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SAYING GOODBYE TO BACK TO BACK LOANS AND WELCOMING TRANSFER PRICING REGULATIONS

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SAYING GOODBYE TO BACK TO BACK LOANS AND WELCOMING TRANSFER PRICING REGULATIONS

Introduction

In February 2017 Cyprus Tax Department has announced that the current practice regarding profit margins between related Company loans will be abolished by the 30th June 2017.

The announcement indicates that the minimum acceptable margins will apply up to 30th June 2017, and as from 1st July 2017 all related Company transactions (e.g. financing arrangements) where Cyprus Tax Resident Companies are involved, should follow the arm’s length principle.  In addition, the announcement indicates that independent

 should be provided as supporting document evidencing that the interest rate used in the particular transaction will be considered as correct having based on the market’s conditions existed at the time the transaction took place.

Definitions

Arm’s Length Principle (ALP) is defined as the condition or the fact that the parties to a transaction are independent and on an equal footing.  This principle is commonly used to commercial and financial transactions between related companies.  Article 33 of the Cyprus Income Tax Law introduces the ALP.

Arm’s Length Transactions (ALT) is defined as the transactions should be valued as if they had been carried out between unrelated parties, each acting in his own best interest.

Back to Back Loan (BTBL) is defined as the arrangement for lending/ borrowing between related parties.

TPS is defined as the document to be provided to the Cyprus Tax Authorities as supporting document evidencing that the transaction took place, was based on ALP.

Current Legislation

Based on Article 33 of the Cyprus Income Tax Law, transactions between related parties should have been carried out at arm’s length terms.  This includes also loan agreements.

The Cyprus Tax Authorities could have imposed tax adjustments in case related party transactions did not follow ALP (in most cases as notional interest income).

However, Cyprus Tax Authorities treated TBTLs in a different way.  In 2011 BTBL regime, between related companies, was agreed with the Tax Commissioner, which allowed low profit margins for funding between related parties.  The acceptable margins ranged between 0.125% and 0.35% depending on the amount of the loan.  Cyprus Companies enjoyed low taxation from the use of back to back arrangements.

New Developments

The Cyprus Tax Authorities having thorough studied the current legislation and considering EU and OECD framework, international standards and code of conduct for the taxation of businesses, and with the intention to fully comply with the OECD BEPS framework, decided to change the current tax regime in relation to the BTBLs.

In February 2017 Cyprus Tax Department has announced that the current practice regarding profit margins between related Company loans will be abolished by the 30th June 2017, as mentioned above.

As from 1 July 2017 all related Company transactions (e.g. financing arrangements) where Cyprus Tax Resident Companies are involved, should follow the arm’s length principle.  In addition, the announcement indicates that TPS should be provided as supporting document evidencing that the interest rate used in the particular transaction will be considered as correct having based on the market conditions existed at the time the transaction took place.

As the current legislation does not contain any transfer pricing rules and regulations and also does not require TPS to be submitted, the Cyprus Tax Authorities announced that detailed transfer pricing rules and regulations for intercompany financing transactions (based on OECD guidelines) will be circulated shortly.  These new rules and regulations will apply to tax assessment, issuing of tax rulings as well as TPS requirements.

TPS

TPS is the first effort by Cyprus to document transfer pricing framework and needs to fulfil the following requirements based on OECD guidance:

  1. Appropriate thought is given to transfer pricing requirements when prices and other conditions are established;
  2. Tax Authorities are given all required/ necessary information to prepare a transfer pricing risk assessment; and
  3. Tax Authorities are given all required/ necessary information to conduct a thorough audit of the transfer pricing practices of the entities (subject to tax in their countries of tax residency).

A TPS will provide a concrete indication that the specific client has studied its tax situation, considered available data and concluded to a consistent transfer pricing position.

The TPS should be in a position to steadily prove that the transactions between related parties are determined, for tax purposes, in accordance with ALP.  Information such as accounting records and taxable profits should be satisfactorily provided.

Therefore, the TPS will be an essential part of the client’s strategic tax risk management.

Conclusion

As the circular of the Cyprus Tax Authorities is still to be issued, there is no clear guidance as to specific requirements.  It is expected to be based on other countries rules and regulations (for example Luxembourg).  It is anticipated that TPSs might not be required for intergroup loans below certain market values.

It has also been announced that any tax rulings issued before 1 July 2017 in relation to the profit margins for BTBLs will be considered as void and therefore be cancelled.

Any transactions that will exist after the 30th of June 2017 will require to be evidenced by TPSs.

As a large number of clients will be affected by the said changes, we suggest that all affected parties to commence a review of their current arrangements and financing structures, recognize and evaluate possible influence of the new forthcoming regulations, re-assess and proceed with necessary steps to correct the current arrangements (such as restructuring of intragroup loans through Notional Interest Deductions – NID – as per our article of January.  This re-evaluation and corrective actions will ensure that the new transfer pricing rules and regulations will be properly followed.

Savva & Associates aims to work with clients to ensure their Cyprus, international and personal structures are established and administered to the highest level of international standards. Our highly experienced and qualified team will ensure the correct structuring of your Companies and provide comprehensive advice in all VAT and Tax matters.

Finance

G20 promises no let-up in stimulus, sees tax deal by summer

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G20 promises no let-up in stimulus, sees tax deal by summer 1

By Gavin Jones and Jan Strupczewski

ROME/BRUSSELS (Reuters) – The world’s financial leaders agreed on Friday to maintain expansionary policies to help economies survive the effects of COVID-19, and committed to a more multilateral approach to the twin coronavirus and economic crises.

The Italian presidency of the G20 group of the world’s top economies said the gathering of finance chiefs had pledged to work more closely to accelerate a still fragile and uneven recovery.

“We agreed that any premature withdrawal of fiscal and monetary support should be avoided,” Daniele Franco, Italy’s finance minister, told a news conference after the videolinked meeting held by the G20 finance ministers and central bankers.

The United States is readying $1.9 trillion in fiscal stimulus and the European Union has already put together more than 3 trillion euros ($3.63 trillion) to keep its economies through lockdowns.

But despite the large sums, problems with the global rollout of vaccines and the emergence of new coronavirus variants mean the future path of the recovery remains uncertain.

The G20 is “committed to scaling up international coordination to tackle current global challenges by adopting a stronger multilateral approach and focusing on a set of core priorities,” the Italian presidency said in a statement.

The meeting was the first since Joe Biden – who pledged to rebuild U.S. cooperation in international bodies – U.S. president, and significant progress appeared to have been made on the thorny issue of taxation of multinational companies, particularly web giants like Google, Amazon and Facebook.

U.S. Treasury Secretary Janet Yellen told the G20 Washington had dropped the Trump administration’s proposal to let some companies opt out of new global digital tax rules, raising hopes for an agreement by summer.

“GIANT STEP FORWARD”

The move was hailed as a major breakthrough by Germany’s Finance Minister Olaf Scholz and his French counterpart Bruno Le Maire.

Scholz said Yellen told the G20 officials that Washington also planned to reform U.S. minimum tax regulations in line with an OECD proposal for a global effective minimum tax.

“This is a giant step forward,” Scholz said.

Italy’s Franco said the new U.S. stance should pave the way to an overarching deal on taxation of multinationals at a G20 meeting of finance chiefs in Venice in July.

The G20 also discussed how to help the world’s poorest countries, whose economies are being disproportionately hit by the crisis.

On this front there was broad support for boosting the capital of the International Monetary Fund to help it provide more loans, but no concrete numbers were proposed.

To give itself more firepower, the Fund proposed last year to increase its war chest by $500 billion in the IMF’s own currency called the Special Drawing Rights (SDR), but the idea was blocked by Trump.

“There was no discussion on specific amounts of SDRs,” Franco said, adding that the issue would be looked at again on the basis of a proposal prepared by the IMF for April.

While the IMF sees the U.S. economy returning to pre-crisis levels at the end of this year, it may take Europe until the middle of 2022 to reach that point.

The recovery is fragile elsewhere too. Factory activity in China grew at the slowest pace in five months in January, and in Japan fourth quarter growth slowed from the previous quarter.

Some countries had expressed hopes the G20 may extend a suspension of debt servicing costs for the poorest countries beyond June, but no decision was taken.

The issue will be discussed at the next meeting, Franco said.

(Additional reporting by Andrea Shalal in Washington Michael Nienaber in Berlin and Crispian Balmer in Rome; editing by John Stonestreet)

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Bank of England’s Haldane says inflation “tiger” is prowling

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Bank of England's Haldane says inflation "tiger" is prowling 2

By Andy Bruce and David Milliken

LONDON (Reuters) – Bank of England Chief Economist Andy Haldane warned on Friday that an inflationary “tiger” had woken up and could prove difficult to tame as the economy recovers from the COVID-19 pandemic, potentially requiring the BoE to take action.

In a clear break from other members of the Monetary Policy Committee (MPC) who are more relaxed about the outlook for consumer prices, Haldane called inflation a “tiger (that) has been stirred by the extraordinary events and policy actions of the past 12 months”.

“People are right to caution about the risks of central banks acting too conservatively by tightening policy prematurely,” Haldane said in a speech published online. “But, for me, the greater risk at present is of central bank complacency allowing the inflationary (big) cat out of the bag.”

Haldane’s comments prompted British government bond prices to fall to their lowest level in almost a year and sterling to rise as he warned that investors may not be adequately positioned for the risk of higher inflation or BoE rates.

“There is a tangible risk inflation proves more difficult to tame, requiring monetary policymakers to act more assertively than is currently priced into financial markets,” Haldane said.

He pointed to the BoE’s latest estimate of slack in Britain’s economy, which was much smaller and likely to be less persistent than after the 2008 financial crisis, leaving less room for the economy to grow before generating price pressures.

Haldane also cited a glut of savings built by businesses and households during the pandemic that could be unleashed in the form of higher spending, as well as the government’s extensive fiscal response to the pandemic and other factors.

Disinflationary forces could return if risks from COVID-19 or other sources proved more persistent than expected, he said.

But in Haldane’s judgement, inflation risked overshooting the BoE’s 2% target for a sustained period – in contrast to its official forecasts published early this month that showed only a very small overshoot in 2022 and early 2023.

Haldane’s comments put him at the most hawkish end among the nine members of the MPC.

Deputy Governor Dave Ramsden on Friday said risks to UK inflation were broadly balanced.

“I see inflation expectations – whatever measure you look at – well anchored,” Ramsden said following a speech given online, echoing comments from fellow deputy governor Ben Broadbent on Wednesday.

(Editing by Larry King and John Stonestreet)

 

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Bitcoin slumps 6%, heads for worst week since March

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Bitcoin slumps 6%, heads for worst week since March 3

By Ritvik Carvalho

LONDON (Reuters) – Bitcoin fell over 6% on Friday to its lowest in two weeks as a rout in global bond markets sent yields flying and sparked a sell-off in riskier assets.

The world’s biggest cryptocurrency slumped as low as $44,451 before recovering most of its losses. It was last trading down 1.2% at $46,525, on course for a drop of almost 20% this week, which would be its heaviest weekly loss since March last year.

The sell-off echoed that in equity markets, where European stocks tumbled as much as 1.5%, with concerns over lofty valuations also hammering demand. Asian stocks fell by the most in nine months.

“When flight to safety mode is on, it is the riskier investments that get pulled first,” Denis Vinokourov of London-based cryptocurrency exchange BeQuant wrote in a note.

Bitcoin has risen about 60% from the start of the year, hitting an all-time high of $58,354 this month as mainstream companies such as Tesla Inc and Mastercard Inc embraced cryptocurrencies.

Its stunning gains in recent months have led to concerns from investment banks over sky-high valuations and calls from governments and financial regulators for tighter regulation.

(Reporting by Ritvik Carvalho; additional reporting by Tom Wilson; editing by Dhara Ranasinghe, Karin Strohecker, William Maclean)

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