International Tax Planning and Transfer Pricing Planning: Portugal 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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Contenido
  • 1 Abstract tax planning
  • 2 Abstract transfer pricing planning
    • 2.1 Introduction
    • 2.2 The high tax country Portugal in the OECD context
    • 2.3 Transfer pricing rules of Portugal
      • 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 Definition of related companies
      • 2.3.6 Reporting requirements
      • 2.3.7 Documentation requirements
      • 2.3.8 Cost sharing
      • 2.3.9 Business restructuring
      • 2.3.10 Interaction between customs valuation and transfer pricing
      • 2.3.11 Dispute resolution
    • 2.4 Calculation of the case studies in international tax planning between Portugal and the USA
      • 2.4.1 Design of the tables
      • 2.4.2 The treaty Portugal-USA in brief
      • 2.4.3 BEPS Project progress
      • 2.4.4 Portugal in brief
      • 2.4.5 The USA in brief
      • 2.4.6 Design of case studies
      • 2.4.7 Case study 1: Dividends from Portugal to the US
      • 2.4.8 Case study 2: Interests from Portugal to the US
      • 2.4.9 Case study 3: Royalties from Portugal to the US
      • 2.4.10 Case study 4: Management and technical service fees from Portugal to the US
      • 2.4.11 Case study 5: Capital gains with Portugal as asset country to the US as seller country
      • 2.4.12 Case study 6: Dividends from the US to Portugal
      • 2.4.13 Case study 7: Interests from the US to Portugal
      • 2.4.14 Case study 8: Royalties from the US to Portugal
      • 2.4.15 Case study 9: Management and technical service fees from the US to Portugal
      • 2.4.16 Case study 10: Capital gains with the US as asset country and Portugal as seller country
    • 2.5 Concluding remarks
  • 3 Notes
Abstract tax planning

According to the International Monetary Fund, Portugal confirms in 2016 with a gross domestic product (GDP) of US$ 205,860 million the fifteenth-highest GDP of the European Union. The combined corporate income tax rate in mainland Portugal is 28.00%. Thus, Portugal is a high tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in low taxing countries by means of tax planning measures. Portugal has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the OECD, in Portugal, GDP growth is projected to remain subdued, at about 1¼ per cent in 2017 and 2018. High corporate leverage and a fragile banking sector will hold back private investment and still high unemployment will restrain consumption growth. As economic slack will persist, inflation will remain low. Boosting investment and productivity are key to raise living standards and growth. Investment incentives could be strengthened through further reforms to simplify administrative procedures, including land use regulations, improvements in judicial efficiency to facilitate insolvency procedures, and easing entry barriers in professional services. This chapter provides a survey on the actual tax law frame conditions in Portugal and practical support in international tax planning and transfer pricing planning between Portugal and the US based on cross border case studies.

Abstract transfer pricing planning

With respect to transfer pricing Portugal applies the arm’s length principle and follows the OECD Guidelines, the following transfer pricing methods are applicable: the comparable uncontrolled price method, the cost plus method, the resale price method, the profit split method, and the transactional net margin method. Although the ‘best method’ rule applies, there is a priority among transfer pricing methods. Transaction-based methods are preferred. A company is related to another if: one of them participates, directly or indirectly, in the other company by owning at least 20% of the equity or voting rights of the other company, or if both of them, directly or indirectly, are at least 20% owned by another company, or an economic, professional or legal dependence exists between the companies. There are reporting and documentation requirements. Cost sharing is allowed and business restructuring is possible. There is interaction between customs valuation and transfer pricing. There are regulations on advance pricing agreements.

Introduction

International tax planning and transfer pricing planning between Portugal, a developed and a high income country, 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 2016 3rd place of the most populous countries in the world (4.40% of the world population).

According to the International Monetary Fund, [1] Portugal confirms in 2016 with a gross domestic product (GDP) of US$ 205,860 million the fifteenth-highest GDP of the European Union. The combined corporate income tax rate in mainland Portugal is 28.00%. Thus, Portugal is a high tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in low taxing countries by means of tax planning measures. Portugal has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the OECD, [2] in Portugal, GDP growth is projected to remain subdued, at about 1¼ per cent in 2017 and 2018. High corporate leverage and a fragile banking sector will hold back private investment and still high unemployment will restrain consumption growth. As economic slack will persist, inflation will remain low. Boosting investment and productivity are key to raise living standards and growth. Investment incentives could be strengthened through further reforms to simplify administrative procedures, including land use regulations, improvements in judicial efficiency to facilitate insolvency procedures, and easing entry barriers in professional services. Removing distressed legacy loans from bank balance sheets and opening up new sources of financing are needed to facilitate investment. Improving skills is also crucial to raise productivity, including through a continued expansion of adult education and training and more effective vocational education. At about 130% of GDP, public debt remains very high despite significant progress achieved in fiscal consolidation, severely limiting fiscal space. The gradual consolidation in 2017 and 2018 strikes a balance between fiscal sustainability and not damaging economic prospects. Going forward, it is important to achieve a tax and spending structure reform that supports growth, including by achieving permanent cuts in current expenditures.

According to Orbitax, [3] (Daily Tax News Digest of 13 October 2016), on 6 October 2016, the Portuguese government announced the approval of the Special Program for the Reduction of Debts to the State. Under the program, both individuals and businesses that pay outstanding tax and social security debts by the end of 2016 will not be subject to interest. The program also allows taxpayers to enter into an installment plan with a maximum duration of 11 years (150 payments) without the need to provide a guarantee. The regularization program is available for tax debts due up to 31 May 2016 and social security debts due up to 31 December 2015. [4]

According to Orbitax, [5] (Daily Tax News Digest of 26 August 2016), on 22 August 2016, Portugal published Law-Decree no. 47/2016, which introduces changes to the Tax Code concerning the country's patent box regime (50% reduction of qualifying taxable IP income). The amendments bring the regime in line with the modified nexus approach developed as part of BEPS Action 5, which requires that the benefits received under a regime be aligned with the actual activities performed by the taxpayer claiming the benefits.

The nexus ratio formula for determining the benefit of the regime as provided in the Law-Decree is DQ / DT x RT x 50%, where:

  • DQ = Eligible costs incurred on development activities for the IP assets performed in-house and through unrelated third parties;
  • DT = Total costs incurred on development activities, including costs incurred with related parties; and
  • RT = Income derived from the IP assets

In addition, a 30% uplift is allowed for the eligible costs amount, limited by the total costs amount.

The amendment regime applies for income from qualifying IP assets registered on or after 1 July 2016. For qualifying assets registered on or after 1 January 2014 that met the requirements for the previous patent box regime as of 30 June 2016, the benefits and rules of the previous regime will continue to apply up to 30 June 2021. [6]

The pivotal question is therefore, how groups of affiliated companies with group companies in Portugal 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.

This chapter had been written based on the following sources:

  • Orbitax[7], Orbitax Country Analysis Portugal and USA, Orbitax Cross-Border Calculation Tools, Orbitax Transfer Pricing Tool,
  • Portuguese Corporate Income Tax Code, [8]
  • Portuguese Tax Reform 2017, [9]
  • the US Internal Revenue Code, [10] and
  • the Double Taxation Convention between Portugal and the USA signed 6 September 1994 and effective from 1 January 1996. [11]
The high tax country Portugal in the OECD context

International tax planning and transfer pricing planning between Portugal and the US based on cross-border case studies is of central importance. The combined corporate income tax rate in mainland Portugal is 28.00%. Thus, Portugal is a high tax country.

Between OECD Member States, especially Portugal and 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...

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