The apple never falls far
Kitty Miv, Editor
23 August, 2019
Last week we focused our attention on Ireland, which is doing its best to keep its affairs in order in the run-up to the UK's planned (well, after a fashion...) Brexit at the end of October.
This week too, the Republic finds itself under the microscope in this column, but as part of our examination into tax disputes and compliance with tax rulings.
Mid-month, the OECD announced that it had released follow-up reports for Belgium, Canada, the Netherlands, Switzerland, the United Kingdom, and the United States on their efforts to implement BEPS recommendations on dispute resolution.
The reviews focused on the Mutual Agreement Procedure (MAP), which is used to settle disputes between countries and taxpayers concerning cross-border tax arrangements for trade and investment where double taxation of the same income occurs.
The OECD reported positive change across all six jurisdictions, including that some had updated or clarified issues in their MAP guidance; and all that had not already done so had introduced documented internal guidance to provide for a notification or bilateral consultation process with the other competent authority concerned in cases where an objection is considered as being not justified.
According to the Organisation, each of the six jurisdictions decreased (or maintained) the amount of time needed to close MAP cases and five of the six jurisdictions met the sought-after 24-month average timeframe to close MAP cases.
Then, on August 16, 2019, the United States Court of Appeals for the Ninth Circuit issued a decision in favor of Amazon, in a case involving the regulatory definition of intangible assets and the method of their valuation in a cost-sharing arrangement.
In the course of restructuring its European business in 2005 and 2006, Amazon entered into a cost sharing arrangement in which a holding company for Amazon's European subsidiaries made a "buy-in" payment for Amazon's assets that met the regulatory definition of an "intangible." This had the effect of shifting a substantial amount of its income from US-based entities to newly created European subsidiaries.
Tax regulations require that the buy-in payment reflect the fair market value of Amazon's pre-existing intangibles. Amazon initially reported a buy-in payment of about USD255m. However, the Commissioner of Internal Revenue concluded that the buy-in payment had not been determined at arm's length in accordance with the transfer pricing regulations, so the IRS performed its own calculation, valuing the buy-in at about USD3.6bn. Amazon then filed a petition in the Tax Court challenging that valuation.
In a case in which, as previously stated, the main point of contention was the correct method for valuing the preexisting intangibles under the then-applicable transfer pricing regulations, the Tax Court sided primarily with Amazon, and the Commissioner subsequently appealed. However, in affirming the Tax Court's decision, the three-judge Appeal Court panel concluded that the definition of "intangible" does not include residual-business assets, and that the definition is limited to independently transferable assets.
"We conclude that the definition does not include residual-business assets," wrote Judge Consuelo M. Callahan in the opinion. "Although the language of the definition is ambiguous, the drafting history of the regulations shows that 'intangible' was understood to be limited to independently transferable assets. We thus affirm."
Meanwhile, across the pond, it was revealed that a date had been set for the EU's General Court to hear Apple's appeal against the Commission's ruling that it had benefited from illegal state aid that had lowered its tax bill in Ireland.
According to media reports the General Court, the EU's second-highest tribunal, will hear the challenge from September 17-18.
In August 2016, the European Commission concluded that two tax rulings provided to Apple by the Irish Government had enabled Apple to pay substantially less tax on profits recorded in Ireland than other companies subject to the same national taxation laws.
Apple submitted an appeal against the decision in December 2016. It claimed that the European Commission erred in its interpretation of Irish law and violated the principle of legal certainty in ordering the recovery of alleged illegal state aid.
In September 2018, the Irish Government confirmed that Apple had deposited approximately EUR14.3bn (USD15.9bn) into an escrow fund set up by the Government. The figure comprises EUR13.1bn in alleged back taxes owed, plus EUR1.2bn in interest. The money will be held in the escrow fund until a decision is reached in the Government's appeal before the EU's Court of Justice.
Last but not least, and ending up back where we began, a report compiled by Irish business association, Ibec, has argued that Ireland may be affected significantly by the OECD's proposals to modify how taxing rights are allocated among countries.
The OECD is developing new digital tax rules that would be presented for adoption internationally at the end of 2020, which will focus on two central pillars.
First, the OECD will review existing rules that divide up among jurisdictions the right to tax the income of multinational enterprises, including traditional transfer pricing rules and the arm's length principle. It will look at how these can be modified to take into account the changes that digitalization has brought to the world economy. This will require a re-examination of the so-called "nexus" rules – namely how to determine the connection a business has with a given jurisdiction – and the rules that govern how much profit should be allocated to the business conducted there.
Under the second pillar, the BEPS Inclusive Framework countries will seek to resolve remaining BEPS issues and will explore two sets of interlocking rules, designed to give jurisdictions a remedy in cases where income is subject to no or only very low taxation. This work looks to minimize tax base erosion and profit shifting by ensuring that income is not inappropriately shifted to territories that levy no or low tax rates, by ensuring that income is subject to at least a minimum level of tax, wherever that may be.
This would involve the introduction of a new effective tax rate test, which would also enable stakeholders to better determine in a harmonized way how much tax multinationals pay internationally.
In a new report, Ibec highlighted potential risks to Ireland's tax framework, its competitiveness, and to revenue receipts. It noted that there is "clear renewed political momentum behind global multilateral tax reform through" pillar two. It said that proposals concerning "the allocation of tax bases between countries and a potential for global minimum effective corporate tax rate" will be significant for Ireland.
Ibec further argued that proposals under pillar one "will mean some re-allocation of taxing rights to larger importing countries and, as a small exporting country, may mean the Irish Exchequer will lose a proportion of its corporate tax base." However, it stated that the Irish business community is more concerned about the possible introduction of a global minimum effective corporate tax rate.
Ibec stressed that, were any such measure introduced, the rate would need to be "set at a level which focuses on addressing actual profit shifting concerns" and that it should not "infringe" on Ireland's "right to set competitive tax rates."
Ibec concluded by observing that Ireland needs to prepare for a post-BEPS world in which the non-tax elements of the country's business model will play a greater role in attracting investment.
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