BEPS: One-size-fits-all approach unlikely to address challenges of digital economy

A number of innovative approaches will likely be needed to address the challenges of the digital economy as raised in the OECD’s base erosion and profit shifting (BEPS) Action Plan, panelists said on August 28 at the 67th Congress of the International Fiscal Association (IFA) in Copenhagen.

According to the OECD, BEPS “refers to tax planning strategies that exploit loopholes in tax rules to make profits disappear for tax purposes or to shift profits to locations where there is little or no real activity but where they are lightly taxed, resulting in little or no overall corporate tax being paid.” In most instances, BEPS strategies employed by taxpayers are legal.

In February 2013, the OECD concluded that international tax standards have not kept pace with changes in global business practices. This potentially allows sophisticated multinationals to achieve single-digit effective tax rates while their smaller counterparts, who often only operate domestically, pay tax at effective rates of up to 30 percent.

In July 2013, the OECD released an Action Plan on BEPS, calling for new international standards on corporate taxation, a better alignment of taxation with income-producing activities, improvements to the current transfer pricing rules, and greater overall transparency.

The Action Plan lists 15 steps to address BEPS, including addressing the tax challenges of the digital economy. This includes examining issues such as a company’s ability to have a significant digital presence in the economy of another country without being liable for tax due to the lack of nexus under current rules, the characterization of income derived from new business models, the application of related-source rules, and how to ensure the effective collection of VAT/GST with respect to the cross-border supply of digital goods and services.

Other steps in the Action Plan seek to: (more…)

Practitioners from three continents discuss international tax implications of mobile app sales

Tax practitioners from Copenhagen, Hong Kong, and New York weighed in on the tax implications of selling mobile apps across borders during an August 26 panel discussion sponsored by Thomson Reuters at the 67th Congress of the International Fiscal Association.

The panel considered the sale of an app for iPhone users by a U.S.-based software developer for a nominal fee. Premium features would be sold to users for a monthly fee and revenue could also be generated through the placement of ads within the app. The software developer maintains no physical presence outside the U.S. and merely uploads the app to the App Store in the U.S. and makes the software available for sale around the world, including in Denmark and China.

Cloud transaction could give rise to VAT and income tax considerations in China.  Stephen Nelson of DLA Piper (Hong Kong) said that the taxation of cloud commerce is not specifically addressed under Chinese legislation. Under the existing Chinese regime, licensing is sourced where the payor is located and income from services is sourced where the services are performed.

With respect to VAT, even if the service provider is outside of China but the payments originate in China, the transaction will be subject to VAT. (more…)

As automatic exchange of information proliferates, tensions surface on adequate taxpayer protections

REUTERS/Issei Kato

As jurisdictions continue to embrace the automatic exchange of information, concerns are being raised about the extent to which taxpayers lack adequate protections.

“Does passing taxpayer information without his or her knowledge violate privacy right principles?” asked Prof. Jennifer Roeleveld of the University of Cape Town’s Faculty of Commerce on August 27, 2013 at the 67th Congress of the International Fiscal Association in Copenhagen. (more…)

Practitioners discuss Latin American transfer pricing developments

An October 3 Latin American tax panel discussed emerging transfer pricing developments at the International Fiscal Association’s 66th Congress in Boston.

Many countries have adopted the OECD guidelines that generally call for arm’s length pricing in related party transactions, although panelists noted that sometimes jurisdictions made their own deviations, including Mexico.

Practitioners from Mexico noted that maquiladoras have a fixed cost plus margin, and thin cap rules are applicable only to related party transactions, irrespective of whether or not there is compliance with the arm’s length standard.

Brazil does not subscribe to the OECD guidelines. Where there is a choice of methods, it was noted that the resale method was most commonly used because the documentation burden for other methods, including cost plus methods could require extensive documentation.  (more…)

Europe, U.S. hit turbulence over airline carbon trading scheme

A European carbon emission trading scheme has received adverse reactions from non-European governments around the world, including the U.S.

The U.S. Senate, September 22, unanimously passed the EU Emission Trading Scheme Prohibition Act to bar U.S. airlines from participating in the European Union’s carbon tax regime, said Mary Bennett, a partner at Baker & McKenzie at the International Fiscal Association’s 66th Congress in Boston on October 4.

The scheme imposes an additional burden on airlines flying into or out of Europe, including U.S. airlines, by requiring them to purchase permits to emit a specified amount of carbon dioxide. An airline that emits more than its permit allows is required to purchase additional credit; conversely, carriers that emit less than their permitted amounts can sell their remaining credits.

Thomson Reuters/RIA Observation:

A carbon tax imposed on U.S. airlines would only add to an already heavily taxed air service commodity. Airlines and their customers pay extraordinary amounts in special taxes and fees for items including homeland security, environmental protection, and airport and airway improvements. Internal Revenue Code Section 4261 imposes:

  1. A passenger ticket tax.
  2. A domestic passenger segment tax.
  3. A tax on the transportation of domestic cargo and mail.
  4. A per gallon tax on commercial aviation fuel.
  5. A per gallon tax on general aviation gasoline.
  6. A per gallon tax on domestic general aviation jet fuel.
  7. A per passenger tax assessed on all international departures and arrivals.
  8. A tax on mileage awards.
  9. A per passenger tax assessed on all flights between the continental U.S. and Alaska or Hawaii (and between Alaska and Hawaii).

Additionally, U.S. airports may collect up to $4.50 from each boarding passenger through a passenger facility charge.

Viewed in this manner, U.S. airlines and their passengers do not need the imposition of yet another tax, especially when considering that other forms of transportation, including trains and buses, are not subject to the same level of taxation.

Clear rules and concrete guidance on permanent establishment issues prove elusive

The Organization for Economic Cooperation and Development is likely to be stuck with the “least worst” definition of a permanent establishment in its model income tax treaty, a panel of leading experts frustratingly conceded.

“I don’t think anybody is happy with where we’re at with the PE test,” remarked Richard Vann, a professor at the University of Sydney Law School at the International Fiscal Association’s 66th Congress in Boston on October 3.

Officially, the OECD says the definition is not changing. Instead, effort is being placed to modify the language clarifying the definition of a permanent establishment. To that end, the OECD released a discussion paper on potential revisions to the permanent establishment commentary  in 2011. The OECD defines a permanent establishment as a fixed place of business where an enterprise is wholly or partly carried on.

The concept is relevant, because if a permanent establishment is deemed to exist in a country, then the profits attributable to that  permanent establishment are taxable in the source country. In practice, the concept can also be elusive, because the definition together with the corresponding commentary does not address every situation, leading to inevitable “gray areas.” That makes permanent establishments a hot topic. (more…)

Academics, practitioners view debt-equity matters as conundrum

An age-old problem of classifying hybrid instruments as debt or equity made its way to the center stage October 2nd, as a panel reviewed experiences in multiple jurisdictions at the International Fiscal Association’s 66th Congress in Boston. While broad conclusions were avoided, novel approaches taken in some countries were scrutinized and in the end, perhaps there were a few things the U.S. could stand to learn in simplifying its own complex classification methods.

In general, the terms of any given instrument is negotiated between an issuer and an investor. The investor is looking to maximize income in exchange for the appropriate amount of risk it is willing to stomach. Conversely, issuers are looking to have their instruments treated as equity, usually to show a stronger balance sheet for financial purposes. In this regard, tax is not the primary inquiry, although it is a complicating factor that requires careful planning.

From a tax perspective there has generally been a bias towards debt, because interest payments are usually deductible while dividend payments are not. Additionally, taxpayers often believe (correctly or incorrectly) that withholding on interest is lower than on dividends.

For classification purposes, non-tax rules usually form the starting point on whether or not an instrument constitutes debt or equity. In some jurisdictions, the rules are decisive and in others, they are merely a starting point for further analysis. (more…)

IFA Panelists grapple with cross-border treatment of technical services

Finding no generally accepted definition of services in model income tax treaties, panelists during the October 1 IFA session on Enterprise Services grappled with the treatment of cross-border technical services.

“Cross-border trade in services now exceeds trade in goods,” General Reporter Ariane Pickering said at the 66th Congress of the International Fiscal Association (IFA) in Boston.

“No country other than Russia has a definition of services in its treaties,” she said.

Some treaties include a provision for fees for technical services, but there have been numerous disputes as to what constitutes technical services. This area can be tricky because it is difficult to differentiate between technical services, technical assistance, royalties, and general business profits (under Article 7 of the OECD Model Tax Treaty).

U.N. considers adding additional article to address technical services, panelists say: (more…)