Signs of the treaty times
Once considered business facilitators and trade boosters, Double Taxation Avoidance Agreements – or DTAAs – are experiencing a sea change, recent research indicates.
DTAAs are now seen as pacts about information-sharing, anti-evasion methods and creating a global level playing field in terms of rates. “Tax treaties are at a crossroads,” said Alex Postma, EY's global international tax services leader in Tokyo.
Postma, in a recent research note – argued that treaties have become more restrictive. “The most pronounced restriction … is the so-called principal purpose test.”
The so-called PPT “essentially excludes an entity from treaty access if it is reasonable to conclude that obtaining access to the treaty was one of the principal purposes for establishing the transaction with that entity,” he said.
He said the PPT “puts the onus for robust documentation addressing all possible angles largely on the taxpayer,” adding that “a smaller tax footprint that is more closely aligned with business activity is more prudent.”
Hong Kong signed its 40th DTAA, with India, on March 19. “This agreement will stimulate [the] flow of investment, technology and personnel,” said Indian ambassador to Beijing Gautam Bambawale.
According to KPMG India the DTAA addresses new income tax requirements and defines rules for residence, permanent establishment and the treatment of business profits.
Significantly, a withholding tax of 10 per cent will apply on interest, royalties and fees for technical services, down from 40 per cent now. “The rate of withholding on interest stands out,” said Abhishek Goenka at PwC in Bangalore.
China's sharp 44.5 percent increase in exports during February over January was interpreted by some as opportunism by exporters fearing a trade war in the wake of the imposition of U.S. tariffs and Beijing’s countermeasures. Wang Tao, head of Asia economics at UBS, attributed the surge in part to “shipment front-loading by some exporters”. Not so fast, say other analysts. “It is … not too much related to the recent trade war as it takes time for producers and traders to get orders and prepare,” says Larry Qiu, a professor specializing in international trade at the University of Hong Kong.
Lara Croft, CPA
For millions of American taxpayers who believe the Internal Revenue Service has them in its crosshairs, it’s not much of a leap of logic to imagine a tax app designed by someone more used to developing first-person-shooter video games.
But KPMG in the U.S. is hoping to hire those kinds of creative technology developers to work on the intricacies of above-the-line deductions and Roth 401(k) plans. In an interview, Rahsaan Shears of the firm’s Ignition innovation facility in Atlanta acknowledged: “Tax is not something that a traditional developer wants to work on, right? They wanted to build a cool game, a cool app…”
However, Ignition is all about fintech, one of those hot new tech buzzwords. “When they see that their capability and their desire for creativity can be applied in issues in our area, many of them get very intrigued,” she said.
Taxing a new paradigm
The effect of digital technology on tax is the subject of a comprehensive new report from the Organisation for Economic Cooperation and Development. Among the new concepts found in digital markets are scale without mass, heavy reliance on intangible assets and unprecedented reliance on data and user participation.
While hailing digitalization as an important source of entrepreneurship, the OECD is concerned at the effects on revenue collection. It wants to consider “how digitalization is changing … the tax system in important and sometimes dramatic ways, providing both new opportunities and new risks for policymakers and tax administrations.”