News letter for the month of May,2012
The OECDs Task Force on Tax and Development, meeting in Cape Town, South Africa, has launched the concept of Tax Inspectors Without Borders a new initiative to help developing countries bolster their domestic revenues by making their tax systems fairer and more effective. Building on that concept, the OECD will establish an independent foundation, to be up and running by the end of 2013, that will provide international auditing expertise and advice to help developing countries better address tax base erosion, including tax evasion and avoidance. The initiative was championed by Oupa Magashula, Commissioner General of the South Africa Revenue Service, South Africas Deputy Finance Minister and Pascal Saint-Amans, Director the OECDs Centre for Tax Policy and Administration.
The stakeholders from business, civil society, as well as OECD and developing country governments attending the Tax and Development Task Force unanimously welcomed the initiative which fills a gap in the existing provision of audit assistance. They agreed to work together to launch a sustainably financed independent organisation to host a Tax Inspectors Without Borders secretariat by the end of next year. This initiative complements several efforts by donor agencies, notably USAID, to mobilise expertise.
Countries helping each other is the only way to effectively fight global tax evasion and avoidance. , said OECD Secretary-General, Angel Gurría. The idea is quite simple. Tax Inspectors Without Borders will match demand from developing countries wanting outside help with complex international tax audits with the supply, of international experts, drawn mainly from cadres of tax inspectors serving in other tax administrations. Joint teams will operate under the local leadership in each country, based on a learning by doing approach .
Oupa Magashula added that, The Tax and Development Task Force should now mobilise the best experts and make them available to developing countries and get the Tax Inspectors Without Borders secretariat in place so the work can begin in earnest from 2013 .
Further information on the OECDs Task Force on Tax and Development is available at: www.oecd.org/tax/globalrelations/development.
Many companies are entering formal Advance Pricing Arrangements (APAs) with one or more tax authorities to mitigate the risks of new tax regulations as tax authorities are increasing their transfer pricing audit activities to ensure that they are staking their claim to taxable profits—and the amounts of tax at stake can be material.
A new survey released by KPMG International, titled Navigating APAs, shows that respondents believe the stability and security of knowing how their transfer pricing will be treated clearly offsets the concerns about the time and expense involved in pursuing an APA. Through an APA respondents also indicated they are better able to manage internal resources and save time and costs by preventing future audits.
APAs offer security that the tax authorities will accept your transfer pricing methodology over the term of the agreement, says Sean Foley, KPMGs Head of Global Transfer Pricing Services. To ensure APA programs keep attracting companies that want the security of an APA at a reasonable cost and speed, the introduction of a simplified, expedited and risk-based process will be critical.
To explore the current perceptions and experiences with APA programs globally, in-depth interviews were conducted with tax directors (or their equivalents) from 25 multinational companies in seven countries. The findings were reviewed and analyzed by a panel of Transfer Pricing Leaders from KPMG member firms. This survey is the result of their considerable collective experience in dealing with APA programs and shares insights on how policy makers can improve the efficiency and effectiveness of transfer pricing compliance and dispute prevention systems.
According to the survey, with more control over the timing of the APA process compared to an audit, respondents were better able to manage their workflows and internal resources.
Some respondents saw value in the opportunity to improve their relationships with the tax authorities and to help them understand their business model over the course of the negotiations. Successful APAs can also serve as precedents to support the companys transfer pricing in other jurisdictions.
Over the past 20 years, APAs have become well-established tools for risk management and advance compliance, says François Vincent, KPMGs Leader, Global Transfer Pricing Dispute Resolution. Experience shows that once a company goes through the process and sees the benefits, many will do it again albeit the right situation.
Negotiating an APA may consume a lot of time and resources. While completion times vary by country, the average time to process and complete APAs typically runs from 10 to 20 months.
With more countries adopting APA programs, most respondents expect that taxpayer demand for APAs will increase in the near term, but they worry that tax authorities will not have the resources to keep up with the increased demand. Some predict increase in demand for APAs will slow down the process even more and cause a drop in the number of files accepted into the program. Others suggest that the rising caseload will prompt tax authorities to introduce a streamlined, expedited APA process.
In the survey, KPMGs transfer pricing professionals make a case for an expedited, fast-track APA process that could be a win-win for tax authorities and taxpayers alike by reducing risks and increasing the efficiency of administration.
For example, the Australian Taxation Office (ATO) has introduced separate APA products for taxpayers based on three levels of risk and complexity: simplified, standard, and complex. This allows the ATO to focus its resources on areas of higher risk and complexity while simplifying requirements for straightforward, lower-risk transactions.
In addition, the Organisation for Economic Co-operation and Development (OECD) is reviewing transfer pricing administration with an eye to simplifying it.
KPMGs Global Transfer Pricing Services practice has submitted comments calling on the OECD to consider the benefits of incorporating a process for expedited APAs into the OECDs transfer pricing guidelines, says Foley.
The results of this survey support the view that tax authorities should adopt expedited APA processes to supplement existing programs. Doing so could boost participation and increase the efficiency of transfer pricing administrations, for the benefit of all concerned.
A Day after the approval of the Finance Bill by the Lok Sabha, the government on Wednesday said that it will move ahead to recover the tax and penalty from the British telecom major Vodafone which is currently estimated at Rs. 20,300 crore. Finance secretary RS Gurjal said that no new notice would be required in the Vodafone case as the Finance Bill, 2012 would validate all the notices send earlier, even as the telecom company described the tax law amendment as grossly unjust and said it would take all possible steps to safeguard its shareholders interest.
..in the Finance Bill there is a validation clause, which is that all orders and assessments which has been passed in this regard stands validated. Once that is there, assessment order of the tax as well as order pertaining to penalty (stands) validated by Parliament , he told a television channel UTV Bloomberg.
Gujral further added, it is governments job to take action to collect dues.
Earlier in the day, Vodafone said in a statement, we are naturally disappointed that, despite very widespread concern in India and internationally, the government has not seen fit to propose amendments to address the uncertainty caused by retrospective tax legislation.
The Lok Sabha has approved the Finance Bill, 2012 which seeks to amend the Income Tax, 1961 with retrospective effect to tax overseas deals involving domestic assets.
The amendment would neutralise the victory secured by Vodafone in the Supreme Court in the Rs. 11,000-crore tax dispute case.
The tax pertains to purchase of Hutchisons stake in Hutchison-Essar by Vodafone for USD 11.2 billion in 2007 through a deal in Cayman Islands.
The tax liability of Vodafone, after taking into account the penalty and interest has been estimated at Rs. 20,300 crore.
The Delhi High Court, in its ruling on the case of Commissioner Income Tax vs. EKL Appliances Limited (Taxpayer), has given its decision on the transfer pricing aspects of a royalty payment by the Taxpayer to its associated enterprise. In its judgment, the High Court ruled that royalty payments cannot be prohibited on instances of continuous loss where the spending was proven to be incurred wholly and exclusively for the purpose of the business of the Taxpayer.
The honorable High Court said that it is not for the tax authorities to inquire into the commercial feasibility of a transaction. While ruling in favour of the EKL Appliances, the honorable High Court observed that it is suitable to rely on the OECD Transfer Pricing Guidelines to evaluate the situation adopted by the Tax Authority, since these guidelines have been recognized in the tax jurisprudence of India.
Relying on the OECD Transfer Pricing Guidelines, the honorable High Court stated that re-characterization of lawful business transactions by the tax authorities is not allowed.
Background of the case
EKL is a subsidiary of AB Electrolux Sweden involved in the business of manufacturing refrigerators, washing machines, compressors and spares thereof, and dealt in all these items as well as microwave ovens, dishwashers, cooking ranges, and air conditioners. During the applicable evaluation years, EKL had entered into a range of worldwide transactions including the payment of royalty. Except for the brand fee/royalty paid by EKL to its out of country associated enterprises, the transfer pricing officer (TPO) acknowledged all the other transactions to be at arms length. The TPO illustrated that EKL had been again and again incurring huge losses and, as a result, the benefits received by EKL from the payment of brand fee/royalty were inquired by the TPO.
Reasons of loss
The honorable High Court held that even on the merits of the case, the disallowance was not acceptable as the Taxpayer had provided numerous substance and valid reasons as to why it was suffering losses. The honorable High Court also stated that full explanation supported by facts and figures were given by the Taxpayer to reveal that the increase in employee costs, finance charges, administrative expenses, depreciation costs and capacity increases had contributed to the continuous losses.
The taxpayers have been facing a tough time to state that the losses are commercial in nature and not the result of transfer pricing. In few cases, the tax authorities need taxpayers to show the economic and commercial benefits resulting from the use of intangible property owned by the associated enterprises. There is repeatedly a propensity to gauge the advantage having regard to the profitability of the intangible property user.
The ruling also emphasizes the significance of maintaining credentials that outline the non-transfer pricing issues such as start-up or market access strategies, downturns in the business cycle, the materialization of more competition or new technologies in the market, or unfavourable economic conditions that have contributed to losses.
The honorable High Courts position to the OECD Transfer Pricing Guidelines and the courts acknowledgement of the significance of the guidelines has also been received in a positive way in light of the new account that the Indian government has expressed its difference with the use of the OECD Transfer Pricing Guidelines by the United Nations as it does not take into account the issues of developing nations.