September 1, 2022
OECD Transfer Pricing Profiles Updated
The OECD has now made available new transfer pricing profiles for Egypt, Liberia, Saudia Arabia and Sri Lanka. The transfer pricing profiles set out “countries’ domestic legislation regarding key transfer pricing principles, including the arm’s length principle, transfer pricing methods, comparability analysis, intangible property, intra-group services, cost contribution agreements, transfer pricing documentation, administrative approaches to avoiding and resolving disputes, safe harbours and other implementation measures.”
Further information and the transfer pricing profiles are available here.
The European Commission has launched a public consultation questionnaire on a new EU-wide system for withholding taxes. Input received will feed into the upcoming legislative initiative planned for adoption in Q4 of 2022, which aims to introduce a common EU-wide system for withholding tax on dividend or interest payments. The draft legislation aims to remove barriers to cross-border investment and will also include a system for the exchange of information between tax authorities.
The policy options being considered for the new legislative proposal are as follows:
Option 1: Improving withholding tax refund procedures to make them more efficient: This option entails the implementation of several measures, the objective of which is to simplify and streamline withholding tax refund procedures by making them quicker and more transparent. These measures are not limited by but could include: the establishment of common EU standardised forms and procedures for withholding tax refund claims irrespective of the Member States concerned and the obligation to digitalise current paper-based relief processes;
Option 2: Establishment of a fully-fledged common EU relief at source system: This option entails the implementation of a standardised EU-wide system for withholding tax relief at source whereby the correct withholding tax rate, as provided in the DTC is applied at the time of payment by the issuer of the security, to the non-resident investor thereby not incurring double taxation;
Option 3: Enhancing the existing administrative cooperation framework to verify entitlement to double tax convention benefits: This option envisages a reporting and subsequent mandatory exchange of beneficial owner-related information on an automated basis, to reassure both the residence and source country that the correct level of taxation has been applied to the non-resident investor.
On 25 April, the European Parliament’s Permanent Subcommittee on Tax Matters held a hearing concerning regulation of the provision of tax advice across the European Union, “How to reinforce the regulation of intermediaries to create an intermediary sector that ensures a fair and user-friendly tax system?”. The hearing was a follow-up to a hearing held in November 2021 concerning the Pandora Papers, tax evasion and tax avoidance. Members of the Subcommittee discussed the role of tax intermediaries in tax avoidance and tax evasion and evaluated options to improve tax intermediaries’ regulatory framework to deter them from playing any part in tax abusive activities.
During the hearing, Ms Jasna Voje from DGTAXUD at the European Commission participated in the discussion, and informed attendees that a public consultation will be launched shortly exploring policy options being considered by the Commission to improve tax intermediaries’ regulatory framework. Ms Voje explained that the Commission have in mind not to regulate the profession in terms of qualification requirements but instead to introduce a sort of behavioural monitoring measure; that the Commission want to establish standards which intermediaries must adhere to, an instrument setting out harmonised definitions of wrong-doing across the EU, with limits and consequences, to tackle the activities of intermediaries operating in the grey-zone of providing tax advice.
On 11 May 2022, the European Commission published a proposal for a directive laying down rules on a debt-equity bias reduction allowance and on limiting the deductibility of interest for corporate income tax purposes (“DEBRA”). These measures seek to equalise the tax treatment of debt and equity by way of introducing an allowance on equity. Under the proposal, the allowance on equity shall be deductible for 10 consecutive tax periods, from the taxable base of a taxpayer for corporate income tax purposes up to 30% of the taxpayer’s EBITDA. If the deductible allowance on equity is higher than the taxpayer’s net taxable income in a tax period, Member States shall ensure that the taxpayer may carry forward, without time limitation, the excess of allowance on equity to the following periods. The taxpayers may carry forward, for a maximum of 5 tax periods, the part of the allowance on equity which exceeds 30% of EBITDA in a tax period.
The proposal also introduces interest deduction limitations, whereby a taxpayer would be able to deduct from its corporate taxable base the exceeding borrowing costs up to an amount corresponding to 85% of such costs incurred during the tax period.
The initial EU Commission inception impact assessment operated with the following options:
A public consultation concerning the initiative was launched, and feedback can be submitted until 18 July 2022.
The CFE has issued an Opinion Statement in relation to the European Commission’s public consultation on introducing an EU-wide system on withholding taxes. The CFE Tax Advisers Europe is supportive of the initiative to introduce an EU-wide system for relief at source of withholding tax on dividend, interest, royalty payments and service fees, and for exchange of information and cooperation between tax authorities under the system.
CFE has a strong preference for a harmonized relief at source system and strongly support that there should be a harmonized means to obtain via e-request a tax residence certificate, with swift online provision of the tax residence certificate, and a digitalised verification system. Refund procedures are costly, time-consuming and often result in taxpayers having their refund claims refused for various administrative-related reasons. It is illogical that if one invests in the US, the treaty rate is automatically applied based on very simple and straightforward procedures, whereas this is not the case automatically if one were to invest in shares in another EU Member State.
In conjunction with the implementation of measures to improve the withholding tax refund procedures and establish a common EU relief at source system, CFE is of the view that there are solid public policy arguments for Option 3 (enhancing the existing administrative cooperation framework to verify entitlement to double tax convention benefits) and extending this to third countries. This could build on existing multinational arrangements including, for example, FATCA, though the focus there is on individuals. This would minimise de facto economic losses to investors etc and does the most to promote transparency and cooperation among tax authorities.
We invite you to read the Opinion Statement and would welcome any feedback or queries concerning the position paper.
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