This week in tax: Tax disputes for Samsung and Rio Tinto

The Indian Supreme Court’s ruling on the tax treatment of software licensing fees has been one of the week’s biggest talking points.

In a landmark victory for companies including Samsung, IBM and Ericsson, the Supreme Court ruled that fees for software licensing paid to foreign multinational enterprises (MNEs) cannot be taxed in India. Chartered Accountant Amar Mehta noted how the apex court’s ruling is similar to one issued in Portugal a decade ago, but the matter in India is not settled yet.

Tax experts and those working within MNEs have told ITR that they expect the Indian revenue authorities to find an alternative way to tax these fees.

“Though many cross-border software payments would be relieved from royalty tax, these transactions could still be covered under the expanded equalisation levy that was introduced in April last year,” said Rakesh Nangia, chairman of Nangia Andersen India.

This view was shared by many others across the tax sector and companies may want to prepare themselves for another long-running dispute.

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Meanwhile, Rio Tinto is preparing for another tax dispute in Australia. The Australian Taxation Office (ATO) has issued an amended tax assessment to Rio Tinto, demanding a total of A$406.5 million ($316 million) in primary taxes (A$359.4 million) plus interest (A$47.1 million).

The company’s announcement on the assessments was published on the company’s website and Business Wire on March 2. It stated that the assessments related to the “denial of interest deductions on an isolated borrowing used to pay an intragroup dividend in 2015. This borrowing was repaid in 2018”.

The mining corporation said it was “confident” that it does not owe the additional tax and plans to contest the assessments. Although, Rio Tinto has already paid half of the primary tax upfront, which is required as part of the objections process.

In other news this week, transfer pricing (TP) directors at ITR’s Women in Tax Forum said they are using a range of methods to deal with the TP implications of the COVID-19 pandemic, which has made in-depth documentation more important.

Also published in ITR this week:

• US Tax Court holds UK treaty does not protect right to deductions

• Modifications to the indirect transfer reporting obligations in Chile

• Central Revenue rules on the business contribution of a PE in Italy

• Brazilian tribunal considers municipal service tax over complex contracts

• Switzerland publishes draft practice on VAT succession for asset deals

• Indonesia issues guidance for collecting VAT on the delivery of LPG

• A closer look at Netherlands’ 2020 Memorandum on Tax Treaty Policy

In another significant development this week, UK Chancellor of the Exchequer Rishi Sunak laid out his annual budget proposals on March 3 that included increasing the corporate tax rate from 19% to 25% in 2023.

However, the government plans to introduce several business tax incentives to support a post-COVID economic recovery. This is why some critics have suggested the future rate rise is a hollow measure.

“The combination of a 130% super deduction and increased future tax rates will give companies a cashflow advantage… the deferred tax liability this creates will be something to keep an eye out for on mergers and acquisitions transactions,” said Philip Harle, tax partner at Hogan Lovells.

On the same day, HM Revenue and Customs (HMRC) published a consultation on its plans to require certain UK digital platforms to report information to HMRC about the income of sellers of services on their platforms.

The proposals are in line with the OECD’s model rules for digital platforms. HMRC will exchange that data it receives from the digital platforms with other participating tax authorities in jurisdictions where the sellers are tax resident.

The rules would apply from 2023, with reporting commencing in 2024.

“This measure will affect digital platforms in the UK that facilitate the provision of services including apps and websites which supply services such as the provision of taxi and private hire services, food delivery services, freelance work and the letting of short-term accommodation,” explained Stuart Halstead, gig and sharing economy indirect tax lead at EY.

“There is also an indication that this could subsequently be applied to digital platforms supplying goods,” Halstead added. “Overall, we are likely to see the enhanced scrutiny of the tax affairs of platform participants as a result of these moves both in the UK and overseas.”

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Meanwhile, taxpayers are getting ready for the UK’s Making Tax Digital (MTD) initiative. Tax directors have told ITR that phase two of MTD should be used as an opportunity to holistically update antiquated VAT processes.

So far, taxpayers have found that preparing for the legislation has been more work than they expected, and there are issues around organising multiple ERP systems and partial exemptions.

It finally looks like international talks on how to tax the digitalisation of the economy can move forward at the OECD.

US Treasury Secretary Janet Yellen told G20 finance ministers and central bank governors on February 26 that the US will drop its calls for a ‘safe harbour’ to the rules for reallocating profits from intangible assets and services to market jurisdictions under pillar one.

Multilateral agreement is more likely now that the US has removed the safe harbour requirement on pillar one, but some experts say technical details may still need negotiating beyond July 2021. Nevertheless, many other governments are still concerned about how an international agreement will impact their national agendas.

In Japan, the International Taxation Study Group under the Digital Economy, a group established by Japan’s Ministry of Economy, Trade and Industry, had its inaugural meeting on March 1 to “examine the ideal form of fair international taxation that contributes to strengthening the competitiveness of Japanese companies and revitalising the economy amid the accelerating digitalisation of the economy”.

Group members will convene each month to take account of the OECD discussions on the digital tax proposals and consider how Japan’s businesses and economy can remain competitive. The government believes there is “an urgent need to strengthen the domestic supply chain and respond to the data economy”.

Negotiations on EU legislation to introduce public country-by-country reporting (CbCR) is set to begin very soon. The European Parliament’s (EP) lead negotiators Evelyn Regner and Ibán García Del Blanco were officially given the green light to enter into negotiations with the EU governments’ representatives on March 4, based on the position the EP adopted in 2017.

This follows a vote in the EU Competitiveness Council that approved the CbCR proposal on February 25. Tax directors are expecting public CbCR to become the norm in the EU and lead to a wider global trend to implement the tax transparency initiative.

The EP’s negotiator Ibán García Del Blanco said: “We have been waiting for the Council for too long. We are ready to start negotiations immediately in order to reach an agreement under the Portuguese Presidency, thereby making progress on tax and corporate transparency.”

At the same time, the EP has several additions it wants to make to the European Commission’s original proposal. It wants MNEs to present the information requested to be presented separately, including for each tax jurisdiction outside the EU.

The Parliament also wants companies to make their annual report on income tax information publicly available and free of charge, and file the report in a public registry managed by the Commission.

The European Parliament also called for the following measures:

• A safeguard clause for sensitive corporate data, allowing MNEs to temporarily omit information when disclosing it would be seriously prejudicial to their commercial positions;

• Additional items of information to be provided in the tax reports to help achieve a more complete picture, such as information on the number of all full-time employees, fixed assets, stated capital, preferential tax treatment, or government subsidies; and

• Subsidiaries with a turnover of €750 million ($895 million) or more to be subject to CbCR requirements.

In other EU news, the Court of Justice of the European Union (CJEU) ruled on March 4 that four Spanish football clubs did receive an unfair tax advantage through a state aid scheme offered by Spain’s government (Commission v Fútbol Club Barcelona, C-362/19).

In another case concerning Spain, the CJEU said on March 3 that a tax imposed via a 2012 law on the value of electricity production is in line with EU laws (Case C‑220/19). It also concluded that it is a direct tax on the production of electricity, rather than an indirect tax on consumption.

Next week, ITR will be celebrating International Women’s Day with a selection of articles and podcasts, showcasing the excellent female talent across the tax sector. We have also launched a survey, asking readers whether diversity and inclusion has improved over the past year or not.

Following ITR’s Women in Tax Forum, in-house tax compliance experts talk about how beneficial ownership registries in developing countries could be based on rules from the US Corporate Transparency Act (CTA) and EU Directive 2018/822 (DAC6).

In addition, after Colorado, Florida, and Chicago recently passed taxes on digital services and many other states considering them too, ITR will look at how US state digital taxes threaten growing compliance burden for MNEs.

Meanwhile, companies have also had to reassess TP policies thanks to the impact of COVID-19 on how they approach intellectual property (IP) valuation. TP teams are sticking to tried and tested methods with the help of OECD guidance, but the future is still uncertain.

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