International Tax News. Edition 30 August 2015

Welcome Keeping up with the constant flow of international tax developments worldwide can be a real challenge for multinational International companies. International Tax News is a monthly publication that offers updates and analysis Tax News on developments taking place around the world, authored by specialists in PwC’s global international tax network. Edition 30 We hope that you will find this publication August 2015 helpful, and look forward to your comments.

Shi-Chieh ‘Suchi’ Lee Global Leader International Tax Services Network T: +1 646 471 5315 E: [email protected] www.pwc.com/its

In this issue

Tax legislation Proposed legislative changes Administration & case law Treaties Tax Legislation

www.pwc.com/its

Tax Legislation Cyprus

Introduction of a notional interest deduction (NID) on A taxpayer may annually elect not to claim part or all of the new corporate equity available NID. In order to tackle possible abuse of the NID, the law contains a general New corporate equity injected into a company as of anti-avoidance provision for non-commercial transactions as well January 1, 2015 in the form of paid-up share capital or as a number of specific anti-avoidance provisions which may restrict the NID. share premium is eligible for an annual notional interest deduction (NID). The NID applies to Cyprus tax resident companies and to permanent establishments (PEs) in Cyprus of non-resident companies and is New equity may be contributed in cash or in assets in kind. In the case effective as of January 1, 2015. of assets in kind, the amount of new equity may not exceed the market value of the asset.

In a similar way that an interest expense on debt financing is generally PwC observation: calculated as an interest rate on loan principal, the annual NID is The aim of the amendment is to encourage new equity which in calculated as an interest rate on the eligible share capital / share turn should increase the economic robustness of Cyprus companies premium. The NID interest rate is the yield on ten‑year government through less reliance on debt financing, whilst keeping their bonds (as at December 31 of the prior tax year) of the country where competitiveness. Corporations should now consider how this the funds are employed in the business of the company plus a 3% amendment may impact the structure of their financing. premium. This is subject to a minimum amount which is the yield of the ten-year Cyprus government bond (as at the same date) plus a This amendment is part of a package of measures aiming to 3% premium. enhance the corporate and personal tax competitiveness of Cyprus. Also included within this package are proposals for a simpler tax The NID is tax deductible in a similar manner as actual interest treatment of foreign exchange differences and fairer treatment expense, i.e. the NID is available for tax purposes when new equity is of arm’s‑length adjustments (refer to the Proposed Legislative utilised to finance most types of business assets, with the proviso that Changes section) as well as enacted law to exempt certain income the NID cannot exceed 80% of the taxable profit (as calculated prior of non-domiciled individuals from tax in Cyprus and proposals to the NID). to improve the exemptions available for high-earning expatriates working in Cyprus.

Marios Andreou Stelios Violaris Joanne Theodorides Nicosia Nicosia Nicosia T: +357 22 555 266 T: +357 22 555 300 T: +357 22 553 694 E: [email protected] E: [email protected] E: [email protected] Proposed Legislative Changes www.pwc.com/its

Proposed legislative changes Brazil

Further changes to the application of PIS/COFINS on certain financial revenues PwC observation: Brazilian taxpayers accruing On May 20, 2015, Decree No. 8,451/2015 was published financial revenues should consider the impact of amending Decree No. 8,426/2015 (issued at the beginning Decree 8,426/2015 and of April 2015) in relation to the application of Social 8,451/2015 on their particular Integration Program (PIS) and the Contribution for Social circumstances to determine Security Financing (COFINS) on financial revenues earned whether PIS/COFINS will by companies subject to the non-cumulative system to apply to their transactions from July 1, 2015. calculate PIS/COFINS.

Prior to Decree No. 8,426/2015, the PIS and COFINS rate on financial revenues was equal to 0%. On April 1, 2015, Decree No. 8,426/2015 reintroduced PIS/COFINS on financial revenue at the rate of 0.65% and 4% respectively. Decree No. 8,451/2015 provides that the 0% rate will continue to apply on financial revenues resulting from foreign exchange inflation adjustments relating to the export of goods and services to foreign operations. Foreign exchange derived from contractual obligations including loans and financing are also covered by the 0% rate. Decree No. 8,451/2015 also provides that the 0% rate should apply to financial revenues arising from hedging transactions conducted on stock exchanges, commodities and futures markets or contracted ‘over- the-counter’ for the purpose of protecting against risks associated with fluctuations related to the operating activities of the entity and which can be allocated to the protection of such rights or obligations. Decree 8451/2015 will apply from July 1, 2015 (the same date as the earlier Decree restoring the 4.65% rate will take effect).

Durval Portela Alvaro Pereira Mark Conomy São Paulo Salvador São Paulo T: +55 11 3674 2522 T: +55 71 3319 1912 T: +55 11 3674 2519 E: [email protected] E: [email protected] E: [email protected] Proposed Legislative Changes www.pwc.com/its

Cyprus

Tax neutral treatment of foreign currency exchange Further, in cases where two related Cyprus taxpayers transact and the differences (forex) and extension of the arm’s‑length Cyprus tax authorities make an upwards arm’s‑length adjustment to one of the taxpayers, it is proposed that there will be a corresponding principle to downwards adjustments downwards adjustment for the other taxpayer. A bill concerning the tax treatment of foreign currency It is expected that the Parliament will discuss and vote on these proposals this coming September following the summer recess with exchange differences (forex) has been sent to the Cyprus their expected effective date to be January 1, 2015. Parliament for discussion and voting. The bill proposes for all forex to be tax neutral from a Cyprus income tax perspective (i.e. gains not taxable / losses not tax deductible) with the exception of forex arising from trading PwC observation: in forex, which remains taxable / deductible. Businesses with cross-border transactions usually incur forex. Forex is often difficult to predict, especially in the current global The definition of forex includes gains / losses on foreign currency economic climate. The above proposal aims to simplify the income rights or derivatives. tax treatment of forex. Further the above proposals aim to be fairer to businesses in the tax treatment of their related party dealings. Regarding trading in forex, which remains subject to tax, this proposal introduces an option for taxpayers to make an irrevocable election This amendment is part of a package of measures aiming to whether to be taxed only upon realisation of forex rather than on an enhance the corporate and personal tax competitiveness of Cyprus. accruals / accounting basis. Also included within this package are amendments which have already been enacted in relation to the introduction of notional Regarding the arm’s‑length adjustments, the income tax law currently interest deduction (NID, refer to Tax Legislation section) and only provides for unilateral upwards adjustments to profits in cases exemption of certain incomes of non-domiciled individuals as well where taxable profits earned on related party transactions are below as proposals to improve the exemptions available for high-earning an arm’s length (i.e. market value) amount. expatriates working in Cyprus. The bill sent to Parliament also contains proposals to introduce the possibility for a downwards adjustment in cases where expenses / losses incurred with related parties are not at arm’s length.

Latvia

Administrative burden on Latvian tax residents However, Latvian tax residents having derived any other type of working in EU to ease income, such as deposit interest, dividends or capital gains, will still have to file the annual income tax return in Latvia. Proposals for amending the personal income tax (PIT) It is also important to note that the proposals provide for removing Act that were presented to Parliament on May 27, 2015 the administrative burden from Latvian tax residents employed only in the EU, given the automatic EoI among the member states. Latvian providing for exempting Latvian tax residents that have tax residents having earned employment income in a country that earned employment income elsewhere in the European has concluded an effective double tax treaty (DTT) with Latvia (e.g. Union (EU) from the obligation to file the annual income Russia, Switzerland, or Norway) will still have to file the annual tax return in Latvia. income tax return in Latvia and confirmation from the foreign tax authorities. Under current tax law, Latvian tax residents that have earned The proposals have been presented to the Parliamentary Budget and employment income outside Latvia must file the annual income tax Finance (Taxation) Committee and are to be debated by Parliament return in Latvia. Based on experience, Latvian residents frequently in three readings. It is not yet known when the amendments might seem to have difficulties to obtain written confirmation of the tax paid be enacted. from foreign tax authorities because: • the authorities do not see why such confirmation is necessary, given the automatic exchange of information (EoI) with the PwC observation: Latvian tax authorities, and The proposals would provide a reduction of administrative burden to Latvian tax residents earning employment income elsewhere in • different filing deadlines mean this confirmation might be received the EU, as they will no longer be required to file the Latvian annual up to one year after the due date in Latvia. tax return. In this situation, the Latvian tax authorities recognise the taxpayer’s income earned abroad but do not recognise the foreign tax paid, resulting in the taxpayer paying extra tax in Latvia. Thus, the proposals for amending the Latvian PIT Act provide that in future the annual income tax return will no longer need to be filed by Latvian tax residents having earned employment income and paid a similar income tax elsewhere in the EU.

Viktorija Kristholde-Luse Latvia T: +371 6709 4400 E: [email protected] Proposed Legislative Changes www.pwc.com/its

United Kingdom

Conservative government’s Summer Budget PwC observation: The Chancellor of the Exchequer delivered the Summer The surprise announcement of a cut in corporation tax rates signals Budget on July 8, 2015. This is the first Budget of the new that Britain is keen to remain competitive internationally and is ‘open for business’. conservative government following the general election in May, and the second Budget for calendar year 2015. The There was a strong focus on tackling tax avoidance and aggressive tax planning. An array of piecemeal changes and new initiatives is Finance Bill containing draft legislation will be published intended to raise approximately 7 billion pounds (GBP) of revenue on July 15, 2015. but with no big headline grabbers.

The key Budget measures of relevance to international tax include: The announcement that requires immediate attention is the restriction on the offset of losses against a CFC charge. Affected • The main UK corporation tax rate will be reduced from the current groups (i.e. loss-making groups with CFCs that are currently subject rate of 20% to 19% effective April 1, 2017, and to 18% effective to a CFC charge) will need to analyse the impact of these changes. April 1, 2020. There were no changes to those areas currently under review • The government has committed to publishing a business tax as part of the Organisation for Economic Co-operation and roadmap by April 2016 setting out its plans for business taxes over Development’s (OECD’s) work plan. It appears therefore that the the rest of the Parliament. UK government will wait for the final base erosion and profit shifting (BEPS) recommendations before proposing any changes in • For profits arising on or after July 8, 2015, companies may no this area. longer offset UK losses and expenses against profits taxable under the controlled foreign companies (CFC) rules. • For acquisitions arising on or after July 8, 2015, no corporation tax relief will be available for the amortisation of purchased goodwill and certain customer-related intangibles. • Several changes will be made to the taxation of corporate debt and derivative contract rules for companies, most of which will take effect for periods beginning on or after January 1, 2016. • The link company requirements for consortium relief claims will be simplified with retrospective effect from December 10, 2014.

Stella C Amiss Jonathan Hare London, Embankment Place London, Embankment Place T: +44 20 7212 3005 T: +44 20 7804 6772 E: [email protected] E: [email protected] www.pwc.com/its

Administration and case law Brazil Brazil

Tax authorities release ruling regarding the Tax authorities publish a tax ruling regarding the deductibility of royalty payments PwC observation: imposition of PIS/COFINS on imports for remittances Brazilian taxpayers making relating to license agreements On June 8, 2015, the Brazilian Federal Revenue Authorities royalty payments abroad should consider the impact of (RFB) issued Tax Ruling No. 146/2015 providing that Tax Ruling No. 146/2015 on On March 10, 2015, the Brazilian Federal Revenue expenses relating to royalties and technical, scientific, their particular circumstances Authorities (RFB) released Tax Ruling No. 71/2015 administrative assistance should be deductible following to ensure that they are providing that the Social Integration Program (PIS) and registration and approval with the National Institute of obtaining an appropriate the Contribution for Social Security Financing (COFINS) Intellectual Property (INPI) back to the date of the request. deduction. on imports should not be imposed on remittances limited to the license to use patents and trademarks. In addition to the general deductibility requirements, deductibility of royalty payments relating to the use / exploitation of patents, Under Brazilian law, PIS/COFINS on imports are social contributions trademarks and technical, scientific, administrative assistance is applicable to the importation of certain goods and services. Following limited to a percentage varying from 1% to 5% of income or profits the introduction of Complementary Law no 116/2003 regulating (less certain specific operational expenses). Further, the deductibility Service Tax (ISS), which included the license to use trademarks and of royalties paid to a foreign beneficiary is conditioned to the software in the list of activities considered to be triggering events for registration of the relevant agreement with the Brazilian Central Bank ISS purposes, there was some debate regarding whether PIS/COFINS (BACEN) and approval by the INPI. should apply on such remittances. According to Tax Ruling No. 146/2015, the RFB considers that a The ruling provides that in agreements which include services related deduction for such royalty payments should be available retroactively to the license to use patents and trademarks, the respective amounts to the date the request of registration is filed with the INPI. should be segregated. Otherwise the total amount should be deemed a On June 2, 2015, the Minister of National Revenue signed the service fee and taxed accordingly (service fees are typically subject to international Multilateral Competent Authority Agreement (MCAA), higher taxation in Brazil). an important step towards implementing the CRS.

PwC observation: Taxpayers making such remittances should review their current treatment of such payments to determine whether they may be able to benefit from the prescribed treatment set out in the ruling. It may represent a reduction of 9.25% on the amount of the importation.

Durval Portela Alvaro Pereira Mark Conomy Durval Portela Alvaro Pereira Mark Conomy São Paulo Salvador São Paulo São Paulo Salvador São Paulo T: +55 11 3674 2522 T: +55 71 3319 1912 T: +55 11 3674 2519 T: +55 11 3674 2522 T: +55 71 3319 1912 T: +55 11 3674 2519 E: [email protected] E: [email protected] E: [email protected] E: [email protected] E: [email protected] E: [email protected] www.pwc.com/its

Brazil

Tax authorities publish a ruling regarding the In the present case, the RFB concluded that the subscription and obligation to register payments in the SISCOSERV the payment of subscribed shares in cash should not fall within the definition of services, intangibles nor in the NBS, and on this basis should not be registered with SISCOSERV. However, where the On April 22, 2015, the Brazilian Federal Revenue subscription of shares is made by a related party located abroad in Authorities (RFB) released Tax Ruling No. 105 providing consideration for intangible assets, the relevant information should be that the subscriptions of shares using intangible assets registered in the SISCOSERV. should be registered in the Integrated System of Foreign Service Trade (SISCOSERV). PwC observation: By way of background, since August 2012, Brazilian individuals, Foreign investors intending to subscribe for shares in Brazilian legal entities and other entities are required to provide information companies using intangible assets should consider their current to the Ministry for Development, Industry, and International Trade registration and disclosure practices with respect to SISCOSERV in in relation to transactions carried out with non-residents involving order to determine whether they may be impacted by Tax Ruling services, intangibles, and other operations that produce changes to the No. 105. Brazilian entity’s net worth. Broadly, for the purposes of registration in the SISCOSERV, services should be understood as an activity that requires the service provider to perform something in benefit of the party contracting the service. Intangibles should be interpreted as a transferable and immaterial asset from which future economic benefits are expected. Finally, other operations that produce changes to the Brazilian entity’s net worth are those operations that do not fall within the definition of service or intangible, but are included in the Nomenclature of Services (NBS) which sets out a list of codes in order to classify the activities for SISCOSERV purposes.

Brazil

Tax authorities release ruling confirming that In the case of Tax Ruling No. 153/2015 being considered, the DTT payments to France in consideration for certain signed between Brazil and France does not treat technical services and / or assistance as royalties and the particular services provided technical services should not be subject to were not considered to fall within the definition of independent withholding tax personal services. On this basis, the RFB considered that the remittances in relation to the services provided should not be subject On June 17, 2015, the Brazilian Federal Revenue to WHT. The ruling confirmed that the payments should still remain Authorities (RFB) released Tax Ruling No. 153/2015 subject to Contribuição de Intervenção de Domínio Econômico (CIDE) at providing that amounts paid or credited to individuals or the rate of 10%. entities domiciled in France in consideration for certain technical services / assistance should not be subject to PwC observation: withholding tax (WHT). Multinational groups should examine whether they may be able to potentially lower or eliminate Brazilian WHT on payments to By way of background, in June 2014, Interpretative Declaratory Act certain treaty countries in relation to technical assistance and (ADI) 5/2014 was released detailing the tax treatment applicable to service agreements. payments made by Brazilian entities in relation to technical assistance and services (with or without transfer of technology) to a company located in a country with which Brazil has signed a double tax treaty (DTT). Broadly speaking, ADI 5/2014 provided that where the relevant DTT or protocol treats technical services and / or assistance as royalties or the service relates to the technical qualification of a person or a group of persons, payments should be governed by the article dealing with royalties or independent personal services (generally Article 12 or 14 respectively). In these cases, the Brazilian DTTs generally grant taxing rights to Brazil. In other situations, payments should be governed by the article dealing with business profits (generally Article 7), in which case Brazil is prevented from taxing the profits of the foreign entity unless the entity carries on business in Brazil through a permanent establishment (PE).

OECD

Model documents for implementing country-by- 2014. In this regard, however, the introduction to the implementation country reporting released package indicates that, as a next step, an ‘XML Schema’ and ‘related PwC observation: User Guide’ will be developed with a view to accommodating the Key takeaways are that the country-by-country (CbC) reporting electronic exchange of the CbCRs. Additional guidance on the CbCR On June 8, 2015, the Organisation for Economic obligation will fall on the ultimate parent entity. If, however, the data requirements may emerge once this schema and user guide are ultimate parent is not obligated to file, or the jurisdiction of the Co‑operation and Development (OECD) released a issued. ultimate parent does not have an EoI agreement in place, or there ‘Country‑by‑Country Reporting Implementation Package’. Helpfully, the model legislation and model competent authority has been a systematic failure under that agreement, then the MNE The package includes model legislation the OECD agreements also reveal the OECD members’ current thinking on, group may appoint a Surrogate Parent Entity to do the filing in its suggests could be used by countries to mandate filing among other things, (i) how a MNE group is to be comprised for country of tax residence. Furthermore, if in the above scenarios the of country‑by‑country reports (CbCRs). purposes of the filing requirements, (ii) which small MNE groups MNE group does not appoint a surrogate, then each Constituent would be excluded from the requirements, (iii) which entity in the Entity will have to file the CbCR locally. The model legislation does not attempt to address the filing of the MNE group would be expected to file the CbCR, and (iv) the intended The implementation package contains measures meant to address so-called master file or local file reports. The implementation package government use and confidentiality of the CbCR information. concerns of MNE groups regarding the lack of rigorous safeguards also includes three model competent authority agreements that could for the commercially sensitive information to be shared among be used by each country, depending on whether it intends to affect tax authorities under the proposed CbC reporting requirements. exchange of CbCRs through the ‘Multilateral Convention on Mutual Specifically, a Country Tax Administration shall preserve the Administrative Assistance in Tax Matters’, the exchange of information confidentiality of the information contained in the CbCR report at (EoI) article of a bilateral tax convention, or a bilateral tax information least to the same extent that would apply if such information were exchange agreement (TIEA). provided to it under the provisions of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. Whether Neither the model legislation nor any of the model competent authority and how countries can actually implement and police these use agreements contains additional guidance regarding the particular data and confidentiality restrictions, of course, necessarily remains to that multinational enterprises need to provide in the CbCRs. Rather, be seen. the model legislation merely sets forth a general description of that data and provides that it should be provided in a form identical to, and As the OECD has now finalised implementation through the model applying the definitions and instructions contained in, the ‘standard legislation and the next step is now at the local country level, MNEs template’ set out either in the OECD Transfer Pricing Guidelines, the should evaluate, if they have not done so already, whether they can final report on Base Erosion and Profit Shifting (BEPS) Action 13, or an timely comply with the CbC reporting proposal. Issues to consider appendix to the legislation, once adopted. Presumably, the ‘standard include: (i) determining whether MNEs can gather the data (noting template’ referred to can be expected to look like the CbCR template set that the data points required require significant modification from forth in the OECD’s first report on Action 13 released on September 16, ledger entries), (ii) performing various analytics on the CbC data to assess risks, and (iii) evaluating what, if any, issues must be addressed (including quality of data concerns and process and control issues).

Isabel Verlinden Adam Katz Richard Stuart Collier Brussels New York London T: +32 2 710 4422 T: +1 646 471 3215 T: +44 20 7212 3395 E: [email protected] E: [email protected] E: [email protected] www.pwc.com/its

Switzerland United Kingdom

Supreme Court: tax-privileged quasi merger is only Supreme Court judgment: UK resident member of US granted if receiving company is issuing own shares PwC observation: LLC - Entitlement to DTR for US tax PwC observation: Companies and individuals Although the case concerns Swiss Supreme Court denies qualification of a specific engaging in ‘quasi-mergers’ The Supreme Court delivered its unanimous judgment in the UK income tax treatment must therefore carefully of a UK resident individual transaction as a so-called quasi-merger and hence as a structure the respective the case of Anson v HM Revenue & Customs (HMRC) on member of a Delaware Swiss tax-neutral restructuring transactions in order to ensure July 1, 2015. LLC, from a corporate tax qualification as a tax neutral perspective it has led HMRC In Switzerland, the quasi-merger is not stipulated under formal Swiss reorganisation. It held that the taxpayer, Mr. Anson, is allowed double taxation to consider whether their merger law. Yet, in the Swiss tax practice, quasi-mergers typically relief (DTR) in the UK for US tax paid on profits of the Delaware existing understanding of the qualify as tax neutral restructurings (so-called ‘tax privileged’ limited liability company (LLC) in which he is a member. Based on nature of a LLC needs to be restructurings), if certain criteria are met. the First-tier Tax Tribunal’s earlier finding of fact that the members revised. Historically, HMRC of a LLC have an interest in the profits of the LLC as they arise, the have generally considered According to Circular Letter No. 5 ‘Reorganisations’ of the Swiss Supreme Court held that the taxpayer’s liability to UK tax is computed LLCs to be ‘opaque’ entities Tax Administration, a Swiss tax-privileged quasi-merger usually by reference to the same income as was taxed in the US, and he is akin to companies and in requires that the receiving company takes over at least 50% of the therefore entitled to DTR under the UK double tax treaty (DTT) with the vast majority of cases, to target’s voting power. In addition, the target’s shareholders may, at a US. This overturns the Court of Appeal’s decision that the LLC should have issued ordinary share maximum, receive a fraction of 50% of the total consideration for their not be regarded as transparent for UK tax purposes, and that DTR for capital. For UK corporate previously held shares in the target in cash and consequently at least a US tax should therefore be denied on the basis that the UK taxed a groups this is an important fraction of 50% of the total consideration must be paid in new shares different source of income to the US. consideration when looking at (of the receiving company). Typically, the receiving company procures such matters as grouping and the shares for the share-exchange by way of a capital increase. the substantial shareholdings In the case at hand, the individual A held 100% of the shares of exemption. X-AG and 50% of the shares in Y-AG in his private wealth. In 2007, HMRC are aware of the A transferred his interest of 50% in Y-AG at book values to X-AG. uncertainty created by this Subsequently, A held his interest of 50% in Y-AG indirectly via X-AG. judgment and we expect them In its decision of June 10, 2015 (2C_976/2014), the Swiss Supreme to communicate their view Court confirmed Circular Letter No. 5 and ruled that in lack of a capital in a public statement in due increase at the level of X-AG, the transfer of the Y-AG-shares does course. not qualify as quasi-merger for Swiss tax purposes. As a result, the difference between the market value and the book value of the 50% interest in the Y-AG-shares was subject to Swiss stamp duty on the issuance of capital.

Stefan Schmid Sarah Dahinden Stella C Amiss Jonathan Hare Zurich Zurich London, Embankment Place London, Embankment Place T: +41 58 792 4482 T: +41 58 792 44 25 T: +44 20 7212 3005 T: +44 20 7804 6772 E: [email protected] E: [email protected] E: [email protected] E: [email protected] www.pwc.com/its

United States

IRS Chief Counsel’s office provides guidance on economic substance analysis

The internal revenue service (IRS) released Chief Counsel Advice 201515020 (the CCA) on April 10, 2015, addressing the application of the common-law economic substance doctrine to the taxpayers’ participation in a transaction with an offsetting loan and contractual rights.

The CCA analysis applies common law because the transaction in question predated the enactment of Section 7701(o) of the internal revenue code (IRC), which codified the economic substance doctrine. The CCA concludes that the IRS could disregard the transaction as lacking economic substance under both the objective and subjective prongs of the analysis. In reaching its conclusion, Chief Counsel’s office considered case law and the case law-derived criteria enumerated in Directive LB&I-4-0711-015 (issued July 15, 2011). It should be noted that CCA 201515020 is characterised as a supplemental CCA addressing an issue not previously dealt with in CCA 201501012, released January 2, 2015, regarding a ‘leveraged forward contract’.

PwC observation: CCA 201515020 confirms that the IRS continues to analyse transactions’ economic substance using common-law factors derived from case law when the transactions predate Section 7701(o). It also shows that the IRS is likely to measure a transaction’s profit potential against its potential tax benefits, rather than respecting the existence of any profit potential as creating a valid business purpose.

Chip Harter Tim Anson David H Shapiro Washington D.C. Washington D.C. Washington D.C. T: +1 202 414 1308 T: +1 202 414 1664 T: +1 202 414 1636 E: [email protected] E: [email protected] E: [email protected] www.pwc.com/its

Treaties Canada China

Convention with New Zealand entered into force and Multilateral Convention on Mutual Administrative TIEA with the Cook Islands signed PwC observation: Assistance in Tax Matters approved PwC observation: The new Convention with The approval of the The new Convention between Canada and New Zealand New Zealand replaces the In August 2013, China signed the Multilateral Convention Convention is a milestone tax convention signed on in China’s efforts to deepen for the avoidance of double taxation and the prevention of May 13, 1980. The new on Mutual Administrative Assistance in Tax Matters and broaden the cooperation fiscal evasion with respect to taxes on income, and related Convention and related (the Convention) to join the network of international with the international protocols, entered into force on June 26, 2015. protocols generally have cooperation on tax administration. tax community. It is also effect in Canada in respect expected to have a significant The new Convention with the First Protocol was signed on May 3, of tax withheld at the source On July 1, 2015, the Standing Committee of the National People’s impact on China’s domestic 2012, and the Second Protocol was signed on September 12, 2014. on amounts paid or credited Congress of China approved the signed Convention and clarified the administrative environment The new Convention limits the rate of withholding tax (WHT) to 5% to non-residents on or after application of relevant administrative provisions. The Convention shall for international taxation. for dividends paid where the beneficial owner is a company that holds August 1, 2015, and in respect apply to the tax jurisdiction of mainland China but not to Hong Kong Now that China has one more directly at least 10% of the voting power in the payor company, to 15% of other Canadian tax for and Macao Special Administration Regions. channel under the Convention for dividends paid in all other cases, to 5% for copyright royalties or taxation years beginning on or to improve tax transparency The Convention provides for all possible forms of administrative other like payments and royalties for the use or right to use computer after January 1, 2016. and counter tax avoidance cooperation among the signed states, which include the exchange and evasion, multinational software or any patent or for information concerning industrial, Once the TIEA with the Cook of information (EoI), assistance in recovery, service of documents, companies operating in China commercial or scientific experience, and to 10% for payments of Islands enters into force, etc. – in the assessment and collection of all categories of taxes, need to be aware of this new interest and all other royalties. The distributive articles of the new Canada’s exemption system e.g. corporate income tax, individual income tax, value-added tax, development and review their Convention specify that no relief shall be available where the main can apply to the net earnings consumption tax. strategy in terms of disclosure purpose or one of the main purposes of any person in undertaking from an active business and tax transparency where certain actions is to take advantage of such articles. The new carried on in the Cook Islands Meanwhile, the Convention also provides flexibility for reservations necessary. Convention further permits the taxation of income or gains realised on by a controlled foreign regarding the taxes covered and the type of assistance to be provided. the disposition of shares or interests that derive, directly or indirectly, corporation (CFC) resident in So far, China has made reservations in terms of tax recovery and more than 50% of their value from immovable property situated in the the jurisdiction. document services. jurisdiction seeking to tax the income or gains. Provisions reflecting the Organisation for Economic Co-operation and Development (OECD) standard for the exchange of tax information are also included. Furthermore, Canada signed a tax information exchange agreement (TIEA) with the Cook Islands on June 15, 2015. This TIEA will enter into force at a later date.

Kara Ann Selby Maria Lopes Matthew Mui Toronto Toronto China T: +1 416 869 2372 T: +1 416 365 2793 T: +86 10 6533 3028 E: [email protected] E: [email protected] E: [email protected] www.pwc.com/its

China China

DTT with Chile signed anytime during the 36 months preceding to the alienation, more New protocol amending the DTT with Russia signed than 50% of their value directly or indirectly from immovable On 25 May 2015, China and Chile signed a double tax properties should be taxed in the source state. On October 13, 2014, China and Russia signed a new treaty (DTT) and an accompanying protocol. If proper Other important features double taxation treaty (DTT) and an accompanying diplomatic procedures are to be completed within 2015, • The article of ‘Exchange of Information’ follows the 2010 protocol. Organisation for Economic Co-operation and Development (OECD) the DTT would apply to income derived on or after Model Tax Convention. On May 8, 2015, another protocol was concluded in order to amend January 1, 2016. • A new article of ‘Entitlement to Benefits’ is provided to allow the interest article in this DTT. In particular, the protocol gives the ‘qualified persons’ only to claim the treaty benefit. A ‘Principal exclusive taxation right on interest to the resident country. The The DTT between China and Chile includes the following key features: Purposes Test’ provision to attack treaty shopping is also included. protocol will enter into force on the 30th day upon receipt of the Permanent establishment (PE) notification for completing the respective internal legal procedures. • The time threshold for constituting a Construction PE should be six months. • The time threshold for constituting a Service PE should be 183 days within any 12-month period. PwC observation: PwC observation: Shipping and Air transport Generally, the DTT between China and Chile follows the trend of The China-Russia DTT generally tends to allocate more tax to the It is clarified that the profits arising from the operation of ships or other tax treaties concluded or re-negotiated by China in recent resident country. The new Protocol on the revised interest article aircraft in international traffic should include profits from bare boat years. It also takes some recommendations reflected in the Base also reflects this general principle. It is a sign that the two countries charter and container leasing if they are part of the international Erosion and Profit Shifting (BEPS) Project into consideration, such are encouraging business from each other. So far, the China-Russia shipping or air transportation operations. as adding the article of ‘Entitlement to Benefits’ to combat the treaty DTT has not entered into force. Relevant taxpayers are suggested shopping. The DTT will definitely provide a lot of treaty benefits to take this revision into consideration in advance when assessing Withholding tax (WHT) and Capital gains to China / Chile businesses. Relevant investors are recommended their eligibility for treaty benefits. • The restricted WHT rate on dividends paid to a beneficial owner to assess and adjust their current structures/arrangements in (BO) meeting the prescribed requirements should be 10%. advance in order to fully take the advantage of this new DTT once • The restricted WHT rates on interests paid to a BO meeting the it is enacted. prescribed requirement should be 4% for interests received by banks or financial institutions and 10% for other situations. • The restricted WHT rates on royalties paid to a BO for the use of industrial, commercial or scientific facilities should be 2% and 10% for other situations. • Capital gains arising from the alienation of shares deriving, at

Matthew Mui Matthew Mui China China T: +86 10 6533 3028 T: +86 10 6533 3028 E: [email protected] E: [email protected] www.pwc.com/its

Hong Kong Italy

Exchange of Notes on the DTT with Japan entered DTT with Hong Kong ratifiied into force PwC observation: The double tax treaty (DTT) between Italy and Hong Kong, Provided that the ratification process would be finalised in 2015, The Exchange of Notes (the Notes) regarding the Exchange signed on January 2013, has been ratified by the Italian the DTT could produce its effects starting from January 1, 2016. In this regard, further legislative actions are expected to be executed of Information (EoI) article in the Hong Kong - Japan parliament with Law n. 96/2015, published in the Italian to fully enact the DTT under the Italian tax law framework. double tax treaty (DTT) entered into force on July 6, 2015. Official Gazette n. 155 on July 7, 2015.

The Notes expand the tax types in Japan that are covered under the EoI Article 25 of the DTT provides for the exchange of information (EoI) article of the HK-Japan DTT. The EoI article will now cover tax types on transactions performed between taxpayer residents in the two other than Japanese income tax (i.e. the inheritance tax, the gift tax, countries, according to Organisation for Economic Co-operation and and the consumption tax). The Notes will take effect in Hong Kong Development (OECD) standards, triggering some relevant impacts in from April 1, 2016. the Italian tax law framework. The ratification of the DTT would in principle have a significant impact for multinational enterprises (MNEs) operating in Italy, considering that: PwC observation: By expanding the tax types in Japan that are covered under the • The withholding tax (WHT) rates on incomes realised in the other EoI article of the HK-Japan DTT, Hong Kong shows its commitment state are significantly reduced (e.g. dividends 10%, interest 12.5%, to international tax cooperation and increased tax transparency. royalties 15%). Other than the HK-Japan DTT, similar change has recently been • Capital gains would be taxable only in the State where the seller is made to the EoI article of the HK-China DTT by the signing of the a resident (except for capital gains on real estate or a shareholding Fourth Protocol, which expands the scope of information exchange in which the value is mainly derived from real estate). under the HK-China DTT to cover certain non-income taxes in China. • Hong Kong should be no longer included in the Italian ‘black lists’ identifying the ‘tax haven’ countries relevant for the application of the controlled foreign company (CFC) regime and the corporate income tax (CIT) restrictive costs’ deduction regime. • Hong Kong should be included in the ‘white list’ relevant for the application of the notional interest deduction (NID) on capital contributions to Italian subsidiaries.

Fergus WT Wong Franco Boga Hong Kong Milan T: +852 2289 5818 T: +39 02 9160 5400 E: [email protected] E: [email protected] www.pwc.com/its

For your global contact and more information on PwC’s international tax services, please contact: Anja Ellmer International tax services T: +49 69 9585 5378 E: [email protected]

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This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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