International Tax News Edition 29 July 2015 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 29July 2015
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.
Tax authorities provide guidelines for notional interest deduction anti-avoidance rules
The Italian tax authorities issued guidelines on June 3, 2015 which address the anti-avoidance rules that apply to the notional interest deduction (NID) regime.
NID is a notional deduction with respect to ‘new equity’, which includes retained earnings and certain cash capital contributions over a particular equity-basis as of 2010.
Certain contributions made by foreign investors that are considered ‘tainted contributions’ do not qualify for the NID. These include contributions made when a foreign investor either is a resident of a tax-haven jurisdiction (generally a Country with a limited exchange of information with Italy) or is ultimately controlled by an Italian-resident person. The stated rationale behind this limitation is to prevent obtaining the benefit at the level of both the ultimate investor and the entity receiving the tainted contribution.
The guidelines take the position that contributions are tainted when they are made directly or indirectly (look-through approach) by tax-haven-resident investors. Based on the wording of the guidelines, the existence of a single ‘black-listed’ shareholder in the ownership chain potentially could taint the entire amount of the contribution, unless the funds are traced back to ‘white-listed’ (i.e. non-tax-haven) investors.
This represents a radical change in the Italian tax authorities’ approach. To lessen the impact, the tax authorities will hear requests for rulings that the contributions in question can be traced to an investor resident in a country that allows a full exchange of tax information and that there is no duplication of benefits. For 2014 and for prior year contributions, the deadline for ruling requests is July 2, 2015.
PwC observation:This new strict approach of the Italian tax authorities is likely to have a broad impact. Multinational corporations (MNCs) and funds with Italian investments that have benefitted from the NID should ensure that the new look-through approach does not jeopardise this benefit. Taxpayers that could be affected by the new approach should consider filing a ruling request by July 2, 2015.
Panama
Tax reform could affect MNCs under a special tax regime
Law 27, including 2015 amendments to the Tax Code of the Republic of Panama was enacted and new provisions are adopted.
One important amendment is the modification of Paragraph 1, letter e of Article 694 of the Tax Code, which added that public entities, whether they belong to the central government, including autonomous, semi-autonomous entities, local governments, State enterprises or companies in which the Panamanian government has at least 51% or more of its shares, as well as entities not subject to corporate income tax (CIT) or those who are in a loss position, are subject to make the corresponding withholding over payments made to companies located abroad, applying the 25% rate over half of the amount paid, regardless of whether the payment is considered deductible.
Article 733-A of the Fiscal Code is restored but with different wording, whereby if according to a special law, the payment of interest, royalties, dividends, fees, or other, is exempt from withholding tax (WHT), said exemption will not apply if the beneficial owner of the payment can credit the taxes that would have been paid in Panama in its country of residence.
In the event that the credit application is not allowed in the country of residence, the taxpayer must request a formal opinion from an independent expert stating the non-applicability of the tax credit in the country of residence.
Francisco Barrios Pedro AnzolaAve Samuel Lewis y Calle 55E Ave Samuel Lewis y Calle 55ET: +507 206 9217E: [email protected]
PwC observation:The above tax reform could affect multinational companies (MNCs) operating in Panama under a special tax regime. Panamanian companies maybe now required to withhold tax on payments made to companies located outside of Panama.
Upstream loan rules in the foreign affiliate arena
As a general matter, where a ‘specified debtor’ in respect of a taxpayer resident in Canada receives a loan from or becomes indebted to a foreign affiliate of the taxpayer, or a partnership of which such affiliate is a member, the specified amount in respect of the loan or indebtedness is included in computing the taxpayer’s income for its taxation year that includes the time when the loan was made or in which the indebtedness was entered.
The definition of ‘specified debtor’ was recently considered by the Department of Finance in a comfort letter dated March 10, 2015. The Department of Finance agreed with the taxpayer’s view that it would be inappropriate for the income inclusion to arise in respect of loans made to a non-controlled foreign corporation (whether or not the foreign corporation deals at arm’s length with the taxpayer) where all of the shares of that corporation, that are not directly or indirectly owned by the taxpayer, are owned by persons with whom the taxpayer deals at arm’s length.
A recommendation is expected to be made to the Minister of Finance (MoF) to amend the definition of ‘specified debtor’ such that it would exclude a foreign affiliate of a taxpayer if each share of the capital stock of the affiliate is owned by any of:
• the taxpayer
• persons resident in Canada
• non-resident persons that deal at arm’s length with the taxpayer, and
• controlled foreign affiliates of the taxpayer (as defined for the purposes of these rules).
The definition of ‘specified debtor’ is also expected to be amended to exclude a foreign affiliate that is held by another foreign affiliate that is not a specified debtor due to the above changes, and to exclude certain partnerships and certain non-resident corporations held through partnerships.
These changes would apply in respect of loans received or indebtedness incurred after August 19, 2011 and in respect of any portion of a particular loan received or indebtedness incurred on or before August 19, 2011 that remained outstanding on August 19, 2014.
PwC observation:This issue had been brought to the attention of the Department of Finance when the upstream loan rules were first introduced but was not specifically considered until now. Although fact specific, loans made to foreign affiliates that are a part of a joint venture where a majority of the ownership is held by arm’s length non-resident persons can now be loans that are excluded from the application of the upstream loan rules.
Kara Ann Selby Maria LopesToronto TorontoT: +1 416 869 2372E: [email protected]
Amendments to Tax Ordinance Act regarding automatic exchange of information on individual’s income between the EU tax authorities
The essence of automatic exchange of information is periodic submission of data about taxpayers’ income between the EU (European Union) member states without any notification from the tax authorities or any other request.
Therefore, information concerning income received by the taxpayer in one of the EU countries, will be provided to the tax authorities of the country of the taxpayer’s residence ex officio.
Until now, the EU countries have been exchanging information on interest income only. Planned amendments to the Tax Ordinance Act extend the information exchange on additional sources of income. When new regulations come into force, information on income received by Polish tax non-residents will be provided by Polish tax authorities to the relevant foreign tax offices. Moreover, information on income received abroad by Polish tax residents will be automatically submitted to the Polish tax authorities.
According to the proposed amendment to the Tax Ordinance Act, Polish authorities will send information on income derived in Poland by Polish tax non-residents from:
• employment contracts
• management contracts
• appointment to the management or supervisory board
• personal activities, and
• retirement pensions or disability pensions.
The Directive 2011/16/EU also predicts automatic exchange of information on income received from immovable property (e.g. rental income, income from sale of immovable property) and life insurance. A Polish project of regulations does not include these sources of income, which means that Polish tax authorities will not send information on the above-mentioned income derived by Polish tax non-residents to the foreign tax authorities.
However, Polish tax authorities may be provided with information on Polish tax residents, who derived income from property located outside Poland or who received payments from foreign life insurance. It is also worth mentioning that the EU is planning to implement Common Reporting Standards (CRS), which additionally extend the exchange of information on dividend income, sale of financial assets, i.e. shares or participation units in investment funds and accounts in financial institutions.
EU member states were obliged to implement Directive 2011/16/EU until January 1, 2015. In Poland, the project of the regulations predicting relevant changes in the Tax Ordinance Act, is currently subject to arrangements at the Council of Ministers.
Therefore, the exact date when new regulations would come into force is still unknown. However, it has been decided that exchange of information will concern income received as of January 1, 2014.
PwC observation:The above-mentioned Tax Ordinance Act regulations concerns only income derived in Poland by Polish tax non-residents. However, all EU member states were obliged to implement the Directive 2011/16/EU. Therefore, information on the above-mentioned income derived by Polish tax residents may be provided to the Polish tax offices. In practice, these amendments mean that taxpayers who are Polish tax residents and did not declare in Poland their foreign income, should consider correcting their annual tax reconciliations, paying penalty interest and should be aware of potential additional fines stipulated by the Polish Penal-Fiscal Code.
In November 2014, Canada and the other G20 countries endorsed a new Common Reporting Standard (CRS) for automatic information exchange developed by the Organisation for Economic Co-operation and Development (OECD).
The Canadian federal budget released on April 21, 2015 reiterated the government of Canada’s pledge to working with international partners to address international tax evasion and improve tax compliance, including a proposal to adopt the CRS starting on July 1, 2017, with the first exchanges of financial account information beginning in 2018.
Foreign tax authorities will provide information to the Canada Revenue Agency (CRA) relating to financial accounts in their jurisdictions held by Canadian residents, and the CRA will, on a reciprocal basis, provide corresponding information to the foreign tax authorities on accounts in Canada held by residents of their jurisdictions.
On June 2, 2015, the Minister of National Revenue signed the international Multilateral Competent Authority Agreement (MCAA), an important step towards implementing the CRS.
Kara Ann Selby Maria LopesToronto TorontoT: +1 416 869 2372E: [email protected]
PwC observation:By signing the MCAA, Canada will benefit from a coordinated arrangement to exchange financial account information with other tax jurisdictions. This information will improve the CRA’s ability to detect and address cases of tax evasion.
France
Deduction of final tax losses: Decision of the Supreme Court, Société Agapes dated April 15, 2015
French Supreme Court ‘Conseil d’Etat’ issued its final decision in the Agapes case law on April 15, 2015 (n°36815, société Agapes) regarding the way a French company treats the final tax losses of its non-resident subsidiaries.
The present comments update our previous tax alert published in International Tax News, Edition 5 in May 2013.
As a reminder, the context is the following. The Agape Company, French tax resident, had introduced a claim in order to offset its tax losses of its Italian and Polish subsidiaries against its French taxable income. These losses could not be carried forward due to the Italian and Polish legislation that limit the loss carry-forward period.
The final decision is in line with the decisions of lower courts (Administrative Court of Montreuil, October 14, 2010 n°0809608 and 0902754 and Administrative Court of Appeal of Versailles, February 26, 2013 n°10VE04169). The Supreme Court confirmed that French legislation is compatible with EU (European Union) law insofar as it bars a French parent company from offsetting EU subsidiaries’ tax losses against its taxable profit, in situations where these losses cannot be carried forward due to limitations on the loss carry-forward period. Please note that no request for preliminary ruling was lodged towards the European Court of Justice (ECJ).
In this respect, French Supreme Court notably ruled the following:
• French tax law is not in contradiction with the EU freedom of establishment insofar as
i. only French companies / entities liable for French corporate income tax (CIT) can be members of a French tax consolidated group and
ii. a tax consolidated group is the only available way for offsetting net operating loss (NOL) of a subsidiary against a French tax group’s result.
• France is not responsible for neutralizing the tax expenses borne by foreign subsidiaries as a result from tax legislation of other EU member states according to which the offsetting of NOL is limited in time.
PwC observation:Following this decision, it is clear that final tax losses that cannot be carried forward abroad due to limitations on the foreign loss carry forward period will not be available for French offsetting either.
In situations where these NOLs would not be available for utilisation due to other reasons (liquidation of the company, termination of its activity), it is uncertain whether any offsetting against French profits would be available.
Release of revised discussion draft on BEPS Action 6: Prevention of Treaty Abuse
On Friday, May 22, 2015, the Organisation for Economic Cooperation and Development (OECD) issued a revised discussion draft (the RDD) on Base Erosion and Profit Shifting (BEPS) Action 6: Prevention of Treaty Abuse.
The RDD includes a simplified limitation on benefits (LOB) article for inclusion in the OECD Model Income Tax Convention and provides ‘conclusions and proposals’ on 20 targeted issues. Most of the proposals are in response to public comment but the RDD also contains new proposals. Some proposals aim to restrict access to treaty benefits with respect to income that may be subject to preferential tax treatment.
The introduction to the RDD stresses that it does not reflect a consensus view of the Committee on Fiscal Affairs; rather, it is intended to provide stakeholders with substantive proposals on how to address the issues for analysis and public comment.
PwC observation:The RDD marks the latest development in the OECD’s work on preventing treaty abuse.
Although the OECD has not yet made final conclusions and recommendations in this respect, it is maintaining a trajectory of three alternatives:
• simplified LOB accompanied by a principal purpose test (PPT)
• more detailed LOB accompanied by an anti-conduit rule, or
• a stand-alone PPT.
Stakeholders should consider the impact of several of the more nuanced details of this work, including those relating to pensions and non-collective investment vehicle (non-CIV) funds, as well as specific anti-abuse rules such as intermediate resident requirements and rules akin to those recently proposed by the US Treasury with respect to the US model income tax convention.
The RDD also includes significant new proposals that need careful scrutiny and input from stakeholders. The Working Party was asked to produce a final version of the report on preventing treaty abuse at the Working Party’s meeting of June 22-26, 2015.
Richard Stuart Collier Stef van Weeghel Steve NauheimLondon Amsterdam Washinton D.C.T: +44 20 7212 3395E: [email protected]
G20 International Tax Symposium stresses collaboration
The G20 International Tax Symposium was held in Istanbul on May 6-8, 2015.
Hosted by the Turkish Ministry of Finance (MoF), the symposium included 300 participants from governments, international organisations, business and industry, non-governmental organisations, and academia from 60 countries.
The symposium provided a platform to discuss the ongoing Organisation for Economic Cooperation and Development (OECD)/G20 Base Erosion and Profit Shifting (BEPS) Action Plan. It included tax matters and issues relevant to developing countries and how they might benefit from the OECD/G20 work on international taxation and other related items.
During the three-day symposium, the main topics discussed in eight sessions were:
• The G20 tax agenda The OECD will deliver the final BEPS package during the G20 Leaders Summit to be held in Antalya, Turkey, in November.
• BEPS in the digital economy In addition to potential options to address the broader tax challenges raised by the digital economy, the collection of value-added tax (VAT) in the digital economy was another issue that participants raised. A common concern appeared to be the need for a definition of ‘digital presence’.
• Contributing to financial stability OECD representatives clarified that deliverables on the hybrid mismatches will include treaty changes and recommendations for domestic law; however, anti-abuse rules will not focus on every type of hybrid mismatch, but rather target structured hybrid mismatches.
• Aligning tax rules to the reality of global value chains The symposium also included discussion on the OECD’s BEPS work on key transfer pricing issues, such as risk allocation, hard-to-value intangibles, and re-characterisation of transactions for transfer pricing purposes.
• The economists’ perspective on BEPS We noted that the OECD is faced with certain obstacles and challenges as regards data availability. However, the OECD believes that it will present credible fiscal estimates and an economic analysis of BEPS by the end of 2015.
• Implementing the international consensus on BEPS Currently, the outcomes of the BEPS Project and their implementation via domestic and treaty law changes are not fully clear. OECD representatives reminded participants that, by the end of 2015, not all measures to tackle BEPS will be supported by guidance but that the OECD will continue to release guidelines on specific subjects (e.g. hybrid mismatches) in the following years.
• Automatic exchange of information (AEoI) According to OECD representatives, the key message of the OECD common reporting standard (CRS) is that one standard for all countries has been developed and will be applied. In addition, implementation packages, e.g. country-by-country reporting, are in the pipeline.
• Developing countries’ perspectives on AEoI We note that the OECD’s key focus areas on AEoI by developing countries are (i) implementation assistance, (ii) monitoring of commitments, and (iii) preliminary assessment of confidentiality and data safeguards. The OECD also indicated that developing countries are lacking a basic infrastructure for AEoI; nevertheless, peer-to-peer learning is in place in those countries.
Zeki Gunduz Richard Stuart Collier Pam OlsonIstanbul London Washinton D.C.T: +90 212 326 6080E: [email protected]
PwC observation:While the final deliverables of the OECD Action Plan are expected to be released during the G20 Leaders Summit in November, implementation plays a key role and the OECD has already started to prepare the implementation package for certain actions.
The OECD and the G20 countries are committed to a consensus approach as an outcome of the BEPS project. But there are signs that many believe that a one-size-fits-all approach does not work anymore and perceive collaboration not only among governments but also among civil society and business as a necessity to address BEPS matters effectively. We believe that international cooperation in addressing (potential) BEPS issues has reached an advanced level and should continue to increase.
Release of BEPS proposals on permanent establishments
The Organisation for Economic Cooperation and Development (OECD) has released its revised proposals on the permanent establishment (PE) rules in Article 5 of the OECD Model Tax Treaty.
The earlier OECD proposals, which set out alternative approaches to a number of significant PE issues, have been replaced by a set of definitive proposals.
The most significant change is the proposed tightening of the dependent agent rule in Art 5 (5) of the OECD Model. This is intended to deal with commissionaire and similar arrangements, though it will have an appreciably wider impact in practice. The OECD has explained that the policy basis of the rule change is that where the activities that an intermediary (i.e. agent) exercises are intended to result in the regular conclusion of contracts to be performed by a foreign enterprise, that foreign enterprise should be considered to have a taxable nexus in that country unless that intermediary is performing these activities in the course of an independent business.
It has been clear for some time that the OECD wishes to restrict the existing specific activity exemptions which allow certain activities to take place in a state without triggering the threshold of the PE rule. As a result, there has been extensive discussion of - and various options proposed for - those specific activity exemptions (contained in Art. 5(4) of the OECD Model). Rejecting the alternative options to amend the terms of certain individual exemptions, the OECD now proposes to restrict all of the exemptions in Art. 5(4) to activities that are of a ‘preparatory or auxiliary’ character. It also proposes additional Commentary to clarify the meaning of that phrase.
Alternative measures to deal with the artificial splitting up of contracts to circumvent the 12 month ‘construction site’ PE rule (which also covers installation projects) were also included in the original proposals to address Base Erosion and Profit Shifting (BEPS) concerns. The OECD now proposes that the addition of an example in the Commentary on the application of the principal purpose test (from the work on treaty abuse in Action 6) is the way to deal appropriately with the issue.
Two options were originally proposed to expand the PE test in the insurance sector. These insurance sector-specific proposals have now been dropped. For those in the insurance sector, this news will be welcome but is unlikely to be an end to the matter. In practice, it is likely to mean that those tax authorities known to have concerns relating to cases where a large network of exclusive local agents is used to sell insurance for a foreign insurer will have to pursue them by other means - specifically, under the more general changes proposed for the tightening of the dependent agent rule.
The discussion draft does not provide any new guidance on the associated PE profit attribution issues but acknowledges the need to provide additional guidance on the attribution of profits, particularly outside the financial sector, and to take account of other work in progress on intangibles, risk, and capital.
PwC observation:These definitive proposals are largely focused on expanding the scope of the dependent agent rule (including narrowing the scope of the independent agent rule) and narrowing the scope of the specific activity PE exemptions. An important element of the package is a proposed anti-fragmentation rule intended to prevent abuse of the PE rules by segregating activities across associated entities. Taken together, the proposed amendments will clearly expand the scope of the PE rules.
The proposals were to be discussed by the OECD’s Working Party 1 in late June, when they were asked to finalise the changes to the OECD Model Treaty.
Guidance on transfer pricing aspects of intangibles: hard-to-value intangibles
The Organisation for Economic Cooperation and Development (OECD) has published a discussion draft on the arm’s length pricing of intangibles when valuation is highly uncertain at the time of the transaction or the intangibles are hard to value.
The discussion draft, released June 4, 2015, is part of Action Item 8 of the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan. Action Item 8 is focused on assuring that transfer pricing outcomes with respect to intangibles are in line with value creation.
The discussion draft explains that tax authorities face difficulties when verifying the arm’s length basis on which taxpayers determined pricing for transactions involving a specific category of intangibles because of information asymmetry between tax authorities and taxpayers. As the OECD announced when it released its discussion draft on risk, re-characterisation and special measures, the need for special measures arises because of the potential for systematic mispricing in circumstances where no reliable comparables exist, where assumptions used in valuation are speculative and where information asymmetries between taxpayers and tax authorities are acute.
The discussion draft is an improvement upon the prior version to the extent some of the more radical special measures (e.g. those regarding minimal functional entities, thick capitalisation, and capital-rich asset owning companies) have been eliminated. It relies much more heavily on ‘commensurate with income’ type rules, allowing for use of information in years subsequent to the transfer, to determine the pricing of intangibles.
PwC observation:The most controversial aspect of the discussion draft will likely be with respect to the proposals to allow tax authorities to re-characterise a transfer of intangibles based upon speculation about alternative, hypothetical pricing arrangements (like price adjustment clauses and subsequent contract renegotiation based upon unforeseen events) that possibly could have been entered into. In practice it would lead to significant uncertainty and unpredictability regarding pricing of intangibles. But it is consistent with other proposals under the BEPS Action Plan, that less emphasis should be placed on separate entities and legal contracts and that tax authorities should have broader powers to re-characterise transactions.
The discussion draft also attempts to set boundaries around the situations where it would or would not be appropriate for tax administrations to use ex post information. However, it depends upon subjective terminology to set those boundaries, such as proving ‘satisfactory’ evidence about ‘significant’ differences between expectations and outcomes, and whether outcomes were ’unforeseeable’, ’extraordinary’, or could have been anticipated. Consequently, in practice it is likely that tax authorities could claim the right to use ex post information in almost any situation where reliable comparables are not available to support the pricing of an intangible that ultimately turns out to be successful in the marketplace.
Multinational enterprises (MNEs) should consider how the proposals in the discussion draft could impact their business operations. The OECD will hold a public consultation on this discussion draft and other transfer pricing topics under Actions 8-10 on July 6 and 7, 2015.
Isabel Verlinden Horacio Pena Richard Stuart CollierBrussels New York LondonT: +32 2710 4422E: [email protected]
Final regulations on substantial business activities in a foreign country
On June 3, 2015, the Internal Revenue Service (IRS) and Treasury issued final regulations under Section 7874 (TD 9720) of the Internal Revenue Code for determining when an expanded affiliated group (EAG) will be considered to have substantial business activities in a foreign country.
The final regulations adopt, with certain modifications, the temporary regulations issued in 2012 and retain the bright-line rule for determining substantial business activities in a foreign country.
Under Section 7874, if a foreign corporation acquires substantially all of the properties of a domestic corporation or a partnership, and, by reason of their equity interest in the domestic entity, the shareholders or partners receive at least 80% of the vote or value of its stock, the foreign corporation generally is treated as a domestic corporation for US federal income tax purposes. If, on the other hand, the shareholders or partners receive at least 60%, but less than 80%, of the vote or value of the foreign corporation’s stock, the domestic entity generally is limited in its ability to use tax attributes (such as net operating losses and credits) to reduce its US tax on income from certain transactions with related foreign persons for a ten-year period. These rules do not apply however if, relative to the group’s worldwide business activities, the group conducts substantial business activities in the foreign corporation’s country of organisation.
The final regulations adopt the definitions of ‘group employees’, ‘employee compensation’, ‘group assets’, and ‘group income’, with certain modifications.
The 2012 temporary regulations provide that the EAG that includes the foreign acquiring corporation is determined as of the close of the acquisition date. The final regulations clarify that an entity that is not a member of the EAG on the acquisition date is not a member of the EAG, even if the entity would have qualified as a member of the EAG at some earlier point during the testing period. The disposition of all assets of an entity may or may not cause it to cease to be a member of the EAG depending on whether the entity remains in existence on the acquisition date.
Under the 2012 temporary regulations, for purposes of the substantial business activities test, a partnership is treated as a corporation that is a member of an EAG if, in the aggregate, more than 50% (by value) of its interests are owned by one or more members of the EAG (deemed corporation rule). The final regulations add a look-through rule, whereby in determining which corporations are members of the EAG, each partner in a partnership is treated as holding its proportionate share of the stock held by the partnership.
Finally, the anti-abuse rule set forth in the 2012 temporary regulations is revised to exclude from both the numerator and the denominator, for purposes of the 25% group employees, group assets, and group income tests, certain items associated with a transfer of property to an EAG that are disregarded under Section 7874(c)(4).
The final regulations apply to acquisitions completed on or after June 3, 2015 and are effective as of June 4, 2015, the date the final regulations were published in the Federal Register.
PwC observation:The IRS and Treasury retained the bright-line rule set forth in the 2012 temporary regulations for determining substantial business activities in a foreign country, which appears to have been designed so that the statutory exception will almost never apply, and in that regard does not seem consistent with congressional intent. In particular, multinational companies (MNCs) selling into the global market rarely have 25% or more of their sales to customers in any single jurisdiction.
Nevertheless, the IRS and Treasury rejected comments that there is insufficient support for the bright-line rule in the legislative history and concluded that the bright-line rule is consistent with Section 7874 and its underlying policies.
While the preamble to the final regulations provides that the bright-line rule has proven more administrable than a facts-and-circumstances test and has the benefit of providing certainty in applying Section 7874 to particular transactions, retaining the bright-line rule is likely a sign that the US government is continuing to crack down on US company migrations.
Michael A DiFronzo Oren Penn Mark BoyerWashington D.C. Washington D.C. Washington D.C.T: +1 202 312 7613E: [email protected]
Commission orders Estonia and Poland to deliver missing information on tax practices
Since June 2013, the Commission has been investigating the tax ruling practices of Member States.
The enquiry is aimed at clarifying allegations that tax rulings may constitute state aid and to allow the Commission to take an informed view of the practices of all Member States.
According to European Union (EU) law, state aid means any aid granted by a member state or through state resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods. State aid is prohibited to the extent it affects trade between member states within the internal market.
With the exception of Estonia and Poland, all EU countries have cooperated and fully provided the required information.
To-date, Estonia and Poland have failed to adequately respond to the request for information, arguing fiscal secrecy and the principle of proportionality. They have only submitted general information but refused to provide a specific and detailed overview of tax rulings issued from 2010 to 2013.
The State aid Procedural Regulation entitles the Commission to request any information it deems necessary to assess for a state aid investigation, including information required in order to assess whether a member state’s tax practice favours certain companies. Moreover, according to the Commission’s Communication on professional secrecy, Member States cannot invoke professional secrecy for refusing to provide information requested by the Commission.
On June 8, 2015, the European Commission issued two injunctions ordering Estonia and Poland to deliver within one month information requested by the Commission on their tax rulings practice. The Commission has also asked 15 Member States to provide a substantial number of individual tax rulings.
Should any of the two fail to deliver the missing information within one month, the Commission may refer that member state to the EU Court of Justice.
On June 9, 2015, the spokesperson of the Minister of Finance (MoF) informed that so far a review of 25,000 tax rulings regarding corporate income tax (CIT) in respect of cross border transactions has been conducted and description of 700 rulings regarding cross border transactions was sent to the Commission. The Commission’s enquiry will be analysed in view of the currently binding law.
PwC observation:The enquiry to deliver mentioned tax rulings does not mean that state aid procedure will be started against entities which obtained tax rulings.
However, the European Commission is entitled to challenge tax rulings issued for tax payers in EU member states if it concludes that by granting selective advantages to certain enterprises or groups of enterprises, they distort the competition on the internal market and thus infringe EU state aid principles.This may have direct influence on Polish taxpayers, who have acted in line with the obtained tax ruling of the MoF, if the Commission concludes that the resulting tax rules constitute prohibited state aid.
Taxation agreement between European Union (EU) and Switzerland
On May 27, 2015 in Brussels, European Union (EU), and Switzerland signed the agreement regarding the exchange of information in the tax area.
The aim of this agreement is to implement the most recent standards to address unfair tax practices at an international level.
The agreement concluded between EU and Switzerland is aimed at upgrading the currently binding agreement from 2004, which imposed on Switzerland the obligation to use measures equivalent to those included in the directive on income savings. It also complies with the automatic exchange of financial account information promoted by a 2014 Organisation for Economic Co-operation and Development (OECD) global standard.
According to the agreement, EU and Switzerland will mutually exchange information regarding bank accounts of their residents.
The agreement enables the tax authorities of member states and Switzerland to, for example:
• identify correctly and unequivocally the taxpayers concerned
• administer and enforce their tax laws in cross-border situations
• assess the likelihood of tax evasion being perpetrated, and
• avoid unnecessary further investigations.
The subsequent step is on-time ratification of the agreement. The expected date for the agreement to come into force is January 1, 2017.
PwC observation:According to the agreement, the information to be exchanged is quite broad. It concerns not only income such as interest and dividends, but also account balances and proceeds from the sale of financial assets. Taxpayers will have limited possibilities to avoid declaring their assets, investments, or revenues in the form of interest and dividends, as well as balances and profits from sale of financial derivatives.
Amending protocol to the DTT with South Africa signed
On April 1, 2015 Cyprus and South Africa signed a protocol amending the 1997 double tax treaty (DTT) between the two countries.
The protocol was ratified by Cyprus on May 8, 2015. We understand that South Africa has not yet ratified the protocol. The protocol will enter into force once all the necessary legal formalities between the two countries have been finalised.
The protocol revises the dividend article and in particular provides for the below withholding tax (WHT) rate on dividends:
• 5% of the gross amount of the dividends if the beneficial owner is a company which holds at least 10% of the capital of the company paying the dividends, or
• 10% in all other cases.
Additionally, the protocol modernises the provisions of the treaty relating to exchange of information and amends the term ‘resident of a contracting state’ to align it with the Organisation for Economic Co-operation and Development (OECD) Model Convention.
PwC observation:Irrespective of the above WHTs on dividends under this protocol to the treaty, as per the domestic Cyprus tax legislation there is no Cyprus WHT on dividend payments to non-Cyprus tax residents anyway.
The Cyprus DTT with South Africa remains a competitive treaty. The above WHT rates on dividends are competitive rates amongst South Africa’s treaty network and the treaty continues to provide for no WHT on interest and royalty payments. Further, under the treaty Cyprus has the exclusive taxation rights on gains on disposals of shares in South African companies, including companies holding immovable property located in South Africa.
Cyprus
DTT with Georgia concluded
Cyprus and Georgia signed a double tax treaty (DTT) on May 13, 2015 with Cyprus subsequently ratifying the treaty on May 29, 2015.
Georgia has not yet ratified the treaty. This is the first DTT concluded between the two countries. The treaty will enter into force once all legal formalities have been completed.
The treaty provides for no withholding taxes (WHTs) on payments of dividends, interest, and royalties.
Further, under the treaty, Cyprus retains the exclusive taxing rights on disposals by Cyprus tax residents of shares in Georgian companies, including shares in Georgian companies which hold immovable property located in Georgia.
PwC observation:Cyprus is ideally geographically located for the establishment of regional headquarters for business in Eastern Europe, North Africa, and the Middle East. This latest very competitive treaty further expands the Cyprus tax treaty network in the region.
On May 15, 2015, the Dutch Parliament ratified the Germany - Netherlands Income Tax Treaty (the treaty).
The treaty was initially signed on April 12, 2012. As Germany already ratified the treaty, it is now expected that the treaty will enter into force on January 1, 2016. The new treaty generally follows the Organisation for Economic Co-operation and Development (OECD) Model. We have outlined the specifics of the treaty below.
The maximum withholding tax (WHT) rates are:
• 15% on dividends distributions, 10% for Dutch pension funds and 5% if the receiving company owns directly at least 10% of the capital of the company paying the dividend. Note that on the basis of the European Union (EU) parent/subsidiary directive as implemented into Dutch law, 5% German parent companies (subject to tax) of Dutch companies are in principle eligible for the Dutch domestic withholding exemption.
• In such case the 5% treaty rate is not relevant.
• 0% on interest.
• 0% on royalties.
On certain key aspects, the new treaty differs from OECD model treaty. Under the new treaty, offshore activities are deemed to constitute a permanent establishment (PE) if such activities exceed 30 days within 12 months. In addition, benefits of the purchase of own shares by a company and liquidation payments are qualified as dividend. Furthermore, Germany and the Netherlands can apply their own domestic anti-abuse rules. If these rules, however, result in double taxation, the states will consult each other. The taxpayer further has the right to request for binding arbitration if both states do not solve the issue within two years.
PwC observation:For the Netherlands, Germany is both its neighbour and most important trading partner. This new tax treaty provides a solid framework that further facilitates cross-border activities. We further consider that the concrete measures in the new treaty in relation to binding arbitration should further contribute to the avoidance of such double taxation.
Treasury proposes fundamental changes to Model Income Tax Convention
On May 20, 2015, the US Department of Treasury released proposed revisions to the US Model Income Tax Convention (the Model).
Treasury has requested comments from the business community and other interested stakeholders with respect to these proposals within 90 days.
The Model was last updated in 2006 and is accompanied by a technical explanation that describes in part the objectives of the Model’s provisions and how those provisions are intended to apply.
The Model serves as a template for future US tax treaties and protocols. Additionally, revisions to the Model may influence the international community’s discussion of approaches to treaty abuse and harmful tax practices with respect to the Organisation for Economic Cooperation and Development’s (OECD) ongoing work regarding Base Erosion and Profit Shifting (BEPS).
Treasury’s proposed revisions address certain aspects of the Model by modifying existing provisions and introducing entirely new provisions. Specifically, the proposed revisions target (i) exempt permanent establishments, (ii) special tax regimes, (iii) expatriated entities, (iv) the anti-treaty shopping measures of the limitation on benefits article, and (v) subsequent changes in treaty partners’ tax laws. The proposals are accompanied by technical explanations.
Bernard E. Moens Oren Penn Steve NauheimWashington D.C. Washington D.C. Washinton D.C.T: +1 202 414 4302E: [email protected]
PwC observation:Treasury’s proposed revisions to the Model represent some of the most significant changes in US tax treaty policy in decades. The release of these proposed revisions as a discussion draft provides taxpayers and other stakeholders with an important opportunity to offer suggestions and concerns to Treasury. But time is of the essence. Treasury has requested comments in 90 days. However, in light of ongoing discussions at the OECD with respect to BEPS, taxpayers and other stakeholders may wish to provide comments as soon as possible.
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This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
