Anti-avoidance: How Officials Can Establish Trust with Taxpayers 8-9 May 2013 Chair: Leon Kwong Wing – Taxand Singapore Panelists: Stewart Grieve – Taxand

Anti-avoidance:How Officials Can Establish Trust with Taxpayers

8-9 May 2013

Chair: Leon Kwong Wing – Taxand SingaporePanelists:

Stewart Grieve – Taxand Australia Manish Bhatra – GE India Li Ying - Siemens

1. Changes to Australian GAAR: How Taxpayers should Adapt

2. Anti-Avoidance Rules in India: Evolution & State of the GAAR

3. TP Audits in China: Appropriate Consideration of TP - Another Approach to Addressing Avoidance

4. Taxand’s Take

5. Key Contacts & About Taxand

Contents

Changes to the Australian GAARStewart Grieve, Taxand Australia

8-9 May 2013

Changes to the Australian GAAR: How Taxpayers should Adapt

Changes to the Australian GAAR1

Architecture of the Australian GAAR

Pre-2010 Administration and Jurisprudence

Recent Administration and Jurisprudence

The Government’s GAAR Announcements

Legislative Changes to the Australian GAAR

Taxand’s Take on How Taxpayers should Adapt

Changes to the Australian GAAR1 Changes to the Australian GAAR: How Taxpayers should Adapt

Architecture of the Australian GAAR

Scheme - defined broadly but still important in analysis

Tax benefit - a defined tax advantage where the advantage would not have been obtained, or it is reasonable to conclude that it would not have been obtained, but for the scheme

Dominant purpose - having regard to 8 factors, it must be concluded that a person entered into a part or the whole of the scheme for the sole or main purpose of the taxpayer obtaining the tax benefit


Pre-2010 Administration and Jurisprudence

Current GAAR (Part IVA) introduced in 1981

Understanding of scope of the GAAR evolved slowly as cases came before the courts

Administrative control over application of the GAAR by the ATO’s GAAR Panel

The Commissioner largely successful in High Court cases

Generally thought that the technical aspects of the application of the GAAR were largely settled after Hart’s case



The Commissioner prepared to apply the GAAR to a broad range of business transactions and arrangements

Successful application of the GAAR where:

The commercial viability of scheme was dependent on tax treatment – Citigroup

There was a step in, or aspect of, the transaction not capable of commercial explanation – BAT

Changes to the Australian GAARChanges to the Australian GAAR: How Taxpayers should Adapt1


Unsuccessful application of the GAAR where:

All steps/aspects of the transaction capable of explanation by reference to commercial exigencies – BHP, Ashwick, RCI

The most reasonable alternative course of action to the scheme produced a tax advantage at least as great as the advantage under the scheme – AXA, RCI, Futuris

Changes to the Australian GAARChanges to the Australian GAAR: How Taxpayers should Adapt

Case DateATO

win/lossCourt

1 BHP Billiton 17 March 2010 Loss Full Federal

2 News Australia Holdings 30 June 2010 Loss Full Federal

3 Trail Bros Steel & Plastics 29 July 2010 Win Full Federal

4British American Tobacco

Australia10 November 2010 Win Full Federal

5 Axa Asia Pacific 18 November 2010 Loss Full Federal

6 Noza Holdings 4 February 2011 Loss Federal

7 Ashwick (Qld) No. 127 8 April 2011 Loss Full Federal

8 Citigroup 10 May 2011 Win Full Federal

9 RCI 22 August 2011 Loss Full Federal

10 Futuris Corporation 18 March 2012 Loss Full Federal

11 Mills 14 November 2012 Loss High Court

12 Macquarie Bank 15 February 2013 Loss Full Federal

1


Litigation Scorecard



September 2011 – Commissioner passes comment on the Courts’ approach to the GAAR

1 March 2012 – Assistant Treasurer announces that Government will act to protect the integrity of Australia’s tax system by amending the GAAR

8 May 2012 – Federal Budget announcement that Government will amend the GAAR to clarify:

the circumstances in which a taxpayer obtains a ‘tax benefit’ in connection with a scheme; and

that the GAAR applies to steps within broader commercial arrangements, implemented in a way to avoid tax



15 May 2012 – Government announces the creation of expert roundtable to assist with reforms

16 November 2012 – Exposure Draft legislation released for comment

13 February 2013 – Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013 introduced



Formulating the alternative postulate

Identification of two alternative bases for demonstrating the existence of a tax benefit

The “Annihilation Approach”

The “Reconstruction Approach”



Nature of inquiry permitted in determining whether a postulate is a reasonable alternative

Have particular regard to the substance of the scheme and any result or consequence for the taxpayer (other than an Australian income tax consequence)

Disregard Australian income tax results achieved by the postulate for any person

Primacy of the dominant purpose test

16 November 2012 start date


Taxand’s Take on how Taxpayers should Adapt

Commissioner likely to continue to apply the GAAR to commercial transactions that result in an Australian tax advantage and taxpayers should prepare their defences now


Taxand’s Take on how Taxpayers should Adapt

Changes to the way in which the alternative postulate is framed:

Tax outcomes and third party commercial consequences are to be ignored

For schemes involving deductions or capital losses, the Annihilation Approach leads to a tax benefit; however, annihilation not appropriate in all circumstances

The Reconstruction Approach will need to be taken in many cases and the analysis will not be straight forward


Taxand’s Take on how taxpayers should adapt

Most GAAR cases will be decided by an application of the dominant purpose test

However, the reasonable alternative postulate retains an important role in the GAAR analysis

Judicial clarification of the new provisions may take many years

Anti-Avoidance Rules in India: Evolution & State of the GAARManish Bhatra, GE India

8-9 May 2013

GAAR in India Effective 2015Anti-Avoidance Rules in India: Evolution & State of the GAAR2

Evolution of GAAR

Key aspects

Over-reach … “main purpose test”

Independence in administration

Grandfathering

Regional Holding Companies

Corresponding adjustments

Withholding tax

Impact on business… and on the Revenue

Evolution of GAARAnti-Avoidance Rules in India: Evolution & State of the GAAR2

August 2009 GAAR proposed in Direct Taxes Code (or DTC) 2009

June 2010 Revised Discussion Paper on DTC… Safeguards proposed in GAAR

August 2010 DTC 2010 … GAAR remains mostly unchanged from 2009

February 2012 Govt. appoints Tax Deptt. led Expert Committee to review GAAR

March 2012 Parliamentary Committee report on DTC 2010 … proposes relief

April 2012 GAAR introduced in Income Tax Act, 1961 effective April 2012

May 2012 GAAR deferred to April 2013

June 2012 Tax Deptt. led Expert Committee submits report … proposes relief

July 2012 Govt. appoints Independent Expert Committee to review GAAR

September 2012 Independent Expert Committee submits DRAFT AND FINAL reports

January 2013 Finance Minister statement … Independent Expert Committee report partially accepted … GAAR deferred to April 2015

2013/ 14 ?? GAAR Guidelines to give effect to Finance Minister statement

Long … but a fairly consultative process

Fin

ance M

iniste

r… P

rana

b M

ukh

erjee

Fin

ance M

iniste

r…

P C

hid

am

ba

ram

GAAR Over-reachAnti-Avoidance Rules in India: Evolution & State of the GAAR2

Issue… “An impermissible avoidance arrangement means an arrangement, the main purpose or one of the main purposes of which is to obtain a tax benefit, and …”

Ask … Limit tax benefit test only to main purpose … consistent with South Africa, China, Australia, Draft Direct Tax Code

Response … Finance Minister (2013) – “An arrangement, the main purpose of which is to obtain a tax benefit, would be considered as an impermissible avoidance arrangement … ”

Consistent with international GAAR rules … GAAR Guidelines & Examples critical

IndependenceAnti-Avoidance Rules in India: Evolution & State of the GAAR2

Issue…A) Approving Panel invoking GAAR consisted of three members; 2 from Revenue & 1 from Legal Services

B) Advance Ruling not possible for GAAR

Ask … Independence of approving panel + advance rulings

Response …A) Approving Panel… 3 members; Chairperson - Judge of a High Court; 1 member - Revenue; and 1 member – Independent academician in tax, business accounts, international trade, etc

B) Section 245N(a)(iv) … Advance Rulings allowed

Framework should reduce Revenue bias

GrandfatheringAnti-Avoidance Rules in India: Evolution & State of the GAAR2

Issue…“The provisions of GAAR will apply to income accruing or arising to taxpayers on or after 01.04.2015”

Ask … Grandfather investments made prior to GAAR

Response … Finance Minister (2013) - “Investments made before August 30, 2010, the date of introduction of Direct Taxes Code, Bill, 2010, will be grandfathered"

Grandfather investments made prior to GAAR

Singapore Hold Co

India Co

Outside India

India

3rd Party US Co

2012 - Investment of $200

2016 - Sale of India Co shares for

$500

UK Co

Regional Holding Co.s – Example Needed in GAAR Guidelines

Anti-Avoidance Rules in India: Evolution & State of the GAAR2

More examples … more certainty

Outside India

India

Singapore Co

Chinese CoIndia CoJapan Co

US CoSale of India Co shares to UK Co

UK Co Singapore Co

India Co 3India Co 2India Co 1

US CoSale of India Co 2 shares to UK Co

UK Co

Why Holding Co

Efficient holding platform for AsiaEfficient treasury managementOptimise US taxes

Why Singapore Ease of doing businessStability of lawsTreaty network

GAAR Tax Mitigation ?

Corresponding Adjustment to Counter-PartyAnti-Avoidance Rules in India: Evolution & State of the GAAR2

Dutch Co

India Co

Outside India

IndiaCCD

Compulsorily Convertible Debt (CCD)

5 years tenorRupee denominated10% coupon rate; payment only if

India Co earns profitConvertible into equity

Dutch Co Interest taxable @ 20% or 10% per treaty

India Co Deduction of interest

Tax Authorities (a) India Co – EQUITY … No deduction of interest + DDT @ ~16%

(b) Dutch Co – DEBT … Taxable as interest(c) Dutch Co … Tax on conversion & subsequent

sale?

Corresponding adjustment Consistency + No double tax

Withholding Tax (WHT)Anti-Avoidance Rules in India: Evolution & State of the GAAR2

Issue… Payers to examine GAAR at tax withholding stage

A) Inadequate access to information to make judgment

B) Exposes payer to penalties, if GAAR invoked

C) Risk of delays in cross-border remittances

Ask… No GAAR review at WHT stage, but during audit of income earner Leverage other mechanisms under current law to collect tax

Response … Expert Committee (2012) … exempts GAAR at WHT stage provided indemnity furnished to Revenue // FM Statement (2013) … no comment

Help simplify business … Limit tax dominance during contract negotiations … PE & Tax Clause are enough distractions

Impact on Business… & on the RevenueAnti-Avoidance Rules in India: Evolution & State of the GAAR2

Business

Business / deal decisions on pre-tax basis

FIN 48 … booking tax benefits in financial statements

Tougher negotiations with customers … e.g. split contracts

Certainty at withholding tax level ?

Delays in doing business … e.g. LCs

Litigation … e.g. transfer pricing & international tax

GAAR Guidelines & Implementation will be key

Impact on Business… & on the RevenueAnti-Avoidance Rules in India: Evolution & State of the GAAR2

Revenue Administration

Quality … investment in training

Quantity … more resources to do justice to new law

Strengthen withholding tax machinery

Continued guidance on positive examples

Invest in independence of Approving Panels

GAAR Guidelines & Implementation will be key

TP Audits in China: Appropriate Consideration of TP - Another Approach to Addressing AvoidanceLi Ying, Siemens

8-9 May 2013

293

Audit Case SelectionTP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance

• Profitability does not commensurate with FRA

• Loss making• Fluctuating profit• Profit lower than industry level

• Tax annual filing• TP documentation

303

Audit Case SelectionTP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance

Tax Authority’s Practices

313

Case ITP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance

• Production line transferred from JV to a local 3rd party

• Local 3rd party sells products to Canada HQ

• Local 3rd party’s selling price is 15% lower than JV’s selling price, BUT is still profitable.

49% 15% 51% 85%

323

Case ITP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance

Relatively long start up stage

Higher expenditure on Training

Force majeure impacts, e.g. 911, SAS

Operating margin lower than 3%

Toll manufacturer

Simple function shall not incur loss

2000 as the 1st profit making year

Operating margin higher than 5%

Audit process lasted for 3 years

2001-2008 taxable income adjusted up by 107mil RMB

JV’s OM should be above 5% in future

Taxpayer Tax bureau

333

Case IITP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance

343


Tax Bureau

Marketing Intangible

Lasted for more than 1 year

Residual profit split

Taxable income adjusted up by 116mil RMB Overall operating margin around 13.4%

353


WOFE

Japan

China70% purchases 90% sales

Commission fee

End Customer

End Customer

10% sales

WOFE

Manufacturer in Cosmetics Industry

363

Case IIITP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance

WOFE

373

Case IIITP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance

Global financial crisis since 2008

Foreign exchange fluctuation

Rapid increase of labor cost

Underutilized production capacity

Favorable CIT policy ended

Revenue increased from 2001 – 2011

Stable revenue annual growth rate

Overloaded operation of equipments

Simple function entity

Audit process lasted for around 2 years

Taxable income adjusted up by 47 mil RMB

Adjustment based on TNMM (median of benchmarking study)

Taxpayer Tax bureau

383

Case IVTP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance

• 30% export• license & trademark fee

70% export

Overseas

China

RPsRPs100% domestic sales

393

Case IVTP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance

Global financial crisis in 2008

Underutilized production capacity

Increased material price

Market demand shrinkage

Decreased selling price

Revenue increased in 2008

Simple function should not incur loss

Audit process lasted for around 2 years

Taxable income adjusted up by 64mil RMB

Adjustment based on External CUP

Taxpayer Tax bureau

403

Case VTP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance

Royalty payment

Asset deal Merge

Overseas

China

Dec 31, 2003: • Goodwill for 200 mil RMB transferred from B • Yearly amortization of 20 milFeb, 2004• B merged into A

5 years

G&A expense/turnover >= 5%

•1% royalty payment to HQ: 200 million for 5 years • 20 million amortized per year: 100 million for 5 years

413

Case VTP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance

Audit process lasted for about 2 years

Amortization of goodwill for 200mil nondeductible

Taxable income adjusted up by 198 mil RMB (Operating margin has been adjusted up

by about 4%)

Adjustment based on TNMM

Tax Authority

423

Case VITP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance

HQ A

products

Business restructuring in 1995

Overseas

Guangzhou

BDistributor

Established in 1987

CManufacturer

Established in 1995

End Customer

products

TP Method

1996-2003: mark up on direct costs2004 afterwards: mark up on fully loaded costs

433


1995• Release of “Provisional Regulations of the People's Republic of China on Consumption Tax”• Manufacturing function transferred from B to C

1995• Release of “Provisional Regulations of the People's Republic of China on Consumption Tax”• Manufacturing function transferred from B to C

1996-2003• Pricing for products sold by C to B is based on C’s direct costs1996-2003• Pricing for products sold by C to B is based on C’s direct costs

2004-2009• Pricing for products sold by C to B is based on C’s fully loaded costs2004-2009• Pricing for products sold by C to B is based on C’s fully loaded costs

Favorable CIT policy for

C: 2+3

443


Audit process lasted for about 2 years

Taxable income adjusted up by 250mil RMB

Consumption tax and VAT adjusted as well

Adjustment based on TNMM

Tax Authority

Consumption tax decreased

by 60%

CIT avoidance for 04 and 05 is 10 mil on group level

453

Thank YouTP Audits in China: Appropriate Consideration of TP – Another Approach to Addressing Avoidance

Thank you!

Taxand’s Take

8-9 May 2013

Taxand’s Take474 Taxand’s Take

Transfer prices are fundamental yet elusive quantities

Attention must first be given to “ordinary” issues like sham, substance, deductibility, beneficial ownership and transfer prices

The GAAR scorecard is mixed

GAAR is the first resort of the maladroit

Be prepared to hang on to the right to make commercial decisions

Key Contacts Key Contacts & About Taxand 485

Leon Kwong WingTaxand SingaporeE. [email protected]. +65 6238 3018

Li YingSiemensE. [email protected]

Stewart GrieveTaxand AustraliaE. [email protected]. +61 3 9672 3443

Manish BhatraGE IndiaE. [email protected]

http://www.taxand.com/events

Understanding and managing the tax consequences of cross-border tax transactions

Considering organisational (re)structuring options in full awareness of the tax implications

Realising tax, supply chain and overall operational efficiencies

Interpreting technical tax provisions

Our Global Service Commitment495 Key Contacts & About Taxand

Lowering effective tax ratesAddressing and preventing tax leakagesEnsuring tax complianceManaging relationships with tax authorities

Global CoverageKey Contacts & About Taxand 505

From 9 to 48 countries in just 7 years

59 ITR awards won since 2009

95% recommended in World Tax 2012

Argentina Ireland Puerto Rico

Australia Italy Romania

Austria Japan Russia

Belgium Korea Singapore

Brazil Luxembourg South Africa

Canada Malaysia Spain

Chile Malta Sweden

China Mauritius Switzerland

Colombia Mexico Thailand

Cyprus Netherlands Turkey

Denmark Norway UK

Finland Pakistan Ukraine

France Panama USA

Germany Peru Venezuela

Greece Philippines

India Poland

Indonesia Portugal

Dedicated to tax

Independence advantage – conflict free, un-bureaucratic, best practice

Local knowledge, global view

Partner led from start to finish

Complex problems, customised advice

Passionate about working together

Practical advice, responsively delivered

Why Taxand?515 Key Contacts & About Taxand

ABOUT TAXAND

Taxand provides high quality, integrated tax advice worldwide. Our tax professionals, more than 400 tax partners and over 2,000 tax advisors in nearly 50 countries - grasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business.

We're passionate about tax. We collaborate and share knowledge, capitalising on our expertise to provide you with high quality, tailored advice that helps relieve the pressures associated with making complex tax decisions.

We're also independent—ensuring that you adhere both to best practice and to tax law and that we remain free from time-consuming audit-based conflict checks. This enables us to deliver practical advice, responsively.

Taxand is a global organisation of tax advisory firms. Each firm in each country is a separate and independent legal entity responsible for delivering client services.

© Copyright Taxand Economic Interest Grouping 2013Registered office: 1B Heienhaff, L-1736 Senningerberg – RCS Luxembourg C68

Documents

Anti-avoidance: How Officials Can Establish Trust with Taxpayers 8-9 May 2013 Chair: Leon Kwong Wing – Taxand Singapore Panelists: Stewart Grieve – Taxand