GLOBAL TAX WEEKLY ISSUE 134 | JUNE 4, 2015 a closer look

SUBJECTS TRANSFER PRICING INTELLECTUAL PROPERTY VAT, GST AND SALES TAX CORPORATE TAXATION INDIVIDUAL TAXATION REAL ESTATE AND PROPERTY TAXES INTERNATIONAL FISCAL GOVERNANCE BUDGETS COMPLIANCE OFFSHORE SECTORS MANUFACTURING RETAIL/WHOLESALE INSURANCE BANKS/FINANCIAL INSTITUTIONS RESTAURANTS/FOOD SERVICE CONSTRUCTION AEROSPACE ENERGY AUTOMOTIVE MINING AND MINERALS ENTERTAINMENT AND MEDIA OIL AND GAS

COUNTRIES AND REGIONS EUROPE AUSTRIA BELGIUM BULGARIA CYPRUS CZECH REPUBLIC DENMARK ESTONIA FINLAND FRANCE GERMANY GREECE HUNGARY IRELAND ITALY LATVIA LITHUANIA LUXEMBOURG MALTA NETHERLANDS POLAND PORTUGAL ROMANIA SLOVAKIA SLOVENIA SPAIN SWEDEN SWITZERLAND UNITED KINGDOM EMERGING MARKETS ARGENTINA BRAZIL CHILE CHINA INDIA ISRAEL MEXICO RUSSIA SOUTH AFRICA SOUTH KOREA TAIWAN VIETNAM CENTRAL AND EASTERN EUROPE ARMENIA AZERBAIJAN BOSNIA CROATIA FAROE ISLANDS GEORGIA KAZAKHSTAN MONTENEGRO NORWAY SERBIA TURKEY UKRAINE UZBEKISTAN ASIA-PAC AUSTRALIA BANGLADESH BRUNEI HONG KONG INDONESIA JAPAN MALAYSIA NEW ZEALAND PAKISTAN PHILIPPINES SINGAPORE THAILAND AMERICAS BOLIVIA CANADA COLOMBIA COSTA RICA ECUADOR EL SALVADOR GUATEMALA PANAMA PERU PUERTO RICO URUGUAY UNITED STATES VENEZUELA MIDDLE EAST ALGERIA BAHRAIN BOTSWANA DUBAI EGYPT ETHIOPIA EQUATORIAL GUINEA IRAQ KUWAIT MOROCCO NIGERIA OMAN QATAR SAUDI ARABIA TUNISIA LOW-TAX JURISDICTIONS ANDORRA ARUBA BAHAMAS BARBADOS BELIZE BERMUDA BRITISH VIRGIN ISLANDS CAYMAN ISLANDS COOK ISLANDS CURACAO GIBRALTAR GUERNSEY ISLE OF MAN JERSEY LABUAN LIECHTENSTEIN MAURITIUS MONACO TURKS AND CAICOS ISLANDS VANUATU GLOBAL TAX WEEKLY a closer look

Global Tax Weekly – A Closer Look

Combining expert industry thought leadership and team of editors outputting 100 tax news stories a the unrivalled worldwide multi-lingual research week. GTW highlights 20 of these stories each week capabilities of leading law and tax publisher Wolters under a series of useful headings, including industry Kluwer, CCH publishes Global Tax Weekly –– A Closer sectors (e.g. manufacturing), subjects (e.g. transfer Look (GTW) as an indispensable up-to-the minute pricing) and regions (e.g. asia-pacifi c). guide to today's shifting tax landscape for all tax practitioners and international fi nance executives. Alongside the news analyses are a wealth of feature articles each week covering key current topics in Unique contributions from the Big4 and other leading depth, written by a team of senior international tax fi rms provide unparalleled insight into the issues that and legal experts and supplemented by commentative matter, from today’s thought leaders. topical news analyses. Supporting features include a round-up of tax treaty developments, a report on Topicality, thoroughness and relevance are our important new judgments, a calendar of upcoming tax watchwords: CCH's network of expert local researchers conferences, and “The Jester's Column,” a lighthearted covers 130 countries and provides input to a US/UK but merciless commentary on the week's tax events.

©2015 CCH Incorporated and/or its affi liates. All rights reserved. GLOBAL TAX WEEKLY ISSUE 134 | JUNE 4, 2015 a closer look CONTENTS

FEATURED ARTICLES District Of Columbia's Transfer Pricing DLA Piper Global Stock Options Overview: Enforcement Program And Combined Th e Americas Reporting Regime: Taking Two Bites Dean Fealk, DLA Piper, San Francisco 14 Of Th e Same Apple Stephen P. Kranz, Diann Smith and A. Tracy Gomes, Pre-Registration GST Claims Process McDermott Will & Emery 5 Will Be Simplifi ed Jacqueline Low, chief operating offi cer Gaining Certainty And Potentially of Hawksford Singapore 20 Better Terms: Th e Case For Bilateral Advanced Pricing Agreements In India Developments In Global Carbon Pricing E. Miller Williams, Ernst & Young LLP (US), Stuart Gray, Senior Editor, Global Tax Weekly 24 Principal, Transfer Pricing Controversy (Washington, DC), International Tax Services, and Ameet Kapoor, Treasury Proposes Signifi cant Changes To US Model Treaty Ernst & Young LLP (India), Executive Director, 33 Transfer Pricing Controversy (Delhi, India) 9 Caplin & Drysdale Topical News Briefi ng: Brazil's Tax U-Turn Topical News Briefi ng: Considering Th e Brexit 37 Th e Global Tax Weekly Editorial Team 13 Th e Global Tax Weekly Editorial Team

NEWS ROUND-UP

International Financial Centers 39 International Trade 41

Isle Of Man Looks To Shore Up Future With EU Brazil To Hike Taxes On Imports EU, Switzerland Sign Tax Transparency Deal TPA Crucial For US Trade Growth, Ryan Says Poland Removes Gibraltar From Tax Blacklist EU MEPs Seek Ambitious And Balanced TTIP

Chile, Philippines To Pursue Free Trade Deal EU–Bosnia, Herzegovina FTA In Force Industry Update: Banking 45 Compliance Corner 53

US Reaches Non-Prosecution Deals France Looking To Slash Red Tape With Four Swiss Banks SARS Boasts High Conviction Rate For Tax Crimes Brazil Hikes Tax On Financial Firms IRS Hit By Huge Tax Refund Scam UK Banking Sector's Tax Contribution Falls

TAX TREATY ROUND-UP 55 VAT, GST, Sales Tax 48 CONFERENCE CALENDAR 58 Puerto Rican Senate Passes Sales Tax Bill IN THE COURTS 69 EU Rejects Italian Reverse Charge Plan THE JESTER'S COLUMN 76 IMF: Japan's Planned Consumption Tax Hike Th e unacceptable face of tax journalism 'Not Enough'

Country Focus: Ireland 50

Ireland Pledges To Ease Tax Burden On SMEs NI Corporation Tax Cut Delay Deterring Investors Ireland Explains Tax Ruling Practices At EU Hearing

For article guidelines and submissions, contact [email protected]

© 2015 CCH Incorporated and its affi liates. All rights reserved. FEATURED ARTICLES ISSUE 134 | JUNE 4, 2015

District Of Columbia's Transfer Pricing Enforcement Program And Combined Reporting Regime: Taking Two Bites Of The Same Apple by Stephen P. Kranz, Diann Smith and A. Tracy Gomes, McDermott Will & Emery

Contact: [email protected] , Tel: +1 202 756 to simultaneously pursue both. To do so seriously 8180; [email protected] , Tel: +1 202 756 8241; risks overtaxing District business taxpayers and ques- [email protected] , Tel: +1 972 232 3064 tions the coherence of the District's tax regime.

In his recent article, "A Cursory Analysis of the Im- History pact of Combined Reporting in the District", Dr. Both combined reporting and section 482 adjust- Eric Cook claims that the District of Columbia's ments have had a renaissance in the past decade. (DC or the District) newly implemented combined Several tax jurisdictions, including the District, reporting tax regime is an eff ective means of increas- enacted new combined reporting requirements ing tax revenue from corporate taxpayers, but it will to increase tax revenue and combat perceived tax have little overlap with DC's ongoing federal-style planning by businesses. At the same time, some section 482 tax enforcement. tax jurisdictions, once again including the District, have stepped up audit changes based on use of Dr. Cook is chief executive offi cer of Chainbridge transfer pricing adjustment authority. Th is change Software LLC, whose company's product and ser- is due in part to new availability of third-party con- vices have been utilized by the District to analyze sultants and the interest in the issue by the Multi- corporations' inter-company transactions and en- state Tax Commission (MTC). States have engaged force arm's length transfer pricing principles. Com- consultants, such as Chainbridge, to augment state bined reporting (i.e. , formulary apportionment, as it capabilities in the transfer pricing area. At the re- is known in international tax circles) and the arm's quest of some states, the MTC is hoping to launch length standard are eff ectively polar opposites in the its Arm's Length Audit Services (ALAS) 1 program. treatment of inter-company taxation. It is inappro- States thus have increasing external resources avail- priate for the District (and other taxing jurisdictions) able for transfer pricing audits.

5 International Context among the largest corporations and the most com- A similar discussion regarding how to address inter- plex transfer pricing arrangements. Going back to company income shifting is occurring at the inter- the earliest days of corporate income taxation, the national level, but with a fundamentally important "economic experts" to the League of Nations re- diff erent conclusion. Th e national governments of jected formulary apportionment for cross-border the Organisation for Economic Co-operation and taxation, having found "the methodology has no Development (OECD) and the G20 are preparing fundamental basis in economic theory which is ca- to complete (on a more or less consensual basis) pable of easy application".3 their Base Erosion and Profi t Shifting action plan. Th is plan will reject formulary apportionment as Arguments in favor of combined reporting (formu- a means of evaluating and taxing inter-company lary apportionment) generally center on simplicity transactions.2 Th us, in the international context, of concept, administrative ease and reduced com- formulary apportionment and transfer pricing ad- pliance burden, along with increased, comprehen- justment authority are not seen as complementary, sive (and thereby, eff ective?) revenue collection. but instead are seen as mutually exclusive alterna- Th ese arguments are generally from the perspective tives. Th e history of formulary apportionment in of the taxing authorities – who struggle with lack an international context sheds light on why states of resources, information and a complexity of rules make a mistake when they seek to use both com- and corporate structures. bined reporting and transfer pricing adjustments. And, yet, as is evident from the eight-part article A combined reporting basis of taxation seeks to treat authored by Michael Durst, former Director of the the members of a consolidated group as a single en- Internal Revenue Service (IRS) Advance Pricing tity, consolidating fi nancial accounts of the member Agreement program – devising and implementa- entities and allocating a portion of the consolidated tion of a formulary apportionment regime is any- income to the taxing jurisdiction based on some thing but simple, or its results anything but certain formula or one or more apportionment factors. or eff ective.4 Aside from the structural issues of de- Under the arm's length approach, individual enti- termining the tax base (in terms of the inclusion ties of a consolidated group within a single jurisdic- of income categories and the disallowance of de- tion are treated (generally) as stand-alone entities ductions, as well as inclusion/exemption of corpo- and taxed according to the arm's length value (the rate members) and the selection of apportionment value that would be realized by independent, third- factors, there is the entire political issue of juris- party entities) of their inter-company transactions. dictional consensus. Th en there are the economic issues, both theoretical and practical – in terms of National governments have for decades wrestled tax incidence, incentives and economic substance, with the taxation of inter-company transactions to name a few. 5 In terms of today's most vexing

6 transfer pricing problem facing both state and na- reporting of revenue among entities established and tional tax authorities – matching tax receipts with operating outside of the District and selling into economic activity/value creation – combined re- the District – that is, entities whose physical pres- porting off ers an imprecise and spurious solution. ence and economic talents (activity) are outside the District but whose products are sold within or with States Should Make A Choice nexus to the District. Unless the District's program Because transfer pricing adjustments and combined has some mechanism to identify (and inter-state reporting are alternatives, not complements, states agreement to credit) the increased tax liability as- should choose which system to adopt. States that sociated with economic activity (value creation) in seek to utilize both lack a coherent tax imposition other tax jurisdiction(s), it will only be taxpayers policy and create signifi cant risk that their business that will realize a "real" increase in (double) tax. taxpayers will be double taxed. Dr. Cook incorrectly asserts that combined report- Th e international context explains why states with ing and transfer pricing should co-exist. Th e fact existing transfer pricing adjustment programs that additional revenue can be earned from impos- should reject adopting combined reporting. In ing both regimes does not mean that both regimes the case of the District's combined reporting re- should be implemented. He specifi cally notes that gime, Dr. Cook's claim that the program is both 30 taxpayers, or 10 percent of his sample, would more eff ective (increases tax revenue) and effi cient have tax increases based partially on the eff ects (non-overlapping) is both unlikely and one-sided. of combined reporting and partially as a result of From the District's standpoint, it may be true that transfer pricing adjustments. Th is is an unaccept- they experienced an increase in tax revenue, but able overlap of competing tax regimes. Further- what is more likely that this is a "shift" (or more more, Dr. Cook supports imposing both systems accurately, a double count) in tax liability from because most of the companies sampled did not one jurisdiction to the next. One of the (other) have an increase in tax under the combined report- problems with implementing combined report- ing regime but did under a transfer pricing analysis. ing, especially on a unilateral basis, is defi ning the Th is does not suggest that both regimes are neces- tax base and segmenting economic activity that sary to properly calculate tax, but rather that both originates in one jurisdiction and culminates in regimes are attractive to state revenue authorities another, so as to ensure a single tax on the same because it increases their odds of fi nding new tax unit of economic activity. money. If someone asks us if we would like a cook- ie, a bowl of ice cream or both, we are always going It is likely that the reported increased tax revenue to take both. Th is does not mean it is the appropri- cited by Dr. Cook is nothing more than an expanded ate thing to do.

7 Finally, while Dr. Cook does not directly address Houston Public Law and Legal Theory Series, 2011 the issue, it is likely that any valid transfer pricing A-6, p. 549 adjustment in a combined reporting regime is a 4 See Michael Durst, "Starting the Conversation: A result of international, rather than purely domes- Formulary System For Dividing Income Among tic, inter-company transactions. If this is true, this Taxing Jurisdictions," 22 Transfer Pricing Report 98, causes additional problems for Dr. Cook's posi- May 16, 2013; "Analysis for Dividing Income, Part tion. Many subnational tax jurisdictions, including II: Examining Current Formulary and Arm's-Length the District, may not have the authority to make Approaches," 22 Transfer Pricing Report 270, June transfer pricing adjustments aff ecting international 27, 2013; "Analysis of a Formulary System Formulary transactions if the IRS has declined to make such System for Dividing Income, Part III: Comparative As- modifi cations. Furthermore, the taxation of inter- sessment of Formulary, Arm's-Length Regimes," 22 national transactions on an arm's length basis and Transfer Pricing Report 653, September 5, 2013; and domestic transactions on a formulary apportion- "Analysis of a Formulary System, Part IV: Choosing ment basis raise signifi cant commerce clause issues a Tax Base," 22 Transfer Pricing Report 771, October for certain taxpayers. Th us, jurisdictions like the 17, 2013, "Analysis of a Formulary System, Part V: Ap- District that use these contrary regimes risk under- portionment using a Combined Tax Base," 22 Transfer mining the validity of their entire inter-company Pricing Report 972, November 28, 2013, "Analysis of tax program. a Formulary System, Part VI: Building the Formula," 22 Transfer Pricing Report 1180, January 23, 2014, E NDNOTES "Analysis of a Formulary System, Part VII: The Sales 1 We love this acronym so much, we are thinking of Factor," 22 Transfer Pricing Report 1414, March 20, getting T-shirts made. 2014, and "Analysis of a Formulary System, Part VIII: 2 See Bloomberg BNA, "OECD's Saint-Amans Says BEPS Suggested Statutory, Regulatory Language for Imple- Debate Over Formulary Apportionment is Finished," menting Formulary Apportionment," 23 Transfer Transfer Pricing Report , April 3, 2014. Pricing Report 70, May 1, 2014. 3 See B. Wells and C. Lowell, "Tax Base Erosion and 5 See Garry Stone and Elif Ekmekci-Taskiran, "Formu- Homeless Income: Collection at the Source is the lary Apportionment: The Case of Missing Income", 22 Linchpin," 65 Tax Law Review 535, University of Transfer Pricing Report 867, November 14, 2013.

8 FEATURED ARTICLES ISSUE 134 | JUNE 4, 2015

Gaining Certainty And Potentially Better Terms: The Case For Bilateral Advanced Pricing Agreements In India by E. Miller Williams, Ernst & Young LLP (US), Principal, Transfer Pricing Controversy (Washington, DC), International Tax Services, and Ameet Kapoor, Ernst & Young LLP (India), Executive Director, Transfer Pricing Controversy (Delhi, India) in India. In fact, India today conducts about 3,000 audits each year, with approximately half resulting Contact: [email protected] , Tel: +1 202 in some form of proposed upward adjustment – or 495 9809; [email protected] , Tel: +91 in other words, India claims more taxable earnings. 124 671 4784 Th e problem is particularly acute for technology Tax disputes. Double taxation. For seven years, US companies who may be off shoring such services as companies operating in India have had their share software development, testing or call center opera- of such headaches. However, improved commu- tions. Th e tendency is for India's taxation authori- nication between US and Indian tax authorities is ties to maintain that these services are generating leading to closer cooperation. For companies, this more value in India than the tax authorities in means fairer dispute resolution plus expanded op- other jurisdictions are willing to recognize, such portunities to reduce the risk of double taxation. as the UK, Japan and Germany, and particularly All told, this could be the right time to pursue a the US Internal Revenue Service (IRS). Unless the US–India bilateral Advance Pricing Agreement company obtains relief from India or their home (APA) for Indian operations. country – which is not likely – the end result is double taxation. A Case Of Infl ated Earnings? Double taxation is a risk for any company con- Enter Th e APA (Unilateral) ducting its business across international borders. Many companies would prefer to avoid the cost For approximately the past 15 years, this has been and uncertainty of such double taxation. One way a recurring problem for not only US companies, companies have been attempting to deal with such but almost any multinational company operating risk is to pursue an APA with the Indian authorities.

9 APAs have been available from the IRS since the ear- APAs – one with the US and one with India – that ly 1990s. Th at is, the IRS has been willing to work could completely eliminate double taxation. with companies to agree, in advance, on the trans- fer pricing for specifi c foreign operations. However, For additional context, consider the controversy it wasn't until 2012 that India announced its own taking place surrounding the tax treaty between the version of the APA program. US and India. When a company believes it is be- ing unfairly subjected to double taxation – when Th e India variety of an APA is available for up to there is a dispute over transfer pricing – the treaty a fi ve-year term. Once negotiated and in place, specifi es mutual agreement procedures (MAP) to so long as the local transfer pricing offi cer (TPO) resolve the double tax dispute. However, observers agrees that the India-based affi liate is following have been noting that such dispute resolution is, agreed terms, the company's profi tability in India so far, a one-sided aff air. Th at is, when controversy for tax purposes is fi xed. So far, the program is prov- arises, India's position in most instances is that its ing quite popular with multinational companies, TPOs are correct and that no relief will be given. In with close to 600 applications now in every stage of short, India has been saying that it is up to US tax the process (with approximately half of these from authorities to provide their domestic US company US-based parent companies). with tax relief; India would not agree that its ad- justed share of taxable income is too high. Th e availability of such unilateral agreements from India is a step in the right direction. However, these Shifting Winds are by no means a panacea. To create genuine cer- Noting a growing number of treaty-based tax con- tainty for both sides of the covered intercompany troversies between India and the US, representatives transactions, such agreements need to be bilateral. of the two jurisdictions met in January of 2015. Fol- Th at is, to be eff ective, a US company (or, for ex- lowing this meeting, IRS offi cials and the Indian tax ample, a Japanese, German or UK company) needs authority both announced that the two Competent a parallel, ideally mirror-image tax agreement with Authorities (CAs) had agreed to a framework that its host country tax authority. will hopefully lead to more give and take between the two nations' taxing authorities – good news Observers generally feel that Indian authorities for those involved in any tax treaty-driven negotia- tend to peg India-based profi tability at levels sig- tions. Th e framework will also allow the authorities nifi cantly higher than most internationally recog- to settle as many as one-third of over 250 CA cases nized standards, such as those promulgated by the pending between the two governments. India real- OECD. Th is lessens the likelihood that a company ized that it needed to demonstrate to US multina- would be able to negotiate simultaneous unilateral tionals that its APA and MAP programs are viable

10 and provide alternatives to the audit and litigation bilateral APAs. In other words, these are APAs that of the past. will be negotiated by the CAs from both nations, greatly improving the odds of a fair outcome. On the US side, the IRS began to better understand that information technology (IT) activities and For example, consider a case where a US company software development services performed in India maintains that its Indian affi liate's profi t margin on should receive higher than a routine return of cost operating costs should be 15 percent, but the local plus 8–10 percent typical in the US due to some Indian TPO insists on a fi gure of 32 percent. Di- unique features of the Indian economy and services rect involvement by the IRS increases a company's business. Also the IRS wanted to minimize the po- negotiating leverage while also increasing the likeli- tential double taxation of US multinationals and hood that the discussion will be premised on ob- reduce the 700 outstanding MAP cases currently jective, internationally recognized transfer pricing in proceedings with all countries, 250 of which are guidelines. Checklists, for example, will be intro- with India. duced to detail which activities are taking place in which jurisdiction. What skills are being utilized in While there has not been another in-person meet- which location? Who owns any intellectual prop- ing, the two governments are starting to make prog- erty and where is it in use? Who is taking on which ress on settling cases. We understand that between risks? Th e introduction of a precise, rigorous meth- 30 and 40 cases have been settled since January, in odology should lead to more objective conclusions. line with the agreed upon framework. In addition, the IRS and Indian tax authority are preparing or In addition, there are complicating factors, such as are in the process of discussing the next wave of the growing use of India's Special Economic Zones, approximately 70 cases. Th e goal is to have the ma- which are locations off ering lower taxation in India. jority of the pending MAP cases resolved by Sep- Such lower tax treatment could leave US authori- tember 30, 2015. Th e settlement of approximately ties wanting a greater share of income. 100 out of 250 pending cases should allow the IRS to give approval for taxpayers to fi le US–India bi- Generally, as more facts are presented, the likeli- lateral APA requests. hood of a fairer outcome increases. In other words, the negotiation may not wind up at the company's More good news stems from a March 2015 an- desired 15 percent profi t margin, but if the facts nouncement that states the IRS is ready to begin support such a case, the 32 percent fi gure could working with taxpayers interested in negotiating decline signifi cantly. Th ose close to the US–India true bilateral APAs between the US and India by negotiation table believe India is generally prepared allowing for pre-fi ling conferences for US–India to accept markups in the 15–16 percent range.

11 Bear in mind, beyond avoiding double taxation, operating costs for their India entities. Meanwhile, companies able to successfully negotiate a bilater- those companies already pursuing a unilateral APA al APA between India and the US gain the add- from Indian authorities will need to supply the IRS ed benefi t of being able to focus less on issues of with details of such applications along with an in- compliance, controversy and litigation and more dication of how far they are in the process. on their core business. Dispute resolution regard- ing taxation is a drawn out process in India, often All of this is welcome news for companies whose lasting ten years or longer. By comparison, a unilat- India-based operations are today facing signifi cant eral APA can often be concluded within one year levels of double taxation or those who simply hope and a bilateral within 18–24 months; both remain to reduce variability in cash fl ows and accompany- in eff ect for a full fi ve years. Moreover, once such ing tax risks. Th e opportunity for US companies agreements are in place, intensive annual audits are to negotiate bilateral APAs, alongside clearer guid- eliminated, replaced instead by a less intrusive pro- ance and better cooperation relating to tax treaty cess focused on whether the terms specifi ed within disputes, can go a long way toward reducing the the APA are being adhered to. Finally, once APAs business risks of operating in India. are established, it is hoped that subsequent renew- als can be concluded with signifi cantly less eff ort. EY refers to the global organization, and may re- Overall, this means more certainty for the business, fer to one or more of the member fi rms of Ernst & and also frees up managerial resources. Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK Signup Begins company limited by guarantee, does not provide ser- Since the inception of India's new APA program, vices to clients. Ernst & Young LLP is a client-serv- nearly 600 applications have been fi led, the bulk ing member fi rm of Ernst & Young Global Limited of these unilateral. However, the IRS is now operating in the US. scheduling pre-fi ling conferences for bilateral US–India APAs. Th e views expressed in this article are those of the au- thors and do not necessarily refl ect those of any mem- At the pre-fi ling conference, interested parties will ber fi rm of the EY global organization. Moreover, need to share operational details including infor- they should be read in the context of the time they mation such as their historic markups on total were expressed.

12 FEATURED ARTICLES ISSUE 134 | JUNE 4, 2015

Topical News Briefi ng: public spending. Th is statement didn't bear much Brazil's Tax U-Turn relation to the plans that Levy announced later that by the Global Tax Weekly Editorial Team month, which included increases to a number of taxes including the IOF fi nancial transactions tax, a tax on fuel known as CIDE, and the PIS/COFINS After cutting taxes for much of 2014, the Brazilian social security levies. Government of President Dilma Rousseff appears to have made an abrupt fi scal policy U-turn in the past More recently, the Government has decided to hike few months with new revenue-raising measures seem- the CSLL social contribution tax on the profi ts of ingly being announced with depressing regularity. fi nancial institutions from September this year, as reported in this issue of Global Tax Weekly, and raise Cynics might suggest that the plethora of tax cuts taxes on a number of imported products, including announced last year were intended to help the un- automotive parts, beer, and pharmaceuticals. popular Rousseff 's re-election campaign more than anything else. And if this was the case, it seemed So what has really gone on behind the scenes in to work – at least just about – as Rousseff scraped Brazil to bring about such an abrupt change in home in the October 2014 election in a closely tax policy? Th e answer to that lies in fl agging eco- fought contest. nomic growth and a rising budget defi cit. Th e 2014 tax cuts were as much about reigniting the Brazil- Taxes didn't start going up straight after the elec- ian economy as helping Rousseff to get re-elected. tion however. Perhaps in a gesture of goodwill to However, the policy looks to have failed. Th e econ- the Brazilian people, the Government waited until omy grew at less than 1 percent last year, and is after Christmas to inform them that tax hikes were expected to remain fl at this year. And in January in the pipeline. Joaquim Levy, sworn in as Brazil's 2015, the Government announced a record budget new fi nance minister on January 5, 2015, attempted defi cit of BRL344bn (USD108bn), or 6.7 percent to let them down gently, saying that some adjust- of gross domestic product. ments to the tax regime may be necessary to increase domestic savings. He said that he would rein in the Given these unfavorable numbers then, taxpay- use of tax incentives and pointed out that any tax ers in Brazil should probably brace themselves for initiative must be consistent with the trajectory of more bad news in the months ahead.

13 FEATURED ARTICLES ISSUE 134 | JUNE 4, 2015

DLA Piper Global Stock Options Overview: The Americas by Dean Fealk, DLA Piper, San Francisco

Many companies today aim to scale their business- es globally and into multiple countries simultane- ously. In order to help clients meet this challenge, DLA Piper has compiled a Guide To Global Equity Stock Options. In the fi fth article in an ongoing applicable). Th e employee is not subject to tax series, we examine the tax, compliance and other when the shares are sold. requirements in relation to equity stock options in Employer: six countries of the Americas. Withholding & Reporting: Tax withholding and Argentina reporting are required upon exercise. Securities: As long as: (i) the off er is not advertized Deduction: Although an Argentine subsidiary's or publicized; (ii) the stock is not traded in Argenti- reimbursement of the parent company for the cost na; (iii) the off er is limited to employees; and (iv) the of the option benefi ts ( e.g. , the spread) may enable off er is intended to compensate employees and not the subsidiary to deduct such cost from its income to raise capital, no securities law requirements apply. taxes, any such reimbursement is prohibited due to foreign exchange restrictions. Reimbursement Foreign Exchange: Th e outbound fl ow of funds for also may implicate certain labor law issues. the purchase of shares is prohibited by the Central Bank. For inbound funds, if an employee repatri- Social Insurance: Social insurance contributions ates more than a designated amount from the sale are generally payable by the employee and employ- of foreign shares to Argentina, a percentage of such er when an option is exercised. funds must be placed in a non-interest-bearing ac- count for a fi xed period of time. Data protection: Obtaining an employee's writ- ten consent for the processing and transfer of his or Tax: her personal data is the most common approach to Employee: Th e employee is taxed on the spread comply with certain aspects of data protection re- upon exercise (including personal assets tax, if quirements. Th e employer is also required to register

14 any database that includes an employee's personal shares that exceed a monthly exclusion are taxed data with the Argentine privacy authorities. as a capital gain.

Employer: Labor Issues: Benefi ts received from an option may be considered part of the employment relationship Withholding & Reporting: Tax withholding and re- and included in a severance payment if options are porting by the employer generally are not required. repeatedly granted to an employee. Upon involun- Deduction: If options are off ered to all employees tary termination of employment, an employee may in Brazil and the subsidiary reimburses the par- be entitled to continued vesting and other rights ent company for the cost of option benefi ts, the with respect to his or her option. In order to reduce subsidiary should be able to deduct such cost the risk of employee claims, the award agreement from its income taxes. However, reimbursement signed by an employee should provide, among requires prior foreign exchange approval and other things, that vesting of an option ceases upon could cause options to be deemed employment termination of employment, and that the plan and income subject to social insurance contributions. any awards under it are discretionary. Social Insurance: Although options generally are Communications: Although plan materials are not not subject to social insurance contributions, regu- required to be translated into Spanish, translation larly granting options or reimbursement of option is required for any government fi lings and is recom- costs could result in the options being deemed em- mended to ensure that employees understand the ployment income subject to such contributions. terms of their awards. Award materials should be addressed to individual employees in order to avoid Data Protection: Obtaining employee consent securities law requirements. for the processing and transfer of personal data is recommended. Brazil Securities: Th e grant of options generally is not Labor Issues: Benefi ts received from an option may subject to securities law requirements. be considered part of the employment relationship and included in a severance payment if such benefi ts Foreign Exchange: Subject to certain foreign ex- are regularly off ered. Upon involuntary termination change requirements, employees may exercise op- of employment, an employee may assert that he or tions by sending funds abroad. she is entitled to continued vesting and other rights with respect to his or her option. In order to reduce Tax: the risk of claims, the award agreement signed by Employee: Generally, the employee is taxed when an employee should provide, among other things, the shares are sold. Proceeds from the sale of that vesting of an option ceases upon termination

15 of employment, and that the plan and any awards Social Insurance: Generally, social insurance con- under it are discretionary. tributions, which are based on an employee's com- pensation and are subject to a cap, are payable on Communications: Although plan materials are not the spread when an option is exercised. required to be translated, translation is required for any government fi ling and is recommended to ensure Data Protection: Obtaining an employee's writ- that employees understand the terms of their awards. ten consent for the processing and transfer of his or her personal data is the most common approach to Canada comply with certain aspects of data privacy require- Securities: In most instances, there should be ments. Additional provincial compliance measures no federal securities restrictions applicable to the may be necessary. off er of stock options due to applicable exemp- tions. However, provincial requirements apply in Labor Issues: Off ering stock options may trig- certain circumstances. ger certain employer obligations and employee claims. For instance, benefi ts received from an Foreign Exchange: Options generally are not sub- option may be considered part of the employ- ject to any foreign exchange requirements. ment relationship and included in the calcula- tion of a severance payment. Upon involuntary Tax: termination of employment, an employee may Employee: Th e employee is taxed on the spread assert that he or she is entitled to continued vest- upon exercise. 50 percent of the spread may be de- ing and other rights with respect to his or her ducted from the taxable amount if certain require- option. In order to reduce the risk of employee ments are met. Upon the sale of shares, generally claims, the award agreement signed by an em- only 50 percent of any gain is taxable. ployee should provide, among other things, that vesting of an option ceases upon termination of Employer: employment, and that the plan and any awards Withholding & Reporting: Generally withholding under it are discretionary. and reporting are required. Deduction: Even if the subsidiary reimburses the Communications: Unless an employee in Que- parent company for the cost of the option benefi ts bec waives his or her right to receive plan materials (e.g. , the spread) pursuant to a written reimburse- in French, such materials must be translated into ment agreement, it is unable to deduct such cost French. It should be feasible for an employee to ex- from its income taxes. ecute his or her award agreement electronically.

16 Chile Labor Issues: Off ering stock options may trig- Securities: As long as the off er of options consti- ger certain employer obligations and employee tutes a private off er, generally no affi rmative securi- claims. For instance, benefi ts received from an op- ties law requirements are implicated. tion may be considered part of the employment relationship and included in a severance payment Foreign Exchange: Any investment in excess of if such benefi ts are routinely off ered. Upon invol- USD10,000 by a Chilean resident in shares of a for- untary termination of employment, an employee eign company is subject to reporting requirements. may assert that he or she is entitled to continued For cumulative investments in excess of USD5m, vesting and other rights with respect to his or her additional reporting requirements apply. option. In order to reduce the risk of employee claims, the award agreement signed by an em- Tax: ployee should provide, among other things, that Employee: Th e employee generally is taxed on the vesting of an option ceases upon termination of spread upon exercise. Any gain upon the sale of employment, and that the plan and any awards shares is also subject to tax. under it are discretionary.

Employer: Communications: Th e Labor Authority has as- Withholding & Reporting: If the subsidiary de- serted that plan materials should be translated; ducts the cost of the option benefi ts, withholding however, translation is not legally required. Gov- and reporting are required. ernment fi lings and any employee consent autho- Deduction: Reimbursement of the parent company rizing the cross-border transfer of personal data for the cost of the option benefi ts ( e.g., the spread) must be in Spanish. and inclusion of such benefi ts in the employee's compensation should enable the subsidiary to Mexico deduct such cost from its income taxes. Reim- Securities: Th e off er of options generally is exempt bursement will trigger employer tax withholding. from affi rmative securities requirements.

Social Insurance: Generally, the spread is subject Foreign Exchange: Option plans are not subject to to social insurance contributions, subject to appli- any specifi c foreign exchange restrictions. cable contribution ceilings. Tax: Data Protection: Obtaining employee consent for Employee: Th e spread is taxed at exercise. Th e gain the processing and transfer of personal data is rec- from the sale of the shares is taxable. ommended. Such consent should be in Spanish.

17 Employer: government fi lings are required to be translated. Withholding & Reporting: Tax withholding and It should be valid for an employee to execute the reporting generally are not required unless the award agreement electronically. Mexican subsidiary reimburses the parent com- pany for the cost of the option benefi ts. Venezuela Deduction: A local tax deduction generally is Securities: As long as the award options are not allowed if the subsidiary reimburses the parent deemed to be a public off er, securities requirements company for the cost of the option benefi ts under generally do not apply. Awards addressed to individ- a written agreement. However, reimbursement ual employees should not be deemed public off ers. may trigger withholding and reporting require- ments for the subsidiary. Foreign Exchange: Foreign exchange restrictions may limit the employees' ability to exercise and Social Insurance: Th e spread likely is subject to so- hold shares. cial insurance contributions if the Mexican subsid- iary reimburses the parent company for the cost of Tax: the option benefi ts. Employee: Generally, the spread is taxed upon ex- ercise. However, if the options are not granted on a Data Protection: Mexico has enacted a compre- regular basis it is arguable that they are extraordinary hensive federal data protection law. Employee con- benefi ts and therefore that the spread is not taxable. sent for the processing and transfer of personal data Th e gain from the sale of the shares is taxable. is required. Employer:

Labor Issues: Although not common, option ben- Withholding & Reporting: Withholding and re- efi ts may be considered part of the employment re- porting requirements do not apply. lationship and may be included in the calculation Deduction: Because of foreign exchange restric- of severance or retirement payments. To reduce the tions, reimbursement of the parent company and a risk of claims, employees should expressly agree in related tax deduction are not likely to be available. writing that: (i) participation in the option plan is discretionary; and (ii) termination of employment Social Insurance: Th e spread is not subject to so- will result in the loss of unvested rights. cial insurance.

Communications: Although it is not legally re- Data Protection: Obtaining employee consent quired, it is recommended that documents re- for the processing and transfer of personal data is garding employee option plans be translated. Any recommended.

18 Labor Issues: Although not common, option ben- it. Th is is a general reference document and should not efi ts may be considered part of the employment re- be relied upon as legal advice. Th e application and lationship and may be included in the calculation eff ect of any law or regulation upon a particular situ- of severance or retirement payments. To reduce the ation can vary depending upon the specifi c facts and risk of claims, employees should expressly agree in circumstances, and so you should consult with a law- writing that: (i) participation in the option plan is yer regarding the impact of any of these regimes in any discretionary; and (ii) termination of employment particular instance. will result in the loss of unvested rights. DLA Piper and any contributing law fi rms accept no Communications: Although not legally required, liability for errors or omissions appearing in this publi- it is recommended that documents regarding em- cation and, in addition, DLA Piper accepts no liabil- ployee option plans be translated. Any fi lings with ity at all for the content provided by any contributing the government are required to be translated. lawyers. Please note that privacy and information law is dynamic, and the legal regime in the countries sur- Th is overview is provided to you as a courtesy, and it veyed could change. No part of this publication may does not establish a client relationship between DLA be reproduced or transmitted in any form without the Piper and you, or any other person or entity that receives prior consent of DLA Piper.

19 FEATURED ARTICLES ISSUE 134 | JUNE 4, 2015

Pre-Registration GST Claims Process Will Be Simplifi ed by Jacqueline Low, chief operating offi cer of Hawksford Singapore

Introduction

Singapore's Budget 2015 unveiled simplifi ed rules to claim goods and services tax (GST) incurred on purchases prior to GST registration, commonly re- services, such services should not have been ac- ferred to as pre-registration claims. Th is change will quired more than six months before the eff ective benefi t businesses that are GST-registered with ef- date of GST registration. fect from July 1, 2015. Th is initiative by the Gov- Apportioning Pre-Registration GST ernment is appreciated by the business community, though only the newly GST-registered businesses If the goods and services purchased by a newly GST- will benefi t. registered business have been partially consumed before the GST registration, or if such consumption Existing Condition straddles across the date of registration, the newly Businesses that are GST-registered can claim GST GST-registered business must apportion the GST incurred on the purchase of goods and services made and claims can be made only on that portion attrib- prior to the GST registration, provided such goods utable to the supplies made after GST registration. and services are not disallowed under Regulations 26 and 27 of the GST (General) Regulations. Proposed Revision From July 1, 2015, newly GST-registered busi- Also, according to Regulation 40, pre-registration nesses can claim the pre-registration GST in full on GST incurred is claimable only on that portion of the following goods and services that are acquired the goods and services used or to be used to make within six months before the GST registration date: taxable supplies after GST registration. Goods held by the business at the point of GST registration; and GST incurred on goods and services used to make Property rental, utilities and services which are taxable supplies before the GST registration are not directly attributable to any supply made by not claimable. For recovering GST incurred on the business before GST registration.

20 No Need To Apportion Benefi ts For Th e Businesses Irrespective of whether the goods and services were Apportionment of GST incurred, based on the time partially used before the GST registration or have period of the usage of goods and services in making been used to make supplies straddling pre- and taxable supplies, was a cumbersome task for busi- post-registration, without any hassle of apportion- nesses, especially small businesses grappling with ing, GST can be claimed in full. However, such the challenges of evolving into a large scale business. goods and services must be used for making taxable supplies and not exempt supplies. Th e diff erent apportionment rule to determine the claimable and non-claimable GST expenses It must be noted that GST incurred on services was a complicated exercise for many business used to make taxable supplies before GST regis- owners. It led to confusion and included the risk tration will continue to remain not claimable. For of incorrect computation. goods and services acquired more than six months before your GST registration date, the existing pre- In order to prevent wrongful claims and to save the registration GST claims rules will prevail. resources spent on the challenging process of pre-reg- istration claims, some businesses even gave up their To claim pre-registration GST incurred on goods right to claim. It was a signifi cant loss for businesses. and services, you are required to maintain docu- mentary evidence such as tax invoices, import per- With the revised simplifi ed rules to make pre-regis- mits, and proof of payment. tration claims, businesses can fi le without having to pursue the elaborate apportioning exercise. Th is is a You must also maintain a goods stock account with signifi cant relief for businesses, which have had to details of quantities purchased, date of purchase, spend considerable time and resources for the process. quantities used in making of other goods, and date and manner of subsequent disposal of both the Businesses who are nearing the GST registration quantities purchased and quantities used in the threshold can also plan their purchases in order making of other goods. to claim back GST expenses. Businesses need not forego their rightful claims merely for a challenging To claim GST incurred on services, you are required calculation process. to maintain the details of services purchased, their description, date of purchase, and date of disposal IRAS will release further details on the simplifi ed of services, if any. pre-registration GST claims rule in June 2015.

21 Th e proposed simplifi cation of the compliance is or may be liable to pay a penalty of 10 percent of defi nitely cost and time saving for new companies the tax due from the date on which its liability to as well as for the existing companies that are ap- register commenced. It will be liable to a further proaching the registration threshold. It provides a penalty of SGD50 for every day during which the lot of clarity and room for small businesses to plan off ense continues after conviction. their purchase operations in such a way that they Voluntary Registration can eff ectively tap on the GST relief, which many otherwise simply forsake because of the complicat- A business not making any taxable supplies or ed apportioning requirement. GST expenses, in- the taxable incomes of which have not exceeded curred by companies before incorporation are also SGD1m may still choose to voluntarily register for claimable, subject to certain conditions. Such ini- GST, if it intends to make taxable supplies, in the tiatives taken by the government with the concerns due course of the business or in its furtherance, or if of small businesses in mind makes Singapore an it expects taxable turnover to exceed SGD1m. ideal launch pad for startups and entrepreneurs." A business making out-of-scope supplies and ex- For more details on GST Registration, see empt supplies can also choose to register voluntari- http://www.guidemesingapore.com/taxation/ ly if it has a business establishment in Singapore or corporate-tax/singapore-gst-tax-guide . it is resident in Singapore.

Who Needs To Register For GST? By voluntarily registering, the business may claim back the GST paid for its purchases; however, there Compulsory Registration are compliance costs involved in maintaining prop- GST registration is compulsory if your business er records, timely reporting, tax payment, audits, meets any of the following conditions. Registra- etc. Once a business is voluntarily registered, it has tion must be done within 30 days from the date on to remain registered for at least two years. which your registration liability arises: Exemption From Registration Th e chargeable income exceeds SGD1m in the past 12-month period; A business can apply for exemption from GST reg- If you are making taxable supplies or intend to make istration if it makes wholly or substantially zero- taxable supplies and the taxable turnover is expected rated supplies (export of goods or services). A busi- to exceed SGD1m in the next 12-month period. ness if granted exemption from GST registration cannot make claims on input GST, meaning the If a business that is required to compulsorily regis- GST paid on its purchases. If there are any changes ter fails to do so, it will be fi ned up to SGD10,000 in the nature of supplies or proportion of supplies

22 made by the business, then it must be duly reported for GST must appoint a local agent to manage its to the comptroller of GST. GST matters.

Overseas Entities It must be noted that transactions between head Th e GST registration requirements are the same for offi ce and its branch are non-supplies as they are local and overseas entities. An overseas company regarded as one entity for Singapore GST purposes. would be required to register for GST if it makes or expects to make taxable supplies in Singapore If the overseas entity's GST liability arises due to exceeding the GST registration threshold. importation of taxable supplies into Singapore, it may appoint a GST agent pursuant to section 33(2) Overseas entities that are not resident in Singa- of the GST Act. Instead of the overseas entity regis- pore or do not have a business establishment in tering for GST, the appointed agent (referred to as a Singapore, but conduct business in Singapore, are Section 33(2) agent) will act as the principal of the also liable for GST registration if they meet the goods imported, and the overseas entity's imported conditions. An overseas entity that is registered goods will be refl ected in the agent's GST returns.

23 FEATURED ARTICLES ISSUE 134 | JUNE 4, 2015

Developments In Global Carbon Pricing by Stuart Gray, Senior Editor, Global Tax Weekly

Th e world is mostly in agreement that in order to avert potentially catastrophic global climate change, nations must drastically cut the amount of carbon their industries pump into the atmosphere. What nations don't yet agree on is the best method to governments have walked across the battle lines and achieve that. However, taxing, or putting a "price" are now working together on how and how fast to on, carbon is rapidly emerging as the preferred so- get prices right," Kyte observed. lution, and recent developments in this area are summarized in this article. Th e World Bank has been a particularly strong advo- cate of carbon taxation to reduce GHG emissions and Introduction subdue the eff ects of climate change. Speaking in De- According to the World Bank's Carbon Pricing cember 2014, Jim Yong Kim, President of the World Watch 2015 report, 1 published on May 26, 2015, Bank Group, said that all countries should commit to about 40 countries and more than 20 cities, states placing a price on carbon emissions to prevent global and provinces now use, or are planning to use, warming from reaching dangerous levels. a price on carbon to bring down greenhouse gas (GHG) emissions. Together, the initiatives in op- "Eff ective prices on carbon can be discovered by eration today are valued at almost USD50bn and taxes, market mechanisms, or regulation," Kim said are generating revenues of USD14bn. during a speech at the Council on Foreign Rela- tions. "Whichever option a country, region or city "Carbon pricing is clearly gaining traction," said chooses, a carbon price makes the pollution we Rachel Kyte, World Bank Group Vice President don't want more expensive and incentivizes effi - and Special Envoy for Climate Change. "So it's no ciency and clean production." longer a matter of if or when to price carbon." It is an argument that appears to be making much "With the focus now on action in the run-up to the headway, with 74 national governments and over Paris climate summit in December, business and 1,000 companies announcing support for placing

24 a price on carbon emissions at talks hosted by the Th e Offi ce of the Premier said that the system World Bank's Partnership for Market Readiness in will reward innovative companies, provide cer- November 2014. tainty for industries, and create more opportuni- ties for investment in Ontario. Ontario has the Some of the more recent carbon pricing develop- fastest growing clean-tech sector in Canada, with ments are described next. 2,700 clean-tech fi rms employing 65,000 people and generating annual revenues of more than Canada CAD8bn (USD6.57bn). One of the latest of the new carbon pricing systems was announced by the Canadian province of On- In November 2014, Ontario and Québec signed a tario in April 2015, when the provincial Govern- Memorandum of Understanding (MoU), agreeing ment confi rmed plans to introduce a cap-and-trade to collaborate in their eff orts to fi ght climate change system to limit GHG pollution. Th e plan means and accelerate the transition to a low carbon econo- that more than 75 percent of Canadians will live in my. Th e respective governments have now issued a a province with some form of carbon pricing. letter formalizing their intent to link their cap-and- trade systems, once Ontario has developed a mech- Th e decision followed the Ontario Government's anism compatible and coherent with Québec and consultation with taxpayers and industry in Feb- California's carbon market. Th is will be refl ected in ruary 2015 on a range of options for attaching a an amendment to the MoU. price to carbon emissions. Th ese included a cap- and-trade program, a baseline and credit system, a British Columbia also operates a carbon tax, at carbon tax, and regulations and performance stan- CAD30 (USD24) per tonne, and Alberta estab- dards. More than 1,500 people attended consulta- lished a baseline and credit system for large indus- tions, and more than 300 ideas and 31,000 votes try and electricity in 2007. were submitted through an online consultation tool, in a demonstration of just how important South Korea the issue of carbon reduction is becoming with the One of the most recent signifi cant carbon pric- public in some countries. ing developments occurred in January 2015 when South Korea's carbon emissions trading scheme Under the proposals, businesses will have their (ETS), a key component of the Government's plan own GHG quota, which they will be able to sell if to cut GHG emissions, became operational on Jan- they no longer require it. Th e Government will re- uary 12, 2015. Th e ETS, which was intended to invest the revenue raised into projects that reduce launch last year, plans to reduce GHG emissions to GHG pollution. 30 percent below current levels by 2020.

25 Th e ETS will impose a cap on GHG emissions by Th e demonstration consisted of performing actu- 525 of South Korea's largest companies, including al over-the-counter trades of carbon credits. Th ese airlines, and automobile, electronics, petrochemical trades were then mirrored in a test environment on and steel producers, covering companies responsible the electronic platforms of the JSE and Silocerts. It for about 65 percent of the country's carbon emis- was shown that carbon off set credits, as contemplated sions. However, during the fi rst three years of the by the South African Government, can be traded in scheme's operation, from 2015 to 2017, companies the country's existing market trading infrastructure. and energy producers will be allowed 100 percent of their benchmarked emissions limit without charge. While it was earlier agreed that measures are need- Companies will have to purchase credits if they wish ed in South Africa to address climate change and to exceed their limits, and those that do not use their to reduce carbon emissions, the Government de- quota may sell their excess credits. Th e trading scheme cided last year that implementation of a carbon tax has no links to the international carbon market, with should be postponed by a year to 2016, to allow for participation being restricted to the 525 companies. further consultation. In the meantime, the Nation- al Treasury has consulted on proposals for a carbon South Korea is the world's seventh-largest carbon off set scheme that will enable South African busi- emitter, and now has the world's second largest nesses to lower their eventual carbon tax liability. ETS market after the EU (see below). Th e scheme is meant to complement the carbon tax of ZAR120 (USD10) per ton of CO2, which is to South Africa increase at a rate of 10 percent annually. Also in January, climate change advisory fi rm Pro- metheum Carbon announced the completion of a To ensure a relatively smooth transitional period, program to demonstrate the readiness of the exist- the carbon tax policy incorporates a number of re- ing South African market infrastructure for the car- lief measures and a gradual phased-in approach to bon off set trading that will form part of the carbon protect the international competitiveness of local tax system being introduced from 2016. businesses. Th ese measures include a basic tax-free threshold of 60 percent, below which the tax will A demonstration of market readiness was the cul- initially not be payable. Under the regime, a carbon mination of a three-year research project executed off set is defi ned as "a measurable avoidance, reduc- by Promethium Carbon in close cooperation with tion or sequestration of carbon dioxide (CO2) or the Johannesburg Stock Exchange (JSE) as the trad- other greenhouse gas emissions." It is intended that ing platform, the JSE's Silocerts as commodities carbon off sets will enable fi rms to cost-eff ectively registry, and Done Technologies as the technology lower their carbon tax liability by up to 10 per- provider to the registry. cent of their actual emissions, and will incentivize

26 investment in GHG emission-mitigation projects of measures, including the promotion of industri- that deliver carbon emissions reduction at a cost al restructuring, a construction program of ener- lower than the carbon tax. gy-saving projects, speeding up the renovation of coal-fi red boilers, and an increase to motor vehicle A number of principles must be fulfi lled for a proj- emission reduction eff orts. However, a signifi cant ect to be awarded a tradable emissions reduction element of the Action Plan is devoted to the imple- credit, to ensure the credibility of carbon off set proj- mentation and acceleration of tax reforms and leg- ects, namely that allowable GHG emissions reduc- islation for environmental protection. tions would not have occurred under a "business- as-usual" scenario; would need to be permanent Th e Plan specifi es that the existing pilot scheme, and unlikely to be reversed; and should originate initiated in Shenzhen in June 2013, will be pro- from tangible projects with proof that they have oc- moted and extended to establish a national carbon curred or will occur at a specifi c point in time. emissions trading market. Shenzhen was earmarked as the fi rst of seven cities or provinces in China to Projects that generate carbon off set credits must oc- launch the pilot scheme, with a view to a nation- cur outside the scope of activities of the entity subject wide rollout of the system. to the carbon tax, and only South African credits will be eligible for use within the carbon off set scheme. Under the scheme, a cap is set on the total amount of GHG that may be emitted, with that limit China then being allocated to companies involved in the Perhaps the biggest endorsement of carbon pricing scheme in the form of carbon credits, or the right as the most eff ective means to reduce global GHG to discharge a specifi c volume, based on historical emissions came when China, the world's largest data. Firms receive the initial credits for free, but emitter of carbon, put into eff ect the "Low Carbon those with excess emissions will then have to buy Development 2014–2015 Action Plan" in 2014. credits from others. Th e Plan is designed to strengthen energy conser- vation and reduce GHG emissions in the country, China has previously looked at a carbon tax, either partly through modifi cations to the taxation of its separately or as an adjunct to the ETS, but, follow- natural resources and the development of a national ing opposition from businesses in a period of slower carbon trading market. economic growth, it appears to have been shelved in favor of the emissions trading market alone. Th e Plan envisages a reduction in carbon emis- sions in China of at least 4 percent in 2014 and Th e State Council's confi rmation occurs simul- 3.5 percent in 2015 through the use of a variety taneously with reports of the establishment of a

27 three-year bilateral dialogue between China and will become the second Latin American country to the EU, during which European experts will pro- use taxation to discourage CO2- emitting technolo- vide their experience and support in the trading gies, after Mexico introduced a similar measure on market's establishment. January 1, 2014.

A second important element in the Action Plan will According to Mexico's Secretariat of Environment be the use of the existing natural resource tax to and Natural Resources, the carbon tax is intended pursue environmental goals and to preserve domes- to create awareness of CO2 emissions, to put a price tic supplies. It is emphasized that the tax will be to carbon, and to promote the use of cleaner fuels. increasingly applied on an ad valorem basis, rather Initially, the tax was to be set at USD5 per ton of than per tonne, to coal and other resources. CO2 equivalent, but this was reduced to USD3.5 per ton during the parliamentary approval process. Latin America Natural gas is exempt from the carbon tax. Carbon pricing is also gaining a foothold in Latin America. Mexico's carbon tax covers fossil fuel sales and im- ports by manufacturers, producers, and import- Shortly after her election to the post of Chilean ers. Strictly speaking, it is not a tax on the full car- President in April 2014, Michelle Bachelet present- bon content of fuels, but rather on the additional ed legislative proposals to tax CO2 emissions by en- amount of emissions that would be generated if ergy companies in Chile, which were subsequently the fossil fuel were used instead of natural gas. Th e approved. Under the carbon tax legislation, thermal tax rate is capped at 3 percent of the sales price of power generators with a capacity of 50 megawatts the fuel, and companies liable to pay the tax may or greater would be taxed at a rate of USD5 per ton choose to pay the carbon tax with credits derived of CO2 emitted from 2018. It is hoped that the tax from clean development mechanism (CDM) proj- will encourage companies to switch to clean-energy ects developed in Mexico, equivalent to the value of technologies. In addition, the Government plans to the credits at the time of paying the tax. increase taxes on imported vehicles fueled by diesel to encourage the use of environmentally friendly European Union alternative fuels. Tariff s will also be increased on A recent development regarding the EU ETS pro- certain imported chemicals, including nitrogen ox- vides something of a cautionary tale about getting ide and sulfur dioxide. the design of carbon pricing systems right.

Unless another country in the region introduces Launched in 2005, the ETS is said to be the lynch- some form of carbon tax in the meantime, Chile pin of the EU's policy to combat climate change.

28 Covering 12,000 industrial installations in 31 coun- allowances off the market if the surplus exceeds a tries (including the EU and EEA/EFTA member certain threshold. In the opposite scenario, allow- states) and aviation emissions, the ETS works on ances could be returned to the market. a cap and trade principle. A cap is set on the to- tal amount of certain GHG that can be emitted by Under the proposed reform, which has been provi- the factories, power plants and other installations in sionally agreed with the European Council, "back- the system. Within the cap, companies receive or loaded" allowances (900m allowances withdrawn buy emission allowances, which they can trade with from the market, initially to be returned from 2019) one another as needed. Th ey can also buy limited would be placed in a reserve. Remaining allowances amounts of international credits from emission-sav- unallocated by the end of the current trading phase ing projects around the world. Th e limit on the total (2020) would also be placed in the reserve, sub- number of allowances available is supposed to en- ject to an overall review of the ETS Directive, to sure that they have a value. After each year a compa- be tabled by the European Commission later this ny must surrender enough allowances to cover all its year. Th e proposal would also see the Market Sta- emissions. Otherwise heavy fi nes are imposed. If it bility Reserve start operating earlier than initially reduces its emissions, a company can keep the spare foreseen, on January 1, 2019, rather than 2021 as allowances to cover its future needs or else sell them proposed by the European Commission. to another company that is short of allowances. Th e provisional agreement is to be put to a full ses- However, dire economic conditions in the EU sion of the European Parliament in early July 2015. following the fi nancial crisis led to a sharp fall in the value of tradable permits, in turn leading the United States European Parliament to suspend issuance of new While most major economies have now intro- tranches of permits in July 2013. Th e surplus of duced, or are considering introducing, some form emission allowances, which has been building up of carbon pricing, one country that is notable by its in the system since 2009, is estimated at over two absence from this list is the United States. billion and is something that Brussels clearly didn't envisage when drawing up the scheme. Although President Barack Obama drew up plans for a national cap-and-trade system early in his On May 26, 2015, the Environment Committee presidency, the plans were quickly shelved when of the European Parliament backed a reform of the they met fi erce resistance from business and mem- scheme to reduce the surplus of carbon credits avail- bers of Congress, especially as this was a time when able for trading. Th e proposed law would create a the US economy was struggling to rebound from system that automatically takes a portion of ETS the fi nancial crisis.

29 It is probably fair to say that there is a great deal 2015, the scheme was extended to fuel distributors more hostility towards the idea of carbon taxes that meet the 25,000 metric ton threshold, mean- among Republican members of Congress, who now ing that around 360 businesses throughout Califor- hold a majority in both chambers of the legislature, nia and nearly 85 percent of the state's total GHG than among Democrat members. Th is was dem- emissions are covered. onstrated last year when the House of Representa- tives passed the Regulations From the Executive in California's program imposes a GHG emission Need of Scrutiny (REINS) Act.2 An amendment limit that will decrease by 2 percent in 2015, and was proposed to be added to this to prevent the by 3 percent annually from 2015 through 2020. Government from imposing or collecting a tax on Emission allowances will be distributed by a mix of carbon emissions without congressional approval. free allocation and quarterly auctions. Th e portion Th e amendment was off ered by Republican Study of emissions covered by free allowances will vary Committee Chairman Steve Scalise (R – Louisiana) by industry, but initially will account for approxi- to stop the Administration from using any author- mately 90 percent of a business's overall emissions. ity it might have to implement a carbon tax un- Th e percentage of free allowances allocated to the der the regulatory authority of the Clean Air Act businesses will decline over time. A business may or any other statute, although the initiative did not also buy allowances from other entities that have become law and was largely a symbolic eff ort. reduced emissions below the amount of allowances held. Additionally, California has linked its cap- In January 2015, a Bill was introduced into Con- and-trade scheme with a similar system operating gress that would provide for longer-term funding in the Canadian province of Québec, with Ontario for Highway Trust Fund transportation projects also set to join. through a USD50 per tonne tax on carbon emis- sion.3 However, as the REINS Act amendment California's is so far the only state-level emissions shows, the carbon tax issue remains a very politi- reduction scheme in operation. However, other cally and economically sensitive issue in the US, state governments have been exploring the idea of suggesting that we are not about to see a carbon tax introducing their own carbon pricing systems, in- at federal level anytime soon. cluding New York, Oregon, and Washington state.

At state level, however, it is a slightly diff erent story. Australia California's cap-and-trade system came into eff ect Not all governments are convinced of the merits of on January 1, 2013, initially covering large electric carbon taxes however, with Australia a notable dis- power plants and large industrial plants that emit senter. Indeed, Australia must be unique in that it 25,000 metric tons of CO2 per year. In January fi rst tried a tax, then shifted towards an ETS, and

30 then scrapped the carbon tax legislation altogether In stark contrast with the emerging consensus when the government changed hands, all in the about carbon pricing around the world, Hunt in- space of a couple of years. sisted that Australia's carbon tax was "truly a policy failure," claiming that the tax "was a AUD7.6bn Th e current Australian Government remains unre- hit on the Australian economy in its fi rst year of pentant about repealing the carbon tax, insisting that operation yet there was no meaningful reduction it left Australian consumers several billion dollars a in emissions." year worse off as a result of higher energy prices and their knock-on eff ect across the rest of the economy. In Summary It remains to be seen if Australia is right (and there- Australia is instead pursuing its emissions reduc- fore much of the rest of the world is wrong) by em- tion target through the Emissions Reduction Fund ploying the carrot rather than the stick to encour- (ERF), which came into eff ect on December 31, age businesses and industries to reduce their CO2 2014. It will provide incentives for emissions re- emissions. However, as the World Bank observed in duction activities across the Australian economy, its Carbon Pricing Watch report, there is a "grow- rather than disincentives in the form of taxation. ing sense of inevitability" regarding the debate on whether to "price" carbon. Th e ERF encourages businesses and organizations to come forward with emissions reduction op- Presently, there are more countries without carbon portunities they have identifi ed. Auctions will be pricing schemes in place than those that have, and held and the Government will enter into contracts there remain some signifi cant gaps in global cov- to buy emissions reductions from successful bid- erage. As mentioned above, the US is unlikely to ders – from those that plan to achieve the great- introduce a national carbon tax for the foreseeable est reductions in emissions at the lowest cost. Th e future. And it is going to be diffi cult for many de- Clean Energy Regulator will administer the ERF veloping nations to introduce sophisticated carbon and will be able to enter into contracts worth up to trading systems given their relative lack of resources AUD2.55bn (USD2bn). Further funding will be and technical and administrative know-how. considered in future budgets. Governments will continue to balance economic According to Environment Minister Greg Hunt, competitiveness and environmental benefi ts when "unlike the carbon tax, the [ERF] will achieve sig- weighing up carbon taxes and other pricing schemes. nifi cant cuts in Australia's emissions because the Nevertheless, with some signifi cant players in the government will only pay on delivery of real and world economy now having taken the carbon pric- measurable cuts." ing plunge, it does seem somewhat inevitable that

31 others will follow, and countries like Australia may 2 https://www.congress.gov/bill/113th-congress/ become the exception, rather than the norm. house-bill/367/text 3 https://huffman.house.gov/sites/huffman.house.gov/ E NDNOTES fi les/gas%20tax%20replacement%20act.pdf 1 http://www-wds.worldbank.org/external/default/ WDSContentServer/WDSP/IB/2015/05/22/090224 b082eb7959/1_0/Rendered/PDF/Carbon0pricing0e0 released0late02015.pdf

32 FEATURED ARTICLES ISSUE 134 | JUNE 4, 2015

Treasury Proposes Signifi cant Changes To US Model Treaty by Caplin & Drysdale

On May 20, 2015, the Treasury Department re- leased fi ve proposed changes to the US Model In- come Tax Treaty (the US Model). Th e changes rep- resent part of an extensive and ongoing overhaul of this document, which was last updated in 2006. past releases have been of the entire US Model as According to Treasury offi cials, the proposed revi- opposed to this piecemeal approach. Treasury has sions are intended to ameliorate the problem of so- indicated its intention to release the completely re- called "stateless income" and to infl uence the work vised US Model by the end of the year, but appar- of the Organisation for Economic Co-operation ently does not intend to issue any other proposed and Development's Base Erosion and Profi t Shift- changes in draft form. It would be easier to assess ing Project, which is soon due to release its fi nal the overall impact of the proposed changes in the report on tax treaty abuse. context of the entire revised US Model.

Th e proposals were introduced at a May 20 meeting 1. Exempt Permanent Establishments of the District of Columbia Bar's Taxation Section. A typical tax avoidance strategy involves a treaty- Danielle Rolfes, Treasury's International Tax Coun- eligible foreign company setting up a permanent sel, remarked at the meeting that "when we take a establishment (PE) in a third country that imposes step back and look at our tax treaties, [they are], in little or no tax on the PE's income. Th is strategy also fact, facilitating double nontaxation." Rolfes indi- requires that the company's country of residence cated that Treasury had considered and ultimately refrain from taxing the income earned by the PE, rejected the possibility of addressing this problem which may result from either an exemption provi- through a general anti-abuse rule, but opted instead sion in the residence country's domestic law or a tax for a targeted approach. Th e release of these provi- treaty between that country and the third country. sions, which are discussed below, diff ers from past If the PE earns US source income that is subject revisions of the US Model in two ways. First, the to little or no US tax under the treaty between the changes have been released as drafts, with Treasury US and the residence country, and that income is seeking public comment on the new rules. Second, also subject to little or no tax in both the residence

33 country and the third country, "double [or, indeed, that often accompany them. Th e new draft para- triple] nontaxation" will have been achieved because graphs, which are to be inserted into Articles 10 the income would be subject to low or zero taxation (Dividends), 11 (Interest), 12 (Royalties), and 21 by the country of source, the country of residence, (Other Income), provide that the United States re- and the jurisdiction in which the PE is located. serves the right to tax income paid by any "expatri- ated entity" in accordance with its domestic law for Th e PE need not be located in a third country; the a period of up to ten years following expatriation, strategy can work equally well if the PE is located in notwithstanding treaty provisions reducing or elim- the country of source. For example, a Luxembourg inating source-based withholding on such income. PE located in the United States that is not engaging in a US trade or business will be subject neither to Th e draft Technical Explanation of the provision Luxembourg tax (because of its statutory exemp- defi nes "expatriated entity" by reference to Internal tion system) nor to US tax (because there is no US Revenue Code section 7874(a)(2)(A) . Very gener- trade or business). ally, that section states that where a domestic en- tity has been acquired by a foreign parent and there A proposed paragraph 7 of Article 1 is intended to is signifi cant continuity of ownership between the stymie this scheme. Th e paragraph states that when: domestic entity's former shareholders and the for- (1) a resident derives income from the other state; eign entity's new shareholders, the domestic entity and (2) the residence state's domestic law attributes is an "expatriated entity." that income to a PE located outside the company's country of residence, then the treaty benefi ts that 3. Special Tax Regimes would ordinarily apply are inapplicable if: (a) the Th ese draft paragraphs generally provide that if PE's profi ts are subject to a combined, aggregate, interest, royalties or "other income": (1) is paid eff ective tax rate of less than 60 percent of the gen- between related parties; and (2) the recipient is erally-applicable corporate tax rate in the residence "subject to a special tax regime" in its country of state, or (b) the state in which the PE is situated residence with respect to that item of income, then does not have a comprehensive income tax treaty the source country may tax the category of income with the residence state (unless the residence state in accordance with its domestic law notwithstand- includes the PE's income in its tax base, in which ing the treaty. case this prong does not apply). Th e phrase "special tax regime" is not defi ned in 2. Expatriated Entities any detail in the draft paragraphs themselves; Th ese revisions are targeted at so-called corporate proposed paragraph (l) of Article 3 states curso- inversions and the earnings-stripping transactions rily that it "means any legislation, regulation, or

34 administrative practice that provides a preferential claimed against US tax) or the other treaty coun- eff ective rate of taxation" on the relevant item of try (if benefi ts are being claimed against the other income. Th e paragraph fl eshes out the defi nition by country); for purposes of gauging an entity's en- providing a list of provisions that would not qualify titlement to treaty benefi ts, an LOB clause is im- as "special tax regimes." Th ose include charitable puted to treaties that currently lack one. exemptions, preferences relating to retirement and pension administration, and preferential rates on Second, in the case of passive income (interest, roy- royalties that entail a "substantial activity" require- alties, and dividends), that same double-tax treaty ment, among others. must entitle the owner to a maximum withholding rate on the relevant category of income that is "at According to Treasury, no current US legislation, least as low" as the rate specifi ed in the US Model. regulations, or administrative practices that apply Finally, with respect to income governed by Article with respect to interest, royalty or other income sat- 7 (Business Profi ts), 13 (Gains) or 21 (Other In- isfy the defi nition of a "special tax regime." At the come), the owner must be entitled to benefi ts un- May 20 meeting, Rolfes stated that Treasury would der its treaty that are "at least as favorable" as the likely refrain from defi ning "special tax regime" benefi ts granted under the US Model. with any greater specifi city, explaining that the De- partment would not be able to "put [its] fi nger on, In the case of putative equivalent benefi ciaries who at the time of negotiation, all of the ways that a own companies indirectly, all intermediate owners country might give preferences." must be "qualifi ed." Th e defi nition of "qualifi ed in- termediate owner" is similar to, yet slightly more 4. Limitation On Benefi ts Article permissive, than the equivalent benefi ciary test. Th e Limitation on Benefi ts (LOB) article has also been substantially revised. Probably the most note- Other signifi cant changes to the LOB Article in- worthy change is the addition of an "equivalent clude: (1) adding a "base erosion" requirement benefi ciary" test. Under this test, a company is trea- for a company to qualify for benefi ts by virtue ty-eligible if it is at least 95 percent owned by seven of its status as a subsidiary of a publicly traded or fewer "equivalent benefi ciaries" and if it satisfi es company; (2) applying the base erosion test to a base erosion test. the company's consolidated group; (3) imposing a "special tax regime" exception to the acceptable Th e defi nition of "equivalent benefi ciary" compris- payments rule under the base erosion test; and es two elements. First, the owner must be entitled (4) changing the defi nition of "gross income" un- to all the benefi ts of a comprehensive double-tax der the base erosion test so as to exclude exempt treaty with the United States (if benefi ts are being dividend income.

35 5. Subsequent Changes In Law [altogether]" but that it would still lead to serious Th is new draft Article provides that certain changes consequences if either treaty partner were to aggres- to the domestic law of either treaty country will cause sively lower its domestic tax rates in an eff ort to at- some of the provisions of the Treaty to be inoperative. tract mobile income. Paragraphs 1 and 2 of the Article state that if the high- est marginal rate of taxation for individuals or business Conclusion entities falls below 15 percent in either treaty coun- Since the US Model typically represents the try, or if either country elects to exempt individual or United States' opening position in treaty negoti- corporate foreign-source income from taxation, then ations, these new provisions will likely have a sig- Articles 10 (Dividends), 11 (Interest), 12 (Royalties) nifi cant impact on the content of US tax treaties and 21 (Other income) will no longer be eff ective for going forward. Multinational businesses need to individuals or companies, as the case may be. be aware that tax structures that work under cur- rent treaties could be rendered obsolete or inef- Th e Technical Explanation provides that the "spe- fective as these rules are incorporated into the cial tax regime" provision (detailed in (3), above) US treaty network. is intended to apply in cases of specifi c exemptions or preferences, but that this Article is applicable to For more information concerning this, please con- broader exemptions or rate reductions. tact Neal M. Kochman ( [email protected] ) or Joseph P. Brothers ([email protected] ), Rolfes stated at the May 20 meeting that the provi- members of Caplin and Drysdale's International sion is "less nuclear than terminating a tax treaty Tax/Transfer Pricing Group .

36 FEATURED ARTICLES ISSUE 134 | JUNE 4, 2015

Topical News Briefi ng: could be aff ected by the result of the upcoming Considering The Brexit EU referendum. by the Global Tax Weekly Editorial Team Naturally, in the debate about the UK's future in Europe, commentators are focusing on all the per- Last month's general election has removed much mutations of a Brexit on the UK. Few people seem uncertainty about the future of the UK's tax and to be considering how these off shore jurisdictions wider economic policies for the next fi ve years. But will fi t into the new framework in the event of a one important question remains to be answered: treaty change or Brexit. Except, of course, the au- the UK's future constitutional relationship with the thorities in these territories themselves. EU. And the fall-out from a "Brexit" could spread well beyond the UK's boundaries. As reported in this week's issue of Global Tax Weekly , this matter was raised recently by the Isle of Man's To set the scene, the one thing we do know about Chief Minister, Allan Bell. While the Isle of Man this issue is that the Conservative Government has isn't a member of the EU, it is a part of the Eu- pledged to stage an "in-out" referendum on the ropean free trade area by virtue of its relationship UK's EU membership before the end of 2017. Ev- with the UK, and has chosen to become part of the erything else is pretty much up in the air. Prime EU's VAT regime. However, technically speaking, Minister David Cameron is determined to rene- neither is the Isle of Man part of the UK, so it is not gotiate the UK's European treaty obligations with covered by the referendum. the hope that some powers will be transferred from Brussels to London, and put this new settlement Th e other UK Crown Dependencies – Guernsey before the British people in the referendum. But and Jersey – are in similar positions with regards to there's no guarantee that he'll succeed, or even if the UK and the EU. Th ese two jurisdictions also voters will prefer this option to the one of the UK form part of the free trade area but they are not leaving the EU altogether. full EU members and also fall outside the EU fi scal area, including the VAT regime. Obviously, either result could have a signifi cant impact on businesses operating in the UK. How- All three islands apply the EU common external ever, there are also tens of thousands more compa- tariff . But Gibraltar, a British Overseas Territory nies registered in international off shore fi nancial clinging on to southern Spain, doesn't. To compli- centers with constitutional links to the UK which cate matters, Gibraltar entered the EU as a member

37 along with the UK, and has transposed much EU and their European fate is largely out of their hands. fi nancial legislation into law. Th ey will probably just be mightily relieved when it's all over, and Britain has decided once and for all As Bell observed, there seems little these jurisdic- in which direction it intends to travel, as will most tions can do to infl uence the EU debate in the UK, with a stake in the UK economy.

38 NEWS ROUND-UP: INTERNATIONAL FINANCIAL CENTERS ISSUE 134 | JUNE 4, 2015

Isle Of Man Looks To Shore Up terms of its own relationship with Europe. We can- Future With EU not control the outcome – that is for the UK as a member of the EU to determine – but we are seek- Representatives from the Isle of Man recently met ing to understand and address the implications for with offi cials and policymakers from the EU and the island." the UK, and subsequently with representatives from Scotland, Northern Ireland, Wales, and Gibraltar, EU, Switzerland Sign Tax to discuss the impact of a UK exit from the EU. Transparency Deal Th e EU and Switzerland will automatically ex- Th e Isle of Man's Chief Minister, Allan Bell, was change information on the fi nancial accounts of accompanied by Manx Treasury Minister Eddie each other's residents from 2018, under a new tax Teare. Th ey met with representatives of the Conser- transparency agreement signed on May 27, 2015. vative Party in London and Brussels to discuss the priorities of the new UK Government, including Th e agreement was signed by EU Tax Commis- the proposed renegotiation of the UK's relation- sioner Pierre Moscovici, Latvian Finance Minister ship with the EU and the planned referendum on Janis Reirs (on behalf of the Latvian Presidency of EU membership. the EU Council), and Jacques de Watteville, the Swiss Secretary for International Finance Matters. Bell explained the island's predicament with regards It will replace the EU–Switzerland taxation of sav- to the prospect of the UK leaving the EU: "Th e Isle ings agreement that has been in force since 2005. of Man is not part of the UK or EU, and so it is not It includes the existing withholding tax exemption included in the UK referendum on EU member- for cross-border payments of dividends, interest ship, which is due to take place before the end of and royalties between related entities. 2017. However, the Isle of Man's relationship with the EU is through the UK and is set out in Protocol Under the deal, the parties will receive, on an an- 3 to the UK's Act of Accession to the EU." nual basis, the names, addresses, tax identifi cation numbers, and dates of birth of their residents with He said that although Scotland, Wales, Northern accounts in contracting states, along with other fi - Ireland and Gibraltar may wish to remain in the nancial and account balance information. UK, "a potential UK-wide 'no' vote could see them all leave, possibly against the wishes of their peo- Th e agreement is expected to enter into force ple. Th e Isle of Man is facing a similar prospect in on January 1, 2017. Switzerland and the 28 EU

39 member states intend to collect account data Poland Removes Gibraltar from 2017. From Tax Blacklist Poland has removed Gibraltar from its list of coun- Moscovici said: "Today's agreement heralds a new tries it considers are non-cooperative for tax purposes. era of tax transparency and cooperation between the EU and Switzerland. It is another blow against Th e move releases Gibraltar-based companies from tax evaders, and another leap towards fairer taxa- previous restrictions. It follows steps taken by the Gi- tion in Europe. Th e EU led the way on the auto- braltar Government to ensure compliance with in- matic exchange of information in the hope that ternational standards in the area of tax transparency, our international partners would follow. Th is including its adoption of the Common Reporting agreement is proof of what EU ambition and de- Standard, its signing of tax information exchange termination can achieve." agreements, and its entering into Foreign Account Tax Compliance Act (FATCA) arrangements with the US A consultation launched by the Swiss Federal and "son of FATCA" arrangements with the UK. Council is open for comment until September 17, 2015. Th e agreement will then be submitted, to- Poland now joins a number of other countries which gether with a dispatch, to the Swiss Parliament for have taken similar measures to recognize Gibraltar approval. In the coming weeks, the Federal Council as an internationally cooperative jurisdiction in the will adopt dispatches on the Automatic Exchange area of tax information exchange. Over the last six of Information Act, the Multilateral Competent months or so, Canada, Estonia and Italy have re- Authority Agreement, and the OECD/Council of moved Gibraltar from their lists. Europe administrative assistance convention. Th e European Commission is concluding negotiations Gibraltar also reported that a further two countries for new tax transparency agreements with Andorra, have confi rmed that they are in the process of in- Liechtenstein, Monaco, and San Marino. ternal legislative or parliamentary procedures to re- move Gibraltar from their lists of countries with preferential tax regimes or similar schedules that at- tract countermeasures.

40 NEWS ROUND-UP: INTERNATIONAL TRADE ISSUE 134 | JUNE 4, 2015

Brazil To Hike Taxes On Imports In an op-ed piece for Fox News, Ryan, whose com- mittee has jurisdiction over tax and trade legisla- Th e Brazilian Senate approved on May 28, 2015, tion, said the US risks losing credibility with its a bill that will raise taxes on a number of import- main trading partners if Congress rejects the op- ed products, including automotive parts, beer, portunity to renew TPA. and pharmaceuticals. TPA sets negotiation goals for the President but If the bill is approved by President Dilma Rous- then prohibits amendments to implementing bills seff , the PIS and COFINS social contribution tax- for trade treaties and imposes a timetable for their es will be hiked to 2.1 percent and 9.65 percent, consideration. It would enable the texts of complet- respectively, on various imported products. Cur- ed free trade agreements to be fast-tracked through rently the taxes are levied at rates of 1.65 percent the legislature. Renewing TPA, which last expired and 7.6 percent, respectively. For some products, in 2007, would therefore allow the US Administra- the combined PIS/COFINS rate would increase tion to submit trade deals that are in line with those to 20 percent. goals for a yes-or-no vote.

It is estimated that the proposed tax increases would Ryan warned lawmakers that without TPA in place, yield an additional BRL694m (USD217.8m) this the countries negotiating the expanded Trans-Pa- year, and revenue worth BRL1.19bn in 2016. cifi c Partnership with Asia-Pacifi c countries and the Transatlantic Trade and Investment Partnership Th e Government is currently seeking to shore up with the EU will not want to make concessions to revenue under its "fi scal adjustment" program. the US "only to see Congress rewrite the deal."

TPA Crucial For US Trade Growth, "Right now, the US is negotiating two historic trade Ryan Says deals – one with countries on the Pacifi c Rim and Negotiations towards historic trade deals between the other with the European Union. One of the the US and Asia-Pacifi c and EU nations will prob- talks is already far along, but the countries involved ably fail unless the US House of Representatives have yet to put their best off ers on the table – for renews trade promotion authority (TPA) in an up- a simple reason: under the Constitution, the presi- coming vote, House Ways and Means Committee dent can negotiate a trade deal, but Congress must Chairman Paul Ryan (R – Wisconsin) has said. approve it. And this division of power makes other countries think twice," Ryan said.

41 He argues that, contrary to what many opponents standards or the right to regulate in the public in- of TPA believe, TPA would actually put Congress terest, said Trade Committee MEPs (Members of in the driving seat in negotiations because it gets to the European Parliament) in draft recommenda- set nearly 150 negotiating priorities, such as ensur- tions agreed on May 28. Th ey also agreed that tools ing that trade barriers to US products are removed. for resolving disputes between investors and states Th e legislation would also require the Government should be reformed and improved. to consult regularly with Congress during trade ne- gotiations and give every elected representative ac- Th e recommendations to the European Commis- cess to US negotiators and the negotiating text. Ad- sion negotiators on the Transatlantic Trade and ditionally, the Government must make the text of a Investment Partnership (TTIP), approved in com- deal public for 60 days before the President can sign mittee by 28 votes to 13 with no abstentions, still it. "Congress then gets the fi nal say on the text of a need to be endorsed by the European Parliament as concluded trade agreement in a vote," he added. a whole.

"Only TPA will reassure other countries they can EU gross domestic product (GDP) is "heavily de- trust the US, and so only TPA can give the US the pendent on trade and export," so a "well-designed" leverage it needs to win a fair deal for America's deal with the US could help boost the industry con- workers," Ryan argued. tribution to EU GDP by 15–20 percent by 2020, says the text, with EU fi rms – especially small, me- Th e Ways and Means Chairman pointed out that, dium, and micro enterprises – newly benefi ting between 2000 and 2010, the countries of east Asia from a market of 850m consumers. completed 48 trade deals among themselves, while the US negotiated just two. As a result, America's Th e Committee highlighted that contradictory share of East Asia's imports fell by 42 percent, he said. study fi ndings make the TTIP's real benefi ts for the EU economy hard to assess. It therefore stressed He concluded: "Less market share means less infl u- that the talks must be transparent, in order to de- ence. So we as a country have to ask ourselves: Is liver an "ambitious" but "balanced" deal, with China going to write the rules of the global econo- shared benefi ts across EU member states, leading my, or is America?" to an "eff ective, pro-competitive economic envi- ronment" and precluding non-tariff trade barriers. EU MEPs Seek Ambitious High levels of protection for EU consumers' data, And Balanced TTIP health and safety must be guaranteed, and social, An EU–US trade deal should deepen EU access fi scal, and environmental dumping must be pre- to the US market, but must not undermine EU vented, it added.

42 It was agreed that, while aiming to eliminate all cus- the Philippines account for about 60 percent of the toms tariff s, the EU and the US should negotiate an population of the Association of Southeast Asian "exhaustive list" of "sensitive agriculture and indus- Nations (ASEAN). trial products" that would either be exempted from trade liberalization or subject to longer transitional Th e President of the Philippine Chamber of Com- periods. Th ey ask the EU negotiators to "make ev- merce and Industry, Alfredo Yao, pointed out that the ery eff ort" to insert a "safeguard clause," reserving FTA would also allow Chile to use the Philippines as the right to close markets for specifi c products in a hub to reach other markets in Southeast Asia. the event of import surges that threaten to cause serious harm to domestic food production. Th ey Chile currently has 24 FTAs in place with 62 econ- have also asked the European Commission to en- omies, covering 63.3 percent of the world's popu- courage the US to lift its ban on EU beef imports. lation and 85.3 percent of global gross domestic product. Most recently, a new FTA for Chile with A plenary vote on the text needs to be endorsed by Hong Kong became eff ective from November 29. the European Parliament as a whole, with a plenary vote currently scheduled for June 10. Th e Philippines has FTAs with Japan and, as an ASEAN member, with China, South Korea, India, Chile, Philippines To Pursue Free Japan, Australia, and New Zealand. Th e country Trade Deal began negotiations on an FTA with the European Chile and the Philippines have agreed to conduct Free Trade Association in March. a study to determine the feasibility of concluding a free trade agreement (FTA), Chile's Directorate EU–Bosnia, Herzegovina FTA In Force General of International Relations announced on Th e Stabilisation and Association Agreement (SAA) May 27, 2015. between the EU and Bosnia and Herzegovina (BiH) entered into force on June 1. Th e two countries will hold meetings in the second half of this year to assess progress. Th e Agreement is intended to further prepare the country for future EU membership. It provides for Th e head of the Directorate, Andrés Rebolledo, said the creation of a free trade area between the EU and that an FTA with the Philippines could open up a BiH within fi ve years. market of about 100m people to Chilean products. Federica Mogherini, High Representative of the EU Rebolledo noted that Chile is already negotiating for Foreign Aff airs and Security Policy and Vice- an FTA with Indonesia. He said that Indonesia and President of the European Commission, welcomed

43 the agreement's entry into force, stating: "Today's Johannes Hahn, Commissioner for European full entry into force of the [SAA] is a milestone on Neighbourhood Policy and Enlargement Negotia- Bosnia and Herzegovina's EU path. [A] new chap- tions, added: "I welcome the entry into force of the ter begins. Political clarity, decisive action and a SAA as a defi ning moment in the relations between real, coordinated eff ort by institutions at all levels the EU and Bosnia and Herzegovina as well as an are now needed to develop and implement the re- agreement which fi rmly sets BiH on an EU-acces- form agenda. Tangible results will be fundamental sion path. At the same time, the SAA also brings for the [EU] Council to consider a membership ap- new responsibilities stemming from its implemen- plication in the future. An overwhelming majority tation and for BiH authorities to deliver upon. Th e of BiH citizens want their country to join the EU Commission will spare no eff ort assisting the coun- and the leadership of the country needs to redouble try's authorities in the implementation of the nec- its engagement and meet citizens' expectations." essary reform agenda."

44 NEWS ROUND-UP: INDUSTRY UPDATE — BANKING ISSUE 134 | JUNE 4, 2015

US Reaches Non-Prosecution Deals agreements "refl ect the Tax Division's continued With Four Swiss Banks progress towards reaching appropriate resolutions with the banks that self-reported and voluntarily Th e US Department of Justice (DoJ) has an- entered the Swiss Bank Program." nounced that four Swiss banks have reached a res- olution with the Government under the DoJ Tax However, Ciraolo reiterated the DoJ's zero-toler- Division's regularization program. ance stance on tax evasion: "Th e department is cur- rently investigating account holders, bank employ- Th e DoJ's Swiss Bank Program was signed by the ees, and other facilitators and institutions based on two countries on August 29, 2013. It provides a information supplied by various sources, including framework for Swiss banks that were not already the banks participating in this Program. Our mes- being investigated to resolve past "cross border sage is clear – there is no safe haven." criminal tax violations." Under the Program, banks are required to: By cooperating with US authorities and disclos- Make a complete disclosure of their cross-border ing detailed information on US account holders, activities; Swiss banks are able to avoid prosecution but will Provide detailed information on an account-by- still be subject to a signifi cant fi ne of between 30 account basis for accounts in which US taxpayers and 50 percent of the total sum of their US cli- have a direct or indirect interest; ents' undeclared assets. Cooperate in treaty requests for account information; Provide detailed information as to other banks According to the terms of the non-prosecution that transferred funds into secret accounts or that agreements signed on May 28, each bank agrees to accepted funds when secret accounts were closed; cooperate in any related criminal or civil proceed- Agree to close accounts of account holders who ings, demonstrate its implementation of controls fail to come into compliance with US reporting to stop misconduct involving undeclared US ac- obligations; and counts, and pay the penalties in return for the de- Pay appropriate penalties. partment's agreement not to prosecute these banks for tax-related criminal off enses. Brazil Hikes Tax On Financial Firms Brazil's Department of Federal Revenue an- Acting Assistant Attorney General Caroline D. nounced on May 22, 2015, that a social contribu- Ciraolo of the DoJ Tax Division said that the tion tax on the profi ts of fi nancial institutions is to

45 be increased from September 1 as part of its "fi scal Th e research shows that, based on current currency adjustment" program. valuations, total UKCT receipts from the bank- ing sector declined from GBP7bn (USD10.8bn) Th e tax, CSLL, which is levied before income tax in 2005/06 to GBP1.3bn in 2011/12 and to on certain fi nancial institutions, is to be hiked from GBP2.3bn in 2012/13. Th e sector's contribution 15 percent to 20 percent. to total UKCT receipts fell from about 20 percent in 2005/06 to 4 percent by 2011/12. Th e tax agency said that the measure will provide the Government with additional revenues worth Th e study found that a rise in tax-deductible im- about BRL747m (USD237m) this year and about pairments, due largely to bad loans, contributed to BRL3.8bn next year. the fall in receipts. A decline in the headline rate of corporation tax from 30 percent in 2005/06 to 26 Following the announcement of the tax hike, the Bra- percent in 2011/12 was also said to have caused a zilian Government announced that it would freeze "relatively small" reduction of GBP200m in UKCT about BRL69.9bn of spending in the 2015 Budget. banking sector receipts.

Th e change was eff ected through Offi cial Gazette Since 2011/12, UK banks have been subject to Provisional Measure No. 675 of May 21, 2015. an additional bank levy, and UK Chancellor George Osborne's 2015 Budget included an in- UK Banking Sector's Tax crease from 0.156 percent of banks' liabilities to Contribution Falls 0.21 percent. A new study by the University of Cambridge's Judge Business School has revealed a sharp fall in Th e study found that, despite the fall in UK rev- banking sector corporation tax receipts for the UK. enues, the operating profi ts of the six largest UK- incorporated banks increased from GBP139bn in Th e research was conducted by Geoff Meeks, Pro- the period 2005–2007 to GBP143bn in the pe- fessor of Financial Accounting at Cambridge Judge, riod 2010–2012. Th e authors also examined the and Dr. J. Gay Meeks, Senior Research Associate at reduction, from 30 percent to 11 percent, in the the University of Cambridge, and was published in share of these banks' global tax payments. While the journal Fiscal Studies . In particular, it looks at global tax payments for those banks increased the "widening gap" between UK corporation tax from GBP12.69bn in the period 2005–2007 to (UKCT) and global payable corporation tax by the GBP12.85bn in the period 2010–2012, the amount UK's largest banks, as reported in their annual re- paid to the UK Exchequer in that period fell from ports to shareholders. GBP3.8bn to GBP1.4bn.

46 Th e study also concluded that current reporting rules hamper the forecasting ability of the UK's Offi ce result in "incomplete disclosures," which severely of Budget Responsibility and banks' shareholders.

47 NEWS ROUND-UP: VAT, GST, SALES TAX ISSUE 134 | JUNE 4, 2015

Puerto Rican Senate Passes Intended to prevent fraud, the reverse charge shifts Sales Tax Bill the obligation to account for VAT to the recipient, instead of the supplier. Puerto Rican lawmakers have passed legislation that will increase the island's sales and use tax from As had been anticipated, the Commission report- 7 percent to 11.5 percent. edly said there is insuffi cient evidence that the re- verse charge is necessary or that it would contribute Th e measure was passed by the Senate in a 14–12 to EU eff orts to tackle fraud. vote on May 25. It was then approved by the House of Representatives on May 26. A Senate amend- Th e Government will now need to fi nd extra rev- ment removed a provision for the extension of the enues or spending cuts worth about EUR730m sales tax to certain processed food. (USD795m). Italy's Budget included a safeguard clause, negotiated with the Commission, which in- Th e Government estimates that the hike will raise cluded a package of measures that will be imple- USD1.2bn in tax revenue. It will be implemented mented if Italy fails to reach its fi scal targets. In the alongside budget cuts of USD500m. absence of other policies, Italy will be obliged to hike the 10 percent and 22 percent VAT rates by 2 Last month, lawmakers voted against plans for a percent from the beginning of 2016. 16 percent value-added tax and subsequently a 13 percent goods and sales tax. IMF: Japan's Planned Consumption Tax Hike 'Not Enough' EU Rejects Italian Th e Japanese Government will probably need to Reverse Charge Plan increase consumption tax beyond the rise sched- Italian media has reported that the European Com- uled to take place in 2017 if it is to achieve its fi scal mission has rejected the nation's plans to introduce consolidation targets, the International Monetary a value-added tax (VAT) reverse charge on the sup- Fund (IMF) has said. plies of large retailers. In its 2015 review of the Japanese economy, the Th e plan was included in the 2015 Budget Bill, la IMF said that while eff orts to contain increases in legge di stabilità . Th e original Bill had also proposed social security spending are appropriate, they will extending the reverse charge to real estate and con- not be enough on their own to eliminate the bud- struction services. get defi cit and that additional measures to bring in more revenue will be required.

48 Th e IMF welcomed the approval of legislation to 2016, it will be cut to 31.33 percent. Th e legisla- reduce the corporate tax rate and to widen the tion also includes provisions to recoup much of the corporate tax base, intended to encourage busi- lost revenue from the rate reduction by broadening ness investment. However, it argued that further the corporate tax base, largely through a reduction increases in the consumption tax will be required in the amount of previous losses that can be off set given the need for "signifi cant medium-term ad- against declared business income. justment" to put government debt on a down- ward trajectory. Th e legislation also modifi ed the consumption tax law, postponing the sales tax hike scheduled for Th e IMF also urged the Government to avoid mul- October 2015 by 18 months to April 2017 because tiple consumption tax rates, which would soften of weakness in the Japanese economy. However, the the blow of the increase in the main rate, and rec- bill eliminated a provision that would enable fur- ommended that it maintain a wide consumption ther postponements. tax base. Th e decision to further defer the consumption tax On March 31, Japan passed legislation to adopt tax rise resulted in Fitch Ratings downgrading Japan's reform proposals for the 2015 fi scal year, including long-term credit rating to "A" from "A+" in April. the planned corporate tax cuts and the postpone- Th e ratings agency pointed out that the Japanese ment of the country's second consumption tax rate Government "did not include suffi cient structural increase from 8 percent to 10 percent. fi scal measures in its budget for the fi scal year April 2015–March 2016" to replace the programmed In a fi rst step, the corporate tax rate was lowered to consumption tax rate hike that was "the centerpiece 32.11 percent on April 1, 2015. From fi scal year of its medium-term fi scal consolidation eff ort."

49 NEWS ROUND-UP: COUNTRY FOCUS — IRELAND ISSUE 134 | JUNE 4, 2015

Ireland Pledges To Ease Tax Burden In particular small businesses and the self-employed On SMEs feel the discrepancy between the tax treatment of the employed and self-employed is unfair." Irish Finance Minister Michael Noonan is to con- sult small and medium-sized businesses on the tax "To achieve full employment by 2018, we need barriers they face. small business to reach their full potential to allow us to achieve this goal. We want to help small busi- Noonan announced the initiative during a speech nesses take advantage of the opportunities off ered to the Irish Small and Medium Enterprises Associa- by the economic recovery that is beginning to take tion (ISME) annual lunch. hold," Twomey added.

He said: "My Department has been reviewing the ISME's new chairman, James Coghlan, said: "In recent tax expenditures currently available, and I am now months ISME has been championing a campaign to seeking your views on what measures work in our tax end the tax discrimination against the self-employed system to encourage entrepreneurs and small busi- and proprietary directors who can, in some cases, pay nesses, and how they could be improved. I want to up to eight times more tax than their PAYE counter- know what tax-related barriers you feel there [are] parts on similar incomes. Our message is simple, those to establishing new enterprises, and what can be on the same income should pay the same tax." done to overcome these barriers." NI Corporation Tax Cut Delay "I also want to know if, given the diff erence in the Deterring Investors treatment of Pay As You Earn (PAYE) and self-as- Grow NI, a collective of businesses and business sessed taxpayers, there is scope for greater alignment." associations in Northern Ireland, has warned the Government of the damage being caused by delays Fine Gael lower house member Liam Twomey, who in the implementation of the territory's new corpo- is the Chairman of the Parliament's Finance Com- rate tax powers. mittee, confi rmed that details of the consultation will be available on the Finance Department's web- Grow NI Chairperson Eamonn Donaghy said: site from June 2. "Continued uncertainty around a start date and an agreed rate of corporation tax means that the pri- He said: "What is clear is that businesses feel their vate sector cannot compete on a level playing fi eld contribution to the economy is not fully recognized. with businesses in the Republic of Ireland."

50 Donaghy's comments came after the Welfare Re- Committee on Tax Rulings and Other Measures form Bill failed to pass the Northern Ireland As- Similar in Nature or Eff ect (TAXE) on May 28. sembly this week. Th e UK Government has made clear that devolved corporation tax powers will He explained that the tax authority, the Revenue commence only if the Executive parties "put their Commissioners, issues non-binding advisory opin- fi nances on a long-term sustainable footing." ions on the application of tax law in relation to spe- cifi c transactions or situations. "Th e provision of Donaghy said: "Th e power to create tens of thou- such opinions comes within the general adminis- sands of jobs is now within our grasp, but unless trative functions vested in Revenue under tax legis- politicians seize this opportunity it will jeopardize lation. Opinions are only issued where the matter signifi cant employment growth opportunities and is complex or where there is genuine uncertainty will increase inequality in Northern Ireland." regarding the applicable tax rules."

He added: "Only by having the same rate of corpora- According to Cody, Revenue's role is to interpret tion tax across the island [of 12.5 percent] will we see and apply the tax law correctly and consistently. any signifi cant increase in employment in Northern It does not have "the authority or discretion to Ireland. Such a change would see increased investment depart from the applicable rules as set out in tax from companies at home and abroad, creating jobs law." Revenue opinions are not binding and can which are much needed in communities everywhere." be reviewed.

Th e devolution of powers comes on the condition Cody said that Ireland has cooperated fully with the of a pro rata reduction in the block grant, money European Commission's state aid inquiries into tax which the UK Government provides to each of its ruling practices. He pointed out that, in the case of regions to fund their day-to-day operations. companies operating in Ireland through a branch, Revenue is "required to charge corporation tax on Ireland Explains Tax Ruling Practices the full profi ts arising from their branch activities At EU Hearing here – and that is what we do." However, Revenue "Ireland does not have a statutory system of bind- cannot "charge tax on profi ts arising from activi- ing tax rulings and there is no provision in Irish ties outside the state that are unrelated to the Irish law for the issuing of such rulings," Revenue Chair branch – such profi ts are outside the scope of the Niall Cody has said. Irish tax system."

Cody made the comments during an address to He pointed out that detailed guidelines on the pro- a session of the European Parliament's Special vision of tax opinions are available on Revenue's

51 website, and the agency publishes a range of in- Revenue publishes a tax briefi ng note that summa- formation on the application of tax legislation, rizes the issue raised by the taxpayer and the opin- including tax briefi ngs and guidance notes, which ion given by Revenue. are updated each year. It does not generally publish opinions on the application of the law to the spe- Th e Irish Revenue is statutorily independent in the cifi c circumstances of any one taxpayer. However, performance of its functions and is accountable to in cases that may be of more general interest, the the Irish Parliament, he told the Committee.

52 NEWS ROUND-UP: COMPLIANCE CORNER ISSUE 134 | JUNE 4, 2015

France Looking To Slash Red Tape Th e Government is also to review cases where it has transposed EU regulations in a way that is more Th e French Government has announced a pack- burdensome than required, to evaluate whether it is age of 92 measures to streamline administrative re- possible to mitigate the impact on businesses. quirements and rules and simplify tax compliance. SARS Boasts High Conviction Rate Th e measures were announced by Th ierry Man- For Tax Crimes don, France's Secretary for State Reform and Th e South African Revenue Service (SARS) has said Simplifi cation. Th ey come two years after Presi- it achieved a 92 percent conviction rate on cases in- dent François Hollande launched the "choc de volving tax and customs fraud that it handed over simplifi cation " initiative. to the National Prosecuting Authority of South Af- rica in the last fi nancial year. Of the new measures just announced, approximate- ly 50 relate to businesses and are primarily aimed at According to SARS, most of the cases involved cutting red tape. high-net-worth individuals, those fi ling fraudulent value-added tax (VAT) refunds, and those engaged One signifi cant measure is a proposal to streamline in income tax fraud. the operation of France's tax and social security au- thorities. Under the measure, businesses will only Over the 2014/15 fi nancial year, there were 256 have to engage with one authority. individuals and entities convicted in cases involv- ing ZAR196m (USD16.2m), with fi nes totaling A code of best practice will also be introduced to ZAR9.6m also issued. improve French authorities' dealings with taxpayers and businesses. Th e website of the social security Th ese cases included 32 convictions for VAT fraud, 73 authority will be revamped and guidance will be convictions for income tax fraud, eight for tobacco- made clearer and more defi nitive. related crimes, and nine involving the construction industry (largely for tender fraud), among others. France is also to ask the European Commission to establish a council for small and medium-sized A further 30 cases were approved for criminal pros- enterprises, which would be responsible for re- ecution in May 2015, SARS said. viewing the impact on small businesses of EU legislative proposals. "Th ese convictions illustrate that SARS has the ca- pability to investigate tax crimes eff ectively despite

53 recent speculation that its enforcement capability criminal gangs. "Th ese are extremely sophisticat- has been diminished," the tax authority stated. ed criminals with access to a tremendous amount of data." IRS Hit By Huge Tax Refund Scam Identity thieves have used information stolen from However, Koskinen's comments will do little to more than 100,000 taxpayers in the US to claim tens reassure a public that is growing increasingly con- of millions of dollars in fraudulent tax refunds in the cerned at the IRS's apparent inability to protect latest security breach to hit the embattled agency. their data and prevent billions of dollars of improp- er tax credit claims. Fraudsters used social security numbers, address- es, dates of birth, and other sensitive pieces of per- Th e IRS has estimated that 27 percent of Earned sonal information stolen from elsewhere to gain Income Tax Credit payments were issued improp- entry into the IRS's Get Transcript system, which erly in the 2014 fi scal year, with the value of these allows taxpayers to view previous tax returns and improper payments said to be USD17.7bn. other tax records. A recent investigation by the Treasury watchdog It is believed that the fraudsters made more than also concluded that the IRS had been wrong to 200,000 attempts to view individual tax returns consider the Additional Child Tax Credit as low from February to the middle of May, and were risk to erroneous claims, estimating that the im- successful in just over 100,000 of these, claiming proper payment rate for the 2014 fi scal year was up around USD50m in fraudulent refunds. to 30.5 percent, with improper payments worth an estimated USD7.1bn. Th e IRS, which has launched an investigation into the data breach, said that the scam had all the hall- Congress is also likely to demand answers from the marks of organized crime. agency about what it intends to do to prevent bil- lions of taxpayer dollars going to waste through "We're confi dent that these are not amateurs," IRS fraud and error. Commissioner John Koskinen told a news confer- ence. "Th ese actually are organized crime syndicates "While the committee is seeking more informa- that not only we but everybody in the fi nancial in- tion about the situation, it's deeply concerning that dustry are dealing with." taxpayer information has been compromised," said House Ways and Means Committee Chairman Paul Koskinen said that around 80 percent of tax re- Ryan. "Protecting the taxpayer is supposed to be the fund fraud in the US was perpetrated by organized IRS's top priority, and we need answers from them."

54 TAX TREATY ROUND-UP ISSUE 134 | JUNE 4, 2015

ARMENIA - SLOVAKIA

Signature Armenia and Slovakia signed a DTA on May 15, 2015, Armenia's Ministry of Foreign Aff airs has confi rmed.

BAHRAIN - PORTUGAL

Signature

Bahrain and Portugal signed a DTA on May 26, 2015.

BELARUS - AUSTRIA COLOMBIA - CZECH REPUBLIC

Forwarded Eff ective

Belarus's House of Representatives on May 6, 2015, Th e DTA between Colombia and the Czech Re- endorsed legislation to ratify the DTA with Austria, public will become eff ective from January 1, 2016, the state news agency reported. the Czech Ministry of Finance confi rmed on May 28, 2015. CHINA - CHILE ETHIOPIA - MOROCCO Signature Negotiations China signed a DTA with Chile on May 25, 2015. Ethiopia and Morocco are engaged in DTA nego- CHINA - RUSSIA tiations, it was confi rmed on May 12, 2015.

Signature GEORGIA - VARIOUS

China and Russia signed a DTA on May 8, 2015. Signature

Georgia signed DTAs with Iceland, Liechtenstein, and Cyprus on May 13, 2015.

55 GERMANY - JERSEY INDIA - KOREA, SOUTH

Signature Forwarded

Germany and Jersey signed a DTA on May 7, 2015. India's Cabinet on May 6, 2015, approved the pending DTA with South Korea. GUERNSEY - MONACO INDIA - MONGOLIA Into Force Initialed Guernsey's DTA with Monaco entered into force on May 9, 2015. India and Mongolia initialed a DTA during Indian Prime Minister Narendra Modi's two-day visit to HONG KONG - JAPAN Mongolia, which began on May 17, 2015.

Ratifi ed MALAYSIA - SLOVAKIA

Hong Kong gazetted an order on May 15, 2015, to Signature ratify the TIEA signed with Japan. Malaysia and Slovakia signed a DTA on May 25, HONG KONG - SAUDI ARABIA 2015.

Negotiations MOROCCO - GUINEA-BISSAU

Hong Kong and Saudi Arabia held a third round of Signature DTA negotiations on May 12–14, 2015. Morocco and Guinea-Bissau signed a DTA on May HONG KONG - VARIOUS 28, 2015.

Ratifi ed PHILIPPINES - VARIOUS

Hong Kong gazetted two orders on May 15, 2015, Forwarded to give force to the comprehensive DTAs signed with South Africa and the United Arab Emirates. Th e Philippines' pending DTA with Germany and Th ey were tabled before the Legislative Council on a Protocol with Italy were discussed at the May 20, May 20, 2015. 2015, subcommittee meeting of the Philippines' Committee of Foreign Aff airs, as part of the na- tion's domestic ratifi cation procedures.

56 QATAR - KENYA TURKMENISTAN - AUSTRIA

Ratifi ed Signature

Qatar completed its domestic ratifi cation procedures Th e Government of Turkmenistan on May 12, in respect of a DTA with Kenya on May 25, 2015. 2015, confi rmed the recent signature of a DTA with Austria. SOUTH AFRICA - VARIOUS UNITED KINGDOM - Forwarded UNITED ARAB EMIRATES

Reports concerning South Africa's pending DTAs Negotiations with Lesotho, Cameroon, and Qatar, and a Proto- col with Cyprus, were tabled before South Africa's Th e United Kingdom and the United Arab Emir- Parliament on May 12, 2015, as part of the nation's ates committed to continuing DTA negotiations at domestic ratifi cation procedures. a meeting on May 14, 2015.

SWITZERLAND - GRENADA

Signature

Switzerland and Grenada signed a TIEA on May 19, 2015.

57 CONFERENCE CALENDAR ISSUE 134 | JUNE 4, 2015

Chairs: Alan M Klein (Simpson Th acher & Bartlett), A guide to the next few weeks of international tax gab-fests (we're just jealous - stuck in the offi ce). Stephen Cooke (Slaughter and May), Maximilian Schiessl (Hengeler Mueller) THE AMERICAS 6/10/2015 - 6/11/2015

TAX PLANNING FOR DOMESTIC & http://www.int-bar.org/Conferences/conf628/ FOREIGN PARTNERSHIPS 2015  SAN FRANCISCO, CA binary/New%20York%20M&A%202015%20 programme.pdf PLI GLOBAL TRANSFER PRICING Venue: PLI California Center, 685 Market Street, CONFERENCE San Francisco, California 94105, USA BNA Co Chairs: Stephen D. Rose (Munger, Tolles & Ol- son LLP), Eric B. Sloan (Deloitte Tax LLP), Clif- Venue: Fairfax Embassy Row, 2100 Massachusetts ford M. Warren (Internal Revenue Service) Avenue Northwest, Washington, DC 20008, USA

6/9/2015 - 6/11/2015 Chairs: Douglas W. O'Donnell (Internal Revenue Service), David Varley (Internal Revenue Service) http://www.pli.edu/Content/Seminar/Tax_ Planning_for_Domestic_Foreign_Partnerships/_/ 6/11/2015 - 6/12/2015 N-4kZ1z129zc?ID=223947 http://go.bna.com/transfer-pricing-conference- 14TH ANNUAL INTERNATIONAL primer/ MERGERS AND ACQUISITIONS CONFERENCE INTRODUCTION TO US INTERNATIONAL TAX  BOSTON, MA International Bar Association Bloomberg BNA Venue: Waldorf Astoria New York, New York, NY 10022, USA Venue: Morgan Lewis, 225 Franklin Street, Boston, MA 02110, USA

58 Chair: Bart Bassett (Morgan Lewis LLP), James 6/17/2015 - 6/19/2015 O'Brien (Baker & McKenzie LLP), Doug Stransky (Sullivan & Worcester LLP) http://www.bna.com/inter2015_boston/

6/15/2015 - 6/16/2015 BASICS OF INTERNATIONAL TAXATION 2015  NEW YORK http://www.bna.com/intro2015_boston/ PLI THE 6TH ANNUAL PRIVATE INVESTMENT FUNDS TAX Venue: PLI New York Center, 1177 Avenue of the MASTER CLASS Americas, New York 10036, USA

Financial Research Associates Chairs: Linda E. Carlisle (Miller & Chevalier Char- tered), John L. Harrington (Dentons US LLP) Venue: Princeton Club of New York, 15 W 43rd St, New York, NY 10036, USA 7/21/2015 - 7/22/2015

Chairs: Elaine B. Murphy (Ropes & Gray), Jay G. http://www.pli.edu/Content/Seminar/Basics_of_ Milkes (Ropes & Gray), Anthony Tuths (Withum International_Taxation_2015/_/N-4kZ1z129zs? Smith+Brown) ID=223955

6/15/2015 - 6/16/2015 INTERNATIONAL TAX ISSUES 2015  CHICAGO, IL https://www.frallc.com/pdf/B957.pdf Practicing Law Institute INTERMEDIATE US INTERNATIONAL TAX UPDATE  BOSTON, MA Venue: University of Chicago Gleacher Center, 450 N. Cityfront Plaza Drive, Chicago, Il 60611, USA Bloomberg BNA Chair: Lowell D. Yoder (McDermott Will & Em- Venue: Morgan Lewis, 225 Franklin Street, Boston, ery LLP) MA 02110, USA 9/9/2015 - 9/9/2015 Chair: Bart Bassett (Morgan Lewis LLP), James O'Brien (Baker & McKenzie LLP), Doug Stransky http://www.pli.edu/Content/Seminar/International_ (Sullivan & Worcester LLP) Tax_Issues_2015/_/N-4kZ1z12a24?ID=223915 59 BASICS OF INTERNATIONAL INTERMEDIATE US INTERNATIONAL TAXATION 2015  SAN FRANCISCO, CA TAX UPDATE  LAS VEGAS, NV

PLI Bloomberg BNA

Venue: PLI California Center, 685 Market Street, Venue: Trump International Hotel, 2000 Fashion San Francisco, California 94105, USA Show Drive, Las Vegas, NV 89109, USA

Chairs: Linda E. Carlisle (Miller & Chevalier Char- Chairs: Bart Bassett (Morgan Lewis LLP), Doug tered), John L. Harrington (Dentons US LLP) Stransky (Sullivan & Worcester LLP)

9/28/2015 - 9/29/2015 9/30/2015 - 10/2/2015

http://www.pli.edu/Content/Seminar/Basics_of_ http://www.bna.com/uploadedFiles/BNA_V2/ International_Taxation_2015/_/N-4kZ1z129zs? Professional_Education/Tax/Live_Conferences/ ID=223955 IntroIntermediateJuneAugSept2015.pdf

INTRODUCTION TO US CAPTIVE INSURANCE TAX SUMMIT INTERNATIONAL TAX  LAS VEGAS, NV  WASHINGTON, DC

Bloomberg BNA BNA

Venue: Trump International Hotel, 2000 Fashion Venue: McDermott Will & Emery, 500 North Show Drive, Las Vegas, NV 89109, USA Capital Street, NW, Washington, DC 20001, USA

Chairs: Bart Bassett (Morgan Lewis LLP), Doug Key Speaker: TBC Stransky (Sullivan & Worcester LLP) 10/26/2015 - 10/27/2015 9/28/2015 - 9/29/2015 http://www.bna.com/captive_dc2015/ http://www.bna.com/uploadedFiles/BNA_V2/ Professional_Education/Tax/Live_Conferences/ IntroIntermediateJuneAugSept2015.pdf

60 INTERMEDIATE US INTERNATIONAL Chairs: TBC TAX UPDATE  CHICAGO, IL

BNA 11/30/2015 - 12/1/2015

Venue: Baker & McKenzie LLP, 300 East Randolph http://www.bna.com/intro_va/ Drive, 50th Floor, Chicago, IL 60601, USA ASIA PACIFIC

Key Speaker: TBC THE 6TH OFFSHORE INVESTMENT 10/28/2015 - 10/30/2015 CONFERENCE HONG KONG 2015

http://www.bna.com/inter_chicago2015/ Off shore Investment

PRINCIPLES OF INTERNATIONAL Venue: Conrad Hong Kong Hotel, One Pacifi c TAXATION Place, Pacifi c Place, 88 Queensway, Hong Kong

Bloomberg BNA Chair: Michael Olesnicky (KPMG China)

Venue: Bloomberg LP, 731 Lexington Avenue, New 6/17/2015 - 6/18/2015 York, NY 10022, USA http://www.off shoreinvestment.com/pages/index. Key Speakers: TBC asp?title=Th e_Off shore_Investment_Conference_ Hong_Kong&catID=12190 11/16/2015 - 11/18/2015 3RD GLOBAL CONFERENCE ON http://www.bna.com/principlesintltax_NYC/ FINANCE & ACCOUNTING

INTRODUCTION TO US Asia Pacifi c International Academy INTERNATIONAL TAX  ARLINGTON, VA Venue: Concorde Hotel, 100 Orchard Rd, 238840 Singapore Bloomberg BNA Chairs: Dr Raymond KH Wong (Th e Chinese Uni- Venue: Bloomberg BNA, 1801 S. Bell Street, Ar- versity of Hong Kong), Prof. Dan Levin (Wharton lington, VA 22202, USA Business School, University of Pennsylvania)

61 7/29/2015 - 7/30/2015 6/5/2015 - 6/5/2015

http://academy.edu.sg/gcfa2015/ http://www.mblseminars.com/Outline?progid=5788

MIDDLE EAST AND AFRICA THE INTERNATIONAL TAX PLANNING ASSOCIATION 40TH TRENDS IN INTERNATIONAL ANNIVERSARY CONFERENCE TAXATION: AN AFRICAN PERSPECTIVE ITPA IBFD Venue: Sofi tel Legend Th e Grand Amsterdam, Ou- Venue: Zambezi Sun, Mosi-oa-Tunya Road, Liv- dezijds Voorburgwal 197, 1012 EX Amsterdam, ingstone 20100, Zambia Netherlands

Key Speakers: Prof. Annet Wanyana Oguttu (Uni- Chair: Milton Grundy versity of South Africa), Antonio Russo (Baker & McKenzie), Belema Obuoforibo (IBFD), Eleni 6/7/2015 - 6/9/2015 Klaver (Carrara Legal), Fredrick Omondi (De- loitte), among numerous others https://www.itpa.org/?page_id=9907

6/18/2015 - 6/19/2015 INTERNATIONAL TAXATION OF EXPATRIATES http://www.ibfd.org/IBFD-Tax-Portal/Events/ Trends-International-Taxation-African-Perspective- IBFD FULL-REGISTRATION-NOW Venue: IBFD head offi ce, Rietlandpark 301, 1019 WESTERN EUROPE DW Amsterdam, Th e Netherlands

VAT UPDATE CONFERENCE 2015 Key Speakers: Bart Kosters (IBFD) MBL 6/10/2015 - 6/12/2015 Venue: TBC, London http://www.ibfd.org/Training/International- Chair: Etienne Wong (Tax Chambers, 15 Old Square) Taxation-Expatriates

62 INTERNATIONAL VAT CONFERENCE TAX FOR OFFSHORE SHIPPING 2015 Informa IBFD Venue: Bonhill House, 1-3 Bonhill Street, London, Venue: Seehotel Überfahrt, Überfahrtstraße 10, 83700 EC2A 4BX, UK Rottach-Egern am Tegernsee, Munich, Germany Key Speakers: Harrie van Duin (KPMG Meijburg), Key speakers: Donato Raponi (European Com- Dorte Cock (EY), Jurjen Bevers (Baker & McKen- mission), Dermot Donegan (Irish Revenue Com- zie), Gavin Stoddart (Moore Stephens CIS), among missioners), Prof. Dr Ben J. M. Terra, Ferdinand numerous others Huschens (German Federal Tax Administration), among numerous others 6/16/2015 - 6/17/2015

6/10/2015 - 6/12/2015 http://www.lloydsmaritimeacademy.com/event/ off shoretax http://www.ibfd.org/IBFD-Tax-Portal/Events/ International-VAT-Conference-2015#tab_program INTERNATIONAL TAX ASPECTS OF PERMANENT ESTABLISHMENTS TAX EXECUTIVES INSTITUTE EMEA SUMMER CONFERENCE IBFD

TEI Venue: IBFD head offi ce, Rietlandpark 301, 1019 DW Amsterdam, Th e Netherlands Venue: Starling Hotel Conference Center, Route François-Peyrot 34, 1218 le Grand-Saconnex, Ge- Key Speakers: Andreas Perdelwitz (IBFD), Bart neva, Switzerland Kosters (IBFD), Hans Pijl, Roberto Bernales (IBFD), Walter van der Corput (IBFD), Madalina Key Speakers: TBC Cotrut (IBFD), Jan de Goede (IBFD)

6/11/2015 - 6/12/2015 6/16/2015 - 6/19/2015

http://www.tei-europe.org/events/agenda.html http://www.ibfd.org/Training/International-Tax- Aspects-Permanent-Establishments

63 TREASURY FOR TAX PEOPLE Key speakers: Fatima Chaouche (Luxembourg Uni- IBC versity), Dr Charlène Herbain (Luxembourg Uni- versity), Miriam Keusen (KPMG Luxembourg), Venue: etc Venues - Marble Arch, Garfi eld House, Ine Lejeune (Advocaat/Avocat), Prof Jacques Mal- 86 Edgware Road, London, W2 2EA, UK herbe (Liedekerke Wolters Waelbroeck Kirkpat- rick), among numerous others Chair: David Hill (Grant Th ornton) 7/6/2015 - 7/10/2015 6/18/2015 - 6/18/2015 https://www.era.int/upload/dokumente/17230.pdf http://www.iiribcfi nance.com/event/treasury-for- tax-people-event PRIVATE CLIENT INTERNATIONAL TAX UPDATES TAX PLANNING WORKSHOP IBC IBFD Venue: TBC, London Venue: IBFD head offi ce, Rietlandpark 301, 1019 DW Amsterdam, Th e Netherlands Key speakers: Ian Maston, Suzanne Willis (Westle- ton Drake), Daniel Sopher (Sopher & Co), Patri- Key Speakers: Shee Boon Law (IBFD), Tamas cia Garcia Mediero (Avantia Asesoramiento Fiscal y Kulcsar (IBFD), Boyke Baldewsing (IBFD), Carlos Legal), among numerous others Gutiérrez (IBFD) 7/7/2015 - 7/9/2015 7/2/2015 - 7/3/2015 http://www.iiribcfinance.com/event/ http://www.ibfd.org/Training/Tax-Planning-Workshop International-Private-Client-Tax-Seminars/speakers

SUMMER COURSE ON EU TAX LAW PRIVATE WEALTH AFRICA 2015

ERA IIR & IBC

Venue: ERA Conference Centre, Metzer Allee 4, Venue: TBC, London 54295 Trier, Germany

64 Key speakers: Richard Howarth (African Private Key Speakers: Emma Chamberlain (Pump Court Offi ce LLP), Chris Moorcroft (Harbottle & Lewis Tax Chambers), Patrick Soares (Gray's Inn Tax LLP), Camilla Dell (Black Brick Property Solu- Chambers), Simon McKie (McKie & Co LLP), tions), Jonathan Burt (Harcus Sinclair), Liam Bai- Giles Clarke (Author - Off shore Tax Planning) ley (Knight Frank) 7/14/2015 - 7/14/2015 7/8/2015 - 7/8/2015 http://www.iiribcfinance.com/event/offshore- http://www.iiribcfinance.com/event/Private- taxation-budget-special Wealth-Africa-Conference INTERNATIONAL TAX SUMMER UPDATE FOR THE ACCOUNTANT SCHOOL 2015 IN INDUSTRY AND COMMERCE  LONDON IIR & IBC Financial Events

CCH Venue: Gonville & Caius College, Trinity St, Cambridge, CB2 1TA, UK Venue: Sofi tel St James Hotel, 6 Waterloo Place, London SW1Y 4AN, UK Key Speakers: Timothy Lyons QC (39 Essex Street), Peter Adriaansen (Loyens & Loeff ), Julie Hao (EY), Key Speakers: Toni Trevett, Dr. Stephen Hill, Kevin Heather Self (Pinsent Masons), Jonathan Schwarz Bounds, among others. (Temple Tax Chambers), among numerous others

7/8/2015 - 7/9/2015 8/18/2015 - 8/20/2015

https://www.cch.co.uk/AIC http://www.iiribcfi nance.com/event/International- Tax-Summer-School-2015 OFFSHORE TAXATION  A BRAVE NEW WORLD THE 25TH OXFORD OFFSHORE SYMPOSIUM 2015 IIR & IBC Off shore Investment Venue: Grange City Hotel, London, 8-14 Cooper's Row, London, EC3N 2BQ, UK Venue: Jesus College, Turl Street, Oxford OX1 3DW, UK

65 DUETS ON INTERNATIONAL Chairs: Nigel Goodeve-Docker (Down End Offi ce), TAXATION: SUBSTANCE AND FORM Peter O'Dwyer (Hainault Capital), Richard Cassell IN CIVIL AND COMMON LAW (Withers LLP), Nick Jacob (Wragge Lawrence Gra- JURISDICTIONS ham & Co), Andrew De La Rosa (ICT Chambers) IBFD 9/6/2015 - 9/12/2015 Venue: IBFD Head Offi ce, Auditorium, Rietland- http://www.off shoreinvestment.com/pages/index. park 301, 1019 DW Amsterdam, Th e Netherlands asp?title=Programme_Ox_2015&catID=12148 Key Speakers: TBC DUETS ON INTERNATIONAL TAXATION: GLOBAL TAX TREATY 9/8/2015 - 9/8/2015 ANALYSIS http://www.ibfd.org/IBFD-Tax-Portal/Events/ IBFD Duets-International-Taxation-Substance-and- form-civil-and-common-law Venue: IBFD Head Offi ce Auditorium, Rietland- park 301,1019 DW Amsterdam, Th e Netherlands UPDATE FOR THE ACCOUNTANT IN INDUSTRY AND COMMERCE  Key Speakers: Richard Vann, Pasquale Pistone, BRISTOL Marjaana Helminen, Peter Harris, Adolfo Martin Jimenez, Scott Wilkie CCH

9/7/2015 - 9/7/2015 Venue: Aztec Hotel and Spa, Aztec West, Almonds- bury, Bristol, South Gloucestershire BS32 4TS, UK http://www.ibfd.org/IBFD-Tax-Portal/Events/ Duets-International-Taxation-Global-Tax-Treaty- Key Speakers: Toni Trevett, Dr. Stephen Hill, Kevin Analysis-1#tab_program Bounds, among others.

9/9/2015 - 9/10/2015

https://www.cch.co.uk/AIC

66 UPDATE FOR THE ACCOUNTANT UPDATE FOR THE ACCOUNTANT IN INDUSTRY AND COMMERCE  IN INDUSTRY AND COMMERCE  MILTON KEYNES MANCHESTER

CCH CCH

Venue: Mercure Abbey Hill Hotel, Th e Approach, Venue: Radisson Blu Hotel Manchester, Chicago Milton Keynes MK8 8LY, UK Avenue, Manchester, M90 3RA, UK

Key Speakers: Toni Trevett, Dr. Stephen Hill, Kevin Key Speakers: Toni Trevett, Dr. Stephen Hill, Kevin Bounds, among others. Bounds, among numerous others

9/15/2015 - 9/16/2015 9/22/2015 - 9/23/2015

https://www.cch.co.uk/AIC https://www.cch.co.uk/AIC

INTERNATIONAL TAXATION UPDATE FOR THE ACCOUNTANT OF BANKS AND FINANCIAL IN INDUSTRY AND COMMERCE  INSTITUTIONS OXFORD

IBFD CCH

Venue: IBFD head offi ce, Rietlandpark 301, 1019 Venue: Oxford Th ames Four Pillars Hotel, Henley DW Amsterdam, Th e Netherlands Road, Sandford-on-Th ames, Sandford on Th ames, Oxfordshire OX4 4GX, UK Key Speakers: Ronald Aw-Yong (Beaulieu Capital), Peter Drijkoningen (French BNP Paribas bank), Key Speakers: Toni Trevett, Dr. Stephen Hill, Kevin Francesco Mantegazza (Pirola Pennuto Zei & As- Bounds, among numerous others sociati), Omar Moerer (Baker & McKenzie), Pedro Paraguay (NautaDutilh), Nico Blom (NautaDutilh) 10/6/2015 - 10/7/2015

9/16/2015 - 9/18/2015 https://www.cch.co.uk/AIC

http://www.ibfd.org/Training/International- Taxation-Banks-and-Financial-Institutions

67 INTERNATIONAL TAX PLANNING EU FINANCIAL ACCOUNTING IN ASSOCIATION MONTECARLO INTERNATIONAL COOPERATION MEETING AND DEVELOPMENT PROJECTS

ITPA European Academy

Venue: Hôtel Hermitage Monte-Carlo, Square Venue: Arcotel John F, Wederscher Markt 11, Beaumarchais, 98000 Monaco 10117, Berlin, Germany

Chair: Milton Grundy Key Speakers: TBC

10/11/2015 - 10/13/2015 11/26/2015 - 11/27/2015

https://www.itpa.org/?page_id=9909 http://www.euroacad.eu/events/event/eu-fi nancial- accounting-in-international-cooperation-and- INTERNATIONAL TAX development-projects.html STRUCTURING FOR MULTINATIONAL ENTERPRISES

IBFD

Venue: IBFD head offi ce, Rietlandpark 301, 1019 DW Amsterdam, Th e Netherlands

Key Speakers: Boyke Baldewsing (IBFD), Tamas Kulcsar (IBFD)

10/21/2015 - 10/23/2015

http://www.ibfd.org/Training/International-Tax- Structuring-Multinational-Enterprises#tab_program

68 IN THE COURTS ISSUE 134 | JUNE 4, 2015

THE AMERICAS

United States Th e US Supreme Court has ruled against Maryland's personal income tax, in a case concerning the taxation of the interstate commerce activities of a company.

Maryland's personal income on state residents con- sists of a "state" income tax and a "county" income tax. Residents who pay income tax to another ju- risdiction for income earned in that other jurisdic- tion are permitted a credit against the "state" tax but not the "county" tax. Nonresidents who earn income from sources within Maryland are required to pay the "state" income tax; and nonresidents not A listing of key international tax cases in the subject to the county tax must pay a "special non- last 30 days resident tax" in lieu of the "county" tax.

Th e respondents (Maryland residents) earned pass- tax system violated the Commerce Clause of the Fed- through income from a Subchapter S corporation eral Constitution. Th e Court of Appeals of Mary- that earned income in several states. Th e respondents land affi rmed and held that the tax unconstitution- claimed an income tax credit on their 2006 Maryland ally discriminated against interstate commerce. income tax return for taxes paid to other states. Th e Maryland State Comptroller of the Treasury, the pe- Before the Supreme Court, it was highlighted that titioner in the case, allowed the respondents a credit the Commerce Clause, which grants Congress against their "state" income tax but not against their power to "regulate Commerce … among the sev- "county" income tax and assessed a tax defi ciency. eral states," also has "a further, negative command, known as the dormant Commerce Clause," which Th at decision was affi rmed by the Hearings and Ap- precludes states from "discriminat[ing] between peals Section of the Comptroller's Offi ce and by the transactions on the basis of some interstate ele- Maryland Tax Court, but the Circuit Court for How- ment." Th erefore, inter alia, a state "may not tax a ard County reversed on the ground that Maryland's transaction or incident more heavily when it crosses

69 state lines than when it occurs entirely within the elections justify disparate treatment of cor- state [or] impose a tax which discriminates against porate and personal income. Th us the Court interstate commerce either by providing a direct has previously entertained and even sustained commercial advantage to local business, or by sub- dormant Commerce Clause challenges by in- jecting interstate commerce to the burden of 'mul- dividual residents of the state that imposed the tiple taxation'." alleged burden on interstate commerce."

Th e Supreme Court said this case was all but dictat- "Maryland's tax scheme is not immune from ed by its dormant Commerce Clause cases, particu- dormant Commerce Clause scrutiny simply larly J. D. Adams Mfg. Co. v. Storen (304 U.S. 307, because Maryland has the jurisdictional pow- 311), Gwin, White & Prince, Inc. v. Henneford (305 er under the Due Process Clause to impose U.S. 434, 439), and Central Greyhound Lines, Inc. v. the tax. While a state may, consistent with the Mealey (334 U.S. 653, 662), which all invalidated Due Process Clause, have the authority to tax a state tax schemes that might lead to double taxation particular taxpayer, imposition of the tax may of out-of-state income and that discriminated in fa- nonetheless violate the Commerce Clause." vor of intrastate over interstate economic activity. Th e Supreme Court concluded that Maryland's Ruling against Maryland's personal income tax re- income tax scheme discriminates against interstate gime, the Supreme Court said this conclusion is not commerce. Th e "internal consistency" test, which aff ected by the fact that these three cases involved a helps courts identify tax schemes that discriminate tax on gross receipts rather than net income, and a against interstate commerce, assumes that every tax on corporations rather than individuals. state has the same tax structure. Maryland's income tax scheme fails the internal consistency test because It observed that: if every state adopted Maryland's tax structure, in- terstate commerce would be taxed at a higher rate " Th is Court's decisions have previously re- than intrastate commerce. jected the formal distinction between gross re- ceipts and net income taxes. And there is no Th is judgment was released on May 18, 2015. reason the dormant Commerce Clause should treat individuals less favorably than corpora- http://www.supremecourt.gov/opinions/14pdf/ tions; in addition, the taxes invalidated in J. D. 13-485_o7jp.pdf Adams and Gwin, White applied to the income of both individuals and corporations. Nor does US Supreme Court: Comptroller of the Treasury of the right of the individual to vote in political Maryland v. Wynne et ux.

70 WESTERN EUROPE Th e Finanzamt said any infringement of the free- dom of establishment is justifi ed by overriding Germany reasons in the public interest related to the pres- Th e European Court of Justice (ECJ) was asked to ervation of the allocation of powers of taxation as consider a dispute between Verder LabTec, a part- between member states, and that its treatment of nership established in Germany, and the Finanzamt the unrealized gains was proportionate to achieve (tax offi ce) in Hilden concerning the taxation of that objective. the transfer of unrealized capital gains to its Dutch permanent establishment (PE). Considering whether this was the case, the ECJ agreed that the taxation of the unrealized capital From May 2005, Verder LabTec dealt exclusively gains did constitute a restriction to freedom of with the administration of its own patent, trade- establishment, as the taxation of unrealized gains mark and model rights. Th e Finanzamt said the – eff ectively an exit tax – would not take place in transfer of those rights to the Dutch PE had to take relation to a similar transfer within the national ter- place with disclosure of the unrealized capital gains ritory, with those capital gains not being subject to pertaining to those rights at their arm's length value tax until they have actually been realized. at the time of the transfer. However, the ECJ then went on to consider the Th e Finanzamt considered that the gains (the Finanzamt's justifi cation of "overriding reasons in amount of which was agreed by all parties and not the public interest." under dispute) should not immediately be subject to taxation in full, and instead the amount should Th e ECJ said, fi rst, that it should be borne in mind be incorporated in profi ts on a straight-line basis that the preservation of the balanced allocation of over a period of ten years, for German tax purposes. powers of taxation between member states is a le- gitimate objective recognized by the Court, and Verder LabTec brought an action against the au- that, in the absence of any unifying or harmonizing thority's decision to bring forward the taxable event measures of the EU, the member states retain the before the Finanzgericht (tax court) in Düsseldorf, power to defi ne, by treaty or unilaterally, the cri- arguing that the decision undermines the freedom teria for allocating their powers of taxation, with a of establishment guaranteed by Article 49 of the view to eliminating double taxation. Treaty on the Functioning of the EU (TFEU). Th e recovery of that tax at the time of the realization of Second, a member state is entitled, in the case of those capital gains would be a less restrictive op- a transfer of assets to a PE located within anoth- tion, it argued. er member state, to impose tax, at the time of the

71 transfer, on the capital gains generated on its terri- applicable national legislation. It cautioned, how- tory prior to that transfer (according to the fi scal ever, that account should also be taken of the risk principle of territoriality) – a measure intended to of non-recovery of the tax. ensure the member state of origin may exercise its powers of taxation in relation to activities carried It noted that in its ruling in DMC , the ECJ had on in its territory. held that requiring the payment of tax on unreal- ized capital gains within a period of fi ve years had Recalling its decision in DMC (C-164/12), the ECJ been found to be a proportionate measure. A stag- said that member states are entitled to tax capital gered recovery of tax on unrealized capital gains gains generated when the assets in question were on over ten annual installments, such as that at issue their territory and have the power, for the purposes in the main proceedings, can only therefore be con- of such taxation, to make provision for a charge- sidered to be a proportionate measure to attain that able event other than the actual realization of those objective, the ECJ concluded. gains, in order to ensure that those assets are taxed. Th is judgment was released on May 21, 2015. Accordingly, it observed: http://curia.europa.eu/juris/document/document. "It is proportionate for a member state, for jsf?text=&docid=164355&pageIndex=0&docla the purpose of safeguarding the exercise of its ng=EN&mode=lst&dir=&occ=first&part=1&c powers of taxation, to determine the amount id=104339 of the tax due on the unrealized capital gains that have been generated in its territory per- European Court of Justice: Verder LabTec v. Finan- taining to the assets transferred outside its ter- zamt Hilden (C-657/13) ritory, at the time when its powers of taxation in respect of the assets concerned cease to ex- Switzerland ist, namely, in the present case, at the time of In two judgments announced simultaneously, the the transfer of the assets at issue outside the Swiss Supreme Court ruled in favor of the Federal Tax territory of that member state." Administration (FTA) in respect of its decision to deny two Danish banks their right to a refund of withhold- It also said it was appropriate to give the taxable ing tax in respect of dividend arbitrage trades. person the choice between, on the one hand, im- mediate payment of that tax, and, on the other Th e case concerned two banks that had fully hedged hand, deferred payment of that tax, together with, their short-term investments in Swiss equities with if appropriate, interest in accordance with the counterbalancing investments in either total return

72 swaps or index futures. Th e FTA had levied with- Th e judgment was released on May 5, 2015. holding tax of 35 percent on the dividends and rejected the banks' respective claims for a refund http://www.bger.ch/fr/press-news-2c_364_2012-t.pdf under the former Danish–Swiss double tax agree- ment, which provided for a full refund of dividend Swiss Federal Supreme Court: (2C_364/2012, withholding tax. 2C_377/2012, and 2C_895/2012)

Supporting the FTA's decision, the Supreme Court United Kingdom said that the banks were not eff ectively the benefi cial Th e UK's First Tier Tribunal Tax Chamber (FTT) owners of the dividends and were therefore not enti- has ruled in a case concerning a taxpayer's conten- tled to reimbursement of withholding tax under the tion that its supply of promotions management treaty. Despite there being no explicit provisions on and marketing services and its provision of a re- benefi cial ownership in that double tax agreement, lated brochure to customers was a mixed supply for the court said that, even in treaties without such value-added tax. provisions, there is an implicit benefi cial ownership requirement in treaties to prevent treaty abuse. Th e case concerned the supplies of the Marketing Lounge Partnership Limited between January 2009 In particular, the Court said that in order for the and October 2012. Th e company's clients were banks to have been the benefi cial owner, they must mainly major public companies, and the compa- have had the right to use, enjoy, or dispose of the ny provided a comprehensive promotions package dividends, and they must have borne the associated on behalf of their clients, providing rewards and risks concerning the potential non-payment of the incentives free of charge to existing and potential dividends. Instead, under the derivatives contracts, customers of its clients, commonly in the form of the dividends received were agreed to be passed on hotel accommodation, spa or beauty treatments, or to the banks' counterparties, which were situated fi lm subscriptions. outside Switzerland and Denmark. For each promotion the company would publish Th e rulings were despite earlier judgments from the a directory or guide setting out a list of provid- Supreme Court being centered on whether the ar- ers of the incentive or benefi t. Th is followed a rangements were contrived – that is, whether they common form, with the same providers of incen- exclusively targeted a tax benefi t – and whether the tives or benefi ts, albeit revised to suit each client. entity claiming a refund had suffi cient activity in It would distribute copies of these to customers the treaty state. Interestingly, in these cases, the two of their clients identifi ed by them as qualifying banks had substantial activities in Denmark. for the benefi ts. Th e company would thereafter

73 undertake all aspects of management of the in- HMRC said the role of the company was more ex- centive scheme, providing supporting telephone tensive than that of supplying written material. It lines for "take-up" of the incentives, and any re- received information in the form of customer lists lated queries thereafter. It also set up websites from its clients. It sent letters to the customers, issued supplementing the information in the lists of the directories, handled bookings, and dealt with 40 providers. Th us the company relieved its clients telephone inquiries and complaints. None of these of all practical aspects of administering and man- elements, HMRC argued, were "standalones"; they aging the promotions. were all parts of one coordinated supply.

Th e client would pay the company a sum to meet Th e FTT agreed that all the elements provided by all outlays relating to the promotion. A fi xed sum the company were integral parts of a whole. It high- would be payable in respect of each customer en- lighted that from the viewpoint of the customer, it titled to take up the "free" benefi t. Th e company would be purposeless – and probably more cost- would then meet the cost of provision of the ho- ly – to have more than one provider. In eff ect, by tel accommodation or spa or beauty treatment. For engaging Marketing Lounge Partnership Limited, fi lm rentals, the company would charge its client its clients were relieved of the whole responsibil- for the cost. Th e company would also provide and ity of running the campaign; it could entrust the meet all other costs of enabling the customer to operation to one "professional." Th e FTT said the take up the incentive off ered. guides and website were truly complementary and it would be artifi cial and would likely create addi- In a letter dated December 7, 2012, an HMRC of- tional unnecessary expense were the two functions fi cer said that the whole supply of the company's separated. From the viewpoint of its clients, this services to clients should be chargeable to the stan- was a single supply, the FTT concluded, and it was dard rate – that is, the standard rate should be ap- artifi cial to divide it between the provision of the plied to the whole value of the services provided by directories and the other support services. the company, for both its fulfi llment services and the provision of printed matter. Th e printed material was a subordinate and inciden- tal part of the promotion, it said. Further, it noted Th e FTT ruled in favor of HMRC, after hearing that the guides were not similar to tourist guides its argument, which was based on the rulings in such as the Michelin guide in that they were not Card Protection Plan (C-349/96) and in Levob Ver- sold independently to the public. Th e FTT add- zekerngen BV (C-41/04), that, among other things, ed that even if the booklet were the costliest item, a single economic supply should not be "artifi cially the decision in College of Estate Management (Case split" to obtain a tax benefi t. C-349/96) indicated that this was not decisive;

74 there the supply was held to be of educational ma- http://www.financeandtaxtribunals.gov.uk/ terial, not of zero-rated printed materials. judgmentfi les/j8365/TC04411.pdf

Th is judgment was released on May 13, 2015. UK First-Tier Tribunal: Marketing Lounge Partner- ship Ltd v. HMRC [2015] 0219

75 THE ESTER'S COLUMN ISSUE 134 | JUNE 4, 2015

Dateline June 4, 2015 initiatives, such as the proposed Regional Compre- Th e ongoing deceleration of the Chinese economy hensive Economic Partnership between the mem- is certainly a worrying development for the world bers of ASEAN and its six FTA partners. It's quite economy as a whole, especially in the context of a remarkable transformation really, when you con- negative growth in both Canada and the US in the sider the China of Chairman Mao. fi rst quarter of the year. But I am going to attempt to put a positive spin on it, because, if nothing else, Okay, in the grand scheme of things, the approval it is forcing the Chinese Government to increase by New Zealand's parliament of the Border Process- the pace of liberalization of its foreign investment ing (Arrivals and Departures) Levy Bill wasn't the and trade framework, and the internationalization week's most gripping development. But it's worth of its currency, the renminbi (RMB). As is almost pointing out because it's yet another example of customary now, Hong Kong is acting as a facili- the propensity of governments to impose taxes on tator for many of these reforms. One example is travelers – probably because they won't be noticed the RMB Qualifi ed Foreign Institutional Investor as much as, say, a hike in income tax. However, (RQFII) scheme, which has opened the Mainland these stealth taxes can raise substantial sums in rev- equity and bond markets to off shore RMB inves- enue. In the US for example, several federal taxes tors. Another is the Hong Kong/Shanghai Stock on passenger air travel are collected by airlines, in- Connect scheme, launched on a pilot basis six cluding the domestic passenger ticket tax (7.5 per- months ago, hopefully representing another step cent on the purchase price of passenger tickets), the towards the opening up of China's equity markets domestic fl ight segment tax (USD4 per passenger to foreign investors. Th e mutual recognition of in- per domestic fl ight segment), the international ar- vestment funds in Hong Kong and China is also rival and departure tax (USD17.70 per interna- expected to commence from next month. Further- tional fl ight, or USD8.90 per fl ight between the more, China recognizes the benefi ts free trade can US and Alaska or Hawaii), and the excise tax on bring, even if it hasn't completely embraced the commercial aviation kerosene use (USD0.044/gal- idea yet, as refl ected in the Government's decision lon). Th ese taxes, which raised USD12bn in 2013, to cut import taxes on a range of consumer items are supposed to fi nance aviation infrastructure by at least 50 percent, rather than scrap them com- through the Airport Improvement Program. I say pletely as an open trading nation should do. Nev- "supposed," because these revenues disappear into ertheless, although it is often accused by its trading the US Treasury fi rst, with the airports apparently partners of not playing by the rules of world trade, facing something of a fi ght to get the money back. China is an active participant in regional free trade However, perhaps the most outrageous example of

76 a revenue-raiser masquerading as something else is bring about automatic exchange of information the UK's air passenger duty (APD). APD is intend- about bank account holders was of course hailed by ed to reduce aviation emissions, but because it is Brussels as another victory for transparency. It was charged on a per-person basis it eff ectively rewards proudly announced that this agreement will entail ineffi cient, half-empty fl ights and punishes more the passing on of not only individuals' names and effi cient full airplanes. Not that the UK Govern- addresses, but also their dates of birth, tax identifi - ment is that bothered about APD's perverse results. cation numbers, details of their bank balances, and About GBP2bn to GBP3bn is collected from APD "other" fi nancial information. In fact, just the sort of in a typical year. Oh, and in case you're wondering, stuff that the identity thieves who managed to trou- UK air traffi c (and presumably aviation emissions) ser USD50m in fraudulently claimed tax refunds has increased since it was introduced. Th e New using information stolen from about 100,000 US Zealand border levy is intended to cover the cost taxpayers would love to get their hands on. We're of the increasingly hard-pressed border protection constantly reassured by the architects of global au- force, and the Government says it is merely doing tomatic exchange of information that such infor- what countries like the UK and US do in recover- mation will be kept secure. But that's going to be ing such costs from passengers. So, it's all our fault the responsibility of not just one agency, but doz- for having the temerity of going on vacation in one ens, all over the world, and potentially this could of these countries! merely multiply the number of weak points in the system. Given the ease with which hackers seem to Depending on which side of the fence one stands, gain access to supposedly secure government and it has either been a very good week for the EU corporate networks these days, the belief that infor- and its crusade against tax avoidance and secrecy, mation exchange and storage systems will be 100 or yet another nail in the coffi n of individual pri- percent watertight is surely incredibly naïve. It's a vacy (surely we haven't got long to go now before strange age we live in isn't it? Never has personal the lid is hammered tightly shut?). Regular readers information been so valuable, but so de-valued at of this blog will know which side I stand on. Th e the same time. agreement between the EU and Switzerland to re- place the existing Savings Tax Directive pact and Th e Jester

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