US-UK competent authority agreements
The US and the UK have recently signed two competent authority agreements which provide welcome clarifications to taxpayers on the interpretation of Article 23 (the ‘Limitation on benefits’ clause) of the US-UK double tax treaty. Article 23 is, very broadly, an anti-abuse provision designed to limit treaty benefits to persons with sufficient connection to the UK or US.
The first agreement confirms that for the purposes of applying paragraph 7(d) of Article 23, ‘a resident of a Member State of the European Community’ continues to include a resident of the UK. There had been some uncertainty following Brexit that this was still the case. This is particularly relevant to the availability of relief from US tax for amounts paid to:
It should be noted, however, that the agreement only applies to the US-UK treaty. The agreement does not address whether the UK would be an equivalent beneficiary jurisdiction for the purposes of applying the limitation on benefits clause under any other US bilateral income tax treaties.
The second agreement provides that, upon entry into force of the United States-Mexico-Canada Agreement (USMCA), references to the North American Free Trade Agreement (NAFTA) shall be understood as references to USMCA. This clarification will primarily allow relief for publicly traded parent companies resident in Mexico or Canada with a UK-resident subsidiary that derives US-source income.
The USMCA agreement is limited in scope to the US-UK double tax treaty. The US tax authorities have however announced previously that they will contact all other countries that have an applicable tax treaty containing references to NAFTA to confirm they agree USMCA replaces this.
US Senate paves the way for legislating tax reforms
Staying with the US, on 11 August, the US Senate narrowly passed a concurrent resolution on the budget for FY2022. This may pave the way to legislate the Biden administrations tax reforms. At the time of writing, the resolution was to be agreed by the House of Representatives.
Should the House of Representatives agree, the concurrent resolution would allow the use of budget reconciliation procedures to advance legislation by simple majority vote in the Senate (rather than the 60 votes typically required). The Senate is split 50-50 between Republicans and Democrats, with Democrat Vice President Harris having a tie-breaker vote, so the Democrats should be able to narrowly pass measures in this way without any need to rely on Republican support.
This is significant as it should allow the Biden administration to push through major tax reforms including its proposed increase in the corporate income tax rate from 21 to 28 percent. US Treasury Secretary, Janet Yellen, has also previously indicated that legislation to implement a global minimum tax rate (i.e. the OECD’s pillar two proposals) would be included in a budget reconciliation bill this year.
The implementation of the OECD’s pillar one proposals which aim to align taxing rights more closely to local market engagement could, however, prove more complex for the US to implement. The OECD’s intention is that countries will implement pillar one through a multilateral tax agreement, as is normally the case for international treaties. This may need a two-thirds majority in the US Senate to reach approval and, if that is the case, Republican support will be key.
OECD transfer pricing country profiles
On 3 August, the OECD published updated transfer pricing country profiles for 20 jurisdictions including those of Australia, India, Japan, and the Netherlands. The profiles reflect the current transfer pricing legislation and practices of over 60 jurisdictions and are a useful source of information to multinational enterprises.
As well as giving information on each country’s domestic law position, the profiles also indicate to what extent the domestic transfer pricing rules follow the OECD transfer pricing guidelines. They include commentary on transfer pricing methods, benchmarking requirements, safe harbours, documentation requirements, and penalties.
The welcomed updates add new information on each country’s legislation and practices regarding the transfer pricing treatment of financial transactions. The application of the ‘Authorised OECD approach’ to attribute profits to permanent establishments is also covered.
This release is due to be followed by more updates throughout the second half of 2021 and the first half of 2022.
Combatting harmful tax practices
Staying with the OECD, on 5 August, new outcomes, on the review of preferential tax regimes by the Forum on Harmful Tax Practices (FHTP), were approved by the OECD/G20 Inclusive Framework on BEPS. The FHTP aims to combat ‘harmful tax practices’ with its work comprising the assessment of preferential tax regimes, the peer review and monitoring of the BEPS Action 5 transparency framework, and the review of substantial activities requirements in ‘no or only nominal tax jurisdictions’.
Outcomes shared via the FHTP included:
Covid-19 tax responses
In response to Covid-19, governments around the world implemented various tax reliefs to help taxpayers navigate the crisis, and particularly to support employment. While many relief measures remain in place, as restrictions ease, some may cease to apply. The position continues to evolve and businesses operating in multiple jurisdictions must carefully monitor covid-19 developments and the associated tax changes.
Employee locations
In the US, as employees were required to work at home, approximately 20 states provided a temporary covid-related relief whereby the states would not assert a corporate income tax nexus on a business, based on the presence of employees working in the state solely owing to covid-19.
Most states linked the expiration of relief to the expiration of the state’s declared state of emergency. Some of these have already been rescinded or are due to be expire in the coming months. These include California (expired 1 July), Maryland (expired 15 August), and South Carolina (expiry due 30 September). Businesses with US-based employees should familiarise themselves with the rules.
The position is similar for employees working from home in another country to their employer. The OECD’s guidance on tax treaties and covid-19, broadly gave the view that employees working overseas as a result of public health measures should not result in a permanent establishment (PE) as it lacked permanence/was not habitual. Where public health restrictions have come to an end, yet employees continue to work at home, businesses should re-evaluate their PE and residence risks as a result.
Extended support measures
Some countries have recently extended or expanded covid-19 relief measures. These include Canada which, this month, announced the extension of the Canada emergency wage subsidy (CEWS) and the Canada emergency rent subsidy (CERS) until 23 October 2021. In South Africa it was announced that a PAYE deferral relief measure would be in place from 1 August 2021 to 31 October 2021, and that the UIF C19 TERS scheme would be extended mainly to support those who have lost jobs due to lockdowns.
Australian loss carry back guidance
As a result of the pandemic many businesses have incurred tax deductible trading losses. Many jurisdictions allow such losses to be carried back in order to generate a cash repayment. In view of this, the Australian tax authority has published a list of common mistakes made in Australian loss carry back claims. These include the tax offset calculation being incorrect (for example as a result of taxpayers applying the wrong tax rate) and mandatory fields in the tax return being incomplete.
These pointers should prove helpful to Australian taxpayers and hopefully result in repayments being processed smoothly and accurately.
Mumbai judgment allows capital loss on sale of shares
Finally, to India and a notable decision from the Mumbai Bench of the Income-tax Appellate. In Swiss Reinsurance Company Ltd v. DCIT (ITA No. 6531/Mum/2017) the tribunal found that a Switzerland-based entity which made a capital loss on the sale of all of its shares in a wholly owned Indian subsidiary to a second Indian company, was allowed to carry the loss forward in its income tax return. The transactions concerned occurred between 2007 and 2015.
The assessing officer had disagreed with this treatment on the basis that there was no justifiable reason for the taxpayer’s investment in the shares (as the shares were bought at a premium price and the Indian company was loss making at the time the shares were acquired), and then selling the shares at a loss. As such, their view was that the capital loss was ‘artificial’ and not allowed. Based on the facts of the case, the Mumbai tribunal found that the purchase and subsequent sale of the shares were genuine commercial transactions.
This case, along with others, serves to illustrate that the determination of whether a transaction is genuine or done for a tax avoidance purpose is a fact-based exercise. Taxpayers operating in India (and indeed elsewhere) should undertake careful analysis to ensure transactions and structures do not fall foul of anti-avoidance provisions. Key anti-avoidance provisions to be aware of include India’s general anti-avoidance rules introduced in the assessment year 2018/19, as well as provisions applying to specific tax treaties with India, such as limitation on benefit clauses and principal purpose tests.
US-UK competent authority agreements
The US and the UK have recently signed two competent authority agreements which provide welcome clarifications to taxpayers on the interpretation of Article 23 (the ‘Limitation on benefits’ clause) of the US-UK double tax treaty. Article 23 is, very broadly, an anti-abuse provision designed to limit treaty benefits to persons with sufficient connection to the UK or US.
The first agreement confirms that for the purposes of applying paragraph 7(d) of Article 23, ‘a resident of a Member State of the European Community’ continues to include a resident of the UK. There had been some uncertainty following Brexit that this was still the case. This is particularly relevant to the availability of relief from US tax for amounts paid to:
It should be noted, however, that the agreement only applies to the US-UK treaty. The agreement does not address whether the UK would be an equivalent beneficiary jurisdiction for the purposes of applying the limitation on benefits clause under any other US bilateral income tax treaties.
The second agreement provides that, upon entry into force of the United States-Mexico-Canada Agreement (USMCA), references to the North American Free Trade Agreement (NAFTA) shall be understood as references to USMCA. This clarification will primarily allow relief for publicly traded parent companies resident in Mexico or Canada with a UK-resident subsidiary that derives US-source income.
The USMCA agreement is limited in scope to the US-UK double tax treaty. The US tax authorities have however announced previously that they will contact all other countries that have an applicable tax treaty containing references to NAFTA to confirm they agree USMCA replaces this.
US Senate paves the way for legislating tax reforms
Staying with the US, on 11 August, the US Senate narrowly passed a concurrent resolution on the budget for FY2022. This may pave the way to legislate the Biden administrations tax reforms. At the time of writing, the resolution was to be agreed by the House of Representatives.
Should the House of Representatives agree, the concurrent resolution would allow the use of budget reconciliation procedures to advance legislation by simple majority vote in the Senate (rather than the 60 votes typically required). The Senate is split 50-50 between Republicans and Democrats, with Democrat Vice President Harris having a tie-breaker vote, so the Democrats should be able to narrowly pass measures in this way without any need to rely on Republican support.
This is significant as it should allow the Biden administration to push through major tax reforms including its proposed increase in the corporate income tax rate from 21 to 28 percent. US Treasury Secretary, Janet Yellen, has also previously indicated that legislation to implement a global minimum tax rate (i.e. the OECD’s pillar two proposals) would be included in a budget reconciliation bill this year.
The implementation of the OECD’s pillar one proposals which aim to align taxing rights more closely to local market engagement could, however, prove more complex for the US to implement. The OECD’s intention is that countries will implement pillar one through a multilateral tax agreement, as is normally the case for international treaties. This may need a two-thirds majority in the US Senate to reach approval and, if that is the case, Republican support will be key.
OECD transfer pricing country profiles
On 3 August, the OECD published updated transfer pricing country profiles for 20 jurisdictions including those of Australia, India, Japan, and the Netherlands. The profiles reflect the current transfer pricing legislation and practices of over 60 jurisdictions and are a useful source of information to multinational enterprises.
As well as giving information on each country’s domestic law position, the profiles also indicate to what extent the domestic transfer pricing rules follow the OECD transfer pricing guidelines. They include commentary on transfer pricing methods, benchmarking requirements, safe harbours, documentation requirements, and penalties.
The welcomed updates add new information on each country’s legislation and practices regarding the transfer pricing treatment of financial transactions. The application of the ‘Authorised OECD approach’ to attribute profits to permanent establishments is also covered.
This release is due to be followed by more updates throughout the second half of 2021 and the first half of 2022.
Combatting harmful tax practices
Staying with the OECD, on 5 August, new outcomes, on the review of preferential tax regimes by the Forum on Harmful Tax Practices (FHTP), were approved by the OECD/G20 Inclusive Framework on BEPS. The FHTP aims to combat ‘harmful tax practices’ with its work comprising the assessment of preferential tax regimes, the peer review and monitoring of the BEPS Action 5 transparency framework, and the review of substantial activities requirements in ‘no or only nominal tax jurisdictions’.
Outcomes shared via the FHTP included:
Covid-19 tax responses
In response to Covid-19, governments around the world implemented various tax reliefs to help taxpayers navigate the crisis, and particularly to support employment. While many relief measures remain in place, as restrictions ease, some may cease to apply. The position continues to evolve and businesses operating in multiple jurisdictions must carefully monitor covid-19 developments and the associated tax changes.
Employee locations
In the US, as employees were required to work at home, approximately 20 states provided a temporary covid-related relief whereby the states would not assert a corporate income tax nexus on a business, based on the presence of employees working in the state solely owing to covid-19.
Most states linked the expiration of relief to the expiration of the state’s declared state of emergency. Some of these have already been rescinded or are due to be expire in the coming months. These include California (expired 1 July), Maryland (expired 15 August), and South Carolina (expiry due 30 September). Businesses with US-based employees should familiarise themselves with the rules.
The position is similar for employees working from home in another country to their employer. The OECD’s guidance on tax treaties and covid-19, broadly gave the view that employees working overseas as a result of public health measures should not result in a permanent establishment (PE) as it lacked permanence/was not habitual. Where public health restrictions have come to an end, yet employees continue to work at home, businesses should re-evaluate their PE and residence risks as a result.
Extended support measures
Some countries have recently extended or expanded covid-19 relief measures. These include Canada which, this month, announced the extension of the Canada emergency wage subsidy (CEWS) and the Canada emergency rent subsidy (CERS) until 23 October 2021. In South Africa it was announced that a PAYE deferral relief measure would be in place from 1 August 2021 to 31 October 2021, and that the UIF C19 TERS scheme would be extended mainly to support those who have lost jobs due to lockdowns.
Australian loss carry back guidance
As a result of the pandemic many businesses have incurred tax deductible trading losses. Many jurisdictions allow such losses to be carried back in order to generate a cash repayment. In view of this, the Australian tax authority has published a list of common mistakes made in Australian loss carry back claims. These include the tax offset calculation being incorrect (for example as a result of taxpayers applying the wrong tax rate) and mandatory fields in the tax return being incomplete.
These pointers should prove helpful to Australian taxpayers and hopefully result in repayments being processed smoothly and accurately.
Mumbai judgment allows capital loss on sale of shares
Finally, to India and a notable decision from the Mumbai Bench of the Income-tax Appellate. In Swiss Reinsurance Company Ltd v. DCIT (ITA No. 6531/Mum/2017) the tribunal found that a Switzerland-based entity which made a capital loss on the sale of all of its shares in a wholly owned Indian subsidiary to a second Indian company, was allowed to carry the loss forward in its income tax return. The transactions concerned occurred between 2007 and 2015.
The assessing officer had disagreed with this treatment on the basis that there was no justifiable reason for the taxpayer’s investment in the shares (as the shares were bought at a premium price and the Indian company was loss making at the time the shares were acquired), and then selling the shares at a loss. As such, their view was that the capital loss was ‘artificial’ and not allowed. Based on the facts of the case, the Mumbai tribunal found that the purchase and subsequent sale of the shares were genuine commercial transactions.
This case, along with others, serves to illustrate that the determination of whether a transaction is genuine or done for a tax avoidance purpose is a fact-based exercise. Taxpayers operating in India (and indeed elsewhere) should undertake careful analysis to ensure transactions and structures do not fall foul of anti-avoidance provisions. Key anti-avoidance provisions to be aware of include India’s general anti-avoidance rules introduced in the assessment year 2018/19, as well as provisions applying to specific tax treaties with India, such as limitation on benefit clauses and principal purpose tests.
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