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Transfer pricing is a method used by multinational companies to set the prices for goods and services exchanged between their subsidiaries in different countries.
Recently, Coca-Cola has found itself in a major dispute with the US Tax Court over transfer pricing.
The court ruled that Coca-Cola must pay an additional $9 billion in taxes due to transfer pricing adjustments, and the company is now planning to appeal this decision.
Coca-Cola, like many multinational companies, sells products across different countries through its subsidiaries.
The US Tax Court found that Coca-Cola had set the prices for these transactions in a way that shifted profits to lower-tax countries, allowing it to pay less tax in the US.
The court ruled that these pricing arrangements violated the arm’s length principle, which requires transactions between related companies to be priced as if they were between independent companies.
As a result, the court ordered Coca-Cola to pay an additional $9 billion in taxes to the US government.
Coca-Cola argues that its transfer pricing arrangements comply with international tax rules and that the court’s ruling is unfair.
The company plans to appeal the decision, which could result in a lengthy legal battle.
If the appeal is successful, Coca-Cola could avoid paying the $9 billion in additional taxes.
However, if the court upholds the original ruling, it could set a precedent for other multinational companies, making it harder for them to shift profits to low-tax countries.
This case is being closely watched by other multinational companies, especially those that rely on complex transfer pricing arrangements.
If Coca-Cola loses the appeal, it could encourage tax authorities in other countries to take a closer look at how companies set their transfer prices.
For multinational companies, this means that they may need to review their transfer pricing policies and ensure they comply with international tax rules to avoid similar disputes.
Coca-Cola’s transfer pricing dispute highlights the challenges that multinational companies face in navigating complex international tax rules.
The outcome of the appeal will have significant implications for both Coca-Cola and other businesses, as it could reshape how transfer pricing is enforced around the world.
If you have any queries about this article on Coca-Cola to Appeal $9B Transfer Pricing Adjustment, or US tax matters in general, then please get in touch
Corporate tax is the money companies pay on their profits, and it varies from country to country.
Vietnam has recently decided to raise its corporate tax rate for large multinational companies, especially those in the technology and manufacturing sectors like Samsung and Intel.
Vietnam raised its corporate tax because it wants to collect more revenue from the large multinational corporations (MNCs) that operate there.
These companies have been benefiting from Vietnam’s relatively low tax rate for years while earning significant profits from their operations in the country.
By raising the corporate tax, Vietnam hopes to increase the amount of money it collects from these companies. This revenue can be used to improve public services like healthcare, education, and infrastructure.
The tax hike is aimed at the largest multinational companies, especially those in tech manufacturing.
Companies like Samsung and Intel, which have significant operations in Vietnam, are expected to see an increase in their tax bills.
However, smaller companies and local businesses are not affected by the tax increase, as the government wants to continue supporting them.
For large companies, this tax increase could mean they have to rethink their tax planning strategies.
While Vietnam is still an attractive place for manufacturing because of its low labour costs and skilled workforce, companies may now have to factor in the higher tax rate when deciding where to invest.
On the other hand, Vietnam remains competitive compared to other countries in the region, and the government is still committed to attracting foreign investment.
Vietnam’s corporate tax hike for multinationals is part of its broader efforts to collect more revenue from big businesses while still supporting local companies.
For multinational corporations, this means adjusting to a higher tax environment, but Vietnam’s strong manufacturing sector and favourable business conditions will likely keep it as a top choice for investment.
If you have any queries about this article, Vietnam Raises Corporate Tax for Multinationals, or tax matters in Vietnam more generally, then please get in touch.
The UK Patent Box regime, which offers a reduced corporate tax rate of 10% on profits derived from UK or European patents, remains significantly under-utilised by UK companies.
According to the latest available data, only around 1,510 UK companies took advantage of the Patent Box system in the financial year spanning April 2021 to March 2022.
This figure is starkly low when compared to the 4.7 million incorporated companies registered in the UK as of 31st March 2021—a number that includes those in the process of dissolution or liquidation.
To put this into perspective, out of approximately 4.4 million active companies at the time, a mere 0.03% are benefiting from this lucrative scheme.
The Patent Box regime is designed to complement existing incentives that provide corporate tax benefits for research and development (R&D) expenditures.
While R&D tax relief supports companies with the upfront costs of qualifying R&D activities, the Patent Box provides ongoing tax relief for businesses that choose to retain and commercialise their innovations within the UK.
Together, these regimes aim to support the entire innovation lifecycle for UK businesses.
One possible reason for the low uptake could be the confusion between the Patent Box and the more widely used R&D tax credit scheme.
While both offer significant financial benefits, they serve different purposes and can be utilised in tandem to maximise tax relief.
As the numbers show, there is a clear opportunity for more UK companies to explore the advantages of the Patent Box and reduce their tax liabilities.
The Patent Box regime is available to all companies, regardless of industry. To qualify, a company must meet the following criteria:
The first step in calculating the benefit under the Patent Box regime is to determine how a company’s QIPR maps to its qualifying income, which can include:
Finance income is excluded from the regime.
Once the qualifying income is identified, further adjustments are made to calculate the profit attributable to the QIPR, which is then eligible for the reduced 10% tax rate.
From 1 July 2016, significant changes were introduced to the Patent Box regime, impacting all new claimants from that date.
These changes require companies to demonstrate a clear link or “nexus” between their R&D activities and the tax benefits derived under the Patent Box.
This means that companies need to track and report relevant R&D expenditures alongside their Patent Box claims.
For companies operating under the previous regime, “grandfathering provisions” allowed them to continue under the old rules until 30 June 2021.
After this date, all claimants must comply with the new rules, necessitating the tracking and tracing of R&D expenditures from 1 July 2016 onward.
The UK Patent Box regime offers a valuable yet under-utilised opportunity for companies to significantly reduce their corporate tax rate on profits derived from patented innovations.
With only a fraction of eligible businesses currently benefiting from this regime, there is a clear need for greater awareness and understanding of how it can complement existing R&D tax reliefs.
By proactively assessing eligibility, optimising claims, and ensuring compliance with the latest rules, companies can unlock substantial tax savings and support their long-term innovation strategies.
The potential benefits are too significant to overlook, making it essential for more businesses to explore and take advantage of the Patent Box regime.
If you have any queries about the UK Patent Box, or UK tax matters in general, then please feel free to get in touch.
In a bid to enhance the UAE’s attractiveness as a business hub, the Federal Tax Authority (FTA) has introduced a new policy aimed at improving the nation’s competitive edge.
One of the key developments is the issuance of Resolution No. 5 of 2024, which establishes a refund policy for fees associated with private clarification requests on tax matters.
This new policy took effect on 1st August 2024.
Since 1st June 2023, the FTA has offered a private clarification service that allows businesses to request detailed information about specific tax regulations.
This service is provided for a fee, enabling companies to gain clarity on complex tax issues.
The newly introduced Resolution outlines the circumstances under which these fees can be refunded.
Under the new Resolution, several scenarios have been identified where the FTA will issue a refund for the fees paid:
If a request pertains to one specific tax and the FTA fails to provide a response, the full fee will be refunded.
For requests covering multiple taxes, if the FTA does not provide any clarification, a full refund will be issued. If the FTA only addresses one of the multiple taxes queried, the applicant will receive a refund for the difference between the fee for multiple taxes and the fee for a single tax.
Alongside these new refund guidelines, the FTA has reminded legal entities with licenses issued in any June to register for corporate tax by 31st August 2024.
Failure to comply with this deadline could result in administrative penalties.
Detailed information about these deadlines and other important decisions can be found on the FTA’s official website.
The introduction of this refund policy by the FTA underscores its commitment to transparency and business support.
By offering these refunds, the FTA aims to facilitate easier navigation of the tax landscape for businesses, thereby promoting a more business-friendly environment in the UAE.
This proactive approach reflects the FTA’s dedication to maintaining a competitive edge in the global market while ensuring that businesses operating in the UAE have the clarity they need to comply with tax regulations effectively.
If you have any queries about this article on UAE Refund Policy for Tax Service Fees, or UAE tax matters more generally, 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 Court of Quebec has recently delivered a significant judgment in the case of Neko Trade v RQ.
The decision provides important insights into Quebec’s income tax legislation.
The court ruled that a loan from a corporation to its owner-manager for home refinancing did not constitute a shareholder benefit.
Instead, it fell under Quebec’s equivalent of a provision known as the Employee Dwelling Exception.
Additionally, the court criticized Revenu Québec’s (RQ) aggressive decision to reassess the owner-manager on a statute-barred year concerning this loan.
The Employee Dwelling Exception can reduce a seller’s capital gains tax rate from 20% to 10% for the first £1 million of lifetime qualifying capital gains, offering potential tax savings up to £100,000.
Historically, this provision has been risky for shareholder-employees due to the ambiguity in the criteria, which require the loan to be granted to the shareholder-employee as an employee, not as a shareholder, and that bona fide arrangements be made for repayment within a reasonable time.
Neko Trade provides valuable guidance for shareholder-employees considering this option.
The Canada Revenue Agency (CRA) and RQ often challenge any transfer of value from a corporation to a shareholder that is not reported as salary, dividend, or another taxable transaction.
The tax code prescribes tax consequences for taxpayers receiving such “shareholder benefits,” which include loans from a corporation to an individual shareholder. However, it also creates several exceptions, including the Employee Dwelling Exception.
This exception applies to loans given to a shareholder-employee (or their spouse) to acquire a dwelling for their habitation, provided specific conditions are met.
Neko Trade involved a corporation (Neko) established in 2009 by Dimitry Korenblit, its sole employee and shareholder.
During an audit of Neko’s 2015-2017 taxation years, RQ reviewed a loan made by Neko to Mr Korenblit in 2011 to refinance his home.
Mr Korenblit and his spouse initially financed their family residence with a bank mortgage and a line of credit.
In 2011, following advice from an accountant, Mr Korenblit arranged a loan from Neko to replace this temporary financing.
The loan was disbursed in three tranches, and all payments were duly recorded over the years.
Mr Korenblit transferred the residence title to his wife to mitigate financial risks related to his business, and they took out another bank loan secured by the residence’s value.
RQ argued that the Loan was a “smoke screen” to conceal a shareholder benefit and that a “simple employee” would not have obtained such a loan.
They cited several factors, including deficiencies in the loan documentation and the lack of a hypothec on the residence.
The Court concluded that the Loan qualified for the Employee Dwelling Exception, citing eight key factors:
The Court emphasized that the Loan was not a “smoke screen” and that Mr Korenblit was transparent in his tax returns.
RQ’s argument that the Employee Dwelling Exception cannot apply to refinancing an already-acquired residence was rejected.
The Court found that RQ’s published position allowed for such refinancing if agreed upon at the time of the original acquisition.
The Court also addressed the short possession period of the residence, noting that the Employee Dwelling Exception does not prescribe a minimum ownership period and that the transfer of title did not negate the Exception’s applicability.
Neko Trade offers encouragement to taxpayers in disputes over shareholder benefits, highlighting the importance of strict compliance with loan terms, specifying market rates and terms, and maintaining accurate corporate records.
The decision contrasts with the Tax Court of Canada’s 2013 decision in Mast, emphasising the need for detailed and transparent handling of shareholder-employee loans.
If you have any queries about this article on Neko Trade v RQ, or Canadian tax matters in general, then please get in touch.
The Federal Tax Authority (FTA) has recently released a guide outlining the conditions and procedures for applying corporate tax to free zone persons.
This guide aligns with the free zone tax regime, emphasizing the critical role free zones play in driving the state’s economic growth and transformation both locally and globally.
Free zones offer numerous advantages for businesses, including fewer restrictions on foreign ownership, simplified administrative procedures, modern and advanced infrastructure, and additional types of legal entities and commercial activities.
These benefits make free zones an attractive option for businesses looking to operate within the state.
The guide details the conditions that a free zone person must fulfill to be classified as a qualifying free zone person and benefit from a 0% corporate tax rate on qualifying income.
If these conditions are not met or cease to be met during any relevant tax period as prescribed by the FTA, the defaulting entity will lose its qualifying free zone status.
Consequently, it will not benefit from the 0% corporate tax rate from the beginning of the tax period in which the conditions were not fulfilled, continuing for the following four tax periods.
The guide also clarifies the treatment of income generated from immovable property and qualifying intellectual property, as well as tax compliance requirements.
It specifies the qualifying and excluded activities for a qualifying free zone person, as outlined in Ministerial Decision No. 265 of 2023 regarding Qualifying Activities and Excluded Activities for the purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.
To aid understanding, the guide provides examples illustrating the application of the corporate tax law to free zone persons.
It outlines how corporate tax is calculated for free zone persons, determining the qualifying income subject to the 0% tax rate and the income subject to a 9% tax rate.
Additionally, it includes conditions for maintaining an actual and sufficient presence in the free zones and the criteria for determining a local or foreign permanent establishment.
The FTA guide also states that when a qualifying free zone person operates through a permanent establishment in the UAE but outside the free zones or in a foreign country, the profits of such permanent establishments will be subject to a corporate tax rate of 9%.
The new FTA guide provides essential information for businesses operating in free zones, ensuring they understand the conditions required to benefit from the 0% corporate tax rate and the implications of not meeting these conditions.
If you have any queries about this article on Free Zone Persons, or UAE tax matters more generally, then please get in touch.
They must have thick skin, those HMRC people.
I sometimes wonder whether it’s provided when they join or if it accumulates over their time in post.
After all, it takes either fortitude or tone deafness to keep going in the face of seemingly endless criticism.
This year alone, among other things, HMRC has been accused of allowing customer service to plummet to an all-time low and performed a rapid about-face over proposals to hang up its helpline during the summer months.
Yet there are times when persistence appears to pay off.
Take the Diverted Profits Tax (DPT), for instance, which (whisper it!) looks as though it may be changing the kind of corporate shenanigans on the part of big multi-national businesses which in the past has enabled them to minimise the amounts which they make to the Revenue.
The tax came into effect in 2015. Whilst not applying to small and medium-sized enterprises (SMEs), it is a means of countering the exploitation of overseas offices (or ‘permanent establishments’, as they’re otherwise known) to artificially reduce their UK profits and tax liabilities.
For organisations with the kind of turnover and structures which make it possible, such paper shuffling can be incredibly lucrative.
There is a sting in the tail, though.
Get caught and the sanctions – including a six per cent surcharge on top of the normal Corporation Tax rate – can be enormous. An even higher rate of 55 per cent exists in respect of specific profits in the oil industry.
Figures released last month by HMRC show that DPT generated more than £8.5 between its introduction and March last year
The Revenue’s notable scalps include the likes of the drinks giant Diageo which agreed to hand over £190 million in 2018, a settlement which I discussed with The Times at the time .
Realising that it was onto a winner, HMRC subsequently turned those thumbscrews even tighter, launching something called the Profit Diversion Compliance Facility (PDCF) the following year.
It aimed to “encourage” companies identified by some of the near 400 Revenue staff working on international tax issues as having operations which might trigger a DPT liability to “review both the design and implementation” of their policies and pay any tax due.
In short, it offers a chance to ‘fess up to any mischief and avoid being hauled over the coals and, given that it’s eked more than £732 million extra income for the Revenue, could be said to have demonstrated its worth.
Cynics might suggest that the DPT performance record, in particular, indicates that its novelty is wearing off.
The £108 million recovered in the last financial year was less than half the sum reclaimed only 12 months before.
However, I take the opposite view.
I think it is evidence that instead of using offices in far-flung corners of the globe to manipulate their balance sheets and mitigate their UK tax bills, multi-nationals accept that they now have nowhere to hide.
Of course, that is not solely down to HMRC’s efforts.
The Organisation for Economic Co-operation and Development (OECD) has, since DPT was introduced, also unveiled the Global Minimum Tax (GMT) as part of its campaign to eradicate the use of profit shifting which led to the Diverted Profits Tax.
This new measure means that multi-nationals turning over more than €750 million (£633.38 million) will be subject to a minimum 15 per cent tax rate wherever they operate in the world.
It amounts to a combination, one-two punch for the UK tax authorities, in particular. The DPT can still address individual methods not covered by the GMT’s more broad brush approach.
However, the extent to which the UK will retain DPT is perhaps up for debate as well.
To all that, we can add the Revenue’s intention, announced in January, to actually reform DPT, making it part of the wider Corporation Tax for the sake of simplicity – something which in itself is a novel and noble development in UK tax procedures.
There are, I should point out, still some companies which appear reluctant to accept that the diverted profits game is up.
The latest detailed HMRC missive describes how it “is currently carrying out about 90 reviews into multinationals with arrangements to divert profits”, inquiries which involve some £2.6 billion in potentially unpaid tax.
Furthermore, the Revenue is involved in “various international tax risk disputes where the business was not prepared to change their arrangements”. Embroiled in those proceedings led by HMRC’s Fraud Investigation Service “are a number of large businesses” who face possible civil or criminal investigation.
It may well be that corporate titans once inclined to accounting mischief have just been worn down by the Revenue’s dogged investigators.
A change in personnel on the boards of these companies coupled with the prospect of a process lasting five years and a large penalty can also persuade even the hardiest souls to call a halt to such behaviour.
Even those who remain resistant to the newly knighted Jim Harra and his colleagues can’t escape the potential reputational damage arising from the leak of sensitive documentation as has happened successively with the Pandora, Paradise and Panama Papers.
Now that HMRC is finally and effectively calling the tune, there is – with no little apologies to Axl Rose and his bandmates – less of an appetite for diversion.
That is a situation for which and for once the Revenue deserves credit.
Thanks for your patience.
If you have any queries about this article on the UK’s diverted profit tax, or other UK tax matters, then please get in touch.
Look what you’ve reduced me to….
On April 25, 2024, the Internal Revenue Service (IRS) and the Treasury Department issued final regulations (the Final Regulations) for energy tax credit transfers under Section 6418 of the Internal Revenue Code (the Code).
Section 6418, introduced as part of the Inflation Reduction Act of 2022 (the IRA), allows eligible taxpayers to transfer certain clean energy tax credits to unrelated taxpayers for cash, creating a marketplace for these tax credit transfers and spurring investment in the energy sector.
Before the IRA, clean energy tax credits could only be used by taxpayers who owned the underlying clean energy projects, often involving complex tax equity structures typically accessible to large-scale projects and financial institutions.
The IRA addressed concerns about the sufficiency of the tax equity market to support clean energy adoption by introducing the transferability of clean energy credits, thus creating a broader market for these credits.
Any taxpayer that is not a tax-exempt organization, state, political subdivision, Indian Tribal government, Alaska Native Corporation, rural electricity cooperative, or the Tennessee Valley Authority. These entities can benefit from the direct pay mechanism under Section 6417.
Eleven tax credits are eligible for transfer under Section 6418, including:
The Final Regulations, which follow proposed regulations issued on June 14, 2023, adopt rules for making transfer elections with additional clarifications:
Section 6418 became effective for taxable years beginning after December 31, 2022, and the Final Regulations take effect from July 1, 2024.
These regulations provide additional certainty for taxpayers as the market for clean energy tax credit transfers grows. Congress is closely monitoring the performance of this new mechanism, which, if successful, could potentially expand to include other tax credits.
If you have any queries about this article on Transfers of Clean Energy Tax Credits, or US tax matters more generally, then please get in touch.
The Ministry of Finance (MoF) of the United Arab Emirates (UAE) held a public consultation to gather feedback on the implementation of the Global Anti-Base Erosion (GloBE) Model Rules, known as Pillar Two.
This consultation which started on 15 March 2024 and ended on 10 April 2024 aimed to refine the draft policy for applying these international tax rules within the UAE.
The consultation process was designed to collect insights from stakeholders on various aspects of the GloBE Rules implementation.
This includes the potential establishment of the Income Inclusion Rule (IIR), the Undertaxed Profits Rule (UTPR), and a Domestic Minimum Top-up Tax (DMTT).
These discussions are pivotal as they will influence how multinational enterprises (MNEs) with substantial revenues are taxed, ensuring they meet a global minimum tax rate of 15%.
The MoF had provided two main documents for review:
Pillar Two aims to ensure that MNEs with consolidated revenues exceeding EUR 750 million pay a minimum tax rate of 15% in each jurisdiction they operate. This is enforced through two mechanisms:
The public consultation seeks feedback on several critical aspects:
For foreign entities and partnerships, the rules specify that these entities must be transparent, meaning profits pass through to the partners who are then taxed individually, subject to certain conditions including effective tax information exchange with the UAE.
The consultation clarifies that the GloBE Rules will primarily target large MNEs but provides room for applying these rules to smaller groups based on strategic economic considerations.
The application of these rules is not intended to impose undue burdens on smaller MNEs headquartered in the UAE.
The consultation process conclude on 10 April 10, 2024.
Undoubtedly, this was a critical step in adapting the global tax reform initiatives to fit the UAE’s unique economic landscape.
By actively seeking input from stakeholders, the UAE MoF aims to craft a regulatory environment that is fair, competitive, and compliant with international standards.
The feedback gathered will play a substantial role in finalizing the UAE’s approach to implementing the GloBE Rules, potentially affecting a wide range of companies and the overall investment climate.
This initiative reflects the UAE’s proactive stance in aligning with global tax reform efforts while considering the impact on its national economic interests.
If you have any queries on this article on the UAE Public Consultation on Implementing Global Minimum Tax, or UAE tax matters in general, then please get in touch.