Direct Tax
Steady progress in the implementation of the BEPS Action 6 minimum standard: latest peer review results
Excerpts from oecd.org dated 20 March 2024
Members of the OECD/G20 Inclusive Framework on BEPS (Inclusive Framework) continue to make steady progress in the implementation of the BEPS package to tackle international tax avoidance, as the Organization of Economic Cooperation and Development (OECD) releases the latest peer review report assessing jurisdictions' efforts to prevent tax treaty shopping and other forms of treaty abuse under Action 6 of the OECD/G20 BEPS Project. A revised peer review document forming the basis of the assessment of the BEPS Action 6 minimum standard was also released today.
The sixth peer review report on the implementation of the Action 6 minimum standard on treaty shopping, which includes data on tax treaties concluded by jurisdictions that were members of the Inclusive Framework on 31 May 2023, reveals that most agreements concluded between the members of the Inclusive Framework are either already compliant with the Action 6 minimum standard or will shortly come into compliance.
Consistent with previous years, the report (also available in French) confirms the importance of the BEPS Multilateral Instrument (BEPS MLI) as the tool used by most jurisdictions in implementing the BEPS Action 6 minimum standard.
The BEPS 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 BEPS MLI continue to increase as additional jurisdictions sign and ratify it. To date, the BEPS MLI covers 102 jurisdictions and around 1 900 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 the benefits of a tax agreement between two jurisdictions indirectly without being a resident of one of those jurisdictions. To address this issue, all members of the Inclusive Framework have committed to implementing the Action 6 minimum standard and participate in a periodic peer review process to monitor its accurate implementation.
The 2024 revised peer review documents (available in French) also released form the basis for the peer review process that will be undertaken as of 2024. The consolidated document includes the Terms of Reference, which set out the criteria for assessing the implementation of the Action 6 minimum standard, and the Methodology, which sets out the procedural mechanism by which the review will be conducted. In light of the successful implementation of the Action 6 minimum standard to date, the revised methodology now provides ongoing targeted assistance to those members of the Inclusive Framework that still need to implement the Action 6 minimum standard with a comprehensive peer review process to be carried out once every five years.
Transfer Pricing
Guidelines to implement Transfer Pricing principles by the SFTA2
This has been the first published guidance by the Swiss Federal Tax Authorities (SFTA) on the application of the arm's length principle in Switzerland, placing reliance on the principles adopted by OECD. Detailed clarification on various aspects of transfer pricing has been provided under this guidance. Some of the key clarifications are captured below for ease of reference:
Application of Cost-Plus Method (CPM)
A detailed guidance has been provided on the application of the CPM along with detailed guidance on the cost components to be included in the cost base (in the likes of operating cost and non-operating costs). It has also emphasized the treatment of the pass-through costs.
Low value-added services
To simplify compliances for undertaking comparability study and maintaining documents, SFTA has stipulated a few conditions under which services may be classified as low value-added services and has provided a simplified approach of applying flat 5% markup for such services with simplified documentation requirements.
Withholding of taxes in the context of primary, correlative and secondary adjustment
Primary adjustments are adjustments to a company's taxable profits made by a first tax authority as a result of the application of the arm's length principle to transactions involving an associated enterprise established in a foreign country. In Switzerland, primary adjustments are made exclusively by the cantonal tax authorities.
The secondary adjustment is the one made over what the OECD refers to as a secondary transaction, i.e., a constructive dividend due to a nonarm's length dealing. Under the Swiss tax system, a remuneration above the arm's length principle might constitute a constructive dividend upon which withholding taxes are levied.
Cost Sharing Agreements (CSA)
CSA is an arrangement for the development of intangible assets wherein parties agree to share cost, risk and profits. The costs are apportioned in a proportion that anticipates the respective benefits that each party will be able to derive from the exploitation of the developed assets, according to the contractual distribution of the profits.
Intra-group loans
The SFTA refers to its safe-harbour interest rate circular. If the taxpayer complies with the same, the taxpayer does not have to benchmark the interest rates applied. However, the condition is that the transaction falls within the scope of the circular.
The various elements of the financial transaction are required to be considered to undertake the benchmarking study, i.e., maturity of the instrument, start date, currency, rating, any guarantees/collaterals, etc.). A detailed guidance in this regard is also issued for the data points to be taken into consideration to undertake a credit rating analysis along with the methodology of undertaking a credit rating analysis.
In a benchmark study, there is usually a range of possible values. The SFTA expects the intra-group interest rate to be within the interquartile range.
The release of the comprehensive transfer pricing guidance by SFTA on applying the arm's length principle has emphasized the importance of transfer pricing in Switzerland. This would also provide better clarity to the taxpayers in Switzerland. It is imperative for multinational groups to devise transfer pricing policies that are compliant with the local transfer pricing laws in the jurisdiction of both the transacting entities.
Indirect Tax
Changes introduced in the UK's Spring Budget 2024
Excerpts from various sources
The key implications of the UK Spring Budget from an indirect tax perspective are as below:
- Effective 1 April 2024, the UK government has raised the VAT registration threshold from GBP 85,000 to GBP 90,000 and the VAT deregistration threshold from GBP 83,000 to GBP 88,000 for the first time in seven years.
- Implementation of the UK Carbon Border Adjustment Mechanism (CBAM) from 1 January 2027 targeting imports from specific sectors such as aluminum, cement, ceramics, fertilizer, glass, hydrogen, iron and steel (details expected towards the end of 2024).
- Alcohol duty is frozen until February 2025.
- A new excise duty is slated to be introduced on vaping products, accompanied by a one-time increase in tobacco duty. Registration for this duty opens on 1 April 2026, with the duty coming into effect from 1 October 2026.
Malaysia issues guidance on service tax exemption for specified logistics services
Service Tax Policy Bill 4/2024: Improvement of Service Tax Policy on Logistics Services
In a bid to alleviate the burden of double taxation and its cascading impact across multiple tiers of the logistics network, B2B logistics service providers have been granted an exemption from service tax payment on the acquisition of similar logistic service components. This exemption encompasses various logistic services, including those catering directly exported goods, transshipment, transit operations, door-to-door logistics, and food and beverage deliveries facilitated through e-commerce platforms.
Moreover, the implementation of the 6% service tax, initially scheduled for 1 March 2024, has been postponed by one month and, accordingly, enforced from 1 April 2024 onwards.
Poland: No extension for temporary zero VAT rate on basic food products
Excerpts from various sources
Effective 1 April 2024, the Polish government has terminated the 0% VAT rate on food products which was implemented two years ago to help soften the blow of soaring inflation.
German Parliament approves legislation introducing three-phase e-invoicing mandate
Excerpts from various sources
The German Federal Council (Bundesrat) approved the Growth Opportunities Bill on 22 March 2024, establishing mandatory B2B e-invoicing effective from 1 January 2025.
The rollout will occur in three phases commencing on 1 January 2025, with the aim of discontinuing the usage of non-e-invoice compliant invoices by 1 January 2028.
New Zealand introduces new GST and gaming duty measures for remote sellers
Excerpts from various sources
The amendment paper issued by the New Zealand Minister of Revenue introduces the following changes to the Taxation Bill:
- Effective 1 July 2024, GST-registered persons based outside the country will impose an offshore gaming duty on remote gambling services provided to New Zealand residents. This duty will be at 12% of the offshore gambling profits generated by these entities.
- The rules governing offshore gaming duty will be harmonized with the current regulations for GST on remote services.
- The duty will not be levied on existing 10% "consumption charges" imposed on sports and racing betting made by New Zealand residents through offshore operators.