A Closer Look

GLOBAL TAX WEEKLY ISSUE 102 | OCTOBER 23, 2014 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. GLOBAL TAX WEEKLY ISSUE 102 | OCTOBER 23, 2014 a closer look CONTENTS

FEATURED ARTICLES Transfer Pricing In Israel: A New Frontier Defense For Transfer Pricing: Profi ts Of A Hong Jonathan Lubick and Nimrod Jagel-Cohen, Kong Procurement Company affi liated with Economics Partners LLC 5 Dr. Alexander Voegele and Philip de Homont, NERA Economic Consulting 39 HNWIs Residency Comparison Chart M/Advocates of Law 10 Topical News Briefi ng: Playing To Win Th e Global Tax Weekly Editorial Team 43 New Developments Regarding Th e Corporate Tax Reform III In Switzerland Key Changes To Company Law In India Walter H. Boss, Poledna Boss Kurer AG 21 Padmini Khare Kaicker and Himanshu Chapsey, B.K. Khare & Co., India, an independent member Topical News Briefi ng: Defi cit. Debt. Denial! of Morison International 44 Th e Global Tax Weekly Editorial Team 28 BEPS: Undermined By Unilateralism? Stuart Gray, Senior Editor, Global Tax Weekly 29

NEWS ROUND-UP

Country Focus: Ireland 49 Budgets 53 American Firms Hail Irish Budget Announcements Italian Cabinet Approves 2015 Tax Cuts Ireland Cuts Individual Income Tax Burden Portugal's 2015 Budget Contains Corporate Tax Cut In 2015 Budget South Africa Defers Certain Budget Tax Measures Kenny: Marginal Tax Rate Will Fall To 50 Percent In 2016

International Tax Planning 55 International Trade 64 Wyden Pushes US Tax Reform As Inversion Activity Slows US Calls For Greater Japanese Ambition On TPP

AbbVie To Pull Out Of Merger With Shire WTO Chief Pushes For Trade Facilitation Pact Breakthrough Seychelles Agrees Terms Of WTO Accession 57 Country Focus: Switzerland EU Reaches Trade Deal With East African Community Switzerland To Fill Argentinian Double Tax Treaty Void

Switzerland, EU Finalize Agreement On Corporate Tax Reform TAX TREATY ROUND-UP 68 Italy, Switzerland DTA Talks Proceeding, Despite Problems CONFERENCE CALENDAR 69 Switzerland Extends Olive Branch To India On Tax IN THE COURTS 78

Compliance Corner 60 THE JESTER'S COLUMN 86 UK Taxpayers' Rights Under Siege, Says CIOT President Th e unacceptable face of tax journalism

European Commission Reports On Progress To Cut Red Tape

UK Tax Gap Widens

Austria Given Extra Year To Automatically Exchange Tax Data

For article guidelines and submissions, contact [email protected] FEATURED ARTICLES ISSUE 102 | OCTOBER 23, 2014

Transfer Pricing In Israel: A New Frontier by Jonathan Lubick and Nimrod Jagel-Cohen, affi liated with Economics Partners LLC

Contact: [email protected] ; Tel: (+972) 9-772-4233

Transfer pricing controversy cases being examined international consensus on many of these issues, at all levels by the Israel Tax Authority ("ITA") have many of the cases under transfer pricing examina- risen over the past two to three years, while the ITA's tion by the ITA have become protracted; however, ability to settle these cases with multinational com- it must be noted that some of these cases are settled panies appears to be an increasingly more diffi cult in the normal examination process. A review of and protracted process. One of the bases for the in- some of the leading transfer pricing examination crease in ITA transfer pricing examination cases is issues which multinational corporations are facing the relatively recent issuance of its transfer pricing in Israel is highlighted herein, together with a brief regulations and its attendant circular (2009), the review of specifi c ITA approaches to various issues obligation to fi ll in a special tax form for transfer relating to transfers of intangibles. pricing purposes that requires itemization of inter- company transactions (Form 1385, 2008), and a Israel Start-Up Background circular on business conversions in the high tech- Prior to highlighting the contentious transfer pric- nology sector (2010). Further, with Israel's entry ing issues under examination in Israel, a brief review into the OECD in 2010, the ITA's transfer pricing of the economy itself is provided as background that department in particular has relied on the resourc- forms a basis on which transfer pricing examinations es provided by the OECD regarding training and are conducted. Many articles, as well as a book, have audit procedures to enable itself to gain the tools been written, documenting the Israeli economy's necessary to perform transfer pricing examinations. entrepreneurial nature and its success in the creation of start-up companies. A recent article published on- On the examination level, given the large num- line by Forbes notes: "Israel, it turns out, is quite good ber of mergers and acquisitions ("M&A") of Is- at coming up with creative ideas, starting up compa- raeli-based companies, some of the more sensitive nies, raising early stage funding, and exiting these small transfer pricing issues with respect to intangibles companies [less than USD100m]." 1 By contrast, what are coming to the forefront. Due to the lack of Israel has yet to achieve is the creation of a growing

5 number of larger multinational entities which do generally speaking, from the success of the entire not seek exits and whose base remains in Israel. Th e Israeli entrepreneurial economy. However, it must same Forbes article noted above highlights this fact: be noted that there is never a guarantee that the "What Israel hasn't demonstrated is that it can build actual buy-out itself becomes a success for the ac- bigger, lasting fi rms." quiring entity.

Herein also lies one of the primary issues which the Th e issuance of the business conversion circular in Israeli government and the ITA are confronting; 2010 was a means to enable the ITA to not only many of these Israeli start-up companies have not tax entities which are acquired and where there is been taxpayers as they are still in the business build- therefore a deemed transfer of intangibles, but to ing stage. Th eir business, like that of many world- also provide the framework for taxing Israeli enti- wide start-up companies, has focused on creating a ties which perform a business restructuring from viable technology/intellectual property ("IP") base within when there is no distinct exit. and beginning to commercialize their product. As a result, the entire business usually records losses Israel's Transfer Pricing Background during this start-up period. Further, a signifi cant And Examination Activity number of M&A exits have, historically, been re- Th e ITA transfer pricing department, since the is- lated to Israeli entities whose product may not have suance of transfer pricing regulations, has worked been completely tested in the market and whose internally within the ITA itself to educate tax ex- market has yet to be eff ectively commercialized. aminers about transfer pricing. Th e department Th ese entities never achieve positive profi ts, mean- is based in Tel Aviv and works with local offi ces ing that they are often not paying income taxes to throughout the country on cases which it deems as the respective economies/governments in which not being dealt with on arm's length terms. More they operate (e.g. , Israel in this article). One im- and more frequently, it is seen that for any Israeli petus for the substantive number of M&A deals in company with cross-border transactions, transfer Israel is that these entities off er a potentially prom- pricing documentation is requested by the ITA re- ising technology, and a larger multinational has the gardless of the size of the transactions. Moreover, it fi nancial wherewithal to fund continued research is not always the case that the documentation is sent and development (R&D) changes and improve- to the transfer pricing department for review; occa- ments and, more importantly, to substantially in- sionally, the local examiner him/herself reviews the vest in the commercialization of the product. For work and asks questions. However, on more sub- the ITA, an M&A buy-out of an Israeli company stantive cases, the ITA transfer pricing department is its opportunity to receive taxes from the "suc- becomes involved. On issues pertaining to valua- cessful" Israeli entrepreneurial entity and, more tion, the transfer pricing department is assisted by a

6 specifi c department within the ITA which handles many cases in which the Israeli entity and its high- valuations. One of the issues that the ITA is slowly level experienced workforce is granted or grants overcoming is its general lack of transfer pricing stock options. A special Israeli tax law allows for the experience – regulations have only been in place entity and its employees to choose for the treatment since 2007. In particular, on issues pertaining to of these options under a capital gains regime. Based the valuation of intangibles, pure transfer pricing on this treatment, the employee's income derived examinations are, in general, more recent.2 from the allocation of options to shares of the company is usually not subject to tax at the time of al- With respect to business restructuring issues, few of location, but will be subject to tax upon the earlier the cases are settled at the fi rst stage of examination. to occur of: (i) the sale of the options/shares by the As a multinational enters into the second stage of trustee; or (ii) the transfer of such options/shares examination in a business restructuring issue, if clo- from the trustee into the name of the employee. sure is not reached there are two standard options Th e employee's aforesaid income is deemed a capi- available: (1) competent authority; or (2) tax court. tal gain (and not employment income) and is sub- Th ough the competent authority procedure can be ject to a capital gains tax at the rate of 25 percent. applied for, a tax court date will still be established. Concurrently, the cost/value of the employee's op- Th ere are, in fact, more than a few competent au- tions is not a deductible expense from a corporate thority cases being handled by the ITA together with perspective. Herein lies the transfer pricing issue. a foreign jurisdiction at the present time. To under- stand the ITA's approaches, two of the major issues Th e ITA has presently adopted an approach under docketed for court, and the approach(es) taken by which the value/cost of the employee stock options the ITA in said cases, are elaborated upon below. needs to be included in the R&D cost base on which an arm's length markup is applied. Th e re- Signiﬁ cant ITA Approaches/Issues sult is that the income recorded by the Israeli con- One major issue presently being handled in the tax tract R&D services company includes not only the court pertains to stock options. Th e stock options salaries and attendant expenses plus an arm's length case in Israel, as contrasted with what is being de- markup, but also the stock options' costs plus the bated on abroad (e.g. , the US), is that the ITA's arm's length markup. However, as was explained debate does not pertain to the inclusion of stock above, the stock options' value/cost is not included options in cost-sharing agreements. Rather, the de- as a deductible expense. Th is issue is shown in the bate centers on the inclusion of stock options in example below, in which an Israeli contract R&D traditional R&D cost-plus agreements – an Israeli services center works according to a cost plus 10 contract R&D services entity performing activities percent agreement, and where it is assumed that for a related foreign entity. For example, there are there are only salary expenses in the company.

7 Example of intangibles. One type of transfer of intangible ideas is cost sharing. Th e idea of cost sharing is 1 #3 + (#3 × 10%) Revenues (not USD550,000 including options) relatively new in Israel, and given that the Israe- 2 (#3 + #4) + ((#3 Revenues (includ- USD605,000 li market itself is relatively small, no cost sharing + #4) × 10%) ing options) agreement could be deemed as reasonable if such 3 Salaries - R&D USD500,000 Services an agreement were allocated based on geographic 4 Options - R&D USD50,000 regions and under which the Israeli entity received Employees (not only Israel as its market. Further, it is often the deductible) 5 #1 - #3 Profi t without USD50,000 case that the Israeli start-up entity has itself en- Options tered into many geographic regions; thus, entering 6 #5/#3 Profi t Percent 10% into a cost sharing agreement based on geographic with Options regions is deemed to be a transfer of intangibles, 7 #2 - #3 Profi t with USD105,000 Options and the idea of cost sharing on a geographic basis 8 #7/#3 Profi t Percent 21% therefore becomes problematic. with Options

Other transfer of intangibles structures, such as the As can be seen in this example, according to the license of an intangible for its commercialization ITA's position, under which the cost of the stock and continued development by a foreign related options to Israeli employees needs to be included entity, or the transfer of the intangible itself, are the in the cost plus charge to the foreign contracting ITA's focus at present. In both of these instances, entity, a traditional 10 percent markup (line 6) in the value of the intangible is at stake. Th e ITA's fact becomes a 21 percent markup (line 8). Th e general stance, based on economic work that it per- Israeli R&D services entity is being taxed on the forms, argues that the total value of an acquisition value/cost of the options, but is not being allowed represents the value of the intangible less a few dis- to take these costs as a corporate deduction. Th ere tinct local assets. Th e ITA in its valuation will de- is at least one of these cases known to have begun to duct the value of the Israeli workforce, as well as the be heard in court already, and there are more such value of any related party selling/marketing entities, cases known to be docketed for court. though these values themselves are often not material. If there is any "synergy" within the purchase A second issue under controversy pertains to the price, it is attributed completely to the Israeli IP, transfer, or deemed transfer, of intangibles. Wheth- i.e. , the transferred intangible. As such, most all of er an Israeli company is acquired, or merely decides the goodwill in an acquisition pertains, according to restructure its business, the ITA often asserts to the ITA, to the developed Israeli intangible(s). that there is a transfer of assets, and, in particular, Th is is likely the most important issue that will be

8 Conclusion debated in court, i.e. , whether goodwill, and in particular synergies, is indeed a cross-border trans- Israel, as a leader in entrepreneurship and the cre- ferable asset. Some of the interesting issues arising ation of start-up entities, is, from a tax perspective, in these cases are derived from the particular corpo- entering the fi eld of transfer pricing through some rate organizational structures set up by Israeli enti- of the most complicated transfer pricing issues. ties. For example, there are many cases in which the Given the ITA's relatively recent passage of transfer corporate parent company established is US-based, pricing legislation and the issues that it is now fac- while the Israeli entity is a subsidiary which devel- ing, quick resolution of such issues may be some- ops the IP. For these early "Israeli" start-up enti- what protracted. At the same time, as these issues ties, it is often the case that under this structure are settled, it could very well be that Israel, a rec- there will be a small amount of US-based employ- ognized start-up nation, also becomes a recognized ees. Th ese employees, however, may be performing infl uence in some of the more complicated transfer important activities such as business development pricing issues. or overall corporate strategy, including strategies for further funding or an exit. Upon acquisition, E NDNOTES it is therefore the US entity which is acquired. 1 See, http://www.forbes.com/sites/zackmill- Th e question then arises whether a portion of the er/2013/12/17/from-start-up-nation-to-scale-up- "goodwill," per the accounting defi nition, should nation-israel-circa-2014/ be attributed to the parent US company, as it was 2 There have historically been examinations of deemed the entity acquired and through which all of the IP transfers, though the formal recognition of transfer funding was provided. As stated earlier, these issues pricing regulations was not normally taken into ac- are at the forefront of transfer pricing debates, and count, as it has taken time for these regulations to due to the Israeli economy's success in the fi eld of become known by the ITA. start-up exits and the regulatory basis that now exists in Israel, many of these high-level transfer pricing issues are beginning to be docketed and heard in the Israeli tax court.

9 FEATURED ARTICLES ISSUE 102 | OCTOBER 23, 2014

HNWIs Residency Comparison Chart by M/Advocates of Law

Contact: [email protected] , Tel. +971 (0) 4 295 57 37

M/Advocates of Law is a boutique law fi rm primarily providing for the needs of successful individuals and wealthy international families. Headquartered in the UAE but with a proud Swiss heritage, we have a substantial track-record assisting clients with multi-juris- no previous traditions of catering for wealthy for- dictional interests in securing an alternative residence eign residents have resorted to creative measures and domicile. Bringing together our tax and private to attract high net worth individuals (HNWIs) wealth expertise, along with the broad capabilities of through attractive investment schemes coupled our sister fi duciary fi rm, we can support our clients in with a residency, often with an emphasis on non- all aspects of their immigration. M/Advocates of Law EU nationals. is operated in association with Ali Ibrahim Advocates. Th e programs introduced by Spain, Portugal and Introduction Greece – providing special residency and/or tax sta- Below we present the Firm's annual HNWIs Resi- tus granted to non-EU nationals – proved particu- dency Comparison Chart. In jurisdictions where larly popular. the Firm does not maintain a presence, we did rely on the precious input of trusted correspondent Elsewhere, jurisdictions where annual tax fi lings are fi rms. Many took the time to provide detailed and not mandatory – e.g. , Monaco, UAE and the Ba- extensive comments. May they be hereby whole- hamas – drew candidates for relocation at an above heartedly thanked for their precious collaboration. average rate. While we have used our best eff orts to ensure that all the gathered information contained in the Chart On the other hand, more traditional jurisdic- should be accurate, we recommend that competent tions for HNWIs residency such as the UK, Sin- professional advice be sought in any case. gapore and Switzerland continued to tighten up their respective regimes. In the case of Switzer- What's New? land, the abandoning of the concept of lump- With the fi nancial crisis lingering in most of west- sum taxation is being submitted to a popular ern and central Europe, many jurisdictions with vote in November 2014.

10 Methodology Tax basis ( e.g. , worldwide income, income remit- Highlighting the features of 17 jurisdictions where ted to the jurisdiction, income generated in the HNWIs may consider relocating for tax purpose, the jurisdiction); present Chart does not constitute an exhaustive list. Costs of issuance and renewal of residence permit; Rather, it constitutes an eminently subjective selection of Costs of ongoing substantiation (e.g. , cost of one- the jurisdictions which, in the Firm's opinion, constitute bedroom fl at); the best all-round propositions for HNWIs relocation. Location and international accessibility; Climate; Th e Firm did select, compile and consider the fol- Political stability; lowing 22 factors: General quality of life; General easiness to obtain a residence permit; Cultural off ering; Quotas on the number of residence permits is- Security; sued yearly; Cleanliness; Requirement to obtain a fi scal quitus from the Presence of international schools; foreign country; Presence of internationally recognized fi nancial, Mandatory interview; presence during applica- legal and tax services providers. tion process; Time frame for completion of the procedure and Besides, are only refl ected those jurisdictions to issuance of residence permit; which at least one of the Firm's clients did relo- Requirement to eff ectively reside in the country; cate over the past three years. Where a way of se- Requirements in respect of time spent annually curing a Residence Permit exists but its practical in the jurisdiction ("day-counting"); use was marginal over the same time period, it was Validity of residence permit; renewability of resi- not considered at all. In this respect, the Chart is a dence permit; true refl ection of the Firm's practice in the fi eld of Annual tax fi lings; HNWIs relocation. Level of taxation on individuals (income tax, wealth tax, gift tax, inheritance tax, capital gains tax), minimal tax liability/lump-sum tax;

11 Europe (1) Portugal Spain Gibraltar United Kingdom Main advantages Marginal minimum stay No minimum stay. No minimum stay. Competitive tax system. requirement. No capital gains, wealth, No minimum investment. Tax incentive schemes. No capital gains tax, except gift and inheritance tax. No capital gains, wealth, Relatively low capital gains on sale of local business No tax fi ling. gift and inheritance tax. tax. property and real estate. Free access to all Schen- No taxation on interest on Facilitated access to all No tax fi ling. gen states. savings. Schengen states. Free access to all Schengen Comprehensive tax Good standard of living. Comprehensive tax treaty states. treaty network. Pleasant climate. network. Comprehensive tax treaty Good standard of living Good standard of living and network. and health care facilities. health care facilities. Good standard of living and Pleasant climate. Politically stable and secure health care facilities. environment. Pleasant climate. Accessibility. Key conditions in Real estate investment in Real estate investment Real estate investment in Investment of a min. value practice Portugal of a min. market in Spain of a min. market Gibraltar; of GBP1m, GBP5m or value of EUR500,000; value of EUR500,000; or GBP10m into qualifying UK or or Subscribe to a tenancy investments. Investment of a min. value Investment of a min. agreement; of EUR1m in Portugal (in- value of EUR2m in Span- and cluding purchase of shares ish public debt; Applicant to evidence in companies); or wealth in excess of or Investment of a min. USD3.2m. Creation of 10 job positions value of EUR1m in Span- in Portugal. ish enterprises; or Deposit of a min. value of EUR1m with Spanish fi nance entities. Quotas on number None None None None of issued residence permits Mandatory inter- No No No No view Presence of appli- Required to undertake fi n- Required Not required for initial ap- Not required cant during the ap- gerprinting. plication. plication procedure Required 2–3 weeks following initial application. Time frame for 5–8 weeks 5–8 weeks 1 month 4–8 weeks completion of procedure and issuance of residence permit Validity & renew- Valid for 1 year – renewable Valid for 1 year – renew- Granted for an indefi nite Valid for 3 years – renewability of residence for up to 2 years. able for up to 2 years. period; able for 2 years. permit After 5 years, a permanent After 5 years, a perma- but After 5 years, a permanent residence can be applied nent residence can be To be endorsed by Gibral- residence can be applied for. for. applied for. tar Finance Centre every three years.

12 Europe (1) Portugal Spain Gibraltar United Kingdom Required legal pres- De lege: not required. De lege: not required. De lege: not required. De lege: not required. ence: In practice: 7 days in the In practice: one day each In practice: recommend- In practice: recommendable "Day counting" fi rst year and 14 days in year to qualify for per- able not to spend more not to spend more than 183 the subsequent period of 2 manent residence. than 183 days in another days in another jurisdiction. years required to qualify for jurisdiction. 180 days required to qualify permanent residence. for permanent residence. Costs of one-bed- Rental: USD16,000/year. Rental: USD8,500/year. Rental: USD18,000/year. Rental: USD46,700/year. room fl at (70m2) Purchase: A villa (250m2) Purchase: USD187,000. Purchase: USD434,000. Purchase: USD545,000. can currently be bought for the equivalent of the real estate investment min. market value. Taxation in a nutshell Annual tax fi lings: none Annual tax fi lings: none Annual tax fi lings: manda- Annual tax fi lings: manda- under the special HNWI under the special HNWI tory. tory. scheme. scheme. Income tax: liable to Income tax: min. of 20%. Income tax: not applicable Income tax: not appli- income tax on the fi rst Capital gains tax: max. of to persons benefi ting from cable to persons ben- USD102,000 of assessable 28%. the special HNWI scheme. efi ting from the special income; min. tax liability: Wealth/net worth tax: none. Capital gains tax: none, HNWI scheme, except USD28,000. Gift tax: yes, but with pos- except on sale of local for non-residents where Capital gains tax: none. sible exemption. business property and real no double taxation is in Wealth/net worth tax: Inheritance tax: none for an estate. place. none. estate up to a max. value Wealth/net worth tax: none Wealth/net worth tax: Gift/inheritance tax: none. GBP325,000; 40% on any at the federal level; wealth none. value beyond the threshold. tax levied at local level on Gift/inheritance tax: Special regime available to real estate. only if deceased person/ so-called "Resident non- Gift/inheritance tax: 10% giver or benefi ciaries are domiciled" individuals: only stamp duty; spouses, de- resident in Spain for tax UK source income and scendants and ascendants purposes or inheritance/ foreign income remitted are exempted. gift of Spanish assets. to the UK is subject to tax. Additional tax: 0.8% on gift None if benefi ciary is After 7 years, remittance of real estate. lineal ascendant/descen- basis charge (GBP30,000 dent of deceased person/ to GBP50,000 depending giver in certain commu- on the number of years of nities (e.g., Madrid). residence).

Europe (2) Belgium Netherlands Switzerland Monaco Main advantages No minimum stay. Competitive tax system. No minimum stay. Total exemption from in- No minimum investment. No taxation on foreign No need to declare world- come, capital gains, wealth No wealth tax. income. wide income and assets and local tax. Relatively low to nil gift Reimbursement of school under annual lump-sum No direct inheritance tax, taxes. fees for children – tax taxation regime. except for assets located in Free access to all Schengen free. No capital gains tax, ex- the country. states. Good standard of living. cept on sale of real estate. Free access to all Schengen Comprehensive tax treaty Free access to all Schen- Free access to all Schen- states. network. gen states. gen states. Good standard of living and Good standard of living and Comprehensive tax treaty health care facilities. health care facilities. network. Pleasant climate. Politically stable and secure Good standard of living Politically stable and secure environment. (See footnote 1). and health care facilities. environment. Politically stable and secure environment.

13 Europe (2) Belgium Netherlands Switzerland Monaco Key conditions in Investment of a min. value Employment contract of Lump sum taxation – Real estate investment in practice of USD130,000 in Belgium; at least 12 months and where available; Monaco; and applicant to evidence or or Applicant to dispose of proof of domicile in Employment contract for Subscribe to a tenancy USD600,000 (suffi cient Netherlands and ability at least 12 months; agreement; means of subsistence or to sustain one's living; or and the ability to obtain those or Proof of self–employment. Reference from a bank in means through work and Investment of a mini- In case of no professional Monaco confi rming that health insurance). mum EUR1.25m in the activity, proof of ability the applicant has suffi cient Dutch economy. to sustain one's living as funds available to live in the well as existence of health Principality. insurance. Quotas on number None None EU/EFTA citizens: none. None of issued residence All others: yes for fi rst time permits applicants. Mandatory inter- Yes, for non EU/EFTA citi- No No Yes view zens. Presence of ap- Required for initial applica- Not required Not required Required for initial applica- plicant during the tion and collection of resi- tion and for interview. application proce- dence permit. Not required for collection dure of residence permit. Time frame for 4-6 weeks 3-5 weeks EU/EFTA citizens: 2-4 EU/EFTA citizens: 9-10 completion of pro- weeks. weeks. cedure and issu- All others: 2-4 months. All others: depending on ance of residence the French Embassy of their permit country of living. Validity & renew- EU/EFTA citizens: valid for Valid for 5 years – renew- EU/EFTA citizens: 5 years Residence permit 1-3: valid ability of residence 5 years – after 5 years of able for up to 5 years (B permit). After 5 years, for 1 year and renewable permit continuous residency, a a permanent residence (C yearly. permanent residence can be permit – with no limit on Residence permit 4-6: valid applied for. validity) can be applied for. for 3 years and renewable All others: valid for 3 years All others: valid for 1 year – for the same term. (limited stay) or 5 years (un- annual renewal until C per- limited stay) – renewable for mit can be applied for (12 same term until permanent years initial period, based residence permit is issued. on the canton and commune of the legal domicile chosen different additional regulations may apply). Required legal De lege: not required. De lege: not required. De lege: minimum of 180 De lege: required: 3 presence In practice: 183 days is rec- In practice: Netherlands days per year. months. Monaco must be "Day counting" ommendable. should be the main "cen- In practice: (can be less if the main home to maintain tre of interests." special personal situation tax residence status. applies), importance of the In practice: 183 days is rec- "centre of interests" criterion ommendable. in order not to arouse scrutiny from local authorities. Authorities may ask for evidence of regular presence. Costs of one Bed- Rental: USD11,500/year. Rental: EUR15,600/ year. Rental: USD40,000/year. Rental: room fl at (70m2) Purchase: USD252,000 (in Purchase: USD391,000. Purchase: USD800,000. USD57,000–USD80,000/year Brussels). Purchase: USD3.4m–USD5.4m.

14 Europe (2) Belgium Netherlands Switzerland Monaco Taxation in a nut- Annual tax fi lings: mandatory. Annual tax fi lings: man- Annual tax fi lings: manda- Annual tax fi lings: none. shell Income tax: dividends, interest datory. tory. Income Tax: none (French and royalties, max withhold- Income Tax: only on in- Income tax: levied at fed- citizens are taxed in France). ing tax of 25%, with exemp- come generated in Neth- eral, cantonal and munici- Capital gains tax: none tions subject to 10%-15%); erlands; tax free payment pal level. (French citizens are taxed in income subject to progressive of 30% for highly skilled Capital gains tax: none, ex- France). tax rates (max. tax rate of migrants. cept on sale of real estate. Wealth/net worth tax: none. 50% to be increased with lo- Capital gains tax: none Wealth/net worth tax: Gift/inheritance tax: on cal surcharges (average 6%)). for foreign income, with levied at the cantonal and Monaco assets only: 0-16% Capital gains tax: none, except exemptions on Dutch municipal level. on Monaco assets (Spouse, for property transaction companies and real Gift/inheritance tax: based ancestors or descendants gains on specifi c investment estate). on the canton of the do- – exempted, brothers and products, gains on transfer Wealth/net worth tax: micile chosen, not appli- sisters – 8%; uncle, aunts, of substantial shareholdings none cable for all cantons. nephews, nieces – 10%; (triggering 15%-25%); capital Gift/inheritance tax: 10-40%, (See footnote 2). unrelated parties – 16%). gain derived from a profes- only if deceased person/giver sional activity is taxable. is a resident in Netherlands. Wealth/net worth tax: none. Gift tax: 0 to 80% (Flemish and Walloon region; 3-80% Brussels region. Inheritance tax: 3-65% (Flem- ish region), 3-80% (Brussels and Walloon region) Indirect tax – 12.5% sales tax (transfer of immovable property) for Brussels and Walloon region or 10% Flanders, except for new property.

Europe (3) Malta Hungary Greece Main advantages No minimum stay. No minimum stay. No minimum stay. No wealth, gift and inheritance tax. No minimum investment. Free access to all Schengen states. Free access to all Schengen states. No capital gains tax under certain Comprehensive tax treaty network. Comprehensive tax treaty network. circumstances. Good standard of living and health Good standard of living and health No wealth, gift and inheritance tax. care facilities. care facilities. Free access to all Schengen states. Pleasant climate. Pleasant climate. Comprehensive tax treaty network. Politically stable and secure environment. Key conditions in Real estate investment in Malta (for Investment of a minimum value Real estate investment in practice non-EU/EFTA citizens, min. value of of EUR120,000 in a governmental Greece of a min. market value of EUR275,000 in Malta, EUR220,000 in investor residency bond program EUR250,000; Gozo/South of Malta); (returned to the investor after 5 or or years with no accrued interest). Subscribe to a tenancy agreement Subscribe to a tenancy agreement (for of at least 10 years with a min. to- non-EU/EFTA citizens, annual rental tal contract value of EUR250,000; of not less than EUR9,600 in Malta, or EUR8,375 in Gozo/South of Malta). Subscribe to a 10-year lease of hotel accommodation or furnished tourist accommodations (houses) in tourist accommodation complexes with a min. total value of EUR250,000.

15 Europe (3) Malta Hungary Greece Quotas on number None None None of issued residence permits Mandatory inter- No No No view Presence of ap- Not required Required for initial application (pos- Not required plicant during the sible through consulate abroad). application procedure Time frame for 3–4 weeks 2 weeks 4–6 weeks completion of procedure and issuance of residence permit Validity & renew- HNWI permit: granted for an indefi - 5 years – renewable for up to 8 years Non-EU/EFTA citizens: up to 5 years ability of residence nite period. (if the applicant does not apply for – renewable up to 5 years. permit Resident permit (mandatory for hold- citizenship after the initial 5-year ers of HNWI permit): valid for 1 year term). and renewable yearly. Required legal De lege: not required. De lege: not required. De lege: not required. presence: In practice: recommendable not to In practice: recommendable not to In practice: recommendable not to "Day counting" spend more than 183 days in another spend more than 183 days in anoth- spend more than 60 days every 3 jurisdiction. er jurisdiction. months in another jurisdiction. Average costs of Rental: USD14,030/year. Rental: USD5,500/year. Rental: USD11,000/year. one-bedroom fl at Purchase: for the equivalent of the Purchase: USD235,200. Purchase: USD133,000. (70m2) real estate investment min. market A two-bedroom villa (100m2) in value. the capital can currently be bought for the equivalent of the real estate investment min. market value. Taxation in a nut- Annual tax fi lings: mandatory. Annual tax fi lings: mandatory. Annual tax fi lings: mandatory – but shell Income tax: min. tax liability for non- Income tax: none, unless applicant only for property tax or income tax EU/EFTA citizens: USD31,000. 15% on physically resides in Hungary for in the case there is rental income any income remitted to Malta from more than 183 days within 12 con- from tenanted properties. foreign source; 35% on any income secutive months or conducts busi- Income tax: 20% on income from arising in Malta. ness in Hungary. dividends and shares' royalties; Capital gains tax: none for foreign Capital gains tax: none (under special 15% interest on income from de- capital gains whether or not remitted circumstances). posits; 11% on rental income up to to Malta; fl at rate 12% otherwise. Wealth/net worth tax: none. EUR12,000 and 33% thereinafter. Wealth/net worth tax: none. Gift/inheritance tax: none. Capital gains tax: 15% with some Gift/inheritance tax: none. exemptions. Wealth/net worth tax: none. Gift/inheritance tax: 0%–10% depending on the proximity of rela- tives to the deceased and the value of asset inherited. Property tax: ranging from 0% to 2% subject to the total value of the asset.

16 Europe (4) Bulgaria Latvia Cyprus Main advantages No minimum stay. No minimum stay. No minimum stay. Low capital gains, gift and in- All foreign income exempted No capital gains, wealth, gift heritance tax. even if remitted to Latvia. and inheritance tax. No wealth tax. Free access to all Schengen To join Schengen states by Deductions and allowances. states. 2015. Free access to all Schengen Comprehensive tax treaty net- states. work. Comprehensive tax treaty net- Pleasant climate. work. Key conditions in practice Investment of a min. value of Constitution of a company Real estate investment in EUR180,000 in Bulgaria; (including purchase of shares Cyprus of a min. market value and in companies) of a min. market of EUR300,000 (plus VAT) and Applicant to dispose of EUR1m; value of USD47,803; evidence of payment for at least or or EUR200.000 (not including Investment of a min. value of Real estate investment in Lat- VAT); EUR511,292 in a governmental via of a min. market value of and bond portfolio (returned to the USD97,476; Applicant to maintain a per- investor after 5 years with no or sonal bank account in Cyprus accrued interest). Investment in Latvia of a min. (EUR30,000 blocked for 3 value of USD382,424. years); and Applicant to evidence annual income of EUR30,000 (plus an additional EUR5,000 for each dependent person under the age of 18). Quotas on number of issued None None None residence permits Mandatory interview No No, with possible exceptions. No, with possible exceptions. Presence of applicant during the Required for collection of ap- Required for visa processing and Not required. application procedure plicant's pre-approved residency collection of residence permit. visa; another visit is required if main applicant applying for dependents. Time frame for completion of 6–9 months 2–3 months 2 months procedure and issuance of residence permit Validity & renewability of resi- 5 years – renewable for up to 5 Valid for 5 years – to be regis- Granted for an indeﬁ nite period dence permit years (if the applicant does not tered yearly. but subject to the holder visit- apply for citizenship after the After 5 years, a permanent resi- ing Cyprus at least once every 2 initial 5-year term). dence can be applied for. years – renewable after 5 years. Required legal presence: De lege: not required. De lege: not required. De lege: not required. "Day counting" In practice: recommendable not In practice: recommendable not In practice: 1 day every two to spend more than 183 days in to spend more than 183 days in years + recommendable not to another jurisdiction. another jurisdiction. spend more than 183 days in another jurisdiction.

17 Europe (4) Bulgaria Latvia Cyprus Average costs of one-bedroom Rental: USD4,750/year. Rental: USD8,400/year. Rental: USD9,500/year. fl at (70m2) Purchase: USD98,500. Purchase: USD223,000. Purchase: USD206,220. A three-bedroom fl at (150m2) in the capital can currently be bought for the equivalent of the real estate investment min. market value. Taxation in a nutshell Annual tax fi lings: mandatory. Annual tax fi lings: mandatory. Annual tax fi lings: mandatory. Income tax: 10% on income Income tax: only on income gen- Income tax: none; min. tax li- generated in Bulgaria (non-resi- erated in Latvia. ability for non-EU/EFTA citizens: dent individuals special regime); Withholding tax: only payments USD26,629. 10% on worldwide income if made to non-residents. Capital gains tax: none, except applicant physically resides in Capital gains tax: taxed as rev- gains arising from the sale of Bulgaria for consecutive months enue gains; 2% on sale of the real property located in Cyprus or conducts business in Bulgaria. property or real estate company or shares in companies owning Dividends: none. shares. Cypriot real estate (20%). Capital gains tax: capital gains Wealth/net worth tax: none. Wealth/net worth tax: none. arising from the sale of real prop- Gift tax: 15% if the gifts value Gift/inheritance tax: none. erty generally are taxable (but exceeds EUR1,425 and the ben- certain exemptions may apply). efi ciary is not lineal ascendant/ Wealth/net worth tax: none. descendent of deceased person. Gift/inheritance tax: 0.4%–6.6% Inheritance tax: 15% only on the and levied at the municipal level. royalties that are paid to the heir.

Rest of The World (1) UAE Mauritius Singapore Main advantages No minimum stay. No minimum stay. All foreign income is exempted Total exemption from income, No capital gains, wealth, gift even if remitted to Singapore. wealth, gift and inheritance tax. and inheritance tax. No capital gains, wealth, gift and No tax fi ling. Comprehensive tax treaty net- inheritance tax. Comprehensive tax treaty network. work. Comprehensive tax treaty network. Accessibility. Yearly sunny climate. Good standard of living and health Yearly sunny climate. Good standard of living. care facilities. Good standard of living and Politically stable and secure health care facilities. environment. Secure environment. Key conditions in practice Constitution of a company; Occupation permit (inves- Investment through the Global or tor, professional and self-em- Investor Programme ("GIP") of a Real estate investment in ployed); min. value of USD2.5m in a new Dubai of a min. market value of or or existing foreign business op- USD360,000. Transfer of bank account (annu- eration engaged in one or more al amount of USD40,000 initial specifi ed industries. transfer); or or Investment of a min. value Real estate investment of a min. USD2.5m in an approved GIP market value of USD500,000 fund that invests in Singapore- in Mauritius through Integrated based companies. Resort (IRS) or Real Estate (RES) Applicant to produce 3-year au- Scheme. dited fi nancial statement of his/ her company, and for the company to have an annual turnover of at least SGD50m. Quotas on number of issued None None None residence permits

18 Rest of The World (1) UAE Mauritius Singapore Mandatory interview No Required for initial application of Yes occupation permit. Not required for permanent residence visa obtained through the acquisition of property or real estate. Presence of applicant during the Not required for initial application. Required for occupation and Required for interview. application procedure Required for visa processing and retired non-citizens permits. Not required otherwise. collection of residence permit. Others: not required. Time frame for completion of 3 weeks (plus 4–6 weeks for the Occupation and retired non- 4–6 months for in principle ap- procedure and issuance of resi- constitution of the company/ citizens: 2–3 weeks. proval. dence permit acquisition and registration of Others: 2 months real estate). Validity & renewability of resi- Valid up to 3 years – renewable Occupation permit: valid up to 3 Valid up to 5 years – renewable dence permit for up to 3 years. years – renewable. subject to compliance with cer- Retired non-citizens: valid up tain specifi ed conditions. to 3 years – renewable. After 3 years, a permanent residence can be applied for. Residence permit: valid until permit holder sells his/her IRS or RES. Permanent residence: valid for 10 years – renewable. Required legal presence: De lege: not required. De lege: not required. De lege: required (no specifi c period). "Day counting" In practice: 1 day every 6 In practice: recommendable not In practice: the 183 days period months + recommendable not to spend more than 183 days in is for the purpose of determining to spend more than 183 days in another jurisdiction. whether one is a "tax resident," another jurisdiction. not to determine "residency." Average costs of one-bedroom Rental: USD12,000– Rental: USD4,500/year. Rental: USD30,000/year. fl at (70m2) USD25,000/year. Purchase: USD227,500. Purchase: USD1.1m. Purchase: USD300,000. A villa (500m2) in Port Louis can currently be bought for USD350,000. Taxation in a nutshell Annual tax fi lings: none. Annual tax fi lings: mandatory. Annual tax fi lings: mandatory. Income tax: none. Resident Income Tax: 15%. Income tax: up to 20% on income Capital gains tax: none. Capital gains tax: none. generated in Singapore; none on Wealth/net worth tax: none. Registration Duty Fee: foreign income even if remitted to Gift/inheritance tax: none. USD70,000 or 5% value of Singapore. IRS (whichever is higher) and Capital gains tax: none. USD25,000 for RES. Wealth/net worth tax: none. Wealth/net worth tax: none. Gift/inheritance tax: none. Gift/inheritance tax: none. Buyer stamp duty: about 3% on purchase of residential property. Additional buyer stamp duty: up to 10% for Singapore permanent residents (i.e., total stamp duty of up to about 13%), and up to 15% for other foreigners and entities (i.e., stamp duty of up to about 18%) on purchase of residential property. Additional seller's stamp duty: up to 16% of consideration or value (whichever is higher), depending on the length of the holding period for the property and whether it is residential or industrial property.

19 Rest of The World (2) Bahamas Panama Main advantages No minimum stay. No minimum stay. Total exemption from income, wealth, gift and All foreign income is exempted, even if remitted to inheritance tax. Panama. No tax fi ling. No wealth, gift and inheritance tax. Yearly sunny climate. Comprehensive tax treaty network. Good standard of living. Yearly sunny climate. Good standard of living and health care facilities. Key conditions in prac- Real estate investment in Bahamas of a min. market Constitution of a Panamanian company; tice value of USD500,000; and or Opening a bank account (initial amount of Business investment of a min. market value of USD10,000) in Panama. USD500,000. Quotas on number of is- None None sued residence permits Mandatory interview No No Presence of applicant Not required Required for initial application (5 days stay in Panama). during the application procedure Time frame for comple- Annual residence permit: 2–3 months. 6 months tion of procedure and Permanent residence permit: 6–12 months. issuance of residence permit Validity & renewability of Annual residence permit: valid for 1 year – renewable The residency is valid for a lifetime – ID card to be residence permit for periods of 1 year. renewed every 10 years. Permanent residence permit: permanent. Required legal presence: De lege: not required. De lege: not required. "Day counting" In practice: recommendable not to spend more than In practice: recommendable not to spend more than 183 days in another jurisdiction. 183 days in another jurisdiction. Average costs of one- Rental: USD47,000/year. Rental: USD12,000–USD15,000/year. bedroom fl at (70m2) Purchase: USD335,500. Purchase: USD154,000–USD168,000. Taxation in a nutshell Annual tax fi lings: none under the special HNWI Annual tax fi lings: mandatory if income derived from scheme. business activity in Panama. Income tax: none. Income tax: min. tax liability USD11,000; 15% on any Capital gains tax: none. income arising in Panama. Wealth/net worth tax: none. Capital gains tax: 10%. Gift/inheritance tax: none. Wealth/net worth tax: none. Value-added tax: approximately 7% starting 2015. Gift/inheritance tax: none.

E NDNOTES 1 In practice, USD130,000 is recommendable. 2 Tax rate will vary from commune to commune. The top rate, inclusive of federal, cantonal/communal tax is approximately 35 percent (Zug) and 45 percent (Geneva). Does not apply to HNWI eligible for lump- sum taxation.

20 FEATURED ARTICLES ISSUE 102 | OCTOBER 23, 2014

New Developments Regarding The Corporate Tax Reform III In Switzerland by Walter H. Boss, Poledna Boss Kurer AG

Contact: [email protected] , Tel. +41 44 220 12 12

1. Introduction Corporate taxes play an important role in international competition between business locations. As a result of the fi nancial crisis many jurisdictions, September 19, 2014, encompassing the latest po- particularly in the EU1 , need to raise additional tax litical decisions taken with respect to the Corporate revenue and are anxious to do so without overly Tax Reform III. Th e Federal Council has now de- harming their respective competitive positions. Th e cided to launch the consultation process on these EU is of the view that certain Swiss corporate tax draft documents. Th e consultation process enables regimes distort tax competition2 , regardless of the all interested parties, such as political or non-polit- fact that such special tax regimes have been in place ical organizations, associations, etc., to express their and accepted for decades, since foreign source prof- views on the draft law as suggested by the Federal its may under certain circumstances be taxed diff er- Council. Th e consultation process will last until ently than domestic ones. January 31, 2015. Aside from the feedback received in response to the consultation, international devel- In this general context, Switzerland has initiated a opments that will occur in the meantime will also new series of corporate tax reforms, which is cur- be taken into account as work progresses. rently the third reform package under way (Cor- porate Tax Reform III). Th e main purpose of the 2. Current Corporate Tax System corporate tax reform is (i) to maintain the tax at- Under the ordinary corporate tax regime, Swiss resi- tractiveness of Switzerland; (ii) to contribute to the dent corporations are subject to federal, cantonal international acceptance of its tax system; (iii) to and communal taxes on their worldwide income at provide legal certainty for taxpayers; and (iv) to be an eff ective rate of 11 percent to 24 percent, depend- in line with internationally accepted tax standards. ing on the canton and municipality of residence.

On September 22, 2014, the Swiss Federal Coun- Th e determination of the taxable corporate income is cil (executive power) published a draft legislative based on the principle of accounting authority, accord- text together with an explanatory report dated ing to which the taxable corporate income corresponds

21 to the income as determined in the accounting process Th ese cantonal tax regimes derogate from the prin- by commercial laws, unless corrective tax rules expressly ciple of accounting authority, because the taxable set out a diff erent treatment for tax purposes. Th e tax- corporate income of such companies is not based able corporate income is thus extremely easy to deter- on the accounting as determined by commercial mine in comparison with other States, which represents laws. However, the determination of an eventual a substantial benefi t for Swiss resident corporations. taxable corporate income under these special tax regimes is easily determinable too. Th e eff ective tax In addition to this favorable ordinary corporate tax burden under these cantonal tax regimes arrives at system, Switzerland off ers tax arrangements which between 7.8 percent up to 12 percent, depending are currently under pressure at the international on the features of each case. level, especially (i) holding, (ii) domiciliary and (iii) mixed company tax status; (iv) principal company; 2.2 Principal Companies and (v) Swiss fi nance branch. International groups frequently centralize certain core functions in one single company, a so-called 2.1 Cantonal Special Tax Regimes "principal company." Such principal company may Th e holding company tax status as well as the dom- be in charge of the supply of goods, research and iciliary and mixed company tax status exclusively development, management of stocks, sales plan- concern cantonal and communal taxes and are ning, cash management, etc . binding for all Swiss cantons. For federal tax purposes, such tax regimes are not available. With respect to the sale of goods, they are sold by foreign distribution companies in the respective ju- A holding company is characterized by its purpose risdictions, in their own name but for the account which is the holding of substantial equity participa- of the Swiss principal company. Th e activities per- tions in other corporations. Holding companies are formed by these distribution companies are deemed exempted from cantonal and communal corporate to create a foreign permanent establishment of the income tax, except for income derived from Swiss principal company. Th ese deemed permanent estab- immovable property. lishments contribute substantially to the creation of added value for the principal company and there- Companies that do not perform any commercial fore a substantial part of the principal company's activity in Switzerland and carry out management total income is allocated to them and hence not functions only (domiciliary companies) or have a taxed at the level of the principal company. Gener- minor commercial activity in Switzerland (mixed ally, the fi nal eff ective corporate income tax burden companies) are subject to reduced corporate income of the principal company amounts approximately taxation at the cantonal and communal levels. to 5 percent.

22 2.3 Swiss Finance Branches from a State with high taxation to another State Swiss fi nance branches of foreign companies may with low taxation. Depending on the fi nal BEPS benefi t from privileged taxation in Switzerland project that will be adopted by the OECD, all im- through a notional interest deduction, i.e. , the de- plicated States including Switzerland will have to duction of (theoretical) interest on equity. Th e eff ec- adapt their tax legislation to the new standards. tive corporate income tax burden in relation thereto Th erefore, the present tax incentive regarding a is generally between 2 percent and 3 percent. new license box in Switzerland as described below may well have to be modifi ed if it is not in line with 3. Main Corporate Tax Reform Proposals the criteria that will set by the OECD later on. In the frame of the Corporate Tax Reform III, the special tax regimes are expected to be replaced by Under the current license box as refl ected in the draft new tax incentives. According to the draft legisla- legislative text with respect to the Corporate Tax tive act and the explanatory report of September Reform III, the introduction of a license box should 19, 2014, the broad lines of the tax reform are ex- be mandatory for all Swiss cantons. It should how- pected to be, in particular, the following: ever not be implemented at the federal level.

3.1 License Box Th e current license box proposal is based on the fol- Th e Swiss Federal Council recommends the in- lowing principles: troduction of a so-called license box , according to Taxpayer : Corporate legal entities that are own- which royalties would benefi t from a privileged tax- ers or benefi ciaries of an eligible intangible asset ation for cantonal tax purposes. Under this new tax have the right to benefi t from the license box . In measure, certain income deriving from intellectual addition, corporate legal entities having an ex- property rights (IP) would be taxed separately from clusive license on eligible intangible assets may other corporate income and be subject to reduced also benefi t from the box. Th e exclusivity of the taxation; such IP income thus enters in a special license must at least apply on Swiss territory; " box ." Th is is also regarded as a production incen- Eligible intangible assets : Patents, supplemen- tive in the fi eld of research, development and inno- tary protection certifi cates, exclusive licenses vation (R&D&I). on a patent and the protection of the fi rst applicant in the fi eld of therapeutic products4 In the frame of the BEPS program, it is expected are eligible for the license box . Regarding the that the OECD3 will defi ne new criteria for this period during which a patent is fi led but not type of box. Th e BEPS project focuses in particular yet approved, the company does not benefi t on higher standards regarding substance, in order to from the box. However, as soon as the patent guarantee that income is not transferred arbitrarily is approved, the related tax assessments which

23 would already be in force can be re-opened and the portion of the purchase price of a prod- reviewed afterwards; uct corresponding to the trademark. After Requirements regarding the substance: In order to deducting these items, the residual amount comply with current international standards, the corresponds to the income benefi ting from company willing to benefi t from the license box the license box . must contribute to the development or improve- Amount of tax relief : Th e tax relief applies on ment of an invention underlying the intangible the calculation basis. However, a maximum of asset; 80 percent of the license box income can be tax Calculation of the relevant privileged income: exempt, which means that the license box income Th e privileged income is calculated according to is subject to a minimum taxation. Cantons are the residual method which can be described as however free to reduce the tax relief if the portion follows: of license box income is lower in a particular case. Step 1 : All income and expenses related to the fi nancing of the company are deducted from 3.2 Allowance For Corporate Equity the total income before taxes (e.g. , dividends, Th e notional interest deduction would be extended interest, etc. ); beyond Swiss fi nance branches of foreign compa- Step 2 : All income and expenses that are not nies and become available to all Swiss resident com- linked with patents or the sale of products or panies or partnerships. Th is means that in addition services based on an eligible intangible asset to the interest deduction on liabilities, an addition- are deducted and subject to ordinary taxation; al interest deduction on equity will be recognized. Step 3 : All royalties paid at arm's length by third parties (or related parties of those third Th e determining equity on which the interest de- parties) which are recorded in the fi nancial duction is calculated corresponds to the equity ex- statements (income statement) are entirely ceeding the average self-fi nancing which has to be taken into consideration in the license box . All defi ned adequately. Th e adequacy is determined in expenses related to royalties such as R&D&I, a particular case on the basis of the diff erent risks depreciation, etc. are entirely taken into con- aff ecting the assets of a company. For this purpose, sideration in the license box ; the equity is divided into two components: (i) the Step 4 : Income deriving from routine func- ground equity and (ii) the security equity. Ground tions and trademark compensation must be equity corresponds to equity which is necessary to deducted. Contract manufacturers, commis- the company on a long-term basis in order to carry sioners and distributors bearing low risks, as out its commercial activity. Th e calculation of this well as service companies carry out routine equity is based on the tax values of the diff erent functions. Trademark compensation refers to assets. Th e portion of equity exceeding the ground

24 equity represents the security equity. Th e deduction between the market value smaller than the ac- of notional interest is admitted on this equity, i.e. , counting value of liabilities). They can be con- only on the security equity. stituted according to binding rules in commercial laws which set out a maximum valuation of Regarding the notional interest rate to be de- assets or on a voluntary basis after depreciation ducted, it should be based on Swiss government or excessive provisions (admitted but not im- ten-year bond yields with a spread of 50 basis posed by commercial laws). In particular, in case points; the minimum interest rate should how- of sale of the concerned assets, hidden reserves ever be 2 percent. are deemed to be realized and represent taxable corporate income. 3.3 Lowering Capital Tax Rates At Th e Cantonal Level Th e subject here is the treatment of such hidden In addition to corporate income taxes, Swiss resi- reserves in case of modifi cation of the corporate dent corporations are subject to capital taxes at the income liability of the company. Th e Swiss Fed- cantonal and communal level. Th e rate varies from eral Council suggests that if a tax privileged com- 0.001 percent up to 0.5 percent depending on the pany turns into an ordinary taxed company, assets canton and the commune of residence of the com- can be re-evaluated up to their respective market pany, and is levied on the taxable equity. value without tax consequences. Th is principle is already applied by most of the cantons today and Th e Federal Council suggests that cantons re- recognized by the Swiss Supreme Court (Federal duce capital taxes, in particular with respect to Tribunal). As already applied today in case of de- participations, intangible assets and loans. Th is parture from Switzerland, the company will have incentive should still enhance the tax competi- to pay corporate taxes on hidden reserves which tiveness of Switzerland as a destination of choice are deemed to be realized at the date of the de- for business operations. parture. With the Corporate Tax Reform III, it is expected that companies relocating to Switzer- 3.4 Declaration Of Hidden Reserves land will be able to declare their hidden reserves, (In Particular Favorable Asset Valuation In i.e., re-evaluate tax free the assets – including Case Of Relocation To Switzerland) the goodwill – up to their market value in the fi - Companies generally have hidden reserves. nancial statements. Th is represents a tax effi cient These hidden reserves derive from an underval- measure because the amount of depreciation on uation of assets (difference between the market the re-evaluated assets will be higher and thus the value higher than the accounting value of as- tax deduction will be higher in the forthcoming sets) or an overvaluation of liabilities (difference tax periods.

25 3.5 Abolition Of Th e Swiss Issuance Stamp Duty would have the consequence of directly exempting Currently, Switzerland levies a 1 percent stamp duty from tax an entire trading arm (commercial transac- on the issuance of equity or additional capital con- tions) and therefore part of the commercial activity tributions made to the company. Th ere are a num- of Swiss banks would be exonerated. For this reason, ber of exceptions, among others restructurings and the reform sets out an exception for banks with re- since March 1, 2012, the issuance of Swiss bonds. spect to the participation exemption.

In the frame of the Corporate Tax Reform III the 4. Conclusion issuance stamp duty may be abolished. Even though the Corporate Tax Reform III is expected to lead to the abolition of various favorable 3.6 Improvement Of Th e Participation Exemption tax regimes, the tax incentives newly put in place Th e participation exemption is a corporate income will maintain the competitiveness of the Swiss tax tax relief on qualifying dividends or capital gains. system whilst at the same time providing more Currently, this tax privilege does not lead to a total transparency and international acceptance. tax exemption. In fact, the taxes due are reduced based on the ratio between net income deriving Th ere is another important tax reform proposal from qualifying participations and the total net in- currently discussed at the federal level in Switzer- come. It represents therefore an indirect tax exemp- land regarding the Swiss withholding tax, which tion of qualifying dividends and capital gains. has not been presented in the considerations afore- mentioned because it is not part of the Corporate One of the negative tax impacts of the current par- Tax Reform III. Th e tax reform procedure related ticipation exemption system is that losses carried to the Swiss withholding tax has however not yet forward reduce the tax relief; the same applies on been eff ectively launched and therefore the broad depreciations which would no longer be recognized lines related thereto are uncertain today. To sum- by tax authorities, which reduce the tax relief as well. marize this tax reform project in its present state, the debtor principle currently in force regarding One of the tax reform proposals is to modify the cur- the Swiss withholding tax would be replaced by the rent system in order to facilitate the conditions for a paying agent principle. In the present tax system, total tax exemption. In fact, under the Corporate Tax i.e., under the debtor principle, the debtor of the Reform III, it is expected that qualifying dividends tax payment ( e.g., a Swiss company in case of divi- and capital gains would no longer be included in the dend distributions) has to levy the tax. Th e paying taxable corporate income. However, regarding the agent principle enables the collection of the tax not- banking sector specifi cally, the free fl oat extension withstanding the type of the investor (individual or of the participation exemption as described above company), the residence (in Switzerland or abroad)

26 and the income (dividend, interest). Generally, the E NDNOTES paying agent takes the form of a bank or securities 1 European Union. broker/manager. Exceptions to the paying agent 2 Different programs are currently being developed principle may however be introduced in the frame by the EU in this ﬁ eld, in particular the BEPS actions of the tax reform, applying in particular to qualify- (Base Erosion and Proﬁ t Shifting). ing dividends or "bail-in bonds." 3 Organisation for Economic Co-operation and Devel- opment. 4 According to Article 12 of the Swiss Act on Therapeutic Products.

27 FEATURED ARTICLES ISSUE 102 | OCTOBER 23, 2014

Topical News Brieﬁ ng: economy, and the 2015 Budget could merely ex- Deﬁ cit. Debt. Denial! acerbate the situation. by the Global Tax Weekly Editorial Team When he assumed power in February, Renzi prom- At fi rst glance, it is hard to see how a budget promised to be bold on public spending, which most an- ising large-scale tax cuts for businesses can be at all alysts agree must be reduced. But, like some other bad. But Italy's 2015 Budget, which does just that, European leaders, Renzi now appears to have lost could cause more problems than it solves. his nerve. While some of the proposed tax cuts will be funded by spending cuts, a substantial chunk Italy has been crying out for a reduction in its tax will have to be paid for by increased debt, which is burden for a number of years, but the problem has going to push up the defi cit at a time when the EU become particularly acute in recent times as the is demanding member states reduce them. Th e Ital- economy has faltered and stagnated. CGIA of Mes- ian Government says that the defi cit will increase tre, Italy's association of sole traders and small busi- from 2.2 percent of GDP to 2.9 percent as a result nesses, said earlier this year that Italian taxpayers of the budget, and is therefore within the 3 percent eff ectively had to work for almost half the year to ceiling set by Brussels. Th at, however, is only being fulfi ll their tax obligations to the state, and the jump technically compliant with EU stability rules, and in requests from taxpayers to pay their tax debts by it is highly likely that the European Commission installments in July 2014 to a record 156,000 is will object to the Budget, at least in part. Indeed, another sign that taxes are beginning to strangle the reports are now suggesting that it is almost certain Italian economy. that the Commission, which is currently reviewing the Budget, will reject it by the end of this month. Th e 2015 Budget, which cuts taxes by around EUR18bn – the largest single tax cut in Italian It's diffi cult to know where Renzi goes from here. history according to Prime Minister Matteo Ren- He will probably be told by the EU that the tax zi – therefore sounds like just the tonic that Italy cuts must be funded with more spending cuts needs. Th ese tax cuts include a EUR5bn reduc- rather than debt. But that is simply going to spark tion in the regional tax on production, tax breaks friction within a left-leaning coalition. Ultimately, for companies taking on more full-time staff , and Renzi's radical platform of tax cuts and economic tax cuts for the low-paid. However, one of Italy's reform could end up being a lot less radical. Ei- major economic problems is that it is weighed ther way, the result is yet more uncertainty for an down by a bloated state sector and a huge public economy which isn't renowned for its political and debt which is now worth 130 percent of the entire fi scal stability.

28 FEATURED ARTICLES ISSUE 102 | OCTOBER 23, 2014

BEPS: Undermined By Unilateralism? by Stuart Gray, Senior Editor, Global Tax Weekly

After the Irish Government last week announced measures to curtail the use of the infamous "Double Irish" international corporate tax planning strategy, this article looks at a number of recent BEPS-inspired tax developments that have been announced by governments around the world which suggest that the coordinated response to base erosion and zero in many cases – by moving the income to a profi t shifting (BEPS) that the OECD is aiming for subsidiary of the Irish company that is tax resident is already being undermined. in a low- or no-tax jurisdiction, with Bermuda seemingly the jurisdiction of choice. Farewell To Th e Double Irish Although the Irish Government has consistently "Aggressive tax planning by multinational com- rejected assertions that the BEPS project would panies has been criticized by Governments across lead to major changes in its business-friendly tax the globe and has damaged the reputation of many regime, it is hard to refute the assertion that the countries," observed Finance Minister Michael most eye-catching measure of the 2015 Irish Bud- Noonan in his Budget address. 1 "Schemes that ex- get has come about because of the BEPS initiative ploit mismatches in tax legislation are being heavily and the increased scrutiny and criticism of the Irish scrutinized by the OECD and others and through tax regime that this has brought about. the [BEPS] project they will come to an end over time. Th e so called 'Double Irish' is one of many Th e measure in question would eliminate the so- such schemes." called "Double Irish" tax structure. Put simply, this allows companies to shelter business profi ts from As a result, Noon said that he is abolishing the tax in high-tax countries by ensuring that income ability of companies to use the "Double Irish" by from intellectual property (IP) rights accrues to no- changing residency rules to require all companies tax jurisdictions. In a typical Double Irish arrange- registered in Ireland to also be tax resident. Th is ment, IP income is shifted from a high-tax juris- will apply to all new companies created in Ireland diction to a company established in Ireland where from January 1, 2015. For existing companies, corporate tax is 12.5 percent. However, tax on the there will be provision for a transition period until IP income can be reduced even further – close to the end of 2020.

29 Noonan said that by taking action to curtail the which it would have been subject if the transaction "Double Irish" now, certainty will be provided was subject to tax in France. to investors in the Irish tax system "for the next decade." However, he also recognized that if the Th e fi nal guidelines require that the taxpayer must OECD hopes to bring an end to international cor- be able to demonstrate compliance with the mini- porate tax planning, "co-ordinated action by all mum taxation test with supporting documentation countries" is required. Recent evidence suggests on request. It must also demonstrate that the lender that the contrary is taking place. accounted for, and paid, ample tax on the transaction as prescribed under the rules. Hybrid Instruments And Interest Deductibility Th e guidelines prescribe that transactions that fail Certain governments, particularly in Europe, are al- to meet the requirements of the test will not fall ready taking action against some of the tax planning under deemed distribution rules and therefore will strategies highlighted in the OECD's BEPS Action not be subject to domestic dividend withholding Plan,2 notably in the area of hybrid instruments, taxes and 3 percent dividend distribution tax; but which have the characteristics of both equity and interest deductions will be disallowed. debt. Th e OECD's September report looked to introduce uniform rules worldwide to prevent the use Introduced by Article 22 of the Finance Act 2014, of these instruments to achieve double non-taxation. and now codifi ed in Article 212 I-b of the French Tax Code, the new rules aim to tackle avoidance On August 5, 2014, the French tax authority re- linked to hybrid loans, which have the characteris- leased fi nal guidelines on France's new interest tics of both debt and equity. deduction limitation rules, replacing preliminary guidance from April, with retroactive eff ect from France was followed earlier this month by the UK, September 25, 2013. with Chancellor of the Exchequer George Osborne announcing that the Government's Autumn State- Th e guidelines require a French company to un- ment, a sort of interim budget due to be announced dertake a "minimum tax test" in respect of hybrid on December 3, will contain plans for new rules instruments provided by a related party (applicable to prevent hybrid mismatch arrangements. Special whether the creditor is resident in France or abroad) provisions for the hybrid regulatory capital instru- in order to be able to deduct interest payments. Th e ments of banks and insurers will also be considered. company must demonstrate that the lender was subject to a tax rate equivalent to at least 25 per- Measures have also been approved at EU level and cent of the French corporate income tax burden to on July 8, the Council of the European Union

30 formally adopted an amendment to EU tax rules Th e Council said the change would help to create a that will prevent the double non-taxation of divi- level-playing fi eld between, on the one hand, groups dends distributed within corporate groups deriving with parent companies and subsidiaries located in from hybrid loan arrangements. diff erent states and, on the other, those with operations in a single member state. Pier Carlo Padoan, Italy's Minister of the Economy and Finance and President of the Council, said: EU member states have been given until the end of "Th e adoption of this amendment to the Parent- 2015 – which, coincidentally or not, will be when Subsidiary Directive is an important step change the OECD delivers its last batch of outputs – to in the fi ght against aggressive tax planning. It rep- transpose the new measures into domestic law. resents a concrete achievement of the EU in this area, in line with international eff orts to combat Tax Rulings tax evasion and avoidance. Th e Italian presidency Another way in which the EU is advancing its own is committed to bringing forward work in this fi eld anti-BEPS agenda is by investigating whether tax to promote a fairer tax system for the benefi t of all rulings granted to certain companies in a number EU citizens and businesses." of member states, namely Ireland, Luxembourg, the Netherlands, and Gibraltar – in other words, the Th e amendment to the Directive will prevent cross- usual suspects – have breached EU state aid laws. border companies from planning their intra-group payments so as to result in double non-taxation Th e latest of these investigations was announced by the where hybrid loan arrangements are involved. Th e European Commission on October 7 into a tax ruling member state of the parent company will hence- that deals with transfer prices between related parties forth refrain from taxing profi ts from the subsid- in Luxembourg owned by online retailer Amazon. iary only to the extent that such profi ts are not tax deductible for the subsidiary. Th e tax ruling for Amazon that is under investigation dates back to 2003 and is still in force. It applies Such tax planning was not ruled out before, as the to Amazon's subsidiary Amazon EU Sàrl, which is provisions of the original Parent-Subsidiary Direc- based in Luxembourg. Based on a methodology tive required member states to exempt from taxa- set by the tax ruling, Amazon EU Sàrl pays a tax tion the profi ts that parent companies received from deductible royalty to a limited liability partnership their subsidiaries in other member states. Th e inten- established in Luxembourg but which is not subject tion was to ensure that profi ts were not taxed twice, to corporate taxation in Luxembourg. As a result, and that cross-border groups were thereby not put most European profi ts of Amazon are recorded in at a disadvantage compared with domestic groups. Luxembourg but are not taxed in Luxembourg.

31 Th e Commission said that, at this stage, it "consid- not the case, groups of companies could have the ers that the amount of this royalty, which lowers possibility to underestimate their taxable profi t, the taxable profi ts of Amazon EU Sàrl each year, whereas other companies which buy and sell goods might not be in line with market conditions." It from the market rather than within that group is concerned that the ruling "could underesti- would be disadvantaged. Th is may constitute state mate the taxable profi ts of Amazon EU Sàrl, and aid within the meaning of EU rules," the Commis- thereby grant an economic advantage to Amazon sion explained. by allowing the group to pay less tax than other companies whose profi ts are allocated in line with Joaquín Almunia, Commission Vice President market conditions." in charge of competition policy, stressed that the Commission was not calling into question Luxem- Luxembourg's Finance Ministry said in a state- bourg's general tax system. ment: "Luxembourg is confi dent that the allega- tions of state aid in this case are unsubstantiated He clarifi ed: "At this stage we consider that the and that the Commission investigation will con- amount of this royalty, which has lowered the clude that no special tax treatment or advantage has taxable profi ts of Amazon, might not be in line been awarded to Amazon." with market conditions. What is unusual is that the tax ruling contains a cap on the tax base: in Article 107(1) of the Treaty on the Functioning of other words, Luxembourg's tax authorities agreed the European Union (TFEU)3 stipulates that any to limit the tax base of Amazon to a fraction of aid granted by an EU member state or through a percentage of the turnover, whatever the profi t state resources that distorts or threatens to distort that Amazon is making." competition by favoring certain undertakings or the provision of certain goods shall be deemed in- He said: "National authorities must not allow se- compatible with the common market. lected companies to understate their taxable profi ts by using favorable calculation methods. It is only Th e Commission said that tax rulings are not, in fair that subsidiaries of multinational companies and of themselves, problematic. However, tax rul- pay their share of taxes and do not receive prefer- ings may be deemed to involve state aid if they ential treatment which could amount to hidden confer selective advantages to a specifi c company subsidies. Th is investigation concerning tax ar- or group. rangements for Amazon in Luxembourg adds to our other in-depth investigations launched in June. "Prices for intra-group transactions have to be cor- I welcome that cooperation with Luxembourg has rectly estimated based on market prices. If this is improved signifi cantly."

32 One week before this announcement, the Com- It added: "Potentially all assessed rulings may contain mission said that it was investigating tax rulings state aid, because none of them are based on suffi - provided to companies by Gibraltar, as part of its cient information so as to ensure the level of taxation ongoing in-depth investigation into the territory's of the activities concerned is in line with the tax paid corporate tax regime. by other companies [that] generate income that is to be considered accrued in or derived from Gibraltar." Th e purpose of its review is to determine whether Gibraltar's new corporate tax regime selectively fa- Just a day earlier, the Commission published a letter vors certain categories of companies and therefore online saying that that two advance tax rulings pro- breaches EU state aid rules. Its investigation into vided by the Irish tax authority may have conferred the corporate tax regime was fi rst expanded to cov- a selective advantage to technology giant Apple in er tax rulings in October 2013. breach of state aid rules.

Gibraltar's tax system is operated on a territorial Following an in-depth investigation into the rul- basis, under which only income deriving from or ings, the Commission has explained its "Opening accruing in Gibraltar is taxable. Meanwhile, the Decision" in a 21-page letter to the Irish Foreign option to secure a tax ruling was introduced in Sec- Aff airs Minister Eamon Gilmore. Th e Commission tion 42 of the Income Tax Act of 2010, enabling will now proceed with the next stage in its investi- fi rms to request an advance opinion on the tax li- gation process and has asked Ireland for additional ability of activities in Gibraltar. information on Apple's operations in Ireland.

Th e Commission has so far assessed 165 tax rulings Th e ongoing investment concerns tax rulings made granted by authorities between August 2013 and the in 1991 and 2007 on the attribution and calcula- introduction of the corporate tax regime in 2011. tion of taxable profi ts to the Irish branches of Apple Operations Europe (AOE) and Apple Sales Inter- Th e Commission said that, based on the informa- national (ASI). In March 2014, the Commission tion that has been provided, it appears that Gibral- informed Ireland that it was investigating whether tar grants formal tax rulings "without performing the tax rulings constituted "new aid." Th e Com- an adequate evaluation of whether the companies' mission is also investigating tax rulings agreed in income has been accrued in or derived from out- other member states with two other multinationals. side Gibraltar." It said: "Even if the Gibraltar tax authorities are given considerable margin of ma- According to the Commission's letter, there is "no neuver under the ITA 2010, a misapplication of its indication that the contested measure can be con- provisions cannot be excluded at this stage." sidered compatible with the internal market," as it

33 "appears to constitute a reduction of charges that taxation – is another area where individual coun- should normally be borne by the entities concerned tries seem to be taking matters into their own hands in the course of their business, and should therefore before any fi rm recommendations and guidance on be considered as operating aid." the issue have emerged from the OECD.

Th e Commission letter says that it has "doubts A recent survey by EY, which covered at least 400 about the appropriateness of the transfer pricing senior tax executives from large public and private method chosen for the 2007 ruling" and that it had companies across 29 countries, found that the vast found "several inconsistencies in the application of majority of companies headquartered in the US ex- the transfer pricing method chosen when determin- pected increased scrutiny of their TP practices in ing profi t allocation to AOE and ASI that do not the short term as a result of the BEPS plan. Indeed, appear to comply with the arm's length principle." more than half of respondents (53 percent) said they are currently being audited in more countries than "To the extent the Irish authorities have deviated ever before. In addition, 65 percent of respondents from the arm's length principle as regards Apple, judge the enforcement posture and tactics of for- the contested rulings should also be considered se- eign tax authorities as more aggressive than before. lective," the letter adds. However, the international business community Th e Commission also raises questions about the still seems unsure how far the global tax rules will "open-ended duration" of the 1991 ruling's valid- change, and how fast these changes are likely to oc- ity and "the discrepancy between the sales growth cur; the survey indicates that while the majority of and the Irish operating capacity" of ASI. tax directors worldwide are increasingly convinced that the BEPS project will generate signifi cant Th e Commission has decided to initiate the procedure changes over the next fi ve years, less than one-third laid down in Article 108(2) of the TFEU.4 It pro- (28 percent) expect any BEPS-driven changes with- vides that if the aid is found to be incompatible, the in two years. member state in question must abolish or alter such aid within a period to be determined by the Com- Developments on the ground, however, suggest that mission. Ireland was given one month to provide the some governments are already forging ahead with Commission with specifi c additional information. new TP rules and practices as a direct result of BEPS.

Transfer Pricing In one recent example, the Tax Executives Institute Transfer pricing (TP) – a key plank of the BEPS Ac- (TEI) expressed concern about the Inland Rev- tion Plan and a hugely complex area of international enue Authority of Singapore's (IRAS's) proposals

34 to update its TP guidelines, which would elevate and recommended that master fi le updates be re- Singapore's TP documentation requirements to a quired only when there are relevant and signifi - higher level than those existing under Chapter V cant changes to functions, assets, or risks. It said of the OECD TP guidelines, even though the fi nal that benchmarking analysis should be refreshed BEPS recommendations on TP documentation are at least once every three years, unless there is a not due until 2015. signifi cant change to a group's business model or there is a restructuring. On the proposal to introduce a master and local fi le concept in the form of group- and entity-level doc- Th e TEI suggested a phased approach to imple- umentation requirements, the TEI said that infor- menting the new documentation guidance, with mation sought at group-level should be limited to the fi rst phase introducing the concept of contem- that which is relevant to the assessment of TP risk poraneous documentation and entity-level docu- for the Singapore entity's business or related-party mentation, and a latter phase requiring the comple- transactions. Also, to avoid a disproportionate hike tion of group-level documentation. in the compliance burdens on taxpayers relative to the tax revenue at risk, the TEI recommended estab- It said that the phases should be implemented with lishing clear materiality thresholds on related-party some lead time before coming into full eff ect – 12 transactions that would not require completion of to 18 months, it suggested – to allow taxpayers to TP documentation in certain circumstances. adjust their internal processes. Th e second phase should track and be coordinated with upcoming In its request for input, IRAS had sought stake- developments in the OECD's BEPS project, it said. holders' views on certain low-risk transactions that could be exempted from TP documentation re- Th e TEI called for consistency with global docu- quirements. In this aspect, the TEI recommended mentation requirements in developing Singapore's that IRAS consider extending the exemption to TP regime rules: "Before fi nalizing the Consultation include domestic transactions between two related Paper, TEI recommends that IRAS consider how entities in Singapore that are subject to the same the Consultation Paper should be revised to ensure, corporate tax rates, given that they are already with- to the fullest extent possible, global consistency in in the Singaporean tax net and the revenue at risk TP documentation requirements, thereby reducing is therefore low. [multinationals'] compliance costs and not adding to the already high costs of operating in Singapore." Th e TEI encouraged the IRAS to further clarify its guidance on the required frequency of updates "It is important that, as a regional hub for [mul- to TP documentation and benchmarking studies, tinationals], Singapore's TP regime develops

35 in as coordinated a manner as possible with in- "To gain the advantages of the patent box, a com- ternationally accepted norms and in a way that pany must either have developed the IP itself, or mitigates or does not add to taxpayers' burden in actively manage the commercial exploitation of managing diff erences in TP requirements across the IP. Th is is a substantial amount of activity for the Asia-Pacifi c region." a business to undertake," Gauke argued. "If all a business wanted to achieve was to shift their profi ts Harmful Tax Regimes in order to receive a lower tax rate, then this simply BEPS will also provide a test of how far OECD would not be worth the hassle. For this purpose, a members are prepared to go towards removing as- business can fi nd other countries' regimes off ering pects of their tax regimes that are clearly benefi cial lower rates with less activity required." to their economies, but which the OECD might, under Action 5, consider "harmful" in that they However, regimes such as the UK's patent box were help to erode the tax bases of other countries. A discussed as part of the OECD's recommendations case in point is the UK patent box regime. on harmful tax practices, in which the adoption of one of three approaches was recommended to en- Th e patent box enables companies to apply a 10 sure "substantial activity" in a territory to allow the percent lower rate of UK corporation tax to profi ts income deriving from intangibles to be subject to earned from their patented inventions and certain special arrangements: a "value creation approach", a other innovations after April 1, 2013. In its brief life "transfer pricing approach", or a "nexus approach". so far, the patent box appears to have been a highly successful tax break, encouraging GlaxoSmithKline Gauke said: "Although many countries have sup- to invest USD800m in new research and produc- ported the nexus approach as set out recently by tion facilities in the UK. the OECD in its update on the BEPS Action Plan, there has been no consideration of its feasibility or Th e UK says that by preparing to introduce new proportionality. We have raised a number of issues rules on hybrid mismatch arrangements, it is reaf- that we feel require further attention." fi rming its commitment to implement the recommendations made by the OECD. However, it clear- It was also interesting to note that one of the new ly has no intention of scrapping the patent box. tax measures announced by Michael Noonan in the Irish Budget was a new "Knowledge Develop- On October 3, David Gauke, the UK's Financial ment Box," which will be drafted along similar Secretary to the Treasury, told the Securities Indus- lines to the patent boxes already in place in several try Conference that he rejects any suggestion that European countries. Th is essentially replaces the the patent box regime "facilitates profi t shifting." "Double Irish" tax loophole and is almost certain

36 to provoke a negative reaction from the OECD where value is generated in today's globalized and the EU. economy and, in line with that, on the principles for allocating tax … between residence It remains to be seen if the UK comes under further states and source states." pressure to repeal the patent box system, or whether Ireland will ultimately be allowed to introduce its "We will see more source states claiming taxation own version. But this issue indicates that countries rights [where] they have none under current OECD are already beginning to pick and choose which bits principles, with the BRICS [economies] and in par- of the BEPS work they are prepared to go along ticular India leading the charge," she added. with and which bits they're not. Roberts' assertions would appear to have been From Double Non-Taxation borne out remarkably quickly, after India recently To Double Taxation expressed reservations over a proposal to introduce Nevertheless, multinationals can still expect to face compulsory and binding arbitration under the mu- more double taxation after BEPS reforms are im- tual agreement procedure in tax treaties to resolve plemented, according to Anne-Marie Roberts, As- international tax disputes. sistant Director of Taxation at the Institute of Char- tered Accountants of Scotland, as certain states are Th is proposal, included in BEPS Action Item 14, encouraged to claim taxing rights on economic ac- aims to make dispute resolution mechanisms more tivity when previously they had none. eff ective. But Nirmala Sitharaman, India's Minister of State for Ministry of Commerce & Industry, said "It seems likely that there will be a move to the proposal not "only impinges on the sovereign more double taxation as a result of the BEPS rights of developing countries in taxation, but [also project and the local interpretation or imple- limits] the ability of the developing countries to mentation of the guidance alongside unilateral apply their domestic laws for taxing non-residents actions by individual countries," she observed and foreign companies." in response to the first set of OECD recommendations. "Over the last year there have been tens Sitharaman added: "While we support the BEPS of BEPS-inspired legislative proposals in various project, it is necessary to underline that the con- countries around the world – the most public- cerns of developing countries regarding BEPS may ity being generated by the French proposals for be diff erent from those of developed countries. hybrid instruments. The risk is further aggra- Th ese concerns are required to be taken on board vated by fundamentally different views between in a more consultative manner, while developing OECD and non-OECD countries on how and consensus on the various issues."

37 As a result of initiatives connected with transfer pric- legislation until further implementing guidance ing documentation, the limitation of treaty benefi ts, has been provided and the interaction with future new reporting requirements, and a shift in the burden action items is understood," the Committee said, of proof, Roberts expects a higher compliance burden before going on to warn that this would "risk creat- in the future for multinationals, despite reassurances ing a series of disparate rules that could negatively from the OECD that better coordination between impact trade and investment." tax authorities will yield benefi ts for businesses. While the list of BEPS-inspired measures proposed Conclusion or implemented at national level is so far quite lim- Critics of multinationals and their tax mitigation ited, it is apparent that a trend towards unilateral strategies may say that a higher compliance burden action is emerging. Th is is precisely the opposite of and an increased level of intrusion into their busi- what the OECD was hoping to achieve at the out- ness and tax aff airs is just deserts after years of play- set of the BEPS project; but it may have unleashed ing fast and loose with the international tax sys- forces it can no longer control. tem to the detriment of countries both rich and poor. However, the Business and Industry Advisory E NDNOTES Committee to the OECD warns that knee-jerk re- 1 http://budget.gov.ie/Budgets/2015/FinancialState- actions, and unpredictable and uncoordinated re- ment.aspx sponses to BEPS are in nobody's interests. 2 http://www.oecd.org/ctp/BEPSActionPlan.pdf 3 http://eur-lex.europa.eu/legal-content/EN/TXT/ "With the release of the seven 2014 deliverables, HTML/?uri=CELEX:12008E107 we caution against governments acting too rapidly 4 http://eur-lex.europa.eu/legal-content/EN/ to implement recommendations into domestic tax ALL/?uri=CELEX:12008E108

38 FEATURED ARTICLES ISSUE 102 | OCTOBER 23, 2014

Defense For Transfer Pricing: Proﬁ ts Of A Hong Kong Procurement Company by Dr. Alexander Voegele and Philip de Homont, NERA Economic Consulting

Contact: [email protected] , Tel. +49 69 710 447 501; [email protected] , Tel. +49 69 710 447 502

Th is case study shows how the high profi ts of a political uncertainties and the better infrastructure Hong Kong procurement company could be de- there, the group established its procurement unit in fended in a German transfer pricing audit. Th e case Hong Kong. Th is entity organizes the entire pur- was defended through a Residual Profi t Split analy- chasing from South East Asia, and has two repre- sis that put special weight on the location advan- sentative offi ces in Southern China. tages that the entity enjoys in Hong Kong. Tax Setup Background When the company was established, the tax au- A German electronics company had developed a thorities in Hong Kong granted a so-called "off- profi table business throughout Europe over the last shore ruling," which meant that effectively 90 century. Th e company had started as a purely na- percent of the income generated in Hong Kong tional manufacturer and distributor of electronic was tax-free in Hong Kong. One condition of and electric goods, but gradually grew its distribu- the ruling was that at least the same percent- tion networks worldwide, with an emphasis on dis- age of the business activities must be performed tribution in Europe. outside Hong Kong, i.e. , at the representative offices. Conversely, the tax authorities in Main- As the global presence grew, and the group fo- land China taxed the representative offices on cused increasingly on the distribution activities, the basis of relatively low local cost plus a small the manufacturing was step by step moved to other profit margin. countries and increasingly to independent contract manufacturers abroad. Germany and Hong Kong do not have a tax treaty, so the group established an intermediate holding Since the 1990s, the group has increasingly relied company that owned the Hong Kong entity in a on third-party manufacturing in China. Due to treaty-protected country.

39 Th e business of the overall group developed very base, approximately by more than 30 percent for well over the last ten years, with increased sales vol- each of the four years. In total, this resulted in a ume and profi tability despite severe competition. more than doubling of the total corporate taxes of Most distribution companies of the group earned the last years. only relatively small profi ts, while the Hong Kong procurement unit earned nearly 25 percent of the Th e lawyers and advisors checked all possibilities, consolidated profi t of the group. including mutual agreement procedures. However, due to a lack of a tax treaty between Germany and Th e Audit Starts Hong Kong, mutual agreement procedures were As is usual for "large" companies in Germany, the not available, even despite an intermediate hold- parent company came under a regular fi eld tax au- ing in a treaty state. Th e chances in tax courts were dit. Th e tax authorities' audit team consisted of sev- regarded as low. eral local fi eld tax auditors and a Federal tax auditor, who quickly called in a specialist for transfer New Facts pricing from the regional tax offi ce. At this relatively late stage, the company engaged us to scavenge what was possible. Th e tax audit procedures lasted for more than two years and covered four tax years. Besides a multi- First, we analyzed the case very carefully and – sur- tude of smaller issues from income tax to VAT, the prisingly – found the following facts, which were auditors crucially focused on the transfer pricing, new to existing advisors and tax authorities alike: and predictably the high perceived profi ts of the Th e group does not conduct its own manufac- Hong Kong entity. turing anymore; almost all products are now manufactured by independent third parties. Th e fi eld tax auditors treated the Hong Kong unit Th e Hong Kong purchasing unit is performing as a simple routine purchasing unit and calculated several functions: its profi t on a mixture of cost-plus on local expenses It identifi es and establishes appropriate manu- and a commission on purchase prices. Th e fi eld tax facturers through factory tours, a multitude of auditor presented a detailed calculation, resulting meetings with suppliers at several locations, in an extremely high proposed adjustment. After searches in the Internet and print media, pres- long discussions with the in-house tax consultants, ence at trade fairs, etc . the CFO and external tax advisors, the proposed It proposes the development of new products adjustment amounted on average to more than to external manufacturers, determines the three-quarters of the declared Hong Kong profi ts, features of such new products, and discusses leading to a dramatic increase of the German tax the timing, prices, and volumes.

40 It clears prices, delivery dates, volumes, pack- During this time the group had avoided losses aging, and logistics. due to the contribution by the products from It conducts active quality control with a Hong Kong. detailed audit procedure and proposes improvements to the suppliers during the These new facts looked quite good. But how manufacturing process. could they be used to defend the profits earned It develops the packaging and instruction in Hong Kong? manuals. It assumes the currency risks. Residual Proﬁ t Split Th e German R&D department of the group had A few of the activities (e.g. , order processing, check- no impact on the new products from Hong Kong. ing of delivered products and of invoices, ship- Th e German contributions, i.e. , product plan- ment, simple logistics, etc .) could indeed be treated ning, distribution planning, etc. , were valuable, as routine activities as the tax authorities suggested. but no more valuable than the functions carried However, others were clearly non-routine activities out by the Hong Kong entity. ( e.g., inspections of manufacturing, proposing new Th e Hong Kong unit is benefi tting from signifi - products, designing the packaging and instruction cant location savings. Initially the entity simply manuals, etc. ) and non-routine risk taking (curren- provided access to the low-cost manufacturing in cy risk of USD/Euro). China. However, we could also prove that it acted as a signifi cant multiplier by improving the quality We conducted an expert survey that proved that the and reliability of the products; we could demon- location savings should be split between the Ger- strate that the products from China suff ered far man and the Hong Kong entities because such lo- less warranty issues than those from either Europe cation savings would have been split between third or China before the entity was established. parties as well. Comparable third party purchasing Th e share of the products purchased by the Hong companies increased their share in the profi t during Kong unit has increased steadily over the years. the years under audit. Th e Hong Kong products contributed to 20 percent of the total sales of the group in 2007 and to Th e activities of the German and the Hong Kong more than 50 percent in 2011. But even in 2007 units are complementary and interdependent. We more than the half of the group's profi t resulted therefore chose a transaction-based residual profi t from products purchased by the Hong Kong unit; split method to assess the transfer prices. Th e rou- the share in profi ts increased over the years in tine remuneration was calculated on the basis of a terms of percentage, but even more in absolute benchmarking study. Th e routine profi t was then amounts after the economic crisis in 2008/2009. deducted from the total profi t yielding the residual

41 profi t. Th e residual profi t was split between the two We also considered the timing of the extremely parties. Th e analysis came to the conclusion that the high increase of volumes and salaries. cost of entrepreneurial personnel should be the basis for the split, adjusted by the level of salaries and Finally we got a range of arm's length margins. by the remuneration for funding and risk taking. Th e range of margins showed that the remunera- We selected the entrepreneurial personnel on the tion of the Hong Kong company had been between basis of the classifi cation by the human resources the upper and the lower quartile and could hence departments of the companies and got the related be regarded as at arm's length. Th e fi ndings, the labor costs from the cost accounting department/ arguments, and the calculations all looked fi ne. controlling. We calculated the funding by using the economic depreciation of assets/investments/intan- Th e client, his lawyers, and tax advisors were more gibles and we calculated the risk remuneration for than happy. the currency risk by using a real option calculation.

42 FEATURED ARTICLES ISSUE 102 | OCTOBER 23, 2014

Topical News Brieﬁ ng: Playing To Win Noonan announced further moves designed to shore by the Global Tax Weekly Editorial Team up Ireland's competitive position, and overall the 2015 Budget was welcomed by taxpayer and business Th e Irish Government may appear to have suc- groups. An important element was the 1 percent cut cumbed to international pressure by announcing in in the top rate of personal income tax. At more than the 2015 Budget new tax residency rules that will 50 percent, Ireland has some of the highest marginal nullify the so-called "Double Irish" tax planning tax rates among its competitors, and this has frequent- arrangement, but in reality Ireland has no inten- ly been highlighted as a barrier to investment because tion of surrendering its competitive advantage in it deters highly skilled, highly paid foreigners from re- the area of taxation. locating to the country. Certainly it is a small step, but with the Government's purse still tightly shut, it is rep- Governments are being criticized for changing na- resentative of the direction in which Ireland intends to tional tax rules in response to the OECD's BEPS travel after successfully exiting its bail-out program last work before the project has come to its conclu- December. Another key announcement was the con- sion and recommendations and guidance are is- tinuation of the Special Assignee Relief Programme, sued. And Ireland could be accused of an unhelp- which supports Irish employers in competing with ful pre-emptive strike in this regard. But the other other countries to attract talented individuals. side of this coin is the growing uncertainty about the international tax environment that the BEPS Ireland's renewed commitment to retaining its 12.5 project, still at quite a formative stage, is causing, percent corporate tax rate and the production of a with ramifi cations for global trade and invest- "road map" for Ireland's tax system provide additional ment. Indeed, Ireland's Finance Minister Michael certainty for multinational taxpayers and have been Noonan says that by acting now with regard to welcomed accordingly. However, there is a question the Double Irish scheme, and by providing a more whether Ireland is just putting itself in the fi ring line general corporate tax "roadmap," the Government once again with its Budget proposal for a "Knowledge is attempting to provide more certainty for fi rms Development Box" that will provide substantial tax already invested in Ireland, or intending to invest relief on IP income. With similar arrangements in there over the next fi ve years. Th e positive reaction the UK and elsewhere under attack by the EU and from business groups such as AmCham Ireland criticized by the OECD for being "harmful" to other seems to have vindicated the Government's deci- countries' tax bases, it seems highly likely. But then, sion, and Ireland could be said to have extended as Louise Phelan, President of AmCham Ireland ob- its lead over the rest of the pack in the race for served in response to the Budget announcement, in incoming investment. the global competition for FDI, Ireland "plays to win."

43 FEATURED ARTICLES ISSUE 102 | OCTOBER 23, 2014

Key Changes To Company Law In India by Padmini Khare Kaicker and Himanshu Chapsey, B.K. Khare & Co., India, an independent member of Morison International

Contact: [email protected] , Tel. + 91 22 22 00 0607; [email protected] , Tel. + 91 22 22 00 0607

Introduction be teething issues as in some cases transitional Th is article continues our recent coverage of de- provisions are either lacking or not clearly articu- velopments in India. Besides a new Government lated. A key feature of the new Act is that in many led by Mr Narendra Modi, India also has a new areas it sets out general principles, with the opera- Companies Act, 2013 ("the new Act"). Th is is a tional details being articulated in the Rules under- signifi cant development as the new Act replaces the lying the legislation. Th is is to enable rule-makers 57-year-old Companies Act, 1956 ("the old Act"). to amend the Rules to meet the evolving business landscape in the country; amending the law itself Th e new Act itself has been in the making for would require Parliamentary assent, which could many years, and comprises 470 sections and seven be diffi cult. schedules (compared with the 659 sections and 15 schedules in the old Act). Th e new Act has been Th e new Act applies to all companies in India, and implemented in a phased manner: 98 sections be- diff ers from the old Act in several areas: came eff ective from September 12, 2013, a further Accounts and fi nancial statements; 183 sections from April 1, 2014, and a date as yet Corporate governance and directors; unspecifi ed for the remaining sections to come into Independent directors; eff ect. In the meantime, sections of the old Act con- Corporate social responsibility; tinue to apply for portions where the new Act has Related party transactions; been made applicable. Audit and auditors; Other matters. Th e new Act is expected to be both transforma- tional and disruptive: it will change the way cor- Here, we summarize key changes in each area, spe- porates are operated and managed in India and cifi cally highlighting points that may aff ect foreign strengthen corporate governance, but there may companies operating in India.

44 Accounts And Financial Statements made by the Central Government, income tax authorities, the Securities and Exchange Board of In- Financial Year dia (SEBI) etc. in situations where accounts were All companies are to follow a uniform fi nancial prepared in a fraudulent manner or the aff airs of year, from April 1 to March 31. With prior approval the company were mismanaged, casting doubt on of the National Company Law Tribunal (NCLT), the reliability of their statements. where a holding or subsidiary of a foreign company follows a diff erent year end, it can follow a diff erent In certain situations, after obtaining NCLT approval, period as its fi nancial year. Th is exemption is not, companies can also voluntarily revise fi nancial state- however, available to associates or joint ventures. ments or board reports for the preceding three fi nancial years. Th is diff ers from the restatement concept Further, all companies with subsidiaries, associates followed in the international accounting rules. or joint ventures are now required to prepare consolidated fi nancial statements. Th e preparation of Other Matters such statements is currently applicable only to listed Th ere are diff erences in the defi nition of "control," Indian companies, so this will increase compliance "subsidiary" and "associate" as compared to the for private companies. Th is may impact subsidiar- old Act and as per Accounting Standard (AS) 21 ies of foreign companies as the exemption available on Consolidated Financial Statements and AS 23 to intermediate holding companies available under Accounting for Associates. Control of total capital IFRS is not available under the new Act. (equity plus convertible preference shares) is relevant to determine whether an entity is a subsidiary National Financial Reporting Authority instead of having total voting power, which could Th e National Financial Reporting Authority result in diff erences between a previous classifi ca- (NFRA) is currently being formed and will now tion and now. formulate Accounting and Auditing standards. Th e NFRA will oversee the audit profession and Corporate Governance And Directors has the authority to proceed against chartered ac- Appointment of at least one woman director countants (including company offi cials who are will be mandatory for listed companies and for chartered accountants). a prescribed class of unlisted public companies. A transition period of one year for compliance is Revision Of Financial Statements allowed for existing companies; Reopening of fi nancial statements is mandatory in At least one director on the board of every com- case of an order passed by the National Company pany must be a director who has resided in India Law Tribunal (NCLT) pursuant to an application for not less than 182 days in the previous calendar

45 year. Th is would be of particular relevance to must be independent if the Chairperson is an foreign companies in which all directors are ex- Executive Chair). A prescribed class of unlisted patriates; public companies must have at least two inde- A listed company may have one director elected pendent directors; by the small shareholders (holding shares of nomi- For listed companies, the amended listing nal value of not more than INR20,000); agreement specifi es that a person cannot be an Every listed company must provide a Director's independent director for more than seven com- Responsibility Statement, declaring that it has panies; laid down adequate and eff ective internal fi nancial Th e appointment of an independent director is controls and systems to ensure compliance with limited to two terms of fi ve years each, to be ap- all applicable laws; plied prospectively. As per the amended listing Listed companies and a prescribed class of un- agreement, independent directors of listed com- listed public companies must establish a vigil panies who have completed 10 years are eligible mechanism for directors and employees to report for appointment for only one more term, for a their concerns or grievances; maximum period of fi ve years; Directors can participate in board meetings via Clarifi cation regarding the rules, that directors are video conferencing or audio/visual media, subject responsible only for the actions of which they are to certain conditions; aware of, for which relief will be given to direc- "Key managerial personnel" (KMP) are defi ned tors from litigation of matters that they were not as the managing director, whole-time directors, party to in the Board Process. chief executive offi cers, the chief fi nancial offi cer, and the company secretary. Corporate Social Responsibility (CSR) All companies having a net worth of INR5bn or Independent Directors more, or turnover of INR10bn or more, or a net Strict norms and responsibilities are prescribed profit of INR50m or more, during a financial for independent directors: year, are to spend money on prescribed CSR ac- Th ey cannot have any pecuniary relationship tivities every financial year. There is a minimum with the company, its holding, subsidiary or spending of 2 percent of average net profits dur- associate companies and their directors; and ing the three preceding financial years. There are Th ey are not eligible for stock options. no penal provisions in case of a failure to spend, At least one-third of the board of every listed but the board must report the reasons for this company must consist of independent directors in its report. This may have a greater effect on (as per the amended listing agreement, eff ective listed companies than on private or public un- October 1, 2014, 50 percent or more of directors listed companies.

46 Loans, Guarantees And Investment To Th e activities that qualify for CSR are specifi ed in Directors, Corporate Bodies And Oﬃ cials the new Act. Loans, advances and guarantees to directors, or to Relevant companies are required to form a CSR persons of interest to directors, are prohibited. Ex- Committee consisting of three or more directors, emption is available for such transactions as to whol- of which at least one should be an independent ly owned subsidiaries and in respect of guarantees to director (not required for a private company). subsidiaries. Earlier barring of exceptions indicated A CSR policy must be formulated, with CSR such transactions were permitted post approval. activities and initiatives to be described in the directors' report. Th e amended requirements may restrict the partly owned subsidiaries of foreign companies from ob- Related Party Transactions taining loans from their parent entities. Related party transactions and restrictions thereon have been introduced in the new Act. Th e key re- A company may also not make investments in more quirements including areas of challenge relate to than two layers of investment companies. Th is the following: could pose challenges to existing group structures. The term "Related Party" is defined differ- ently in the Companies Act 2013, Accounting Audit And Auditors Standards (where the definition is similar to Th e new requirement relating to audit and auditors IFRS) and SEBI regulations (applicable to is also expected to have a signifi cant impact on In- listed companies); dian companies. Extensive approval process laid down – requirements diff erent in the Companies Act 2013 and Stricter norms have been introduced to ensure the SEBI regulations; independence of auditors and restrictions on certain Listed companies require prior approval of Audit non-audit services. Th e auditor is required to report Committees for related party transactions; to the Central Government on fraud that is being Prior approval of shareholders by way of special or has been committed against the Company by its resolution is required for transactions which are offi cers and employees. As there is no materiality beyond the prescribed limit or which are not in threshold beyond which this reporting is required, the ordinary course of business and are not at this may require reporting of immaterial frauds. arm's length; Shareholders' approval is required by a majority Mandatory rotation of auditors has been intro- of minority shareholders and concerned related duced: an individual auditor is required to rotate parties shall not vote on such resolutions. out after fi ve years. For audit fi rms this extends to

47 two terms of fi ve years each, subject to rotation of Class action lawsuits introduced; the audit partners after fi ve years. Th ere is a cooling Particulars of loans, investments, and related party period of fi ve years during which the auditor can be transactions to be disclosed in the board report. re-appointed. While key changes are summarized above, there A transition period of three years is provided to au- are many other areas that may aff ect the way ditors who have completed seven or more years at companies operate and conduct their business in the commencement of the new Act. Th is rotation India. As the corporate world adapts to the new requirement would have a signifi cant impact espe- requirements, the representatives of industry and cially in the case of foreign companies whose parent the accounting profession (the Federation of In- companies may be audited by diff erent auditors or dian Chambers of Commerce and Industry (FIC- which may have diff erent rotation requirements. CI), the Confederation of Indian Industry (CII), the Institute of Chartered Accountants of India Th ere is an additional responsibility cast on audi- (ICAI), the Institute of Cost and Management tors to report on internal controls for every compa- Accountants of India, etc.) have made detailed ny relating to existence, adequacy and operational representations to the Ministry of Corporate Af- eff ectiveness of internal control. Th is requirement fairs highlighting the diffi culties being faced in is applicable to all companies formed in India. implementing the law. Th e Ministry of Corporate Aff airs (MCA) has promised to issue clarifi cations Other Matters and make amendments as necessary. Mandatory e-voting for listed companies and companies having 1,000 or more shareholders;

48 NEWS ROUND-UP: COUNTRY FOCUS — IRELAND ISSUE 102 | OCTOBER 23, 2014

American Firms Hail Irish Budget Companies already with operations in Ireland will Announcements be given until 2020 to unwind their Double Irish arrangements. For new companies, from 2015, Ire- American fi rms with operations in Ireland have land intends to amend its residency rules to expand welcomed the certainty brought about by Ireland's the nation's taxing rights to prevent such arrange- 2015 Budget and its new corporate tax "roadmap," ments, while also introducing a "Knowledge De- which sets out plans to lower the tax burden on velopment Box" income-based tax regime for in- companies undertaking research and development tangible assets in 2015 to encourage companies to (R&D) activities in Ireland. locate their R&D activities in Ireland.

Ireland's roadmap included an announcement of a Th e Knowledge Development Box will likely mir- pre-emptive change to Irish company tax residency ror the UK's patent box regime, with a consulta- rules to prevent companies from using Double Irish tion paper on Ireland's proposals due shortly. In arrangements from 2020 at the latest. With the addition, Ireland's existing section 291A capital OECD's base erosion and profi t shifting (BEPS) allowances regime for expenditure on intangible work due to be completed by the end of 2015, assets will be enhanced in Finance Bill 2014. Th e which has already addressed such arrangements, current 80 percent cap on the aggregate amount the roadmap notes that a change to Irish rules is of allowances and related interest expense that may needed, as Ireland's residency rules have "not kept be claimed will be removed, and the defi nition of pace with international tax developments." specifi ed intangible assets will be amended to ex- plicitly include customer lists. In addition, Ireland Th e Double Irish arrangement has been used to is to phase out the base year restriction under the enable a US parent to exploit intellectual property R&D tax credit regime. (IP) rights owned by a subsidiary off shore without that income becoming taxable in the US (unless Th e President of the American Chamber of Com- the profi ts are remitted). Th e structure includes two merce Ireland (AMCHAM Ireland), Louise Phelan, Irish companies, one incorporated in a lower tax said the roadmap will "allow American companies territory, which is deemed not to be tax resident in currently considering setting up operations in Ireland, Ireland, while another Irish company, responsible and those already [in Ireland], to plan accordingly." for central management and control, is based and taxed in Ireland. Under US and Irish rules, profi ts She said: "Ensuring Ireland remains a highly at- accruing from the IP received by the subsidiary off - tractive location for investment must be a top shore are neither taxable in Ireland nor in the US. priority. In this context the American Chamber

49 welcomes the vision within this roadmap, which She concluded: "Th e measures announced and sends out a very positive and powerful signal that the certainty they provide are extremely valuable – as the Minister has previously stated – in the and will make Ireland an even more attractive lo- global competition for FDI jobs, Ireland will play cation for Foreign Direct Investment in future." fair but will play to win. Th is plan contains a range [of] major improvements across the key pillars Ireland Cuts Individual Income Tax which are central to Ireland's tax off ering: Intellec- Burden In 2015 Budget tual Property; the Research and Development Tax Credit Regime; fi nancial services; and Income Tax. Irish Finance Minister Michael Noonan has an- Th e American Chamber had, in the lead up to the nounced plans to cut the marginal rate of tax budget, highlighted the opportunities presented for individuals and has set out plans for reform by such enhancements." of the corporate tax regime, in a tax-heavy 2015 Budget that is aimed at shoring up Ireland's eco- "In the current international tax environment, it nomic recovery. is imperative that Ireland makes it attractive for multinational companies to hold, develop, and ex- Signaling an end to austerity budgets, Noonan told ploit their [IP] from Ireland. Th e planned intro- Parliament on October 14: "Th e progress made duction of a new Knowledge Development Box over the past three years in improving public fi - will be a major asset to Ireland in securing these nances, increasing economic growth, and creating valuable investments. Changes to the R&D Tax jobs, means the Government can focus on reform- Credit, which the Chamber had called for, are also ing the income tax system in a manner that posi- to be welcomed as it is well established that the tively contributes to and strengthens that recovery. location of R&D activity has signifi cant impact on Th ese reforms will give confi dence about the fu- economic growth." ture and create the opportunity for businesses to grow again." Welcoming the reduction in the marginal rate of individual income tax in the Budget, Phelan said: Noonan said that income tax changes will make it "Th e personal taxation burden had reached an un- more attractive to work in Ireland. Th e marginal sustainable level and the changes announced in the tax rate of 52 percent will be lowered "in a manner Budget will support greater levels of job creation in that maintains the highly progressive nature of the both multinational and indigenous companies. Th e Irish tax system." Changes will be introduced over improvements to the Special Assignee Relief Pro- a number of budgets, with the 2015 Budget lower- gramme will also help Ireland attract key leadership ing the marginal rate from 52 percent to 51 percent talent into the country." through changes to income tax rates and thresholds.

50 In particular, the top rate of income tax is to fall continues to be the home of the best and most from 41 percent to 40 percent, and the Universal successful companies in the world. It will attract Social Charge (USC) will be restructured. and retain companies with real substance off ering real jobs." For lower income persons, USC rates will fall and the exempt threshold will rise to EUR12,012 from Welcoming the Budget, the CEO of business group EUR10,036. Th ose on higher incomes will see rates Ibec, Danny McCoy, said: "Th e Budget will add restructured and the rate of USC on self-assessed momentum to the recovery and sends an important income over EUR100,000 will rise by 1 percent to signal to taxpayers and the international commu- 11 percent. nity that our era of austerity is over. Ireland is again on the front foot." Further measures to lower the income tax burden will feature in next year's Budget, and also in sub- "Income tax cuts will boost economic activity sequent budgets if the Government is re-elected, and make it easier for companies to create jobs. Noonan said. Th e high marginal tax rate and the early entry point puts Ireland way out of line internationally A key announcement is the continuation of the and is a major disincentive to work, doing over- Special Assignee Relief Programme (SARP), which time or taking a promotion. Th e reduction to the supports Irish employers to compete with other marginal rate, reform of the tax bands, and the countries to attract talented individuals. plan for more reductions to come will make Ire- land a more attractive place to live and work." While retaining the 12.5 percent corporate income tax rate and a number of other key tax incentives for Kenny: Marginal Tax Rate Will Fall businesses, a report called "Competing in a Chang- To 50 Percent In 2016 ing World: A Road Map for Ireland's Tax Com- petitiveness" was published alongside the Budget, Following on from the release of the nation's latest setting out plans to alter Ireland's tax regime, in budget, the Irish Prime Minister, Enda Kenny, has particular for multinationals. Included are plans to said that Budget 2016 will lower the marginal tax prevent the use of "Double Irish" arrangements by rate faced by middle-income families to 50 percent. no later than 2020. Kenny made the announcement during a parlia- Noonan said: "Th ese measures will enhance Ire- mentary debate on Budget 2015, which was deliv- land's corporate tax regime and align it with best ered by Finance Minister Michael Noonan on Oc- practice internationally. It will ensure that Ireland tober 14, 2014.

51 Th e Budget included plans to reduce the marginal "The 52 percent tax rate on low- and middle-in- tax rate from 52 percent to 51 percent. Th is incomes introduced by the previous Government cludes a reduction in the top rate of income tax is anti-employment and anti-enterprise, and is from 41 percent to 40 percent, a EUR1,000 in- dangerously out of line with the marginal tax crease in the standard 20 percent income tax rate rates on middle-income workers in other coun- band to EUR33,800 (USD42,905) for single indi- tries with which we compete for investment and viduals, and a restructuring of the Universal Social talent. It undermines the incentive to work, Charge (USC). to do overtime, to start a business. It makes it harder to attract home the 350,000 people who Kenny said: "We now have a formula for targeting have left our shores because of the recession," rate reductions at low- and middle-income earners Kenny said. without giving disproportionate benefi ts to those on the highest incomes. Th e tax rate on middle Th e Prime Minister also informed parliament that income families will be lowered further in Budget a series of tax reforms, along the lines of those mea- 2016 – to at most 50 percent – while ensuring those sures set out in Budget 2015, will boost employ- on higher incomes continue to pay their fair share." ment levels. Th e Finance Department estimates that as many as 15,000 jobs could be created "over and Kenny said his Government, if re-elected in 2016, above existing projections, when the full impact of would deliver a further rate reduction in Budget 2017. the changes have taken eff ect in the economy."

52 NEWS ROUND-UP: BUDGETS ISSUE 102 | OCTOBER 23, 2014

Italian Cabinet Approves 2015 European Commission is likely to be negative about Tax Cuts Renzi's plans, which, as in France, break previous assurances given to the Commission. Th e Italian Cabinet approved on October 15, 2014, Portugal's 2015 Budget the Government's Budget for 2015, which contains EUR18bn (USD23bn) in tax cuts. Contains Corporate Tax Cut Th e Portuguese Government has proposed lower- Th e Budget seeks to reduce by EUR5bn the region- ing the corporate tax rate from 23 percent to 21 al tax on production (IRAP), which had its rate percent in its 2015 Budget, which was presented to slashed by 10 percent earlier this year. It also in- Parliament on October 15, 2014. cludes EUR1.9bn in tax breaks for companies that hire and retain full-time staff , and also an income Minister of State and Finance Maria Luís Albuquer- tax cut for low earners. que said that it is not possible to reduce personal income taxes in 2015, but that reductions could be Prime Minister Matteo Renzi said that the package made in 2016 provided the Government's crack- of tax reductions contained in the 2015 Budget is down on fraud and tax evasion proves successful. the largest ever undertaken in Italy's history. Th e tax cuts will be funded mainly by spending cuts Th e 2015 Budget also exempts old-age pension- and increased borrowing, but the nation's defi cit ers from the 3.5 percent special tax imposed on will keep within EU rules, he said. all income.

Measures to crack down on tax evasion are expect- Th e Government is targeting a budget defi cit of 2.7 ed to provide EUR3.8bn of additional revenue percent of gross domestic product (GDP) next year, next year. down from the 4 percent targeted this year.

His plans are centered on an increase in the budget Earlier this year Portugal withdrew from a EUR78bn defi cit next year to 2.9 percent of gross domestic (USD100m) international bailout program under product (GDP), from 2.2 percent this year. which it was required to cut its budget defi cit to 2.5 percent of GDP by 2015. It seems that most of the cost of the measures will actually be fi nanced by increased debt, with Most of the tax hikes introduced under the spending cuts, already cut back from EUR15bn bailout program have been kept in place in the to EUR5bn, playing a relatively minor role. Th e 2015 budget.

53 South Africa Defers Certain purposes. Th e draft TALAB also changes the tax in- Budget Tax Measures centive provisions relating to research and develop- South Africa's National Treasury has published two ment and Special Economic Zones. revised draft tax amendment bills to give eff ect to tax proposals announced in the 2014 Budget, with During the hearings in Parliament, the SCOF some amendments. Th ey are expected to be tabled made two recommendations, which have been in Parliament shortly. incorporated into the TLAB. As a result of the changes, the Government will delay the imple- In July this year, the National Treasury published mentation of changes concerning the treatment two bills for public comment: the draft Taxation of retirement fund contributions until March 1, Laws Amendment Bill 2014 (TLAB) and the draft 2016, from an original date of March 1, 2015, to Tax Administration Laws Amendment Bill 2014 allow for the proposals to be refi ned. If this pro- (TALAB). Following a public consultation, the re- cess is not fi nalized by the end of June 2015, the vised bills and a draft Response Document were implementation date may be moved forward to presented to the Standing Committee on Finance March 1, 2017. (SCOF) in Parliament on October 15. Second, the repeal of the zero rate on certain agri- Th e TLAB covers the introduction of tax-free sav- cultural inputs will also be postponed for at least a ing accounts; amendments to the taxation of con- year. It is intended that this will allow the South Af- tributions to defi ned benefi t funds; changes to the rican Revenue Service, the National Treasury, and taxation of small businesses; adjustments to the tax the Department of Agriculture to further analyze treatment of the risk business of long-term insurers; the impact of the changes and undertake further refi nements to the employment tax incentive; and consultations as necessary. Th e extra period will the repeal of the zero rate of value-added tax on provide farmers more time to prepare for the repeal inputs for agricultural, pastoral, or other farming of the zero rate.

54 NEWS ROUND-UP: INTERNATIONAL TAX PLANNING ISSUE 102 | OCTOBER 23, 2014

Wyden Pushes US Tax Reform If that were the case, the passage of anti-inver- As Inversion Activity Slows sion legislation through Congress would remain diffi cult, in the face of a Republican Party that Senate Finance Committee Chairman Ron Wyden considers tax reform – to cut the corporate tax has indicated that, as companies appear to be re- rate and change the way the US taxes foreign considering inversions following the administrative earnings – to be the only real long-term solution measures put forward by the Treasury Department for halting inversions. last month, he is focused on reforming the US tax AbbVie To Pull Out Of Merger code, rather than pressing for immediate anti-inversion legislation. With Shire Pharmaceutical company AbbVie has announced "While it looks like the rush of inversions is slow- that its Board of Directors has recommended to ing, we are continuing to examine the issue while shareholders to pull out of a merger with UK focusing on fi xing the root problem – our broken firm Shire, after the US Treasury's non-legisla- tax code," he stated. "I'm committed to continued tive measures of September 22, 2014, to tackle work across the aisle to close loopholes and get bi- tax inversions. partisan, comprehensive tax reform done." Th e non-legislative measures put forward by the Wyden's statement on the reduced priority for Treasury Department on September 22 were in- stop-gap anti-inversion legislation followed tended to deter multinationals from using tax in- AbbVie Inc's decision to pull out of its merger with versions to move their tax residence abroad – away UK-based Shire plc, as well as Salix Pharmaceuti- from the high US tax rate – and to unlock their cals' previous announcement that put a stop to its repatriated earnings held off shore. deal with the Irish subsidiary of Italian company Cosmo Pharmaceuticals SpA. Th e company said its decision followed detailed consideration of the impact of the Treasury's His position could change again if more multina- changes to tax rules. It said the changes eliminated tionals, like Medtronic Inc, in its deal to acquire certain of the fi nancial benefi ts of the transaction, Dublin-based Covidien plc, look at Treasury's non- most notably the ability to access current and fu- legislative measures with their advisors and decide ture global cash fl ows in a tax-effi cient manner as that an inversion to move their tax residence abroad originally contemplated in the transaction. Th is could still be an eff ective means of reducing their fundamentally changed the implied value of Shire tax payments. to AbbVie in a signifi cant manner, it said.

55 AbbVie's Chairman and Chief Executive Offi cer, AbbVie's decision to pull out of the deal will be Richard A. Gonzalez, said: "AbbVie has always completed after a number of formalities. Providing been fi nancially disciplined and we have rigor- shareholders approve the decision, AbbVie will have ous standards in place to ensure transactions are to pay a break fee of approximately USD1.635bn fi nancially sound and deliver compelling stock- to Shire. holder returns. Although the strategic rationale of combining our two companies remains strong, Th e notifi cation comes after the two companies an- the agreed upon valuation is no longer supported nounced in July that they were considering a merg- as a result of the changes to the tax rules and we er that would shift AbbVie's tax residence to the did not believe it was in the best interests of our UK from the US, in a move that would have almost stockholders to proceed." halved AbbVie's eff ective tax rate to 13 percent.

56 NEWS ROUND-UP: COUNTRY FOCUS — SWITZERLAND ISSUE 102 | OCTOBER 23, 2014

Switzerland To Fill Argentinian Last, the rates of withholding tax for royalty income re- Double Tax Treaty Void main unchanged: 3 percent for the use of, or right to use, news material; 5 percent for the use of, or right to Th e Swiss Government has forwarded a double tax use, any copyright of literary, dramatic, musical or artis- agreement signed with Argentina to Parliament tic works, with the exception of royalties for cinemato- for its approval. Th e agreement would replace the graphic fi lms and records on fi lm or videotapes or other terminated agreement of 1997 and contains provi- recordings for television; 10 percent for the use of, or the sions on administrative assistance in tax matters. right to use, industrial, commercial, or scientifi c equipment, or any patent, trademark, design or model, plan, Th e agreement was signed in Berne on March 20, secret formula or process, or for the use of commercial 2014, to put an end to a tax agreement vacuum, communications or scientifi c experience, including which emerged when Argentina terminated the technical assistance fees paid. A 15 percent rate applies countries' 1997 agreement on January 16, 2012. for the gross amount of royalties in all other cases. Th e agreement had been provisionally applied by both countries until that date. Switzerland has now signed 49 double tax agreements in line with standards developed by the Th e text's provisions on the maximum withholding OECD, of which 38 are in force. tax rates on dividend, interest, and royalty income Switzerland, EU Finalize Agreement are largely unchanged, other than for more specifi c wording concerning types of royalty income. On Corporate Tax Reform Switzerland and member states of the EU have In line with the 1997 agreement, the withholding signed a joint statement that reaffi rms Switzer- tax rate on dividends should be capped at 10 per- land's commitment to abolish contested corpora- cent if the recipient owns at least 25 percent of the tion tax regimes and EU member states' pledge to company paying the dividend. Otherwise the rate lift countermeasures. is capped at 15 percent. Th e agreement was signed on October 14, 2014, Th e provisions concerning withholding tax on inter- on the sidelines of a joint meeting of economics est income are generally consistent with those in the and fi nance ministers from the EU and European 1997 agreement – that the withholding tax on inter- Free Trade Area (EFTA). It was initialed in July. est income should be capped at 12 percent, on certain conditions, if the recipient is the benefi cial owner of Th e statement explains that the Swiss Federal the asset from which the interest income derives. Council intends to take steps to remove fi ve tax

57 regimes. It will abolish: the cantonal administra- With the appointment of a new Government in It- tive company status, the cantonal mixed company aly, Ceriani said that the provisions being sought by status, the cantonal holding company status, Cir- Italy, in particular on the division of taxes collected cular Number 8 of the Federal Tax Administra- from Italian workers with jobs across the border in tion on principal structures, and the current prac- Ticino, remained unchanged, with talks being held tice of the Federal Tax Administration regarding "in a consistent fashion" by successive Italian Gov- fi nance branches. ernments. He said the new Government is "not beating around the bush" in its search for a new Th e Council has clarifi ed that any possible replace- treaty with Switzerland as soon as possible. ment measures will need to be in line with generally accepted international standards. It will adopt He suggested, however, that new proposals from draft legislation and open the compulsory consulta- Switzerland had added "new points of friction." tion process with the cantons, political parties, and Th ese have included proposals to negotiate a bilat- other interested groups as soon as possible. eral automatic information exchange agreement. Italy, however, has always insisted that information A consultation has already begun on plans for abol- exchange should be negotiated at EU-level. ishing the cantonal tax statuses currently available to holding, domiciliary, and mixed companies. By Italy has also taken a tough line in that the DTA using a practice known as "ring fencing," the Swiss should not off er provisions that would establish a cantons can tax multinationals' foreign profi ts at a tax amnesty. Italy is seeking payment of any un- lower rate than their domestic earnings. Th e con- paid taxes on Italian taxpayers' assets in Switzerland sultation will run until January 31, 2015. and transparency about account-holders' identities, Ceriani said. According to the statement, the parties "agree on the positive eff ects of fair tax competition and the Another sticking point is the division of taxes col- need to ensure competitiveness at international lev- lected from cross-border workers. Under the exist- el, whilst noting that unfair tax competition may ing agreement, cross-border Italian workers em- lead to harmful eff ects." ployed in Switzerland are exempt from taxation in Italy, but Switzerland is required to transfer 38.8 Italy, Switzerland DTA Talks percent of the fi scal revenue collected to Italy. Proceeding, Despite Problems Switzerland and Italy may agree amendments to Th e cantonal government in Ticino has won sup- their existing double tax agreement (DTA) by spring port from the federal Government in its challenge 2015, Vieri Ceriani, Italy's chief negotiator, has said. against "wage dumping," involving the supply of

58 less than market rate labor from Italy, and is seeking According to the statement, Das agreed to indicate a revision to this percentage. Italy is keen to keep which cases should be prioritized and to give ad- the revenue split consistent under a new deal, but ditional information where appropriate. Th e Swiss Ceriani is convinced that a deal can be negotiated. Federal Tax Administration committed to provide the requested data in a "time-bound manner," and, Ceriani said the discussions on the cross-border if it is unable to do so within an agreed timeframe, taxation of workers are progressing. He said the indicate the reasons why. two sides are looking at a change that would see "a reciprocity and division of taxation rights. A part De Watteville noted India's wish to engage in dis- of wages would be taxed in Switzerland, and the cussions aimed at concluding an automatic ex- rest in Italy." He said this would eliminate issues change of information (AEOI) agreement with concerning the transfer of taxes, but practicalities Switzerland. He told Das that Switzerland would – including the functioning of tax rates and deduc- commence talks with India once it has completed tions – still need to be agreed. the domestic procedures necessary for implementing the new global standard on the automatic ex- Switzerland Extends Olive Branch change of information. Switzerland aims to have To India On Tax the required laws in place by the fi scal year 2017/18. Swiss authorities have confi rmed that, if asked, they will assist India in eff orts to confi rm the genuineness De Watteville and Das also decided that, as a mat- of bank documents and will swiftly provide informa- ter of principle, both sides should continue their tion on requests relating to non-banking dossiers. regular consultations, with the aim of reaching "effective and pragmatic solutions agreeable to both Th e commitment was made in a joint statement sides in accordance with their legal order and inter- following a meeting between the Swiss State Secre- national obligations." tary, Jacques de Watteville, and the Indian Revenue Secretary, Shakikanta Das.

59 NEWS ROUND-UP: COMPLIANCE CORNER ISSUE 102 | OCTOBER 23, 2014

UK Taxpayers' Rights Under Siege, She said the argument "'We're fi nding it too dif- Says CIOT President fi cult to collect via the court system,' isn't a good enough reason to throw out the protection of the Th e President of the Chartered Institute of Taxa- courts for taxpayers. Th e state inevitably has the tion (CIOT), Anne Fairpo, has said that new pow- balance of power and resources, even if it doesn't ers granted to HM Revenue & Customs (HMRC) feel like it from an individual civil servant's end are undermining the ability of taxpayers to chal- of things." lenge tax assessments through the court system. "Th ere's undoubtedly problems with enforcing At CIOT's annual President's Reception on Octo- debts – but that's true for all, not just [the] Govern- ber 14, 2014, she said there is a danger that the bal- ment. Sidestepping the courts to benefi t the state ance of power is tilting too far towards the state at alone is missing the opportunity to reform the court the expense of taxpayers' rights. system to enable business to work better in general." European Commission Reports She noted HMRC powers for the direct recovery of debt; its proposals for a new strict liability criminal On Progress To Cut Red Tape off ense for those who fail to declare overseas income With the ushering in of a new European Commis- and gains; and follower notices, with a 50 percent sion, outgoing President José Manuel Barroso has fi ne "for those taxpayers who persist with their right highlighted the progress made during the past de- to have their case heard in the courts and lose," and cade by the Commission to "make EU law lighter, with accelerated payment notices served that require simpler, and less costly," including in the area of tax. taxpayers to pay disputed amounts upfront. President Barroso said: "I have made smart regu- She told the event: "I am concerned about the in- lation a key priority of the Commission since the creasing focus on HMRC enforcement without beginning of my fi rst mandate. Focusing EU action third-party supervision. Th ere is, and can be, no on those issues that are best dealt with at European dispute that HMRC needs to enforce tax debts. level, while making EU law lighter, simpler, and Th ere's no dispute that we have a societal infra- less costly, is key for the [EU's] credibility. Smart structure that needs to be paid for. In a perfect regulation is also essential to boost growth and jobs world, perhaps HMRC wouldn't need the courts in Europe and we have spared no eff ort to make it – but then again, in a perfect world, no one would happen during the last ten years. I believe we can be need the courts. Th is is not a perfect world. People proud of what we have achieved during this period make mistakes. HMRC makes mistakes." which is nothing less than a true culture change

60 in the Commission's way of working. Our success Longworth, said: "Th e sentiment of this report is in crucially depends on a similar level of ambition by the right place; it tells us that the EU has listened to the European Parliament and member states." businesses' concerns about the impact of burdensome regulations on competitiveness and economic Since 2012, the Commission has reportedly taken growth." 200 individual actions, including undertaking measures for simplifi cation and burden reduction, the "It is also incumbent on governments to pay more repeal of legislation deemed no longer necessary, attention to the actions of their MEPs; too often the withdrawal of proposals that do not receive ap- burdensome legislation from Europe has been pro- proval from the European Parliament or the Coun- posed or supported by UK MEPs of all parties." cil, and the evaluation of further opportunities for simplifi cation and burden reduction. Since 2005, Noting a focus on reducing the burden on small the Commission has repealed over 6,100 legal acts and medium-sized enterprises (SMEs), Longworth and has withdrawn almost 300 proposals. said: "Reform shouldn't stop with SMEs – we want to see improvements for businesses of all sizes. Th is Th e Commission reported that it has exceeded its is essential if we are to see a vibrant and growing 25 percent reduction target for administrative bur- economy in Europe. Th e next step is for the EU dens, with a reduction equal to 27 percent – a fi g- to deliver on the single market for both goods and ure equivalent to more than EUR33.4bn in savings services, so that it works better for business. Th is for businesses each year. Th is includes EUR18.8bn should be a major objective of any future negotia- in savings on invoicing and EUR6.6bn on annual tion on reform of the EU." accounting requirements. Th is has included simplifi cation of VAT returns and fewer formalities for VAT reform is a key component of improving the participating in public procurement exercises. In functioning of the single market in the EU. In a re- addition, plans are afoot to introduce a standard port from an Expert Group appointed by the Euro- VAT return for adoption by all member states to cut pean Commission to devise value-added tax (VAT) the cost of compliance by approximately EUR15bn policies, member states were urged to considerably (USD20.6bn) annually. reform EU VAT rules, after businesses warned that the current rules are creating barriers to trade with- Commenting on "Cutting Red Tape in Europe – in the EU that make it simpler to import goods Legacy and Outlook," a report prepared by the Eu- from non-EU countries than to do businesses with ropean Commission to recount its achievements other EU states. Th is complexity is seen to be dis- and look at future initiatives, the Director Gen- couraging SMEs from operating across borders in eral of the British Chambers of Commerce, John the EU, the Expert Group said.

61 As well as improving fi ling requirements by adopt- Financial Secretary to the Treasury David Gauke ing uniform VAT forms, the EU is seeking to achieve said: "Since 2010/11, the percentage tax gap has harmonized rules on the taxation of goods and ser- stayed lower than at any point under the previous vices, in particular by broadening the tax base, re- Government, saving the country GBP4bn. Today's stricting member states' use of reduced rates, and fi gures show that there's still more work to do, but tackling VAT fraud. our continued drive to tackle avoidance means that avoidance is down. In 2012/13 HMRC achieved a UK Tax Gap Widens compliance yield of GBP20.7bn, rising to a record Th e UK tax authority, HM Revenue & Customs breaking GBP23.9bn in 2013/14." (HMRC), has revealed that the UK tax gap grew to 6.8 percent in the fi scal year 2012/13, up 0.2 "Th e UK has one of the lowest tax gaps in the world percent year-on-year. but HMRC will continue to deploy its resources and skills to maintain the downward pressure that Th e tax gap, which measures the amount of tax that has proved so eff ective in recent years." is theoretically due but goes uncollected, totaled GBP34bn (USD54.4bn) in 2012/13, HMRC said, Patrick Stevens, Tax Policy Director at the Char- attributing the increase to poorer value-added tax tered Institute of Taxation (CIOT), commented: (VAT) collections in particular. "GBP34bn is a large amount of tax not to be col- lecting, and there appears to have been a small up- HMRC said that while the VAT gap expanded from tick after years of the tax gap fi gure falling. How- GBP11.4bn to GBP12.4bn, or 10.9 percent of the- ever, the fi gure still compares well to international oretical collections, last tax year, the portion of the jurisdictions. Th e most recent estimate of the tax tax gap owing to tax avoidance fell from GBP3.4bn gap in the US, for example, put the tax gap there at to GBP3.1bn. more than 14 percent of total tax liabilities, more than double the percentage share in the UK." Meanwhile, tax evasion cost the UK revenues worth Austria Given Extra Year To GBP4.1bn, criminal activities GBP5.4bn, and non- payment GBP4.4bn. Th e hidden economy was esti- Automatically Exchange Tax Data mated to account for GBP5.9bn of the lost revenues. At a meeting of the EU's ECOFIN council in Lux- embourg this week, the member states of the EU Looking at longer term trends, HMRC highlighted agreed to expand the scope of mandatory auto- that the tax gap since 2005/06 (the fi rst year on matic exchange of tax information by 2017, with record) has fallen from 8.5 percent, delivering an Austria being granted an extra year to develop the additional GBP43bn in tax. infrastructure needed to comply with the new law.

62 Under the new law, tax authorities in the EU will standard on tax information exchange adopted by be required to exchange information on interest, the OECD in July this year. It also commits EU dividends and other income, as well as account bal- states to share the same level of information with ances and sales proceeds from fi nancial assets. Th ey each other as they do with the US under the For- are already required to share information on in- eign Account Tax Compliance Act (FATCA). come from employment, directors' fees, life insurance, pensions, and property under an existing law. Th e new directive will be adopted at a forthcoming Council meeting without further discussion, once Austria said it needed more time to create a new re- it has been fi nalized in all offi cial languages. Based porting system and was given until 2018 to comply. on Article 115 of the Treaty on the Functioning Luxembourg also initially said it would need more of the EU, it needs unanimity for adoption by the time, but then agreed to meet the 2017 deadline. Council, after consulting the European Parliament.

Th e new law, which is intended to combat tax evasion, will bring the EU in line with the global

63 NEWS ROUND-UP: INTERNATIONAL TRADE ISSUE 102 | OCTOBER 23, 2014

US Calls For Greater Japanese said it was unlikely that the text of the other TPP Ambition On TPP chapters could be concluded before an agreement on tariff s is reached. During a telephone conversation with Japanese Prime Minister Shinzo Abe on October 15, US Th ere will be a ministerial meeting for all prospec- President Barack Obama stressed "the need to be tive TPP member states in Sydney on October 25– bold" in order to move forward the stalled negotia- 27, during which it is expected that Akira Amari, tions on Trans-Pacifi c Partnership (TPP) tariff s. Japan's Economy Minister, and Michael Froman, the US Trade Representative, will hold further talks. Obama's call followed further meetings between the US and Japanese TPP negotiators recently that Th e prospective TPP member countries are Austra- – despite achieving some progress – had highlighted lia, Brunei, Canada, Chile, Japan, Malaysia, Mex- the diffi culties that still remain before both leaders' ico, New Zealand, Singapore, Peru, the US, and pledge for an early conclusion of the trade treaty Vietnam. might be realized. WTO Chief Pushes For Trade

Th e outstanding market access issues between Ja- Facilitation Pact Breakthrough pan and the US remain focused on the agriculture Th e Director-General of the World Trade Orga- and automobile sectors, with the US insisting that nization (WTO), Roberto Azevêdo, has urged the Japan should snub a previous parliamentary call to Organization's members to overcome the impasse maintain agricultural tariff s. in Trade Facilitation Agreement (TFA) talks.

Although the elimination of tariff s is meant to be Reporting to the Trade Negotiations Committee a key feature of the TPP agreement, Japan has in- on October 16, 2014, Azevêdo said that intensive sisted that it should be allowed to retain signifi cant consultations have failed to produce a solution to import duties on its ultra-sensitive agricultural a deadlock between members, which he said could products: rice, wheat, beef, pork, dairy products, be "the most serious situation that [the WTO] has sugar, and starch. ever faced."

In recent remarks in Washington, DC, Mexico's Th e negotiations broke down when India said in Economy Secretary, Ildefonso Guajardo Villarreal, July that it would not ratify the TFA until progress emphasized the importance to other TPP parties is made by advanced nations on the WTO's food of an agreement on agricultural import duties. He security program and other measures for developing

64 states. India's stance received support from a num- in goods. It requires the formal approval of all 160 ber of countries, including South Africa, Tanzania, WTO members, who are due to meet in December. Uganda, Bolivia, and Cuba. As part of the accession negotiations, Seychelles Azevêdo warned that the standoff "is having a par- concluded eight bilateral agreements on market alyzing eff ect on our work across the board." He access for goods. It has undertaken tariff conces- added that "continuation of the current paralysis sions and commitments that "bind" tariff rates would serve only to degrade the institution – par- for all products on average at 9.5 percent. For ag- ticularly the negotiating function." ricultural products, this average is 16.9 percent, while for non-agricultural products the average is On October 15, 2014, the Foreign Trade Associa- 8.3 percent. tion, in conjunction with 14 business organizations from four continents and representing more Upon accession, the Seychelles has also commit- than 60 countries, issued a statement urging WTO ted to join the Information Technology Agreement members to immediately ratify the TFA, warning (ITA), the WTO plurilateral agreement providing that failure to do so would have dramatic conse- for the complete elimination of import duties on quences for international commerce. certain IT products between signatories.

Th e TFA creates binding commitments across all WTO Director-General Roberto Azevêdo said: "I WTO members to expedite the movement, release, welcome the hard work undertaken by WTO mem- and clearance of goods, improving cooperation bers and the Government of Seychelles to complete among WTO members on customs matters. It is this accession process. It is particularly timely as the estimated that the agreement can cut trade costs by world is marking the International Year of Small almost 14.5 percent for low-income countries, and Island Developing States. Th e WTO provides a vi- by 10 percent for high-income countries. tal platform for small economies like Seychelles to make their voice heard at the global level." Seychelles Agrees Terms

Of WTO Accession Pierre Laporte, Seychelles' Minister of Finance, Th e terms of Seychelles' accession to the World Trade, and Investment, added: "WTO member- Trade Organization (WTO) were agreed on Octo- ship [is] an extremely important step forward for ber 17, 2014, concluding 18 years of negotiations. Seychelles. … WTO Membership will provide Sey- chelles with a platform to continue to reform its Seychelles' draft accession package contains its mar- trade regime. It will open Seychelles' economy fur- ket access concessions and commitments on trade ther to the benefi ts of a more open trading system

65 and complement Seychelles' eff orts toward further the United Nations. Free EU market access was integration both in the region and the multilateral withdrawn for Kenyan exports at the start of this trading system." month, after negotiators failed to reach a deal on the EPA by an October 1 deadline. Chairperson of the Seychelles' WTO Working Par- ty, Hilda Al-Hinai, stated: "Seychelles' WTO ac- Th e EU has now confi rmed that, under the new cession is a strong, positive, and clear signal to its EPA, all EAC members – least developed or more trading partners, including to other Small Island advanced – will benefi t from the same "predictable Developing States, for its commitment to engaging and uniform trade scheme." with the global economy in the framework of the rules-based multilateral trading system." Betty Maina, CEO of the Kenya Association of Man- ufacturers, said: "because of the delay in concluding EU Reaches Trade Deal With the EPA, Kenyan fi rms will unfortunately have to pay East African Community taxes for still another three to six months before the Th e EU has said the conclusion of a new trade deal full legal processes for reinstatement into the duty- with the East African Community (EAC) means free schedule can be concluded." However, she added that EAC countries no longer have to worry that that "consultations are underway between [the] Gov- their improving economic status will lead to the ernment and private sector on how to cushion Kenya loss of full duty-free and quota-free access to the exporters to the EU against the eff ects of the [EU's] European market. Generalised Scheme of Preferences tariff system."

According to the EU, the fi nalized Economic Part- To comply with World Trade Organization rules, nership Agreement (EPA) will "provide legal cer- the EPA includes a commitment that EAC coun- tainty for businesses and open a long-term perspec- tries should increase EU duty-free access to 80 per- tive for free and unlimited access to the EU market cent of their imports over the next 15 years. If EAC for products from Burundi, Kenya, Rwanda, Tan- countries negotiate broader agreements with the zania, and Uganda." EU's main competitors, the EU would be able to claim the same tariff relief. An interim EPA was signed in 2007. Imports from EAC countries have entered the EU duty- and quo- Th e EU also said that the two blocs had reached a ta-free since January 1, 2008. balanced agreement on export taxes and had concluded an agreement that includes provisions cover- All EAC members, with the exception of Kenya, ing the free movement of goods, cooperation on cus- are classed as least developed countries (LDCs) by toms and taxation, and trade defense instruments.

66 EU Trade Commissioner Karel De Gucht said: "Th e that Europe wants to off er. I hope that these EPAs EAC region stands out for its dynamism and ambi- will be signed and implemented soon." tion to develop as an integrated region. Th e comprehensive partnership agreement we have just reached In 2013, total trade between the EU and the EAC is the best way in which we can support [the] EAC's reached EUR5.8bn (USD7.4bn). EU imports from the aspirations. We have concluded two other develop- EAC are worth EUR2.2bn and mostly comprise cof- ment-oriented partnerships with African regions this fee, cut fl owers, tea, tobacco, fi sh, and vegetables. Th e year. It's a source of my personal satisfaction also to EU mainly exports machinery, equipment, vehicles, and see East Africa benefi ting from the opportunities pharmaceutical products to the EAC, worth EUR3.5bn.

67 TAX TREATY ROUND-UP ISSUE 102 | OCTOBER 23, 2014

CHINA - RUSSIA

Signature

China signed a new DTA with Russia on October 13, 2014.

HONG KONG - SOUTH AFRICA

Signature

Hong Kong signed a DTA with South Africa on October 16, 2014. VIETNAM - IRAN

MACEDONIA - VIETNAM Signature

Signature Vietnam signed a DTA with Iran on October 14, 2014. Macedonia signed a DTA with Vietnam on Octo- ber 15, 2014.

UNITED ARAB EMIRATES - AUSTRALIA

Negotiations

Offi cials from the United Arab Emirates and Aus- tralia met on October 15, 2014, beginning negotiations towards a DTA.

68 CONFERENCE CALENDAR ISSUE 102 | OCTOBER 23, 2014

10/29/2014 - 10/31/2014 A guide to the next few weeks of international tax gab-fests (we're just jealous - stuck in the offi ce). http://www.bna.com/inter_chicago2014/

THE AMERICAS 2014 INTERNATIONAL UPDATE: U.S. - MEXICO - CANADA CROSS- INTRODUCTION TO U.S. BORDER TAX ISSUES INTERNATIONAL TAX Procopio International Tax Bloomberg BNA Venue: Joan B. Kroc Institute for Peace & Justice, Venue: Baker & McKenzie LLP Conference Cen- 5998 Alcala Park, San Diego, CA 92110-2492, ter, 300 East Randolph Street, 50th Floor, Chicago, USA IL 60601, USA Chair: TBA Chairs: James O'Brien (Baker & McKenzie), Col- leen Romero (Baker & McKenzie), Julia Skubis 10/30/2014 - 10/31/2014 (Baker & McKenzie), Doug Stransky (Sullivan & http://www.procopio.com/ Worcester). conference/2014-conference

10/27/2014 - 10/28/2014 8TH TAX PLANNING FOR THE http://www.bna.com/intro_chicago2014/ INTERNATIONAL CLIENT

INTERMEDIATE U.S. INTERNATION- Federated Press AL TAX UPDATE Venue: Courtyard by the Marriott, 475 Yonge Bloomberg BNA Street,Toronto, Ontario, M4Y 1X7, Canada

Venue: Baker & McKenzie LLP Conference Cen- Chairs: Grace Chow (Cadesky and Associates LLP), ter, 300 East Randolph Street, 50th Floor, Chicago, Greg Kanargelidis (Blake, Cassels & Graydon LLP) IL 60601, USA 11/5/2014 - 11/6/2014 Chair: James O'Brien (Baker & McKenzie), Colleen Romero (Baker & McKenzie), Julia Skubis (Baker & http://www.federatedpress.com/pdf/TPIC1411-E. McKenzie), Doug Stransky (Sullivan & Worcester). pdf

69 THE 5TH ANNUAL PRIVATE INTRODUCTION TO U.S. EQUITY TAX, OPERATIONS AND INTERNATIONAL TAX COMPLIANCE FORUM Bloomberg BNA Financial Research Associates, LLC Venue: Hilton Boston Downtown, 89 Broad Street, Venue: Th e Princeton Club New York, 15 West Boston, MA 02110, USA 43rd St, New York, New York 10036, USA Chairs: Maher Haddad (Baker & McKenzie), James Key Speaker: TBC O'Brien (Baker & McKenzie), Colleen Romero (Baker & McKenzie), Julia Skubis (Baker & McK- 11/13/2014 - 11/14/2014 enzie), Doug Stransky (Sullivan & Worcester).

https://www.frallc.com/conference. 11/17/2014 - 11/18/2014 aspx?ccode=B945 http://www.bna.com/intro_boston2014/ 107TH ANNUAL CONFERENCE ON TAXATION PRINCIPLES OF INTERNATIONAL TAX National Tax Association Bloomberg BNA Venue: Eldorado Hotel and Santa Fe Community Convention Center, Santa Fe, NM, USA Venue: Bloomberg LP, 731 Lexington Avenue, New York, NY 10022, USA Chair: James Nunns, (President, National Tax Association) Chairs: Mark Leeds (Mayer Brown), Daniel Mayo (KPMG LLP) 11/13/2014 - 11/15/2014 11/17/2014 - 11/19/2014 http://ntanet.org/images/stories/pdf/2014_nta_an- nualconference_preliminaryprogram_sept11.pdf http://www.bna.com/principles_newyork_2014/

70 16TH ANNUAL EFFECTIVE HEDGE Venue: Baker & McKenzie, 300 East Randolph FUND TAX PRACTICES Street, 50th Floor, Chicago, IL 60601, USA

Key Speakers: TBA Financial Research Associates, LLC

Venue: Th e Princeton Club, 15 West 43rd Street, 11/20/2014 - 11/21/2014 New York, NY 10036, USA http://www.bna.com/yearreview_chicago2014/ Key Speaker: TBC 2014 CORPORATE TAX 11/18/2014 - 11/19/2014 DEVELOPMENTS – THE YEAR IN REVIEW: NEW YORK https://www.frallc.com/conference. aspx?ccode=B931 Bloomberg BNA

INTERMEDIATE U.S. Venue: Baker & McKenzie, 452 5th Ave, New York, INTERNATIONAL TAX UPDATE NY 10018, USA

Key Speakers: Maja Arcyz (KPMG), Paul Bagratu- Bloomberg BNA ni (McGladrey), Bart Bassett (Morgan Lewis), June Venue: Hilton Boston Downtown, 89 Broad Street, Anne Burke (Baker & McKenzie), Fred Chilton Boston, MA 02110, USA (KPMG), Rob Clary (McDermott Will & Emery), William F. Colgin (Morgan Lewis), among numer- Chairs: Maher Haddad (Baker & McKenzie), James ous others O'Brien (Baker & McKenzie), Colleen Romero (Baker & McKenzie), Julia Skubis (Baker & McK- 11/20/2014 - 11/21/2014 enzie), Doug Stransky (Sullivan & Worcester) http://www.bna.com/yearreview_newyork2014/ 11/19/2014 - 11/21/2014

http://www.bna.com/inter_boston2014/ TREATY ASPECTS OF INTERNATIONAL TAX PLANNING

2014 CORPORATE TAX IBFD DEVELOPMENTS – THE YEAR IN REVIEW: CHICAGO Venue: Hilton Sao Paulo Morumbi, Av. das Nacoes Unidas, 12901, Sao Paulo, SP, 04578-000, Brazil Bloomberg BNA Key Speakers: Boyke Baldewsing, Jan de Goede

71 11/26/2014 - 11/28/2014 Venue: Bloomberg BNA Conference Center, 1801 S. Bell Street, Arlington Virginia 22202, USA http://www.ibfd.org/Training/ Treaty-Aspects-International-Tax-Planning-0 Chair: TBA

7TH TAX PLANNING FOR R&D 12/1/2014 - 12/2/2014 http://www.bna.com/intro_dc2014/ Federated Press

Venue: Courtyard by the Marriott, 475 Yonge TAXATION OF INTELLECTUAL Street, Toronto, Ontario M4Y 1X7, Canada PROPERTY

Chair: David W. Regan (KPMG LLP) Bloomberg BNA

11/27/2014 - 11/28/2014 Venue: Bloomberg LP, 731 Lexington Ave, New York, NY 10022, USA http://www.federatedpress.com/pdf/TPRD1411- E.pdf Co-Chairs: Rob Bossart (Law Offi ces of Rob Bossart), Paulus Merks (DLA Piper) INTRODUCTION TO U.S. INTERNATIONAL TAX - SAN JOSE 12/1/2014 - 12/2/2014 http://www.bna.com/uploadedFiles/Content/ Bloomberg BNA Events_and_Training/Live_Conferences/Tax_ and_Accounting/Conferences_-_Seminars/IPAc- Venue: PricewaterhouseCoopers, 488 S Almaden qReorgDec2014.pdf Blvd #180, San Jose, CA 95110, USA

Chair: TBA U.S. INTERNATIONAL TAX PLANNING 12/1/2014 - 12/2/2014

http://www.bna.com/intro_sanjose2014/ Bloomberg BNA

Venue: Th e Houstonian Hotel, 111 North Post INTRODUCTION TO U.S. Oak Lane, Houston, TX 77024, USA INTERNATIONAL TAX - WASHINGTON DC Key Speakers: Martin Euson (Ernst & Young LLP), Mitra Ghaemmaghami (Ernst & Young LLP), James Bloomberg BNA Howard (Gardere Wynne Sewell LLP), Chris Lallo

72 (Ernst & Young LLP), among numerous others TAX FOR SHIPPING BRAZIL

12/1/2014 - 12/3/2014 Lloyd's Maritime Academy

http://www.bna.com/taxplanning_houston2014/ Venue: Pestana Rio Atlantica, Avenida Atlântica, 2964, Rio de Janeiro - RJ, 22070000, Copacabana, INTERMEDIATE U.S. Brazil INTERNATIONAL TAX UPDATE - Key Speakers: Luis Wolf Trzcina (KPMG), André SAN JOSE de Souza Carvalho (Veirano Advogados), Werner Braun Rizk (Zouain, Rizk, Colodetti e Advogados Bloomberg BNA Associados), among numerous others. Venue: PricewaterhouseCoopers, 488 S Almaden Blvd #1800, San Jose, CA 95110, USA 12/4/2014 - 12/5/2014

Chair: TBA http://www.lloydsmaritimeacademy.com/event/ taxbrazil 12/3/2014 - 12/5/2014 U.S. TAX ASPECTS OF INTERNATIONAL http://www.bna.com/inter_sanjose2014/ ACQUISITIONS & REORGANIZATIONS

INTERMEDIATE U.S. Bloomberg BNA INTERNATIONAL TAX UPDATE - WASHINGTON DC Venue: Morgan Lewis Conference Center, 1 Mar- ket Street, San Francisco, CA 94105, USA

Bloomberg BNA Chair: Bart Bassett (Morgan Lewis) Venue: Bloomberg BNA Conference Center, 1801 S. Bell Street, Arlington Virginia 22202, USA 12/10/2014 - 12/11/2014

Chair: TBA http://www.bna.com/uploadedFiles/Content/ Events_and_Training/Live_Conferences/Tax_ 12/3/2014 - 12/5/2014 and_Accounting/Conferences_-_Seminars/IPAc- qReorgDec2014.pdf http://www.bna.com/inter_dc2014/

73 U.S. INTERNATIONAL TAX PRINCIPLES OF INTERNATIONAL REPORTING AND COMPLIANCE TAXATION

Bloomberg BNA IBFD

Venue: 731 Lexington Avenue, New York, NY Venue: Hotel Maya, 138 Jalan Ampang, 50450 10022, USA Kuala Lumpur, Malaysia

Key Speaker: Kyle Bibb (K. Bibb LLC, TX), Eytan Key Speakers: Bart Kosters, Jagdev Singh, Rachel Burstein (McGladrey, NY), Victor Gatti (KPMG, Saw, SM Th anneermalai, Steve Towers. NY), James Hemelt (Bloomberg BNA, VA), Mar- cellin Mbwa-Mboma (Ernst & Young LLP, NY), 11/17/2014 - 11/21/2014 Mitchell Siegel (McGladrey, NY) http://www.ibfd.org/Training/ Principles-International-Taxation-2#tab_program 12/15/2014 - 12/16/2014

http://www.bna.com/ THE 3RD OFFSHORE INVESTMENT reportingandcompliance_newyork2014/ CONFERENCE SINGAPORE 2015

Off shore Investment ASIA PACIFIC Venue: Raffl es, 1 Beach Rd, 189673, Singapore INTERNATIONAL TAXATION OF OIL AND GAS AND OTHER MINING Chair: Nicholas Jacob (Wragge Lawrence Graham ACTIVITIES & Co)

IBFD 1/21/2015 - 1/22/2015

Venue: Conrad Centennial Singapore, Two Temas- http://www.offshoreinvestment.com/media/up- ek Boulevard, 038982, Singapore loads/The%203rd%20OI%20Conference%20 Singapore%202015%20pgs%207-10%20(2).pdf Key Speakers: Henry Syrett, Patrick Ellingsworth, Paul Cornelius, Rachel Saw, Sharon Tan

10/27/2014 - 10/30/2014

http://www.ibfd.org/Training/International-Taxa- tion-Oil-and-Gas-and-Other-Mining-Activities-1

74 MIDDLE EAST AND AFRICA WESTERN EUROPE

THE 6TH ANNUAL PRIVATE WEALTH INTERNATIONAL TAXATION MIDDLE EAST 2014 OF BANKS AND FINANCIAL INSTITUTIONS Private Wealth Middle East IBFD Venue: Conrad Dubai, PO Box 115143, Sheikh Venue: IBFD head offi ce, Rietlandpark 301, 1019 Zayed Road, Dubai, UAE DW Amsterdam, Th e Netherlands Key Speakers: Shaykh Haytham Tamim (Sharia Solu- Key speakers: Ingrid Rensema, Eelco van der Stok, tions), Reshmi Manekporia (Berwin Leighton Pais- Omar Moerer, Francesco Mantegazza, João Fé- ner), Yann Mrazek (M/Advocates of Law), Tim Cas- lix Pinto Nogueira, Ronald Aw-Yong, Bob van ben (Lawrence Graham), among numerous others. Kasteren

11/5/2014 - 11/5/2014 10/27/2014 - 10/29/2014 http://www.iiribcfinance.com/event/ http://www.ibfd.org/Training/International-Taxa- Private-Wealth-Leaders-Middle-East tion-Banks-and-Financial-Institutions

INTRODUCTION TO VAT 3RD ANNUAL EUROPEAN INCLUDING CROSS-BORDER FINANCIAL INTELLIGENCE & SUPPLIES, FINANCIAL SERVICES INVESTIGATIONS CONFERENCE AND REAL ESTATE

Off shoreAlert IBFD Venue: Th e Bloomsbury Hotel, 16-22 Great Rus- Venue: Hilton Dubai Jumeirah Hotel, Jumeirah sell St, London WC1B 3NN, UK Beach Road, Dubai Marina, Dubai Chair: David Marchant (Off shoreAlert, Miami) Key Speakers: Fabiola Annacondia, Ridha Hamzaoui 11/10/2014 - 11/11/2014

11/16/2014 - 11/18/2014 http://www.off shorealert.com/conference/london/

http://www.ibfd.org/sites/ibfd.org/fi les/content/ita/ pdf/program/OC14DUBVAT%20Program.pdf

75 PRINCIPLES OF INTERNATIONAL INTERNATIONAL TAX AUDIT TAX PLANNING FORUM 2014

IBFD International Tax Center

Venue: IBFD Head Offi ce, Rietlandpark 301, 1019 Venue: BMW Welt, Am Olympiapark 1, 80809 DW, Amsterdam, Th e Netherlands München, Germany

Key Speakers: Boyke Baldewsing, Tigran Mkrt- Chairs: Professor Dr. Rudolf Mellinghoff , Dr. chyan, Eduard Sporken, Clive Jie-A-Joen, Marcello Giammarco Cottani, Professor Dr. Heinz Jirousek Distaso, Piet Boonstra, Ariën Doeksen, Ronald van de Merwe, Patrick Ellingsworth, Shee Boon Law. 11/19/2014 - 11/21/2014

http://www.taxauditforum.eu/ 11/10/2014 - 11/14/2014

http://www.ibfd.org/Training/Principles-Interna- STEP JERSEY 22ND ANNUAL tional-Tax-Planning#tab_program INTERNATIONAL CONFERENCE

INTERNATIONAL TAXATION OF STEP OIL AND GAS AND OTHER MINING Venue: Pomme d'Or Hotel, Liberation Square, St ACTIVITIES Helier, JE1 3UF, Jersey

IBFD Chair: Sir Philip Bailhache

Venue: IBFD head offi ce, Rietlandpark 301, 1019 11/21/2014 - 11/21/2014 DW Amsterdam, Th e Netherlands http://www.step.org/sites/default/fi les/step-jersey- Key Speakers: Patrick Ellingsworth, Bart Kosters, 22nd-international-conference.pdf John Wells, Firas Zebian

11/17/2014 - 11/19/2014 TAX PLANNING FOR NON- DOMICILIARIES CONFERENCE http://www.ibfd.org/Training/International-Taxa- tion-Oil-and-Gas-and-Other-Mining-Activities-0 IIR & IBC Financial Events

Venue: TBC, London, UK

Key Speakers: Jonathan Burt (Harcus Sinclair),

76 Richard Frimston (Russell Cooke), John Barnett TREASURY FOR TAX PEOPLE (Burges Salmon), Michael Sherry (Temple Tax Chambers), among numerous others. IBC

Venue: London, UK, TBC 11/25/2014 - 11/25/2014 Co-Chairs: David Hill (Grant Th ornton), Edward http://www.iiribcfinance.com/event/ Brown (Grant Th ornton) Tax-Planning-For-Non-Domiciles

12/9/2014 - 12/9/2014 CAPITAL GAINS TAX CONFERENCE 2014 http://www.iiribcfinance.com/event/ treasury-for-tax-people-event IBC

Venue: TBC, London, UK PRIVATE CLIENT PROPERTY TAXA- Chair: David Kilshaw (EY) TION 2014

12/2/2014 - 12/2/2014 IBC

http://www.ifcreview.com/eventsfull. Venue: London, UK, TBC aspx?eventId=199 Key Speaker: Th omas Adcock (Carter Backer Win- ters LLP), Christopher Groves (Withers), Paul OFFSHORE TAXATION CONFERENCE Fairbairn (Withers), Jo Bateson (KPMG), among numerous others. IIR & IBC Financial Events 1/22/2015 - 1/22/2015 Venue: TBC, London, UK http://www.iiribcfinance.com/event/ Key Speakers: Patrick Soares (Field Court Tax Cham- private-client-property-taxation-conference bers), Emma Chamberlain (Pump Court Tax Cham- bers), Patrick Way QC (Field Court Tax Chambers), Philip Baker QC (Field Court Tax Chambers).

12/3/2014 - 12/3/2014

http://www.iiribcfinance.com/event/ off shore-tax-planning-conference

77 IN THE COURTS ISSUE 102 | OCTOBER 23, 2014

WESTERN EUROPE

France Th e European Court of Justice (ECJ) was asked for a preliminary ruling concerning an Italian company which manufactured metal parts to sell to a company which had its registered offi ce in France. Before the parts reached the purchasing company, they were sent to another company in France to be painted and fi nished, the cost of which was included in the invoice issued to the purchasing fi rm, while the painting company charged the manufacturer for the service.

Th e manufacturer applied for a refund of the VAT A listing of key international tax cases in the paid on the painting to the French tax authorities, last 30 days arguing that under European VAT rules it should not have been liable in France on this transaction; the authorities refused, arguing that the parts were account the processing done by a second company supplied in France by the painting company to the in the same country as the buyer. purchasing company. Th e ECJ acknowledged that according to EU law Th e manufacturer argued before the Administra- the manufacturer can apply for a VAT refund if tive Court in Paris in 2008, and the Administrative it did not make a taxable supply in France, but if Court of Appeal in Paris in 2010, that it had sup- through interpretation of the law the place of supplied the parts and had not made a taxable transac- ply is found to be the country of the receiver of tion in France so that the purchasing company was the goods, then the painting company is entitled to liable for the VAT on the sale. deduct VAT paid by the manufacturer.

Th e matter was referred to the Council of State, Th e main issue was the wording of the relevant legal which approached the ECJ for an interpretation of provision which the ECJ, following a literal inter- the EU VAT Directive regarding where the supply pretation of the phrase "the place where the goods of the parts took place, and whether to take into are at the time when dispatch or transport to the

78 Germany person to whom they are supplied begins", took to mean that the supply occurred in France when the Th e European Court of Justice (ECJ) was asked fi nished product was transported by the painting for a preliminary ruling concerning taxpayers who company after its work had been completed. Th e owned units in investment funds, some of which ECJ emphasized the logic that the transaction be- were non-transparent, in Belgium. Th e taxpayers tween the manufacturer and the buyer consisted of submitted an estimate of the value of the funds ac- payment for the supply of the fi nished product, and cording to the stock exchange for income tax pur- since the service of the painting company resulted poses, but the tax authority assessed the income in the fi nished product which it then delivered to from the non-transparent funds on a fl at-rate basis the buyer, the supply took place in the country of at 6% of the last fi xed redemption price, according that company. to national tax legislation.

Th e ECJ concluded that, according to the EU VAT Th e taxpayers argued in court against the amend- Directive, the supply took place once the painting ed assessment by claiming that the relevant legis- company in France had completed its work on the lation was a violation of the EU principle of free goods which were then delivered to the buyer, rath- movement of capital, and so the referring court er than in Italy where the manufacturer supplied approached the ECJ for an interpretation of EU the unfi nished product. Accordingly the manufac- law with regard to the "fl at-rate taxation of income turer would not be able to apply for a refund of the from so-called non-transparent (domestic and) for- VAT paid. eign investment funds".

Th e judgment was delivered on October 2, 2014. Th e ECJ established that the fl at-rate tax resulted from the non-resident investment funds' inability European Court of Justice: Fonderie 2A v. France to meet the communication and information re- (C-446/13) quirements set out in the national legislation, and that although a fl at rate may be more benefi cial to http://curia.europa.eu/juris/document/document. the taxpayers during periods where income gener- jsf?text=&docid=158190&pageIndex=0&docla ated by the funds is particularly high, the fact that ng=EN&mode=lst&dir=&occ=first&part=1&c the fl at rate is a disadvantage cannot be overlooked id=351191 due to any related tax benefi t.

Th e ECJ recognized that the relevant national legislation had the eff ect of discouraging residents from acquiring foreign investment funds which could

79 not comply with the legal requirements and would the taxpayers themselves to relay the informa- therefore be subject to less benefi cial tax treatment, tion from the funds to the tax authority, went resulting in a restriction of the residents' right to "beyond what is necessary to ensure effective free movement of capital. fiscal supervision".

Th e ECJ then considered whether the restriction In fact, the ECJ pointed out that under EU law the could be justifi ed because the legislation fulfi lled "a tax authority is able to approach the tax authority legitimate objective in the public interest", which of another member state and ask for information in the present case the German Government ar- pertaining to a taxpayer's activities and assets in gued was "the need to safeguard the balanced allo- order to assess their tax liability, and while mak- cation of the power to impose taxes between Mem- ing such requests and allowing taxpayers to submit ber States." their own gathered information may be adminis- tratively complicated for the tax authority, such dif- Th e Government stated that in the interest of equal fi culties are not enough to justify a restriction of taxation, the national legislation was intended to the free movement of capital according to case law. unify the tax treatment of both direct investment and investment funds, and investment in resident Th e ECJ concluded that national legislation which and non-resident funds. However, although accord- imposed a fl at rate of tax on income from foreign in- ing to case law protecting the balanced allocation of vestment funds which do not meet the information power is a valid justifi cation, it does not apply in and communication requirements usually met by this case because the legislation does not go so far as resident investment funds was a restriction of tax- to prevent any disruption to the balance or interfer- payers' right to free movement of capital that could ence with the German tax authority's ability to tax not be justifi ed, since there were other ways for the residents' foreign income. tax authority to receive the necessary information.

The Government's second justification was that Th e judgment was delivered on October 9, 2014. the legislation was necessary for the sake of effective fiscal supervision and tax collection, but European Court of Justice: Rita van Caster and Pat- while the legislation sets out the required infor- rick van Caster v. Germany (C-326/12) mation to allow the tax authority to correctly collect income tax on investments, the ECJ was http://curia.europa.eu/juris/document/document. of the opinion that automatically applying a flat jsf?text=&docid=158426&pageIndex=0&docla tax rate to foreign investment funds which do ng=EN&mode=lst&dir=&occ=first&part=1&c not provide such information, without allowing id=112408

80 Italy According to the ECJ, the former supersedes the Th e European Court of Justice (ECJ) was asked for latter, so that if the decision to impose a minimum a preliminary ruling concerning a company which rate is made then the rate must be applied to all contested a decision by the Director-General of the cigarettes, and therefore because the national leg- Italian tax authority that set a higher minimum ex- islation in the present case is allowing for a higher cise duty on cigarettes sold at retail for less than the minimum excise duty rate on cigarettes sold at the most popular price. cheapest prices, it has the eff ect of distorting competition between cigarette sellers. Th e company, which manufactured and sold cheap cigarettes, argued to a tribunal that the rate intro- Various governments relied upon the notion that duced a minimum selling price for cigarettes, and the higher excise duty was intended to protect pub- the tribunal agreed that a minimum price would be lic health and discourage smoking, and the ECJ contrary to an ECJ judgment. agreed that taxation can be used eff ectively to dis- suade taxpayers from smoking, but stated that the Upon appeal, the tax authority claimed that the le- taxation method must adhere to the EU legal pro- gal basis for the minimum selling price of cigarettes, visions. Th erefore, because the minimum excise tax which the tribunal relied upon in its ruling, was duty applied only to cigarettes sold for less than the diff erent from the legal provision which allowed most popular price and not to all cigarettes as laid the Director-General to set the excise duty rate, out by EU law, the ECJ ruled that the national law and that EU law permits member states to impose at issue violates EU law. a minimum excise duty on cigarettes. Th e referring court approached the ECJ for an interpretation of Th e judgment was delivered on October 9, 2014. EU law with regard to a diff erent excise duty rate for cigarettes sold at a low price. European Court of Justice: Italy v. Yesmoke Tobacco SpA (C-428/13) Th e ECJ identifi ed the EU legal provisions relevant to excise duty imposed on cigarettes and stated that http://curia.europa.eu/juris/document/document. they were intended "to ensure the proper function- jsf?text=&docid=158424&pageIndex=0&docla ing of the internal market and neutral conditions ng=EN&mode=lst&dir=&occ=first&part=1&c of competition." Under one provision the excise id=118789 duty rate must be the same for all cigarettes, but under the other provision member states can impose a minimum duty rate as long as it adheres to the bands set out in the provision.

81 Poland person has established his business. However, if those services are provided to a fi xed establishment Th e European Court of Justice (ECJ) has delivered of the taxable person located in a place other than a preliminary ruling concerning the place of sup- the place where he has established his business, the ply of services rendered to a company established place of supply of those services shall be the place in Cyprus by a Polish company whose website it where that fi xed establishment is located." maintained. Th e ECJ noted settled case-law concerning Article Th e case centered on whether the Cypriot com- 9 of the Directive, which it said is also valid in rela- pany, through a contractual agreement to manage tion to Article 44, that the most appropriate, and the Polish company's website with recourse to that thus the primary point of reference for determining company's human and technical resources, could the place of supply of services for tax purposes is be said to have had a "fi xed establishment" in Po- the place where the taxable person has established land. Th is was under consideration for the express his business. It said: "It is only if that place of busi- purpose of determining the place of supply of those ness does not lead to a rational result or creates a administrative and technical services to the Cypriot confl ict with another member state that another es- company, and therefrom whether they were liable tablishment may come into consideration." to VAT in Poland or in Cyprus. Suggesting that the supply should be taxed in Cy- Th e Polish company (which later acquired the Cy- prus, it said: "Th e place where the taxable person priot entity) was of the opinion that the services has established his business as primary point of ref- provided as part of its agreement with the Cypriot erence appears to be a criterion that is objective, company were supplied to the company in Cyprus simple, and practical, and off ers great legal certain- and therefore subject to VAT in Cyprus. ty, being easier to verify than, for example, the existence of a fi xed establishment." However, the Polish tax authority decided that Pol- ish VAT should be due on the services, as it con- "Moreover, the presumption that the services are sidered that they were supplied to a fi xed establish- supplied at the place where the taxable person re- ment of the Cypriot company in Polish territory. ceiving them has established his business makes it possible both for the competent authorities of Th e key provision in the case was Article 44 of the the member states and for suppliers of services to VAT Directive, the salient extract of which pro- avoid having to undertake complex investigations vides: "Th e place of supply of services to a taxable in order to determine the point of reference for tax person acting as such shall be the place where that purposes."

82 Th e ECJ further noted: "Th e place of business is the Polish company and to use them for the opera- mentioned in the fi rst sentence of Article 44 of the tion and maintenance of the website. VAT Directive, whereas the fi xed establishment is mentioned only in the following sentence. Th at Th e judgment was delivered on October 16, 2014. sentence, introduced by the adverb 'however,' can only be understood as creating an exception to the European Court of Justice: Welmory sp z.o.o. v. Po- general rule set out in the previous sentence." land (C-605/12)

More generally, the ECJ said that in order for the http://curia.europa.eu/juris/document/document. Cypriot company to have had a fi xed establishment jsf?text=&docid=158645&pageIndex=0&docla in Poland it would need "a suffi cient degree of per- ng=EN&mode=lst&dir=&occ=first&part=1&c manence and a suitable structure in terms of hu- id=129625 man and technical resources" in Poland to enable it to receive the services supplied to it and use them Spain for its business. Th e European Court of Justice (ECJ) was asked In its argument, which the ECJ again highlighted for a preliminary ruling concerning a government- prior to its conclusion, the Polish company said owned company in Spain that was primarily in- that the infrastructure that it made available to the volved in the construction and maintenance of Cypriot company did not enable the Cypriot com- naval vessels for various countries including other pany to receive and use for its business the services EU member states, although it also undertook such supplied to it by the Polish company. According to activity for the private sector. the company, the human and technical resources for the business carried on by the Cypriot company, Th e company owned a shipyard on land in the Mu- such as computer servers, software, servicing, and nicipality of Ferrol, the use of which was transferred the system for concluding contracts with consum- by the Government in 2001 under an agreement ers and receiving income from them, were situated with the company, for a token sum. outside Polish territory. Ferrol levied property tax on the land which ac- Concluding, the ECJ said that the national court cording to national law would be payable by the has exclusive jurisdiction to verify such factors in owner, but under the 2001 agreement, the tax li- order to assess whether the Cypriot company has ability was also transferred from the Government the necessary human and technical resources in Po- to the company. Both parties sought exemption land for it to be able to receive services supplied by from the property tax by applying the relevant legal

83 provision (which grants exemptions in various cir- same industry which were subject to the property cumstances, including where the immovable prop- tax. Th e ECJ agreed that the company did have an erty in question is state-owned, is used for the pur- advantage over its competitors, despite the Gov- poses of public security, or for defense purposes). ernment's contentions that the exemption was intended to benefi t the Government rather than the Th is exemption was disputed by Ferrol, and when company, and that it was compensation for the the case was brought to court in Spain, it was con- company performing a public service rather than sidered that the exemption may constitute state aid an actual advantage. contrary to EU law, granting the state-owned fi rm an unfair advantage likely to distort competition. Th e ECJ then stated that it is not necessary for the Th e court therefore approached the ECJ for an in- tax advantage provided by the Government to actu- terpretation of EU law in this area. ally distort competition in relation to trading with other member states; to constitute prohibited state Th e ECJ fi rstly pointed out that the relevant EU Ar- aid it is enough that the legal measure was liable to ticle prevents "any aid granted by a Member State aff ect trade and competition between companies. or through State resources in any form whatsoever In the present case the company was dealing with which distorts or threatens to distort competition", other member states through its business operations and that aid is basically categorized by involvement and competing with other companies in the same of the government which distorts competition industry for the same customers, and therefore the through the granting of an advantage to a company exemption from property tax provided a tax advan- engaged in trading with other member states. tage that aff ected the company and its competitors.

A distinction was made by the ECJ between tax Th e ECJ gave its interpretation of EU law which treatment granted by the Government, which ef- was that the property tax exemption provided to fectively provides an advantage to specifi c taxpayers government-owned companies under national law so as to elevate them above their competitors, and is capable of being considered prohibited state aid a tax benefi t provided to all companies without dis- due to the tax advantage enjoyed by a company tinction; the former would constitute state aid, but dealing with other member states, and therefore the latter would not. could distort the competition between companies, but that ultimately it was for the national court Ferrol argued that because the property tax exemp- to deliberate over the evidence and give a ruling tion applied to government-owned companies, the whether this was indeed the case. company in the present case enjoyed a specifi c tax benefi t that cannot apply to other companies in the Th e judgment was delivered on October 9, 2014.

84 European Court of Justice: Navantia S.A. v. Spain http://curia.europa.eu/juris/document/document. (C-522-13) jsf?text=&docid=158425&pageIndex=0&docla ng=EN&mode=lst&dir=&occ=first&part=1&c id=57391

85 THE ESTER'S COLUMN ISSUE 102 | OCTOBER 23, 2014

Dateline October 23, 2014 created over 115,000 jobs in more than 700 US fi rms So, in the great stand-off between Ireland and the in the Irish Republic. Pretty impressive for a country OECD, Dublin has been the one to blink fi rst, with with a total population of 4.5m. Certainly, not all the Irish Government having announced in the 2015 that shines in Ireland is gold (or should that be emer- Budget new corporate residency rules that will put ald?), and the scale of its banking crisis leaves it vul- paid to the infamous "Double Irish" international nerable. But would Ireland be recovering to the same tax planning technique so beloved of American tech- degree it is now, or even recovering at all, if it had put nology and pharmaceutical fi rms. Th is is not really corporate tax up, a move the French and Germans surprising, given the amount of pressure Ireland has were clamoring for in the bail-out? In fact, it is some- been under from the international community with thing of a triumph that Finance Minister Noonan regard to its corporate tax regime. What was more un- has been able to announce tax cuts this time around expected was the speed with which Ireland has acted, given the state Ireland was in just four years ago. especially since it has fought tooth and nail against And mischievous Ireland hasn't completely caved in the likes of the EU and the OECD for years to ensure by relinquishing the Double Irish. Th e "Knowledge that Irish tax laws are decided in Ireland. But ulti- Development Box" announced in the Budget will mately, perhaps the Double Irish just wasn't worth almost certainly be considered a "harmful" tax mea- the hassle anymore. Physical investment on the other sure by either the OECD or the EU, or both. Let hand, is. Ireland is often maligned for being one of the fun and games begin! those jurisdictions with a tax regime attracting a lot of corporate profi t, but not a lot of corporate substance. I do, however, feel sorry for Portugal. Th e decision to Th is is unfair, and the country's detractors misunder- cut corporate tax in the Government's latest Budget stand (or pretend to misunderstand) what the Gov- was praiseworthy, but one gets the awful impression, ernment is trying to achieve by having one of the as ominous economic clouds gather over the rest of lowest rates of corporate tax outside of the world of the European mainland, that it is akin to whistling off shore: jobs, wealth creation, and economic growth. into the wind. Who's going to hear, or even be listen- AmCham Ireland, the American Chamber of Com- ing to, the message, when the rest of the continent is merce's Irish branch, has some quite astounding sta- once again fi ghting fi res? Portugal exited its bail-out tistics about the level of FDI pumped into Ireland by program earlier this year, but it is by no means out American fi rms in recent years: US companies have of the woods. Th e country was praised by the "troi- USD204bn in FDI in Ireland, more than the total ka" for some "ambitious" economic reforms during invested in the BRICS economies combined, and the period of austerity, but they evidently haven't during the decade to 2010, US investment in Ireland gone far enough because the troika went on to warn was triple that of China-bound investment. Th is has that the economy still needs to be more "dynamic,

86 fl exible and resilient" and that making it so would worse, Switzerland's strict privacy rules have meant be "challenging." One challenge standing between that until recently, the EU and its member states have the Government and fi scal stability is the constitu- been able to do very little about the large sums of un- tional court, which has routinely blocked austerity taxed cash parked in Swiss banks. In other words, this measures ranging from public sector pay cuts to new largely low-tax, privacy-loving country is complete taxes, such as the one proposed for public sector pen- anathema to most of those leading the EU. Although sions. Without these, Portugal is going to struggle to Switzerland has signed a number of agreements with get its defi cit down, and the longer this goes on, the the EU in areas such as trade and immigration, it isn't more nervous its creditors will get about its ability actually a member of the EU. Although you wouldn't to pay its debts, with potentially disastrous conse- know it given the way that Brussels routinely ex- quences for the economy. It's sad to say, but Portu- pects Switzerland to jump on demand, in particular gal is just one of several European economies that on matters to do with tax. In the past, tenuous argu- are now reaping what they have sown by refusing to ments made by the Commission that the 1972 free modernize their economies before the storm arrived. trade agreement meant Swiss tax laws more or less had to fall in line with the EU's were, fi guratively speak- October 14, 2014, was a black day for national self- ing, met with a type of "talk to the hand" gesture from determination. For this is when Switzerland and the Swiss, and Brussels knew that there really wasn't the EU signed a joint statement affi rming the Swiss anything it could do unless the Swiss consented. But Government's commitment to abolish certain com- EU persistence has paid off . Th e world is diff erent pany laws in order to appease Brussels. A bit like the now, and most of it appears to be ganging up on Swit- Double Irish, in the era of BEPS, corporate forms like zerland. Ah, you might say, aren't the Swiss the bad Switzerland's domiciliary, holding and mixed com- guys, because they allow evil dictators to stash their panies, which eff ectively allow a company to split its ill-gotten gains in numbered accounts, no questions profi t from its substance, thereby avoiding some of asked? Shouldn't they be forced to change? My an- Europe's high taxes, are never going to withstand in- swer to that is, regardless of one's view of the Swiss, ternational scrutiny. But the EU, or more precisely its shouldn't they be allowed to govern themselves as taxation henchman the European Commission, was they see fi t? Th e fact that the country has been so chipping away at Switzerland, a neutral and fi ercely successful for so long, in contrast to many of its Eu- independent nation, way before anybody had heard ropean neighbors, is testament to its way of doing of the term "base erosion and profi t shifting." To the things. It's just another example of the alarming EU, low-tax Switzerland represents some kind of fi s- trend among the rich Western countries to meddle cal sink, down which disappear corporate tax revenues piously in the aff airs of other nations. due to the treasuries of Germany, France, the UK and any number of other high-tax states. To make matters Th e Jester