International Tax Planning and Transfer Pricing Planning: Lithuania 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
 
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Professor Dr Rainer Zielke [1]

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

According to the International Monetary Fund, Lithuania confirms in 2016 with a gross domestic product (GDP) of US$ 42,776 million the twenty-fifth-highest GDP of the European Union. In Lithuania, the profit tax rate is 15.00%. Thus, Lithuania is a low tax country. Especially for multinational enterprises, it is interesting to realize profits in low taxing countries by means of tax planning measures. Lithuania has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the OECD, accession to the euro area confirms Lithuania’s commitment to sound and sustainable economic policies. The economy is expected to recover despite weak Russian demand. Labor and product markets are flexible. Productivity rose on average by 5% per year between 1995 and 2014, but remains one-third below the OECD average. Some firms lack skilled workers and the innovation intensity of the business sector is low. Greater spending efficiency needs to make a contribution to finance productivity-enhancing measures. Inequality and poverty rates are high, job satisfaction and life expectancy are low while emigration is high, although to a lower extent more recently. This chapter provides a survey on the actual tax law frame conditions in Lithuania and provides practical support in international tax planning and transfer pricing planning between Lithuania and the US based on cross border case studies.

Abstract transfer pricing planning

With respect to transfer pricing Lithuania applies the arm’s length principle and follows the OECD Guidelines, 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), and the transactional net margin method (TNMM). The methods have the same order in priority as listed above. The following circumstances constitute companies to be related: A group of companies in which the parent company holds at least 25% or more in each subsidiary, are regarded as related companies; and a company is regarded as related to another company if it holds at least 25% of the shares or voting rights in the other. There are reporting requirements and documentation requirements. There are regulations on binding advance pricing agreements.

Introduction

International tax planning and transfer pricing planning between Lithuania, that experienced very high real growth rates in the decade before 2009, peaking at 11.1% in 2007, and as a result, was often termed as a Baltic Tiger, 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] Lithuania confirms in 2016 with a gross domestic product (GDP) of US$ 42,776 million the twenty-fifth-highest GDP of the European Union. In Lithuania, the profit tax rate is 15.00%. Thus, Lithuania is a low tax country. Especially for multinational enterprises, it is interesting to realize profits in low taxing countries by means of tax planning measures. Lithuania has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the OECD, [3] accession to the euro area confirms Lithuania’s commitment to sound and sustainable economic policies. The economy is expected to recover despite weak Russian demand. Labor and product markets are flexible. Productivity rose on average by 5% per year between 1995 and 2014, but remains one-third below the OECD average. Some firms lack skilled workers and the innovation intensity of the business sector is low. Greater spending efficiency needs to make a contribution to finance productivity-enhancing measures. Inequality and poverty rates are high, job satisfaction and life expectancy are low while emigration is high, although to a lower extent more recently. Social assistance is not effective enough at reducing poverty. Securing effective job search and programs to get people back to work would foster inclusive growth. These challenges are addressed in the “New Social Model” reform package. Promoting healthy lifestyles and primary health care would also help to achieve better well-being outcomes. Past fiscal consolidation has placed government debt at a sustainable level. Longer term challenges relating to population ageing and future potential macroeconomic shocks should be addressed by: 1) Further moving taxation away from labor towards less distortionary tax bases and continuing to improve tax collection. 2) Strengthening the sustainability of the pension system. 3) Continuing to strengthen the medium-term budgetary framework.

The pivotal question is therefore, how groups of affiliated companies with group companies in Lithuania 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 low tax country Lithuania is to be reviewed in the OECD context (see section 2) – also with respect to the transfer pricing rules of Lithuania (see section 3), and constructive hereon 10 case studies in international tax planning between Lithuania 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 Lithuania and the US.

This chapter had been written based on the following sources:

  • Orbitax[4], Orbitax Country Analysis Lithuania and USA, Orbitax Cross-Border Calculation Tools, Orbitax Transfer Pricing Tool,
  • the Lithuanian Corporate Income Tax Act, [5]
  • the Lithuanian Tax Reform 2017, [6]
  • the US Internal Revenue Code, [7] and
  • the Double Taxation Convention between Lithuania and the USA signed 15 January 1998 and effective from 1 January 2000. [8]
The low tax country Lithuania in the OECD context

International tax planning and transfer pricing planning between Lithuania and the US based on cross-border case studies is of central importance. In Lithuania, corporate income tax is levied at a rate of 15.00%. Thus, Lithuania is a low tax country.

Between OECD Member States, also Lithuania that is no OECD Member State, 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 the corporate income tax burden of any country are the statutory corporate income tax rates. [9] Furthermore in many OECD Member States there are – in addition to the statutory corporate income tax rates – further corporate income taxes, especially on the level of subordinated regional administration bodies. Consequential and following the concept of Gerd Rose[10] there can be calculated combined tax rates for any country, that applied to one (uniform) taxable basis, result in the tax burden of the related country. The combined corporate income tax rates of countries with several taxes can then be compared with countries that just apply a single corporate income tax rate. In addition, an average rate for the whole OECD can be calculated.

In 2016, Lithuania has a combined tax rate of 15.00%. Within the OECD, the corporate income tax rates range between 12.50% in case of Ireland (distribution rate) und 40.00% in case of France (distribution rate). The average corporate income tax rate in the OECD in 2016 is 24.95%. The margin is 27.50 percentage points. It attracts attention that OECD Member States with the highest tax burden also apply surtaxes, as the US. 21 of the OECD Member States are also EU Member States.

Lithuania is 9.95 percentage points beneath and the US 14.65 percentage points above the OECD average. High corporate income tax rates form the incentive to reduce the taxable basis by cross-border tax planning measures.

Transfer pricing rules of Lithuania Laws and rules

According to Article 40 paragraph 2 of the Corporate Income Tax Act the tax authority has the right to adjust...

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