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Top direct tax cases and transfer pricing disputes in Q1 2021

The first quarter of 2021 saw General Electric (GE) win a battle with the UK tax authority, while the Indian tax administration rebuffed Cairn’s settlement offer, and Rio Tinto fights its corner in Australia.

There have been several landmark developments in tax disputes in recent months, including some that bring fresh bouts of uncertainty for taxpayers. One example is from India where the government rejected European oil and gas company Cairn Energy’s $1.4 billion settlement offer in a long-running transfer pricing dispute. This case alongside another involving an indirect asset transfer by Vodafone continues to scare off foreign direct investment in India.

Meanwhile, governments have started getting more aggressive towards long-standing tax arrangements in Europe. One high-profile case comes from the Court of Appeal in the UK, which recently ruled against HM Revenue and Customs (HMRC) in a case about GE’s tax agreement with the UK revenue authority from 2005.

Important rulings in 2021 from courts around the world, including the Court of Justice of the European Union (CJEU), will set an example on international topics for tax directors such as professional privilege concerns under the EU Council’s Directive 2018/822 (DAC6).

ITR has been following these disputes from the last quarter, and compiled a list of some of the top direct tax and TP events globally.

GE wins battle over tax agreement with HMRC

The Court of Appeal in the UK ruled against HMRC in a landmark case on April 14 regarding an arbitrage clearance agreement with GE. The court ruled that HMRC was too late in raising allegations of “fraudulent misrepresentation” in order to remove GE’s tax agreement.

HMRC first asked the court to annul the agreement in 2018 because GE misrepresented information for the arrangement in 2005. HMRC came forward with its claim 13 years after the agreement was made, but it contends that there is no limitation period on its claim. A six-year limitation would only apply to claims linked to the removal of GE’s arbitration clearance agreement.

The Court of Appeal decided the IGE USA Investments Limited v HMRC case on a key point, that if there is a common law time limit for a similar remedy then the same limit should apply in equity. GE argued its case based on Molloy v Mutual Reserve Life Insurance Company from 1906, which set such a limit.

The ruling allows GE to keep its agreement for a tax deduction on its complex structure of 107 loans, and continue routing billions of dollars in transactions through Australia, the UK and the US. However, tax advisors suggest HMRC will likely seek leave to appeal the case at the Supreme Court in the UK.

India rebuffs Cairn’s offer to settle tax dispute

The Indian government is moving forward with an appeal against Cairn Energy after The Permanent Court of Arbitration at The Hague ruled in favour of the taxpayer in a long-running TP dispute, which awarded the oil and gas company approximately $1.4 billion.

The case is about capital gains tax on Cairn Energy restructuring its operations in India, which it then consequently sold almost a decade ago. Cairn Energy’s Indian subsidiary argued that this was a business reorganisation with no tax motive driving it, but the Indian Tax Department saw it differently.

The tax authority argues that the oil and gas company owes $1.4 billion in capital gains tax, and it even retrospectively amended domestic tax rules to grant itself powers to tax deal-making activity on underlying assets in India.

The Indian government is continuing to fight this case under international arbitration via the Dutch Courts of Appeal after also rebuffing Cairn CEO Simon Thomson’s offer to reinvest the entire legal award in India in exchange for the government to drop the case in April.

One reason for India to reject the proposal is that the arbitration decision could set a precedent that could impact similar court cases, such as the Vodafone case.

This case puts downward pressure on foreign direct investment into India because it promotes legal uncertainties in operating under the Indian tax system. However, the case is also a reminder of why developing countries are sceptical of international arbitration.

Rio Tinto dispute with the ATO

Rio Tinto is preparing for another tax dispute in Australia. The Australian Taxation Office (ATO) issued an amended tax assessment to Rio Tinto on March 1, demanding a total of A$406.5 million ($317 million) with A$359.4 million in primary taxes and A$47.1 million in interest.

The company’s announcement of the revised assessments was published on March 2. Company representatives said the revision was linked to the denial of interest deductions on isolated borrowing used to pay an intragroup dividend in 2015.

The mining corporation also said it was confident that it does not owe the additional tax since the borrowed sum was paid back in 2018, and it plans to contest the assessments. However, Rio Tinto has already paid half of the primary tax upfront, which is required as part of the objections process.

Canada’s Supreme Court blocks appeal in the Cameco case

Cameco’s landmark court victory is secure since the Supreme Court of Canada declined the Crown’s request to appeal the Federal Court of Appeals’ (FCA) decision in the TP case on February 19.

The case is about Cameco’s use of subsidiaries in Luxembourg and Switzerland to trade uranium in Europe. The FCA ruled that transactions were in line with the arm’s-length principle (ALP) and Canada’s TP rules. The issues raised in the case establish broad implications for TP globally, since the decision affects many other Canadian business groups with similar TP arrangements.

Cameco CEO Tim Gitzel expects the Crown to pay back C$5.5 million ($4.46 million) plus interest for taxes the company paid on previous reassessments for 2003, 2005 and 2006, on top of more than C$10 million in legal fees and up to almost C$18 million in disbursements.

The Crown was seeking leave to appeal the FCA decision on the grounds that the “recharacterisation” part of the TP rules in the Canadian Tax Act contains an objective test to determine the arm’s-length rate of a given transaction.

However, the Cameco dispute may not be over in the longer-term as the latest Canadian budget from April 19 addresses concerns about TP loopholes that were highlighted by the case. The government plans to consult on Canada’s transfer pricing rules with a view to closing any loopholes, and a public consultation document is expected in the coming months.

Ryanair appealing EU General Court’s decision on French and Swedish state aid

Irish low-cost airline Ryanair is appealing the General Court of the EU’s joint-judgment (Ryanair DAC v Commission, T-259/20, and Ryanair v Commission, T-238/20) from February 17 about the legality of state aid schemes in France and Sweden.

The schemes allow national airlines to defer certain taxes, and the General Court’s ruling clarifies that such schemes are consistent with provisions in the Treaty of the Functioning of the EU (TFEU).

However, Ryanair’s representatives argue that the schemes “violated the general principles of European law regarding the prohibition of discrimination based on nationality and free movement of services that have underpinned the liberalisation of air transport in the EU since the late 1980s.”

The company claims that the measures specifically violate Article 18(1) of the TFEU by unfairly favouring domestic airlines over pan-national and international carriers.

The General Court explained that the state aid is legal because the COVID-19 pandemic resulted in extraordinary damage to national carriers in France and Sweden, and the aid does not go against the principle of non-discrimination on grounds of nationality laid down in Article 18(1) of the TFEU, according to the court. Nonetheless, Ryanair is moving forward with its appeal to the CJEU.

The airline said the nationality conditions of the state aid schemes ignored the damage other EU airlines have experienced because of COVID-19, despite their contribution to connectivity, jobs, traffic growth and the wider economy in France and Sweden.

CJEU receives its first DAC6 case from Belgium high court

The Constitutional Court of Belgium filed a request for an opinion from the CJEU (case C-694/20) in February about exceptions to reporting tax arrangements that the Flemish Bar Council and Belgian Association of Tax Lawyers raised under the EU Council’s Directive 2018/822 (DAC6).

The Flemish Bar Council and Belgian Association of Tax Lawyers argue that Article 14 under the Belgian decree that transposed DAC6 into national law infringes on provisions under Articles 7, 8, 20, 21, 47, 48, 49 and 51 of the Charter of Fundamental Rights of the EU, according to documents filed to the Belgian high court.

The case was referred to the CJEU based on Article 267 of the TFEU and relevant to member states with legal measures that give tax advisors the right to waive filing certain cross-border arrangements when the report can breach legal privilege with a client under the national law.

The case could impact how intermediaries comply with DAC6 rules in several EU member states, since some countries have broader definitions for “reportable arrangements” and professional secrecy rules. The DAC6 differences between member states create mismatches in the interpretation of cross-border arrangements within scope in multiple countries.

Many of the issues raised in these cases are not going away anytime soon, and some cases are likely to continue for some time such as Cairn's dispute with the Indian government. However, the first few months of 2021 also offered large businesses some tax certainty amid the economic fallout from the pandemic such as in the Cameco case.

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