Direct Tax

Brazil tax reform bill proposes tax cuts for individuals, companies

[Excerpt from Reuters, 25 June 2021]

Brazil's tax system is widely seen as one of the most complex in the world, and the government insists that simplifying it and reducing the overall tax burden is crucial to fostering sustainable, longterm investment and economic growth. Brazil's government unveiled the second phase of its wider tax reform bill, in which it aims to reduce income tax for up to 30 million workers, cut corporate profit tax, and increase levies on financial market gains and activity.

Delaware proposes tax cuts for the poor and tax hike for wealthy

[Excerpt from IBFD, 29 June 2021]

On 24 June 2021, the Delaware House of Representatives introduced a legislation, seeking an adjustment to the existing individual income tax brackets, cut individual tax rates for lower-income earners and increase tax rates for highincome earners effective for taxable years beginning on or after 1 January 2022. The bill is currently awaiting a hearing before the House Revenue and Finance Committee.

Indonesia proposes a discussion on new income bracket, Amnesty

[Excerpt from Bloomberg, 28 June 2021]

Indonesia began discussing a tax overhaul proposal with the parliament, with plans to increase VAT, impose a new income bracket and target loss-making firms, while offering potential amnesty. The general VAT covering most goods and services will be raised to 12%, from 10%, while certain items can carry variable 5% to 25% rates depending on the price, said Finance Minister Sri Mulyani Indrawati. The government included a tax amnesty program in the draft submitted to the parliament, although details were not read out during the hearing.

Transfer Pricing

European Union (EU) institutions reach a conclusion on Country-by-country reporting (CbCR) directive

The proposed CbCR directive reached a conclusion which was initially proposed in 2016 on 1 June 2021 by representatives of the EU institutions. Applicable to EU-based multinational enterprises (MNEs) and non-EU based MNEs doing business through a branch/ subsidiary with total consolidated revenue of more than EUR 750 million in each of the last two consecutive financial years, the directive shall be applicable from one financial year following the transposition deadline, i.e., 18 months of converting the directive to national law. The reporting under the law shall be within 12 months from the date of the balance sheet of the said financial year.

Key pointers from the directive

  • Every MNE is required to disclose details on the economic activity in every EU State, as well as third country either on Annex I of EU list of non-cooperative jurisdiction (i.e., blacklist) or is from the last two consecutive years on the Annex II of the EU list on non-cooperative jurisdictions (i.e., gray list).
  • Safeguard Clause: Publication of commercially sensitive information during the five-year safeguard clause can be delayed by companies. However, information regarding tax jurisdictions listed on the EU list of non-cooperative jurisdictions for tax purposes can never be omitted.
  • Every four years, the application shall be reviewed.

The details required to be disclosed by MNE would include:

  • The name of the ultimate parent undertaking or the standalone undertaking, the financial year concerned and the currency used.
  • The nature of activities, number of employees, total net turnover made, profit made after tax, amount of income tax due in the country by reason of the profits made in the current year in that country, amount of tax actually paid during that year and accumulated earnings.

Draft Guidance on Intangibles issued by the Australian Taxation Office (ATO)

The ATO released a draft Practical Compliance Guideline on crossborder arrangements connected with intangibles outlining the compliance approach to international arrangements connected with the Development, Enhancement, Maintenance, Protection and Exploitation (DEMPE) of intangible assets and/or involving the migration of intangible assets.

Key features of the Guidelines are outlined below -

Scope -

The draft PCG is applicable to all types of arrangements involving intangibles, including:

  • The transfer or migration of intangible assets between an Australian entity and offshore related parties.
  • The use of intangible assets, e.g. through licensing arrangements.
  • Activities related to DEMPE functions.
  • Characterization of intangible transactions, including whether payments in the nature of royalty have been appropriately recognized.

Applicability to Intangible Arrangements with -

  • Tax Risks and potential application of transfer pricing provisions to Intangible Arrangements; and
  • Tax Risk including withholding tax, Capital Gains Tax (CGT), General anti-avoidance rule (GAAR) and Diverted Profits Tax (DPT)

Risks Factors of Intangibles Arrangements -

On the basis of the risks factors outlined below, the taxpayer should maintain sufficient documentation and evidences in support of the Intangible Arrangement

  • Commercial considerations and decision making;
  • The legal form;
  • Identifying intangible assets and connected DEMPE activities;
  • Tax and profit outcomes; and
  • Type of arrangements i.e. high, medium or low risk

Framework for understanding the arrangement

  • Compliance risks;
  • Analysis of compliance risks and the documents and evidence in respect to the Arrangement;
  • Level of engagement basis assessment of compliance risk;
  • A way ahead to mitigate the compliance risks

The tax compliance for intangible arrangements is divided into 2 parts i.e. Compliance Approach and Risk Assessment Framework.

Compliance Approach

  1. Review of Intangible Arrangements to avoid mischaracterisation between Australian activities connected with DEMPE of intangible assets;
  2. Arrangement shouldn’t be such that it is not at arm’s length and structured to avoid tax litigations;
  3. Basis the functions performed, assets used and risks assumed in respect to DEMPE of intangible assets are properly recognised and remunerated basis arm’s length requirements;
  4. Application of other income tax provisions, such as GAAR and/or the DPT (Diverted Profits Tax), where there is
    • Lack of evidence of commercial rationale and/or substance
    • Tax benefit in connection with an Intangibles Arrangement and the other legislative conditions are met, the Commissioner may cancel the benefit
    • In respect to DPT tax benefit of Intangibles Arrangement and the other legislative conditions are met, the Commissioner may issue a DPT assessment.

Risk Assessment Framework

  1. Assessment of risks basis ‘Risks Factors’ outlining the features & examples considered for risk assessment and the documentation and evidence supporting the claim to success the level of risks;
  2. Understanding and evidencing commercial considerations and decision making specifically where there is a restructure or change;
  3. Risks Factors associated with Intangible Arrangements, including documentation maintained as per requirements

Indirect Tax

Impact of new EU VAT Rules on UK e-commerce sellers

The new EU VAT Rule coming into effect from 1 July 2021 requires online shoppers to pay VAT on all the packages bought from outside the European Union. The present VAT exemption on small items having a value less than EUR 22 will be removed.

Tax Street June 2021