#1 Treaty Priority Countries
While the survey was on hiatus for several years, we are not comparing this year’s results to prior years. NFTC member companies who responded to the survey (“respondents”) ranked one country as the clear priority for the most number of respondents. The next tranche of countries were closely clustered together.
- The country that was identified as the most important to respondents was Brazil– with Transfer Pricing identified as the greatest concern*, followed very closely by (1) reducing withholding rates on Royalties and Dividends; (2) the Mutual Agreement Process (MAP); and (3) Covered Taxes.
(* Survey conducted prior to Brazil Transfer Pricing reforms)
The countries that were identified as the next most significant to respondents are: Taiwan followed by Singapore, Saudi Arabia and Switzerland. The negotiation items that were listed as most significant in each country are:
- Taiwan: MAP was the greatest concern, followed closely by PE, Business Profits and Non-discrimination. Reducing withholding rates on Royalties was also a concern.
- Singapore: Permanent Establishment, Business Profits, Royalty withholding, MAP, and Transfer pricing were all significant. Covered Taxes were also a concern.
- Saudi Arabia: MAP and Permanent Establishment were both significant.
- Switzerland: Reducing withholding rates on interest and dividends as well as MAP and LOB were all equally important.
Overall Treaty Priority Countries
After evaluating the overall top priority for respondents, we aggregated the rankings. The countries that were included as #1 priorities also rounded out the list of overall priorities with Brazil, Singapore and Taiwan comprising the top three countries (these countries received the most overall votes as as well as being the first or second most important country by respondents). India ranked next in its own tranche. Colombia and Hungary followed in the third tranche accompanied by Saudi Arabia and Switzerland. The final tranche was comprised of Malaysia, Mexico and the United Kingdom.
In total, respondents requested treaties with 31 countries.
The items that were selected as most important for these countries are:
- India: The main items were PE, Business Profits, and MAP. Transfer Pricing and dividend withholding were also important.
- Colombia: The sole priority item was MAP.
- Hungary: Reducing withholding rates on interest was the main concern.
- Malaysia: Transfer Pricing was the most important item.
- Mexico: Permanent Establishment and Business Profits were both significant.
- United Kingdom: LOB was a concern as well as withholding rates on Interest and Royalties
Question #1 asked respondents to expand upon any tax treaty negotiation issues that were noted in the selection of countries and items.
- The most frequently cited problem was the transfer pricing and permanent establishment interpretations in India. India is taking very aggressive positions on PE, especially in relation to remote services. Transfer pricing is also challenging, including the ability to enter into an Advance Pricing Agreement. There are other challenges with LLCs leading to residence issues under the Treaty. Respondents requested that the tax treaty with India be renegotiated to clarify these issues.
- Respondents also reiterated the importance of eliminating withholding taxes on interest, royalties and dividends. Specific countries were cited as having high withholding rates, including Brazil, Taiwan, Singapore, Switzerland and the UK.
- Problems were encountered in permanent establishment interpretations in Italy, France and India. It was cited as a priority negotiation item for Taiwan, Singapore, Saudi Arabia and Brazil.
- Binding arbitration and more efficient mutual agreement procedures were also referred to in several responses (to this question and to question #2); respondents noted that significant delays were encountered in resolving examinations and that settlements were often held hostage unless taxpayers waived access to mutual agreement procedures. Many respondents would like to see binding arbitration provisions added to all future treaties. A mandatory arbitration provision in India was requested.
Question #2 focused on tax treaty implementation issues, asking respondents to provide details about examinations, settlement problems, and procedural issues encountered in obtaining tax treaty benefits.
- Respondents cited issues in:
- Mexico with the VAT and denying advertising and promotion due to royalties.
- Germany with transfer pricing issues and adhering to OECD norms. Concerns with Limited Risk Distributors were also raised.
- Egypt with withholding tax on offshore services even after a residency certificate was provided. It is often difficult to obtain refunds.
- China with market-based taxation.
- Onerous procedures encountered to receive reduced tax treaty withholding rates were cited, particularly in Italy, Singapore, Portugal, Latin America and the U.K. Withholding tax issues in Saudi Arabia arise in relation to payment versus accrual of the tax and inconsistencies with local law and the Treaty.
- The expansion by certain countries of what constitutes a permanent establishment and the attribution of profits to that permanent establishment (at times attributable to misinterpretation by tax authorities) is another issue of significant concern to respondents.
- Respondents requested that the U.S. view be promoted that tax treaties are not purely for the avoidance of double taxation, but have a wider and more important goal, e.g., the bilateral agreement to the allocation of taxing rights, establish minimum thresholds before taxation rights accrue, facilitate cross border flows with minimal withholding taxes and establish procedures to resolve cross border disputes.
- The inability of the MAP and Competent Authority to resolve issues of double taxation was cited with reference to India, Mexico, Saudi Arabia and Vietnam. Respondents cited numerous problems with India, both in its expansive view of what constitutes a permanent establishment and how APA and MAP cases are processed.
- Inefficiencies and aggressive audits in Vietnam, Honduras and the EU were cited as concerns. Particularly, the ability to remedy issues is difficult due to multiple interruptions by the government for audit status and court proceedings.
- The slowness of the MAP process with Canada has been problematic for many respondents as well as onerous documentation requests. Respondents also requested that Canada either accept bonds or not require prepayment of the tax to challenge a deficiency.
An infographic of the top most requested countries can be found here.