Anti-avoidance:How Officials Can Establish Trust with Taxpayers
8-9 May 2013
Chair: Leon Kwong Wing – Taxand SingaporePanelists:
Stewart Grieve – Taxand Australia Manish Bhatra – GE India Li Ying - Siemens
1. Changes to Australian GAAR: How Taxpayers should Adapt
2. Anti-Avoidance Rules in India: Evolution & State of the GAAR
3. TP Audits in China: Appropriate Consideration of TP - Another Approach to Addressing Avoidance
4. Taxand’s Take
5. Key Contacts & About Taxand
Contents
Changes to the Australian GAARStewart Grieve, Taxand Australia
8-9 May 2013
Changes to the Australian GAAR: How Taxpayers should Adapt
Changes to the Australian GAAR1
Architecture of the Australian GAAR
Pre-2010 Administration and Jurisprudence
Recent Administration and Jurisprudence
The Government’s GAAR Announcements
Legislative Changes to the Australian GAAR
Taxand’s Take on How Taxpayers should Adapt
Changes to the Australian GAAR1 Changes to the Australian GAAR: How Taxpayers should Adapt
Architecture of the Australian GAAR
Scheme - defined broadly but still important in analysis
Tax benefit - a defined tax advantage where the advantage would not have been obtained, or it is reasonable to conclude that it would not have been obtained, but for the scheme
Dominant purpose - having regard to 8 factors, it must be concluded that a person entered into a part or the whole of the scheme for the sole or main purpose of the taxpayer obtaining the tax benefit
Changes to the Australian GAAR1 Changes to the Australian GAAR: How Taxpayers should Adapt
Pre-2010 Administration and Jurisprudence
Current GAAR (Part IVA) introduced in 1981
Understanding of scope of the GAAR evolved slowly as cases came before the courts
Administrative control over application of the GAAR by the ATO’s GAAR Panel
The Commissioner largely successful in High Court cases
Generally thought that the technical aspects of the application of the GAAR were largely settled after Hart’s case
Changes to the Australian GAAR1 Changes to the Australian GAAR: How Taxpayers should Adapt
Recent Administration and Jurisprudence
The Commissioner prepared to apply the GAAR to a broad range of business transactions and arrangements
Successful application of the GAAR where:
The commercial viability of scheme was dependent on tax treatment – Citigroup
There was a step in, or aspect of, the transaction not capable of commercial explanation – BAT
Changes to the Australian GAARChanges to the Australian GAAR: How Taxpayers should Adapt1
Recent Administration and Jurisprudence
Unsuccessful application of the GAAR where:
All steps/aspects of the transaction capable of explanation by reference to commercial exigencies – BHP, Ashwick, RCI
The most reasonable alternative course of action to the scheme produced a tax advantage at least as great as the advantage under the scheme – AXA, RCI, Futuris
Changes to the Australian GAARChanges to the Australian GAAR: How Taxpayers should Adapt
Case DateATO
win/lossCourt
1 BHP Billiton 17 March 2010 Loss Full Federal
2 News Australia Holdings 30 June 2010 Loss Full Federal
3 Trail Bros Steel & Plastics 29 July 2010 Win Full Federal
4British American Tobacco
Australia10 November 2010 Win Full Federal
5 Axa Asia Pacific 18 November 2010 Loss Full Federal
6 Noza Holdings 4 February 2011 Loss Federal
7 Ashwick (Qld) No. 127 8 April 2011 Loss Full Federal
8 Citigroup 10 May 2011 Win Full Federal
9 RCI 22 August 2011 Loss Full Federal
10 Futuris Corporation 18 March 2012 Loss Full Federal
11 Mills 14 November 2012 Loss High Court
12 Macquarie Bank 15 February 2013 Loss Full Federal
1
Recent Administration and Jurisprudence
Litigation Scorecard
Changes to the Australian GAARChanges to the Australian GAAR: How Taxpayers should Adapt1
The Government’s GAAR Announcements
September 2011 – Commissioner passes comment on the Courts’ approach to the GAAR
1 March 2012 – Assistant Treasurer announces that Government will act to protect the integrity of Australia’s tax system by amending the GAAR
8 May 2012 – Federal Budget announcement that Government will amend the GAAR to clarify:
the circumstances in which a taxpayer obtains a ‘tax benefit’ in connection with a scheme; and
that the GAAR applies to steps within broader commercial arrangements, implemented in a way to avoid tax
Changes to the Australian GAARChanges to the Australian GAAR: How Taxpayers should Adapt1
The Government’s GAAR Announcements
15 May 2012 – Government announces the creation of expert roundtable to assist with reforms
16 November 2012 – Exposure Draft legislation released for comment
13 February 2013 – Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013 introduced
Changes to the Australian GAARChanges to the Australian GAAR: How Taxpayers should Adapt1
Legislative Changes to the Australian GAAR
Formulating the alternative postulate
Identification of two alternative bases for demonstrating the existence of a tax benefit
The “Annihilation Approach”
The “Reconstruction Approach”
Changes to the Australian GAARChanges to the Australian GAAR: How Taxpayers should Adapt1
Legislative Changes to the Australian GAAR
Nature of inquiry permitted in determining whether a postulate is a reasonable alternative
Have particular regard to the substance of the scheme and any result or consequence for the taxpayer (other than an Australian income tax consequence)
Disregard Australian income tax results achieved by the postulate for any person
Primacy of the dominant purpose test
16 November 2012 start date
Changes to the Australian GAARChanges to the Australian GAAR: How Taxpayers should Adapt1
Taxand’s Take on how Taxpayers should Adapt
Commissioner likely to continue to apply the GAAR to commercial transactions that result in an Australian tax advantage and taxpayers should prepare their defences now
Changes to the Australian GAARChanges to the Australian GAAR: How Taxpayers should Adapt1
Taxand’s Take on how Taxpayers should Adapt
Changes to the way in which the alternative postulate is framed:
Tax outcomes and third party commercial consequences are to be ignored
For schemes involving deductions or capital losses, the Annihilation Approach leads to a tax benefit; however, annihilation not appropriate in all circumstances
The Reconstruction Approach will need to be taken in many cases and the analysis will not be straight forward
Changes to the Australian GAARChanges to the Australian GAAR: How Taxpayers should Adapt1
Taxand’s Take on how taxpayers should adapt
Most GAAR cases will be decided by an application of the dominant purpose test
However, the reasonable alternative postulate retains an important role in the GAAR analysis
Judicial clarification of the new provisions may take many years
Anti-Avoidance Rules in India: Evolution & State of the GAARManish Bhatra, GE India
8-9 May 2013
GAAR in India Effective 2015Anti-Avoidance Rules in India: Evolution & State of the GAAR2
Evolution of GAAR
Key aspects
Over-reach … “main purpose test”
Independence in administration
Grandfathering
Regional Holding Companies
Corresponding adjustments
Withholding tax
Impact on business… and on the Revenue
Evolution of GAARAnti-Avoidance Rules in India: Evolution & State of the GAAR2
August 2009 GAAR proposed in Direct Taxes Code (or DTC) 2009
June 2010 Revised Discussion Paper on DTC… Safeguards proposed in GAAR
August 2010 DTC 2010 … GAAR remains mostly unchanged from 2009
February 2012 Govt. appoints Tax Deptt. led Expert Committee to review GAAR
March 2012 Parliamentary Committee report on DTC 2010 … proposes relief
April 2012 GAAR introduced in Income Tax Act, 1961 effective April 2012
May 2012 GAAR deferred to April 2013
June 2012 Tax Deptt. led Expert Committee submits report … proposes relief
July 2012 Govt. appoints Independent Expert Committee to review GAAR
September 2012 Independent Expert Committee submits DRAFT AND FINAL reports
January 2013 Finance Minister statement … Independent Expert Committee report partially accepted … GAAR deferred to April 2015
2013/ 14 ?? GAAR Guidelines to give effect to Finance Minister statement
Long … but a fairly consultative process
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GAAR Over-reachAnti-Avoidance Rules in India: Evolution & State of the GAAR2
Issue… “An impermissible avoidance arrangement means an arrangement, the main purpose or one of the main purposes of which is to obtain a tax benefit, and …”
Ask … Limit tax benefit test only to main purpose … consistent with South Africa, China, Australia, Draft Direct Tax Code
Response … Finance Minister (2013) – “An arrangement, the main purpose of which is to obtain a tax benefit, would be considered as an impermissible avoidance arrangement … ”
Consistent with international GAAR rules … GAAR Guidelines & Examples critical
IndependenceAnti-Avoidance Rules in India: Evolution & State of the GAAR2
Issue…A) Approving Panel invoking GAAR consisted of three members; 2 from Revenue & 1 from Legal Services
B) Advance Ruling not possible for GAAR
Ask … Independence of approving panel + advance rulings
Response …A) Approving Panel… 3 members; Chairperson - Judge of a High Court; 1 member - Revenue; and 1 member – Independent academician in tax, business accounts, international trade, etc
B) Section 245N(a)(iv) … Advance Rulings allowed
Framework should reduce Revenue bias
GrandfatheringAnti-Avoidance Rules in India: Evolution & State of the GAAR2
Issue…“The provisions of GAAR will apply to income accruing or arising to taxpayers on or after 01.04.2015”
Ask … Grandfather investments made prior to GAAR
Response … Finance Minister (2013) - “Investments made before August 30, 2010, the date of introduction of Direct Taxes Code, Bill, 2010, will be grandfathered"
Grandfather investments made prior to GAAR
Singapore Hold Co
India Co
Outside India
India
3rd Party US Co
2012 - Investment of $200
2016 - Sale of India Co shares for
$500
UK Co
Regional Holding Co.s – Example Needed in GAAR Guidelines
Anti-Avoidance Rules in India: Evolution & State of the GAAR2
More examples … more certainty
Outside India
India
Singapore Co
Chinese CoIndia CoJapan Co
US CoSale of India Co shares to UK Co
UK Co Singapore Co
India Co 3India Co 2India Co 1
US CoSale of India Co 2 shares to UK Co
UK Co
Why Holding Co
Efficient holding platform for AsiaEfficient treasury managementOptimise US taxes
Why Singapore Ease of doing businessStability of lawsTreaty network
GAAR Tax Mitigation ?
Corresponding Adjustment to Counter-PartyAnti-Avoidance Rules in India: Evolution & State of the GAAR2
Dutch Co
India Co
Outside India
IndiaCCD
Compulsorily Convertible Debt (CCD)
5 years tenorRupee denominated10% coupon rate; payment only if
India Co earns profitConvertible into equity
Dutch Co Interest taxable @ 20% or 10% per treaty
India Co Deduction of interest
Tax Authorities (a) India Co – EQUITY … No deduction of interest + DDT @ ~16%
(b) Dutch Co – DEBT … Taxable as interest(c) Dutch Co … Tax on conversion & subsequent
sale?
Corresponding adjustment Consistency + No double tax
Withholding Tax (WHT)Anti-Avoidance Rules in India: Evolution & State of the GAAR2
Issue… Payers to examine GAAR at tax withholding stage
A) Inadequate access to information to make judgment
B) Exposes payer to penalties, if GAAR invoked
C) Risk of delays in cross-border remittances
Ask… No GAAR review at WHT stage, but during audit of income earner Leverage other mechanisms under current law to collect tax
Response … Expert Committee (2012) … exempts GAAR at WHT stage provided indemnity furnished to Revenue // FM Statement (2013) … no comment
Help simplify business … Limit tax dominance during contract negotiations … PE & Tax Clause are enough distractions
Impact on Business… & on the RevenueAnti-Avoidance Rules in India: Evolution & State of the GAAR2
Business
Business / deal decisions on pre-tax basis
FIN 48 … booking tax benefits in financial statements
Tougher negotiations with customers … e.g. split contracts
Certainty at withholding tax level ?
Delays in doing business … e.g. LCs
Litigation … e.g. transfer pricing & international tax
GAAR Guidelines & Implementation will be key
Impact on Business… & on the RevenueAnti-Avoidance Rules in India: Evolution & State of the GAAR2
Revenue Administration
Quality … investment in training
Quantity … more resources to do justice to new law
Strengthen withholding tax machinery
Continued guidance on positive examples
Invest in independence of Approving Panels
GAAR Guidelines & Implementation will be key
TP Audits in China: Appropriate Consideration of TP - Another Approach to Addressing AvoidanceLi Ying, Siemens
8-9 May 2013
293
Audit Case SelectionTP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance
• Profitability does not commensurate with FRA
• Loss making• Fluctuating profit• Profit lower than industry level
• Tax annual filing• TP documentation
303
Audit Case SelectionTP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance
Tax Authority’s Practices
313
Case ITP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance
• Production line transferred from JV to a local 3rd party
• Local 3rd party sells products to Canada HQ
• Local 3rd party’s selling price is 15% lower than JV’s selling price, BUT is still profitable.
49% 15% 51% 85%
323
Case ITP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance
Relatively long start up stage
Higher expenditure on Training
Force majeure impacts, e.g. 911, SAS
Operating margin lower than 3%
Toll manufacturer
Simple function shall not incur loss
2000 as the 1st profit making year
Operating margin higher than 5%
Audit process lasted for 3 years
2001-2008 taxable income adjusted up by 107mil RMB
JV’s OM should be above 5% in future
Taxpayer Tax bureau
333
Case IITP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance
343
Case IITP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance
Tax Bureau
Marketing Intangible
Lasted for more than 1 year
Residual profit split
Taxable income adjusted up by 116mil RMB Overall operating margin around 13.4%
353
Case IITP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance
WOFE
Japan
China70% purchases 90% sales
Commission fee
End Customer
End Customer
10% sales
WOFE
Manufacturer in Cosmetics Industry
363
Case IIITP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance
WOFE
373
Case IIITP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance
Global financial crisis since 2008
Foreign exchange fluctuation
Rapid increase of labor cost
Underutilized production capacity
Favorable CIT policy ended
Revenue increased from 2001 – 2011
Stable revenue annual growth rate
Overloaded operation of equipments
Simple function entity
Audit process lasted for around 2 years
Taxable income adjusted up by 47 mil RMB
Adjustment based on TNMM (median of benchmarking study)
Taxpayer Tax bureau
383
Case IVTP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance
• 30% export• license & trademark fee
70% export
Overseas
China
RPsRPs100% domestic sales
393
Case IVTP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance
Global financial crisis in 2008
Underutilized production capacity
Increased material price
Market demand shrinkage
Decreased selling price
Revenue increased in 2008
Simple function should not incur loss
Audit process lasted for around 2 years
Taxable income adjusted up by 64mil RMB
Adjustment based on External CUP
Taxpayer Tax bureau
403
Case VTP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance
Royalty payment
Asset deal Merge
Overseas
China
Dec 31, 2003: • Goodwill for 200 mil RMB transferred from B • Yearly amortization of 20 milFeb, 2004• B merged into A
5 years
G&A expense/turnover >= 5%
•1% royalty payment to HQ: 200 million for 5 years • 20 million amortized per year: 100 million for 5 years
413
Case VTP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance
Audit process lasted for about 2 years
Amortization of goodwill for 200mil nondeductible
Taxable income adjusted up by 198 mil RMB (Operating margin has been adjusted up
by about 4%)
Adjustment based on TNMM
Tax Authority
423
Case VITP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance
HQ A
products
Business restructuring in 1995
Overseas
Guangzhou
BDistributor
Established in 1987
CManufacturer
Established in 1995
End Customer
products
TP Method
1996-2003: mark up on direct costs2004 afterwards: mark up on fully loaded costs
433
Case VITP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance
1995• Release of “Provisional Regulations of the People's Republic of China on Consumption Tax”• Manufacturing function transferred from B to C
1995• Release of “Provisional Regulations of the People's Republic of China on Consumption Tax”• Manufacturing function transferred from B to C
1996-2003• Pricing for products sold by C to B is based on C’s direct costs1996-2003• Pricing for products sold by C to B is based on C’s direct costs
2004-2009• Pricing for products sold by C to B is based on C’s fully loaded costs2004-2009• Pricing for products sold by C to B is based on C’s fully loaded costs
Favorable CIT policy for
C: 2+3
443
Case VITP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance
Audit process lasted for about 2 years
Taxable income adjusted up by 250mil RMB
Consumption tax and VAT adjusted as well
Adjustment based on TNMM
Tax Authority
Consumption tax decreased
by 60%
CIT avoidance for 04 and 05 is 10 mil on group level
453
Thank YouTP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance
Thank you!
Taxand’s Take
8-9 May 2013
Taxand’s Take474 Taxand’s Take
Transfer prices are fundamental yet elusive quantities
Attention must first be given to “ordinary” issues like sham, substance, deductibility, beneficial ownership and transfer prices
The GAAR scorecard is mixed
GAAR is the first resort of the maladroit
Be prepared to hang on to the right to make commercial decisions
Key Contacts Key Contacts & About Taxand 485
Leon Kwong WingTaxand SingaporeE. [email protected]. +65 6238 3018
Li YingSiemensE. [email protected]
Stewart GrieveTaxand AustraliaE. [email protected]. +61 3 9672 3443
Manish BhatraGE IndiaE. [email protected]
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Interpreting technical tax provisions
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