SECTION A : MULTIPLE CHOICE (2 marks each, 40 marks in total)

Spend about 45 minutes on this section

Answer All the questions:

1.   Which  of the  following  is  true  for  income  derived  by  or  through  an  entity  or arrangement that is treated as wholly and partially transparent under the tax law of either contracting state:

a.   It is considered as income under DTA provided such income is treated as the

income of a resident of that State.

b.   It is not considered as income under DTA

c.   It is only considered as income if country of source also considers as income

d.   It is an income on which Foreign Tax Credit does not apply

2.   Identical or Similar taxes under DTA refers to:

a.   Taxes similar to Sales Taxes and Customs duties

b.   Taxes similar to income taxes and capital gains

c.   Taxes similar to income taxes only

d.   Taxes on income taxes and immovable property only

3.   The term “business” in DTA:

a.   refers only to an entity that derives profits through body corporate  setup and

collective investment vehicles                                                                                    b.   also includes the performance of professional services and of other activities of an

independent character.

c.   aligns with the definition of business income as per section 17 of Fiji’s Income Tax Act

d.  None of the above

4.   The “tie breaker” rule for resident individual:

a.   Will finally resolve residency clash disputes through nationality argument

b.   Will  finally resolve residency clash disputes through exchange of information

article                                                                                                                          c.   Will finally resolve residency clash disputes through mutual agreement procedure

article

d.   Will  finally  resolve  residency  clash  disputes  through  center  of vital  interest argument

5.   Permanent Establishment strictly:

a.   applies that a country can impose withholding tax if PE rules are satisfied.

b.   applies that a country can impose income tax if PE rules are satisfied

c.   applies that a country can only impose capital gains tax if PE rules are satisfied

d.   All of the above

6.   International Shipping and Air Transport profits:

a.   are taxed on withholding basis

c.   are taxed only in country of source.

d.   are taxed based on investment levels in country of source

7.   DTA and TIEA:

a.   Both DTA and TIEA deals with double taxation and information exchange

b.   DTA deals with information exchange and double taxation

c.   TIEA deals with double taxation as well as information exchange

d.   TIEA has wider scope than DTA

8.   An Associate Enterprise article generally:

a.   states tax allocation rule in relation to profits accrued to related parties through non-

arm’s length dealings

b.   states tax allocation rule in relation to profits accrued to related parties through arm’s length dealings.

c.   states tax allocation rule in relation to profits accrued to independent parties through non-arm’s length dealings.

d.   states tax allocation rule in relation to profits accrued to independent parties through arm’s length dealings.

9.   Which of the following is strictly true:

a.   Profit Split method has been considered as an alternative to arm’s length principle

b.   Global Formulary method has been considered as an alternative to arm’s length

principle

c.   Transfer pricing is an alternative to arms length principle

d.   Controlled Uncomparable price is an alternative to arms length principle

10. Which of the following is strictly CORRECT:

a.   Fiji adopts both exemption and credit method to eliminate double taxation

b.   DTA is only about eliminating double taxation

c.   There are only two types of double international taxation

d.  None of the above

11. Which of the following is true:

a.   Transaction Net Margin Method is the most superior transfer pricing method;

b.   Profit Split is the most superior transfer pricing method;

c.   Transaction Net Margin Method is the most superior transfer pricing method;

d.  No one transfer pricing method is superior to others

12. Which of the following is STRICTLY TRUE for Fiji’s International Tax regime:

a.   Fiji has updated its PE rule in 2021

b.   Fiji has a section on international tax in its Income Tax Act 2016

c.   Fiji provides Foreign Tax Credit but does not allow foreign losses in tax computation

d.  None of the above

13. Separate entity approach in MNE strictly means:

a.   The global profits of MNE is determined and then it is separated by each tax

jurisdiction equally                                                                                                     b.   Each  affiliate  of the  MNE  is  assessed  separately  in  each jurisdiction  for tax

purposes

c.   Each   affiliate   of  the   MNE   is   treated   separately  by   applying   Controlled Uncomparable Price method

d.   Each affiliate of MNE is treated as separate and distinct from owners for accounting purposes.

14. Transfer Price:

a.   Leads to tax minimization situations as part of shareholder wealth maximization strategies of MNEs

b.   Leads to tax minimization that is created by MNEs through the use of tax arbitrage

c.   are prices being paid for cross border financial flows relating to exchange of goods

between MNEs.                                                                                                          d.   are  the prices  at  which  an  enterprise  transfers  physical  goods  and  intangible

property or provides services to associated enterprises.

15.  Transfer Pricing disputes can be prevented through:

a.   The use of Advance Pricing Agreements

b.   The double tax agreements tie breaker rules in relation to residency

c.   Profit Split method

d.   All of the above

16.  Collective Investment Vehicles:

a.   Are not covered in tax treaties

b.   Are exempted outright from being taxed

c.   Are covered in tax treaties

d.   Are used as an anti-treaty abuse rule in tax treaties.

17.  Capital Export Neutrality generally:

a.   A situation where a resident tax taxpayer is not influenced as to where to invest

offshore

b.   A situation where tax neutrality is achieved through exemption method of tax treaties

c.   Neutralizes tax gains though transfer pricing rules

d.   All of the above.

18.   Which of the following is an anti-treaty abuse measure in tax treaties:

a.   Entitlement to Benefits article

b.   Permanent Establishment article

c.   Tie breaker rule on Residents

d.   All of the above

19.     Which of the following is true?

a.   Assistance in Collections Article is about collection of indirect taxes

b.   Assistance in Collections Article is already in Fiji’s DTAs

c.   Assistance in Collections Article requires exchange of information only

d.  None of the above.

20.    Which of the following is true:

a.   Economic Double Tax is about taxing the same income in same hands twice

b.   Economic Double Taxation is about taxing the same person twice

c.   Economic Double Taxation is about taxing same income in different hands

d.  None of the above

SECTION B SHORT APPLICATION QUESTIONS [30 Marks]

Spend about 30 minutes on this question

Question 1 :

From  an  international  tax  policy  standpoint,  evaluate  Fiji’s  current  tax  treatment  on dividends. (15 Marks)

Model Answer

Taxation of dividends had been an integral part of the overall Corporate Income Tax. The system of taxation of dividends had been changing over the years. A Dividend Imputation System was replaced by a Dividend Exemption system in 2003 that attempted to ensure that profits taxed at corporate level is not taxed again at shareholder level. Fiji introduced a final withholding dividend tax system in 2017 where dividend distribution to resident shareholders were taxed at 3% whilst the 9% rate applied to non-residents.  Recently, taxation on dividends were removed and at the moment there is no tax on dividends.

Whilst the current tax free dividend regime may enhance simplicity in the tax system, it however creates complications from international standpoint. The implications are as follows:

(i)        Shifting of tax revenue aboard

Under the Model Conventions as well as under Fiji’s DTAs, Dividend income is to be taxed in Fiji at a reduced rate. Non—taxation could mean a giveaway of the revenue.

(ii)       Undermining   the   reciprocity   arrangement   from   international   tax   policy

perspective.

(iii)      Giving away of taxing rights although tax implication to a foreign investor will be

tax neutral

(iv)      Creating opportunities for treaty shopping

Question 2 :

Evaluate the following statement.

“The non-availability of $30,000 income tax exemption threshold to non-resident individuals (as compared to resident taxpayers) creates tax discrimination.” (15 marks)

Model Answer

Whilst it is clear that both the resident and non-resident taxpayers are subjected to      different rules in so far as the exemption threshold is concerned, it can be equally        argued from the international viewpoint that there are no tax discrimination because of the following:

•   There is no tax sparing provisions in Fiji’s DTA with any country that says that the tax threshold incomes can be ringfenced

•   Fiji  has  a  right  to  tax  employment  income  of  foreign  individuals  since  the employment is exercised here and taxing structure is the prerogative of the source country.

•   The non-resident taxpayer will be required to declare Fiji sourced income in his home country and will be subjected to full taxation with credits being given for all taxes paid in Fiji. Credits for income tax exemption won’t be granted.

•   Articles 23 of the Model Convention requires that all incomes exempted offshore be added in the computation of tax liability.

•   Notwithstanding the above points, if tax exemption benefit from Fiji would have been recognized then this would have led to double dipping situation since most countries also have a similar exemption provision.

•   From international tax compliance perspective, the exemptions accorded in Fiji could be an incentive in not declaring such income in the home country.

•   The $30,000 exemption in Fiji has formed part of Fiji’s domestic tax policy and such policy hasn’t raised international concerns.

SECTION C : CASE STUDY

Spend about 45 minutes on this question

All countries  have tax treaties with each other that fully subscribe to  OECD  Model Convention.

Required:

(i)       Summaries transfer pricing risks for each of the entities (20 marks).

Model Answer

Summarizing Risks

The tax administrations can take functional analysis and comparability analysis to determine  if  prices  being  charged  are  consistent  with  arm’s  length  price.  The comparability analysis will evaluate the arm’s length pricing by looking at a number of

factors. Comparability analysis is an essential step in any transfer pricing analysis in order to    gain    a    correct    understanding    of   the    economically    significant characteristics of the controlled transaction and of the respective roles of the parties to the controlled transaction.

•   Characteristics of the property or service transferred.

•   Functions performed by the parties taking into account assets employed and risks assumed, in short referred to as the “functional analysis”;

•   Contractual terms;

•   Economic circumstances; and

•   Business strategies pursued.

Functional Analysis analyzes the functions performed (taking into account assets used and risks assumed) by associated enterprises in a transaction.

Based on above, the risks are as follows:

•   All entities – from global perspective setting up entities in low tax jurisdiction will raise some attention. Equally, large amounts of transfer price going out of high tax jurisdiction will equally be a cause of concern.

•   MNE  HQ – the  risk  of  having two  different  rates  of fee for  intangibles.  Tax administration of country D can increase the incomes from Sub 3 by 100% on the grounds that other entities are being $1m.

•   Sub2 involves in manufacturing and the risk relates to the different prices being charged internally to that charged externally.  Country B has a high rate of 30% and the adjustment will be significant.

•   Sub 3 has a risk being the interest payout at the rate of 10% being reduced to 3% and  this  will  have  an  impact  in  view  of  Country  D  having  a  high  tax  rate. Additionally, the higher amounts of biscuits being purchased internally can be seen to uncomparable to the acquired externally.

•   Sub 3 is the greatest risk of adjustments, and it can be significant in view of high tax rate prevailing in Country D.

(ii)      Explain how tax authorities in each state can validate any potential tax

adjustments and how these can be managed without creation of double taxation (10 marks).

Model Answer

Validating Adjustments

Tax authorities will use either of the following methods to validate their claims of potential tax adjustments:

•   Controlled Uncomparable Price Method

•   Resale Price Method

•   Cost Plus Method

•   Profit Split Method

•   Transaction Net Margin Method

In relation to the above case, the following can be applied:

•   The CUP method can be applied for the interest payout from Sub3 to MNE HQ. Tax jurisdiction in D will argue that the interest rate to be charged should be 3% consistent with the initial borrowing rate in MNE HQ country. It can be argued by Country D that there is an attempt to shift profit out of country D to country A by claiming a non-arm’s length interest payout at a rate of 10%. The motivation to shift profit to country D is that it has a low tax rate of 5%.

•   Country A will question as tgo why a significant lower amount of IP licence fee is being charged for Sub 3 a nd could be seen to be not comparable with what is being charged to other affiliates. This could be seen to be under reporting of income in country D.

•   Country B will use Cost Plus Method to argue that the 5% commission charged for internal  markup  is  understated  when  the  10%  had  been  charged  for  an independent party in Country A. The resale price method can also be pursed to validate higher margins being made for dealings with the independent party.

•   Country  D  will  argue  the  lower  retail  sales  margin  be  recorded  for  internal purchases  being  sold  to  final  consumers.  Although  the  final  price  of $20  is consistent with the CUP method, the payment of $15 to MNE HQ could be seen to be an attempt to shift profits from country D as it is a high tax jurisdiction.

Managing Double Taxation

•   The double tax treaty between each of the country will look at the equivalent of the Article 9 of the Model Tax Convention to undertake adjustment and require the other contracting state.

•   Articles 5 and 7 are also related and similar articles that will require adjustments

•   Given the risks, the affiliates can undertake the following administrative measures to prevent transfer pricing risks:

•              Formalize   an   Advanced   Pricing   Arrangement   with   tax administrations.