Tax Matters | Fighting erosion in taxable base and profit shifting

Paulo Cordeiro de Sousa

The RAEM government has recently discussed some amendments to the Corporate Income Tax Regulations (CITR, or Regulamento do Imposto Complementar de Rendimentos) and to the Regime of Exchange of Information on Tax Matters (REIT, or Regime Jurídico da Troca de Informações em Matéria Fiscal), and has sent a draft law with amendments to the Legislative Assembly for approval. The main aim of the draft law is to follow the principles and guidelines of the Organisation for Economic Co-operation and Development (OECD) on international collaboration to fight tax avoidance resulting from base erosion and profit shifting (BEPS). Multinational economic groups are persistently tempted to shift the profits they make in some countries with high corporate tax rates to low tax rate countries, using complex schemes with the enterprises that compose their groups. The practice may be legal usually, but it represents a loss of revenue to some countries, usually the ones where the income is produced. The BEPS project is an OECD project to combat the use of such schemes and the BEPS action plan is now being implemented by many countries and territories.

In the draft law, the RAEM government has also taken the opportunity to (i) update a threshold that is already outdated – the amount of profit that will subject taxpayers to Group A of the CITR will be increased to MOP1,000,000.00 as an average of the last three years, instead of the current MOP500,000.00; and (ii) make exemptions for interest tax obtained from debt securities issued in the RAEM by the Chinese state and local governments, and central companies of the People’s Republic of China, as well as all income obtained from the purchase and sale, redemption, or otherwise, of such debt securities.

With respect to the BEPS, the draft law has inserted some new legal provisions in the CITR. Article 1-A contains a number of legal definitions, of which the definition of “Ultimate Parent Entity” (UPE) is worth mentioning. A UPE is an entity that is part of a multinational group of enterprises that (i) directly or indirectly holds a sufficient interest in one or more entities of the same group that requires the preparation of consolidated financial statements in accordance with accounting standard principles applicable in the jurisdiction of its tax residence, or requires such preparation in case the shares held are negotiated in a stock exchange market; and (ii) has no other entity of the same multinational group of enterprises that directly or indirectly holds the same interest. The requirements are cumulative, but the definition is so vague and so broad that, in my opinion, there will be a lot of cases where the fulfilment of the requirements for an entity to be considered a UPE will fall under the absolute discretion of the authorities. The draft law also. contains a definition for permanent establishment, a definition that exists in most tax jurisdictions around the world but, until now in Macau, only existed in the few tax treaties for the avoidance of double taxation that the RAEM entered.

When the total income of the UPE, reflected in the consolidated financial statements, is equal to or higher than MOP7,000,000,000.00 (MOP7 billion), the UPE is required to prepare and present documents to the Financial Services Bureau (DSF) (i) disclosing the activities of the enterprises composing the multinational group, (ii) present the financial and tax statements per country or tax jurisdiction, and (iii) the documentation and information of which are to be kept for a period of seven years. Additionally, the DSF will be entitled to exchange financial and banking information about the UPE automatically with other jurisdictions, pursuant to the REIT.

At first glance, the actual application of the new provisions, should the amendments to the CITR and the REIT be approved by the Legislative Assembly, do not seem easy due to the broadness of the new legal concepts. However, since a lot of matters are still to be treated in more detail by administrative regulation, let’s wait and see.