WTE
PRACTICAL INTERNATIONAL
TAX STRATEGIES
A Twice-Monthly Report on International Tax Planning
Articles
International Tax Planning
Private Letter Ruling: CFC Qualifies for
Same-Country Exception to FBCSI Though
Some Manufacturing Activities Conducted
Outside Same Country
By Bob Giusti, Matt Berger and Javier Salinas
(Ernst & Young)...........................................................................p. 2
U.S.--Government Releases Framework for Plan
to Cut Corporate Tax Rate
By Mel Schwarz and Dustin Stamper (Grant Thornton LLP)......p. 3
Treasury, IRS Issue Proposed FATCA Regulations
By Philip R. West and Amanda P. Varma
(Steptoe & Johnson LLP)............................................................p. 4
Canada--Latest Step in CRA’s New Audit
Approach: “Risk Assessment” Interviews with
Large Businesses
By Patrick Lindsay and Sal Mirandola
(Borden Ladner Gervais LLP)......................................................p. 9
Ireland--Irish Finance Bill 2012 Published—
Contains Corporate Tax Changes; Benefits for
Financial Industry
By Paul Fleming, Norah Walsh, Tim Kiely, Joe Bollard and
Kevin McLoughlin (Ernst & Young)............................................p. 13
Russia--Russia Drops Proposed Tax on
Eurobonds—For Now
By Lidia Kelly (Reuters).............................................................p. 15
New Transfer Pricing Rules in Russia
By Dmitri V. Nikiforov, Alyona N. Kucher and Anna S. Eremina
(Debevoise & Plimpton LLP).....................................................p. 16
WORLDTRADE EXECUTIVE
The International Business Information SourceTM
February 29, 2012
Volume 16, Number 4
In This Issue
Same-Country Exception Applies
The IRS has ruled that income to a CFC
from the sale of products to related
parties is not foreign base company
sales income under the same country
manufacturing exception of Section
954(d)(1)(A), even when some of the
manufacturing of products occurred
in more than one country. The ruling
found that the exception of Reg. Section
1.954-3(a) is not limited to the final state
of manufacturing. Page 2
U.S. Administration Proposals:
Corporate Tax of 28 Percent and
Minimum Tax on Foreign Earnings
The proposals call for elimination
of most business tax incentives, and
would limit the ability of companies
to place income from intangibles in
tax havens. The proposals call for an
end to accelerated depreciation and
deductions for corporate interest.
Page 3
Is Reporting by Governments the
FATCA Compliance Goal?
Foreign banks and other financial
institutions would avoid direct dealings
with the IRS if they reported account
information to their own government,
which in turn would make information
available to the IRS. A review of the
newly released FATCA proposed
regulations. Page 4
New Round of Tax Audits in
Canada, AKA an "Engaged
Approach to Compliance"
Canada's tax authorities plan to conduct
individual risk-assessment interviews
with large businesses. Suggestions for
companies wondering where to draw
the line. Page 9
Advisory Board page 6
U.S.
International Tax Planning
Private Letter Ruling: CFC Qualifies for Same-Country
Exception to FBCSI Though Some Manufacturing Activities
Conducted Outside Same Country
By Bob Giusti, Matt Berger and Javier Salinas (Ernst & Young)
Executive Summary
In Private Letter Ruling (PLR) 201206003, the IRS
ruled that a controlled foreign corporation’s (CFC) income
from the sale of products to related parties is not foreign
base company sales income (FBCSI) under the same
country manufacturing exception of Section 954(d)(1)(A);
CFC satisfied the same country manufacturing exception
since the products were purchased from an unrelated
corporation organized and which (partly) manufactured
the products in CFC’s country of incorporation.
Detailed Discussion
In the letter ruling, Taxpayer is a domestic corporation
and the common parent of an affiliated group of
corporations filing a U.S. consolidated federal income tax
return. Taxpayer conducts activities directly and through
domestic and foreign subsidiaries. Taxpayer owns CFC,
which was created under the laws of Country 1.
Foreign corporation (FC) is not related to Taxpayer, or
any of Taxpayer’s subsidiaries and other affiliated groups
within the meaning of Section 954(d)(3). FC was created
under the laws of Country 1.
Pursuant to an agreement between Taxpayer affiliates
and FC affiliates, FC and its affiliates perform physical
manufacturing activities for certain products, and sell
finished products to Taxpayer affiliates (including CFC)
for distribution in Taxpayer’s supply chains within the
region. CFC resells the products to various Taxpayer
distribution center affiliates, which are themselves
considered related persons within the meaning of Section
954(d)(3). In a typical arrangement, Taxpayer distribution
center affiliates will on-sell products to Taxpayer sales
entities which then sell such products to third-party
Bob Giusti (bob.giusti@ey.com) is a Partner in Ernst &
Young’s San Jose, California office. Matt Berger (matt.
berger@ey.com) is a Manager in the New York office.
Javier Salinas (javier.salinas@ey.com) is a Manager
in the Washington office. The authors are with Ernst &
Young’s International Tax Services.
customers that are usually located within the same
jurisdiction as the relevant Taxpayer sales entity.
The manufacture of products by FC and its affiliates
entails several stages of production in multiple jurisdictions
involving component parts production and final assembly.
Though FC purchases most of the components as raw
materials, FC manufactures exclusively in Country 1
several critical component parts incorporated in the
products at issue.
Some Manufacturing Activities Outside Country
FC and its affiliates also conduct finishing
manufacturing activities with respect to the products
in countries other than Country 1 (Country 2) at certain
finishing manufacturing plants. The activities conducted
at such plants include the manufacture of component
parts embedded in the products, the assembly of the
products, packaging, and the labeling and shipping of
the products. FC’s finishing manufacturing activities
in Country 2 are conducted through wholly-owned
subsidiaries of FC.
The PLR specifically notes Taxpayer’s representation
that the manufacturing activities performed by FC in
Country 1 with respect to the Country 1 manufactured
component parts are substantial in nature and “constitute
the manufacture, production, or construction of
property” with respect to the finished products within
the meaning of Treas. Reg. Section 1.954-3(a)(4)(iii), and
are substantial with respect to the manufacture of the
finished products as a whole. Taxpayer further represents
that the manufacturing activities performed by FC and
its affiliates with respect to products in Country 2 may
“constitute the manufacture, production, or construction
of property” with respect to finished products within the
meaning of Treas. Reg. Section 1.954-3(a)(4)(iii).
As PLR 201206003 discusses, the definition of FBCSI
under Section 954(d)(1) includes income derived in
connection with the purchase of personal property from
any person and its sale to a related person where the
property which is purchased is manufactured, produced,
grown, or extracted outside the country under the laws of
(Section 954(d)(1), continued on page 7)
www.wtexec.com/tax.html
U.S.
Government Releases Framework for Plan to Cut
Corporate Tax Rate
By Mel Schwarz and Dustin Stamper (Grant Thornton LLP)
The administration on February 23 released a
framework for tax reform that would lower the corporate
tax rate to 28 percent and more narrowly target tax
incentives to specific areas of the economy, particularly
alternative energy and manufacturing.
Specifically, the framework would expand and
make permanent the research credit, but would limit or
repeal most other business tax benefits. The framework
also rejects the idea of shifting to a territorial tax system,
calling instead for a minimum tax on the foreign earnings
of U.S. corporations and several changes that would limit
the ability to place income (particularly income from
intangibles) in foreign countries with lower taxes. The
plan is focused on corporate taxes and does not address
individual tax reform.
The plan was outlined in a 25-page document
from the Treasury Department that is light on details
in some areas and leaves several key issues unresolved.
In general, the administration lays out a vision for an
essentially revenue-neutral overhaul of the corporate tax
code, balancing a reduction in the corporate tax rate with
revenue offsets the president has proposed before
The basic premise starts with the “presumption
that we should eliminate all tax expenditures for specific
industries” with exceptions aimed at preserving large
incentives for U.S. investment like the research credit
and Section 199 deduction. The plan does not list all the
incentives to be repealed, but does target several specific
provisions:
• repealing the last-in, first-out (LIFO) method of
accounting;
• repealing oil- and gas-related tax incentives;
• changing the tax treatment of many insurance
industry products;
• taxing carried interest in a partnership as ordinary
income; and
• eliminating five-year depreciation for noncommercial
aircraft.
Tax incentives not repealed would be made permanent,
and the plan would increase the rate for the alternative
simplified research credit to 17 percent. The Section 199
Mel Schwarz (Mel.Schwarz@us.gt.com) is a Partner,
and Dustin Stamper (Dustin.Stamper@us.gt.com) is a
Manager, with Grant Thornton’s National Tax office in
Washington. The authors specialize in tax legislation and
regulatory developments.
domestic production activities deduction would increase
to 10.7 percent in order to preserve the three-point
reduction in the effective rate that the current 9 percent
deduction offers against the current 35 percent corporate
rate. Treasury acknowledged that these changes would
leave the plan short on revenue needed to fully fund a
rate cut to 28 percent, and offered three additional options
for reforming the corporate tax base:
• changing current depreciation schedules;
• limiting deductions for interest; and
• creating parity between the tax treatment of passthroughs and C corporations.
The administration’s framework clashes with
many Republican ideas for tax reform. A number of
congressional Republicans have said corporate reform
cannot be done without also addressing individual taxes
and have called for reducing both the top individual and
corporate rate to 25 percent or lower. In addition, Sen.
Mike Enzi, R-Wyo., and Ways and Means Committee
Chair Dave Camp, R-Mich., have released proposals to
move the tax code toward a more territorial system.
But the plan was not immediately rejected on Capitol
Hill. Mr. Camp released a statement praising some
of the administration’s general tax reform principles
but disagreeing with the administration’s positions on
several issues. Tax reform appears unlikely in 2012, but
it could emerge as a major campaign issue in advance of
2013. The White House plan has little in common with
the tax platforms of the current Republican candidates
for president, who have all called for rates lower than
28 percent
The following discussion provides more information
on specific elements of the White House plan.
President’s Goals for Tax Reform
The administration provides only a basic framework
for tax reform, and several issues are unresolved. But the
framework document provides a detailed premise for
reform that offers important insights into the tax positions
the administration has taken and will likely take.
There is broad bipartisan agreement that the statutory
U.S. corporate rate of 35 percent is among the highest in
the world and should be lowered. The administration
agrees with this, but repeatedly asserts that the effective
U.S. corporate tax rate, after taking into account tax
various incentives and rules, is consistent with that
of trading partners like France, Japan and the United
Kingdom. The administration argues that reform is
(Corporate Tax Rate, continued on page 8)
February 29, 2012
®
Practical International Tax Strategies U.S.
Treasury, IRS Issue Proposed FATCA Regulations
By Philip R. West and Amanda P. Varma (Steptoe & Johnson LLP)
On February 8, 2012, Treasury and the IRS issued
proposed regulations under Internal Revenue Code
Sections 1471 through 1474 (enacted as part of the Foreign
Account Tax Compliance Act (FATCA) provisions of
the Hiring Incentive to Restore Act of 2010 (the HIRE
Act)), which require foreign financial institutions (FFIs)
to identify and report U.S. account holders or face a
30 percent withholding tax on certain payments. The
proposed regulations are voluminous (388 pages) and will
need to be carefully analyzed by FFIs, U.S. withholding
agents, and other persons potentially impacted by
FATCA. A summary of certain significant developments
and provisions in the proposed regulations is provided
below.
Government-to-Government Alternative
In connection with the release of the proposed
regulations, the United States, France, Germany,
Italy, Spain, and the United Kingdom released a joint
Treasury and the IRS intend to publish
a draft model FFI agreement in “early
2012” and a final agreement in fall 2012.
statement describing an intergovernmental approach
to “improving international tax compliance and
implementing FATCA.”
The joint statement outlines a possible framework for
an intergovernmental approach, under which a partner
country (a FATCA partner) would agree to: (1) pursue
legislation to require FFIs in its jurisdiction to collect and
report to FATCA partner tax authorities the information
required by FATCA; (2) enable FFIs established in
the FATCA partner (other than FFIs that are excepted
pursuant to the agreement or in U.S. guidance) to apply
the necessary diligence to identify U.S. accounts; and (3)
transfer to the United States on an automatic basis the
information reported by the FFIs.
Philip West (pwest@steptoe.com) is a Partner, and
Amanda Varma (avarma@steptoe.com) is an Associate,
in the Washington office of Steptoe & Johnson. Mr. West’s
practice is focused on international tax issues for both
domestic and foreign companies and individuals. He is
Chair of the firm’s Tax Practice. Ms. Varma’s practice
is concentrated in tax law, including international and
corporate tax planning, tax legislative and regulatory
developments, and tax controversies.
In return, the United States would agree to: (1)
eliminate the obligation of each FFI established in the
FATCA partner to enter into a separate FFI agreement; (2)
allow FFIs established in the FATCA partner to comply
with their FATCA obligations by reporting information
to the FATCA partner rather than the IRS; (3) eliminate
U.S. withholding under FATCA on payments to FFIs
established in the FATCA partner; (4) treat specific
categories of FFIs established in the FATCA partner as
deemed compliant or presenting a low risk of tax evasion;
and (5) commit to reciprocity with respect to collecting
and reporting on an automatic basis to the authorities of
the FATCA partner information on the U.S. accounts of
residents of the FATCA partner.
Under this approach, FFIs established in the FATCA
partner would not be required to terminate the account
of a recalcitrant account holder or impose “passthru”
payment withholding on payments to recalcitrant account
holders and payments to other FFIs organized in the
FATCA partner or other jurisdiction with which the
United States has a FATCA implementation agreement.
Transition Rules
The proposed regulations refine the transition rules
of Notice 2011-53:
• Treasury and the IRS intend to publish a draft model
FFI agreement in “early 2012” and a final agreement
in fall 2012.
• For reporting in 2014 and 2015 (with respect to
calendar years 2013 and 2014), FFIs will be required
to report only name, address, TIN, account number,
and account balance with respect to U.S. accounts.
Reporting on income will be phased in beginning
in 2016 (with respect to the 2015 calendar year) and
reporting on gross proceeds will begin in 2017 (with
respect to the 2016 calendar year).
• Withholding on “passthru” payments will not be
required before January 1, 2017, but participating
FFIs will be required to report annually the
aggregate amount of certain payments made to each
nonparticipating FFI.
• A two-year transition (until January 1, 2016) rule (with certain due diligence requirements imposed)
is provided for implementation of the Section
1471(e) requirement that an FFI’s obligations under
an FFI agreement apply to the U.S. accounts of the
participating FFI and U.S. accounts of each other FFI
that is a member of the same expanded affiliated
group.
(FATCA, continued on page 5)
www.wtexec.com/tax.html
U.S.
FATCA (from page 4)
Due Diligence
The proposed regulations provide detailed guidance
on the due diligence that participating FFIs will be
required to undertake to identify U.S. accounts. The
approach of prior preliminary FATCA guidance (Notices
2010-60 and 2011-34) is modified in certain respects.
U.S. Indicia
As in prior guidance, the proposed regulations apply
different due diligence rules to preexisting and new
individual and entity accounts. The proposed regulations
also require FFIs to look for “U.S. indicia” for individual
accounts, which are refined to include (1) identification
of an account holder as a U.S. person; (2) a U.S. place of
birth; (3) a U.S. address; (4) a U.S. telephone number;
(5) standing instructions to transfer funds to an account
maintained in the United States; (6) a power of attorney
or signatory authority granted to a person with a U.S.
address; or (7) a U.S. “in-care-of” or “hold mail” address
that is the sole address on file.
WorldTrade Executive
WTE
PRACTICAL INTERNATIONAL
TAX STRATEGIES
Senior Editor: Scott P. Studebaker, Esq.
scott.studebaker@thomsonreuters.com
Assistant Editor: Edie Creter
Contributing Editor: George Boerger, Esq.
Special Interviews: Scott P. Studebaker
Marketing: Jon Martel
Production Assistance: Dana Pierce
PRACTICAL INTERNATIONAL
TAX STRATEGIES
is published by
WorldTrade Executive,
a part of Thomson Reuters
P.O. Box 761, Concord, MA 01742 USA
Tel: 978-287-0301, Fax: 978-287-0302
info@wtexec.com
www.wtexecutive.com
Copyright © 2012 by Thomson Reuters/WorldTrade Executive
This publication is sold or otherwise distributed with the
understanding that the authors, editor and publisher are not
providing legal, accounting, or other professional service. If legal
advice or other expert assistance is required, the services of a
competent professional person should be sought. Reproduction or
photocopying — even for personal or internal use — is prohibited
without the publisher's prior written consent. Multiple copy
discounts are available.
February 29, 2012
Preexisting Individual Accounts
With respect to preexisting individual accounts, the
private banking rules of Notice 2011-34, which required
enhanced diligence for certain accounts, are eliminated
and replaced with requirements based on account value
threshold. Preexisting accounts with a balance or value
that does not exceed $50,000 and certain cash value
insurance and annuity contracts held by individual
account holders with a value or balance of $250,000 or less
are exempt from review unless the FFI elects otherwise.
Preexisting accounts with a balance or value below
The proposed regulations provide
detailed guidance on the due diligence
that participating FFIs will be required to
undertake to identify U.S. accounts.
$1,000,000 are subject only to a review of electronically
searchable data for indicia of U.S. status.
Accounts with a balance exceeding $1,000,000 are
subject to a review of electronic and non-electronic
records (including the customer master file and the most
recent documentary evidence and account opening
documentation) for U.S. indicia. This enhanced review is
only required, however, where certain information (i.e.,
nationality/residency status; current residence/mailing
addresses, current phone number, standing instructions to
transfer funds, an “in care of” or “hold mail” designation,
and power of attorney or signature authority) is not
available through an electronic search. If a relationship
manager is assigned to an account with a balance
exceeding $1,000,000, the FFI must establish whether the
relationship manager has “actual knowledge” that the
account holder is a U.S. person.
New Individual Accounts
With respect to new individual accounts, the FFI
will be required to review the information provided at
the opening of the account and determine whether U.S.
indicia are present. If U.S. indicia are identified, the FFI
must obtain additional documentation or treat the account
holder as recalcitrant. The preamble states that “FFIs will
generally not need to make significant changes to the
information collected during the account opening process
in order to identify U.S, accounts, except to the extent that
U.S. indicia are identified.”
The proposed regulations provide rules on records
that must be kept with respect to both new and preexisting
accounts.
Compliance Verification
The proposed regulations require FFI officer
verification that the FFI has complied with the terms of the
(FATCA, continued on page 6)
®
Practical International Tax Strategies U.S.
FATCA (from page 5)
FFI Agreement. Verification of compliance through third
party audits, however, is generally not required. Further,
according to the preamble, “[i]f an FFI complies with the
obligations set forth in an FFI agreement, it will not be held
strictly liable for failure to identify a U.S. account.”
Grandfathered Obligations
The proposed regulations expand the scope of a
grandfathering rule in the HIRE Act, which provided
that a payment under any obligation outstanding on
March 18, 2012 (or from the gross proceeds from any
disposition of such an obligation) is not subject to FATCA
withholding. The proposed regulations extend the March
18 date to January 1, 2013. An “obligation” is generally
defined to include debt and certain legal agreements, but
not equity. Comments are requested on the definition of
“obligation.”
Deemed Compliant FFIs
The categories of FFIs treated as deemed compliant
under Section 1471(b)(2) are expanded to include
“registered deemed-complaint FFIs” (local FFIs, nonreporting members of participating FFI groups, qualified
investment vehicles, restricted funds, and FFIs in
compliance with an agreement between the United States
and a foreign government that register with the IRS) and
“certified deemed-complaint FFIs” (non-registering local
banks, retirement plans, non-profit organizations, certain
owner-documented FFIs, and FFIs with only low-value
accounts).
“Passthru” Payments
According to the preamble, Treasury and the IRS
continue to consider ways to implement the passthru
payment requirement while easing the compliance
burden. Comments are requested on this issue.
The preamble also states that Treasury and the IRS
are studying options to prevent U.S. institutions from
serving as “blockers” with respect to passthru payments
(as U.S. institutions are required to withhold with respect
to withholdable payments but not passthru payments).
©2012 Steptoe & Johnson q
Advisory Board
Richard E. Andersen
Arnold & Porter LLP (New York)
Marc Lewis
Sony USA (New York)
Joan C. Arnold
Pepper Hamilton LLP (Boston)
Keith Martin
Chadbourne & Parke LLP
(Washington)
Sunghak Baik
Ernst & Young (Singapore)
William C. Benjamin
Wilmer Cutler Pickering Hale and Dorr LLP
(Boston)
Kevin Rowe
Reed Smith (New York)
Steven D. Bortnick
Pepper Hamilton (New York)
John A. Salerno
PricewaterhouseCoopers LLP
(New York)
Joseph B. Darby III
Greenberg Traurig LLP (Boston)
William F. Roth
BDO USA, LLP
Michael J. Semes
Blank Rome LLP (Philadelphia)
Rémi Dhonneur
Kramer Levin Naftalis & Frankel LLP
(Paris)
Douglas S. Stransky
Sullivan & Worcester LLP (Boston)
Hans-Martin Eckstein
PricewaterhouseCoopers
(Frankfurt am Main)
Michael F. Swanick
PricewaterhouseCoopers LLP
(Philadelphia)
Jaime González-Béndiksen
BéndiksenLaw
(Mexico)
Edward Tanenbaum
Alston & Bird LLP (New York)
Alan Winston Granwell
DLA Piper (Washington)
Guillermo O. Teijeiro
Negri & Teijeiro Abogados
(Buenos Aires)
Jamal Hejazi, Ph.D.
Gowlings, Ottawa
David R. Tillinghast
Baker & McKenzie LLP (New York)
Lawrence M. Hill
Dewey & LeBoeuf LLP (New York)
Eric Tomsett
Deloitte & Touche LLP (London)
www.wtexec.com/tax.html
U.S.
Section 954(d)(1) (from page 2)
which the CFC is created or organized, and the property
is sold for use, consumption, or disposition outside such
foreign country. See Treas. Reg. Section 1.954-3(a)(1).
Treas. Reg. Section 1.954-3(a)(2) provides that FBCSI
does not include income derived in connection with the
purchase and sale of personal property in a transaction
described in Treas. Reg. Section 1.954-3(a)(1) if the
property is manufactured, produced, constructed, grown
or extracted in the country under the laws of which the
CFC that purchases and sells the property is created
or organized. Thus, CFC’s sale of products to various
Taxpayer distribution center affiliates considered related
persons would not generate FBCSI if another person
physically manufactures such products in Country 1.
Treas. Reg. Section 1.954-3(a)(4)(ii) provides that
purchased property, which is substantially transformed
prior to sale, is treated as having been manufactured
by the selling corporation. Treas. Reg. Section 1.9543(a)(4)(iii) provides that if purchased property is used as
a component of property that is sold, and the operations
conducted by the selling corporation in connection with
the property purchased and sold are substantial in nature
and generally considered to constitute the manufacture
of property, then the sale of the property will be treated
as the sale of a manufactured good. Here, CFC purchases
products from FC and its affiliates. FC and its affiliates
manufacture products in a multi-step process, which
involves component part production and final assembly
in multiple jurisdictions. The ruling indicates that the
manufacturing activities with respect to Country 1
manufactured component parts are conducted by FC
exclusively in Country 1, and manufacturing activities
with respect to some component parts and final assembly
are conducted by FC and its affiliates in Country 2.
Based on the facts presented and Taxpayer ’s
representation that the activities conducted by FC in
Country 1 constitute manufacturing within the meaning
of Treas. Reg. Section 1.954-3(a)(4)(iii) and are substantial
with respect to the products as a whole, the IRS ruled that
income earned by CFC with respect to the sale of products
purchased from FC, or its affiliates, to a related person
within the meaning of Section 954(d)(3), is not FBCSI
within the meaning of Section 954(d) because the income
qualifies for the same country manufacturing exception
under Section 954(d)(1)(A).
Implications
Though private letter rulings may not be used or
cited as precedent by persons other than the taxpayer
requesting the ruling, this ruling indicates how the IRS may
determine whether a CFC earns FBCSI from its purchase
and resale of manufactured property. Interestingly, the
IRS determined that although Taxpayer represented that
it believed the manufacturing activities performed by
February 29, 2012
FC and its affiliates with respect to the products outside
Country 1 may “constitute the manufacture, production,
or construction of property” of finished products within
the meaning of Treas. Reg. Section 1.954-3(a)(4)(iii), CFC
was still able to qualify for the exception under Treas. Reg.
Section 1.954-3(a)(2) notwithstanding that the products
were partly manufactured in Country 2. Consistent with
The ruling acknowledges the possibility
of two or more manufacturing locations
for the same product and finds that
the manufacturing exception of 1.9543(a) is not limited to the final stage of
manufacturing.
the recent multiple manufacturing branch rules of Treas.
Reg. Section 1.954-3(b)(1)(ii)(c)(3) and the implications of
the safe harbor test in Treas. Reg. Section 1.954-3(a)(4)(iii),
the ruling acknowledges the possibility of two or more
manufacturing locations for the same product and finds
that the manufacturing exception of 1.954-3(a) is not
limited to the final stage of manufacturing. q
Swiss Take Steps to Clean Up
Tax-Haven Image
Switzerland announced plans on February
22 to force banks to do more to make sure foreign
clients’ money is taxed in an attempt to shake off
its past as a haven for untaxed funds as it seeks
to put an end to a damaging U.S. tax probe.
“The focus is on enhanced due diligence
requirements for banks when accepting assets
as well as a requirement for foreign clients to
make a declaration on the fulfillment of their tax
obligations,” the cabinet said in a statement.
The announcement comes on top of a raft
of measures already announced in recent years,
including a planned withholding tax on foreign
assets held in Switzerland and better co-operation
with foreign authorities pursuing alleged tax
dodgers.
A global crackdown from cash-strapped
governments in recent years has chipped away
Switzerland’s cherished tradition of banking
secrecy, which helped it build up a $2 trillion
offshore wealth management industry. — Caroline
Copley (Reuters) q
®
Practical International Tax Strategies U.S.
Corporate Tax Rate (from page 3)
needed not to lower how much corporations pay overall,
but rather to end economic distortions and complexity
that slow economic growth.
The framework document then makes the case
that our current corporate tax code encourages debt
financing over equity, pass-through organizations over
C corporations, and shifting of profits overseas. These
are all characterized as unfavorable economic distortions,
and many of the proposals in the plan are intended to
reverse them.
Trading Tax Expenditures for Corporate Rate Cut
The plan seeks to trade a rate cut to 28 percent for
the repeal of targeted tax incentives. It says that reform
should start with the “presumption that we should
The administration argues that reform
is needed not to lower how much
corporations pay overall, but rather
to end economic distortions and
complexity that slow economic growth.
eliminate all tax expenditures for specific industries, with
a few exceptions that are critical to broader growth and
fairness.” The tax expenditures that would be retained
would be made permanent.
The plan does not clarify whether tax expenditures
would be repealed for both corporations and passthrough entities, and it does not offer an exhaustive list
of which provisions should be repealed and which should
be kept. Instead, Treasury lists five examples, all of which
have already been identified in previous presidential
budgets:
• repealing the last-in, first-out (LIFO) method of
accounting;
• repealing oil- and gas-related tax incentives;
• changing the tax treatment of many insurance
industry products;
• taxing carried interest in a partnership as ordinary
income; and
• eliminating five-year depreciation for noncommercial
aircraft.
The administration does not provide any concrete
revenue estimates, but does acknowledge that further
“base broadening” would be needed to produce enough
revenue to make the package revenue neutral. The plan
provides the following three options and says “several
would be needed” to bring the rate to 28 percent:
• Repealing accelerated depreciation—The administration
argues that the depreciation schedules allowed for
tax purposes overstate true economic depreciation
and are often shorter than under accounting rules.
According to Treasury, accelerated depreciation is
a less-effective way to encourage investment than
simply lowering rates. The position appears to
represent a shift in policy, because the administration
has pushed hard over the last several years for
expensing provisions such as 100 percent bonus
depreciation.
• Limiting the deduction for corporate interest—The plan
states that reducing the deductibility of interest for
corporations should be considered to further limit
the current bias toward debt financing. No details
are offered as to how this would be accomplished
• Establishing parity between pass-throughs and C
corporations—The administration asserts that C
corporations and “large non corporate entities” such
as partnerships and S corporations should be treated
more alike. The plan does not provide any details
on how this could be achieved, but the argument is
similar to statements from Senate Finance Committee
Chair Max Baucus, D-Mont., indicating an interest in
taxing some large pass-throughs as C corporations.
The administration points to proposals from
President Bush’s 2005 Advisory Panel on Tax Reform
and President Obama’s 2010 Economic Recovery
Advisory Board. Obama’s board offered suggestions
such as taxing publicly traded partnerships as C
corporations, taxing pass-throughs over a certain
size threshold as C corporations or eliminating the
double taxation of corporate income. Bush’s panel
suggested taxing all large businesses at the entity
level but excluding dividends and distributions from
individual income.
Manufacturing Incentives
The president’s plan seeks to preserve tax incentives
for U.S. investment. This is primarily done by retaining
and modifying the research credit and Section 199
deduction, which the administration has proposed
several times before. As it has done in previous budgets,
the administration proposes to increase the alternative
simplified research credit rate from 14 to 17 percent.
Several additional details were offered regarding
the proposal to narrow and increase the Section 199
deduction. The new version of the proposal would bring
the general deduction from 9 to 10.7 percent, which
Treasury said is designed to achieve a top corporate rate
of 25 percent on domestic manufacturing activities. The
plan also proposes an even higher rate for “advanced
manufacturing,” without specifying what constitutes
advanced manufacturing or what the rate would be.
Earlier versions of this proposal offered a deduction of 18
percent. The new version includes no new information on
which activities would be excluded from the deduction,
(Corporate Tax Rate, continued on page 9)
www.wtexec.com/tax.html
U.S.
Corporate Tax Rate (from page 8)
and in the past the administration has specifically targeted
only oil- and gas-related production.
The framework document also proposes making the
Section 45 alternative energy production credit permanent
and refundable. The other incentives specifically identified
in the plan have been previously offered in the president’s
budget, including proposals to:
• increase the Section 179 expensing limit to $1
million;
• allow businesses with up to $10 million gross receipts
to use cash accounting;
• double the start-up expensing limit from $5,000 to
$10,000; and
• expand the health insurance tax credit for small
businesses.
International Incentives
The administration’s plan explicitly rejects the move
to a territorial system, which generally seeks to tax only
income earned in the United States. The framework
document states that such a move “could aggravate,
rather than ameliorate, many of the problems in the
current code.”
Instead, the president reproposes international
provisions from his budget, which would:
• limit interest deductions attributable to foreign source
income until the income is repatriated;
• tax “excess profits” associated with the shifting of
intangibles to “low tax jurisdictions;”
• deny deductions for the costs of moving operations
overseas and provide a 20 percent credit for the costs
of moving operations to the United States; and
• impose a minimum tax on overseas profits.
No new information is offered on the proposed
minimum tax on overseas profits. It is unclear what
the rate would be and how the minimum tax would be
calculated.
Advancing the Plan
The administration does not appear to be close
to offering legislative language or resolving the open
issues. There is no concrete revenue estimate for the
whole package, though the administration pledges that
corporate tax reform “should not add a dime to the
deficit.” This pledge appears to be based on a current
policy baseline that assumes all temporary tax incentives
expire, because the administration says it would pay for
the cost of extending the current temporary incentives that
it supports, which it estimates at $250 billion. q
© 2012 Grant Thornton LLP
Canada
Latest Step in CRA’s New Audit Approach: “Risk Assessment”
Interviews with Large Businesses
By Patrick Lindsay and Sal Mirandola (Borden Ladner Gervais LLP)
What’s Happening?
The Canada Revenue Agency (CRA) plans to conduct
individual risk-assessment interviews with a select
group of 50 large businesses in the near future. These
taxpayers face the prospect of being labeled “high-risk,”
a designation that will likely come with significant costs
related to increased audit scrutiny.
It is important for potential interviewees to understand
what to expect from this process, and what their rights
are, in order to prepare for the interview and determine
the most effective way to participate.
CRA’s New Audit Approach
The interviews are part of the CRA’s new approach
to large business audits. Instead of assigning audits
based on a taxpayer’s gross income,1 the CRA intends to
select audits based on “risk.” At the interviews, the CRA
is expected to: explain its new audit approach; provide
information regarding its initial risk assessment of the
taxpayer and identify issues of concern for the next audit
cycle; and ask for information regarding the taxpayer’s
own assessment of its tax risks.
The interviews are part of the first phase of the new
risk-based audit approach, which is being introduced
Patrick Lindsay (plindsay@blg.com) is a Partner in
the Calgary office, and Sal Mirandola (smirandola@
blg.com) is a Partner in the Toronto office, of Borden
Ladner Gervais. Mr. Lindsay’s practice is concentrated
in tax litigation at all levels, as well as tax settlement
negotiations. He has worked extensively with companies
in the banking, oil and gas, and mining sectors. Mr.
Mirandola’s practice is focused on tax dispute resolution
from audit to appeal, including disputes before various
courts and administrative agencies related to federal and
(CRA Audit Approach, continued on page 10)
provincial tax matters.
®
February 29, 2012
Practical International Tax Strategies Canada
CRA Audit Approach (from page 9)
gradually over five years. Within five years, the CRA
plans to meet with all large file taxpayers to discuss their
risk categorization.
Questions to Expect
Letters issued to the selected taxpayers request a
meeting to discuss items including “the potential benefits
of adopting an engaged approach to compliance.” The
letter attaches a proposed list of questions for taxpayers,
which include:
• How are your tax risks identified, managed, reported
and monitored? What are the names of the individuals
involved in this process?
• Will you disclose your own analysis of your tax
risks?
Taxpayers may challenge the
reasonableness of the number, scope
and availability of the documents
requested.
• Do you have a tax risk management committee?
Who is on the committee? Will you provide meeting
minutes?
• Describe a situation where you were not compliant
and explain what you did.
• Do you use external tax planners? Are any paid on a
contingency basis?
The questions invite taxpayers to disclose their own
analysis of their tax risks. While most taxpayers may not
object to providing the CRA with the necessary records to
test the honesty and accuracy of their tax returns, it can be
expected that many will take issue with disclosing their
own mental impressions regarding their tax risks.
How to Prepare
Taxpayers that participate in the interviews should
prepare by:
• Reviewing the CRA interview request letter and considering the questions attached to the letter;
• Discussing the scope of the CRA’s authority to compel
answers to the questions and decide in advance how
much information to provide at the meeting;
• Reviewing the internal processes for assessing tax
risk and consider what information the CRA could
compel the taxpayer to produce;
• Considering which individuals should attend, what
materials to bring to the meeting, if any, and who will
take meeting minutes; and
• Preparing questions for the CRA regarding the new
risk assessment audit process including the benefits,
costs, and specific changes the taxpayer can expect.
The most likely area of disagreement between the
taxpayer and the CRA involves how much information
the taxpayer should provide regarding its own assessment
of its tax risks. As such, we discuss below: perspectives
of the CRA and taxpayers on this issue; the scope of the
CRA’s authority to compel taxpayers to produce records;
and the impact of the CRA’s request for taxpayer’s own
tax risk assessments.
CRA: Taxpayers Must Self-Audit
The CRA’s position is that taxpayers are obligated to
disclose “concerns with regard to tax at risk” to assist the
CRA to “identify audit issues.”2
In other words, taxpayers must self-audit and disclose
results to the CRA. The extent to which the CRA can
compel disclosure of a taxpayer’s own assessment of
tax risks has not been tested in Canada. In the United
States, the Internal Revenue Service has taken court
action against taxpayers that declined to disclose such
information, with mixed results.3
From the CRA’s perspective, the audit process would
be more effective and cost-efficient if taxpayers simply
disclosed their own assessment of their tax risks; “The
CRA’s goal is to develop a useful and cost-effective
program to better target its compliance efforts.”4
Taxpayers: Must I Tell my Adversary
Where I am Vulnerable?
Tax litigation is inseparable from the audit process
because information gathered during an audit can be
used against taxpayers in litigation. The CRA litigates
tax issues regularly using the largest law firm in the
country, the Department of Justice. As such, any requests
for information from the CRA need to be considered
knowing that the CRA has a dual role as both auditor
and adversary.
The CRA’s Authority To Access Records
Under the CRA’s primary audit power, it has broad
authority to “inspect, audit or examine the books and
records of a taxpayer.”5 This authority is necessary for
the CRA to carry out the purpose for which it exists
– assessing taxpayer’s accuracy and honesty within a selfassessment system. This authority imposes obligations
on taxpayers to: maintain and disclose proper books and
records; provide “all reasonable assistance”; and answer
“all proper questions.”6
Taxpayers should be aware that the CRA frequently
asks for information that it cannot compel taxpayers to
provide. For example, the CRA often requests access
to legal opinions that are protected from disclosure
by solicitor-client privilege. 7 The CRA also requests
(CRA Audit Approach, continued on page 11)
10
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Canada
CRA Audit Approach (from page 10)
information for the purpose of auditing unnamed persons
(for example, a client list), even though the CRA has no
authority to demand such information without judicial
authorization.8 Taxpayers should consider the limits of
the CRA’s authority when considering an information
request.
Since “risk-assessment” interviews are a new process
and the scope of the compliance obligation is unclear, we
expect considerable discussion between the CRA and
taxpayers regarding the appropriate level of disclosure.
Limits on the CRA’s Authority to Access Records
Limitations on the CRA’s authority to compel
taxpayers to produce records include: solicitor-client
privilege; purpose; reasonability; and relevance. Each
limitation is discussed briefly below.
Privilege
The most important limitation on the CRA’s ability
to compel the production of information is the solicitorclient privilege. Accountants and other professionals do
not have this protection, and the CRA has made it clear
that it can and will demand to see accountants’ working
papers and similar tax-related documentation where it
chooses to do so.9
The current interviews are part of gradual changes
in CRA audit practices that have evolved over the
past several years. In response to these changes, many
taxpayers have organized their tax risk assessment
process so that many records are subject to solicitorclient privilege. In such cases, the taxpayers cannot be
compelled to produce records that are properly subject to
privilege. In some cases, privilege other than traditional
solicitor-client privilege may apply, such as where legal
advice is sought in anticipation of litigation. Where
taxpayers assert privilege, the CRA may request sufficient
information in order to assess whether they wish to
challenge the privilege claim. The focus in such privilege
disputes is often: (i) whether the records at issue were
produced as part of a solicitor-client relationship; and (ii)
where privileged records were provided to a third party,
whether privilege was waived.
Most large businesses consider how to manage their
information flow so as to create and preserve solicitorclient privilege where possible. The CRA interview
questions directed at accessing the taxpayers’ own tax
risks assessment are likely to result in large businesses
analyzing their process for identifying tax-risks and
considering whether that process should be modified so
that solicitor-client privilege applies to more records.
Purpose
The CRA exists to verify taxpayers’ accuracy and
honesty within a self-assessing system, which is a distinctly
February 29, 2012
“regulatory” function. The powers granted to CRA are
limited to the carrying out of this regulatory function, as
opposed to a policing or legislative function.
The CRA has, on occasion, tried to use its regulatory
powers to carry out a policing function. In these cases,
where the CRA demands records for the primary purpose
of advancing a criminal investigation (i.e., tax evasion),
the CRA has no authority to compel a response. Courts
have confirmed that CRA’s regulatory powers are not
available where the CRA is carrying out a different
function.10 Similarly, CRA document demands that are
primarily directed at impeding a particular business
activity have been overturned on the basis that they do not
The CRA frequently asks for information
that it cannot compel taxpayers to
provide.
come within the “purpose” test of the CRA’s regulatory
powers.11
Reasonability
Any CRA request must provide a reasonable time to
comply.12 In addition to challenging the reasonableness
of the time given to comply, taxpayers may challenge
the reasonableness of the number, scope and availability
of the documents requested. Often CRA requests are
necessarily over-broad because the CRA does not
have the benefit of knowing what records the taxpayer
maintains. Where the scope is perceived as unreasonably
broad, discussions with the CRA are needed to try to
reach a suitable compromise. Where the CRA compels
the production of records, such demand is a “seizure”
within the meaning of the Canadian Charter of Rights
and Freedoms.13
Since the Charter prohibits seizures that are
“unreasonable,” any requests must be reasonable in order
to be enforceable. The vast majority of the CRA’s requests
for information are clearly reasonable. For example,
a request for documents or information necessary to
complete an audit is clearly reasonable. A demand to
disclose a summary of potential uncertainties in one’s
tax filings may be considered unreasonable.
Relevance
The CRA is granted authority to “administer and
enforce the Act.”14 As such, the CRA can only compel
the production of records or information relevant to this
purpose. In the vast majority of cases, relevance is clear
and the CRA is entitled to the information requested.
(CRA Audit Approach, continued on page 12)
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Practical International Tax Strategies 11
Canada
CRA Audit Approach (from page 11)
However, where relevance is unclear, it is important to
consider whether this relatively low threshold is met.
Where disputed, the Minister need only show that the
requested records “may be relevant.”15
Taxpayers may question the extent to which their
own mental impressions are “relevant.” The CRA’s job
is to gather the necessary factual information and to form
its own view as to whether the law has been complied
with. Where the CRA has been provided with all of the
information necessary to form that view as to the accuracy
of the taxpayer’s returns as filed, it is not obvious that
The extent to which the CRA can
compel disclosure of a taxpayer’s own
assessment of tax risks has not been
tested in Canada.
the taxpayer’s own impressions are “relevant” to the
administration or enforcement of the Act. This question
has not yet been considered by a Canadian court.
Policy Note: CRA Access Will Impact Financial
Reporting
There is an important public policy reason for large
businesses to carefully and thoroughly analyze their tax
risk. We all recall when public confidence in financial
reporting collapsed after the bankruptcy of Enron and
others. To rebuild public confidence, reporting issuers
faced more stringent financial reporting standards,
including an obligation to increase the quality and
quantity of records related to the calculation of tax risk.
The records that the CRA now seeks include records
generated in connection with the public policy goal of
ensuring large businesses accurately calculate tax risks
such that the financial statements accurately depict the
financial position of the business. In order to calculate
tax at risk, taxpayers must consider the strengths and
weaknesses of their legal position, including the strength
of witnesses and other evidence in the event that uncertain
issues are litigated.
If the CRA can access records related to a taxpayer’s
own risk assessment, the quality and quantity of records
maintained in connection with internal tax risk will
decline. As noted by the United States Court of Appeal,
if tax advisors who identify “uncertainties in their clients’
tax returns know that putting such information in writing
will result in discovery by the IRS, they will be more
likely to avoid putting it in writing, thus diminishing
12
the quality of representation. [Access to the records by
the IRS] will have ramifications that will affect the form
and detail of documents” prepared when assessing tax
risks.16 The same considerations apply in Canada and the
extent to which the CRA can access taxpayer records will
impact the manner in which such records are prepared
and maintained.
__________
Currently, taxpayers with gross income exceeding $250 million
are assigned a large case file manager and a team of auditors who
together complete an annual audit. Taxpayers with gross income
from $20 million to $250 million are selected for audit based on
a complexity rating and are assigned to a single auditor.
2
Canada Revenue Agency Technical Statement “Acquiring
Information from Taxpayers, Registrants and Third Parties,” June 2,
2010, http://www.cra-arc.gc.ca/tx/tchncl/cqrngnfrmn/menueng.html, at para 5.
3
See, for example: U.S. v. Deloitte LLP, 2010 WL 2572965 (D.C. Cir.
June 29, 2010) and v. Textron Inc., 577 F.3d 21 (1st Cir. 2009), cert.
denied, 2010 WL 2025148 (May 24, 2010). Many corporations in
the United States with assets in excess of $100 million must file
a schedule identifying uncertain tax positions, see: http://www.
irs.gov/pub/irs-utl/df1120.pdf.
4
Canada Revenue Agency, Income Tax Technical News No. 34,
(April 27, 2006), available at http://www.cra-arc.gc.ca/E/pub/
tp/itnews-34/README.html.
5
Section 231.1 of the Income Tax Act (Canada) (the “Act”).
6
Sections 230, 231.1 and 231.2 of the Act.
7
Boilerplate language used in requirements issued by the CRA
often includes a request for legal opinions (without notice to
taxpayers that privilege may apply) and contains a caution that
criminal prosecution may occur if the requested information is
not disclosed.
8
Subsection 231.2(2). The CRA can generally compel such
information to be produced after obtaining judicial authorization:
Artistic Ideas v. Canada, [2005] 2 CTC 25 (FCA).
9
See, for example, Suarez, “Canada Updates Policy on Accessing
Working Papers,” Tax Notes International, Vol. 55, no. 3, July 20,
2009 at p. 172.
10
See for example: R. v. Jarvis, [2003] 1 CTC 135 (SCC) and R. v.
Ling, [2002] SCR 214.
11
See for example: M.N.R. v. RBC Life Insurance Company et al.,
2011 FC 1249 at para. 62 where J. Tremblay-Lamar writes: “It was
not open to the Minister to seek ex parte authorization under
the pretence of verifying compliance with the Act when her true
purpose was to achieve through audits what the Department of
Finance refused to do through legislative amendment.”
12
Subsection 231.2(1) of the Act. See also R. v. MacDonald, [2005]
5 CTC 77 (BC PC).
13
Canadian Charter of Rights and Freedoms, Part I of the Constitution
Act, 1982 being Schedule B to the Canada Act 1982 (U.K.), 1982,
c. 11, s. 8.
14
Sections 231.1 and 231.2 of the Act.
15
See for example: 1144020 Ontario Ltd. v. M.N.R., [2005] 3 CTC
310 (FCTD) and Fraser Milner Casgrain LLP v. M.N.R., [2002] 4
CTC 210 (FCTD).
16
U.S. v. Textron Inc., 2009 U.S. App. LEXIS 1538, at p 36-37. q
1
www.wtexec.com/tax.html
Ireland
Irish Finance Bill 2012 Published
Contains Corporate Tax Changes; Benefits for Financial Industry
By Paul Fleming, Norah Walsh, Tim Kiely, Joe Bollard and Kevin McLoughlin (Ernst & Young)
The Irish Government published the Finance Bill 2012
on February 8, 2012. The Bill contains further details on
the proposals announced in the recent Budget that are
aimed at further improving Ireland’s competitiveness for
attracting strategic foreign direct investment.
The Bill now proceeds to the Committee and Report
stages, where additional amendments may be tabled.
Some of the key details contained in the Bill, which
will be relevant to inbound investors into Ireland, are
discussed below.
Corporation Tax Measures—General
Irish Group Relief
In a move that codifies the recent UK case FCE Bank
plc v HMRC, a provision is made to extend the definition
of a group for the purposes of surrendering trading
losses for tax purposes. The effect of this rule is to move
towards an ability to trace the 75 percent required group
relationship on a global basis. The application of these
rules to each situation will need to be carefully considered.
This provision will be effective for accounting periods
ending on or after January 1, 2012.
Deduction for Foreign Withholding Taxes
A specific provision is made for securing a corporate
tax deduction for foreign withholding tax suffered
on certain royalty and interest income, not otherwise
qualifying for double tax relief or unilateral credit relief.
The provision applies to income received after January
1, 2012.
Taxation of Foreign Dividends
The Bill also extends the categories of foreign
dividends received by Irish companies that can qualify
for the 12.5 percent tax rate. At present dividends sourced
out of the trading profits of subsidiaries resident in an EU
Member State or country with which Ireland has a double
tax treaty, are liable to corporation tax at the 12.5 percent
rate rather than 25 percent. This will be extended to
dividends sourced from the trading profits of subsidiaries
Paul Fleming (paul.fleming@ey.com) is a Director, Norah
Walsh (norah.walsh@ey.com) is a Tax Manager, and Tim
Kiely (tim.kiely@ey.com) is International Tax Manager,
with the Irish Tax Desk of Ernst & Young in New York. Joe
Bollard (joe.bollard@ie.ey.com) and Kevin McLoughlin
(kevin.mcloughlin@ie.ey.com) are Tax Partners with the
Dublin office of Ernst & Young.
February 29, 2012
resident in a territory that has ratified the Convention on
Mutual Assistance in Tax Matters. This would include
countries such as Argentina and Brazil. The measure will
apply to dividends received on or after January 1, 2012.
Start Up Operations
Ireland currently provides a three-year exemption
from tax on certain trading profits and capital gains
The bill includes a deduction for foreign
withholding tax on some royalties and
interest income.
(subject to conditions) to companies with a total
corporation tax liability of less than €40,000 per year.
The Bill further extends the relief to new companies that
commence a trade by December 31, 2014.
Stimulus Measures
Enhancing Research and Development (R&D)
Tax Credit Regime
The Finance Bill introduces a number of enhancements
to the R&D regime as follows:
• a volume basis of relief for the first €100K of R&D
spent in each period;
• improving the cap on allowable outsourced activity
to allow for the greater of either the existing caps or
€100K; and
• a provision for certain companies to pass on their
R&D tax credits to qualifying key R&D employees.
These employees could use the credit to obtain
refunds of their income tax (not USC or PRSI). The
relief is capped such that the effective income tax rate
payable by these key R&D employees cannot be less
than 23 percent.
The Bill also makes a provision for a number of
technical changes including:
• a welcome form of reorganization relief allowing
excess credits to move between companies on certain
intra-group trade transfers;
• exempting a clawback of credits for certain intragroup transfers of R&D buildings; and
• a provision for interest and penalties for erroneous
claims.
(Tax Changes, continued on page 14)
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Practical International Tax Strategies 13
Ireland
Tax Changes (from page 13)
Employee-Related Measures
Special Assignee Relief Program (SARP)
The Finance Bill sets out the detail of the Special
Assignee Relief Program, which replaces the limited
remittance basis available to non-Irish domiciled
individuals on employment income until December 31,
2011.
The relief reduces the Irish income tax liability of
individuals who are transferred into Ireland (when the
transfer commences in 2012, 2013 or 2014) to work for an
associated company. The relief is a welcome development
as it will help to reduce the costs for employers assigning
key employees and executives from abroad to Ireland.
Though there are some conditions to be satisfied, the
relief, if applicable, will operate by granting an exemption
The Bill proposes several specific
measures to support the continued
success of the Irish financial services
industry.
from income tax on 30 percent of employment income
between €75,000 and €500,000. The relief can be claimed
for the duration of the assignment up to a maximum of
five years.
Foreign Earnings Deduction (FED)
The Finance Bill introduces a Foreign Earnings
Deduction (FED) as an incentive for companies expanding
into Brazil, Russia, India, China and South Africa (BRICS
countries) through assigning Irish-based employees to
those markets. The relief provides a reduction in the Irish
income tax liability for the individual reducing any tax
equalization costs for the company.
The FED should allow individual employees to
achieve a tax saving of €14,350 per annum where the
maximum deduction is available.
Financial Services Industry Measures
In addition to several other general measures,
including those highlighted elsewhere in this article,
which will be beneficial to the financial services industry
(such as changes to the SARP, R&D tax credit, FED, group
relief for losses, taxation of foreign source dividend
income and stamp duty changes), the Bill proposes several
specific measures to support the continued success of the
Irish financial services industry. These are summarized
below.
Asset Management
The measures proposed by the Bill in relation to the
asset management industry include:
• the implementation of facilitating legislation for
UCITS IV cross-border mergers/amalgamations and
reconstructions (including master/feeder structures)
plus associated stamp duty exemptions and rollover
of gains for Irish unitholders;
• the extension of simplification measures to the
non-Irish resident declaration process to include
intermediaries and fund migrations to Ireland; and
• stamp duty exemptions for exempt unit trusts.
Corporate Treasury
The Bill contains a welcome measure in relation
to the tax-deductibility of certain interest paid by cash
pooling operations to non-EU/non-tax treaty jurisdictions
that may have been regarded as putting Ireland at a
competitive disincentive when it came to multinationals
deciding where to locate such operations (although it
remains to be seen how the proposed measure operates
in practice).
Islamic Finance
The Bill includes other facilitating measures that
are designed to increase Ireland’s attractiveness as a
location for Islamic Finance (allowing, in particular, for
a broadening of income which a finance company within
the regime may receive).
Aircraft Leasing
The proposed extension of credit relief for foreign tax
withheld on lease payments from non-tax treaty countries
in respect of equipment (including planes and engines)
should prove beneficial to the Irish aircraft leasing sector,
as well as to other big-ticket lessors.
Insurance
The Bill proposes the expansion of exemptions
from exit tax on investments in life policies to include
investment by certain pension funds bringing the
exemptions broadly into line with those available for
investment funds.
Capital Markets
Certain amendments have been proposed to the
residual charge to income tax on Irish publicly-listed
debt.
Green IFSC
The Bill proposes additional measures aimed at
supporting the well-publicized “Green IFSC” initiative,
including the broadening of the definition of “carbon
offsets” within the Section 110 regime with an associated
stamp duty exemption in respect of such assets.
(Tax Changes, continued on page 15)
14
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Ireland
Tax Changes (from page 14)
Other Business Taxation Measures
Capital Taxes
New Capital Gains Tax (CGT) Relief on Property
The Bill provides details of the new CGT incentive
for property purchased between midnight on December
6, 2011 and the end of 2013. Provided that a property
acquired between December 7, 2011 and the end of
2013 is held for seven years, the proportion of the gain
as seven years relates to the entire period of ownership
shall be exempt. For example, on a disposal of property
after ownership for seven years, the full gain would be
exempt. If the property was held for 20 years, 7/20ths of
the gain would be exempt.
The relief applies to property in any EEA State in
compliance with EU law.
Stamp Duty
The Bill gives effect to the announcement in the Budget
that a new lower single rate of stamp duty of 2 percent will
apply to instruments relating to non-residential property
(previously the maximum rate of stamp duty in respect
of non-residential property was 6 percent).
Certain reliefs such as associated companies’ relief
will no longer require adjudication from Irish revenue.
The Finance Bill introduces a number of exemptions
from stamp duty in relation to financial services
transactions to further strengthen Ireland’s position in
the financial services market. These include:
• a provision for relief from stamp duty in respect of
the reconstruction or amalgamation of unit trusts and
offshore funds;
• the extension of the exemption in respect of the
transfer of units in a unit trust to other unit trusts;
and
• the extension of the provision of the stamp duty relief
in respect of fund reorganizations.
The Bill also provides for a new exemption in respect
of the merger and cross-border merger of companies.
The Bill also provides for a new exemption in respect
of the transfer of property held for the benefit of a
pension scheme or charity in certain circumstances. This
exemption is effective as of February 8, 2012.
© 2012 EYGM Limited q
russia
Russia Drops Proposed Tax on Eurobonds—For Now
By Lidia Kelly (Reuters)
Russia’s finance ministry, pressured by borrowers and
banks, said late on February 20 that it is scrapping plans
to collect tax on corporate Eurobonds placed by January
1, 2013 and may apply only a partial levy to papers issued
after that day.
Some of Russia’s biggest corporate borrowers,
including Russia’s top gas producer Gazprom and its
second largest state bank VTB, had been facing large bills
in relation to existing bond programs.
Oil pipeline monopoly Transneft had threatened to
redeem over $4 billion bonds at par in response to the
proposals outlined by officials in recent months.
“First, as regards interest income paid on Eurobonds
issued prior to January 1, 2013, we propose to fully release
Russian borrowers from any obligations to withhold
tax, i.e., from obligations to act as tax agents (including
interest income that has already been paid to investors),”
the ministry said in a statement.
February 29, 2012
Tax to Start in January, but Only for Some
Corporate Eurobonds issued after January 1 of the
next year will be taxed only on interest income received
by an intermediary located in an offshore jurisdiction that
has no double tax treaty with Russia, the ministry said.
Deputy Finance Minister Sergei Shatalov in a letter to
tax officials at the end of last year advised that, by Russian
law, companies issuing Eurobonds were obliged to pay
20 percent profits on interest at source.
The finance ministry had also insisted that payments
to foreign debt holders through offshore units called
special purpose vehicles (SPV) are taxable under the
existing Russian law, but this tax has not been collected
in the past.
Russian corporates, which have over $100 billion in
Eurobonds outstanding, could face a back-tax bill for $600
million, Shatalov said earlier in February. q
®
Practical International Tax Strategies 15
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New Transfer Pricing Rules in Russia
Sophisticated Controls Could Bring More Enforcement by Tax Authorities
By Dmitri V. Nikiforov, Alyona N. Kucher and Anna S. Eremina (Debevoise & Plimpton LLP)
On January 1, 2012 Federal Law No. 227-FZ (Law),
which completely revamps the Tax Code provisions on
transfer pricing, came into force. The changes replace
the previous outdated transfer pricing regulation system
with more sophisticated controls, which are widely based
on OECD Transfer Pricing Guidelines. The new rules
are expected to lead to greater enforcement by the tax
authorities; a special division was recently established
within the federal headquarters of the Russian Tax Service
in order to focus specifically on transfer pricing control
and international cooperation (TP Tax Body).
The previous Russian transfer pricing rules had been
in effect since 1999, when the Tax Code entered into
The new rules are expected to lead
to greater enforcement by the tax
authorities.
force, and were widely criticized for their incompleteness
and ineffectiveness. This was due, on the one hand, to
their vagueness which created a threat of unpredictable
tax assessments to taxpayers, and on the other hand, to
imperfections in the criteria for “relatedness” and the
lack of agreed sources of acceptable market information.
The absence of clear guidance often led to differing and
inconsistent interpretations of the transfer pricing rules
by the Russian tax authorities and courts.
The new law was adopted only after extensive
reworking by the Ministry of Finance, numerous public
discussions, and rejections of several previous bills by the
State Duma and has become one of the most noteworthy
of recent tax developments.
Dmitri V. Nikiforov (dvnikiforov@debevoise.com) and
Alyona N. Kucher (ankucher@debevoise.com) are
Partners, and Anna S. Eremina (aseremina@debevoise.
com) is an Associate, with the Moscow office of Debevoise
& Plimpton LLP. Mr. Nikiforov’s practice is focused on
venture capital transactions, mergers & acquisitions,
corporate financing and general corporate practice, and
primarily within the sectors of energy (oil and gas), natural
resources, and telecommunications. He is Chair of the
Moscow office. Ms. Kucher’s practice is concentrated
in infrastructure projects, real estate, oil and gas, and
mergers and acquisitions. Ms. Eremina’s practice is
concentrated in international and Russian tax, including tax
planning and tax implications of particular transactions.
16
Transactions in Focus
The Law generally confirms the arm’s length principle:
a transaction price may be reviewed and adjusted for tax
purposes if (i) the parties to such a transaction are deemed
related (with certain additional qualifications for parties
that are all Russian related entities, described below); or
(ii) a particular kind of transaction is specifically defined
as controlled.
Related-Party Transactions: Definition of Related
Parties Expanded
Parties may be deemed related based either on formal
criteria (i.e., the type of relation falls within the statutory
list), or if the court, at its own discretion, finds that the
parties are able to affect each other’s business operations
(so-called “judicial criterion”). (Under the previous formal
criteria, parties could be deemed related if (i) one party
directly or indirectly held more than 20 percent of the other
party’s share capital; (ii) the parties were both individuals
and have an employer-employee relationship; or (iii) the
parties were spouses or relatives under Russian family
law. In practice, these criteria excluded any relations
between sister companies, or between a company and
its management, and many other common situations
where individuals and/or entities in fact have significant
influence over each other.)
Under the new Law the general approach of referring
to both formal and judicial criteria remains the same except
that the participation threshold has been increased to 25
percent. The list of formal criteria in the previous law,
however, has been significantly expanded. As a result,
the following parties are deemed related under the new
rules:
• legal entities (or a legal entity and an individual) if
one entity (or individual) holds, directly or indirectly,
more than 25 percent of the other entity’s share capital,
as well as groups of legal entities, where more than 25
percent of each entity is directly or indirectly owned
by the same person;
• legal entities (or a legal entity and an individual,
including together with his or her spouse and certain
relatives)1 if one entity (or individual) has the right to
appoint the CEO or more than 50 percent of the board
of directors/management board of the other entity,
as well as legal entities when their CEO or more than
50 percent of their board of directors/management
board is appointed by the same person;
• legal entities where more than 50 percent of the board
of directors/management board of both entities are
(Transfer Pricing, continued on page 17)
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Transfer Pricing (from page 16)
comprised of the same individuals (attribution rules
apply for spouses and certain relatives);
• a legal entity and an individual acting as the entity’s
CEO, as well as legal entities managed by the same
person acting as CEO; and
• individuals where one is subordinate to the other
as an employee or where they may be deemed close
relatives under Russian family law.
Additional Prerequisites for Russian Related Entities
In order for the new transfer pricing rules to apply to
a transaction between related parties that are registered or
tax resident in Russia (i.e., in a non-cross-border context),
at least one of the following prerequisites must be met:
• aggregate revenue from all transactions between the
two parties in any respective calendar year exceeds
RUB 3 billion (approximately $100 million) (in
2012);2
• one of the related parties is a payer of mineral
extraction tax (MET), the transaction concerns
extracted minerals subject to a MET percentage
rate, and the revenue from transactions between
these related parties exceeds RUB 60 million in the
respective calendar year;3
• at least one of the parties enjoys a special tax regime
in the form of a Unified Agricultural Tax or Unified
Tax on Imputed Income, while at least one of the
parties does not apply either of these special regimes,
provided that the aggregate revenue received from
transactions between these related parties exceeds
RUB 100 million in the respective calendar year;4
• at least one of the parties is exempt from profits tax
or applies a 0 percent profits tax rate as a resident of
the Skolkovo Innovative Center area, while the other
party (or parties) does not apply such exemption or
such tax benefit, provided that the aggregate revenue
received from the transactions between these related
parties exceeds RUB 60 million in the respective
calendar year; or
• at least one of the parties enjoys profits tax benefits as
a resident of a special economic zone, while the other
party/parties is not resident in any special economic
zone with a beneficial profits tax regime, provided that
the aggregate revenue received from the transactions
between these related parties exceeds RUB 60 million
in the respective calendar year.5
These rules will exempt most domestic small- and
medium-scale business transactions from transfer pricing
control.
Given that Russian tax laws do not provide for
any other pricing control mechanisms, starting from
2012 Russian tax authorities should not have any
supervision powers with regard to “domestic” relatedparty transactions that do not reach these thresholds.
Other Controlled Transactions
The Law specifically includes the following transactions
as subject to transfer pricing control (even when the parties
are not deemed related as described above):
• any series of transactions effectively carried out by
related entities with the involvement of non-related
intermediaries, but which do not perform any
additional functions apart from arrangement of resale
from one related party to another;
• foreign trade in international exchange commodities:
oil and oil products, ferrous and non-ferrous metals,
mineral fertilizers, precious metals and stones,
provided that the amount of aggregate revenue
received from the transactions with the same party
exceeds RUB 60 million in the respective calendar
year; and
• any transactions with persons registered or tax
resident in jurisdictions on the so-called “black list”
of the Russian Ministry of Finance (the list currently
includes, for example, Cyprus, along with other
popular jurisdictions for holdings in Russia, such as
British Virgin Islands, Jersey and Guernsey), provided
that the amount of aggregate revenue received from
the transactions with the same party exceeds RUB 60
million in the respective calendar year.6
In addition, a court may, upon a claim filed by TP Tax
Body, rule that a transaction must be subject to transfer
pricing control if the court believes that such a transaction
belongs to a series of similar transactions undertaken to
avoid transfer pricing control.
Transactions Exempt from Transfer Pricing Control
Importantly, certain transactions are outside of
the scope of the new transfer pricing rules: some are
specifically exempt and therefore relevant prices cannot
be reviewed. Other transactions are subject to specific
rules (e.g., transactions with securities and derivatives),
and still others are not yet expressly subject to the Law
(as described below).
First, the Law provides for two types of transactions
that are expressly not subject to transfer pricing control;
both types of transactions relate to the specific status of the
parties. Exempt from control are (i) transactions between
parties that belong to the same consolidated group
of taxpayers,7 and (ii) transactions between profitable
parties that are registered in the same region of Russia,
act exclusively within this region and pay profits tax (in
its regional portion) only to the relevant budget, provided
that they do not apply any exemptions and special tax
regimes or are not subject to MET (as described above).
According to the Law, with regard to these transactions
Russian tax authorities have no power to review or revise
relevant prices.
Second, transactions with securities or financial
instruments (derivatives) are still regulated by specific
transfer pricing rules enacted in 2010 (which remain in
(Transfer Pricing, continued on page 18)
February 29, 2012
®
Practical International Tax Strategies 17
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Transfer Pricing (from page 17)
force); the amendments in the Law do not cover any
specific issues associated with the sale of securities. At
the same time, it is unclear but still possible that parties
to securities and derivative transactions are now required
to adhere to the new tax administration connected to the
new transfer pricing rules (including reporting and audits,
as described below).
Notably, under the common treatment (that was in the
past supported by the Ministry of Finance, tax authorities
and courts) the previous transfer pricing rules did not
apply to transactions with proprietary rights, such as
shares in Russian limited liability companies, and could
not be applied to royalties and interest. However, under
the Law these transactions are not expressly exempt
from transfer pricing control. When commenting on the
Law, representatives of the Russian Ministry of Finance
expressed their view that the new rules should also make
these types of transactions subject to transfer pricing
control, and it is expected that relevant amendments to
the Law will be soon initiated.
Adjustment of Price
Prices set in transactions between unrelated parties
and other transactions not subject to transfer pricing
control are presumed to be at a market level. For relatedparty and other controlled transactions prices can be
compared to the market level and, if necessary, re-assessed
by the TP Tax Body (but not by the local tax inspectorate)
for the purposes of the following taxes:
• Russian profits tax;
• personal income tax payable by individual
entrepreneurs, notaries, advocates and other individual
practitioners;
• MET (if one of the parties is a MET payer and the
transaction deals with minerals that are subject to a
MET percentage rate);
• value added tax (VAT) chargeable on transactions
where one party is a person exempt from VAT.
Under the new law, income received other than at an
arm’s length basis can be re-assessed only if this leads to
an increase in tax liability (except for adjustments made
as a result of a corresponding adjustment). This provision
conflicts with Art. 9 of the OECD Model Tax Treaty and
similar provisions in tax treaties entered into by Russia. As
of yet, the Russian Tax Administration has not indicated
how it will deal with this conflict.
Before the enactment of new transfer pricing rules
the tax authorities were tasked with determining whether
the actual price deviated from the market level by more
than 20 percent (if the difference was less than 20 percent
no pricing adjustment was permissible). From 2012,
this rule has been abolished, and the TP Tax Body is
required to compare the reviewed transaction with one
or more comparable non-related-party transactions.
In making its determination the TP Tax Body can use
a range of five different methods (separately or in any
combination) of recalculating the price, three of which
(using the comparable market prices, transactional net
margin method and profits split method) are new and are
available along with the previously used resale minus and
cost plus methods. In any event, the comparable market
prices method should be given priority.
Comparability of Transactions
The Law provides for numerous criteria that must be
taken into account when determining the comparability
of transactions. For example, it is necessary to consider
the characteristics of the goods, the functions performed
by the parties, as well as their possessions, commercial
strategies and risks taken. The terms and conditions of
the contracts in question, as well as the nature and any
peculiarities of the relevant markets should also be taken
into account.
Information About Market Prices
In contrast with the previous transfer pricing rules, the
Law introduces a list of public information sources that can
be officially used by TP Tax Bodies to compare the price in
question with the applicable market price. The list includes
quotations of Russian and foreign stock exchanges, foreign
trade customs statistics, information officially published
by Russian and foreign state authorities and provided
by information and price assessment agencies. The tax
authorities can also use information on prices that was
previously used by the audited taxpayer. This list of
sources is non-exhaustive but the authorities are not
allowed to use any confidential information, apart from
information concerning the audited taxpayer itself and its
transactions with related parties.
Under the Law, it is the TP Tax Body that is required
to prove that a price is not at a market level; at the same
time, taxpayers remain responsible for their transfer
pricing reporting and calculations.
Prices Presumed to be at Arm’s Length
According to the new rules, certain prices are
presumed to be at a market level:
• prices prescribed by antitrust authorities and other
state regulated prices (if they fall within specifically
established limits);
• prices set as a result of exchange auctions at Russian
and foreign stock exchanges;
• the value of the property that is the subject of the
transaction as determined in the course of the
independent appraisal (when such appraisal is
mandatory); and
• prices determined in accordance with an advance
pricing agreement (see below).
(Transfer Pricing, continued on page 19)
18
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Transfer Pricing (from page 18)
Tax Administration
The TP Tax Body is the authority exclusively
empowered to perform transfer pricing control by
conducting specific transfer pricing audits (TP Audits)
that will take place along with regular field and desk tax
audits conducted by local tax inspectorates.
If as a result of a TP Audit the TP Tax Body
discovers any deviations from market level that lead to
underpayment of tax, it is supposed to issue an act to
summarize the findings and justification thereof. The
taxpayer may then file a letter of disagreement.
In order to collect taxes assessed as a result of a TP
Audit as described above, the TP Tax Body must apply
to a court.
Reporting Requirements8
No later than May 20 of each year, a taxpayer is
required to notify its local tax inspectorate about any
related-party or other controlled transactions (as described
above) performed in the previous calendar year (the
statutory form of such notification is yet to be approved).
The local tax inspectorate must pass this information on
to the TP Tax Body, together with any similar information
revealed in the course of ordinary tax audits.
In addition to self-reporting duties, at the request of
the TP Tax Body a taxpayer must provide information
about particular transactions (or series of transactions),
its counterparties (with indication of their tax residency,
role in the transactions, used assets, risks taken, etc.), the
terms and conditions, as well as pricing methods used by
the taxpayer and adjustments of tax base. The TP Tax Body
can request this information no earlier than June 1 of the
year following the year when the transaction in question
took place. The TP Tax Body is not entitled to request
any documents concerning (i) transactions that are not
related party or not otherwise controlled, (ii) prices that
are state regulated or prescribed by antitrust authorities,
(iii) transactions with securities or financial instruments
quoted on a stock exchange, (iv) transactions regulated
by pricing agreements.
Failure to comply with the above reporting
requirements can lead to a fine of RUB 5,000.
Corresponding Adjustments
The Law introduces the right to corresponding
adjustments: namely, if the TP Tax Body discovers any
underpayment of tax and the audited party discharges
the underpayment, other parties to the transaction in
question that are Russian taxpayers can also adjust
their tax liabilities accordingly. The TP Tax Body is
required to notify other parties about such possibility.
Transfer Pricing Audits9
A decision to conduct a TP Audit must be issued no
later than two years after the taxpayer is notified; the
review period for a TP Audit cannot exceed three years
prior to the year of the audit (i.e., the year when a decision
to undertake the audit is made). Repetitive TP Audits (i.e.,
second transfer pricing audits concerning same transaction
[or series of transactions] and the same calendar year) are
not allowed. Moreover, once a TP Audit is performed with
regard to one party to a transaction (or series of similar
transactions) and the prices are found to be at a market
level, other parties to such transactions cannot be subject
to a separate TP Audit. A standard TP Audit will last
no more than six months (other than exceptional cases
where it can possibly be extended to nine months). It is
remarkable that the TP Tax Body has significantly less
power than a local tax inspectorate performing a regular
tax audit; for example, the TP Tax Body cannot examine
a taxpayer’s premises or seize documents.
Advance Pricing Agreements
Advance pricing agreements (APA) are a new concept
for Russian taxpayers. Starting from 2012 Russian legal
entities that are “major taxpayers” have an opportunity
to enter into APAs with the TP Tax Body (represented by
its head or deputy head) and thus to agree on the pricing
methods applicable to a related-party or other controlled
transaction (or series of transactions) as well as on the
sources of information on market prices. If the taxpayer
plans to enter into a foreign trade transaction with a
resident of any country that is a party to a double tax
treaty with Russia, it can apply to the TP Tax Body with
a request to enter into an APA with an authorized body
of such a treaty country. A multilateral APA can also be
concluded with a group of related entities that plan to
enter into similar controlled transactions; in such cases
the APA applies to all such related entities. An APA can
be concluded for three years and possibly be extended
for no more than two years. In order for the TP Tax Body
The new rules exempt most domestic
small- and medium-scale business
transactions from transfer pricing
control.
Adjustments can be made within the limits indicated in the
relevant notification (provided that the figures set in the
notification are the same as those in the decision to charge
underpayment). If the decision to charge underpayment is
revoked or changed, the other parties are also required to
reverse the corresponding adjustments. The Law does not
provide for the right to make corresponding adjustments
if the principal adjustment is made as a result of the
taxpayer itself proactively adjusting the transfer pricing
as distinct from the TP Tax Body requiring and making
such adjustments.
(Transfer Pricing, continued on page 20)
February 29, 2012
®
Practical International Tax Strategies 19
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Transfer Pricing (from page 19)
to consider an application for conclusion of an APA, a
taxpayer must pay a fixed state duty in the amount of
RUB 1.5 million.
As mentioned before, prices agreed on in the APAs
are presumed to be at arm’s length. If a taxpayer complies
with APA provisions, it cannot be charged with any
underpayments, fines or late payment interest. In addition,
the TP Tax Body is not entitled to request any documents
relating to transactions entered into in accordance with the
conditions set forth in an APA. Taxpayers that are parties
to an APA are guaranteed that the agreed pricing methods
will remain in effect regardless of any changes in Russian
tax laws. Nonetheless, the APAs may not become a very
popular tool, since they are available only to a small range
of Russian legal entities and cannot be quickly entered
into. TP Tax Bodies have six months to consider every
application for APA conclusion, and any APA can enter
into force no earlier than January 1 of the year following
the execution thereof. In addition, the TP Tax Body has
the right to terminate any APA if it believes that the terms
of the APA were breached and that led to underpayment
of tax.
period: in 2012-2013 fines will not be applicable at all, and
in 2014-2016 fines will amount to 20 percent. A taxpayer
will be relieved of fines if it provides the TP Tax Body
with documents justifying its transaction pricing and
proving its compliance with the methods provided for
in the Tax Code. Therefore, transfer pricing monitoring
and compliance and transfer pricing documentation are
expected to become more relevant in Russia like it has
in many other countries to avoid the imposition of stiff
penalties.
__________
Such relatives include parents, children, siblings and legal
guardians.
2
According to the Law, a threshold of RUB 3 billion is set forth
for 2012; for 2013 it is set at RUB 2 billion, and starting from
2014 RUB 1 billion.
3
In order to determine the aggregate annual revenue the TP
Tax Body is entitled to examine all revenue received within the
calendar year from the transfer pricing perspective.
4
This additional prerequisite will become applicable starting
from 2014.
5
This additional prerequisite will become applicable starting
from 2014.
6
The “black list” was ratified by the Order of the Ministry of
Finance No. 108h, dated November 13, 2007, as amended, and
includes 42 low-tax jurisdictions that do not require the disclosure
and provision of information on financial operations.
Penalties
7
The concept of consolidated group of taxpayers was enacted
Starting in 2017, any underpayment of taxes resulting together with the new transfer pricing rules: at the end of
from transfer pricing will be subject to a fine amounting November the President signed into law No. 321-FZ (Law
to 40 percent of such underpayment (but in any event On Tax Consolidation) to amend the Tax Code with relevant
no less than RUB 30,000) and applicable late payment special provisions. According to this Law, consolidation for tax
interest. Before that, the Law provides for a transition purposes is available only for Russian companies with intercompany participation of 90 percent or more, consolidated group
revenues of no less than RUB 100 billion,
consolidated taxes of no less than RUB 15
billion, and consolidated asset value of
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section will apply in 2012 if the aggregate
annual income from related-party or other
Name
controlled transactions with the same
Company
counterparty exceeds RUB 100 million; in
order for these requirements to apply in
Address
2013 such amount must exceed RUB 80
million; starting from 2014 they will apply
City
without limitations.
9
State/Country/Zip
For the year 2012 tax audits addressed in
this section will apply to taxpayers whose
Telephone/Fax
aggregate annual income from relatedparty or other controlled transactions with
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the same counterparty exceed RUB 100
million; in 2013 such amount must exceed
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