Direct Tax
OECD releases statistics from the International Compliance Assurance Programme (ICAP)
Excerpts from oecd.org dated 29 January 2024
The OECD released the first aggregated statistics from the Forum on Tax Administration (FTA) International Compliance Assurance Programme (ICAP) for a multilateral risk assessment of an MNE group’s key international tax risks. These statistics cover all cases completed by October 2023, including the two ICAP pilots, and provide an overview of the jurisdictions and topics covered by the completed risk assessments, the time taken to complete a risk assessment, and aggregated data on risk assessment outcomes. They also consider the relationship between ICAP and other routes to tax certainty, such as Advance Pricing Arrangements (APAs) and Mutual Agreement Procedures (MAPs), including how these tools complement each other and can be used together by an MNE group to manage its tax risk and increase tax certainty.
Key takeaways from the statistics include:
- 20 ICAP cases were completed by October 2023, with more currently in progress.
- The average time taken from the start of an ICAP process to the issuing of risk assessment outcomes to an MNE was 61 weeks, which is higher than the maximum target timeframe of 52 weeks described in the ICAP handbook, in part due to the impact of COVID-19 on the second pilot.
- For 40% of MNE groups, all the main covered transfer pricing risk areas were considered low risk by all tax administrations that included them in the scope of the risk assessment.
- The risk area that received the highest proportion of low-risk outcomes was PE (considered low risk in 95% of instances where the topic was included in the scope of a tax administration’s risk assessment), followed by tangible property (90%), intragroup services (88%), financing (76%) and intangible property (75%).
MNEs interested in applying for ICAP, including MNEs that have already participated in the program, should reach out to the tax administration in which their group is headquartered at the earliest convenience. For MNEs headquartered in a jurisdiction that does not currently participate in ICAP, such MNEs can contact the OECD to express their interest in participating.
Applications can be accepted at one of the two annual deadlines – 31 March and 30 September.
Transfer Pricing
United States: Issues guidance on implicit support for intra-group financing transaction
Recently, the Internal Revenue Service (IRS) Office of Chief Counsel issued an internal guidance in the form of a Generic Legal Advice Memorandum (GLAM) that provides insights into its position on the effect of group memberships on intra-group financing transactions under Section 482.
Section 482 provides for consideration of “all relevant factors” while determining the arm’s length rate of interest, which includes “the credit standing of the borrower.” The said regulation does not explicitly state that the borrower's credit standing should include implicit support when pricing intercompany debt.
However, in the GLAM, the IRS has outlined its position by clarifying that the factors contributing to the borrower’s credit rating include the borrower’s role, level of integration within the controlled group, and implicit support from affiliates. This approach is consistent with the Transfer Pricing Guidelines of the OECD.
The IRS posits by an example that even though the member from whom implicit support is expected is the lending entity in an intra-group arrangement, the borrowing entity should retain the benefit of a lower interest rate as per the realistic alternative principle6 and passive association rules7 contained in the regulations.
The guidance sheds light on expected positions the IRS might take in future audits on intra-group financing arrangements. Taxpayers should evaluate such arrangements to determine whether the borrower is essential to the group’s financial performance such that a party lender would take into account the inherent implicit support available to the borrowing entity.
The said guidance issued is a clarification of the existing law and is not a new law.
Italy: Revised timelines for maintaining Transfer Pricing Documentation
The Revenue Agency, vide Legislative Decree no. 1/2024, amended the due date to file income tax returns, pursuant to which taxpayers will have to file returns within nine months of the financial year’s end rather than 11 months, which existed earlier. Thus, taxpayers with calendar year end will have to file a return for 2023 electronically by 30 September 2024.
This would have a direct implication on transfer pricing compliance wherein the Transfer Pricing Documentation must be finalized, digitally signed, and timestamped before the income tax return is filed to qualify for penalty protections given under the law.
Taxpayers should review and reorganize their annual schedules in light of reduced timelines for compliance.
Poland: Issues revised Safe Harbour rates for intra-group loans
The Polish tax authority specified the following margins for Safe Harbor for loan, credit, or bond (debt) transactions between related parties in 2024:
- A maximum of 3.1 % for the borrower; and
- At least 2.2 % for the lender,
Although currently, the notice allows the usage of synthetic (USD / GBP) LIBOR for contracts entered on or before 1 January 2022, however, the same is planned to be discontinued at the end of September 2024 (for USD 3M Libor) and March 2024 (for GBP 3M Libor).
After the said discontinuation, the reference rate of SOFR and SONIA should be used.
6. This principle concludes that a borrowing entity would reject a financing at higher rate from related party when it could obtain the same from third party lender who would consider such “implicit support” of the group while lending.
7. These rules state that no compensation is owed for any benefit arising solely from passive association with a controlled group. Thus, the benefit of lower interest rate should be retained by the borrower absent legally binding explicit support.
Indirect Tax
Bulgarian VAT amendments effective 1 January 2024
Excerpts from various sources
The Bulgarian Parliament accepted changes to the VAT Act to align their legislation with the European legal acts. The key highlights of the amendments are captured below:
- Destroying or scrapping of goods that are duly proven to have lost all usefulness in the taxable person's economic activities will not give rise to an adjustment obligation.
- Reduced VAT rate of 9% on restaurant and catering services extended from 31 December 2023 to 31 December 2024.
- Reduced VAT rate of 9% for tourist services and use of sports facilities extended from 31 December 2023 to 30 June 2024.
- The zero VAT rate for bread and flour extended from 31 December 2023 to 30 June 2024.
- An increase in the threshold for mandatory VAT registration to BGN 166,000 from 1 January 2025.
Poland postpones mandatory E-invoicing system
Excerpts from www.gov.pl
The Polish Ministry of Finance has announced that the National e-Invoicing System (KSeF), which was to be mandatory from 1 July 2024, will be implemented at a later date. The Ministry will commission an external IT audit of the KSeF and set a new deadline for implementing the system.
VAT reduction is applicable till June 2024 in Vietnam
Excerpts from various sources
The Vietnamese Government has issued guidance (Decree 94/2023) on the 2% VAT reduction applicable from 1 January 2024 through 30 June 2024. The reduction applies to groups of goods and services currently subject to the tax rate of 10% (with some exceptions). It also applies to business establishments that adopt the VAT credit method and business establishments (including business households and business individuals) that declare and pay VAT at a deemed rate (%) of revenue.