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Global tax newsletter Welcome to the eighth edition of the When I introduced our first edition of So the future looks bright for the Global tax newsletter. this newsletter, I indicated the purpose globally minded tax professional who of this publication was to keep our keeps current on tax developments international tax practitioners and their around the world as multi-nationals will clients up to date on world tax seek the guidance and expertise from developments which impact businesses those who can demonstrate creative tax globally. Since that first edition we have thinking in a world of constant change. presented hundreds of tax developments This will be my last time to address of cross border tax interest around the you in this forum. I will be assuming new world. The pace of the developments duties within Grant Thornton has increased since that first edition and International Ltd (GTIL) and Francesca the theme has changed as you can see Lagerberg will succeed me as the Global from the Organisation for Economic leader – tax services. Co-operation and Development I look forward to reading future (OECD), Base Erosion and Profit editions of this newsletter under Shifting (BEPS) report article on page 3. Ian Evans
Global leader – tax services (Outgoing) Grant Thornton International Ltd Global tax newsletter No. 8: June 2013

I would also like to add my welcome First of all I would like to personally Wales and a former Council member of it is no wonder that tax policy is to our eighth edition of the Global thank Ian Evans for all of the the Chartered Institute of Taxation. I becoming more unified and the contributions he has made to the GTIL have had the good fortune to sit on a multinational is finding it more difficult tax newsletter.
global tax community during his tenure number of Her Majesty's Revenue and to manage the global effective tax rate.
as Global leader - tax services. Ian was Customs' committees and was one of the But as Ian suggests, with all of this the first to hold that position and he has tax practitioners invited to join the increased focus on cross border taxation, built the role to where it is today. Ian has Coalition's Tax Professionals' Forum.
there will be opportunities, such as set the bar high and will be a tough act For the past several years, I was the UK's thinking outside the tax practitioner's head of tax and worked with Ian on the home country and continuing to Under Ian's leadership, he established GTIL Tax Advisory Committee.
perform the taxpayer advocacy role.
a GTIL tax infrastructure on behalf of all I am currently active on a number of This is the role of this newsletter…to of the tax practices in our member firms tax policy committees and therefore find inform you of global tax trends and which includes many initiatives that have this publication of particular interest.
tax policies.
become part of our tax landscape. I look Today we see governments requesting In this issue we continue to forward to continuing to work with Ian more transparency from taxpayers as investigate cross border tax issues as he assumes new roles and well as being more transparent in regionally as well as for transfer pricing, responsibilities within GTIL. sharing ideas amongst themselves. These indirect taxation and developments in tax For those of you I haven't met yet, I trends have turned what was once a treaties. We are also increasing our joined Grant Thornton UK LLP as a government by government, issue by African tax focus within the EMEA tab.
direct entry partner in 2006 after 15 years issue, discussion into a multi An analysis by The Economist finds that of tax experience. I was a past Chairman government discussion with common over the ten years to 2010, no fewer than of the Tax Faculty of the Institute of issues being raised across the borders.
six of the world's ten fastest-growing Chartered Accountants in England and When you factor in some of the economies were in sub-Saharan Africa so OECD reports, such as the BEPS paper, it is an important area to keep aware of. which Ian mentioned together with the transfer pricing guidelines, hybrid Global leader – tax services (Incoming) mismatch arrangements, tackling Grant Thornton International Ltd aggressive tax planning and many more, Global tax newsletter No. 8: June 2013
OECD featured article Since our last edition, one of the more The report highlights many of the The tax authorities' armament to OECD: Addressing Base Erosion and Profit Shifting (BEPS)
significant developments is a report reasons multinationals are able to combat aggressive tax planning includes: Base erosion constitutes a serious risk to tax revenues, tax achieve BEPS, including; differences in transfer pricing; general anti-avoidance sovereignty and tax fairness for many countries. While there BEPS is the ability of a multi- jurisdictional taxing rights; transfer rules or doctrines; CFC rules; thin are many ways in which domestic tax bases can be eroded, a national to shift profits from high tax to pricing; hybridisation of entities, capitalisation; and anti-hybrid rules.
significant source of base erosion is profit shifting. The BEPS low tax jurisdictions. The most financing transactions, and leasing The OECD notes in its report that report presents the studies and data available regarding the publicised BEPS strategy was the double arrangements; use of conduit companies; there is no magic recipe to address the existence and magnitude of BEPS, and contains an overview of Irish manoeuvre where a multinational, and derivative instruments.
BEPS issues. Although the OECD is global developments that have an impact on corporate tax routes profits through its European ideally positioned to support countries' matters and identifies the key principles that underlie the headquarters in Ireland, whose laws efforts to ensure effectiveness and fairness taxation of cross-border activities, as well as the BEPS then allow the company to shift profits as is noted in the report, no doubt opportunities these principles may create. The report to zero-tax jurisdictions, such as differences in the interpretation and concludes that current rules provide opportunities to associate Bermuda or the Caymans.
implementation of OECD guidelines will more profits with legal constructs and intangible rights and The OECD issued a report which most likely create a new set of challenges obligations, and to legally shift risk intra-group, with the addresses ‘Base Erosion' and ‘Profit and opportunities for adjusting prior tax result of reducing the share of profits associated with and profit shifting Shifting' and presents studies and data strategies to comply with future cross substantive operations. Finally, the report recommends the (BEPS) is the ability regarding the existence and magnitude of border tax opportunities. development of an action plan to address BEPS issues in a BEPS. The report contains an overview of a multi-national to of global developments that have an shift profits from impact on corporate tax matters and high tax to low tax identifies the key principles that underliethe taxation of cross-border activities, as well as the BEPS opportunities theseprinciples may create.
Global tax newsletter No. 8: June 2013
How big a problem is BEPS? An
Addressing concerns related to base
• Transfer of manufacturing overview of the available data
erosion and profit shifting
operations together with a transfer • Data on corporate income tax • Key pressure areas of supporting intangibles under a cost-contribution arrangement the report indicates • Data on Foreign Direct Investments • Developing a global action plan • Leveraged acquisition with debt- the comprehensive • A review of recent studies relating push down and use of intermediate • Immediate action from our tax holding companies.
coverage of BEPS administrations is also needed.
by the OECD.
Global business models,
Current and past OECD work related
Data on corporate tax revenue as a
to base erosion and profit shifting
governance and taxation
percentage of GDP
• Tax transparency • Global business models and taxation • Tax treaties • Competitiveness and taxation A review of recent studies relating to
• Transfer pricing • Corporate governance and taxation.
• Aggressive tax planning • Studies of effective tax rates of MNEs • Harmful tax practices Key tax principles and opportunities
• Studies using data from taxpayer • Tax policy analyses and statistics for base erosion and profit shifting
• Tax administration • Key principles for the taxation of • Other analyses of profit shifting • Tax and development cost- cross-border activities contribution arrangement • Key principles and BEPS • Leveraged acquisition with debt- Examples of MNEs' tax planning
push down and use of intermediate holding companies.
• E-commerce structure using a two-tiered structure and transfer ofintangibles under a cost-contributionarrangement Global tax newsletter No. 8: June 2013
Isle of Man featured article Man's taxation policy has been a significant contributor to its economic success.
The Isle of Man taxation
member of the European Union but it in the Isle of Man and have taxable system and its use in
falls within the EU common customs income of more than £500,000.
The island has long been The Isle of Man has been, and continues The Isle of Man's taxation policy has committed to international standards to be, a significant economic success been a significant contributor to its of tax transparency and helped develop story that has now enjoyed over 29 economic success. The standard rate of the OECD template for tax years of continuous economic growth.
tax for individuals is 10% with a higher information exchange agreements The Isle of Man economy is well rate of 20% applicable for all income (TIEA). Since then, the Isle of Man has diversified and counts aviation, clean above £10,500 after generous personal remained at the forefront of efforts to tech, e-business, e-gaming, financial allowances and reliefs have been taken put in place tax co-operation This commitment to openness was services, manufacturing, maritime, space, account of. The Isle of Man also agreements, signing 27 TIEAs and 11 recognised by the G20, with the Isle of agriculture and tourism amongst its operates a cap on the maximum amount double taxation agreements thus far.
Man earning a place on the OECD successful industries. of tax payable of £120,000 for a single Such agreements have been signed with ‘white list' of countries. Responding to The Isle of Man, located in the Irish individual. There is no capital gains tax, Argentina, Australia, Bahrain, evolving world standards, the island Sea between the UK and Ireland is an wealth tax, stamp duty, death duty or Belgium, Canada, China, Czech moved to the automatic exchange of tax internally self-governing dependency of inheritance tax.
Republic, Denmark, Estonia, Faroe information on savings, under the EU the British Crown and is not part of the The standard rate of corporate Islands, Finland, France, Germany, savings Directive, in 2011.
United Kingdom (it is however, part of income tax in the Isle of Man is 0%. A Greenland, Guernsey, Iceland, India, In further recognition of its wish to the British Isles). Tynwald, the Island's 10% rate of tax applies to income Indonesia, Ireland, Japan, Jersey, cooperate on the international stage, the 1,000 year old Parliament, makes its received by a company from banking Luxembourg, Malta, Mexico, the Isle of Man Chief Minister announced own laws and oversees all internal business, land and property in the Isle of Netherlands, New Zealand, Norway, that they would be moving to a closer administration, fiscal and social policies.
Man (including property development, Poland, Portugal, Qatar, Seychelles, form of tax cooperation with the UK, The population of the Isle of Man is residential and commercial rental or Singapore, Slovenia, Sweden, Turkey, based on the same principles as the around 85,000 all contained within an property letting and mining & UK and USA. Further agreements with FATCA agreement which the Isle of area of 221 square miles (572 square quarrying) and, from 6 April 2013, on Italy, the Netherlands and Spain are Man was negotiating with the USA. The kilometres). The Isle of Man is not a full companies who carry on retail business currently being negotiated. new arrangements with the UK will also Global tax newsletter No. 8: June 2013
primary benefits for businesses…will be their ability to use the Isle of Man as a be put in place shortly. The Isle of Man information on the investments of can significantly reduce these issues and Treasury Minister said that after three UK resident taxpayers, which will provide a very effective route to the EU months of intensive negotiation he then be shared automatically with market. The Isle of Man has its own anticipated a package of measures with the UK by the Isle of Man tax electronic Entry Processing Unit (EPU) the UK that would include: authorities. Both governments will which is housed within the UK's • a bespoke Isle of Man disclosure work together to minimise the import/export computer system. This facility, based on the Liechtenstein burden on those businesses affected provides importers, exporters and their model, for UK taxpayers wishing to by the new system. In addition, in agents with the ability to electronically regularise their tax affairs. This will recognition of their different status declare goods imported to or exported customs and excise imports, no matter give those taxpayers a number of under UK tax law, people who are from the UK/Isle of Man. Accordingly where in the EU the goods arrive. In important assurances about what to resident but non-domiciled in the Isle of Man importers, exporters and summary, one of the primary benefits expect after they first contact UK will be subject to an alternative their agents are able to obtain fast for businesses from, for instance, the HMRC. The Isle of Man reporting regime under this electronic system generated customs USA, China, India or Canada, will be Government will assist the UK clearance without the need for the goods their ability to use the Isle of Man as a authorities in ensuring that the to physically travel to the Isle of Man.
base to operate in the EU.
facility is a success In respect of international trade matters, Advantages of using an Isle of Man • the extension of the double taxation the Isle of Man, by virtue of its unique company in this way are that Isle of For any further information regarding the Isle of Man, agreement between the Isle of Man Customs and Excise Agreement with Man companies are taxed at 0% for this and the UK to include the automatic the United Kingdom and European type of business, a permanent exchange of tax information between Law, is treated as part of the UK and EU establishment in the UK is avoided, the T +44 (0)1624 639481 the two countries for customs, excise and Value Added Isle of Man is treated as part of the EU • a new agreement between the Isle of Tax (VAT) purposes. for VAT and customs purposes, goods Man and the UK, closely modelled Non-EU companies which supply do not need to physically travel to the on a US FATCA agreement that will goods to the EU can often face Isle of Man and an electronic single result in Manx financial institutions complexities and costs when importing point of entry is provided for all providing a broad range of into the EU, but using the Isle of Man Global tax newsletter No. 8: June 2013
The German tax authorities will send Cross border pension out demands for Austrian pensioners to Angola's National Assembly recently submit a tax declaration dating back to introduced an advance enacted several corporate tax continues to be an EU 2005. The move follows the decision to tax ruling regime. The amendments which include: issue given the proximity of borders and modify German legislation. The new regime, which had immediate effect, is • new rules for companies involved in worker mobility.
legislation provides that German designed to provide greater certainty for mergers – providing for an A change to German tax law will pensions paid out to foreign taxpayers taxpayers and enhanced monitoring exemption from taxation of those require individuals currently in receipt will be subject to taxation in Germany.
capabilities for the tax administration.
operations if the transferred assets of a German pension to pay taxes on The Austrian Finance Ministry intends Administered by the Directorate of are registered in the account of the their income, with retroactive effect to challenge the decision to seek hefty Large Enterprises (DGE), it allows a acquirer at the same value they had from 2005. In 2010 a 2005 amendment back payments and to find a sustainable taxpayer to request a ruling that sets out in the merged company, and are to the German Income Tax Act entered solution to protect low-income the formal position of the tax amortised the same way into force. Individuals who are not pensioners in particular. administration on the taxpayer's • establishment of a withholding tax resident in Germany are subject to particular situation. A taxpayer rate of 6.5% on the Angola-source income tax in Germany if they receive a requesting a ruling must act in good income of companies that do not German pension. Almost three years faith, and must state the particulars of its have their head office or place of after this change – and just before the situation clearly so that the tax effective management or permanent statutory period of limitations for 2005 administration can make a fully establishment in Angola expired on 31 December 2012 – the informed decision on the request. The • non-allowable expenses to include German tax authorities began sending ruling can be applied only to the specific interest on loans from shareholders. notices to hundreds of thousands of the situation for which the ruling was 1.6 million recipients of German requested and is binding on the tax pensions who reside outside Germany.
administration only in relation to thespecific case and the correspondingprovisions of the tax law (this is notbinding for other taxpayers).
Global tax newsletter No. 8: June 2013
African Tax Administration Forum
The OECD and ATAF have signed a The Antwerp court and appeal court ruled for the ‘Memorandum of Co-operation', A Dutch national, had government and held that the pension was derived from The ATAF is a platform to promote and agreeing to work together to improve been working in the private employment. Under the treaty, pensions and other facilitate mutual co-operation among tax systems in Africa. Netherlands for a similar remuneration paid to a resident of a contracting state in African tax administrations (and other This memorandum was signed at the consideration of past employment – as well as annuities and relevant and interested stakeholders) Global Forum on Transparency and Upon retiring, he took up Belgian benefits, whether or not periodic, arising from pension with the aim of improving the efficacy Exchange of Information in Cape Town, residence in 1992. Part of his pension savings, pension funds, and group insurance funds – that are of their tax legislation and South Africa. The forum brings together relates to his work for the foundation in paid to a resident of a contracting state will be taxable only in 116 members, including 15 from Africa. the Netherlands and the pension was The ATAF brings together heads of Joint activities planned for 2013 – taxed in Belgium for tax years 2004 and At the request of the taxpayer, the court of appeal African tax administrations and their 2015 include technical events for African submitted a request for a preliminary ruling from the representatives to discuss the progress tax officials to share knowledge and The taxpayer appealed, arguing that constitutional court. made, challenges faced and possible new develop good practices. Co-operation under the Belgium-Netherlands tax The constitutional court held that the treaty's treatment of direction for African tax policy and efforts will include working on tax treaty, his pension should be taxable in pensions derived from a government service in the source state administration in the 21st century.
incentives for investment, transfer the Netherlands because it was derived is in accordance with the rules of international courtesy and ATAF works towards state building, pricing, exchange of information, from government service. The taxpayer mutual respect between sovereign states and that the right to governance, political economy and taxpayer education, and collection of argued that a pension derived from tax government pensions is reserved for the state that financed African revenue statistics and support employment with a foundation should the pension build-up. The work and programme priorities for the proposed Tax Inspectors without not be treated differently from a pension The constitutional court referred the case back to the of the Forum will be driven and Borders (TIWB) initiative. derived from government service that is referring court, which must determine whether the build-up managed by African countries, with the taxable in the Netherlands since both of pension rights occurred from private employment or from support of donor agencies, other tax pensions were funded (at least partially) government service and to what extent the state was in charge administrations and international by the Dutch government. Taxing his of financing the build-up of those pension rights.
organisations to reflect African needs pension in Belgium is, therefore, and strategies.
discriminatory according to thetaxpayer.
Global tax newsletter No. 8: June 2013
During the operating phase, and for a Advance or estimated tax The African region is offering more maximum of ten years, entities will be The Congolese Government has payments are merely a incentives than usual to spur economic granted a total or partial exemption introduced a new tax regime for holding prepayment of the growth in the region.
(depending on the investment's size and companies under the following current year's tax liabilities. From a tax Cameroon introduced several tax efficiency) from the following taxes: authority viewpoint, such payments feed incentives to boost private investment in • corporate income tax and other taxes • the company holds shares in other the treasury sooner rather than later the country. The following incentives on profits and incomes companies (domestic or foreign) that when the final tax payment is made. The are granted to companies during the are classified as companies limited by basis upon which the advance payment setup phase, which should not exceed • registration duties shares and the share value represents is calculated can also influence the fat or • taxes and other levies due on the more than two-thirds of the fixed lean situation of taxpayer revenue in the • exemption from registration duties purchase of equipment required for assets of the holding company on deeds related to setting up the the operating activities.
• the company holds the above- Corporate income tax advance company or increasing its share mentioned shares for at least five payments will be calculated, During the operating phase, losses commencing 1 January 2013, on the • exemption from VAT on purchases incurred may be carried forward for the • activities should consist only of the basis of forecasted tax profit instead of of services provided by non- five subsequent years (as opposed to management of share portfolios, being calculated on taxable profits of residents that relate to establishing four years under the standard treatment management services rendered to previous years. Taxpayers will pay affiliate companies, research and instalments on either a monthly or • exemption from VAT, other taxes development activities performed for quarterly basis depending on their level and customs duties, levied on the the sole benefit of a group of of net income from sales. Monthly import of equipment indicated in the companies, and management of the advance instalments are due the 15th day of the current month and for quarterlydepositors the 15th day following thequarter. Global tax newsletter No. 8: June 2013
To demonstrate the non-resident's circumvent the dividend/capital gain The Ministry of Finance income recipient's eligibility for the The Danish parliament distinction with a result that makes it lower 15% domestic withholding tax passed two bills (Bill no.
less attractive to use Denmark as an information on the rate, a valid identity card or a sworn 10 and Bill no. 49) that international holding company location. means to demonstrate the income statement can be used. Where the expand the scope of dividend Bill no. 49 prevents resident recipient's residence for the purpose of recipient of income claims the benefits withholding taxes.
minority corporate shareholders from application of withholding tax. Tax of a tax treaty, the withholding agent Bill no. 10 prevents non-resident transforming taxable dividends into tax- residence of the recipient of income, is a may apply the reduced tax treaty rates taxpayers from circumventing dividend exempt capital gains through determinant for both the application of withholding tax by internal liquidations, share redemptions, and the correct domestic withholding tax • the recipient of income has furnished reorganisations. Denmark does not levy repurchase strategies. The basic issue is rate (i.e. 35% or 15%), and the a valid tax residency certificate tax on capital gains on shares in Danish the same issue of the taxation of withholding tax rate under a tax treaty. confirming that the recipient is companies derived by non-residents dividends and capital gains. The residence of individuals who resident in the other contracting state unless the shares are attributable to a claim to be resident in the Czech • the recipient of income has made a permanent establishment in Denmark.
Republic shall be demonstrated by the sworn statement that the recipient is By contrast, non-residents are subject to relevant identification document. The the beneficial owner of the income a 27%, or lower, treaty rate of residence of companies incorporated in • all other conditions for applying the withholding tax on dividends from the Czech Republic shall be relevant treaty have been met. Danish companies. Non-residents that demonstrated by an excerpt from the intend to repatriate cash from a Danish relevant public register (e.g. company Where the recipient's eligibility for the subsidiary may thus be better off by register). Alternatively, a sworn lower 15% domestic withholding tax adopting a transaction that receives statement can be used as evidence of rate or for tax treaty benefits cannot be capital gains treatment rather than demonstrated, the 35% domestic dividend treatment. The bill negates withholding tax rate shall be applied. planning structures that attempt to Global tax newsletter No. 8: June 2013
The Finnish supreme court did not find The second case, involved a Finnish A Oy contended that the Finnish tax Two cases concerning any grounds to apply the statutory parent company, A Oy, that had a rules constitute a violation of the cross border tax issues income tax rate of the UK instead of the wholly owned subsidiary in Sweden.
freedom of establishment because they are of interest, the first tax actually paid when calculating the Following trading losses, the Swedish permit a Finnish parent company to use deals with portfolio dividends and the imputation credit granted to FIN Oy. subsidiary ceased trading in Sweden, a subsidiary's losses in a merger only if second with cross border loss In another case, the European Court though it would remain bound by two the subsidiary is located in Finland of Justice (ECJ) held that Finland's rules long-term leases. It was decided that the (provided the merger was not carried A company resident in Finland (FIN denying the transfer of tax losses subsidiary would be merged into its out solely to obtain a tax advantage). Oy), received portfolio dividends from a incurred by a non-resident subsidiary to parent in Finland; the parent would no The ECJ held that the rules do group's parent company resident in the its Finnish parent company in a cross- longer have a subsidiary or permanent constitute an obstacle to the freedom of UK (UK Co) during which time border merger do not violate the establishment in Sweden as a result of establishment because the inability of a Finland applied an imputation credit freedom of establishment unless the resident parent company to use a non- system. The assets of UK Co consisted parent is not allowed to show that the The Finnish parent asked the Finnish resident subsidiary's tax losses when it of dividends it received from its non-resident subsidiary has exhausted tax authority if it could deduct the merges with that subsidiary, is liable to subsidiaries running the business of the possibilities of taking those losses Swedish subsidiary's tax losses once the make establishment in the non-resident merger was carried out. The Finnish tax state less attractive and to deter the The issues were whether Finland, authority denied the request on the parent from setting up subsidiaries there. when calculating the imputation credit, grounds that the Finnish tax rules do not should take into account: allow the use of losses, if the losses are • the statutory income tax rate instead from a business activity in another of the tax actually paid member state that is not subject to • the corporate income tax paid by the subsidiaries of UK Co.
Global tax newsletter No. 8: June 2013
A new tax on database collection
A new definition of permanent
As part of an effort to The report proposes the creation of a establishment for the digital economy
Currently, there is a raise more tax revenues new tax on the use of data that has been In order to more effectively attribute 100% exemption on from large Internet collected from the systematic profits to a permanent establishment, the dividend and capital companies, the French government is monitoring of web usage on the French report proposes a number of measures.
gains income received from a studying the feasibility of measures These measures are as follows: corporation by another corporation proposed in a new report on the taxation • applying (in some form) the concept regardless of its nature, foreign or of the digital economy, including a levy Adaptation of the research and
of ‘free work' of web users which, in domestic, and regardless of any holding on the collection of personal data. development (R&D) credit to the
providing their data, must be period or amount of shareholding.
The Colin-Collin report had been regarded as a source of revenue for In 2011, the ECJ decided in an commissioned by the government to According to the report, the current digital companies (i.e. the permanent infringement proceeding that the non- evaluate the rise of the digital economy R&D credit is not adapted to the digital establishment in France) refunding of German withholding tax and find ways to effectively tax economy. The report proposes to merge • the implementation of a virtual on dividend payments generated by multinational companies that pay little the R&D credit and the start-ups or permanent establishment for portfolio holdings of foreign corporate to no corporation tax in France despite innovative companies credit. companies that provide services investors is contrary to the Treaty on the their business activities there.
based on personal data collected Functioning of the European Union On 19 January 2013, the expert Promoting the role of the market in
from the systematic monitoring of (TFEU) and the European Economic commission submitted their official financing the digital economy
web usage on French territory. area (EEA) agreement. Since Germany report that states, the current tax The availability of capital is a critical taxes dividends paid to foreign legislation is not able to effectively tax factor for the development of the digital companies more heavily in economic this type of activity. The report gives sector. To stimulate the contribution of terms than dividends paid to domestic proposals to remedy this problem as this capital, the report contains four companies, it restricts the free summarised below: proposals to encourage the equity movement of capital provided for in financing of companies. article 63 of the TFEU and article 40 ofthe EEA agreement.
Global tax newsletter No. 8: June 2013
The upper house of Germany's parliament and the lower house decided The Budget for 2013 was presented to The government has The Icelandic parliament to insert a 10% minimum shareholding parliament by the Minister for finance published a list of the approved a bill to change requirement in the participation and economic planning. The minister Free Business Zones the withholding tax law exemption rule. The minimum 10% announced the following tax (FBZ). Different tax, social security and applicable on fixed income securities.
requirement is fulfilled if at least 10% of administration measures: vocational training contribution credits The change will abolish withholding tax the shares are held directly from the • to undertake a comprehensive and allowance are available for on interest and capital gains from beginning of the calendar year.
review of the tax exemption regime businesses operating in the designated Icelandic fixed income securities, for After the legislative modifications with the view to reducing the grant zones from 2013. both foreign and resident investors that entered into force, nothing changes for of such incentives The decree lists 903 business zones are issued by Icelandic financial those shareholders with a participation • to make changes to the income tax in towns and villages located in the least institutions or Icelandic energy of more than 10% and those with and anti-money laundering laws in developed parts of Hungary. A income from capital gains. However, accordance with recommendations designation is valid for five years but can Exemption will be granted at issuer those owning less (portfolio shares) be prolonged by the government. The and instrument level. In order to qualify must tax 100% of their dividend income • to initiate steps to expand the available FBZ benefits are: for the exemption, issuers must meet a at a corporate tax rate of 15% and an network of tax information exchange • a corporate tax credit for the set of specific requirements. The average trade tax rate of another 15%. promotion of development for issuance of the bonds must be done in • to establish a special unit that will investments in FBZ their own name and issuers must qualify undertake tax audits with the view to • a social contribution tax credit for as financial institution by meeting the detecting and reducing transfer employment in FBZ requirements set forth in the Act or, if • a vocational training contribution the issuer is an energy company, it will • to make improvements to the tax be subject to a different set of rules administration in order to facilitate under an Act on the taxation of energy compliance by taxpayers • to improve the system of VAT refunds and duty drawbacks. Global tax newsletter No. 8: June 2013
• the first €100,000 spend on R&D • expenditure includes direct and Ireland has long been can qualify for the credit on a full indirect costs in addition to capital Many countries with user friendly for volume basis: any spend above expenditure on related plant and worldwide taxation, that establishing soft tech €100,000 must be more than the allow the profits of a industries through tax incentives. The 2003 base year spend • a company's credit may be assigned foreign subsidiary to be deferred from Irish Ministry of Finance has opened a • the exemption from the base year to key employees taxation until repatriated, are finding consultation with interested parties on restriction would be increased to the • a scheme also exists in respect of locally based multi-nationals hoarding provisions that would increase research first €200,000 of R&D expenditure.
capital expenditure for R&D profits in offshore subsidiaries. Israel has tax incentives for small and medium-size There is no ceiling to the level of adopted new legislation which, if copied eligible expenditure over the 2003 elsewhere, would be a good approach to Ireland has a tax credit scheme for encourage both local investment and R&D, the key features of the scheme • unused tax credits can be carried homeward repatriation. A combination back and set-off against a company's of host country withholding taxes and • a tax credit of 25% on incremental prior year corporation tax liabilities home country foreign tax credit erosion R&D expenditure – in addition to thus generating a tax refund discourage homeward repatriations of the normal 12.5% trading deduction • where there is insufficient current or offshore profits.
• the scheme is based on incremental prior year corporate tax liabilities, Israel's legislators passed a law that spend and provides for expenditure the company can claim unused tax will reduce the amount of tax payable by on R&D that is in excess of that credits in cash over three years (in multinational companies seeking to company's R&D expenditure in the three instalments over 33 months distribute dividends or invest profits base year of 2003 to qualify for the from the end of the accounting abroad, in return for these companies period in which the expenditure is investing at least 50% of their profits in • the base year has been permanently the country.
set at 2003, making it effectivelyvolume based for new entrants Global tax newsletter No. 8: June 2013
Under prior law, a qualifying Foreign investors are only taxed on industrial companies profits were not the distribution of profits from the taxable until distributed as dividends.
Commission (EC) called investment fund. These untaxed profits authorities victorious However, this led to large scale profit for the development of are subject to a final 20% withholding attacks on taxpayers, tax retention by these companies. The innovative financing solutions, making tax. No further Italian taxation applies. authorities must play by the rules when government has therefore proposed a the creation of an efficient European Foreign investors are fully exempt enforcing collection in what it perceives one year lowering of the tax rate on venture capital market a reality. Italy has from withholding tax on the funds' to be delinquent taxes. The Kenyan profit distributions made by such now implemented an attractive tax profit distributions, if they are: High Court gave its decision against the incentive to stimulate investments in • resident in a country or territory tax authorities on this issue. The ‘trapped profits' law will lower venture capital initiatives in line with the included in Italy's ‘white list' The taxpayer (GDC) entered into a the amount payable by multinationals principles expressed by the commission.
• entities or international bodies contract with another company by 40% to 60%, depending on how Italian investment funds are subject established in accordance with (GWDC Ltd.) to provide drilling much the company is willing to invest in to corporate income tax and thus international treaties implemented in services for ten geothermal wells. Israel. However, the tax rate of a entitled to tax treaty benefits. However, Kenya Revenue carried out an audit company benefiting from the trapped under domestic legislation income in the • institutional investors established in of the transaction and issued a tax profits law cannot fall below 6%. hands of Italian investment funds is a ‘white list' country, even if they are demand to GDC. The letter of demand The law specifies that the company exempt from corporate income tax, not subject to tax set out the amount due and requested must invest in ‘industrial enterprise, in provided that either the fund or the fund • central banks or bodies that manage GDC to pay to avoid additional interest.
assets used by the enterprise, in R&D or manager is subject to oversight. Italian a country's official reserves.
The letter did not draw GDC's attention in the salaries of new employees' and investment funds are exempt from the to the fact that it was an assessment and that tax benefits will only be available if business regional tax on productive the subsequent consequences of failure the company commits to reinvest at least activities. Therefore, no income taxation to comply. Kenya Revenue sought to half of the freed profits in Israel. The applies at the fund level (except for a enforce the tax due through an agency proposals will also change the tax possible final withholding tax). In treatment of dividend distributions from particular, dividends and capital gains such profits in the hands of the recipient.
are not subject to income taxes in thehands of investment funds. Global tax newsletter No. 8: June 2013
GDC filed a petition seeking to have X also requested a refund for the rest Regarding the Netherlands – the agency notice removed on the basis of the withheld DWT. X argued that the Switzerland income tax treaty, the AG that the letter did not meet the reporting and increased domestic law provisions, which grant a noted that neither the treaty, nor the requirements of a proper notice. taxpayer reporting full refund of DWT to resident, tax protocol, requires the Swiss authorities The court ruled that a notice to although sometimes burdensome, can exempt entities, read in conjunction with to exchange information regarding the enforce collection of taxes must clearly come to the taxpayer's benefit freedom of establishment laid down in beneficial ownership (in this case, the state the amount claimed, the legal particularly in terms of determining provision under which it is made and beneficial ownership for tax treaty The tax inspector disagreed, and The AG acknowledging that the draw the taxpayers attention to the denied the request as did the he District agreement did not cover portfolio consequences of failure to comply with The Dutch Supreme Court Court. The appeal court, however, sided dividends, and noted that the exchange the law. It must also state the (Advocate General (AG)) gave an with X and decided a refund should be of information requirements of the opportunity provided by law to contest opinion on the refund of dividend granted. The case was appealed to the agreement could only be activated in the withholding tax to an exempt pension Dutch Supreme Court.
case of ‘.tax fraud or the like'. The term The court held that the letter failed The DWT law provides that a Dutch ‘the like' refers to acts that have the same to meet the requirements of a proper The taxpayer (X), a Swiss resident resident entity, not subject to corporate degree of severity as that of tax fraud. As notice as it failed to draw attention to pension fund received portfolio income tax, may request a refund of any the case at hand concerned portfolio the consequences of non-compliance dividends from listed companies, withheld DWT if that entity is the dividends, it falls outside the scope of and notify GDC of the available resident in the Netherlands on which beneficial owner. The beneficial channels to review and appeal. dividend withholding tax (DWT) was ownership criterion also applies to non- This led the AG to propose that X's withheld. X was exempt from a tax on resident situations. In the specific treaty, situation resulted in no refund of DWT profits in Switzerland. there was no mutual assistance provision as the beneficial owner cannot be X requested, and received a refund of under which the Dutch tax inspector officially verified. dividend withholding tax on the basis of may request information from the Swiss the Netherlands – Switzerland income tax authorities about the beneficial and capital tax treaty (1951). This treaty ownership of the recipient (X).
entitled X to a refund of the tax as thewithholding rate exceeded 15%. Global tax newsletter No. 8: June 2013
• irrespective of whether or not the The commission believes the interest On 11 April, Norway's interest has been deductible for the The deductibility of deduction limitation rules only affect Ministry of Finance payer, the recipient of the interest certain interest payments interest payments to companies that are released a consultation income is taxed according to the was abolished in 2009 to not resident in Sweden. It believes that paper on a plan to limit the deduction of prevent certain types of tax planning similar problems may arise when interest on related-party debt. The main • the limitation is calculated separately using interest deductions on debts to interest is paid to a pension fund that is purpose of the proposal is to restrict for each entity in a group situation group companies provided the loan not domiciled in Sweden. earnings stripping, via intercompany • disallowed interest deductions may funded an intra-group stock purchase.
The EC considers that the rules be carried forward for five years Loans that funded external acquisition constitute indirect discrimination for Details of the bill are summarised as • the limitation applies to limited of shares were not covered by the rules companies and pension funds that are liability companies and other and the scope of the rules was extended not resident in Sweden and, accordingly, • parties are considered related if one companies and entities that are non- as from 1 January 2013 to cover all intra- the Swedish interest deduction party directly or indirectly owns or transparent for tax purposes. In group interest payments irrespective of limitation rules violate the freedom of controls the other party by at least addition, it covers partnerships and whether intra group or third party stock 50% of the capital or voting power.
CFC companies, as well as foreign purchases are made.
Sweden's Ministry of Finance issued Related parties may be resident in entities that have a taxable presence The EC stated that it had received a reply to the EC inquiry and essentially Norway or abroad. Hence, the in Norway (e.g. a permanent several complaints regarding the stated that Sweden considers that the limitation also applies to the establishment). Financial institutions Swedish interest deduction limitation interest deduction limitation rules do deductibility of interest expenses are excluded from its scope rules. The EC considers it unlikely that not restrict the freedom of establishment between two Norwegian companies • the new rules are proposed to be domestic intra-group loans can ever be because the rules apply regardless of • qualifying interest expenses in excess effective from 2014 but would also considered to have arisen in order to where the lender is domiciled and of 25% of the taxable income of an apply for interest expenses on loan obtain a significant tax benefit because regardless of whether the borrower has entity, subject to certain adjustments, agreements concluded before 2014 of exceptions for deductibility together limited or unlimited liability to tax. are not deductible for tax purposes with the low rates of Swedish incometaxation.
Global tax newsletter No. 8: June 2013
The cantonal tax authorities had The Cayman branch's main purpose The Swiss Federal granted an advance tax ruling was the financing of the Swiss group Supreme Court denied confirming that the Cayman finance companies that were eligible to claim full Economics has published treatment as a permanent branch constituted a foreign permanent tax deduction for interest paid. a new Decree, which establishment to a foreign finance establishment. Accordingly, the relevant As a result of collapsing the Cayman provides an opportunity for regional branch that a Swiss corporation financial assets (loans) and income permanent establishment, the entire management centres to operate in Turkey operated in the Cayman Islands. The (interest) was allocated from Switzerland profit resulting from the financing under a liaison office structure. A regional Swiss group financing performed with to the foreign permanent establishment, activities was subject to Swiss corporate management centre may perform the part-time employees was not deemed to and based on Swiss domestic law, coordination and management services be a sufficient enough business activity exempted it from Swiss taxation. for business units in other countries for to justify treatment as a foreign The Swiss federal tax administration the following areas: permanent establishment, which would did not accept this assessment and • establishment of investment and have been exempt from taxation in requested a decision that for federal tax management strategies purposes the branch's income be taxed The taxpayer involved a Swiss group in Switzerland.
that had outsourced its group financing The court confirmed the tax to a Cayman branch of a Swiss affiliate.
authority's view. It held that the overseas • after sales services The Cayman branch had hired four financing activities did not reach the • brand management people who each worked one day per level of business substance required for a • financial management week and were paid annual salaries.
foreign permanent establishment to be • technical support The group claimed that the financing recognised. The company's lean • research and development activities constituted a foreign structure in the Cayman Islands and the permanent establishment of the Swiss economic value created in the Cayman • testing of new products (including company and that therefore the profit Islands were contrasted with the laboratory activities) resulting from the financial activities considerable financial assets and the • research and analysis should be exempt from Swiss taxation. related income involved. • employee training.
Global tax newsletter No. 8: June 2013
The liaison offices are granted the license • there are no jurisdictions where UK • increasing the likelihood of evaders, to operate in Turkey for a period of HMRC has issued a taxpayers feel safe to hide their and those who make offshore three years. However, based on the new report in conjunction income and assets evasion possible, being caught, by decree, if a liaison office operates as a with the release of the • would-be offshore evaders realise investing in the skills of specialist regional management centre after the 2013 budget that describes its strategy to that the balance of risk is against staff, using the data generated by initial period of three years, an extension address offshore tax evasion. The report international agreements, and of an additional ten years can be granted.
defines offshore evasion as using a non- • offshore evaders voluntarily pay the investing in improved tools, Liaison offices cannot have any UK jurisdiction with the objective of technology and customer commercial operations, thus they are evading UK tax. This includes moving • those who do not come forward are understanding to identify, exempted from the major taxes in UK gains, income or assets offshore to detected and face vigorously understand and profile high risk Turkey. Accordingly, based on the new conceal them from HMRC; not enforced sanctions decree, a regional management centre declaring taxable income or gains from • there will be no place for facilitators • strengthening the severity of the operating under a liaison office will be overseas sources or taxable assets kept of offshore evasion.
punishments for those who are exempted from the following Turkish overseas; and using complex offshore caught, with tough penalties, the structures to hide the beneficial The report states that the way that possibility of criminal investigation • corporate income tax ownership of assets, income or gains. HMRC will achieve these objectives is and publishing the names of the • value-added tax The report states that HMRC is most serious evaders.
• income tax on salaries of building a new offshore evasion strategy, • reducing the opportunities to evade • the liaison office employees expressing a renewed commitment to offshore through initiatives to ensure • stamp tax.
clamping down on those who conceal compliance, international agreements income, assets and gains overseas to and multilateral action evade tax. The objectives of this newstrategy are to ensure that: Global tax newsletter No. 8: June 2013
The Australian resident taxpayer The taxpayer's FX gains and FX The globalisation of held a diverse asset portfolio with losses arise from currency transactions business has led to particular classes of assets, including that are entered into as part of its Administration of dealing in multiple international equity investments that strategy to hedge its exposure to foreign Taxation (SAT) issued a currencies due to supply contracts and were held in foreign currencies but were currency fluctuations affecting the new bulletin on capital gains provisions customer contracts. This has resulted in recorded in Australian dollars in the underlying value of its international in China's tax treaties. Such articles the management of foreign currencies taxpayer's financial statements. The equity investments. A currency hedging usually deal with the sale of shares but and resulting hedging contracts, the taxpayer adopted a mark to market transaction by its nature will result in often contain exceptions to treaty taxation of which is not often a well accounting system. FX gains and FX losses. These are a benefits for capital gains where the settled issue.
In relation to the international equity function of the direction in which the underlying assets of the company in The Australian tax Office (ATO) investments only, the taxpayer entered foreign currency moves against the which the shares were sold meet certain recently ruled favourably for a taxpayer into foreign currency hedging Australian dollar. with foreign currency hedging losses transactions to hedge its exposure to The FX losses are reasonably related Under most of China's tax treaties, (FX losses), arising from transactions currency risk in respect of the to the FX gains in this instance by being capital gains arising from the sale of entered into to hedge exposure to underlying capital value of these part of the hedging strategy shares of a company resident in a treaty foreign currency movements. The ATO investments through an actively implemented by the taxpayer in relation country can be exempted from tax held that the FX losses were ‘reasonably managed currency strategy applicable to to its international equity investments to provided that the following two tests related' to foreign currency hedging those investments. The taxpayer realised limit its exposure to FX risks. can be satisfied: gains (FX gains) in relation to the same assessable FX gains and incured FX • the target company is not a ‘land- losses arising from these foreign rich' company in which 50% or currency hedging transactions. No more of the share value consists foreign income tax was paid on the FX (directly or indirectly) of immovable gains. The FX gains and FX losses are property (the 50% test) from a foreign source. Global tax newsletter No. 8: June 2013
• the transferor company must hold, The bulletin introduces a look- Hong Kong
• procuring samples and relaying of directly or indirectly, less than 25% through concept for the 25% Hong Kong is used for the manufacturers terms and of the shares of the target company shareholding test. If a Singapore resident several purposes with (the 25% shareholding test).
indirectly owns the equity interest of a respect to a multi- • coordination activities, including Peoples Republic of China (PRC) national's Asian based operations. One negotiating and placing purchaser The bulletin provides that the scope of company through a nominee, but taxpayer, a well-known athletic shoe orders, between India and the immovable property includes exclusively enjoys the participation company used Hong Kong as a location operational and non-operational interest of the equity and substantially in which procurement services were • payment of the manufacturers on housing properties, land use rights, and bears the equity investment risks of the performed. Despite the efficiency of the behalf of the athletic shoe company attached fixtures. The bulletin also PRC. company, the Singapore resident Hong Kong operation, the taxpayer ran India. The invoices were issued in further describes the meaning of the can be treated as if it holds the equity into tax difficulties for services the taxpayer's name as the agent of three-year look back period for interest of the PRC company directly performed with respect to services determining the proper date, or dates for purposes of the 25% shareholding provided to a related party in India.
that should be used to apply the 50% test. The nominee can be an individual, The taxpayer was a Hong Kong However, the taxpayer did not have the test defining it as the 36 consecutive company, or other entity. resident and it functioned as a ‘buyer' authority to accept or reject prices or calendar months before the month of for the entities within the group of terms established between India and the the share transfer. companies including a related company manufacturers. In return for the above in India. The services provided by the services, the taxpayer received an arm's taxpayer to India included, amongst length agency service fee. The taxpayer contended in its Indian tax return that • sourcing new manufacturers and the fees did not qualify as fees for maintaining relationships with technical services and in the absence of a existing manufacturers permanent establishment in India, theincome was not taxable in India. Global tax newsletter No. 8: June 2013
The tax authorities disagreed and In its transfer pricing analysis, Z In the transfer pricing audit, the held that the fees did qualify as fees for India is well known as a chose the comparable uncontrolled price transfer pricing officer examined Z's technical services and thus, were taxable favourable location from (CUP) method to establish the arm's- documentation and agreed that its in India. The issue before the tribunal length price of its transaction with S.
transaction with S was at arm's length.
was whether the fees were in the nature outsourcing activities. In a recent ruling, The US company paid 85% of the The transfer pricing officer issued an of fees for technical services and thus, the use of an outsourcing operation amount it received from its external order to that effect and advised the tax taxable in India.
together with a tax advantaged company clients to Z as an arm's-length fee under assessing officer (TAO). The tribunal held that the fees were the CUP method, based on the The TAO challenged the amount of not for managerial, technical or The taxpayer Z, a provider of back functions performed and risks assumed Z's profits that were eligible for the tax consultancy services and as such did not office support services (excluding holiday under the ITA. The TAO constitute fees for technical services.
telecommunication services), was As a backup analysis, Z also adopted denied the tax holiday for profits in Fees for technical services had to involve established in a designated software park the transactional net margin method excess of 8% of Z operating costs, and some type of applied and industrial and was eligible for a tax holiday for the (TNMM) and selected a few assessed tax on that amount. sciences and in this case, the taxpayer profits attributable to its exported comparables from the public domain.
The tribunal ruled that profits from provided no such technical services. The average operating margin of the the supply of business outsourcing Z supplied its services exclusively to comparables was around 8%. Z's services to a related party by an Indian a related party in the United States (S).
operating margin was 1.5 times its company qualifying for a tax holiday are In terms of the business model, clients operating cost and was much higher fully tax exempt, even if the profit contracted with S to provide back office than the average operating margin of the margins are excessive because of services, and S subcontracted with Z for comparables. Z therefore determined operating efficiencies, provided that the the non-telecommunication portion of that its transaction with S was at arm's supply is at an arm's-length price. those services. S assumed the marketing, length. As Z was eligible for the tax contractual, and credit risks whereas Z holiday, it claimed that its profits from assumed the operating risks associated the transaction with S were exempt from with the delivery of its services. tax under the domestic income tax act(ITA). Global tax newsletter No. 8: June 2013
The tribunal sided with Z and Residence taxpayer victory
overruled the tax assessment. It held that Indonesia's Finance Two recent international A victory in a Japanese gift tax case of once the transfer pricing officer agreed Ministry has been developments are of the elder heir of the recently bankrupt with the taxpayer and accepted the looking into the granting interest, the bad news, Japanese consumer finance company has arm's-length nature of the transaction of tax incentives to encourage the earnings stripping, the good news, a been widely publicised. One aspect of with S the TAO had to have new production of environmentally-friendly taxpayer victory concerning residence.
the case that drew particular media evidence to invoke his powers under the ‘green' vehicles. The proposals have attention was the loss to the Japanese recently received parliamentary backing. state through the payment of around Further, the TAO provided no The proposals would allow tax Japan adopted earnings stripping JPY40Bn (USD450m) of interest and independent evidence to support his incentives for the manufacturing of low- provisions under which a corporation's penalties to the taxpayer in addition to conclusion that Z had generated more cost low-emission cars in Indonesia, that deduction for net interest expense paid the taxes repaid of around JPY133Bn than ordinary profits by virtue of the could, not only reduce fuel to a related party will be limited to 50% arrangement of its dealings with its consumption, but also make the country of adjusted income, effective for tax In the case the taxpayer had received into an Asian production base for such years beginning on or after 1 April 2013.
a gift of the company's shares during a The tribunal also found that Z had A related party is defined to be any: period when he was living in Hong significant operating efficiencies and The incentives for low-cost green car i) person with whom the corporation Kong, where he spent approximately low-cost advantages over some of the production form part of the Ministry of has a 50% of more equity two thirds of his time while spending Industry's plans for Indonesia to just over a quarter of his time visiting The tribunal therefore held that the become a regional production base, in ii) person with whom the corporation Japan and the remainder elsewhere. TAO could not adjust Z's profits for competition with Thailand and has a de facto controlling or The tax authorities had asserted that purposes of the tax holiday and erred in Malaysia, while increasing employment.
controlled relationship the taxpayer was resident in Japan assessing tax on a part of the profits. The Indonesian government has also iii) third party lender which is during the period concerned, despite his announced that companies involved in financially guaranteed by one of the relatively short period of residence in the exploration of oil, gas and geothermal resources are able to get taxincentives. Global tax newsletter No. 8: June 2013
The authorities asserted that he had an ‘address' in Japan and hence the gift Previously, tax residents • name of the individual who fails to The Labuan Financial of shares to him was a taxable in South Korea were comply will be disclosed to the Services Authority transaction by virtue of such residence.
required to file a foreign public effective from reporting year (LFSA) has issued Under changes to the law in Japan in financial accounts report form with the 2012 (filing due 30 June 2013) guidelines applicable to all Labuan 2000, where either the recipient or National Tax Service (NTS) between 1 • if the total amount not reported or international trading companies (LITCs) transferor of gifted assets has been June and 30 June of the following year if under-reported exceeds KRW 5 licensed to conduct international resident in Japan for five years tax can the aggregate value of cash and listed billion, criminal law penalties will commodity trading business in the apply to such assets even when they are stocks held in foreign financial accounts apply with a maximum of two years Labuan International Business and not located in Japan.
exceed KRW 1 billion on any day during imprisonment or a fine up to 10% of Financial Centre (LIBFC) under the In the instant case, the taxpayer's the tax year. Under the revised law, the the non-reported or under-reported Global Incentives for Trading (GIFT) lifestyle was 25% or less in Japan for reportable criterion is extended to more than the five year period.
include all financial assets including The guidelines that were effective The court ruling in the case indicated bonds, derivatives, etc. In addition, the from 1 January 2013, cover a Labuan a warning from the Japanese courts KRW 1 billion value measurement date international commodity trading against abusive interpretation of the tax has changed from ‘on any day during business involved in the trading of law by the tax authorities. In particular the year' to the ‘end of each month' for physical and related derivative the ruling noted the words of the the convenience of taxpayers in instruments of petroleum and Japanese constitution, that ‘…taxes determining the reportable financial petroleum-related products including should be assessed according to the accounts value.
liquefied natural gas (LNG), agriculture Additionally, new penalty provisions products, refined raw materials, have been introduced to enhance chemicals and base minerals. An LITC effective enforcement of the law, these can only deal with non-residents in anycurrency other than Malaysian ringgit.
Global tax newsletter No. 8: June 2013
Under the GIFT program, a general New Zealand
Under international accounting LITC is subject to a corporate tax rate of Although miles from standards (which required that the A proposed plan has been announced to 3%, but an LITC set up purely as an Europe, New Zealand is OCNs be split into their debt and introduce six pilot economic free zones in LNG trading company is entitled to a just as plugged into equity components, and interest northern, central and southern Taiwan. The 100% income tax exemption on attacking tax avoidance schemes as other recognised on the debt element), and a zones will offer foreign investors tax incentives including: chargeable profit for the first three years jurisdictions many times its size.
determination issued by the Inland • a reduced corporate income tax rate of 10% (previously of its operation, provided the company The appeal court has recently issued Revenue, ANZ treated the difference 17%) for multinational companies that set up their is licensed before 31 December 2014.
a judgment concerning a finance between the present value of the debt regional headquarters in the designated locations Other tax incentives applicable for structure which was held to be a tax component of the OCNs (NZD 38 • a 50% income tax exemption for foreign and Chinese avoidance scheme. The case involved million) and the cash redemption value workers in the first three years of their employment • a 100% exemption on fees paid to taxpayer (ANZ) funding its NZD 78 (NZD 78 million), i.e. NZD 40 million, non-Malaysian directors of the LITC million acquisition of two New Zealand as deductible interest expenditure. It • incentives for profits repatriated from overseas to • a 50% exemption on gross companies by issuing non-interest then amortised over the term of the enterprises established in the zones employment income of non- bearing, ten-year optional convertible OCNs. Australia treated OCNs as • incentives for the acquisition of patented technologies Malaysian professional and notes (OCNs) to its Australian parent equity and did not assess the amortised • incentives for research and development activities managerial staff, including traders company (AA). At maturity the OCNs • duty-free import and export of goods and raw materials could be redeemed in cash or converted ANZ's resultant tax loss was offset from and to the zones. • an exemption on dividends received into ANZ shares at the rate of one share against the taxable incomes of its New by or from the LITC Zealand group companies.
Subsidies for rents and a relaxed work permit policy for • an exemption on royalties received The High Court found that the qualified foreign workers will also be available. arrangement was a tax avoidance • an exemption on interest received by arrangement and therefore void. ANZ residents or non-residents from the appealed the High Court's decision. The appeal court upheld the High Court • a stamp duty exemption on all decision in favour of the commissioner.
instruments for Labuan businessactivities and the transfer of shares.
Global tax newsletter No. 8: June 2013
In 2013, the annual income tax In order to enjoy an alternative Many countries are exemption for SMEs will be increased From 1 January 2012, incentive, an enterprise must notify the raising corporate tax rates from THB150,000 to THB300,000, and companies were no local tax authority of the alternative CIT but are being criticised there will be a 15% tax rate on their longer entitled to enjoy incentives by the submission deadline by those who say raising tax rates lowers profits between THB300,000 and incentives based on the export criteria, as for the 2012 final CIT return. Where an government tax collections and lowering THB1m. The normal 20% tax rate a result of Vietnam's world trade enterprise has already declared/notified tax rates has the opposite effect. Who is would apply to incomes above THB1m.
organisation commitments. This is an alternative CIT incentive which is not right? Let's look at Thailand. Thailand's tax collections for the first somewhat similar to the US Foreign in line with circular 199, it is allowed to Thailand's cabinet approved a five months of the 2013 fiscal year Sales Corporation complaint several make an adjustment and submit a package of tax measures to provide beginning last October reached 28.06 revised notification to the local tax assistance to small and medium-sized billion US dollars, which is 13% or 3.21 The Ministry of Finance issued a enterprises (SMEs) and lessen the effect billion dollars more than targeted, circular describing the alternative of the government's minimum wage according to the Fiscal Policy Office. corporate income tax (CIT) incentives The Fiscal Policy Office reported available to these affected companies.
While the government has already that the collected taxes from all agencies The circular indicates the length of time lowered corporate tax from 30% to between October and February were that the replacement incentive is to run, 23% last year, and has adjusted the rate higher than targeted, reflecting an as well as, which regulations to apply.
even lower to 20% in 2013, there have economic expansion, especially The circular also provides guidance been calls for further help to small- regarding domestic demand and on the conversion of CIT incentives in medium sized entities (SMEs), with household income. some special cases and also provides a annual revenues of up to THB50m number of specific examples. (USD1.65m), to counteract the increasedwage costs caused by the introduction ofthe country's THB300 daily minimumwage on 1 January 2013.
Global tax newsletter No. 8: June 2013
The National Tax Administration Cisco Systems Argentina challenged some of the expenses SA (CA) entered into a incurred by CA outside of Argentina authorities issued a contract with Cisco (and also locally), arguing that they were Systems Inc (CI) under which CA unrelated to the activity developed in regulates the carrying forward of Government has approved new tax agreed to promote the sale of Cisco Argentina and therefore were not accumulated losses for financial years breaks to encourage investment in the products to distributors and customers deductible from the tax balance. The 2010 and 2011. The resolution has an nation's internet infrastructure.
located in Argentina and neighbouring Argentine National Tax Court held that immediate effect and establishes the Companies wishing to secure the tax countries. This promotion included the expenses a company incurred outside of period to set off tax losses as follows: breaks must submit investment plans by use of advertising, technical support and Argentina were tax deductible because • a three year period for: 30 June 2013, outlining proposed promotional materials. they were necessary to comply with – accumulated tax losses generated improvements to their 3G and 4G The service fee paid by CI to CA contractual obligations and were networks to improve mobile access to comprised of: (i) an amount equal to the therefore directly related to the taxable – tax losses generated as from 2011 the internet. Tax breaks provide for an sum of the costs incurred by CA, to stream of income.
• a five year period for: exemption to PIS/COFINS taxes (social comply with the contractual marketing – the hydrocarbon and mining security levies) and to industrial profits obligations, including employee salaries, tax, known as IPI. The concessions will professional fees, rents, depreciation, – new businesses registered after 9 not only benefit telecoms providers but and other expenses; plus (ii) 5% of those September 2011 with an also those firms providing the costs (cost plus). investment capital that exceeds equipment and necessary hardware and software infrastructure to facilitate theimprovements. In order to be eligible forthe tax breaks, companies mustcomplete their proposed projects by theend of 2016, and domestically source atleast 50% of the technologies andcomponents they intend to use. Global tax newsletter No. 8: June 2013
Imports (PIS) and (COFINS)
According to the court, a grossed up Any person paying a fee, Brazil's Supreme Court (STF) has ruled calculation of PIS-imports and The Canada Revenue commission, or other amount to a non- on a case of interest to Brazilian COFINS-imports and the inclusion of resident for services rendered in Canada importers. The case concerns the tax base ICMS into the tax base amounted to an is required to withhold and remit to the determination of two social welfare taxes unconstitutional extension of the withholding obligation arising on CRA 15% of the payment. levied on imports (PIS-imports and definition of customs value and should remuneration paid by a Canadian In either case, the CRA may provide COFINS-imports) as unconstitutional.
employer to a non-resident employee (a a waiver from withholding tax if it can The decision is important because it will The decision is important to foreign nonbinding technical interpretation). In be shown that the non-resident is not reduce the overall tax cost of importing exporters, local importers and Brazilian the ruling, the Canadian employer subject to Canadian tax on the payment products into the country. consumers as the overall tax burden on operated a business that had computer (for example, under a tax treaty). In its lawsuit, the Brazilian importer imports will be reduced by as much as servers physically located in Canada.
The CRA ruled that a person argued that the PIS-imports and 5%, depending on the ICMS tax rate in The non-resident employee was a performs the duties of his employment COFINS-imports tax basis was the state of destination of the goods. programmer/analyst who performed his in the place where he is physically unconstitutionally enlarged and that the duties from his home country by way of present. As such, if the employee is two taxes should be levied only on the an electronic connection to the physically located outside Canada when ‘customs value' of the imports, which is employer's Canadian computer servers. performing his employment duties, no legally established and composed of the Canada's tax system imposes Canadian tax should be withheld from cost, insurance, freight (CIF) value, the withholding obligations on payments the remuneration paid to that employee. freight tax (AFRMM), the financial for services rendered or performed in transaction tax (IOF) and other customs Canada. Employers are required to charges. There was no constitutional withhold and remit tax to the CRA for basis to include either a grossed-up remuneration paid to their employees, calculation or the ICMS (state sales tax) subject to exclusion for employees who in the tax basis for PIS-imports and are neither resident nor employed in COFINS-imports, the Brazilian Canada and whose remuneration does importer had argued. not reasonably relate to employmentduties performed in Canada. Global tax newsletter No. 8: June 2013
Foreign Account Tax Compliance Act Various banks requested that the The OECD recently (FATCA) with the US due to its desire The Supreme Court held resolution be declared void based on released a ‘phase 2' peer to rid itself of any association with that financial institutions general bank law provisions, under review report in respect facilitating the evasion of taxes. The must inform the tax which banks and financial institutions of the Caymans' regime, which stated information disclosed under FATCA administration (SII) on international are subject to bank secrecy and bank that the islands have demonstrated that will be cross-referenced against transactions carried out on behalf of confidentiality. Bank secrecy is standards for transparency and tax individuals' tax filings, and as such, if third parties according to a resolution applicable with regard to any type of information have been properly anyone thought a Cayman bank account which was upheld as lawful. bank deposits. This information may be implemented, and that the territory could be used to hide US taxes, it will The resolution issued by the SII provided only to the holder of the bank exchanges tax information effectively in most certainly now be very transparent.
provides that banks, financial account or its representative. Other practice. Among the many positive The Cayman Islands Monetary institutions and other resident entities bank transactions are subject to bank comments in the report, the OECD Authority has reported that it received must annually inform the SII on any confidentiality. This information may be states the tax information authority's 67 applications for new captive international transaction carried out on provided only to those who have a exchange process is ‘very well organised insurance licenses in 2012, with 52 behalf of third parties. These legitimate interest so long as it does not with many internal processes in place for licenses granted and the remainder transactions include remittances, foreign imply an economic damage for the handling exchange of information (EOI) scheduled for approval in 2013. This payments and capital inflows for an client. In the case of offshore companies, requests as well as the unit being well represents growth in applications of amount equal to or exceeding USD the income tax law specifically provides resourced in personnel, IT and technical 58% year-on-year, the strongest year in 10,000. For this purpose, an affidavit that the bank secrecy or reserve is not expertise. As a result, high quality terms of interest in captives since 2004.
must be filed electronically by 15 March responses are provided to partner Although Cayman is widely recognised The resolution was successfully jurisdictions and in 87% of cases the as a leading healthcare captive domicile, challenged before the lower court and time in which a final response was the 52 new formations came from a the appeals court. However, the provided was less than 90 days'.
broad range of sectors including life Supreme Court reversed the decision The Cayman Islands agreed to enter reinsurance, property and casualty and decided that resolution was lawful. into a ‘Model 1 Intergovernmental reinsurance, manufacturing and Agreement (IGA)' under the US technology, as well as healthcare. Global tax newsletter No. 8: June 2013
The main provisions that will affect Costa Rica
Colombia's congress companies and individuals carrying out Costa Rica notified the Mexico, as Chile has done a few years ago, is recently approved a business in Colombia include: OECD that it has ratified looking to introduce a new tax on mining comprehensive tax the ‘Convention on companies' profits in a bid to raise the reform that will substantially change the • permanent establishment Mutual Administrative Assistance in Tax country's tax-to-Gross Domestic Product (GDP) ratio, which international tax rules for individuals • income tax rate and tax base Matters', the most comprehensive remains the lowest among OECD member states.
and for companies carrying out business • capital gains tax multilateral agreement available for tax- A lower house parliamentary committee endorsed the new • general and specific anti-abuse rules cooperation and exchange of information. law, which would impose a 5% levy on pre-tax mining profits, The tax reform aims to update • exchange of information The convention was developed up from a 4% rate that had previously been under Colombia's tax rules to align them with • transfer pricing rules.
jointly by the OECD and the Council the income tax treaties it has concluded of Europe, and has been open to all The royalty would apply to net earnings before interest, thus far, which are mainly based on the countries since 1 June 2011. It helps taxes, depreciation, and amortisation (EBITDA). The OECD model tax treaty. Specifically, the counter cross-border tax evasion and definition of EBITDA in the income tax law refers to the tax reform amended the transfer pricing ensures compliance with national tax company as a whole, without regard to the nature of the rules, extended the income tax to foreign laws, while respecting the rights of income and expenses. The calculation of income and expenses capital investment portfolio income, and taxpayers. G20 leaders strongly would be based on taxable income and deductible expenses introduced thin capitalisation rules and encouraged all jurisdictions to sign the under the income tax law. provisions to tackle the use of tax The proposed bill also includes increased penalty havens, among other things. The convention provides a payments for duties or rights that are currently assessed on multilateral basis for a wide range of concession holders based on the size of the property. These administrative assistance, including penalties are imposed when a concession is not being information exchange on request, automatic exchange, simultaneous taxexaminations and assistance in thecollection of tax debts. The conventionwill enter into force for Costa Rica on 1August 2013. Global tax newsletter No. 8: June 2013
For UK tax purposes, the UK The tax incentive is granted if any one of The tax court held that a counterpart was treated as the owner of Uruguay has continued the conditions below is met: US bank's Structured the trust and, thus, was able to claim in issuing industry • the activity implements a deductions and credits against its UK specific tax incentives by ‘programme of development for Repackaged Securities (STARS) taxes. However, for US purposes, the providing tax incentives for the providers (of biotechnology transaction with a counterpart in the transactions were treated as a secured biotechnology industry. products and services' UK lacked economic substance and, lending arrangement, so that the US The corporate income tax exemption • the activity is carried out by a micro, therefore, did not give rise to foreign tax bank was the owner of the trust and applies to income derived from the small or medium company credits, deductible expenses or foreign- could claim foreign tax credits for the qualified activity as follows: • the taxpayer is a new company source income. Through a complicated UK taxes paid on the trusts income.
• a 90% exemption for tax years that created ad hoc to produce qualified system of subsidiaries and special- While the STARS transaction was began or will begin between 1 biotechnology products and/or purpose entities, the US bank structured to meet the foreign tax credit January 2012 and 31 December 2017 contributed assets to a trust, the trust requirements, it was actually an • a 75% exemption for tax years that sold its shares to the UK counterpart, elaborate series of pre-arranged steps will begin between 1 January 2018 The tax incentive does not apply and the UK counterpart loaned the US designed for generating, monetising and and 31 December 2018 automatically. Taxpayers must file with bank money through the trust. transferring the value of the foreign tax • a 50% exemption for tax years that the Ministry of Industry, Energy and credits between the US bank and the will begin between 1 January 2020 Mining, an affidavit describing the UK counterpart.
and 31 December 2021. activity. The requested ministry and aspecial commission have the finaldecision on whether to grant the taxincentive. Global tax newsletter No. 8: June 2013
Transfer pricing news Subsequently, the taxpayer filed According to official The Czech Supreme another additional tax return for the guidance published by an requiring all transfer Administrative Court 2007 tax year in which it declared a advisory committee from pricing reports to be filed rendered a decision substantially lower tax liability. The HMRC on 15 April 2013, a general anti- electronically. The Argentine tax concerning the burden of proof in taxpayer claimed that there was no abuse rule, soon to become law in the authority issued a general resolution transfer pricing disputes and the reason for the adjustment of the transfer UK, will not apply to many of the which established the new requirements application of transfer pricing methods. prices, as claimed in the 2008 additional recent transfer pricing related for taxpayers. The resolution states that The taxpayer was a company tax return. The tax authorities disputed controversies. However, abusive taxpayers must file a transfer pricing resident in the Czech Republic and they the reduction of the tax base and the tax arrangements which try to exploit report in a digital format through the tax filed an additional tax return in respect liability in respect of the 2007 tax year, particular provisions in a double tax authority's website, of its 2007 tax liability. In that return, the and argued that the taxpayer failed to treaty may still fall under the rule, which taxpayer declared that its tax liability for demonstrate that the transactions with is included in the 2013 finance bill.
pricing report must be translated by a 2007 should have been higher than its parent company, resulting in a lower The General Anti-Abuse Rule public translator if prepared in a originally declared, because the transfer tax liability, were at arm's length. The (GAAR) received support from the different language, and must include the prices in transactions with its parent lower court upheld the tax authorities' Prime Minister following public digital signature of the taxpayer, the company, were not at arm's length. The position. The taxpayer then brought the controversy over alleged tax avoidance independent certified public accountant, plaintiff paid the additionally assessed case before the Supreme Administrative amid dwindling revenues and slashed and the accountant's professional board.
corporate income tax in respect of the social services — including claims that The new requirement applies to fiscal large multinational companies were years ending 31 December 2012, or later.
using transfer pricing as a way to avoid For years ending 31 December 2012, the paying corporate income tax in the UK, deadline for filing a new report is despite doing substantial business in the August 2013.
Global tax newsletter No. 8: June 2013
The dispute concerned the following Accordingly, the taxpayer was expected • transactions involving a person that types of controlled transactions: to provide evidence of both the price in The Russian Federal tax is registered or resides for tax • purchase of raw materials from the a controlled transaction and the arm's service released guidance purposes in countries or territories parent company – the cost-plus length price. The court held that the included in the Russian Finance taxpayer did not meet its burden of transactions are controlled transactions Ministry's list of countries and • sale of finished goods to the parent proof in the present dispute. for Russian transfer pricing purposes territories that have a preferential tax company – the profit-split method The court further held that the when they are executed by an agent in regime or do not require the transfer pricing methods were not its own name but at the request of and disclosure of information about applied correctly. In particular, the court for the account of a principal.
The court ruled in favour of the tax found that the costs taken into The guidance indicates a transaction authorities. The taxpayer must consideration for the application of the is considered to be controlled where: The guidance indicates that if (under an substantiate all information stated in his cost-plus method included the plaintiff's • transactions involving a sale or agency contract) an agent at the request tax return; thus, the burden of proof is ‘share in the losses of the parent services executed with the of the principal and in exchange for a generally on the taxpayer. In an earlier participation of (or through the fee, undertakes legal and other acts in case, the Supreme Administrative Court In addition, the court found that the agency of) third persons that are not the agent's name but for the account of found that this principle does not apply application of the profit-split method considered related for tax purposes the principal, or in the principal's name in transfer pricing disputes. In such resulted in the transfer of 80% of the • foreign trade transactions involving and account, a controlled transaction disputes the burden of proof shifts to parent company's losses to the plaintiff.
the following commodities traded on the tax authorities.
The court found that these arrangements global stock exchanges: oil and oil In the present case, however, the were not at arm's length, and effectively products, fertilisers, ferrous and burden of proof was on the taxpayer, resulted in the transfer. nonferrous metals, precious metals, rather than the tax authorities, as it was and precious stones, if the aggregate the taxpayer who claimed that the annual amount of income resulting transfer prices used as a basis for its 2007 from all the transactions between the tax liability, declared in the 2008 parties exceeds RUB 60 million additional tax return, should be revised.
(about $1.95 million) Global tax newsletter No. 8: June 2013
If an agent executes a transaction To recognise as ‘controlled' a A Oyj and it did not have any other customers. Still, it was the with a third party in the agent's name transaction executed by the agent and a The case dealt with largest manufacturer in Europe in its line of production. A but for the account of the principal, the third party in the agent's name but for whether the transfer Oyj had the ownership of the products manufactured by B AS agent acquires the respective rights and the account of the principal, it is pricing between Finnish throughout the entire manufacturing process. obligations and a controlled transaction necessary to total the income that the A Oyj and its Estonian subsidiary B AS A Oyj also had an Irish subsidiary to which it sold at least exists. If the agent executes a transaction agent must transfer to the principal in had been in accordance with the arm's- a portion of the products made by B AS that required with a third party on behalf of and for connection with that transaction under length principle. A Oyj had included in finishing. The Irish subsidiary finalised and packed the the account of the principal, the an agency contract. The tax service the remuneration paid to B AS a portion products and resold them to distributors in its own name. principal acquires the respective rights stated that this transaction is subject to of the calculated location savings caused The transfer pricing of the manufacturing services and obligations that arise, a controlled transfer pricing provisions because a by the lower price level of Estonia purchased by A Oyj from B AS had been determined using transaction exists. third party incurs expenses as a result of compared with Finland. the transactional net margin method. The pricing method by The tax service said, to recognise a the transaction's execution. A Oyj the parent company of the which the remuneration was paid by A Oyj to B AS was based transaction executed by the agent and The tax service also stated that group operated the group's research and on a transfer pricing analysis carried out by A Oyj. The the principal as controlled, it is necessary taxpayers must notify tax authorities of development activities and had remuneration included a ‘location-neutral' cost-plus margin to total the income the agent received their controlled transactions executed in ownership of the technology and but also a location savings compensation. from the principal as an agency fee a calendar year. Therefore, a third party models used in the group's business The court held that the location savings principle did not under an agency contract and the that entered into a transaction with an activities. B AS owned the equipment apply in this particular case because the Finnish company, income the principal gained from the agent must notify the tax authorities of used in its own manufacturing activities which had transferred its manufacturing operations to Estonia, transaction executed by the agent with a that transaction if it is recognised as and had bought the equipment from A never had manufacturing activities in Finland that were Oyj in 2004, before which it had rented comparable to the operations of its Estonian subsidiary. the equipment from A Oyj. B ASoperated as a contract manufacturer for Global tax newsletter No. 8: June 2013
Consequently, Glaxo Canada Glaxo Canada's income was • the Supreme Court upheld the order of the court of appeal The Supreme Court of purchased ranitidine at prices fixed by increased by CAD 51 million. remanding the matter to the tax court for determination of Canada issued its first Adechsa (CAD 1,512-1,651 per kg) that The case has had a long judicial the arm's length price. transfer pricing ruling to were far in excess of the prices paid (CAD 194-304 per kg) to other • against the assessment, Glaxo The Supreme Court held that the purchase price paid by Glaxo Canada procured ranitidine, suppliers of ranitidine by other local Canada appealed to the tax court of Glaxo Canada for ranitidine under the supply agreement with an active pharmaceutical ingredient, from drug manufactures that sold the anti- Adechsa included a payment for the rights and benefits Adechsa S.A. Switzerland, as associated ulcer drug under its generic name.
• the tax court, substantially upheld received by Glaxo Canada under the licensing agreement with entity, under a supply agreement. The However, Glaxo Canada's Zantac sold at the reassessment made by the Glaxo Group Ltd. Therefore, the licensing agreement could ranitidine was used by Glaxo Canada to a higher price as compared to the other Minister in the prices paid by Glaxo not be excluded, as had been done by the tax court, in manufacture an anti-ulcer drug, which anti-ulcer drugs that were sold under Canada to Adechsa determining the arm's length price under the supply was sold in the Canadian market under their generic name of ranitidine. • Glaxo Canada appealed against this the Zantac brand name. This brand name The Minister of National Revenue order to the court of appeal The Supreme Court upheld the finding of the court of was owned by Glaxo Group Ltd. UK; reassessed Glaxo Canada for the tax • the court of appeal set aside the appeal that in determining what should be the arm's length another associated entity, and was made years 1990 to 1993, holding that the order of the tax court and remanded price for ranitidine purchased at higher than market prices by available for use by Glaxo Canada under excess consideration paid by it to the matter to the tax court to rehear Glaxo Canada, due regard should also be had to the benefit a licensing agreement. Adechsa for purchase of ranitidine was the matter based on the observations obtained by Glaxo Canada under the licensing agreement Under the licensing agreement, Glaxo not an arm's length payment that was to of the court of appeal which imposed a condition to make such purchases, and Canada was required to pay Glaxo be considered under section 69(2) • an appeal was made to the Supreme consequently remanded the matter to the tax court to make Group a royalty of 6% on sales in (subsequently replaced in 1998 with Court by the Minister against the that determination. Canada, and also to procure ranitidine section 247(2)), and that the excess order of the court of appeal. A cross- only from entities nominated by Glaxo payment was deemed to be a dividend appeal was also filed by Glaxo Group. In consideration, Glaxo Canada paid to Adechsa under section 56(2) and Canada against the order of the court obtained the right to use the Zantac liable to withholding tax under the of appeal remanding the case to the brand name and a clutch of other benefits and support services from Glaxo Group. Global tax newsletter No. 8: June 2013
In the decision of the Administrative criteria for a comparable that the A Brazilian multinational Council of Tax Appeals (CARF), the The French court of administration had not provided. The company underwent a majority of counsellors held in favour of appeal rejected the use of tax administration provided no precision the taxpayer, saying that there is no legal secret comparable in the about the identity of the comparables or restructuring in which it contributed basis to disregard treaty provisions, case of a large based Swiss multinational.
about how their cash pool management shares in a number of its offshore which must take precedence over Nestle Enterprises, a French function works, or about whether these investments to a Spanish holding national law. The CARF held that the subsidiary of the Swiss-based Nestle comparables or these cash pool company, which was subject to a special Spanish holding company had economic group, was appealing a 2011 ruling by management functions of the regime, under which revenue derived substance, evidenced by the fact that it the lower Administrative Court comparables include guarantees similar from controlled foreign corporations carried out its activities as a holding regarding the transfer of an internal cash to the guarantees of Nestle Finance was not taxed in Spain. The Brazil-Spain company and was not constituted solely pooling service to a Swiss affiliate. The tax treaty ensured that profits from the for the purposes of tax avoidance. Also, lower court, siding with the French tax In France, the government is not Spanish entity were not taxed in Brazil. Brazilian CFC rules should only reach administration, found the relocation of supposed to use a secret comparable The Federal Revenue Department the profits of the directly controlled the cash pool management function was because they hamper a taxpayer's ability (FRD) contended that the new entities (since the profits accrued by the a transaction that required arm's-length to defend itself by disproving the corporate structure served only as a indirectly controlled ones should be validity of the comparables offered by means to channel profits to Brazil while consolidated by the treaty). Thus the In overruling that judgment, the the tax authority. The court stated that avoiding tax and therefore lacked CARF considered the usual investment Paris appeals court said the tax one of the reasons why the comparable economic substance. The FRD position of a holding company as administration failed to prove its basis should not be acceptable is that the tax attempted to tax the profits accrued by sufficient evidence of economic for calculating a compensation amount authorities have not disclosed to the the indirectly controlled entities (held by for Nestle France's transfer of the cash taxpayer the identity of such the Spanish holding company). In pool management activity to the Swiss essence, the FRD argued that the foreign Nestle entity. The ruling lists required subsidiaries profits were taxed as earnedirrespective of any repatriation.
Global tax newsletter No. 8: June 2013
Indirect taxes news The following products and services The Dutch tax administration Although this location is would be exempt from VAT: The ECJ found that VAT determined that the VAT paid on the popular as a low tax • healthcare and education services paid by a group of Dutch pension services was not deductible by jurisdiction and often • transfers and leases of land and companies for the the group and issued a reassessment, referred to as a tax haven, it appears that residential buildings management of assets in a pension against which the taxpayer appealed.
the popular VAT has crept in the back • financial services pooling scheme is not deductible for the The company argued that the VAT was • social and community services deductible because it was an expenditure On 14 February, the Bahamian • agriculture and fisheries.
The case involves a group of related made for the benefit of its employees government issued a white paper on the companies that created a separate entity and that it was part of the overhead for proposed VAT that was announced in VAT would apply to every supply of to pool employee pension resources.
the company's taxable activity. the 2012-2013 budgets. The VAT, which goods and services made in the Bahamas The companies were all part of a tax For VAT to be deductible, the input would be charged at 15%, 10, or a zero in the course of a taxable activity carried group, but for Dutch legal reasons, the transactions must have a direct and rate, would be effective from 1 July on by a VAT registrant. The concept of a pension fund was a separate legal and immediate link with the output 2014. The standard VAT rate would be taxable supply includes a zero rated transactions, giving rise to a right of 15%, while export sales and supply for exempt products and The taxpayer, a member of the deduction. The right to deduct VAT international transport of goods and group, contracted with third parties for charged on the acquisition of input passengers would be zero rated. A pension management, administration, goods or services presupposes that the discounted rate of 10% would apply for auditing, and consulting services and expenditure incurred in acquiring them hotel services, including food and drink paid directly for those services. In 2001 was a component of the cost of the supplied on their premises. That rate is and 2002, the company paid an output transactions that gave rise to the the same as that of the current hotel approximate amount of VAT on right to deduct. occupancy tax, which the VAT would pension-related services and sought to replace. Of course this is a concession to deduct those invoiced payments against tourist trade.
Global tax newsletter No. 8: June 2013
The Dutch tax authorities argued Thus, the ECJ rule that while group The court agreed that the directive's that the costs related to the pension fund has no right to deduct the VAT paid on The ECJ held that wording does not limit potential did not have a direct and immediate link the management of fund assets, it may allowing non-taxable members in a VAT group to taxable to the outputs of the company while the deduct VAT paid on fees related to the persons to join a VAT persons, writing that the insertion of taxpayer, joined by the European setting up of the fund, the enrolment of group does not violate the VAT directive. ‘any' and the omission of ‘taxable' Commission, argued that the legal employees, and the assurance of timely The case involved a complaint by the clearly expanded the potential VAT requirement for providing employees payments into the fund. European Commission that Ireland's group membership to non-taxable with a pension meant that the costs were VAT consolidation act allows a non- entities. The court said that based on the a necessary component of its business. taxable person to join a VAT group. The wording there is no reason to exclude The UK intervened in the case to commission argued that this violated the non-taxable entities from a VAT group. argue that a limited portion of the costs, VAT directive and could lead to the such as those associated with setting up creation of an entirely non-taxable VAT the fund, should be deductible, but that group, a situation contrary to the goals the costs of the management of the fund of the VAT system. assets should not be. Of key importance in the case is the The ECJ sided with the argument wording of VAT directive, which says raised by the UK and reiterated legal that member states may allow ‘any and fiscal separation between the fund persons' to join a VAT group. The and the company that created it and held commission argued that although the that while the fund could deduct the word ‘taxable' does not appear between input VAT paid by group against the ‘any' and ‘persons', it is implicit that VAT due on its own activities, there is taxable persons, as defined in the VAT no direct and immediate link with the directive, is intended and furthermore, activities of the group.
that the use of the word ‘grouping'implies that all VAT group membersshould occupy the same VAT category. Global tax newsletter No. 8: June 2013
The tax authority (CRA) assessed In response to questions referred to A recent decision dealt the taxpayer on the basis that the fees it by the Supreme Administrative Court, with automated banking were simply fees for a license to use real purchased two aircraft the ECJ declared that the directive must machines (ABMs) in the property, by allowing CIBC to place its from a manufacturer in be interpreted as meaning that the zero taxpayer's convenience stores across machines in taxpayer stores for a fee. France and, instead of using them for the rate for which it provides, also applies to Canada. The taxpayer lost one issue and After reviewing the case law on purpose of carrying out international air the supply of an aircraft to an operator won the other at the tax court of ‘arranging for', the judge concluded that transport for consideration, company A which is not itself an ‘airline operating the taxpayer was simply not sufficiently designated company B as the user of the for reward chiefly on international The taxpayer had an agreement with involved with CIBC' s financial services aircraft. Company B organised routes' but which acquires that aircraft CIBC to place CIBC banking machines provided through the ABMs. All the international charter flights. After a for the purposes of exclusive use thereof in many of its stores. The taxpayer taxpayer did was provide space for the short period of time, A resold the by such an undertaking. In the light of received fees from CIBC based on the machines and this was a taxable supply aircraft to an undertaking registered in ECJ judgment, the Finnish Supreme fees that CIBC charged to non-CIBC of a license to use real property. Administrative Court declared that, by customers who used the machines. The The administrative court, Helsinki purchasing the aircraft, company A had taxpayer did not charge Goods and decided that, since it did not carry out not effected an intra-community Services Tax (GST) on these fees, taking international air transport itself, acquisition of goods for which it was the position that they fell within the company A had to account for VAT on liable to pay VAT.
definition of a ‘financial service' because the intra-community acquisition of the taxpayer was ‘arranging for' financial two aircraft.
services that CIBC provided. Global tax newsletter No. 8: June 2013
treatment of that service would then be VAT on the amount they received from Services supplied by an determined by what is deemed to be the A hotel business (the the taxpayer and the taxpayer's services entity established in principal element of the service. taxpayer) had bought were not subject to any VAT at all. That The Supreme Court observed that it accommodation in hotels result is not consistent with the resident business customer are zero could find no arguments for application established in other member states of the taxpayer's status as an intermediary. rated if the services by their nature are of the zero rate because a larger or EU and sold the accommodation, In first instance, the first-tier tribunal capable of being delivered from a remote smaller part of the service of unaltered, to travellers resident in the concluded that, in this respect, the location. As the services of lawyers that representing a client in judicial UK. The taxpayer argued that it acted as taxpayer acted as a principal consist of representing a non-resident proceedings will often consist of work an agent for the hotels and, (commissionaire) and, since it was client in judicial proceedings before a that can be done at a distance, but that consequently, its intermediary services established in the UK, had to account Norwegian court are to a certain extent work forms an integral part of the main were deemed to be supplied at the places for UK VAT under the special scheme linked to a specific place in Norway, in service. The Supreme Court concluded where the hotels were located, meaning for travel agents, i.e. the taxpayer had to so far as the lawyer represents his client that services that consist of representing that no UK VAT was due on its services. account for UK VAT on its margin (the at the hearing, the question was whether a client in judicial proceeding including The contracts under which the difference between the selling price and or not the remaining part of the service, the written preparatory work, must be taxpayer operated suggested that it acted purchase price of the rooms). However, in particular the preparatory work for considered to constitute a single service as an agent. However, its behaviour did the upper tribunal had reversed the first- the hearing, could be considered to be and that the principal component of that not support this position. The taxpayer tier tribunal's decision on the basis of the delivered from a distance, i.e. in the case service is representing the client at the set the price for which it sold the contracts under which the taxpayer of a non-resident business client, could hearing. Consequently, the entire service accommodation to the travellers and the be zero rated. Alternatively, the various is subject to 25% VAT. overseas hotels, not know the selling activities of the lawyer in the framework price, as the taxpayer only paid the of representing his client in judicial hotels an amount that was net of its proceedings could be considered to ‘variable commission'. Consequently, constitute a single service and the the hotels could only account for local Global tax newsletter No. 8: June 2013
The appeal court decided that the In addition, the coupon books did upper tribunal had been wrong to base A publishing company not qualify for exemption as goods that its decision on the contracts alone. It distributed a free weekly are consumed or destroyed, or lose their agreed with the first-tier tribunal that it local newspaper and once identity in the manufacture of other may be necessary to look beyond the a month, inserted coupon books into the goods (the newspapers). written contracts and have regard to all newspapers. The company also On those grounds, the Vermont the facts to establish the actual nature of distributed the coupon books by placing Supreme Court decided that the coupon the supply. On those grounds, the them on news racks. The coupon books books were not exempt from Vermont appeal court restored the decision of the contained only advertisements and did sales and use tax under the exemption first-tier tribunal and concluded that the not contain any news content. The for newspapers, which had the effect taxpayer hotels had to account for UK publishing company's salespersons that the publishing company had to pay VAT on its margin. solicited advertisements for the coupon sales tax on the cost price of the free books as well as for the newspaper. coupon books.
The coupon books differed from the newspaper in size, format and method ofdistribution. The coupon books wereprepared and printed separately fromthe newspaper (they were not part of thenewspaper print run) and they were notseparately indexed sections of thenewspaper. Thus, since they werefundamentally different from thenewspaper, the coupon books did notqualify for exemption as a componentpart of the newspaper. Global tax newsletter No. 8: June 2013
Under the treaty, a permanent In 2010, the commissioner of establishment is a fixed place of business taxation issued RCF a default through which a resident of a assessment that included a net capital contracting state, whether or not a legal gain from the sale of shares of some The Ministry of Finance in Russia issued entity, carries on business activities in A limited partnership formed in the AUD 58 million and imposed an a guidance letter clarifying that the the other contracting state. Cayman Islands (RCF), bought shares administrative penalty of 75% of the tax profits earned by a US resident legal The Russian tax code specifies that a in an Australian company that liability. In other words, the entity from the provision of web-based permanent establishment of a foreign conducted a gold mining enterprise in commissioner considered that the profit intellectual services to Russian clients are legal entity is a branch, representative Australia (SBM). In 2007, RCF sold of RCF was taxable in Australia and in taxable only in the US unless the office, division, bureau, agency, any some of its shares in SBM to unrelated the absence of an income tax return, activities result in the creation of a other structural subdivision, or any parties and realised a profit on the sale. issued a default assessment requesting a permanent establishment in Russia. other place through which a foreign RCF has one general partner, which tax payment at 30% of the gain The Ministry of Finance indicated legal entity regularly carries on business is also a partnership formed in the calculated by the commissioner. RCF that the business profits of a resident of in Russia, including: Cayman Islands, a number of limited lodged an objection to the assessment on a contracting state are taxable only in • the performance of works and partners, most of which are US the basis that the commissioner is not that contracting state unless the resident provision of services involving the residents. RCF's affairs were managed allowed to tax RCF and the gain was carries on or has carried on business in installation, assembly, adjustment, by a Delaware LLC and neither RCF, its calculated incorrectly. The the other contracting state through a servicing, and operation of manager or any of the partners were commissioner reduced the penalty to permanent establishment situated there.
resident in Australia. It could be 25%, but did not change the default If the resident carries on or has carried • the sale of goods from warehouses assumed that neither RCF nor any of its assessment. In 2011, the RCF's objection on such business, its business profits located in Russia partners paid income tax in Australia in to the assessment was deemed to have may be taxed in the other contracting • the use of subsoil or other natural respect of the sale. been automatically disallowed, as the state, but only to the extent they are relevant time period for the amendment attributable to the assets or activity of • the performance of other works, the had expired, and RCF lodged an appeal that permanent establishment. provision of other services, and other against the default assessment to the activities, except those listed in tax code article 306, section 4.
Global tax newsletter No. 8: June 2013
The court was asked to rule on two Capital gains of non-residents are The treaty allows Australia to tax The court agreed with RCF and subject to tax in Australia only if they gains realised by a US resident from a ruled that since RCF is not a US treaty • was the Commissioner able to issue relate to assets used in the business of a disposal of shares in a company, assets of resident, the treaty does not authorise an assessment to RCF or whether permanent establishment in Australia or which consist wholly or principally of Australia to tax the gain to RCF. the Australia – United States Income realised in respect of ‘taxable Australian real property situated in Australia. RCF submitted that the gain was Tax Treaty (1982) (the treaty) real property' (TARP) assets. Shares in Thus, if RCF is a US treaty resident, realised by the limited partners in RCF precluded him from doing so an Australian company are a TARP asset Australia will be allowed to tax the gain.
on the basis of the wording of the treaty, • was the commissioner able to issue where the sum of the market values of The commissioner argued that RCF the US treasury's technical explanations the assessment – whether the gain the company's TARP assets exceeds the is a US treaty resident on the basis that: realised by RCF was subject to tax in sum of the market values of the – partnerships must be recognised by Based on the valuations proved by Australia under the domestic company's non-TARP assets. the US as a resident RCF, the court found that the shares Australia does not have a tax treaty – the partnerships' income must be disposed by RCF were not a TARP with the Cayman Islands, but has a taxed in the hands of US resident asset and therefore the domestic Under the domestic law, RCF, by virtue comprehensive treaty with the US, provisions should exempt the gain from of being a limited partnership formed which says that a partnership will be a taxation in Australia. and operating overseas, is treated as a treaty US resident if the partnership is RCF, on the other hand, argued that as As such, the commissioner lost on non-resident corporate entity. Under the resident in the US for the purposes of its RCF is a foreign partnership and a flow- both questions. It is expected that the domestic rules, RCF was the taxpayer tax, provided that income is subject to through entity under the US tax law, it is commissioner will appeal to the full that realised the gain. The gain realised US tax as income of a resident, either in not a US tax resident, and the first Federal Court.
by RCF was a capital gain.
the hands of the partnership or in the residence requirement in the treaty hands of its partners. cannot be met and therefore RCF is nota treaty US resident. Global tax newsletter No. 8: June 2013
The interest is determined by If the income was classified calculating an annual fictitious income according to this article, the state of The Ministry of Finance on the deferred capital gains. This residence – Finland in this example – published a ‘letter ruling' fictitious income is calculated as 1.67% would have an exclusive taxing right on clarifying whether a Russian Administrative Court (SAC) delivered a of the deferred capital gains at the end of that income. Presumably, no other entity may deduct all the advertising costs incurred in 2012 judgment regarding the capital gains the tax year in question. That income is country except Sweden taxes deferred further to advertising services, provided by one of its taxation of privately owned houses and taxed at the general capital income tax capital gains with an additional fictitious shareholders resident in Germany. apartments. The judgment addressed the rate, which is 30%. income that is calculated as 1.67% of the The Ministry of Finance concluded that advertising costs tax treatment of fictitious income – The litigation involved a couple who deferred capital gain, and the incurred by a Russian company could be tax deductible namely, interest charged on deferred had moved from Sweden to Finland.
consequence would be double non- They had sold their home in Sweden • the participation requirement provided for in article 3 of According to Swedish tax law, the and bought a new one in Finland. They The SAC interpreted the concept of the protocol is fulfilled at the moment when the respective deferral of capital gains on privately were granted tax deferral in Sweden on fictitious income according to the expenses are recognised as tax deductible owned houses and apartments is the capital gains but were taxable Nordic tax treaty, concluding that it was • the respective deductible expenses are set at arm's length possible if the capital gain is used to buy annually on the fictitious income not income. The court stated that the a new home. From a fiscal point of view, calculated on the capital gains. fictitious income was merely a ‘technical this system permits considerable tax The SAC had to decide how this construction' created to allow the state However, in case the Russian tax authorities find out that the revenue to be deferred. Interest is income should be classified under the to earn interest on a deferred capital sole purpose of participation in the Russian entity pursued by imposed on the tax deferral.
multilateral Nordic tax treaty, which the German shareholder is to obtain the treaty benefits, the includes Finland and Sweden. The court above-mentioned provisions should not apply. concluded that the only potentiallyapplicable classification was ‘otherincome' (which is similar to article 21 ofthe OECD model tax convention).
Global tax newsletter No. 8: June 2013
South African tax treaties
From 1 April 2012, the STC was The SARS ruled that: The South African repealed and replaced by a dividends tax.
• dividends tax is a tax on an ‘element Revenue Service (SARS) Unlike an STC, a dividends tax is levied issued a binding general at 15% of a dividend paid by a company • dividends tax is similar to STC since ruling dealing with the question as to (exemptions apply). In the case of a it is also a tax on income B (Holdings) Limited is a company whether the ‘dividends tax' introduced dividend (other than a dividend in kind), • therefore, that dividends tax is incorporated in the British Virgin on 1 April 2012 is covered under South the liability for the dividends tax falls on covered under article 2 of the tax Islands. Its sole shareholder is HSBC Africa's tax treaties that were signed the beneficial owner of the dividend, Trustee (Guernsey) Limited (HSBC before that date. even though the tax is withheld by the trustee), a company incorporated under Prior to 1 April 2012, South Africa company paying the dividend. In the Thus, the SARS has taken the view that the laws of Guernsey. HSBC trustee had a secondary tax on companies case of a dividend in kind, the liability dividends tax is an ‘identical and holds the shares of B in trust for a (STC). An STC was imposed at the for dividends tax falls on the company substantially similar tax' to STC and that discretionary trust established under the second stage on a resident company on paying the dividend. all treaty partner states were informed of laws of Guernsey (G Trust). The the amount by which a dividend The question addressed, was both the introduction of the dividends beneficiaries of the G Trust include Mr declared exceeded the sum of incoming whether dividends tax is covered by tax and its similarity with STC. K, a UK citizen, but a long-time resident dividends accrued during the ‘dividend South Africa's tax treaties even though it of South Africa. Although Mr K is only cycle' – the dividend cycle being a may not be specifically named as a one of the beneficiaries under the trust, period that begins and ends each time a he controls the entire structure. Mr K dividend is declared. An STC was was charged with tax evasion and other therefore a tax on a company declaring a criminal offences in South Africa for the dividend and not a tax on the recipient years following those involved in this Global tax newsletter No. 8: June 2013
B owed tax, interest and penalties to ‘. an amount owed in respect of The defendants made several the SARS, totalling approximately USD taxes of every kind and description arguments including, that the request for 350 million for the years 1998-2000. The imposed on behalf of the contracting assistance was invalid, as it was made in amounts owing were the subject of states, or of their political subdivisions respect of years before the treaty became appeals in South Africa that were finally or local authorities, insofar as the A recent treaty case involved a Swiss- decided in 2010. The SARS alleged that taxation thereunder is not contrary to The tax treaty became effective with resident company involved in Mr K arranged for B to transfer its assets the convention or any other instrument regard to South African taxes (other international shipping through an agent to another BVI company. The SARS to which the contracting states are than withholding taxes) for tax years in India for the years 1998-99 to 2003- became aware that this other company parties, as well as interest, administrative beginning on or after 1 January 2003.
04. The Swiss company's profits were had over USD 10 million in a London penalties and costs of collection or The request for assistance made by the taxable under Indian income tax law, so bank account and requested assistance conservancy related to such amount'. SARS related to unpaid taxes for the the only issue was whether or not the from HMRC in collecting this amount The treaty provides that a 1998-2000 tax years, before the tax provisions of the India-Switzerland under the assistance-in-collection-of-tax contracting state receiving a request for treaty became effective. Income Tax Treaty (the treaty) provision of the South Africa-United assistance must accept the request and The UK High Court rejected the prevented India from taxing the profits. Kingdom income tax treaty (the treaty) . collect the claim as if it were a revenue defendants' argument. The court noted Until 2001, the treaty excluded The treaty was amended to provide claim involving its own taxes. The that the UK legislation implementing international shipping profits from the that the contracting states will provide revenue claim must be enforceable in the the protocol recited it was ‘for the scope of articles 7 and 8. Before 2001, assistance to each other ‘in the collection requesting state and the taxpayer must purpose of assisting international tax the tax treaty did not contain an ‘other of revenue claims' and that such not have any right to prevent the income' article. The combined effect of assistance is not limited to the taxes collection of the claim in the requesting According to the court, this these provisions was that the tax treaty covered by the tax treaty or to persons state, i.e. any appeal rights have been expression of purpose indicated the did not deal at all with international resident in one of the contracting states. absence of any intention to impose a shipping, with the result that profits The treaty defines the term ‘revenue temporal limitation with regard to the from international shipping were taxable enforcement of revenue claims other in accordance with the domestic law of than the condition that the claims must the contracting states. be enforceable in the requesting state. Global tax newsletter No. 8: June 2013
The situation changed in 2001 with The Indian Income Tax Appellate The ITAT found that the Indian the addition of the ‘other income' article.
Tribunal (ITAT) rejected these agent of the Swiss company was legally Article 22 of the treaty conforms to arguments. According to the ITAT, the and economically dependent on the article 21 of the OECD model, except intentions of the contracting states Swiss company. The Indian agent for the references to fixed base and changed with the addition of article 22 cleared inbound cargo and booked The taxpayer, an American citizen, had of the treaty and, according to the plain outbound cargo on the Swiss company's worked for Ontario Power Generation The Indian tax authorities made the meaning of article 22(1), the exclusion of ships. Accordingly, the agent could be (OPG) at its nuclear facility in Ontario argument that article 22 of the treaty did international shipping profits from considered to have and habitually for four years from 2000 to 2003. He not apply to international shipping articles 7 and 8 meant that such profits exercise the authority to conclude spent over 330 days in Canada in each of were not dealt with in those articles.
contracts binding on the Swiss company. those years. The taxpayer did not have a The tax authorities also argued that Having concluded that article 22 of However, the ITAT found that the post-secondary degree, but had worked the intentions of the contracting states the treaty applied to international ships owned by the Swiss company at nuclear facilities in the US for many were originally clear that international shipping profits, the ITAT turned its were not assets of the deemed agency years, although it is not clear in what shipping profits should be taxable in attention to whether the Swiss company permanent establishment in India or capacity. He worked on a contract basis accordance with domestic law, had a permanent establishment in India effectively connected to that permanent for Onsite Engineering (Onsite), a US unconstrained by the tax treaty and that and whether the right or property in establishment, as the agents had no company. Onsite arranged a contract this explicit understanding was not respect of which the profits were paid control of the ships. According to the with OPG for the taxpayer to provide altered by the addition of article 22 in was effectively connected with the ITAT, for the ships to be effectively engineering and management services on permanent establishment. connected to the permanent a boiler-cleaning project. The taxpayer establishment, it had to have economic and his wife bought a condo in Ontario ownership of the ships. in June 2000, but sold it in December of Accordingly, the tribunal held that the same year when his wife returned to the international shipping profits of the the US for medical care. The taxpayer Swiss company were taxable only in immediately bought another condo. His wife visited and stayed with him Global tax newsletter No. 8: June 2013
occasionally. In November 2002, he Capital Tax Treaty. The taxpayer was The tribunal agreed with the bought a home in Canada and continued clearly a resident of Canada for purposes taxpayer and reinstated the tax to live and work in Canada until 2005. of Canadian tax law, and a resident of deduction. It noted that the websites on The taxpayer and his wife retained the United States for purposes of the tax which the advertising appeared do not their US home, which he visited once a treaty because of his US citizenship.
The taxpayer paid Google Ireland and constitute permanent establishment's in month and on major holidays. He also Accordingly, the issue was the Yahoo US for sponsored search results India under the applicable tax treaties. maintained his gun club membership in application of the tiebreaker rules. and online advertising. The advertising The Yahoo and Google servers were Tennessee so he could continue his As the taxpayer had a permanent services offered by the search engines outside India and the payments were favourite hobby, skeet shooting. He had home in both countries and the taxpayer require the use of software codes and are made to the service providers outside bank accounts and credit cards in both had extensive personal and economic automated. The advertising server is a India, the tribunal concluded that those countries. He maintained his US medical connections to both countries, his centre computer or computer programme that companies' websites cannot be insurance coverage until November of vital interests could not be clearly stores and manages access to the characterised as permanent establishments 2003, when he became eligible for determined. Consequently, it became of Yahoo and Google in India. Ontario health insurance. On his US tax necessary to have recourse to the third The taxpayer withheld no tax on its The tribunal also ruled that the fees return, the taxpayer indicated that his tiebreaker rule, i.e. habitual abode. Based payments to Google and Yahoo, arguing were neither royalties nor fees for ‘tax home' was Canada. For Canadian on the habitual abode test as to where that the fees were not subject to tax in technical services. There was no right tax purposes, the taxpayer claimed to be the taxpayer stays more frequently, the India. During the audit of the taxpayer's given by Yahoo or Google to the taxpayer tax court found that the taxpayer tax return, the tax officer said the fees to use any property. Also, a service that The only issue in the case was normally lived in Canada and not in the were taxable in India as ‘fees for technical has no element of human intervention or whether or not the taxpayer was a United States, primarily because the services and royalties'. The officer also interface does not fall within the resident of Canada for purposes of the taxpayer worked and spent more time in disputed the taxpayer's claim that neither definition of a technical service. Canada-United States Income and service provider had a permanent The tribunal ruled that the fees were establishment in India. The tax officer not subject to tax in the hands of Google disallowed the taxpayer's deduction for or Yahoo and that the taxpayer had no the fees. The taxpayer appealed. obligation to withhold tax. As such, thefees were deductible.
Global tax newsletter No. 8: June 2013
As part of a series of measures to To preclude conflicts of interest and South Africa
open up the market and improve threats to independence, EU audit firms On 22 March 2013, the Parliament's Legal transparency, the committee backed the would be required to abide by rules South African Revenue Affairs Committee has proposed prohibition of ‘Big 4-only' mirroring those in effect internationally.
Service (SARS) released a voted to negotiate changes to a draft law contractual clauses requiring that the Most committee members saw the draft interpretation note that provides aimed at reforming EU audit services, so audit be done by one of these firms. proposed general prohibition on an indication of how the agency intends that only non-auditing services that PIEs would be obliged to issue a call offering non-auditing services as to apply thin capitalisation in the could jeopardise independence would be for tenders when selecting a new counterproductive for audit quality.
context of transfer pricing. prohibited; the law would also require auditor. To ensure that relations between They agreed that only non-auditing The application of thin capitalisation companies to switch auditors regularly.
the auditor and the audited company do services that could jeopardise applies to ‘affected transactions which The law would require auditors in not become too cosy, there would be a independence should be prohibited.
are broadly cross border transactions the EU to publish audit reports mandatory rotation rule whereby an They also approved a list of services that between connected persons that have according to international auditing auditor may inspect a company's books would be prohibited under the new law. been concluded on terms and conditions standards. For auditors of public- for a maximum of 14 years, which could For instance, auditing firms would that would not have existed if the parties interest entities (PIEs), such as banks, be increased to 25 years if safeguards are be able to continue providing had been independent persons dealing at insurance companies and listed put in place. The commission had certification of compliance with tax companies, the committee agreed that proposed six years, but a majority in requirements, but prohibited from The range of parties potentially audit firms would have to provide committee judged that this would be a supplying tax advisory services which falling under thin capitalisation has shareholders and investors with a costly and unwelcome intervention in directly affect the company's financial increased to include transactions detailed understanding of what the the audit market. statements and may be subject to between a non-resident and another auditor did and an overall assurance of questions from national tax authorities. non-resident's permanent establishments the accuracy of the company's accounts. in South Africa or, alternatively,transactions between a resident andanother resident's permanentestablishments located outside SouthAfrica. Global tax newsletter No. 8: June 2013
A taxpayer will be considered thinly In the secondary tax adjustment, the Over the past two years, income tax capitalised if it carries a greater quantity amount of the disallowed deduction The OECD has recently issued a report burdens have risen in 23 out of 34 of interest-bearing debt than it could (which arises as a result of the primary on personal taxation. New data shows countries, largely because a higher sustain on its own, the duration of adjustment) is deemed to be a loan by that across OECD countries the average proportion of earnings were subject to lending is greater than would be the case the taxpayer, that constitutes an affected tax and social security burden on tax as the value of tax free allowances at arm's length, or the repayment or transaction. This means that a taxpayer employment incomes increased by 0.1% and tax credits fell relative to earnings.
other terms are not what would have will have to calculate and account for to 35.6% in 2012. It increased in 19 out In 2012, only six countries had higher been entered into at arm's length. In interest income at an arm's-length rate of 34 countries, fell in 14, and remained statutory income tax rates for workers selecting cases for audit, SARS will on the deemed loan. Where the deemed unchanged in just one. on average earnings than they did in adopt a risk-based approach in which a loan has been repaid to the taxpayer, for The increases were largest in the taxpayer is considered to be of a greater example, by a refund of the excessive Netherlands, Poland and the Slovak The report provides details about the risk if the debt-EBIDTA (Earnings interest and the repayment took place Republic (mainly due to increased rates taxation of employment incomes and Before Interest, Taxes, Depreciation, and by the end of the year of assessment in and other changes to employer social the associated costs to employers for Amortisation) ratio exceeds 3 to 1.
which the primary adjustment was security contribution) as well as Spain different household types and at The effect of thin capitalisation is made, the primary adjustment will not and Australia (due to higher statutory different earnings levels on an addressed by means of two adjustments: be treated as a loan. income tax rates). internationally comparable basis, key the primary adjustment and the This follows substantial increases in factors in whether individuals seek secondary adjustment. In the primary 2011 and since 2010, the tax burden has employment and businesses hire adjustment, any interest, finance increased in 26 OECD countries and charges, or other consideration for or in fallen in seven, partially reversing the relation to that portion of the non- reductions between 2007 and 2010. arm's-length portion of the debt must bedisallowed as a deduction in determiningthe taxpayer's taxable income. Global tax newsletter No. 8: June 2013
The tax burden is measured by the The following information would be ‘tax wedge as a percentage of total On 3 April 2013, the The commission has set up the ‘Platform labour costs' or the total taxes paid by Australian Treasury • the company's name and Australian for Tax Good Governance, Aggressive employees and employers, minus family released a discussion Tax Planning and Double Taxation' (the benefits received, divided by the total paper outlining three steps to give effect • the company's total revenue labour costs of the employer. Taxing to the government's intention to (including amounts that are exempt The platform will allow for a wages also breaks down the tax burden improve the transparency of the from tax or receive other dialogue on issues related to good between personal income taxes, country's business tax system. concessional treatment) governance in tax matters, fighting including tax credits, and employee and Under the first measure, the • the company's taxable income and aggressive tax planning and preventing employer social security contributions. Australian revenue authorities would be the amount of tax payable (meaning double taxation in which experience and required to publish each year presumably just the Australian tax expertise are exchanged and the views of information taken from the tax returns all stakeholders are heard. of companies with annual revenue of The platform will comprise of AUD 100 million or more and The second proposal would amend member states' tax authorities and up to companies liable for minerals resource legislation to protect the publication of fifteen business, civil society and tax rent tax (MRRT) or petroleum resource aggregate revenue figures in cases where practitioner organisations. rent tax (PRRT) – that is, companies the identity of specific taxpayers could involved in the extraction of coal, iron be guessed from that information. ore, oil and gas. The third measure involves adjusting the current information sharingarrangements between Australiangovernment agencies. Global tax newsletter No. 8: June 2013
EU and internet taxation
Efforts are underway to try to make Several European governments are The OECD Secretary-General, Angel Tax authorities across Europe are the diverse national corporate tax actively exploring additional taxes Gurría, has presented a report to G20 exploring a variety of modifications to policies across Europe more uniform to directed toward internet companies. For Finance Ministers and Central Bank tax laws in an effort to derive greater prevent companies from moving to example, French and Italian tax Governors that highlights measures to revenues from taxes on internet activities jurisdictions that provide the most authorities are reportedly investigating ensure that all taxpayers pay their fair and transactions. Challenging economic favourable tax structure. At present, major internet companies to determine conditions have led those governments Ireland is viewed by many companies as if they have been systematically The report covers three strategic to pursue all available options to the most attractive tax haven in Western underreporting their income.
generate greater revenues. Many Europe and applies the lowest corporate • progress reported by the ‘Global European governments believe that tax rate in Western Europe. It also Forum on Transparency and more aggressive taxation of online permits companies to shift a substantial Exchange of Information for Tax corporate earnings provides an portion of their profits to other low tax Purposes' including the upcoming extremely attractive vehicle for jurisdictions, such as Bermuda, a ratings of jurisdictions' compliance enhancing revenues. These European tax strategy not permitted by most other with the forum's standards on initiatives are primarily directed towards European nations.
exchange of information on request large internet companies such as • efforts by OECD to strengthen Amazon and Google. They can also automatic exchange of information significantly affect smaller businesses • latest developments to address tax operating in Europe.
base erosion and profit shifting, apractice that can give multinationalcorporations an unfair tax advantageover domestic companies andcitizens.
Global tax newsletter No. 8: June 2013
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