Ecuador
June 22, 2021
June 22, 2021
June 11, 2021
In May this year, the IASB issued updates to IFRS-16, with regard to rent concessions, and to IAS-12, which covers leases as part of income tax reporting.
The international financial reporting standards (IFRS) are a set of international accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They’re intended to bring transparency, make international comparisons more straightforward and give investors the information they need to make decisions.
The standards are frequently updated, as in the case of these two recent changes – but what do those amendments mean in practice?
IAS-12 established how an individual company should account for income tax, including any deferred tax representing tax payable or which is later recoverable.
In certain circumstances, companies aren’t obliged to recognise deferred tax (that is, to record them in the financial statements that form the body of their accounts) the first time they recognise assets or liabilities.
In the past, whether the exemption applied to leases and decommissioning obligations, which companies recognise as both asset and liability, was something of a grey area.
This amendment removes that ambiguity, making it absolutely clear that companies are expected to recognise deferred tax on transactions of this type.
The amendments take effect for annual reporting periods beginning on or after 1 January 2023. Companies can choose to apply the amendments before that date under the principles of ‘early application’.
On 31 March 2021 the IFRS issued ‘Covid-19-Related Rent Concessions beyond 30 June 2021’.
This amendment to IFRS-16 extends a ‘practical expedient’ (effectively an emergency measure) by a year, first announced in May 2020 as part of the global response to COVID-19.
The expedient recognised the impact of the COVID-19 pandemic on businesses. Many sought rent concessions from landlords as part of an effort to control cashflow as, for example, footfall in city centres dropped drastically due to national lockdowns.
Under the practical expedient, lessees were not required to assess whether rent concessions counted as ‘lease modifications’ for accounting purposes.
Without this amendment, the concession would have expired at the end of June 2021, while many world economies are still grappling with COVID-19 or its aftermath.
Under the terms of the recent amendment, a lessee can apply the expedient to COVID-19-related rent concessions for which a reduction in lease payments affects only payments originally due on or before 30 June 2022.
The lessee is required to apply the amendment for annual reporting periods beginning on or after 1 April 2021.
They must also apply the amendment retrospectively, with the cumulative effect of its initial application being recognised as an adjustment to the opening balance retained earnings. Disclosure requirements under paragraph 28(f)1 of IAS-8, ‘Accounting Policies, Changes in Accounting Estimates and Errors, don’t apply on this initial application.
Contact your local Kreston audit contact (or admin@kreston.com) for more information or to talk about how these changes might affect your company accounts.
The range of support that businesses have received from governments around the world in response to the Coronavirus pandemic has been largely effective, according to key voices from across our network.
We recently conducted an informal poll featuring 41 of our senior leaders, of whom the majority (59%) stated that the schemes such as furlough, tax relief and emergency business loans have been “very effective” in helping clients weather the pandemic. The figure is even greater among EMEA-based respondents (63%), who describe such initiatives as “very effective.” Globally, only about 30% said that such schemes had little to no impact for clients, and about 12% said that clients had not utilised the available schemes at all.
Our leaders believe that the technology, media, and telecoms (78% of those asked), as well as life sciences (66%), are the sectors that stand in poll position to kickstart the global economic recovery. In contrast, manufacturing is not anticipated to be a major driver of post-pandemic growth (with only 37% believing in its potential). Only 15% of respondents said that the retail industry would play a significant role in the economic recovery globally.
Liza Robbins, Chief Executive of Kreston, said:
“Throughout this crisis, we have seen unprecedented levels of government intervention to stave off economic disaster across the globe, with schemes aimed at, and often succeeding in, supporting businesses and protecting jobs. These figures bear out in our conversations within the Kreston network, indicating that, despite the challenges, many schemes have often been successful – particularly across EMEA. With the worst of the pandemic’s economic impact hopefully now behind us, Technology, Media, and Telecoms, and Life Sciences appear poised to play an important role in the next phase of economic recovery and post-pandemic growth around the globe.”
June 10, 2021
May 19, 2021
Losses in a limited-risk entity pursuant to the OECD Guidance on the Transfer Pricing Implications of the Covid-19 Pandemic
By Guillermo Narvaez, Tax Partner at Kreston FLS Mexico
The OECD guidance on the transfer pricing implications of the Covid-19 pandemic (referred to as the “Guidance”) was issued in December 2020. The idea was to give light to taxpayers and tax administrations on what to do about intercompany operations and how to apply the methodology of transfer pricing determined in the OECD TP Guidelines (“OECD TPG”) due to ‘fact patterns that may arise commonly in connection with the pandemic’.
There is a permanent discussion in transfer pricing related to ‘limited risk’ distribution operations and how to deal with this kind of transaction. A point to stress is whether a limited-risk distribution business could afford losses or these businesses are not ‘entitled’ to generate them.
There is neither a rule in the OECD TPG nor the Guidance related to losses generated by limited-risk distribution operations. Moreover, the term ‘limited risk’ is not defined in the OECD TPG. However, what is expected is that distributors with low risks have profits regularly and if losses are generated these should be part of an isolated fact not frequently repeated; however, this is only convention. When a subsidiary has full support from its related parties to make the distribution of products with moderate risks, the least expected thing is to deal with risks that could finally drive operating losses.
The fact is that a limited-risk operation can indeed generate losses, and this matter should not be a concern for the taxpayer nor the tax authority as long as the risks associated with the distribution operation and borne by the distributor, including the financial risk, are assumed by the latter.
If the terms of the agreement between related parties were those that independent businesses would have agreed and the negative operating result of the distribution operation is directly coming from applying such terms, the loss will probably make sense. Note that risks during a pandemic may be exacerbated. Nonetheless, the contractual terms should not be necessarily modified because of force majeure.
The Guidance is clear when it states that ‘It is important to emphasize that in the absence of clear evidence that independent parties in comparable circumstances would have revised their existing agreements or commercial relations, the modification of existing intercompany arrangements and/or the commercial relationships of associated parties is not consistent with the arm’s-length principle’.
Each case should be analysed to understand the background and effect of the pandemic on the specific operation accurately to get conclusions on what to do when a loss is incurred by a low-risk distribution operation.
Another matter is that the pandemic does not suffice to change the transfer pricing method applied in previous years. The Guidance is clear with regard to fostering the OECD TPG aims without modifying the arm’s length principle and its rules, all of them determined in the OECD TPG.
The Guidance is focused on giving light on what is needed to do in an extraordinary event like the pandemic suffered since the beginning of 2020 but in some cases with a very general view.
May 14, 2021
Practical application of the arm’s length principle in the context of the Covid-19 pandemic
By Carlos D’Arrigo, Transfer Pricing and Valuation Partner, Kreston BDM
In 2021 most taxpayers around the world would face an unprecedented challenge to reflect how their 2020 transactions compared to fair and open market values simply because in a crisis downturn like no other with disruptions and restrictions across almost every industry, how can you define what market conditions were fair? In the so-called phrase “business as usual”, how can you explain “usual”? We are not quite certain either but let’s try to find some answers.
On December 18, 2020, the 137 members of the Organization for Economic Co-operation and Development (“OECD”) Inclusive Framework on Base Erosion and Profit Shifting Action Plan (“BEPS”) released the Guidance on the transfer pricing implications of the COVID-19 pandemic (the “Guidance”) with the purpose of helping both taxpayers and tax administrations in reporting the financial periods affected by the pandemic in compliance with the arm’s length principle[1]. The guidance provides insights for the following four priority issues:
The Guidance recommends to first identify each specific cause that impacted taxpayers results and group them into three risk bubbles: Market Risk, Operational Risk and Financial Risk. The following chart intends to show a more comprehensive process flow:
Identify specific cause
• Drop in sales volume and/or price
• Increase in material and labour cost
• Increase in overhead expenses
• Exceptional, non-recurring, extraordinary operational cost
• Decrease in capacity utilisation or economy of scale
• Increase in days inventory and obsolescence
• Increase in days Receivable
• Increase in interest rates and bank fee charges
Once specific causes are identified, the Guidance suggests addressing each of them on a case by case basis using the following sources of contemporaneous information to support the performance of a comparability analysis applicable for Fiscal 2020:
Guidance suggested source |
Our comments |
Pre-COVID sales vs. 2020 actual | Be mindful when using new product/services data that could distort comparability, also marketing strategies to retain customers |
Pre-COVID utilization vs 2020 actual | Economies of scales, cost structures and operating leverage, break-even analysis |
Exceptional, non-recurring, extraordinary operational cost | Warehousing, logistics, overtime, transport, insurance |
Government grants, subsidies, programs | Employee retention cost, rental and lease cost, tax waivers, deferral of contributions, interest |
Macroeconomic data | GDP by country, sector or region, and trade association data can be helpful to confirm Pre-COVID sales vs. 2020 actual conclusions. Macroeconomics analyses might use data such as market share variation and drop in consumption, demand and other market metrics |
Regressions | Regression analysis of variance analysis is more reliable to
predict variations when a large amount of data inputs are included; thus, it might be of limited help. |
2020 Budget vs 2020 real | Budget data is unlikely to be considered official data for controversy or court cases. |
Finally, Guidance made important remarks about comparability adjustments that are likely to be rejected by tax administrations including the following:
Guidance remarks |
Our comments |
Prior global crisis comparison | Since COVID-19 is an unprecedented crisis like no other, using data from other global crisis, such as the 2008/2009 financial crisis, could lead to poor and superficial conclusions |
Using Loss-making comparables | Although the Arm’s Length principle does not override the inclusion or exclusion of loss-making comparables[2] as long their inclusion/exclusion satisfy the comparability criteria, extra care should be taken when performing comparability analysis for fiscal 2020 ensuring that chosen comparables assumed similar levels of risk and that have been similarly impacted by the pandemic. |
Intercompany renegotiations | Related parties that renegotiated certain terms in their existing agreements are advised to identify clear evidence that independent parties in comparable circumstances would have revised their existing agreements or commercial relations, otherwise, such modification of existing intercompany arrangements and/or the commercial relationships of associated parties is deemed to be considered not consistent with the arm’s length principle. Examples of fair renegotiation might include: renegotiate a contract to support the financial survival of any of the transactional counterparties, or to retain key customers, |
Limited-risk arrangements | Consistency is key to support changes in limited-risk arrangements, for instance, a “limited-risk” distributor did not assume any marketplace risk Pre-COVID and hence was only entitled to a low return, but in 2020 argues that the same distributor assumes some marketplace risk and hence should be allocated losses, is expected to keep bearing such risk in 2021 and so on. |
Force majeure adjustments | Taxpayers should carefully review existing intercompany arrangements when invoking a force majeure clause to ensure that: i) the arrangement actually includes a written force majeure clause, ii) if no clause existed but one was added in 2020, such clause is also expected to remain in force after the pandemic, iii) the law governing the contract is not a civil law jurisdiction where force majeure would automatically apply, and iv) the specific related party situation actually qualifies as a force majeure. |
As discussed above, reporting the financial periods affected by the pandemic in compliance with the arm’s length principle cannot be done with one single and straightforward approach, in this particular challenge, our preferred approach is to build up from a pre-COVID vs. 2020 actual comparability analysis which in fact compares the actual tested party with itself as long as the pre-COVID pricing policy was not intended to aggressively shift profits within the MNE.
[1] The foundation of transfer pricing is the arm’s length principle, which states that the price, terms and conditions charged in a controlled transaction between two related parties should be the same as that in a transaction between two unrelated parties on the open market. In other words, an arm’s length transaction refers to a business deal in which buyers and sellers act independently without one party influencing the other.
[2] It worth noting that in many cases, domestic legislation and/or tax administration ruling prescribe against the use of loss-making comparable.
May 12, 2021
By Guillermo Narvaez – Technical Director of the Kreston International Global Tax Group
Digital Services Taxes (DSTs) are a new global initiative designed to charge larger technology companies that provide digital platforms such as social media, advertising, online marketplaces and other search engine tools for commercial transactions or selling user data online advertising. It is beginning to apply across the world at the behest of the G20 – the Organisation for Economic Co-operation and Development (OECD) who are calling for changes to the international tax system to address the challenges of the digitisation of the economy by mid-2021.
A simple enough idea – impose additional tax costs on those who earn more – but is it really this simple? Who actually pays this tax, as on the face of it, it is the customers themselves who face liability rather than the platforms on which they are advertising.
Online platforms essential for SMEs to grow
Big tech companies like Amazon, Google and Apple shift the tax burden instigated by DSTs downstream to their customers, many of whom are SMEs. The European Centre for International Political Economy (ECIPE) has stated that “the EU’s commercial landscape is characterised by an overall share of highly diverse SMEs who account for 99.8% of all EU enterprises and 66.6% of overall EU employment.”
Copenhagen Economics also point out that 82% of SMEs in Europe use search engines to promote products and services online, while 42% of SMEs use online marketplaces to sell their products and services.
So we can see that SMEs are disproportionately affected by DSTs and are the ones left with the bill.
But in reality, to what extent are DSTs targeting the big fish? The DSTs’ purpose is well-meaning – challenge some of the world’s largest multinational enterprises (MNEs) to pay their dues.
However, when these enterprises can just pass this on to others – particularly digitally dependent SMEs who cannot otherwise achieve their goals – the DST is surely not having its desired effect?
Not looking at the profitability of the platforms means that the DST may end up being a disproportionate levy and, as a result, drive a possible deceleration of economic growth.
SMEs are inadvertent “victims” of the new tax levy
So what is the thinking behind this new levy? Many SMEs exist either in the middle of the digital services supply chain or to ensure the delivery of a product or service to its final customer. Where tech companies at one end of the chain and final customers at the other, SMEs sit between the two, paying for services (such as advertising) provided by the tech companies.
The logic of the DST is, in part, that tax on profitability (such as income tax) do not have the reach to impose tax burdens on tech companies for digital services. However, tech companies can circumvent the economic burden of the DST by transferring the levy to their customers, as they currently do with SMEs.
Conversely, whilst tech companies can pass on the levy to SMEs by increasing the cost of their services and so cover their tax liability, SMEs cannot similarly shift the burden downstream to their customers, as doing so may well take away their competitive advantage.
A well-meaning but flawed tax concept
Finally, even though consumers successfully use one or more digital service, they do not usually have to pay anything at all. Most of these can access any information, products and services through the use of free online services.
While SMEs serve a vital purpose in domestic economies, they are often the primary victims of this tax burden, whereas tech companies escape cost-free. Hence this system of taxation is a flawed one and deeply unfair.
SMEs are part of the digital services supply chain and a vital element of any country seeking to pursue economic growth while achieving a healthy economy. Since over 99% of EU businesses are SMEs, surely it would be fairer to support their development, rather than leave them to have to shoulder most of the actual tax burden?
(a version of this article also appeared in Accountancy Daily, May 12th 2021)
May 6, 2021
This publication aims to provide an overview of the different tax systems across Latin America, Spain and Portugal, to support member firms in this vital area of every practice.
Produced by Kreston Guatemala, other Kreston member firms in Latin America and Kreston Iberaudit, based in Spain.
May 3, 2021
Our Mexican firm, Kreston BSG, has provided a comprehensive publication on important aspects to consider in the subcontracting reform in Mexico that became law last month.
The publication explains the reform should be considered a legal system that establishes the conditions to enact new rules in using the subcontracting labour figure.