Global tax newsletter - Grant Thornton India · inform you of global tax trends and tax policies. In this issue we continue to investigate cross border tax issues regionally as well

Global tax newsletter

Welcome to the eighth edition of theGlobal tax newsletter.

When I introduced our first edition ofthis newsletter, I indicated the purposeof this publication was to keep ourinternational tax practitioners and theirclients up to date on world taxdevelopments which impact businessesglobally. Since that first edition we havepresented hundreds of tax developmentsof cross border tax interest around theworld. The pace of the developments has increased since that first edition andthe theme has changed as you can seefrom the Organisation for Economic Co-operation and Development(OECD), Base Erosion and ProfitShifting (BEPS) report article on page 3.

Global tax newsletter No. 8: June 2013 1

Welcome OECD featured article

Isle of Manfeatured article

EMEA news APAC news Americas news

Transferpricing news

Indirect taxesnews

Treaty news Tax policy Who’s who

Go to page…

3 OECD featured article

4 Isle of Man featured article

7 EMEA news

20 APAC news

27 Americas news

32 Transfer pricing news

37 Indirect taxes news

42 Treaty news

49 Tax policy

53 Who’s who

So the future looks bright for theglobally minded tax professional whokeeps current on tax developmentsaround the world as multi-nationals willseek the guidance and expertise fromthose who can demonstrate creative taxthinking in a world of constant change.

This will be my last time to addressyou in this forum. I will be assuming newduties within Grant ThorntonInternational Ltd (GTIL) and FrancescaLagerberg will succeed me as the Globalleader – tax services.

I look forward to reading futureeditions of this newsletter underFrancesca’s leadership.

Ian EvansGlobal leader – tax services (Outgoing)Grant Thornton International Ltd


I would also like to add my welcome to our eighth edition of the Global tax newsletter.

First of all I would like to personallythank Ian Evans for all of thecontributions he has made to the GTILglobal tax community during his tenureas Global leader - tax services. Ian wasthe first to hold that position and he hasbuilt the role to where it is today. Ian hasset the bar high and will be a tough actto follow.

Under Ian’s leadership, he establisheda GTIL tax infrastructure on behalf of allof the tax practices in our member firmswhich includes many initiatives that havebecome part of our tax landscape. I lookforward to continuing to work with Ianas he assumes new roles andresponsibilities within GTIL.

For those of you I haven’t met yet, Ijoined Grant Thornton UK LLP as adirect entry partner in 2006 after 15 yearsof tax experience. I was a past Chairmanof the Tax Faculty of the Institute ofChartered Accountants in England and

it is no wonder that tax policy isbecoming more unified and themultinational is finding it more difficultto manage the global effective tax rate.

But as Ian suggests, with all of thisincreased focus on cross border taxation,there will be opportunities, such asthinking outside the tax practitioner’shome country and continuing toperform the taxpayer advocacy role.This is the role of this newsletter…toinform you of global tax trends and tax policies.

In this issue we continue toinvestigate cross border tax issuesregionally as well as for transfer pricing,indirect taxation and developments in taxtreaties. We are also increasing ourAfrican tax focus within the EMEA tab.An analysis by The Economist finds thatover the ten years to 2010, no fewer thansix of the world’s ten fastest-growingeconomies were in sub-Saharan Africa soit is an important area to keep aware of.

Francesca LagerbergGlobal leader – tax services (Incoming)Grant Thornton International Ltd

Wales and a former Council member ofthe Chartered Institute of Taxation. Ihave had the good fortune to sit on anumber of Her Majesty’s Revenue andCustoms’ committees and was one of thetax practitioners invited to join theCoalition’s Tax Professionals’ Forum.For the past several years, I was the UK’shead of tax and worked with Ian on theGTIL Tax Advisory Committee.

I am currently active on a number oftax policy committees and therefore findthis publication of particular interest.Today we see governments requestingmore transparency from taxpayers aswell as being more transparent insharing ideas amongst themselves. Thesetrends have turned what was once agovernment by government, issue byissue, discussion into a multigovernment discussion with commonissues being raised across the borders.

When you factor in some of theOECD reports, such as the BEPS paper,which Ian mentioned together with thetransfer pricing guidelines, hybridmismatch arrangements, tacklingaggressive tax planning and many more,





Indirect taxesnews



OECD featured article

Since our last edition, one of the moresignificant developments is a report on BEPS.

BEPS is the ability of a multi-national to shift profits from high tax tolow tax jurisdictions. The mostpublicised BEPS strategy was the doubleIrish manoeuvre where a multinational,routes profits through its Europeanheadquarters in Ireland, whose lawsthen allow the company to shift profitsto zero-tax jurisdictions, such asBermuda or the Caymans.

The OECD issued a report whichaddresses ‘Base Erosion’ and ‘ProfitShifting’ and presents studies and dataregarding the existence and magnitude ofBEPS. The report contains an overviewof global developments that have animpact on corporate tax matters andidentifies the key principles that underliethe taxation of cross-border activities, aswell as the BEPS opportunities theseprinciples may create.

The report highlights many of thereasons multinationals are able toachieve BEPS, including; differences injurisdictional taxing rights; transferpricing; hybridisation of entities,financing transactions, and leasingarrangements; use of conduit companies;and derivative instruments.

The tax authorities’ armament tocombat aggressive tax planning includes:transfer pricing; general anti-avoidancerules or doctrines; CFC rules; thincapitalisation; and anti-hybrid rules.

The OECD notes in its report thatthere is no magic recipe to address theBEPS issues. Although the OECD isideally positioned to support countries’efforts to ensure effectiveness and fairnessas is noted in the report, no doubtdifferences in the interpretation andimplementation of OECD guidelines willmost likely create a new set of challengesand opportunities for adjusting prior taxstrategies to comply with future crossborder tax opportunities.

OECD: Addressing Base Erosion and Profit Shifting (BEPS) Base erosion constitutes a serious risk to tax revenues, taxsovereignty and tax fairness for many countries. While thereare many ways in which domestic tax bases can be eroded, asignificant source of base erosion is profit shifting. The BEPSreport presents the studies and data available regarding theexistence and magnitude of BEPS, and contains an overview ofglobal developments that have an impact on corporate taxmatters and identifies the key principles that underlie thetaxation of cross-border activities, as well as the BEPSopportunities these principles may create. The reportconcludes that current rules provide opportunities to associatemore profits with legal constructs and intangible rights andobligations, and to legally shift risk intra-group, with theresult of reducing the share of profits associated withsubstantive operations. Finally, the report recommends thedevelopment of an action plan to address BEPS issues in acomprehensive manner.





Indirect taxesnews


Base erosion and profit shifting

(BEPS) is the ability of a multi-national to

shift profits from high tax to low tax

jurisdictions.


The outline of the report indicatesthe comprehensivecoverage of BEPS

by the OECD.

How big a problem is BEPS? Anoverview of the available data• Data on corporate income tax

revenues• Data on Foreign Direct Investments • A review of recent studies relating

to BEPS.

Global business models,competitiveness, corporategovernance and taxation• Global business models and taxation• Competitiveness and taxation • Corporate governance and taxation.

Key tax principles and opportunitiesfor base erosion and profit shifting• Key principles for the taxation of

cross-border activities • Key principles and BEPS

opportunities.

Addressing concerns related to baseerosion and profit shifting• Key pressure areas• Next steps• Developing a global action plan

to address BEPS• Immediate action from our tax

administrations is also needed.

Data on corporate tax revenue as apercentage of GDP

A review of recent studies relating toBEPS • Studies of effective tax rates of MNEs • Studies using data from taxpayer

returns• Other analyses of profit shifting • Bibliography

Examples of MNEs’ tax planningstructures• E-commerce structure using a

two-tiered structure and transfer ofintangibles under a cost-contributionarrangement

• Transfer of manufacturingoperations together with a transferof supporting intangibles under acost-contribution arrangement

• Leveraged acquisition with debt-push down and use of intermediateholding companies.

Current and past OECD work relatedto base erosion and profit shifting• Tax transparency • Tax treaties • Transfer pricing• Aggressive tax planning• Harmful tax practices• Tax policy analyses and statistics• Tax administration • Tax and development cost-

contribution arrangement • Leveraged acquisition with debt-

push down and use of intermediateholding companies.





Indirect taxesnews



Isle of Man featured article

The Isle of Man taxationsystem and its use ininternational trade

The Isle of Man has been, and continuesto be, a significant economic successstory that has now enjoyed over 29years of continuous economic growth.The Isle of Man economy is welldiversified and counts aviation, cleantech, e-business, e-gaming, financialservices, manufacturing, maritime, space,agriculture and tourism amongst itssuccessful industries.

The Isle of Man, located in the IrishSea between the UK and Ireland is aninternally self-governing dependency ofthe British Crown and is not part of theUnited Kingdom (it is however, part ofthe British Isles). Tynwald, the Island’s1,000 year old Parliament, makes itsown laws and oversees all internaladministration, fiscal and social policies.The population of the Isle of Man isaround 85,000 all contained within anarea of 221 square miles (572 squarekilometres). The Isle of Man is not a full

member of the European Union but itfalls within the EU common customsarea.

The Isle of Man’s taxation policy hasbeen a significant contributor to itseconomic success. The standard rate oftax for individuals is 10% with a higherrate of 20% applicable for all incomeabove £10,500 after generous personalallowances and reliefs have been takenaccount of. The Isle of Man alsooperates a cap on the maximum amountof tax payable of £120,000 for a singleindividual. There is no capital gains tax,wealth tax, stamp duty, death duty orinheritance tax.

The standard rate of corporateincome tax in the Isle of Man is 0%. A10% rate of tax applies to incomereceived by a company from bankingbusiness, land and property in the Isle ofMan (including property development,residential and commercial rental orproperty letting and mining &quarrying) and, from 6 April 2013, oncompanies who carry on retail business

in the Isle of Man and have taxableincome of more than £500,000.

The island has long beencommitted to international standardsof tax transparency and helped developthe OECD template for taxinformation exchange agreements(TIEA). Since then, the Isle of Man hasremained at the forefront of efforts toput in place tax co-operationagreements, signing 27 TIEAs and 11double taxation agreements thus far.Such agreements have been signed withArgentina, Australia, Bahrain,Belgium, Canada, China, CzechRepublic, Denmark, Estonia, FaroeIslands, Finland, France, Germany,Greenland, Guernsey, Iceland, India,Indonesia, Ireland, Japan, Jersey,Luxembourg, Malta, Mexico, theNetherlands, New Zealand, Norway,Poland, Portugal, Qatar, Seychelles,Singapore, Slovenia, Sweden, Turkey,UK and USA. Further agreements withItaly, the Netherlands and Spain arecurrently being negotiated.

This commitment to openness wasrecognised by the G20, with the Isle ofMan earning a place on the OECD‘white list’ of countries. Responding toevolving world standards, the islandmoved to the automatic exchange of taxinformation on savings, under the EUsavings Directive, in 2011.

In further recognition of its wish tocooperate on the international stage, theIsle of Man Chief Minister announcedthat they would be moving to a closerform of tax cooperation with the UK,based on the same principles as theFATCA agreement which the Isle ofMan was negotiating with the USA. Thenew arrangements with the UK will also

The Isle of Man’s taxation policyhas been a significant

contributor to itseconomic success.





Indirect taxesnews



be put in place shortly. The Isle of ManTreasury Minister said that after threemonths of intensive negotiation heanticipated a package of measures withthe UK that would include:• a bespoke Isle of Man disclosure

facility, based on the Liechtensteinmodel, for UK taxpayers wishing toregularise their tax affairs. This willgive those taxpayers a number ofimportant assurances about what toexpect after they first contactHMRC. The Isle of ManGovernment will assist the UKauthorities in ensuring that thefacility is a success

• the extension of the double taxationagreement between the Isle of Manand the UK to include the automaticexchange of tax information betweenthe two countries

• a new agreement between the Isle ofMan and the UK, closely modelledon a US FATCA agreement that willresult in Manx financial institutionsproviding a broad range of

information on the investments ofUK resident taxpayers, which willthen be shared automatically withthe UK by the Isle of Man taxauthorities. Both governments willwork together to minimise theburden on those businesses affectedby the new system. In addition, inrecognition of their different statusunder UK tax law, people who areresident but non-domiciled in theUK will be subject to an alternativereporting regime under thisagreement.

In respect of international trade matters,the Isle of Man, by virtue of its uniqueCustoms and Excise Agreement withthe United Kingdom and EuropeanLaw, is treated as part of the UK and EUfor customs, excise and Value AddedTax (VAT) purposes.

Non-EU companies which supplygoods to the EU can often facecomplexities and costs when importinginto the EU, but using the Isle of Man

can significantly reduce these issues andprovide a very effective route to the EUmarket. The Isle of Man has its ownelectronic Entry Processing Unit (EPU)which is housed within the UK’simport/export computer system. Thisprovides importers, exporters and theiragents with the ability to electronicallydeclare goods imported to or exportedfrom the UK/Isle of Man. AccordinglyIsle of Man importers, exporters andtheir agents are able to obtain fastelectronic system generated customsclearance without the need for the goodsto physically travel to the Isle of Man.

Advantages of using an Isle of Mancompany in this way are that Isle ofMan companies are taxed at 0% for thistype of business, a permanentestablishment in the UK is avoided, theIsle of Man is treated as part of the EUfor VAT and customs purposes, goodsdo not need to physically travel to theIsle of Man and an electronic singlepoint of entry is provided for all

customs and excise imports, no matter where in the EU the goods arrive. Insummary, one of the primary benefitsfor businesses from, for instance, theUSA, China, India or Canada, will betheir ability to use the Isle of Man as abase to operate in the EU.

For any further information regarding the Isle of Man, please contact:

Richard RatcliffePartnerT +44 (0)1624 639481E [email protected]

One of the primary benefits

for businesses…will be their ability to usethe Isle of Man as a

base to operate in the EU.





Indirect taxesnews


mailto:[email protected]


EMEA news

AustriaCross border pensionpayment taxationcontinues to be an EU

issue given the proximity of borders andworker mobility.

A change to German tax law willrequire individuals currently in receiptof a German pension to pay taxes ontheir income, with retroactive effectfrom 2005. In 2010 a 2005 amendmentto the German Income Tax Act enteredinto force. Individuals who are notresident in Germany are subject toincome tax in Germany if they receive aGerman pension. Almost three yearsafter this change – and just before thestatutory period of limitations for 2005expired on 31 December 2012 – theGerman tax authorities began sendingnotices to hundreds of thousands of the1.6 million recipients of Germanpensions who reside outside Germany.

The German tax authorities will sendout demands for Austrian pensioners tosubmit a tax declaration dating back to2005. The move follows the decision tomodify German legislation. The newlegislation provides that Germanpensions paid out to foreign taxpayerswill be subject to taxation in Germany.The Austrian Finance Ministry intendsto challenge the decision to seek heftyback payments and to find a sustainablesolution to protect low-incomepensioners in particular.

AlgeriaAlgeria recentlyintroduced an advancetax ruling regime. The

regime, which had immediate effect, isdesigned to provide greater certainty fortaxpayers and enhanced monitoringcapabilities for the tax administration.Administered by the Directorate ofLarge Enterprises (DGE), it allows ataxpayer to request a ruling that sets outthe formal position of the taxadministration on the taxpayer’sparticular situation. A taxpayerrequesting a ruling must act in goodfaith, and must state the particulars of itssituation clearly so that the taxadministration can make a fullyinformed decision on the request. Theruling can be applied only to the specificsituation for which the ruling wasrequested and is binding on the taxadministration only in relation to thespecific case and the correspondingprovisions of the tax law (this is notbinding for other taxpayers).

AngolaAngola’s National Assembly recentlyenacted several corporate taxamendments which include:• new rules for companies involved in

mergers – providing for anexemption from taxation of thoseoperations if the transferred assetsare registered in the account of theacquirer at the same value they hadin the merged company, and areamortised the same way

• establishment of a withholding taxrate of 6.5% on the Angola-sourceincome of companies that do nothave their head office or place ofeffective management or permanentestablishment in Angola

• non-allowable expenses to includeinterest on loans from shareholders.





Indirect taxesnews



African Tax Administration Forum(ATAF) The ATAF is a platform to promote andfacilitate mutual co-operation amongAfrican tax administrations (and otherrelevant and interested stakeholders)with the aim of improving the efficacyof their tax legislation andadministrations.The ATAF brings together heads ofAfrican tax administrations and theirrepresentatives to discuss the progressmade, challenges faced and possible newdirection for African tax policy andadministration in the 21st century.ATAF works towards state building,governance, political economy andrevenue mobilisation.

The work and programme prioritiesof the Forum will be driven andmanaged by African countries, with thesupport of donor agencies, other taxadministrations and internationalorganisations to reflect African needsand strategies.

The OECD and ATAF have signed a‘Memorandum of Co-operation’,agreeing to work together to improvetax systems in Africa.

This memorandum was signed at theGlobal Forum on Transparency andExchange of Information in Cape Town,South Africa. The forum brings together116 members, including 15 from Africa.

Joint activities planned for 2013 –2015 include technical events for Africantax officials to share knowledge anddevelop good practices. Co-operationefforts will include working on taxincentives for investment, transferpricing, exchange of information,taxpayer education, and collection ofAfrican revenue statistics and supportfor the proposed Tax Inspectors withoutBorders (TIWB) initiative.

BelgiumA Dutch national, hadbeen working in theNetherlands for a

government-subsidised foundation.Upon retiring, he took up Belgianresidence in 1992. Part of his pensionrelates to his work for the foundation inthe Netherlands and the pension wastaxed in Belgium for tax years 2004 and2005.

The taxpayer appealed, arguing thatunder the Belgium-Netherlands taxtreaty, his pension should be taxable inthe Netherlands because it was derivedfrom government service. The taxpayerargued that a pension derived fromemployment with a foundation shouldnot be treated differently from a pensionderived from government service that istaxable in the Netherlands since bothpensions were funded (at least partially)by the Dutch government. Taxing hispension in Belgium is, therefore,discriminatory according to thetaxpayer.

The Antwerp court and appeal court ruled for thegovernment and held that the pension was derived fromprivate employment. Under the treaty, pensions and othersimilar remuneration paid to a resident of a contracting state inconsideration of past employment – as well as annuities andbenefits, whether or not periodic, arising from pensionsavings, pension funds, and group insurance funds – that arepaid to a resident of a contracting state will be taxable only inthat state.

At the request of the taxpayer, the court of appealsubmitted a request for a preliminary ruling from theconstitutional court.

The constitutional court held that the treaty’s treatment ofpensions derived from a government service in the source stateis in accordance with the rules of international courtesy andmutual respect between sovereign states and that the right totax government pensions is reserved for the state that financedthe pension build-up.

The constitutional court referred the case back to thereferring court, which must determine whether the build-upof pension rights occurred from private employment or fromgovernment service and to what extent the state was in chargeof financing the build-up of those pension rights.





Indirect taxesnews



BulgariaAdvance or estimated taxpayments are merely aprepayment of the

current year’s tax liabilities. From a taxauthority viewpoint, such payments feedthe treasury sooner rather than laterwhen the final tax payment is made. Thebasis upon which the advance paymentis calculated can also influence the fat orlean situation of taxpayer revenue in thetreasury.

Corporate income tax advancepayments will be calculated,commencing 1 January 2013, on thebasis of forecasted tax profit instead ofbeing calculated on taxable profits ofprevious years. Taxpayers will payinstalments on either a monthly orquarterly basis depending on their levelof net income from sales. Monthlyadvance instalments are due the 15th dayof the current month and for quarterlydepositors the 15th day following thequarter.

CameroonThe African region is offering moreincentives than usual to spur economicgrowth in the region.

Cameroon introduced several taxincentives to boost private investment inthe country. The following incentivesare granted to companies during thesetup phase, which should not exceedfive years: • exemption from registration duties

on deeds related to setting up thecompany or increasing its sharecapital

• exemption from VAT on purchasesof services provided by non-residents that relate to establishingthe activity

• exemption from VAT, other taxesand customs duties, levied on theimport of equipment indicated in theinvestment programme.

During the operating phase, and for amaximum of ten years, entities will begranted a total or partial exemption(depending on the investment’s size andefficiency) from the following taxes: • corporate income tax and other taxes

on profits and incomes• stamp duties• registration duties• taxes and other levies due on the

purchase of equipment required forthe operating activities.

During the operating phase, lossesincurred may be carried forward for thefive subsequent years (as opposed tofour years under the standard treatmentof losses).

CongoThe Congolese Government hasintroduced a new tax regime for holdingcompanies under the followingconditions: • the company holds shares in other

companies (domestic or foreign) thatare classified as companies limited byshares and the share value representsmore than two-thirds of the fixedassets of the holding company

• the company holds the above-mentioned shares for at least fiveyears

• activities should consist only of themanagement of share portfolios,management services rendered toaffiliate companies, research anddevelopment activities performed forthe sole benefit of a group ofcompanies, and management of thegroup’s assets.





Indirect taxesnews



Czech RepublicThe Ministry of Financehas publishedinformation on the

means to demonstrate the incomerecipient’s residence for the purpose ofapplication of withholding tax. Taxresidence of the recipient of income, is adeterminant for both the application ofthe correct domestic withholding taxrate (i.e. 35% or 15%), and thewithholding tax rate under a tax treaty.

The residence of individuals whoclaim to be resident in the CzechRepublic shall be demonstrated by therelevant identification document. Theresidence of companies incorporated inthe Czech Republic shall bedemonstrated by an excerpt from therelevant public register (e.g. companyregister). Alternatively, a swornstatement can be used as evidence ofresidence.

To demonstrate the non-resident’sincome recipient’s eligibility for thelower 15% domestic withholding taxrate, a valid identity card or a swornstatement can be used. Where therecipient of income claims the benefitsof a tax treaty, the withholding agentmay apply the reduced tax treaty rateswhere: • the recipient of income has furnished

a valid tax residency certificateconfirming that the recipient isresident in the other contracting state

• the recipient of income has made asworn statement that the recipient isthe beneficial owner of the income

• all other conditions for applying therelevant treaty have been met.

Where the recipient’s eligibility for thelower 15% domestic withholding taxrate or for tax treaty benefits cannot bedemonstrated, the 35% domesticwithholding tax rate shall be applied.

DenmarkThe Danish parliamentpassed two bills (Bill no.10 and Bill no. 49) that

expand the scope of dividendwithholding taxes.

Bill no. 10 prevents non-residenttaxpayers from circumventing dividendwithholding tax by internalreorganisations. Denmark does not levytax on capital gains on shares in Danishcompanies derived by non-residentsunless the shares are attributable to apermanent establishment in Denmark.By contrast, non-residents are subject toa 27%, or lower, treaty rate ofwithholding tax on dividends fromDanish companies. Non-residents thatintend to repatriate cash from a Danishsubsidiary may thus be better off byadopting a transaction that receivescapital gains treatment rather thandividend treatment. The bill negatesplanning structures that attempt to

circumvent the dividend/capital gaindistinction with a result that makes itless attractive to use Denmark as aninternational holding company location.

Bill no. 49 prevents residentminority corporate shareholders fromtransforming taxable dividends into tax-exempt capital gains throughliquidations, share redemptions, andrepurchase strategies. The basic issue isthe same issue of the taxation ofdividends and capital gains.





Indirect taxesnews



FinlandTwo cases concerningcross border tax issuesare of interest, the first

deals with portfolio dividends and thesecond with cross border lossportability.

A company resident in Finland (FINOy), received portfolio dividends from agroup’s parent company resident in theUK (UK Co) during which timeFinland applied an imputation creditsystem. The assets of UK Co consistedof dividends it received from itssubsidiaries running the business of the group.

The issues were whether Finland,when calculating the imputation credit,should take into account:• the statutory income tax rate instead

of the tax actually paid• the corporate income tax paid by the

subsidiaries of UK Co.

The Finnish supreme court did not findany grounds to apply the statutoryincome tax rate of the UK instead of thetax actually paid when calculating theimputation credit granted to FIN Oy.

In another case, the European Courtof Justice (ECJ) held that Finland’s rulesdenying the transfer of tax lossesincurred by a non-resident subsidiary toits Finnish parent company in a cross-border merger do not violate thefreedom of establishment unless theparent is not allowed to show that thenon-resident subsidiary has exhaustedthe possibilities of taking those lossesinto account.

The second case, involved a Finnishparent company, A Oy, that had awholly owned subsidiary in Sweden.Following trading losses, the Swedishsubsidiary ceased trading in Sweden,though it would remain bound by twolong-term leases. It was decided that thesubsidiary would be merged into itsparent in Finland; the parent would nolonger have a subsidiary or permanentestablishment in Sweden as a result ofthe merger.

The Finnish parent asked the Finnishtax authority if it could deduct theSwedish subsidiary’s tax losses once themerger was carried out. The Finnish taxauthority denied the request on thegrounds that the Finnish tax rules do notallow the use of losses, if the losses arefrom a business activity in anothermember state that is not subject toFinnish tax.

A Oy contended that the Finnish taxrules constitute a violation of thefreedom of establishment because theypermit a Finnish parent company to usea subsidiary’s losses in a merger only ifthe subsidiary is located in Finland(provided the merger was not carriedout solely to obtain a tax advantage).

The ECJ held that the rules doconstitute an obstacle to the freedom ofestablishment because the inability of aresident parent company to use a non-resident subsidiary’s tax losses when itmerges with that subsidiary, is liable tomake establishment in the non-residentstate less attractive and to deter theparent from setting up subsidiaries there.





Indirect taxesnews



FranceAs part of an effort toraise more tax revenuesfrom large Internet

companies, the French government isstudying the feasibility of measuresproposed in a new report on the taxationof the digital economy, including a levyon the collection of personal data.

The Colin-Collin report had beencommissioned by the government toevaluate the rise of the digital economyand find ways to effectively taxmultinational companies that pay littleto no corporation tax in France despitetheir business activities there.

On 19 January 2013, the expertcommission submitted their officialreport that states, the current taxlegislation is not able to effectively taxthis type of activity. The report givesproposals to remedy this problem assummarised below:

A new tax on database collectionThe report proposes the creation of anew tax on the use of data that has beencollected from the systematicmonitoring of web usage on the Frenchterritory.

Adaptation of the research anddevelopment (R&D) credit to thedigital economyAccording to the report, the currentR&D credit is not adapted to the digitaleconomy. The report proposes to mergethe R&D credit and the start-ups orinnovative companies credit.

Promoting the role of the market infinancing the digital economyThe availability of capital is a criticalfactor for the development of the digitalsector. To stimulate the contribution ofthis capital, the report contains fourproposals to encourage the equityfinancing of companies.

A new definition of permanentestablishment for the digital economyIn order to more effectively attributeprofits to a permanent establishment, thereport proposes a number of measures.These measures are as follows: • applying (in some form) the concept

of ‘free work’ of web users which, inproviding their data, must beregarded as a source of revenue fordigital companies (i.e. the permanentestablishment in France)

• the implementation of a virtualpermanent establishment forcompanies that provide servicesbased on personal data collectedfrom the systematic monitoring ofweb usage on French territory.

GermanyCurrently, there is a100% exemption ondividend and capital

gains income received from acorporation by another corporationregardless of its nature, foreign ordomestic, and regardless of any holdingperiod or amount of shareholding.

In 2011, the ECJ decided in aninfringement proceeding that the non-refunding of German withholding taxon dividend payments generated byportfolio holdings of foreign corporateinvestors is contrary to the Treaty on theFunctioning of the European Union(TFEU) and the European Economicarea (EEA) agreement. Since Germanytaxes dividends paid to foreigncompanies more heavily in economicterms than dividends paid to domesticcompanies, it restricts the freemovement of capital provided for inarticle 63 of the TFEU and article 40 ofthe EEA agreement.





Indirect taxesnews



The upper house of Germany’sparliament and the lower house decidedto insert a 10% minimum shareholdingrequirement in the participationexemption rule. The minimum 10%requirement is fulfilled if at least 10% ofthe shares are held directly from thebeginning of the calendar year.

After the legislative modificationsentered into force, nothing changes forthose shareholders with a participationof more than 10% and those withincome from capital gains. However,those owning less (portfolio shares)must tax 100% of their dividend incomeat a corporate tax rate of 15% and anaverage trade tax rate of another 15%.

GhanaThe Budget for 2013 was presented toparliament by the Minister for financeand economic planning. The ministerannounced the following taxadministration measures:• to undertake a comprehensive

review of the tax exemption regimewith the view to reducing the grantof such incentives

• to make changes to the income taxand anti-money laundering laws inaccordance with recommendationsof the OECD

• to initiate steps to expand thenetwork of tax information exchangeagreements

• to establish a special unit that willundertake tax audits with the view todetecting and reducing transferpricing abuses

• to make improvements to the taxadministration in order to facilitatecompliance by taxpayers

• to improve the system of VATrefunds and duty drawbacks.

HungaryThe government haspublished a list of theFree Business Zones

(FBZ). Different tax, social security andvocational training contribution creditsand allowance are available forbusinesses operating in the designatedzones from 2013.

The decree lists 903 business zonesin towns and villages located in the leastdeveloped parts of Hungary. Adesignation is valid for five years but canbe prolonged by the government. Theavailable FBZ benefits are:• a corporate tax credit for the

promotion of development forinvestments in FBZ

• a social contribution tax credit foremployment in FBZ

• a vocational training contributionallowance.

IcelandThe Icelandic parliamentapproved a bill to changethe withholding tax law

applicable on fixed income securities.The change will abolish withholding taxon interest and capital gains fromIcelandic fixed income securities, forboth foreign and resident investors thatare issued by Icelandic financialinstitutions or Icelandic energycorporations.

Exemption will be granted at issuerand instrument level. In order to qualifyfor the exemption, issuers must meet aset of specific requirements. Theissuance of the bonds must be done intheir own name and issuers must qualifyas financial institution by meeting therequirements set forth in the Act or, ifthe issuer is an energy company, it willbe subject to a different set of rulesunder an Act on the taxation of energycompanies.





Indirect taxesnews



IrelandIreland has long beenuser friendly forestablishing soft tech

industries through tax incentives. TheIrish Ministry of Finance has opened aconsultation with interested parties onprovisions that would increase researchtax incentives for small and medium-sizeenterprises.

Ireland has a tax credit scheme forR&D, the key features of the schemeinclude: • a tax credit of 25% on incremental

R&D expenditure – in addition tothe normal 12.5% trading deduction

• the scheme is based on incrementalspend and provides for expenditureon R&D that is in excess of thatcompany’s R&D expenditure in thebase year of 2003 to qualify for thecredit

• the base year has been permanentlyset at 2003, making it effectivelyvolume based for new entrants

• the first €100,000 spend on R&Dcan qualify for the credit on a fullvolume basis: any spend above€100,000 must be more than the2003 base year spend

• the exemption from the base yearrestriction would be increased to thefirst €200,000 of R&D expenditure.There is no ceiling to the level ofeligible expenditure over the 2003base year level

• unused tax credits can be carriedback and set-off against a company’sprior year corporation tax liabilitiesthus generating a tax refund

• where there is insufficient current orprior year corporate tax liabilities,the company can claim unused taxcredits in cash over three years (inthree instalments over 33 monthsfrom the end of the accountingperiod in which the expenditure isincurred)

• expenditure includes direct andindirect costs in addition to capitalexpenditure on related plant andmachinery

• a company’s credit may be assignedto key employees

• a scheme also exists in respect ofcapital expenditure for R&Dpurposes

IsraelMany countries withworldwide taxation, thatallow the profits of a

foreign subsidiary to be deferred fromtaxation until repatriated, are findinglocally based multi-nationals hoardingprofits in offshore subsidiaries. Israel hasadopted new legislation which, if copiedelsewhere, would be a good approach toencourage both local investment andhomeward repatriation. A combinationof host country withholding taxes andhome country foreign tax credit erosiondiscourage homeward repatriations ofoffshore profits.

Israel’s legislators passed a law thatwill reduce the amount of tax payable bymultinational companies seeking todistribute dividends or invest profitsabroad, in return for these companiesinvesting at least 50% of their profits inthe country.





Indirect taxesnews



Under prior law, a qualifyingindustrial companies profits were nottaxable until distributed as dividends.However, this led to large scale profitretention by these companies. Thegovernment has therefore proposed aone year lowering of the tax rate onprofit distributions made by suchmultinationals.

The ‘trapped profits’ law will lowerthe amount payable by multinationalsby 40% to 60%, depending on howmuch the company is willing to invest inIsrael. However, the tax rate of acompany benefiting from the trappedprofits law cannot fall below 6%.

The law specifies that the companymust invest in ‘industrial enterprise, inassets used by the enterprise, in R&D orin the salaries of new employees’ andthat tax benefits will only be available ifthe company commits to reinvest at leasthalf of the freed profits in Israel. Theproposals will also change the taxtreatment of dividend distributions fromsuch profits in the hands of the recipient.

ItalyThe EuropeanCommission (EC) calledfor the development of

innovative financing solutions, makingthe creation of an efficient Europeanventure capital market a reality. Italy hasnow implemented an attractive taxincentive to stimulate investments inventure capital initiatives in line with theprinciples expressed by the commission.

Italian investment funds are subjectto corporate income tax and thusentitled to tax treaty benefits. However,under domestic legislation income in thehands of Italian investment funds isexempt from corporate income tax,provided that either the fund or the fundmanager is subject to oversight. Italianinvestment funds are exempt from thebusiness regional tax on productiveactivities. Therefore, no income taxationapplies at the fund level (except for apossible final withholding tax). Inparticular, dividends and capital gainsare not subject to income taxes in thehands of investment funds.

Foreign investors are only taxed onthe distribution of profits from theinvestment fund. These untaxed profitsare subject to a final 20% withholdingtax. No further Italian taxation applies.

Foreign investors are fully exemptfrom withholding tax on the funds’profit distributions, if they are: • resident in a country or territory

included in Italy’s ‘white list’• entities or international bodies

established in accordance withinternational treaties implemented inItaly

• institutional investors established ina ‘white list’ country, even if they arenot subject to tax

• central banks or bodies that managea country’s official reserves.

KenyaDespite the taxauthorities victoriousattacks on taxpayers, tax

authorities must play by the rules whenenforcing collection in what it perceivesto be delinquent taxes. The KenyanHigh Court gave its decision against thetax authorities on this issue.

The taxpayer (GDC) entered into acontract with another company(GWDC Ltd.) to provide drillingservices for ten geothermal wells.

Kenya Revenue carried out an auditof the transaction and issued a taxdemand to GDC. The letter of demandset out the amount due and requestedGDC to pay to avoid additional interest.The letter did not draw GDC’s attentionto the fact that it was an assessment andthe subsequent consequences of failureto comply. Kenya Revenue sought toenforce the tax due through an agencynotice.





Indirect taxesnews



GDC filed a petition seeking to havethe agency notice removed on the basisthat the letter did not meet therequirements of a proper notice.

The court ruled that a notice toenforce collection of taxes must clearlystate the amount claimed, the legalprovision under which it is made anddraw the taxpayers attention to theconsequences of failure to comply withthe law. It must also state theopportunity provided by law to contestthe finding.

The court held that the letter failedto meet the requirements of a propernotice as it failed to draw attention tothe consequences of non-complianceand notify GDC of the availablechannels to review and appeal.

NetherlandsTax transparencyreporting and increasedtaxpayer reporting

although sometimes burdensome, cancome to the taxpayer’s benefitparticularly in terms of determiningbeneficial ownership for tax treatybenefits.

The Dutch Supreme Court(Advocate General (AG)) gave anopinion on the refund of dividendwithholding tax to an exempt pensionfund.

The taxpayer (X), a Swiss residentpension fund received portfoliodividends from listed companies,resident in the Netherlands on whichdividend withholding tax (DWT) waswithheld. X was exempt from a tax onprofits in Switzerland.

X requested, and received a refund ofdividend withholding tax on the basis ofthe Netherlands – Switzerland incomeand capital tax treaty (1951). This treatyentitled X to a refund of the tax as thewithholding rate exceeded 15%.

X also requested a refund for the restof the withheld DWT. X argued that thedomestic law provisions, which grant afull refund of DWT to resident, taxexempt entities, read in conjunction withfreedom of establishment laid down inthe EC treaty.

The tax inspector disagreed, anddenied the request as did the he DistrictCourt. The appeal court, however, sidedwith X and decided a refund should begranted. The case was appealed to theDutch Supreme Court.

The DWT law provides that a Dutchresident entity, not subject to corporateincome tax, may request a refund of anywithheld DWT if that entity is thebeneficial owner. The beneficialownership criterion also applies to non-resident situations. In the specific treaty,there was no mutual assistance provisionunder which the Dutch tax inspectormay request information from the Swisstax authorities about the beneficialownership of the recipient (X).

Regarding the Netherlands –Switzerland income tax treaty, the AGnoted that neither the treaty, nor theprotocol, requires the Swiss authoritiesto exchange information regarding thebeneficial ownership (in this case, thedividends).

The AG acknowledging that theagreement did not cover portfoliodividends, and noted that the exchangeof information requirements of theagreement could only be activated in thecase of ‘...tax fraud or the like’. The term‘the like’ refers to acts that have the samedegree of severity as that of tax fraud. Asthe case at hand concerned portfoliodividends, it falls outside the scope ofthe agreement.

This led the AG to propose that X’ssituation resulted in no refund of DWTas the beneficial owner cannot beofficially verified.





Indirect taxesnews



NorwayOn 11 April, Norway’sMinistry of Financereleased a consultation

paper on a plan to limit the deduction ofinterest on related-party debt. The mainpurpose of the proposal is to restrictearnings stripping, via intercompanydebt financing.

Details of the bill are summarised asfollows: • parties are considered related if one

party directly or indirectly owns orcontrols the other party by at least50% of the capital or voting power.Related parties may be resident inNorway or abroad. Hence, thelimitation also applies to thedeductibility of interest expensesbetween two Norwegian companies

• qualifying interest expenses in excessof 25% of the taxable income of anentity, subject to certain adjustments,are not deductible for tax purposes

• irrespective of whether or not theinterest has been deductible for thepayer, the recipient of the interestincome is taxed according to thenormal rules

• the limitation is calculated separatelyfor each entity in a group situation

• disallowed interest deductions maybe carried forward for five years

• the limitation applies to limitedliability companies and othercompanies and entities that are non-transparent for tax purposes. Inaddition, it covers partnerships andCFC companies, as well as foreignentities that have a taxable presencein Norway (e.g. a permanentestablishment). Financial institutionsare excluded from its scope

• the new rules are proposed to beeffective from 2014 but would alsoapply for interest expenses on loanagreements concluded before 2014

SwedenThe deductibility ofcertain interest paymentswas abolished in 2009 to

prevent certain types of tax planningusing interest deductions on debts togroup companies provided the loanfunded an intra-group stock purchase.Loans that funded external acquisitionof shares were not covered by the rulesand the scope of the rules was extendedas from 1 January 2013 to cover all intra-group interest payments irrespective ofwhether intra group or third party stockpurchases are made.

The EC stated that it had receivedseveral complaints regarding theSwedish interest deduction limitationrules. The EC considers it unlikely thatdomestic intra-group loans can ever beconsidered to have arisen in order toobtain a significant tax benefit becauseof exceptions for deductibility togetherwith the low rates of Swedish incometaxation.

The commission believes the interestdeduction limitation rules only affectinterest payments to companies that arenot resident in Sweden. It believes thatsimilar problems may arise wheninterest is paid to a pension fund that isnot domiciled in Sweden.

The EC considers that the rulesconstitute indirect discrimination forcompanies and pension funds that arenot resident in Sweden and, accordingly,the Swedish interest deductionlimitation rules violate the freedom ofestablishment.

Sweden’s Ministry of Finance issueda reply to the EC inquiry and essentiallystated that Sweden considers that theinterest deduction limitation rules donot restrict the freedom of establishmentbecause the rules apply regardless ofwhere the lender is domiciled andregardless of whether the borrower haslimited or unlimited liability to tax.





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SwitzerlandThe Swiss FederalSupreme Court deniedtreatment as a permanent

establishment to a foreign financebranch that a Swiss corporationoperated in the Cayman Islands. TheSwiss group financing performed withpart-time employees was not deemed tobe a sufficient enough business activityto justify treatment as a foreignpermanent establishment, which wouldhave been exempt from taxation inSwitzerland.

The taxpayer involved a Swiss groupthat had outsourced its group financingto a Cayman branch of a Swiss affiliate.The Cayman branch had hired fourpeople who each worked one day perweek and were paid annual salaries.

The group claimed that the financingactivities constituted a foreignpermanent establishment of the Swisscompany and that therefore the profitresulting from the financial activitiesshould be exempt from Swiss taxation.

The cantonal tax authorities hadgranted an advance tax rulingconfirming that the Cayman financebranch constituted a foreign permanentestablishment. Accordingly, the relevantfinancial assets (loans) and income(interest) was allocated from Switzerlandto the foreign permanent establishment,and based on Swiss domestic law,exempted it from Swiss taxation.

The Swiss federal tax administrationdid not accept this assessment andrequested a decision that for federal taxpurposes the branch’s income be taxedin Switzerland.

The court confirmed the taxauthority’s view. It held that the overseasfinancing activities did not reach thelevel of business substance required for aforeign permanent establishment to berecognised. The company’s leanstructure in the Cayman Islands and theeconomic value created in the CaymanIslands were contrasted with theconsiderable financial assets and therelated income involved.

The Cayman branch’s main purposewas the financing of the Swiss groupcompanies that were eligible to claim fulltax deduction for interest paid.

As a result of collapsing the Caymanpermanent establishment, the entireprofit resulting from the financingactivities was subject to Swiss corporateincome taxes.

TurkeyThe Ministry ofEconomics has publisheda new Decree, which

provides an opportunity for regionalmanagement centres to operate in Turkeyunder a liaison office structure. A regionalmanagement centre may perform thecoordination and management servicesfor business units in other countries forthe following areas:• establishment of investment and

management strategies• planning• promotion• sales• after sales services• brand management• financial management• technical support• research and development• procurement• testing of new products (including

laboratory activities)• research and analysis• employee training.





Indirect taxesnews



The liaison offices are granted the licenseto operate in Turkey for a period ofthree years. However, based on the newdecree, if a liaison office operates as aregional management centre after theinitial period of three years, an extensionof an additional ten years can be granted.

Liaison offices cannot have anycommercial operations, thus they areexempted from the major taxes inTurkey. Accordingly, based on the newdecree, a regional management centreoperating under a liaison office will beexempted from the following Turkishtaxes:• corporate income tax• value-added tax• income tax on salaries of• the liaison office employees• stamp tax.

United KingdomHMRC has issued areport in conjunctionwith the release of the

2013 budget that describes its strategy toaddress offshore tax evasion. The reportdefines offshore evasion as using a non-UK jurisdiction with the objective ofevading UK tax. This includes movingUK gains, income or assets offshore toconceal them from HMRC; notdeclaring taxable income or gains fromoverseas sources or taxable assets keptoverseas; and using complex offshorestructures to hide the beneficialownership of assets, income or gains.

The report states that HMRC isbuilding a new offshore evasion strategy,expressing a renewed commitment toclamping down on those who concealincome, assets and gains overseas toevade tax. The objectives of this newstrategy are to ensure that:

• there are no jurisdictions where UKtaxpayers feel safe to hide theirincome and assets

• would-be offshore evaders realisethat the balance of risk is againstthem

• offshore evaders voluntarily pay thetax due

• those who do not come forward aredetected and face vigorouslyenforced sanctions

• there will be no place for facilitatorsof offshore evasion.

The report states that the way thatHMRC will achieve these objectives isby: • reducing the opportunities to evade

offshore through initiatives to ensurecompliance, international agreementsand multilateral action

• increasing the likelihood of evaders,and those who make offshoreevasion possible, being caught, byinvesting in the skills of specialiststaff, using the data generated byinternational agreements, andinvesting in improved tools,technology and customerunderstanding to identify,understand and profile high riskcustomers

• strengthening the severity of thepunishments for those who arecaught, with tough penalties, thepossibility of criminal investigationand publishing the names of themost serious evaders.





Indirect taxesnews


APAC news

AustraliaThe globalisation ofbusiness has led todealing in multiple

currencies due to supply contracts andcustomer contracts. This has resulted inthe management of foreign currenciesand resulting hedging contracts, thetaxation of which is not often a wellsettled issue.

The Australian tax Office (ATO)recently ruled favourably for a taxpayerwith foreign currency hedging losses(FX losses), arising from transactionsentered into to hedge exposure toforeign currency movements. The ATOheld that the FX losses were ‘reasonablyrelated’ to foreign currency hedginggains (FX gains) in relation to the sameinvestments.

The Australian resident taxpayerheld a diverse asset portfolio withparticular classes of assets, includinginternational equity investments thatwere held in foreign currencies but wererecorded in Australian dollars in thetaxpayer’s financial statements. Thetaxpayer adopted a mark to marketaccounting system.

In relation to the international equityinvestments only, the taxpayer enteredinto foreign currency hedgingtransactions to hedge its exposure tocurrency risk in respect of theunderlying capital value of theseinvestments through an activelymanaged currency strategy applicable tothose investments. The taxpayer realisedassessable FX gains and incured FXlosses arising from these foreigncurrency hedging transactions. Noforeign income tax was paid on the FXgains. The FX gains and FX losses arefrom a foreign source.

The taxpayer’s FX gains and FXlosses arise from currency transactionsthat are entered into as part of itsstrategy to hedge its exposure to foreigncurrency fluctuations affecting theunderlying value of its internationalequity investments. A currency hedgingtransaction by its nature will result inFX gains and FX losses. These are afunction of the direction in which theforeign currency moves against theAustralian dollar.

The FX losses are reasonably relatedto the FX gains in this instance by beingpart of the hedging strategyimplemented by the taxpayer in relationto its international equity investments tolimit its exposure to FX risks.

ChinaChina’s StateAdministration ofTaxation (SAT) issued a

new bulletin on capital gains provisionsin China’s tax treaties. Such articlesusually deal with the sale of shares butoften contain exceptions to treatybenefits for capital gains where theunderlying assets of the company inwhich the shares were sold meet certainspecified requirements.

Under most of China’s tax treaties,capital gains arising from the sale ofshares of a company resident in a treatycountry can be exempted from taxprovided that the following two testscan be satisfied: • the target company is not a ‘land-

rich’ company in which 50% ormore of the share value consists(directly or indirectly) of immovableproperty (the 50% test)






Indirect taxesnews


• the transferor company must hold,directly or indirectly, less than 25%of the shares of the target company(the 25% shareholding test).

The bulletin provides that the scope ofimmovable property includesoperational and non-operationalhousing properties, land use rights, andattached fixtures. The bulletin alsofurther describes the meaning of thethree-year look back period fordetermining the proper date, or datesthat should be used to apply the 50%test defining it as the 36 consecutivecalendar months before the month ofthe share transfer.

The bulletin introduces a look-through concept for the 25%shareholding test. If a Singapore residentindirectly owns the equity interest of aPeoples Republic of China (PRC)company through a nominee, butexclusively enjoys the participationinterest of the equity and substantiallybears the equity investment risks of thePRC. company, the Singapore residentcan be treated as if it holds the equityinterest of the PRC company directlyfor purposes of the 25% shareholdingtest. The nominee can be an individual,company, or other entity.

Hong KongHong Kong is used forseveral purposes withrespect to a multi-

national’s Asian based operations. Onetaxpayer, a well-known athletic shoecompany used Hong Kong as a locationin which procurement services wereperformed. Despite the efficiency of theHong Kong operation, the taxpayer raninto tax difficulties for servicesperformed with respect to servicesprovided to a related party in India.

The taxpayer was a Hong Kongresident and it functioned as a ‘buyer’for the entities within the group ofcompanies including a related companyin India. The services provided by thetaxpayer to India included, amongstothers: • sourcing new manufacturers and

maintaining relationships withexisting manufacturers

• procuring samples and relaying ofthe manufacturers terms andconditions

• coordination activities, includingnegotiating and placing purchaserorders, between India and themanufacturers

• payment of the manufacturers onbehalf of the athletic shoe companyIndia. The invoices were issued inthe taxpayer’s name as the agent ofIndia.

However, the taxpayer did not have theauthority to accept or reject prices orterms established between India and themanufacturers. In return for the aboveservices, the taxpayer received an arm’slength agency service fee. The taxpayercontended in its Indian tax return thatthe fees did not qualify as fees fortechnical services and in the absence of apermanent establishment in India, theincome was not taxable in India.






Indirect taxesnews


The tax authorities disagreed andheld that the fees did qualify as fees fortechnical services and thus, were taxablein India. The issue before the tribunalwas whether the fees were in the natureof fees for technical services and thus,taxable in India.

The tribunal held that the fees werenot for managerial, technical orconsultancy services and as such did notconstitute fees for technical services.Fees for technical services had to involvesome type of applied and industrialsciences and in this case, the taxpayerprovided no such technical services.

IndiaIndia is well known as afavourable location fromwhich to conduct

outsourcing activities. In a recent ruling,the use of an outsourcing operationtogether with a tax advantaged companywas addressed.

The taxpayer Z, a provider of backoffice support services (excludingtelecommunication services), wasestablished in a designated software parkand was eligible for a tax holiday for theprofits attributable to its exportedservices.

Z supplied its services exclusively toa related party in the United States (S).In terms of the business model, clientscontracted with S to provide back officeservices, and S subcontracted with Z forthe non-telecommunication portion ofthose services. S assumed the marketing,contractual, and credit risks whereas Zassumed the operating risks associatedwith the delivery of its services.

In its transfer pricing analysis, Zchose the comparable uncontrolled price(CUP) method to establish the arm’s-length price of its transaction with S.The US company paid 85% of theamount it received from its externalclients to Z as an arm’s-length fee underthe CUP method, based on thefunctions performed and risks assumedby each party.

As a backup analysis, Z also adoptedthe transactional net margin method(TNMM) and selected a fewcomparables from the public domain.The average operating margin of thecomparables was around 8%. Z’soperating margin was 1.5 times itsoperating cost and was much higherthan the average operating margin of thecomparables. Z therefore determinedthat its transaction with S was at arm’slength. As Z was eligible for the taxholiday, it claimed that its profits fromthe transaction with S were exempt fromtax under the domestic income tax act(ITA).

In the transfer pricing audit, thetransfer pricing officer examined Z’sdocumentation and agreed that itstransaction with S was at arm’s length.The transfer pricing officer issued anorder to that effect and advised the taxassessing officer (TAO).

The TAO challenged the amount ofZ’s profits that were eligible for the taxholiday under the ITA. The TAOdenied the tax holiday for profits inexcess of 8% of Z operating costs, andassessed tax on that amount.

The tribunal ruled that profits fromthe supply of business outsourcingservices to a related party by an Indiancompany qualifying for a tax holiday arefully tax exempt, even if the profitmargins are excessive because ofoperating efficiencies, provided that thesupply is at an arm’s-length price.






Indirect taxesnews


The tribunal sided with Z andoverruled the tax assessment. It held thatonce the transfer pricing officer agreedwith the taxpayer and accepted thearm’s-length nature of the transactionwith S the TAO had to have newevidence to invoke his powers under theITA.

Further, the TAO provided noindependent evidence to support hisconclusion that Z had generated morethan ordinary profits by virtue of thearrangement of its dealings with itsrelated party.

The tribunal also found that Z hadsignificant operating efficiencies andlow-cost advantages over some of thecomparables.

The tribunal therefore held that theTAO could not adjust Z’s profits forpurposes of the tax holiday and erred inassessing tax on a part of the profits.

IndonesiaIndonesia’s FinanceMinistry has beenlooking into the granting

of tax incentives to encourage theproduction of environmentally-friendly‘green’ vehicles. The proposals haverecently received parliamentary backing.

The proposals would allow taxincentives for the manufacturing of low-cost low-emission cars in Indonesia, thatcould, not only reduce fuelconsumption, but also make the countryinto an Asian production base for suchvehicles.

The incentives for low-cost green carproduction form part of the Ministry ofIndustry’s plans for Indonesia tobecome a regional production base, incompetition with Thailand andMalaysia, while increasing employment.

The Indonesian government has alsoannounced that companies involved inthe exploration of oil, gas andgeothermal resources are able to get taxincentives.

JapanTwo recent internationaldevelopments are ofinterest, the bad news,

earnings stripping, the good news, ataxpayer victory concerning residence.

Earnings strippingJapan adopted earnings strippingprovisions under which a corporation’sdeduction for net interest expense paidto a related party will be limited to 50%of adjusted income, effective for taxyears beginning on or after 1 April 2013.A related party is defined to be any:i) person with whom the corporation

has a 50% of more equityrelationship

ii) person with whom the corporationhas a de facto controlling orcontrolled relationship

iii) third party lender which isfinancially guaranteed by one of theabove.

Residence taxpayer victory A victory in a Japanese gift tax case ofthe elder heir of the recently bankruptJapanese consumer finance company hasbeen widely publicised. One aspect ofthe case that drew particular mediaattention was the loss to the Japanesestate through the payment of aroundJPY40Bn (USD450m) of interest andpenalties to the taxpayer in addition tothe taxes repaid of around JPY133Bn(USD1.6Bn).

In the case the taxpayer had receiveda gift of the company’s shares during aperiod when he was living in HongKong, where he spent approximatelytwo thirds of his time while spendingjust over a quarter of his time visitingJapan and the remainder elsewhere.

The tax authorities had asserted thatthe taxpayer was resident in Japanduring the period concerned, despite hisrelatively short period of residence inJapan.






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The authorities asserted that he hadan ‘address’ in Japan and hence the giftof shares to him was a taxabletransaction by virtue of such residence.

Under changes to the law in Japan in2000, where either the recipient ortransferor of gifted assets has beenresident in Japan for five years tax canapply to such assets even when they arenot located in Japan.

In the instant case, the taxpayer’slifestyle was 25% or less in Japan formore than the five year period.

The court ruling in the case indicateda warning from the Japanese courtsagainst abusive interpretation of the taxlaw by the tax authorities. In particularthe ruling noted the words of theJapanese constitution, that ‘…taxesshould be assessed according to thelaw…’.

KoreaPreviously, tax residentsin South Korea wererequired to file a foreign

financial accounts report form with theNational Tax Service (NTS) between 1June and 30 June of the following year ifthe aggregate value of cash and listedstocks held in foreign financial accountsexceed KRW 1 billion on any day duringthe tax year. Under the revised law, thereportable criterion is extended toinclude all financial assets includingbonds, derivatives, etc. In addition, theKRW 1 billion value measurement datehas changed from ‘on any day duringthe year’ to the ‘end of each month’ forthe convenience of taxpayers indetermining the reportable financialaccounts value.

Additionally, new penalty provisionshave been introduced to enhanceeffective enforcement of the law, these

are as follows:• name of the individual who fails to

comply will be disclosed to thepublic effective from reporting year2012 (filing due 30 June 2013)

• if the total amount not reported orunder-reported exceeds KRW 5billion, criminal law penalties willapply with a maximum of two yearsimprisonment or a fine up to 10% ofthe non-reported or under-reportedamount.

MalaysiaThe Labuan FinancialServices Authority(LFSA) has issued

guidelines applicable to all Labuaninternational trading companies (LITCs)licensed to conduct internationalcommodity trading business in theLabuan International Business andFinancial Centre (LIBFC) under theGlobal Incentives for Trading (GIFT)programme.

The guidelines that were effectivefrom 1 January 2013, cover a Labuaninternational commodity tradingbusiness involved in the trading ofphysical and related derivativeinstruments of petroleum andpetroleum-related products includingliquefied natural gas (LNG), agricultureproducts, refined raw materials,chemicals and base minerals. An LITCcan only deal with non-residents in anycurrency other than Malaysian ringgit.






Indirect taxesnews


Under the GIFT program, a generalLITC is subject to a corporate tax rate of3%, but an LITC set up purely as anLNG trading company is entitled to a100% income tax exemption onchargeable profit for the first three yearsof its operation, provided the companyis licensed before 31 December 2014.

Other tax incentives applicable foran LITC include:• a 100% exemption on fees paid to

non-Malaysian directors of the LITC• a 50% exemption on gross

employment income of non-Malaysian professional andmanagerial staff, including traderswith the LITC

• an exemption on dividends receivedby or from the LITC

• an exemption on royalties receivedfrom the LITC

• an exemption on interest received byresidents or non-residents from theLITC

• a stamp duty exemption on allinstruments for Labuan businessactivities and the transfer of shares.

New ZealandAlthough miles fromEurope, New Zealand isjust as plugged into

attacking tax avoidance schemes as otherjurisdictions many times its size.

The appeal court has recently issueda judgment concerning a financestructure which was held to be a taxavoidance scheme. The case involvedtaxpayer (ANZ) funding its NZD 78million acquisition of two New Zealandcompanies by issuing non-interestbearing, ten-year optional convertiblenotes (OCNs) to its Australian parentcompany (AA). At maturity the OCNscould be redeemed in cash or convertedinto ANZ shares at the rate of one sharefor one note.

Under international accountingstandards (which required that theOCNs be split into their debt andequity components, and interestrecognised on the debt element), and adetermination issued by the InlandRevenue, ANZ treated the differencebetween the present value of the debtcomponent of the OCNs (NZD 38million) and the cash redemption value(NZD 78 million), i.e. NZD 40 million,as deductible interest expenditure. Itthen amortised over the term of theOCNs. Australia treated OCNs asequity and did not assess the amortisedamounts.

ANZ’s resultant tax loss was offsetagainst the taxable incomes of its NewZealand group companies.

The High Court found that thearrangement was a tax avoidancearrangement and therefore void. ANZappealed the High Court’s decision. Theappeal court upheld the High Courtdecision in favour of the commissioner.

TaiwanA proposed plan has been announced tointroduce six pilot economic free zones innorthern, central and southern Taiwan. The

zones will offer foreign investors tax incentives including: • a reduced corporate income tax rate of 10% (previously

17%) for multinational companies that set up theirregional headquarters in the designated locations

• a 50% income tax exemption for foreign and Chineseworkers in the first three years of their employment within the zones

• incentives for profits repatriated from overseas toenterprises established in the zones

• incentives for the acquisition of patented technologies• incentives for research and development activities• duty-free import and export of goods and raw materials

from and to the zones.

Subsidies for rents and a relaxed work permit policy forqualified foreign workers will also be available.






Indirect taxesnews


ThailandMany countries areraising corporate tax ratesbut are being criticised

by those who say raising tax rates lowersgovernment tax collections and loweringtax rates has the opposite effect. Who isright? Let’s look at Thailand.

Thailand’s cabinet approved apackage of tax measures to provideassistance to small and medium-sizedenterprises (SMEs) and lessen the effectof the government’s minimum wagepolicy.

While the government has alreadylowered corporate tax from 30% to23% last year, and has adjusted the rateeven lower to 20% in 2013, there havebeen calls for further help to small-medium sized entities (SMEs), withannual revenues of up to THB50m(USD1.65m), to counteract the increasedwage costs caused by the introduction ofthe country’s THB300 daily minimumwage on 1 January 2013.

In 2013, the annual income taxexemption for SMEs will be increasedfrom THB150,000 to THB300,000, andthere will be a 15% tax rate on theirprofits between THB300,000 andTHB1m. The normal 20% tax ratewould apply to incomes above THB1m.

Thailand’s tax collections for the firstfive months of the 2013 fiscal yearbeginning last October reached 28.06billion US dollars, which is 13% or 3.21billion dollars more than targeted,according to the Fiscal Policy Office.

The Fiscal Policy Office reportedthat the collected taxes from all agenciesbetween October and February werehigher than targeted, reflecting aneconomic expansion, especiallyregarding domestic demand andhousehold income.

VietnamFrom 1 January 2012,companies were nolonger entitled to enjoy

incentives based on the export criteria, asa result of Vietnam’s world tradeorganisation commitments. This issomewhat similar to the US ForeignSales Corporation complaint severalyears ago.

The Ministry of Finance issued acircular describing the alternativecorporate income tax (CIT) incentivesavailable to these affected companies.The circular indicates the length of timethat the replacement incentive is to run,as well as, which regulations to apply.

The circular also provides guidanceon the conversion of CIT incentives insome special cases and also provides anumber of specific examples.

In order to enjoy an alternativeincentive, an enterprise must notify thelocal tax authority of the alternative CITincentives by the submission deadlinefor the 2012 final CIT return. Where anenterprise has already declared/notifiedan alternative CIT incentive which is notin line with circular 199, it is allowed tomake an adjustment and submit arevised notification to the local taxauthority.






Indirect taxesnews


Americas news


ArgentinaCisco Systems ArgentinaSA (CA) entered into acontract with Cisco

Systems Inc (CI) under which CAagreed to promote the sale of Ciscoproducts to distributors and customerslocated in Argentina and neighbouringcountries. This promotion included theuse of advertising, technical support andpromotional materials.

The service fee paid by CI to CAcomprised of: (i) an amount equal to thesum of the costs incurred by CA, tocomply with the contractual marketingobligations, including employee salaries,professional fees, rents, depreciation,and other expenses; plus (ii) 5% of thosecosts (cost plus).

The National Tax Administrationchallenged some of the expensesincurred by CA outside of Argentina(and also locally), arguing that they wereunrelated to the activity developed inArgentina and therefore were notdeductible from the tax balance. TheArgentine National Tax Court held thatexpenses a company incurred outside ofArgentina were tax deductible becausethey were necessary to comply withcontractual obligations and weretherefore directly related to the taxablestream of income.

BoliviaThe Bolivian taxauthorities issued aresolution which

regulates the carrying forward ofaccumulated losses for financial years2010 and 2011. The resolution has animmediate effect and establishes theperiod to set off tax losses as follows: • a three year period for:

– accumulated tax losses generateduntil 2010

– tax losses generated as from 2011 • a five year period for:

– the hydrocarbon and miningsector

– new businesses registered after 9September 2011 with aninvestment capital that exceedsUSD 150,000.

BrazilBrazil internetinfrastructureThe Brazilian

Government has approved new taxbreaks to encourage investment in thenation’s internet infrastructure.Companies wishing to secure the taxbreaks must submit investment plans by30 June 2013, outlining proposedimprovements to their 3G and 4Gnetworks to improve mobile access tothe internet. Tax breaks provide for anexemption to PIS/COFINS taxes (socialsecurity levies) and to industrial profitstax, known as IPI. The concessions willnot only benefit telecoms providers butalso those firms providing theequipment and necessary hardware andsoftware infrastructure to facilitate theimprovements. In order to be eligible forthe tax breaks, companies mustcomplete their proposed projects by theend of 2016, and domestically source atleast 50% of the technologies andcomponents they intend to use.





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Imports (PIS) and (COFINS)Brazil’s Supreme Court (STF) has ruledon a case of interest to Brazilianimporters. The case concerns the tax basedetermination of two social welfare taxeslevied on imports (PIS-imports andCOFINS-imports) as unconstitutional.The decision is important because it willreduce the overall tax cost of importingproducts into the country.

In its lawsuit, the Brazilian importerargued that the PIS-imports andCOFINS-imports tax basis wasunconstitutionally enlarged and that thetwo taxes should be levied only on the‘customs value’ of the imports, which islegally established and composed of thecost, insurance, freight (CIF) value, thefreight tax (AFRMM), the financialtransaction tax (IOF) and other customscharges. There was no constitutionalbasis to include either a grossed-upcalculation or the ICMS (state sales tax)in the tax basis for PIS-imports andCOFINS-imports, the Brazilianimporter had argued.

According to the court, a grossed upcalculation of PIS-imports andCOFINS-imports and the inclusion ofICMS into the tax base amounted to anunconstitutional extension of thedefinition of customs value and shouldbe excluded.

The decision is important to foreignexporters, local importers and Brazilianconsumers as the overall tax burden onimports will be reduced by as much as5%, depending on the ICMS tax rate inthe state of destination of the goods.

CanadaThe Canada RevenueAgency (CRA)considered the

withholding obligation arising onremuneration paid by a Canadianemployer to a non-resident employee (anonbinding technical interpretation). Inthe ruling, the Canadian employeroperated a business that had computerservers physically located in Canada.The non-resident employee was aprogrammer/analyst who performed hisduties from his home country by way ofan electronic connection to theemployer’s Canadian computer servers.

Canada’s tax system imposeswithholding obligations on paymentsfor services rendered or performed inCanada. Employers are required towithhold and remit tax to the CRA forremuneration paid to their employees,subject to exclusion for employees whoare neither resident nor employed inCanada and whose remuneration doesnot reasonably relate to employmentduties performed in Canada.

Any person paying a fee,commission, or other amount to a non-resident for services rendered in Canadais required to withhold and remit to theCRA 15% of the payment.

In either case, the CRA may providea waiver from withholding tax if it canbe shown that the non-resident is notsubject to Canadian tax on the payment(for example, under a tax treaty).

The CRA ruled that a personperforms the duties of his employmentin the place where he is physicallypresent. As such, if the employee isphysically located outside Canada whenperforming his employment duties, noCanadian tax should be withheld fromthe remuneration paid to that employee.





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Cayman IslandsThe OECD recentlyreleased a ‘phase 2’ peerreview report in respect

of the Caymans’ regime, which statedthat the islands have demonstrated thatstandards for transparency and taxinformation have been properlyimplemented, and that the territoryexchanges tax information effectively inpractice. Among the many positivecomments in the report, the OECDstates the tax information authority’sexchange process is ‘very well organisedwith many internal processes in place forhandling exchange of information (EOI)requests as well as the unit being wellresourced in personnel, IT and technicalexpertise. As a result, high qualityresponses are provided to partnerjurisdictions and in 87% of cases thetime in which a final response wasprovided was less than 90 days’.

The Cayman Islands agreed to enterinto a ‘Model 1 IntergovernmentalAgreement (IGA)’ under the US

Foreign Account Tax Compliance Act(FATCA) with the US due to its desireto rid itself of any association withfacilitating the evasion of taxes. Theinformation disclosed under FATCAwill be cross-referenced againstindividuals’ tax filings, and as such, ifanyone thought a Cayman bank accountcould be used to hide US taxes, it willmost certainly now be very transparent.

The Cayman Islands MonetaryAuthority has reported that it received67 applications for new captiveinsurance licenses in 2012, with 52licenses granted and the remainderscheduled for approval in 2013. Thisrepresents growth in applications of58% year-on-year, the strongest year interms of interest in captives since 2004.Although Cayman is widely recognisedas a leading healthcare captive domicile,the 52 new formations came from abroad range of sectors including lifereinsurance, property and casualtyreinsurance, manufacturing andtechnology, as well as healthcare.

ChileThe Supreme Court heldthat financial institutionsmust inform the tax

administration (SII) on internationaltransactions carried out on behalf ofthird parties according to a resolutionwhich was upheld as lawful.

The resolution issued by the SIIprovides that banks, financialinstitutions and other resident entitiesmust annually inform the SII on anyinternational transaction carried out onbehalf of third parties. Thesetransactions include remittances, foreignpayments and capital inflows for anamount equal to or exceeding USD10,000. For this purpose, an affidavitmust be filed electronically by 15 Marchof each year.

Various banks requested that theresolution be declared void based ongeneral bank law provisions, underwhich banks and financial institutionsare subject to bank secrecy and bankconfidentiality. Bank secrecy isapplicable with regard to any type ofbank deposits. This information may beprovided only to the holder of the bankaccount or its representative. Otherbank transactions are subject to bankconfidentiality. This information may beprovided only to those who have alegitimate interest so long as it does notimply an economic damage for theclient. In the case of offshore companies,the income tax law specifically providesthat the bank secrecy or reserve is notapplicable.

The resolution was successfullychallenged before the lower court andthe appeals court. However, theSupreme Court reversed the decisionand decided that resolution was lawful.





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ColumbiaColombia’s congressrecently approved acomprehensive tax

reform that will substantially change theinternational tax rules for individualsand for companies carrying out businessin Colombia.

The tax reform aims to updateColombia’s tax rules to align them withthe income tax treaties it has concludedthus far, which are mainly based on theOECD model tax treaty. Specifically, thetax reform amended the transfer pricingrules, extended the income tax to foreigncapital investment portfolio income, andintroduced thin capitalisation rules andprovisions to tackle the use of taxhavens, among other things.

The main provisions that will affectcompanies and individuals carrying outbusiness in Colombia include: • residency• permanent establishment• income tax rate and tax base• capital gains tax• general and specific anti-abuse rules• exchange of information• transfer pricing rules.

Costa RicaCosta Rica notified theOECD that it has ratifiedthe ‘Convention on

Mutual Administrative Assistance in TaxMatters’, the most comprehensivemultilateral agreement available for tax-cooperation and exchange of information.

The convention was developedjointly by the OECD and the Councilof Europe, and has been open to allcountries since 1 June 2011. It helpscounter cross-border tax evasion andensures compliance with national taxlaws, while respecting the rights oftaxpayers. G20 leaders stronglyencouraged all jurisdictions to sign theconvention.

The convention provides amultilateral basis for a wide range ofadministrative assistance, includinginformation exchange on request,automatic exchange, simultaneous taxexaminations and assistance in thecollection of tax debts. The conventionwill enter into force for Costa Rica on 1August 2013.

MexicoMexico, as Chile has done a few years ago, islooking to introduce a new tax on miningcompanies’ profits in a bid to raise the

country’s tax-to-Gross Domestic Product (GDP) ratio, whichremains the lowest among OECD member states.

A lower house parliamentary committee endorsed the newlaw, which would impose a 5% levy on pre-tax mining profits,up from a 4% rate that had previously been underconsideration.

The royalty would apply to net earnings before interest,taxes, depreciation, and amortisation (EBITDA). Thedefinition of EBITDA in the income tax law refers to thecompany as a whole, without regard to the nature of theincome and expenses. The calculation of income and expenseswould be based on taxable income and deductible expensesunder the income tax law.

The proposed bill also includes increased penaltypayments for duties or rights that are currently assessed onconcession holders based on the size of the property. Thesepenalties are imposed when a concession is not beingdeveloped.





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USAThe tax court held that aUS bank’s StructuredTrust Advantaged

Repackaged Securities (STARS)transaction with a counterpart in theUK lacked economic substance and,therefore, did not give rise to foreign taxcredits, deductible expenses or foreign-source income. Through a complicatedsystem of subsidiaries and special-purpose entities, the US bankcontributed assets to a trust, the trustsold its shares to the UK counterpart,and the UK counterpart loaned the USbank money through the trust.

For UK tax purposes, the UKcounterpart was treated as the owner ofthe trust and, thus, was able to claimdeductions and credits against its UKtaxes. However, for US purposes, thetransactions were treated as a securedlending arrangement, so that the USbank was the owner of the trust andcould claim foreign tax credits for theUK taxes paid on the trusts income.While the STARS transaction wasstructured to meet the foreign tax creditrequirements, it was actually anelaborate series of pre-arranged stepsdesigned for generating, monetising andtransferring the value of the foreign taxcredits between the US bank and theUK counterpart.

UruguayUruguay has continuedin issuing industryspecific tax incentives by

providing tax incentives for thebiotechnology industry.

The corporate income tax exemptionapplies to income derived from thequalified activity as follows:• a 90% exemption for tax years that

began or will begin between 1January 2012 and 31 December 2017

• a 75% exemption for tax years thatwill begin between 1 January 2018and 31 December 2018

• a 50% exemption for tax years thatwill begin between 1 January 2020and 31 December 2021.

The tax incentive is granted if any one ofthe conditions below is met:• the activity implements a

‘programme of development forproviders (of biotechnologyproducts and services’

• the activity is carried out by a micro,small or medium company

• the taxpayer is a new companycreated ad hoc to produce qualifiedbiotechnology products and/orservices.

The tax incentive does not applyautomatically. Taxpayers must file withthe Ministry of Industry, Energy andMining, an affidavit describing theactivity. The requested ministry and aspecial commission have the finaldecision on whether to grant the taxincentive.





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Transfer pricing news


United KingdomAccording to officialguidance published by anadvisory committee from

HMRC on 15 April 2013, a general anti-abuse rule, soon to become law in theUK, will not apply to many of therecent transfer pricing relatedcontroversies. However, abusivearrangements which try to exploitparticular provisions in a double taxtreaty may still fall under the rule, whichis included in the 2013 finance bill.

The General Anti-Abuse Rule(GAAR) received support from thePrime Minister following publiccontroversy over alleged tax avoidanceamid dwindling revenues and slashedsocial services — including claims thatlarge multinational companies wereusing transfer pricing as a way to avoidpaying corporate income tax in the UK,despite doing substantial business in thecountry.

ArgentinaArgentina is nowrequiring all transferpricing reports to be filed

electronically. The Argentine taxauthority issued a general resolutionwhich established the new requirementsfor taxpayers. The resolution states thattaxpayers must file a transfer pricingreport in a digital format through the taxauthority’s website,http://www.afip.gob.ar. The transferpricing report must be translated by apublic translator if prepared in adifferent language, and must include thedigital signature of the taxpayer, theindependent certified public accountant,and the accountant’s professional board.The new requirement applies to fiscalyears ending 31 December 2012, or later.For years ending 31 December 2012, thedeadline for filing a new report isAugust 2013.

Czech RepublicThe Czech SupremeAdministrative Courtrendered a decision

concerning the burden of proof intransfer pricing disputes and theapplication of transfer pricing methods.

The taxpayer was a companyresident in the Czech Republic and theyfiled an additional tax return in respectof its 2007 tax liability. In that return, thetaxpayer declared that its tax liability for2007 should have been higher thanoriginally declared, because the transferprices in transactions with its parentcompany, were not at arm’s length. Theplaintiff paid the additionally assessedcorporate income tax in respect of the2007 tax year.

Subsequently, the taxpayer filedanother additional tax return for the2007 tax year in which it declared asubstantially lower tax liability. Thetaxpayer claimed that there was noreason for the adjustment of the transferprices, as claimed in the 2008 additionaltax return. The tax authorities disputedthe reduction of the tax base and the taxliability in respect of the 2007 tax year,and argued that the taxpayer failed todemonstrate that the transactions withits parent company, resulting in a lowertax liability, were at arm’s length. Thelower court upheld the tax authorities’position. The taxpayer then brought thecase before the Supreme AdministrativeCourt.





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http://www.afip.gob.ar


The dispute concerned the followingtypes of controlled transactions:• purchase of raw materials from the

parent company – the cost-plusmethod was used

• sale of finished goods to the parentcompany – the profit-split methodwas used.

The court ruled in favour of the taxauthorities. The taxpayer mustsubstantiate all information stated in histax return; thus, the burden of proof isgenerally on the taxpayer. In an earliercase, the Supreme Administrative Courtfound that this principle does not applyin transfer pricing disputes. In suchdisputes the burden of proof shifts tothe tax authorities.

In the present case, however, theburden of proof was on the taxpayer,rather than the tax authorities, as it wasthe taxpayer who claimed that thetransfer prices used as a basis for its 2007tax liability, declared in the 2008additional tax return, should be revised.

Accordingly, the taxpayer was expectedto provide evidence of both the price ina controlled transaction and the arm’slength price. The court held that thetaxpayer did not meet its burden ofproof in the present dispute.

The court further held that thetransfer pricing methods were notapplied correctly. In particular, the courtfound that the costs taken intoconsideration for the application of thecost-plus method included the plaintiff’s‘share in the losses of the parentcompany’.

In addition, the court found that theapplication of the profit-split methodresulted in the transfer of 80% of theparent company’s losses to the plaintiff.The court found that these arrangementswere not at arm’s length, and effectivelyresulted in the transfer.

RussiaThe Russian Federal taxservice released guidanceclarifying when

transactions are controlled transactionsfor Russian transfer pricing purposeswhen they are executed by an agent inits own name but at the request of andfor the account of a principal.

The guidance indicates a transactionis considered to be controlled where: • transactions involving a sale or

services executed with theparticipation of (or through theagency of) third persons that are notconsidered related for tax purposes

• foreign trade transactions involvingthe following commodities traded onglobal stock exchanges: oil and oilproducts, fertilisers, ferrous andnonferrous metals, precious metals,and precious stones, if the aggregateannual amount of income resultingfrom all the transactions between theparties exceeds RUB 60 million(about $1.95 million)

• transactions involving a person thatis registered or resides for taxpurposes in countries or territoriesincluded in the Russian FinanceMinistry’s list of countries andterritories that have a preferential taxregime or do not require thedisclosure of information aboutfinancial transactions.

The guidance indicates that if (under anagency contract) an agent at the requestof the principal and in exchange for afee, undertakes legal and other acts inthe agent’s name but for the account ofthe principal, or in the principal’s nameand account, a controlled transactionexists.





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If an agent executes a transactionwith a third party in the agent’s namebut for the account of the principal, theagent acquires the respective rights andobligations and a controlled transactionexists. If the agent executes a transactionwith a third party on behalf of and forthe account of the principal, theprincipal acquires the respective rightsand obligations that arise, a controlledtransaction exists.

The tax service said, to recognise atransaction executed by the agent andthe principal as controlled, it is necessaryto total the income the agent receivedfrom the principal as an agency feeunder an agency contract and theincome the principal gained from thetransaction executed by the agent with athird party.

To recognise as ‘controlled’ atransaction executed by the agent and athird party in the agent’s name but forthe account of the principal, it isnecessary to total the income that theagent must transfer to the principal inconnection with that transaction underan agency contract. The tax servicestated that this transaction is subject totransfer pricing provisions because athird party incurs expenses as a result ofthe transaction’s execution.

The tax service also stated thattaxpayers must notify tax authorities oftheir controlled transactions executed ina calendar year. Therefore, a third partythat entered into a transaction with anagent must notify the tax authorities ofthat transaction if it is recognised ascontrolled.

FinlandThe case dealt withwhether the transferpricing between Finnish

A Oyj and its Estonian subsidiary B AShad been in accordance with the arm’s-length principle. A Oyj had included inthe remuneration paid to B AS a portionof the calculated location savings causedby the lower price level of Estoniacompared with Finland.

A Oyj the parent company of thegroup operated the group’s research anddevelopment activities and hadownership of the technology andmodels used in the group’s businessactivities. B AS owned the equipmentused in its own manufacturing activitiesand had bought the equipment from AOyj in 2004, before which it had rentedthe equipment from A Oyj. B ASoperated as a contract manufacturer for

A Oyj and it did not have any other customers. Still, it was thelargest manufacturer in Europe in its line of production. AOyj had the ownership of the products manufactured by B ASthroughout the entire manufacturing process.

A Oyj also had an Irish subsidiary to which it sold at leasta portion of the products made by B AS that requiredfinishing. The Irish subsidiary finalised and packed theproducts and resold them to distributors in its own name.

The transfer pricing of the manufacturing servicespurchased by A Oyj from B AS had been determined usingthe transactional net margin method. The pricing method bywhich the remuneration was paid by A Oyj to B AS was basedon a transfer pricing analysis carried out by A Oyj. Theremuneration included a ‘location-neutral’ cost-plus marginbut also a location savings compensation.

The court held that the location savings principle did notapply in this particular case because the Finnish company,which had transferred its manufacturing operations to Estonia,never had manufacturing activities in Finland that werecomparable to the operations of its Estonian subsidiary.





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CanadaThe Supreme Court ofCanada issued its firsttransfer pricing ruling to

GlaxoSmithKline (Glaxo).Glaxo Canada procured ranitidine,

an active pharmaceutical ingredient, fromAdechsa S.A. Switzerland, as associatedentity, under a supply agreement. Theranitidine was used by Glaxo Canada tomanufacture an anti-ulcer drug, whichwas sold in the Canadian market underthe Zantac brand name. This brand namewas owned by Glaxo Group Ltd. UK;another associated entity, and was madeavailable for use by Glaxo Canada undera licensing agreement.

Under the licensing agreement, GlaxoCanada was required to pay GlaxoGroup a royalty of 6% on sales inCanada, and also to procure ranitidineonly from entities nominated by GlaxoGroup. In consideration, Glaxo Canadaobtained the right to use the Zantacbrand name and a clutch of other benefitsand support services from Glaxo Group.

Consequently, Glaxo Canadapurchased ranitidine at prices fixed byAdechsa (CAD 1,512-1,651 per kg) thatwere far in excess of the prices paid(CAD 194-304 per kg) to othersuppliers of ranitidine by other localdrug manufactures that sold the anti-ulcer drug under its generic name.However, Glaxo Canada’s Zantac sold ata higher price as compared to the otheranti-ulcer drugs that were sold undertheir generic name of ranitidine.

The Minister of National Revenuereassessed Glaxo Canada for the taxyears 1990 to 1993, holding that theexcess consideration paid by it toAdechsa for purchase of ranitidine wasnot an arm’s length payment that was tobe considered under section 69(2)(subsequently replaced in 1998 withsection 247(2)), and that the excesspayment was deemed to be a dividendpaid to Adechsa under section 56(2) andliable to withholding tax under theincome tax act.

• the Supreme Court upheld the order of the court of appealremanding the matter to the tax court for determination ofthe arm’s length price.

The Supreme Court held that the purchase price paid byGlaxo Canada for ranitidine under the supply agreement withAdechsa included a payment for the rights and benefitsreceived by Glaxo Canada under the licensing agreement withGlaxo Group Ltd. Therefore, the licensing agreement couldnot be excluded, as had been done by the tax court, indetermining the arm’s length price under the supplyagreement.

The Supreme Court upheld the finding of the court ofappeal that in determining what should be the arm’s lengthprice for ranitidine purchased at higher than market prices byGlaxo Canada, due regard should also be had to the benefitobtained by Glaxo Canada under the licensing agreementwhich imposed a condition to make such purchases, andconsequently remanded the matter to the tax court to makethat determination.

Glaxo Canada’s income wasincreased by CAD 51 million.

The case has had a long judicialhistory:• against the assessment, Glaxo

Canada appealed to the tax court ofCanada

• the tax court, substantially upheldthe reassessment made by theMinister in the prices paid by GlaxoCanada to Adechsa

• Glaxo Canada appealed against thisorder to the court of appeal

• the court of appeal set aside theorder of the tax court and remandedthe matter to the tax court to rehearthe matter based on the observationsof the court of appeal

• an appeal was made to the SupremeCourt by the Minister against theorder of the court of appeal. A cross-appeal was also filed by GlaxoCanada against the order of the courtof appeal remanding the case to thetax court





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BrazilA Brazilian multinationalcompany underwent amajor corporate

restructuring in which it contributedshares in a number of its offshoreinvestments to a Spanish holdingcompany, which was subject to a specialregime, under which revenue derivedfrom controlled foreign corporationswas not taxed in Spain. The Brazil-Spaintax treaty ensured that profits from theSpanish entity were not taxed in Brazil.

The Federal Revenue Department(FRD) contended that the newcorporate structure served only as ameans to channel profits to Brazil whileavoiding tax and therefore lackedeconomic substance. The FRDattempted to tax the profits accrued bythe indirectly controlled entities (held bythe Spanish holding company). Inessence, the FRD argued that the foreignsubsidiaries profits were taxed as earnedirrespective of any repatriation.

In the decision of the AdministrativeCouncil of Tax Appeals (CARF), themajority of counsellors held in favour ofthe taxpayer, saying that there is no legalbasis to disregard treaty provisions,which must take precedence overnational law. The CARF held that theSpanish holding company had economicsubstance, evidenced by the fact that itcarried out its activities as a holdingcompany and was not constituted solelyfor the purposes of tax avoidance. Also,Brazilian CFC rules should only reachthe profits of the directly controlledentities (since the profits accrued by theindirectly controlled ones should beconsolidated by the treaty). Thus theCARF considered the usual investmentposition of a holding company assufficient evidence of economicsubstance.

criteria for a comparable that theadministration had not provided. Thetax administration provided no precisionabout the identity of the comparables orabout how their cash pool managementfunction works, or about whether thesecomparables or these cash poolmanagement functions of thecomparables include guarantees similarto the guarantees of Nestle FinanceFrance.

In France, the government is notsupposed to use a secret comparablebecause they hamper a taxpayer’s abilityto defend itself by disproving thevalidity of the comparables offered bythe tax authority. The court stated thatone of the reasons why the comparableshould not be acceptable is that the taxauthorities have not disclosed to thetaxpayer the identity of suchcomparables.

FranceThe French court ofappeal rejected the use ofsecret comparable in the

case of a large based Swiss multinational.Nestle Enterprises, a French

subsidiary of the Swiss-based Nestlegroup, was appealing a 2011 ruling bythe lower Administrative Courtregarding the transfer of an internal cashpooling service to a Swiss affiliate. Thelower court, siding with the French taxadministration, found the relocation ofthe cash pool management function wasa transaction that required arm’s-lengthcompensation.

In overruling that judgment, theParis appeals court said the taxadministration failed to prove its basisfor calculating a compensation amountfor Nestle France’s transfer of the cashpool management activity to the SwissNestle entity. The ruling lists required





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Indirect taxes news

Bahamas Although this location ispopular as a low taxjurisdiction and often

referred to as a tax haven, it appears thatthe popular VAT has crept in the backdoor.

On 14 February, the Bahamiangovernment issued a white paper on theproposed VAT that was announced inthe 2012-2013 budgets. The VAT, whichwould be charged at 15%, 10, or a zerorate, would be effective from 1 July2014. The standard VAT rate would be15%, while export sales andinternational transport of goods andpassengers would be zero rated. Adiscounted rate of 10% would apply forhotel services, including food and drinksupplied on their premises. That rate isthe same as that of the current hoteloccupancy tax, which the VAT wouldreplace. Of course this is a concession totourist trade.

The following products and serviceswould be exempt from VAT: • healthcare and education services• transfers and leases of land and

residential buildings• financial services• social and community services• agriculture and fisheries.

VAT would apply to every supply ofgoods and services made in the Bahamasin the course of a taxable activity carriedon by a VAT registrant. The concept of ataxable supply includes a zero ratedsupply for exempt products andservices.

NetherlandsThe ECJ found that VATpaid by a group of Dutchcompanies for the

management of assets in a pensionpooling scheme is not deductible for thegroup.

The case involves a group of relatedcompanies that created a separate entityto pool employee pension resources.The companies were all part of a taxgroup, but for Dutch legal reasons, thepension fund was a separate legal andVAT entity.

The taxpayer, a member of thegroup, contracted with third parties forpension management, administration,auditing, and consulting services andpaid directly for those services. In 2001and 2002, the company paid anapproximate amount of VAT onpension-related services and sought todeduct those invoiced payments againstits output tax.

The Dutch tax administrationdetermined that the VAT paid on thepension services was not deductible bythe group and issued a reassessment,against which the taxpayer appealed.The company argued that the VAT wasdeductible because it was an expendituremade for the benefit of its employeesand that it was part of the overhead forthe company’s taxable activity.

For VAT to be deductible, the inputtransactions must have a direct andimmediate link with the outputtransactions, giving rise to a right ofdeduction. The right to deduct VATcharged on the acquisition of inputgoods or services presupposes that theexpenditure incurred in acquiring themwas a component of the cost of theoutput transactions that gave rise to theright to deduct.





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The Dutch tax authorities arguedthat the costs related to the pension funddid not have a direct and immediate linkto the outputs of the company while thetaxpayer, joined by the EuropeanCommission, argued that the legalrequirement for providing employeeswith a pension meant that the costs werea necessary component of its business.

The UK intervened in the case toargue that a limited portion of the costs,such as those associated with setting upthe fund, should be deductible, but thatthe costs of the management of the fundassets should not be.

The ECJ sided with the argumentraised by the UK and reiterated legaland fiscal separation between the fundand the company that created it and heldthat while the fund could deduct theinput VAT paid by group against theVAT due on its own activities, there isno direct and immediate link with theactivities of the group.

Thus, the ECJ rule that while grouphas no right to deduct the VAT paid onthe management of fund assets, it maydeduct VAT paid on fees related to thesetting up of the fund, the enrolment ofemployees, and the assurance of timelypayments into the fund.

IrelandThe ECJ held thatallowing non-taxablepersons to join a VAT

group does not violate the VAT directive. The case involved a complaint by the

European Commission that Ireland’sVAT consolidation act allows a non-taxable person to join a VAT group. Thecommission argued that this violated theVAT directive and could lead to thecreation of an entirely non-taxable VATgroup, a situation contrary to the goalsof the VAT system.

Of key importance in the case is thewording of VAT directive, which saysthat member states may allow ‘anypersons’ to join a VAT group. Thecommission argued that although theword ‘taxable’ does not appear between‘any’ and ‘persons’, it is implicit thattaxable persons, as defined in the VATdirective, is intended and furthermore,that the use of the word ‘grouping’implies that all VAT group membersshould occupy the same VAT category.

The court agreed that the directive’swording does not limit potentialmembers in a VAT group to taxablepersons, writing that the insertion of‘any’ and the omission of ‘taxable’clearly expanded the potential VATgroup membership to non-taxableentities. The court said that based on thewording there is no reason to excludenon-taxable entities from a VAT group.





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CanadaA recent decision dealtwith automated bankingmachines (ABMs) in the

taxpayer’s convenience stores acrossCanada. The taxpayer lost one issue andwon the other at the tax court ofCanada.

The taxpayer had an agreement withCIBC to place CIBC banking machinesin many of its stores. The taxpayerreceived fees from CIBC based on thefees that CIBC charged to non-CIBCcustomers who used the machines. Thetaxpayer did not charge Goods andServices Tax (GST) on these fees, takingthe position that they fell within thedefinition of a ‘financial service’ becausetaxpayer was ‘arranging for’ financialservices that CIBC provided.

The tax authority (CRA) assessedthe taxpayer on the basis that the feeswere simply fees for a license to use realproperty, by allowing CIBC to place itsmachines in taxpayer stores for a fee.

After reviewing the case law on‘arranging for’, the judge concluded thatthe taxpayer was simply not sufficientlyinvolved with CIBC’ s financial servicesprovided through the ABMs. All thetaxpayer did was provide space for themachines and this was a taxable supplyof a license to use real property.

FinlandCompany A hadpurchased two aircraftfrom a manufacturer in

France and, instead of using them for thepurpose of carrying out international airtransport for consideration, company Adesignated company B as the user of theaircraft. Company B organisedinternational charter flights. After ashort period of time, A resold theaircraft to an undertaking registered inCyprus.

The administrative court, Helsinkidecided that, since it did not carry outinternational air transport itself,company A had to account for VAT onthe intra-community acquisition of thetwo aircraft.

In response to questions referred toit by the Supreme Administrative Court,the ECJ declared that the directive mustbe interpreted as meaning that the zerorate for which it provides, also applies tothe supply of an aircraft to an operatorwhich is not itself an ‘airline operatingfor reward chiefly on internationalroutes’ but which acquires that aircraftfor the purposes of exclusive use thereofby such an undertaking. In the light ofECJ judgment, the Finnish SupremeAdministrative Court declared that, bypurchasing the aircraft, company A hadnot effected an intra-communityacquisition of goods for which it wasliable to pay VAT.





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NorwayServices supplied by anentity established inNorway to a non-

resident business customer are zerorated if the services by their nature arecapable of being delivered from a remotelocation. As the services of lawyers thatconsist of representing a non-residentclient in judicial proceedings before aNorwegian court are to a certain extentlinked to a specific place in Norway, inso far as the lawyer represents his clientat the hearing, the question was whetheror not the remaining part of the service,in particular the preparatory work forthe hearing, could be considered to bedelivered from a distance, i.e. in the caseof a non-resident business client, couldbe zero rated. Alternatively, the variousactivities of the lawyer in the frameworkof representing his client in judicialproceedings could be considered toconstitute a single service and the

treatment of that service would then bedetermined by what is deemed to be theprincipal element of the service.

The Supreme Court observed that itcould find no arguments for applicationof the zero rate because a larger orsmaller part of the service ofrepresenting a client in judicialproceedings will often consist of workthat can be done at a distance, but thatwork forms an integral part of the mainservice. The Supreme Court concludedthat services that consist of representinga client in judicial proceeding includingthe written preparatory work, must beconsidered to constitute a single serviceand that the principal component of thatservice is representing the client at thehearing. Consequently, the entire serviceis subject to 25% VAT.

United KingdomA hotel business (thetaxpayer) had boughtaccommodation in hotels

established in other member states of theEU and sold the accommodation,unaltered, to travellers resident in theUK. The taxpayer argued that it acted asan agent for the hotels and,consequently, its intermediary serviceswere deemed to be supplied at the placeswhere the hotels were located, meaningthat no UK VAT was due on its services.

The contracts under which thetaxpayer operated suggested that it actedas an agent. However, its behaviour didnot support this position. The taxpayerset the price for which it sold theaccommodation to the travellers and theoverseas hotels, not know the sellingprice, as the taxpayer only paid thehotels an amount that was net of its‘variable commission’. Consequently,the hotels could only account for local

VAT on the amount they received fromthe taxpayer and the taxpayer’s serviceswere not subject to any VAT at all. Thatresult is not consistent with thetaxpayer’s status as an intermediary.

In first instance, the first-tier tribunalconcluded that, in this respect, thetaxpayer acted as a principal(commissionaire) and, since it wasestablished in the UK, had to accountfor UK VAT under the special schemefor travel agents, i.e. the taxpayer had toaccount for UK VAT on its margin (thedifference between the selling price andpurchase price of the rooms). However,the upper tribunal had reversed the first-tier tribunal’s decision on the basis of thecontracts under which the taxpayeroperated.





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The appeal court decided that theupper tribunal had been wrong to baseits decision on the contracts alone. Itagreed with the first-tier tribunal that itmay be necessary to look beyond thewritten contracts and have regard to allthe facts to establish the actual nature ofthe supply. On those grounds, theappeal court restored the decision of thefirst-tier tribunal and concluded that thetaxpayer hotels had to account for UKVAT on its margin.

USAA publishing companydistributed a free weeklylocal newspaper and once

a month, inserted coupon books into thenewspapers. The company alsodistributed the coupon books by placingthem on news racks. The coupon bookscontained only advertisements and didnot contain any news content. Thepublishing company’s salespersonssolicited advertisements for the couponbooks as well as for the newspaper.

The coupon books differed from thenewspaper in size, format and method ofdistribution. The coupon books wereprepared and printed separately fromthe newspaper (they were not part of thenewspaper print run) and they were notseparately indexed sections of thenewspaper. Thus, since they werefundamentally different from thenewspaper, the coupon books did notqualify for exemption as a componentpart of the newspaper.

In addition, the coupon books didnot qualify for exemption as goods thatare consumed or destroyed, or lose theiridentity in the manufacture of othergoods (the newspapers).

On those grounds, the VermontSupreme Court decided that the couponbooks were not exempt from Vermontsales and use tax under the exemptionfor newspapers, which had the effectthat the publishing company had to paysales tax on the cost price of the freecoupon books.





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Treaty news

Russia/US

The Ministry of Finance in Russia issueda guidance letter clarifying that theprofits earned by a US resident legalentity from the provision of web-basedintellectual services to Russian clients aretaxable only in the US unless theactivities result in the creation of apermanent establishment in Russia.

The Ministry of Finance indicatedthat the business profits of a resident ofa contracting state are taxable only inthat contracting state unless the residentcarries on or has carried on business inthe other contracting state through apermanent establishment situated there.If the resident carries on or has carriedon such business, its business profitsmay be taxed in the other contractingstate, but only to the extent they areattributable to the assets or activity ofthat permanent establishment.

Under the treaty, a permanentestablishment is a fixed place of businessthrough which a resident of acontracting state, whether or not a legalentity, carries on business activities inthe other contracting state.

The Russian tax code specifies that apermanent establishment of a foreignlegal entity is a branch, representativeoffice, division, bureau, agency, anyother structural subdivision, or anyother place through which a foreignlegal entity regularly carries on businessin Russia, including: • the performance of works and

provision of services involving theinstallation, assembly, adjustment,servicing, and operation ofequipment

• the sale of goods from warehouseslocated in Russia

• the use of subsoil or other naturalresources

• the performance of other works, theprovision of other services, and otheractivities, except those listed in taxcode article 306, section 4.

Australia/US

A limited partnership formed in theCayman Islands (RCF), bought sharesin an Australian company thatconducted a gold mining enterprise inAustralia (SBM). In 2007, RCF soldsome of its shares in SBM to unrelatedparties and realised a profit on the sale.

RCF has one general partner, whichis also a partnership formed in theCayman Islands, a number of limitedpartners, most of which are USresidents. RCF’s affairs were managedby a Delaware LLC and neither RCF, itsmanager or any of the partners wereresident in Australia. It could beassumed that neither RCF nor any of itspartners paid income tax in Australia inrespect of the sale.

In 2010, the commissioner oftaxation issued RCF a defaultassessment that included a net capitalgain from the sale of shares of someAUD 58 million and imposed anadministrative penalty of 75% of the taxliability. In other words, thecommissioner considered that the profitof RCF was taxable in Australia and inthe absence of an income tax return,issued a default assessment requesting atax payment at 30% of the gaincalculated by the commissioner. RCFlodged an objection to the assessment onthe basis that the commissioner is notallowed to tax RCF and the gain wascalculated incorrectly. Thecommissioner reduced the penalty to25%, but did not change the defaultassessment. In 2011, the RCF’s objectionto the assessment was deemed to havebeen automatically disallowed, as therelevant time period for the amendmenthad expired, and RCF lodged an appealagainst the default assessment to theFederal Court.





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The court was asked to rule on twoquestions:• was the Commissioner able to issue

an assessment to RCF or whetherthe Australia – United States IncomeTax Treaty (1982) (the treaty)precluded him from doing so

• was the commissioner able to issuethe assessment – whether the gainrealised by RCF was subject to tax inAustralia under the domesticprovisions.

Under the domestic law, RCF, by virtueof being a limited partnership formedand operating overseas, is treated as anon-resident corporate entity. Under thedomestic rules, RCF was the taxpayerthat realised the gain. The gain realisedby RCF was a capital gain.

Capital gains of non-residents aresubject to tax in Australia only if theyrelate to assets used in the business of apermanent establishment in Australia orrealised in respect of ‘taxable Australianreal property’ (TARP) assets. Shares inan Australian company are a TARP assetwhere the sum of the market values ofthe company’s TARP assets exceeds thesum of the market values of thecompany’s non-TARP assets.

Australia does not have a tax treatywith the Cayman Islands, but has acomprehensive treaty with the US,which says that a partnership will be atreaty US resident if the partnership isresident in the US for the purposes of itstax, provided that income is subject toUS tax as income of a resident, either inthe hands of the partnership or in thehands of its partners.

The treaty allows Australia to taxgains realised by a US resident from adisposal of shares in a company, assets ofwhich consist wholly or principally ofreal property situated in Australia.

Thus, if RCF is a US treaty resident,Australia will be allowed to tax the gain.

The commissioner argued that RCFis a US treaty resident on the basis that: – partnerships must be recognised by

the US as a resident – the partnerships’ income must be

taxed in the hands of US residentpartners.

RCF, on the other hand, argued that asRCF is a foreign partnership and a flow-through entity under the US tax law, it isnot a US tax resident, and the firstresidence requirement in the treatycannot be met and therefore RCF is nota treaty US resident.

The court agreed with RCF andruled that since RCF is not a US treatyresident, the treaty does not authoriseAustralia to tax the gain to RCF.

RCF submitted that the gain wasrealised by the limited partners in RCFon the basis of the wording of the treaty,the US treasury’s technical explanationsand US model.

Based on the valuations proved byRCF, the court found that the sharesdisposed by RCF were not a TARPasset and therefore the domesticprovisions should exempt the gain fromtaxation in Australia.

As such, the commissioner lost onboth questions. It is expected that thecommissioner will appeal to the fullFederal Court.





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Sweden/FinlandTheSwedishSupreme

Administrative Court (SAC) delivered ajudgment regarding the capital gainstaxation of privately owned houses andapartments. The judgment addressed thetax treatment of fictitious income –namely, interest charged on deferredcapital gains.

According to Swedish tax law, thedeferral of capital gains on privatelyowned houses and apartments ispossible if the capital gain is used to buya new home. From a fiscal point of view,this system permits considerable taxrevenue to be deferred. Interest isimposed on the tax deferral.

The interest is determined bycalculating an annual fictitious incomeon the deferred capital gains. Thisfictitious income is calculated as 1.67%of the deferred capital gains at the end ofthe tax year in question. That income istaxed at the general capital income taxrate, which is 30%.

The litigation involved a couple whohad moved from Sweden to Finland.They had sold their home in Swedenand bought a new one in Finland. Theywere granted tax deferral in Sweden onthe capital gains but were taxableannually on the fictitious incomecalculated on the capital gains.

The SAC had to decide how thisincome should be classified under themultilateral Nordic tax treaty, whichincludes Finland and Sweden. The courtconcluded that the only potentiallyapplicable classification was ‘otherincome’ (which is similar to article 21 ofthe OECD model tax convention).

If the income was classifiedaccording to this article, the state ofresidence – Finland in this example –would have an exclusive taxing right onthat income. Presumably, no othercountry except Sweden taxes deferredcapital gains with an additional fictitiousincome that is calculated as 1.67% of thedeferred capital gain, and theconsequence would be double non-taxation.

The SAC interpreted the concept offictitious income according to theNordic tax treaty, concluding that it wasnot income. The court stated that thefictitious income was merely a ‘technicalconstruction’ created to allow the stateto earn interest on a deferred capitalgain.

Russia/GermanyThe Ministry of Financepublished a ‘letter ruling’clarifying whether a Russian

entity may deduct all the advertising costs incurred in 2012further to advertising services, provided by one of itsshareholders resident in Germany.

The Ministry of Finance concluded that advertising costsincurred by a Russian company could be tax deductibleprovided: • the participation requirement provided for in article 3 of

the protocol is fulfilled at the moment when the respectiveexpenses are recognised as tax deductible

• the respective deductible expenses are set at arm’s length(market) level.

However, in case the Russian tax authorities find out that thesole purpose of participation in the Russian entity pursued bythe German shareholder is to obtain the treaty benefits, theabove-mentioned provisions should not apply.





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South African tax treatiesThe South AfricanRevenue Service (SARS)issued a binding general

ruling dealing with the question as towhether the ‘dividends tax’ introducedon 1 April 2012 is covered under SouthAfrica’s tax treaties that were signedbefore that date.

Prior to 1 April 2012, South Africahad a secondary tax on companies(STC). An STC was imposed at thesecond stage on a resident company onthe amount by which a dividenddeclared exceeded the sum of incomingdividends accrued during the ‘dividendcycle’ – the dividend cycle being aperiod that begins and ends each time adividend is declared. An STC wastherefore a tax on a company declaring adividend and not a tax on the recipientshareholder.

From 1 April 2012, the STC wasrepealed and replaced by a dividends tax.Unlike an STC, a dividends tax is leviedat 15% of a dividend paid by a company(exemptions apply). In the case of adividend (other than a dividend in kind),the liability for the dividends tax falls onthe beneficial owner of the dividend,even though the tax is withheld by thecompany paying the dividend. In thecase of a dividend in kind, the liabilityfor dividends tax falls on the companypaying the dividend.

The question addressed, waswhether dividends tax is covered bySouth Africa’s tax treaties even though itmay not be specifically named as acovered tax.

The SARS ruled that:• dividends tax is a tax on an ‘element

of income’ • dividends tax is similar to STC since

it is also a tax on income• therefore, that dividends tax is

covered under article 2 of the taxtreaties.

Thus, the SARS has taken the view thatdividends tax is an ‘identical andsubstantially similar tax’ to STC and thatall treaty partner states were informed ofboth the introduction of the dividendstax and its similarity with STC.

UK/South Africa

B (Holdings) Limited is a companyincorporated in the British VirginIslands. Its sole shareholder is HSBCTrustee (Guernsey) Limited (HSBCtrustee), a company incorporated underthe laws of Guernsey. HSBC trusteeholds the shares of B in trust for adiscretionary trust established under thelaws of Guernsey (G Trust). Thebeneficiaries of the G Trust include MrK, a UK citizen, but a long-time residentof South Africa. Although Mr K is onlyone of the beneficiaries under the trust,he controls the entire structure. Mr Kwas charged with tax evasion and othercriminal offences in South Africa for theyears following those involved in thiscase.





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B owed tax, interest and penalties tothe SARS, totalling approximately USD350 million for the years 1998-2000. Theamounts owing were the subject ofappeals in South Africa that were finallydecided in 2010. The SARS alleged thatMr K arranged for B to transfer its assetsto another BVI company. The SARSbecame aware that this other companyhad over USD 10 million in a Londonbank account and requested assistancefrom HMRC in collecting this amountunder the assistance-in-collection-of-taxprovision of the South Africa-UnitedKingdom income tax treaty (the treaty) .

The treaty was amended to providethat the contracting states will provideassistance to each other ‘in the collectionof revenue claims’ and that suchassistance is not limited to the taxescovered by the tax treaty or to personsresident in one of the contracting states.

The treaty defines the term ‘revenueclaim’ to mean:

‘... an amount owed in respect oftaxes of every kind and descriptionimposed on behalf of the contractingstates, or of their political subdivisionsor local authorities, insofar as thetaxation thereunder is not contrary tothe convention or any other instrumentto which the contracting states areparties, as well as interest, administrativepenalties and costs of collection orconservancy related to such amount’.

The treaty provides that acontracting state receiving a request forassistance must accept the request andcollect the claim as if it were a revenueclaim involving its own taxes. Therevenue claim must be enforceable in therequesting state and the taxpayer mustnot have any right to prevent thecollection of the claim in the requestingstate, i.e. any appeal rights have beenexhausted.

The defendants made severalarguments including, that the request forassistance was invalid, as it was made inrespect of years before the treaty becameeffective.

The tax treaty became effective withregard to South African taxes (otherthan withholding taxes) for tax yearsbeginning on or after 1 January 2003.The request for assistance made by theSARS related to unpaid taxes for the1998-2000 tax years, before the taxtreaty became effective.

The UK High Court rejected thedefendants’ argument. The court notedthat the UK legislation implementingthe protocol recited it was ‘for thepurpose of assisting international taxenforcement’.

According to the court, thisexpression of purpose indicated theabsence of any intention to impose atemporal limitation with regard to theenforcement of revenue claims otherthan the condition that the claims mustbe enforceable in the requesting state.

Switzerland/India

A recent treaty case involved a Swiss-resident company involved ininternational shipping through an agentin India for the years 1998-99 to 2003-04. The Swiss company’s profits weretaxable under Indian income tax law, sothe only issue was whether or not theprovisions of the India-SwitzerlandIncome Tax Treaty (the treaty)prevented India from taxing the profits.

Until 2001, the treaty excludedinternational shipping profits from thescope of articles 7 and 8. Before 2001,the tax treaty did not contain an ‘otherincome’ article. The combined effect ofthese provisions was that the tax treatydid not deal at all with internationalshipping, with the result that profitsfrom international shipping were taxablein accordance with the domestic law ofthe contracting states.





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The situation changed in 2001 withthe addition of the ‘other income’ article.Article 22 of the treaty conforms toarticle 21 of the OECD model, exceptfor the references to fixed base andarticle 14.

The Indian tax authorities made theargument that article 22 of the treaty didnot apply to international shippingprofits.

The tax authorities also argued thatthe intentions of the contracting stateswere originally clear that internationalshipping profits should be taxable inaccordance with domestic law,unconstrained by the tax treaty and thatthis explicit understanding was notaltered by the addition of article 22 in2001.

The Indian Income Tax AppellateTribunal (ITAT) rejected thesearguments. According to the ITAT, theintentions of the contracting stateschanged with the addition of article 22of the treaty and, according to the plainmeaning of article 22(1), the exclusion ofinternational shipping profits fromarticles 7 and 8 meant that such profitswere not dealt with in those articles.

Having concluded that article 22 ofthe treaty applied to internationalshipping profits, the ITAT turned itsattention to whether the Swiss companyhad a permanent establishment in Indiaand whether the right or property inrespect of which the profits were paidwas effectively connected with thepermanent establishment.

The ITAT found that the Indianagent of the Swiss company was legallyand economically dependent on theSwiss company. The Indian agentcleared inbound cargo and bookedoutbound cargo on the Swiss company’sships. Accordingly, the agent could beconsidered to have and habituallyexercise the authority to concludecontracts binding on the Swiss company.

However, the ITAT found that theships owned by the Swiss companywere not assets of the deemed agencypermanent establishment in India oreffectively connected to that permanentestablishment, as the agents had nocontrol of the ships. According to theITAT, for the ships to be effectivelyconnected to the permanentestablishment, it had to have economicownership of the ships.

Accordingly, the tribunal held thatthe international shipping profits of theSwiss company were taxable only inSwitzerland.

Canada/US

The taxpayer, an American citizen, hadworked for Ontario Power Generation(OPG) at its nuclear facility in Ontariofor four years from 2000 to 2003. Hespent over 330 days in Canada in each ofthose years. The taxpayer did not have apost-secondary degree, but had workedat nuclear facilities in the US for manyyears, although it is not clear in whatcapacity. He worked on a contract basisfor Onsite Engineering (Onsite), a UScompany. Onsite arranged a contractwith OPG for the taxpayer to provideengineering and management services ona boiler-cleaning project. The taxpayerand his wife bought a condo in Ontarioin June 2000, but sold it in December ofthe same year when his wife returned tothe US for medical care. The taxpayerimmediately bought another condo. Hiswife visited and stayed with him





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occasionally. In November 2002, hebought a home in Canada and continuedto live and work in Canada until 2005.

The taxpayer and his wife retainedtheir US home, which he visited once amonth and on major holidays. He alsomaintained his gun club membership inTennessee so he could continue hisfavourite hobby, skeet shooting. He hadbank accounts and credit cards in bothcountries. He maintained his US medicalinsurance coverage until November2003, when he became eligible forOntario health insurance. On his US taxreturn, the taxpayer indicated that his‘tax home’ was Canada. For Canadiantax purposes, the taxpayer claimed to bea non-resident.

The only issue in the case waswhether or not the taxpayer was aresident of Canada for purposes of theCanada-United States Income and

Capital Tax Treaty. The taxpayer wasclearly a resident of Canada for purposesof Canadian tax law, and a resident ofthe United States for purposes of the taxtreaty because of his US citizenship.Accordingly, the issue was theapplication of the tiebreaker rules.

As the taxpayer had a permanenthome in both countries and the taxpayerhad extensive personal and economicconnections to both countries, his centreof vital interests could not be clearlydetermined. Consequently, it becamenecessary to have recourse to the thirdtiebreaker rule, i.e. habitual abode. Basedon the habitual abode test as to wherethe taxpayer stays more frequently, thetax court found that the taxpayernormally lived in Canada and not in theUnited States, primarily because thetaxpayer worked and spent more time inCanada.

India/US/Ireland

The taxpayer paid Google Ireland andYahoo US for sponsored search resultsand online advertising. The advertisingservices offered by the search enginesrequire the use of software codes and areautomated. The advertising server is acomputer or computer programme thatstores and manages access to theadvertisements.

The taxpayer withheld no tax on itspayments to Google and Yahoo, arguingthat the fees were not subject to tax inIndia. During the audit of the taxpayer’stax return, the tax officer said the feeswere taxable in India as ‘fees for technicalservices and royalties’. The officer alsodisputed the taxpayer’s claim that neitherservice provider had a permanentestablishment in India. The tax officerdisallowed the taxpayer’s deduction forthe fees. The taxpayer appealed.

The tribunal agreed with thetaxpayer and reinstated the taxdeduction. It noted that the websites onwhich the advertising appeared do notconstitute permanent establishment’s inIndia under the applicable tax treaties.

The Yahoo and Google servers wereoutside India and the payments weremade to the service providers outsideIndia, the tribunal concluded that thosecompanies’ websites cannot becharacterised as permanent establishmentsof Yahoo and Google in India.

The tribunal also ruled that the feeswere neither royalties nor fees fortechnical services. There was no rightgiven by Yahoo or Google to the taxpayerto use any property. Also, a service thathas no element of human intervention orinterface does not fall within thedefinition of a technical service.

The tribunal ruled that the fees werenot subject to tax in the hands of Googleor Yahoo and that the taxpayer had noobligation to withhold tax. As such, thefees were deductible.





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Tax policy

EUThe EuropeanParliament’s LegalAffairs Committee has

voted to negotiate changes to a draft lawaimed at reforming EU audit services, sothat only non-auditing services thatcould jeopardise independence would beprohibited; the law would also requirecompanies to switch auditors regularly.

The law would require auditors inthe EU to publish audit reportsaccording to international auditingstandards. For auditors of public-interest entities (PIEs), such as banks,insurance companies and listedcompanies, the committee agreed thataudit firms would have to provideshareholders and investors with adetailed understanding of what theauditor did and an overall assurance ofthe accuracy of the company’s accounts.

As part of a series of measures toopen up the market and improvetransparency, the committee backed theproposed prohibition of ‘Big 4-only’contractual clauses requiring that theaudit be done by one of these firms.

PIEs would be obliged to issue a callfor tenders when selecting a newauditor. To ensure that relations betweenthe auditor and the audited company donot become too cosy, there would be amandatory rotation rule whereby anauditor may inspect a company’s booksfor a maximum of 14 years, which couldbe increased to 25 years if safeguards areput in place. The commission hadproposed six years, but a majority incommittee judged that this would be acostly and unwelcome intervention inthe audit market.

To preclude conflicts of interest andthreats to independence, EU audit firmswould be required to abide by rulesmirroring those in effect internationally.Most committee members saw theproposed general prohibition onoffering non-auditing services ascounterproductive for audit quality.They agreed that only non-auditingservices that could jeopardiseindependence should be prohibited.They also approved a list of services thatwould be prohibited under the new law.

For instance, auditing firms wouldbe able to continue providingcertification of compliance with taxrequirements, but prohibited fromsupplying tax advisory services whichdirectly affect the company’s financialstatements and may be subject toquestions from national tax authorities.

South AfricaOn 22 March 2013, theSouth African RevenueService (SARS) released a

draft interpretation note that providesan indication of how the agency intendsto apply thin capitalisation in thecontext of transfer pricing.

The application of thin capitalisationapplies to ‘affected transactions whichare broadly cross border transactionsbetween connected persons that havebeen concluded on terms and conditionsthat would not have existed if the partieshad been independent persons dealing atarm’s length’.

The range of parties potentiallyfalling under thin capitalisation hasincreased to include transactionsbetween a non-resident and anothernon-resident’s permanent establishmentsin South Africa or, alternatively,transactions between a resident andanother resident’s permanentestablishments located outside SouthAfrica.





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A taxpayer will be considered thinlycapitalised if it carries a greater quantityof interest-bearing debt than it couldsustain on its own, the duration oflending is greater than would be the caseat arm’s length, or the repayment orother terms are not what would havebeen entered into at arm’s length. Inselecting cases for audit, SARS willadopt a risk-based approach in which ataxpayer is considered to be of a greaterrisk if the debt-EBIDTA (EarningsBefore Interest, Taxes, Depreciation, andAmortisation) ratio exceeds 3 to 1.

The effect of thin capitalisation isaddressed by means of two adjustments:the primary adjustment and thesecondary adjustment. In the primaryadjustment, any interest, financecharges, or other consideration for or inrelation to that portion of the non-arm’s-length portion of the debt must bedisallowed as a deduction in determiningthe taxpayer’s taxable income.

In the secondary tax adjustment, theamount of the disallowed deduction(which arises as a result of the primaryadjustment) is deemed to be a loan bythe taxpayer, that constitutes an affectedtransaction. This means that a taxpayerwill have to calculate and account forinterest income at an arm’s-length rateon the deemed loan. Where the deemedloan has been repaid to the taxpayer, forexample, by a refund of the excessiveinterest and the repayment took placeby the end of the year of assessment inwhich the primary adjustment wasmade, the primary adjustment will notbe treated as a loan.

OECDThe OECD has recently issued a reporton personal taxation. New data showsthat across OECD countries the averagetax and social security burden onemployment incomes increased by 0.1%to 35.6% in 2012. It increased in 19 outof 34 countries, fell in 14, and remainedunchanged in just one.

The increases were largest in theNetherlands, Poland and the SlovakRepublic (mainly due to increased ratesand other changes to employer socialsecurity contribution) as well as Spainand Australia (due to higher statutoryincome tax rates).

This follows substantial increases in2011 and since 2010, the tax burden hasincreased in 26 OECD countries andfallen in seven, partially reversing thereductions between 2007 and 2010.

Over the past two years, income taxburdens have risen in 23 out of 34countries, largely because a higherproportion of earnings were subject totax as the value of tax free allowancesand tax credits fell relative to earnings.In 2012, only six countries had higherstatutory income tax rates for workerson average earnings than they did in2010.

The report provides details about thetaxation of employment incomes andthe associated costs to employers fordifferent household types and atdifferent earnings levels on aninternationally comparable basis, keyfactors in whether individuals seekemployment and businesses hireworkers.





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The tax burden is measured by the‘tax wedge as a percentage of totallabour costs’ or the total taxes paid byemployees and employers, minus familybenefits received, divided by the totallabour costs of the employer. Taxingwages also breaks down the tax burdenbetween personal income taxes,including tax credits, and employee andemployer social security contributions.

AustraliaOn 3 April 2013, theAustralian Treasuryreleased a discussion

paper outlining three steps to give effectto the government’s intention toimprove the transparency of thecountry’s business tax system.

Under the first measure, theAustralian revenue authorities would berequired to publish each yearinformation taken from the tax returnsof companies with annual revenue ofAUD 100 million or more andcompanies liable for minerals resourcerent tax (MRRT) or petroleum resourcerent tax (PRRT) – that is, companiesinvolved in the extraction of coal, ironore, oil and gas.

The following information would bepublished: • the company’s name and Australian

business number• the company’s total revenue

(including amounts that are exemptfrom tax or receive otherconcessional treatment)

• the company’s taxable income andthe amount of tax payable (meaningpresumably just the Australian taxpayable).

The second proposal would amendlegislation to protect the publication ofaggregate revenue figures in cases wherethe identity of specific taxpayers couldbe guessed from that information.

The third measure involves adjustingthe current information sharingarrangements between Australiangovernment agencies.

European CommissionThe commission has set up the ‘Platformfor Tax Good Governance, AggressiveTax Planning and Double Taxation’ (theplatform).

The platform will allow for adialogue on issues related to goodgovernance in tax matters, fightingaggressive tax planning and preventingdouble taxation in which experience andexpertise are exchanged and the views ofall stakeholders are heard.

The platform will comprise ofmember states’ tax authorities and up tofifteen business, civil society and taxpractitioner organisations.





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OECDThe OECD Secretary-General, AngelGurría, has presented a report to G20Finance Ministers and Central BankGovernors that highlights measures toensure that all taxpayers pay their fairshare.

The report covers three strategicinitiatives: • progress reported by the ‘Global

Forum on Transparency andExchange of Information for TaxPurposes’ including the upcomingratings of jurisdictions’ compliancewith the forum’s standards onexchange of information on request

• efforts by OECD to strengthenautomatic exchange of information

• latest developments to address taxbase erosion and profit shifting, apractice that can give multinationalcorporations an unfair tax advantageover domestic companies andcitizens.

EU and internet taxationTax authorities across Europe areexploring a variety of modifications totax laws in an effort to derive greaterrevenues from taxes on internet activitiesand transactions. Challenging economicconditions have led those governmentsto pursue all available options togenerate greater revenues. ManyEuropean governments believe thatmore aggressive taxation of onlinecorporate earnings provides anextremely attractive vehicle forenhancing revenues. These European taxinitiatives are primarily directed towardslarge internet companies such asAmazon and Google. They can alsosignificantly affect smaller businessesoperating in Europe.

Efforts are underway to try to makethe diverse national corporate taxpolicies across Europe more uniform toprevent companies from moving tojurisdictions that provide the mostfavourable tax structure. At present,Ireland is viewed by many companies asthe most attractive tax haven in WesternEurope and applies the lowest corporatetax rate in Western Europe. It alsopermits companies to shift a substantialportion of their profits to other low taxjurisdictions, such as Bermuda, astrategy not permitted by most otherEuropean nations.

Several European governments areactively exploring additional taxesdirected toward internet companies. Forexample, French and Italian taxauthorities are reportedly investigatingmajor internet companies to determine if they have been systematicallyunderreporting their income.





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Who’s whoGrant Thornton International Ltd

Ian EvansGlobal leader – tax services (Outgoing)T +44 (0)20 7391 9544E [email protected]

Francesca LagerbergGlobal leader – tax services (Incoming)T +44 (0)20 7728 3454E [email protected]

Claude LedouxExecutive director – tax operationsT +1 312 602 8522E [email protected]

Bill ZinkExecutive director – tax quality and trainingT +1 312 602 9036E [email protected]

Guenter SpielmannExecutive director, EMEA – tax services T +49 (0) 163 895 2434 E [email protected]

Regional tax resourcesWinston Romero Senior tax development manager – AmericasT +1 312 602 8349E [email protected]

Mirka VaicovaTax development manager – APACT +852 3987 1403E [email protected]

Jessica Maguren Tax development manager – EMEAT +44 (0)20 7391 9573E [email protected]

Global coordinatorsAgata EysymonttCoordinator – tax specialist servicesT +44 (0)20 7391 9557E [email protected]

Francie KaufmanGlobal project coordinator – training and qualityT +1 262 646 3060 E [email protected]

© 2013 Grant ThorntonInternational Ltd. All rightsreserved.

This information has beenprovided by member firmswithin Grant ThorntonInternational Ltd, and is for informational purposesonly. Neither the respectivemember firm nor GrantThornton International Ltd can guarantee theaccuracy, timeliness orcompleteness of the datacontained herein. As such,you should not act on theinformation without firstseeking professional taxadvice.

Grant Thornton InternationalLtd (Grant ThorntonInternational) and themember firms are not a worldwide partnership.Services are deliveredindependently by themember firms.

MarketingRussell BishopSenior marketing executive – taxT +44 (0)20 7391 9549E [email protected]





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