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Country-by-Country Survey of Global Secondary Adjustment Rules 

Posted on July 5, 2021
Lillie Sullivan
Lillie Sullivan
Cameron Taheri
Cameron Taheri
Sean Foley
Sean Foley

Sean Foley is a principal, Cameron Taheri is a managing director, and Lillie Sullivan is a manager in the tax controversy and dispute resolution group of the Washington National Tax practice of KPMG LLP.

The authors thank the following individuals for their contributions to this article: Wadih Abu Nasr; Effie Adamidou; Teodora Alecu; Rubén Alonzo; Ericson G. Amaral; Maria Anderson; Svein Gunnar Andresen; Alfredo Artiles; Steve Austwick; Khaled Balbaa; Marco Bañuelos; Lucia Barone; Alejandro Barran; Manal Becirbegovic; Shabana Begum; Johnny Bøgebjerg; Tomislav Borošak; Sophie Boulanger; Aaron E. P. Brunier; Neil Casey; Marcelo A. Castillo; Alvaro Castro; Mei Seen Chang; Sherry J. Chang; Patrick Cheung; Cheng Chi; Felicia Chia; Poliksenia Chukanska; Tomáš Ciran; Edson J. Costa; Marina De Bartolo; Gianni De Robertis; Başak Diclehan; Jeroen Dijkman; Dessislava Dimova; Maged Elmenyawi; Gino Erazo; Kyle Finnerty; Gerhard Foth; David L. Francescucci; Thalia Francis; Kofi Frempong-Kore; Michael Freudenberg; Koichiro Fujimori; Hitesh Gajaria; Sergio Garcia; James Gatley; Mihály Gódor; Michael Gordon; Tony Gorgas; Ágúst K. Guðmundsson; Juan Pablo Guerrero; Kalin Hadjidimov; Daniel Head; Thuy Duong Hoang; Iwan Hoo; Glen Hutchings; Marcos Incer; Kim M. Jarrett; Carola Jáuregui; Shamila Jayasekara; Young-Kyu Jo; Senad Kadunic; Md Kamruzzaman; Gil-Won Kang; Bob LJ Kee; Olivier Kiet; Matej Kolar; Marija Kovačević; Benjamas Kullakattimas; Sanna Laaksonen; Ghalia Labraimi; Luis Laguerre; Maike Leppik; Jorge Letran; Gracie Li; Henrik Lund; Marco Macías; Costas Markides; Marko Mehle; Mauricio Meyer; Leah Minton; Mykola Mishyn; Trung Thang Nguyen; Per Daniel Nyberg; Tayo Ogungbenro; Conor O’Sullivan; Monika Palmowska; Alba Paparisto; Manoj Pardasani; Veena Parrikar; Maria Carmela M. Peralta; Holger Peters; Birutė Petrauskaite; Magdalena Pichler; Susana Pinto; Adam Polacsik; Gerald Posautz; Frank Putrino; Maria Teresa Quiñones Fernandez; Craig Reeder; Zdenek Rehak; Werner Rosar; Karina Rubio; Ricardo A. Ruiz; Polina Ruseva; Soňa Saidlová; Willhem Salgado; David Samson; Carmen Sánchez; Simon Schaadt; Hermann Schomakers; Michelle Sledz; Mischa Sollberger; Erik Olof Spjuth; Eduard Sporken; Peter Steeds; Nicholas Stevart; Martina Strubelj; Jun A. Tanaka; Veronica Tejada; Demet Tepe; Lars Terkilsen; Montserrat Trapé Viladomat; Natasha Vaidanis; Natalia Valkovskaya; Dirk Van Stappen; Karolina Viberg; Juan Carlos Vidal; Francois Vincent; Mimi Wang; Xiaoyue Wang; and Daniel Zmaragowski.

In this article, the authors examine the complexities in secondary adjustment rules and detail those regimes globally.

As multinational enterprises grapple with the coronavirus’s effects on the global marketplace, some may consider adjusting their transfer pricing to respond to changes in profitability or manage cash. When taxpayers engage in self-initiated adjustments to their transfer pricing, it’s important to keep in mind the potential second-level effects. Following a transfer pricing adjustment, some countries impose rules requiring secondary adjustments to reflect an inferred secondary transaction to resolve the discrepancy between the taxpayer’s cash accounts and tax accounts. This article discusses the complexities inherent in secondary adjustment rules and details the secondary adjustment rules of the United States and other jurisdictions.

I. Secondary Adjustments

A primary adjustment occurs when a tax authority or a taxpayer adjusts taxable profits as a result of applying the arm’s-length principle to transactions between related parties. Through the mutual agreement procedure article of an income tax treaty, the tax authority of the affected second tax jurisdiction may then make a corresponding adjustment to the tax liability of the related party in that jurisdiction. Those adjustments result in a discrepancy between the taxpayer’s cash accounts and tax accounts. To resolve that and make the actual allocation of profits consistent with the primary adjustment, some countries impose a constructive transaction to account for the profits in the hands of one related party (in country A) that would have been in the hands of another related party (in country B) if the actual transaction had been at arm’s length. That constructed secondary transaction can be a deemed dividend,1 deemed capital contribution, or deemed loan.2 The OECD describes the adjustment that arises from imposing tax on the secondary transaction as the secondary adjustment, although the secondary transaction and any related tax consequences are typically described together in common parlance as a secondary adjustment. For a basic understanding of how a secondary adjustment may come into play, consider examples 1, 2, 3, and 4.

Example 1. IRS Adjustment

Example 2. German Tax Authority Adjustment

Example 3. German Tax Authority Adjustment

Example 4. IRS Adjustment

Not all jurisdictions impose secondary adjustments; in fact, most do not. Some notable countries without secondary adjustment rules include Australia, China, Japan, and the United Kingdom. Other countries, like Israel, do have rules imposing secondary adjustments, but the tax authority will sometimes compromise on secondary adjustments as part of a tax settlement, an outcome not possible in the United States. Of the jurisdictions that do impose secondary adjustments, the rules on how to handle the mechanics and effects of the secondary adjustments vary. The following sections discuss some of the complexities that taxpayers should keep in mind when navigating secondary adjustments in various countries and provide an overview of the U.S. rules. Although the discussion does not address how specific income tax treaties may affect secondary adjustments, the treatment of secondary transactions under treaties will often differ from that under the treaty partners’ domestic laws. For instance, income tax treaties frequently contain language altering the applicable withholding tax rate.

II. Complexities of Secondary Adjustment Rules

A. How Does Domestic Law Treat a Dividend?

One complexity of secondary adjustments that taxpayers should keep in mind is that jurisdictions treat inbound dividends differently. In some jurisdictions, like Canada, Morocco, and New Zealand, inbound deemed dividends will not give rise to income. However, in most jurisdictions, inbound dividends are generally subject to tax, although they may qualify for an exemption under a jurisdiction’s domestic rules.

In Example 2, the U.S. parent is deemed to receive a dividend from its German subsidiary. In the United States, a deemed dividend will be treated the same as any dividend. To determine the tax impact of a dividend deemed received by the U.S. parent, taxpayers must consider the participation exemption system created under the Tax Cuts and Jobs Act. Under section 245A, U.S. corporations may deduct 100 percent of dividends received from 10-percent-owned foreign corporations other than passive foreign investment companies. As a result, when the participation exemption applies, U.S. taxpayers may be able to avoid tax on the deemed dividend.

When taxpayers have a dividend deemed received by an affiliate in another country, as in Example 4, they will need to beware of that jurisdiction’s domestic treatment of deemed dividends.

Additional detail on the domestic treatment of deemed dividends in various jurisdictions is in the table at the end of this article.

B. Is Withholding Tax Imposed?

When secondary adjustment rules infer a deemed dividend from subsidiary to parent to resolve the discrepancy between tax and cash accounts that results from primary and corresponding adjustments to the taxable income of those entities, there may be withholding tax on the deemed dividend. For illustrations of situations in which withholding tax on a deemed dividend might arise, consider examples 2 and 4 above. In Example 2, the German subsidiary is deemed to have paid a dividend to its U.S. parent. German domestic law might impose withholding tax on that deemed dividend, and as can be seen in the table, Germany does in fact impose withholding tax in some situations. In Example 4, we see a similar situation in reverse: The U.S. subsidiary has a deemed dividend to its German parent. The United States imposes withholding tax on deemed dividends. Because U.S. Treas. reg. section 1.1441-2e(2) creates a withholding tax liability on deemed dividends that arise under the transfer pricing regulations, the U.S. subsidiary would be a withholding agent required to withhold tax on the deemed dividend.

C. Sibling Companies

Another complexity in the administration of secondary adjustments arises in the following circumstance: There is a primary transfer pricing adjustment between subsidiaries of a common parent company, with the income of a related resident increased by the primary adjustment and the corresponding adjustment decreasing the related nonresident’s income. In that case, the question is whether there will be a deemed dividend to the related nonresident even though it has no ownership interest in the resident company.

Example 5. IRS Adjustment

Example 6. CRA Adjustment

As shown in the examples above, that question arises with brother-sister companies. Jurisdictions may have differing rules on whether the deemed dividend or deemed capital contribution flows directly between the brother-sister companies or instead flows from the brother company to the common parent followed by a deemed capital contribution to the sister company.

The U.S. rules dictate that the deemed dividend or capital contribution flows through the chain of legal ownership. In Example 5, when the IRS makes a primary adjustment to increase the U.S. subsidiary’s taxable income, the secondary adjustment takes place in two steps: There is first a deemed dividend from the U.S. subsidiary to the German parent, followed by a deemed capital contribution from the German parent to the Canadian subsidiary.

However, the rules in other countries might apply the secondary adjustment directly between the transacting parties. For instance, the deemed dividend mechanism in Canada applies directly between the parties that are the subjects of the primary and corresponding transfer pricing adjustments. That is illustrated in Example 6, in which the Canada Revenue Agency makes a transfer pricing adjustment increasing a Canadian subsidiary’s taxable income and the corresponding adjustment decreases the taxable income of its U.S. sister company. Under Canadian rules, the secondary adjustment that follows is a deemed dividend directly from the Canadian subsidiary to its U.S. sister company.

D. How to Characterize the Deemed Transaction?

The characterization of the deemed transaction also differs between jurisdictions. The United States characterizes the deemed transaction as a deemed distribution or dividend if it flows from subsidiary to parent and as a deemed capital contribution if it flows from parent to subsidiary. That is how secondary transactions are characterized in approximately one-third of the jurisdictions that impose secondary adjustments. Around half the jurisdictions with secondary adjustment rules instead consider a secondary transaction to be a deemed dividend regardless of the direction of the transaction, even when the deemed transaction is a payment from a parent to a subsidiary and so would typically be treated as a capital contribution.

Several jurisdictions have unique rules governing the characterization of the deemed transaction. Norway considers secondary adjustments to be deemed dividends if the adjusted transaction is between a parent and subsidiary. However, if the related parties are not parent and subsidiary, the secondary adjustment is instead a deemed loan. In Israel, payments to parent companies are deemed dividends, but a potential deemed capital contribution will instead be recharacterized as a notional loan and there will be deemed interest. South Korea characterizes transactions much like the United States does when the transacting parties are parent and subsidiary. However, when the transacting parties are brother-sister companies, the deemed transaction is always a deemed dividend flowing between the brother-sister companies. In Thailand, a deemed payment is generally characterized as a profit payment rather than a dividend or capital contribution. In India, the deemed transactions are considered deemed advances.

III. Avoiding Secondary Adjustments

The transfer pricing rules of about 50 percent of the jurisdictions that impose secondary adjustments let taxpayers opt to avoid secondary adjustments and all the attendant complications by using repatriation — called a “conforming adjustment” in some countries — of the excess cash to resolve the discrepancy between tax accounts and cash accounts caused by the primary and corresponding adjustments. The impact of income tax treaties is not discussed here, but repatriation may be handled differently under treaties and domestic laws. It also may be available through MAP settlement even if it is unavailable through domestic rules, as in Germany and Switzerland.

Repatriation may be effected either by setting up an account receivable or by reclassifying other transfers, such as dividend payments. For example, if the adjustment is between parent and subsidiary, a dividend may be offset and used as a payment of additional transfer price (if the original price was too low). While secondary adjustments create a deemed transaction to explain the discrepancy between tax and cash accounts, repatriation corrects the discrepancy by moving the cash from one related party to another. If repatriation is available, taxpayers in some countries may find that it minimizes or eliminates the additional tax consequences that would be associated with a secondary adjustment.

Repatriation is available in the United States under Rev. Proc. 99-32, 1999-2 C.B. 296. It allows for the creation of either an account receivable (if the U.S. taxpayer’s income increased) or an account payable (if it decreased) so eligible taxpayers can make adjustments to conform their accounts to reflect the section 482 allocation associated with a primary adjustment made or accepted by the IRS.

For an example of how repatriation can resolve the discrepancy between tax accounts and cash accounts, consider Example 4 above. The IRS determined that a U.S. subsidiary of a Germany company was paying the German parent an amount greater than arm’s length and made an upward adjustment to the U.S. subsidiary’s taxable income. If the subsidiary elects Rev. Proc. 99-32 treatment, it can repatriate the cash from the German parent back to itself by establishing an account receivable. In that case, Rev. Proc. 99-32 provides that there are no U.S. income tax consequences arising from the movement of that cash.

When repatriation is accomplished by establishing an account receivable or payable, domestic rules may require that the account bear interest. That is the case in the United States: Rev. Proc. 99-32 provides that the account receivable or payable must bear interest at an arm’s-length rate, computed according to Treas. reg. section 1.482-2(a)(2), starting the day after the date the account is deemed created, which is the last day of the taxpayer’s tax year for which the primary adjustment is made. If domestic rules require that the account receivable or payable bears interest, it’s important to remember that while repatriation avoids the tax consequences associated with secondary adjustments, the interest associated with repatriation may itself have income tax consequences.

IV. Taxpayer Takeaways

Taxpayers and practitioners handling transfer pricing adjustments should remain alert to the effects of secondary adjustments. Although U.S. taxpayers and practitioners may be familiar with secondary adjustments, this is one area in which there is a notable lack of symmetry in global rules. Because most jurisdictions do not impose secondary adjustments, and those that do have major variations in their rules, many tax practitioners are not aware of the existence of, or complexities inherent in, secondary adjustments. It is important for tax advisers to be aware that secondary adjustments may come into play as a result of transfer pricing adjustments, even when that is a departure from domestic tax regulations.

V. Global Survey of Secondary Adjustment Rules

The authors surveyed colleagues in 79 jurisdictions to collect information on the domestic treatment of secondary adjustments (see table).3

Global Survey of Secondary Adjustment Rules

Country

Are There Rules for Secondary or ‘Deemed’ Transactions in Your Country?

Is a Deemed Dividend Treated as an Actual Dividend Under Domestic Law?

Is Withholding Tax (Subject to Limitations of Any Bilateral Treaty or EU Directive) Imposed on a Deemed Dividend That Arises From a Secondary Adjustment?

How Does the Deemed Dividend or Deemed Capital Contribution Flow?

If Secondary Transactions Flow Through the Legal Ownership Chain Under Your Domestic Law, Will a Deemed Outbound Payment Be Treated as a Capital Contribution if Made to a Subsidiary, or Will It Always Be Treated as a Dividend?

For Countries Where Secondary Transactions Flow Directly Between the Transacting Parties, Are the Deemed Transactions Always Treated as Dividends or Can They Be Classified Differently?

Does Domestic Law Permit Taxpayers to Eliminate the Deemed Transaction by Repatriating the Funds Equivalent to the Transfer Pricing Adjustment?

Albania

No

N/A

N/A

N/A

N/A

N/A

N/A

Argentina

No

N/A

N/A

N/A

N/A

N/A

N/A

Australia

No

N/A

N/A

N/A

N/A

N/A

N/A

Austria

Yes

Yes

Yes

Through the legal ownership chain

Treated as capital contribution if payment deemed is made to a subsidiary

N/A — deemed transactions flow through the legal ownership chain under domestic law

Yes

Bangladesh

No

N/A

N/A

N/A

N/A

N/A

N/A

Belgium

No

N/A

N/A

N/A

N/A

N/A

N/A

Bolivia

No

N/A

N/A

N/A

N/A

N/A

N/A

Bosnia and Herzegovina

No

N/A

N/A

N/A

N/A

N/A

N/A

Brazil

No

N/A

N/A

N/A

N/A

N/A

N/A

Bulgaria

Yes

Yes

Yes

Between the transacting parties

N/A — deemed transactions flow directly between the transacting parties under domestic law

Always treated as a dividend

No

Cambodia

No

N/A

N/A

N/A

N/A

N/A

N/A

Canada

Yes

Noa

Yes

Between the transacting parties

N/A — deemed transactions flow directly between the transacting parties under domestic law

Always treated as a dividend

Yes

Chile

No

N/A

N/A

N/A

N/A

N/A

N/A

China

No

N/A

N/A

N/A

N/A

N/A

N/A

Colombia

Yes

Yes

Yes

Between the transacting parties

N/A — deemed transactions flow directly between the transacting parties under domestic law

Always treated as a dividend

No

Costa Rica

No

N/A

N/A

N/A

N/A

N/A

N/A

Croatia

No

N/A

N/A

N/A

N/A

N/A

N/A

Cyprus

No

N/A

N/A

N/A

N/A

N/A

N/A

Czech Republic

Yes

Yes

Yes

Through the legal ownership chain

Always treated as a dividend

N/A — deemed transactions flow through the legal ownership chain under domestic law

Yes

Denmark

Yes

Yes

Yesb

Between the transacting parties

N/A — deemed transactions flow directly between the transacting parties under domestic law

Can be classified differently

Yes

Dominican Republic

Yes

Yes

Yes

Through the legal ownership chain

N/A — deemed transactions flow directly between the transacting parties under domestic law

Can be classified differently

No

Ecuador

No

N/A

N/A

N/A

N/A

N/A

N/A

Egypt

No

N/A

N/A

N/A

N/A

N/A

N/A

Estonia

No

N/A

N/A

N/A

N/A

N/A

N/A

Finland

No

N/A

N/A

N/A

N/A

N/A

N/A

France

Yes

Yesc

Yesd

Between the transacting parties

N/A — deemed transactions flow directly between the transacting parties under domestic law

Always treated as a dividend

Yes

Germany

Yes

Yes

Yese

Through the legal ownership chain

Treated as a capital contribution if payment is deemed made to a subsidiary

N/A — deemed transactions flow through the legal ownership chain under domestic law

Yesf

Ghana

No

N/A

N/A

N/A

N/A

N/A

N/A

Greece

No

N/A

N/A

N/A

N/A

N/A

N/A

Guatemala

No

N/A

N/A

N/A

N/A

N/A

N/A

Honduras

No

N/A

N/A

N/A

N/A

N/A

N/A

Hong Kong

No

N/A

N/A

N/A

N/A

N/A

N/A

Hungary

No

N/A

N/A

N/A

N/A

N/A

N/A

Iceland

No

N/A

N/A

N/A

N/A

N/A

N/A

India

Yes

N/Ag

N/A

N/Ah

N/A

N/A

Yesi

Indonesia

Yes

Yes

Yes

Through the legal ownership chain

Always treated as a dividend

N/A — deemed transactions flow through the legal ownership chain under domestic law

No

Ireland

No

N/A

N/A

N/A

N/A

N/A

N/A

Israel

Yesj

Treatment of inbound deemed transactions is unclear

Yes

Through the legal ownership chain

Can be classified differentlyk

N/A — deemed transactions flow through the legal ownership chain under domestic law

No

Italy

No

N/A

N/A

N/A

N/A

N/A

N/A

Jamaica

No

N/A

N/A

N/A

N/A

N/A

N/A

Japan

No

N/A

N/A

N/A

N/A

N/A

N/A

Latvia

No

N/A

N/A

N/A

N/A

N/A

N/A

Lithuania

No

N/A

N/A

N/A

N/A

N/A

N/A

Luxembourg

Yes

Yes

Yes

Through the legal ownership chain

Treated as a capital contribution if payment is deemed made to a subsidiary

N/A — deemed transactions flow through the legal ownership chain under domestic law

Yes

Malaysia

No

N/A

N/A

N/A

N/A

N/A

N/A

Malta

No

N/A

N/A

N/A

N/A

N/A

N/A

Mexico

No

N/A

N/A

N/A

N/A

N/A

N/A

Morocco

Yes

No

Yes

Between the transacting parties

N/A — deemed transactions flow directly between the transacting parties under domestic law

Always treated as a dividend

No

Netherlands

Yes

Yes

Yesl

Through the legal ownership chain

Treated as a capital contribution if payment is deemed made to a subsidiary

N/A — deemed transactions flow through the legal ownership chain under domestic law

Yesm

New Zealand

Yes

No

Yes

Between the transacting parties

N/A — deemed transactions flow directly between the transacting parties under domestic law

Always treated as a dividend

Yes

Nicaragua

No

N/A

N/A

N/A

N/A

N/A

N/A

Nigeria

No

N/A

N/A

N/A

N/A

N/A

N/A

Norway

Yes

Yes

Yes

Between the transacting parties

N/A — deemed transactions flow directly between the transacting parties under domestic law

Can be classified differentlyn

Noo

Panama

No

N/A

N/A

N/A

N/A

N/A

N/A

Peru

Yes

Yes

Yes

Between the transacting parties

N/A — deemed transactions flow directly between the transacting parties under domestic law

Always treated as a dividend

No

Philippines

No

N/A

N/A

N/A

N/A

N/A

N/A

Poland

No

N/A

N/A

N/A

N/A

N/A

N/A

Portugal

No

N/A

N/A

N/A

N/A

N/A

N/A

Republic of China (Taiwan)

No

N/A

N/A

N/A

N/A

N/A

N/A

Romania

No

N/A

N/A

N/A

N/A

N/A

N/A

Russia

No

N/A

N/A

N/A

N/A

N/A

N/A

Saudi Arabia

No

N/A

N/A

N/A

N/A

N/A

N/A

Singapore

No

N/A

N/A

N/A

N/A

N/A

N/A

Slovakia

No

N/A

N/A

N/A

N/A

N/A

N/A

Slovenia

Yes

Yes

Yes

Through the legal ownership chain

N/A — deemed transactions flow directly between the transacting parties under domestic law

Always treated as a dividend

Yes

South Africa

Yes

Yes

Yesp

Between the transacting parties

N/A — deemed transactions flow directly between the transacting parties under domestic law

Always treated as a dividend

No

South Korea

Yes

Yes

Yes

Between the transacting parties

N/A — deemed transactions flow directly between the transacting parties under domestic law

Can be classified differentlyq

Yes

Spain

Yes

Yes

Yes

Through the legal ownership chain

Treated as a capital contribution if payment is deemed made to a subsidiary

N/A — deemed transactions flow through the legal ownership chain under domestic law

Yes

Sri Lanka

No

N/A

N/A

N/A

N/A

N/A

N/A

Sweden

No

N/A

N/A

N/A

N/A

N/A

N/A

Switzerland

Yes

Yes

Yesr

Between the transacting parties

N/A — deemed transactions flow directly between the transacting parties under domestic law

Can be classified differently

Yess

Thailand

Yes

N/At

Yesu

Between the transacting parties

N/A — deemed transactions flow directly between the transacting parties under domestic law

The deemed payment is always a profit payment (or sometimes other payment), not a capital contribution

No

Turkey

Yes

Yes

Yes

Between the transacting parties

N/A — deemed transactions flow directly between the transacting parties under domestic law

Always treated as a dividend

No

Ukraine

Yes

Yes

Yes

Between the transacting parties

N/A — deemed transactions flow directly between the transacting parties under domestic law

Always treated as a dividend

No

United Arab Emirates

No

N/A

N/A

N/A

N/A

N/A

N/A

United Kingdom

No

N/A

N/A

N/A

N/A

N/A

N/A

United States

Yes

Yes

Yes

Through the legal ownership chain

Treated as a capital contribution if payment is deemed made to a subsidiary

N/A — deemed transactions flow through the legal ownership chain under domestic law

Yes

Vietnam

No

N/A

N/A

N/A

N/A

N/A

N/A

Note: Although the authors attempted to identify all jurisdictions with secondary adjustment rules, there may be some that were not included in this list.

aA deemed dividend payable to a Canadian enterprise does not give rise to income in Canada.

bIf the constructive dividend is deemed paid to a parent in the EU in a situation to which the EU parent-subsidiary directive (2017/952) applies, on request, withholding tax will not be imposed. In practice, secondary adjustments are seldom relevant because contributions and dividends between group companies are usually tax exempt.

cDeemed dividend income does not benefit from the participation-exemption regime and is fully taxable.

dThe parent-subsidiary directive will not eliminate intra-EU withholding tax on a secondary adjustment in France. However, a bilateral treaty could apply to reduce the withholding tax.

eIf the constructive dividend is deemed paid to a parent in the EU in a situation to which the parent-subsidiary directive applies, on request, withholding tax will not be imposed or refunded.

fUnder German domestic law, repatriation cannot avoid qualification as a constructive dividend; the repatriation would therefore be qualified as a hidden contribution. However, use of repatriation to avoid the withholding tax on a constructive dividend might be negotiated as part of a MAP settlement.

gSecondary adjustments are considered deemed advances under India’s income tax regulations. Therefore, if excess money in the hands of a foreign related party is not repatriated to India within the prescribed timelines, the Indian taxpayer would be deemed to be earning interest income on the deemed advance.

hUnder the deemed advance approach, repatriation is allowed from any of the overseas related parties and does not have to be from the transacting party itself.

iIf repatriation is not made within the prescribed timelines, payment in the form of interest on the deemed advance also must be made by the foreign related party until the excess money is repatriated into India. Alternatively, the Indian taxpayer may pay additional income tax (18 percent plus applicable surcharge and cess) on any excess money pertaining to the primary adjustment and will not be required to make any secondary adjustment and compute interest thereon for the amount not repatriated to India.

jImportantly, the Israeli tax authority will sometimes compromise on the secondary adjustment as part of a tax settlement.

kA potential deemed capital contribution will be recharacterized as a notional loan and there will be deemed interest recognized in Israel; payments to parent companies are deemed dividends.

lIf the constructive dividend is deemed paid to a parent in the EU in a situation to which the parent-subsidiary directive applies, a withholding tax exemption may be invoked via notification to the Dutch tax authorities that the relevant criteria were met within one month of the dividend distribution.

mFollowing specific domestic procedures, the taxpayer can repatriate the cash attributable to a primary adjustment via an account to avoid a deemed dividend or capital contribution only if it can be considered a primary transfer pricing correction.

nA deemed dividend occurs when there is a parent-subsidiary relationship. If the related parties are not parent and subsidiary, the secondary adjustment is a deemed loan.

oThe regulations do not specifically address repatriation. In principle, repatriation would be in line with Norway’s secondary adjustment scheme.

pThe deemed dividend is subject to withholding tax of 20 percent (borne by the South African entity), which is not eligible for reduction under treaty.

qWhen the transacting parties are parent-subsidiary, the deemed transaction is a deemed dividend or capital contribution, depending on the relationship and the adjustment. When the transacting parties are brother-sister companies, the deemed transaction is always a deemed dividend flowing between them.

rIf the outbound deemed dividend is the result of a successful MAP procedure, generally no withholding tax is due.

sRepatriation is generally not available outside a MAP settlement.

tThe deemed payment is generally characterized as a profit payment and not a dividend.

uThe deemed profit payment is subject to withholding tax at the dividend rate.

FOOTNOTES

1 A deemed distribution will be characterized as a dividend to the extent of the payer’s earnings and profits. For ease of reference, this article uses the term “deemed dividend” to refer to deemed distributions generally.

2 See 2017 OECD transfer pricing guidelines glossary.

3 The information in this article is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the authors only and does not necessarily represent the views or professional advice of KPMG LLP.

END FOOTNOTES

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