Tax Professional usually responds in minutes
Our tax advisers are all verified
Unlimited follow-up questions
Base Erosion and Profit Shifting, or BEPS, refers to tax strategies used by multinational companies to shift their profits from high-tax countries to low-tax or no-tax jurisdictions, where they pay less or no taxes.
This practice results in less tax revenue for governments, making it harder for countries to fund public services like healthcare, education, and infrastructure.
The OECD (Organisation for Economic Co-operation and Development) introduced the BEPS initiative to tackle this issue by creating global tax rules that ensure companies pay their fair share of taxes in the countries where they make their profits.
As the global economy became more interconnected, it became easier for multinational companies to shift profits across borders.
Many companies took advantage of loopholes in international tax laws, reducing their tax bills by moving profits to tax havens. This left many countries with significantly lower tax revenues.
In 2013, the OECD launched the BEPS Action Plan, which consists of 15 actions designed to close these loopholes and ensure that multinational companies pay taxes where their economic activities occur.
The BEPS initiative is an important step towards creating a fairer global tax system.
By closing tax loopholes, BEPS ensures that countries can collect the tax revenues they need to fund essential public services.
For companies, BEPS means that they must be more transparent about their operations and comply with stricter rules on where and how they pay taxes.
If you have any queries about this article or any international tax matters then please get in touch.
On 10th July 2024, Taiwan’s Ministry of Finance (MOF) issued a new tax ruling which clarifies the obligations and reporting procedures for both onshore and offshore trustees concerning Controlled Foreign Corporation (CFC) trust income.
This ruling supplements previous guidance by outlining the responsibilities of trustees regarding the settlor or beneficiary’s CFC trust income, starting from the 2024 fiscal year.
Earlier, on 4th January 2024, the MOF had issued a tax ruling which provided a calculation method and guidance for CFC reporting.
This guidance applies to any settlor using shares or capital of a foreign-affiliated enterprise based in a low-tax jurisdiction (the “Shares of Foreign Enterprise in Low-Tax Countries”).
Under Article 92-1 of the Taiwan Income Tax Act, trustees are required to report such holdings.
The latest Ruling further elaborates on the specific procedures trustees must follow when reporting income from such trust assets.
Trustees are now required to report trust income to the MOF under the following conditions:
Trustees must submit a comprehensive report of all trust assets, including but not limited to the property inventory, revenue and expenditure statements, and the statement of trust benefits accrued and payable to beneficiaries.
This requirement pertains specifically to trusts that include Shares of Foreign Enterprises in low-tax jurisdictions.
It’s important to note that while all trust property must be declared, only the CFC trust income is taxed in advance.
The taxation of other trust property remains on a “cash basis.” The MOF is expected to release a CFC filing form for trustees, which will become the standard format for such reports.
Trustees are required to begin reporting the trust income of settlors or beneficiaries from the fiscal year 2024 onwards.
The report for each fiscal year must be submitted by the end of January of the following year, meaning the first report, covering fiscal year 2024, is due by 31st January 2025.
Offshore trustees who are unable to file the report themselves may appoint an agent to assist with the process.
Trustees must apply for a uniform tax ID number from the tax authorities to facilitate the reporting process.
Specific instructions on which tax authorities trustees should apply to will be provided.
Trustees who fail to meet their reporting obligations under Article 92-1 of the Income Tax Act, the CFC rules, or the new Ruling will face penalties under Article 111-1 of the Income Tax Act.
These penalties include fines amounting to 5% of the under-reported or undeclared trust income, with a maximum fine of NT$ 300,000 and a minimum of NT$ 15,000.
Additionally, trustees who fail to accurately file tax withholding returns or issue the necessary documents and certificates will incur a fine of NT$ 7,500.
They must also submit corrected filings within a specified timeframe to avoid further fines, which are calculated as 5% of the current year’s trust property income, subject to the same fine limits.
The new Ruling has significant implications for offshore trustees, who are now required to adhere to Taiwan’s reporting obligations.
Previously, Taiwan’s participation in the Common Reporting Standard (CRS) network was limited, making it difficult for the MOF to access foreign tax information, except through bilateral agreements with countries such as Japan, the UK, and Australia.
Following this Ruling, offshore trustees must review their Taiwanese clients’ offshore asset structures and assess their CFC risks to ensure compliance.
There is some uncertainty about whether trustees need to report income for the first half of 2024, particularly if the trust relationship is terminated shortly after the Ruling’s issuance.
Preliminary discussions with the MOF suggest that if a trust is terminated after 10th July 2024, and a successor trustee takes over, the previous trustee may not be penalised, provided the successor trustee reports the income for the entire year.
Further clarification from the MOF is anticipated.
If a trust has beneficiaries both in and outside of Taiwan, and the trustee cannot confirm the beneficiaries’ tax residency status, they must report all beneficiaries and their respective income to the MOF.
Each beneficiary is responsible for declaring their overseas income based on their residency status.
How the MOF will enforce penalties against foreign trustees without a physical presence or business agent in Taiwan remains to be seen.
There is some ambiguity regarding whether offshore trustees of special purpose trusts need to declare the trust property, especially when no specific beneficiaries are designated.
According to an earlier MOF ruling , if a trust has no specified beneficiaries and the settlor does not retain the right to designate them, the trustee is responsible for reporting the trust’s assets under Article 5-1 of the Estate and Gift Tax Act.
The trustee would also be subject to income tax on the income derived from such trust property.
Thus, if a settlor establishes an offshore special purpose trust that meets these conditions, and there is no income generated during the trust’s term, none of the beneficiaries should be treated as Taiwanese tax residents, and the trustee would not be required to report the trust property.
The recent MOF Ruling on CFC trust income reporting necessitates careful attention to compliance.
Trustees must thoroughly analyse the financial details of the CFC, identify the beneficiaries, and review the trust property to ensure accurate reporting.
It is recommended that anyone potentially impacted by these changes should engage professional assistance.
Concerned about the new trustee reporting obligations in Taiwan? Find your international tax advisor here to navigate these changes effectively. For tailored Taiwan tax advice, get in touch with our experts today.
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
Double taxation occurs when the same income is taxed in multiple jurisdictions, which can impose significant financial burdens on both individuals and businesses.
To address this issue, the UAE has established a robust legal framework through international tax treaties and specific domestic regulations.
This article delves into the key legislative instruments that mitigate double taxation:
Understanding these regulations is crucial for managing international tax liabilities effectively.
Cabinet Decision No. 85/2022 plays a pivotal role in defining tax residency within the UAE, which is essential for accessing double taxation relief.
The decision outlines the criteria for determining tax residency status, highlighting the following key points:
Entities are deemed tax residents if they are established, formed, or recognized under UAE laws or acknowledged as tax residents by UAE tax laws.
Individuals are considered tax residents if their primary residence and financial interests are in the UAE.
Individuals who spend substantial periods (183 days or more) in the UAE within a 12-month period qualify as tax residents.
Those who spend 90 days or more within a 12-month period and meet specific conditions related to residence permits or nationality may also qualify.
These criteria are critical for determining eligibility for double taxation treaty benefits, thereby reducing international tax liabilities.
Ministerial Decision No. 27/2023 provides detailed guidelines for implementing the criteria set forth in Cabinet Decision No. 85/2022. It elaborates on:
The assessment of whether the UAE is the primary place of residence and center of financial and personal interests includes factors such as habitual presence, occupation, family ties, and management of assets.
Methods for calculating days spent in the UAE, including non-consecutive days, are crucial for establishing tax residency.
The decision considers days spent in the UAE due to unforeseen circumstances, ensuring temporary or emergency stays do not unduly affect tax residency status.
Ministerial Decision No. 247/2023 addresses the issuance of Tax Residency Certificates (TRCs), which are necessary for claiming benefits under international tax treaties.
The decision outlines:
Requirements and procedures for applying for a TRC, including necessary documentation and forms specified by the Federal Tax Authority.
Criteria used by the Authority to confirm an applicant’s tax residency status, ensuring compliance with relevant international agreements.
The format and manner in which TRCs are issued, enabling individuals and businesses to present these certificates to foreign tax authorities to avoid double taxation.
TRCs are vital for leveraging international agreements to mitigate or eliminate double taxation, thereby facilitating more efficient international business operations and personal financial planning.
The UAE’s legal framework is meticulously designed to address the complexities of double taxation, providing clarity and certainty for taxpayers.
By understanding and applying the provisions of Cabinet Decision No. 85/2022, Ministerial Decision No. 27/2023, and Ministerial Decision No. 247/2023, individuals and businesses can navigate their international tax obligations more effectively.
This comprehensive approach ensures that the UAE remains an attractive and competitive environment for both local and international stakeholders.
If you have any queries on this article about the UAE’s Double Tax Framework, or UAE tax matters more generally, then please get in touch.
In a notable shift, the Federal Supreme Court of Switzerland has recently revised its stance on inter-cantonal double taxation, a move that greatly benefits taxpayers.
Historically, individuals and businesses faced significant hurdles in contesting double taxation across cantonal borders.
However, a key ruling from the Federal Supreme Court has now eased these restrictions, providing taxpayers with enhanced avenues to defend against inter-cantonal double taxation.
Intercantonal double taxation occurs when the same income or assets are taxed by more than one canton.
Previously, taxpayers could lose their right to appeal against such double taxation if they had unconditionally accepted their tax liability in one canton despite knowing about a competing tax claim from another canton.
This situation often affected companies relocating their registered offices between cantons, leading to simultaneous tax claims by both the original and new cantons of registration.
For example, if a company moved its registered office from one canton to another but allowed the assessment by the new canton to become legally binding without informing it of a competing claim from the original canton, it could end up being taxed by both cantons.
This resulted in effective double taxation, which was difficult to contest under previous legal precedents.
The landmark ruling delivered on 17 August 17, 2023, and concerned a married couple. They had been living in their own home in the canton of St. Gallen since 2010.
The husband had been working as a self-employed doctor in the canton of Schwyz since 2011.
After deregistering in St. Gallen and registering in Schwyz in 2018, the couple faced assessments by both cantons for the same tax year, leading to double taxation.
Despite the canton of Schwyz assessing the couple in 2020, St. Gallen also issued an assessment for 2018, claiming the couple’s domicile had not effectively changed.
The result was that the couple was taxed as residents in both cantons for the same period. Subsequent appeals against the St. Gallen assessment were unsuccessful, and their request for a revision of the Schwyz assessment was also denied.
Under the previous legal framework, taxpayers forfeited their right to appeal if they acknowledged their tax liability in one canton while knowing of a competing claim in another.
This forfeiture occurred if the taxpayer submitted to the assessment unconditionally, paid the required taxes without reservation, and did not pursue further legal remedies.
A 2020 Federal Supreme Court ruling emphasized that forfeiture should only occur in cases of clear abuse of rights or actions contrary to good faith, but it still left room for significant challenges for taxpayers facing double taxation.
The Federal Supreme Court has now revised this stance.
In its recent decision, the court determined that forfeiture of the right to appeal is no longer a proportionate response to a taxpayer’s conduct in inter-cantonal relations.
The court concluded that the elimination of unconstitutional inter-cantonal double taxation should be refused only in cases of qualified abuse by the taxpayer and where the canton has a legitimate interest in withholding the taxes, even if it has no legal claim under inter-cantonal tax law.
The ruling now restricts the previous practice on forfeiture, making it easier for taxpayers to challenge and eliminate intercantonal double taxation.
Misconduct by the taxpayer will now primarily result in the imposition of costs incurred, rather than a complete forfeiture of the right to appeal.
The ruling significantly enhances taxpayers’ ability to avoid or contest intercantonal double taxation. Here are some practical steps taxpayers should consider:
The Federal Supreme Court’s change in practice represents a significant victory for taxpayers, providing them with better tools to combat inter-cantonal double taxation.
If you have any queries on this article on Supreme Court Alters Practice on Inter-cantonal Double Tax, or other Swiss tax matters, then please get in touch.
Deep knowledge, adaptability, and a client-centric focus – these are the core approaches of Tax Natives founder Andy Wood, who joins us on the Frontline Podcast.
Andy shares his journey from tax advisor to leading crypto taxation expert and how certain essential entrepreneurial qualities led him there. Let’s take a closer look at the key takeaways from the podcast and how Tax Natives can help people and businesses achieve their financial goals.
Andy began his tax advisory career in the 90s, quickly rising from a graduate scheme to founding his own practice in 2011.
Here, he discusses his desire to blend tax challenges with client-focused commercial goals and personal objectives and how Tax Natives allowed him to achieve this by offering many taxation services.
Andy notes that many entrepreneurs have short attention spans, especially regarding complex tax matters. This shaped Andy’s advisory style with Tax Natives, focusing on providing clear, concise advice with an emphasis on brevity and clarity in communications – especially for busy entrepreneurs who need to make quick decisions.
Andy’s expertise in crypto taxation has made him a highly sought-after advisor for crypto investors. But in a nascent and evolving world of crypto, this brought its own set of challenges, including the legal status of digital assets, transaction complexity, and cross-border tax issues.
Andy ends with the impact of recent non-dom changes on high-net-worth individuals and his move to Dubai for personal and professional reasons.
Want to know more about Andy’s entrepreneurial journey and gain more insight into his route to financial success? Watch the full podcast episode on the Frontline Podcast now.
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.
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.
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….