Headline Verdana Bold International Tax matters ICPAU Tax Seminar, Hotel Africana November, 2017
Contents Related party transactions 3 URA practice on international tax 14 OCED Action Plan on BEPS 30 2017 Deloitte & Touche 2
Related party transactions 2017 Deloitte (Uganda) Limited
Who is a related party Reporting purposes Financial reporting IAS 24.9: A related party is a person or entity that is related to the entity that is preparing its financial statements (referred to as the 'reporting entity') Tax purposes Income Tax (ITA, Cap. 340) Section 2(e) and 3 Parent company Subsidiaries Associates of entity and other group companies Value Added Tax (VATA, Cap. 349) Section 3 4 4
Related party transactions Taxing triggers Income sourced in Uganda (International payments) Dividends Interest Management/ Technical fees Recharges for costs incurred Creation of PE (Branch) Foreign entity carrying on business in Uganda Transfer Pricing Abuse of principle of arm s length pricing for related party transactions 5 5
International tax
International Tax planning US/UK Parent Dividends Preferential regime Intangibles owner Low Tax Subsidiary Holding company License/ financing/ service agreement Low or no WHT Dividends/ Interest/ Management fees High Tax Market or production country UG subsidiary Operating company Maximize deductions 2017 Deloitte (Uganda) Limited
Use of Tax treaties Reduced rates and exemption Double tax agreements (DTAs) Meant to protect against double taxation i.e Determine who has taxing rights If both, then allow for a credit or deduction of tax suffered Uganda currently has 9 DTAS Country Dividends Interest Royalty Mgt fees 8 Denmark 10% 10% 10% 10% India 10% 10% 10% 10% Italy 10% 10% 10% 10% Mauritius 10% 10% 10% 10% Netherlands 10% 10% 10% 10% Norway 10% 10% 10% 10% South Africa 10% 10% 10% 10% UK 15% 15% 15% 15% 8
Use of Tax treaties Interaction with Domestic Law DTA terms take precedence over domestic law Section 88(5): Anti treaty shopping provisions Beneficial ownership Beneficial ownership has a treaty contextual meaning, not a domestic meaning right to use and enjoy the income unconstrained by contractual or legal obligation to pass the payment on to another person or other facts and circumstances showing that, in substance, the recipient clearly does not have said right The obligation to pass on the income must be related to the payment received (mere use to satisfy other obligations not enough) Substance tests Thin capitalization rule: 1.5:1 (Debt to equity ratio) 9 9
Creation of Permanent Establishment (Branch)
Carrying on business in Uganda Branch Carrying on business Agent other than independent agent Installing equipment/substantial equipment for 90 days Construction, assembly, installation for 90 days Services for a project for 90 days Permanent Establishment (PE) Carrying on business through a fixed place of business Basic Rule (physical) PE Construction PE Agency PE (ability to conclude contracts) 1 1 11
Carrying on business in Uganda Avoiding creation of a PE Use PE exclusions (e.g. warehouse, display) Independent agents Fragmentation of operations among various group entities Result: despite significant sales, low taxation 1 2 12
Planning around PE legislation US/UK Parent Buy-in payments Intangibles owner Transfer of intangibles and other value drivers Low Tax Subsidiary Contracts with customers Uganda Services Customers Local buy/sell distributor agent Avoid Taxable Presence 2017 Deloitte (Uganda) Limited
URA practice on International tax 2017 Deloitte (Uganda) Limited
Transfer Pricing
URA s Expectations on TP compliance A. Documentation requirements B. Compliance Initiatives 1 6 2017 Deloitte (Uganda) Limited
A. Documentation requirements 1. General Information 2. Intra group services 3. Loans 4. Goods 5. Intangibles 6. Allocation keys 1 7 2017 Deloitte (Uganda) Limited
1. General Information a. Documentation shall be required for transfer pricing under the following: Controlled transactions for Multinational Enterprises (MNEs) Domestic related party transactions with aggregate value of UGX 500 million. b. The TP Report has to indicate Group legal structure showing all the related parties. Details of the nature and extent of controlled transactions. An industry analysis: - Key drivers of profit in the industry - Supply chain/value chain 1 8 2017 Deloitte (Uganda) Limited
1. General Information Cont Functional organisation structure/chart for each party to the controlled transactions: - Departments - Personnel - Functions performed Documents to substantiate functions performed - Job descriptions. - Performance evaluation. - KPI - Appointment letters. - Remuneration schemes or incentive schemes 1 9 2017 Deloitte (Uganda) Limited
1. General Information Cont Agreements, invoices/purchases order with related parties and third parties and supporting documentation. Board minutes, committee meeting minutes and department meeting minutes of parties to the controlled transactions. Financial statements of all related parties involved in controlled transactions o Mapping financials to cost centres. o Segmented financials. o Trial balances and ledgers. 2 0 2017 Deloitte (Uganda) Limited
2. Intra group services a. Documentation showing benefits received. b. Documentation showing services rendered Evidence of staff visits Time sheets Training notes and photographic evidence Email and correspondences Reports and policies developed c. Multi-layered service structure. d. Identification of shareholder costs and non-chargeable costs e. Determination of arm s length charge: cost base, allocation keys, benchmarking report 2 1 2017 Deloitte (Uganda) Limited
3. Loans a. Banks statements showing the receipt or remittance b. Loan and interest ledgers showing movement c. Loan agreements d. Related party bank statements 2 2 2017 Deloitte (Uganda) Limited
4. Goods a. Customs documentation in support of the transactions b. Supply agreements c. Contracts with third parties involved in the transaction 2 3 2017 Deloitte (Uganda) Limited
5. Intangibles a. License or purchase agreements b. Benchmarking report 2 4 2017 Deloitte (Uganda) Limited
6. Allocation Keys a. Entity names b. Value (Both Local currency and translated currency) c. Allocation keys mapped to group financials d. Basis of entities excluded from allocation keys 2 5 2017 Deloitte (Uganda) Limited
TP documentation to be kept by taxpayers 2 6 2017 Deloitte (Uganda) Limited
B. Compliance Initiatives 1. URA associated party disclosure form Section A Identifying information Section B Activity description Section C Declaration 2. Form is in the process of automation 2 7 2017 Deloitte (Uganda) Limited
Other international tax matters
Use of DTAs Training of International Tax team internally Requirement to prove applicability of reduced WHT under DTAs Capital Gains Tax assessments Heritage case Zain case Thin capitalization rules: amendment of legislation to reduce debt to equity ratio to 1.5 :1 Information sharing with other Revenue Authorities 2017 Deloitte & Touche 29
OCED BEPS Action plan 2017 Deloitte (Uganda) Limited
Developing countries Challenges that need addressing Excess payments to related parties (Royalties/service fees) Profit shifting through supply chain restructuring Difficulty in obtaining information Abuse of tax treaties Artificial tax losses Tax treaties no source taxation Difficulty in capacity building (manpower) Technology development (spread of digital economy) 3 1 31
BEPS Actions A response to aggressive tax structures Base Erosion and Profit Shifting (BEPS) BEPS refers to tax planning strategies that exploit gaps in the architecture of the international tax system to artificially shift profits to places where there is little or no economic activity or taxation Action Plan OECD s response to addressing perceived flaws in international tax rules. First published in 2013 as combined effort with G20 countries Adopted a 15-point Action Plan Basis Address tax avoidance, ensuring that: profits are taxed where economic activities generating the profits are performed; and where value is created 3 2 32
BEPS Action plan Action 1: Address the tax challenges of the digital economy Action 2: Neutralise the effects of hybrid mismatch arrangements Action 3: Designing Effective Controlled Foreign Company Rules Action 4: Limiting Base Erosion Involving Interest Deductions and Other Financial Payments Action 5: Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances Action 7: Preventing the Artificial Avoidance of Permanent Establishment Status 3 3 33
BEPS Action plan cont d Action 8, 9, 10: Aligning Transfer Pricing Outcomes with Value Creation (Intangibles, risk and capital, other high risk transactions) Action 11: Establish methodologies to collect and analyse data on BEPS and the actions to address it Action 12: Mandatory Disclosure Rules (Require taxpayers to disclose their aggressive tax planning arrangements) Action 13: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting Action 14: Make dispute resolution mechanisms more effective Action 15: Developing a Multilateral Instrument to Modify Bilateral Tax Treaties 3 4 34
Requirements from countries that have signed on Minimum standards Action 5: Harmful tax practices Action 6: Prevent treaty abuse Action 13: Country by Country (CbC) reporting only Action 14: Dispute resolution Strengthening existing international standards Action 7: Permanent Establishment (PE) Actions 8-10: Transfer Pricing Action 13: Master file and local file Common approach Action 1: Digital economy Action 2: Hybrid mismatch arrangements Action 4: Interest deductions Best practices Action 3: Controlled foreign company (CFC) rules Action 12: Aggressive tax planning arrangements 35 Action 15: Multilateral instrument 35
Impact of BEPS Action Plan High Tax Ultimate Residence Country US/UK Parent Actions 8-10: Is remuneration for intangible/value driver? Action 3: CFC Actions 8-10: Substance requirements Intangibles owner Preferential regime Low Tax Subsidiary Holding company UG subsidiary / Distributor Customers High Tax Market or production country Actions 8-10: remuneration for Distributor, local intangibles, contribution to intangibles Action 7: Permanent establishment Action 13: CBCR 2017 Deloitte (Uganda) Limited
What next? Uganda has not yet signed on to BEPS. Only E.A country to sign is Kenya It cannot go the distance alone (need to work with other authorities in E.A and elsewhere to adopt a common approach) BEPS Action points OECD/UN Tax Inspectors without borders Domestic laws need to be reviewed to see what changes are necessary to adapt to the changing landscape Definitions Exclusions International Treaties (DTTs) may need to be re-visited 2017 Deloitte & Touche 37
About the presenters 38
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