International Tax Planning and Transfer Pricing Planning: Iceland from a US perspective

Autor:Professor Dr. Rainer Zielke
Cargo del Autor:Professor in business economics at Østfold University College, Halden, Norway
Actualizado a:April 2017
 
EXTRACTO GRATUITO

Professor Dr Rainer Zielke[1]

Contenido
  • 1 Abstract tax planning
  • 2 Abstract transfer pricing planning
    • 2.1 Introduction
    • 2.2 The low tax country Iceland in the OECD context
    • 2.3 Transfer pricing rules of Iceland
      • 2.3.1 Country-per-Country (CbC) reporting
      • 2.3.2 Laws and rules
      • 2.3.3 Arm's length principle
      • 2.3.4 Transfer pricing methods
      • 2.3.5 Reporting requirements
      • 2.3.6 Documentation requirements
      • 2.3.7 Interaction between customs valuation and transfer pricing
      • 2.3.8 Dispute resolution
    • 2.4 Calculation of the case studies in international tax planning between Iceland and the USA
      • 2.4.1 Design of the tables
      • 2.4.2 The treaty Iceland-USA in brief
      • 2.4.3 BEPS Project progress
      • 2.4.4 Iceland in brief
      • 2.4.5 The USA in brief
      • 2.4.6 Design of case studies
      • 2.4.7 Case study 1: Dividends from Iceland to the US
      • 2.4.8 Case study 2: Interests from Iceland to the US
      • 2.4.9 Case study 3: Royalties from Iceland to the US
      • 2.4.10 Case study 4: Management and technical service fees from Iceland to the US
      • 2.4.11 Case study 5: Capital gains with Iceland as asset country to the US as seller country
      • 2.4.12 Case study 6: Dividends from the US to Iceland
      • 2.4.13 Case study 7: Interests from the US to Iceland
      • 2.4.14 Case study 8: Royalties from the US to Iceland
      • 2.4.15 Case study 9: Management and technical service fees from the US to Iceland
      • 2.4.16 Case study 10: Capital gains with the US as asset country and Iceland as seller country
    • 2.5 Concluding remarks
  • 3 Notes
Abstract tax planning

According to the International Monetary Fund, Iceland has in 2016 a gross domestic product (GDP) of US$ 19,444 million. In Iceland, the corporate income tax rate is 20.00%. In principle, the tax system is a classical system, which means that corporate profits are fully taxed and distributions from the taxed profits are again fully taxed in the hands of the shareholders. However, dividends are not taxed in the hands of resident corporate shareholders. Such shareholders must include dividends received in their taxable income but may generally claim an offsetting deduction to the extent that the dividends have been received from taxable resident companies. Thus, Iceland is a high tax country. Especially for multinational enterprises, it is interesting to realize profits in low taxing countries by means of tax planning measures. Iceland has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the OECD, in Iceland, economic growth is strong with continued expansion in tourism, robust private consumption and favorable terms of trade. Steep wage gains, employment expansion and large investments are fueling domestic demand. The capital controls introduced during the financial crisis are being lifted. Currency appreciation and low import prices have kept inflation low. Inflationary pressures from wage increases and uncertainty with respect to the lifting of capital controls nevertheless call for a tight monetary stance. This chapter provides a survey on the actual tax law frame conditions in Iceland and provides practical support in international tax planning and transfer pricing planning between Iceland and the US based on cross border case studies.

Abstract transfer pricing planning

With respect to transfer pricing Iceland applies the arm’s length principle, the following transfer pricing methods are applicable: the comparable uncontrolled price method (CUP), the resale price method (RPM), the cost plus method, the profit split method (PSM), the transactional net margin method (TNMM). There are no specific reporting requirements, but documentation requirements. Retroactive transfer pricing adjustments do not interact with the customs valuation of imported goods. The competent authority for mutual agreement procedures, MAPs, is the Director of Internal Revenue. Advance pricing agreements are not available.

Introduction

International tax planning and transfer pricing planning between Iceland, where about 85 percent of total primary energy supply in Iceland is derived from domestically produced renewable energy sources and where utilization of abundant hydroelectric and geothermal power has made Iceland the world's largest electricity producer per capita, thus as a result of its commitment to renewable energy, the 2016 Global Green Economy Index ranked Iceland among the top 10 greenest economies in the world, and the US as most important national economy of the world based on cross-border case studies is of central importance. In addition, the USA confirm with a population of 321 million inhabitants in 2017 3rd place of the most populous countries in the world (4.40% of the world population).

According to the International Monetary Fund, [2] Iceland has in 2016 a gross domestic product (GDP) of US$ 19,444 million. In Iceland, the corporate income tax rate is 20.00%. In principle, the tax system is a classical system, which means that corporate profits are fully taxed and distributions from the taxed profits are again fully taxed in the hands of the shareholders. However, dividends are not taxed in the hands of resident corporate shareholders. Such shareholders must include dividends received in their taxable income but may generally claim an offsetting deduction to the extent that the dividends have been received from taxable resident companies. Thus, Iceland is a high tax country. Especially for multinational enterprises, it is interesting to realize profits in low taxing countries by means of tax planning measures. Iceland has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the OECD, [3] in Iceland, economic growth is strong with continued expansion in tourism, robust private consumption and favorable terms of trade. Steep wage gains, employment expansion and large investments are fueling domestic demand. The capital controls introduced during the financial crisis are being lifted. Currency appreciation and low import prices have kept inflation low. Inflationary pressures from wage increases and uncertainty with respect to the lifting of capital controls nevertheless call for a tight monetary stance. Moreover, the central bank should continue using its macro-prudential toolkit to tackle potentially large short-term capital inflows that might follow the lifting of capital controls. Reformed wage bargaining could prevent a future wage-price spiral while improved competition and reduced barriers to entry would boost productivity. Iceland has considerably improved its fiscal position, reduced its net public debt and introduced a new budget law. Given the position of the economy, fiscal expansion would be unwise. But resources could be redeployed to health, pensions, and public infrastructure. Doing so would make growth more socially inclusive.

According to Orbitax, [4] (Daily Tax News Digest of 10 January 2017),

Iceland's Ministry of Finance has published[5] the individual income tax rates and brackets for 2017. Changes include a reduction in the number of brackets from three to two (middle bracket removed), a reduction in the lower rate from 22.68% to 22.50%, and a reduction in the municipal tax rate from 14.45% to 14.44%. The changes result in the following tax brackets for 2017:

  • up to ISK 10,016,484 (834,707 per month) - 36.94%
  • over ISK 10,016,484 (834,707 per month) - 46.24%

The 14.44% municipal rate is the rate of tax withheld, while the rate applied in the final assessment varies from 12.44% to 14.52%.

The pivotal question is therefore, how groups of affiliated companies with group companies in Iceland and in the US can – before the background of anti-avoidance legislation and other tax law frame conditions – optimize their strategies of international tax planning based on cross-border case studies.

Therefore and first of all the high tax country Iceland is to be reviewed in the OECD context (see section 2) – also with respect to the transfer pricing rules of Iceland (see section 3), and constructive hereon 10 case studies in international tax planning between Iceland and the US are to be calculated (see section 4). Finally the results of this survey are to be compiled in concluding remarks (see section 5), especially with respect to the deduction of strategies in international tax planning between Iceland and the US.

This chapter had been written based on the following sources:

  • Orbitax[6], Orbitax Country Analysis Iceland and USA, Orbitax Cross-Border Calculation Tools, Orbitax Transfer Pricing Tool
  • the Icelandic Income Tax Act, [7]
  • the Icelandic tax reform 2017, [8]
  • the US Internal Revenue Code, [9]
  • the US Tax reform 2017[10], and
  • the Double Taxation Convention between Iceland and the USA signed 23 October 2007 and effective from 1 January 2009. [11]
The low tax country Iceland in the OECD context

International tax planning and transfer pricing planning between Iceland and the US based on cross-border case studies is of central importance. In Iceland, the corporate income tax rate is 20.00%. In principle, the tax system is a classical system, which means that corporate profits are fully taxed and distributions from the taxed profits are again fully taxed in the hands of the shareholders. However, dividends are not taxed in the hands of resident corporate shareholders. Such shareholders must include dividends received in their taxable income but may generally claim an offsetting deduction to the extent that the dividends have been received from taxable resident companies. Thus, Iceland is a high tax country.

Between OECD Member States, also Iceland, that is no OECD Member country, the US, and other countries and also within the OECD there exists – also in 2016 – a considerable tax differential. Here from there results the incentive to international tax planning and to shift the taxable basis into lower taxing OECD Member States and other countries outside the OECD. Primary parameters of...

Para continuar leyendo

SOLICITA TU PRUEBA