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In a significant ruling that could have widespread implications for taxpayers across the UAE, the Abu Dhabi Cassation Court has delivered a judgment that clarifies the rights of taxpayers in recovering Value Added Tax (VAT) from non-compliant suppliers.
The ruling, issued on 8 August 2024, in Case No. 648/2024, addresses a common issue where the UAE Federal Tax Authority (FTA) has historically rejected VAT refund requests due to suppliers failing to provide compliant tax invoices.
This decision now opens the door for taxpayers to seek financial recourse from suppliers, potentially reclaiming substantial amounts of VAT.
The case involved a construction company that issued a cheque to a supplier as a guarantee for VAT related to a construction project.
The dispute arose when the FTA rejected the company’s VAT refund request, citing a lack of proper documentation—specifically, the necessary VAT invoices from the supplier.
Under UAE VAT Law (Federal Decree-Law No. 8 of 2017), businesses are entitled to recover input tax (VAT paid on goods and services) provided they possess a valid tax invoice.
However, strict compliance with the invoicing requirements, as detailed in Article 59 of the Executive Regulations, is crucial.
Non-compliance has frequently led to the FTA rejecting VAT refund requests, leaving businesses with significant unrecovered VAT liabilities.
In this particular case, the construction company was unable to submit compliant invoices within the required timeframe, leading to the FTA’s rejection of their refund claim. Consequently, the company initiated legal action to recover the VAT from the supplier who had failed to provide the necessary documentation.
The Abu Dhabi Cassation Court’s decision is a pivotal moment in UAE tax law, establishing that taxpayers have a clear legal path to recover VAT amounts from suppliers when refund claims are denied due to non-compliance.
The court upheld the principle that if a supplier issues a non-compliant tax invoice and this results in the FTA rejecting the taxpayer’s VAT refund claim, the taxpayer is entitled to reclaim the corresponding amount from the supplier.
The court’s reasoning was based on the supplier’s obligations under UAE VAT Law.
It emphasized that issuing a compliant tax invoice is a statutory requirement, and failing to do so can have serious financial consequences for the purchaser.
In this case, the court found that the supplier’s failure to provide the necessary VAT invoices within the stipulated period directly led to the FTA’s decision to deny the refund.
As a result, the court ruled that the taxpayer could recover the lost VAT from the supplier.
Moreover, the court underscored the principle of equity, asserting that the financial burden resulting from non-compliance should not fall on the taxpayer.
Instead, the supplier, who failed to meet their legal obligations, should bear the responsibility.
This ruling has significant implications for both taxpayers and suppliers in the UAE:
This decision offers a vital remedy in situations where VAT refunds are denied due to the supplier’s non-compliance with invoicing requirements.
Taxpayers now have a clear legal avenue to seek compensation directly from suppliers, ensuring they are not financially penalised for issues beyond their control.
The ruling serves as a strong warning to suppliers about the importance of adhering to VAT invoicing standards.
Suppliers must ensure that their tax invoices meet the FTA’s requirements, as failure to do so could lead to substantial financial liabilities, including the need to reimburse clients for denied VAT refunds.
The Abu Dhabi Cassation Court’s ruling in Case No. 648/2024 marks a landmark moment in the UAE’s tax landscape.
It reinforces the critical importance of compliance with VAT regulations and provides a robust legal mechanism for taxpayers to recover amounts denied by the FTA due to non-compliant supplier invoices.
Both taxpayers and suppliers should pay close attention to this ruling and its potential impact on their financial and operational practices.
If you have any queries about this article, UAE Court Allows VAT Recovery, then please do get in touch.
In a notable ruling, the Irish Tax Appeals Commission (TAC) has decided in favor of a taxpayer in Ireland’s first-ever transfer pricing case.
The case revolved around transfer pricing adjustments proposed by the Revenue Commissioners (Revenue) concerning the supply of services by an Irish subsidiary (Taxpayer) to its US parent company (Parent), particularly focusing on share-based awards (SBAs) granted to the Taxpayer’s employees by the Parent.
The Taxpayer, under intercompany services agreements, performed sales, marketing, and research and development activities for the Parent on a “cost-plus” basis.
This arrangement meant the Taxpayer charged the Parent a fee based on its costs plus a mark-up. Although the Taxpayer’s financial statements included expenses for SBAs as required by Financial Reporting Standard 102 (FRS 102), the intercompany agreement explicitly excluded these expenses from the cost base used to calculate the charges to the Parent.
The Revenue contended that the Taxpayer failed to demonstrate that the intercompany service fees were at arm’s length, arguing that SBA costs should have been included in the cost base for the markup calculation.
Both parties agreed that the Transactional Net Margin Method (TNMM) was the appropriate transfer pricing method to apply in this case.
The Taxpayer disputed the Revenue’s view, asserting that SBA costs were notional and should not factor into the cost base for determining intercompany charges.
The Taxpayer’s expert witness argued that the economic risk associated with SBAs was borne by the Parent’s shareholders, who effectively diluted their ownership to incentivise the Taxpayer’s employees.
The TAC, relying on OECD guidelines, sided with the Taxpayer.
It considered whether the SBAs created an economic cost for the Taxpayer, ultimately concluding that the Parent bore the risk and administrative burden of the SBAs.
The TAC emphasised that while the accounting treatment of SBAs was correct, it did not reflect the economic reality.
Therefore, the SBAs should be excluded from the Taxpayer’s cost base in accordance with the arm’s length principle.
The Revenue objected to the admissibility of the Taxpayer’s expert reports, claiming they were opinions on Irish domestic law rather than expert economic evidence.
However, the TAC found the expert witnesses credible, independent, and helpful in addressing the appeal’s issues.
The TAC accepted the Taxpayer’s evidence on accounting treatment as uncontroversial.
A contentious point was the 2015 tax return and the four-year statutory time limit for Revenue to raise an assessment.
The Revenue argued the time limit did not apply because the return was insufficient, citing flaws in the transfer pricing documentation.
The TAC, however, stated that a “sufficient” return does not need to align with Revenue’s assessment, as long as the taxpayer provided full and true disclosure.
Consequently, the TAC ruled in favour of the Taxpayer.
This decision holds international significance, diverging from rulings in other jurisdictions such as Israel.
For instance, in the Israeli cases of Kontera and Finisar, tax authorities required that SBA costs be included in the cost base for calculating cost-plus remuneration, despite the subsidiaries not incurring these costs.
This TAC ruling, informed by comprehensive expert testimony and aligned with OECD Transfer Pricing Guidelines, will impact multinational corporations with SBA schemes.
Businesses should consider reviewing their transfer pricing policies in light of this landmark decision.
If you have any queries around this article, the Taxpayer Wins First Transfer Pricing Case, or other tax matters in Ireland, then please get in touch
The introduction of General Anti-Avoidance Rules (GAAR) into the Income Tax Act, 1961, marked a significant shift in India’s tax enforcement landscape.
Effective from the financial year 2017-18, these provisions grant the Indian Revenue Authorities (IRA) extensive powers to recharacterize transactions, disregard certain transactions, and disallow expenses if they are primarily designed to obtain tax benefits.
Despite initial concerns about their broad application, the IRA has invoked GAAR provisions sparingly.
However, the recently delivered a landmark judgment on one such GAAR-related case.
The case involved a taxpayer accused of engaging in a “bonus stripping” scheme through transactions with Crown C Supply, a building supply company owned by brothers Michael and Thomas Connelly.
This scheme typically involves issuing bonus shares and subsequently selling them to claim tax losses.
The taxpayer and a sister concern, XYZ, acquired shares of ABC at INR 115 per share.
Shortly after, the taxpayer purchased additional shares from XYZ. ABC then issued bonus shares, reducing the share value to INR 19.20 from INR 115.
The taxpayer sold these shares to another entity, PQR, claiming a short-term capital loss of INR 4,620 million.
The IRA argued that the bonus stripping arrangement was a tax avoidance scheme.
The taxpayer contended that GAAR should not apply as Section 94(8) of the Income Tax Act specifically addresses bonus stripping for mutual funds but not shares, thus falling under Specific Anti-Avoidance Rules (SAAR).
However, the Court dismissed this argument, noting that GAAR provisions, introduced through a non-obstante clause, take precedence over other sections.
The Court emphasized that the scheme was designed primarily to evade taxes and lacked commercial substance.
It cited the Supreme Court’s ruling in the Vodafone International Holdings B.V. case, reinforcing the “substance over form” doctrine, which aims to identify and disregard transactions lacking genuine business intent.
The Telengana High Court ruled that the taxpayer’s transactions constituted impermissible tax avoidance under GAAR.
It highlighted that while Section 94(8) applies to mutual funds, it does not preclude GAAR’s application to share transactions.
The Court referenced the Finance Minister’s speech during GAAR’s introduction, clarifying that GAAR or SAAR applicability would be determined case-by-case.
The judgment affirmed that the IRA can invoke GAAR in cases where the primary objective is tax avoidance, regardless of other provisions.
The taxpayer’s attempt to sidestep tax liabilities through contrived transactions was deemed invalid.
This ruling underscores the importance of ensuring transactions have genuine commercial substance.
Taxpayers must meticulously document the business rationale behind transactions, especially those yielding tax benefits, to avoid falling afoul of GAAR provisions.
The judgment serves as a reminder that while specific anti-avoidance rules exist, GAAR can be applied to a broader range of tax avoidance schemes.
Businesses should anticipate more stringent scrutiny from tax authorities and prepare accordingly.
If you have any queries about this article on the First Indian GAAR Judgment ruling, or any other Indian tax matters, then please get in touch.
The U.S. Supreme Court has affirmed the Ninth Circuit’s decision in Moore v United States, upholding the constitutionality of the mandatory repatriation tax enacted in 2017.
On 20 June 20, 2024, the U.S. Supreme Court ruled that the mandatory repatriation tax (MRT) under section 965 of the Internal Revenue Code is constitutional.
The decision might well be a narrow one. Nonetheless, it potentially also has significant implications.
The MRT was introduced as part of the 2017 Tax Cuts and Jobs Act.
It imposes a one-time tax on specific US shareholders of foreign corporations based on their pro rata share of the foreign corporation’s realized but undistributed earnings accumulated since 1986.
The Moore’s challenged the MRT under the Sixteenth Amendment, arguing that it constituted an unapportioned direct tax on property.
The Court, however, upheld the MRT based on established precedents that allow Congress to attribute undistributed (and untaxed) income realized by an entity to its equity holders and tax those equity holders on their pro rata share of the income.
The Supreme Court affirmed the Ninth Circuit’s decision, concluding that the MRT is constitutional.
This conclusion was based on long-standing precedents which assert that Congress may attribute realized income of one entity (a foreign corporation) to another person (certain US shareholders) and tax them on that income.
This ruling is notable as Moore is one of the first significant constitutional tax cases addressed by the Court in many years.
Had the Court found an affirmative realization requirement, many tax regimes under the Code, such as subpart F, GILTI, PFIC, and partnership taxation, could have been upended.
However, the Court’s “precise and narrow” decision did not extend that far.
While the decision affirms the MRT’s constitutionality, the Court did not address two critical issues:
These unanswered questions suggest potential areas for future legal challenges. Notably, the concurring and dissenting opinions revealed that at least four Justices might require a realization event for an income tax to be constitutional under the Sixteenth Amendment.
Although the decision did not declare large portions of the Code unconstitutional, it leaves the door open for future challenges to certain tax laws and policies.
The opinions expressed by the Justices indicate that areas such as wealth tax or certain income tax provisions might still be subject to scrutiny.
Taxpayers and legal experts should closely monitor developments, as Moore v United States is unlikely to be the final word on the constitutionality of various tax provisions. This decision, while maintaining the status quo, sets the stage for further debates and potential litigation in the tax law arena.
If you have any comments on this article on Supreme Court Upholds Repatriation Tax, or US tax matters in general, then please get in touch.
In an important decision, the Supreme Court recently addressed the extent to which professional advisory fees associated with the disposal of a loss-making investment can be deducted as management expenses under section 1219 of the Corporation Tax Act 2009 (CTA 2009).
The case in question was Centrica Overseas Holdings Ltd v HMRC.
The crux of the matter was whether the fees incurred were of a revenue or capital nature, as only the former are deductible under section 1219 CTA 2009.
While it was accepted that the fees were expenses of management, their classification as either revenue or capital expenditure remained contested.
The Supreme Court unanimously agreed with the Court of Appeal that the test for determining the nature of the expenditure is the same for both investment companies and trading companies, leading to the conclusion that the fees were non-deductible capital expenditure.
Centrica Overseas Holdings Ltd (COHL), an intermediate holding company within the Centrica group, owned a failing Dutch investment known as Oxxio.
Following a decision in mid-2009 to dispose of the Oxxio business, it was accounted for as a “discontinued operation” and “held for sale” starting June 30, 2009, with an anticipated sale by June 30, 2010.
However, complications delayed the sale process.
From July 2009 to early 2011, COHL incurred approximately £2.5 million in fees for banking, accountancy, and legal services related to the strategic considerations and sale documentation.
The sale was finally completed in March 2011 after Centrica plc’s board approved a third-party offer.
The Supreme Court affirmed the Court of Appeal’s stance that determining whether expenditure is capital or revenue in nature is a question of law, and the same test applies to both investment management businesses and ordinary trading businesses.
The primary indicator is the objective purpose of the expenditure.
Where a capital asset is involved, money spent on its disposal is generally considered capital expenditure unless specific transaction features indicate otherwise.
In this case, once the decision was made in 2009 to sell the Oxxio business, the fees for professional advice to facilitate the sale were deemed capital in nature and, therefore, non-deductible.
A crucial aspect of this case was the 2009 strategic decision to sell the Oxxio business and its subsequent accounting as a discontinued operation held for sale.
The Supreme Court found that the professional services were engaged to achieve the disposal, as reflected in the engagement letters.
Consequently, the taxpayer’s argument that the advice was to inform management decisions rather than directly facilitate the sale was rejected.
The Court emphasized that considering different options does not change the commercial reality that a decision to dispose of Oxxio had been made.
COHL did not differentiate between the various professional services fees, resulting in a broad-brush approach by both the Court of Appeal and the Supreme Court.
A more detailed breakdown might have highlighted services not directly aimed at achieving the disposal, potentially altering the outcome.
Uncertainty about whether an asset will be sold does not classify the expenditure as revenue.
The Supreme Court noted that uncertainty is common in transactions and does not change the fact that expenses aimed at enabling a decision on acquisition or disposal are capital in nature, even if the transaction does not occur.
The possibility of an aborted transaction does not alter the commercial reality of a decision to dispose of an asset.
The Supreme Court’s decision underscores the importance of the objective purpose behind expenditure when determining its capital or revenue nature.
In the context of COHL, the professional fees incurred to facilitate the disposal of the Oxxio business were capital in nature and thus non-deductible under section 1219 CTA 2009.
This ruling highlights the nuanced considerations involved in classifying expenditure and the rigorous application of legal principles to determine tax deductibility.
If you have any queries about this article on Centrica Overseas Holdings Ltd v HMRC, or other UK tax matters, then please get in touch.
The High Court of Australia (HCA) has unanimously dismissed an appeal by Godolphin Australia Pty Ltd (Godolphin), concluding that the company failed to demonstrate that the “dominant use” of its properties was for primary production, thus ineligible for the primary production land tax exemption.
In this decision Godolphin Australia Pty Ltd v Chief Commissioner of State Revenue [2024] HCA 20, handed down on June 5, 2024, the HCA addressed the interpretation of “land used for primary production” and the “dominant purpose” of land under section 10AA of the Land Tax Management Act 1956 (NSW) (Land Tax Act).
The HCA upheld the NSW Court of Appeal’s (NSWCA) majority view that the term “dominant use” in section 10AA(3) applies both to the “maintenance of animals” and the purpose of sale as specified in section 10AA(3)(b), adopting what they termed the “use-for-a-purpose” construction.
To qualify for the primary production land tax exemption under section 10AA(3)(b) of the Land Tax Act, the dominant use of the land must be for maintaining animals, and the dominant purpose of this use must be selling the animals or their natural increase or bodily produce.
The HCA clarified that section 10AA(3)(b) uses a composite phrase, combining the identified use of the land with a specified purpose.
The word “dominant” applies to both the use of the land and the purpose for which it is used.
Determining the dominant purpose involves evaluating the amount of land used for various purposes, the nature, extent, and intensity of those uses, the time, labor, and resources spent, and the financial gain from each activity.
An objective observer’s perspective is crucial in this assessment.
Godolphin was assessed for land tax for the years 2014 to 2019 on two properties used for breeding thoroughbred horses and racing them.
The business operations included selling about 70% of the bred horses and retaining the most promising for racing, which aimed to enhance the horses’ value and breeding fees.
Despite the racing operation running at a loss, it occupied the majority of the land and resources, while the profitable breeding operation used a smaller portion of the land.
Godolphin argued that the properties should be exempt from land tax, claiming that the dominant use of the land was for maintaining animals for sale.
The primary judge ruled in favor of Godolphin, viewing the breeding and racing operations as integrated and serving the overall objective of increasing the value of the stud operations.
This led to the conclusion that the properties were used for primary production and thus exempt from land tax.
The NSWCA reversed this decision, with the majority finding that the words “dominant use” in section 10AA(3) required examining the purpose of maintaining the animals.
The court concluded that the dominant use of the land was for racing, not for selling the horses, making the land ineligible for the exemption.
Godolphin’s appeal to the HCA contested the NSWCA’s interpretation, arguing that the “dominant use” should only apply to the maintenance of animals, not the purpose of selling them.
They contended that the sale purpose need only be significant, not dominant.
However, the HCA dismissed these arguments, affirming that the word “dominant” qualifies the composite phrase encompassing both the use of the land and the purpose.
The court ruled that the land’s predominant use for racing activities disqualified it from the primary production exemption.
The HCA’s unanimous decision reinforces the strict interpretation of the primary production land tax exemption under section 10AA(3)(b).
The ruling emphasizes the necessity of demonstrating that the dominant use and purpose of the land align with the specified criteria for the exemption. Godolphin’s appeal was dismissed, upholding the NSWCA’s decision and confirming the land’s ineligibility for the primary production exemption.
The case underscores the importance of clearly establishing the dominant use and purpose of land in tax exemption claims.
If you have any queries on this article on the Godolphin Appeal on Land Tax Exemption, or any other Australian tax matters, than please get in touch
On 3 April 2023, the United States Tax Court ruled in Farhy v Commissioner, preventing the IRS from assessing and collecting penalties for failure to file Form 5471, the Information Return of US Persons With Respect to Certain Foreign Corporations.
This form is used to report an individual’s control over a foreign corporation.
Under US Internal Revenue Code (IRC) section 6038(b), failing to provide this information incurs a penalty ranging from $10,000 to $50,000.
In June 2021, Alon Farhy challenged the penalties imposed on him for not filing Form 5471.
The Tax Court ruled in his favor, stating that the IRS did not have the authority to assess these penalties under section 6038(b).
However, it noted that the IRS could pursue civil action to collect the penalties.
The IRS appealed this decision to the United States Court of Appeals for the District of Columbia Circuit (DC Circuit), which on 3 May 2024, reversed the Tax Court’s decision, affirming the IRS’s authority to assess and collect these penalties.
From 2003 to 2010, Farhy owned two corporations in Belize—Katumba Capital Inc. and Morningstar Ventures, Inc.
Despite knowing his obligation to file Form 5471, he willfully chose not to. After notifying Farhy of his failure, the IRS assessed penalties and issued a final notice of intent to levy when he did not respond.
Farhy requested a collection due process hearing, but the IRS upheld the penalties, leading him to petition the Tax Court, which initially ruled in his favor.
Both parties referenced IRC section 6201(a). The IRS argued that this section granted them broad authority to assess penalties as taxes.
Conversely, Farhy contended that penalties must be explicitly labeled as “tax” or “assessable” in the Code to fall under the IRS’s authority. Farhy outlined four classes of assessable penalties, arguing that section 6038(b) did not fit any of these categories.
The DC Circuit did not fully align with either party’s arguments but concluded that Congress intended section 6038(b) penalties to be assessable, citing:
Congress amended section 6038 to simplify the penalty collection process, countering Farhy’s argument that penalties should be nonassessable to limit IRS’s collection powers.
Sections 6038(b) and 6038(c) penalties work together, and making 6038(b) penalties nonassessable would complicate the process intended by Congress.
The reasonable cause exception for late filing, determined by the Secretary of Treasury, indicates that section 6038(b) penalties fall under the IRS’s assessment authority.
Farhy’s interpretation would necessitate separate proceedings for sections 6038(b) and 6038(c) penalties, potentially leading to conflicting judgments, which the DC Circuit found impractical.
The DC Circuit’s decision reversed the Tax Court’s ruling, affirming the IRS’s authority to assess penalties under section 6038(b).
Following this decision, Farhy petitioned for a rehearing, which was denied on 13 June 2024.
As of now, Farhy has not appealed to the United States Supreme Court, but given the ongoing litigation surrounding these penalties, further appeals are likely.
This case underscores the complexities of tax compliance and the importance of adhering to filing requirements for foreign assets. It also highlights the evolving legal interpretations of the IRS’s authority, which may have significant implications for taxpayers with international interests.
If you have any queries about this case Farhy v Commissioner Case, or US tax matters in general, then please get in touch.
On June 26, 2024, in PepsiCo, Inc v Commissioner of Taxation [2024], the Full Federal Court delivered a critical decision regarding the tax treatment of payments made under two Exclusive Bottling Agreements (EBAs).
The Court ruled that these payments were not subject to Royalty Withholding Tax and, by majority, also decided that the Diverted Profits Tax (DPT) would not apply.
However, in a minority opinion, Justice Colvin asserted that DPT should apply.
The Full Federal Court’s decision overturned the earlier ruling by Justice Moshinsky on November 30, 2023, which had classified portions of the payments related to beverage concentrate sales as royalties subject to Royalty Withholding Tax.
Justice Moshinsky had also ruled that DPT could apply under alternative circumstances.
PepsiCo, Inc. (PepsiCo) and Stokely-Van Camp, Inc (SVC), both US resident companies, had entered into EBAs with Schweppes Australia Pty Ltd (SAPL), an Australian company.
These agreements provided SAPL with beverage concentrate to produce finished beverages for retail in Australia, along with licenses for trademarks and intellectual property related to both carbonated and non-carbonated beverages.
The beverage concentrate was sold as a ‘kit’ containing various ingredients for blending and resale.
The Full Federal Court, comprising Judges Perram and Jackman (majority) and Colvin (minority), diverged significantly from the trial judge’s approach.
They focused on a detailed contractual interpretation of the EBAs, analyzing the central rights obtained by the parties, and referred to significant case precedents involving stamp duty and property/rights transfers.
The judges emphasized the importance of the ‘commercial and economic substance’ of the agreements over a simplistic contractual interpretation.
Given the divergence in views on critical tax issues such as ‘royalties’, ‘tax benefit’, and ‘principal purpose’ among the four Federal Court judges, it is anticipated that the Australian Tax Office (ATO) may seek leave to appeal to the High Court of Australia.
This case holds significant precedent value, particularly concerning DPT, and is closely monitored by sectors with valuable intellectual property, including Consumer Goods/Retail, Pharmaceuticals/Medical/Life Sciences, and Technology.
Perram and Jackman JJ ruled that the payments made by SAPL under the EBAs were solely for beverage concentrate and did not include any component that constituted a royalty for using PepsiCo/SVC’s intellectual property, such as trademarks.
They emphasized that the license rights granted to SAPL for using trademarks and other intellectual property benefitted both SAPL and PepsiCo/SVC by allowing SAPL to take advantage of the goodwill attached to these trademarks.
The judges noted that the contractual documents, including EBAs, purchase orders, and invoices, did not indicate that the payments were partly for the right to use trademarks.
They referred to the precedent set by International Business Machines Corporation v Commission of Taxation (2011) FCA335, supporting their reliance on the terms of the agreements.
The majority concluded that the payments were not royalties because the EBA stipulated that the license was royalty-free, at least under the SVC/EBA.
As no portion of the payments could be considered a royalty, there was no liability for Royalty Withholding Tax.
Regarding DPT, the Commissioner proposed two alternative postulates: first, that the EBA might reasonably have included payments for all property provided, including trademarks and IP rights; second, that the payments should have explicitly included a royalty for these rights.
However, the majority judges found these postulates unreasonable and concluded that the Commissioner’s arguments on DPT failed.
They noted that while the taxpayers might be seen to secure a ‘tax benefit’ under Section 177J, the Commissioner’s postulates were not reasonable alternatives.
Justice Colvin viewed the EBAs as appointing SAPL with the right to bottle, distribute, and sell branded beverages.
He argued that the trademarks were known to be valuable, and it would be commercially unreasonable to consider the EBAs as involving no consideration for these trademarks.
Therefore, he believed a portion of the payments should be classified as royalties.
However, Colvin J. agreed that because the Seller was nominated under the EBAs, the amounts paid were not derived by PepsiCo/SVC, and thus no Royalty Withholding Tax was applicable.
Justice Colvin also believed that the EBAs should have explicitly provided for the payment of royalties to PepsiCo/SVC, resulting in a ‘tax benefit’ with the principal purpose of achieving this benefit.
Hence, he concluded that DPT should apply.
The Full Federal Court’s ruling has significant implications for the classification and tax treatment of payments under similar agreements.
The decision underscores the importance of detailed contractual analysis and the economic substance of transactions over simplistic interpretations.
While the majority ruling favored PepsiCo, the minority opinion highlighted potential areas of contention that could influence future tax assessments and legal interpretations.
Given the potential for an appeal to the High Court, this case may continue to shape the landscape of international tax law and intellectual property transactions in Australia.
If you have any queries about the PepsiCo case, or other Australian tax matters, then please get in touch.
A landmark ruling by the US Supreme Court has significantly curtailed the authority of federal agencies, including the Internal Revenue Service (IRS), to interpret the laws they enforce.
The decision in the case of Loper Bright v Raimondo overturns the Chevron doctrine, a 40-year-old principle that required courts to defer to federal agencies on the interpretation of ambiguous laws passed by Congress.
For decades, the IRS relied on the Chevron doctrine to defend its tax regulations in litigation.
This doctrine compelled federal courts to defer to a federal agency’s reasonable interpretation of an ambiguous statute.
This effectively limited the opportunities for taxpayers and tax practitioners to contest some of the muddier aspects of Internal Revenue Code.
The Supreme Court declared that Chevron is incompatible with the Administrative Procedure Act’s mandate for courts to resolve legal questions using their judgment.
Going forward, the Courts will rely on their discretion in cases involving ambiguous statutes rather than deferring to agency interpretations. That said, they may still consider an agency’s interpretation if it is long-standing or well-reasoned.
The implications of the Loper ruling are still unfolding, but experts anticipate an increase in litigation.
Additionally, the IRS will likely face constraints in issuing tax guidance and rules, as the process to establish these as settled law becomes more protracted.
The ruling may also invigorate pending legal challenges to potentially overreaching federal agency actions.
However, the Supreme Court’s decision in Loper does not retroactively invalidate cases decided under the Chevron deference doctrine over the past 40 years. Statutory precedent will still apply to those cases. “We do not call into question prior cases that relied on the Chevron framework,” the Court stated. “The holdings of those cases that specific agency actions are lawful remain subject to statutory stare decisis despite our change in interpretive methodology.”
This ruling marks a significant shift in the balance of power between federal agencies and the courts, with potentially far-reaching consequences for regulatory practices and the enforcement of federal laws.
If you have any queries about this article on Loper Bright v Raimondo, or any other US tax matters, then please get in touch.
In a recent ruling, the Israeli court addressed claims by the Netanya tax assessor regarding the restructuring of Shalam Packaging Products Group.
The assessor argued that the group’s restructuring was conducted solely to reduce tax liabilities by offsetting business losses against a capital gain from insurance payouts following a fire at one of their plants.
Shalam Packaging Products (1998) Ltd, the parent company, manufactures and markets plastic packaging products.
It owns several subsidiaries, including Shalam Packaging Solutions Ltd., which operated an industrial plant in Yakum.
The parent company acquired 100% of the subsidiary’s shares between 2008 and 2013, during which the subsidiary incurred business losses totaling about ILS 54 million.
In January 2014, the parent company filed a notice of restructuring with the tax assessor, transferring assets to the subsidiary under Section 104A of the Income Tax Ordinance, in exchange for shares allotted to the parent company.
Subsequently, the subsidiary transferred operations from its Yakum plant to the parent company’s plant in Caesarea.
In June 2014, a fire at the Caesarea plant led to insurance payouts totaling ILS 155 million.
The group reported capital gains from these payouts and offset significant business losses against this income.
However, the tax assessor claimed the restructuring was a scheme to improperly reduce tax liabilities, labeling it as an artificial transaction.
The assessor issued a tax assessment charge, disallowing the loss offset.
The assessor also contested the classification of ILS 49 million in capital notes from the subsidiary’s previous owner, Kibbutz Yakum, as perpetual notes.
The assessor argued these were regular liabilities and should be treated as such for tax purposes, requiring the income from debt forgiveness to be offset against the business loss.
The court ruled in favor of Shalam Packaging Products Group, rejecting the tax assessor’s claims on several grounds:
This ruling underscores the importance of commercial substance in tax planning and restructuring activities.
It confirms that tax authorities must consider the genuine business purposes behind transactions, rather than solely focusing on potential tax benefits.
The decision provides clarity on how business losses can be offset against capital gains and reinforces the distinction between legitimate tax planning and artificial transactions.
If you have any queries on this article about this New Israeli Court Ruling on Artificial Transactions, or tax matters in Israel more generally, then please get in touch.