APRIL 2012
Looking at Globalization Challenges from a Tax,
Transfer Pricing and Customs Perspective
– Efficient Supply Chain Management –
WTS Alliance Members
Argentina
LF Abogados Tributaristas, Buenos Aires
Australia
WTS Australia Consulting & Advisory Pty Ltd., Melbourne
Austria
WTS Tax Service Steuerberatungsgesellschaft mbH, Vienna
China
WTS Consulting (Shanghai) Ltd., Shanghai
Cyprus
WTS World Tax Service Cyprus Ltd., Nicosia
Czech Republic
WTS Alfery s.r.o., Prague
Egypt
WTS Egypt LLC, Cairo
France
WTS Seseke France, Paris
Germany
WTS Steuerberatungsgesellschaft mbH, Munich
Ghana
WTS Nakyea & Adebiyi, Accra
Hong Kong
WTS Hong Kong Ltd., Hong Kong
India
WTS India Private Limited, New Delhi/Mumbai
Italy
R&A Studio Tributario Associato, Turin
Malta
Fenech Farrugia Fiott Legal, Valletta
Netherlands
WTS World Tax Service B.V., Rotterdam
Nigeria
WTS Adebiyi & Associates, Lagos
Norway
Steenstrup Stordrange, Oslo/Bergen
Philippines
BDB Law, Makati City
Poland
WTS&SAJA Sp.z.o.o., Poznan/Warsaw
Portugal
CCA Advogados, Lisbon
South Africa
WTS IntegriFin Tax Consultants, Johannesburg
Spain
WTS Lamarque & Krieg Tax Advisers, Madrid
Switzerland
WTS Schweiz AG, Bäch
Turkey
Çelen SMMM Ltd. Sti., Istanbul
Ukraine
KM Partners, Kiev
USA
WTS LLC, Morristown/New York City
2 | International Tax Journal
Editorial
APRIL 2012
Looking at Globalization Challenges from a Tax,
Transfer Pricing and Customs Perspective
– Efficient Supply Chain Management –
Globalization and digitalization have shaped the economy as we know it
today. Along with these rapid developments came numerous financial
turmoils, as well as new regulations. Multi-national corporations must
comply with laws in many countries at the same time, and are being
faced with a growing number of direct and indirect taxes, duties, and
other fees. While some countries seemingly attempt to protect their
markets by raising duties and taxes, others try to take advantage of
global developments by concluding favorable tax treaties or free trade
agreements.
The OECD and UN are currently focusing on developing countries,
where withholding taxes play a major role. The taxation of permanent
establishments is also under discussion, and potential significant
changes would lead to a more frequent creation of permanent
establishments and to higher compliance costs as a consequence.
Plans for so-called green taxes on financial transactions further
complicate the situation.
This issue of our International Tax Journal focuses on the main
developments in several key countries. This includes traditional
industrialized countries as well as some from the new “BRICS” group
of rapidly growing economies. In general, it appears that countries deal
with issues of globalization differently, and taxpayers should therefore
be very careful when entering new territories.
Enjoy the read!
Dr. Arwed Crüger
Partner, Head of Transfer Pricing,
WTS
Imprint
WTS Alliance
P.O. Box 19201
3001 BE Rotterdam • The Netherlands
[email protected] • www.wts-alliance.com
Editorial Team:
Dr. Arwed Crüger
Phone:
+49 69 133 84 5615
Fax:
+49 69 133 84 5699
Email: [email protected]
Andrea Hoffmann M.A.
Table of Contents
Argentina..............................................................................................4
Brazil.....................................................................................................5
Chile.......................................................................................................6
China......................................................................................................7
Colombia................................................................................................8
Germany................................................................................................9
Hong kong...........................................................................................10
India.....................................................................................................11
Korea...................................................................................................12
Norway................................................................................................13
russia...................................................................................................14
usa.......................................................................................................15
Phone:
+49 89 286 46 1565
Fax:
+49 89 286 46 2323
Email: [email protected]
Authors: Esteban L. Aguirre Saravia,
Ignacio Fernández Borzese, Prof. Dr. Luís
Eduardo Schoueri, Claudio Bustos A.,
Hongxiang Ma, Mónica Reyes Rodríguez, Maria
Fernanda Castillo, Dr. Arwed Crüger, Claus
Schuermann, Kunjan Gandhi, Christopher Sung,
Woo Taik Kim, Tae Yeon Nam, Ulf Sørdal, Igor
Schikow, Robert B. Gardner, Sean Faulkner
Typography, Layout, Print:
LOGOPRINT GmbH, Munich
This issue of INTERNATIONAL TAX JOURNAL
is published by WTS Alliance. The information
is intended to provide general guidance with
respect to the subject matter. This general
guidance should not be relied on as a basis
for undertaking any transaction or business
decision, but rather the advice of a qualified
tax consultant should be obtained based on a
taxpayer’s individual circumstances. Although
our articles are carefully reviewed, we accept
no responsibility in the event of any inaccuracy
or omission. For further information please
refer to the authors.
ISSN: 2212-8239
APRIL 2012 | 3
Argentina
Mechanisms for Inbound Investment in Argentina
From a tax treaty network perspective (in particular with
regard to double tax treaties – DTTs – and compared with
other OECD countries), the LatAm countries’ network is rather
limited. Argentina, currently a party to only 17 tax treaties
in force, provides a representative example. Argentina has
treaties in force with Australia, Bolivia, Brazil, Belgium,
Canada, Chile, Denmark, Germany, Finland, France, Italy,
Netherlands, Norway, Spain, Sweden, Switzerland and the
United Kingdom.
Most treaties in force are patterned after the OECD Model
Convention (OECD MC). Exceptions are the tax treaties
entered into with Bolivia and Chile, which are structured along
the lines of the model tax treaty approved by Decision 40 of
the Andean Group, and the treaty with Brazil, which, although
following the formal structure of the OECD MC, has certain
unique provisions. Although Argentina is not a member of the
OECD, as an observer country, local courts follow the OECD
Commentaries and Guidelines in their interpretation of the
DTTs. This is also true for transfer pricing purposes.
Moreover, Argentina has signed several international
treaties for the protection of foreign investments, which
protect foreign parties – among others – in case of fiscal
discrimination. It is also a member of the WTO, the ALADI
(Latin American Integration Association) and the MERCOSUR
(Common Southern Market), in addition to other multilateral
organizations. The combination of the current DTTs and the
existence of the regional market associations make Argentina
an interesting gate for investments by multinational firms
(MNEs) in Latin America. Note in this regard that according
to recent rulings, the ALADI implies restrictions on local tax
authorities to levy the holding of shares of local subsidiaries
by foreign residents of member countries. Likewise, the
MERCOSUR is an economic agreement between Argentina,
Brazil, Paraguay and Uruguay, with other associate South
American countries. Among other purposes, this southern
market promotes: (i) the free transit of produced goods,
services and factors (this includes the elimination of customs
rights and lifting of non-tariff restrictions on the transit of
goods or any other measures with similar effects); and (ii)
fixing a common external tariff (CET). Nonetheless, both the
ALADI and the MERCOSUR are far from tax harmonization.
In addition it is worth mentioning that traditionally, Argentina
has been a capital importer country with no restrictions
on the free interchange of goods. However, currently the
local government is restraining imports. With the off-therecord aim of equalizing imports and exports, the Argentine
authorities are pressuring taxpayers to obtain locally a
substantial percentage of the value chain of the products
4 | International Tax Journal
consumed in Argentina. In this regard, starting on February
2012, any company willing to import to Argentina will
have to file an additional bureaucratic affidavit to the tax
authorities. Still, imports of capital assets, industrial supplies
and products that do not compete with the local industry
should not be affected. Despite the above, this measure may
encourage MNEs doing business in Argentina to export to
other South American countries.
To summarize, Argentina is far from EU or OECD members
with regard to their approach to globalization and international
trade. However, the DTTs in force, the regional market
associations and domestic legislation might provide incentives
to MNEs to invest in Latin America through local subsidiaries.
Contact Persons
Esteban L. Aguirre Saravia
Email: [email protected]
Phone: +54 11 5258 5008
Ignacio Fernández Borzese
Email: [email protected]
Phone: +54 11 5258 5008
LF Abogados Tributaristas
Av. Roque Saenz Peña 615, 10th floor
(C1035 AAB) Buenos Aires
Argentina
Homepage: www.lf-abogados.com
Brazil
Globalization Challenges from a Brazilian
Perspective
Globalization has increased competition between companies
and between tax systems. The dogma of tax sovereignty falls
apart when one realizes that international investors seek
more attractive systems. It is not only financial capital that
is movable: as an outcome of the international crisis, whole
companies are moving from one country to another. Since it
is useless to forbid such movements, each country seeks to
adjust its juridical – including tax – system according to the
common practice, under the risk of isolation.
Several countries take advantage of this competitive
environment by enhancing their companies’ abilities.
Unfortunately, besides the high tax burden, the current
Brazilian tax system demands oppressive compliance costs
and offers clear examples of mismatch with the international
standards.
Brazilian multinational companies are subject to fiscal
transparency on their taxation on a worldwide income
basis. While several countries restrict transparency to CFC
legislation (usually passive income in tax havens), Brazilian law
applies the same regime for every investment, which ends up
exporting the Brazilian tax burden.
As a result, if a subsidiary of a Brazilian company is in a
country where it competes with locals and multinationals
therein, all under the same taxation, only the Brazilian parent
company will have the additional tax burden from undistributed
profits. Accordingly, if the competitor is a European company,
dividends shall most probably not be taxed in the country of
the parent company due to the participation exemption. In the
case of investors from the US, dividends shall be taxed only
if and when they are distributed (tax deferral), not to mention
the possibility of offsetting taxes paid in third countries. If
one considers that subsidiaries usually do not distribute
profits, but rather reinvest them, the effect on competition is
enormous.
One should also take into account the insignificant number of
Brazilian tax treaties: this issue becomes especially relevant
insofar as Brazil is becoming the host country of multinational
companies investing abroad.
When it comes to international trade, Brazilian compliance
with WTO rules (namely the national treatment principle) was
questioned worldwide when, in late 2011, the government
raised by about 30% the excise tax charged on imported
vehicles that do not meet requirements of national content
(at least 65%). Despite the absence of a formal trade dispute
regarding the issue to date, this is not the first time Brazil
raises questions in the ambit of the WTO; one may remember
the “Brazil Aircraft case”, where the DSB allowed Canada to
adopt compensatory measures regarding illegal subsidies
granted by the country to its main airplane export company
(Embraer). On the other hand, one must say that Brazil has
successfully claimed before the WTO the illegality of the
subsidies granted by other countries. This was the case of the
US to its cotton producers.
Contact Person
Prof. Dr. Luís Eduardo Schoueri (Professor of Tax Law at the
University of São Paulo)
Email: [email protected]
Phone: +55 11 3897 0110
Lacaz Martins, Pereira Neto, Gurevich & Schoueri
Advogados
Rua Padre João Manuel, 923, 8º andar
São Paulo
Brazil
Homepage: www.lacazmartins.com.br
Present Brazilian transfer pricing rules also discourage
investments in the country. Suffice it to say that the resale
price method – one of the most usual and ordinary methods –
requires, on the resale price of a company that purchases
a good that is already finished and not submitted to any
further production locally, a predetermined profit margin of
20%. If the same company decides to purchase raw material
and industrialize it in Brazil, the margin will jump to 60%. In
such a circumstance, for a cost of $ 40, a profit of $ 60 is
required, which implies an absurd margin of 150%.
APRIL 2012 | 5
Chile
Globalization in Chile from a Tax Perspective –
Evolution and Challenges
Until 1980, the Chilean economy was mostly based on
imports. However, in the last 30 years Chile has progressively
evolved to an increasing exporting economy. Along with
exports, foreign investment in Chile has also increased in
relevant terms during the same period, mostly in the mining
and services sector. The increase in exports and foreign
investment has been favored by a stable growing economy
(from 2000 to 2010, Chile’s GDP grew at an average annual
rate of 3.8%), and an extensive network of international
trade agreements and double taxation treaties (DTTs). Chile
has subscribed to 21 trade agreements with a total of 58
countries, consolidating its position as an active international
partner and expanding its domestic market of 16.9 million
inhabitants to one of over four billion potential consumers
around the world. Because of said trade agreements, in
respect of several countries the customs duties for some
products have dropped to zero or have been reduced
substantially.
In the same context, since 1997 Chile has subscribed to
DTTs with 27 countries out of which 24 are currently in force
and three are waiting to be ratified by Congress (DTTs with
USA, Russia and Australia). With the exception of the DTT
with Argentina, all of the DTTs subscribed to by Chile follow
the OECD Model with some particular relevant differences as
to services (which may trigger a permanent establishment in
Chile just for keeping personnel in the country for more than
183 days), construction and assembling activities (which
give rise to a permanent establishment after six months of
activities in the country, instead of the 12 months considered
by the OECD Model) and dividends (Chile reserves itself the
right to apply the ordinary 35% withholding tax on dividends
instead of the reduced tax rates contemplated in the DTTs).
Aside of the treaties network, there has also been some effort
to adapt the domestic tax legislation to a more globalised
international context. Therefore, in the year 2002 a special
tax regime was enacted (the regime of article 41D of the
Income Tax Act) to stimulate the use of Chile internationally
as a platform or springboard to develop investments in other
countries. Companies incorporated in Chile subject to this
regime, and to the extent that some conditions are met, are
exempt of all taxes in Chile for any foreign source income. A
credit is granted for taxes paid abroad, up to 30% of the net
foreign source income, regardless of the existence or not of
a DTT with the respective country. The 30% credit is relevant
considering that the Chilean income tax system is integrated,
a pretty unique quality today, meaning that the overall income
tax for foreign investors is 35% (the 20% corporate tax paid
by the company is a credit against the 35% withholding tax
6 | International Tax Journal
levied on the repatriated dividend). New anti-avoidance rules
and control measures have also been enacted especially
in connection with the use of uncooperative tax haven
jurisdictions qualified by the OECD.
However, domestic legislation still needs to be strengthened
in order to be efficient in today’s globalized context, in areas
such as transfer pricing, permanent establishment, and
international business restructuring, among others. One could
expect that most of these challenges will be addressed in the
near future, now that Chile is an OECD member.
Contact Person
Claudio Bustos A.
Email: [email protected]
Phone: +56 2 9547621
B&B Tax Planning
Estoril 120, Of. 515
Santiago – Las Condes
Chile
Homepage: www.bybtax.cl
China
China on its Way to an International Tax and
Customs System
In order to establish a more international taxation regulatory
system, the Chinese government has taken great efforts in
concluding more double tax treaties (DTTs) and free trade
agreements (FTAs) with other countries. One of the major
FTAs is the China-Costa Rica FTA, which entered into force on
1 August 2011. This FTA constitutes the 10th FTA China has
concluded and executed. Over 90% of goods trade between
China and Costa Rica will enjoy a zero tariff on a stage-by-stage
basis. The two countries also reached agreements on issues
such as service trade, intellectual property right (IPR), trade
relief, rules of origin, customs procedures, technical barriers to
trade, health and plant inspection and quarantine cooperation.
Since Costa Rica is China’s second largest trading partner in
Central America, Chinese companies are able to expand their
businesses to a large extent under this updated arrangement.
The globalization has also had a great impact on the structure
of turnover taxes in China. Effective from 1 January 2012, the
pilot program for the transformation from business tax (BT)
to value added tax (VAT) was first launched in Shanghai, and is
expected to be rolled out nationwide for all service sectors. As
such, the separated system of VAT and BT, which has been in
existence over a long period in China, would be expected to be
unified for sales and services (the same as goods and services
tax (GST) in most other countries). The pilot program will be
initially carried out in specific sectors such as transportation
and certain modern service industries in Shanghai. During
the pilot period, the VAT and BT implications may be more
complicated considering the fact that cross-region taxation
between the respective pilot city and other cities, the import
and export of services and transitional policies under the VAT
pilot program could face some practical issues. Therefore,
enterprises might consider reviewing their current or planned
business models to see if they can benefit from the new
reform, in particular for intercompany charge arrangements.
At this stage, the Chinese government has been rather
supportive regarding foreign investment in China, and the
provincial governments are actively formulating policies to
attract foreign investment in their areas and make local
industries more competitive. The series of measures taken to
reach such competitiveness includes encouraging multinational
corporations (MNCs) to set up purchasing centers in China
and solving problems related to customs, foreign exchange,
taxation and other issues.
Since 2010, the customs authority is initiating reforms
in order to restructure the overall control of the current
customs system. The focus is consequently shifting from
scene investigations towards supervisions based on risk
management and inspection. It is therefore more important
than ever to assure that a company’s activities are not
inconsistent with the current custom regulations since such
violation may hold up or even cut off the supply chain.
In the year 2011, an adjustment of the trade restrictions policy
was launched, which involved eight ministry announcements
and 17 different customs-control documents. In this context,
the customs authority put the focus of the restriction policy on
the import and export of rare and endangered species, solid
waste, toxic chemicals and others. Those MNCs who hold large
shares in the associated imports and exports should pay special
attention to the current policy imposed as incorrect tariff
classification can have significant negative impacts.
In the meantime, the Chinese government is very concerned
about the issue of affiliated transactions in enterprises with
foreign investment and foreign enterprises. Recently released
relevant data shows that most MNCs in China see transfer
pricing as the most important issue. In light of the above,
scientific use of advance pricing arrangements (APA) is the
best way to resolve benefit conflicts between enterprises and
governments. As such, in essence, an APA is the understanding
reached between tax authorities and taxpayers with regard to
the application of transfer pricing methods for cross-border
transactions of affiliated enterprises, or the prior judgment on
compliance with the normal trading standards.
In conclusion, it clearly appears that China is taking major
steps towards the improvement of the current tax and
customs system in order to comply with an increasingly
globalised world. As such, it is very important for foreign
investors and MNCs to observe the Chinese market in
order to prepare during or even ahead of new regulation
announcements regarding essential changes in the tax
and customs system. Based on the specific status of
the enterprise, taxpayers can adopt as many free trade
agreements, DTTs and APAs as possible in order to achieve
the most preferential treatment.
Contact Person
Hongxiang Ma
Email: [email protected]
Phone: +86 21 2898 6690
WTS Consulting (Shanghai) Ltd.
Unit 602, No. 88 Ke Yuan Road
Pudong, Shanghai
China
Homepage: www.worldtaxservice.cn
APRIL 2012 | 7
Colombia
Globalization and Development in Colombia. New
Tools to Simplify Procedures for Trade in Goods
and Services
In recent years, Colombia has implemented material legislative
changes designed to favor the development of highly productive
and competitive industrial processes in the global market.
Within those changes, the introduction of tools to simplify
procedures for the trade of goods and services, such as
the regulations on Free Trade Zones and the adoption of
the qualification as Authorized Economic Operator (AEO),
must be noted in particular. The regulations on Free Trade
Zones in Colombia have undergone considerable change
since 2007. The recognition of special economic zones is not
only applicable to specific geographical areas but may also
be granted to a qualifying legal entity under the regulations
regarding Special Permanent Free Zones (also known as
“Uniempresarial” Zones) and Transitory Free Zones, when
the entity plans to develop an investment project of a high
economic and social impact on the country, or to hold trade
fairs, exhibitions, or seminars which are of a significant
relevance for the country´s economy and international trade1.
On the other hand, the certification as an AEO, given the
obligations accepted by Colombia to adhere to standards of
the World Customs Organization as part of the Memorandum
of Understanding, guarantees security in the international
supply chain and facilitates international trade. The most
significant aspect of these regulations, which have been
in force since 1 November 2011, is the very stringent
requisites to be complied with by the participant in the
international supply chain applying for AEO certification,
with the purpose of assigning such certification exclusively
to the most trustworthy and sound operators. The benefits
and prerogatives granted to the AEO under local regulations
correspond to those contemplated by the SAFE regulations:
recognition as a customs user that renders safety and
protection; free assignment of a customs officer providing
permanent support; a reduction in the number of audits and
inspections by the customs authorities; application of special
simplified procedures to complete recognition or inspection
processes; and authorization to importers and exporters to
file customs declarations directly, among others2. From a tax
point of view, it should be noted that the National Government
will be filing a Taxation Bill that will reduce the general tax
rate from 33% to rates ranging from 31% down to 25%
and introduce a tax on dividends together with incentives to
reinvest profits in resident legal entities.
Geographical areas qualifying as Free Trade Zones are subject to special dispositions
regarding preferential tax and customs treatment, in accordance to which, merchandise
entering the zone is deemed to be outside the national customs territory and consequently
import transactions within the zone are exempt from import taxes, i.e. Value Added Tax
(VAT) and custom duties. Similarly, regarding income tax, Free Trade Zones are subject to
a preferential 15% rate as opposed to the general 33%.
1
2
Decree 3568/ 2011. Currently, only exporters are allowed to obtain the quality of OAS.
8 | International Tax Journal
These measures coincide with the increase in foreign
investment and trade that is taking place in Colombia with
the purpose to facilitate and endorse the recognition of the
Colombian entrepreneur as an strategic ally in the logistics
chain, under the scope of the Foreign Trade Treaties and
Agreements for the Reciprocal Promotion and Protection of
Investments (ARPPI) executed to date3. There are nine Free
Trade Agreements (FTAs) in force today in Colombia (Canada,
Mexico, Chile, Cuba, the countries in the Northern Triangle of
Central America – El Salvador, Guatemala and Honduras, the
EFTA States – Switzerland and Liechtenstein, the Caricom
Countries – Jamaica, Trinidad & Tobago, Barbados and
Guyana, the Andean Community, and CAN-Mercosur), which
grant important preferential access quotas and import tax
exemption programs. There are two other FTAs that are being
formalized with the European Union and Peru, and three that
are being negotiated with Turkey, South Korea, Panama and
Israel. Undoubtedly, the more relevant Free Trade Agreement
is the one executed between the United States of America
and Colombia, which was approved and sanctioned in October
2011.
With the US-Colombia agreement, the country obtains
immediate access to the American industrial market and
guaranteed access to the US capital goods sector through
the elimination of the great majority of customs duties.
Simultaneously, the US-Colombia FTA establishes protection
mechanisms, ample terms of exemption, contingent customs
duties and grace periods for the Colombian agriculture, which
is very sensitive to adverse competition conditions. In light
of National Treatment, Most-Favored-Nation and Minimum
Standards of Treatment provisions, Colombia is expected to
become a platform for capital investment to and from the US
and other countries.
Colombia has subscribed ARPPI with Japan, the UK, Spain, China and India, among
others.
3
Contact Persons
Mónica Reyes Rodríguez
Email: [email protected]
Phone: +571 620 7870
Maria Fernanda Castillo
Email: [email protected]
Phone: +571 620 7870
Reyes Abogados Asociados
Carrera 7 nro. 113-43 Ofic. 909
Bogotá
Colombia
Homepage: www.reyesaa.com
Germany
Exports, Globalization and its Pitfalls
Traditionally, Germany builds on a strong export economy. To
support such favorable activities, Germany has been highly
active in international organizations like the WTO or the OECD,
and has adopted the respective guidelines. Connected to that
is also the conclusion of more than 100 double tax treaties
(DTTs), and several free trade agreements, supposed to give
German companies a framework to export their products all
over the world within sound rules and a clear legal framework.
The implementation of the European Union has further
helped to decrease trade barriers and compliance burdens.
Within the EU, trade barriers have mainly vanished. Tariffs
have been abandoned and there was also a trend towards
some harmonization in other areas, like taxation. The EU has
also successfully worked on concluding further free trade
agreements, with South Korea being an example.
In this comfortable situation, German companies were
able to further increase the exports of goods and services.
Especially between the so-called industrialized nations, things
progressed well. Those countries are usually a member
of both the OECD and WTO, and follow similar rules and
procedures. If there ever was a problem, it could either be
solved in court or by other means. A common tool to solve
issues of double taxation is the mutual agreement procedure
(MAP) that is regulated in the respective DTT. According to
the OECD, the number of on-going MAP cases of all member
countries has increased from 2006 to 2010 by nearly
40% to a total of 3261 cases. It takes about two years to
solve a case on average. Every year, more than 1000 new
cases are reported and a nearly equal number of cases get
settled. However, 2010 has shown a drop in cases by 5%
compared to 2009. There are two possible explanations for
that. Either taxpayers or fiscal authorities have become more
sophisticated and experienced in their work, or the focus has
been shifted elsewhere – maybe both?
Globalization has increased international trade and tax issues,
but the fiscal authorities and taxpayers have been able to
deal with it in the OECD and WTO framework. Globalization
has also turned the attention to a new group of players: the
so-called BRIC countries. Brazil, Russia, India and China are
not OECD members. Russia has not been a WTO member
until very recently. After 18 years of negotiations, Russia will
be a WTO member from 2012. Tariffs are supposed to drop
from ca. 10% to ca. 7% on average. However, the transition
periods connected to that shift are rather long. Although the
other BRIC countries are already members, the situation is
far from perfect. Conflicts between BRIC countries and other
countries regarding trade have recently increased rather than
decreased. The tendency towards protectionism seems to be
getting stronger, both from BRIC and industrialized countries.
Consequently, German taxpayers have to face the results
of such developments. Examples are numerous, covering all
BRIC countries: legal issues in India, tariff issues with Russia,
plagiarism in China, and tax issues with Brazil. Due to the
difficult situation with Brazil, Germany has cancelled the DTT
and attempts to negotiate and conclude a new DTT between
these two countries have proven to be unsuccessful. This can
also be interpreted towards an increasing protectionism in
both countries.
In Europe, tariffs have more or less left the focus of taxpayers
after the formation of the European Union. The governments
have reduced the number of customs and tariffs experts, and so
have taxpayers. The growing importance of global trade outside
the EU, for example with BRIC countries, comes at a time when
taxpayers are rather unprepared and the growing strategic
importance of tariffs has long been ignored. Only recently did
taxpayers realize the enormous amounts of cost connected to
tariffs and exports related to BRIC countries. In addition to that,
there are several constellations in which competitors from other
countries might play a role, and a possible difference in tariffs
or taxes might become critical to win the customer.
To summarize these observations, it can be noted that
taxpayers have to revisit the area of tariffs and international
relations. Of course, the compliance part is important, but
even more important is an adjustment of the value chain to
the needs of a global organization. Depending on the specific
structure, several tools might be helpful. Making use of free
trade agreements can be advantageous, and the existence of
a DTT might prove to be critical as well to be in a position to
apply for a MAP. To receive certainty before problems come up
and therewith avoid a MAP, it is also possible to apply for an
APA (advance pricing agreement) to receive the approval of two
countries for a certain transfer pricing system. So far, Germany
has not concluded any APAs with BRIC countries. Another EU
country has concluded an APA with China, and Germany is
currently negotiating a few select cases with China as well. It
can only be hoped that these developments will increase the
reliability of international trade rules for German companies.
Contact Person
Dr. Arwed Crüger
Email: [email protected]
Phone: +49 69 133 84 5615
WTS
Taunusanlage 19
60325 Frankfurt on the Main
Germany
Homepage: www.wts.de
APRIL 2012 | 9
Hong Kong
A Tax Enhanced Business Model for Asia
There is a combination of trends that heavily impact supply
chain planning and make it increasingly relevant for tax
management, particularly with regard to the inhomogeneous
landscape in Asia. One key driver is the continuing economic
growth in high-duty countries (e.g. BRIC and most of Asia).
Another trend is the globalization of manufacturing networks.
On one side there is a continuing increase in the number of
free trade agreements, while on the other western countries
in particular are stepping up protectionist measures and
compliance requirements.
In practice, internationally expanding companies increasingly
establish regional responsibilities in Asia (including finance
management, HR, R&D, tax, trade), i.e. close to their
operations. This is particularly necessary in Asia since tax
regulations – among others – have to be dealt with in a
different manner compared to Europe or North America.
In Asia, a very pragmatic hands-on approach is required
to manage business, especially with regard to taxation.
Therefore, allocating functions such as the tax function for the
Asian business in Asia, closer to where business is conducted
and taxes are paid, increases effectiveness through quicker
response times and qualitatively better communication with
the respective stakeholders.
These functions (hopefully) add – directly or indirectly – some
value to the end product/service. They generally must carry a
small profit, at least from a transfer pricing perspective. Thus
direct taxes like the profits tax in Hong Kong or corporate
income tax in Singapore or China become a cost factor which
directly impacts the bottom-line result. An additional expense
in the case of China is the business tax on services, generally
at 5% on the charged amount.
With regard to the supply of goods, further to the cost of
income taxation and VAT (VAT is not always neutral for the
company, but in some cases becomes cost as well) there may
be customs duties that add to the cost profile of cross-border
sales transactions. In contrast to taxes, the customs duties
are generally booked as cost of goods sold and therefore have
a direct impact on the gross profit (margin). Especially for
high custom duty goods, the country mix of sales transactions
has to be analyzed to avoid paying unnecessary high customs
duties. It also has to be assessed if a free trade agreement is
in place that grants access to a reduced tariff.
In Asia, if large parts of the trade take place in Southeast Asia
then often Singapore would be the preferred hub-location, as
it gives access to the ASEAN Free Trade Agreement (AFTA).
At the same time, the profit margin generated by such
trade would generally be taxable in Singapore unless certain
10 | International Tax Journal
incentives (e.g. the Global Trader Programme) have been
granted by the Singapore authorities.
Hong Kong is a well-established trading and sourcing location
particularly for China-related business. Here, trading income
can be generated tax free if the underlying business activities
are undertaken outside of Hong Kong. In contrast to the
incentives in Singapore that are limited to a certain number of
years, usually five to ten, there is no time limit per se on such
exemption in Hong Kong as long as the conditions are fulfilled.
From an operational viewpoint, there is often a tendency to
allocate functions alongside manufacturing or distribution
functions, for example in China. However, the arithmetic
has to be done before reaching a premature conclusion.
Services provided by a Chinese entity generally create a
business tax cost of over 5% on the transaction price and
25% on any profit generated by the functions. If the same
function were provided out of Singapore, the indirect tax
cost would generally be 0% and the profit would be taxed at
17%. Similarly, in Hong Kong as there is no indirect tax at
all, only profit generated would be taxed at either 16.5% or
if provided outside of Hong Kong then the profit would be tax
exempt. Assuming a profit margin of 5% (for lower margin
functions), the total tax for such a function (considering no
customs duties apply) would be around 7% in China compared
to approximately 1% in Hong Kong and Singapore. Where
higher margin functions (e.g. intellectual property and IP
Management) can be allocated to the hub, the total tax rate
differential is even higher. These figures do not yet consider
the personal income taxes. With a 45% top tax bracket in
China compared to 21% and 15% for Singapore and Hong
Kong respectively, there are further tax savings available by
setting up a tax enhanced business model.
Contact Person
Claus Schuermann
Email: [email protected]
Phone: +852 2528 1229
WTS (Hong Kong) Ltd.
Unit 1004, 10/F Kinwick Centre,
32 Hollywood Road, Central
Hong Kong S. A. R.
Homepage: www.wts.com.hk
India
Globalization: The Challenging Landscape of
Transfer Pricing in India
The Indian transfer pricing (TP) milieu has undergone quantum
transformation since the onset of detailed TP regulations
a decade ago. The rapidly evolving domain owes its growth
spree in significant measure to the fact that India is among
the most attractive foreign investment destinations in the
world. Whether it is manufacturing, trading or the services
sector (financial services, information technology, etc.), India
remains one of the most preferred locations for multinational
enterprises (MNEs) to setup an operational base. This trend
has led to an upward spiral in volumes of cross-border trade
and transactions, thus having a direct impact on the level and
complexities of activities witnessed in the TP field during the
last decade.
The Indian Revenue and the taxpayers both are seized of
the problems faced in the transfer pricing audits and thus
an urgent need to minimize the litigation. While on one
hand, the Indian Revenue has become synonymous with
adopting aggressive stances on most of the issues leading
to high-pitched TP adjustments across almost all sectors,
on the other hand, several new measures introduced by the
government in recent years, such as the dispute resolution
panel (DRP), safe harbor rules, advance pricing agreements
(APA) etc., also hint at an underlying positive and encouraging
mind-set of the government aimed at relieving the operational
burden of compliance and providing the necessary certainty
and assurance to taxpayers during TP audits.
What is the GST?
Since India is a federal country that has two major taxing
agencies – i.e. the Union Government and the State
Government – the proposal is to replace the host of existing
indirect taxes with a dual GST i.e. a central GST and state
GST to be levied simultaneously by the centre and the states.
The GST would replace most indirect taxes currently in place.
The tax base is anticipated to be complicated in effect on all
goods and services, with minimum exemptions. For inter-state
transactions in India, there is the proposal of integrated GST
(IGST), which will be equal to both the central GST and state
GST. A total input credit system would operate in parallel for
central GST and state GST. Cross utilization of input tax credit
would not be permitted although both central GST and state
GST will be eligible to be set off against IGST.
Contact Person
Kunjan Gandhi
Email: [email protected]
Phone: +91 22 6145 5600
WTS India Private Ltd.
Mafatlal House – Backbay Reclamation
Churchgate 1, Mumbai - 400 020
India
Homepage: www.wts.co.in
More and more commercial transactions take place
across borders, involving indirect taxes and increasing and
complicating the tax risks. The magnitude of indirect taxes –
such as value added taxes, sales taxes, service tax, custom
duties and excise – is rarely highlighted in annual reports
due to the fact that same are invariably passed on to the
end users. Poor indirect tax management can squeeze cash
flow, allow the over- or underpayment of tax, and attract stiff
penalties for non-compliance of relevant taxes applicable to
goods as well as services.
A Way towards Simplification – GST
It is now amply clear to the policymakers in India that if they
are to attract foreign investment and provide a boost to
the Indian economy by inviting global players to India, much
is needed to be done to simplify the indirect tax regime. A
welcome step in this direction is the proposed introduction of
the Goods and Service Tax (GST) for which action has already
been initiated. It was initially planned to be introduced in the
year 2012 although this does not look likely for a variety of
reasons.
APRIL 2012 | 11
Korea
Recent Efforts to Harmonize Customs Valuation
and Transfer Pricing
Subsidiaries of foreign multinational companies doing business
in Korea must carefully manage prices on cross-border
transactions of goods for customs valuation and transfer
pricing purposes. Since different set of laws and regulations
apply to customs valuation (i.e. the Korea Customs Act (KCA)
and transfer pricing for income tax purposes (i.e. the Law for
Coordination of International Tax Affairs (LCITA), companies
frequently find themselves in the very difficult position of
having two different prices applied to the same transaction
whereby the customs authorities argue that the transfer price
is too low while the tax authorities take the opposite view,
often resulting in a form of double taxation.
Even where both authorities generally agree that the
overall transfer price over a given period is arm’s length,
customs authorities can still review each individual import
transaction on a product-by-product basis and isolate certain
transactions where the transfer prices may have deviated
from the norm (as in the case of temporary fluctuations in
the price). This explains in part why a transfer pricing study
or an advance pricing agreement (APA) based on comparable
profits methods such as the transactional net margin
method (TNMM), which is often used for Korean distribution
subsidiaries of foreign multinational companies that focus on,
for example, operating margin of the company as the profit
level indicator, have limitations as a possible defense to a
valuation scrutiny by customs authorities, notwithstanding
also the fundamental differences in the governing laws of the
respective regime. Still, where there is lack of supporting
evidence on the valuation of the goods, a transfer pricing
study and APA, whether unilateral or bilateral in nature, may
offer some practical value in supporting the arm’s length
nature of the import prices especially where the comparable
uncontrolled price (CUP) method, as opposed to the TNMM, is
employed in the analysis.
Against this back drop and in an effort to provide relief to
companies engaged in cross-border transactions, early this
year the Korean Ministry of Strategy and Finance (MOSF),
which governs income tax as well as customs duty, organized
a task force team consisting of government officials and
outside experts to harmonize transfer pricing and customs
valuation rules in Korea. As a result of the findings of the Task
Force Team, on 7 September 2011, the MOSF announced a
set of proposals to amend the LCITA and the KCA which was
later approved by the National Assembly in December 2011
and have since been in effect from 1 January 2012.
12 | International Tax Journal
Some of the key features of the new law are:
–If the Korea Customs Service (KCS, the main customs
agency) adjusts a taxpayer’s declared import price of
goods, the National Tax Services (NTS, the main tax agency)
should provide a corresponding adjustment to the tax base
for income tax purposes if the taxpayer files an amended
corporate tax return, and vice versa.
–If the corresponding adjustment is not made available to
the taxpayer, the taxpayer can request a hearing before
the Tax Coordination Committee of the NTS which was
set up specifically to address grievance of the taxpayer on
disparate treatment of transfer price
–The relevant authorities (NTS and KCS) shall exchange
information to facilitate fair assessment and collection of
national tax and customs duty
Overall, the new laws are designed to promote greater
cooperation between the NTS and the KCS for a more
taxpayer-friendly administration of national tax and customs
duty. Going forward, it is expected that the NTS and the KCS
together with the MOSF will soon put into place a framework
of implementation measures to carry out the objectives of the
law.
Contact Persons
Christopher Sung
Email: [email protected]
Phone: +82 2 3703 1115
Woo Taik Kim
Email: [email protected]
Phone: +82 2 3703 1020
Tae Yeon Nam
[email protected]
Phone: +82 2 3703 1028
KIM & CHANG
Seyang Building, 223 Naeja-dong, Jongno-gu
Seoul 110-720
Korea
Homepage: www.kimchang.com
Norway
Tax Effective Supply Chain Planning in Norway –
Legal Environment
Norway is not a direct member of the EU community; however,
the EEC agreement entered into in 1992 with the EU provides
close links between Norway and the European community.
Norway is one of the most adapt countries in Europe in terms
of implementing legal directives into local legislation. Despite
the close alignment, the major difference from EU countries
is linked to the fact that Norway is not a part of the joint VAT
treatment inside the EU.
An effective network of around 90 double tax treaties,
membership of the WTO and free trade agreements with
countries through the EFTA alliance, makes the legal
environment comparable to other EU members of similar size.
The effectiveness of the legal system should also be
mentioned as Norway has been a frontrunner in establishing
electronic systems for both corporate and individual tax
returns, VAT reporting, and not to forget the efficient
Business Register with electronic information on all legal
entities including ownership details.
Tax Competition and Enforcement
With a corporate tax rate of 28%, relatively low import duties
on most goods and services, VAT of 25% and limited stamp
duties or similar costs on transactions, the Norwegian tax
system is competitive compared to peers.
Holding structures with almost zero corporate tax due to
the participation system is also competitive compared to EU
countries. However, more aggressive CFC legislation than
peers will by itself lead to the avoidance of establishment of
holding structures from Norway. The fact that Norwegian
tax authorities (NTA) have been relatively aggressive in tax
enforcement is also a clear indication that multinationals
should refrain from locating legal entities or activities in
Norway without having a concrete incentive. We will only
mention as example that NTA have been leaders in the
development of PE taxation offshore and onshore, introducing
aggressive EXIT taxation and challenging global income
taxation both for corporate and individuals. By mixing the
rather aggressive tax enforcement with lack of APA or rulings,
it is difficult to put Norway on top of the list of countries which
should be part of a tax effective supply chain management.
It is also worth mentioning that tax advisors in Norway have
recently been prosecuted due to setting up (too) tax efficient
structures for a multinational drilling company. The trend is
worrisome and draws unfavorable links with less developed
countries.
Controversy
The MAP procedure in EU is not applicable to Norwegian
taxpayers. Tax controversies are treated in the ordinary court
system with three tiers subsequent to the administrative
complaint treatment. Lack of expertise in a separate tax
court is also an obstacle, adding further insecurities to the
supposed safe and rapid treatment of the courts. The MAP
procedure in the DTT will still be applicable if the country
involved in the transaction has entered into a DTT with
Norway. However, this procedure is not often utilised and
should not encourage others.
Summary
The efficient supply chain management needs transparency
and ability to foresee future effects of the set-up and changes
in the chain. The legal environment in Norway has been
changing over the years, with the offshore shipping industry
as one of the losers in terms of challenging and burdensome
changes in the tax system over the past 20 years. Lack of
predictability has been held against the Norwegian players and
subsequently held back investments in Norway for decades.
However, the last changes to the shipping tonnage tax regime
led to a shift in migration and even attracted ship owners to
relocate to Norway.
We do not expect this model to be adaptable to all industries
as the Ministry of Finance actively fights hard against the
free move of capital, assets and individuals across Europe.
The battle of tax money in Norway is continuous, being a solid
exporter of raw materials as oil and gas, electricity, and fish
of various species, along with a strong maritime industry
linked to the shipping and transportation industry. The most
likely scenario is that Norway will hold a firm grip around the
tax base and not allow too many incentives in order to attract
global players to locate tax, VAT or custom efficient set-ups in
Norway.
Contact Person
Ulf Sørdal
Email: [email protected]
Phone: +47 55 30 10 17
Steenstrup Stordrange
Torgallmenningen 3B, Pb. 1150 Sentrum
Bergen
Norway
Homepage: www.steenstrup.no
APRIL 2012 | 13
Russia
Transfer Pricing and Consolidation of Tax
Obligations – New Rules of the Game for Russia’s
Big Business?
The most significant recent developments in the Russian tax
system are the transfer pricing rules, which have undergone
a radical face lift, and a completely new Russian tax law
opportunity that allows for the creation of a consolidated
group for income tax purposes.
Both these tax institutions share a common purpose – to
govern the allocation of profits among group companies.
Companies that are legally independent but economically
related may enter into internal transactions and set nonarm’s-length prices, i.e. different from those agreed between
unrelated enterprises under similar market conditions. This
creates an opportunity (and a temptation) to artificially
allocate profits from one tax jurisdiction to another providing
a more favorable tax regime (e.g. lower tax rates). The tax
control over the prices agreed for intra-group transactions
(so called transfer prices) must prevent the erosion of the tax
base in Russia.
Yet, fiscal interests require an equitable allocation of profits
among group companies within Russia, as most of the profit
tax is assigned to regional budgets with tax burden differences
up to 4.5%. Consequently, the Russian rules provide for
transfer pricing controls both in cross border and domestic
transactions. Compared to the previous transfer pricing
rules, the focus of control is now placed on major domestic
transactions with aggregate value exceeding statutory
thresholds allowing one to expect the control to become
more efficient. The new rules provide for special reporting
obligations for group companies who shall notify the tax
authorities about a transaction falling under control and keep
special records (transfer pricing documentation) to evidence
that their transfer prices are comparable with the market
level. In case of substantial deviations the regulator would
adjust the tax base and charge extra taxes that would have
been paid if the transaction price had been arm’s length.
Tax consolidation, a completely new mechanism for the
Russian tax system, opens up an opportunity for major
businesses to allocate profits within a consolidated group
in Russia since transfer prices are not regulated. The fiscal
interests of Russian regions are compensated by allocating
the aggregate profit of the consolidated group members
among regional budgets pro rata to the members’ core
resources concentrated in such regions. In particular, group
members with a higher number of employees or more
expensive production facilities, i.e. primarily manufacturers,
will make a greater contribution to the tax allocation calculated
according to the consolidated profits. However, not every
14 | International Tax Journal
group of companies is entitled to this benefit. First, such a
group may only include corporations related on the basis of a
minimum capital participation of 90%. Second, the established
thresholds for aggregate revenues, total assets and total tax
proceeds are high even for many large businesses.
The consolidation system allows for one group member
to be selected as the party responsible for calculating the
consolidated tax base as a sum of all incomes minus all
expenses of the consolidation participants. The effect of
intra-group transactions on the overall result will be leveled
off. Therefore, even if transfer prices are not arm’s length, it
should not affect the overall tax results. Tax consolidation may
also yield savings in terms of profit tax payments as compared
to individual taxation, provided that group members are not
focused solely on each other in their business. Thus, the profits
gained from the “external” business of some companies may be
offset by the loss-making business of other group members and
the final taxable profits will result from the net amount.
Tax consolidation does not affect the financial position of each
of the group companies determined under RAS (Russian
Accounting Standards). Any dividends payable when profits
are distributed within a group as well as their taxation at
shareholder level remain outside of such consolidation. Like
foreign consolidation schemes (Organschaft in Germany and
Gruppenbesteuerung in Austria) the law provides for a ban
on the utilization of tax losses created prior to consolidation.
Otherwise the consolidation could serve as an instrument to
artificially utilize tax losses as they would be deducted from
the tax profits generated by other group companies.
Although the new consolidation rule currently has a very
limited scope of application, the general trend in developing
the tax environment for large businesses no doubt testifies to
the intentions to create conditions that are in line with today’s
realities. As always, the matter depends only on the proper
application of the new rules.
Contact Person
Igor Schikow (MBA Int. Tax. Freiburg i.Br.)
Email: [email protected]
Phone: +7 495 935 80 10
Egorov Puginsky Afanasiev & Partners
40/5 Bol. Ordynka str.
119017, Moscow
Russia
Homepage: www.epam.ru
USA
New Cost Sharing Regulations
In December, the treasury and the IRS released a series of
regulations under Section 482 of the Internal Revenue Code
including final, temporary and proposed regulations. The final
regulations address the determination of taxable income in
connection with a Cost Sharing Arrangement (CSA) between
controlled parties.
In general, a CSA is an agreement between related parties
to share the costs of developing intangible property (IP) in
proportion to the participants’ anticipated benefits from
the developed IP. The four key elements of a qualifying CSA
remain generally unchanged in the final regulations: (1) an
agreement to share the costs and risks of IP development; (2)
participants must make a platform contribution transaction
(PCT) in connection with IP contributed to the CSA; (3)
participants receive an exclusive, non-overlapping interest in
the IP; and (4) participants must comply with administrative
and reporting rules.
The most significant changes in the final regulations relate
to the application of the income method to determine initial
PCT payments. Under the income method, PCT payments are
determined by comparing a participant’s projected results
under the CSA to its expected results under a “best realistic
alternative.” In most cases, this is the “licensing alternative”
and will involve one participant incurring all IP development
costs and licensing the IP to the other participant(s). From
the perspective of the participant making the PCT payment
(the PCT Payor), an appropriate PCT payment would leave it
indifferent between participating in the CSA and the licensing
alternative.
effect of narrowing the spread between the two alternatives
and reducing the required PCT payment. As such, the new
temporary regulations introduce the concept of an “implied
discount rate.” The implied discount rate essentially provides
a basis for assessing whether the income method has been
reasonably applied.
Although the final regulations make cost sharing less
attractive to taxpayers, there continue to be circumstances
where cost sharing may be beneficial, such as when the CSA
relates to greenfield IP development or when both parties to
the CSA are making significant PCT contributions. In addition,
where the U.S. taxpayer has certain tax attributes to shelter
the PCT payments, entering into a CSA may continue to be an
attractive option for IP development.
Contact Persons
Robert B. Gardner
Email: [email protected]
Phone: +1 973 871 2040
Sean Faulkner
Email: [email protected]
Phone: +1 973 871 2040
WTS LLC
67 Park Place East, 6th Floor
Morristown, NJ 07960
USA
Homepage: www.wtsus.com
The final regulations explain that the discount rates used
for the two alternatives are “closely related” because both
are derived from the “single probability-weighted financial
projections associated with the CSA activity.” In general,
the difference between the discount rates will reflect the
incremental risk associated with bearing IP development
costs and the differences between licensing payments and the
PCT payments. As it is generally less risky for a participant
to license IP outright than to actively participate in IP
development, the discount rate under the licensing alternative
will generally be lower in most cases. This appears to be
an attempt by the IRS to limit taxpayers’ ability to support
substantial differences in discount rates.
The preamble to the 2011 temporary regulations reflects that
the Treasury and the IRS “are aware” that some taxpayers
have applied the income method using an unrealistically
low discount rate for the licensing alternative and an
unrealistically high rate for the CSA. This practice has the
APRIL 2012 | 15