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Global Developments

Direct Tax

The Organisation for Economic Cooperation and Development (OECD) invites public input on the Progress Report on the Administration and Tax Certainty Aspects of Amount A of Pillar One

Excerpts from OECD.org, 6 October 2022

The Progress Report on the Administration and Tax Certainty Aspects of Amount A of Pillar One (également disponible en français) is a consultation document released by the OECD Secretariat to obtain further input from stakeholders on the administration and tax certainty aspects of Amount A. The comments provided will assist members of the Inclusive Framework in completing the work on these components.

Comments are sought with respect to the processes and rules contained in this document. Where relevant, the input should refer to the relevant section of the rules. While comments are invited on any aspect of the rules and procedures, input will be most helpful where it explains the additional guidance that would be needed to improve the application of the rules and procedures, as well as input on whether anything is missing or incomplete.

Interested parties are invited to send their comments on this discussion draft no later than 11 November 2022. The instructions for submitting comments can be found in the consultation document.

Mexican Senate approves BEPS MLI Bulgaria Deposits Ratification Instrument for BEPS MLI

Excerpts from OECD.org, 17 October 2022

On 12 October 2022, the Mexican Senate approved the ratification of the Multilateral Convention to Implement Tax Treaty Related Measures to prevent Base Erosion and Profit Shifting (BEPS) Multilateral Convention(MLI). After the internal ratification process is completed, Mexico must deposit its ratification instrument to bring the MLI into force for its covered agreements (tax treaties).

The MLI will generally enter into force for a particular covered agreement on the first day of the month following a three-month period after both parties to the covered agreement have deposited their ratification instrument. Once in force, the provisions of the MLI will generally apply for a covered agreement from 1 January of the year following its entry into force in respect of withholding taxes and for all other taxes with respect to taxable periods beginning on or after the expiration of a six-month period following the date of entry into force.

Transfer Pricing

Court of Justice of the European Union : Penalties for failure to comply with the obligation to keep or provide transfer pricing documentation compatible with EU law³

On 13 October 2022, the Court of Justice of the European Union (CJEU) issued a judgment in case C-431/21 concerning sanctions for incompliance with transfer pricing documentation requirements. Under German law, there is a rebuttable presumption that if a taxpayer fails to keep and submit the appropriate transfer pricing documentation, its German taxable income is higher than the one declared. In these cases, tax authorities are required to estimate the additional income based on certain price bands and could choose to select the upper value of the range and impose additional penalties computed as a percentage (5 % to 10 %) of the additional income estimated, plus late payment penalties (if the case). The referring Court asked the CJEU to rule on whether these rules are compliant with the freedom of establishment and the freedom to provide services established by the Treaty on the Functioning of the European Union.

Key aspects of the CJEU’s observations:

• The obligation to provide tax documentation applies only to crossborder transactions between related parties, whereby one entity has a definite influence on the other. Hence, the measures under dispute need to be assessed in light of the freedom of establishment.
• The documentation requirements were not precluded by EU law, as taxpayers must document crossborder transactions with related parties to enable the Member States to monitor whether the transactions were performed at market value.
• Imposing penalties may be considered necessary in order to ensure compliance with national rules, provided that such penalties are proportionate to the gravity of the infringement that it is designed to penalize. Furthermore, the Court confirmed that imposing a penalty computed as a percentage of the adjustment of taxable income is suitable for establishing a correlation between the fine and the gravity of the taxpayer’s actions. In the Court’s view, the 10% ceiling ensures that the penalty is not excessive.

Israel: Introduction of Transfer Pricing Rules and Documentation Requirements⁴

Israel publishes new TP regulations following the adoption of BEPS Action 13 principles in domestic legislation.

The Israeli Official Gazette published the Income Tax Regulations 2022, amending the Income Tax Ordinance, which was adopted on 30 June 2022 for the introduction of the three-tiered transfer pricing documentation requirements of BEPS Action 13. The amendments to the Regulations include the following:

• TP documentation requirements are in line with the OECD Local file guidelines.
• A Master File requirement is required for members of MNE groups with turnover exceeding ILS 150 million.
• The ultimate parent entities of MNE groups meeting a consolidated revenue threshold of ILS 3.4 billion are required to submit a CbC report within 12 months following the end of the reporting fiscal year.
• The time limit to submit TP documentation (Local File) and Master File is reduced from 60 days to 30 days following a request by the tax authority.