GLOBAL TAX WEEKLYa closer look

ISSUE 124 | MARCH 26, 2015

SUBJECTS TRANSFER PRICING INTELLECTUAL PROPERTY VAT, GST AND SALES TAX CORPORATE TAXATION INDIVIDUAL TAXATION REAL ESTATE AND PROPERTY TAXES INTERNATIONAL FISCAL GOVERNANCE BUDGETS COMPLIANCE OFFSHORE

SECTORS MANUFACTURING RETAIL/WHOLESALE INSURANCE BANKS/FINANCIAL INSTITUTIONS RESTAURANTS/FOOD SERVICE CONSTRUCTION AEROSPACE ENERGY AUTOMOTIVE MINING AND MINERALS ENTERTAINMENT AND MEDIA OIL AND GAS

EUROPE AUSTRIA BELGIUM BULGARIA CYPRUS CZECH REPUBLIC DENMARK ESTONIA FINLAND FRANCE GERMANY GREECE

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

COUNTRIES AND REGIONS

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GLOBAL TAX WEEKLYa closer look

ISSUE 124 | MARCH 26, 2015

CONTENTS

FEATURED ARTICLES

NEWS ROUND-UP

On Intangibles, Hard To Value Intangibles, And BEPS Philippe G. Penelle, Ph.D., Deloitte Tax LLP 5 CPA Canada Replies To OECD Proposals For International VAT/GST Guidelines On Th e Place Of Taxation Of B2C Supplies Of Services And Intangibles Jacques Roberge, Wolters Kluwer CCH 12 Topical News Briefi ng: Switzerland Wins Plaudits Th e Global Tax Weekly Editorial Team 17 US Unclaimed Property – A Blind Spot For CFOs Mark van der Linden, Principal, International Tax, and Jacob Oennerfors, Manager, Abandoned and Unclaimed Property, Ryan LLC 18

Marketplace Fairness: Attempts To Level Th e United States Sales Tax Playing Field Stuart Gray, Senior Editor, Global Tax Weekly 22 Anti-crisis Amendments To Tax Accounting For Interest Come Into Eff ect Alexander Ponyrko, Senior Manager, and Anna Sokolova, Advanced Staff , Business Tax Advisory, EY Moscow 29 US Taxation Of Income From Provision Of Services On Th e Outer Continental Shelf – Creating A US Trade: Eff ect On US Taxation Of Foreign Corporations Stephen Flott and Joseph Siegmann, Flott & Co 32 Topical News Briefi ng: EC Advances Anti-Avoidance Package Th e Global Tax Weekly Editorial Team 35

Tax Reform 36

EU Commission Release Corporate Tax Reform Plan

Former US Treasury Offi cial Advises Against Minimum Tax

Australia To Kickstart Tax Reform Debate

Luxembourg Urges Global Action On Digital Tax Rules

Country Focus: Switzerland 41

Switzerland, EU Ink New Savings Tax Pact

OECD Supports Swiss Tax Transparency Advances

Switzerland Consults On Financial Services Reform

GLOBAL TAX WEEKLYa closer look

For article guidelines and submissions, contact GTW_Submissions@wolterskluwer.com

International Trade 44

India To Re-engage With EU On Free Trade Deal

Indonesia To Place Minimum Tax On Palm Oil Exports

New Zealand Signs FTA With South Korea

Doha Talks Remain On Track, WTO Head Says

EU Requests WTO Mediation On Russian Tariff s

Country Focus: United Kingdom 47

Oil Companies Winners, Banks Losers In UK Budget

CIOT Criticizes UK's New 'Strict Liability' Tax Off ense

CBI Seeks Competitive Tax Regime From Next UK Gov't

International Financial Centers 51

DIFC Growth Shows No Signs Of Slowing

Hong Kong Pushes To Become IP Trading Hub

Individual Taxation 53

Canadian FTC To Benefi t Mid-High Income Earners

Austria To Overhaul Income Tax System

US House Looks At Death Tax Repeal

TAX TREATY ROUND-UP 56CONFERENCE CALENDAR 58IN THE COURTS 70THE JESTER'S COLUMN 76Th e unacceptable face of tax journalism

© 2015 CCH Incorporated and its affi liates. All rights reserved.

FEATURED ARTICLES ISSUE 124 | MARCH 26, 2015

On Intangibles, Hard To Value Intangibles, And BEPS by Philippe G. Penelle, Ph.D., Deloitte Tax LLP

Copyright © 2015 Deloitte Development LLC

Physics was in crisis in the late 19th century. Since the fi rst publication in 1687 of Philosophiae Natu-ralis Principia Mathematica by Isaac Newton, clas-sical mechanics, built on Newton's three Laws of Mechanics and Law of Universal Gravity, had been immensely successful in explaining the movement of objects on earth and in space. Newton's second law, captured by the simple formula below that states that the force applied to an object is equal to the mass of the object multiplied by its accel-eration, explains, for example, why when a freight train hits a car, the car will suff er much more dam-age than the train.

F = m × a

Unfortunately, as physicists began accumulating a growing body of empirical observations about the movement and speed of light, stars, planets, and galaxies, a number of those observations appeared inconsistent with the predictions of classical me-chanics. 1 Similarly, James Clerk Maxwell's equa-tions predicted the speed of light to be constant and, unlike those of Newton, were not invariant under the Galilei transformation. Th e coup de grace was delivered with the 1887 publication of the famous

Michelson-Morley experiment results showing the speed of light is constant and invariant with respect to the speed of the observer – a blatant violation of Newton's fi rst law.

While most physicists of the time desperately tried to reconcile the troubling empirical observations with the prevailing Newtonian theory through a number of ad hoc intellectual patches, 2 a clerk in the Swiss Patent Offi ce named Albert Einstein asked himself a very simple question: what would life be like traveling on a light beam?

Einstein had been a student of famed German mathematician Hermann Minkowski, who provid-ed in 1907 the geometric four-dimensional space-time interpretation of Einstein's 1905 Th eory of Special Relativity (known as Minkowski spacetime). Between his 1905 publication of the Th eory of Spe-cial Relativity and 1915 publication of the Th eory of General Relativity , Einstein struggled with the math-ematics of tensors and with Minkowski spacetime that Einstein fi rst overlooked as mere mathematical trickery, and tried to reconcile classical mechanics

5

and special relativity in a single overarching theory that would equally apply in Newtonian Euclidean approximation of curved space-time, and in curved space-time for massive objects and objects moving near the speed of light. 3 Einstein's contribution to science culminated with the publication of his fa-mous Field Equations that are now viewed as uni-versally correct:

Th e right-hand sides of Einstein's Field Equations de-scribe how the mass of objects tells space-time how to curve (left-hand sides), and reciprocally the left-hand sides describe how curved space-time tells mass how to move (right-hand sides). Th ese Field Equations are consistent with Newton's three Laws of Mechanics and Law of Universal Gravity when dealing with ob-jects not moving near the speed of light or objects of relatively modest mass. For example, Newton's sec-ond law, which states that force is equal to mass times acceleration, is embedded in Einstein's Field Equa-tions, written above in tensors form.

Intangibles And Valuation Of Intangibles Transfer pricing articles typically are not prefaced by a brief history of physics and physics formulae. However, because transfer pricing deals with deter-mining how markets would have priced transac-tions that take place outside the market place, i.e. , within a controlled group, any analogy between economics and physics is likely to carry over to transfer pricing. Th is article does not propose the

use of Einstein's Field Equations to solve transfer pricing problems, but rather encourages practitio-ners to consider the analogies that exist in the sci-entifi c process of inquiry of physics and economics into universal laws.

While physics seeks to derive universal laws of movement for objects subjected to various natural forces, economics seeks to derive universal laws of prices and quantities in markets subjected to vari-ous competitive forces. Th e scientifi c approach is the same in both cases: use empirical observations to speculate, postulate ideas, and develop theories, then empirically validate the theories by testing the predictions of said theories. Th e language used in both cases is that of mathematics. While a physicist will model out the dynamic trajectory of a particle subjected to physical forces, an economist will mod-el out the dynamic trajectory of prices and quanti-ties in markets subjected to competitive forces.

Why show the equations for Newton's Second Law and for Einstein's Field Equations? To drive home the point that there exists a law of equal stature in fi nan-cial economics that is regarded as universally correct.

Th is law is written, following Cochrane (2005):

p = E( m × X )

m = f ( data, parameters )

Th e law says the price of an asset p is the expected value E(.) of its discounted cash fl ows X , evalu-ated at a certain probability measure, where the

6

(possibly) stochastic discount factor m is a func-tion of data and parameters. Because intangible as-sets are assets, they are all priced by the competitive forces of the market following this law.

Notice that there is a diff erence between asserting that a theory is universally correct and asserting that a theory is regarded as universally correct. Th e for-mer encompasses a notion of the discovery of abso-lute truth; the latter speaks only of a temporal truth accepted as absolute until empirically proven so or supplanted by a competing theory that is then re-garded as the universally correct theory. For example, Einstein's Th eory of General Relativity is not univer-sally correct. It took decades after Einstein's death to confi rm empirically only a number of his theory's predictions – many have not yet been verifi ed and probably will not be for the foreseeable future.

World-class brains can perceive things (theory) that the most accurate measurement devices will not be able to detect until technology allows (empirics). In some cases, the fact that we cannot detect or mea-sure something can provide the foundation to build further theories despite the theoretical inaccuracy of said foundation. For example, the famous principle of equivalence that forms the basis of the Th eory of Spe-cial Relativity is actually incorrect theoretically but correct empirically: because of tidal forces, the gravi-tational pull exerted on the head of an individual is lower than that exerted on the same individual's feet.

Einstein understood tidal forces and cleverly used the fact that no measurement device is precise

enough to measure or even register this infi nitesi-mal diff erence in forces to make a point (Special Relativity) that challenged the most basic intu-ition people have about space and time, and ulti-mately energy and mass. Specifi cally, he recognized that there exists no experiment that would allow an observer standing in a closed box on the surface of earth, subject to earth's gravitational pull and therefore tidal forces, to distinguish his predica-ment from a similar observer standing in a closed box being accelerated upwards at the same rate as earth's gravitational pull (and therefore not subject to tidal forces). Neither observer would be able to determine whether his inertial frame of reference (the box) is moving or at rest. Within each inertial frame of reference, Newton's Laws would apply.

Is the asset-pricing law discussed earlier universally correct? Th e answer is unambiguously no, but the law is regarded as universally correct because it has withstood a fair amount of empirical scrutiny and has yet to be disproved. Th eoretical economists and theoretical physicists have a lot in common in their scientifi c approaches, and both depend on the abil-ity and accuracy of experimental and non-exper-imental measurements of their respective theory predictions. Because measuring a social phenome-non is much more diffi cult than measuring a physi-cal phenomenon, upgrading a theory regarded as universally correct to universally correct is much more likely in physics than in economics.

Th e skeptical reader will point to asset-pricing observations that contradict predictions of the

7

asset-pricing law, or will point to pricing puzzles that no theory has fully and satisfactorily explained. If this sounds familiar, it should. Th is is exactly what happened to Newton's theories in the late 19th century.

Th ose who think a theory is useless until proven universally correct should think again. Science is built on incremental progress; Einstein under-stood this and identifi ed when and why New-ton's theory broke down – linear approximation of curvature works locally, not globally. He then proceeded to encapsulate and extend Newton's theories into his Th eory of General Relativity. Th e formula F = m × a is not universally wrong, it is just not universally correct. In most cases, it will provide the correct answer, and in any iner-tial frame of reference, it is always correct.

Will an economist encapsulate and extend the as-set-pricing law so that our observational challenges are satisfactorily resolved and pricing puzzles are things of the past? Certainly; the question is not if but when . As 18th and 19th century physicists used F = m × a and Newton's other formulas to great success, fi nancial economists have been us-ing p = E( m × X ) with m = f ( data, parameters ) in a variety of contexts to great success. Th ere is nothing special about transfer pricing applications of this law, as economic principles transcend the fi elds they are applied to.

A specifi c application of the asset-pricing law is the sometimes celebrated and sometimes vilifi ed Capital

Asset Pricing Model (CAPM). In the CAPM, the probability measure used to evaluate E(.) is the true probability measure, m = (1 + r CAPM ) -1 , r CAPM = ( D + E ) -1 × D × r debt + ( D + E )-1 × E × r equity , with requity = r f + ß × Market Premium . 4

Another specifi c application of the asset-pricing law is the famous risk-neutral pricing model that won a number of distinguished economists the Alfred Nobel Memorial Prize for Economics. In that mod-el, the probability measure used to evaluate E(.) is a purely mathematically made-up measure called the risk-neutral probability measure, and the discount factor is m = (1 + r f ) -1 .

Whichever model is selected, the same asset-pricing law is consistently used:

p = E( m × X )

Rejecting the CAPM is not a rejection of the un-derlying pricing Law – it is a rejection of a specifi c model for m at a certain probability measure p . Un-fortunately, this critical distinction is more often than not overlooked by practitioners.

BEPS And Hard To Value Intangibles Th e above discussion brings us to modern times and the base erosion and profi t shifting (BEPS) ini-tiative at the Organisation for Economic Co-op-eration and Development (OECD). Most modern multinational companies rely heavily on the devel-opment of a variety of intangible assets to maintain and create value for their shareholders. Some of these intangible assets are routine in nature and are

8

required to stay competitive and in business. Other intangible assets are clearly non-routine, and com-panies can remain in business without developing them. However, by accepting the risks and funding obligations associated with developing non-routine intangible assets, companies may be able to diff er-entiate themselves from their competitors and fi ne tune their optimal price-quantity mix to maximize profi t. Most developed countries encourage intan-gible assets development activities by off ering re-search and development credits, sophisticated legal protection of resulting intellectual property, and substantial tax incentives to attract companies en-gaged in such activities.

Taxing authorities, on the other hand, tend to close-ly scrutinize multinationals engaged in the devel-opment of intangible assets, particularly companies that transfer the foreign rights to such assets off -shore for consideration often viewed as egregiously low by tax authorities. Th e resulting shift of taxable income to lower-tax jurisdictions may be perceived by tax authorities as a signifi cant threat to their na-tional tax base.

It is this perception of base erosion and taxable profi t shifting that has prompted the OECD to act and provide guidance to tax authorities on curtail-ing those perceived abusive profi t stripping behav-iors. For example, in September 2014, the OECD issued a revision to Chapter VI of the OECD trans-fer pricing guidelines that provides an updated defi -nition of "intangible," introduces a number of new concepts such as realistic alternative , and provides

some guidance on how to apply discounted cash fl ow methods to perform the valuation of intan-gible transfers. Special measures for hard to value intangibles are expected in 2015.

Based on comments by the OECD, it appears that the US concept of "commensurate with income," or a concept close to it, is likely to be considered. A non-consensus draft revision of Chapter I issued De-cember 19, 2014, lists commensurate with income as an option to address hard to value intangibles. Th e commensurate with income concept has been around in the United States since the Tax Reform Act of 1986 and has been extremely rarely used by the IRS to curtail the migration of US intangibles.

Although the OECD has reaffi rmed at the begin-ning of the BEPS project the supremacy of the arm's length standard (ALS) as the universal yardstick of transfer pricing compliance, the December Chapter I draft has left the door open to a departure from the ALS for so-called hard to value intangibles. 5 However, if a version of commensurate with income similar to the US concept is adopted, the OECD is likely to argue, like the IRS has for decades, that it is a concept consistent with the ALS – all will be well and good, and the ALS will survive BEPS.

Th e political undertones of the BEPS action plan, and the give-and-take between the US Government (opposed to departures from the ALS, the overarch-ing principle of US tax policy since the 1930s) and the European governments (working toward mean-ingful changes with respect to BEPS), is nowhere

9

more apparent than in the revisions to Chapter VI and in the putative adoption of commensurate with income for so-called hard to value intangibles. Th e OECD gets its special measures for hard to value intangibles, and the IRS gets adherence to the ALS, since it has always argued that the commensurate with income concept satisfi es the ALS. Politics is the art of compromise to achieve win-win outcomes.

Although the OECD has never defi ned what a hard to value intangible is, it does appear to be a concept born out of politics rather than science. Remember that the asset-pricing law, p = E( m × X ) , will correct-ly price all intangibles once the correct pair of prob-ability measure p and discount factor m has been identifi ed. Th us, there is no such thing as a hard to value intangible in fi nancial economics literature. Since the values of X encompass all possible num-bers on the real line R , 6 all intangible assets take the same possible values but with diff erent probabilities, and discounted at possibly diff erent rates.

As such, any meaningful defi nition of a hard to val-ue intangible must be an intangible for which the probability distribution of possible outcomes or the discount factor is diffi cult to estimate. Under such a defi nition, some of the riskiest and potentially most profi table intangibles would not fall under the defi -nition of hard to value intangibles. For example, ethical pharmaceutical compounds would likely not qualify, as the probability distribution of de-velopment success and failure is well known for all major therapeutic areas. Similarly, reliable informa-tion about the cost of capital of companies engaged

in the development of ethical drugs is readily avail-able. Finally, the risk-neutral valuation model out-lined above eliminates the need to use a discount rate other than the risk-free interest rate, as long as the risk-neutral probability measure is used.

We suspect that this is not what the OECD intend-ed on the subject of hard to value intangibles, but it does highlight the risks of introducing concepts that are not deeply grounded in the scientifi c body of knowledge that is applicable and universally re-garded as correct.

Conclusions Scientists of the 19th century, faced with growing empirical evidence that Newton's Laws were some-times ineff ective at accurately predicting the motion of massive objects or objects traveling at or near the speed of light, had to make a choice: either reject the laws and replace them with concepts that were con-venient but incorrect (for instance, the luminiferous ether), or accept the laws with their shortcomings and work at making them universally correct.

While the former had the benefi t of convenience and played well into the political and religious views of the time, Einstein decided to pursue the latter. In the process, he revolutionized the way we think about space, time, mass, and energy, and became as celebrated a scientist, if not more, as Galileo, Copernicus, Newton, and Maxwell. Th e results of his work led to nuclear energy and countless other discoveries and improvements in our lives that we often take for granted and that

10

may not have been possible without Einstein's re-markable determination.

Th e OECD, through BEPS, is facing a similar di-lemma today. Either it allows for departures from the ALS as a way to alleviate the frustration of tax authorities but introduces concepts that have no foundation in science ( e.g. , the luminiferous ether), or it refi nes its guidance on how to properly apply to transfer pricing problems the asset-pricing law that is regarded as universally correct. Advances re-lated to the measurement of the various elements of the asset-pricing law are bound to happen over time and will increase the reliability of the analysis. Remember, it took Einstein over 15 years to lead the fi eld of physics out of its late 19th century cri-sis; this lesson in patience and persistence may serve the OECD well with respect to BEPS.

Philippe Penelle is a principal of Deloitte Tax LLP in Los Angeles, California. He can be reached at ppenelle@deloitte.com . Th e author thanks Michael Bowes for his valuable comments and suggestions on an earlier ver-sion of this article. Many thanks to Vicki Ha and Bet-ty Fernandez for their editorial assistance. All errors, omissions, and other shortcomings are the author's.

ENDNOTES

1 For example, Newtonian mechanics predicts that if

the sun were to disappear from our galaxy, planets

orbiting around the sun would immediately leave

their orbit due to the disappearance of the sun's gravi-

tational pull. However, this prediction would require

gravity to travel instantaneously. Since nothing trav-

els faster than the speed of light (299,792,458 meters

per second), classical mechanics cannot possibly be

correct in that prediction.

2 Perhaps the best example of such an intellectual patch

is the once popular idea that light must be traveling

through stationary luminiferous "ether," the same

way sound needs air or water to transmit its wave

motions. Ironically, the Michelson-Morley experiment

that was designed to empirically study movements

through ether provided one of the fundamental tests

of the theory of relativity, where ether plays no role.

3 Massive objects in this context are objects such as

planets, black holes, and suns, not airplanes or other

large objects we are familiar with.

4 D denotes debt, E denotes equity, r debt denotes the

cost of debt, r f denotes the risk-free interest rate, and

ß denotes the covariance of the asset payoff with the

market portfolio.

5 The draft contains multiple possible departures from

the ALS under Sections D.1–D.4 as well. These will be

the subject of another article.

6 The real line R includes all rational and irrational

numbers. Rational numbers are those that can be

represented as a ratio of two numbers, irrational

numbers are those numbers that cannot. An example

of an irrational number is pi = 3.1415926.

11

FEATURED ARTICLES ISSUE 124 | MARCH 26, 2015

CPA Canada Replies To OECD Proposals For International VAT/GST Guidelines On The Place Of Taxation Of B2C Supplies Of Services And Intangibles by Jacques Roberge, Wolters Kluwer CCH

Th e Organisation for Economic Co-operation and Development ("OECD") has invited comments on draft VAT/GST Guidelines (the "Guidelines") relating to the taxation of business-to-consumer ("B2C") supplies of intangibles and services. Th ese Guidelines form part of a larger undertaking by the OECD to develop global standards to address issues of double taxation and unintended non-taxation re-sulting from inconsistencies in the application of val-ue-added tax ("VAT") to international trade. Th ese draft guidelines complement the fi rst three chapters of the Guidelines (the "Chapters") approved by the OECD Committee on Fiscal Aff airs ("FCA") in January 2014. Th e Chapters present standards on VAT-neutrality and on the taxation of cross-border business-to-business ("B2B") supplies of services and intangibles. Th e B2C draft guidelines were presented on December 18, 2014, and the OECD welcomed comments by the end of February 2015. Th ese draft guidelines, if approved, will be integrated into Chap-ter 3 of the previously adopted guidelines.

Draft supporting provisions (set to become Chapter 4 of the Guidelines) are intended to complement

the Guidelines on VAT-neutrality and on place-of-taxation. Th e supporting provisions indicate ex-plicitly that the Guidelines on neutrality and place of taxation apply when parties involved act in good faith and when all transactions are both legitimate and with economic substance, and that it is not in-consistent with the Guidelines for jurisdictions to take proportionate measures to protect against eva-sion or avoidance and to alleviate the risk of rev-enue losses and distortion of competition.

Goods Versus Services And Intangibles – B2B Versus B2C

In international trade, VAT-neutrality is generally achieved through the implementation of the "des-tination principle." Accordingly, the destination principle intends to ensure that tax on cross-border supplies is ultimately levied only in the taxing juris-diction where the fi nal consumption occurs.

Place-of-supply rules, as they are called in Cana-da, or the "place-of-taxation rules" as called in the OECD report, are needed for supplies of goods

12

as well as for supplies of services and intangibles. While the existence of border controls, or fi scal frontiers, facilitates implementation of the destina-tion principle where goods are concerned, this may not be the case with services or intangibles. Indeed, the nature of those supplies is such that they can-not be subject to border controls in the same way as goods. Th is is why these latest proposed guidelines concentrate on supplies of services and intangibles. Th ey set out recommended approaches that refl ect the destination principle for determining the ju-risdiction of taxation for international supplies of services and intangibles (such as software), while ensuring that:

International neutrality is maintained; Compliance by businesses involved in these sup-plies is kept as simple as possible; Clarity and certainty is provided for both business and administrations; Costs involved in complying with administering tax is minimal; and Barriers to evasion and avoidance are suffi ciently robust.

Application of the destination principle results in diff erent challenges in respect of B2B supplies and B2C supplies. In particular, the taxation objectives are diff erent ( i.e. , the taxation of B2C supplies in-volve the imposition of a fi nal tax burden; the taxa-tion of B2B supplies is merely a means of achieving the ultimate objective of the tax, which is to tax fi nal consumption). Th us, as explained in the draft guidelines, the place of taxation rules for B2B sup-plies should focus not only on where the business

customer will use its purchases to create the goods, services or intangibles that fi nal consumers will ac-quire, but also on facilitating the fl ow-through of the tax burden to the fi nal consumer while main-taining the neutrality of the VAT system.

Th e objective of B2C supplies is to predict, subject to practical constraints, the place where the fi nal consumer is likely to use the services or intangibles supplied. VAT systems regularly employ diff erent mechanisms to enforce and collect the tax for both categories of supplies. An example of such a mecha-nism is Canada's GST/HST system in which the pro-vincial portion of the HST is applied diff erently on imports by consumers and on imports intended for "business use." Ultimately, this system helps to sim-plify the application and collection of diff erent HST rates of "participating provinces." Th e new draft pro-posals focus mainly on rules for B2C supplies.

Registration And Simplifi ed Compliance For Non-residents In B2C Situations

A novel idea of these recommendations is that the OECD favors registration of non-resident suppli-ers to ensure VAT neutrality and compliance with respect to B2C supplies. In B2B situations the ob-jective is to ensure the fl ow-through of the tax to the fi nal consumer, and to ensure that the bur-den of tax does not rest on the paying business. In practice, this is mostly achieved (although some compliance costs remain) by the input tax credit system. VAT neutrality objectives are more easily met in a B2C context. Nevertheless, while it was easy to achieve the stated "destination principle" in

13

the past when consumers still typically purchased services from local suppliers and when those sup-plies generally involved services that could be ex-pected to be consumed in the jurisdiction where the service was performed, this is no longer al-ways the case in the present world. Traditionally, place of taxation for such services was determined primarily by a reference to the supplier's location because this was where the services were normally performed and where consumers were actually lo-cated when consuming the services. Th e advent of the global economy has created challenges for such traditional approaches given that technology and trade liberation now enable businesses to sup-ply services and intangibles to customers around the world.

Nowadays, the location of a supplier, or place of performance, may be irrelevant in predicting where the services or intangibles are likely to be consumed ( i.e. , in order for the destination principle to apply). As the actual place of performance may be unclear, the new draft proposals give the example of a tech-nician in one country taking control of a computer in another country to resolve issues using informa-tion and communication infrastructure located in a number of diff erent jurisdictions. It is simply not easy to predict where the services or intangibles are eff ectively consumed.

Diff erent approaches may be used to practically solve such problems. Again, a good example of the complexities involved may be found by con-sulting the new place of supply rules enacted in

Canada, in May 2010, just before Ontario (and British Columbia, who later opted out) joined the HST system. Th ese place of supply rules are detailed in the over 130-page long Technical In-formation Bulletin B-103 .

Th e Guidelines identify two diff erent situations and sets of rules: (1) for goods and services per-formed on-the-spot, when both suppliers and con-sumers are located at the same place when "per-formance of service" occurs ( e.g. , hairdressers, car mechanics, etc. ), and generally based on the "place of performance" to determine the place of taxation and appropriate taxing jurisdiction; and (2) where supplies of services and intangibles are likely to be consumed at some other time than at the time of performance, or when services or intangibles are supplied remotely.

Th e place of physical performance, or the supplier's location, does not provide a good indication of the likely place of consumption of supplies of services and intangibles that lack an obvious connection with a readily identifi able place of physical perfor-mance. Th is includes supplies that are likely to be consumed at some other time than the time of per-formance, when performance and/or consumption is/are likely to be ongoing, or when the services or intangibles are supplied remotely. In such cases, the place of usual residence of the consumer is the ap-propriate proxy for the jurisdiction of consumption as it can be assumed these types of services or intan-gibles will usually be consumed in the jurisdiction where the customer resides.

14

While determining the jurisdiction of the usual resi-dence of the consumer creates distinct challenges de-serving further analysis, an additional issue needing consideration is how to collect the VAT/GST where the consumer is not in the jurisdiction of the supplier.

In B2B situations, where both suppliers are busi-nesses (and likely registered), a reverse approach is taken, transferring the burden of collecting the tax (by the supplier) to the client (by self-assessment). While this approach is feasible in the business world, it is not so viable where there are large numbers of individual customers not registered with taxing au-thorities ( i.e. , in B2C situations).

While the Canadian GST/HST system does not make any distinction in applying the self-assessment rules in B2B and B2C (thus resulting in a high level of non-collection and non-compliance from custom-ers technically required to self-assess), the OECD proposal suggests a simplifi ed registration system for non-resident suppliers in such B2C situations.

In these circumstances, under the proposals non-res-ident suppliers would be registered in a fashion that would not allow input-tax credits and that would simplify compliance. Registration would be com-pleted by electronic means, and payments would be made electronically. However, international col-laboration is needed for such a system to work, as legal issues inevitably arise when enforcing registra-tions between countries of a supplier and consumer without a trade agreement. Moreover, it is impor-tant to indicate that such "simplifi ed registration"

would not be considered as "carrying on business" in the country where the services or intangibles are deemed supplied or consumed, as this could cre-ate unwanted corporate tax reporting and payment obligations that would negate the simplifi ed nature of the registration system put in place to ensure the collection of tax which is currently lost for all prac-tical purposes.

Chartered Professional Accountants Of Canada's Response

As it did following the publication of prior guide-lines, Chartered Professional Accountants of Canada ("CPA Canada") submitted their com-ments on February 23, 2015. In general, they strongly support the development of guidelines encouraging neutrality, consistency and certain-ty across jurisdictions, and greater harmoniza-tion with respect to the taxation of international trade. CPA Canada recognizes that issues exist with regard to the collection of VAT/GST on B2C supplies and its surrounding potential com-petitive distortions.

CPA Canada made the following observations: Th e requirement for non-resident vendors to collect and remit VAT will impose signifi cant challenges and compliance costs for businesses. Th ese should be kept as low as possible through simplifi ed compliance procedures. Critically, VAT should not become a barrier to trade, and there is a risk that if the compliance burden is too high (in terms of costs and risks) businesses may choose not to supply customers in some countries.

15

CPA Canada feels that applying the reverse charge mechanism ( i.e. , self-assessment) on B2B supplies while using non-resident registration (and collection) on B2C supplies imposes a signifi cant compliance burden by forcing suppliers to determine if their customers are "businesses" or "consumers," a burden that does not currently exist. CPA Canada would prefer to see foreign suppliers charge VAT in respect of both B2C and B2B supplies. Simplifi ed registra-tion rules should ensure that input tax credits be recoverable when taking into account appropriate documentary requirements. For "on-the-spot" supplies, CPA Canada agrees that the place of physical performance be a valid proxy to determine the place of consumption of services for fi nal consumers. CPA Canada would like to see this rule also adopted for B2B supplies. CPA Canada agrees with the observation made in the Guidelines that collecting and remitting tax may be more burdensome for non-resident suppliers than domestic suppliers, especially if

selling to various jurisdictions. Accordingly, CPA Canada strongly supports the recommendation for simplifi ed online registration and compliance. Th ey welcome the suggestions that countries eliminate requirements for invoices on B2C sup-plies covered by the simplifi ed registration regime. Confirming that non-resident suppliers are sometimes reluctant to register in a jurisdiction for VAT/GST purposes out of fear that this may trigger consequences for corporate income tax purposes, CPA Canada states that countries wish-ing to encourage compliance with the proposed guidelines should clearly state that registration for remote B2C supplies does not, in and of itself, create a permanent establishment or other fi ling obligations for corporate tax.

All in all, it is good to see organizations such as the OECD and CPA Canada collaborating in the de-sign and implementation of a fair, simple, and func-tioning tax system intended to benefi t everyone.

16

FEATURED ARTICLES ISSUE 124 | MARCH 26, 2015

Topical News Briefi ng: Switzerland Wins Plaudits by the Global Tax Weekly Editorial Team

After a fairly punishing few years, which have seen the country subjected to increasing scrutiny by tax authorities and governments around the world, it appears that Switzerland may have turned the corner in PR terms, having pledged to share tax information with an ever-increasing number of countries (with 57 OECD-compliant double tax agreements or tax information exchange agree-ments in place at the last count), an agreement in place with the OECD and the Council of Europe to provide multilateral mutual assistance in tax matters, and new rules to counter money launder-ing and terrorism fi nancing.

Th e process, which began in earnest following Switzerland's signature of the OECD's Multi-lateral Convention on Mutual Administrative Assistance in Tax Matters in October 2013, cul-minated most recently in the initialing of an agreement for the automatic exchange of infor-mation with the EU to replace the existing sav-ings tax agreement.

Initialed on March 19, the agreement is expected to be signed in the next few weeks, enabling its en-try into force and data collection to begin in 2017.

Automatic information exchange would then start the following year.

In addition to earning the jurisdiction a pat on the head from the EU, Switzerland's commitment to tax transparency won the praise of the OECD re-cently, with the news that it will be admitted to phase 2 of the peer review process later this year. Phase 1, in which analysts check whether the neces-sary legal foundations are in place for the exchange of information in line with international standards, was published in 2011, with a follow-up report, to assess progress, requested by the Swiss Government last summer.

Despite it being just shy of the end of the fi rst quarter, Switzerland has had a busy few months already, with consultations launched on legisla-tion to permit the automatic exchange of infor-mation in line with OECD standards, and agree-ments signed or under negotiation with India, Liechtenstein, Italy, and Australia, and Tax Infor-mation Exchange Agreements (TIEAs) with Jer-sey, Guernsey and the Isle of Man entering into force at the start of the year.

However, Switzerland may have a way to go to beat Italy, which recently announced negotiations with the Holy See in Rome's Vatican City towards a TIEA. It seems Italy is attempting to secure credit in both this world and the next.

17

FEATURED ARTICLES ISSUE 124 | MARCH 26, 2015

US Unclaimed Property – A Blind Spot For CFOs by Mark van der Linden, Principal, International Tax, and Jacob Oennerfors, Manager, Abandoned and Unclaimed Property, Ryan LLC

Contact: mark.vanderlinden@ryan.com , Tel. +1 212 871 3901; jacob.oennerfors@ryan.com , Tel. +1 212 871 3901

Introduction Companies that decide to enter foreign markets by incorporating an entity in another country practi-cally always face a number of new challenges from a compliance perspective. One issue that might not normally be thought of as a "challenge" is the fail-ure of a company's employees, vendors and busi-ness partners to claim the money that the company has attempted to pay them.

However, unclaimed payments, commonly known as "unclaimed property" or "abandoned property," can present a major challenge for companies that decide to do business in the US by incorporating an entity there. Unclaimed property in the US can take the form of payroll checks, vendor checks, customer refunds, unused balances on gift cards, or unclaimed stocks and dividends.

Known as escheatment, state-level laws in the United States dictate that such unclaimed properties, with

certain exceptions, must be turned over to the state of the owner's address or the state of the corporate do-micile of the company holding the properties. Failure to do so can, in some cases, lead to interest, penalty and estimation charges that are many times greater than the value of the unclaimed property itself.

Every US state currently has unclaimed property laws, which have their direct roots in English com-mon law and ultimately in Roman law.

Unclaimed Property Has Become "Easy" State Revenue In Th e US

A major reason why the United States is fertile ground for the collection of unclaimed property is that its banking and payment system is antiquated by international standards. Th e reliance on physical checks, which have essentially been phased out in the rest of the Western world, is a very important factor for the collection of unclaimed property.

In the United States, physical checks are used by cor-porations to pay employees, vendors, government

18

organizations and other counterparties. Th e US Government estimates that 7.7 percent of Ameri-can households (almost ten million people) do not have bank accounts, which is likely a factor behind the continued reliance on physical checks.

Because checks can get lost in the mail or simply for-gotten about, they are often not cashed and can thus become classifi ed as unclaimed property. Large cor-porations also tend to write a high volume of checks, involving multiple departments, which can result in duplicate checks or checks that contain incorrect in-formation. Even if checks with errors are not actually unclaimed, corporations may have to turn them over as unclaimed property in an audit situation. Th e rea-son for that is that audit periods stretch so far back in time, sometimes more than 30 years, that corpo-rations can often not (understandably) explain the reason for a check error going back that far.

Because most countries nowadays use some type of electronic, direct deposit system, CFOs of non-US companies operating in the US are often completely unaware of the exposure and impact that unclaimed property can have on their US-based subsidiaries. Similarly, their US controllers/tax directors tend to face signifi cant challenges in gaining the proper attention from non-US tax departments to handle unclaimed property compliance and audit defense because there is no real equivalent to US unclaimed property laws anywhere else in the world.

Over the last 20 to 30 years, the administra-tion of unclaimed property has become a major

undertaking for companies doing business in the United States. Why? Because unclaimed property has become a very large source of revenue for the states, even though the states, in theory, are only supposed to act as custodians of the property until it is claimed by its rightful owner. In reality, some states, such as Delaware, return less than 5 percent of the money that it collects from corporations to its rightful owners. In the last few years, unclaimed property has become the third largest source of rev-enue for the state of Delaware. And because most states in the US are scrambling to fi nd revenue, the pursuit of unclaimed property has become more intense. As a result, this blind spot may only get bigger for non-US CFOs.

Contingency Fee Audits Over the past 15 or so years, somewhere around 30 to 40 states in the US have started to collect un-claimed property with the help of private compa-nies that receive a share of the unclaimed property that they can fi nd during an audit. Th ese audits can drag on for more than fi ve years in some cases, and are usually a signifi cant drain on company resources for the accounting, treasury, legal and other depart-ments. Th e private auditors routinely insist that companies produce records going back more than 30 years, and if such records cannot be produced, they will "estimate" the fact that unclaimed prop-erties existed 30 years ago and demand payment of such estimated properties. Th ese estimated liabili-ties can often amount to many millions of dollars. Th e aggressive practices of these private auditors have resulted in multiple lawsuits in recent years.

19

Th e Inclusion Of Unclaimed Properties Belonging To Non-US Owners In 1965, the US Supreme Court decided that un-claimed properties that had owners with unknown addresses should be turned over to the holder's (the company's) state of corporate domicile. Following that decision, some states decided that unclaimed properties with owner addresses in foreign coun-tries should also be turned over to the state of the holder's corporate domicile. Th is theory has often been described by the states as a "rational exten-sion" of the Supreme Court's unknown address rule. Examples of such properties may be credit bal-ances in accounts that belong to foreign customers, or unclaimed dividend checks payable to foreign stockholders of US corporations.

Because foreign companies that decide to enter the US market will inevitably engage in transac-tions with foreign counterparties, the fact that states in the US are claiming to be entitled to for-eign unclaimed properties is often a problem. Th is is especially true in audit situations when foreign properties are often used to increase the amount of estimated liabilities that are calculated to be owed to the state of incorporation of a company.

What To Do In Practice? All states in the US have unclaimed property pro-grams – a fact that corporations must accept while operating there. A fair number of other countries, such as Canada, Jamaica and even the United King-dom, also have unclaimed property laws in some form. However, the administration of unclaimed

property laws in those countries does not even come close to that of American states in terms of reach and aggressiveness.

Th erefore, the fi rst take-away is that when a non-US company is entering into the US market, it should not automatically incorporate a company in a state that off ers a facilitating legal system. It should in fact weigh the benefi t of the part of the legal system that is unrelated to unclaimed prop-erty against the possible exposure that the corpo-ration's business model has with respect to un-claimed property.

Second, if your company is under audit, you should do a reverse audit to make sure that you can chal-lenge the audit fi ndings. Th is is especially important in terms of audits of accounts receivable credits. Some auditors do not automatically take off setting transactions into account, which is why it is very important for corporations to know if such off set-ting transactions exist.

Th ird, if your company is not under audit, you can have an exposure review performed, with the goal of entering into the voluntary disclosure agreements (VDAs) that many states off er. In many cases, this can avoid interest and penalties.

Lastly, if you are ahead of the curve, you could per-haps consider segregating an unclaimed property sensitive part of the business (A/R, gift cards, etc. ) into a state that has a friendlier attitude towards unclaimed property.

20

Because unclaimed property compliance at US companies is often the responsibility of the tax department, it is essential that non-US CFOs familiarize themselves with the general con-cepts, resource challenges and potential mon-etary exposure it can bring to their companies. US unclaimed property laws and enforcement

are truly unique in the world. The National As-sociation of Unclaimed Property Administrators recently stated that there is USD41.7bn sitting in state unclaimed property funds (waiting to be returned to the rightful owners). This money was to a large extent once sitting on corporate balance sheets.

21

FEATURED ARTICLES ISSUE 124 | MARCH 26, 2015

Marketplace Fairness: Attempts To Level The United States Sales Tax Playing Field by Stuart Gray, Senior Editor, Global Tax Weekly

Th e OECD's base erosion and profi t shifting proj-ect is the manifestation of many governments' de-sire to bring their anachronistic tax laws into the 21st century world of e-commerce and the digital economy. And as far as its existing sales tax legisla-tion is concerned, the US is similarly lagging far behind online retailers, with sales and use tax laws still largely anchored to the concept of a business needing a physical presence in a state to establish a tax "nexus." Enter the Marketplace Fairness Act, an attempt the level the playing fi eld once and for all between online and offl ine vendors.

Background As things currently stand, brick-and-mortar retail-ers in states that impose sales and/or use taxes are legally obliged to collect these taxes from custom-ers who make purchases in their stores at the point of sale and remit them to the state tax authority. However, if a resident of the same state chooses to purchase the same item from an online retailer or catalog seller based out-of-state, sales tax usually goes uncollected by the vendor because they don't have a physical presence there, and therefore the state tax authority doesn't have suffi cient tax nexus. In fact, under such circumstances, it is normally

the buyer's responsibility to account for and pay sales tax on purchases of such items on their tax re-turn, but as one might expect, this rarely happens, and it is a diffi cult for states to enforce these rules. Understandably, brick-and-mortar stores, the vast majority of which are small businesses, are pressing for the online sales tax "loophole" to be closed as they continue to concede a substantial cost advan-tage to online retailers, many of which have grown into some of America's largest companies.

It is not just Main Street that claims to be suff ering as a result of outdated sales tax laws, however. State and local governments are said to view the taxes they cannot collect on most online sales as lost revenue, and the National Conference of State Legislatures previously calculated that the existing state of aff airs costs USD23bn in uncollected taxes each year.

Th e only source of guidance on this issue remains the two-decade-old pre-internet sales boom ruling by the US Supreme Court in the Quill case, 1 which established the "physical presence" test for applying

22

existing sales taxes to out-of-state merchants. Cru-cially, the Supreme Court also decided in the Quill case that only Congress has the authority to regulate interstate commerce under the Commerce Clause of the US Constitution, therefore leaving it to fed-eral lawmakers to resolve the matter. However, while legislation is in place to prevent the imposi-tion of taxes on internet access and other "discrimi-natory" taxes on internet use, Congress has yet to legislate in the area of online sales taxes, allowing a confusing and uncertain situation to arise.

Discussions on the taxation of internet sales has also been stimulated by Justice Anthony Kennedy's additional comments within the recent Supreme Court decision in Direct Marketing Association v. Brohl , 2 on the Quill decision, that established the physical nexus ruling.

Justice Kennedy noted that "there is a powerful case to be made that a retailer doing extensive business within a state has a suffi ciently 'substantial nexus' to justify imposing some minor tax-collection duty, even if that business is done through mail or the internet," and suggested that "it is unwise to delay any longer a reconsideration of the Court's holding in Quill ."

"Th e Internet has caused far-reaching systemic and structural changes in the economy, and, indeed, in many other societal dimensions," Justice Kennedy observed. He continued:

"Although online businesses may not have a physi-cal presence in some States, the Web has, in many

ways, brought the average American closer to most major retailers. A connection to a shopper's favorite store is a click away – regardless of how close or far the nearest storefront.

"Today buyers have almost instant access to most retailers via cell phones, tablets, and laptops. As a result, a business may be present in a State in a meaningful way without that presence being physi-cal in the traditional sense of the term."

"Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court's holding in Quill . A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier."

Marketplace Fairness Act Until the Supreme Court rules defi nitively on this matter, it remains the responsibility of Congress to tidy things up with new legislation. Th is is most like-ly to come in the form of the Marketplace Fairness Act (MFA), 3 which would require online retailers to collect sales tax for state and local governments, even though they lack a physical presence in a state.

Th e MFA would certify the Streamlined Sales and Use Tax Agreement (the "Agreement"), an interstate system involving 22 states to harmonize state and local government sales and use taxes and associated administrative requirements. In addition, the legis-lation would provide states, which choose to use it, with the clear authority to require remote retailers

23

to collect sales taxes already owed, and would re-quire them to meet a list of simplifi cation require-ments to ease administrative burdens for sellers be-cause of the country's more than 9,000 diverse sales tax jurisdictions, and with an exemption for remote retailers with less than USD1m in national sales.

A summary of the Bill provided by the Congressio-nal Research Service is provided below.

Section 2 would authorize each member state un-der the Agreement to require all sellers with annual gross receipts in total US remote sales of USD1m or more in the preceding calendar year to collect and remit sales and use taxes for remote sales un-der the provisions of the Agreement, but only if the Agreement complies with minimum simplifi ca-tion requirements for administration of such taxes, audits and streamlined fi ling. Th e state would be authorized to exercise its authority under the Act beginning 180 days after publication of its intent to exercise such authority, but not earlier than the fi rst day of the calendar quarter that is at least 180 days after the enactment of the Act.

Section 2 would also allow a state that does not participate in the Agreement to collect and remit sales taxes if that state adopts and implements the minimum simplifi cation requirements under the Act. Th e section would provide that such taxing au-thority must commence no sooner than six months after the state:

Enacts legislation specifying the tax(es) to which the simplifi cation requirements apply

Specifi es the products and services otherwise sub-ject to such taxes that would be exempt Implements minimum simplifi cation require-ments, including providing a single entity within the state responsible for all state and local sales and use tax administration, a single audit and tax return for all state and local jurisdictions, and a uniform sales and use tax base for all state and local taxing jurisdictions Adopts a uniform rule for sourcing all remote sales Provides information indicating the taxability of products and services, and exemptions from tax Provides free software for remote sellers that cal-culates sales and use taxes, fi les tax returns, and updates tax rate changes Exempts remote sellers and certifi ed software providers from liability for incorrect collection, remittance, or non-collection of sales and use taxes, and Provides remote sellers and certifi ed software providers with 90 days' notice of tax rate changes.

Section 3 would declare that nothing in the Act shall be construed to:

Subject a seller or any other person to franchise, income, occupation or any other type of taxes, other than sales taxes, aff ect the application of such taxes, or enlarge or reduce state authority to impose such taxes Create any nexus or alter the standards for determin-ing nexus between a person and a state or locality Deny the ability of a remote seller to deploy and utilize a certifi ed software provider of the seller's choice

24

Permit or prohibit a state from licensing or regu-lating any person, requiring any person to qualify to transact intrastate business, subjecting any person to state or local taxes not related to the sale of products or services, or exercising authority over matters of interstate commerce Encourage a state to impose sales and use taxes on any products or services not subject to taxation prior to enactment, and Alter or preempt the Mobile Telecommunications Sourcing Act.

Section 4 would provide defi nitions used in the Act, including defi ning "remote sale" to mean the sale of goods or services into a state in which the seller would not legally be required to pay, collect, or remit state or local sales and use taxes unless provided by the Act. It would also provide rules for determining the source of a remote sale ( i.e. , the location where the product or service sold is received by the purchaser).

Section 6 would declare that nothing in the Act shall be construed to preempt or limit any power exercised or to be exercised by a state or local juris-diction or under federal law.

Arguing in favor of the Bill, one of its sponsors, Mike Enzi (R – Wyoming), the Chairman of the Senate's Budget Committee, observed that thou-sands of local businesses are forced to do business at a competitive disadvantage because they have to collect sales and use taxes and remote sellers do not. "Th e MFA would put Main Street businesses on a level playing fi eld with online retailers," he said.

Th e latest version of the MFA was introduced in the Senate on March 10, 2015, and is largely un-changed from the Bill passed by the then Demo-crat-led Senate in the previous Congress in May 2013. Th e MFA 2013 had hit a roadblock in the Republican-led House, particularly on the grounds that it was considered to create new taxation and onerous compliance requirements. Th e fact that the Republicans now have a majority in the Senate therefore does not bode well for supporters of this particular legislative solution.

Online Sales Simplifi cation Act Although Republican opposition remains strong, House Judiciary Committee Chairman Bob Good-latte (R – Virginia) has proposed a restructured sys-tem of taxing "remote sales" in an attempt to over-come his colleagues' doubts.

Goodlatte's Online Sales Simplifi cation Act, 4 released as a discussion draft in January 2015, adopts so-called "hybrid-origin sourcing," under which a state may tax a remote sale only if it is the Origin State (defi ned as the state in which the remote seller has the greatest average number of employees) and is party to a state distribution agreement (with revenue distributed among states through a clearinghouse). Tax is applied at the Origin State's rate (including the local rate), and sellers may be audited only by their home state taxing authority. Double taxation is prevented, as states may not impose tax on a purchaser who paid sales tax at the Origin State's rate at the time of purchase.

25

Th e draft legislation is clear that "click-through" ac-tivities do not create a physical presence, contrary to the attempts of many states to expand the mean-ing of physical nexus to include affi liate businesses, which attract buyers by hosting a link to the retailers' websites in exchange for a commission for each sale.

Remote sellers in states that do not impose sales tax would be required to collect tax using a "fl at rate," or report sales information to the clearinghouse. Th e fl at rate to be applied would be established an-nually by determining the lowest combined gener-ally applicable state rate and an average local rate.

However, the states themselves are far from keen on Goodlatte's draft proposal, which would appear to cross a constitutional Rubicon by forcing consum-ers to pay sales tax rates decided by lawmakers in other states and jurisdictions. In other words, as the National Conference of State Legislatures (NCSL) put it, Goodlatte's proposal would codify "taxation without representation."

In a letter to Rep. John Boehner (R – Ohio), Speak-er of the House of Representatives, the NCSL com-plained that "[Goodlatte's] discussion draft adopts Hybrid-Origin Sourcing, which not only imposes new taxes on consumers in non-sales tax states, it raises taxes on consumers who purchase prod-ucts from higher sales tax states. We also believe it tramples upon the 10th Amendment as it preempts state sovereignty to levy taxes on its own residents, establishes a new sub-national entity to govern the collection of remote sales taxes." 5

Th e Multistate Tax Commission expressed similar reservations about the draft Online Sales Simpli-fi cation Act in a letter to Goodlatte himself. Julie P. Magee, Alabama Commissioner of Revenue and Chair of the MTC, warned that the Bill "impacts state sovereignty and needlessly interferes with the principles of federalism."

"For some taxpayers, the bill amounts to the federal imposition of a new state tax, set at rates that in some cases are not established by the elected rep-resentatives of the residents who pay those taxes," Magee wrote. 6

With lawmakers already fi nding it diffi cult to rally around the MFA, it seems unlikely that the much more controversial Online Sales Simplifi cation Act would fare much better if formally introduced in Congress.

"Amazon" Taxes Absent new federal laws taxing online sales, state leg-islatures and governments have taken it upon them-selves to ensure that sales taxes are paid on internet purchases, even in situations when the company making the sales has no physical presence in the state, or at least only a highly tenuous one. A num-ber of states have gone about this by requiring affi li-ates of an internet retailer, which redirect customers to that company's retailing website, to impose state sales tax. Such laws have often been dubbed "Ama-zon" taxes because, as the country's largest e-tailer, the company has an almost ubiquitous virtual pres-ence, if not a physical one, across the nation.

26

Amazon's response to these measures has been mixed. Th e company has been increasing the num-ber of states in which it does agree to collect tax revenue, particularly where it is building new ware-houses. But it has also been fi ghting the imposition of the tax on its online sales in many states, particu-larly those where it does not have such a physical presence, and its program operating agreement for its associates now reads that, "if at any time follow-ing your enrollment in the Program, you become a resident of Arkansas, Colorado, Maine, Missouri, Rhode Island or Vermont, you will become ineli-gible to participate in the Program, and this Oper-ating Agreement will automatically terminate, on the date you establish residency in that state."

In January 2015, Vermont was added to the list of states in which Amazon will not operate its US as-sociates advertising program, a move thought to be a reaction to Vermont's online sales tax legislation. In reply, Vermont Tax Commissioner Mary Peter-son pointed out that the state's additional legisla-tion was passed in 2011 and, while it would tax Vermont residents on "click-through" sales, it is only due to come into eff ect after the state attorney general's offi ce determines that one-third of states with sales tax have adopted similar laws.

Peterson claimed that Vermont's law "was passed in order to put pressure on Congress to enact the MFA," and that, while "Amazon has severed adver-tising contracts in states with click-through laws, … in Vermont's case, [it has] acted even before our click-through law took eff ect." She also pointed out

that Vermont's governor "will be asking the legisla-ture to amend our click-through law to take eff ect one year after twenty-fi ve states adopt similar laws."

On the other hand, the company surprised many observers last year when it confi rmed that it would begin to charge sales tax in North Carolina from February 1, 2014, where the company doesn't have a substantial physical presence, thus concluding a long dispute with the state over the tax legislation. Th is brought the number of states in which it has agreed to collect the tax to a total of 20, encompass-ing states with more than half of the US population.

Ultimately, Amazon wants a federal solution to the online sales tax conundrum, and has stated its sup-port for the MFA. As Paul Misener, Amazon Vice President for Global Public Policy, said recently: "Federal legislation is the only way to level the play-ing fi eld for all sellers, the only way for states to obtain more than a fraction of the sales tax revenue that is already owed, and the only way to fully pro-tect states' rights."

Not all internet-based sellers are as enamored with the MFA as Amazon, however. eBay has been a no-table critic of the bill, warning that the USD1m sales threshold is not high enough to protect small internet e-tailers. And NetChoice, a trade asso-ciation of e-commerce businesses and online con-sumers, believes that the current "physical pres-ence" standard protects all businesses, large and small, from the unreasonable compliance burdens they would face if forced to collect for thousands

27

of state and local tax jurisdictions within the US. "Instead of leveling the playing fi eld, MFA would heavily discriminate against e-commerce," Christo-pher Cox, the tax policy adviser to NetChoice, told Goodlatte's panel last year.

Conclusion In the fi nal analysis, it would appear that the MFA, or any other federal legislation attempting to level the sales tax playing fi eld for that mat-ter, is unlikely to pass Congress for the foreseeable future anyhow, largely due to lack of support for the proposals among Republicans. And until the day comes when Congress is ready to legislate in this area, or the Supreme Court issues new guid-ance on the matter, state legislatures are likely to

continue fi nding their own solutions to the online sales tax "loophole."

ENDNOTES

1 https://www.law.cornell.edu/supct/html/91-0194.

ZO.html

2 http://www.supremecourt.gov/opinions/14pdf/

13-1032_8759.pdf

3 https://www.govtrack.us/congress/bills/114/s698/text

4 http://thomascarlson.org/wp-content/uploads/

2015/01/011215-Hybrid-Origin-Discussion-Draft-

Section-by-Section.pdf

5 http://www.ncsl.org/documents/statefed/Letter_to_

Speaker%20Boehner_01262015.pdf

6 http://www.mtc.gov/The-Commission/News/2015-

01-26-MTC-Letter-RE-Draft-Online-Sales-Simpli.aspx

28

FEATURED ARTICLES ISSUE 124 | MARCH 26, 2015

Anti-crisis Amendments To Tax Accounting For Interest Come Into Effect by Alexander Ponyrko, Senior Manager, and Anna Sokolova, Advanced Staff , Business Tax Advisory, EY Moscow

Contact: Alexander.Ponyrko@ru.ey.com , anna.v.sokolova@ru.ey.com

Introduction Draft Law No. 675906-6 concerning changes to the defi nition of "controlled debt" and the exclu-sion of loans from third-party banks from the scope of thin capitalization rules was submitted to Rus-sia's State Duma in December 2014.

Th e draft law was substantially amended in Febru-ary during readings in the State Duma and then swiftly enacted. It was signed by the President on March 8 and published as Federal Law No. 32-FZ the next day. Notably, no provisions extending the application of the thin capitalization rules to loans received from foreign affi liated companies were in-cluded in the fi nal text of the new law.

Amendments In Ranges Of Th reshold Values For Interest

On January 1, the new wording of Article 269 in-troduced by Federal Law No. 420-FZ of Decem-ber 28, 2013 came into eff ect. Th is specifi es that if

transactions are recognized as controlled under the transfer pricing rules, those rules should be taken into account in determining the interest recognized for profi ts tax purposes unless otherwise established by Article 269. An exception to this general rule was specifi cally envisaged for loans where one of the parties to a controlled transaction is a bank. For such cases the Tax Code provides ranges of thresh-old values allowing the borrower or lender to rec-ognize interest calculated on the debt obligation at the actual rate if it falls within the threshold. In all other cases of controlled transactions to which one of the parties is a bank, the interest recognized by a taxpayer (as deductible or taxable) is to be deter-mined based on the transfer pricing provisions.

Amendments enacted by the new law expand the application of the ranges of threshold values to all controlled transactions; the restriction to loans where one of the parties is a bank has been abolished.

Th e new law also replaces the Russian Central Bank's (CBR's) refi nancing rate with the key interest rate

29

in the calculation of the ranges of threshold values for interest rates for loans denominated in roubles. In particular, if a debt obligation between Russian residents is recognized as a controlled transaction and the loan is arranged in roubles, the ranges of threshold values of interest rates for debt are 0 per-cent to 180 percent of the CBR's key interest rate in 2015 and from 75 percent to 125 percent of the CBR's key interest rate from 2016.

If a debt obligation is recognized as a controlled transaction under another criterion ( i.e. , where at least one party to a controlled transaction is not Russian resident) and the loan is arranged in rou-bles, the ranges of threshold values for interest rates for debt are from 75 percent of the CBR's refi nanc-ing rate to 180 percent of the CBR's key interest rate for 2015, and from 75 percent to 125 percent of the key interest rate from 2016. Th is amendment was prompted by the increase in the key interest rate to 17 percent on December 16, 2014, which triggered an immediate increase in interest rates on loans (on March 13, 2015, the key interest rate had fallen to 14 percent). A cap based on the current refi nancing rate of 8.25 percent was therefore too far out of line with debt markets to be employed.

Measures To Smooth Th e Eff ect Of Rouble Devaluation

Th e rapid devaluation of the rouble in the second half of 2014 substantially increased the debt-to-equity ratios of borrowers with foreign currency loans and consequently increased the proportion of interest on controlled debt which was non-deductible under the

thin capitalization rules. Amendments to Clause 2 of Article 269 have been enacted to allow taxpayers to reduce the rouble value of foreign currency loans in determining their debt-to-equity ratio.

In respect of controlled debt arising before October 1, 2014, the calculation of the maximum amount of deductible interest for the period from July 1, 2014 to December 31, 2015 is to be made in the following way:

Th e rouble value of controlled debt denominated in foreign currency is to be calculated at the lower of the CBR exchange rate at the last accounting date of the relevant accounting (tax) period and the offi cial rouble exchange rate established by the CBR as at July 1, 2014; and Th e value of equity is to be determined without taking into account any exchange rate diff erences which arose as a result of the revaluation of claims and obligations expressed in foreign currency in connection with changes in offi cial CBR exchange rates after July 1, 2014.

An additional measure introduced to refl ect the sig-nifi cant increase in interest rates on debt markets is a cap on the deductible interest accrued in Decem-ber 2014 on loans denominated in roubles. Th e relevant limit is three and a half times the CBR's refi nancing rate.

What Th is Means For Taxpayers Th e new law came into force on March 9, 2015, and the amendments to Article 269 apply with ret-roactive eff ect from January 1, 2015.

30

Taxpayers should therefore recalculate the capital-ization coeffi cient for accrued interest on loans sub-ject to the thin capitalization rules for the fi rst nine months of 2014 and the year 2014. Th is should increase the amount of tax-deductible interest.

Also, using the provisions as amended by the new law, taxpayers may recalculate the maximum

amount of deductible interest accrued in Decem-ber 2014 with respect to rouble loans.

Also with eff ect from January 1, 2015, taxpayers may use the new thresholds established by Clause 1 of Ar-ticle 269 with respect to controlled loans in order to determine whether any transfer pricing adjustments to interest income or expense should be made.

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FEATURED ARTICLES ISSUE 124 | MARCH 26, 2015

US Taxation Of Income From Provision Of Services On The Outer Continental Shelf – Creating A US Trade: Effect On US Taxation Of Foreign Corporations by Stephen Flott and Joseph Siegmann, Flott & Co

Contact: sfl ott@fl ottco.com , Tel. + 703-525-5110

Th is is the tenth article in a series of articles on US taxation of income from the transportation of cargo or passengers to or from the United States or from the pro-vision of services on the US Outer Continental Shelf, and the compliance regimes that apply to companies that receive such income.

In the immediately prior article (see Global Tax Weekly , Issue 120, February 26, 2015), we ex-plained the imposition of tax on activities conduct-ed by foreign corporations operating on the US Outer Continental Shelf ("OCS") under Section 638 of the Internal Revenue Code ("IRC"). In this article we will discuss the US taxation of income earned by foreign corporations from such activities. In the next article, we will cover the employment tax ramifi cations for foreign corporations engaged in business on the OCS.

Determining the US taxation of a foreign com-pany's OCS activities depends upon whether it has a US trade or business. Th e term "US trade or

business" is not defi ned in the IRC. However, over the years US courts have developed relatively clear guidelines as to what constitutes conduct of a US trade or business.

Elements such as continuity of operations or activ-ity, employment of personnel, rental of offi ce space or equipment located in the US and so forth are all hallmarks of a US trade or business. In the context of the OCS, the performance of personal services "within the United States at any time" within a tax-able year may constitute the conduct of a US trade or business. Th e exception is if the personal services are provided within the US for less than 90 days during a tax year and the total compensation paid for those services is less than USD3,000 in total. 1

US sourcing rules are very important in determin-ing the tax exposure of foreign corporations work-ing on the OCS. Section 861(a)(3) provides that income from personal services is sourced where the services are performed. Th us, a seismic vessel do-ing work on the OCS generates US source income

32

for its operator (and its owner). Section 864(c)(3) provides that income from US sources is treated as eff ectively connected with a US trade or business unless an exemption applies.

In eff ect, these sections in combination mean that most foreign corporations conducting activities on the OCS that are subject to US tax under Section 638 have US source income eff ectively connected to a US trade or business. Th e exceptions include foreign companies that bareboat out vessels or lease out equipment (but not services) to others doing business on the OCS.

A foreign corporation subject to US tax under Sec-tion 638 with eff ectively connected income should fi rst determine whether it qualifi es for benefi ts un-der a US tax treaty 2 because those that do must have a permanent establishment ("PE") in the US before its US source income is subject to US tax. All US tax treaties contain articles that set out what constitutes (and does not constitute) the creation of a PE. Obviously, these rules vary by treaty and need to be considered carefully.

For example, Article 5.3 of the US–Russia treaty provides that a qualifying Russian entity may con-duct resource exploration and/or extraction activi-ties on the OCS for up to 18 months before its ac-tivities will constitute a PE. Similarly, Article 5.3 of the US–Hungary treaty allows natural resource ex-ploration and/or extraction activities to persist for up to 24 months before the activities constitute a PE. 3 In contrast to those two relatively generous PE

provisions, Article 4A.2 of the US–Norway treaty limits activities related to natural resource explora-tion and/or extraction to less than 30 days in any 12-month period before such activities constitute the creation of a PE in the US.

Even if a foreign corporation that qualifi es for trea-ty benefi ts is not subject to US taxation on its OCS activities, it is still required to fi le a US income tax return, including a Form 8833 to disclose the treaty benefi ts it is claiming, the amount of US source income covered by its treaty claim, and the provi-sion of the LOB article under which it qualifi es for treaty benefi ts. Failure to timely fi le the return and form is subject to a penalty of USD10,000.

If a foreign business does not qualify for treaty ben-efi ts or if its activities on the OCS create a PE, it is subject to US tax on its US source income that is eff ectively connected to its US trade or business pursuant to Section 882 . Th at section provides that foreign corporations are taxed on their net US source income at graduated rates very similar to those paid by US domestic corporations, with the exception that foreign corporations are subject to US tax only on their US source income, not on their worldwide income. Section 882 limits the ability to pay tax on net income to those foreign corporations that timely fi le a US tax return. Th ose that fail to timely fi le a US tax return are subject to tax under the sec-tion on their gross US source income. 4

Foreign companies operating on the OCS that do not have a US trade or business and are not covered

33

by a tax treaty exemption are subject to 30 percent withholding tax on any payments made to them by US counterparties pursuant to Section 1441 . Th ose foreign corporations that have income eff ectively connected to a US trade or business are not subject to Section 1441 withholding.

ENDNOTES

1 IRC Section 864(b) .

2 Most US bilateral tax treaties contain a "Limitation

on Benefi ts" ("LOB") article which restricts use of the

treaty to foreign corporations organized in that treaty

country that are in turn controlled by individuals who

are tax resident in that treaty country or to foreign

corporations that have an active business presence

in the treaty country.

3 It is interesting to note that the US–Hungary treaty

does not contain an LOB article, which means the

treaty is available to any Hungarian corporation re-

gardless of its ownership by non-Hungarian residents.

4 Foreign corporations that have activities in the US

OCS which create a US trade or business need to be

aware of the impact of branch profi ts tax on their US

activities. A discussion of that issue will not be covered

in these articles.

34

FEATURED ARTICLES ISSUE 124 | MARCH 26, 2015

Topical News Briefi ng: EC Advances Anti-Avoidance Package by the Global Tax Weekly Editorial Team

Continuing with the tax transparency theme, the Eu-ropean Commission has revealed that it will be rolling out a package of measures targeting tax avoidance.

Unveiled on March 18, the package – released ahead of a more detailed Action Plan due later in the year – outlined a number of measures that can be taken in the short term, including establishing an increased link between taxation and economic substance, in line with ongoing talks being led by the OECD.

Initially, however, the Commission has its sights on improving transparency regarding the tax rul-ings issued to companies, sometimes referred to as "sweetheart deals."

Explaining the frailties of the current "spontane-ous" information exchange system in place, the EC stated that:

"Currently, EU legislation provides for spontane-ous exchange of information on tax rulings, but only in certain circumstances. Th ese spontaneous exchange provisions require a Member State to communicate information on their tax ruling(s) to any other Member State for whom the information may be relevant."

"However, this system leaves a lot of room for interpre-tation by the Member State issuing the tax ruling. Th at State decides what is 'relevant' and which other Mem-ber States should receive the information. In some cas-es, this leeway may be deliberately exploited to avoid sharing information. In other cases, the Member State issuing the tax ruling may simply not realize that this information could be useful to another Member State, so it doesn't spontaneously exchange it. Moreover, un-der current rules, Member States can refuse to sponta-neously exchange the information on the grounds of commercial secrecy laws or public policy."

Increased scrutiny on advance rulings initially fo-cused on Cyprus, Ireland, Luxembourg, Malta, the Netherlands, Belgium, and the UK, but the Com-mission expanded its probe to cover all member states' regimes in December 2014.

In parallel, Members of the European Parliament (MEPs) have established a special parliamentary committee, tasked with looking into advance tax rulings as far back as 1991, examining how trans-parent member states are with regard to such rul-ings, and the impact on public fi nances.

Th e aim of all of this, no doubt, is to level the play-ing fi eld in terms of competition – which some may also see as a step towards corporate tax federalism. But as can be seen with the tiny principality of Lux-embourg, which is currently grappling with the re-cent "place of supply" VAT rule changes, the result is often that the playing fi eld is anything but level.

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ISSUE 124 | MARCH 26, 2015NEWS ROUND-UP: TAX REFORM

EU Commission Release Corporate Tax Reform Plan

On March 18, 2015, the European Commission presented a package of transparency measures aimed at tackling corporate tax avoidance and harmful tax competition within the EU.

Th e transparency package is said to be "the fi rst step in the Commission's ambitious agenda for 2015 to fi ght tax avoidance." Th e Commission said it will be followed, before the summer, by a detailed Ac-tion Plan on corporate taxation, which will set out the Commission's views on fair and effi cient cor-porate taxation in the EU and propose a number of ideas to achieve this objective. Th is will include re-consideration of proposals for a Common Consoli-dated Corporate Tax Base among member states.

Th e package sets out a number of measures that can be taken in the short term, including to establish an increased link between taxation and economic substance, in line with ongoing talks being led by the OECD.

However, more immediately, the Commission is in particular seeking to establish strict transparency requirements for tax rulings issued to companies by member states.

Th e Commission's report says: "Tax rulings which result in a low level of taxation in one member state

can entice companies to artifi cially shift profi ts to that jurisdiction. Not only can this lead to serious tax base erosion for other member states, but it can further incentivize aggressive tax planning and cor-porate tax avoidance."

Th e report adds: "Currently, there is little infor-mation exchange between national authorities on tax rulings. Member states whose revenues are ad-versely aff ected by the tax rulings of others cannot take the necessary action in response. In line with the joint eff ort to combat corporate tax avoidance, there is an urgent need for greater transparency and information sharing on cross-border tax rul-ings including transfer pricing arrangements."

"Th erefore, the Commission is putting forward a proposal for the automatic exchange of informa-tion on cross-border tax rulings. National tax au-thorities will be obliged to automatically share basic information on their cross-border tax rulings with all other member states, at regular intervals. Where relevant, member states that receive this informa-tion can then request more details."

Th e Commission has proposed that these new re-quirements be built into the existing legislative framework for information exchange, through amendments to the Directive on Administrative Cooperation. Th e Commission called upon the Council to prioritize adoption of these proposals.

36

Welcoming the announcement, OECD Secretary-General Angel Gurría said: "Th e European Com-mission's initiative is another major step to tackle corporate tax avoidance. It confi rms that the BEPS project is fully on point and that coordinated solu-tions are the best way forward. Th e message is clear: change is happening and cooperation and transpar-ency are replacing secrecy and harmful practices."

"Th e package is fully in line with the work carried out in the OECD/G20 base erosion and profi t shifting (BEPS) project and refl ects the long-standing coop-eration with the EU on these matters. Th e OECD will continue to work with the Commission on the implementation of these measures and in particular on a common format for transmission of informa-tion on rulings among tax administrations."

Former US Treasury Offi cial Advises Against Minimum Tax President Barack Obama's proposal to impose a minimum tax on the foreign income of US com-panies would place them at a substantial competi-tive disadvantage in global markets, Pamela Olson, former assistant secretary for tax policy at the US Department of Treasury, has said.

As well as including proposals for a 14 percent one-time tax on previously untaxed foreign income accumulated overseas, Obama's 2016 Budget pro-posed a 19 percent minimum tax on the foreign in-come of US multinational companies, reduced by 85 percent of the eff ective foreign tax rate imposed on that income, resulting in an eff ective tax rate of

at least 22.4 percent in every foreign jurisdiction in which the US company has operations.

In her testimony before a recent Senate Finance Committee hearing, Olson, who worked for the Treasury between 2002 and 2004, said that the US should instead be looking at "a territorial sys-tem similar to those in other advanced economies, [which] would allow US companies to invest their foreign earnings in the US on the same basis as they invest them abroad and on the same basis as foreign companies invest in the US."

She pointed out that the high US statutory corpo-rate income tax rate in combination with the world-wide income tax system has negative consequences for American businesses and workers. "First, it dis-courages both US and foreign companies from lo-cating their more profi table assets and operations inside the United States; second, it encourages both US and foreign companies to locate their borrow-ing in the United States, as the value of interest de-ductions is greater against a higher corporate tax rate; and, third, it discourages US companies from remitting foreign profi ts to the United States."

"Evidence of the competitive disadvantage created by our international tax rules can be seen in the increase in foreign acquisitions of US multination-als and in the number of cross-border merger and acquisitions in which the combined company has chosen to be headquartered outside the United States. Th e current system tilts the playing fi eld against US companies competing for acquisitions of

37

foreign companies and US companies with foreign operations. If the ultimate parent company were incorporated in the United States, distributions of foreign income to the ultimate parent company would be subject to the US repatriation tax – a tax that would not apply (or could be mitigated) if the parent company were headquartered in a country with a territorial tax system. Th e tax system should create a level playing fi eld that does not favor one owner over another. Our worldwide tax system es-sentially places a premium on the value of US com-panies' assets in the hands of a foreign bidder."

She pointed out that "other developed countries with territorial systems have adopted a variety of an-ti-abuse rules to discourage income shifting without imposing a minimum tax rate. Th ose anti-abuse rules are aimed at preventing the erosion of the domestic tax base, not at imposing a global minimum tax rate that would handicap their globally engaged compa-nies with operations in lower tax jurisdictions."

"Some countries have chosen not to extend territo-rial tax treatment to foreign affi liates in specifi c tax haven jurisdictions. But no other country imposes a minimum tax on active business income such as proposed by the Obama Administration," Olson continued. She also noted that the OECD's base erosion and profi t shifting (BEPS) project has fea-tured proposals from the US for a foreign mini-mum tax as a special measure "to backstop transfer pricing rules." She warned the Administration that "if the United States were to enact a minimum tax while the rest of the world rejects the concept, it

would push the United States even further from in-ternational norms to the disadvantage of US com-panies and their employees."

Last, Olson argued that the Obama Administra-tion's recent budget proposals on interest expense deductions would again establish limitations "be-yond international norms" and would "further tilt the playing fi eld against investment in the US to the detriment of the American worker – a result that should be avoided."

Australia To Kickstart Tax Reform Debate Australian Treasurer Joe Hockey has confi rmed that the Government's long awaited Tax White Paper process will begin with the publication of a discus-sion paper on March 30, 2015.

Hockey announced the release date at the Tax In-stitute's national convention. He said that the dis-cussion paper "will consider the competitiveness of Australia's tax system, consistent with the Gov-ernment's aim for a better tax system that delivers lower, simpler, and fairer taxes."

Th e Treasurer told attendees: "We need a 'fi t for purpose' tax system – a 21st century tax system – one that suits our modern and growing economy. Tax reform benefi ts all Australians. Th at is why the Government is committed to a national conversa-tion on tax reform through the Tax White Paper process. Of course, a meaningful conversation must deliver meaningful outcomes."

38

Institute President Stephen Healey welcomed Hockey's announcement and said that the release will be a pivotal moment for Australia's tax system.

"Th e Tax Institute has long argued for a simpler, fairer tax system in Australia and the White Paper process has signifi cant potential to provide a foun-dation on how to achieve this. Tax reform in recent years has not been holistic but has only tinkered around the edges of the tax system," he said.

Last month, Prime Minister Tony Abbott said that the Government would invite debate from across the political spectrum "on all options for a better tax system to deliver taxes that are lower, simpler, and fairer."

Luxembourg Urges Global Action On Digital Tax Rules Th e Government of Luxembourg has urged that in-creased importance be placed on value-added tax (VAT) recommendations emanating from the OECD's base erosion and profi t shifting (BEPS) project.

In a policy statement on the Digital Single Market – one of the ten priorities of the new European Commission, aimed at removing barriers to trade in electronic services in the EU – Luxembourg said that the Commission and the EU member states should seek to make the treatment of the digital economy an integral part of all ongoing tax dis-cussions at international level, including in discus-sions on VAT and in eff orts to tackle tax avoidance and BEPS.

A year ago, on March 19, 2014, the OECD re-leased its BEPS Action 1 report on the tax chal-lenges of the digital economy. On the VAT front, the measures put forward by the OECD were based on reforms that have now been implemented to tax business-to-consumer (B2C) supplies of broadcast-ing, telecommunications and electronic services in the location of the consumer in the EU. It also recommended the rollout of systems similar to the EU's mini one-stop-shop, which was intended to ease the compliance burden on businesses.

Th e recommendations from the Action 1 report have been incorporated into new OECD VAT/GST Guidelines, which recommend that nations should adopt reforms largely the same as those al-ready implemented in the EU – that B2C supplies of electronically supplied services should be taxed under the destination principle (that is, in the loca-tion of the consumer, rather than that of the suppli-er), and nations should introduce special schemes to alleviate the burden on businesses.

Luxembourg was most aff ected by the reforms to place of supply rules in the EU, given that the na-tion off ers the EU's lowest VAT rates and therefore was successful in attracting major internet-based electronically supplied services providers.

In its report, Luxembourg noted the fi ndings of the OECD Action 1 report that "ring-fencing the digi-tal economy is not possible," as the Commission's Expert Group has also concluded, and therefore a tax regime specifi c to the digital economy is not

39

appropriate. It therefore said that it is important to include consideration of the digital economy in ongoing discussions.

Th e conclusions from the OECD's work on this area are to be released in November 2015, ahead of the completion of its BEPS project in Decem-ber 2015. However, the subject matter has been discussed to a lesser extent in recent talks around international tax policy, as matters concerning

multinational tax planning arrangements, includ-ing the treatment of intangibles, have recently re-ceived the most focus.

On digital tax reform, Luxembourg's report conclud-ed: "Ongoing work at international level should be supported and the EU should refrain from taking uni-lateral action. Fiscal neutrality in terms of similar goods being sold in their physical or digital form should be ensured in order to stimulate digital innovation."

40

ISSUE 124 | MARCH 26, 2015NEWS ROUND-UP: COUNTRY FOCUS — SWITZERLAND

Switzerland, EU Ink New Savings Tax Pact

Switzerland and the EU have initialed an agree-ment on the automatic exchange of tax infor-mation (AEOI). Account data will be collected from 2017, with the first exchange scheduled for 2018.

Th e agreement was initialed on March 19, 2015, by Swiss State Secretary Jacques de Watteville, Deputy Director of the Switzerland's Directorate for Euro-pean Aff airs Dominique Paravinci, and head of EU Directorate General on Tax and Customs Union Heinz Zourek. It is expected to be signed in the coming weeks.

Th e agreement will replace the savings tax agree-ment that has been in force since 2005 and extends to all 28 EU member states.

Th e AEOI agreement provides that EU member states and Switzerland will be required to exchange account information automatically on a recipro-cal basis annually. Th e information that will be ex-changed will include the name, address, tax identi-fi cation number, date of birth, and a broad amount of fi nancial and account balance information about EU taxpayers and vice versa.

Switzerland and the EU intend for the deal to enter into force on January 1, 2017.

Tax Commissioner Pierre Moscovici said: "We are taking a decisive step towards total tax transparency between Switzerland and the EU. I am confi dent that our other neighbors will soon follow suit. Th is transparency is vital to ensure that each country can collect the tax revenues due."

OECD Supports Swiss Tax Transparency Advances Th e OECD has welcomed Switzerland's recent moves towards greater tax transparency, admitting the country to phase 2 of the peer review process.

Jacques de Watteville, head of Switzerland's State Secretariat for International Financial Matters, said: "We are delighted about this decision. It is the re-sult of intensive work on Switzerland's part, which is committed to a competitive fi nancial center that complies with international standards."

Switzerland has been removed from the category of ju-risdictions blocked from moving forward in the peer review process. Th e Global Forum on Transparency and Exchange of Information for Tax Purposes con-ducts peer reviews in two phases. In phase 1, analysts check whether the necessary legal foundations are in place for the exchange of information in accordance with the international standard. Phase 2 examines the processes in place to exchange information in practice.

Phase 2 should begin for Switzerland in autumn 2015, with a report due in the second half of 2016.

41

"We are on the right track and want to pursue the eff orts towards a morally sound and competitive fi -nancial center," de Watteville said.

Th e report on Switzerland's phase 1 peer review was published in June 2011, when the Global Forum concluded that improvements were needed. In June 2014, Switzerland requested a supplementary report to assess the progress made since the original review. Further changes to Switzerland's Tax Administra-tive Act entered into force on August 1, 2014. Th ese amendments provided for an exemption regarding the prior notifi cation of individuals aff ected by an administrative assistance request. In certain cases, the aff ected taxpayers can now be informed only after their data has been transferred to requesting foreign authorities, rather than in advance.

Switzerland currently has signed 57 OECD stan-dard-compliant tax information exchange agree-ments (TIEAs) and double taxation agreements. In October 2013, Switzerland signed the OECD/Council of Europe Convention on Mutual Assis-tance in Tax Matters, and in December 2014, the Swiss Parliament approved legislation for imple-menting new rules on money laundering and ter-rorist fi nancing, which will improve transparency in the case of bearer shares.

In its supplementary report, the OECD recommend-ed that Switzerland ensure that TIEAs negotiated prior to March 13, 2009, allow for the exchange of information in line with the international standard and that it continue to develop its TIEA network.

Th e Government should make certain that appro-priate mechanisms are in place to identify owners of bearer shares in all instances, the OECD said, and ensure that ownership and identity information is available in the case of permanent establishments.

Switzerland Consults On Financial Services Reform Th e Swiss Federal Council has said that new rules for the fi nancial services sector should strengthen client protection, enhance the competitiveness of the country's fi nancial center, and reduce competi-tive distortions between providers.

Th e Federal Council has noted the results of a con-sultation on proposed changes to the Financial Ser-vices Act (FinSA) and the Financial Institutions Act (FinIA). Th e FinSA governs the pre-requisites for providing fi nancial services and instruments, and facilitates the enforcement of customers' claims against fi nancial services providers. Th e FinIA makes provision for a diff erentiated supervisory re-gime for fi nancial institutions.

According to the Council, the preliminary drafts presented for consultation were positively received by a majority of participants. However, serious res-ervations were expressed about certain measures. Proposed rules on the reversal of the burden of proof and due diligence requirements relating to clients' tax compliance were rejected, along with a scheme for a new arbitration court and proce-dural costs fund. A planned client advisor register also proved controversial, as did regulations on the

42

disclosure of information on the compensation of fi nancial services providers.

Th e Federal Council has announced that plans for the reversal of the burden of proof, a procedural costs fund, and an arbitration court will be scrapped. Access to a court of law will be facilitated with a new cost settlement rule without cross-fi nancing among fi nancial service providers. Financial ser-vices providers, subject to certain conditions, will pay the plaintiff 's costs, regardless of the outcome of proceedings.

Th e regulations on the instruments of collective le-gal protection (group settlement proceedings and representative action) will be integrated in ongoing

reforms of the Civil Procedure Code and no lon-ger regulated in the FinSA. Th e client advisor regis-ter will be completely revised and merged with the register for foreign fi nancial service providers. Th e Banking Act will remain in place, but the FinIA and the Banking Act will be reconciled.

Th e rule on disclosure of compensation ( e.g. , ret-rocessions) will be retained in its current form. No provision will be made for a ban on retro-cessions or restrictions on transparency. Th e en-hanced due diligence requirements relating to clients' tax compliance will be regulated within the scope of the Federal Council's dispatch on the implementation of automatic exchange of infor-mation legislation.

43

ISSUE 124 | MARCH 26, 2015NEWS ROUND-UP: INTERNATIONAL TRADE

India To Re-engage With EU On Free Trade Deal

India's Commerce and Industry Minister, Nirmala Sitharaman, has said that the nation is ready to re-visit talks towards a free trade agreement with the EU, despite an earlier impasse on several issues that led to the talks being shelved.

In February 2013, the European Commission had reported that "the contours of a deal" were emerg-ing, but "both sides need to go the fi nal mile to put the package together." By then, 15 rounds of negoti-ations had been held since the launch of negotiations in 2007, and concerns were being raised that "pain-fully slow" progress was being made. Th ereafter, it was agreed in May that certain issues could not be resolved, including negotiations on tariff reductions; data security standards, in particular IT market ac-cess for India; and the free movement of persons.

Disclosing that India and the EU will revisit the talks, Sitharaman told reporters on March 23: "I have assured the EU ambassador and ambassadors of individual EU countries that we are ready to talk with the European community. Th ey have been our traditional trading partners."

Indonesia To Place Minimum Tax On Palm Oil Exports Indonesia looks set to impose a fi xed tax of USD50 per tonne on its exports of crude palm oil (CPO)

when prices fall below the country's USD750 per tonne threshold. Since October last year, Indonesia – the world's largest producer of CPO – has levied a zero rate of export tax below that threshold.

Malaysia, the second-largest, has levied a zero rate of export tax on CPO since September last year. Earlier, Malaysia said that, based on a price of USD613 per tonne, it would levy a 4.5 percent from April 2015 under its mechanism, which is tied to selling prices.

Indonesia's Chief Economic Minister Sofyan Djalil said the Government is now proposing that, with eff ect from next month, a fi xed levy of USD50 per tonne will be placed on CPO exports when CPO prices are below the USD750 threshold.

Th e revenues from the fi xed levy will be chan-neled directly to fund its recently enhanced biofuel subsidy program. Subsidies will rise to IDR4,000 (USD0.31) per liter from IDR1,500 per liter to prop up the local biofuel industry. Th e Govern-ment has also confi rmed that it will raise the etha-nol content requirement for biodiesel blends to 15 percent, up from 10 percent.

New Zealand Signs FTA With South Korea New Zealand's Trade Minister, Tim Groser, on March 23, 2015, signed the New Zealand–South Korea Free Trade Agreement (FTA) with his Ko-rean counterpart, Yoon Sang-jick.

44

Upon its entry into force, the agreement will eliminate tariff s on 48.3 percent, or NZD793.7m (USD604m), of New Zealand's current exports to South Korea. Th e agreement will progressively re-move tariff s on 98 percent of New Zealand's ex-ports to South Korea. In addition, New Zealand will completely remove its duties on all South Ko-rean products within seven years of the agreement coming into force.

"Particular success stories include the removal of wine tariff s of 15 percent on entry into force, and the removal of 45 percent tariff s on kiwi fruit eff ec-tively fi ve years after entry into force," Groser said. "Improving access to international markets through free trade agreements is a key component of the Government's Business Growth Agenda. Support-ing our exporters is crucial to creating new jobs and boosting incomes for New Zealanders."

"Th is Agreement secures the long-term future of New Zealand exporters to Korea whose interna-tional competitors were benefi ting from Korea's other FTAs. It reduces barriers to trade and in-vestment, provides greater certainty about the business environment, and ensures our export-ers remain competitive in each other's market," Groser added.

Th e New Zealand Government said that the FTA will off er improved protections for New Zealand investors in the Korean market, and will reinforce the attractiveness of New Zealand as a stable invest-ment destination.

Doha Talks Remain On Track, WTO Head Says

Th e Director-General of the World Trade Orga-nization (WTO), Roberto Azevêdo, has said that WTO members are continuing to make progress on negotiations towards the conclusion of the Doha Development Agenda.

Azevêdo called a meeting of all WTO members on March 18, 2015, to share information, review progress, and agree upon a work program on the remaining issues.

"We are continuing to make steady progress in terms of understanding the issues and each other's aspira-tions and limitations," Azevêdo said. "Th is is criti-cal if we are going to advance these negotiations."

"Th ere is a clear sense that members are moving into a solution-fi nding mode. Th e discussion is much more focused than it has been to date. But, while we are making progress, this does not yet mean we are converging. Th ere remain many challenges to overcome before we can fi nd solutions – but at least now we are looking for them," he said.

Th e Doha Round, launched in 2001, seeks to achieve a global agreement on the reduction of tax and non-tariff barriers on international trade.

Th e WTO said discussions will continue in the various Negotiating Groups on specifi c Doha is-sues over the coming weeks. Meanwhile, the

45

Director-General intends to engage in his own con-sultations with stakeholders to address "the tough-est political issues" to try to broker solutions.

EU Requests WTO Mediation On Russian Tariffs Russia has blocked the EU's request for a World Trade Organization (WTO) panel to mediate in a dispute over Russian tariff s on imports of certain agricultural and manufacturing sector goods.

Th e EU argues that Russia has been taxing a num-ber of products, including paper products, refrig-erators, and palm oil, more heavily than permitted under the terms of its WTO membership.

"Russia diverges from what was decided at the time it was joining the WTO in two ways: either

it applies a higher duty rate, e.g. , 15 percent in-stead of 5 percent for paper products, or, in [the] case of refrigerators and palm oil, it fi xes a mini-mum amount that needs to be paid even if not justifi ed by the agreed duty rate expressed in a percentage of the product value," the European Commission said.

Th e Commission said that the higher duties have a clear negative impact on European exports of paper products, refrigerators and palm oil worth approxi-mately EUR600m (USD636m) a year.

Consultations between the EU and Russia have so far failed to resolve the dispute. However, Russia said it believes that a resolution can be reached through further talks. Th e WTO's Dispute Settlement Body has deferred the establishment of a panel.

46

ISSUE 124 | MARCH 26, 2015NEWS ROUND-UP: COUNTRY FOCUS — UNITED KINGDOM

Oil Companies Winners, Banks Losers In UK Budget

Th e oil industry has welcomed UK Chancellor George Osborne's move to restructure the North Sea tax regime, but the banking sector has criticized his decision to hike the bank levy.

Delivering his Budget on March 18, Osborne said: "While the falling oil price is good news for families across the country, it brings with it challenges for hundreds and thousands whose jobs depend on the North Sea. Th anks to the fi eld allowances we've in-troduced we saw a record GBP15bn (USD22.3bn) of capital investment last year in the North Sea. But it's clear to me that a fall in the oil price poses a pressing danger to the future of our North Sea in-dustry – unless we take bold and immediate action."

Osborne announced a cut to the Petroleum Rev-enue Tax from 50 percent to 35 percent for charge-able periods ending after December 31, 2015. Th e Supplementary Charge – an additional charge on a company's ring-fenced profi ts, excluding fi nance costs – will be reduced from 30 percent to 20 per-cent, eff ective January 1, 2015. Th is builds on the reduction from 32 percent to 30 percent made in the 2014 Autumn Statement. A new single tax al-lowance will reduce the amount of adjusted ring-fenced profi ts subjected to the Supplementary Charge. Th e portion of profi ts reduced by the al-lowance will depend on a company's investment

expenditure, and will be generated at 62.5 percent of that spend from April 1, 2015.

Th e Treasury expects these measures to increase oil production by around 15 percent by 2019, provide a 0.1 percent boost to gross domestic product by 2019/20, and drive GBP4bn of new investment over the next fi ve years.

According to Malcolm Webb, Chief Executive of industry association Oil & Gas UK, the Budget "lays the foundations of the regeneration of the UK North Sea."

"Th ese measures send exactly the right signal to in-vestors. Th ey properly refl ect the needs of this ma-turing oil and gas province and will allow the UK to compete internationally for investment," he said.

Oil & Gas UK estimates that in the near-term, an additional GBP4bn of capital investment would enable the development of 500m barrels of oil, which at today's prices would be worth GBP20bn.

Osborne also unveiled plans to ensure that banks "make a bigger contribution to the repair of our public fi nances." From April 1, 2015, the bank levy rate applying to short-term chargeable liabilities will go up from 0.156 percent to 0.21 percent. Th e rate for chargeable equity and long-term chargeable liabilities will rise from 0.078 percent to 0.105 per-cent. Th ese increases are expected to generate an

47

extra GBP900m a year. In addition, banks will no longer be able to deduct from corporation tax the compensation they make to customers for products they have mis-sold.

Responding to the announcement, Anthony Browne, Chief Executive of the British Bankers As-sociation, pointed out that banks in the UK already pay more than GBP40bn in taxes each year.

"Th e bank levy imposes a signifi cant cost on bank-ing businesses in the UK, which is making many banks move work and jobs to other parts of the world, and is deterring international banks from in-vesting in the UK. Th is major increase in the bank levy is likely to accelerate that process and damage the competitiveness of the UK economy. Th is will also further disadvantage UK-headquartered banks by increasing tax on their overseas activities, while their competitors in those markets do not pay this tax at all," Browne warned.

Andrew Hubbard, Tax Partner at law fi rm Baker Tilly, said that the banks had been "clobbered" in the Budget. John Cridland, Director-General of the Confederation of British Industry, stressed that "while it is right that banks should pay their fair share, banks like any business need consistency around their liabilities."

Matthew Barling, PwC Banking Partner, cautioned the Government that "the short-term benefi ts to the Treasury are perhaps understandable, but this could potentially be at the cost of the longer-term

growth and competitiveness of the UK as a global fi nancial center."

CIOT Criticizes UK's New 'Strict Liability' Tax Offense Th e Chartered Institute of Taxation (CIOT) has said the UK Government has taken its campaign against off shore tax evasion too far, after degrad-ing taxpayer rights with confi rmed plans for a new "strict liability" off ense for off shore tax evasion.

Th e CIOT said that, while it is generally strongly supportive of HM Revenue & Customs (HMRC's) eff orts to tackle tax evasion, it is opposed to the creation of a criminal off ense that will require no proof of intent.

In future, HMRC would only need to demon-strate that the income was taxable and unde-clared, rather than that tax was deliberately evad-ed, as under the current rules. Th e use of strict liability in criminal law is controversial; in some cases, taxpayers have been found liable even when they are not directly at fault, or where they have taken reasonable care to ensure compliance with the law.

Patrick Stevens, CIOT Tax Policy Director, com-mented: "Tax evasion is a serious crime. Th e Gov-ernment are right to have put additional resources into investigating and combating it. Th ere is al-ready tough legislation in this area, but if the Gov-ernment feel it needs strengthening further in par-ticular areas then it is reasonable of them to look at

48

how this can be done, and the CIOT will be happy to work with them on this."

"However any new measures should be based on sound legal principles. One of these is that in order to make a criminal conviction it should generally be required to show that the act was committed with criminal intent. Th e proposed strict liability off ense for failing to declare overseas income and gains fails this test. A taxpayer may fall within the ambit of the off ense without any intention or knowledge on their part."

"It is easy to see why this is attractive to the tax authorities. But UK and international taxation is a minefi eld of complexity and, while some tax-payers do actively seek to hide their income by intentionally failing to declare it, there are others who simply make mistakes in their fi nancial aff airs without intending to act wrongly. We cannot con-ceive that it would ever be reasonable for someone to be convicted, let alone imprisoned, for off shore tax evasion without guilt being proved beyond reasonable doubt."

"In light of our concerns, we look forward to en-gaging with HMRC on the further consultation that has been announced to consider appropriate defenses and thresholds. However, they will do nothing to change the fact that someone who has no intention to evade tax could still be liable to criminal sanctions, and we think this is wrong."

CBI Seeks Competitive Tax Regime From Next UK Gov't

Th e Confederation of British Industry (CBI) has said that the next UK government should publish a busi-ness tax roadmap within its fi rst 100 days in offi ce.

In "Best Foot Forward – the business plan for the fi rst 100 days," the CBI in particular calls for a new government to commit to ensuring that the UK has the most competitive corporation tax re-gime in the G20.

According to the CBI, an early statement con-fi rming the administration's commitment to the OECD's base erosion and profi t shifting project and setting out its policy priorities, ahead of the project's fi nal stages, would help clarify the UK's position on these reforms.

With legislation due to be passed to introduce the Diverted Profi ts Tax from April 1, 2015, its future, should power change hands in the May 7 election, will also be a key matter for businesses seeking cer-tainty from a new government.

Th e new government should also ensure that HM Revenue & Customs has suffi cient skills and re-sources to carry out its mandate, the CBI said, urg-ing that the department should be able to balance tackling abusive tax arrangements and helping grow-ing businesses to navigate the complex tax system.

49

Th e CBI has also said that "the broken business rates (property tax) system requires immediate attention because it has become too complex and outdated, and is an increasing burden on fi rms." Last week, the Coalition Government announced a long-awaited review of the regime in England, which is expected to be completed in time for Budget 2016.

Also on the CBI's wish list is an expansion of the research and development tax credit, along with changes to the capital allowance regime. It would like to see the new government target tax simplifi -cation measures and retain employer National In-surance contribution rates.

50

ISSUE 124 | MARCH 26, 2015NEWS ROUND-UP: INTERNATIONAL FINANCIAL CENTERS

DIFC Growth Shows No Signs Of Slowing

Th e Dubai International Financial Centre (DIFC), a free zone in the United Arab Emirates, reported on March 18, 2015, that the number of active registered companies operating within the zone increased 18 percent year-on-year to 1,225 in 2014.

Th e free zone said that 242 new companies received licenses last year, compared with 199 in 2013.

Of the 1,225 total active fi rms at the end of 2014, there were 362 fi nancial services fi rms, up 11 per-cent from 327 the previous year; 682 non-fi nancial services fi rms (additionally ten fi rms were provi-sionally approved at the end of 2014), up 21 per-cent from 565 non-fi nancial fi rms the previous year; and 171 retailers, up 18 percent from 145 re-tailers the previous year.

Th e total workforce rose 14 percent during 2014 to 17,860 people, up from 15,600 at the end of 2013. Th e number of net new jobs created in 2014 was 42 percent more than the net new jobs created in 2013.

Th e DIFC off ers a number of perks to fi rms estab-lished in the center, including zero percent income tax guaranteed for 50 years, 100 percent foreign ownership, and no exchange controls.

Hong Kong Pushes To Become IP Trading Hub

Hong Kong's Working Group on Intellectual Prop-erty (IP) Trading has released recommendations to further develop Hong Kong as an IP trading hub in the region.

Th e Chairman of the Working Group, the Secre-tary for Commerce and Economic Development, Gregory So, said that, "on the basis of a strategic framework formulated in late 2013, the Working Group has drawn up 28 recommended measures," which the Government has accepted for adoption.

Th e recommended measures fall under four strate-gic areas: enhancing the IP protection regime; sup-porting IP creation and exploitation; fostering IP intermediary services and manpower capacity; and pursuing promotion, education, and external col-laboration eff orts.

Various actions are underway, including legislative changes through the Copyright (Amendment) Bill 2014, which will strengthen IP protections and is being scrutinized by the Legislative Council. In ad-dition, legislative proposals are being developed to implement a revised patent system.

On fostering IP intermediary services, the Hong Kong Trade Development Council is to foster the growth of the region's largest online IP listings

51

portal, the Asia IP Exchange. To enhance Hong Kong's capabilities and connections, the portal will ally with 28 local and overseas strategic part-ners and will feature over 25,000 entries of trad-able IP rights.

Th e 2015/16 Budget also featured new measures in this area, including the launch of an IP Consulta-tion Service Scheme to provide free initial IP advice to small and medium-size enterprises.

To support IP creation and exploitation, the Work-ing Group recommended that the Government should continue to expand Hong Kong's network of double tax agreements with its major trading and investment partners to provide withholding tax re-lief for royalties; and should consider tax incentives for IP trading, notably the expansion of the present

tax deduction for capital expenditure incurred on the purchase of IP rights.

In addition, the Hong Kong Business Valuation Forum, an alliance formed by the Hong Kong In-stitute of Surveyors, the Royal Institution of Char-tered Surveyors, and the Hong Kong Society of Financial Analysts, has released a standard on the reporting of IP values.

Th e Vice Chairman of the Working Group, Andrew Liao, confi rmed he was "happy to see that some of the recommendations go to great lengths in ad-dressing issues such as promoting the use of arbi-tration and mediation to resolve IP disputes, given the unique strength and role of Hong Kong as both a premier IP trading hub and a leading center for dispute resolution in the region."

52

ISSUE 124 | MARCH 26, 2015NEWS ROUND-UP: INDIVIDUAL TAXATION

Canadian FTC To Benefi t Mid-High Income Earners

Canada's middle and middle-high income house-holds will benefi t most from the introduction of so-called "income splitting," according to a new report from the Parliamentary Budget Offi cer (PBO).

Last November, the Government announced that income splitting will be available from the 2014 tax year, enabling families to split up to CAD50,000 (USD39,051) of their income each year for tax purposes. Th e Family Tax Credit (FTC) provides a maximum CAD2,000 in tax relief for couples with children under the age of 18. It allows a "higher income spouse" to, in eff ect, transfer up to CAD50,000 of taxable income to a spouse in a lower income bracket for federal tax purposes.

A new report by the Offi ce of the PBO notes that FTC benefi ts around two million households (15 percent). Middle and middle-high income house-holds benefi t most because they are more likely to have a family income and income tax structure conducive to FTC gains.

Th e PBO found that the FTC eligibility rate for households in the bottom 20 percent of income earners is near zero. On the other hand, about 27 percent of households in the 80th percentile of in-come and above are expected to benefi t. Middle income households (in the fourth to sixth income

deciles) are likely to receive larger gains as a share of after-tax income.

Th e report also points out that in FTC-eligible fami-lies, primary earners predominantly work full-time hours and have a gross wage rate that is roughly dou-ble that of secondary earners. Th e highest per family gains are concentrated among those with high pri-mary incomes and relatively low secondary incomes.

Th e PBO estimates that the FTC will reduce gov-ernment revenues by about CAD2.2bn a year. It will have a negligible impact on provincial revenues.

Th e PBO projects that the FTC will result in a small net reduction in the labor supply of approximately 7,000 full-time equivalents (FTEs) and a CAD90m decline in labor income. However, these fi gures are relatively low, representing less than 0.04 percent of total labor hours across the economy and less than 0.01 percent of total employment income.

Austria To Overhaul Income Tax System Austria has announced proposals to provide per-sonal income tax cuts worth EUR5bn (USD5.3bn) to lower income earners.

Th e new tax package, which aims to boost economic growth by reducing the lowest income tax rate from 36.5 to 25 percent, will mean that lower income taxpayers will pay, on average, EUR1,000 less a year.

53

Th e Government plans to fi nance the reform by tackling non-compliance, closing tax loopholes, and raising the top income tax rate to 55 percent. Th e 10 percent reduced rate of value-added tax, which is applied broadly, would also be raised to 13 percent.

Austria also intends to raise property tax, and an in-crease in tax on dividends income is being considered.

Th e reforms may be adapted before they are passed, as the Government will require support from op-position parties to achieve a two-thirds majority needed to pass required constitutional reforms. Th e reforms, if enacted, would come into force in 2016.

US House Looks At Death Tax Repeal Th e burden that the estate tax places on family busi-nesses and farms was the subject of a recent hear-ing of the US House of Representatives Ways and Means Subcommittee on Select Revenue Measures.

Until 2012, above a USD5m cap, estates paid a 35 percent estate tax, more commonly known as the "death tax." Th e tax was scheduled to revert in 2013 to 2001 tax law, with a USD1m exemption and a 55 percent tax rate, but the enactment of the American Taxpayer Relief Act indexed its USD5m exemption for infl ation and set a 40 percent tax rate.

In his opening statement, Subcommittee Chairman Dave Reichert (R – Washington) said "family busi-ness owners and farmers work hard for their entire lives with the goal of passing on the fruits of their

labor, but face the sometimes insurmountable hur-dle of the death tax. And in addition to the actual tax liability the death tax imposes, merely planning for it – regardless of whether these businesspeople and farmers end up owing it – is yet another challenge."

He congratulated Kevin Brady (R – Texas), a se-nior member of the Ways and Means Committee, on introducing the Death Tax Repeal Act of 2015, to which Reichert is a co-sponsor. "I thank Kevin Brady for his work to provide much needed perma-nent relief to families across the country, by [seeking to repeal] the death tax once and for all," he said.

Participating in the hearing, Brady added that "this tax is not about reducing income inequality. Because it's not the super-rich that pay this tax. No, it's the small business owner whose assets are tied up in buildings, machines, and property that pays the estate tax. It's his or her spouse and chil-dren that have to sell that business he built to pay Uncle Sam."

He called the death tax "an immoral tax," adding that "it disproportionately aff ects small businesses and start-ups. Th e tax burden on these business owners is already too high during their lifetime – most pay a marginal tax rate over 50 percent. And then when they die, the federal Government swoops into the funeral home and takes another 40 percent of those assets."

Opponents to the Bill point out that the death tax aff ects relatively few families, especially after the

54

exemption amount was raised to USD5m in 2010. Th e Subcommittee's Ranking Member, Rich-ard Neal (D – Massachusetts), had concerns that, "while our nation's farmers and small businesses have legitimate concerns about the estate tax, it is my hope that they are not being used to end the estate tax for our nation's wealthiest."

He pointed out that an inheritance tax has "long been recognized as a legitimate way to fund gov-ernment operations and prevent concentrations of wealth," and that the Tax Policy Center (TPC) recently revealed that "only 20 small business and farm estates nationwide owed any estate tax in 2013. Furthermore, TPC estimate those 20 es-tates owed just 4.9 percent of their value in tax, on average."

In a report in September last year, the Heritage Foun-dation confi rmed that it raises only tiny amounts of revenue for the federal Government, and said in-creased jobs and growth would arise from cancel-ing the death tax. It estimated that the repeal of "the federal estate tax (and related gift taxes) would

boost US economic growth by more than USD-46bn over the next ten years and generate an aver-age of 18,000 private-sector jobs annually."

In a recent study, the Tax Foundation also found that, "as estate taxes become narrow-based, mea-ger revenue sources, with high administrative costs, repeal becomes a strong option. Th irteen OECD countries or jurisdictions have repealed their estate or inheritance taxes since 2000."

It noted that US estate tax receipts have declined signifi cantly over the last 15 years, from USD38bn in 2001 to an estimated USD20bn in 2015. By its calculations, repeal of the tax "would gradually in-crease the US capital stock by 2.2 percent, boost gross domestic product, create 139,000 jobs, and eventually increase federal revenue."

Following the hearing, it is now expected that the Ways and Means Committee will move to a mark-up of the Death Tax Repeal Act, and the House will then pass it, contrary to the wishes of President Barack Obama.

55

TAX TREATY ROUND-UP ISSUE 124 | MARCH 26, 2015

AUSTRALIA - SWITZERLAND

Signature Australia and Switzerland signed a TIEA to auto-matically exchange tax data from 2018 on March 3, 2015.

BELARUS - MALAYSIA

Initialed

According to a report from Belarus's state news agency on March 17, 2015, Belarus and Malaysia have newly initialed a DTA.

GUERNSEY - SWAZILAND

Into Force

Th e TIEA between Guernsey and Swaziland en-tered into force on March 12, 2015.

HUNGARY - LUXEMBOURG

Signature

Hungary and Luxembourg signed a DTA on March 10, 2015.

ITALY - GUERNSEY

Into Force

Th e TIEA between Italy and Guernsey entered into force on March 5, 2015, following the completion of Italy's domestic ratifi cation procedures.

ITALY - MONACO

Signature

Italy and Monaco signed a TIEA on March 2, 2015.

MALAYSIA - GEORGIA

Negotiations

According to preliminary media reports, Malaysia and Georgia are engaged in negotiations towards a DTA, which is expected to be signed by the end of the year.

PAKISTAN - AUSTRIA

Signature

Pakistan and Austria signed an additional Protocol to amend their DTA on March 17, 2015.

56

PORTUGAL - GEORGIA

Ratifi ed

Portugal published Decree 24 of 2015 in its Offi -cial Gazette on March 5, 2015, ratifying the DTA signed with Georgia.

RUSSIA - CHINA

Negotiations

Th e Russian Government confi rmed on March 18, 2015, that it has agreed to sign a Protocol with China to amend their DTA.

57

CONFERENCE CALENDAR

A guide to the next few weeks of international tax gab-fests (we're just jealous - stuck in the offi ce).

ISSUE 124 | MARCH 26, 2015

THE AMERICAS

TAX PLANNING FOR DOMESTIC & FOREIGN PARTNERSHIPS 2015 CHICAGO

PLI

Venue: Skadden, Arps, Slate, Meagher & Flom LLP, 155 N. Wacker Drive, Suite 3500, Chicago, IL 60606-1420, USA

Co Chairs: Stephen D. Rose (Munger, Tolles & Ol-son LLP), Eric B. Sloan (Deloitte Tax LLP), Clif-ford M. Warren (Internal Revenue Service)

4/28/2015 - 4/30/2015

http://www.pli.edu/Content/Seminar/Tax_Plan-ning_for_Domestic_Foreign_Partnerships/_/N-4kZ1z129zc?ID=223947

US INTERNATIONAL TAX COMPLIANCE WORKSHOP

BNA

Venue: Bloomberg BNA, 1801 South Bell Street, Arlington, VA 22202, USA

Key Speakers: Jon Brian Davis (Ivins Phillips & Barker Chtd), Adam Halpern (Fenwick & West LLP), Matthew Harrison (PwC LLP), Meg Hogan (KPMG LLP), Josh Kaplan (KPMG LLP), among numerous others

5/4/2015 - 5/5/2015

http://www.bna.com/uploadedFiles/BNA_V2/Professional_Education/Tax/Live_Conferences/In-tlTaxWorkshopDynamicsEPMay2015.pdf

US TAX ASPECTS OF INTERNATIONAL SHIPPING

BNA

Venue: Mayer Brown LLP, 1999 K Street NW, Washington, DC 20006, USA

Chair: Kenneth Klein (Mayer Brown LLP)

5/4/2015 - 5/5/2015

http://www.bna.com/uploadedFiles/BNA_V2/Professional_Education/Tax/Live_Conferences/ShippingMay2015.pdf

58

TAX PLANNING FOR DOMESTIC & FOREIGN PARTNERSHIPS 2015 NEW YORK

PLI

Venue: Th e Roosevelt Hotel, 45 East 45th Street, New York, NY 10017, USA

Co Chairs: Stephen D. Rose (Munger, Tolles & Ol-son LLP), Eric B. Sloan (Deloitte Tax LLP), Clif-ford M. Warren (Internal Revenue Service)

5/12/2015 - 5/14/2015

http://www.pli.edu/Content/Seminar/Tax_Plan-ning_for_Domestic_Foreign_Partnerships/_/N-4kZ1z129zc?ID=223947

INTERMEDIATE US INTERNATIONAL TAX UPDATE NEW YORK

Bloomberg BNA

Venue: Morgan Lewis, 101 Park Avenue #40, New York, NY 10178, USA

Key Speakers: TBC

5/20/2015 - 5/22/2015

http://www.bna.com/inter2015_NYC/

4TH CROSS BORDER PERSONAL TAX PLANNING

Federated Press

Venue: Courtyard by Marriott Downtown To-ronto, 475 Yonge Street, Toronto, Ontario M4Y 1X7, Canada

Chairs: Jonathan Garbutt (Dominion Tax Law), Martin J. Rochwerg (Miller Th omson LLP)

5/26/2015 - 5/27/2015

http://www.federatedpress.com/pdf/HGLegal/CBP1505-E.pdf

TAX PLANNING FOR DOMESTIC & FOREIGN PARTNERSHIPS 2015 SAN FRANCISCO

PLI

Venue: PLI California Center, 685 Market Street, San Francisco, California 94105, USA

Co Chairs: Stephen D. Rose (Munger, Tolles & Ol-son LLP), Eric B. Sloan (Deloitte Tax LLP), Clif-ford M. Warren (Internal Revenue Service)

6/9/2015 - 6/11/2015

http://www.pli.edu/Content/Seminar/Tax_Plan-ning_for_Domestic_Foreign_Partnerships/_/N-4kZ1z129zc?ID=223947

59

14TH ANNUAL INTERNATIONAL MERGERS AND ACQUISITIONS CONFERENCE

International Bar Association

Venue: Waldorf Astoria New York, New York, NY 10022, USA

Key Speakers: TBC

6/10/2015 - 6/11/2015

http://www.ibanet.org/Article/Detail.aspx?ArticleUid=7ca03d57-41c9-44ba-b1a4-7434572160e9

GLOBAL TRANSFER PRICING CONFERENCE

BNA

Venue: Fairfax Embassy Row, 2100 Massachusetts Avenue Northwest, Washington, DC 20008, USA

Key Speakers: TBC

6/11/2015 - 6/12/2015

http://go.bna.com/transfer-pricing-conference-primer/

INTRODUCTION TO US INTERNATIONAL TAX BOSTON

Bloomberg BNA

Venue: Morgan Lewis, 225 Franklin Street, Boston, MA 02110, USA

Chair: TBC

6/15/2015 - 6/16/2015

http://www.bna.com/intro2015_boston/

US INTERNATIONAL TAX COMPLIANCE WORKSHOP

BNA

Venue: Manchester Grand Hyatt, One Market Place, San Diego, CA 92101, USA

Key Speakers: TBC

6/15/2015 - 6/16/2015

http://www.bna.com/compliance_sd/

INTERMEDIATE US INTERNATIONAL TAX UPDATE BOSTON

Bloomberg BNA

Venue: Morgan Lewis, 225 Franklin Street, Boston, MA 02110, USA

Key Speakers: TBC

6/17/2015 - 6/19/2015

http://www.bna.com/inter2015_boston/ 60

BASICS OF INTERNATIONAL TAXATION 2015 PLI

Venue: PLI New York Center, 1177 Avenue of the Americas, New York 10036, USA

Chairs: Linda E. Carlisle (Miller & Chevalier Char-tered), John L. Harrington (Dentons US LLP)

7/21/2015 - 7/22/2015

http://www.pli.edu/Content/Seminar/Basics_of_International_Taxation_2015/_/N-4kZ1z129zs?ID=223955

INTERNATIONAL TAX ISSUES 2015 CHICAGO

Practicing Law Institute

Venue: University of Chicago Gleacher Center, 450 N. Cityfront Plaza Drive, Chicago, Il 60611, USA

Chair: Lowell D. Yoder (McDermott Will & Em-ery LLP)

9/9/2015 - 9/9/2015

ht tp://www.pl i .edu/Content/Seminar/In-ternat ional_Tax_Issues_2015/_/N-4kZ1z12a24?ID=223915

BASICS OF INTERNATIONAL TAXATION 2015 PLI

Venue: PLI California Center, 685 Market Street, San Francisco, California 94105, USA

Chairs: Linda E. Carlisle (Miller & Chevalier Char-tered), John L. Harrington (Dentons US LLP)

9/28/2015 - 9/29/2015

http://www.pli.edu/Content/Seminar/Basics_of_International_Taxation_2015/_/N-4kZ1z129zs?ID=223955

ASIA PACIFIC

INTERNATIONAL CORPORATE TAX PLANNING ASPECTS

IBFD

Venue: Conrad Centennial Singapore, Two Temas-ek Boulevard, 038982 Singapore

Key Speakers: Chris Finnerty (ITS), Julian Wong (Ernst & Young), Tom Toryanik (RBS)

4/20/2015 - 4/22/2015

http://www.ibfd.org/Training/International-Corporate-Tax-Planning-Aspects-0

61

THE 6TH OFFSHORE INVESTMENT CONFERENCE HONG KONG 2015 Off shore Investment

Venue: Conrad Hong Kong Hotel, One Pacifi c Place, Pacifi c Place, 88 Queensway, Hong Kong

Chair: Michael Olesnicky (KPMG China)

6/17/2015 - 6/18/2015

http://www.off shoreinvestment.com/pages/index.asp?title=Th e_Off shore_Investment_Conference_Hong_Kong&catID=12190

WESTERN EUROPE

SPRING RESIDENTIAL CONFERENCE 2015

Chartered Institute of Taxation

Venue: Queens' College, Silver Street, Cambridge CB3 9ET, UK

Chair: Chris Jones (Chartered Institute of Taxation)

3/27/2015 - 3/29/2015

http://www.tax.org.uk/Resources/CIOT/Docu-ments/2014/11/v4Spring%20Conference%202015%20-%20brochure.pdf

GLOBAL TRANSFER PRICING CONFERENCE Bloomberg BNA

Venue: Westin Paris Vendome, 3 Rue de Casti-glione, 75001 Paris, France

Chairs: Pascal Saint Amans (OECD), Michael Len-nard (U.N. Dept. of Economic and Social Aff airs), Heinz Zourek (Taxation and Customs, European Commission)

3/30/2015 - 3/31/2015

http://www.bna.com/globalconference-paris/

INTERNATIONAL TAX ASPECTS OF MERGERS, ACQUISITIONS AND CORPORATE FINANCE

IBFD

Venue: IBFD head offi ce, Rietlandpark 301, 1019 DW Amsterdam, Th e Netherlands

Key Speakers: Jan-Pieter Van Niekerk, Daan Aardse (KPMG), Rens Bondrager (Allen & Overy LLP), Marcello Distaso (Van Campen Liem), Piet Boonstra (Van Campen Liem), Paulus Merks (DLA Piper LLP)

3/30/2015 - 4/1/2015

http://www.ibfd.org/Training/International-Tax-Aspects-Mergers-Acquisitions-and-Corporate-Finance

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GLOBAL TAX POLICY CONFERENCE

Maastricht University

Venue: Royal Netherlands Academy of Arts and Sciences, Kloveniersburgwal 29, 1011 JV Amster-dam, Netherlands

Chair: Prof. Dr. Hans van den Hurk (Maastricht University)

4/9/2015 - 4/9/2015

http://www.ibfd.org/sites/ibfd.org/files/content/p d f / I N V I TAT I O N - G l o b a l - Ta x - Po l i c y -Conference-2015.pdf

15TH ANNUAL TAX PLANNING STRATEGIES US AND EUROPE

American Bar Association

Venue: Hotel Bayerischer Hof, Promenadeplatz 2-6 80333 Munich, Germany

Chairs: Carol P. Tello (Sutherland Asbill & Brennan LLP), Pia Dorfmueller (P+P Pöllath + Partners)

4/15/2015 - 4/17/2015

http://www.ifcreview.com/eventsfull .aspx?eventId=242

STEP TAX, TRUSTS & ESTATES CONFERENCE 2015 EXETER

STEP

Venue: Sandy Park Conference & Banqueting Cen-tre, Sandy Park Way, Exeter, Devon, EX2 7NN, UK

Key Speakers: Helen Clarke, George Hodgson (STEP), Helen Jones (BDO LLP), Lesley King (LK Law Ltd), Lucy Obrey (Higgs and Sons), Peter Rayney (Peter Rayney Tax Consulting Ltd), Chris Whitehouse (5 Stone Buildings).

4/16/2015 - 4/16/2015

http://www.step.org/tax-trusts-estates-step-conference-2015

PRINCIPLES OF INTERNATIONAL TAXATION

IBFD

Venue: IBFD head offi ce, Rietlandpark 301, 1019 DW Amsterdam, Th e Netherlands

Key Speakers: Laura Ambagtsheer-Pakarinen (IBFD), Roberto Bernales (IBFD), Piet Boon-stra (Van Campen Liem), Marcello Distaso (Van Campen Liem), Carlos Gutiérrez (IBFD)

4/20/2015 - 4/24/2015

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http://www.ibfd.org/Training/Principles-International-Taxation-1

DIVERTED PROFITS TAX

IBC

Venue: Millennium Hotel London Knightsbridge, 17 Sloane Street, Knightsbridge, London, SW1X 9NU, UK

Key Speakers: Philip Baker QC (Field Court Tax Chambers), Timothy Lyons QC (39 Essex Street), Steve Edge (Slaughter and May), Jonathan Schwarz (Temple Tax Chambers), among numerous others.

4/21/2015 - 4/21/2015

h t t p : / / w w w. i i r i b c f i n a n c e . c o m / e v e n t /Diverted-Profi ts-Tax-Conference

PRIVATE WEALTH CYPRUS 2015

IBC

Venue: Four Seasons Hotel, Limassol, 3313, Cyprus

Speakers: Andrew Terry (Withers), Rose Carey (Charles Russell Speechlys), Th eo Parperis (PwC Cyprus), Celia Pourgoura (CA Advocates), among numerous others

4/22/2015 - 4/23/2015

http://www.iiribcfinance.com/event/Private-Wealth-Cyprus-Conference

INTERNATIONAL BUSINESS TAXATION: INCREASING TRANSPARENCY

ERA

Venue: ERA Conference Centre, Metzer Allee 4, Trier, Germany

Key Speakers: Raquel Guevera (MNKS), Howard M. Liebman (Jones Day), Prof. Jacques Malher-be (Liedekerke Wolters Waelbroeck Kirkpatrick), Alain Steichen (Bonn Steichen & Partners)

4/23/2015 - 4/24/2015

https://www.era.int/upload/dokumente/16950.pdf

STEP TAX, TRUSTS & ESTATES CONFERENCE 2015 BIRMINGHAM

STEP

Venue: Crowne Plaza Birmingham City Centre, Central Square, Birmingham, B1 1HH, UK

Key Speakers: Helen Clarke, George Hodgson (STEP), Helen Jones (BDO LLP), Lesley King (LK Law Ltd), Lucy Obrey (Higgs and Sons), Peter Rayney (Peter Rayney Tax Consulting Ltd), Chris Whitehouse (5 Stone Buildings).

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4/24/2015 - 4/24/2015

http://www.step.org/tax-trusts-estates-step-conference-2015

STEP TAX, TRUSTS & ESTATES CONFERENCE 2015 LEEDS

STEP

Venue: Hilton Leeds City, Neville Street, Leeds, LS1 4BX, UK

Key Speakers: Helen Clarke, George Hodgson (STEP), Helen Jones (BDO LLP), Lesley King (LK Law Ltd), Lucy Obrey (Higgs and Sons), Peter Rayney (Peter Rayney Tax Consulting Ltd), Chris Whitehouse (5 Stone Buildings).

4/29/2015 - 4/29/2015

http://www.step.org/tax-trusts-estates-step-conference-2015

STEP TAX, TRUSTS & ESTATES CONFERENCE 2015 LONDON

STEP

Venue: Th e Queen Elizabeth II Conference Centre, Broad Sanctuary, London, SW1P 3EE, UK

Key Speakers: Helen Clarke, George Hodgson (STEP), Helen Jones (BDO LLP), Lesley King (LK Law Ltd), Lucy Obrey (Higgs and Sons), Peter

Rayney (Peter Rayney Tax Consulting Ltd), Chris Whitehouse (5 Stone Buildings).

5/8/2015 - 5/8/2015

http://www.step.org/tax-trusts-estates-step-conference-2015

INTERNATIONAL TAXATION OF ECOMMERCE

IBFD

Venue: IBFD head offi ce, Rietlandpark 301, 1019 DW Amsterdam, Th e Netherlands

Key Speakers: Bart Kosters (IBFD), Tamas Kulcsar (IBFD)

5/11/2015 - 5/13/2015

http://www.ibfd.org/Training/International-Taxation-e-Commerce#tab_program

INTERNATIONAL CROSS BORDER ESTATE PLANNING

IBC

Venue: Grange Tower Bridge Hotel, 45 Prescott Street, London, Greater London, E1 8GP, UK

Key Speakers: Steven Kempster (Withers), Michael Wells-Greco (Speechly Bircham), Dominic Law-rence (Speechly Bircham), Edward Stone (Collas

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Crill), Jon Edmondson (Mourant Ozannes), Rich-ard Dew (Ten Old Square), among numerous others.

5/15/2015 - 5/15/2015

http://www.iiribcfi nance.com/event/International-Cross-Border-Estate-Planning

ESTATE & TAX PLANNING FOR THE US CITIZEN IN THE UK

IBC

Venue: Crowne Plaza London - Th e City, 19 New Bridge St, London, EC4V 6BD, UK

Key Speakers: Kehrela Hodkinson (Hodkinson Law Group), Christopher Horton (Deloitte), Suzanne Reisman (Law Offi ces of Suzanne Reisman), Peter Cotorceanu (Anaford), among numerous others

5/19/2015 - 5/21/2015

http://www.iiribcfinance.com/event/US-UK-Estate-Planning

PRINCIPLES OF INTERNATIONAL TAX PLANNING

IBFD

Venue: IBFD head offi ce, Rietlandpark 301, 1019 DW Amsterdam, Th e Netherlands

Chair: Boyke Baldewsing (IBFD)

6/1/2015 - 6/5/2015

http://www.ibfd.org/Training/Principles-International-Tax-Planning-0

THE INTERNATIONAL TAX PLANNING ASSOCIATION 40TH ANNIVERSARY CONFERENCE

ITPA

Venue: Sofi tel Legend Th e Grand Amsterdam, Ou-dezijds Voorburgwal 197, 1012 EX Amsterdam, Netherlands

Chair: Milton Grundy

6/7/2015 - 6/9/2015

https://www.itpa.org/?page_id=9907

INTERNATIONAL TAXATION OF EXPATRIATES

IBFD

Venue: IBFD head offi ce, Rietlandpark 301, 1019 DW Amsterdam, Th e Netherlands

Key Speakers: Bart Kosters (IBFD)

6/10/2015 - 6/12/2015

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http://www.ibfd.org/Training/International-Taxation-Expatriates

TAX FOR OFFSHORE SHIPPING

Informa

Venue: Bonhill House, 1-3 Bonhill Street, London, EC2A 4BX, UK

Key Speakers: Harrie van Duin (KPMG Meijburg), Dorte Cock (EY), Jurjen Bevers (Baker & McKen-zie), Gavin Stoddart (Moore Stephens CIS), among numerous others

6/16/2015 - 6/17/2015

http://www.lloydsmaritimeacademy.com/event/off shoretax

INTERNATIONAL TAX ASPECTS OF PERMANENT ESTABLISHMENTS

IBFD

Venue: IBFD head offi ce, Rietlandpark 301, 1019 DW Amsterdam, Th e Netherlands

Key Speakers: Andreas Perdelwitz (IBFD), Bart Kosters (IBFD), Hans Pijl, Roberto Bernales (IBFD), Walter van der Corput (IBFD), Madalina Cotrut (IBFD), Jan de Goede (IBFD)

6/16/2015 - 6/19/2015

http://www.ibfd.org/Training/International-Tax-Aspects-Permanent-Establishments

TAX PLANNING WORKSHOP

IBFD

Venue: IBFD head offi ce, Rietlandpark 301, 1019 DW Amsterdam, Th e Netherlands

Key Speakers: Shee Boon Law (IBFD), Tamas Kulcsar (IBFD), Boyke Baldewsing (IBFD), Carlos Gutiérrez (IBFD)

7/2/2015 - 7/3/2015

http://www.ibfd.org/Training/Tax-Planning-Workshop

UPDATE FOR THE ACCOUNTANT IN INDUSTRY AND COMMERCE LONDON

CCH

Venue: Sofi tel St James Hotel, 6 Waterloo Place, London SW1Y 4AN, UK

Key Speakers: Toni Trevett, Dr. Stephen Hill, Kevin Bounds, among others.

7/8/2015 - 7/9/2015

https://www.cch.co.uk/AIC

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INTERNATIONAL TAX SUMMER SCHOOL

IIR & IBC Financial Events

Venue: Gonville & Caius College, Trinity St, Cam-bridge, CB2 1TA, UK

Key Speakers: Timothy Lyons QC (39 Essex Street), Peter Adriaansen (Loyens & Loeff ), Julie Hao (EY), Heather Self (Pinsent Masons), Jonathan Schwarz (Temple Tax Chambers), among numerous others

8/18/2015 - 8/20/2015

http://www.iiribcfi nance.com/event/International-Tax-Summer-School-2015

DUETS ON INTERNATIONAL TAXATION: GLOBAL TAX TREATY ANALYSIS

IBFD

Venue: IBFD Head Offi ce Auditorium, Rietland-park 301,1019 DW Amsterdam, Th e Netherlands

Key Speakers: Richard Vann, Pasquale Pistone, Marjaana Helminen, Peter Harris, Adolfo Martin Jimenez, Scott Wilkie

9/7/2015 - 9/7/2015

http://www.ibfd.org/IBFD-Tax-Portal/Events/Duets-International-Taxation-Global-Tax-Treaty-Analysis-1#tab_program

UPDATE FOR THE ACCOUNTANT IN INDUSTRY AND COMMERCE BRISTOL

CCH

Venue: Aztec Hotel and Spa, Aztec West, Almonds-bury, Bristol, South Gloucestershire BS32 4TS, UK

Key Speakers: Toni Trevett, Dr. Stephen Hill, Kevin Bounds, among others.

9/9/2015 - 9/10/2015

https://www.cch.co.uk/AIC

UPDATE FOR THE ACCOUNTANT IN INDUSTRY AND COMMERCE MILTON KEYNES

CCH

Venue: Mercure Abbey Hill Hotel, Th e Approach, Milton Keynes MK8 8LY, UK

Key Speakers: Toni Trevett, Dr. Stephen Hill, Kevin Bounds, among others.

9/15/2015 - 9/16/2015

https://www.cch.co.uk/AIC

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INTERNATIONAL TAXATION OF BANKS AND FINANCIAL INSTITUTIONS

IBFD

Venue: IBFD head offi ce, Rietlandpark 301, 1019 DW Amsterdam, Th e Netherlands

Key Speakers: Ronald Aw-Yong (Beaulieu Capital), Peter Drijkoningen (French BNP Paribas bank), Francesco Mantegazza (Pirola Pennuto Zei & As-sociati), Omar Moerer (Baker & McKenzie), Pedro Paraguay (NautaDutilh), Nico Blom (NautaDutilh)

9/16/2015 - 9/18/2015

http://www.ibfd.org/Training/International-Taxation-Banks-and-Financial-Institutions

UPDATE FOR THE ACCOUNTANT IN INDUSTRY AND COMMERCE MANCHESTER

CCH

Venue: Radisson Blu Hotel Manchester, Chicago Avenue, Manchester, M90 3RA, UK

Key Speakers: Toni Trevett, Dr. Stephen Hill, Kevin Bounds, among numerous others

9/22/2015 - 9/23/2015

https://www.cch.co.uk/AIC

UPDATE FOR THE ACCOUNTANT IN INDUSTRY AND COMMERCE OXFORD

CCH

Venue: Oxford Th ames Four Pillars Hotel, Henley Road, Sandford-on-Th ames, Sandford on Th ames, Oxfordshire OX4 4GX, UK

Key Speakers: Toni Trevett, Dr. Stephen Hill, Kevin Bounds, among numerous others

10/6/2015 - 10/7/2015

https://www.cch.co.uk/AIC

INTERNATIONAL TAX STRUCTURING FOR MULTINATIONAL ENTERPRISES

IBFD

Venue: IBFD head offi ce, Rietlandpark 301, 1019 DW Amsterdam, Th e Netherlands

Key Speakers: Boyke Baldewsing (IBFD), Tamas Kulcsar (IBFD)

10/21/2015 - 10/23/2015

http://www.ibfd.org/Training/International-Tax-Structuring-Multinational-Enterprises#tab_program

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IN THE COURTS

A listing of key international tax cases in the last 30 days

ISSUE 124 | MARCH 26, 2015

THE AMERICAS

United States Th e US Fifth Circuit Court of Appeals has ruled against a decision by the Commissioner of Internal Revenue to partially disallow BMC Software, Inc.'s (BMC's) repatriated dividends tax deduction un-der 26 USC Section 965(b)(3) .

Section 965 of the USC permits a one-time tax de-duction of 85 percent of certain dividends paid by an overseas subsidiary to its US-based parent. Sec-tion 965(b)(3) provides that the amount of repatri-ated dividends otherwise eligible for a dividends-received deduction must be reduced by the amount of any increase in related-party "indebtedness" within a specifi ed testing period.

Th e Commissioner had based its decision on the ground that subsequently created accounts re-ceivable constituted "indebtedness" and reduced BMC's eligibility for the deduction.

In the 2006 tax year, BMC decided to take a Sec-tion 965 deduction by repatriating USD721m from its wholly owned foreign subsidiary, BMC Software European Holding (BSEH), via a cash dividend. Of this sum, roughly USD709m quali-fi ed for the Section 965 dividends-received deduc-tion, which permitted BMC to deduct 85 percent of that amount, USD603m, from its taxable in-come on its 2006 tax return.

Th e Court said BMC accurately reported no re-lated-party indebtedness on its 2006 tax return. Th erefore, neither party disputed that, at the time BSEH paid its USD721m cash dividend to BMC, the Section 965(b)(3) related-party indebtedness exception had no relevance or eff ect.

Th en, in a matter completely unrelated to the repa-triation under Section 965 , BMC and the Commis-sioner signed a transfer pricing closing agreement in 2007 to correct BMC's net overpayment for royalties from its foreign subsidiary, BSEH. In this agreement, BMC agreed to a primary adjustment for each tax year from 2003 to 2006, increasing its

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taxable income by approximately USD102m in to-tal. Because the USD102m BMC had "overpaid" BSEH remained in the cash accounts of BSEH, BMC was also required to make secondary adjust-ments to conform its books and records to refl ect that fact.

Under one of two available options under IRS Reve-nue Procedure 99-32 , BMC treated the USD102m "overpayment" to BSEH as a series of interest-bear-ing accounts receivable, one for each tax year, rath-er than a capital contribution. BMC's stated goal was to put the company in the same place that it would have occupied had the primary adjustments been refl ected on its original tax returns. BMC and the Commissioner then executed another closing agreement to execute the secondary adjustment, ef-fective as of September 25, 2007 (the 99-32 Clos-ing Agreement).

Th e 99-32 Closing Agreement created two accounts receivable, established on November 27, 2007, and payable from BSEH to BMC, with deemed estab-lishment dates of March 31, 2005 and March 31, 2006. Th e parties also agreed that when BSEH paid off the newly created accounts receivable, such pay-ment would be "free of the federal income tax con-sequences of the secondary adjustments that would otherwise result from the primary adjustment."

In 2011, four years after the execution of the 99-32 Closing Agreement, the Commissioner issued to BMC a notice of tax defi ciency in the amount of approximately USD13m for the 2006 tax year.

Th e Commissioner asserted that the accounts re-ceivable which BMC established pursuant to the 99-32 Closing Agreement constituted related-party indebtedness between BMC and BSEH during the relevant Section 965(b)(3) testing pe-riod, thereby reducing BMC's eligibility for the Section 965 deduction.

However, the Court ruled that the text of the legis-lation does not warrant treating the accounts receiv-able as "indebtedness," given that Section 965(b)(3) specifi cally requires that the determination of the fi nal amount of "indebtedness" be made as of the close of the taxable year for which the election under Section 965 is in eff ect. "Here, the relevant taxable year is 2006, and the close of that taxable year occurred on March 31, 2006. So the relevant testing period ended on March 31, 2006," the Court said.

Th e Court noted the Commissioner had made much of the fact that, in the 99-32 Closing Agreement, BMC agreed to backdate the accounts receivable. Th e Court said this is an incorrect interpretation of the testing period requirements of Section 965 :

"Th e fact that the accounts receivable are backdated does nothing to alter the reality that they did not exist during the testing peri-od. Even assuming arguendo that a correction of a prior year's accounts could create indebt-edness for purposes of Section 965(b)(3) , that is not what happened in this case. Th is is not a situation in which a subsequent adjustment

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was made in order to accurately refl ect what actually happened in the taxable year ending on March 31, 2006. Rather, with the second-ary adjustments, BMC agreed to create pre-viously non-existent accounts receivable with fi ctional establishment dates for the purpose of calculating accrued interest and correcting the imbalance in its cash accounts that result-ed from the primary adjustment."

In respect of this point, it concluded:

"Th e text of Section 965(b)(3) requires that, to reduce the allowable deduction, there must have been indebtedness 'as of the close of' the applicable taxable year. Because the accounts receivable were not created until 2007, BMC's Section 965 deduction cannot be reduced under Section 965(b)(3) ."

Th e judgment was delivered on March 13, 2015.

http://www.ca5.uscourts .gov/opinions%5Cpub%5C13/13-60684-CV0.pdf

Fifth Circuit Court Of Appeals: BMC Software v. Commissioner (No. 13-60684)

United States In Alabama Department of Revenue et al v. CSX Transportation, Inc. , the Supreme Court was asked to decide whether a State violated the Railroad Re-vitalization and Regulation Reform Act of 1976 by taxing diesel fuel purchases made by a rail carrier

while exempting similar purchases made by its com-petitors; and if so, whether the violation is eliminat-ed when other tax provisions off set the challenged treatment of railroads.

Alabama imposes sales and use taxes on railroads when they purchase or consume diesel fuel, nor-mally at a rate of 4 percent, but exempts from those taxes trucking transport companies (motor carri-ers) and companies that transport goods interstate through navigable waters (water carriers) – both railroad competitors. Motor carriers pay an alterna-tive fuel-excise tax on diesel, of 19 cents per gallon, but water carriers pay neither the sales tax nor the excise tax.

Th e respondent, CSX, an interstate rail carrier that operates in Alabama, sought to enjoin state offi cers from collecting sales tax on its diesel fuel purchases, claiming that the State's asymmetrical tax treatment "discriminates against a rail carrier" in violation of the Act.

In its earlier ruling on the dispute, CSX Transp. v. Alabama Dept. of Revenue (562 U.S. 277, 287), the Supreme Court held that a tax "discriminates" under sub section 11501(b)(4) of that Act when it treats "groups [that] are similarly situated" diff er-ently without suffi cient "justifi cation for the diff er-ence in treatment."

On remand, the District Court rejected CSX's claim. Reversing, the US Court of Appeals for the Eleventh Circuit held that CSX could establish

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discrimination by showing that Alabama taxed rail carriers diff erently than their competitors, and re-jected Alabama's argument that imposing a fuel-excise tax on motor carriers, but not rail carriers, justifi ed imposing the sales tax on rail carriers, but not motor carriers.

According to the Supreme Court, the Eleventh Circuit properly concluded that motor carriers, as CSX's competition, are an appropriate comparison class for its sub section 11501(b)(4) claim.

However, it said that the Eleventh Circuit erred in refusing to consider whether Alabama could justify its decision to exempt motor carriers from its sales and use taxes through its decision to subject motor carriers to a fuel excise tax.

For instance, the Supreme Court said it does not accord with ordinary English usage to say that a tax discriminates against a rail carrier if a rival who is exempt from that tax must pay another compa-rable tax from which the rail carrier is exempt, since both competitors could then claim to be discrimi-nated against relative to each other. "An alternative, roughly equivalent tax is one possible justifi cation that renders a tax disparity non-discriminatory," the Court said. "We think Alabama can justify its decision to exempt motor carriers from its sales and use tax through its decision to subject motor carri-ers to a fuel-excise tax," it said.

Th e matter of whether the exemption of water car-riers from both taxes is suffi ciently justifi ed under

federal law was left for the Eleventh Circuit Court to determine.

Th is judgment was delivered on March 4, 2015.

http://www.supremecourt.gov/opinions/14pdf/13-553_1b82.pdf

US Supreme Court: Alabama Dept. of Revenue et al v. CSX Transportation, Inc.

WESTERN EUROPE

Czech Republic

Th e European Court of Justice (ECJ) has ruled il-legal the Czech Republic's decision to impose a tax on greenhouse gas (GHG) emission allowances that were distributed free of charge to electricity pro-ducers, to the extent that the tax applied to more than 10 percent of those allowances.

Th e Emissions Trading Directive (Directive 2003/87/EC) provided that member states should, during the period 2008–2012, allocate at least 90 percent of GHG allowances free of charge.

In 2011 and 2012, the Czech authorities intro-duced a gift tax on electricity producers' acquisi-tion of the free-of-charge allowances, at a rate of 32 percent, with the intention of supporting operators of photovoltaic power stations.

Bringing an action before the Czech courts, šKO-ENERGO, a Czech electricity producer which was

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subject to that tax, argued that its imposition was incompatible with the Emissions Trading Directive. Th e Supreme Administrative Court of the Czech Republic ( Nejvyšší správní soud ), hearing an appeal in the case, referred the matter to the ECJ.

Th e ECJ said that, in light of the restriction that just 10 percent of allowances could be allocated for consideration, the Directive precludes both the di-rect fi xing of a price for the allocation of emission allowances and the subsequent levying of a charge in respect of their allocation.

Th e tax under consideration is incompatible with the Directive to the extent that it does not respect that ceiling, the ECJ explained, leaving it to the na-tional court to determine the extent that this was the case.

Th e ECJ also found that the application of that tax cannot be justifi ed by the aim of generating addi-tional revenue for certain producers of green en-ergy, as that is not one of the aims of the Directive.

Th e ECJ concluded:

"Article 10 of Directive 2003/87/EC … must be interpreted as precluding the imposition of a gift tax, such as that at issue in the main proceedings, if it does not respect the 10 per-cent ceiling on the allocation of emission al-lowances for consideration laid down in that Article, which is a matter for the referring court to determine."

Th e judgment was delivered on February 26, 2015.

http://curia.europa.eu/juris/document/document.jsf?text=&docid=162532&pageIndex=0&doclang=EN&mode=req&dir=&occ=fi rst&part=1&cid=30973

European Court of Justice: ŠKO-ENERGO s.r.o. v. the Czech Tax Appeal Board (C-43/14)

France and Luxembourg Th e European Court of Justice (ECJ) has outlawed the decisions of the governments of Luxembourg and France to impose reduced rates of value-added tax (VAT) on electronic books.

Th e ruling concerns paid-for books supplied via download or web streaming to a computer, smart-phone, e-reader, or other such system.

Since January 1, 2012, France has levied a 5.5 per-cent VAT rate on e-books, and Luxembourg has levied a 3 percent rate. Th e Commission challenged the decisions, arguing that they contravened the EU VAT Directive, and subsequently the Commission referred the matter to the ECJ in September 2013.

Ruling in favor of the Commission, the ECJ argued that a reduced VAT rate can apply only to supplies of goods and services covered by Annex III to the VAT Directive, which refers to the "supply of books … on all physical means of support."

Th e ECJ concluded that the reduced VAT rate is ap-plicable to a transaction consisting of the supply of a

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book found on a physical medium. While it agreed that in order to be able to read an electronic book, physical support (such as a computer) is required, that support is not included in the supply of elec-tronic books; therefore the supply of such books is not included within the scope of Annex III.

Additionally, the ECJ observed that, under the VAT Directive, the possibility of a reduced VAT rate be-ing applied to "electronically supplied services is excluded." It confi rmed that an e-book is such a service. Th e Court rejected the argument that the supply of electronic books constitutes a supply of goods (and not a supply of services). It said only the physical support enabling an electronic book to be read could qualify as "tangible property," but such support is not part of the supply of electronic books.

Th e ECJ ruled in each case that, by applying a reduced rate of VAT to the supply of digital or

electronic books, both France and Luxembourg had failed to fulfi ll their obligations under Articles 96 and 98 of Council Directive 2006/112/EC of November 28, 2006, on the common system of VAT, as amended.

Th e judgments were released on March 5, 2015.

http://curia.europa.eu/juris/document/document.jsf?text=& docid;=162685& pageIndex;=0& doclang;=EN& mode;=lst& dir;=& occ;=fi rst& part;=1& cid;=222698 and http://curia.europa.eu/juris/document/document.jsf?text=& docid;=162692& pageIndex;=0& doclang;=EN& mode;=lst& dir;=& occ;=fi rst& part;=1& cid;=222785

European Court of Justice: Commission v. France and Luxembourg (C-479/13) and (C-502/13)

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THE ESTER'S COLUMN ISSUE 124 | MARCH 26, 2015

Dateline March 26, 2015

It's diffi cult to know what to make of George Os-borne's sixth budget as the UK's Chancellor of the Exchequer (that's fi nance minister to the rest of the world). In the days leading up to the last budget of the current Parliament, Osborne promised that headline-grabbing gimmicks would be absent from his speech. But with the general election less than two months away, he would have been almost fool-ish not to have sprinkled the Budget with at least some fairy dust in the form of tax cuts for low- and middle-income workers and pensioners – winning over the substantial "gray vote" is one way to ensure electoral success. And sprinkle he did. Th e taxa-tion of savings will be more or less abolished for ordinary savers, while another increase in the per-sonal income tax allowance will ensure that most low-paid workers will be lifted out of income tax altogether. Pension rules will be further relaxed to give people more control over how they spend their retirement savings. By the time of the election, cor-porate tax will be 20 percent, further supporting the Chancellor's claim that the UK has the most business-friendly tax regime in the G7.

Th e fact that the UK is growing faster than most advanced economies – as Osborne never tires of telling us – has given him room for these and other tax giveaways and permitted him to announce that the Government's fi scal consolidation program will end a year earlier than planned in 2019/20. Th at'll be just before the next general election.

(Coincidence? I don't think so.) Th e UK's relative-ly strong economy allowed Osborne to claim that the sun was coming out again for Britain's taxpay-ers. But is this position of economic strength mere-ly superfi cial? Looking at the situation objectively, it's perhaps overegging the pudding somewhat to suggest that boom times are returning to Britain. With much of the eurozone crashing and burn-ing, the UK probably looks like it's doing better than it actually is. Yes, the budget defi cit has been halved from its peak of 10 percent during the bank-ing crisis. But under the Government's original plans it should have been eliminated by now. He also didn't mention that, under his new fi scal plan, the squeeze on public spending will be greater in the next two years than at any time during the cur-rent Parliament. Th at Osborne kept schtum about this is unsurprising when there's an election to be fought. On balance, he probably deserves an enco-mium. However, the Chancellor's silence on other issues of quite fundamental importance to the UK economy spoke volumes.

Maybe the most worrying aspect as far as the UK is concerned is its chronic under-productivity, which the current Government seemingly has no answer for. UK productivity has been stagnant since the crisis, and now lags well behind the leading indus-trialized nations. As wage growth has virtually fro-zen, it is perhaps unsurprising that tax receipts have been relatively subdued, in spite of the UK's grow-ing economy. What's more, the 2015 Budget was

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not all sweetness and light. Th ere is plenty of devil in the detail: the ill-conceived diverted profi ts tax remains; and there will be a further erosion of tax-payer rights as the Government intensifi es its crack-down on tax avoidance, including the presumption of guilt for those with undeclared off shore bank ac-counts. And the banks were up in arms after Os-borne once again increased the bank levy. Not that they'll get a great deal of sympathy from voters. Th e measure is expected to raise around GBP900mn a year, which is probably the size of a large banking group's annual bonus pool. It's almost worth an encomium on its own.

Th e British Government's sense of economic secu-rity may be unfounded to a certain extent. But Italy would probably bend over backwards to swap its current predicament with the problems facing the UK. Earlier this month we saw further evidence of the high tax and administrative burden that con-tinues to stifl e business investment and growth, with a medium-sized company in Italy spending on average EUR7,500 a year to comply with Italy's bureaucratic tax code, according to the ImpresaLa-voro research center. Th is gives Italy the dubious distinction of having the EU's most burdensome tax regime, and that's saying something.

However, it's not as if this is a surprise revelation: reports about the state of taxation in Italy are a regu-lar feature in the news. What's worrying is the Gov-ernment's apparent inability to do anything about it. Italy's economy continues to be weighed down by a large and ineffi cient state sector, and businesses

tend to be over-regulated and over-taxed. A key dif-ference between the UK and Italy is that the for-mer has a fairly fl exible labor market, which has been credited with a fall in unemployment since the end of the recession there. Italy's labor laws by comparison mean that hiring and fi ring personnel can be a time-consuming, expensive, and onerous business. Prime Minister Matteo Renzi has put the transformation of Italy's economy at the heart of his program, yet there are few signs of real progress. Last November, after the Chamber of Deputies ap-proved the Government's 2015 Budget, Economy Minister Pier Carlo Padoan professed his convic-tion that the Bill "will allow Italy to begin a rever-sal in fortune, in terms of economic growth and employment." We must wait for him to be proved right, but I'm not that convinced. I read a quite startling statistic recently, that Italy's economy has eff ectively grown by only 4 percent since the single European currency was created 16 years ago. It sug-gests that Italy's problems are much deeper than Padoan would probably like to admit, and even harder to overcome.

Th ere couldn't be much more of a contrast between uncompetitive Italy on the one hand, and uber-com-petitive Singapore on the other. In the World Bank's latest annual Doing Business ranking, which (un-surprisingly) ranks economies on their ease of do-ing business, Italy is in 56th place. Singapore is top. PwC's annual Paying Taxes Index, which measures how easy it is to pay taxes in 189 countries, puts Italy 141st, while Singapore fl ies high at 5th place. Singa-pore is also the second-freest economy in the world

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according to the Heritage Foundation. Italy is down in 80th place (just below Samoa and Madagascar) and is considered only "moderately free."

Regular readers will know that praise is heaped on low-tax jurisdictions like Singapore on a fairly reg-ular basis. So it feels strange, given all this, to dish out an execration for the city-state this week. I sup-pose it's only for a minor off ense, but that off ense does set a precedent. In the 2015/16 Budget, Fi-nance Minister Th arman Shanmugaratnam intro-duced a new top rate of personal income tax. At 22 percent, it is considerably lower than the top rates found in many developed countries, but one of the reasons why Singapore has been so successful is that investors are attracted by its low – and fl at – taxes.

Th at the Government has said that it is determined to enforce this measure shows that it is worried about current fi scal trends. In last year's Budget, Th arman warned that with increased social and health care spending, the Government is forecasting a small

budgetary defi cit of SGD1.2bn (USD950m), or about 0.3 percent of gross domestic product (GDP), in 2014/15, after a surplus of 1.1 percent of GDP in 2013/14. Government spending is expected to rise by 8.3 percent, outstripping a 4.1 percent rise in revenue. He then disclosed that expenditure is likely to increase by 3 percent of GDP by 2030, due to infrastructure spending and social spending, especially in health care. Health care spending, on account of the ageing population, is expected to double from 2011 levels to SGD8bn by 2015, be-fore reaching SGD12bn by 2020. It is remarkably reminiscent of Hong Kong, which is also facing up-ward pressure on taxation as a result of projected increases in public spending. Th e fi scal situation in the two places can hardly be described as dire, and both Singapore and Hong Kong have sensibly built up fi scal reserves. But it won't be surprising if we see more tax increases, albeit on a fairly small scale, in the future.

Th e Jester

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