GLOBAL WEEKLY ISSUE 104 | NOVEMBER 6, 2014 a closer look

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

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

Global Tax Weekly – A Closer Look

Combining expert industry thought leadership and team of editors outputting 100 tax news stories a the unrivalled worldwide multi-lingual research week. GTW highlights 20 of these stories each week capabilities of leading law and tax publisher Wolters under a series of useful headings, including industry Kluwer, CCH publishes Global Tax Weekly –– A Closer sectors (e.g. manufacturing), subjects (e.g. transfer Look (GTW) as an indispensable up-to-the minute pricing) and regions (e.g. asia-pacifi c). guide to today's shifting tax landscape for all tax practitioners and international fi nance executives. Alongside the news analyses are a wealth of feature articles each week covering key current topics in Unique contributions from the Big4 and other leading depth, written by a team of senior international tax fi rms provide unparalleled insight into the issues that and legal experts and supplemented by commentative matter, from today’s thought leaders. topical news analyses. Supporting features include a round-up of developments, a report on Topicality, thoroughness and relevance are our important new judgments, a calendar of upcoming tax watchwords: CCH's network of expert local researchers conferences, and “The Jester's Column,” a lighthearted covers 130 countries and provides input to a US/UK but merciless commentary on the week's tax events. GLOBAL TAX WEEKLY ISSUE 104 | NOVEMBER 6, 2014 a closer look CONTENTS

FEATURED ARTICLES Th e Implications Of Th e Latest Russian Topical News Briefi ng: De-Off shorization Proposals For Users Grand Ambition Or Grand Gesture? Of Cyprus Holding And Finance Structures Th e Global Tax Weekly Editorial Team 18 Philippos Aristotelous and Stavros Supashis, Andreas Neocleous & CO LLC 5 Recent Transfer Pricing Developments Duff & Phelps Corp. 19 Canada Repeals Immigration Trust Rules — Restructuring Options Topical News Briefi ng: Taxing Th e Net Ron Choudhury, Aird & Berlis LLP 10 Th e Global Tax Weekly Editorial Team 23 OECD Releases Finalized Proposals On Taxation In Rousseff ’s Brazil Key Tax Base Erosion Concerns Stuart Gray, Senior Editor, Global Tax Weekly 24 Patricia G. Lewis, J. Clark Armitage, Peter A. Barnes and Neal M. Kochman of Caplin France — Transfer Pricing: More Information and Drysdale, Chartered 13 To Provide To Th e Tax Authorities Bruno Gouthière, Partner with CMS Bureau Francis Lefebvre 33

NEWS ROUND-UP

Digital Taxation 36 International 38

Spain Approves Controversial ‘Google Tax’ African Blocs To Start Talks On Grand Area Hungary Backs Down On Internet Tax Plan Europe Seeks To Streamline FTA Negotiation Process Report Charts Global Tax Rates On IT Goods China Planning Additional Free Trade Zones And Services EU Seeks WTO Mediation In Tax Disputes Compliance Corner 41 Individual Taxation 50

Automatic Info Exchange Moves A Step Closer Accountants Warn Against UK 50 Percent Income South Africa Issues Tax Dispute Resolution Guide Taxpayers Warned On Obamacare Tax Credits Italy Approves Pre-Compiled Tax Returns US Savers Advised To Plan Now To Gain Australia Passes Law To Cut Red Tape Canada Planning Substantial Family Tax Cuts

Tax Policy 45 TAX TREATY ROUND-UP 55 Puerto Rico To Introduce In 2015 CONFERENCE CALENDAR 56 Italy In EU Defi cit Compromise IN THE COURTS 65 New Indonesian Government Seeks More Revenue THE JESTER'S COLUMN 74 Th e unacceptable face of tax journalism VAT, GST, Sales Tax 48

Maldives Hikes GST On Tourism Services IMF Urges Suriname To Install VAT

For article guidelines and submissions, contact [email protected] FEATURED ARTICLES ISSUE 104 | NOVEMBER 6, 2014

The Implications Of The Latest Russian De-Offshorization Proposals For Users Of Cyprus Holding And Finance Structures by Philippos Aristotelous and Stavros Supashis, Andreas Neocleous & CO LLC

In September 2014, the Russian Ministry of Fi- proposals in the law submitted to the Duma and nance published a third version of the draft law on consider their possible implications. the package of tax initiatives generally referred to as "de-off shorization". Th e fi rst draft law was of- Th e Current Proposal fi cially published in March 2014, for consultation, Th e main proposed changes are as follows: and based on the results of the consultation, a sec- ond version was published towards the end of May Defi nition Of A CFC 2014. Th e third draft diff ered from its predecessors Th e latest draft law defi nes a CFC as a foreign com- in areas including the controlled foreign company pany that is not tax resident in Russia and that is ("CFC") rules (particularly, but not only, the pa- controlled by organizations or individuals that are rameters for classifying companies as CFCs), crite- Russian tax residents. ria for determining of foreign compa- nies, and penalties for non-disclosure. A number of categories of company are excluded from the defi nition of CFC. Th ese are as follows: Towards the end of October, a draft law was pre- non-commercial organizations that do not dis- sented to the Russian State Duma for consideration, tribute their profi t; which diff ers in several respects from the third draft companies resident in the Eurasian Economic published by the Ministry of Finance. Union; companies resident in jurisdictions that exchange Since Cyprus is one of the principal portals for information with Russia for tax purposes and im- investment into Russia (in 2013 it accounted for pose an eff ective tax rate in excess of 75 percent USD22.7bn, more than 13 percent of Russian in- of the entity's average Russian tax rate on income ward investment), the proposed changes are of great calculated in accordance with the formula set out potential importance for users of Cyprus structures. in the CFC legislation. In most cases this will In the following paragraphs we set out the main equate to 15 percent;

5 companies resident in jurisdictions that exchange own right or in conjunction with close relatives information with Russia for tax purposes, at least (his or her spouse and minor-age children) and 80 percent of whose income comprises active other associates (as defi ned in the transfer pricing income. Passive income is defi ned in the draft rules set out in cl 2 of Art 105.1 of the Tax Code); legislation and includes dividends, royalties, and ownership of a participating interest (direct, indirect, proceeds from the sale of shares or real estate; or direct and indirect combined) of more than 10 foreign companies involved in projects under percent in the organization in his or her own right production-sharing, concession and similar agree- or in conjunction with close relatives (his or her ments in their country of incorporation, provided spouse and minor-age children) and other associates, that income from such activities represents at least if Russian tax residents, alone or jointly with their 90 percent of total income; spouses, minor children and other associates directly foreign structures in which there is no formation or indirectly have an interest of over 50 percent. of a legal entity, such as trusts, as long as they are unable to distribute profi t to participants or Th e latest draft also introduces a transition peri- benefi ciaries; od ending on January 1, 2017, during which the banks or insurance companies operating in a terri- threshold for both tests will be 50 percent. In ad- tory that exchanges information with the Russian dition, an individual or entity may be treated as Federation; a controlling person despite these conditions not issuers of listed bonds or organizations authorized being met if they exercise a decisive infl uence on to receive interest on listed bonds issued by an- the distribution policy of a CFC either due to their other foreign company, if the interest on them is participation in its share capital under an agree- at least 90 percent of the issuer's income; ment governing its functions, or due to implica- the company is an operator or a direct shareholder tions of their relationship with the CFC. of newly developed sea-based hydrocarbon deposits. As in the preceding draft, control over a structure Control Criteria other than a company is assessed by reference to As in the previous draft laws, the CFC rules will the degree of infl uence the person concerned exer- apply to all Russian tax residents, whether legal cises over the person who manages the assets of the entities or individuals. However, the participation structure with regard to the distribution of income, thresholds have been substantially increased, and rather than the level of their participation interest, are now as follows: and no specifi c percentage is included in the draft ownership of a participating interest (direct, in- law. Th e latest draft law leaves this concept and a direct, or direct and indirect combined) of more number of other terms undefi ned, leaving room for than 25 percent in the organization in his or her diff erences in interpretation to arise.

6 Notifi cation Requirements 2016. Following the expiry of the transitional pe- The latest version of the draft law requires tax- riod, from January 1, 2017, the threshold will be payers to notify the tax authorities of relevant RUB10m, a substantial increase on the amount interests in Russian and overseas companies and in earlier drafts. structures with effect from February 1, 2015. Earlier versions of the draft law imposed a blan- CFC Profi t Calculations ket requirement to notify any participation of Th e profi t of a foreign CFC that is resident in a more than 1 percent in all Russian and foreign country with which Russia has a double tax agree- organizations. The latest version of the draft law ment will be calculated in accordance with its au- removes this obligation and replaces it with an dited fi nancial statements and otherwise in accor- obligation to notify the tax authorities of par- dance with Chapter 25 of the Russian Tax Code. ticipation in: foreign organizations of more than 10 percent (25 A CFC's profi t is reduced by the amount of dividends percent for an initial transition period expiring paid out of that profi t and by Russian and overseas on January 1, 2017); tax paid on the profi t of the CFC, including Russian foreign structures not involving the formation of corporate on the profi t of any permanent a legal entity (whether as a benefi ciary or in any establishment it has in Russia. Th e previous draft did other capacity); and not allow any deduction for Russian tax. Russian organizations (with the exception of busi- ness partnerships and limited liability companies) Penalties in which they have an interest of over 10 percent. Th e penalty for non-payment or underpayment of tax as a result of non-inclusion in the tax base Th e time allowed for notifying the tax authorities of a share in the profi t of a CFC remains un- of participation has been increased from 20 days to changed at 20 percent of the amount of unpaid tax one month. In relation to CFCs, the notifi cation or RUB100,000, whichever is higher. However, a must take place no later than March 20 of the year grace period has been introduced in the latest ver- following the tax period in relation to which the sion of the draft law: no penalty will be charged for profi ts of the CFC must be accounted for. the tax periods 2015 to 2017 inclusive.

Inclusion Of CFC Profi ts In Th e Owner's Tax Base A penalty of RUB100,000 will be imposed for fail- Th e threshold for including a CFC's profi t in ure to notify the tax authorities of participation in a Russian taxpayer's tax base will be RUB50m a CFC, or for failing to provide the tax authority (approximately EUR956,000) for 2015 and with information or for submitting inaccurate in- RUB30m (approximately EUR574,000) for formation on a controlled entity.

7 Disclosure Of Participants In Companies And executive management of the organization, and Structures Th at Own Property In Russia the location in which the key executives princi- Foreign companies and structures not involving the pally operate. formation of a legal entity that have - able in Russia are required to provide the tax of- Th e draft defi nes executive management as the fi ce responsible for the area in which the property adoption of decisions and the performance of oth- is located with information on the participants in er actions pertaining to the organization's current the company or structure, including disclosing the activities which fall within the competence of the indirect participating interest of any individual or executive management bodies. Th e executive man- public company whose direct or indirect interest agement of a foreign company will be considered to exceeds 5 percent. be exercised outside Russia if it carries out business using its own qualifi ed personnel and assets in a Failure to provide this information or delay in pro- country in which it is resident and which has a tax viding it will incur a penalty equal to the tax cal- treaty with Russia. culated on the company's property, which will be allocated between the participants by reference to Th e following secondary criteria are taken into ac- their participation percentage. count only if necessary: the location of financial and management Determination Of Tax Residence Of Legal information; Entities By Place Of Management the location of other records; and Th e latest version of the draft law includes rules for the place from which operating and administrative determining the tax residence of legal entities, provid- procedures relating to the company's operations ing greater certainty and consistency than hitherto. (as opposed to any group operations) are issued.

A company incorporated overseas is to be regarded Th e CFC rules will not apply to companies that as tax resident in Russia if (i) it is tax resident in voluntarily choose to be treated as tax resident in Russia under an agreement, Russia. Foreign companies that are resident in a or (ii) its place of eff ective management is in Russia. country that has a tax treaty with Russia and that are tax residents of that foreign country under the As in the previous draft, the place of eff ective treaty may opt for such treatment. Similarly, for- management is determined according to three eign companies involved in production-sharing main criteria, namely, the location of the major- and similar agreements or that have an autonomous ity of the meetings of the board of directors or subdivision in Russia may choose to be treated as equivalent management body, the location of the tax resident in Russia.

8 Gains On Disposal Of Shares In Property-Rich 2017, gains on shares in property-rich companies Companies will be taxable only in the country of residence of Th e latest version of the draft law provides that the disponor. Th e proposal to tax such gains in the gains derived from the sale of shares and similar in- country in which the property is located is incom- terests in foreign companies deriving more than 50 patible with this, and under the Vienna Conven- percent of their value from real estate in Russia will tion on the Law of Treaties, to which both Russia be taxable in Russia, unless the securities concerned and Cyprus are parties, Russia is bound by its obli- are traded on a recognized stock exchange. gations under the agreement.

Th in Capitalization Rules These issues will clearly need to be resolved at Th e earlier amendments to the thin capitalization an early stage. In the meantime, it would be pru- rules have been removed in the draft law submitted dent for users of Cyprus structures (and indeed to the Duma. structures involving other jurisdictions) for in- vestment into Russia, to carry out an analysis Eff ects On Cyprus Structures of the companies and other entities involved in Although it has a comprehensive order to assess the possible implications in terms agreement with Russia, which includes up-to-date of future tax costs and develop strategies for information exchange arrangements, the Cyprus mitigating them. However, the significant dif- rate of 12.5 percent is below the ef- ferences between the draft law published by the fective tax rate (generally 15 percent) required for Ministry of Finance in September and the ver- exemption on the basis of the eff ective tax rate. sion submitted to the Duma only a few weeks Companies that are holding companies and whose later demonstrate that the law is very much a income is principally characterized as passive will work in progress and that further significant also be aff ected by the proposals as they stand. changes are likely to emerge during the legisla- tive process. It would not be prudent to take any Th e current double taxation agreement between firm, irreversible steps until there is much more Cyprus and Russia provides that until January 1, clarity regarding its final provisions.

9 FEATURED ARTICLES ISSUE 104 | NOVEMBER 6, 2014

Canada Repeals Immigration Trust Rules – Restructuring Options by Ron Choudhury, Aird & Berlis LLP

An immigration trust is a planning structure com- monly used by prospective immigrants to Canada to avoid tax on income and capital gains for a pe- riod of up to 60 months from immigration. An im- migration trust is a non-resident trust in which in- no contributions are made to the trust on or come can accumulate free of Canadian tax for up to after February 11, 2014; or 60 months. Th e immigration trust has proved to be (2) Th at end on or after February 11, 2014, in an extremely useful planning tool for newcomers any other case. to Canada. However, the Government of Canada announced in the 2014 Federal Budget (on Febru- Given that trusts generally have calendar year- ary 11, 2014) that it will amend the Income Tax ends, in most cases the new rules will apply from Act (Canada) (the "Act") to remove the tax benefi ts January 1, 2015. available to newcomers through the immigration trust structure. Th is article considers certain planning options in view of the removal of the immigration trust structure. In particular, immigration trusts will now be subject to the Canadian non-resident trust rules (in section Planning Options 94 of the Act) such that the exemption available from In view of the proposed changes to the immigra- those rules (and the resulting benefi cial tax treatment) tion trust rules, taxpayers that benefi t from im- will no longer be available to immigration trusts. migration trusts in off shore jurisdictions have the following options: Th e changes pertaining to immigration trusts pro- (1) Allow the non-resident trust rules to apply to posed in the 2014 Federal Budget will be applicable the immigration trust from January 1, 2015 in respect of trusts for taxation years: or earlier (either by not taking any action in (1) Th at end after 2014, if the trust is eligible respect of the trust until January 1, 2015, or for the tax benefi ts currently accorded to an by making a contribution to the trust); immigration trust (i.e. , the 60-month exemp- (2) Migrate the trust to Canada (by moving its tion still applies in respect of the trust) and trustees and/or management and control to

10 Canada) and allow it to be subject to the tax the relevant taxation year. As a result, the trust will regime applicable to Canadian trusts; or be able to bump the cost base of its non-Canadian (3) Liquidate the trust and distribute its assets assets to fair market value at the time of becoming to the benefi ciaries. subject to the non-resident trust rules.

Each option has benefi ts and disadvantages. Each is 2. Migrating the Trust discussed below. Th e benefi t of migrating a non-resident trust to Canada is that the assets of the trust will be deemed 1. Application of Non-Resident Trust Rules to have been disposed immediately before the trust's If a trust is automatically allowed to be subject to migration to Canada and to have been reacquired the non-resident trust rules, a taxpayer will avoid the at fair market value immediately upon migration. costs associated with the unwinding of the immigra- Th is will lead to a step-up in the cost base of the tion trust structure. However, the application of the assets upon migration and, therefore, reduced Ca- non-resident trust rules will result in the correspond- nadian tax on the resulting capital gain upon a fu- ing application of a number of rules in the Act and ture disposition. Adequate planning is necessary for the trust generally being subject to tax in Canada. this. For example, it will be necessary to wind up any corporations owned by the trust such that the In particular, the trust will be deemed to be a resi- value of the underlying assets can be stepped up dent of Canada as it will likely have a resident con- and not the shares of any such corporation. tributor and resident benefi ciaries (as defi ned in the Act) and will be subject to tax in Canada pursuant Th e diff erence between actually migrating a trust to the rules in section 94 and associated provisions. and allowing it to be subject to the non-resident tax rules in this regard is that the provisions applicable A trust that is subject to the non-resident trust rules in allowing for the step-up in basis are diff erent. will be allowed to bump the adjusted cost base of its assets to fair market value at the time it is subject to Th e disadvantage of any such migration is that the such rules. In particular, paragraph 94(3)(c) of the trust will be subject to Canadian tax at the highest Act will apply to deem the trust to have disposed of marginal rate of tax unless its income is distributed each of its property (other than certain Canadian annually to its benefi ciaries (such that the benefi - properties) for fair market value immediately before ciaries are subject to tax on the distributed income). the end of its previous taxation year where it was not a non-resident throughout the year and to have Th ere may be an additional benefi t to migrating an reacquired such property for the proceeds of dispo- immigration trust to Canada if an immigrant were sition (i.e. , fair market value) at the beginning of to leave Canada at a later time. Generally, Canada

11 deems a disposition of various assets of an emigrant deemed to have disposed of their capital interest at the time of departure and taxes the inherent gain for proceeds equal to the adjusted cost base of such from such disposition. Th e policy rationale here is interest and each benefi ciary will acquire the trust to tax the increase in gains in such assets during property distributed to such benefi ciary at its tax the time in which they were held by a Canadian cost to the trust. In other words, the property may resident. However, an excluded right or interest, as be rolled out of the trust to the benefi ciary resident defi ned, is excluded from this deemed disposition in Canada without any tax cost. However, certain rule. An excluded right or interest is defi ned in sub- attribution rules in the Act may apply to attribute section 128.1(10) of the Act to include an interest the income from such assets to the settlor of the in a personal trust resident in Canada if the inter- trust. It is possible for the benefi ciaries to elect out est was not acquired for consideration and did not of a rollover and pay tax on the capital gains on the arise as a consequence of a qualifying disposition, resulting distribution in an eff ort to avoid the attri- as defi ned. Accordingly, the interest in a migrated bution rules. If a trust holds shares of an underly- immigration trust will not be deemed to be dis- ing company that is wound up prior to distribution posed, whereas an interest in a non-resident trust (with the resulting step-up in the basis of the assets will be deemed to be disposed on departure even if of the company), a fair market value distribution it is subject to the non-resident trust rules (barring from the trust upon liquidation should not result narrow exceptions). in a large capital gain (if any).

3. Liquidating the Trust Given the three options above, newcomers to Can- Liquidating the trust and distributing its assets to ada have a few planning options to consider prior to the benefi ciaries is a third option for an immigra- the end of 2014. However, none of the unwinding tion trust. On liquidation, the benefi ciaries of an structures will result in the prior benefi cial treat- immigration trust resident in Canada should be ment available to immigration trusts.

12 FEATURED ARTICLES ISSUE 104 | NOVEMBER 6, 2014

OECD Releases Finalized Proposals On Key Tax Base Erosion Concerns by Patricia G. Lewis, J. Clark Armitage, Peter A. Barnes and Neal M. Kochman of Caplin and Drysdale, Chartered

Contact: [email protected] , carmitage@capdale. com, [email protected] , nkochman@capdale. com ; Tel: + 1 202 862 5000, www.caplindrysdale.com of value creation" and emphasized that the reports Introduction were crafted to conform closely to that goal. On September 16, 2014, the Organisation for Eco- nomic Co-operation and Development (OECD) Th ere is no question that the OECD has approached released its 2014 deliverables on the base erosion these issues with great resolve. Th e BEPS project is and profi t shifting (BEPS) project. Th e BEPS proj- likely to lead to signifi cant taxpayer-adverse chang- ect – an ambitious and wide-ranging eff ort by the es to the domestic laws and treaty instruments of OECD Centre for and Administration developed and developing nations alike. Centre – aims to combat strategies in which for Tax Policy and Administration Director Pascal global businesses minimize their overall tax burden Saint-Amans believes that change is already afoot. by moving profi ts into taxpayer-friendly jurisdic- In a recent interview with the Wall Street Journal , he tions and exploiting diff erences in the tax laws and remarked that the Centre's work is "having an im- treaties of countries around the world. Th e OECD pact already even though it hasn't [yet] come into began its eff orts in 2013 at the behest of the G20 force." He also cautioned against some of the ag- group of nations, which had realized that any seri- gressive tax planning currently taking place, warn- ous eff ort to prevent these tax avoidance strategies ing that even though the BEPS project is not yet would require centralized, coordinated planning complete, "[i]t is diffi cult to sell your scheme to a and study. company that knows [these avoidance opportuni- ties] will be over in a few years." On the same day, the BEPS committee heads hosted a Paris-based webcast to present the most Some governments have not waited for the OECD's signifi cant aspects of these reports. Th e panel de- fi nal verdicts on these issues before toughening scribed the primary purpose of the BEPS project as domestic tax laws in light of the problems it has "realign[ing] the location of profi t with the location identifi ed. For example, earlier this year the Irish

13 Department of Finance solicited offi cial input on rules to refl ect the borderless and geographically whether the country should alter its domestic tax transient nature of today's digital economy. A possi- rules to prevent the "double-Irish" avoidance struc- ble withholding tax on digital transactions was also ture currently employed by Google, Pfi zer, Apple discussed and evaluated. Th is proposal has proven and other multinationals. controversial among international businesses, some of which have expressed concerns regarding the Th ese pre-emptive moves are cause for concern. high compliance costs, administrability issues and Th ey raise the question of whether BEPS is helping economic distortions that might arise if such a tax to harmonize transfer pricing and other interna- were implemented into law. tional tax rules or, conversely, is leading to the dete- rioration of a longstanding and eff ective consensus Action 2: Hybrid Mismatch Arrangements in these areas. Th is report focused on identifying and eliminating certain cross-border tax arbitrage opportunities. It Th e 2014 deliverables included fi nal reports and addressed situations in which, for example, parties recommendations regarding seven of the 15 action to an international fi nancial instrument exploit in- items identifi ed at the beginning of the BEPS proj- consistent tax characterizations of the instrument ect. Th e remaining eight items are due to be ad- in their respective countries; if the issuer's home dressed in reports to be completed in 2015. During jurisdiction characterizes the instrument as debt, its webcast presentation, the panel discussed the but the holder's jurisdiction treats it as represent- highlights of the seven reports. ing an equity relationship, the issuer may be able to deduct interest payments without corresponding Action 1: Th e Digital Economy income inclusions by the holder. Th ese kinds of op- Th e fi nal report on this item concluded that it is not portunity can also arise when jurisdictions diff er as possible to "ring-fence" the digital economy from to whether a business entity should be taxed on a the broader economy for tax purposes. It described transparent or pass-through basis. a number of new digital business models, explaining that some of them pose signifi cant BEPS risks. How- Th e webcast panel noted that the report's fi nal rec- ever, the report refrained from providing or endors- ommendations were intended to eliminate these ing any concrete measures to deal with the problems mismatch opportunities without aff ecting other it identifi ed, with the webcast panel noting that it commercial or regulatory considerations. More- was intended merely to "clarify debate" on the issues. over, the report tried to avoid general anti-abuse or purpose-based draft laws, instead crafting its Legislative options discussed in the report include draft provisions to be as rule-like and "automatic" modifying the nexus or as possible.

14 According to the webcast panel, participating na- noted that this rule is still in an interim and early- tions have reached consensus regarding: stage form, due in part to concerns expressed by Th e desirability of "linking rules" – domestic law businesses that it would hamper their fl exibility in provisions that make specifi c reference to the law allocating assets to the countries where they can be of the counterparty jurisdiction; most eff ectively and productively used. A compul- "Scope" or a minimum related-party threshold sory information-exchange mechanism that would before the mismatch rules would become appli- apply among taxing authorities has also been pro- cable to a transaction or business structure; posed. With respect to this proposal, the report Th e necessity of secondary rules, which would noted that it has been diffi cult to strike a satisfac- be triggered if one counterparty's home law tory balance between the need for cooperation and failed adequately to eliminate the mismatch information exchange on the one hand, and respect opportunity; and for the confi dentiality of taxpayer information on Stopgap measures to avoid unintended double or the other. Some taxing authorities also worry that otherwise excessive taxation of global businesses. this kind of exchange mechanism would overwhelm them with raw and unfi ltered data. Finally, the re- Th e report set out a number of draft rules intended port provided a list of nations whose taxing systems to address these concerns. Further work is planned are under review for harmful or questionable tax on a number of technically complex areas, such laws or lax enforcement. as repo fi nancing transactions, and more study is required to ensure that these recommendations Action 6: Preventing Tax Treaty Abuse are consistent with other elements of the broader Th is report expressed the unequivocal consensus BEPS project. among OECD member nations that tax treaties should not be used to achieve double non-taxation Action 5: Harmful or to further tax avoidance objectives. It proposed Th is aspect of the BEPS project, which the report that language to this eff ect be inserted into the pre- described as still at an interim stage, aims to com- amble of the OECD Model Tax Convention. bat certain harmful tax practices of governments. It focuses on low-tax or otherwise taxpayer-friendly In previous discussion drafts, there was high-level jurisdictions and regimes. agreement that countries should include a "limita- tion on benefi ts" clause in their bilateral tax treaties. Th e report discussed a controversial "substantial However, there was less consensus as to whether that activity" rule that would limit the ability of mul- clause should take the form of a US-style limita- tinational businesses to locate income-generating tion on benefi ts clause (containing specifi c thresh- intangible assets in tax-favorable jurisdictions. It olds for benefi cial ownership of resident entities or

15 minimum levels of "substantial" business activity), has been signifi cant disagreement among OECD or a more general, purposive, UK-style limitation members countries as to whether (and to what ex- on benefi ts clause. tent) core economic factors such as risk-bearing, use and exploitation of assets or fi nancial capital, Th e fi nal report ducked this debate by adopting or functions performed should supersede mere le- a "minimum standard" approach. Under this ap- gal ownership and contractual arrangements for proach, either a US-style or UK-style limitation on the purpose of gauging compliance with transfer benefi ts clause is suffi cient to prevent the most serious pricing rules. Th ere are also complex and technical forms of treaty abuse. Th us, the report gives member coordination issues to be worked out among the nations broad discretion to choose either the general various transfer pricing action items (8–10), and or specifi c form of the clause (or both), depending on further work is required to ensure that these fi nal the details of relationships with other countries. reports do not confl ict with one another.

Action 8: Guidance On Transfer Pricing Finally, the report identifi ed areas in need of further And Intangible Assets study, including the "excessive" capitalization of busi- Th e report also dealt with the problem of applying ness entities and the problem of "cash-box" owners of transfer-pricing principles to intangible assets, in- intangibles carrying out little or no business activity. cluding patents, trademarks and proprietary know- how. Th e report set out fi nal guidance to member Action 13: Transfer Pricing Documentation governments as to some of the issues studied and And Country-By-Country Reporting interim guidance as to other, more complex issues. Th is report laid out a specifi c plan to coordinate and harmonize the reporting and documentation Chapter 1 of the OECD Transfer Pricing Guidelines requirements of multinational businesses with re- has now been expanded to discuss issues such as loca- spect to transfer pricing. It provided for a three- tion savings and group synergies. In addition, a re- tiered approach to reporting, where a multinational vised Chapter VI of the guidelines refl ects the report's would be required to keep: fi nal guidance on identifying intangibles and on im- A master fi le (containing a high-level overview of plementing the arm's length principle to intangible the overall group's business); assets. Chapter VI now discusses issues such as com- A local fi le for each of the group's constituent parability principles in intangibles transactions and entities (containing detailed information on spe- valuation techniques for hard-to-value intangibles. cifi c intragroup transactions in which that entity is involved); and Guidance on the appropriate allocation of income A country-by-country report (including details to intangible assets remains in interim form. Th ere on aggregate, jurisdiction-wide information on

16 allocation of income, taxes paid, business func- Action 15: Developing A Multilateral tions, and economic activity). Legal Instrument Th ere is now consensus that a multilateral tax trea- Th e OECD's thinking remains in fl ux with respect to ty or convention is feasible. In January 2015 the the mechanics of fi ling this information. Th e report OECD Committee on Fiscal Aff airs will begin steps provided that the local fi le will be presented only to to coordinate this logistically challenging task. the jurisdiction in which a given entity operates or is tax resident. However, there is disagreement regard- Next Steps ing how extensively the master fi le and the country- During the webcast presentation, the BEPS proj- by-country report should be fi led and disseminated. ect committee heads stated that the fi nalized rec- Some countries have expressed particular concern that ommendations will be presented to the govern- requiring businesses to fi le the country-by-country ments of member nations for approval, political report to large numbers of taxing jurisdictions would endorsement, and legislative implementation. provide a roadmap for the most aggressive among Th ose in the international tax planning commu- them to assert taxing power over these businesses' nity hope that governments will wait to enact global operations on a disproportionate or otherwise new domestic legislation until all of the BEPS inappropriate basis. Some companies also worry that action items, including the reports due in 2015, widespread dissemination of the report may raise a are complete; many of the proposals contained "weak link" problem with respect to taxpayer confi - in the recently issued reports interact with issues dentiality; if even one taxing authority is lax as to the to be addressed in the 2015 reports. Rushing to confi dentiality or security of the country-by-country implement these proposals may lead to inconsis- fi le, this sensitive and proprietary information could tencies with the recommendations set to be fi nal- leak into the public domain. ized later. However, countries need not wait until the BEPS project is complete before incorporat- According to the report, concerns of this kind have ing its proposals into domestic tax laws. It has led the OECD to postpone specifi c proposals on already spurred some governments to crack down fi ling and disseminating the master fi le and the on perceived loopholes or abuses in the tax-plan- country-by-county report until at least 2015. Th e ning realm. As such, the BEPS project is already report also stated that these fi ling mechanics will be aff ecting the tax-planning strategies of a number subject to ongoing revision even after completion of multinational enterprises. As the BEPS project of the BEPS project, with a view to "continuously nears completion, international businesses should improving [their] operation." Some countries are be alert to the possibility of imminent and signifi - likely to require companies to fi le the report locally cant legislative reform in these areas. and to make the reports public.

17 FEATURED ARTICLES ISSUE 104 | NOVEMBER 6, 2014

Topical News Briefi ng: According to the World Bank, African leaders could Grand Ambition Or Grand Gesture? unlock an extra USD20bn annually for traders if by the Global Tax Weekly Editorial Team the existing web of rules, fees and expensive trans- portation costs and other barriers to trade can be dismantled. Illustrating the bureaucratic nightmare Globalization is a contentious topic, and the debate that importers and exporters in African currently about whether it is a positive force or not is likely to face, the World Bank has identifi ed that a total of continue ad infi nitum. Few can deny though that 17 documents are needed in the Central African the lowering of trade barriers, in the form of tax and Republic (CAR) to import goods, closely followed non-tax impediments to international trade, has by 12 in Cameroon and Niger, and 11 in Chad. Im- benefi ted the economies of those countries which porting goods takes on average 101 days in Chad, have embraced free trade the most. Now, hopefully, 73 in Zimbabwe, and 64 in Niger. Meanwhile, ex- it is Africa's turn. porters in Congo are required to fi le 11 documents, while exporters in Cameroon are required to fi le Although much of the African continent is covered 10. Exporting in Chad takes 75 days, 59 days in by networks of regional trade blocs, which also have Niger, 54 days in CAR, and 53 days in Zimbabwe, preferential trade deals with developed economies substantially pushing up the cost per container of like the US and the EU, it has to be concluded that exported goods to untenable levels. these agreements haven't been nearly as eff ective at unlocking trade and economic growth as they have Which brings us on to the proposed tripartite free elsewhere in the world. Although much headway between the Southern African De- has been made recently in the cutting of trade taxes, velopment Community, the Common Market for particularly on food, within Africa, non-tariff barri- Eastern and Southern Africa, and the East African ers remain a signifi cant problem. Traders encounter Community, to be known as the Grand Free Trade numerous issues when trading across borders, in- Area of Africa, encompassing 26 nations and 625m cluding outdated regulations, lack of competition people. Th e scale and ambition of this project, ef- in the transportation market and poor services, ex- fectively creating a sub-Saharan African free trade port bans, unnecessary permits and licenses, costly bloc, is admirable. But given the problems already documentation requirements, and standards that inherent in the African trading system in spite of rather than facilitating trade often instead create a the existence of regional free trade areas, it has to be barrier for small producers. hoped that this grows beyond mere Grand Gesture.

18 FEATURED ARTICLES ISSUE 104 | NOVEMBER 6, 2014

Recent Transfer Pricing Developments by Duff & Phelps Corp.

Road Map For Ireland's Tax Competitiveness Released by Paul Koppel, Senior Associate, Duff & Phelps

On October 14, 2014, Ireland's Department of Finance released "A Road Map for Ireland's Tax Competitiveness." Th e publication seeks to outline changed international landscape," according to Mi- a set of measures that will be undertaken to reposi- chael Noonan, the Minister for Finance. Th ere are tion Ireland to "be best able to reap the benefi ts, in ten essential elements to "A Road Map for Ireland's terms of sustainable foreign direct investment, of a Competitiveness," summarized at left:

Item Road Map – Summary Of Actions For more information please see the full version of "A Maintain the 12.5% corporation tax rate, Road Map for Ireland's Tax Competitiveness" at http:// 1 supported by independent research budget.gov.ie/Budgets/2015/Documents/Compet- 2 Introduce a default corporate tax residence rule ing_Changing_World_Tax_Road_Map_fi nal.pdf Improve the intellectual property (IP) regime, including consultation to develop to a 3 "Knowledge Development Box" and enhance States Team Up On the existing IP regime Domestic Transfer Pricing Audits Enhance the R&D regime, including removal 4 by Rod Kaborsi, Vice President, Duff & Phelps of the base year restriction Enhance the Special Assignee Relief Th e US Multistate Tax Commission (MTC) 5 Programme (SARP) to attract mobile talent Arm's-Length Adjustment Service (ALAS) Adviso- Enhance the Employment & Investment In- 6 ry Group reconvened in Atlanta, Georgia, in early centive (EII) to support indigenous businesses October. Th e goal of the meeting was to continue Enhance the Foreign Earnings Deduction 7 (FED) tax regime, to support Irish businesses to develop an interstate transfer pricing system that in accessing foreign markets will aid in identifying, analyzing, and correcting Increase revenue competent authority 8 improper transfer pricing practices. resources to defend transfer pricing disputes Continue expansion of Ireland's tax treaty 9 network Specifi cally, the MTC invited seven third-party Maintain commitment to ensuring an open 10 consulting fi rms to provide key recommendations and transparent tax regime in three areas:

19 Perceived challenges in improving tax compli- Alabama, Washington DC, Florida, Georgia, Ha- ance related to intercompany transactions and waii, Iowa, Kentucky, New Jersey, and North Caro- methods for overcoming these obstacles; lina. Th e draft "Design for an MTC Arm's-Length Types of transfer pricing services the advisors Adjustment Service," which details the mission, time- would be capable of providing to assist the ALAS line, steps, and resources necessary for implementing Advisory Group; and a transfer pricing system, can be found at http://www. Recommendations on integrating transfer pricing mtc.gov/getattachment/Th e-Commission/Commit- work with local staff . tees/ALAS/2014-10-03-DRAFT-Design-for-MTC- ALAS.PDF.aspx . Additional supporting documents Th e third-party advisors collectively agreed that pertaining to the ALAS Advisory Group's Octo- implementing a transfer pricing system improperly ber meeting can be found at http://www.mtc.gov/ could prove to be costly and ineff ective. Th e ALAS Th e-Commission/Committees/ALAS. Advisory Group expressed considerable interest in how third-party advisors could provide resources and New French Transfer Pricing support to assist local staff in recognizing red fl ags Reporting Requirements for improper transfer pricing. Both parties seemed to by Richard Newby, Managing Director, reach a consensus regarding the utility of advisors in Duff & Phelps the event that a state auditor identifi es a taxpayer with Background potentially improper transfer pricing. Under such cir- cumstances, third-party advisors may be called upon On September 16, 2014, the Organisation for Eco- to perform a detailed economic analysis or team with nomic Co-operation and Development (OECD) the state if the analysis moves to the litigation phase. released its fi rst tranche of seven base erosion and profi t shifting (BEPS) deliverables, including After hearing presentations from the third-party "Guidance on Transfer Pricing Documentation and advisors, the ALAS Advisory Group met to discuss Country-by-Country Reporting" which included necessary next steps in implementing a transfer an improved version of the "Country-by-Country pricing system. While the takeaways from this fol- Reporting Template" (CBCRT). (See http://www. low-up meeting have not yet been made public, it is duff andphelps.com/expertise/publications/Pages/ clear that the MTC and the ALAS Advisory Group ArticleDetail.aspx?itemid=347&list=Articles ) are serious about implementing a transfer pricing system that is valuable for its members. On the same day, France released the fi nal version of its new transfer pricing disclosure return, eff ec- So far, nine members have committed to the devel- tively aligning the French approach with that rec- opment of the Interstate Transfer Pricing System: ommended by the OECD, while at the same time

20 expanding France's domestic reporting require- For forms 2. and 3., transactions only need to be ments beyond those of the OECD's CBCRT. reported if the aggregated amounts of all transac- tions per category exceed EUR100,000. For large Th e French Filing Requirements businesses, these new transfer pricing reporting re- Th e new French return consists of three spread- quirements are in addition to the comprehensive sheet-type forms covering: transfer pricing documentation requirements in- (1) Group activities and intangible assets: broad troduced in 2010. descriptive information about the nature and ownership of group intangible assets used by Th e annual fi ling deadline is within six months of the French reporting business; the due date for the business' normal tax return. As (2) Income statement: descriptive and fi nancial a transitional measure, French businesses with tax information in respect of intragroup trading return fi ling deadlines between June and November transactions by amount, category of income this year have until November 20 to fi le the transfer or expenditure, and applied transfer pricing pricing return. For example, a business with a fi scal methodologies; and year-end of December 31, 2013, must fi le its return (3) Balance sheet: descriptive and fi nancial informa- by November 20, 2014. tion in respect of intragroup asset transactions (intangible and tangible) by amount, category Late-fi ling penalties are very modest at EUR150. of acquisition or disposal, and applied transfer However, further penalties of EUR15 can be ap- pricing methodologies. plied for each additional error or omission, up to a maximum total of EUR10,000. To receive our English translation of the explanatory note and the return, contact Shiv Mahalingham (http:// Implications www.duff andphelps.com/expertise/our_team/Pag- In terms of content, it is important to appreciate that es/bio.aspx?itemid=582&list=People ) or Richard the information required by the return is not purely Newby (http://www.duff andphelps.com/expertise/ domestic and will allow France to build a reasonable our_team/Pages/bio.aspx?itemid=581&list=People ). picture of many of a multinational group's key in- tragroup transfer pricing fl ows, together with the na- Th ese new measures apply to French entities with ture and ownership of intangible assets, by country. either sales revenues or gross assets of at least EUR400m (approximately USD540m) in their Critically, in today's age of information exchange, it own right, and also to French entities of any size would be a mistake to believe that this information controlled by foreign entities which themselves will remain in France; transfer pricing information meet the EUR400m threshold. received by France will be capable of being shared

21 with other taxing jurisdictions under various inter- investigations into transfer pricing agreements en- national exchange of information provisions. tered into in Ireland, Luxembourg, and the Nether- lands. Th is decision comes following three in-depth Recommendations investigations, launched earlier this year, examining At the time of preparing the return, groups should as- whether decisions by tax authorities in these coun- sess the possible implications for non-French group tries comply with the EU's rules on state aid with entities. A recommended best practice will be for regards to corporate income tax. groups reporting in France under the new transfer pricing requirements to establish a centralized over- Th e investigations pertain to whether or not the sight process to collate and classify the information formal agreements, entered into by certain taxpay- required, and to draft the return forms, in order to: ers and the member states, follow the arm's length Ensure accuracy, completeness, and consistency standard set forth by the OECD's Transfer Pricing of presentation; Guidelines. Th e EC has specifi ed key aspects con- Identify potential gaps and to assess risks and sidered relevant to the agreements under review, in- possible mitigating actions, as necessary; and cluding the exclusion of a proper transfer pricing Identify potential "touch points" that could analysis; failure to explain a methodology applied; arise group-wide once the French tax authorities inability to adjust an agreement for future cir- receive information and (1) ask their own ques- cumstances; and general departure from the arm's tions, and (2) share it with other tax authorities. length standard.

European Commission Investigates For more information related to the September TP Practices Of Member Countries meeting, see the EU's press release available at http:// by Paul Koppel, Senior Associate, Duff & Phelps europa.eu/rapid/midday-express-30-09-2014.htm . On September 30, 2014, the European Com- mission (EC) released its decision to open formal

22 FEATURED ARTICLES ISSUE 104 | NOVEMBER 6, 2014

Topical News Briefi ng: posting links to news stories on its Google News Taxing The Net page that it would have to pay for, and the aff ected by the Global Tax Weekly Editorial Team publications watched their site traffi c plummet. Th e German law was rapidly withdrawn before it was introduced. We were informed this week by the Information Technology and Innovation Foundation that the Another example in this week's issue is the case of less ICT goods and services are taxed by gov- the proposed Hungarian internet tax, which was ernments, the more opportunities there are for also withdrawn from the 2015 Budget after a pub- productivity gains and economic growth to take lic outcry. Th is was much more your classical tax, in place. A pity then that most governments are do- that internet users would be charged according to ing the opposite by taxing ICT seemingly at every the amount of data they download, and the revenues opportunity, or at least to a point that they can passed on to the Government. As protests grew, the get away with. Government said that the tax would be capped, but then had to rescind it altogether as people took to One example in this week's issue is Spain's contro- the streets in large numbers. Prime Minister Victor versial "Google tax," a label which is misleading on Orbán attempted to downplay the controversy, sug- both counts due to the fact that it targets all online gesting the debate had merely "gone astray" rather news aggregators, not just Google; and because it than gone ballistic, and Hungary still has plans for isn't really a "tax" in the normal sense of that word a consultation on the proposal next year. However, because the revenues are designed to compensate what most governments and lawmakers don't seem Spanish publishers for the apparent theft of their to be realizing is that while taxpayers may tolerate intellectual property rather than to replenish the being taxed on their incomes, purchases, invest- Spanish Government's coff ers. Several countries ments, and just about every other human activity have tried variants of a Google tax in the past, but possible, the idea of restricting the internet, and the experience thus far suggests that they are not eas- tools that make it possible, is anathema to most. ily workable. We only have to look at Germany Th e US at least has legislation in place banning in- to see why: there, the federal Government was on ternet access taxes, but it's unlikely we'll see the end the brink of applying a Google tax earlier this year, of so-called Google taxes and other taxes on ICT in but the ubiquitous search engine merely stopped other parts of the world.

23 FEATURED ARTICLES ISSUE 104 | NOVEMBER 6, 2014

Taxation In Rousseff's Brazil by Stuart Gray, Senior Editor, Global Tax Weekly

Brazilian President Dilma Rousseff was voted in for another term on October 26 in one of the most closely contested elections in the country's history. It was a margin of victory which strongly suggested that the electorate was unsure about entrusting Bra- zil's fortunes to a leader with a decidedly mixed track subsequent three years, with 60 percent expressing record on economic matters, and as the economy a desire to establish operations there in the near slows to a probable standstill this year, investors will term, and 33 percent revealing that they had fi rm be demanding more loudly than ever that Rousseff plans to do so. accelerate the pace of economic reforms they say are necessary to unlock the country's huge growth po- Th is appears to have translated into healthy foreign tential. And overhauling the country's nightmarish direct investment (FDI) infl ows, which increased 8 tax system might be a good place to start. percent in the eight months to the end of August 2014 while most of the rest of Latin America suf- Introduction fered lower levels of FDI over the same period. Yet Like many emerging economies, foreign investors the fact that the Brazilian stock market plunged on are attracted to Brazil by a large and growing mid- the announcement that Rousseff would serve an- dle class, abundant natural resources, moderniza- other term as President indicates that investors are tion programs, and infrastructure expansion, which not optimistic that she will be able to turn around in Brazil's case has included preparations for host- an economy which has seen growth fall from 7.5 ing the 2014 soccer World Cup and the forthcom- percent when she was fi rst elected to probably less ing 2016 Olympic Games. In fact, according to than 1 percent this year, at the same time as also Ernst & Young's Brazilian Attractiveness Survey,1 tackling rising infl ation, falling tax revenues, and a published in August 2012, the domestic market growing budget defi cit. was the key attraction for foreign direct investors, with 86.5 percent of those polled stating that this Tax was their top consideration. A similar percentage of However, the tax system surely has to be a high pri- respondents believed that the country's attractive- ority for the Government if it wants to make Brazil ness as a business location would increase over the a more attractive proposition for investors, for not

24 only is the tax burden higher than in most of its commercial companies to 32 percent for service emerging market and developed economy compet- providers. A 10 percent surcharge is payable in a itors, tax administration sucks up huge amounts of quarter in which revenues exceed BRL60,000. a company's time and resources – resources which could be put to much better use invested in busi- For very small companies (those with turnover be- ness projects. low BRL3.6m), a single minimum tax (simples na- cional) of between 4 percent and 17.42 percent can Of course, in most jurisdictions, a company's tax be applied, in place of the corporate income tax and obligations don't end at corporate tax, and the same a number of other social, sales and municipal levies. is true in Brazil where taxpayers must also account for personal income tax, tax on gains, withholding A resident business in Brazil (generally one with taxes, labor and social security taxes, real estate tax- its place of management in the country) will pay es, fi nancial taxes, and a plethora of indirect taxes, tax on its worldwide income, while a non-resident including VAT and taxes. According to PwC, business is subject to tax only on income arising these combine to push up the total tax rate of the in or sourced from Brazil; double tax treaties may average company operating in Brazil to 68.3 per- mean that an entity is spared taxation on such in- cent. Brazil's main taxes are summarized below. come where it has already been taxed in its home country, although this will depend on the terms of Corporate Tax the agreement in question. At the time of writing, Brazil's statutory corporate tax of 15 percent is more than 30 DTAs are in force. relatively low. However, when a 10 percent sur- tax on income in excess of BRL240,000 (approx. On May 14, 2014, the Brazilian Government con- USD96,700 at the time of writing) and a 9 percent verted Provisional Measure No. 627/2013 – setting social contribution are added into the equation, the out a transitional regime with changes to rules con- combined eff ective rate rises to 34 percent. cerning the tax treatment of CFC income – into Law No. 12,973/2014, 2 with a few amendments. Where turnover is below BRL48m, there is no for- eign turnover, and the company is not a fi nancial Th e law introduces a new system of taxation of over- institution, an estimated basis of taxation can be seas profi ts earned by subsidiaries and associated used, which often results in a lower tax liability. In companies of a Brazilian parent. It states that profi ts such a case, assessment for income tax purposes is earned by a Brazilian enterprise by a foreign affi liate, calculated by applying a percentage to the com- on fulfi llment of certain conditions, will be taxable pany's gross quarterly revenues. Generally, the per- in Brazil on December 31 of every year in which centage ranges from 8 percent for industrial and profi ts are distributed to the Brazilian enterprise.

25 Th e new law also provides, on certain conditions, If a company elects not to consolidate, any losses in- that 12.5 percent of profi ts earned by foreign sub- curred may be off set against future profi ts, but lim- sidiaries and associated companies will be deemed itations apply to gas and oil exploitation activities. to be profi ts distributed to the Brazilian enterprise and will be taxable in the fi rst year, and each sub- Th e new law will become eff ective from January 1, sequent year profi t is distributed. Th e remaining 2015. However, taxpayers may choose to adopt the profi ts will be deemed to have been distributed by new law's provisions from January 1, 2014. the eighth year. Income and losses attributable to a CFC directly or indirectly owned by the CFC will ICMS be included in the taxable base for Brazilian income A state-level value-added tax (VAT), known as tax purposes. ICMS (imposto sobre circulação de mercadorias e ser- viços ), is imposed on various items, including the A key change permits Brazilian parent companies circulation of goods, transportation between states to consolidate the active income of their direct or and municipalities, communications, and electric- indirect subsidiaries into their own active income ity. ICMS rates range between 4 percent and 25 until calendar year 2022 from the year the law en- percent, depending on the state and the type of ters into force. goods, and it is levied when goods leave their place of manufacture, or when they come into a state as In the investment account of a directly owned imports. ICMS is principally levied on production, CFC, the Brazilian company must apportion in and on all subsequent commercial steps after de- subaccounts the profi t and losses of the CFC and duction of input tax. any CFCs of that CFC. Th ese fi gures should refl ect the proportion of the Brazilian company's equity IPI interest, or the ownership interest of its CFC in At federal level there is IPI (imposto sobre produtos other entities. industrializados), another VAT applying mostly to industrial products including imported industrial Such consolidation is permissible on a number of goods, and on the "industrialization" of goods in- conditions, including that the CFC is in a territory tended for the domestic market. Th e IPI rate is cal- that has undertaken to share tax information on re- culated based on the value of the goods in question quest with Brazil in line with internationally agreed (and is payable either monthly or at the time of standards, and is subject to domestic tax of at least importation), and rates vary between 0 percent and 20 percent. Additionally, the active income of the 300 percent, according to how "essential" the prod- foreign subsidiary must be lower than 80 percent of uct is deemed to be by the authorities; items such its total income. as alcoholic drinks and cigarettes, for example, face

26 higher rates. Th e average rate of IPI is around 20 by employers, although between December 1, 2011 percent. IPI is not applied on . and December 31, 2014, certain types of "labor in- tensive" businesses, including those in the IT and IOF microchip manufacture sector, clothing and foot- A further federal tax, IOF (imposto sobre operações wear manufacturers, hotels, and call centers, can de crédito, câmbio e seguros ), is imposed on credit instead pay a lower tax on gross income, imposed and exchange transactions, insurance and securities. at either 1 percent or 2 percent. Th e IOF is calculated based on the loan amount, the foreign currency amount that is purchased or Tax Complexity sold, the insurance premium amount, or the price Apart from their incessant tweaking of IOF, the of the securities that are sold or purchased. Th e Brazilian authorities have a marked tendency to use rates range between 0 percent and 25 percent. Th e changes in tax rates in pursuit of current economic Government has tended to use IOF as a lever of goals, to incentivize or inhibit particular sectors or economic and currency management, imposing behaviors, and often in what can only be described frequent and unexpected changes to the scope of as a protectionist way. Th e motivation for these the tax and individual rates. changes is however often obscure (at least to a non- Brazilian), as is the regulatory process from which COFINS they emerge. Th e contribution for fi nancing social security (con- tribuição para fi nanciamento da seguridade social – In fact, Brazil holds the dubious distinction of hav- COFINS) is assessed on monthly gross invoicing of ing the most time-consuming tax regime in the goods and services, and is payable at 7.6 percent for world, by far. According to PwC, even though only fi rms which choose the non-cumulative payment nine tax payments are required each year, it takes method (and on the import of goods and services), the average tax professional 2,600 hours per year to 3 percent for companies choosing to pay via the comply with Brazilian taxes. To put this into con- cumulative method, and 4 percent for fi nancial text, the next worse place to calculate and fi le taxes institutions. Th ere is also the workers council tax, is Bolivia, where 1,025 hours are spent on average. which is payable by employers every January (the In the US, where the tax code is by no means sim- amount is calculated by the workers' council), and ple, it takes on average 175 hours for a company to by employees every April. discharge its tax obligations.

INSS As can be seen from the above summary, a great deal Th ere is also a 20 percent social security of Brazil's tax complexity is due to its fragmented in- ( Instituto Nacional do Seguro Social – INSS) payable regime, with sales, consumption, service,

27 excise, and value-added taxes due at federal, regional Brazil to ensure suffi cient supply. Th e decision re- and municipal level. In fact, there are more than 25 in- duces the import on aff ected tariff lines to 2 direct taxes applicable in Brazil, and this means thou- percent, from between 4 percent and 18 percent, sands of tax permutations are possible on any given until December 31, 2014. Th e list of industrial ma- transaction across local and regional boundaries. chinery and equipment benefi ting from the import duty reduction is set out in CAMEX Resolution Simplifi cation of the ICMS regime has been on the No. 23,3 published in the nation's Offi cial Gazette drawing board for around two decades. Th e idea is on April 10, 2014. According to the Government, to impose a fl at 4 percent across all regions, but high- the main benefi ciaries will be companies engaged taxing states are resistant to the idea and it is unclear in construction, mining, the pulp and paper indus- when, or even if, the new regime will be introduced. try, the manufacturing of auto parts, and recycling. CAMEX Resolution No. 23 adds to a list of 525 On October 28, Rousseff mentioned aspirations other goods, in particular IT and telecommunica- to reform Brazil's Byzantine tax system. However, tions inputs, which have received benefi cial import there is obviously a lot of work to do and this will tax treatment since the start of this year. defi nitely not happen overnight; one has to won- der whether the Government's priorities will be in In a televised speech given ahead of the Labor Day other areas of economic and social policy as it bids holiday on May 1, President Rousseff pledged that to tackle infl ation, a widening trade defi cit, high income tax thresholds would rise by 4.5 percent in crime rates, and poverty. order to counteract the eff ect of infl ation. Coupled with a signifi cant increase in social welfare spend- Th ere are also numerous tax changes – mostly tax ing, benefi ting low-income families in particular, cuts of one sort or another – already in the pipeline Rousseff said that workers would see an increase in that were announced in the months preceding the their take-home pay despite high rates of infl ation. election which will have to be absorbed into the tax system. Th ese will invariably take time for taxpay- Finance Minister Guido Mantega announced on ers to digest, making the tax system probably even May 27, 2014, that payroll tax breaks for 56 in- more complex rather than less so in the short term. dustries would be made permanent. Th e minister Some of the main tax measures announced this year also said that the tax breaks will be made available are summarized in the next section. to more industries in the coming years. Th e tax re- lief exempts eligible companies from the 20 per- Recent Tax Developments cent payroll tax, and instead requires the payment In April 2014, the Government slashed the rate of of a rate of between 1 percent and 2 percent of import duty on 95 capital goods not produced in domestic sales turnover, depending on the nature

28 of the company's business activity. Th e industries apply to investments in infrastructure debentures that currently benefi t from the tax break include until 2020. In addition, exchange-traded funds will construction, engineering, news organizations, a benefi t from a reduction in . Th e wide range of transportation companies, and port revised rates of capital gains tax on investments in services providers. Th e decision to make the tax re- exchange-traded funds (ETFs) will range from 15 lief permanent will cost the Brazilian Government percent to 25 percent, depending on how long a more than BRL21.6bn in revenues annually. Th e portfolio is held. tax breaks were introduced in 2011 to help Brazil- ian companies weather the global fi nancial crisis, Shortly thereafter, the Government announced and to boost exports, which are not subject to the that it has expanded the list of medicines which are turnover-based levy. exempt from the so-called PIS/COFINS tax. A de- cree published in the Offi cial Gazette on June 27, Shortly after, Mantega announced that the Gov- 2014, added 174 items to the list, bringing the total ernment has decided to exempt some foreign loans number of items to more than 1,000. Th e updated from the IOF. As a result of the change, the 6 per- list covers 74.5 percent of medicines sold in Brazil. cent IOF no longer applies to short-term loans Th e Government decides which medicines should with maturities between 180 days and 360 days. be covered by the based on whether According to the Finance Minister, the measure is they are used to treat chronic or degenerative dis- intended to help small Brazilian banks and compa- eases, whether they are included in government nies obtain overseas credit, and to increase capital health programs, and whether they are essential for fl ows into the country. Th e change was introduced the population. Th e exemption applies only to pre- through Decree No. 8263, published in the Offi - scription medicines with red or black identifi cation cial Gazette on June 4, 2014. stripes that are for sale in the domestic market.

In what was turning out to be a busy period for And on June 30, 2014, Mantega announced that the Finance Minister, Mantega then announced, tax breaks for the automobile and furniture indus- on June 16, that investments in the initial pub- tries will be extended until the end of this year. Th e lic off erings of smaller companies will be exempt IPI tax for new cars will remain at the reduced rates from the 15 percent capital gains tax. Th e tax break set earlier this year, of between 3 percent and 10 applies to the IPOs of companies with a market percent depending on engine capacity and the type value of BRL700m or less and gross revenues of of fuel the vehicle requires. Th e tax was due to re- BRL500m or less in the year prior to the IPO. Th e turn to the higher rates levied in 2011 on July 1, measure will remain in place until 2023. Th e min- 2014. Mantega explained that the extension of the ister also announced that capital gains tax will not tax break is to boost automobile sales, which fell

29 14.5 percent in the fi rst fi ve months of this year, In August, Brazil proposed implementing a zero and to support employment in the sector. Th e ex- tariff policy for trade between members of the tension of the tax relief to the end of this year will South American trade blocs Mercosur and the cost the Government BRL800m. Mantega also said Pacifi c Alliance by the end of this year. Th e two that the extension of the tax break for the furniture blocs already had plans in place to zero rate tariff s sector, until December 31, 2014, is worth a further by 2019, but Brazil has urged its fellow Mercosur BRL161.6m in forfeited revenue. members, namely Argentina, Paraguay, Uruguay, and Venezuela, to work towards implementing the In July, Brazil's Senate unanimously approved leg- policy by December this year. Antônio Simões, islation to extend the tax benefi ts of the Free Eco- Deputy Secretary-General for South and Central nomic Zone of Manaus, located in the northern America and the Caribbean at Brazil's Foreign state of Amazonas, by 50 years. Th e Senate also Ministry, said at a recent Mercosur summit that approved reductions in the IPI tax for the com- free trade with the Pacifi c Alliance countries will puter products sector until 2029, and extensions signifi cantly boost the sale of manufactured prod- for other free trade areas in the north of Brazil ucts and create new jobs. He said that, from 2002 until 2050. to 2013, Brazil's trade with Colombia, Peru, and Chile increased by 300 percent, 389 percent, and Th e extension of the Manaus free zone tax bene- 200 percent, respectively. fi ts was enacted under Constitutional Amendment 83/2014 4 on August 5 and, in something of a coup Th at same month, President Rousseff signed a law for the Government, later that month it was an- which amends the simplifi ed tax regime for small nounced that China's largest manufacturer of au- businesses. Th is regime reduces the tax burden for tomobiles, BYD, was investigating setting up in the small businesses and allows them to pay several free zone. Th is was followed by the opening of a taxes using a single payment form. Th e signing pharmaceutical factory in the free zone on August of Complementary Law 147/2014 (60/14 PLC) 5 25. Senator Eduardo Braga, the former governor of adds 142 activities in the area of services to the Amazonas, said that the extension of the free zone regime. About 450,000 companies with turnover will ensure more development, more investment, up to BRL3.6m are expected to benefi t. Pursuant and more jobs in the western Amazon. Th e free to the new law, professionals such as doctors, law- zone is home to around 600 high-tech companies yers, and journalists may be eligible to account for in the electronics, IT, and vehicle production sec- tax under the simplifi ed regime. Th e new law also tors, according to Braga. In 2013, these companies seeks to make it easier to start a small business by generated nearly 113,000 jobs and nearly USD- reducing red tape. 90bn of revenue.

30 A law extending tax breaks for Brazil's IT industry made from sugar, is predominantly used in Brazil was published in the offi cial gazette on August 11, as a motor fuel and fuel additive. Th e sugar and 2014. Th is means that the 80 percent reduction in ethanol industries have been hit by poor harvests the IPI tax currently enjoyed by Brazilian IT com- as well as Government measures to keep gasoline panies will remain in place until 2024, having been prices down. due to expire this year. Between 2025 and 2026, a 75 percent reduction will be applied, and from However, later that month, the Finance Minister 2027 to 2029, a 70 percent reduction will be in ef- said that the tax rebate available to exporters under fect. Th e new law also requires IT companies to in- the program will be raised to 3 percent of the value vest at least 5 percent of their gross sales in research of exports from September 2014. Th e Government to develop the sector. had originally planned to increase the rebate from the beginning of 2015. Mantega also said that cus- In September, the Government announced toms procedures will be simplifi ed. Th e increase is BRL15bn worth of investment in broadband un- intended to support struggling businesses and will der its tax break program for telecom infrastruc- cost the Government BRL6bn next year. ture projects. Th e program, called Regime Especial de Tributação do Programa Nacional de Banda Larga September also witnessed Brazil's Chamber of For- (REPNBL), was created with the aim of encourag- eign Trade (CAMEX) announcing temporary im- ing investments in the telecommunications sector port tax reductions for hybrid electric vehicles. Un- in Brazil by providing tax relief. Under the program, der the changes, hybrid passenger cars with space telecommunication network construction projects for up to six people and with a cylinder capacity are exempt from IPI, PIS, and COFINS. Th e ap- of between 1,000cc and 3,000cc will face lowered proved projects are expected to result in around duties of between 0 percent and 7 percent, down BRL6bn in foregone . Th e deadline for from 35 percent. Th e new rates will be calculated businesses to submit projects to the program was according to the energy effi ciency of the vehicle, June 30, but Congress is considering proposals to and will remain in place until December 31, 2015. extend the deadline to June 2015. Hybrid electric vehicles are powered by a combina- tion of an internal combustion engine and one or Later in September, Mantega announced that etha- more electric motors. nol and sugar producers are to be included in the tax credit program known as Reintegra. Inclusion Th e Government has also recently approved tax in the program means that Brazilian sugar and etha- breaks for wind turbine manufacturers in a bid to nol exporters will receive a tax credit worth 0.3 per- prop up the domestic wind energy industry. Ac- cent of the value of their exports this year. Ethanol, cording to Provisional Measure 656 6 published in

31 the Offi cial Gazette on October 8, 2014, manufac- At present, it seems that the rewards for investing turers will no longer have to pay PIS and COFINS in Brazil must still be outweighing the risks for for- on purchases of components used in the produc- eign investors. But it cannot be emphasized strong- tion of wind turbines. However, entire wind tur- ly enough that prospective investors should hire a bines imports will continue to be subject to the two good accountant. taxes, which total 9.25 percent. Th e incentive is the latest tax measure aimed at encouraging green tech- ENDNOTES nology in the country. 1 http://emergingmarkets.ey.com/wp-content/up- loads/downloads/2012/08/J12-3222_Xerox.pdf Conclusion 2 http://www.receita.fazenda.gov.br/legislacao/ Recent FDI fi gures suggest that Brazil remains a leis/2014/lei12973.htm strong lure for foreign investors. However, with 3 http://www.camex.gov.br/legislacao/interna/id/1203 analysts and investors already eff ectively giving the 4 http://www.brasil.gov.br/economia-e-em- second Rousseff administration a no-confi dence prego/2014/08/zona-franca-de-manaus-esta-ofi- vote before it has even started, it remains to be seen cialmente-prorrogada-ate-2073 whether these levels will be maintained. 5 http://www.brasil.gov.br/governo/2014/08/sancio- nado-nesta-quinta-feira-7-novo-simples-nacional On the taxation front, signs that the Government 6 http://www.jusbrasil.com.br/diarios/77900372/dou- will begin to ease the tax and administrative burden secao-1-08-10-2014-pg-1 in a more systematic way than the piecemeal tax cuts it has announced this year are few and far between.

32 FEATURED ARTICLES ISSUE 104 | NOVEMBER 6, 2014

France – Transfer Pricing: More Information To Provide To The Tax Authorities by Bruno Gouthière

© 2014 CCH Incorporated. All Rights Reserved

Bruno Gouthière is a Partner with CMS Bureau Francis Lefebvre, France. accounts and their consolidated accounts; this in- Th is article was previously published in Wolters Klu- formation will likely be used by the tax authorities wer's International Tax Journal in October 2014. to determine more accurately, for instance, the func- tions assumed and the value of the assets used. Ana- Th e recent focus of the Organisation for Economic lytical accounts have to be provided if, in summary, Co-operation and Development (OECD) on Base (1) the taxpayer establishes such accounts (this is Erosion and Profi t Shifting (BEPS) has already pro- not mandatory at law), and (2) the turnover of the duced eff ects in France. In order to combat transfer taxpayer exceeds EUR152.4m if the company car- pricing more effi ciently, the French tax authorities ries on a sale activity (the same threshold applies to have recently obtained more power to get informa- certain other activities; otherwise, the threshold is tion for carrying on transfer pricing audits: tax- generally reduced to EUR76.2m) or if the amount payers that establish analytical and consolidated of its gross assets is at least EUR400m at the end of accounts now have to provide them to the tax au- the fi nancial year. As regards consolidated accounts, thorities; in addition (see below), large enterprises only companies that have compulsorily established now have to compulsorily fi le every year a specifi c such accounts have to provide them to the tax au- form describing their transfer pricing policy, and thorities upon request; companies which establish the same large enterprises now have to include in consolidated accounts on a voluntary basis are left their transfer pricing documentation information outside of the scope of the statute. on foreign rulings. As regards transfer pricing documentation, it was In order to get more information, particularly (but already provided by a law of December 30, 2009, not exclusively) for transfer pricing purposes, the that large enterprises had to establish appropriate tax authorities have the possibility to demand that documentation and to deliver it to the tax inspec- certain taxpayers provide them with their analytical tor upon request at the beginning of a tax audit

33 (the fact that only "large enterprises" have statutory in relation to the French enterprise and of the fi ling obligations does not mean that other enter- changes during the fi nancial year; prises do not have to justify their transfer pricing Specifi c information on the French enterprise: policy; simply, the justifi cation that they have to description of the activity, including changes provide upon audit is not regulated by the law). during the financial year; recapitulative list of transactions realized with associated enter- Large enterprises have now, in addition, to fi le ev- prises, by nature and amount (the aggregated ery year a simplifi ed form describing their transfer amount of income, expenses, acquisitions and pricing policy. Th is form is due for the fi rst time at sales of assets has to be declared only if higher the latest on November 20, 2014, for enterprises than EUR100,000 for each set of transactions); whose fi nancial year coincides with the civil year description of the method(s) used for the deter- (a template was issued on September 16, 2014). A mination of the transfer prices in accordance with "large enterprise" is defi ned as a legal entity estab- the arm's length principle, with an indication of lished in France that meets one of the following the main method used and the changes during tests: (1) its turnover (excluding VAT) or amount the fi nancial year. of its gross assets is at least EUR400m, or (2) at the close of the fi nancial year it directly or indirectly Th e due date for fi ling is six months after the date owns more than 50 percent of the capital or voting on which the corporate income tax return has to be rights in a legal entity satisfying the EUR400m test, fi led. For instance, assuming that the enterprise has or (3) more than 50 percent of its capital or voting to fi le a corporate income tax return on May 3 at rights is, at the close of the fi nancial year, directly the latest (the due date varies every year as it is the or indirectly owned by a legal entity satisfying the second business day following May 1 of each year), EUR400m test, or (4) it belongs to a French tax the transfer pricing return has to be fi led at the lat- group that includes at least one legal entity satisfy- est on November 3. Note that the due date has ex- ing one of the above tests. Th ose "large" enterprises ceptionally been extended to November 20, 2014, have to fi le every year a specifi c form providing the for enterprises which had otherwise to fi le the re- following information: turn between June and November 2014. Th ere is no General information on the group of associated specifi c penalty in case of noncompliance, so that a enterprises: general description of the activity, penalty of a maximum of EUR10,000 is applicable. including changes during the fi nancial year; list of the main intangible assets, including patents, Finally, large taxpayers have now to include in trademarks, commercial names and know-how, their transfer pricing documentation a copy of used by the French enterprise; general descrip- private rulings delivered by foreign tax authori- tion of the transfer pricing policy of the group ties to associated enterprises. Th is information is

34 supposed to provide the tax authorities with ad- itself or to its own subsidiaries or where there is ditional background on the global strategy of the a prohibition to communicate under foreign law. taxpayer so that they may better understand the In our opinion, the taxpayer could also refuse intercompany transactions. As interpreted by the to communicate rulings having no transfer pric- Constitutional Court in a decision rendered on ing implications and no consequence on the tax- December 29, 2013, this obligation bears only on able income of the associated foreign enterprise. the rulings that the audited enterprise has "in its It should be noted, however, the tax authorities possession." It seems accordingly likely that the have not yet given their comments in this respect taxpayer would be able to refuse to provide foreign and that the exact scope of this obligation remains rulings if such rulings have not been delivered to rather uncertain.

35 NEWS ROUND-UP: DIGITAL TAXATION ISSUE 104 | NOVEMBER 6, 2014

Spain Approves Hungary Backs Down Controversial 'Google Tax' On Internet Tax Plan

Th e Spanish Congress on October 30, 2014, ap- Hungary has suspended plans to impose a new levy proved a reform of the Intellectual Property Law, on internet service providers, after a proposal to cap including a controversial levy on news aggregators. the amount payable failed to placate protesters.

Dubbed the "Google tax," the levy would allow news Speaking on Kossuth Radio , Prime Minister Victor publishers to charge "electronic news aggregation sys- Orbán said that the debate had "gone astray" and tems," such as the Google News service, every time "a that there was no "common basis" for continuing link and a meaningful description" of one of their arti- with the move. cles is posted. A tax would be placed on those revenues. Th e Prime Minister again stressed that the intention Th e reform received 172 votes in favor, 144 against, was to extend the telecommunications tax paid by sup- with three abstentions. It is set to come into eff ect pliers, rather than to impose a new tax on consumers. on January 1, 2015. Under the original plan, internet usage was to be Google said in a statement following the approval: taxed at a rate of HUF150 (USD0.61) per giga- "We are disappointed with the new law because we byte. As protests grew, the Government said that think services like Google News help publishers to the amount would be capped at HUF700 per draw traffi c to their websites. Looking forward, we month for usage by individuals and at HUF5,000 will continue to work with Spanish publishers to for businesses. help them increase their income while we consider our options in light of this new regulation." Orbán said that there will now be a national con- sultation in mid-January. Th e Government has not said how much the charge would be, but it has said that the law would not apply Report Charts Global Tax Rates to Internet users who share articles via social media. On IT Goods And Services Th e Information Technology and Innovation Foun- Th e law, which is offi cially named Canon AEDE, dation has released a new report that ranks 125 na- is expected to raise about EUR80m (USD106.7m) tions on the taxes and tariff s that they levy on IT in tax revenue per year. Th e additional revenue is goods, as part of the not-for-profi t organization's intended to prop up the domestic media industry. eff orts to lobby governments for tax relief.

36 In its new Digital Drag report, the Foundation Greece is the only OECD country to feature in the charts the tariff s and taxes on cell phones, comput- top-20 countries, imposing a tax and tariff burden ers, telecommunication services, and an array of ad- of 9.6 percent. Chile, the only other OECD coun- ditional ICT goods and services. Th e Foundation try in the top-50, adds taxes of 4 percent. contends that nations should look to reduce the tax barriers they impose on trade in the industry's One-half of the 50 countries with the highest tax products, noting the productivity improvements burden are in sub-Saharan Africa, and 11 are in the that the industry's goods and services can unlock Latin America and Caribbean region. for both the developed and developing world. Th e report concludes by noting evidence that shows According to the Foundation's report, of the 125 that taxes have a noteworthy impact on the adop- nations examined, 31 impose combined ICT tax tion of ICT goods and services, lowering demand and tariff rates of over 5 percent of product or ser- by as much as 20 percent in Bangladesh, Brazil, and vice costs, with several countries adding more than Congo, and also pushing up digital piracy rates. 20 percent to costs. Another 40 countries impose Th e report says that taxes are also having a major taxes and tariff s of between 1 and 5 percent, it says, impact on economic productivity. In India, for in- and 68 add tariff s of at least 1 percent. stance, for every dollar raised from taxes, USD1.30 is lost as a result of lower productivity. Bangladesh is said to impose the highest taxes on the industry, averaging tax of 57.8 percent in ad- "A clear way for nations to enable faster economic dition to the country's 15 percent value-added tax growth is to spur the use of ICT by businesses and rate. In second and third place are Turkey and Con- consumers. And many can do this with the stroke go, which add taxes and tariff s of 26.1 percent and of a pen: eliminating discriminatory taxes and tariff s 23.8 percent, respectively. on ICT goods and services," the Foundation said.

37 NEWS ROUND-UP: INTERNATIONAL TRADE ISSUE 104 | NOVEMBER 6, 2014

African Blocs To Start Talks A statement, issued after the agreement's launch, On Grand Free Trade Area said that "the tripartite FTA off ers signifi cant op- portunities for business and investment, and will Th e Southern African Development Community act as a magnet for attracting foreign direct in- (SADC), the Common Market for Eastern and vestment, in the tripartite region. Th e business Southern Africa (COMESA), and the East Afri- community, in particular, will benefi t from an can Community (EAC) have agreed to launch free improved and harmonized trade regime which trade negotiations in December. reduces the cost of doing business as a result of elimination of overlapping trade regimes due to Th e decision to launch the tripartite free trade area multiple memberships." (FTA), popularly known as the Grand Free Trade Area, took into account the fact that the majority Europe Seeks To Streamline of its member states have made ambitious tariff of- FTA Negotiation Process fers. Th ey have also agreed the rules of origin to Th e European Court of Justice (ECJ) will be asked be applied in the interim, while further work will to provide an opinion on the impact of the Lis- continue on product-specifi c rules. bon Treaty on EU trade negotiations and the sub- sequent ratifi cation process. Th e tripartite FTA will encompass 26 member states from SADC, COMESA, and EAC, with a com- EU Trade Commissioner Karel De Gucht said: "I bined population of 625 million people and a total have been saying for months that we need to clarify gross domestic product (GDP) of USD1.2 trillion. the interpretation of the Lisbon Treaty as regards It will include half of the membership of the Afri- trade matters. And this is what I have decided to do can Union and 58 percent of the continent's GDP. now. Th e Court can solve the ongoing diff erence of It is being seen as the launching pad for the estab- opinion between the Commission and the Council lishment of a pan-African Free Trade Area in 2017. on the interpretation of the Lisbon Treaty, clarify which procedures to follow, and increase [EU] pre- Th e Chair of the ministerial meeting, Chiratidzo dictability [for] our trade partners." Iris Mabuwa, Zimbabwe's Deputy Minister of Commerce, confi rmed: "We have made signifi cant Last month, the EU and Singapore concluded ne- progress in negotiations on trade in goods, and we gotiations on the investment portion of their free now need to expedite negotiations on trade-related trade agreement. Investment protection talks began areas, including trade in services, intellectual prop- later than discussions on other provisions, because erty, and competition policy." of EU competence rules introduced under the

38 Lisbon Treaty. A text containing all but the invest- Th e Shanghai FTZ has concentrated on fi nancial ment provisions was initialed in September 2013. services and investment, commodities trading, and logistics. It off ers additional tax incentives for in- Th e Lisbon Treaty entered into force on December vestment and trade, with zero duties and 1, 2009. It made the European Parliament co-legis- import taxes. lator with the European Council on trade matters. It also gave the EU exclusive competence on foreign New tax administration services introduced in the direct investment (FDI), meaning that the EU can FTZ include the automatic online allocation of tax both conclude international agreements and adopt registration numbers and an expanded use of elec- autonomous measures on FDI. Agreements on in- tronic invoices by e-commerce enterprises. Th ere vestment protection were previously only conclud- is also an online registration service for existing ed bilaterally by individual EU member states. tax incentives and for the fi ling of tax reports on a quarterly basis. "Th e aim of the Commission is to bring clarity [as to] which provisions of the free trade agreement In addition, wholly foreign-owned international with Singapore fall within the EU's exclusive or ship management companies have been attracted shared competence and which remain within the to Shanghai, with a tax exemption on business in- member states' remit," De Gucht explained. come arising from international shipping, trans- portation, warehousing, and shipping insurance, Th e Commission intends to submit a formal re- for companies registered in the FTZ port areas. quest to the ECJ as soon as possible. EU Seeks WTO Mediation China Planning Additional In Tax Disputes Free Trade Zones Th e EU has sought the World Trade Organization's Chinese President Xi Jinping has said that, after (WTO's) support to resolve trade tax disputes with more than a year since Shanghai's pilot free trade Brazil and Russia. zone (FTZ) was fi rst launched, its example should now be copied in more provinces as soon as possible. Th e EU has requested that the WTO establish a panel of experts to rule on what it claims are dis- About 12,000 businesses have been set up in the criminatory Brazilian tax measures. According to Shanghai FTZ since its launch, and foreign trade the EU, the bloc aims to re-establish a level playing therein reached RMB747.5bn (USD122.3bn) in fi eld between Brazilian and European businesses its fi rst year of operation. and products.

39 At present, goods manufactured in the EU and sold prolonged some of the contested tax breaks. Th e in Brazil face higher taxes than Brazilian products EU has therefore requested the creation of a panel. because domestic products can benefi t from ex- emptions from or reductions in the internal taxes Th e EU has also asked for the WTO to mediate in a imposed in various sectors. For example, the EU dispute with Russia over its import duties for paper says that the tax on imported vehicles can exceed products, refrigerators, and palm oil. Th e EU says that collected on Brazilian-made cars by 30 percent that Russia has violated its WTO commitments of a car's value. When combined with the customs to keep import duties below the limits in Russia's duties levied at the border and other charges, the WTO accession documents. tax can reach 80 percent of the import value. According to the EU, Russia either applies a duty Th e EU also claims its exporters are hurt by a re- rate of 15 percent (rather than the stated 5 percent quirement that Brazilian manufacturers must use limit) or fi xes a minimum amount that must be domestic components in order to qualify for tax ad- paid. Th e EU argues that these higher duties have vantages. Th e EU alleges that the measures help to a negative impact on European exports of these shield uncompetitive Brazilian manufacturers from goods, which are worth around EUR600m (US- international competition and limit the choice of D751m) a year. aff ordable quality products for consumers. Th e EU says that it raised the issue with Russia, but Consultations were held between the EU and Brazil to no avail. If the proposed WTO consultations are earlier this year in an attempt to resolve the dispute. unsuccessful, the EU may ask the WTO to estab- Th e talks failed, and Brazil has since extended and lish a panel to rule in this case also.

40 NEWS ROUND-UP: COMPLIANCE CORNER ISSUE 104 | NOVEMBER 6, 2014

Automatic Info Exchange entities will be made available to tax authorities and Moves A Step Closer exchanged with treaty partners.

On October 29, 2014, 51 jurisdictions signed a Th e Global Forum will establish a peer review pro- Multilateral Competent Authority Agreement on cess to ensure the eff ective implementation of au- the automatic exchange of information that will tomatic exchange procedures. A status report on enable "early adopters" to begin sharing data by committed and non-committed jurisdictions will September 2017. be presented to G20 leaders next month, during their annual summit. Th e agreement was endorsed by all OECD and G20 countries, as well as by major fi nancial centers partic- It has also invited developing countries to join the ipating in the seventh annual meeting of the Global move toward automatic exchange, and will off er Forum on Transparency and Exchange of Informa- technical assistance through a series of pilot proj- tion for Tax Purposes. It specifi es the details of what ects. Th e African members of the Global Forum information will be exchanged and when, as set out will lead an "African Initiative" to increase aware- in the Standard for Automatic Exchange of Financial ness of the merits of transparency in Africa. Information in Tax Matters, published in September. OECD Secretary-General Ángel Gurría said: "We Th e Standard calls on jurisdictions to obtain infor- are making concrete progress toward the G20 ob- mation from their fi nancial institutions and auto- jective of winning the fi ght against . Th e matically exchange that information with other ju- fact that so many jurisdictions have agreed today to risdictions on an annual basis. automatically exchange fi nancial account informa- tion shows the signifi cant progress that can occur Th e agreement provides for the exchange of certain when the international community works together account and personal information, consistent with in a focused and ambitious manner." the Common Reporting Standard. All information exchanged will be subject to the confi dentiality rules Algirdas Šemeta, the EU Tax Commissioner, wel- and other safeguards contained in the Multilateral comed the signing as "an important joint eff ort by Convention on Mutual Administrative Assistance many in creating a fairer, more appropriate tax en- in Tax Matters. vironment worldwide."

Participating governments have also agreed that in- He said: "Th e Global Standard, developed by the formation on the benefi cial ownership of all legal OECD in cooperation with G20 countries and the

41 European Commission, will facilitate tax authori- with particular regard to the provisions contained ties' access to fi nancial account information and in the new Tax Administration (TA) Act that was boost worldwide eff orts to crack down on tax eva- enacted on October 1, 2012. sion. Th is global agreement shows that many coun- tries around the world are ready to work towards Th e guide confi rms that when taxpayers are ag- alignment with the Global Standard and recognize grieved by an assessment or a decision, they have a automatic exchange of information as the new stan- right to dispute it. It says Chapter 9 (Dispute Reso- dard for international cooperation." lution) of the TA Act provides the legal framework for disputes across all tax types, and must be read "Agreement on a Global Standard is not something in addition to the rules under section 103 of that we could have foreseen even a few years ago and it Chapter, which have now been gazetted and apply signals a new step towards greater tax transparency. with eff ect from July 11, 2014. I am confi dent that this move will enable countries around the world to better combat tax evasion and Essentially, the new rules govern the procedures to improve the effi ciency of their tax collection." lodge an objection and appeal against an assess- ment or decision; alternative dispute resolution Th e full list of signatories is as follows: Albania, procedures under which SARS and the person ag- Anguilla, Argentina, Aruba, Austria, Belgium, Ber- grieved by an assessment or decision may resolve a muda, the British Virgin Islands, the Cayman Is- dispute in accordance with the rules; and the con- lands, Colombia, Croatia, Curacao, Cyprus, the duct and hearing of an appeal before a tax board Czech Republic, Denmark, Estonia, the Faroe Is- or tax court. lands, Finland, France, Germany, Gibraltar, Greece, Guernsey, Hungary, Iceland, Ireland, the Isle of Th e tax board and tax court are tribunals created Man, Italy, Jersey, South Korea, Latvia, Liechten- under the TA Act, and a taxpayer may also appeal stein, Lithuania, Luxembourg, Malta, Mauritius, the judgment of the tax court to the High Court or Mexico, Montserrat, the Netherlands, Norway, Po- the Supreme Court of Appeal. land, Portugal, Romania, San Marino, Slovak Re- public, Slovenia, South Africa, Spain, Sweden, the Th e new rules also fi x certain shortcomings in the Turks and Caicos Islands, and the UK. old rules. Th ey simplify the rules to enhance un- derstanding of and compliance with them; shorten South Africa Issues Tax Dispute procedural time periods in order to improve turn- Resolution Guide around times for fi nalizing disputes; and provide Th e South African (SARS) has is- for more eff ective remedies to address failures to sued a new guide on the resolution of tax disputes, comply with time periods.

42 Th ey are also said to give a better balance between on purchases of medicine and other health servic- taxpayer rights and remedies, and SARS's powers es, which will be provided by the public health and duties; and regulate the use of the SARS eFil- billing system. ing platform for disputes. By April 15 each year, a pre-compiled form will be Transitional procedures are also contained in the rules. made available to the taxpayer or their representa- Th ey provide that disputes not fi nalized at the com- tive over the internet. Th e taxpayer will then be able mencement date of the new rules (that is, July 11, to accept the information automatically included 2014) will generally be dealt with and fi nalized under in the return or make modifi cations. the new rules issued under the TA Act. For example, if a taxpayer has objected under the old rules and the If taxpayers accept the pre-compiled data, their objection has not been dealt with by SARS upon com- tax declarations will become fi nal and will not be mencement of the new rules, the dispute must contin- selected for audit by the Agency. Tax refunds that ue and the objection must be dealt with by SARS "as have been assessed automatically will also be paid if taken or instituted under the new rules." without further examination.

Italy Approves Th ose who contest the pre-compiled informa- Pre-Compiled Tax Returns tion will need to submit an amended return to the At its meeting on October 30, Italy's Cabinet defi n- Agency by July 7 each year. itively approved a decree to pre-compile individual income tax returns for some 30 million employees Th e tax simplifi cation decree is being issued with- and pensioners. in the framework of the Legge Delega , which was approved in March this year and sets out general Th e scheme will cover 2015 tax forms, for income reform principles that need to be implemented from 2014, and future years. Th e Revenue Agency within one year through a series of decrees from will use information from its tax database from previ- the Government. ous fi ling years, information provided by third parties (such as banks, insurance companies, and pension Australia Passes Law funds), and the forms completed by employers con- To Cut Red Tape taining the details of employees' wages and salaries. Th e Australian Government has introduced legisla- tion to cut tax red tape as part of a broader package Beginning with tax forms produced in 2016, pre- of reforms expected to reduce business compliance compiled tax returns will also include information costs by AUD14m (USD12.3m) a year.

43 Th e Treasury Legislation Amendment (Repeal Day) Section 4 of the Bill addresses concerns about the Bill 2014 simplifi es tax laws by consolidating du- defi nition of "Australia" for taxation purposes. Ac- plicated provisions from various Taxation Acts into cording to the Government, the current defi nition a single law. It also repeals "spent or redundant" tax is complex, overly detailed, and expressed diff erent- laws, and moves longstanding regulations into the ly in diff erent parts of the taxation laws. Schedule primary law. 4 rewrites the defi nition of "Australia" into a single location in the for use across all the tax laws in a simple and coherent form.

44 NEWS ROUND-UP: TAX POLICY ISSUE 104 | NOVEMBER 6, 2014

Puerto Rico To Introduce taxpayers to create fl ow-through tax businesses or Tax Reform In 2015 conduits for tax planning purposes.

Puerto Rico's Department of the Treasury has dis- In addition, there would be an elimination of inef- closed the framework of the tax reforms that are pro- fi cient business tax expenditures, while alternatives posed to be introduced during the fi rst quarter of would be considered for the reform or substitution next year, together with a proposed increase in the of the 4 percent "Act 154" excise tax, which is im- excise tax charged on crude oil that would bolster posed on a proportion of the income derived by the Island's Highways and Transportation Authority. large multinationals in Puerto Rico.

As Puerto Rico looks to shore up its weak budget- At the same time, so as to minimize the under- ary position by raising revenues, it intends to repo- ground economy, the present 7 percent SUT will sition its tax code by reducing its dependence on be transformed into a broader-based goods and ser- the collection of direct income taxes and reforming vices tax (GST), with the intention of introducing a the present indirect sales and use tax (SUT). Th e value-added tax at a later date. Th e single-rate GST aim would be to cut the large portion (estimated would include exemptions for small businesses and at 23 percent) of economic activity in Puerto Rico relief for those on low income. that is unrecorded and not currently subject to ei- ther income or sales taxes. It was stressed, however, that the revenue from the SUT that is currently transferred to the COFINA For example, the plan would aim to ensure that fund, which is allocated to repay the Island's public 80 percent of individual taxpayers will not pay in- debt, would be protected, and that COFINA will come taxes by establishing an initial tax threshold stay as an important source of . of USD60,000, while the income tax base would be broadened to make up part of the revenues lost At the same time, the Government Development by eliminating or adjusting the current, at least, 85 Bank has proposed to raise the oil excise tax by tax expenditures. USD6.25 per barrel to USD15.50 per barrel, from March 2015. Part of the increased funding would To simplify the corporate code, it is also contem- be utilized by Puerto Rico's Infrastructure Financ- plated that the gross profi ts tax introduced last ing Authority to assume and refi nance the debt of year will be repealed and that the corporate tax the Highways and Transportation Authority, which rate will be equalized with the maximum rate paid is in fi nancial diffi culty, and assist it to issue up by individuals. Th is would eliminate any need for USD2.9bn in bonds.

45 Italy In EU Defi cit Compromise allocation to deficit reduction from a govern- ment reserve, which is funded by efforts against Th e Italian Government has responded to the Eu- tax evasion, and which was originally meant to ropean Commission's (EC's) concerns over the be used to lower tax burdens. EUR730m would extent of its less-than-programmed fi scal defi cit also found from a further extension of the re- reduction in 2015, by off ering to compromise by verse charge value-added tax mechanism to the utilizing funds from various existing sources. retail sector (with a surcharge on excise taxes as a safeguard clause). Italy's draft Budget, announced after a Cabinet meeting on October 15, contained some EUR18bn At the same time, Padoan reminded Katainen that (USD22.9bn) in tax cuts, in an attempt to stimulate the Italian economy is in its third year of economic the economy, and targeted a defi cit-to-gross domes- recession, and that a tighter fi scal stance could be tic product (GDP) ratio in 2015 of only 0.1 percent self-defeating in terms of both the country emerg- below the 3 percent threshold imposed by the EU. ing from that recession and also the sustainability of its high public debt. However, under the country's defi cit reduction pro- gram previously agreed with the EC, Italy should Finally, on October 28, Katainen postponed any have been seeking a defi cit of only 2.5 percent of immediate reply to the Italian Government. He GDP next year, prompting a letter on October 22 stated that, with regard to EU member countries' from the EC asking the reasons "why Italy plans draft budgetary plans, he "cannot immediately non-compliance" and requiring "to know how Ita- identify cases of 'particularly serious non-compli- ly could ensure full compliance with its budgetary ance' which would oblige us to consider a negative policy obligations." opinion at this stage in the process. … Th e new Commission will adopt its opinions on [the bud- In his reply on October 27 to new European Com- gets] in November. Any shortcomings or risks will missioner for Economic and Monetary Aff airs and be clearly highlighted at that point." the Euro Jyrki Katainen, Pier Carlo Padoan, the Italian Economy and Finance Minister, has sug- New Indonesian Government gested a compromise, by proposing a 2015 defi cit Seeks More Revenue level of 2.6 percent of GDP, which would only be Indonesia's newly appointed Finance Minister, 0.1 percent above the EC program limit. Bambang Brodjonegoro, has said the new Govern- ment will focus on improving tax compliance rates The EUR4.5bn of measures to be taken to reach to fi nd the extra revenue required to pursue infra- that compromise would include a EUR3.3bn structure and welfare spending policies.

46 Brodjonegoro said the fi rst task will be for the Di- Brodjonegoro said that, in order for the DGT to rectorate General of Taxation (DGT) to collate extra reach its targets, the tax authority's headcount will data on current and prospective personal and corpo- be increased to compensate for the increased work- rate taxpayers in order to raise Indonesia's relatively load, with support also from Indonesian law en- low tax-to-gross domestic product (GDP) ratio. forcement agencies.

With regard to businesses, he said, "maybe they've He also said Indonesia would review the measures been registered as a taxpayer, and they may also pay on off er to encourage investment in the manufac- taxes on a regular basis, but we want to fi nd out if turing sector, including tax holidays and tax incen- they have paid taxes in accordance with the regula- tives introduced by the previous government. tions." Meanwhile, in its dealings with individual taxpayers, the Government will concentrate on broadening the tax base.

47 NEWS ROUND-UP: VAT, GST, SALES TAX ISSUE 104 | NOVEMBER 6, 2014

Maldives Hikes GST tourists by domestic air transportation service pro- On Tourism Services viders. It clarifi es also that the term "tourists" refers to persons entering the Maldives under a tourist Th e rate of goods and services tax (GST) on tour- visa issued under the Maldives Immigration Act. ism services in the Maldives increased to 12 percent from November 1, 2014. Th e increase is part of a package of measures in- tended to generate higher revenues for the islands. Th e change was introduced through the First Th e rate on tourism services was 3.5 percent from Amendment to the GST Act (Law No. 6/2014). As December 31, 2011, when the GST regime was a result of the change, persons who are required to fi rst introduced; 6 percent from January 1, 2012; fi le GST returns quarterly must comply with spe- and 8 percent from January 1, 2013. Other mea- cial reporting requirements. sures to broaden the GST base have included the introduction of GST on telecom services since May In addition, in a last minute amendment published 1, 2014. From this date, GST was also imposed, on October 27, 2014, authorities in the Maldives also at a rate of 6 percent, on sales of immovable intend to further amend the GST Act to provide property. Th e leasing of immovable property re- that the rate applies only to goods and services sup- mains exempt. plied exclusively to tourists. Goods and services subject to the change – listed as tourism services in IMF Urges Suriname To Install VAT the law – include supplies by shops, diving schools, Th e International Monetary Fund (IMF) has spas, water sports facilities, and other such facilities provided a progress update on Suriname's long- in tourist resorts, tourist hotels, guesthouses, picnic delayed eff orts to implement a value-added tax islands, tourist vessels, and yacht marinas autho- (VAT) regime. rized by the Tourism Ministry. Th e IMF reported that a draft of the revised VAT Alongside the rate increase, the Maldives has also law is being reviewed for implementation in early revoked the Tourism Tax – an USD8 per night 2016. It said that the timely implementation of the charge on accommodation – also from November VAT, together with further reforms and the mod- 1, through the Fifth Amendment to the Maldives ernization of customs and the entire tax structure, Tourism Act (Law No. 5/2014) of February 6, 2014. will strengthen government revenues, which fell by 2 percent of gross domestic product (GDP) last year Th e last minute amendment also adds to the list of as taxes, royalties, and dividends from the mineral tourism services supplies of goods and services to sector declined.

48 A VAT would provide an effi cient new source of of GDP from the introduction of VAT. Th ese extra revenue, stimulate improvements in tax adminis- revenues could fund the authorities' plans to lower tration, and improve the resilience of the revenue direct tax rates, which are currently higher than re- base to shocks, the IMF said. It added that authori- gional averages, to enhance the business environ- ties should aim to increase revenues by 2.5 percent ment, the IMF said.

49 NEWS ROUND-UP: INDIVIDUAL TAXATION ISSUE 104 | NOVEMBER 6, 2014

Accountants Warn Against the average in Western Europe, as a result of the UK 50 Percent Income Tax Rate Coalition Government's decision to scrap the 50 percent rate from April 2013. High earners in the UK would pay 24 percent more tax than the current global average if the Labour Th e survey found that Belgium taxes high earners Party succeeds in reintroducing the 50 percent tax the most, with Belgian taxpayers taking home just rate, according to international accountants UHY 46.31 percent of their pay. Th e UK ranks 14th in Hacker Young. UHY's list of 25 jurisdictions, with workers taking home 54.21 percent of their pay. If the 50 percent According to the fi rm, the higher rate would in- rate was reintroduced, the UK would have the eighth crease the tax burden on an individual with an in- highest burden, just behind Ireland and Spain. come of USD1.5m (GBP876,915) by USD62,172 (GBP36,245). High earners would take home just Th e global average tax burden on earners earning 50.1 percent of their income after tax and National USD1.5m is 59.87 percent, while the Western Eu- Insurance contributions (NICs). ropean average is 49.7 percent.

Between 2011 and 2013, the 50 percent rate Mark Giddens, Partner at UHY Hacker Young, was charged on all income over GBP150,000 said: "Th e UK Government reduced the 50p tax (USD240,000). Th e opposition Labour Party has rate in April last year on the basis that this would pledged to reintroduce the rate if it wins the 2015 encourage wealth creation and prevent a brain drain general election. of skilled professionals. Reintroduction of the 50p tax rate could be something of a backwards step at UHY Hacker Young studied tax data in 25 coun- a time when other countries are rolling back their tries across its international network. Taking into top rates of tax and could put the UK at a signifi - account personal taxes and social security contribu- cant disadvantage to its rivals." tions, the survey captured the take home pay for low, middle, and high income workers. High earn- "We would lose some of the edge that we current- ers were defi ned as those earning USD1.5m a year. ly have over other western European countries in Th e calculations are based on the model of a single, attracting successful entrepreneurs and investors. unmarried taxpayer with no children. We will also fi nd it harder to compete against oth- er major English-speaking economies such as the UHY estimates that workers earning USD1.5m a US, where high earners already take home an extra year are USD67,637 better off , as compared with USD48,300 compared to the UK."

50 Taxpayers Warned for a single individual; between USD15,510 and On Obamacare Tax Credits USD62,040 for a family of two; and between USD23,550 and USD94,200 for a family of four. Th e US National Association of Enrolled Agents (NAEA) has recommended that taxpayers urgently Olson cautioned: "If the actual 2014 household review their tax situation and make any necessary ad- income exceeds these amounts and a subsidy was justments to withholding or estimated tax payments, granted, the subsidy will need to be repaid on their in response to the Aff ordable Care Act (ACA). 2014 federal tax return."

As part of the ACA, from 2014, eligible taxpayers Th e (TF) noted that the problem have the option of receiving a tax credit to help pay lies when actual income diff ers from previous es- monthly health insurance premiums. Th e credit is timates. "If, for instance, a family got an unex- paid directly as a subsidy to the health insurance pected bonus or raise, pushing them out of the carrier and is based on estimated household size and household income range, the full amount of the income. However, a taxpayer does not have to wait subsidies would have to be repaid on their income until his or her earnings are verifi ed by the Internal tax return Th is can be a substantial and unexpect- Revenue Service when fi ling an annual tax return ed change in tax liability. Earning one dollar more to benefi t from the tax credit, but may choose to can lead to an infi nite marginal tax rate for disal- apply it to health insurance premiums each month. lowed taxpayers."

Mary Olson, Enrolled Agent and Manager of Th e Th e TF said that, while not all taxpayers will face Iola Tax Place in Wisconsin, said: "Th is year, many this issue, "it is a potential problem with the ACA's tax professionals need to devote more time to un- subsidy structure. Th ese subsidies are expected to derstanding the impact of the new ACA on their become the largest refundable tax credit, as much clients. Taxpayers who obtained health insurance as all other refundable tax credits combined. [How- through the ACA Marketplace may be in for a big ever,] for those who did make more than expected surprise at tax time." this year, the extra income could be bittersweet."

Generally, the NAEA pointed out, individuals and US Savers Advised To Plan Now families with estimated household incomes for the To Gain Tax Credit year between 100 percent and 400 percent of the Th e US Internal Revenue Service (IRS) has re- federal poverty level for their family size are eligible minded low- and moderate-income workers that for the subsidy. Th at is equivalent to annual house- they can take steps now to save for retirement and hold income between USD11,490 and USD45,960 earn a special tax credit in 2014 and in future years.

51 Th e IRS noted that the saver's credit helps off set In tax year 2012, the most recent year for which part of the fi rst USD2,000 workers voluntarily complete fi gures are available, saver's credits to- contribute to individual retirement arrangements taling USD1.2bn were claimed on more than 6.9 (IRAs), 401(k) plans, or similar workplace retire- million individual income tax returns. Saver's cred- ment programs. Also known as the retirement its claimed on these returns averaged USD215 for savings contributions credit, the saver's credit is joint fi lers, USD165 for heads of household, and available in addition to any other tax savings that USD127 for single fi lers. may apply. Th e saver's credit also supplements other tax ben- Th e agency pointed out that eligible workers still efi ts available to people who set money aside for have time to make qualifying retirement contribu- retirement. For example, most workers may deduct tions and obtain the saver's credit on their 2014 tax their contributions to a traditional IRA. Normal- return. Th e credit can increase a taxpayer's refund ly, contributions to 401(k) and similar workplace or reduce the tax owed. plans are not taxed until withdrawn.

Workers have until April 15, 2015, to set up a new Canada Planning Substantial IRA or add money to an existing IRA for 2014, but Family Tax Cuts elective deferrals (contributions) to a 401(k) plan Th e Canadian Government has announced that or similar workplace program must be made by the so-called "income splitting" will be available from end of the year. the 2014 tax year, enabling families to split up to CAD50,000 (USD79,975) of their income each Th e saver's credit can be claimed by married cou- year for tax purposes. ples fi ling jointly with incomes up to USD60,000 in 2014, or USD61,000 in 2015; heads of house- Th e proposed new Family would provide a hold with incomes up to USD45,000 in 2014, maximum CAD2,000 in tax relief for couples with or USD45,750 in 2015; and married individuals children under the age of 18. Under the plans, a fi ling separately and singles with incomes up to "higher-income spouse" would be allowed to, in ef- USD30,000 in 2014, or USD30,500 in 2015. fect, transfer up to CAD50,000 of to a spouse in a lower income for federal However, a taxpayer's actual credit amount is based tax purposes. on his or her fi ling status, adjusted gross income, tax liability, and amount contributed to qualifying Th e tax relief granted would be calculated on the retirement programs. basis of the diff erence in tax before and after the

52 eff ective transfer of income. If the diff erence ex- credit when they fi le their 2014 tax returns. Each ceeds CAD2,000, the credit would be limited to spouse would need to fi le a tax return, but either this amount. would be able to claim the credit. More than 1.7m families are expected to benefi t. Th e Government says that, under the current in- come tax structure, a couple with two children Th e Government estimates that the measure would in which the spouses report a taxable income of reduce federal tax revenues by approximately CAD60,000 and CAD20,000, respectively, would CAD2.5bn in 2014–15 and CAD1.9bn in 2015– pay CAD1,210 more in federal income taxes in 16. Th e Family Tax Cut has been designed as a fed- 2014 than a couple with two children in which both eral non-refundable credit. It should therefore have spouses each report taxable incomes of CAD40,000. no eff ect on provincial revenues.

Th e fi rst CAD43,953 of taxable income is taxed at Th e Government has also unveiled plans for an 15 percent. Taxable income of between CAD43,954 enhanced Universal Child Care Benefi t (UCCB), and CAD87,907 is taxed at 22 percent. which would replace the existing for the 2015 tax year and subsequent tax years. From In a scenario where one spouse earns CAD60,000 January 1, 2015, parents would receive a benefi t of in taxable income and the other earns CAD12,000, CAD160 a month for each child under the age of the fi rst spouse would fall in the 22 percent tax six, up from the current CAD100 a month. For bracket and the second in the 15 percent bracket. children aged between six and 17, parents would However, the value of non-refundable credits avail- get CAD60 per month. able to the spouse earning CAD12,000 would be greater than the tax payable, meaning that they In addition, the Government intends to increase would not pay federal income tax. the Child Care Expense Deduction dollar limits from the 2015 tax year. Under the changes, the Under the Family Tax Cut, the spouse earn- maximum amounts that can be claimed would in- ing CAD60,000 would be able to "transfer" crease from CAD7,000 to CAD8,000 for children CAD24,000 of taxable income to their partner. under seven, and from CAD4,000 to CAD5,000 Th is would bring their taxable incomes for the pur- for children aged seven to 16. For children who are poses of calculating the credit to CAD36,000. Th is eligible for the Disability Tax Credit, the amount would place both in the 15 percent tax bracket. would rise from CAD10,000 to CAD11,000.

If the Government succeeds in passing the neces- Prime Minister Stephen Harper said: "Our Govern- sary legislation, couples would be able to claim the ment is focused on helping hard-working Canadian

53 families make ends meet, by making important pri- spend on their priorities as a family. Our Govern- orities like childcare and after-school sports more ment is fulfi lling its promise to balance the feder- aff ordable. Under this plan, every family with chil- al budget. We are now in a position to fulfi ll our dren will have more money in their pockets, to promise to help Canadian families balance theirs."

54 TAX TREATY ROUND-UP ISSUE 104 | NOVEMBER 6, 2014

ITALY - KOREA, SOUTH

Ratifi ed Italy's ratifi cation of its DTA protocol with the Re- public of Korea was published in the offi cial gazette on October 29, 2014.

ITALY - VARIOUS

Ratifi ed

Italy's ratifi cation of its TIEAs with the Cook Is- lands and Jersey was published in the offi cial ga- zette on October 30, 2014.

MAURITIUS - MALTA

Signature

Mauritius and Malta signed a DTA on October 15, 2014.

SINGAPORE - UNITED ARAB EMIRATES

Signature

Singapore signed a protocol amending its DTA with the United Arab Emirates on October 31, 2014.

55 CONFERENCE CALENDAR ISSUE 104 | NOVEMBER 6, 2014

http://ntanet.org/images/stories/pdf/2014_nta_an- A guide to the next few weeks of international tax gab-fests (we're just jealous - stuck in the offi ce). nualconference_preliminaryprogram_sept11.pdf

THE AMERICAS INTRODUCTION TO US INTERNATIONAL TAX THE 5TH ANNUAL PRIVATE Bloomberg BNA EQUITY TAX, OPERATIONS AND COMPLIANCE FORUM Venue: Hilton Boston Downtown, 89 Broad Street, Financial Research Associates, LLC Boston, MA 02110, USA

Venue: Th e Princeton Club New York, 15 West Chairs: Maher Haddad (Baker & McKenzie), James 43rd St, New York, New York 10036, USA O'Brien (Baker & McKenzie), Colleen Romero (Baker & McKenzie), Julia Skubis (Baker & McK- Key Speaker: TBC enzie), Doug Stransky (Sullivan & Worcester).

11/13/2014 - 11/14/2014 11/17/2014 - 11/18/2014

https://www.frallc.com/conference.aspx?ccode=B945 http://www.bna.com/intro_boston2014/

107TH ANNUAL CONFERENCE ON PRINCIPLES OF INTERNATIONAL TAXATION TAX

National Tax Association Bloomberg BNA

Venue: Eldorado Hotel and Santa Fe Community Venue: Bloomberg LP, 731 Lexington Avenue, New Convention Center, Santa Fe, NM, USA York, NY 10022, USA

Chair: James Nunns, (President, National Tax Chairs: Mark Leeds (Mayer Brown), Daniel Mayo Association) (KPMG LLP)

11/13/2014 - 11/15/2014 11/17/2014 - 11/19/2014

56 http://www.bna.com/principles_newyork_2014/ 2014 CORPORATE TAX DEVELOPMENTS  THE YEAR IN REVIEW: CHICAGO 16TH ANNUAL EFFECTIVE HEDGE FUND TAX PRACTICES Bloomberg BNA

Financial Research Associates, LLC Venue: Baker & McKenzie, 300 East Randolph Street, 50th Floor, Chicago, IL 60601, USA Venue: Th e Princeton Club, 15 West 43rd Street, New York, NY 10036, USA Key Speakers: TBA

Key Speaker: TBC 11/20/2014 - 11/21/2014

11/18/2014 - 11/19/2014 http://www.bna.com/yearreview_chicago2014/

https://www.frallc.com/conference.aspx?ccode=B931 2014 CORPORATE TAX DEVELOPMENTS  THE YEAR IN INTERMEDIATE US REVIEW: NEW YORK INTERNATIONAL TAX UPDATE Bloomberg BNA Bloomberg BNA Venue: Baker & McKenzie, 452 5th Ave, New York, Venue: Hilton Boston Downtown, 89 Broad Street, NY 10018, USA Boston, MA 02110, USA Key Speakers: Maja Arcyz (KPMG), Paul Bagratu- Chairs: Maher Haddad (Baker & McKenzie), James ni (McGladrey), Bart Bassett (Morgan Lewis), June O'Brien (Baker & McKenzie), Colleen Romero Anne Burke (Baker & McKenzie), Fred Chilton (Baker & McKenzie), Julia Skubis (Baker & McK- (KPMG), Rob Clary (McDermott Will & Emery), enzie), Doug Stransky (Sullivan & Worcester) William F. Colgin (Morgan Lewis), among numer- ous others 11/19/2014 - 11/21/2014 11/20/2014 - 11/21/2014 http://www.bna.com/inter_boston2014/ http://www.bna.com/yearreview_newyork2014/

57 TREATY ASPECTS OF Chair: TBA INTERNATIONAL TAX PLANNING IBFD 12/1/2014 - 12/2/2014

Venue: Hilton Sao Paulo Morumbi, Av. das Nacoes http://www.bna.com/intro_sanjose2014/ Unidas, 12901, Sao Paulo, SP, 04578-000, Brazil INTRODUCTION TO US Key Speakers: Boyke Baldewsing, Jan de Goede INTERNATIONAL TAX  WASHINGTON DC 11/26/2014 - 11/28/2014 Bloomberg BNA http://www.ibfd.org/Training/Treaty-Aspects- International-Tax-Planning-0 Venue: Bloomberg BNA Conference Center, 1801 S. Bell Street, Arlington Virginia 22202, USA 7TH TAX PLANNING FOR R&D Chair: TBA Federated Press 12/1/2014 - 12/2/2014 Venue: Courtyard by the Marriott, 475 Yonge Street, Toronto, Ontario M4Y 1X7, Canada http://www.bna.com/intro_dc2014/

Chair: David W. Regan (KPMG LLP) TAXATION OF INTELLECTUAL PROPERTY 11/27/2014 - 11/28/2014 Bloomberg BNA http://www.federatedpress.com/pdf/TPRD1411-E.pdf Venue: Bloomberg LP, 731 Lexington Ave, New INTRODUCTION TO US York, NY 10022, USA INTERNATIONAL TAX  SAN JOSE Co-Chairs: Rob Bossart (Law Offi ces of Rob Bloomberg BNA Bossart), Paulus Merks (DLA Piper)

Venue: PricewaterhouseCoopers, 488 S Almaden 12/1/2014 - 12/2/2014 Blvd #180, San Jose, CA 95110, USA

58 http://www.bna.com/uploadedFiles/Content/ INTERMEDIATE US Events_and_Training/Live_Conferences/Tax_ INTERNATIONAL TAX UPDATE  and_Accounting/Conferences_-_Seminars/IPAc- WASHINGTON DC qReorgDec2014.pdf Bloomberg BNA

US INTERNATIONAL TAX PLANNING Venue: Bloomberg BNA Conference Center, 1801 S. Bell Street, Arlington Virginia 22202, USA Bloomberg BNA Chair: TBA Venue: Th e Houstonian Hotel, 111 North Post Oak Lane, Houston, TX 77024, USA 12/3/2014 - 12/5/2014

Key Speakers: Martin Euson (Ernst & Young LLP), http://www.bna.com/inter_dc2014/ Mitra Ghaemmaghami (Ernst & Young LLP), James Howard (Gardere Wynne Sewell LLP), Chris Lallo TAX FOR SHIPPING BRAZIL (Ernst & Young LLP), among numerous others Lloyd's Maritime Academy 12/1/2014 - 12/3/2014 Venue: Pestana Rio Atlantica, Avenida Atlântica, http://www.bna.com/taxplanning_houston2014/ 2964, Rio de Janeiro - RJ, 22070000, Copacabana, Brazil INTERMEDIATE US INTERNATIONAL TAX UPDATE  SAN JOSE Key Speakers: Luis Wolf Trzcina (KPMG), André de Souza Carvalho (Veirano Advogados), Werner Bloomberg BNA Braun Rizk (Zouain, Rizk, Colodetti e Advogados Associados), among numerous others. Venue: PricewaterhouseCoopers, 488 S Almaden Blvd #1800, San Jose, CA 95110, USA 12/4/2014 - 12/5/2014

Chair: TBA http://www.lloydsmaritimeacademy.com/event/ taxbrazil 12/3/2014 - 12/5/2014

http://www.bna.com/inter_sanjose2014/

59 US TAX ASPECTS OF INTERNATIONAL 4TH ANNUAL INSTITUTE ON TAX, ACQUISITIONS & REORGANIZATIONS ESTATE PLANNING AND THE Bloomberg BNA ECONOMY STEP Venue: Morgan Lewis Conference Center, 1 Mar- ket Street, San Francisco, CA 94105, USA Venue: Newport Beach Marriott Hotel & Spa, 900 Newport Center Drive, Newport Beach, Califor- Chair: Bart Bassett (Morgan Lewis) nia, 92660, USA

12/10/2014 - 12/11/2014 Chair: Mark Silberfarb (Chapter Chair, STEP OC)

http://www.bna.com/uploadedFiles/Content/ 1/22/2015 - 1/24/2015 Events_and_Training/Live_Conferences/Tax_ and_Accounting/Conferences_-_Seminars/IPAc- http://www.step.org/sites/default/fi les/STEP%20 qReorgDec2014.pdf OC%20Conference%20Brochure%202015%20 SCREEN%2026%20August%202014.pdf US INTERNATIONAL TAX REPORTING AND COMPLIANCE INTERNATIONAL TAX ISSUES 2015

Bloomberg BNA Practising Law Institute

Venue: 731 Lexington Avenue, New York, NY Venue: PLI New York Center, 1177 Avenue of the 10022, USA Americas, New York, New York 10036, USA

Key Speaker: Kyle Bibb (K. Bibb LLC, TX), Eytan Chair: Michael A. DiFronzo (PwC) Burstein (McGladrey, NY), Victor Gatti (KPMG, NY), James Hemelt (Bloomberg BNA, VA), Mar- 2/11/2015 - 2/11/2015 cellin Mbwa-Mboma (Ernst & Young LLP, NY), Mitchell Siegel (McGladrey, NY) http://www.pli.edu/Content/Seminar/Internation- al_Tax_Issues_2015/_/N-4kZ1z12a24?ID=223914 12/15/2014 - 12/16/2014

http://www.bna.com/reportingandcompliance_ newyork2014/

60 ASIA PACIFIC MIDDLE EAST AND AFRICA

PRINCIPLES OF INTERNATIONAL INTRODUCTION TO VAT TAXATION INCLUDING CROSSBORDER SUPPLIES, FINANCIAL SERVICES IBFD AND REAL ESTATE

Venue: Hotel Maya, 138 Jalan Ampang, 50450 IBFD Kuala Lumpur, Malaysia Venue: Hilton Dubai Jumeirah Hotel, Jumeirah Key Speakers: Bart Kosters, Jagdev Singh, Rachel Beach Road, Dubai Marina, Dubai Saw, SM Th anneermalai, Steve Towers. Key Speakers: Fabiola Annacondia, Ridha Hamzaoui 11/17/2014 - 11/21/2014 11/16/2014 - 11/18/2014 http://www.ibfd.org/Training/Principles- International-Taxation-2#tab_program http://www.ibfd.org/sites/ibfd.org/fi les/content/ita/ pdf/program/OC14DUBVAT%20Program.pdf

THE 3RD OFFSHORE INVESTMENT WESTERN EUROPE CONFERENCE SINGAPORE 2015

Off shore Investment 3RD ANNUAL EUROPEAN FINANCIAL INTELLIGENCE & Venue: Raffl es, 1 Beach Rd, 189673, Singapore INVESTIGATIONS CONFERENCE Off shoreAlert Chair: Nicholas Jacob (Wragge Lawrence Graham & Co) Venue: Th e Bloomsbury Hotel, 16-22 Great Rus- sell St, London WC1B 3NN, UK 1/21/2015 - 1/22/2015 Chair: David Marchant (Off shoreAlert, Miami) http://www.offshoreinvestment.com/media/up- loads/The%203rd%20OI%20Conference%20 11/10/2014 - 11/11/2014 Singapore%202015%20pgs%207-10%20(2).pdf http://www.off shorealert.com/conference/london/

61 PRINCIPLES OF INTERNATIONAL INTERNATIONAL TAX AUDIT TAX PLANNING FORUM 2014 IBFD International Tax Center

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

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

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

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

INTERNATIONAL TAXATION OF STEP OIL AND GAS AND OTHER MINING ACTIVITIES Venue: Pomme d'Or Hotel, Liberation Square, St Helier, JE1 3UF, Jersey IBFD Chair: Sir Philip Bailhache Venue: IBFD head offi ce, Rietlandpark 301, 1019 DW Amsterdam, Th e Netherlands 11/21/2014 - 11/21/2014

Key Speakers: Patrick Ellingsworth, Bart Kosters, http://www.step.org/sites/default/fi les/step-jersey- John Wells, Firas Zebian 22nd-international-conference.pdf

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

Venue: TBC, London, UK

62 Key Speakers: Jonathan Burt (Harcus Sinclair), Key Speakers: Antonio Russo, Tim Brierley, Danny Richard Frimston (Russell Cooke), John Barnett Houben, Michel van der Breggen, Chris Demetri- (Burges Salmon), Michael Sherry (Temple Tax us, among numerous others. Chambers), among numerous others. 12/1/2014 - 12/5/2014 11/25/2014 - 11/25/2014 http://www.ibfd.org/Training/Principles- http://www.iiribcfi nance.com/event/Tax-Planning- Transfer-Pricing-2 For-Non-Domiciles CAPITAL GAINS TAX CONFERENCE TAX AND THE FAMILY COMPANY & 2014 BUSINESS 2014 IBC IIR & IBC Financial Events Venue: TBC, London, UK Venue: etc. Venues, Th e Hatton, 51-53 Hatton Garden, London, EC1N 8HN, UK Chair: David Kilshaw (EY)

Key Speakers: Patrick Soares (Field Court Tax 12/2/2014 - 12/2/2014 Chambers), Pete Miller (Th e Miller Partnership), Paul Smith (Blick Rothenberg), Clive Weir (ALbert http://www.ifcreview.com/eventsfull.aspx?eventId=199 Goodman), among numerous others. OFFSHORE TAXATION CONFERENCE 11/27/2014 - 11/27/2014 IIR & IBC Financial Events http://www.iiribcfinance.com/event/Tax-Plan- ning-for-the-Family-Company-and-Business Venue: TBC, London, UK

PRINCIPLES OF TRANSFER PRICING Key Speakers: Patrick Soares (Field Court Tax Cham- bers), Emma Chamberlain (Pump Court Tax Cham- IBFD bers), Patrick Way QC (Field Court Tax Chambers), Philip Baker QC (Field Court Tax Chambers). Venue: IBFD head offi ce, Rietlandpark 301, 1019 DW Amsterdam, Th e Netherlands 12/3/2014 - 12/3/2014

63 EMPLOYMENT TAX PLANNING http://www.iiribcfi nance.com/event/off shore-tax- CONFERENCE 2015 planning-conference IIR & IBC Financial Events TREASURY FOR TAX PEOPLE Venue: etc. Venues, Th e Hatton, 51-53 Hatton IBC Garden, London, EC1N 8HN, UK

Venue: London, UK, TBC Key Speakers: Patrick Way QC (Field Court Tax Chambers), Teresa Payne (BDO), Nick Wallis (Smith Co-Chairs: David Hill (Grant Th ornton), Edward & Williamson), Rosemary Martin (Deloitte), Jenny Brown (Grant Th ornton) Wheater (Duane Morris), among numerous others.

12/9/2014 - 12/9/2014 1/28/2015 - 1/28/2015

http://www.iiribcfi nance.com/event/treasury-for- http://www.iiribcfi nance.com/event/Employment- tax-people-event Tax-Planning-Conference

PRIVATE CLIENT PROPERTY 4TH IBA/CIOT CONFERENCE: TAXATION 2014 CURRENT INTERNATIONAL TAX ISSUES IN CROSSBORDER IBC CORPORATE FINANCE AND CAPITAL MARKETS Venue: Radisson Blu Portman Hotel London, 22 Portman Square, London W1H 7BG, UK International Bar Association

Key Speakers: Robert Smeath (Clarke Wilmott Venue: Holborn Bars, 138-142 Holborn, London, LLP), Michael Th omas (Gray's Inn Tax Chambers), EC1N 2NQ, UK Emma Chamberlain (Pump Court Tax Chambers), Marilyn McKeever (Berwin Leighton Paisner LLP), Key Speakers: TBA among numerous others. 2/9/2015 - 2/10/2015 1/22/2015 - 1/22/2015 http://www.ibanet.org/Article/Detail. http://www.iiribcfinance.com/event/ aspx?ArticleUid=39e22db5-3c06-4228-a829- private-client-property-taxation-conference ccb351190d1e

64 IN THE COURTS ISSUE 104 | NOVEMBER 6, 2014

THE AMERICAS

United States Th e US Tax Court heard the case of a Swedish parent company and its subsidiaries that acquired a number of security service and insurance com- panies in the United States, and created a captive insurance program in Ireland in order to insure the risks undertaken by the various companies at a lower cost. Th e IRS took issue with the US holding operation within the group deducting reinsurance premiums from its tax liability in the US and par- tially disallowed said deductions, which the group objected to in court. A listing of key international tax cases in the Th e relevant national legislation permits companies last 30 days to deduct necessary expenses incurred while con- ducting business, and the Tax Court recognized that insurance premiums can be considered as such, but However, the Tax Court dismissed the argument also that there is no statutory defi nition of insur- by relying on a past judgment which "held that ance. Th e Tax Court therefore undertook the mat- the existence of a parental guaranty by itself is not ter of the deductions by utilizing past court deliber- enough to justify disregarding the captive insurance ations to determine whether the actions under the arrangement." Th e Tax Court concluded that the captive insurance program constituted insurance. aspects of the captive insurance program adequate- ly shifted risk away from the group. Th at the transactions under question involved in- surable risk was not disputed by the IRS. Th ere- Th e Tax Court then considered whether the ar- fore, the fi rst condition to be examined was wheth- rangement had the eff ect of distributing "a large er the risk of loss was being shifted to the insurer, enough collection of unrelated risks, those that which the IRS argued had not occurred because are not generally aff ected by the same circum- the parental guaranty between the parent company stance or event" among policyholders. Given the and the insurer prevented any risk shifting from number of employees and the size of operations the group. of both the foreign and American operations,

65 the fi nding was that the volume of premiums re- WESTERN EUROPE ceived by the insurer was large enough to fulfi ll the condition. Germany

With regard to the last condition needing to be Th e European Court of Justice (ECJ) was asked satisfi ed in order to permit the deductions, which for a preliminary ruling concerning taxpayers who was whether the arrangement involved insurance owned units in investment funds, some of which in the logical and commonsense defi nition of were non-transparent, in Belgium. Th e taxpayers the word, the Tax Court stated that the insur- submitted an estimate of the value of the funds ac- ance company involved was legitimately acting cording to the stock exchange for income tax pur- and treated as an insurance company, and was poses, but the tax authority assessed the income providing "valid and binding" insurance poli- from the non-transparent funds on a fl at-rate basis cies charged at a reasonable premium. Accord- at 6 percent of the last fi xed redemption price, ac- ingly the Tax Court ruled that the group's in- cording to national tax legislation. surance company was providing actual insurance comprehensively. Th e taxpayers argued in court against the amend- ed assessment by claiming that the relevant legis- Th e Tax Court therefore concluded that the captive lation was a violation of the EU principle of free insurance program was successfully and legitimately movement of capital, and so the referring court providing insurance to the group of companies by approached the ECJ for an interpretation of EU shifting and distributing their risks to the insurance law with regard to the "fl at-rate taxation of income company, and that consequently the premiums paid from so-called non-transparent (domestic and) for- by the group were tax deductible expenses, despite eign investment funds". the IRS's assertion to the contrary. Th e ECJ established that the fl at-rate tax resulted Th e judgment was delivered on October 29, 2014. from the non-resident investment funds' inability to meet the communication and information re- http://www.ustaxcourt.gov/InOpHistoric/ quirements set out in the national legislation, and SecuritasHoldings,Inc.Memo.Buch.TCM.WPD.pdf that although a fl at rate may be more benefi cial to the taxpayers during periods where income gener- Tax Court: Securitas Holdings Inc. et al. v. Commis- ated by the funds is particularly high, the fact that sioner (T.C. Memo. 214-225) the fl at rate is a disadvantage cannot be overlooked due to any related tax benefi t.

66 Th e ECJ recognized that the relevant national legis- investment funds which do not provide such infor- lation had the eff ect of discouraging residents from mation, without allowing the taxpayers themselves acquiring foreign investment funds which could to relay the information from the funds to the tax not comply with the legal requirements and would authority, went "beyond what is necessary to ensure therefore be subject to less benefi cial tax treatment, eff ective fi scal supervision". resulting in a restriction of the residents' right to free movement of capital. In fact, the ECJ pointed out that under EU law the tax authority is able to approach the tax authority Th e ECJ then considered whether the restriction of another member state and ask for information could be justifi ed because the legislation fulfi lled "a pertaining to a taxpayer's activities and assets in legitimate objective in the public interest", which in order to assess their tax liability, and while mak- the present case the German Government argued ing such requests and allowing taxpayers to submit was "the need to safeguard the balanced allocation of their own gathered information may be adminis- the power to impose taxes between Member States." tratively complicated for the tax authority, such dif- fi culties are not enough to justify a restriction of Th e Government stated that in the interest of equal the free movement of capital according to case law. taxation, the national legislation was intended to unify the tax treatment of both direct investment Th e ECJ concluded that national legislation which and investment funds, and investment in resident imposed a fl at rate of tax on income from foreign in- and non-resident funds. However, although accord- vestment funds which do not meet the information ing to case law protecting the balanced allocation of and communication requirements usually met by power is a valid justifi cation, it does not apply in resident investment funds was a restriction of tax- this case because the legislation does not go so far as payers' right to free movement of capital that could to prevent any disruption to the balance or interfer- not be justifi ed, since there were other ways for the ence with the German tax authority's ability to tax tax authority to receive the necessary information. residents' foreign income. Th e judgment was delivered on October 9, 2014. Th e Government's second justifi cation was that the legislation was necessary for the sake of eff ec- http://curia.europa.eu/juris/document/document.jsf tive fi scal supervision and tax collection, but while ?text=&docid=158426&pageIndex=0&doclang=EN the legislation sets out the required information to &mode=lst&dir=&occ=fi rst&part=1&cid=112408 allow the tax authority to correctly collect income tax on investments, the ECJ was of the opinion European Court of Justice: Rita van Caster and Pat- that automatically applying a fl at tax rate to foreign rick van Caster v. Germany (C-326/12)

67 Italy legislation to take precedence where such action is necessary on the grounds of public policy, security Th e European Court of Justice (ECJ) was asked or health, arguing that the imposition of the tax for a preliminary ruling concerning taxpayers in on international winnings but not national ones Italy who earned income from gambling in oth- was designed to help prevent money laundering er countries which they did not declare (in fact and other social ills. having failed to fi le income tax returns for the period under dispute); when the liability for the Th e referring court therefore sought a preliminary 2007–2009 tax years was assessed, the taxpay- ruling whether it is incompatible with Article 56 ers objected to the tax authority's assessment of of the Treaty on the Functioning of the European said income for tax purposes. Under Italian law, Union (TFEU) on the freedom to provide services gambling winnings over a designated threshold to require Italian residents to pay tax on winnings are included in ordinary income for tax purposes, from casinos in other member states, or whether although this does not apply to winnings from such action could be justifi ed under the Article 52 Italian casinos, as these are already taxed under TFEU exemption, on public health, security or entertainment tax rules. policy grounds.

It was argued by the taxpayers that in addition to Th e ECJ found that the Italian national legislation the amounts of tax due having been incorrectly as- was discriminatory in its nature, and could not be sessed, the inclusion of the casino winnings earned justifi ed under Article 52 TFEU, arguing that: in other member states infringed European rules with regard to freedom to provide services (by mak- "As regards, fi rst of all, the objectives invoked by ing it less attractive for Italian taxpayers to under- the Italian Government relating to the prevention take gambling activity in another country), and of money laundering and the need to limit the fl ow that it infringed European principles of non-dis- of capital abroad or the arrival in Italy of capital crimination, as winnings obtained from casinos in whose origin is uncertain, it suffi ces for the Court, other member states and third countries faced a tax without needing to determine whether those ob- liability that would not apply were such winnings jectives could fall within the defi nition of public obtained from a casino in Italy. policy, to point out, fi rst of all, that, as is appar- ent from the Court's case law, it is not justifi able Th e referring court argued that the imposition for the authorities of a Member State to assume, in of the tax liability could be justifi ed under an a general way and without distinction, that bodies exemption to the EU rules governing the free- and entities established in another Member State dom to provide services, which permits national are engaging in criminal activity …"

68 It went on to observe: Upon appeal, the tax authority claimed that the le- gal basis for the minimum selling price of cigarettes, "Furthermore, to include in a general way which the tribunal relied upon in its ruling, was the benefi t of a tax exemption appears to diff erent from the legal provision which allowed be disproportionate, as it goes beyond what the Director-General to set the excise duty rate, is necessary to combat money laundering, and that EU law permits member states to impose other methods being available to Mem- a minimum excise duty on cigarettes. Th e referring ber States in this respect, such as Direc- court approached the ECJ for an interpretation of tive 2005/60 which aims to combat money EU law with regard to a diff erent excise duty rate laundering, and which applies to casinos for cigarettes sold at a low price. under Article 2(1)(3)(f) thereof." Th e ECJ identifi ed the EU legal provisions relevant Th e judgment was delivered on October 22, 2014. to excise duty imposed on cigarettes and stated that they were intended "to ensure the proper function- http://curia.europa.eu/juris/document/document.js ing of the internal market and neutral conditions f?text=&docid=158804&pageIndex=0&doclang=E of competition." Under one provision the excise N&mode=lst&dir=&occ=fi rst&part=1&cid=68341 duty rate must be the same for all cigarettes, but under the other provision member states can im- European Court of Justice: Cristiano Blanco v. Italy, pose a minimum duty rate as long as it adheres to Pier Paolo Fabretti v. Italy (C-344/13; C-367/13) the bands set out in the provision.

Italy According to the ECJ, the former supersedes the Th e European Court of Justice (ECJ) was asked for latter, so that if the decision to impose a minimum a preliminary ruling concerning a company which rate is made then the rate must be applied to all contested a decision by the Director-General of the cigarettes, and therefore because the national leg- Italian tax authority that set a higher minimum ex- islation in the present case is allowing for a higher cise duty on cigarettes sold at retail for less than the minimum excise duty rate on cigarettes sold at the most popular price. cheapest prices, it has the eff ect of distorting com- petition between cigarette sellers. Th e company, which manufactured and sold cheap cigarettes, argued to a tribunal that the rate intro- Various governments relied upon the notion that duced a minimum selling price for cigarettes, and the higher excise duty was intended to protect the tribunal agreed that a minimum price would be public health and discourage smoking, and the contrary to an ECJ judgment. ECJ agreed that taxation can be used eff ectively to

69 dissuade taxpayers from smoking, but stated that Th e Polish company (which later acquired the Cy- the taxation method must adhere to the EU legal priot entity) was of the opinion that the services provisions. Th erefore, because the minimum excise provided as part of its agreement with the Cypriot tax duty applied only to cigarettes sold for less than company were supplied to the company in Cyprus the most popular price and not to all cigarettes as and therefore subject to VAT in Cyprus. laid out by EU law, the ECJ ruled that the national law at issue violates EU law. However, the Polish tax authority decided that Pol- ish VAT should be due on the services, as it con- Th e judgment was delivered on October 9, 2014. sidered that they were supplied to a fi xed establish- ment of the Cypriot company in Polish territory. http://curia.europa.eu/juris/document/document. jsf?text=&docid=158424&pageIndex=0&docla Th e key provision in the case was Article 44 of ng=EN&mode=lst&dir=&occ=first&part=1&c the VAT Directive, the salient extract of which id=118789 provides: "Th e place of supply of services to a taxable person acting as such shall be the place European Court of Justice: Italy v. Yesmoke Tobacco where that person has established his business. SpA (C-428/13) However, if those services are provided to a fi xed establishment of the taxable person located in a Poland place other than the place where he has estab- Th e European Court of Justice (ECJ) has delivered a lished his business, the place of supply of those preliminary ruling concerning the place of supply of services shall be the place where that fi xed estab- services rendered to a company established in Cyprus lishment is located." by a Polish company whose website it maintained. The ECJ noted settled case-law concerning Ar- Th e case centered on whether the Cypriot com- ticle 9 of the Directive, which it said is also valid pany, through a contractual agreement to manage in relation to Article 44, that the most appro- the Polish company's website with recourse to that priate, and thus the primary point of reference company's human and technical resources, could for determining the place of supply of services be said to have had a "fi xed establishment" in Po- for tax purposes is the place where the taxable land. Th is was under consideration for the express person has established his business. It said: "It is purpose of determining the place of supply of those only if that place of business does not lead to a administrative and technical services to the Cypriot rational result or creates a conflict with another company, and therefrom whether they were liable member state that another establishment may to VAT in Poland or in Cyprus. come into consideration."

70 Suggesting that the supply should be taxed in Cy- that the infrastructure that it made available to the prus, it said: "Th e place where the taxable person Cypriot company did not enable the Cypriot com- has established his business as primary point of ref- pany to receive and use for its business the services erence appears to be a criterion that is objective, supplied to it by the Polish company. According to simple, and practical, and off ers great legal certain- the company, the human and technical resources ty, being easier to verify than, for example, the exis- for the business carried on by the Cypriot company, tence of a fi xed establishment." such as computer servers, software, servicing, and the system for concluding contracts with consum- "Moreover, the presumption that the services are ers and receiving income from them, were situated supplied at the place where the taxable person re- outside Polish territory. ceiving them has established his business makes it possible both for the competent authorities of the Concluding, the ECJ said that the national court member states and for suppliers of services to avoid has exclusive jurisdiction to verify such factors in having to undertake complex investigations in order order to assess whether the Cypriot company has to determine the point of reference for tax purposes." the necessary human and technical resources in Po- land for it to be able to receive services supplied by Th e ECJ further noted: "Th e place of business is the Polish company and to use them for the opera- mentioned in the fi rst sentence of Article 44 of the tion and maintenance of the website. VAT Directive, whereas the fi xed establishment is mentioned only in the following sentence. Th at Th e judgment was delivered on October 16, 2014. sentence, introduced by the adverb 'however,' can only be understood as creating an exception to the http://curia.europa.eu/juris/document/document.jsf general rule set out in the previous sentence." ?text=&docid=158645&pageIndex=0&doclang=EN &mode=lst&dir=&occ=fi rst&part=1&cid=129625 More generally, the ECJ said that in order for the Cypriot company to have had a fi xed establishment European Court of Justice: Welmory sp z.o.o. v. Po- in Poland it would need "a suffi cient degree of per- land (C-605/12) manence and a suitable structure in terms of hu- man and technical resources" in Poland to enable it Spain to receive the services supplied to it and use them Th e European Court of Justice (ECJ) was asked for its business. for a preliminary ruling concerning a government- owned company in Spain that was primarily in- In its argument, which the ECJ again highlighted volved in the construction and maintenance of prior to its conclusion, the Polish company said naval vessels for various countries including other

71 EU member states, although it also undertook such advantage to a company engaged in trading with activity for the private sector. other member states.

Th e company owned a shipyard on land in the Mu- A distinction was made by the ECJ between tax nicipality of Ferrol, the use of which was transferred treatment granted by the Government, which ef- by the Government in 2001 under an agreement fectively provides an advantage to specifi c taxpayers with the company, for a token sum. so as to elevate them above their competitors, and a tax benefi t provided to all companies without dis- Ferrol levied property tax on the land which ac- tinction; the former would constitute state aid, but cording to national law would be payable by the the latter would not. owner, but under the 2001 agreement, the tax lia- bility was also transferred from the Government to Ferrol argued that because the property tax exemp- the company. Both parties sought exemption from tion applied to government-owned companies, the the property tax by applying the relevant legal pro- company in the present case enjoyed a specifi c tax vision (which grants exemptions in various circum- benefi t that cannot apply to other companies in the stances, including where the immovable property same industry which were subject to the property in question is state-owned, is used for the purposes tax. Th e ECJ agreed that the company did have an of public security, or for defense purposes). advantage over its competitors, despite the Gov- ernment's contentions that the exemption was in- Th is exemption was disputed by Ferrol, and when tended to benefi t the Government rather than the the case was brought to court in Spain, it was con- company, and that it was compensation for the sidered that the exemption may constitute state aid company performing a public service rather than contrary to EU law, granting the state-owned fi rm an actual advantage. an unfair advantage likely to distort competition. Th e court therefore approached the ECJ for an in- Th e ECJ then stated that it is not necessary for terpretation of EU law in this area. the provided by the Government to actually distort competition in relation to trading Th e ECJ fi rstly pointed out that the relevant EU with other member states; to constitute prohibited Article prevents "any aid granted by a Member state aid it is enough that the legal measure was li- State or through State resources in any form able to aff ect trade and competition between com- whatsoever which distorts or threatens to distort panies. In the present case the company was deal- competition", and that aid is basically catego- ing with other member states through its business rized by involvement of the government which operations and competing with other companies distorts competition through the granting of an in the same industry for the same customers, and

72 therefore the exemption from property tax provid- to deliberate over the evidence and give a ruling ed a tax advantage that aff ected the company and whether this was indeed the case. its competitors. Th e judgment was delivered on October 9, 2014. Th e ECJ gave its interpretation of EU law which was that the property tax exemption provided to http://curia.europa.eu/juris/document/document. government-owned companies under national law jsf?text=&docid=158425&pageIndex=0&docla is capable of being considered prohibited state aid ng=EN&mode=lst&dir=&occ=first&part=1&c due to the tax advantage enjoyed by a company id=57391 dealing with other member states, and therefore could distort the competition between companies, European Court of Justice: Navantia S.A. v. Spain but that ultimately it was for the national court (C-522-13)

73 THE ESTER'S COLUMN ISSUE 104 | NOVEMBER 6, 2014

Dateline November 6, 2014 that the local population is deprived of choice and It's not easy to fi nd positives where Greece is con- forced to pay through the nose for sub-standard cerned, but this benighted country, which could products. Th at's progress! be teetering on the brink of economic oblivion once again, came out surprisingly well in a recent Looking a relatively short distance to the north, report on the taxation of ICT goods and services the announcement by Romania's Prime Minister – computers, cell phones, tablets, internet access, Victor Ponta that the country's 16 percent fl at tax and an array of other digitally delivered services is here to stay – for the time being at least – was – around the world. While other industries con- encouraging news for a country that has had its tinue to contribute more taxes to help pull Greece problems and remains under the watchful eye of out of its fi scal Slough of Despond, the ICT sec- the IMF. Romania's economic fortunes have see- tor is getting away rather lightly according to the sawed since the end of Communist rule in 1989. report by the Information Technology and Innova- With its dilapidated state-run industries domi- tion Foundation, which found that Greece is the nating an obsolete economy, the country initially only OECD country to feature in the top-20 of its struggled to adapt to a brave new world of mar- league table, with an overall tax and tariff burden ket forces and globalization. A painful recession of less than 10 percent. Tragically, but at the same ensued in the late 1990s, before an investment-led time unsurprisingly, the countries with the highest recovery brought with it strong GDP growth in the "digital drag" – those with the largest tax burdens noughties. However, corruption and red tape con- on ICT goods and services – are mostly lower- or tinued to permeate the business environment, and middle-income countries located in Africa, South the global fi nancial crisis hit the country hard, forc- Asia, and South America, with sub-Saharan na- ing Romania to sign on to a USD26bn emergency tions prominent among them, i.e., those countries assistance package from the IMF, the EU, and other that would benefi t the most from the productivity international lenders. Usually, this means taxes go gains accruing from greater use of technology and up, and Romania's fl at tax would normally be con- the resultant economic growth. It is estimated that sidered something of an extravagance by the likes in countries with the highest tax and tariff rates on of the EU under these circumstances. Romania the ICT sector, annual GDP-per-capita growth is though, seems to have got away fairly lightly on the reduced by between 0.7 and 2.3 percent. Th e re- tax front, with the IMF pressuring the country to port points out that governments like to slap tariff s tighten up tax administration and crack down on on ICT goods in the vain belief that it will spur evasion rather than increase taxes, or dream up new domestic production of these goods. All that tends ones. One only has to look elsewhere in Europe to to happen as a result of such policies, though, is see the correlation between high taxation and low

74 or no growth (France and Italy), and vice versa (Ire- I've written before about how Her Majesty's Rev- land). I'm skeptical that such reasoning fi gured in enue & Customs is determined to tear up the Mag- the IMF's analysis of the situation in Romania, but na Carta in the year of its 800th anniversary by it should hopefully serve the country well in the taking money and property before an off ense has longer-term, nevertheless. even been proven. Now its America's turn. As if FATCA wasn't bad enough, the Internal Revenue In an age when we are all seemingly expected to Service is making liberal use of CAFRA – the Civil pay the maximum amount of tax the law tells us Asset Forfeiture Reform Act of 2000 – to extract to, even though on many occasions the law is un- money and property from taxpayers it suspects of clear, just where the line exists between "aggres- tax evasion. And "suspects" is the operative word sive" (unacceptable) and "unaggressive" (accept- here. Originally intended to help the Government able) tax avoidance has yet to be resolved, and bear down on the money laundering activities of indeed could be drawn diff erently depending on drug traffi ckers, fraudsters and other undesirable which country is being looked at, and the gov- criminal types, in essence this law targets "structur- ernment of the day. But governments are also ing," a practice whereby off enders make a series of stretching legal boundaries at the moment, not small payments into a bank account to forestall the only in their desperation to get us to pay more mandatory report that banks have to make to the tax, but also to encourage us to behave like perfect Treasury on transactions of USD10,000 or more, children – er, I mean citizens – by following all thus in theory enabling said off ending criminals to the rules and not giving Nanny any trouble. As a remain under the Government's radar. "Structur- light-hearted digression, I was amused to read a ing" isn't, however, very easy to prove. So CAFRA few years ago about how municipalities in the UK allows the Government to use civil proceedings, were allegedly using surveillance laws intended to which have a lower burden of proof than criminal catch terrorists for all manner of trivial off enses, ones, against suspected lawbreakers, including tax if you can even classify them as off enses in the evaders. Although CAFRA tightened the original fi rst place. Examples included the family spied on statute, adding a modicum of protection for those to see whether they were lying about where they on the wrong end of this law, such as time limits lived, a trick supposedly used to get their children and the need for a seizure warrant from a District into the state school of their choice, and the case Court (although the accused doesn't have to be in- of the "Dustbin Stasi," when another municipal- volved in this procedure), the bottom line is that ity used the legislation to crack down on those it assumes guilt over innocence, and is an easy way awful bourgeois reactionaries who take a cavalier for the IRS to take what it thinks it is owed with- attitude to sorting regular trash from recyclables out needing to follow pesky due process. Unsur- (plastic in the garden waste? You're nicked mate!). prisingly, the route one must follow to claim one's

75 property back in the event that the Government same date in 2012. I wonder what Rousseau would makes a mistake is costly and time-consuming, and make of all this? Time, perhaps, to begin redrawing not many people bother. Which is probably why the Social Contract. net asset forfeitures jumped from USD1.7bn to USD4.2bn between end-September 2011 and the Th e Jester

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