Welcome Belgium Mexico United States EMEA news APAC news Americas Transfer Indirect taxes Treaty news Tax policy Who’s who featured article featured article featured article news pricing news news

Global tax newsletter

Welcome to this edition of the Global You will see in our tax policy tab that the Our transfer pricing tab has an Go to page… tax newsletter where we will look at Organisation for Economic Co-operation interesting discussion of a French case and Development’s (OECDs) Business dealing with the emigration of a treasury 2 Belgium featured article what some of the tax authorities have Advisory Committee (BIAC) issued a centre which could have widespread been up to for the past few months. document covering suggested best practices applicability to many kinds of captive 3 Mexico featured article for engaging with tax authorities in developing special purpose corporate vehicles. countries, and a statement covering tax The indirect tax tab includes the 4 United States featured article principles for international business. Finnish supreme court dealing with the In this edition we also have three question of an input tax credit paid by 5 EMEA news different feature articles: recent changes in the taxpayer’s parent corporation, a Belgium for the taxation of Belgian frequent transaction occurring in any 14 APAC news corporate repatriations; a recent decision multi-national group. in the United States (US) concerning Finally, in our treaty tab there is a 20 Americas news software transactions in foreign discussion of what the Netherlands subsidiaries and the ability to defer such intends to do with its tax transparency 26 Transfer pricing news revenue streams; and finally significant programme in terms of its treaties with new tax proposals in Mexico. developing countries. 29 Indirect taxes news In our regional updates there are a I hope you find this edition of the number of cases recently dealing with exit Global tax newsletter to be both enjoyable 32 Treaty news taxation, controlled foreign corporate regimes, and informative. 34 Tax policy and thin capitalisation developments. It is interesting to note that these are also agenda Francesca Lagerberg Global leader – tax services 37 Who’s who items for the OECD in its Base Erosion Grant Thornton International Ltd Profit Shifting (BEPS) working party. Global tax newsletter No. 9: November 2013 1 Welcome Belgium Mexico United States EMEA news APAC news Americas Transfer Indirect taxes Treaty news Tax policy Who’s who featured article featured article featured article news pricing news news

Belgium featured article

Belgium recently A summary of the changes includes: reduction would take place before • anti-abuse legislation for reductions enacted new changes • liquidation proceeds to be subject to expiry of that period of 8 (or 4) of share capital to the taxation of a 25% withholding tax (compared to years, an additional withholding tax • the notional interest deduction that liquidation proceeds; withholding the actual 10%) in order to bring it of 15%, 10% or 5% will apply, grants companies a deduction against tax on dividends linked to newly in line with the standard withholding depending on the number of years profits for the cost of equity contributed share capital, the notional tax rate of 25% that applies to which have already expired since • the value of shares held as financial interest deduction and the patent dividend payments the transformation assets should currently be deducted income deduction. • exemptions or reductions based on • anti-abuse legislation has been put from the ‘equity’ on which the notional internal tax law or due to double into place for dividend transactions interest is calculated. As of tax year taxation agreements (DTAs) that • a 20% withholding tax will apply to 2013, that provision will be extended remain in place dividends distributed out of the to the shares held as an investment of • an established transitional regime profit allocation of the second which the dividends benefit from the offering the possibility to transform financial year following the financial participation exemption taxed reserves (ie carried forward year of contributions • the benefit of the patent income Belgium has profits) into share capital whereby a • the rate will be further reduced to deduction (leading to an average tax recently enacted 10% withholding tax will be due 15% for dividends distributed out of rate of 6.8%) is currently subject to new changes to immediately the profit allocation as of the third the requirement that the research • taxed reserves which are transformed financial year following the financial and development (R&D) department taxation. into share capital under this year of the contribution of the company should be structured transitional regime can be distributed • a number of conditions have to be as a branch of activity. That to the shareholders tax free, by way met in order to benefit from the condition will be abolished for of a share capital reduction (subject reduced withholding tax rates small- and medium-sized companies to conditions). Where a share capital as of tax year 2014.

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Mexico featured article Mexico has submitted amendments to the tax legislation that could be applicable for the 2014 Last September the • a prohibition for the deduction of • to eliminate the tax incentive of tax year . Mexican President payments made to related parties taxpayers dedicated to build and submitted amendments being Mexican residents or residents sell real-estate through which they to the tax legislation that could be abroad, where the corresponding are able to deduct 100% of the applicable for the 2014 tax year. In income is not taxed to such related acquisition cost of the land general terms, it includes the issuance of parties, or if the income is taxed at a • to establish a 10% income tax rate a new income tax law, several lower rate than the 75% income tax over dividends distributed to modifications to other tax laws and that would be generated in Mexico shareholders. The tax will be payable provisions, the repeal of the flat tax law, • with respect to employees by the entity which issues the as well as the repeal of the cash deposits allowances, which are either exempt dividends payment • foreign tax credit carry forwards law. Some of the more significant or partially exempt items, the • that in order to be able to continue can be used for ten years, although new income tax proposals include: deduction for these employer working as a ‘maquila entity’ it must foreign tax credit limitations will be • to repeal the actual Mexican income expenses would be limited to only export at least 90% of the total imposed tax law that has been in force since 41% over such exempt items invoicing of the entity • to eliminate the preferential Value 2002, and issue a new law that will • to eliminate the tax incentive with a • entities of residents abroad which Added Tax (VAT) rate of 11% be in force from 1 January 2014 possibility to apply an accelerated operate through a ‘maquila shelter’ applicable to all transactions and • to include a new procedure which deduction of new asset investments can remain under the terms of such services carried out in the border region will allow the tax authorities to and eliminate the linear tax regime for a maximum period of • to repeal the obligation that certain request information of residents depreciation, 100% deductible, over three tax years, counted when such taxpayers have in regard with filing the abroad for double taxation relief the machinery and special equipment entities start operations in Mexico. tax report (dictamen fiscal) before the under DTAs acquisitions for controlling After that, it is considered that the tax authorities environmental pollution resident abroad will have to • to create substance over form • to eliminate the tax consolidation incorporate a subsidiary in Mexico provisions concerning invoicing for regime non-existent goods and services.

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United States featured article

The Inland Revenue customers; two of those customers were The taxpayer and the IRS agreed to • regularly engaged in the business of marketing (or Service (IRS) issued acquired by the taxpayer when one of its characterise the income stream as rental marketing and servicing) the leased property advice that a controlled affiliates closed. income from the lease of copyrighted • substantial in relation to the amount of rents from foreign corporation’s (CFCs) income The taxpayer had two employees, a articles. This characterisation reflects leasing the property. from software transfers to customers financial controller and a software media that copyright rights in the software nor was foreign personal holding company production assistant, as well as three benefits and burdens of owning the The exception also extends to leases acquired by the CFC income (FPHCI) and as such immediately directors, one of whom (the executive software are transferred under the if the CFC performs active and substantial management, taxable to the US shareholder of the director) was treated as an employee agreements. Unless an exception applies, operational and remarketing functions with respect to the CFC. The advice is important to US based on his duties. At different points rents generally constitute FPHCI, which leased property. based companies in the software of time the taxpayer did not employ the is currently taxable to US shareholders. The IRS found little evidence that the taxpayer regularly industry with offshore subsidiaries. production assistant. The employees’ Rents derived in the active conduct engaged in a marketing business. The taxpayer did not employ The taxpayer, a CFC, transferred backgrounds were in accounting, finance of a business and received from anyone with marketing expertise, compensate employees for software to customers under perpetual, and technology and their job functions unrelated persons are excluded from the marketing activity or success, or document the time its nonexclusive and transferable (though were largely administrative (eg definition of FPHCI (the ‘active leasing personnel spent on marketing. Related entities produced only to affiliates of the customer) bookkeeping, tracking payments, exception’). Rents are considered nearly all of the press releases for the parent’s website and had licenses. Under a license agreement, a ordering the ‘software keys’ to transfer derived in an active business if the CFC even won international marketing awards. The agreement customer paid a one-time fee for each to customers and filing tax returns). leases one of four types of property, between the taxpayer and its parent company indicated that user and annual maintenance and While there was some indication that the only one of which, the ‘active marketing the taxpayer was not a marketing company, and the taxpayer support fees based on the total number executive director assisted with exception’, is relevant. The active had signed only one of its customers in the years at issue. The of users. After one year, a customer marketing and worked with an affiliate marketing exception applies if property IRS concluded that the taxpayer mainly collected passive could terminate the agreement as well as company to promote sales, the is leased as a result of a CFC lessor’s rents, especially considering that a huge proportion of its the maintenance and support fees, employees did not track time spent on marketing function if the lessor, through income was funnelled to the parent company. Consequently, provided that the customer certified in specific activities. The maintenance and its own officers and employees in a the taxpayer’s rents constituted FPHCI because no active writing that it no longer used the support services provided to customers foreign country, maintains and operates business was conducted and was therefore immediately software. The taxpayer had seven under the license agreements are an organisation in that country that is: taxable to the US shareholder of the CFC. contracted out to affiliates of the CFC.

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EMEA news

Austria Under the Austrian group taxation Denmark Denmark argued that it is An Austrian resident regime, write-offs in respect of The Danish corporate proportionate to impose taxation on joint stock company participations in group members are not income tax act states that unrealised non-financial assets at the (company G) acquired deductible for corporate income tax any cross-border transfer time of transfer if the assets are used in a via its 100% owned subsidiary purposes. Instead, the group parent may of assets and liabilities out of the Danish business and are subject to depreciation. (subsidiary E) a 100% participation in a depreciate the goodwill derived from the tax jurisdiction will be subject to Danish If taxation could be deferred to the time limited liability company resident in the acquisition of the participation in an exit taxation. The transfer of assets out of realisation, taxpayers could avoid Slovak Republic (company Z). From operating resident group subsidiary. of the Danish tax jurisdiction will be taxation completely, Denmark argued, 2006, all three companies were part of a Goodwill is determined as the lower of: treated as a sale at market value, and any because such assets will often not be tax group, where G functioned as parent • the difference between the capital gain arising from it will be realised at all. company of the group. After a legal acquisition price and the accounting subject to Danish corporate income tax The ECJ rejected this argument and merger in 2008 between G and E, equity of a group subsidiary, at a rate of 25%. stated that even though it is company G became the legal successor increased by unrealised capital gains The European Court of Justice proportionate for a member state to of E, ie the sole shareholder of Z. In the • 50% of the acquisition price, spread (ECJ) held that this legislation violates determine the tax due on the unrealised annual tax return for 2006, Z claimed over 15 years. the treaty on the functioning of the gains at the time when its power of depreciation of goodwill in relation to European Union (EU) regarding the taxation regarding the assets in question the acquired participation in Z. When Under the Austrian group taxation freedom of establishment. The ECJ ceases to exist; taxation at the time of the tax authorities denied the claim regime, a non-resident company can also deemed the Danish rules to be transfer without an option to defer for depreciation, G appealed against be a group member, provided that it is disproportionate because they impose taxation is disproportionate. the decision. comparable to a resident stock company, immediate capital gains taxation on limited liability company or cooperative. unrealised assets at the time of transfer The court ruled in favour of the taxpayer. without any possibility of deferring taxation to a later point in time.

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Finland The ECJ held that the Finnish tax France • Penalties for tax fraud – the A Finnish company, law does not prohibit the Finnish loss France is expected to government will increase criminal (company P), applied to carry forward scheme because it hold hearings based on penalties for major tax fraud and deduct losses, despite a constitutes existing aid and may remain the ‘Council of tax evasion. change of ownership. Under Finnish in place until the European Commission Ministers’ publication on a new set of • List of non-cooperative states or income tax law, the change in ownership (EC) finds it to violate EU law and the anti-avoidance measures to fight against territories (NCSTs) – the would prohibit the carry forward of the ECJ supports that finding. tax fraud. The key elements of this government proposes to add losses. However, tax authorities may The court wrote that the loss carry publication are summarised below. countries to the NCSTs list that will allow the deductions for special reasons. forward provision does not violate EU • Reporting obligations – to harden not cooperate actively with France. The change in ownership restriction law because it is not new aid, but rather the fight against tax havens, large Currently, countries that have signed is very common around the world existing aid, having come into force companies, banks and wealthy an exchange of information as a means to limit trafficking in before Finland joined the EU in 1995. individuals will bear new reporting agreement with France are not loss companies. Only new aid must be reported to the obligations. French banks and included on the list even though in P’s application was rejected by the EC, existing aid, such as the loss carry companies will be required to report practice assistance is not given. The tax authorities and its appeal was forward scheme, may be lawfully annually the list of their foreign main consequence for being on the rejected by a Helsinki administrative implemented as long as the EC has not subsidiaries, including specific details French NCSTs list is that the court. P then appealed to the supreme found it to be incompatible with EU law. on the nature of their business, withholding tax on interest, administrative court, which referred If the Finnish loss carry forward transactions, sales, employees, dividends and royalties paid to questions to the ECJ asking whether the scheme had been amended, it could be profits, taxes paid and public residents of an NCST is increased Finnish scheme constituted state aid and classified as new aid, in which case the aid received. to 75%. would therefore be prohibited. decision would be against Finland. • Investigative powers – the government plans to increase the police and judiciary authorities specialising in tax investigation staff and create a new prosecuting office for major corruption and tax fraud.

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Germany The regulation would cover: Greece The new ITC retains the principle of income taxation on The federal ministry of • how the income of a PE is calculated; A new Income Tax Code the basis of worldwide income in respect of domestic tax finance in Germany there would be an ‘auxiliary (ITC) was announced in residents and Greek source income in respect of non-domestic released a draft regulation calculation’ that requires the introductory report tax residents. on the attribution of permanent documentation relating to the as part of Greek Government’s effort to There are new earnings-stripping rules, including: establishment (PE) profits in accordance attribution of assets and liabilities, overhaul the Greek fiscal system • net deductible interest is limited to 25% of Earnings with the OECD guidelines. Given the equity (allotted free capital), and towards enhancing transparency and Before Interest, Taxes, Depreciation, and Amortisation level of foreign firms operating in relevant business transactions combatting tax avoidance and evasion. (EBITDA) (under Greek accounting principles and the Germany with German branches, these • the circumstances under which civil The new ITC is expected to be relevant tax adjustments) draft regulations are important as they law contracts (dealings) would be complemented with a new framework • net interest, the amount by which interest expenses exceed will ultimately provide the guidance recognised under German tax law for the rationalisation of existing (but interest revenues necessary to calculate German branch • details about certain business sectors, fragmented) tax incentives and special • limitation does not apply to business taxpayers that are not taxable profits. such as banking, insurance, tax regimes. The ITC becomes effective part of a group of companies and the net interest does not The OECD focuses on function, construction and mineral exploration. in respect of revenues and expenses exceed €1 million per year assets, risks and capital, and Germany’s occurring in fiscal years starting on or • interest expenses disallowed can be carried forward to the new draft regulation contains provisions after 1 January 2014. following five fiscal years relating to the classification of PE The ITC adopts rules and definitions • credit institutions are exempt from such rules. income as well as the calculation and already existing in the EU and attribution of that income. The international tax materials (eg the In terms of CFC legislation, undistributed profits earned by a regulation would be a reliable OECD model tax convention, the EU CFC are added to the taxable profits of the shareholder, under instrument for investors in connection merger directive, the EU council the following conditions: with the classification and attribution of resolution regarding CFCs and thin • shareholder directly or indirectly controls the business profits in general, regardless of capitalisation rules). foreign corporation whether they choose a German For combatting tax evasion and • CFC is a tax resident in a non-cooperative jurisdiction corporation or partnership instead of a avoidance, the ITC contains rules on or in a jurisdiction with a preferential tax regime PE for investing in Germany. CFC and thin capitalisation, imputation • more than 30% of the income earned by the CFC is of income, disallowance of payments to classified as passive income (interest, royalties, non-cooperating jurisdictions and dividends etc.) preferential tax regimes. • CFCs established in EU member states are outside the scope of the rule, provided profits have not been artificially diverted there for tax evasion purposes.

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Hungary • was applied without affording the Ireland Israel The European Court of applicant a transitional period within Irish tax authorities issued The Israeli Government proposed a number of Human Rights (ECHR) which to adjust to the new scheme an anti-avoidance measure major changes to the Israeli tax system, including gave its decision in a case • was imposed on income related to designed to combat amendments that could be particularly relevant with unusual circumstances. The facts of activities prior to the material tax schemes whereby an employer places to new immigrants and companies doing business in Israel. the case dealt with a Hungarian national year and realised in the tax year, on funds in trusts or other arrangements Among the measures proposed are: and former civil servant. the applicant’s dismissal. (generally offshore) and under such • a corporate tax increase from 25% to 26.5% The ECHR found that the applicant, schemes, payments/loans, benefits or • increases in all tax brackets for individuals by 1.5% so that who was entitled to statutory severance, The ECHR concluded that the specific assets are provided to a director or the highest marginal tax rate would be 49.5%, plus a was subjected to a tax whose rate measure, as applied to the applicant employee or to an individual connected to potential surcharge of 2%, for a total of 51.5% exceeded about three times the general cannot be justified by the legitimate a director or employee. Where loans are • significant changes to the CFC regime personal income tax rate of 16%. The public interest relied on by the involved, they are generally rolled over • the cancellation, for new immigrants, of a tax exemption for ECHR observed that the 98% surtax: Hungarian Government. and not repaid. The new measure imposes proceeds from the sale of residential apartments in Israel, and • entailed an excessive and individual a charge to income tax where it was not a narrowing of the exemption for Israeli residents burden on the applicant’s side otherwise chargeable: • changes to the ‘family company’ regime so that Israeli • targeted only a certain group of • in the case of a current or former companies that are considered to be transparent under individuals, who were singled out by director or employee, on the amount certain conditions could no longer be treated as transparent the public administration in its of such payment/loan, the cost of if they have foreign shareholders capacity as employer providing (or the value of) such • a narrowing of the tax exemption provided to foreign • made the applicant bear an excessive benefit, or the value of the asset residents on the sale of Israeli companies and the denial of and disproportionate burden, while • in the case of an individual, though the exemption if the Israeli company holds natural resources. other civil servants with comparable not a director or employee at the statutory and other benefits were not time of receipt of the payment/loan, In addition to these proposals, the bill calls for significant required to contribute to a comparable benefit or asset, who subsequently changes in the taxation of trusts and new immigrants in Israel. extent to the public burden becomes a director or employee, on the amount of such payment/loan, the cost of providing (or the value of) such benefit, or the value of the asset • in the case of a current or former director or employee, on an amount calculated as if the benefit-in-kind provisions apply as regards a loan or use of an asset.

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Italy Liechtenstein The assistant attorney general stated Netherlands A recent court case involved an Italian Recent activity from the US department “this non-prosecution agreement Stock options continue company that distributed software produced of justice has sent a stern pre-Foreign addresses the past wrongful conduct of to be used by employers by a US entity. The Italian subsidiary of a US Account Tax Compliance Act (FATCA) the bank in Vaduz in allowing US as a means of non-cash based multinational was subject to assessment for corporate warning to US taxpayers holding taxpayers to evade their legal obligations compensation for executives. In a recent income tax purposes. offshore bank accounts with US tax through the use of undisclosed case, a Dutch resident individual who During the assessment the Italian tax authorities evasion intentions. Liechtenstein bank accounts, while also was a managing director for a Dutch challenged the deduction of a significant part of the royalties In a US department of justice acknowledging the extraordinary efforts limited liability company, A B.V. was paid by the Italian subsidiary to its US parent by claiming the announcement, the assistant attorney of the bank in bringing about significant awarded warrants by A B.V., which gave substantially higher transfer pricing was not in line with the general for the tax division, announced a changes in Liechtenstein law. As a result him the right to buy a specific number arm’s length standards. The tax inspectors recomputed the bank based in Vaduz, Liechtenstein has of new Liechtenstein legislation, US of shares in A B.V. at a certain price transfer pricing for the royalties as 7% of the proceeds, based agreed to pay more than $23.8 million to taxpayers who thought that they had during selected periods. The taxpayer on the guidelines of the ministry of economy and finance. the US and entered into a non- obtained the benefit of Liechtenstein’s exercised his warrants from which he The taxpayer successfully argued against the tax prosecution agreement (NPA). The tax secrecy laws have learned that their derived a net taxable gain of assessment before the tax court in the first instance, and the NPA provides that the bank will not be bank files were turned over on the €326,475.36. A B.V. withheld the Italian tax authorities then appealed the decision. The second criminally prosecuted for opening and request of the department of justice.” applicable marginal wage tax rate of tax court reversed the previous judgment and validated the tax maintaining undeclared US taxpayers’ 52% on this amount. The shares were inspectors’ action that disallowed the deduction of a bank accounts from 2001 through 2011, transferred into the taxpayer’s personal substantial portion of the royalties paid. at a time when the bank assisted a investment account. The price of the The court rejected the appeal concerning the transfer significant number of US taxpayers in shares in A B.V. had, however, dropped pricing applied to the payment of royalties for the license of evading their US tax obligations, by since the warrants were exercised. At software. The supreme court upheld the position of the Italian filing false federal tax returns with the this point, the net gain was €240,084. In revenue agency. IRS and otherwise hiding accounts held the taxpayer’s tax return for 2007, the at the bank from the IRS. The NPA taxpayer included a negative income of requires the bank to forfeit $16,316,000, €86,391, ie €326,475.36 (the net gain) – representing the total gross revenues €240,084 (the net gain of the shares). that it earned in maintaining these The tax inspector rejected the undeclared accounts and to pay deduction of the negative income, $7,525,542 in restitution to the IRS, assessing a taxable income of €424,373. representing the approximate unpaid The taxpayer appealed the assessment to taxes arising from the tax evasion by the lower court of The Hague and the the bank’s clients. appeal was rejected.

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Portugal Romania If, on 31 December of the tax year, the Russia The Portuguese The ministry of finance conditions for applying lump-sum The presidium of the Supreme Arbitration Government amended its published a draft of an taxation are no longer met, the taxpayer Court (SAC) held in a case involving a Russian corporate tax law to ordinance, introducing must report this to the tax authorities by telecommunications company, that deductible include a withholding tax exemption lump-sum taxation for certain 31 March of the following year. interest expenses on controlled loans must be calculated when the beneficial owner of a royalty companies deriving income from The lump-sum tax would be quarterly and cannot be recalculated for subsequent changes in or interest payment is a company or PE activities specified by the law. determined based on computation the taxpayer’s balance sheet position. in another EU member state. The lump-sum tax, which would formulas which are different for each The issue of the litigation was the legitimacy of a taxpayer’s The change completes Portugal’s replace the current 16% corporate type of activity. recalculation of the thin capitalisation ratio on a cumulative transition of the EU interest and income tax or 3% turnover tax, would be Lump-sum tax would be payable on basis in subsequent reporting periods. Profits tax returns are royalties directive, which eliminates imposed on resident companies that, on a current year basis, with quarterly normally filed for the first quarter of a calendar year, the first withholding tax on interest and royalty 31 December of the preceding tax year: declarations and payments, by the 25th six months, the first nine months and the year as a whole payments made between associated • carried on, as main activity, services day of the month following each quarter. (unless the taxpayer opts for monthly reporting). The taxpayer companies of different member states. of maintenance and repair of cars, had recalculated interest deductions for each period covered Also, Portugal will exempt tourism, bars and public alimentation by a tax return. This resulted in the recognition of increased withholding tax on payments to a Swiss • derived income from the main deductible interest. company or Swiss PE under the 2004 activity in an amount exceeding 70% The tax inspector did not accept the recalculation of EU-Switzerland savings tax agreement, of the total income interest for periods covered by previous tax returns. The lower which provides for measures equivalent • had a net annual turnover of less courts concluded that tax law did not prohibit the adjustment to those on the taxation of savings than €50 million or owned total (recalculation) of deductible interest expenses, but the case was income in the form of interest payments. assets of a maximum value of referred to the SAC for a supervisory review. €43 million The SAC supported the tax authorities’ position, holding • had less than 250 employees that the deductible interest expenses have to be calculated on a annually, on average quarterly basis and should not be recalculated for every period • were not under liquidation. covered by the tax return.

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South Africa In another ruling, SARS issued a binding The applicant proposes splitting the Sweden In a recent ruling issued private ruling dealing with the question loan claim into two parts. Interest will The Swedish parliament has passed a law by the South African as to whether the cancellation and continue being charged on the ZAR 1.1 whereby foreign employers must report to the Revenue Service (SARS), extinguishment of a right to claim billion, while interest on ZAR 3.061 authorities their employees that are seconded various wealth transfer tax issues interest on a shareholder loan will billion, reflecting the discounted portion to Sweden. The law requires a contact person in Sweden to be were addressed. trigger a capital gains tax liability. of the loan claim, will be cancelled. The registered and authorised to receive notices on behalf of the The descendants of a testator are the A listed public company sold its ZAR 3.061 billion amount will employer and provide documents to show that requirements designated residuary heirs under the will majority shareholding of 74% in a subsequently become an ‘interest under Swedish law regarding stationed employees are met. of the deceased. The will also bequeaths private company (the co-applicant) to free portion’. The authorities have issued brief regulations detailing the certain legacies to the surviving spouse another public company (the applicant). In addition, the loan claim will be reporting requirements that apply from 1 July 2013 and affect of the deceased. The applicant of the The co-applicant and the applicant, subordinated in order to restore the foreign employers inside and outside the EU. The notification ruling request, who is the executor of a which are both incorporated and tax solvency of the co-applicant and to must be filed no later than when the employees begin their deceased estate, anticipates that estate resident in South Africa, were not allow them to be in a position to work in Sweden. duty will become leviable on the net connected parties prior to this negotiate better credit terms with other The notification shall include the following information: value of the estate. The descendants equity acquisition. financial institutions. • the employer’s name, mailing address and residence propose to renounce their inheritances. As part of the equity acquisition, the SARS ruled that: • information on an authorised representative of the The SARS ruled that: applicant acquired a loan claim to the • since the co-applicant and the employer, including their name, Swedish personal identity • the renunciations will not result in value of ZAR 4.161 billion owed by the applicant were not connected parties number if existing (or if not their birth date), mailing the levying of any donations tax co-applicant to a financing company. prior to the equity acquisition, the address, telephone number, and email address • the renunciations will not The applicant paid ZAR 1.1 billion for ZAR 1.1 billion paid for the loan • the type or types of services to be provided in Sweden be ‘disposals’ the loan claim. The co-applicant, claim will represent an arm’s • period during which the services will be provided • the estate duty act will apply to the however, continues to owe the applicant length price in Sweden inheritances that will accrue by the total ZAR 4.161 billion amount. • the cancellation and extinguishment • the place or places in Sweden at which the services will operation of law to the surviving Interest is charged at the Johannesburg of the applicant’s right to interest be provided spouse by virtue of the proposed interbank agreed rate plus 4.9% per based on the interest free portion of • name and Swedish personal identity number if existing, or renunciations. annum. The co-applicant is not in a the loan claim will not trigger any if not, birth date of the employee(s) that are stationed to position to service all the interest on the capital gains tax liability work in Sweden. loan claim due to the applicant.

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Turkey Any investment project to be Ukraine For tax purposes, the term ‘control’ means: Turkish tax authorities granted with an investment incentive The Ukrainian ministry • a direct possession or possession through related natural issued a ‘resolution certificate goes through an elaborate and of revenue issued a persons or legal entities of a stake of at least 20% in the communiqué’ providing extensive process carried out by the guidance in which it taxpayer’s capital guidance for incentives in Turkey. The relevant central/local authority. clarified the corporate deductibility of • a direct influence or influence through related natural objective of the resolution is to explain The ‘General Directorate of expenses incurred in transactions with persons or legal entities of a taxpayer’s business activities the principles and procedures of how to: Incentive Implementation and Foreign interdependent (related) persons. The as a result of: • orient savings to investments with Capital’, affiliated with the ‘Ministry of ministry indicated that the following – obtaining corporate rights permitting the exercise of high added value Economy’, is the central, if not the sole, persons should be qualified as related: decisive influence on the formation and decision- • boost production and employment public body vested with authority to • legal entities, if one of them controls making of the taxpayer’s managing bodies • encourage regional, large-scale, and issue investment incentive certificates. the other(s) or if two or more legal – filling posts in the taxpayer’s supervisory and executive strategic investments with greater But there are also local authorities such entities are controlled by a third bodies with persons who already occupy similar posts content of research and development as chambers of industry, development legal entity in other legal entities • enhance international agencies, and other chambers that • a natural person, his family – obtaining a right to enter into contracts authorising the competitiveness operate as local branches of the Union members, and a legal entity if that imposition of conditions for exercising the taxpayer’s • attract more foreign direct investment of Chambers and Commodity natural person or his family business activities, to make obligatory instructions for • deal with regional developmental Exchanges of Turkey to issue investment members control that legal entity the taxpayer, or to delegate to third persons the powers discrepancies. incentive certificates pertaining to • managers and other executive and functions of the taxpayer’s managing bodies. investments under TRY 10 million and officers of a legal entity, as well as Investment incentive certificates need to falling within the scope of the general their family members, who are The ministry held that any expenses incurred by a taxpayer in be obtained by individual investors to investment incentive scheme. Four authorised to undertake actions on connection with the sale or exchange of goods, performance of activate whatever investment benefits principal categories of investment behalf of the legal entity that will works, or provision of services to persons considered affiliated will be granted to them. Thus, this incentives are: create, modify, or terminate the legal with the taxpayer may be recognised to the extent they do not document, issued upon request of • general investment incentive scheme entity’s legal relations exceed the income gained from those transactions. It further investors, specifies which benefits will • regional investment incentive scheme • members of any association of legal held that the taxpayer may not register losses on those be granted and utilised in what • large-scale investment incentive entities carrying on business transactions in its tax accounting. investment-related circumstances under scheme activities through such association. the relevant provisions of the resolution. • strategic investment incentive scheme.

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United Kingdom Therefore the committee recommended: Uzbekistan In the House of Lords, a select committee • Parliament should establish a joint The President signed a decree establishing a on economic affairs issued a report ‘Tackling committee made up of Members of new Free Industrial and Economic Zone corporate tax avoidance in a global economy: Parliament and Peers, to exercise (FIEZ) in the Djizzak region. The decree is a new approach needed?’ In the report, the committee greater parliamentary oversight of introduces a special fiscal, customs and administrative noted that: Her Majesty’s Revenue and Customs regime available for residents of the Djizzak FIEZ, for a 1. The UK faces a serious problem of avoidance of (HMRC) and the settlements it period of 30 years. corporation tax, due in part to the complexity of the tax reaches with multinationals. Like the Legal entities registered in the FIEZ are provided with regime in the UK, but mainly because the international tax Intelligence and Security Committee, exemption from corporate income tax, property tax, system gives multinational companies opportunities to the new committee would examine infrastructure development tax, unified tax payment for small shift profits between countries in ways that reduce their confidential evidence in private companies and contributions to the Republican Road Fund. liabilities in the UK. This damages the economy and • the treasury should urgently review The decree provides a relief for customs payment (with the undermines trust in the tax system. the UK’s corporate taxation regime exception of customs clearance fees) on imported equipment, 2. Under the present international framework of corporate and report back within a year with raw materials and spare parts, not produced in Uzbekistan and taxation, companies operating globally can make their proposed changes to be made at imported into the Djizzak FIEZ as part of the projects, which taxable profits arise in low-rate jurisdictions, such as home and pursued internationally, are approved by the cabinet of ministers. Ireland and Luxembourg, even when their customers are especially through the OECD The above-mentioned exemptions are granted for the in the UK or elsewhere. The amount of corporation tax a • the review should re-examine some period of: company pays in any one country, such as the UK, can be fundamentals of the UK’s • three years, if the investments made in the region equal determined by how aggressively the company seeks to corporation tax regime, including USD 300,000 to USD 3 million shift its profits to other lower-taxed countries. The effect differential tax treatment of debt and • five years, if the investments equal USD 3 million to is to make corporation tax payments in a given country equity and the scope for introduction USD 10 million largely voluntary for multinational companies. of an allowance for corporate equity • seven years, if the investments equal over USD 10 million. 3. The UK faces the prospect of losing much-needed revenue • HMRC should be better resourced through avoidance of corporation tax. There are also to deal effectively with the tax affairs distortions in the market place: there is no level playing of complex and well-resourced field between, say, a UK-based retailer which has to pay multinationals. corporation tax in the UK and a global rival selling in the UK but paying corporation tax somewhere else at a lower rate.

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APAC news

Australia NF loaned funds to NPHP which it The commissioner had submitted a China A recent decision dealt used to subscribe for shares in NPIP. currency exchange loss that could be The Shanghai free trade zone, proposed by the with foreign currency NF and NPHP accounted for this realised without a related exchange, ministry of commerce and Shanghai municipal denominated transaction as three separate loans in being necessarily a payment or outgoing government, contains special liberal rules that transactions. The News Corporation AUD, USD and GBP although the involving exchanges of foreign and will apply to the new zone in respect of: Limited (TNCL), incorporated in cheque was in AUD. NPIP then used Australian currency. The commissioner • setting up foreign investment enterprises (new sectors open Australia, was the parent company of the funds to acquire NL’s interest in argued that more was required than to foreign investment and less restriction on participation the News group; News Finance Pty Ltd NPL and NL used the proceeds of that an exchange of promissory notes and rates in certain sectors) (NF), News Limited (NL) and News sale to retire debt. Other financing an extinguishment of liabilities in • customs clearance Publishing Holdings Pty Ltd (NPHP), transactions were also consummated in foreign currencies. • financial sector (including abolition of foreign exchange wholly owned subsidiaries and News the group. The full court noted that the term control of the Chinese currency on capital accounts, Publishing Investments Pty Ltd (NPIP) The News Group undertook a global ‘currency exchange loss’ was defined as interest rate, overseas portfolio investment and foreign was a subsidiary of NPHP. NL had built reorganisation of its operations in ‘a loss to the extent to which it is participation in future trading etc.) up a large debt (its capital and reserves response to a downturn in the economy attributable to currency exchange rate • preferential tax rate and other incentives. were negative AUS$239 million) in and a liquidity crisis. The restructure fluctuations’. Considering the definition, funding the foreign expansion of the involved NPIP disposing of its interest in the loss must be attributable to The Shanghai Government published its ‘Plan for the News Group through its interest in NPL by that company redeeming and fluctuations in the currency exchange Guidance of the State Council on Financial Support for News Publishers Limited (NPL) buying back the redeemable preference rate; and noted that the explanatory Economic Restructuring, Transformation and Upgrading’ to incorporated in Bermuda. NL was a shares and ordinary shares held by NPIP memorandum also supported that launch a financial reform which will be experimented in the borrower and guarantor of external debt and assigning or endorsing a series of interpretation. Had it not been so new zone. The financial reform will cover cross-border and its accounts were publicly disclosed. promissory notes to various companies defined they acknowledged that an settlements, credit asset securitisation, use of CNY in To address this problem, News group within the News Australia group. argument that an actual exchange of international trade, investment and insurance, direct foreign undertook a reorganisation with the NPHP claimed a forex loss occurred currency was required for the section to investment by Chinese enterprises and individuals. objective of reducing NL’s debt. when it endorsed the two USD be activated might have a plausible basis. If the plan is carried out, the new zone is considered to be promissory notes to NPIP and when it one of the biggest transformations of the Chinese economy presented the promissory note to NPIP and financial sector in Chinese history. in final satisfaction of the loan.

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Hong Kong • the documents presented by the India The tax authority contended that Given the constant flow applicant are not sufficient to prove Generally transfer capital infusion or a subscription of of executives into and out the resident status pricing applies to related shares of an Indian company by the of Hong Kong, the issue • the applicant applies for the resident party sales, services, foreign parent is well within the scrutiny of tax residency becomes important. status on the basis of automatic leases, licenses and loans. Usually the of transfer pricing regulations. The tax The ‘State Administration of Taxation’ recognition of resident status for issuance of shares between related authority claimed that Shell India had issued an announcement regarding the listed companies, including higher- parties and most jurisdictions would not issued more shares to its parent than the procedure for issuing a Hong Kong tier companies of the listed companies even raise a related party share issuance amount invested. It sought to tax the tax residence certificate. • the applicant, who is an individual, as a transfer pricing issue, although shortfall of around INR 150 billion The mainland tax authority may applies for the application of the tax the Indian tax authorities have been which according to the tax authority determine Hong Kong tax resident arrangement on capital gains. looking into a recent transaction as was receivable by Shell India from its status on the basis of the certificate of outlined below. Dutch parent on an arm’ s length basis. incorporation/registration issued by the To obtain a Hong Kong tax residence Shell Oil is an interesting Indian Shell India has challenged the tax Hong Kong registrar of companies or certificate, the following documents view of transfer pricing legislation. Shell authority’s order before the Bombay the business registration certificate when must be submitted to the Hong Kong India issued around 870 million shares high court on the basis that the tax the applicant for the treaty benefit is a tax authority: to its Dutch parent at a price of INR 10 authority does not have jurisdiction to legal entity. In cases where the applicant • a letter of request issued by the per share. The capital was infused into invoke transfer pricing regulations for is an individual, the following mainland tax authority (at county the Indian company as foreign direct taxing subscription to shares of a documents must be presented: or higher level) to the Hong Kong investment (FDI) in compliance with company, which is a capital transaction • Hong Kong identity card tax authority Indian exchange control regulations. In that should not have tax consequences. • Hong Kong resident travel pass to • the application form for resident the course of transfer pricing assessment the mainland status issued by the Hong Kong tax proceedings, Indian tax authorities • Hong Kong tax clearance certificate authority (for legal entities there are claimed that Shell India significantly of the preceding tax year. two forms available, (i) for undervalued its shares. According to companies incorporated in Hong the tax authority, Shell India’s shares However, in the following cases, a tax Kong and (ii) for companies should have been valued at around residence certificate issued by the Hong incorporated outside Hong Kong. INR 180 per share. Kong tax authority is required: Hong Kong will, as the case may • the Chinese tax authority is be, issue the respective tax suspicious about the applicant’s residence certificate). resident status

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Japan Overseas assets are valued at either Korea In addition, the reporting exemption Permanent residents are fair value or estimated value as of 31 Under revised given to individuals with permanent now required to annually December. The fair value can be the regulations, the foreign residence rights overseas will be report on their overseas value assessed by a professional exchange that will be removed to prevent the avoidance of assets worth more than JPY 50 million appraiser or the price published in the exempt from reporting duties are: tax on overseas direct investments. in the aggregate for the purposes of financial market. The estimated value is • net settlements of less than USD 1,000 Information regarding foreign income and inheritance taxes. A the value computed according to the • payments to third parties exchange transactions will be shared permanent resident is either a Japanese reasonable benchmarks, such as the • all kinds of settlement practices more extensively among government national or a foreign individual who acquisition price or the sale price of the usually used in the global market agencies such as the National Tax resided in Japan for more than five years similar asset. • small transactions and transactions Service, the Korea Customs Service and in the preceding ten years. The overseas asset report is subject that are difficult to report, such as the Financial Supervisory Service. Such The overseas assets, regardless of to inspection by the tax authority, and rent payments by individuals cooperation is expected to help prevent their business or private use, include: non-compliance with the reporting working overseas and transfers of overseas tax evasion and illegal foreign real properties, bank accounts, requirement may trigger a fine up to investment due to bankruptcy. exchange transactions. brokerage accounts, securities (shares JPY 500,000 or, in serious cases, one and bonds), equity rights (stock options) year imprisonment. The following foreign exchange related not exercised or disposed, interest in transactions must be reported: partnerships and trusts, antiques, • capital increases and sales of overseas jewellery and other valuables. subsidiaries as well as their establishments • investments of holding companies in all their subsidiaries • tax payments of real estate sales by foreigners when they send revenues from real estate sales in Korea overseas.

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Malaysia The new rules cover locally owned New Zealand To qualify for the refund, a company Malaysia has published companies that: A white paper, entitled (and also a group, if the company is part rules on the deductibility • have obtained the approval of the ‘R&D tax losses’, invited of a group) would: of costs for the Malaysian investment development discussion on proposed • pay R&D wages and salaries of at acquisition of foreign-owned authority regarding an application changes to the tax rules to assist start-up least 20% of its total expenditure on companies. A qualifying locally owned for deduction submitted on or after companies undertaking R&D. It will wages and salaries company may deduct as expenses 20% 3 July 2012, but no later than be interesting to see what comes out • be in a tax loss position for the of the costs of acquiring a foreign- 31 December 2016 of the discussion in terms of income year owned company in the basis year for a • acquire more than 51% of the legislative amendments. • be resident in New Zealand year of assessment. The acquisition must paid-up ordinary shares issued by The paper suggests that such • not be a look-through company, be completed within three years from a foreign-owned company companies be allowed a refund in listed company, qualifying company the date an application for deduction is • use the high technology transferred respect of 100% of their eligible tax or special corporate entity. submitted to the Malaysian investment from the foreign company in their losses, instead of these losses being development authority. The deduction operational activities in order to carried forward and offset against the The paper has proposed that R&D will be withdrawn if the paid-up create or increase the demand for company’s net income in future years. expenditure be based on the definition ordinary shares issued by the acquired Malaysian-originated products or The eligible losses will be capped at in the New Zealand equivalent of foreign-owned company are disposed services provided in Malaysia (the NZD 500,000 initially (equivalent to a International Accounting Standard 38, of within five years following the date technology must be used for the tax refund of NZD 140,000, at the with certain activities excluded, such as of completion of the acquisition. production or the improvement of 28% corporate tax rate) and rising expenditure incurred in a post- material, devices, products, or incrementally each year to a maximum development phase or related to routine processes or for the improvement of of NZD 2 million (a refund of work. It is also proposed to exclude processing or quality of services) NZD 560,000). interest expenses related to R&D, the • have not been granted any incentives purchase of existing R&D assets, R&D under the promotion of investment undertaken offshore, lease payments, acts, except for pioneer status or the and any expenditure funded by investment tax allowance as a high- government or other research grants. technology company.

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Philippines Singapore Taiwan Regulations have been published dealing with a Singapore’s inland revenue authority published Taiwan’s parliament amended the capital gains new excise tax and a requirement for the new guidance clarifying the tax rules for the tax on stock trading. The original capital gains advance payment of VAT and corporate income productivity and innovation credit (PIC) regime. tax, which was passed requiring taxpayers to tax by entities selling gold and other metallic minerals to PIC is an incentive that allows businesses that invest in pay a progressive tax ranging from 0.02% to 0.06% whenever foreign corporations and to non-resident individuals who are specified activities enhanced tax deductions, allowances and the Taiwan capitalisation weighted stock index hit or exceeded not engaged in business in the Philippines. deferred tax payments. The regime is available from tax year 8,500 points. There is no 8,500 point threshold under the The regulation was imposed by the bureau of internal 2011 through tax year 2015. amended capital gains tax. Rather, it is levied at 0.1% on revenue to stop growing revenue leakages resulting from PIC grants businesses that invest in specified productivity annual sales at or above NT $1 billion (about $33.2 million). unreported sales of gold, other metallic minerals, and jewellery and innovation activities enhanced deductions and allowances Taxpayers can choose to pay a 15% capital gains tax on the to foreign individuals and entities that come to the Philippines on as much as $400,000 of qualifying expenditure incurred for actual gains/losses if doing so would create a lower overall for a limited period of time for the sole purpose of making each activity. These benefits are in addition to the deductions tax burden. cash purchases of those products. and allowances provided under the general tax rules. The total The capital gains tax on initial public offerings will remain The 2% excise tax will be levied either on the actual market deductions and allowances amount, in effect, to 400% per the same. Investors are required to pay a 15% tax on any value of the gross output at the time of excavation, in the case dollar of qualifying expenditure. capital gains from a sale of more than 10,000 shares in an of locally extracted gold (and other metallic minerals), or the Eligible activities are as follows: Intellectual Property Office (IPO). The 15% rate also applies value established by the bureau of customs in computing • the acquisition or leasing of specific information to capital gains from a sale of 100,000 (or more) shares of an tariffs and duties on imports. technology and automation equipment emerging stock or unlisted company. However, if the shares The VAT will be 12% if the gross selling price exceeds the • the acquisition or licensing of intellectual property rights are retained for more than one year, the taxpayer will receive a threshold set by the tax code and other relevant rules and • the registration of certain intellectual property rights 50% discount. regulations (currently PHP 1,919,500). Otherwise, the rate • R&D will be 3%. • training The standard corporate income tax rate will be 30%, and • design. individual income tax will be levied at progressive rates ranging from 5% to 32%. The regulation does not specify when the advance payments of VAT and corporate income tax are to be made.

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Thailand Vietnam An individual with a permanent To simplify management of the tax The Thai Minister of The Vietnamese ministry residence in Vietnam who stays in status of foreigners working for foreign Finance announced plans of finance issued a Vietnam fewer than 183 days during a contractors and subcontractors in to enhance the country’s Circular, which clarifies tax year may be considered non-resident Vietnam, the new circular requires such tax incentives for research and the tax treatment of foreign individuals for income tax purposes if the taxpayer foreigners to register for tax codes in development. Currently, Thai entities working in Vietnam and other non- can provide sufficient evidence that he is Vietnam for filing purposes. performing in-house R&D activities are resident individuals with Vietnamese a tax resident in another jurisdiction. Finally, a 10% withholding tax rate allowed to deduct double the costs source income. Evidence can include a certificate of will apply to every payment exceeding incurred from those activities when Under the circular, an individual is residence or, if an individual is resident VND 2 million (about $94,000) to a computing their income taxes. The considered to be tax resident in Vietnam in a country that does not have an resident individual if the payment is corporate tax rate is scheduled to drop if he stays in Vietnam for a minimum income tax treaty with Vietnam, a copy not specified in a short-term labour from 23% to 20% on 1 January and period of 183 days during a tax year or of the individual’s passport. contract (covering a maximum period had been as high as 30% in 2011. This has a permanent or long-term residence The new circular provides a tax of three months). further reduction will reduce the actual in Vietnam, including a house lease for a exemption for specific income and savings from the R&D deductions so the minimum period of 183 days in a tax benefits in kind granted to expatriates government is proposing to allow year. Currently, the minimum period for working in Vietnam and to Vietnamese taxpayers to claim a triple deduction a house lease is 90 days. persons working abroad. The exempt of R&D expenses. The government items include, for example, a relocation is also planning to extend the R&D allowance, round-trip airline tickets tax incentive to activities performed for annual leave, and education by external researchers, hired firms, expenses. The circular also specifies or joint development projects with details concerning: other businesses. • gross-up rules for net income • treatment of housing benefits • consequences of benefits-in-kind.

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Americas news

Argentina Dividends paid by Argentine legal Recent landmark ruling After the national tax court and Tax reform measures entities to Argentine individual residents In other news the Argentine supreme national chamber of appeals both ruled A package of Argentine and non-residents and to non-resident court of justice recently delivered a in favour of IESA, the tax authority tax reform measures legal entities will now be subject to a landmark ruling. In the case, IESA brought the case before the supreme announced in August entered into force 10% tax unless a tax treaty applies, in merged with another company, court, which also sided with IESA, on 23 September. The reforms will affect which case the treaty will govern IMASUR that was part of the same holding that: the fact that the taxpayer both personal and corporate taxpayers, (previously, dividends generally were tax economic group. IESA served notice of initially filed the reorganisation as a as well as cross-border and domestic exempt). Dividends paid by Argentine the reorganisation to the tax authorities merger, but failed to meet the relevant transactions. With the repeal of a 20- legal entities to other Argentine legal as a merger. requirements does not prevent the year-long tax exemption, capital gains entities will remain non-taxable. The federal tax agency (AFIP) found reorganisation from being analysed derived from the sale of depreciable Once the new change will be in force that the reorganisation did not qualify as under another provision, the movable assets, shares, quotas and the effective rate for investors will tax-free because IMASUR did not meet requirements of which were fulfilled participations, bonds and other increase at 41.5% according to the the relevant requisites. It also held that by the taxpayer. securities will now be subject to income following calculation: reorganisation cannot be characterised as tax in Argentina. If the sale is performed both reorganisation and a goods transfer by an individual, the applicable tax rate Income type or sale within the same economic group. will generally be 15%, applied on a net Income 100 basis. If the sale of securities is Corporate income tax -35 performed by a foreign legal entity, the Net income to be distributed 65 withholding tax rate will be 13.5% on Withholding tax on distribution -6.50 the gross sale price (unless the Net Income 58.50 transaction is subject to a different treatment under an applicable income tax treaty).

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Bolivia • Enforceable tax obligations – taxes Brazil In a transaction where no payment A temporary tax on due that have not been paid or A published ruling held was made within or from Brazil, it could foreign currency disputed before the tax authorities, that capital gains realised be argued that no Brazilian withholding transactions (IVME) was as well as tax debts which have been by non-residents are tax should apply because the source of approved by the chamber and must now disputed before the tax authorities taxable in Brazil even when both payment is not Brazilian. However, be approved by the senate. Features of and the tax courts, where the ruling contracting parties are non-resident and absent taxpayer challenge, Brazil adopts the IVME include: or decision obtained was not in the only link to Brazil is the location of the ‘source of payment’ principle for • it will apply for a 36-month period favour of the corporate taxpayer. the relevant asset. The ruling clarified taxing cross-border transactions, so the • only financial institutions and • Partial payment of tax due – even that a 15% withholding tax applies to absence of payment in or from Brazil in foreign exchange businesses will be though the tax authorities have capital gains ‘arising from the a transaction taking place outside the subject to tax attempted to collect the tax due disposition of property and rights country should not trigger any Brazilian • a rate of 0.7% will be applicable directly from the corporate taxpayer located in Brazil by non-resident legal tax on capital gains realised by non- on the profits from the sale of (frozen bank accounts, asset entities, except where otherwise residents. In practice, the foreign foreign currencies forfeiture), the funds available are provided in conventions to avoid double purchaser’s Brazilian representative may • foreign exchange businesses will pay insufficient to pay the tax debt in taxation signed by Brazil’. not be aware of, or have access to, details the tax on only 50% of the tax base full. In this case, the tax authorities In a disposition involving a Brazilian of the transaction, such as the purchase • profits derived from the sale of may collect the full amount of tax property where both purchaser and price or, more importantly, the seller’s foreign currencies by the central due or the corresponding difference seller are non-resident in Brazil, the acquisition cost and/or the amount of bank of Bolivia will be tax exempt from directors, managers and ruling cited the statutory authority capital gains realised by the non-resident • it will not be deductible from the legal representatives. requiring the Brazilian representative of seller. However, under Brazilian law, he net profit subject to corporate • Reasoned decision – once the tax the foreign purchaser to withhold is required to calculate and pay the income tax authorities have declared that the income tax on the capital gains realised withholding tax and, is personally liable • it will enter into force on the day funds available are insufficient or by the foreign seller and to remit it to for tax levied on a transaction in which following the day on which the that the corporate taxpayer is the government even if no payment has the representative might not have been decree is published. insolvent, it shall issue a reasoned been made within Brazil. directly involved. decision including the enforceable In another development a recent tax obligations, wrongful acts resolution passed indicating that the tax performed by the legal representative authorities may now request the or person in charge of administering payment of tax debts from directors, the assets and equity, and the managers and legal representatives in the deadline for replying to this decision. following cases:

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Canada Chile For the indirect transfer rules to As taxpayer transparency efforts continue to The Chilean IRS apply, the indirect transfer of a Chilean explode globally, the minister of national confirmed that the company must be executed via the direct revenue announced the launch of a indirect transfer rules transfer of ‘rights, titles, shares, quotas, strengthened ‘Foreign Income Verification Statement’ (form that were introduced in 2012 will not etc’ or similar items representing capital T1135), to crack down on international tax evasion and apply to the trading of Chilean company in a foreign entity. Because ADRs do aggressive tax avoidance. Starting in 2013, Canadians who American Depositary Receipts (ADRs). not represent rights or titles in a foreign hold foreign property with a cost of over CAD 100,000 will be The Chilean IRS also confirmed that entity, but rather in a Chilean company, required to provide additional information to the Canada capital gains arising from the disposal of the trading of ADRs should not fall Revenue Agency (CRA). The criterion for those who must file ADRs should not be subject to Chilean within the indirect transfer tax rules. form T1135 has not changed, however, the new form has been income tax provided that both the The Chilean IRS also confirmed that revised to include more detailed information on foreign transferor and the depositary bank for capital gains derived from the disposal of property. Increased reporting requirements include: the ADRs are neither domiciled nor tax ADRs should not be subject to income • the name of the specific foreign institution or other entity resident in Chile. tax in Chile provided that both the holding funds outside Canada The indirect transfer rules, which transferor and the ADR’s depositary • the specific country to which the foreign property relates apply to the indirect sale or other bank are neither domiciled nor tax • the income generated from the foreign property. disposal of Chilean company shares via resident in Chile. The reason is that any the transfer of an upper-tier non- capital gain arising should be deemed to The CRA will use the additional information to ensure all resident owner, were introduced as part be derived from foreign sources for taxpayers comply with Canadian tax laws, through activities of last year’s tax reform. In accordance Chilean tax purposes and, therefore, including education and audit. Failure to report income from with these rules, gain that is realised in not taxable in Chile. domestic or foreign sources is illegal, and Canadians should connection with certain indirect know that the CRA actively pursues cases of non-compliance. transfers of Chilean shares may be Tax evasion and aggressive tax avoidance can lead to significant subject to tax. In the ruling, the Chilean taxes, interest and penalties. IRS states that the trading of ADRs will not be considered an indirect transfer of a Chilean company for this purpose because an ADR does not constitute an asset representing capital in a foreign entity.

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Colombia Individuals must be classified as Costa Rica There are several definitions of related The government clarified ‘self-employed’ when receiving more Costa Rica, a popular low parties the more important of which is a the classification of than 80% of their income from any of tax conduit jurisdiction, 25% ownership threshold. The approved resident individuals into the specified economic activities has finally succumbed to methods for determining the arm’s-length two categories: employees and self- indicated the NTC. the passage of transfer pricing rules. The price of a transaction are: employed and issued a decree that contains In order to determine if an individual new transfer pricing rules apply to • the comparable uncontrolled price definitions of the following terms: is employed or self-employed, the transactions between related parties. A (CUP) method • employee decree establishes that he must provide special transfer pricing information form or, alternatively, the valuation of • self-employed the following information to the payer must be included with affected taxpayers goods based on international price • individuals subject to ordinary or withholding agent, each year before income tax returns for the 2013 tax quotations (which is not an income tax regime 31 March: period and thereafter. Tax authorities OECD-approved method) • liberal profession • whether the income received in the may make adjustments to taxable • the cost plus method • technical service. previous year derives from the income if they determine that the • the resale price method provision of personal services or an transactions were not conducted at • the profit split method The government issued decree regulates economic activity carried out on arm’s length. • the transactional net margin method. the withholding tax on employment behalf of an employer or contractor income and provides the scope of in more than 80% of the total The new regime provides for Advance application of the simplified minimum income received during the year Pricing Agreements (APAs) that are tax for employees and self-employed • whether the income received in the valid for three years. Transfer pricing individuals. previous year derives from the documentation should be prepared According to the National Tax Code provision of professional or technical annually in Spanish and must be (NTC), individuals must be classified as services (that does not require the submitted to tax authorities ‘employees’ when deriving more than use of specialised materials, supplies, upon request. 80% of their income from the provision specialised machinery or equipment) of personal services or from an in more than 80% of the total economic activity carried out on income received during the year behalf of an employer or a contractor • whether the individual is obliged to under a labour contract or any other file an income tax return for the type of contract. previous year • whether the income received in the previous year is higher than specified thresholds.

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Jamaica • allow tax authorities to request and Panama Peru The house of obtain information in urgent The government issued a The local tax authorities representatives approved a circumstances without prior decree to introduce new have published bill in order to provide the notification to the taxpayer rules with respect to regulations with respect tax administration with mechanisms to • prescribe a minimum retention period withholding agents for taxes, to the tax incentives created to promote promote tax compliance, and collect and of seven years for books, records and contributions, and any other kind of productivity. The tax incentives use the information required to assess other documents relevant to levies on commercial and industrial regulations relate to: taxpayers. The main objectives are to: determine the person’s tax liability. activities derived in Panama. • scientific and technological • increase and facilitate access to A withholding agent must meet research expenses information to allow for an efficient the following conditions: • technological innovation expenses and effective investigation, audit, • be a taxpayer in Panama • credit for employees’ training expenses. assessment, collection and • derive at least PAB 5 million of enforcement by the tax administration gross income during the previous The provisions will be in force effective • improve the quality and usefulness of fiscal year. as of 1 January 2014. information supplied to the tax administration on a periodic basis The local treasury office suggests on a • provide the commissioner general monthly basis a list of taxpayers who with power to request information may be designated as withholding agents from taxpayers by the decision-making administrative • extend the definition of taxpayer to body. Withholding agents are subject to include persons who might not be the following main mandatory under examination by the tax assignments: authorities and persons who may be • be liable for any deficiency of of interest to a requesting state acting withholding in pursuance of an international • transfer the withholding tax to the agreement, in order to empower the tax authorities by the last day of the tax authorities to obtain information month following the month of on these persons payment. In the case of delay, after a period of 60 days, the withholding agent is subject to legal proceedings.

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Puerto Rico United States Under the DRD provisions, any The 2013 ‘Tax Burden The US tax court heard a related party debt reduced the amount Redistribution and case that involved a US of the dividend and thus the low Adjustment Act’ has corporation that effective rate of taxation. amended the 2011 tax code by repatriated funds from its wholly owned The IRS determined that the related- disallowing various deductions. The CFC and claimed a dividend received party debt rule applied to the two following are now regarded as non- deduction (DRD), which provided a accounts receivable established as a deductible expenses: temporary one year DRD to US result of the transfer pricing • expenses related to the use, corporations equal to 85% of cash adjustments. The IRS thus disallowed maintenance and depreciation of dividends repatriated from their CFCs the corresponding amount of the residential property located outside and resulted in a maximum tax rate of claimed DRD. Puerto Rico 5.25% on such dividends. The US tax court rejected the US • expenses related to the ownership, The US IRS determined that certain corporation’s argument that the related- use, maintenance and depreciation of royalty payments from the US party debt rule applies only to automobiles (with exceptions) corporation to the CFC were not at intentionally abusive transactions. • a percentage of the following arm’s length under internal revenue code The US tax court explained that payments made abroad if such section 482, dealing with transfer congress did not incorporate such expenses are not subject to income pricing. The parties made the primary an intent requirement. tax in Puerto Rico (provided that adjustments that reduced the royalty The US tax court then held that the such income is not exempt under a payments, thereby increasing the US two accounts receivable qualified as tax incentive act or any other law corporation’s income. increased related-party indebtedness for granting income tax exemptions): The primary adjustments required the purpose of the related-party debt – 51% of expenses incurred or paid the US corporation to make secondary rule. Accordingly, the US tax court to related legal entities located adjustments, which would have been affirmed the IRS’s determination and outside Puerto Rico. For the deemed capital contributions from the denied the DRD for the amount of the purposes of this rule, home US corporation to the CFC. Instead, the related party debt attributable to the offices are deemed related US corporation elected to establish transfer pricing adjustments. legal entities interest-bearing accounts receivable – 100% of expenses incurred or from the CFC to the US corporation. paid to a partner, member or shareholder that holds more than 50% of the interest in the company.

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Transfer pricing news

France The French tax authorities The administrative courts reduced India An interesting case was considered that the transfer of the cash the amount of the reassessment and In a recent case, the heard concerning the pooling activity of a group out of France stated that the reassessment should be assessee, a wholly owned emigration of a captive to a related party in Switzerland based on the average gross margins ratio manufacturing and treasury centre. Although the courts qualifies as an indirect transfer of profits, of SNFF. distribution subsidiary of a Dutch could have raised the issue of an for an amount equal to the market value The administrative court of appeal parent, imports fully built cars and car outbound intangible asset transfer for a of this activity. Consequently, the tax overturned these decisions, but did not kits from its parent company. The captive service provider, the courts authorities reassessed the taxable income take a position on the existence of an assessee entered into an import bypassed this issue entirely leaving the of the French company and also applied intangible asset transfer. It merely agreement with its parent company that question open as to whether or not a withholding tax on the corresponding pointed out the lack of reliability of the covered India’s responsibilities for the intangible value exists in a captive deemed distribution. rates that the tax authorities used to set marketing and promotion of the parent service provider. The administrative courts took a their reassessment. The tax authorities company’s cars. A French entity (SNFF) was in position on the withholding tax and on had not provided any information on The assessee applied the resale price charge of carrying out a cash pooling the corporate income tax, respectively. the identity of their comparables, nor on method as the primary method, and the activity for the exclusive benefit of the They ruled that the transfer of a business the way they operate; moreover, the tax transactional net margin method as the entire group in Europe. SNFF activity had a value, even if it was an authorities did not consider that the secondary method, to establish that its transferred this activity to a related administrative function which was only lower rates retained by the transactions with the parent company Swiss entity, Treasury Centre Europe rendered for the internal benefit of the administrative courts were relevant. were at arm’s length. (TCE). SNFF did not receive any group (with accordingly a ‘captive’ compensation for the transfer of its cash clientele) and not vis-a-vis third parties. pooling activity to the Swiss entity.

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The tax officer argued that the The tribunal held that unlike a Poland The draft decree provides a broad assessee had contributed to the brand routine distributor, the assessee also The Polish minister of outline of the description and lists development of the parent company by performed the functions of sales finance prepared a draft exemplary services that qualify as low incurring high spending, and they asked promotion and advertising and had a regulation (decree) value-adding intragroup services (for the Indian subsidiary to show why the greater role in the company and more making several modifications to the example, administrative and parent company had not compensated it responsibility than the companies that transfer pricing regulations to bring the management services, technical support, for expenses relating to its brand were used as comparables. The tribunal rules in line with the OECD transfer information technology services, promotion, which resulted in the therefore accepted the assessee’s pricing guidelines and the marketing, and legal services). creation of marketing intangibles for argument that its expenditures for recommendations of the EU joint The draft decree defines shareholder the parent. warehousing, sales promotion, and transfer pricing forum. costs that should not be charged to The Indian subsidiary argued it had a advertising were necessary and justified. One of the changes proposed is to related entities as costs relating to significantly high profit margin from its The tribunal held that the replace the hierarchy of transfer pricing shareholding that are of no actual benefit distribution operations, and there was compensation for additional services methods and adopt a ‘most appropriate to a related entity (and therefore do not no need for further compensation from provided by the Indian subsidiary were method’. To assess income under that justify charging the costs to the parent company. The assessee embedded in the contract. After a method, the tax authorities would first subsidiaries). The draft decree lists appealed to the dispute resolution panel, detailed functional analysis of the Indian take into account the nature of the exemplary shareholders’ costs and which upheld the tax officer’s subsidiary and the terms of its transaction, the degree of comparability, includes the cost of increases in share adjustment. However, the panel directed importation agreement with its parent, as well as the reliability of comparability, capital, the cost of consolidated financial the tax officer to exclude after-sales the tribunal held that no further and the availability of information reporting, costs of boards of directors support costs and sales bonuses from the compensation was required from the on comparables. associated with the statutory duties of assessee’s costs in India, thereby parent for the assessee’s extra expenses The proposal stresses the significance the directors, and so on. bringing the assessee’s expenditures because that compensation had already of the comparability analysis. The draft closer into line with the spending of been received. The tribunal therefore decree also addresses restructuring the comparables. rejected the tax officer’s transfer operations. There will also be proposed The tribunal held that a distributor’s pricing adjustment. new regulations on low value-adding profits are generally based on pricing intragroup services. Under the proposed arrangements, although it can be regulations, if the taxpayer provides a compensated over and above that if it description of a transaction involving renders additional services and pricing such services, the tax authorities should adjustments have not covered the costs examine the transaction based on the of the routine services it renders. description presented.

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Ukraine For tax purposes, the term ‘control’ means: The ministry held, that any expenses The Ukrainian ministry • a direct possession or possession incurred by a taxpayer in connection of revenue clarified the through related natural persons or with the sale or exchange of goods, corporate deductibility of legal entities of a stake of at least performance of works, or provision of expenses incurred in transactions with 20% in the taxpayer’s capital services to persons considered affiliated interdependent (related) persons. The • a direct influence or influence with the taxpayer may be recognised to ministry said the following persons through related natural persons or the extent they do not exceed the should be qualified as related: legal entities of a taxpayer’s business income gained from those transactions. • legal entities if one of them controls activities as a result of: It further held that the taxpayer may not the other(s) or if two or more legal – obtaining corporate rights register losses on those transactions in entities are controlled by a third permitting the exercise of its tax accounting. legal entity decisive influence on the • a natural person, his family formation and decision-making members, and a legal entity if that of the taxpayer’s managing bodies natural person or his family – filling posts in the taxpayer’s members control that legal entity supervisory and executive bodies • managers and other executive with persons who already officers of a legal entity, as well as occupy similar posts in other their family members, who are legal entities authorised to undertake actions on – obtaining a right to enter into behalf of the legal entity that will contracts authorising the create, modify, or terminate the legal imposition of conditions for entity’s legal relations exercising the taxpayer’s business • members of any association of legal activities, to make obligatory entities carrying on business instructions for the taxpayer, or activities through such association. to delegate to third persons the powers and functions of the taxpayer’s managing bodies.

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Indirect taxes news

Bulgaria In order to provide proof of the Accordingly, the Bulgarian tax China A recent Bulgarian case acquisition of the animals, in addition to authorities denied the taxpayer the right China’s state involves a company the nine invoices, the taxpayer produced to deduct, in the form of a tax credit, the administration of incorporated under weight certificates, bank statements VAT relating to the invoices issued taxation released a Bulgarian law (the taxpayer) and their relating to payment of those invoices by supplier. bulletin which clarifies the scope of the main economic activity is the trade in and the contract concluded for the The taxpayer lodged an VAT exemption on exported services animals. The taxpayer declared nine supply of calves. administrative appeal against that under the VAT pilot programme. invoices concerning the supply of calves The taxpayer was subject to a tax decision refusing the deduction and then The bulletin lists various sub- for slaughter, in order to obtain, in the investigation and the Bulgarian tax appealed against the tax assessment. In categories and related requirements for: form of a tax credit, the deduction of the authorities requested the supplier to particular, it claimed before that court, • international transportation services VAT relating to those invoices. provide information on the supplies that the information which it had • exported technology services In addition, the taxpayer declared which it had invoiced to the taxpayer. communicated was sufficient to prove • technology-related information that it had exported live calves to The taxpayer revealed certain gaps in that the supplies invoiced by supplier services Albania and provided proof of their its accounting and in its compliance with had been carried out. • innovative services purchase by invoices and by producing the veterinary formalities relating, in The administrative court for the city • transportation-related ancillary customs declarations, veterinary particular, to titles of ownership of the of Sofia decided to stay the proceedings services certificates indicating the animals’ ear animals and to their ear tags. The tax and to refer the following questions to the • leasing of tangible-movable property tags and veterinary certificates for the authorities took the view that it had not court of justice for a preliminary ruling. • certification and consulting services transportation of the animals on been proven that those supplies had in The ECJ held that for purposes of • radio, film, and television services. national territory. fact been carried out and that, claiming VAT input tax deductions, consequently, the taxpayer was not satisfaction of formal ownership rules is entitled to claim a right to deduction of not required to prove the supply of the VAT relating to those supplies. goods was made.

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To qualify for the tax exemption, Finland France In support of its appeal the taxpayer Chinese taxpayers must sign agreements The Finnish supreme In a recent case the ECJ claimed that, in order to determine the with the foreign recipients of the tax- court addressed the issue held that a company deductible proportion of expenses of its exempt services. All income from the of whose VAT input is principally established in principal establishment for VAT services must be obtained from outside it anyway? a member state may not take into purposes, the income of its branches China. Taxpayers are also required to A Finnish parent company (FI Oy) account the turnover of its branches established in other EU member states separate tax-exempt income from other had paid an invoice issued by a German established abroad when determining and in third states should be taken into income and to accurately calculate the consulting firm (DE Co) which did not VAT deductibility. account as a single taxable person. input VAT paid in connection with the have a fixed establishment in Finland and The taxpayer is a bank which has its The taxpayer maintained that the provision of the tax-exempt services. which had not voluntarily registered principal establishment in France and branches established in an EU member Also, taxpayers must submit documents itself to the Finnish VAT register. The branches in EU member states and in state are themselves subject to VAT to the competent tax authority. invoice was addressed to FI Oy and third states. and must be taken into account, in related to a due diligence investigation Following an examination of the determining their own deductible which DE Co had performed on a accounts of the taxpayer, the tax proportions of VAT. German company, whose shares in a administration decided the taxpayer had The court held that the fixed German subsidiary of FI Oy (DE Sub) a tax deficiency for VAT. Those arrears establishment situated in a member state had been acquired. The tax authorities result from the administration’s refusal and the principal establishment situated imposed VAT on FI Oy based on the to take account of the interest on loans in another member state constitute a reverse charge mechanism. The issue was granted by taxpayer’s establishment of single taxable person subject to VAT and whether services which related to the its branches established outside France. it follows that a taxpayer is subject, in subsidiary’s business activity (ie The taxpayer objected to the addition to the system which applies in acquiring another subsidiary), but declaration claiming that the amount of the state of its principal establishment, to where paid by a parent company, were the interest in question could be taken as many national systems of deduction deductible for the parent company. into account in calculating the as there are member states in which it The court held that FI Oy did not deductible proportion of VAT. has fixed establishments. Under the have the right to deduct the VAT as the Those complaints were rejected by taxpayer’s position there would be over- consulting services did not have a direct the tax administration and the taxpayer crediting of input tax. Thus the foreign link to FI Oy’s own business but the appealed to the tribunal and then to the branches were to be ignored in the business activities of its German subsidiary. French council of state. calculation of the input tax credit.

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Indonesia The officials eligible for the Netherlands The principal issue was whether a taxable person who has The government issued exemption are the head, staff and experts The ECJ held that a established a separate pension fund for the purpose of regulations on the who have received a permit to work in company may be entitled safeguarding the pension rights of their employees and former exemption of VAT and Indonesia. The exemption is not given to to deductions of input employees can deduct the tax paid on the basis of services sales tax on luxury goods for diplomatic staff of diplomatic missions or VAT paid on pension fund management supplied in respect of the implementation of the pension missions and international organisations international organisations who are fees if it can show a ‘direct and provision and the operation of the pension fund. as well as their officials. The regulation Indonesian nationals. The exemption immediate link’ between the payments For a taxable person to be accorded the right to deduct applies to: applies (with restrictions) to and its sales transactions. input VAT, and in order to determine the extent of that right, • importation of taxable goods international organisations that are The taxpayer established a pension the existence of a direct and immediate link between a • supply of taxable goods not subject to income tax and obtain a fund for the employees that was separate particular input transaction and an output transaction or • rendering of taxable services. recommendation from the ministry from taxpayer (from a legal and fiscal transactions giving rise to the right to deduct is, in of state secretariat. point of view). Netherlands law that was principle, necessary. A ‘diplomatic mission’ includes a in force at the time left it to employers Whether there is a direct and immediate link will depend consular representative that has been to choose whether to set up such a fund on whether the cost of the input services is incorporated either accredited to the Indonesian themselves, or to entrust the in the cost of particular output transactions or in the cost of Government, including permanent performance of their obligations to an the goods or services supplied by the taxable person as part of representatives and/or diplomatic insurance company to which they his economic activities. missions accredited to the association of would pay their contributions and that A taxable person who has set up a pension fund in the Southeast Asian nations secretariat. The would be responsible for paying form of a legally and fiscally separate entity, such as that at officials of a diplomatic mission who are pensions to retired employees. There issue in the main proceedings to safeguard the pension rights eligible for exemption are the head and was no option, however, for them to of their employees and former employees, is entitled to deduct the staff of the mission. An international retain an internal pension scheme. the VAT paid on services relating to the management and organisation refers to the representative A subsidiary of a taxpayer entered operation of that fund, provided that the existence of a direct of an institution under the United into contracts with suppliers of services and immediate link is apparent from all the circumstances of Nations, a foreign diplomatic mission established in the Netherlands relating the transactions in question. or any foreign organisation domiciled to the administration of the pensions in Indonesia. and the management of the assets of the pension fund. The costs associated with those contracts were paid by that subsidiary and not passed onto the pension fund. The taxpayer deducted the amounts of VAT relating to those costs as input tax.

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Treaty news

Korea/India The taxpayer constituted an The tribunal disagreed with the tax The Netherlands installation PE in India under the India- officer. For income to be considered The Netherlands will improve tax transparency Korea income tax treaty. Therefore, in Indian source, the underlying activities and update tax treaties with low-income its Indian return, the company divided must have a nexus with India. Although countries and low middle-income countries. A South Korean company’s income the total revenue and attributed it the offshore supplies were an essential Tax treaties with Zambia and 22 other developing countries from the offshore supply of goods and separately to offshore supplies and part of the project, no portion of the will be revised to allow the incorporation of anti-abuse services used in a power plant project in onshore supplies of goods and services. income derived from the offshore clauses where necessary. The government is taking the India is not attributable to the The taxpayer maintained that the activities could be attributed to the following measures: company’s Indian permanent income for the offshore supplies were Indian PE, unless the tax officer was able • substantial activity requirements (companies must run establishment and is therefore not not attributable to the Indian PE and to show either that the price of the genuine risks in the Netherlands and the actual taxable in India the Delhi income tax was therefore not taxable in India. The offshore supplies was not at arm’s length management of the company must be conducted in the appellate tribunal has held. taxpayer computed its taxable income or that the Indian PE was somehow Netherlands) will apply to more companies The taxpayer was executing a for the onshore supplies after deducting involved in them. Without that evidence, • the Netherlands will inform its treaty partners turnkey power plant project in India its onshore contractor costs from its the revenue from the offshore supplies spontaneously when, in retrospect, a company turns out that involved the offshore supply of onshore revenue. During the audit, the could not be taxed in India, the not to meet the substantial activity requirements. Thanks plant and machinery and services such as tax officer held that the offshore and tribunal held. to this improved information exchange with the source engineering, fabrication, and so on, as onshore supplies and revenue were country, that country will be in a position to deny the well as onshore supplies of plant and indivisible and therefore held that treaty benefits to a company machinery and installation and taxpayer’s income from the project was • information exchange will also apply to particular commissioning services. The Indian Indian-source income attributable to the financing companies that have obtained advance certainty client paid for each service in a lump assessee’s installation PE in India. • the tax administration will process requests for a tax ruling sum. The taxpayer was responsible for from holding companies (these companies receive all risks associated with the project until dividends from non-residents and pay out dividends to the plant was transferred to the Indian non-residents) if the group in which they operate has client, and the assessee provided a sufficient ties with the Netherlands. warrant to that effect.

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Russia US/Belgium The provisions of the convention When double taxation arises due to The Russian ministry of The that require a determination of whether the application of the principles of the finance issued guidance competent an asset or amount is effectively full OECD approach, the US will in which it clarified the authorities connected or attributable to a PE are continue to eliminate double taxation by corporate tax regime for interest of the US and Belgium entered into an also to be interpreted in a manner allowing the foreign tax credit provided payments that a Russian legal entity agreement regarding the application of entirely consistent with the full OECD by the laws of the US, subject to the makes to a non-resident legal entity ‘Article 7’ (business profits) of the approach as set out in the report. limitations of those laws. Where a located in a jurisdiction that does not convention between the governments Where, in accordance with the full taxpayer can demonstrate to the US have a tax treaty with Russia. The of the US and Belgium for the avoidance OECD approach a contracting state competent authority that such double ministry of finance held that the payer of double taxation and the prevention adjusts the profits that are attributable to taxation has been left unrelieved after must withhold from each payment of fiscal evasion with respect to taxes a PE of an enterprise of one of the the application of mechanisms under US corporate tax at a 20% rate. on income. Specifically the agreement contracting states and taxes accordingly law such as the utilisation of foreign tax The ministry of finance stated that authorises: the profits of the enterprise that have credit limitation created by other under the tax code, the corporate tax • the use of the OECD authorised been charged tax in the other state, the transactions, the US will relieve such base for foreign legal entities that do not approach to determine the profits of competent authorities of the US and additional double taxation. operate in Russia through a PE consists a business enterprise attributable to Belgium agree that the other contracting of income derived from Russian sources. a PE state shall (to the extent necessary to The ministry of finance held that income • the agreement also authorises double eliminate double taxation) make an in the form of interest that a non- taxation relief is to be applied where appropriate adjustment if it agrees with resident legal entity receives from a the OECD approach results in a tax the adjustment made by the first- Russian legal entity should be qualified liability at the PE. mentioned state. If the other contracting as income gained from the Russian state does not so agree, the contracting sources for corporate tax purposes. The competent authorities of the US and states shall eliminate any double taxation Belgium agree that paragraph 1, Article resulting therefrom by mutual agreement. 7 of the convention is to be interpreted in a manner entirely consistent with the full OECD approach as set out in the OECD report. This means a transfer pricing profit considering the PEs functions, assets, and risks must be considered.

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Tax policy

OECD Tax best practices 4. If questions or assessments from 8. Businesses should refrain from The BIAC to the OECD has released a statement covering 1. Businesses should be open and the tax authorities appear not to claiming or accepting exemptions various tax best practices for engaging with tax authorities in transparent with tax authorities be legitimate or are based on not contemplated in the statutory, developing countries. about their tax affairs and provide misunderstandings of the facts or the regulatory, or administrative The tax best practices identified in this statement are relevant, reasonably requested law, businesses should work with tax framework related to taxation, intended to support responsible business tax management and information that is necessary to authorities where possible to identify financial incentives, or other issues. to enhance co-operation, trust and confidence between tax enable a balanced assessment of the issues and explore options to 9. Businesses should follow established authorities in developing countries and international business, possible tax risks. resolve misunderstandings. and agreed upon procedures and understanding that business must comply with the laws and 2. Businesses should commit to 5. Where relevant, reasonably channels when dealing with tax regulations of the jurisdiction in which it operates. responding to reasonable tax requested information is not authority officials. These tax best practices aim to promote stability, certainty authority enquiries and make available, businesses should inform 10. Businesses should consider how best and consistency in the application of tax principles as well as payment of their tax liabilities within the tax authorities and explore to explain fully to the public, their to support the capacity building for efficient and effective tax established due dates, or within a mutually acceptable alternatives economic contribution and taxes authorities in developing countries. This will foster cross- reasonable time-frame where no in a timely manner. paid in the jurisdictions in which border trade, investment and sustainable growth for the such due dates are established. 6. Businesses should work they operate, where they determine benefit of all. 3. Where tax authorities ask collaboratively with tax authorities that such explanation would reasonable, specific and legitimate to achieve early agreement on be helpful in building trust in the questions, businesses should disputed issues and certainty on a tax system. commit to answering those real-time basis, wherever possible. questions in a straight-forward 7. Businesses may utilise tax incentives and transparent manner. that are transparent, publicly published and endorsed by the host nation legislation.

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OECD 3. International businesses contribute The objectives • in international tax matters, businesses should follow the The BIAC to the OECD has released a significantly to the global economy • to enhance co-operation, trust and terms of the applicable DTA and relevant domestic and statement covering tax principles for and pay a substantial amount of tax confidence between tax authorities, OECD guidance. Businesses should engage constructively international business. The statement of comprising not only corporation tax, business taxpayers and the public in in international dialogue on the review of global tax rules tax principles is intended to promote but also labour taxes, social regard to the operation of the global and the need for any changes. and affirm responsible business tax contributions and other taxes such as tax system management by international businesses. environmental levies and VAT. • to promote the efficient working Transparency and reporting principles These principles are based on five 4. Transparency, open dialogue and co- of the tax system to fund public Relationships between international businesses and tax key observations: operation between tax authorities services and promote sustainable authorities should be transparent, constructive, and based on 1. Public trust in the tax system is a and business contributes to greater growth mutual trust with the result that tax authorities and businesses vital part of any flourishing society compliance and a better functioning • to support stability, certainty and should treat each other with respect, and with an appropriate and growing economy. tax system. consistency in global tax principles focus on areas of risk. International businesses should, therefore: 2. Most businesses comply fully with 5. Tax is a business expense which that will foster cross-border trade • be open and transparent about their tax affairs with the tax all applicable tax laws and needs to be managed, like any other, and investment. authority in each jurisdiction and provide the relevant, regulations, recognising the and therefore businesses may reasonably requested information (subject to appropriate obligations of governments to legitimately respond to tax incentives Tax planning principles confidentiality provisions) that is necessary to enable a protect a sustainable tax base. and statutory alternatives offered • international businesses should only reasonable review of possible tax risk by governments. engage in tax planning that is aligned • work collaboratively with the tax authorities to achieve with commercial and economic early agreement on disputed issues and certainty on a real- activity and does not lead to an time basis, wherever possible abusive result • where necessary seek to increase public understanding of • international businesses may the tax system in order to build trust The BIAC to respond to tax incentives • where they determine explanations in order to build public and exemptions trust in the tax system, they should consider how best to the OECD has • international businesses should explain to the public their economic contribution and taxes released a statement interpret the relevant tax laws in a paid in the jurisdictions in which they operate. reasonable way, consistent with a covering tax principles relationship of ‘co-operative for international compliance’ with tax authorities business.

Global tax newsletter No. 9: November 2013 35 Welcome Belgium Mexico United States EMEA news APAC news Americas Transfer Indirect taxes Treaty news Tax policy Who’s who featured article featured article featured article news pricing news news

South Africa The committee will make • the impact of the tax system in the The minister of finance recommendations to the minister of promotion of small and medium size announced members of finance. Any tax proposals arising from businesses, including analysis of tax the tax review committee these recommendations will be compliance costs, the possible as well as the committee’s terms of announced as part of the normal budget further streamlining of tax reference. The committee’s and legislative processes. As with all tax administration and simplification of appointments give effect to the minister’s policy proposals, such proposals will be tax legislation announcement in February that the subject to the normal consultation and • a review of the corporate tax system government will initiate a tax review this parliamentary oversight. with special reference to: year ‘to assess the tax policy framework The committee should evaluate the – the efficiency of the corporate and its role in supporting the objectives South African tax system against the income tax structure of inclusive growth, employment, international tax trends, principles and – tax avoidance (eg base erosion, development and fiscal sustainability’. practices, as well as recent international income splitting and profit The terms of reference for the tax initiatives to improve tax compliance shifting, including the tax bias in review committee are to inquire into the and deal with tax base erosion. favour of debt financing) role of the tax system in the promotion The following aspects should receive – tax incentives to promote of inclusive economic growth, specific attention from the committee: developmental objectives employment creation, development and • an examination of the overall tax – the average (and marginal) fiscal sustainability. The committee will base and tax burden including the effective corporate income tax in its work take into account recent appropriate tax mix between: direct rates in the various sectors of domestic and global developments and, taxes, indirect taxes, provincial and the economy. in particular, the long term objectives of local taxes the national development plan.

Global tax newsletter No. 9: November 2013 36 Welcome Belgium Mexico United States EMEA news APAC news Americas Transfer Indirect taxes Treaty news Tax policy Who’s who featured article featured article featured article news pricing news news

Who’s who Grant Thornton International Ltd

Francesca Lagerberg Regional tax resources Global coordinators Marketing © 2013 Grant Thornton Global leader – tax services Winston Romero Agata Eysymontt Russell Bishop International Ltd. T +44 (0)20 7728 3454 Senior tax development manager – Americas Coordinator – tax specialist services Senior marketing executive – tax “Grant Thornton” refers to E [email protected] T +1 312 602 8349 T +44 (0)20 7391 9557 T +44 (0)20 7391 9549 the brand under which the E [email protected] E [email protected] E [email protected] Grant Thornton member Claude Ledoux firms provide assurance, Executive director – tax operations Mirka Vaicova Francie Kaufman tax and advisory services to their clients and/or refers T +1 312 602 8522 Tax development manager – APAC and Middle East Global project coordinator – training and quality to one or more member E [email protected] T +852 3987 1403 T +1 262 646 3060 firms, as the context E mirka.vaicova@ gti.gt.com E [email protected] requires. Grant Thornton Bill Zink International Ltd (GTIL) and Executive director – tax quality and training Jessica Maguren the member firms are not T +1 312 602 9036 Tax development manager – Europe and Africa a worldwide partnership. GTIL and each member firm E [email protected] T +44 (0)20 7391 9573 is a separate legal entity. E [email protected] Services are delivered by Guenter Spielmann the member firms. GTIL Executive director, EMEA – tax services does not provide services T +49 (0) 163 895 2434 to clients. GTIL and its member firms are not E [email protected] agents of, and do not obligate, one another and are not liable for one another’s acts or omissions.

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