International Tax Updates

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1. CBDT prescribes conditions to claim relief on offshore indirect transfer of Indian assets

Retrospective taxation introduced on indirect transfer of ownership in Indian entity had impacted Vodafone, Cairn and some other multinational groups. There had been a significant litigation on the same, including an arbitral award in favour of Vodafone and Carin. The Government of India had notified the Taxation Laws Amendment Act, 2021 with an objective to resolve the disputes in these cases. The tax demand raised in such cases is sought to be nullified on fulfilment of specified  conditions. The amount paid/collected in these cases shall be refunded to taxpayers, without any interest.

CBDT has notified the final rules vide Notification No. GSR 713(E) dated 1 October 2021, implementing withdrawal of retrospective application of ‘indirect transfer related provisions’. These rules include form and manner of furnishing the undertaking for withdrawal of pending litigation, claiming no cost, damages, etc.  among other operational aspects. 

2. OECD releases Global Anti-Base Erosion Rules for implementation of 15 per cent global minimum tax

In continuation of efforts being carried out for addressing the challenges of taxability of digital economy under the Inclusive Framework (Two Pillar approach), the Organisation for Economic Co-operation and Development (OECD) has released Global Anti-Base Erosion (GloBE) Model Rules. 

The GloBE Rules apply to entities that are members of an MNE Group that has annual revenue of EUR 750 million or more in the consolidated financial statements of the Ultimate Parent Entity in at least two of the four Fiscal Years immediately preceding the tested Fiscal Year.

The rules provide that large multinational enterprise (MNE) groups pay a minimum level of tax at the rate of 15 per cent on the income arising in each of the jurisdictions where they operate. The rules further provide that a “top-up tax” will be applied on the profits of the group whenever the effective tax rate, determined on a jurisdictional basis, is below the minimum 15 per cent rate. The model rules provide various steps to compute the top-up tax along with various other administrative provisions. 

As a next step, OECD is expected to release a commentary relating to the model rules and would also develop a mulitalteral instrument for public consultation in order to implement the said rules. The implementation of these new rules is envisaged by 2023. 

3. Recent developments in the concept of “Beneficial Ownership”

The concept of ‘Beneficial Ownership’ is relevant in International tax and commonly found in articles of tax treaties relating to Dividends, Interest, Royalties and Fees for Technical Services, etc.  Simply put, the recipient of these income streams is not only required to be a resident of the residence country, but such recipient also needs to be the “beneficial owner” of the income received, in order to be eligible to the reduced rate of withholding tax as prescribed in the relevant tax treaty.  The term, “Beneficial Owner” is not defined anywhere and is often a subject matter of litigation. Two very recent developments on the meaning and interpretation of the term “Beneficial Owner” have been captured below: 
  • Tests applied for determination of 'Beneficial Owner' by Korean Supreme Court
In the facts of the decision, the taxpayer was a tax resident of Korea. A Hungary-based company, owned 50 per cent of the share capital of the taxpayer. The ultimate parent of the group was a tax resident of the United States (‘US’). The taxpayer paid dividends to the Hungarian company after withholding tax at the rate of 5 per cent as per the tax treaty between Korea and Hungary. The Korean tax authorities contested that the ultimate parent (US entity) is the beneficial owner of the dividend income and taxes should have been deducted at 15 per cent as per tax treaty between Korea and the US.

Korean Supreme Court upheld the taxpayer’s claim that it was entitled to apply the lower withholding tax rate of 5 per cent as per tax treaty between Korea and Hungary. It observed that beneficial owner is a person who is entitled to enjoy benefits of the dividend income and is not bound by law or by contract to re-transfer dividend income to another person; on  the other hand, a person is not a beneficial owner, where there is another person who substantially controls or manages the property by means of governance over the nominal owner.

Against the above background, the Korean Supreme Court factually observed that the Hungarian parent of the Korean company substantially performed duties as an intermediary holding company, such as receipt of  dividend from subsidiaries, control of shares, management of investments etc.  It also acted as a service centre to manage the general affairs, finances, data processing, and other support activities of affiliated companies within Europe, Middle East, and Africa. 
  • OECD’s Global Forum on Transparency and Exchange of Information releases new toolkit on “Building Effective Beneficial Ownership Frameworks”  
In October 2021, the OECD released a Toolkit on building Beneficial Ownership  frameworks, acknowledging that the availability of beneficial ownership information on legal entities is a key requirement of tax transparency and a key instrument in the fight against tax evasion. 

The ToolKit summarises key lessons learned from Global peer reviews. It presents four main options for ensuring availability of beneficial ownership information: 
        • Anti-Money Laundering / Countering the Financing of Terrorism (AML/CFT) approach: beneficial ownership information maintained by financial institutions; 
    • Entity approach: beneficial ownership information kept by entities themselves;
    • Central register approach: a register of beneficial owners held by public authorities; or
    • Tax administration approach: beneficial ownership information kept by the tax administration
The OECD does not prescribe a particular option; but rather states that jurisdictions are free to choose the approach that best fits their own context and specific operating legal environment. 

4. The Supreme court of Ukraine laid down factors to assess whether the activities of the representative office are preparatory or auxiliary in nature to decide PE exemption:

The Supreme Court of Ukraine in the case of Meda Pharmaceuticals Switzerland GMBH (TS-1140-FC-2021(UK)) highlighted the principle of substance over form and held that in case of inconsistency of the legal form with its economic essence, the preference should be given to the economic essence. 

The Supreme Court remanded the matter to lower court and laid down various factors to be considered while analysing the nature of activities undertaken by representative office (such as Job description and employment contract of the staff, conclusion of sale contracts, role of the representative office in the organization's overall activities etc.) to assess whether the activities are preparatory or auxiliary in nature to decide PE exemption.

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