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In recent months, a virus COVID-19 has broken out in many countries on the globe, which caused huge losses to countries and enterprises. As many firms declared difficulties in their cash flows, some upcoming tax burdens also become an issue in need of a provisional solution allowing firms to survive this unprecedented period. The OECD has quickly published a set of guidance to tax authorities last month to help with establishing provisional measures countering negative impacts brought by the COVID-19. This guidance is meant to assist countries dealing with this sudden outbreak, providing supports to the public, increasing liquidity of firms and thus maintaining productivity of each economy as much as possible.

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The guidance can be summarised into the following key recommendations:

1.  Authorities should provide temporary relief or subsidies to individuals and labourers domestically, including groups which are not eligible to receive such benefits in normal conditions due to the special circumstance of COVID-19.
2.  Provide exemptions or deferrals of taxation on social securities and income tax on enterprises and sole proprietorships.
3. Provide tax benefits to medical personnel and staff working closely with virus preventions, for instance, exempting partial income tax and social security contributions.
4.  Apply deferral schedules on levying import VAT, customs duty, consumption tax and the like while safeguarding and enhancing the management of such schedules to avoid any abuse.
5.  Expedite tax returns on VAT, target on prevention of tax fraud, and simplify procedures on application for VAT exemptions on bad debt.
6.  Adjust expected tax estimates on taxpayers to reflect taxpayer obligations more accurately and adjust the prepayment of such taxes accordingly.
7.  Grant deferrals or exemptions to taxes of which the tax bases are not changing according to economic cycles.
8. Enact generous rules on carry-over losses.
9. Allow employers to pay workers with partial employment subsidies or other substitutive incomes to ease the pressure of staff trimming.
10. Countries should stay prepared for post-pandemic economic recovery, in particular maintaining a balance between fiscal incentives and stabilizing measures.

OECD further pointed out that the focus of taxation management policy has shifted to implementing more traditional tax incentives, the purpose is to restore market faith and encourage economic activities. The current economic hibernation could effectually help everyone and every country to survive such a down-turn caused by the outbreak of COVID-19. Recovery in economy can be expected but it could take some time. In post-pandemic recovery, a balance between incentives and stability is actively sought with discretion in each country. If you would like to know more about OECD obligations on enterprises or wish to see some relief benefits on your company, talk to us!

Global Connect Admin B.V. | Xuan Hao

On 11^th February, OECD has published a new guidance on transferring pricing, the Transfer Pricing Guidance on Financial Transactions, which was a new development under the BEPS Action Plans, specifically under Actions 4 and 8-10. It signifies the first attempt to update the existing OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations for further specification of transfer pricing in financial transactions to improving efficiency and consistency of applying transfer pricing principles and preventing both disputes and double taxation.

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Transfer Pricing refers to the behaviours typically found in intra-group trade within multinational enterprises (MNEs) to allocate costs and profits to more favourable tax jurisdictions for tax avoidance purposes. Transfer Pricing Principle is better known by the term arm’s length principle, which refers to a rule that the price of the goods or services traded within one MNE between different entities located in different tax jurisdictions should be determined as if they are independently functioning companies in the market. If prices can be freely decided between group subsidiaries or affiliated companies, market distortion or monopoly can be easily achieved by MNEs or such groups holding dominant market shares by means of profit shifting and tax evasion.

Here is a simplified overview of new contents in this new guidance. Actions 4 and 8-10 of BEPS Action Plans talk about interest deduction limitations, intangibles, risks & capital, and high-risk transaction respectively. Transfer Pricing Guidance on Financial Transactions being part of the Inclusive Framework on BEPS regarding these Actions has provided for more clarity in section B on the application of the accurate delineation analysis to capital structure of an MNE within an MNE group. Meanwhile it is also made clear that this section does not prevent countries from implementing domestic measures to address capital structure and interest deductibility. Other clarifications include outlining economically relevant characteristics for analysing terms and conditions of financial transactions, such as contractual clauses, functionality analysis, characteristics of financial instrument, economic environment and operational strategies. Sections C-E has addressed specific issues in relation to the pricing of financial transactions, include but not limited to treasury functions, intra-group loans, cash pooling, hedging, guarantees and captive insurance, which are highly elaborative on both the accurate delineation and the pricing of the controlled financial transactions. Section F, as the last part of the main body, provides for determinations of a risk-free rate of return and a risk-adjusted rate of return. This guidance is annexed into the OECD Transfer Pricing Guidelines as Chapter X in entirety with adjusted numbering.

For many, OECD rules and BEPS updates are of high relevance due to boosting trade between MNE groups and affiliated companies. Stay on top of news and seek professional assistance are always helpful to avoid the avoidable and keep your business as stable as possible. We are always here to hear your needs.

Global Connect Admin B.V. | Xuan Hao