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The Tax Court’s recent ruling in the case of ABD Limited v Commissioner for the South African Revenue Service (CSARS) has marked a significant shift in how South Africa approaches disputes over transfer pricing.
In today’s global economy, Multi-National Enterprises (MNEs) face the complex challenge of navigating international tax and compliance rules, with transfer pricing being a crucial issue.
Adhering to the “arm’s length principle” is vital for MNEs to avoid penalties for non-compliance, especially when launching new subsidiaries abroad or expanding existing ones.
Despite the well-established international guidelines laid out by the Organisation for Economic Co-operation and Development (OECD), many MNEs face frequent scrutiny through transfer pricing audits.
This often results from insufficient tax and legal structures to support transactions between related entities.
The recent ruling by the Tax Court in the case of ABD Limited v CSARS (14 February 2024) highlights the delicate nature of transfer pricing disputes in South Africa.
In this case, the court ruled in favor of ABD Limited, shedding light on the complexities involved in such legal proceedings.
The core issue was the licensing of Intellectual Property (IP) to subsidiaries, a common practice among MNEs in industries like telecommunications and software.
The dispute involved the royalty payments made by the fourteen Opcos of ABD Limited from 2009 to 2012. ABD Limited charged all its subsidiaries a uniform royalty rate of 1% for the right to use its intellectual property, based on expert advice and supported by a benchmarking study.
The South African Revenue Service (SARS), acting on expert advice, argued that ABD Limited should have charged a variable royalty rate based on the country and the year of assessment.
SARS contended that the differences created by adopting this approach were significant on both a country and year-by-year basis.
They sought a court order under section 129(2)(b) of the Tax Administration Act (TAA) to adjust the additional assessment to reflect the variable rates.
Despite initial challenges from SARS, the court’s ruling validated ABD Limited’s pricing strategy.
The court upheld the flat 1% royalty rate charged to all subsidiaries, as the arm’s length nature of the royalty rate was also supported by the same rate charged to an unrelated entity in Cyprus.
This case underscores the importance of solid legal arguments backed by comprehensive evidence, such as annual transfer pricing documentation (local file and master file) and relevant comparability analyses to substantiate the arm’s length nature of the taxpayer’s cross-border intercompany transactions.
To mitigate the risk of non-compliance and navigate the complexities of transfer pricing regulations, MNEs must assemble a skilled team of tax advisors, legal experts, and financial analysts.
By proactively addressing transfer pricing obligations and implementing best practices, companies can protect their operations from potential audits and ensure alignment with regulatory requirements.
The case of ABD Limited v CSARS highlights a significant development in South Africa’s approach to transfer pricing disputes.
It emphasises the need for MNEs to maintain robust documentation and comprehensive legal strategies to defend their transfer pricing practices effectively.
If you have any queries on the case of ABD Limited v CSARS, or South African tax matters more generally, then please get in touch
On February 16, 2024, the Zakat, Tax, and Customs Authority (ZATCA) released new Regional Headquarters (RHQ) rules in Saudi Arabia.
These rules supplement the existing Zakat/Tax Law provisions and the Ministry of Investment of Saudi Arabia (MISA) guidance published in February 2022, offering tax incentives for businesses establishing their RHQs in the Kingdom of Saudi Arabia (KSA).
RHQs that meet the criteria set by MISA and ZATCA will enjoy the following tax incentives:
The timing of these new rules is helpful as, since January 1, 2024, businesses must have had to have their RHQ located in KSA in order to bid for government contracts (with some exceptions).
The following are Eligible RHQ Activities**
In order to qualify, the activities must commence within six months of receiving the RHQ license.
Three of the following optional activities must commence within the first year of receiving the RHQ license:
RHQs engaging in non-eligible activities must maintain separate accounts for these activities, allocating income between eligible and non-eligible activities as if they were independent.
To qualify as an RHQ, the following key conditions must be met:
Failure to meet these conditions can lead to fines and potentially the cancellation of the RHQ license by MISA.
The rules also introduce several administrative requirements:
RHQs must comply with the TP Bylaws issued by ZATCA. Key considerations include:
Special consideration should be given to TP arrangements to meet regulatory requirements and receive the tax benefits offered under the RHQ program.
The new RHQ rules provide substantial tax incentives and administrative benefits for businesses establishing their regional headquarters in KSA.
These incentives aim to attract multinational companies and enhance KSA’s position as a regional business hub.
Businesses planning to establish an RHQ in KSA should carefully review the new rules and consider the TP arrangements to ensure compliance and maximize tax benefits.
If you have any queries on this article on KSA Regional Headquarters Tax, or tax matters in Saudi Arabia in general, 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.
In early 2024, Malta introduced a special 12% VAT rate for yacht charters starting in its waster – a notable reduction from the standard 18% rate.
This change is part of a strategic effort to strengthen Malta’s position as a premier yachting destination and boost its maritime services industry. If you’re involved in yacht chartering in Malta, here’s a simple guide to you understand any relevant eligibility criteria and can benefit from this reduced VAT rate.
The Malta tax authorities have published guidelines to facilitate the industry’s understanding and application of these new regulations.
Additionally, Transport Malta issued a Port Notice emphasizing exemptions for visiting yachts from the Commercial Vessels Regulations, provided they are registered for commercial use and comply with their flag state requirements.
To qualify for the reduced 12% VAT rate, several conditions must be met:
The guidelines also address the concept of composite supplies in VAT applications.
If a taxable person offers mixed supplies of goods and services, these might be considered a single composite supply for VAT purposes if they are primarily related to the yacht charter.
Thus, the special 12% VAT rate applies to such composite supplies provided they are integral to the charter service.
This reduced VAT rate is expected to enhance Malta’s attractiveness as a premier yachting destination, encouraging more high-value tourism and reinforcing its maritime services sector.
Yacht charter businesses should review these conditions and guidelines to ensure compliance and optimize their operations under this new fiscal framework.
If you have any queries about the Special 12% VAT Rate for Yacht Charters in Malta then please get in touch.
India and Mauritius have signed a new protocol, dated 7 March 2024, amending the India-Mauritius tax treaty.
The protocol introduces a Principal Purpose Test (PPT) to address concerns about treaty shopping and tax avoidance.
This amendment aims to close loopholes and ensure that the tax treaty is not used for non-taxation or reduced taxation through tax evasion or avoidance.
The exact application and potential retrospective effect of these changes are not yet clear, but the amendment reflects a significant shift in India’s approach to tax treaties.
Mauritius has been a popular route for investments in India due to favorable tax provisions and no local taxes on capital gains.
Previously, the India-Mauritius tax treaty exempted capital gains earned by Mauritian residents from the sale of shares in Indian companies.
This changed in 2016, with the exemption withdrawn for shares acquired after 31 March 2017.
The shares acquired before that date were “grandfathered,” allowing capital gains tax exemption on their sale, regardless of when they were sold.
However, anti-abuse conditions were not part of the treaty’s 2016 amendments.
India has already introduced General Anti-Avoidance Rules (GAAR) into its domestic tax laws, effective from 1 April 2017, which aim to prevent tax avoidance by focusing on substance over form.
GAAR gives tax authorities the power to deny tax benefits if the main purpose of an arrangement is to obtain a tax benefit without commercial substance.
Additionally, India ratified the Multilateral Instrument (MLI) in 2019, an OECD initiative to combat base erosion and profit shifting.
MLI includes the Principal Purpose Test (PPT), which can deny tax treaty benefits if one of the principal purposes of an arrangement is to obtain a tax benefit inconsistent with the treaty’s purpose.
However, the India-Mauritius tax treaty was not part of MLI’s covered tax agreements, making this latest protocol significant for incorporating PPT.
The new protocol introduces anti-abuse conditions directly into the India-Mauritius tax treaty:
Benefits such as concessional withholding tax rates and capital gains tax exemptions will now be subject to the PPT. This means that if the primary purpose of an arrangement is to obtain a tax benefit, it can be denied.
The protocol expands the objects and purposes of the tax treaty to prevent non-taxation or reduced taxation due to tax evasion or avoidance, specifically targeting treaty shopping arrangements.
The protocol will take effect once both the Indian and Mauritian governments notify it according to their domestic laws. The exact application and potential retrospective effect are not yet clear.
The introduction of PPT into the India-Mauritius tax treaty aligns with international efforts to curb tax evasion and treaty shopping.
However, this move deviates from the approach taken in 2016 when the treaty was amended without introducing anti-abuse conditions.
There are concerns about the potential retrospective application of the PPT and its impact on previously grandfathered investments.
The lack of clarity on whether the amendments could apply to past transactions has raised concerns about investor sentiment and the stability of the tax treaty.
Given the Supreme Court of India and other courts’ rulings affirming treaty entitlement for Mauritian investors based on valid tax residency certificates, the retrospective application of the PPT could unsettle these rulings.
While the protocol’s intent is to prevent abuse, clarity on its application and potential retrospective effect is essential.
It is hoped that the government will provide further guidance to allow investors to understand and adapt to the new requirements.
If you have any queries about this article – India Amends Tax Treaty with Mauritius – or any other tax matters in India, then please get in touch.
Cyprus has become a premier destination for creating trusts, thanks to its robust legal framework and generous tax incentives.
The concept of a trust, considered one of the most significant legal innovations in English jurisprudence, allows individuals and corporations to meet various objectives, such as asset protection, estate planning, and confidentiality.
In Cyprus, the legal system supports a wide range of trust types, including fixed trusts, discretionary trusts, and charitable trusts, each designed to serve different needs.
One of the most notable trust structures in Cyprus is the “international trust.”
Following the 2012 amendments to the International Trusts Law 69(I)/92, Cyprus has become one of the most competitive jurisdictions for establishing international trusts, offering unique benefits compared to other locations.
This type of trust allows individuals to take advantage of the country’s favorable legal and tax environment while enjoying significant flexibility.
To create a Cyprus international trust, certain criteria must be met:
The term “resident” refers to someone who resides in Cyprus for more than 183 days in a tax year or a company that is managed and controlled within Cyprus.
Setting up a Cyprus international trust provides numerous benefits, including:
These trusts offer an excellent solution for high-net-worth individuals seeking strategic asset planning, particularly for those with complex family arrangements.
Settlors can reserve certain powers when establishing a Cyprus international trust.
These powers might include the ability to revoke or alter the trust, appoint or remove trustees or other key positions, or give specific instructions to the trustee.
Cyprus international trusts can continue in perpetuity, as the rule against perpetuities has been excluded.
The 2012 amendments to the Cyprus International Trusts Law have positioned Cyprus as a leading jurisdiction for setting up international trusts.
The comprehensive legal framework provides unparalleled protection and flexibility, allowing settlors, trustees, and beneficiaries to structure their family or business arrangements to meet their unique needs and objectives.
With these advantages, Cyprus stands out as an attractive destination for creating trusts with significant tax benefits and legal security.
If you have any queries about this article on Cyprus Trusts, or tax matters in Cyprus more generally, then please get in touch.
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Ethiopia has revitalized its transfer pricing regulatory framework with the reissuance of its 2015 Transfer Pricing (TP) Directive, now renumbered as “Directive No. 981/2024.”
This move by the Ethiopian Ministry of Finance signals a serious commitment to enforcing transfer pricing regulations to ensure that multinational and domestic enterprises conduct their inter-company transactions at arm’s length.
The directive will not apply retrospectively but will take effect from the date it is registered and published by the Ministry of Justice and on the Ministry of Finance’s website.
Taxpayers are mandated to maintain detailed documentation that substantiates that their related-party transactions comply with the arm’s length principle. This documentation must justify the choice of transfer pricing method as the most appropriate based on the specific circumstances of the transactions.
The required TP documentation must be ready by the statutory tax return filing deadline. If requested, this documentation should be provided to the Ethiopian Tax Authority within 45 days.
Failure to comply can result in severe penalties, including a 20% tax penalty or a flat fee of ETB 20,000 when no tax is due, and potential disallowance of deductions for all related party transactions.
Multinationals with existing TP documentation in other jurisdictions will need to adapt these documents to meet the Ethiopian requirements, ensuring that local branches or subsidiaries also comply with the new directive.
Transfer pricing involves a detailed analysis of numerous factors including the nature of the exchanged goods or services, the roles of the parties involved, and the economic conditions influencing the transactions.
The complexity of these analyses can pose significant challenges for both taxpayers and tax authorities.
A special unit within the Ministry of Revenues is tasked with overseeing TP documentation review. However, there are concerns about the adequacy of expertise and resources available to handle the potential volume of transfer pricing audits effectively.
There has been a tendency by the Ethiopian tax authorities to view all related-party transactions with suspicion, sometimes reversing transactions indiscriminately. It is crucial for the fairness and effectiveness of the tax system that the transfer pricing rules are applied judiciously and equitably.
Taxpayers, particularly those involved in multinational or cross-border transactions, will need to reassess their compliance strategies and possibly enhance their documentation practices to align with the new directive.
Given the complexities and the strict penalties for non-compliance, it is advisable for affected entities to consult with TP experts to ensure that their documentation and transfer pricing methodologies meet the regulatory requirements.
The reissued Transfer Pricing Directive in Ethiopia is a clear indication of the country’s efforts to tighten tax compliance among corporations, particularly those engaging in cross-border transactions.
While this move aims to align with international best practices, the effectiveness of its implementation will depend heavily on the capacity and fairness of the tax authority’s enforcement mechanisms.
If you have any queries about this article called Ethiopia Revives 2015 Transfer Pricing Directive, or Ethiopian tax matters more generally, then please get in touch
If you are a tax adviser – whether from a legal or accountancy background – then we would love to discuss how you can become one of our ranks of Tax Natives.
All you need is your local tax knowledge of Ethiopia and any other regions!
For more information please see here or get in touch.
On March 12, 2024, the Legislative Assembly of El Salvador passed an amendment to the Income Tax Law (LISR).
This law significantly impacts the taxation of income earned abroad.
Here’s a breakdown of the key changes and their potential effects:
The amendment adds a new provision (IV) to Article 3 of the LISR, specifying that income obtained abroad in any form, including capital movement, remuneration, or emoluments, is not taxable under the law.
Additionally, the amendment exempts income covered under this new provision from the requirement to apply proportionality in determining costs and expenses, as outlined in Article 28 of the LISR.
The reform repeals several existing provisions that currently tax income earned by individuals and entities domiciled in El Salvador from overseas deposits, securities, financial instruments, and derivative contracts.
Overseas profits and returns that were previously taxable will now be considered non-taxable income for taxpayers in El Salvador.
This change is expected to encourage increased capital investment within El Salvador, as investors will no longer face taxation on income generated abroad.
Specifically, the following types of income will be exempt from taxation:
The amendment to El Salvador’s Income Tax Law represents a significant shift in the taxation of income earned abroad by individuals and entities domiciled in the country.
By exempting such income from taxation, the government aims to attract more capital investment into El Salvador.
However, taxpayers should consult with legal and financial advisors to understand the full implications of these changes for their specific circumstances.
If you have any queries about this article on El Salvador’s Income Tax Law, or tax matters in South America more generally, then please get in touch
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All you need is your local tax knowledge. For more information please see here or get in touch.
Cyprus has long been recognized as a strategic location for businesses looking to optimize their intellectual property (IP) management.
In 2016, Cyprus further enhanced its appeal by aligning its IP Box Regime with EU regulations and the OECD’s Base Erosion and Profit Shifting (BEPS) Action 5 rules.
Recent amendments in 2020 to Section 9(1)(l) of the Income Tax Law have introduced significant tax advantages for intangible assets, reaffirming Cyprus as a prime destination for IP-centric companies.
The 2020 amendments came at a crucial time, offering tax exemptions on incomes derived from the disposal of intangible assets, effectively exempting them from capital gains tax since January 1, 2020.
This move aims to boost innovation by making it more financially viable for companies to invest in IP development.
Cyprus stands out in the EU for its competitive IP tax regime. As a member of the EU and a signatory to all major IP treaties, Cyprus ensures robust protection for IP owners.
The IP Box Regime in Cyprus offers one of the most advantageous programs in the EU, characterized by low effective tax rates, a broad range of qualifying IP assets, and generous deductions on gains from disposals.
The regime’s hallmark is the substantial tax exemption provided for IP income.
Specifically, 80% of worldwide qualifying profits generated from qualifying assets is deemed a tax-deductible expense, and the same percentage of profits from the disposal of IP is exempt from income tax.
This arrangement results in a maximum effective tax rate of just 2.5%.
Qualifying Assets (QAs) include patents, certain software and computer programs, and other legally protected intangible assets that meet specific criteria, such as utility models and orphan drug designations.
These assets must be the result of the business’s research and development (R&D) activities. Notably, marketing-related IP such as trademarks and brand names does not qualify.
The regime employs a nexus approach to determine the portion of income eligible for tax benefits, relating it to the company’s actual R&D expenditure.
The formula for Qualifying Profits (QP) considers the ratio of qualifying R&D expenditure and total expenditure on the QA, fostering a direct link between tax benefits and genuine innovation efforts.
Qualifying Expenditure includes all R&D costs directly associated with the development of a QA, such as salaries, direct costs, and certain outsourced expenses.
However, acquisition costs of intangible assets and expenditures not directly linked to a QA do not qualify.
Entities eligible for the Cyprus IP Regime’s benefits include Cyprus tax resident companies, tax resident Permanent Establishments (PEs) of non-resident entities, and foreign PEs subjected to Cyprus taxation, provided they meet certain criteria.
The Income Tax Law amendments also introduced capital allowances for all intangible assets, allowing for the spread of these costs over the asset’s useful life (up to 20 years).
This provision supports businesses in managing the financial impact of large IP investments over time.
Moreover, the regime permits taxpayers to opt out of claiming these allowances in a given tax year, offering flexibility in tax planning.
Upon the disposal of an IP asset, a taxpayer must provide a detailed balance statement to determine any taxable gains or deductible amounts.
With its favorable IP Box Regime and recent legislative enhancements, Cyprus continues to cement its status as an attractive location for IP-rich companies seeking tax efficiency within the European Union.
Companies operating in high-tech and innovative industries should consider Cyprus for their IP management and development activities, benefiting from substantial tax incentives and robust legal protections.
If you have any queries about this article on Cyprus and Intellectual Property, or tax matters in Cyprus more generally, then please get in touch.
On 5 April 2024, the Irish Government released a consultation on a potential new tax exemption for qualifying foreign dividends as part of the Finance Act 2024.
The proposed participation exemption could mean significant changes to the way foreign dividend income is taxed, impacting Irish corporation tax starting 1 January 2025.
Here’s the lowdown…
Currently, Ireland operates on a “tax and credit” system, which taxes foreign dividends but allows credits for taxes paid abroad.
The proposed participation exemption would remove Irish corporation tax on qualifying foreign dividend income, aligning Ireland with international best practices and making the country more competitive for business investment.
The consultation document outlines key features of the proposed regime, including eligibility criteria and other important details.
The exemption is intended to support Irish companies with foreign subsidiaries and make Ireland a more attractive location for international businesses and investment funds.
The consultation outlines a strawman proposal, which serves as a draft for feedback and discussion. Here’s a summary of its key points:
The proposed participation exemption is expected to benefit international businesses with Irish-based subsidiaries, similar to the introduction of a participation exemption for capital gains some 20 years ago.
With the OECD’s Global Minimum Tax rules now in effect in Ireland for large multinational groups, it’s crucial for these companies to manage their tax obligations efficiently.
The new regime could also increase the attractiveness of Ireland for private equity funds, providing more flexibility for investment structures.
The consultation period for the feedback statement runs until 8 May 2024, with a second feedback statement expected later in the year.
If you have any queries about this article on the the Irish Participation Exemption for Foreign Dividends, or tax matters in Ireland more generally, then please get in touch.