TP Ticker – June 2018 (2)
New Tax Convention between Singapore and Kenya
On 12 June 2018, Singapore and Kenya signed a comprehensive tax convention for the avoidance of double taxation, covering transactions between associated enterprises in the two countries in Article 9. This agreement is not yet ratified and therefore not effective. Upon ratification by both sides, it will represent the first tax convention between the two countries.
The text of the convention can be found on the website of Internal Revenue Authority of Singapore here: https://www.iras.gov.sg/irashome/uploadedFiles/IRASHome/Quick_Links/Singapore-Kenya%20DTA%20(Not%20in%20force)%20(13%20June%202018).pdf
Australian Reporting Deadlines for Related Party Transactions
On 12 June 2018, the Australian Taxation Office (“ATO”) announced the availability of the “2018 International dealings schedule” and their instructions. This schedule must be provided by enterprises if they fulfill certain conditions, such as specific replies to certain trigger questions on the tax return or exceeding a certain threshold of dealings with related parties. The questions on the form, which have been partially updated for 2018, relate to different topics such as R&D and intangibles, controlled foreign companies, thin capitalization, and hybrid arrangements.
The announcement and the international dealings schedule are available on the website of the ATO here: www.ato.gov.au/Business/Large-business/In-detail/Business-bulletins/Articles/2018-International-dealings-schedule-now-available/
and here: www.ato.gov.au/Forms/International-dealings-schedule-2018/
Indian Court Ruling on Shared AMP Expenses
On 4 May 2018, the Income Tax Appellate Tribunal in Mumbai pronounced its ruling relating to the transfer pricing assessment of Colgate Palmolive (India) Limited (CP India) by the Assistant Commissioner of Income Tax in Mumbai for the assessment years 2005/06 and 2006/07. In the case, the local Indian subsidiary of the Palmolive group engaged in the manufacturing and marketing of diversified pharmaceutical products. Tax administration had noted that the Advertising, Marketing & Sales Promotion (“AMP”) expenses of the company were with approximately 13% of sales above the determined industry standard of 6.39%. It further noted a substantial increase in royalty payments of the Indian taxpayer to its US-affiliate increased in absolute terms as well as in terms of percent of sales over the accounting periods from 1999/2000 to 2005/06.
Therefore, the tax administration argued that the foreign affiliate is benefiting from the high AMP expenses and, under arm’s-length conditions, would share a part of them. Based on this argumentation, the tax administration made a transfer pricing assessment relating to a portion of these expenses (thus, deemed income that would have been received from the foreign affiliate in the form of a reimbursement).
Contrary to this, the taxpayer argued that he is operating as a fully-fledged manufacturer who incurs AMP expenses on behalf of its own operations and not for the direct benefit of the US-affiliate. Rather than simply distributing a “global product line” if the US-affiliate, the Indian taxpayer operates as an entrepreneurial entity, manufacturing and distributing its own products. Under this setup, CP India does not create any marketing intangibles for the US-affiliate and brand royalty payments to the US were not made during the assessment period. Any benefits for the US-entity would therefore only be incidental and cannot be charged to it.
One comment of the tribunal was that the AMP expenses were mostly meeting expenses, traveling expenses and hotel expenses which were third-party costs and that such expenses do not directly indicate any brand-building or the creation of marketing intangibles. Contrary to this, the tax administration had not conducted an analysis of the AMP expenses that would support its position. The tribunal further pointed out that in similar cases, it was found that in the absence of an agreement between the local Indian taxpayer and its foreign affiliates about the conduct of AMP activities and the reimbursement of the respective expenses, the tax administration cannot simply assume the existence of a respective transaction.
The pronouncement is available online here: https://www.taxpundit.org/phocadownload/Taxpundit_Reporter/Taxpundit_Reporter_2018/May_2018/518Taxpundit99.pdf