fair, sustainable, and modern
international tax system, and welcome international co-operation to advance
pro-growth tax policies. We reaffirm the importance of the worldwide
implementation of the G20/OECD Base Erosion and Profit Shifting (BEPS) package
and enhanced tax certainty. We welcome the recent progress on addressing the
tax challenges arising from digitalisation and endorse the ambitious work
programme that consists of a two-pillar approach, developed by the Inclusive
Framework on BEPS. We will redouble our efforts for a consensus-based
solution with a final report by 2020. We welcome the recent achievements on tax
transparency, including the progress on automatic exchange of information for
tax purposes. We also welcome an updated list of jurisdictions that have not
satisfactorily implemented the internationally agreed tax transparency
standards. We look forward to a further update by the OECD of the list that
takes into account all of the strengthened criteria. Defensive measures will be
considered against listed jurisdictions. The 2015 OECD report inventories
available measures in this regard. We call on all jurisdictions to sign and
ratify the Multilateral Convention on Mutual Administrative Assistance in Tax
Matters. We reiterate our support for tax capacity building in developing
countries.’

(VII)  OECD expands transfer pricing country
profiles to cover 55 countries

The OECD has just
released new transfer pricing country profiles for Chile, Finland and Italy,
bringing the total number of countries covered to 55. In addition, the OECD has
updated the information contained in the country profiles for Colombia and
Israel.

These country
profiles reflect the current state of legislation and practice in each country
regarding the application of the arm’s-length principle and other key transfer
pricing aspects. They include information on the arm’s-length principle,
transfer pricing methods, comparability analysis, intangible property,
intra-group services, cost contribution agreements, transfer pricing
documentation, administrative approaches to avoiding and resolving disputes,
safe harbours and other implementation measures as well as to what extent the
specific national rules follow the OECD Transfer Pricing Guidelines.

The transfer
pricing country profiles are published to increase transparency in this area
and reflect the revisions to the Transfer Pricing Guidelines resulting from the
2015 Reports on Actions 8-10 Aligning Transfer Pricing Outcomes with Value
Creation and Action 13 Transfer Pricing Documentation and Country-by-Country
Reporting of the OECD/G20 Project on Base Erosion and Profit Shifting
(BEPS), in addition to changes incorporating the revised guidance on safe
harbours approved in 2013 and consistency changes made to the rest of the
OECD Transfer Pricing Guidelines.

A.    UN
DEVELOPMENTS

(VIII)     Manual
for the Negotiation of Bilateral Tax Treaties between Developed and Developing
Countries, 2019

The United Nations Manual for the Negotiation of Bilateral Tax Treaties
between Developed and Developing Countries (2019) is a compact training tool
for beginners with limited experience in tax-treaty negotiations. It seeks to
provide practical guidance to tax-treaty negotiators in developing countries,
in particular those who negotiate based on the United Nations Model Double
Taxation Convention between Developed and Developing Countries. It deals with
all the basic aspects of tax-treaty negotiations and it is focused on the
realities and stages of capacity development of developing countries.

The core of the Manual is contained in Section III which
introduces the different Articles of the United Nations Model Double Taxation
Convention between Developed and Developing Countries (United Nations Model
Convention). This section is not intended to replace the Commentaries thereon,
which remain the final authority on issues of interpretation, but rather to
provide a simple tool for familiarising less experienced negotiators with the
provisions of each Article.

We sincerely hope that the reader would find the above developments to
be interesting and useful.