In this article, we have covered some of these developments for updating the readers.
1. OECD RELEASES THE LATEST EDITION OF THE TRANSFER PRICING GUIDELINES FOR MULTINATIONAL ENTERPRISES AND TAX ADMINISTRATIONS
The OECD Transfer Pricing Guidelines provide guidance on the application of the “arm’s length principle”, which represents the international consensus on the valuation, for income tax purposes, of cross-border transactions between associated enterprises. In today’s economy, where multinational enterprises play an increasingly prominent role, transfer pricing continues to be high on the agenda of tax administrations and taxpayers alike. Governments need to ensure that the taxable profits of MNEs are not artificially shifted out of their jurisdiction and that the tax base reported by MNEs in their country reflects the economic activity undertaken therein and taxpayers need clear guidance on the proper application of the arm’s length principle.
This latest edition consolidates into a single publication the changes to the 2017 edition of the Transfer Pricing Guidelines resulting from:
- The report Revised Guidance on the Transactional Profit Split Method, approved by the OECD/G20 Inclusive Framework on BEPS on 4th June, 2018, and which replaced the guidance in Chapter II, Section C (paragraphs 2.114-2.151) found in the 2017 Transfer Pricing Guidelines and Annexes II and III to Chapter II;
- The report Guidance for Tax Administrations on the Application of the Approach to Hard-to-Value Intangibles, approved by the OECD/G20 Inclusive Framework on BEPS on 4th June, 2018, which has been incorporated as Annex II to Chapter VI;
- The report Transfer Pricing Guidance on Financial Transactions, adopted by the OECD/G20 Inclusive Framework on BEPS on 20th January, 2020, which has been incorporated into Chapter I (new Section D.1.2.2) and in a new Chapter X;
- The consistency changes to the rest of the OECD Transfer Pricing Guidelines needed to produce this consolidated version of the Transfer Pricing Guidelines, which were approved by the OECD/G20 Inclusive Framework on BEPS on 7th January, 2022.
2. OECD RELEASES THIRD BATCH OF TRANSFER PRICING COUNTRY PROFILES
The updated country profiles add new information on countries’ legislations and practices regarding the transfer pricing aspects of financial transactions and the application of the Authorised OECD Approach (AOA) on the attribution of profits to permanent establishments. In addition, the country profiles reflect updated information on a number of transfer pricing aspects such as methods, comparability, intra-group services, cost contribution agreements, transfer pricing documentation and administrative approaches to prevent and resolve disputes.
In August and December 2021, the OECD released the first and second batches of updated transfer pricing country profiles. With this third batch, the profiles for Brazil, Canada, Chile, China, Croatia, Dominican Republic, Estonia, Finland, Greece, Hungary, Israel, Korea, Liechtenstein, Lithuania, Luxembourg, Malta, Panama, Portugal, Slovenia, the United Kingdom, Uruguay and the United States have been updated, and 6 new country profiles from OECD/G20 Inclusive Framework on BEPS Members (Honduras, Iceland, Jamaica, Papua New Guinea, Senegal and Ukraine) were added, bringing the total number of countries covered to 69.
The OECD will continue to update existing transfer pricing country profiles to include new jurisdictions as changes in legislation or practice are submitted to the OECD Secretariat.
To access the latest transfer pricing country profiles, visit: https://oe.cd/transfer-pricing-country-profiles
3. TAX CHALLENGES OF DIGITALISATION: DRAFT RULES FOR TAX BASE DETERMINATIONS UNDER AMOUNT A OF PILLAR ONE
The purpose of the tax base determinations rules is to establish the profit (or loss) of an in-scope MNE that will be used for the Amount A calculations to reallocate a portion of its profits to market jurisdictions. The rules determine that profit (or loss) will be calculated on the basis of the consolidated group financial accounts while making a limited number of book-to-tax adjustments. The rules also include provisions for the carry-forward of losses.
Public comments received on Draft rules for tax base determinations under Amount A of Pillar One are available on the OECD website for reference.
4. TAX CHALLENGES OF DIGITALISATION: TAX CERTAINTY ASPECTS OF AMOUNT A UNDER PILLAR ONE
A central element of Amount A is an innovative Tax Certainty Framework for Amount A, which guarantees certainty for in-scope groups over all aspects of the new rules, including the elimination of double taxation. This eliminates the risk of uncoordinated compliance activity in potentially every jurisdiction where a group has revenues, as well as a complex and time-consuming process to eliminate the resulting double taxation. The Tax Certainty Framework incorporates a number of elements designed to address different potential risks posed by the new rules:
- A Scope Certainty Review, to provide an out-of-scope Group with certainty that it is not in-scope of rules for Amount A for a Period, removing the risk of unilateral compliance actions.
- An Advance Certainty Review to provide certainty over a Group’s methodology for applying specific aspects of the new rules that are specific to Amount A, which will apply for a number of future Periods.
- A Comprehensive Certainty Review to provide an in-scope Group with binding multilateral certainty over its application of all aspects of the new rules for a Period that has ended, building on the outcomes of any advance certainty applicable for the Period.
Furthermore, a tax certainty process for issues related to Amount A will ensure that in-scope Groups will benefit from dispute prevention and resolution mechanisms to avoid double taxation due to issues related to Amount A (e.g. transfer pricing and business profits disputes), in a mandatory and binding manner. An elective binding dispute resolution mechanism will be available only for issues related to Amount A for developing economies that are eligible for deferral of their BEPS Action 14 peer review and have no or low levels of MAP disputes.
The Inclusive Framework on BEPS released the public consultation documents on a Tax Certainty Framework for Amount A and Tax Certainty for Issues Related to Amount A in order to obtain public comments, but this does not reflect consensus regarding the substance of the documents. The stakeholder input received will assist members of the Inclusive Framework on BEPS in further refining and finalising the relevant rules.
Public comments received on tax certainty aspects of Amount A of Pillar One are available on the OECD website for reference.
5. TAX CHALLENGES OF DIGITALISATION: THE REGULATED FINANCIAL SERVICES EXCLUSION UNDER AMOUNT A OF PILLAR ONE
The Regulated Financial Services Exclusion will exclude from the scope of Amount A the revenues and profits from Regulated Financial Institutions. The defining character of this sector is that it is subject to a unique form of regulation, in the form of capital adequacy requirements, that reflect the risks taken on and borne by the firm. The scope of the exclusion derives from that requirement, meaning that Entities that are subject to specific capital measures (and only those) are excluded from Amount A.
Public comments received on the regulated financial services exclusion under Amount A of Pillar One are available on the OECD website for reference.
6. CHINA DEPOSITS AN INSTRUMENT FOR THE APPROVAL OF THE MULTILATERAL BEPS CONVENTION
On 1st June, 2022, over 880 treaties concluded among the 76 jurisdictions which have ratified, accepted or approved the BEPS Convention will have already been modified by the BEPS Convention. Around 940 additional treaties will be modified once the BEPS Convention will have been ratified by all Signatories.
7. OECD RELEASED DETAILED TECHNICAL GUIDANCE ON THE PILLAR TWO MODEL RULES FOR 15% GLOBAL MINIMUM TAX
The release of the Commentary to the GloBE Rules provides MNEs and tax administrations with detailed and comprehensive technical guidance on the operation and intended outcomes under the rules and clarifies the meaning of certain terms. It also illustrates the application of the rules to various fact patterns. The Commentary is intended to promote a consistent and common interpretation of the GloBE Rules that will facilitate coordinated outcomes for both tax administrations and MNE Groups.
The OECD/G20 Inclusive Framework on BEPS is developing an Implementation Framework to support tax authorities in the implementation and administration of the GloBE Rules.
The full text of the GloBE Rules and its Commentary can be accessed at https://oe.cd/pillar-two-model-rules
8. NEW RESULTS ON THE PREVENTION OF TAX TREATY SHOPPING SHOW PROGRESS CONTINUES WITH THE IMPLEMENTATION OF INTERNATIONAL TAX AVOIDANCE MEASURES
This peer review process, which includes data on tax treaties concluded by each of the 139 jurisdictions that were members of the OECD/G20 Inclusive Framework on BEPS on 31st May, 2021, was the first to be carried out under the revised methodology forming the basis of the assessment of the Action 6 minimum standard.
The fourth peer review report reveals that members of the OECD/G20 Inclusive Framework on BEPS are respecting their commitment to implement the minimum standard on treaty shopping. It further demonstrates that the BEPS Multilateral Instrument (MLI) has been the tool used by the vast majority of jurisdictions that have begun implementing the BEPS Action 6 minimum standard, and that the MLI has continued to significantly expand the implementation of the minimum standard for the jurisdictions that have ratified it.
The impact and coverage of the MLI are expected to rapidly increase as jurisdictions continue their ratifications and as other jurisdictions with large tax treaty networks consider joining it. To date, the MLI covers 99 jurisdictions and over 1,800 bilateral tax treaties.
As one of the four minimum standards, BEPS Action 6 identified treaty abuse, and in particular treaty shopping, as one of the principal sources of BEPS concerns. Treaty shopping typically involves the attempt by a person to access indirectly the benefits of a tax agreement between two jurisdictions without being a resident of one of those jurisdictions. To address this issue, all members of the OECD/G20 Inclusive Framework on BEPS have committed to implementing the BEPS Action 6 minimum standard and participate in annual peer reviews to monitor its accurate implementation.
9. MAKING TAX DISPUTE RESOLUTION MORE EFFECTIVE: NEW PEER REVIEW ASSESSMENTS FOR ANDORRA, BAHAMAS, BERMUDA, BRITISH VIRGIN ISLANDS, CAYMAN ISLANDS, FAROE ISLANDS, MACAU (CHINA), MOROCCO AND TUNISIA
These reports evaluate the progress made by these nine jurisdictions in implementing the recommendations resulting from their Stage 1 peer review. They take into account any developments in the period of 1st September, 2019 – 30th April, 2021 and build on the Mutual Agreement Procedure (MAP) statistics for 2016-2020.
The results from the peer review and peer monitoring process demonstrate positive changes across all nine jurisdictions, although not all show the same level of progress. Highlights include:
- The Multilateral Instrument was signed by Andorra, Morocco and Tunisia, with the instrument already being ratified by Andorra, which will bring a substantial number of their treaties in line with the Action 14 minimum standard. In addition, there are bilateral negotiations either ongoing or concluded.
- Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Faroe Islands, Macau (China), Morocco and Tunisia now have a documented bilateral notification/consultation process that they apply in cases where an objection is considered as being not justified by their competent authority.
- The Faroe Islands closed MAP cases within the pursued average time of 24 months, whereas Andorra, Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Macau (China) had no MAP experience.
- Andorra, Macau (China) and Tunisia ensure that MAP agreements can always be implemented notwithstanding domestic time limits.
- Bermuda, Faroe Islands, Macau (China), Morocco and Tunisia have issued or updated their MAP guidance.
The OECD will continue to publish Stage 2 peer review reports in batches in accordance with the Action 14 peer review assessment schedule. In total, 82 Stage 1 peer review reports and 69 Stage 1 and Stage 2 peer monitoring reports have been published, with the tenth and final batch of Stage 2 reports being released in a few months.
10. INTRODUCTION OF CORPORATE TAX IN THE UAE
The UAE currently does not have a federal CT regime. CT is determined at an Emirate level through tax decrees. Currently, at an Emirate level, the UAE only levies a corporate tax on oil and gas companies and branches of foreign banks. Furthermore, the UAE benefits from the presence of more than 40 free zones, which have their own rules and regulations. Such zones generally afford companies incorporated therein significant tax benefits, making the UAE an attractive jurisdiction from a tax perspective. Additionally, the UAE does not levy income tax on employment-based income.
The UAE, as a member of the OECD inclusive framework, is introducing the federal CT regime as a stepping stone to the execution of its commitment to the global minimum effective tax rate concept proposed by Pillar II of the OECD BEPS project. The responsible body of oversight has been designated as the Federal Tax Authority (FTA). In introducing CT, the UAE aims to further its objectives of accelerating its development and transformation by introducing “a competitive CT regime that adheres to international standards, together with the UAE’s extensive network of double tax treaties, which will cement the UAE’s position as a leading jurisdiction for business and investment”. The introduction of CT is also perceived as an important step in diversifying the UAE Government’s budget revenue away from revenues that today are mainly generated from the hydrocarbon industry. The Consultation Document offers assurances that the CT regime will build on international best practices as opposed to introducing new concepts, in order to ensure the seamless integration and cooperation of the regime with existing international frameworks.
The Consultation Document indicates that the UAE Government has been guided by a set of key principles in its legislative undertaking. Such principles include: (1) flexibility and alignment with modern business practices, ensuring adaptability to changing socio-economic circumstances; (2) certainty and simplicity of the tax rules to support businesses’ accurate decision-making and cost effective operation; (3) neutrality and equity, ensuring fair taxation treatment to different types of businesses; and (4) transparency.
The Consultation Document heavily emphasises the UAE’s ongoing commitment to executing BEPS 2.0, noting that “further announcements on how the Pillar Two rules will be embedded into the UAE CT regime will be made in due course.” No further practical guidance is otherwise offered in the Consultation Document.
