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Welcome Keeping up with the constant flow of international developments worldwide International can be a real challenge for multinational companies. International Tax News is a monthly Tax News publication that offers updates and analysis on developments taking place around the world, authored by specialists in PwC’s global Edition 61 international tax network. We hope that you will find this publication March 2018 helpful, and look forward to your comments.

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

In this issue

Legislation Administrative Treaties www.pwc.com/its

Legislation Kong

Hong Kong government issues BEPS Actions Bill Please see our PwC Insight for more information.

Hong Kong Inland (Amendment) (No.6) Bill 2017 For discussion of the Bill’s TP-related provisions, please refer to our Insight – Draft transfer pricing legislation comes to (the Bill) was gazetted on December 29, 2017. The Bill Hong Kong. introduces a transfer pricing (TP) regulatory regime and a mandatory TP documentation requirement. It also would implement the minimum standards under the OECD’s BEPS PwC observation: Action Plan and revise the advance ruling applications fees. Hong Kong is closer to implementing the minimum standards under the OECD’s BEPS package. The Bill was introduced into the In addition to the TP regulatory regime and documentation, the Bill’s Legislative Council in January 2018. Even though it will take a few key BEPS-related provisions: months before the Bill’s enactment, Hong Kong companies should assess the potential impact of the Bill’s proposed legislative changes • introduce an effective and efficient statutory dispute resolution on their existing holding structures and operations and mechanism by giving effect to mutual agreements made with other monitor any developments in this area, including any guidance treaty jurisdictions under the Mutual Agreement Procedure (MAP) issued by the Inland Revenue Department. or arbitration process of a • clarify the double tax relief available with or without a tax treaty • extend the time limit for making a fresh foreign (FTC) claim from two years to six years after the end of the relevant assessment year • remove the ring-fencing features in the existing concessionary tax regimes for corporate treasury centers (CTCs), reinsurance , and captive insurance businesses, and • empower the Commissioner of Inland Revenue (CIR) to prescribe a threshold requirement for determining whether profit-producing activities are carried out in Hong Kong with respect to existing concessionary tax regimes.

Qiming Lu Clara Tsui Jennifer Zhang New York New York New York T: +1 646 313 3179 T: +1 646 471 2518 T: +1 646 746 4136 E: [email protected] E: [email protected] E: [email protected] www.pwc.com/its

Hong Kong Hong Kong

AEOI implementation ordinance 15% stamp on transfer of enacted in Hong Kong PwC observation: residential property enacted in PwC observation: Despite the Ordinance’s enactment, the Hong Kong Foreign investors who are interested in investing Multilateral Convention does not apply yet in Hong Kong’s property market should consider The Ordinance facilitating the in Hong Kong. The following two steps are the increased transaction costs as a result of implementation of the Multilateral required still: (i) deposition of the declaration The (Amendment) Ordinance the Hong Kong Special Administrative Region’s Convention on Mutual Administrative for territorial extension of the Multilateral 2018 was enacted on January 19, 2018. It current policy to prioritize the home ownership Assistance in Tax Matters (Multilateral Convention by the Chinese government to introduces a 15% ad valorem stamp duty needs of HKPRs and other measures aimed at Convention) and refining the AEOI regime the OECD and (ii) gazetting of the CE Order (AVD) on transfers of Hong Kong residential curbing property speculation in Hong Kong. declaring that the Multilateral Convention shall in Hong Kong was gazetted on February have effect in Hong Kong and a negative vetting property. The Ordinance is deemed to have 2, 2018. The Ordinance empowers the of the Order at the Legislative Council. become effective on November 5, 2016 and Hong Kong Chief Executive (CE) to give applies retroactively to residential property effect to the Multilateral Convention and As for the financial account information reporting transactions executed on or after November other tax agreements for international tax by Hong Kong financial institutions , the existing 5, 2016, with certain exemptions. AEOI provisions in the IRO will continue to cooperation that apply to Hong Kong. The apply to reporting that covers 2018 data, and the For example, the 15% rate does not apply to Ordinance also amends certain existing refined provisions will apply to reporting that residential property acquired by a Hong Kong AEOI provisions to align them with the covers data of 2019 and afterwards. permanent resident (HKPR) who does not own any international standard stipulated by other residential property in Hong Kong at the time the OECD. This includes updating the of acquisition. In addition, a HKPR who purchases definitions of certain terms including residential property for the purpose of replacing controlling person, annuity contract, their only other residential property is exempt from depository accounts, and specified the 15% AVD if the HKPR disposes of the original property within 12 months of the conveyance date insurance company. for purchasing the newly acquired property. The HKPR pays the 15% AVD first, then subsequently The amendments to the existing AEOI provisions receives a refund of that amount. The Scale 1 rates in the Hong Kong Inland Revenue Ordinance (1.5% to 8.5%) will continue to apply to transfers of (IRO) effected by the Ordinance will take effect on non-residential property in Hong Kong. January 1, 2019 whereas the Ordinance’s other provisions took effect on February 2, 2018.

Fergus WT Wong Fergus WT Wong Hong Kong Hong Kong T: +852 2289 5818 T: +852 2289 5818 E: [email protected] E: [email protected] www.pwc.com/its

India

India 2018 budget: impact on foreign investors and multinational enterprises PwC observation: The Budget proposals lay the foundation for the Indian economy to become more resilient and achieve a high growth rate. The Budget The Indian Minister presented the 2018 Union and the events leading up to it indicate the Indian government’s Budget (Budget) on February 1, 2018. The Finance Minister efforts to promote a climate of foreign investment and focus on described the Budget as focused on consolidating gains and overall development in the country. The reforms correlate with boosting the aspirations of a new India. the Indian Prime Minister’s message at Davos to transform Indian administration and maximize governance in the country. The Budget aims to strengthen India’s agriculture and rural economy, provide better health care to economically weaker segments of Indian society, develop infrastructure, and improve the quality of education. The proposals, like those of past budgets, continue to focus on supporting development, improving the ability to conduct business in India, and attracting foreign investment.

The PwC Insight provides an overview of the key Budget proposals affecting foreign investors and multinational enterprises (MNEs) doing business in India. Some of the key proposals include a corporate reduction, a new regime for taxing long-term capital gains on the sale of listed equity shares, and BEPS Action Plan initiatives.

The Budget proposals would take effect after the Budget passes both houses of Parliament and obtains presidential assent.

Sriram Ramaswamy Saurabh Kothari New York New York T: +1 646 471 7017 T: +1 646 471 9079 E: [email protected] E: [email protected] www.pwc.com/its

Netherlands

Dutch corporate for fiscal unities amended in response to the CJEU’s ‘per-element approach’

In response to the Court of Justice for the European Union’s (CJEU’s) decision (which is in line with the Advocate General’s opinion, covered in our November 2, 2017 Tax Insight), the Dutch Ministry of Finance (MOF) will amend several provisions in both the corporate income tax act and the dividend withholding tax act.

These amendments will have retroactive effect, accomplished by implementing emergency response measures. Despite a Dutch fiscal unity presence, the amended provisions will apply as if there was no fiscal unity. This also applies to domestic situations. The MOF’s response may have a severe impact on the tax position of MNEs whose Dutch entities currently are included in a fiscal unity.

Please see our PwC Insight for more information.

PwC observation: The court case itself presents opportunities for Dutch entities to take more advantageous positions for past taxable periods that are still open for appeal, based on the advantages that would have been available if a cross-border fiscal unity had been allowed.

The fiscal unity emergency response measures will enter into force retroactively from October 25, 2017 at 11:00 a.m. These measures may severely impact MNEs with a Dutch fiscal unity.

Clark Noordhuis Arjan Fundter Ruben Bolwerk New York New York New York T: +1 646 471 7435 T: +1 646 471 6089 T: +1 212 738 6341 E: [email protected] E: [email protected] E: [email protected] www.pwc.com/its

Uruguay

Amendments to the Free Zone Regime Additionally, the Law establishes thematic zone exemptions for the provision of audio-visual, leisure, and entertainment services outside the metropolitan area. Law N° 19,566 (Law) became effective on March 8, 2018 and includes the following measures to improve and amend We expect the Executive Branch to issue regulatory provisions shortly. the Uruguayan Free Zones (FZ) regime, without affecting the rights acquired by FZ users as guaranteed by the Uruguayan government. PwC observation: Free zone users have new opportunities, including tax exempt status for more types of services or IP development, and the ability FZ users now may provide all types of services, under the broad tax to hire more foreign employees. While FZ users must meet certain exemption, from a FZ to Uruguayan non-FZ territory entities subject requirements, more clarity is expected via regulations. to Uruguayan corporate income tax (CIT). Uruguayan FZ Law requires 75% of the FZ user’s ) total staff to be Uruguayan citizens. Under the new regulations FZUs rendering services activities could hire up to 50% of its staff with foreign employees, if the government approves the FZ user’s activity.

Income from IP rights and other intangibles will be tax exempt if derived from R&D activities performed within the FZ.

The Law introduces maximum term limits for FZ contracts, generally up to 5, 10 or 15 years, depending on the activity and type. FZ users with existing agreements that do not comply with such limits will need to complete a filing in order to comply.

The new provisions clarify that: (i) activities developed outside of the national territory must be necessary or complementary to the FZ user activities and (ii) auxiliary activities could be developed as an exception in Uruguayan territory outside the FZ.

Daniel Garcia Eduardo Rodriguez Carolina Techera Uruguay Uruguay Uruguay T: +59 8291 60463 T: +59 8291 60463 T: +59 8291 60463 E: [email protected] E: [email protected] E: [email protected] www.pwc.com/its

Uruguay

Uruguay updates its Shared Services Centers regime

The Uruguayan Executive Branch passed Decree 361/017 (the Decree) on December 22, 2017, aligning the Uruguayan Shared Services Centers (SSC) regime with OECD international standards.

The Decree amends the SSC definition and the determination of the place of use of the services that qualify for SSC tax benefits. These benefits basically remain unchanged and include a temporary exemption (up to 10 years) from the corporate income tax on a portion of the income. They also include an exemption from the net , subject to mandatory job creation and training expense requirements.

The Decree clarifies that the SSC regime does not apply to the exploitation of IP rights.

Decree provisions are effective as of January 1, 2018.

Please see our PwC Insight for more information.

PwC observation: Companies operating SSCs in Uruguay should analyze how the alignment with OECD standards might impact their activities. In particular, companies should review the number of countries that their Uruguayan SSCs serve and also transactions with local resident entities.

Daniel Garcia John Salerno Jose Leiman Montevideo New York Miami T: +598 2916 0463 T: +1 203 539 5733 T: +1 305 381 7616 E: [email protected] E: [email protected] E: [email protected] www.pwc.com/its

Administrative Brazil

Brazilian tax authorities issue declaratory act on withholding tax on licenses to distribute or commercialize software

The Federal Brazilian tax authorities (RFB) recently published Declaratory Interpretative Act 7/2017 (ADI 7/2017) (the ‘Act’) on the withholding tax (WHT) application on payments abroad for the right to distribute or commercialize software.

The Act, published December 26, 2017, provides that payments, credits, and remittances to a non-resident in consideration for the right to distribute or commercialize software should classify within the concept of royalty and be subject to a 15% WHT. However, when the payment’s beneficiary is resident or domiciled in a , a 25% WHT rate applies.

This follows a recent trend of decisions including Solução de Divergência 18/2017 (March 27, 2017) and Solução de Consulta 154/2016 (November 18, 2016) which modify the RFB’s previous position on this issue. The Act confirms that this decision modifies the conclusions of contrary positions in Soluções de Consulta / Soluções de Divergência issued prior to the Act’s publication.

PwC observation: Although not law, the Act clarifies how the RFB will treat such payments going forward. Therefore, taxpayers with transactions abroad related to acquiring rights to distribute or commercialize software in Brazil should revisit these transactions to determine how the decision may impact their arrangements, including deductibility.

Fernando Giacobbo Mark Conomy Sao Paulo Sao Paulo T: +55 11 3674 2359 T: +55 11 3674 2519 E: [email protected] E: [email protected] www.pwc.com/its

Chile

Chilean tax authorities issue guidelines on anti-abuse rules

The Chilean tax authorities updated their list of ‘tax schemes’ on November 25, 2017. In an effort to provide taxpayers with legal certainty in tax matters and to prevent taxpayers from obtaining undeserved tax benefits, the tax authorities discussed whether the taxpayer in various new scenarios could be viewed as breaching the general anti- abuse rule (GAAR). The GAAR was added to the Income in 2014.

This PwC Insight describes the new scenarios that may have greater relevance for foreign investors doing business in Chile. The Insight also discusses new guidance regarding the existence of a Chilean (PE) and a proposed new tax on the transfer of certain real estate located in new urban areas.

PwC observation: MNEs that operate in Chile should analyze whether certain transactions may be subject to the GAAR under the new guidance issued by the Chilean tax authorities. Taxpayers intending to sell real estate that may be subject to a requalification as urban property by the relevant Municipal Council may need to consider the timing of that sale in light of the proposed new tax being debated in the Chilean Congress.

German Campos John Salerno Jose Leiman Santiago New York Miami T: +56 2 2940-0098 T: +1 203 539 5733 T: +1 305 381 7616 E: [email protected] E: [email protected] E: [email protected] www.pwc.com/its

China

China issues clearer guidance on beneficial ownership Public Notice 9, however, tightens the first two unfavourable factors from Circular 601. This could present challenges to some non-resident taxpayers; they could be denied treaty benefits due to Determining the Chinese beneficial ownership (BO) status a lack of BO status. of non-residents that derive dividends, interests, and royalties from China for purposes of tax treaty benefits Public Notice 9 will take effect April 1, 2018. historically has been difficult. Since 2009, the State Administration of Taxation (SAT) has released several Please see our PwC Insight for more information. circulars on the topic, including Guoshuihan [2009] No.601 (Circular 601), which listed seven unfavourable PwC observation: factors for determining BO. The SAT also released Public MNEs should review their existing investment structures and Notice [2012] No.30 (Public Notice 30), which provided a business models in light of the extended safe harbour and the ‘same safe-harbour rule for qualified non-tax residents to obtain country/same treaty benefit’ rule and assess whether it is possible treaty benefits with respect to dividends. Despite this to realise these benefits. Some MNEs may need to consider internal restructuring in response to the changes. In any event, MNEs guidance, taxpayers and local tax authorities in China should retain sufficient supporting documents such as contracts, encountered numerous technical and practical problems invoices, receipts, and accounting entries in anticipation of tax when dealing with BO-related cases, and they awaited authority challenges. further guidance from the SAT.

Therefore, on February 3, 2018, the SAT released long-awaited SAT Public Notice [2018] No.9 (Public Notice 9). Public Notice 9 revokes Circular 601 and Public Notice 30, and updates the assessment principles for BO determination. Compared to Circular 601 and Public Notice 30, Public Notice 9 includes two major breakthroughs for those claiming tax treaty benefits on dividends: 1) it expands the group of non-residents that are eligible for the safe harbour, and 2) it allows qualified treaty benefit applicants to apply a ‘same country/same treaty benefit rule’ under multi-tier holding structures. These changes will increase the ability of non-residents to obtain treaty benefits with respect to dividends.

Jessica Lu Clara Tsui Jennifer Zhang New York New York New York T: +1 646 313 3179 T: +1 646 471 2518 T: +1 646 746 4136 E: [email protected] E: [email protected] E: [email protected] www.pwc.com/its

Spain

Spanish Tax Agency releases 2018 Tax and Control Plan

On January 8, 2018, the Spanish Tax Agency published the general guidelines of the 2018 Tax and Customs Control Plan through the Official Bulletin of the State, with a specific focus on efforts to avoid .

The general guidelines are based on four main pillars: (i) tax and customs fraud prevention through access to increased information, (ii) enhanced investigations of tax and customs fraud through new data analytic and technology tools, (iii) focused mechanisms to control tax and customs fraud in the collection phase, and (iv) increased collaboration between the Spanish Tax Agency and regional tax administrations.

Please see our PwC Insight for more information.

PwC observation: In light of these developments, taxpayers should analyze the information to be reported through the Immediate Supply of Information and Common Reporting Standard (and other tax collection means). Furthermore, they should review the overall structure of their multinational group as well as individual transactions, with an eye toward the tax liabilities of not only Spanish entities, but also other entities within the group. In addition, they should consider the view of the corresponding tax administrations.

Javier Gonzalez David Swenson Madrid Washington T: +34 915 684 542 T: +1 202 414 4659 E: [email protected] E: [email protected] www.pwc.com/its

United States

IRS Rev. Proc. 2018-17 limits changes to accounting periods under the ‘toll tax’ PwC observation: Rev. Proc. 2018-17, the latest guidance issued by the IRS and The Internal (IRS) and Treasury issued Treasury, prevents taxpayers from changing the tax years of specified foreign corporations with a US shareholder that is subject an advance copy of Rev. Proc. 2018-17, IRB 2018-09 (the to the toll tax under amended Section 965. Revenue Procedure) on February 13, 2018, modifying Taxpayers should review and assess the impact of the Revenue existing procedures for changing the annual accounting Procedure on a change of tax year made in 2017 on any foreign period (tax year) of certain foreign corporations whose US corporation, whether or not connected to the toll tax. shareholders are subject to the new mandatory deemed repatriation of deferred foreign earnings (the ‘toll tax’). The Revenue Procedure applies to any request to change a tax year otherwise ending on December 31, 2017. This follows the introduction of the new territorial tax regime under the 2017 reconciliation act, also known as the ‘Tax Cuts and Jobs Act’ (the Act).

Under the Revenue Procedure, certain foreign corporations may not change their tax year that otherwise begins on January 1, 2017 and ends on December 31, 2017. The Revenue Procedure applies to all applications to change certain foreign corporations’ tax year ending December 31, 2017, including those filed, in whatever form, before the Revenue Procedure was published. The Revenue Procedure was published in IRB 2018-09 on February 26, 2018.

Please see our PwC Insight for more information.

Michael Urse Marty Collins David Sotos Cleveland Washington San Jose T: +1 216 875 3358 T: +1 202 414 4659 T: +1 408 808 2966 E: [email protected] E: [email protected] E: [email protected] www.pwc.com/its

Treaties Cyprus

Cyprus - Barbados tax treaty enters into force

The first tax treaty between Cyprus and Barbados was signed in May 2017 and took effect on January 1, 2018 per the treaty.

The treaty provides for a 0% WHT rate on payments of dividends, interest and royalties.

Cyprus retains the exclusive taxing rights on disposals by Cyprus tax residents of shares in companies, including companies holding Barbados-located immovable property. There is an exception when the value of the shares relates to certain offshore rights or property relating to exploration or exploitation of the seabed or subsoil or their natural resources located in Barbados.

PwC observation: This treaty further expands the Cyprus treaty network and opens the way for new investment opportunities and relations between the two countries.

Marios Andreou Stelios Violaris Joanne Theodorides Nicosia Nicosia Nicosia T: +357 22 55 52 66 T: +357 22 55 53 00 T: +357 22 55 36 94 E: [email protected] E: [email protected] E: [email protected] www.pwc.com/its

France

French anti-abuse provisions could deny tax The Supreme Court decision does not specify whether the domestic treaty benefits anti-abuse provisions could be applied where a tax treaty or a multilateral tax convention (such as the OECD Multilateral Instrument) include their own anti-abuse provisions. The French administrative Supreme Court (CE, October 25, 2017, 396954) ruled that French domestic anti-abuse provisions may be applied to deny the benefit of a tax treaty PwC observation: signed by France, even where the treaty does not specifically The Supreme Court decision implies that the interposition of a allow the contracting parties to do so. company is per se abusive where it has no economic rationale even though such company has some legal substance and is itself not fictitious. In the present case, a taxpayer had interposed a Luxembourg company for the sole purpose of selling real estate located in France. The taxpayer intended to benefit from a capital gain in France upon application of the Double Tax Convention signed between France and Luxembourg. The new draft of the treaty no longer provides for such exemption. According to Luxembourg case law, the capital gain was also tax exempt in Luxembourg. Nonetheless, the company had some legal substance and the directors meetings were regularly held.

French anti-abuse provisions may be applied if a structuring is either (i) fictitious or without economic substance or (ii) the literal application of the law allowing a tax benefit even though it is contrary to the lawmaker’s intention.

In its decision, the Court applied the second of the anti-abuse provisions above. The Court concluded that the contracting parties to the treaty, the lawmakers, did not intend to draft provisions that would benefit artificial arrangements that have no economic rationale other than benefiting from the tax treaty.

Renaud Jouffroy Guillaume Glon Neuilly Sur Seine (Crystal Park) Neuilly Sur Seine (Crystal Park) T: +33 156 575 657 T: +33 156 574 072 E: [email protected] E: [email protected] www.pwc.com/its

Glossary

Acronym Definition Acronym Definition ADI Declaratory Interpretative Act IRO Inland Revenue Ordinance AEOI Automatic Exchange of Information IRS Internal Revenue Service AVD Ad Valorem stamp Duty IRS Rev. Proc. Internal Revenue Service Revenue Procedure BEPS Base Erosion and Profit Shifting LTCG Long-term Capital Gains BO Beneficial Ownership MAP Mutual Agreement Procedure CE Chief Executive MNEs Multinational Enterprises CIR Commissioner of Inland Revenue MOF Dutch Ministry of Finance CIT Corporate Income Tax Multilateral Convention Multilateral Convention on Mutual Administrative CITA Corporate Income Tax Act Assistance in Tax Matters NI Normative Instructions CJEU Court of Justice for the European Union NWT Net Wealth Tax CRS Common Reporting Standard OECD Organization for Economic Co-operation and Development CTC Corporate Treasury Centers PE Permanent Establishment DTT Double Tax Treaty PM Provisionary Measure DWTA Dividend Withholding Tax Act PPT Principal Purpose Test FTC Foreign Tax Credit R&D Research and Development FZ Free Zones RFB Brazilian tax authorities GAAR General Anti-Abuse Rule SAT State Administration of Taxation HKPR Hong Kong Permanent Resident SFCs State Financial Corporations HKSAR Hong Kong Special Administrative Region SSC Shared Service Centers IP Intellectual Property TP Transfer Pricing IRD Inland Revenue Department WHT Withholding Tax www.pwc.com/its

Contact us

For your global contact and more information on PwC’s international tax services, please contact: Shi‑Chieh ‘Suchi’ Lee Global Leader International Tax Services Network T: +1 646 471 5315 E: [email protected]

Geoff Jacobi International Tax Services T: +1 202 414 1390 E: [email protected]

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