International Tax News Edition 45 November 2016 Welcome Keeping up with the constant flow of international tax developments worldwide can be a real challenge for multinational companies. International Tax News is a monthly publication that offers updates and analysis on developments taking place around the world, authored by specialists in PwC’s global international tax network. We hope that you will find this publication helpful, and look forward to your comments. Shi‑Chieh ‘Suchi’ Lee Global Leader International Tax Services Network T: +1 646 471 5315 E: [email protected]
Transcript
International Tax NewsEdition 45November 2016
WelcomeKeeping up with the constant flow of international tax developments worldwide can be a real challenge for multinational companies. International Tax News is a monthly publication that offers updates and analysis on developments taking place around the world, authored by specialists in PwC’s global international tax network.
We hope that you will find this publication helpful, and look forward to your comments.
Brazil creates Program for Investment Partnerships
On September 13, 2016, Brazil published law 13,334/16, as a result of the conversion of the Provisional Measure 727/16. The law creates the Program for Investment Partnerships (Programa de Parcerias de Investimentos - PPI). These programs intend to amplify and strengthen the interaction between the Brazilian State and private sector through partnership agreements to carry out public infrastructure projects.
PPIs can be used for: i) public infrastructure projects that are already under way or to be performed through partnership agreements to be signed by the direct or indirect bodies of the Brazilian federal government ii) public infrastructure projects to be performed through partnerships signed by the government of states or municipalities directly or indirectly, but delegated or fomented by the federal government, and iii) other measures established by the National Privatisation Plan, per law 9,491/97.
The objective of the PPI, as indicated above, is to increase investment and employment opportunities, as well as foment technological and industrial development. It also aims to secure quality and adequately remunerated public infrastructure, as well as reduce the participation of the Brazilian government in investments and business and focus on the role of the Brazilian government as a regulatory agent. Additionally, all public agents will consider the PPIs as priority projects.
Finally, the Brazilian National Development Bank (BNDES) is authorised to support the PPIs through the Partnership Structuring Support Fund (Fundo de Apoio à Estruturação de Parcerias - FAEP), created specifically for such partnerships. The fund will be responsible for providing technical services to structure the aforementioned PPIs and the necessary privatisation measures, and shall have a ten year period, renewable for an additional ten year period if necessary.
PwC observation:PPIs offer interesting opportunities for multinationals dealing with infrastructure projects and aiming to increase investment in these areas in Brazil.
New rules open investment opportunities through Brazilian private equity investment funds
On August 30, 2016, the Brazilian Securities Exchange Commission (Comissão de Valores Mobiliários - CVM) issued Normative Instruction (‘NI’) 578, providing new rules for the Brazilian private equity investment funds (Fundo de Investimento em Participações - FIPs).
In a comparison between FIPs and direct investment, FIPs are able to provide a much more efficient tax treatment both when remunerating investors and when investors exit the structure (to the extent certain requirements are met). However, the regulations for the FIPs were considered to be outdated and the CVM had opened a public consultation for desired changes to the current regulations, which culminated in the aforementioned NI 578.
Among the changes introduced by the new NI, which revoked the previous NI for FIPs, 391/03, certain FIPs now have the ability to invest in Brazilian limited liability companies (Sociedades Limitadas - Ltda.), which is the corporate form elected by most of the companies in Brazil due to its simplicity and lack of bureaucracy. Start-ups and other similar initiatives are often incorporated as limited liability companies (LLCs), and can now also have access to financing through FIPs, a resource previously only available to corporations (sociedades anônimas - SAs).
However, it is important to note that the possibility for the FIP to invest in LLCs is subject to certain governance requirements, which may vary according to the total annual gross revenue of the LLC itself. Only certain categories of FIP, as per the NI, are authorised to invest in LLCs as well.
Another change that also mirrors the requests from the market and investors relates to the possibility of holding foreign investments. Per the new NI, FIPs are now allowed to invest abroad, up to 20% of their total assets for any FIP or, alternatively, up to 100% of its assets, as long as this FIP is classified under a particular category labelled ‘Multistrategy’ and also contains the expression ‘Investment Abroad’ in its denomination.
The NI introduced further changes such as the possibility of FIP investing in debentures (non-convertible debentures) up to 33% of the subscribed capital, as well as the possibility of advances for future capital increases in investment companies.
PwC observation:The update to the FIP regulations is a welcome change. Multinationals are encouraged to analyse how this change may bring additional investment opportunities.
The new goods and services tax (GST) on digital products and remote services commenced on October 1, 2016. The rules apply to sales by offshore sellers to New Zealand private consumers.
For offshore sellers, GST at 15% is presumed to apply to all sales to New Zealand customers unless you have supporting information indicating that the sale is to a GST-registered business or a ‘B2B concession’ has been secured from Inland Revenue.
The concept of ‘remote services’ is very broad and needs to be considered in detail.
PwC observation:Inland Revenue has been engaged in the process to implement these rules and this has helped offshore sellers to register promptly and to implement systems for the new rules.
Offshore sellers should ensure that the following have been considered:
• Whether sales are subject to the new GST, including whether they are to New Zealand customers and whether they are to private consumers or to businesses.
• If sales are largely to businesses, would it be advantageous to seek a concession from Inland Revenue, which would relieve one of the requirements to hold information on the customer’s GST status for each transaction?
• If sales are largely to private consumers, would it be advantageous to seek a confirmation from Inland Revenue, which would allow one to charge GST on each transaction without the requirement to hold information on the customer’s GST status for each transaction?
• Are one’s systems, pricing, and contracts or documentation set up to comply with your obligations under this new GST?
On September 22, 2016, the President signed a bill (the Amendment) amending personal income tax (PIT) and corporate income tax (CIT) laws. The Amendment introduces a number of important changes intended to close the loopholes in the tax collection system relating to categories of non-resident income subject to taxation in Poland, exclusion of deferral of taxation of share exchange, rules of taxation of in-kind contribution of assets (other than enterprise) and the application of withholding tax (WHT) exemptions for interest and royalties depending on whether the recipient is the beneficial owner thereof.
Under the Amendment, a new 15% CIT rate (as opposed to standard 19%) will be introduced for ‘small taxpayers’. Further, a lower CIT rate will be applicable to the taxpayers commencing business activities in their first tax year.
The Amendment introduces to the CIT law and expands in the PIT law income categories of non-resident taxpayers that are deemed earned in the territory of Poland, and thus subject to taxation in Poland. Besides income related to business activities carried out in Poland and Polish real property, such categories will include income from receivables settled by entities resident in Poland, regardless of the place where the agreement is concluded or performance occurs. Income earned in Poland will also include income from securities and derivatives quoted on the Polish stock exchange, as well as direct or indirect transfer of
shares in a company, partnership or investment fund whose assets are composed in at least 50% of real estate or rights to real estate located in Poland. Also, dividends, interest and other payments made by Polish residents (and subject to WHT) will be deemed as Polish sourced income.
In addition, under the Amendment, the deferral of taxation with respect to share exchange will not be applicable where one of the primary purposes of the transaction is tax avoidance. This will be deemed to be the case where share exchange is performed without business justification.
The Amendment also changes rules on recognition of taxable revenues related to in-kind contribution of assets other than an enterprise or an organised part thereof. Taxable revenues will no longer be equivalent to the nominal value of the shares issued in exchange for the contribution. Instead, in practice, taxable revenue will correspond to the market value of the contributed assets.
The Amendment introduces a condition for application of exemption from WHT of interest and royalties paid to associated companies from the European Union (EU). In order to apply the WHT exemption, the Polish payer will have to obtain a written statement that, including other items, will confirm that the recipient company or permanent establishment (PE) is the beneficial owner of the payment.
The Amendments to the legislation will take effect from January 1, 2017, with certain exceptions, while CIT taxpayers whose tax year will begin before that date would still be subject to the current regulations until the end of such tax year.
PwC observation:The Amendment, to a large extent, is intended to prevent tax avoidance. It also eliminates certain tax planning schemes that were commonly used by taxpayers. With the introduction of the amended CIT law, taxpayers should pay close attention to the business justification and substance of their planned transactions.
Decree-Law no. 47/2016, dated August 22, 2016, introduces a new patent box regime, following the legislative authorisation included in the State Budget Law for 2016. The new regime applies to intellectual property (IP) rights registered on or after July 1, 2016.
The regime provides for a 50% relief from taxation on the income obtained by Portuguese tax resident companies and permanent establishments (PEs) in Portugal of non-resident entities, and derived from the sale or granting of temporary use of patents, industrial drawings, and models. Internally-developed IP shall also result in qualifying income. Income derived from IP contracted from third parties, as well as transactions with associated enterprises (including blacklisted), are excluded.
Qualifying income corresponds to the positive balance between profits and gains obtained in the tax period concerned, and the qualifying costs and losses incurred that are directly connected to the IP developed. Costs and losses do not include financial expenses or costs related with the acquisition, construction, or depreciation of real estate.
The relief from taxation cannot exceed the amount resulting from the qualifying expenses, increased by 30%, divided by the total expenses incurred in connection with the development of the IP. The balance is multiplied by the total income derived from the IP and then by 50%.
The previous patent box regime is still applicable to IP registered between January 1, 2014 and June 30, 2016 and shall remain in effect until June 30, 2021. The previous regime is not subject to limitations in respect to qualifying costs and expenses and it also applies to income derived from IP contracted from third parties.
PwC observation:The introduction of a new patent box regime intends to adopt an IP regime that is fully compliant with the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action plan.
Investment Tax Code of the Autonomous Region of Madeira
The Investment Tax Code (ITC) applicable to the Autonomous Region of Madeira was published in the Official Gazette on June 28, 2016.
The Investment Tax Code (ITC) applicable to the Autonomous Region of Madeira was published in the Official Gazette on June 28, 2016.
The ITC adapts the tax benefits and incentives foreseen for the mainland to the Autonomous Region of Madeira.
The ITC foresees the following tax benefits and incentives:
• Contractual tax regime: Investment projects amounting to 1.5 million euros (EUR) (Madeira Island) and EUR 500,000 (Porto Santo Island) are eligible (minimum of EUR 3 million in the mainland). The regime provides for a corporate income tax (CIT) credit up to 35% of the relevant investment (20% in the mainland) and exemptions or reductions from property taxes and exemptions from stamp duty. Eligible activities do not include defence; however, they are in general wider than those eligible in the mainland, as it includes education, healthcare, social support and management, and companies support administration services. It is regarded as regional state aid within the context of European Union Commission’s (EC) Regulation 651/2014 of June 16, 2016 (as general rule notification to the EC is not required).
• Tax Regime for Investment Support: Investment in specific business sectors is eligible for a CIT credit up to 35% of the relevant investment up to EUR 1.5 million (25% and EUR 5 million in the mainland), and up to 15% of the relevant investment up to EUR 1.5 million (10% and EUR 5 million in the mainland); any unused credit can be carried forward for ten years. Exemptions or reductions from property taxes and exemptions from stamp duty are also available. It is regarded as regional state aid within the context of EC’s Regulation 651/2014 of June 16, 2016 (as general rule notification to the EC is not required).
• Reinvestment of retained earnings: Micro, small, and medium sized companies that reinvest up to 15% of its retained earnings (capped at EUR 1.5 million) are eligible for a CIT credit up to 25% of the tax due (in the mainland, 10% of retained earnings capped at EUR 5 million).
• Investment projects developed in ‘Brava Valley’ will benefit from an additional deduction up to 10% in all the tax benefits and incentives available. The Brava Valley concept is still awaiting regulation; however, it aims at being an expertise centre of excellence and knowledge, with the purpose of attracting foreign investment. Eligible activities are computer services, R&D, high technology, information technology, audiovisual and multimedia production and education.
PwC observation:Fully compliant with European Union (EU) law, the investment tax regime applicable in the Autonomous Region of Madeira aims at attracting foreign investment to the region. Combined with the Madeira International Business Centre and the International Shipping Register, the regime is an interesting alternative for investments.
Income tax changes including the automatic exchange of information
The Income Tax (Amendment No. 2) Act 2016 was gazetted on July 4, 2016. The changes in the Amendment Act relate mainly to the implementation of the Common Reporting Standard (CRS). Subject to the conclusion of bilateral Competent Authority Agreements, Singapore will be able to commence automatic exchange of financial account information in 2018.
PwC observation:Reflecting its role as a financial centre and trading hub, Singapore is taking proactive steps to align itself with the new norms in international taxation regarding the exchange of information.
United Kingdom
The UK Finance Act 2016
On September 15, 2016, the UK Finance Bill 2016 received Royal Assent, becoming the Finance Act 2016.
There were some minor amendments to the Finance Bill clauses to counteract avoidance using hybrid mismatches at the report stage in early September 2016. In addition, the bill was revised to give Her Majesty’s (HM) Treasury the power to make regulations to include a country-by-country report (CbCR) as part of the published tax strategies of large businesses.
The enactment of Finance Act 2016 brings welcome certainty because many of its provisions are effective from April 1, 2016 for corporate taxpayers and April 6, 2016 for individual taxpayers. The key international tax measures in the Finance Act 2016 include:
• the introduction of the anti-hybrid rules with effect from January 1, 2017
• the changes to the deduction of income tax at source on royalties (and consequential changes to diverted profits tax) with effect for royalty payments made on or after June 28, 2016, and
• the extension of the scope of corporation tax to non-UK resident companies which carry on a trade of dealing in or developing UK land with effect from July 5, 2016.
PwC observation:As reported in the August edition of the International Tax News, the passage of this year’s Finance Bill through the various stages in Parliament was delayed significantly because of the UK’s European Union (EU) Referendum. Typically, Royal Assent of the Finance Bill is granted in mid-July.
Groups should ensure that they have considered the impact of the anti-hybrid rules and royalty withholding tax (WHT) changes may have on their financing arrangements and/or business models.
The government has stated that CbCR regulations will only be implemented if and when there is further international consensus on CbCR.
On September 16, 2016, the Canadian Department of Finance released draft legislative proposals containing various measures affecting international transactions. The following is an overview of key proposals:
• Introduction of a relieving measure to treat the foreign division of a non-resident corporation as giving rise to a dividend, rather than a shareholder benefit, if all of the shares of the new corporation are received by the shareholders of the original corporation on a pro rata basis. This amendment applies to divisions of non-resident corporations that occur after October 23, 2012.
• The foreign tax credit generator rules deny a deduction for foreign accrual tax, leaving foreign accrual property income (FAPI) unsheltered for the taxpayer, when the taxpayer or certain connected persons own, under the foreign tax law, less than all of the shares of the foreign affiliate or certain other persons (‘pertinent persons or partnerships’) that are considered to be owned for Canadian tax purposes. The proposal would expand an existing exception to ensure that these rules do not apply simply because the pertinent persons or partnerships are fiscally transparent entities in the foreign jurisdiction. This amendment would apply to the computation of foreign accrual tax applicable to an inclusion for FAPI for a tax years ending after October 24, 2012, in respect of a foreign affiliate of the taxpayer.
• Initial proposals released on July 12, 2013 provided that stub period FAPI was included in a taxpayer’s income where the surplus entitlement percentage (SEP) of the taxpayer in respect of the controlled foreign affiliate reduced in circumstances where there was no corresponding increase to the SEP of another in respect of
the same affiliate. The proposals released on September 16, 2016 build on these initial proposals and deem the foreign affiliate to have had a tax year-end at the stub period end time. The tax year-end ensures that the stub period FAPI is properly reflected in the foreign affiliate’s taxable surplus. Furthermore, the new proposals ensure that the stub period FAPI rules do not apply where a Canadian amalgamation triggers the SEP changes or where the taxpayer’s SEP decrease over the relevant period is not more than 5% (de minimis exception).These rules will be deemed to have taken effect on July 12, 2013.
• The foreign affiliate dumping rules would be amended to apply where a corporation resident in Canada (CRIC) makes an investment in a non-resident corporation that is not a foreign affiliate of the CRIC but that is a foreign affiliate of another corporation resident in Canada that does not deal at arm’s length with the CRIC, for transactions or events that occur after September 15, 2016 or debt obligations that arose before September 16, 2016 and remain outstanding on January 1, 2017. The proposals further amend the foreign affiliate dumping rules to introduce an election that restores a taxpayer’s ability to obtain deemed dividend treatment by opting out of the paid-up capital offset rules in respect of certain transactions that occurred after March 28, 2012 and before August 16, 2013. To obtain this result, the CRIC must meet certain conditions and file an election by December 31, 2016.
• The upstream loan rules would be amended to include a reserve deduction for previously-taxed FAPI where the specified debtor is the Canadian resident taxpayer or a person resident in Canada that does not deal at arm’s length with the taxpayer. Moreover, the upstream loan rules would be amended to ensure that they do not apply where the debtor is a non-arm’s-length foreign affiliate of the taxpayer (that is not a controlled foreign affiliate of the taxpayer)
where the shares in the affiliate are owned by the taxpayer and other persons, including arm’s-length non-resident persons or controlled foreign affiliates of the taxpayer. These amendments would apply in respect of upstream loans made after August 19, 2011 and any portion of an upstream loan made before August 20, 2011 that remained outstanding on August 19, 2014. Lastly, upstream loan continuity rules are proposed to ensure that a reorganisation involving a debtor (the ‘original debtor’) or creditor (the ‘original creditor’) following the issuance of an upstream loan does not result in double taxation either by causing the upstream loan rules to apply multiple times in respect of what is in substance the same debt or preventing the repayment of the upstream loan. For this purpose, the term ‘reorganisation’ is defined narrowly to include an amalgamation, merger, foreign merger, winding-up, or liquidation and dissolution involving either the original debtor or the original creditor. The upstream loan continuity rules would apply to transactions and events that occur after September 15, 2016; however, a taxpayer can elect before January 1, 2017 to have these rules apply as of August 20, 2011.
PwC observation:Many of the proposals respond to issues raised by taxpayers and interested parties, or are part of an ongoing effort by the Department of Finance to improve Canadian tax rules and regulations. The international tax proposals are largely positive for taxpayers and therefore welcome. However, the upstream loan continuity proposals mentioned above provide limited relief as they do not address situations where the upstream loan rules may apply multiple times other than by reason of an amalgamation, merger, foreign merger, winding-up or liquidation and dissolution, such as in situations where the upstream loan has been assigned by one foreign affiliate to another foreign affiliate of the same taxpayer.
Budget Day 2017: Proposed broadened dividend withholding tax exemption and alignment of Dutch dividend withholding tax position of Cooperatives and NVs/BVs
On Budget Day, the Dutch State Secretary of Finance sent a letter to the House of Representatives regarding the dividend withholding tax (WHT) treatment of cooperatives, BVs, and NVs. In this letter, the Secretary announced a legislative proposal that would further align the treatment of cooperatives, NVs, and BVs for Dutch dividend WHT purposes. The letter further hints at a broadened exemption from dividend WHT when there is a participating ownership interest equal to or greater than 5%.
Current situationIn the current Dutch Dividend WHT of 1965, cooperatives, NVs, and BVs are treated differently. NVs and BV are generally liable for WHT on distributed dividends (exceptions may apply in domestic situations, within the European Union [EU], or under specific double tax treaties[DTTs]). A cooperative is generally exempt from Dutch dividend WHT when distributing dividends to its members, provided certain anti-abuse rules do not apply.
Proposed changesIn his letter, the Dutch State Secretary of Finance proposes an exemption from dividend WHT for cooperatives, NVs, and BVs if a ’participating ownership’ (an ownership of at least 5%) is held by a parent company established in a country that has concluded a tax treaty with the Netherlands. The exemption would not apply in abusive situations. The letter does not provide much more guidance, however, it seems that a domestic exemption from Dutch dividend WHT would apply to many entrepreneurial structures. For example, it appears from the letter that a Dutch BV in an entrepreneurial structure with a parent company in Japan, Canada, or Turkey could become exempt from Dutch dividend WHT under the new legislation.
It is still unclear what will be the case in non-treaty situations. This will hopefully become clear once the legislative proposal is published. It is possible that cooperatives will be obliged to withhold in non-treaty situations.
PwC observation:Broadening the exemption from dividend WHT when there is a participating ownership interest would be a positive development. The new bill is expected to become effective on January 1, 2018, but the legislative proposal must first be published. We will provide further updates as they become available.
Budget Day 2017: Amendments to interest deductibility provisions
On Budget Day, new legislation was proposed to further tighten the deductibility of interest expenses in certain abusive cases. The bill, if enacted, would take effect January 1, 2017.
Background The Dutch Corporate Income Tax Act of 1969 (CITA) limits the deductibility of interest expense in certain ‘abusive’ structures. The Dutch anti-base erosion rules (laid out in article 10a CITA) may apply to interest expenses on debt taken out by a Dutch taxpayer from a related entity used to finance certain ‘tainted’ transactions.
Furthermore, on the basis of the so-called acquisition debt rules (article 15ad CITA), the deductibility of interest can also be limited in acquisitions followed by inclusion in a Dutch fiscal unity or a legal merger or de-merger. In such scenarios, it is not possible to offset interest expense on ‘excessive acquisition debt’ against profits of the acquired company. An acquisition debt is regarded as excessive if it amounts to more than a certain percentage of the acquisition price paid for the acquired company. This percentage starts at 60% and decreases over a period of seven years by 5% per year until it reaches 25% (the ‘scaling down period’). Under current legislation, it was possible to ‘reset’ the scaling down period by transferring an acquired company within a group.
New legislation - ‘collaborating groups’ under article 10a CITAAs mentioned above, article 10a CITA may only apply to intra-group debt, meaning debt between ‘related entities’. The Ministry of Finance (MoF) has proposed changes to broaden the scope of these rules to apply to situations in which, when viewed strictly, the parties involved are not related but in reality are operating as a group and are related in appearance (‘collaborating group’).
The assessment whether a collaborating group exists takes place on the basis of the facts and circumstances in each individual case. The presence of ‘coordinated investment’ is essential in making the determination. A collaborating group exists, in any event, if a coordinating person or entity has material control over the investment and each shareholder finances this investment in a similar way.
New legislation - acquisition debts under article 15ad CITAUnder the new legislative proposal, the above-mentioned ‘resetting’ of the scaling down period would no longer be possible. The proposed changes would further prevent companies from avoiding the acquisition debt rules by means of a debt push-down to the target company and includes a restriction in relation to the grandfathering rules.
PwC observation:Interest expense is generally deductible for Dutch corporate income tax (CIT) purposes. We recommend reviewing the application of the above-mentioned restrictions in relation to debt-funded structures in the Netherlands. In particular, structures that benefitted from ‘resetting’ the scaling down period may be restricted as of January 1, 2017.
While it is anticipated that, in light of Base Erosion and Profit Shifting (BEPS) Action Item 4 and the recently adopted European Anti-Tax Avoidance Directive, the Netherlands will introduce an earnings stripping interest limitation (EBITDA) rule under which certain existing rules may be abolished, the Dutch legislator deemed the above-mentioned amendments necessary in the period leading up to the introduction of such EBITDA rule.
Budget Day 2017: Dutch innovation box regime aligned with OECD BEPS Item 5
As part of the Base Erosion and Profit Shifting (BEPS) Action Plan of the Organisation for Economic Co-operation and Development (OECD) and G20, the Netherlands will amend its innovation box provisions to implement the so-called ‘nexus approach’. This includes a stricter substance criterion, which is intended to prevent companies from benefiting from the innovation box without having substantial economic activity in the Netherlands. In addition the requirements are altered for qualifying innovations (that is, for access to the innovation box) and certain administrative obligations. The revised innovation box regime will be effective January 1, 2017 and applies to intangible assets developed on or after July 1, 2016. A transition period applies, for a maximum period of five years, to qualifying innovations already existing before July 1, 2016.
To recap, the Dutch innovation box is a preferential regime for certain profits, including royalties, derived from a self-developed intangible asset. Provided that it meets certain conditions, a taxpayer may elect to apply a lower effective tax rate of 5% to profits derived from these intangible assets. In response to the recommendations included in the OECD report on BEPS Action Item 5, the Netherlands will amend the Dutch innovation box regime. To a large extent, the existing regime will remain unchanged. The main changes relate to the access criteria for the innovation box and the nexus approach.
• Small taxpayers could make a research & development (R&D) work declaration (so-called ‘Speur- & Ontwikkelingswerk-verklaring’ or ‘S&O declaration’) in order to take advantage of the innovation box. Large taxpayers - taxpayers that, on average, measured over a period of five years, have a group net turnover greater than 50 million euros (EUR) per year or generate gross income from innovative activities of more than EUR 7.5 million per year need an additional entrance ticket, such as a patent, plant breeder’s right, user model, medicine, or software licence. Brands, trademarks, and other similar assets are explicitly excluded from the Dutch innovation box as they are not the result of technical innovation.
• Implementation of the OECD BEPS nexus approach implies that stricter substance requirements would apply going forward. The nexus approach prevents companies without substantial innovative activities in the Netherlands from benefiting from the innovation box. The income qualifying for the innovation box is determined based on a so-called ‘nexus formula’, whereby the R&D expenditures incurred by the taxpayer itself and not outsourced to related parties for the development of the intangible assets are considered a measure of substantial innovative activities in the Netherlands.
For the sake of transparency, the proposed legislation includes explicit administrative obligations. One requirement is that the taxpayer includes details in its records that show which technical innovations have been produced, as well as a specification of expenditure per innovation and how the benefits for each intangible asset or group of related intangibles assets are determined.
PwC observation:The innovation box continues to make the Netherlands an attractive location for multinational entities planning to invest in R&D because they can benefit from a preferential tax regime. The proposed changes would strengthen the Netherlands’ position as a responsible jurisdiction for R&D investments and make such investments more sustainable.
In September 2016, the New Zealand government released a discussion document outlining proposals to address hybrid mismatch arrangements. The discussion document put forward would adopt the full range of the Organisation for Economic Co-operation and Development (OECD) recommendations with respect to hybrid mismatches to address Base Erosion and Profit Shifting (BEPS), with some minor amendments to fit with New Zealand’s current domestic and international rules.
The proposed changes are complex and the document discounts the possibility of only introducing specific and limited targeted rules for hybrid arrangements of concern to Inland Revenue. The document calls for submissions on how these changes should be incorporated into New Zealand law, and states that final policy decisions will be made after the consultation phase. The document does not include detailed timing for implementation.
The proposals focus on the elimination of certain hybrid mismatch arrangements. Payments under these arrangements utilise the differences in the tax treatment of an instrument or entity under the laws of two or more countries, resulting in double non-taxation or reduced overall taxation. The document includes some examples of arrangements that may be impacted by the proposed rules:
Debt instruments issued by a New Zealand taxpayer, but viewed as equity by the foreign holder, such as optional convertible notes or mandatory convertible notes:
• New Zealand unlimited liability companies, treated as disregarded for United States tax purposes
• share lending arrangements • New Zealand branches of overseas parents, and • New Zealand partnerships (general or limited) with
foreign partners.
The proposals include the implementation of, in New Zealand’s domestic tax legislation, a series of ‘linking rules’ contained in the OECD report which seek to adjust the tax treatment of a hybrid mismatched arrangement in one country by reference to the tax treatment in the counterparty country. The government is looking closely at the equivalent proposed tax changes in the United Kingdom and Australia and recognises that the effectiveness of any proposed changes will depend on a global coordinated approach.
PwC observation:The timeframe for the draft legislation is ambitious and it is clear that the government’s preference is to fully adopt the OECD recommendations, rather than targeted rules. This indicates that the government is eager to support and implement the BEPS initiatives, but is likely to result in some significant and highly complex legislative changes.
Concerns have been raised with Inland Revenue regarding the potential issues arising if New Zealand implements these rules in advance of global coordination. A New Zealand entity is likely to face significant technical and practical difficulties under the proposals given their complexity and we believe that further guidance on the implementation of the changes will be necessary.
The Ministry of Finance (MOF) issued the draft Income Tax (Amendment) (No. 3) Bill 2016, which contains the 2016 Budget proposals and country-by-country reporting (CbCR) implementation measures for public consultation.
The 2016 Budget proposals include:
• An increase in the corporate tax rebate for years of assessment (YAs) 2016 and 2017 (tax years 2015 and 2016) from 30% to 50%. The rebate amount remains capped at 20,000 Singapore dollars (SGD) per year.
• Enhancement of the mergers and acquisitions scheme to allow a qualifying Singapore company to claim a deduction for 25% of the cost of acquisition, capped at SGD 40 million, for qualifying share purchases. The previous cap was SGD 20 million.
• The acquisition cost of qualifying intellectual property (IP) rights can be claimed over five years. Taxpayers will now be given the option of claiming the allowance over five, 10 or 15 years. An anti-avoidance rule has also been proposed which will allow the Singapore tax authority (IRAS) to substitute the open market value for the transacted (acquisition or disposal, as the case may be) price of the IP for the purpose of computing the writing down allowance (WDA) and claw-back of WDA.
• Introduction of a new Business and Institution of a Public Character (IPC) Partnership Scheme to allow companies a 250% deduction for specified expenses when they send their employees to volunteer and provide services to an approved charity (IPC), subject to certain caps.
• Certain incentives have been renewed and/or enhanced. These include the safe harbour rule on exemption of gains on divestments of ordinary shares, the double tax deduction for internationalisation, the exemption for not-for-profit organisations,the land intensification allowance, the finance and treasury centre incentive, certain insurance tax incentives, the maritime sector incentive, and the global trader programme.
• Non-budget changes include a double tax deduction for costs attributable to the issuance of retail bonds under the bond seasoning framework and exempt bond issuer framework for five years effective May 19, 2016, to encourage the issuance of retail bonds to broaden the range of investment options available to retail investors.
• The bill also includes a provision to implement CbCR. The MOF has announced that Singapore will commit to implement CbCR for tax years beginning on or after January 1, 2017 for multinational enterprises (MNEs) whose ultimate parent entities are based in Singapore and whose group turnover exceeds SGD 1,125 million. These enterprises are required to file their CbC reports with the IRAS within 12 months from the last day of their tax year.
Further, the MOF, Monetary Authority of Singapore (MAS), and IRAS have jointly issued proposed regulations for the implementation of the Standard for Automatic Exchange of Financial Account Information (AEOI) in Tax Matters (also known as the Common Reporting Standard or CRS) effective January 1, 2017. These regulations will enable Singapore to meet its international commitment to commence AEOI under the CRS in 2018.
PwC observation:The draft legislation has been released only for the purpose of consultation. It cannot be relied upon at this stage as it does not represent the final legislation. Taxpayers are encouraged to monitor the status of the draft legislation and prepare for the changes should they be enacted.
UK Autumn Statement 2016 and draft Finance Bill 2017
On September 8, 2016, the UK Chancellor of the Exchequer, Phillip Hammond, announced he will present his first Autumn Statement to Parliament on November 23, 2016. The Autumn Statement is based on the latest forecasts from the Office for Budget Responsibility for the economy and public finances.
Following the Autumn Statement, the draft clauses to be included in Finance Bill 2017 will be published on December 5, 2016. A consultation on the draft legislation will be open until January 30, 2017.
PwC observation:We expect Finance Bill 2017 to include clauses to introduce:
• new interest deductibility rules to implement Base Erosion and Profit Shifting (BEPS) Action 4, scheduled to take effect April 1, 2017, and
• new rules to reform the corporation tax loss relief regime, also effective April 1, 2017.
Robin G PalmerLondon, Embankment PlaceT: +44 20 7213 5696E: [email protected]
Uruguay
Tax amendments under Congress consideration
A bill of law was submitted for Congress consideration, introducing tax amendments intended to balance the budget and to secure the country’s projected growth until the end of the Presidential term in 2019. The House of Representatives recently approved the bill and the Senate is now considering it. The most relevant tax provisions include:
• limiting net operating loss (NOL) deductions to 50% of taxable income, a reduction from the current limitation of 100%,
• subjecting undistributed earnings to the existing 7% withholding tax (WHT) if the earnings remain undistributed for three years. The WHT would not apply if the undistributed earnings are reinvested in a certain type of assets and under certain conditions,
• increasing the tax rate applicable to high-income earners, and • a 2% reduction in the value-added tax (VAT) on purchases made
with debit cards or other electronic means.
PwC observation:Multinational enterprises (MNEs) operating in Uruguay should start considering the possible impact of the measures, if passed.
Australian Taxation Office releases Taxpayer Alerts
The Australian Taxation Office (ATO) has issued a large number of Taxpayer Alerts to notify large business taxpayers where there are new or emerging areas considered a high tax risk.
These alerts do not constitute the ATO’s final view on particular arrangements, but rather signal to taxpayers the global tax planning arrangements that will be under increased scrutiny going forward. Since late April, the ATO has released 11 Taxpayer Alerts, with more anticipated later this year. Some of the arrangements covered by Taxpayer Alerts issued to date include:
• thin capitalisation - inappropriate recognition of internally generated intangible assets and revaluations
• interim arrangements in response to the Multinational Anti-Avoidance Law (MAAL)
• related party foreign currency denominated finance with related party cross-currency swaps
PwC observation:The ATO has been quite vocal about their desire to pursue the type of arrangements described in the Taxpayer Alerts. Taxpayers, and their advisors, should review any arrangements highlighted in the Taxpayer Alerts and monitor any further announcements.
Australia expands definition of deemed royalties to Indian IT companies
On September 22, 2016, the Full Federal Court in Tech Mahindra Limited v Commissioner of Taxation [2016] FCAFC 130 upheld an assessment that Australia had taxing rights with respect to income generated from information technology (IT) services performed by Tech Mahindra in India.
Tech Mahindra is an Indian tax resident that carries on business in Australia through a permanent establishment (PE). In the income year in issue, Tech Mahindra performed IT services for its Australian customers both in Australia via its PE (Australian IT services) and in India (Indian IT services). Tech Mahindra did not dispute that the Australia-India double taxation treaty (DTT) gave Australia the right to tax the income received with respect to the Australian IT services. Rather, the issue was whether Australia had any taxing rights with respect to the income generated from the Indian IT services. The Full Federal Court agreed with the Australian Taxation Office (ATO) and held that the income generated from certain types of Indian IT services was deemed royalty income under the unusually broad definition for the purpose of the Australia-India DTA. The Australia-India DTA therefore gave Australia the right to tax the Indian IT services income notwithstanding it was not attributable to, nor were the services performed in India effectively connected with, the PE.
PwC observation:This decision is a ‘red flag’ to all Indian IT service companies operating in Australia, with the ATO likely to be more active in this space as a consequence. Companies potentially affected should review their position and consider next steps.
Association of persons not a tax limited partnership
On June 22, 2016, the Full Federal Court in D Marks Partnership by its General Partner Quintaste Pty Ltd v Commissioner of Taxation [2016] FCAFC 86A held that notwithstanding two entities were registered as a limited partnership, they were not a limited partnership for the purposes of income tax law.
By way of background, for Australian income tax purposes, a limited partnership is treated as a company and the partners are treated as if they were shareholders. Australian tax law defines a ‘limited partnership’ as ‘an association of persons (other than a company) carrying on business as partners or in receipt of ordinary income or statutory income jointly, where the liability of at least one of those persons is limited …’. The Full Federal Court held that notwithstanding the association of these two entities was registered as a limited partnership, they could not be a tax limited partnership unless they qualified as a partnership under the Partnership Act 1891 (Qld) or at common law. In this case there was no relationship between the two entities of carrying on a business in common with a view to profit. They were therefore not a partnership and could not qualify as a limited partnership for the purposes of income tax law.
PwC observation:Taxpayers currently using, or thinking of using, an Australian limited partnership should ensure the partnership has sufficient commercial substance.
Ireland included in list of tax havens and Austrian holding companies in the privileged tax regime list
As background, on June 4, 2010, the Brazilian tax authorities (RFB) issued Normative Instruction (NI) 1,037/2010, updating the list of countries considered as tax havens (‘black list’) and adding a list of regimes regarded as privileged tax regimes (‘grey list’).
The RFB on September 14, 2016, issued NI 1,658/2016 (NI 1,658), adding Ireland to the list of tax havens and the Austrian holding company regime to the list of privileged tax regimes. The NI also formalises the definition of ‘significant economic activities’ for purposes of treating the Dutch and Danish holding company regimes as grey-list regimes. NI 1,658 is effective October 1, 2016.
In this regard, NI 1,658 in general terms confirms the RFB’s initial understanding on what should be viewed as ‘significant economic activities’ previously shared by the RFB through Public Consultation no. 007/2016 released in May, 2016. According to NI 1,658, a foreign holding company is deemed to carry out significant economic activities if it has, in its country of domicile, operating capacity to manage and make decisions regarding (i) activities with the purpose of generating income from its assets or (ii) management of equity interests with the purpose of generating income in the form of profit distributions and capital gains.
Operating capacity would be measured by (i) the existence of physical facilities and (ii) qualified employees to manage and make decisions according to the complexity of the tasks to be performed. Note that the concept of significant economic activities is applicable only to the Dutch and Danish holding regimes, and not to other holding company regimes that are regarded as privileged tax regimes regardless of whether significant economic activities are carried out.
Further, NI 1,658 has adjusted the black list by replacing the Dutch Antilles for Curaçao and Saint Martin, and deleting St. Kitts and Nevis, which was duplicated in the previous NI, keeping the country listed only under its native Portuguese name, São Cristóvão e Nevis.
PwC observation:These changes, together with the application of the Brazilian controlled foreign company (CFC), transfer pricing, thin capitalisation, more strict deductibility rules, and higher withholding tax (WHT) rates on payments to black-listed jurisdictions, among others, may have significant impacts on international structures involving Brazilian entities and the jurisdictions mentioned above (Austria, Ireland, the Netherlands and Denmark). Multinationals are encouraged to analyse how these changes may affect their specific structures.
Supreme Court provides clarity on the Dutch participation exemption regime
The Dutch Supreme Court (the Court) recently provided its judgment in two landmark cases concerning the applicability of the Dutch participation exemption. In case no. 15/02428 the Court clarifies under which circumstances a compensation payment received by a Dutch taxpayer could qualify under the participation exemption. In case no. 15/00707 the Court elaborates on the application of the so-called effective tax rate test (‘ETR test’), thereby clarifying how the foreign tax base should be taken into account when determining whether a foreign shareholding is sufficiently taxed for purposes of this test.
Background The Netherlands offer a broad participation exemption regime. Any benefits (including dividends, capital gains and/or foreign exchange results) realised by a Dutch taxpayer on its (foreign) shareholding may be fully exempt from Dutch corporate income tax (CIT) under the Dutch participation exemption regime. For these purposes, it should first be determined that the benefit received by the Dutch taxpayer qualifies as ‘benefit realised on a (foreign) shareholding’. If this is the case, such benefit can be fully exempt if both the shareholding requirement and either the intention test, asset test, or ETR test is met. The last test applies if the shareholding is subject to a tax on its profits of at least 10% calculated according to Dutch tax standards.
A benefit realised on a shareholdingThe first case further clarifies under which circumstances a received compensation qualifies as a benefit realised on a shareholding. A Dutch BV, established in the Netherlands (‘B’), and its joint venture partner established in Canada (‘G’) both owned 50% in a Kazakh entity (‘C’), which was controlled by the Kazakh government. In a.o. the shareholders agreement it was stated that if one of the joint venture partners would encounter a change of control, this shareholder would offer its shares in C to the other shareholder. When G indeed encountered a change of control, B referring to a.o. the shareholders agreement – called out its pre-emptive rights, but G refused this. This led to a legal proceeding in which G was eventually condemned to pay a compensation to B in the amount of 438 million United States dollars (USD) (a settlement payment).
The Court now had to decide whether such settlement payment received by B qualified as a benefit realised on a shareholding (and would thereby fall within the scope of the Dutch participation exemption). The Court decided that a compensation payment resulting from a ‘pre-contractual’ stage is not covered by the participation exemption (even if the negotiations between parties are at a stage that retreating from such negotiations is no longer possible without adverse consequences). A compensation payment relating to the contractual stage (e.g. a payment resulting from an existing purchase agreement that is not complied with) can however be covered by the participation exemption. The Court further stated that in the case at hand, B did not have a ‘derived right’ (e.g. an option on the shares, which under circumstances qualifies for the participation exemption). In the case at hand, no purchase agreement was concluded, the parties were still in the pre-contractual stage and therefore the participation exemption did not apply.
The effective tax rate testIn the second case, it was clear that the benefit was derived from a subsidiary, but here more clarity is given on the application of the effective tax rate test. As mentioned before, this is one of the tests on the basis of which the Dutch participation exemption can apply. In the case at hand, an Irish subsidiary of a Dutch company granted an interest-free loan to group companies. In dispute was whether deemed interest payments and (unrealised) foreign currency exchange results should be taken into account, when determining whether the Irish subsidiary meets the effective tax rate test (i.e. when determining whether the Irish subsidiary was sufficiently taxed according to Dutch tax standards).
The Court began by observing that, in determining as to whether tax is levied in a foreign country in accordance with Dutch standards, an adjustment must be made for elements that reduce the effective tax burden and are incompatible with Dutch profit calculation rules. Because, for Dutch tax calculation purposes, currency results are to be taken into account in scenarios similar to the case at hand, this should also be considered in this respect. The fact that the currency results were not taken into account in Ireland under Irish tax law is irrelevant. In addition, deemed interest payments at an at arm’s length rate should be taken into account.
PwC observation:The Dutch Supreme Court has provided more certainty regarding the application of the participation exemption. Specifically when negotiating potential compensation payments, the clarification provided by the Dutch Supreme Court is to be kept in mind as there a fine line between a tax exempt and a taxable compensation payment.
European Commission opens in-depth investigation into Poland’s tax on the retail sector
The European Commission (EC) has opened an in-depth investigation into a Polish tax on the retail sector. The EC has concerns that the progressive rates based on turnover give companies with a low turnover a selective advantage over their competitors in breach of EU State aid rules.
The EC has also issued an injunction, requiring Poland to suspend the application of the tax until the Commission has concluded its assessment.
The initiation of the investigation The EC started to look into the matter following media reports. On September 19, 2016, the EC published a press release that it has opened a detailed investigation concerning tax on retail sales, introduced into Polish law by the Act of July 6, 2016.
According to the EC’s preliminary assessment, the progressive rate structure is not justified by the logic of the Polish tax system, which is to collect funds for the general budget. Poland has so far not demonstrated why larger retail operators should be taxed differently from smaller ones in light of the objectives of the tax on retail sales.
Injunction to suspend application of the Act At the same time, on September 19, 2016, the EC issued an injunction requiring Poland to suspend the application of the tax until the end of its analysis by the Commission. The law introducing the tax took effect on September 1, 2016. The first deadline to file relevant declaration and settle tax would lapse on October 25, 2016.
The answer of the Ministry of Finance (MoF)During the press conference of September 20, 2016, the Minister of Finance announced that Poland will suspend the collection of retail sales tax in its present form. It is therefore expected that in the near future the Ministry of Finance will take appropriate steps to fulfil the order imposed by the EC. However, the adopted method of waiver of the tax collection may be important for the tax returns.
Further, the MoF announced the introduction of taxation on large retail operators under the revised formula as of January 1, 2017.
PwC observation:The MoF has published a draft of decree waiving the tax collection of retail sales tax for the period September to December 2016. However, it is not known when the decree will be finalised. Further, the Ministry has not released any information about the new tax.
Several updates from the Singaporean tax administration
The Singaporean tax administration has provided several updates.
Foreign-sourced income exemption Foreign-sourced dividends may be tax exempt if they are received from a jurisdiction with a headline tax rate of at least 15% and have been subject to tax in that jurisdiction. The Inland Revenue Authority of Singapore (IRAS) provided a list of documents that may be submitted to substantiate that tax has been paid on the income from which foreign-sourced dividend is paid. In practice, taxpayers, in particular portfolio investors, sometimes have difficulty substantiating that the income from which the dividends were paid had been subject to tax. The expanded list of documentation that the IRAS will accept should make it easier for them to qualify for the exemption.
Research & development (R&D) tax measures On July 22, 2016, the IRAS revised the referral process to the R&D Technical Advisory Panel and on the availability of the ‘pre-claim scheme’ to provide upfront certainty for large and complex projects. It can be difficult to ascertain whether an R&D project will be accepted by the IRAS as a qualifying project for the purpose of R&D tax benefits. The revised referral process and the introduction of the pre-claim scheme should make it easier for taxpayers to obtain upfront certainty as to whether their projects will qualify.
Finance & Treasury Centre (FTC)On June 1, 2016, the Economic Development Board of Singapore (EDB) issued a circular that sets out the details of the enhancements to the FTC scheme announced in Budget 2016. These include:
• extension of the FTC scheme for another five years to March 31, 2021
• reduction in the concessionary tax rate from 10% to 8%, with an increase in qualifying requirements
• introduction of a five-year tenure for new applicants and FTC renewal cases approved from March 25, 2016, and
• expansion of the scope of tax exemption to cover interest payments made by an FTC from March 25, 2016, on deposits placed with the FTC by its non-resident approved network companies, provided the funds are used for the conduct of qualifying activities or services.
General Anti-avoidance Provision (GAAR)The IRAS, in its guidelines issued on July 11, 2016 on the application of the GAAR, adopts the approach taken by the Court of Appeal in Comptroller of Income Tax v AQQ and another appeal [2014] SGCA 15 in assessing whether there is any tax avoidance. Given today’s international fiscal environment, the IRAS guidelines serve to reinforce Singapore’s stance against abusive arrangements and its reputation as a substantive business hub.
Financial Reporting Standard (FRS) 109 Financial Instruments Entities are required to adopt FRS 109 for annual periods beginning on or after January 1, 2018. The adoption of FRS 109 will give rise to a number of tax considerations given the new classification and measurement rules. Because of the divergence between accounting and tax principles, adjustments will be necessary to arrive at the appropriate taxable income. In light of this impending change to the accounting treatment, the IRAS has endeavoured to identify the consequential tax adjustments and their implications for entities that are required to adopt FRS 109. These are set out in a consultation paper issued on July 1, 2016, to garner public feedback.
Business and Institution of a Public Character (IPC) Partnership Scheme (BIPS)On June 30, 2016, the Ministry of Finance (MoF) released guidelines on BIPS, which was first introduced in the 2016 Budget and aims to encourage businesses to support philanthropic activities through employee volunteerism or secondments. Broadly, businesses that support employees who volunteer with or provide services to IPCs will enjoy tax deduction of 250% of the wages and related expenses associated with those activities, subject to certain caps.
PwC observation:Taxpayers should consider the described updates and the potential consequences on their related tax positions.
Notice 2016-52 details Section 909 regulations for FTC splitting events
On September 15, 2016, the US Department of the Treasury and the internal revenue service (IRS) issued Notice 2016-52, announcing future Section 909 regulations addressing situations in which foreign tax credit (FTC) splitter arrangements arise due to foreign-initiated adjustments to which Section 905(c) would apply. The Notice preamble specifically references retroactive payments for prior-year taxes required under the European Union (EU) State aid rules as adjustments that could raise this issue. However, the future regulations announced by the Notice could apply to any foreign-initiated adjustment to a taxpayer’s foreign tax liability.
The Notice adds two new types of splitter arrangements to the exclusive list set forth in the current regulations under Section 909: (i) arrangements arising from the application of Section 905(c) to successor entities, and (ii) arrangements arising from distributions made before payment of additional tax required by foreign-initiated adjustments.
Treasury and the IRS are concerned that taxpayers anticipating a foreign-initiated adjustment may attempt to change their ownership structure or cause a Section 902 corporation to make an extraordinary distribution so that a subsequent foreign tax payment will create a high-tax post-1986 pool of earnings and profits (E&P) that can generate substantial deemed-paid foreign taxes without the payment of US income tax on the E&P to which the taxes relate.
The Notice announces that, for foreign taxes paid on or after September 15, 2016, the future regulations will include such transactions as FTC splitting events subject to Section 909, unless the taxpayer is able to demonstrate through clear and convincing evidence that the transactions or distributions were not undertaken with a principal purpose of creating a separation of the foreign taxes.
PwC observation:Taxpayers are encouraged to assess past and proposed global structuring transactions and distributions of foreign earnings, as well as their foreign tax audit activity and developments to determine the potential impact of the new rules. In some cases, taxpayers may want to consider alternative transactions or documentation with respect to transactions that clearly evidence that such transactions or distributions were not, or will not, be undertaken with a principal purpose of separating any anticipated foreign tax payment from the income to which the foreign tax relates.
EU extends Gibraltar State aid investigation to include rulings
On September 23, 2016, the European Commission (EC) published the full text of its letter dated October 1, 2014 to the UK government where it announced that it would examine the Gibraltar tax rulings practice from the perspective of the European Union (EU) State aid rules. Previously this was only available as a summary press release. This decision is part of an on-going State aid investigation into the Gibraltar corporate tax system, which was opened in October 2013.
The Gibraltar tax system under investigation dates from 2010. The tax system includes the possibility for taxpayers to conclude tax rulings with the Gibraltar tax authorities. The EC reviewed 165 out of the 340 tax rulings granted by Gibraltar between 2011 and August 2013. The companies that received these rulings are identified in this letter to the UK government, notifying them of the decision.
The EC has concluded that, in their view, the Gibraltar tax authorities have granted rulings without adequately evaluating the companies’ business in order to safeguard Gibraltar’s tax base. By granting these rulings to certain multinational companies (MNCs) versus purely domestic companies that do not ask for rulings, the EC believes that the Gibraltar tax authorities treat companies in a similar legal and factual situation differently. Finally, the EC believes that this is a derogation from the Income Tax Act 2010 (the system of reference) with no justification and accordingly is unlawful State aid.
The EC’s view is that the 165 rulings listed in the annex and Gibraltar’s tax rulings practice constitutes State aid measures.
EU LawGibraltar
PwC observation:This decision represents the EC’s preliminary view. Interested parties will have one month after the decision is published in the EC Official Journal to submit comments. Taxpayers should continue to monitor the investigation and the EC’s final conclusion.
In the meantime, however, since it appears that the EC’s preliminary view is that the Gibraltar tax ruling practice, as well as granting aid to the 165 companies whose rulings were reviewed, represents an aid scheme, any group having received a tax ruling in Gibraltar since 2010 may wish to consider the potential implications of this case for their situations.
EC opens formal State aid investigation into Luxembourg’s tax treatment of GDF Suez (now Engie)
On September 19, 2016, the European Commission (EC) announced, in a press release, a formal State aid investigation into tax rulings granted by the Luxembourg tax authorities to GDF Suez group (now Engie) (‘the group’).
The formal investigation concerns the treatment of certain interest-free convertible loans issued by two Luxembourg group subsidiaries (‘borrowers’) to two other Luxembourg group companies (‘lenders’). The press release describes the reasons why the EC believes that the tax treatment applied to those transactions could represent State aid. According to the press release:
• the borrowers recorded in their accounts provisions for interest payments which were deductible at their level, and
• upon conversion of the loans into shares at the lender level, the shares incorporate the value of the provisioned interest and therefore generate a profit for the lenders, but given the conversion of the loan into shares, the profit generated was not subject to tax at the lender level as it was considered a dividend associated to the shares.
The EC considers at this stage that the tax treatment resulted in tax benefits that are not available to other taxpayers, primarily because it qualifies the same financial transaction both as equity and as debt, giving rise to double non-taxation.
After this preliminary assessment, the press release mentions that the EC will now assess whether the Luxembourg tax authorities departed from provisions of national law in the concerned tax rulings issued to the group. The EC will also assess whether, by doing so, the group obtained an advantage not available to other companies subject to the same national tax rules.
PwC observation:This decision (not yet published) represents only the EC’s preliminary assessment in this matter and confirms that the investigation does not question the general Luxembourg tax regime.
The Member States and taxpayers concerned now have the option of presenting their own arguments, after which the EC will render its final decision in the case. Based on other investigations, we expect that the final decision will not be issued for several months.
In the meantime, we await the publication of the detailed opening decision in order to determine the case’s full implications.
The Convention between the government of Canada and the government of the State of Israel for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (the Convention) was signed on September 21, 2016.
The new Convention limits the withholding tax (WHT) rate on dividends to 5% where the beneficial owner of the dividends is a resident of the other state and a company (other than a partnership) that holds directly at least 25% of the capital of the company paying the dividends. The WHT rate on dividends is 15% in all other cases.
The new Convention limits the WHT rate on interest and royalties to 10%, where the beneficial owner is a resident of the other state. However, the reduced WHT rate is available only with respect to the portion of interest or royalties determined absent any special relationship between the payer and beneficial owner or between both of them and some other person.
Lastly, the new Convention contains provisions reflecting the standard developed by the Organisation for Economic Co-operation and Development (OECD) for the exchange of tax information.
TreatiesCanada
PwC observation:The new Convention will enter into force once Canada and the State of Israel have completed mutual notification procedures. A resident of a State will not be entitled to benefit from the reduced WHT rates on dividends, interest, and royalties if one of the main purposes of certain transactions is for that resident to obtain the benefits of the applicable articles.
Protocol to the double tax treaty (DTT) between China and Estonia entered into force
China and Estonia signed a Protocol to the China-Estonia DTT (the Protocol) on December 9, 2014. In August 2016, China’s State Administration of Taxation (SAT) announced that the Protocol has been ratified by both States and entered into force on December 18, 2015 and is applicable to income derived on and after January 1, 2016.
The Protocol revises certain articles set out in the China-Estonia DTT signed in 1998. Key changes include:
• In the definition of resident of a State, the phrase ‘means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of head office, place of incorporation, or any other criterion of a similar nature’ is replaced by ‘means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of incorporation or place of effective management or any other criterion of a similar nature’.
• In the capital gains article, in determining the threshold for the source state to exercise its taxing right on gains from disposal of property-rich shares, the word ‘mainly’ is replaced by ‘more than 50%’.
• The shareholding threshold in the Estonian company paying dividends for indirect foreign tax credit purpose in China is increased from ‘no less than 10%’ to ‘no less than 20%’.
• The Exchange of Information (EoI) Article is updated to be in line with the 2014 Organisation for Economic Co-operation and Development (OECD) Model Tax Convention.
PwC observation:With the amendments contained in the Protocol, it seems China intends to put the China-Estonia DTT on par with other tax treaties concluded or re-negotiated by China in recent years. Relevant investors need to consider the impact of the Protocol and take action accordingly.
PwC observation:Given that Hong Kong does not currently impose any withholding tax (WHT) on dividends and interest paid to non-residents and the WHT rate on royalties under Hong Kong domestic law (4.95%) is lower than that under the Hong Kong-Korea DTT (10%), the major benefits of the Hong Kong-Korea DTT for Korean resident corporations will be (i) the treaty protection for profits derived from business activities carried out in Hong Kong as long as their business activities do not create a permanent establishment (PE) in Hong Kong and (ii) the Hong Kong profits tax exemption for income derived by a Korean resident from lease of movable property (e.g. equipment) in Hong Kong, provided that the property is not effectively connected with a permanent establishment (PE) of the Korean resident in Hong Kong.
Korea
Korea-Hong Kong double tax treaty ratified by Korea’s National Assembly
On September 7, 2016, Korea’s National Assembly ratified the income tax treaty with Hong Kong without any changes from the original agreement that was signed on July 8, 2014. For Korean tax purposes, the provisions of the treaty will become effective on April 1, 2017 for taxes withheld at source and from January 1, 2017 for all other taxes.
The key benefits under the treaty for Hong Kong investors into Korea include:
• the reduction of withholding tax (WHT) rates on dividends to 10% if the beneficial owner is a company holding directly at least 25% of the capital of the company paying the dividends or 15% in other cases,
• reduced WHT rates on interest (10%) and royalties (10%),
• the elimination of WHT on equipment rental provided there is no permanent establishment (PE) in Korea,
• a threshold of 12 months for construction site PE under which a building site or construction, assembly, or installation project or related supervisory activities will only constitute a PE if such site, project or activities last for more than 12 months, and
• taxpayers may now initiate mutual agreement procedures to obtain double tax relief and proactively seek certainty on transfer pricing arrangements via bilateral advance pricing agreement (APA) requests.
However, the treaty does not offer any tax relief on capital gains derived by a Hong Kong resident from the disposal of shares in a Korean company regardless of whether the Korean company’s assets are mainly comprised of immovable property or not.
PwC observation:The treaty provides a number of potential tax benefits to Hong Kong investors into Korea. Following ratification of the treaty, Hong Kong companies investing and doing business in Korea should review their investment structures and business arrangements and assess whether they can benefit from the treaty.
Several updates on double tax treaties (DTTs) with Portugal should to be considered.
Tax treaty with the Kingdom of Saudi Arabia enters into force Following the publication of Notice 103/2016, dated October 4, 2016, the tax treaty between Portugal and the Kingdom of Saudi Arabia has entered into force on September 1, 2016. It generally applies to taxes due on or after January 1, 2017. The tax treaty limits the tax withheld at source to 10% on dividends (0%, under certain conditions), 10% on income from debt claims and 8% on royalty payments.
Tax treaty with the Principality of Andorra is approved The Counsel of Ministers on September 22, 2016 approved the tax treaty with the Principality of Andorra. The details of the tax treaty are not yet known.
Tax treaty with the Bahrain is approved and ratified On September 22, 2016, it was published in the Official Gazette that the tax treaty signed between Portugal and Bahrain has been approved and ratified. This tax treaty limits the tax withheld at source to 15% on dividends (10% if the beneficial owner is a company which holds directly at least 25% of the capital of the company paying the dividends), 10% on income from debt claims, and to 5% on royalty payments. This tax treaty will enter into force pending the completion of all formalities required by both States. It will be applicable in Portugal to taxes due at source on or after January 1 of the year following the year the tax treaty enters into force.
Protocol to the tax treaty with France On August 26, 2016, Portugal and France have signed to amend the protocol of the existing tax treaty. The amendment aims to introduce procedures and mechanisms for the exchange of information (EoI) and mutual assistance on tax matters between the Portuguese and the French tax authorities. The amendment has not yet entered into force.
Treaty with the Ivory Coast is approved and ratified On August 22, 2016, it was published in the Official Gazette that the tax treaty signed between Portugal and the Ivory Coast has been approved and ratified. This tax treaty limits the tax withheld at source to 10% on dividends and interest, and to 5% on royalty payments. This tax treaty will enter into force pending the completion of all formalities required by both States. It will be applicable in Portugal to taxes due at the source on or after January 1 of the year following the year of entrance into force of the tax treaty.
PwC observation:These tax treaties aim to facilitate foreign investment in Portugal and also to continue to develop the basis and the network of foreign tax administrations with which the Portuguese tax authorities may cooperate and exchange information with in order to increase the effectiveness of the fight against tax fraud and tax evasion. The increase of the existing network of tax treaties has been defined as a strategic action within a wider objective of capitalising the Portuguese enterprises and allowing them to expand their businesses.
Several updates on Singaporean tax treaties should be considered.
France The revised treaty with France concluded on January 15, 2015, was gazetted and entered into force on June 1, 2016. It offers improved terms such as lower withholding tax (WHT) rates for dividends and includes anti-abuse provisions. The revised treaty is expected to enhance trade and investment flows between the two countries.
Ethiopia Ethiopia and Singapore signed an income tax treaty on August 24, 2016. The treaty will clarify the taxing rights of both countries on all forms of income flows arising from cross-border business activities, and minimise double taxation of such income. This will lower barriers to cross-border investment and boost trade and economic flows between the two countries. The treaty has not yet been ratified and has not entered into force.
Myanmar Myanmar and Singapore plan to negotiate an update to the tax treaty, and potentially start discussions for a bilateral investment treaty.
SwitzerlandJörg Gasser, Swiss State Secretary for International Financial Matters, has met representatives in Singapore and Hong Kong to discuss multilateral tax issues such as international standards on the automatic exchange of information (EoI), according to a press release dated July 14, 2016.
United StatesThe United States (US) and Singapore, in a joint statement issued on August 2, 2016, agreed to complete negotiations on, and sign as soon as possible, a tax information exchange agreement (TIEA) and a reciprocal Foreign Account Tax Compliance Act (FATCA) intergovernmental agreement. The countries will continue discussions on whether to negotiate a tax treaty in the future.
PwC observation:Generally, these treaties provide clarity on tax matters and eliminate double taxation relating to cross-border transactions between Singapore and the respective jurisdictions.
Agreements awaiting US Senate approval The six bilateral agreements (new income tax treaties with Chile, Hungary and Poland, and proposed protocols to existing income tax treaties with Japan, Luxembourg, Spain, and Switzerland) and one multilateral agreement that have been awaiting ratification by the US Senate remain stalled as a result of the actions of Senator Rand Paul (R-KY) to block the normal unanimous consent process for treaty approval. Repeated efforts by the business community and the Administration to convince the Senator to drop his blockage of approval have proved fruitless. Nonetheless, renewed efforts are underway to convince the Senate leadership to make this a priority and to convince Senator Paul to remove his objections. If it does not happen by the end of the congressional year, the process will have to start all over again with the new Congress when they convene in January.
New agreements with Norway and Vietnam We understand that a new treaty with Vietnam and a revised or new treaty with Norway have been signed and are working their way through the administrative process for submission to the Senate. This may add to the pressure for resolving the above blockage. Importantly, the new agreement with Norway might possibly incorporate the new restrictions on access to treaty benefits reflected in the controversial new US Model Income Tax Convention (US Model). While we would expect these restrictive rules to have little impact in the context of the US-Norway treaty, having a treaty partner agreeing to these restrictions would set an unfortunate precedent.
Other US Treaty discussions and negotiations Ireland On August 25, 2016, the Irish Department of Finance announced that discussions have begun with the US for revisions of the US-Ireland income tax treaty to take into account the changes reflected in the new
US Model. The Finance Department asked for input from the public, with comments to be submitted by October 14, 2016. We await further developments on this matter.
Netherlands While there has been no public information with regard to the Netherlands, we understand the US Department of the Treasury expects to have similar discussions with the Netherlands.
United Kingdom The US and the UK have been having continuing discussions regarding treaty issues including a possible protocol to the existing treaty. These discussions date back to prior to the issuance of the new US Model but are continuing, leaving open the possibility that the US will push for incorporation of the provisions in the new US Model.
Luxembourg Negotiations between the US and Luxembourg have been ongoing for close to a year. The initial focus of the negotiations was the US desire to eliminate taxpayers’ ability to form a Luxembourg finance company for loans to US affiliates where the loan was booked in a US branch of the Luxembourg company with the result that neither the United States nor Luxembourg taxed the interest income. This ‘triangular branch’ structure is also used for royalty income. On June 22, 2016, the United States and Luxembourg announced an agreement in principle to include in a protocol to the existing income tax treaty an amendment that addresses the potential for double non-taxation for US-source income of a Luxembourg company that is attributable to a US branch of the company. Once ratified, the provision could have retroactive effect to three days after Luxembourg parliamentary action approving the language. A bill with the language has been submitted to the Parliament. The timing of Parliamentary action is uncertain. The treaty
negotiations are ongoing and could well include US efforts to add the new restrictions on access to treaty benefits contained in the US Model.
Technical Explanation (TE) of the new US Model Income Tax Convention When the new US Model was issued in February, Treasury said it was working on an accompanying TE, which will be important in getting greater insight into some of the new concepts found in the US Model. Treasury asked for comments from the public, with a deadline of April 18, 2016. While we expected the TE to be issued by now, we understand that, with other demands on the relevant professionals at Treasury, the TE has not been given the highest priority. However, one Treasury attorney suggested that it should be ready before year end.
Regulatory guidance on treaty interpretation There has been a longstanding project on the IRS Business Plan to issue new regulations under Section 894 addressing certain treaty interpretive issues. A Treasury official recently commented that the project has been narrowed to hybrid entity issues, particularly in regard to testing ownership and holding period. While not included in that official’s informal list of projects aimed for completion before year end, it was included in several projects identified as ‘on the horizon’.
PwC observation:While actions on certain US treaties appear to be ongoing, the approval process has stalled due to the blockage imposed by Senator Rand Paul. However, stakeholders should continue to monitor US treaty developments in relevant jurisdictions in case the blockage is removed.
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This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
