Kreston Quezada Fernández
June 10, 2021
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 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 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.
April 30, 2021
Two member firms of Kreston – Kreston FLS, based in Mexico, and Daehyun Accounting Corporation, based in Seoul – have joined the Expatland Global Network, a leading provider of global mobility services.
The addition of the two firms as Expatland Global Network partners represents the latest expansion of the network’s collaboration with Kreston, which now includes a total of 13 member firms around the globe.
The Expatland Global Network brings together international teams of professionals to provide global mobility services across taxation, logistics, real estate, education advice and more. These ‘E-Teams’ are made up of like-minded service providers in over 30 cities globally. Their expertise ranges from banking and insurance to medical and education, each passionate about helping expats coordinate their moves abroad and settle into their new home.
The partnership with Expatland Global Network will provide expats with access to trusted advice on tax planning and financial reporting across Mexico and South Korea, benefitting from the expert advice and local insight offered by Expatland Global Network’s international ‘E-Teams’.
Kreston FLS is a full-service accounting, legal and financial services firm based in Mexico City. Its clients span a wide spectrum of sectors, most notably in manufacturing and services. With its five offices and 95 staff members, Kreston FLS is one of six firms that make up Kreston International’s Mexican presence.
Based in Seoul, Daehyun Accounting Corporation provides a broad spectrum of services, including audit, tax, consulting and M&A for its SME clients both local and international. Daehyun Accounting Corporation is one of two Seoul-based Kreston International members.
Kreston FLS and Daehyun Accounting Corporation become the 68th and 69th partners, respectively, to join the Expatland Global Network– 13 of which are Kreston International member firms – across the UK, Europe, Asia-Pacific and North America.
Liza Robbins, Chief Executive of Kreston: “Expatland Global Network has for some time been a trusted partner of Kreston Global and is at the forefront of providing global mobility services and insight. The addition of these two firms to the Expatland network is a testament to its success and we look forward to seeing this international partnership continue to bear fruit.”
John Marcarian, Founder of Expatland Global Network: “Despite the setbacks to international movement caused by the pandemic, the demand for expatriation among the internationally mobile community looks set to recover quickly. We’re pleased to expand our relationship with Kreston International by adding these two firms as new partners and, in doing so, significantly enhance our offering in Mexico and South Korea.”
February 1, 2021
GUILLERMO NARVAEZ
International Tax Technical Director of the Kreston International Tax SIG
Kreston FLS, Mexico
For many decades, international tax (INTAX) advisory has been a key feature of the most important business-focused service firms. In many countries, this service was initially provided by accounting firms before extending to legal firms too. Why is it relevant to large international law/ accounting firms to advise on INTAX? In my view, the reason lies in the following points:
• INTAX is highly specialised. And INTAX is becoming ever more complex.
• INTAX is a subject always related to multinational companies (MNE). This is obviously due to operations being carried out or with effects in more than one jurisdiction.
• INTAX means competitiveness among jurisdictions; different states will compete to win foreign investment, which will generate wealth in their territories.
Competitiveness between states expands the possibilities of the MNEs to distribute their activity among multiple jurisdictions with the purpose of achieving greater fiscal efficiency. The freedom of choice to decide where a business is going to do certain activities contributes to forecasting the net global tax rate an MNE may pay. This is, in a nutshell, an exclusive attribute of the jurisdictions identified as ‘sovereignty’.
Accordingly, the jurisdictions create an offer for the MNEs to carry out tax strategies using various elements such as royalty and interest payments, hybrid operations, permanent establishments, strategies related to capital gains, or complicated corporate structures in several jurisdictions with attractive low or nil tax impact, among many other elements to assess.
As if these were not enough, in 2015 the OECD1 launched the BEPS2 project, trying to stop the shifting of profits to jurisdictions where no value was generated to the taxable activities. This generated a straight and quite clear implication – an urgent need for MNEs and companies doing international operations to be advised to efficiently face the new reality in INTAX.
Kreston’s INTAX experts and global collaboration has advantages over many other organisations; with more than 200 firms located in 110 countries, we cover the main economies of the world in areas where MNEs perform a large part of their operations.
There is a tendency to assume that only the large accounting firms (Big Four) or law firms are able to provide INTAX services. Yet good advice on international tax is provided by specialists who collaborate with other firms, regardless of company size.
Kreston’s INTAX experts and global collaboration has advantages over many other organisations; with more than 200 firms located in 110 countries, we cover the main economies of the world in areas where MNEs perform a large part of their operations.
