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International Tax NewsEdition 83February 2020
www.pwc.com/its
Keeping up with the constant flow of international tax developments worldwide can be a real challenge for multinational companies. International Tax News is a monthly publication that offers updates and analysis on developments taking place around the world, authored by specialists in PwC’s global international tax network.
We hope that you will find this publication helpful, and look forward to your comments.
Welcome
Bernard Moens Global Leader International Tax Services Network T: +1 703 362 7644E: [email protected]
Featured articles
Responding to the potential business impacts of COVID-19 COVID-19 can cause potentially significant people,
social and economic implications for organisations.This link provides information on how you
can prepare your organisation and respond.
In this issue
Legislation Judicial EU/OECD Treaties
Legislation
Argentina – New government approves major tax reform
The Argentine Congress, on December 23, 2019, approved the Social Solidarity and Productive Reactivation Law (‘the Law’) with the intent to align public accounts, boost the economy, and reduce social inequalities. The Law introduces relevant changes to the Argentine tax system, including a suspension of the 2018 corporate income tax rate reduction, an increase in the wealth tax rate, the reinstatement of certain tax exemptions on investment income in Argentine securities, and a new tax on outbound payments for specific transactions. The Law includes changes to customs duties rules on exports of goods and services and also to employment taxes.
The 2018 tax reform introduced a two-step corporate tax rate reduction from 35% to 30% for taxable years 2018 and 2019 and a further reduction to 25% from 2020 onwards. The rate reduction was offset by a withholding tax on dividend distributions at a 7% rate for 2018 and 2019 and 13% for 2020 onwards. The Law suspends the 25% rate reduction until fiscal years beginning on or after January 1, 2021.
Therefore, the 30% corporate income tax rate and the 7% withholding tax on dividend distributions will continue to apply to fiscal year 2020. The Law provides that the tax adjustment for inflation for the first two taxable years starting on or after January 1, 2019 must be allocated 1/6 to the taxable year in question and the remaining 5/6 in equal parts over the following five taxable years. Under the prior rule, 1/3 of the inflation adjustment had to be allocated in the first taxable year and the remaining 2/3 in the following two taxable years.
Ignacio Rodríguez
Argentina
T: +5411 4850 6714E: [email protected]
Juan Manuel Magadan
Argentina
T: +5411 4850 6847E: [email protected]
Luis Vargas
United States
T: +1 646 471 0582E: [email protected]
Argentina
PwC observation:While taxpayers are still digesting the 2018 tax reform, these latest tax law changes represent a significant challenge since the new rules amend, postpone, roll-back or even repeal the 2018 changes.
The recent changes to the tax law require analysis of the potential impact on the day-to-day operations of local and multinational companies in Argentina.
Stuart Landsberg
New York
T: +1 646 675 4713E: [email protected]
Phil Strauss
Australia
T: +1 347 387 7421E: [email protected]
Peter Collins
Australia
T: +61 3 8603 6247E: [email protected]
Australia’s hybrid mismatch rules: tweaks and uncertainties
The Australian hybrid mismatch rules were released in draft form in late 2017, legislated in August 2018 and took effect for tax periods commencing on or after January 1, 2019. However, the Australian Treasury, on December 13, 2019, released Exposure Draft legislation which proposes to ‘tweak’ the enacted Australian hybrid mismatch rules. Public consultation on these proposed amendments closed on January 24, 2020.. The hybrid mismatch rules may affect taxpayers with a December 31 year-end; such taxpayers should account for any adverse impacts that these rules may have on their financial statements.
The ATO also has indicated publicly that the following issues have been the subject of detailed consideration and likely will be addressed by ATO guidance:
• Whether the US tax laws correspond to, or have substantially the same effect as, the Australian hybrid mismatch rules. This takes into consideration the combined effect of US tax laws, including its anti-hybrid rules (Section 267A), dual consolidated loss
rules (Section 1503), and treatment of hybrid dividends (Section 245A(e)).
• How intra-group payments between members of a US tax consolidated group should be treated – in particular, whether the payments are disregarded for purposes of the Australian hybrid mismatch rules or treated as offsetting deductions and income inclusions.
Australia
PwC observation:Taxpayers with related-party cross-border deductible payments (or hybrid entities, including Australian entities that may be ‘disregarded’ for foreign tax purposes) should review the potential impact of the hybrid mismatch rules, including the imported mismatch and low-tax lender rules. Taxpayers with cross-border transactions may be caught off guard as the hybrid mismatch rules do not have a tax avoidance purpose test, a de minimis carve-out, or transitional provisions. The rules will be important for year-end tax provisioning for accounting purposes, as well responding to extensive questions on the annual Australian income tax return.
Circular letter Belgian group contribution regime
The group contribution (tax consolidation) regime, applicable as of FY2019, enables Belgian companies and Belgian branches of entities located in the European Entrepreneurial Region to transfer taxable profits to other affiliated Belgian companies/branches with the aim of offsetting these profits against current-year tax losses. The regime’s scope is limited to qualifying companies that have concluded a group contribution agreement that meets certain conditions. The circular letter provides clarifying examples on the application of the regime in view of eligible and excluded companies, minimal holding period, application after a business restructuring, final foreign PE losses, and the mandatory compensation to be paid. Simultaneously, a template version of the group contribution agreement (which needs to be included in the tax return in order to confirm that the conditions to justify the regime’s application have been fulfilled) has been published.
India 2020 budget: Impact on foreign investors and multinationals
The Indian Finance Minister presented the Union Budget 2020 of the Modi government on February 1. Budget 2020 includes measures aimed at making India a USD five trillion economy by 2024. Budget 2020 was drafted around three principles – aspirational India, economic development, and caring society, focusing on ‘ease of living’ for all citizens. As expected, the Budget focuses on the agricultural sector, education and skills, infrastructure, rural economy, and climate change. Continuing previously enacted reform measures, the Budget’s direct tax proposals focus on reforms to stimulate growth, simplify the tax structure, lessen the compliance burden, and reduce litigation. Key tax proposals include a reduction in tax rates for lower-income individual taxpayers, abolishment of the dividend distribution tax (DDT), introduction of a safe harbor and Advance Pricing Arrangement (APA) to attribute profits, and a corporate tax litigation amnesty.
Currently, dividends distributed by an Indian domestic company are subject to DDT, payable by the distributing Indian company. Such dividend is exempt from income tax in the hands of the nonresident shareholders. The Budget proposes the taxation of dividends received by shareholders at the applicable rates. Correspondingly, the Indian domestic company would not be required to pay any additional tax on the income distribution. The budget also proposes an interest expense deduction equal to 20% of such dividend income. Companies are required to withhold tax on dividends paid at the following rates:
• to resident shareholders – 10%• to non-resident shareholders – 20%, subject to
tax treaty benefits
The rates exclude applicable surcharge and cess. Please see our PwC Insight for more information.
Belgium India
Evi Geerts
Belgium
T: +32 492 743970E: [email protected]
Sriram Ramaswamy (Sri)
New York
T: +1 646 901 1289E: [email protected]
Tamara Geboers
Belgium
T: +32 494 475312E: [email protected]
PwC observation:Multinational groups with multiple Belgian companies or branches can benefit from the group contribution regime if they fulfill the conditions. Monitoring during the year is necessary to see whether a group contribution will occur, as these elements also will impact prepayments for the year (and other tax aspects). Companies should timely assess such matters in order to fulfil the necessary formalities (agreement, payments, etc.).
PwC observation:The Budget proposal focuses on widening the tax base with increased reforms in all sectors and provides a foundation for the Indian economy to become more resilient and to achieve a high growth rate. Abolishment of DDT may attract equity investment. Other proposals, such as extension of lower withholding tax rate of 5% for interest income, and corporate tax dispute resolution mechanism, also may help India achieve its goals.
Thematic zone for audio-visual services
The update of the Free Zones Law (December, 2017), introduced the concept of Thematic Zones of Services (TZS). TZS are instruments for the provision of audio-visual, leisure, and entertainment services (except for gambling). They must be located outside the metropolitan area (i.e., 40 km away from Montevideo’s downtown). Under these provisions, the Executive Branch authorized the first TZS for the audio-visual industry.
Since the TZS are free zones, companies operating within them can utilize the broad tax benefits granted by this regime. Generally,, companies are exempt from all national taxes, including those taxes for which a specific legal exemption is required, in connection with the activities performed within the zone (guaranteed by the Uruguayan State).
TZS users may also perform film activities in Uruguayan non-TZS territory, to the extent that the cost of these activities do not exceed 25% of the total annual costs of the user.
Companies authorized to manage and develop these zones (TZS developers) are also exempt from all national taxes, including those taxes for which a specific legal exemption is required, except for Corporate Income Tax and Social Security Contributions.
Uruguay
PwC observation:These zones help create high-qualified employment in Uruguay, attract significant investments, and generate added value, incorporating new and developing technologies and innovation.
Patricia Marques
Uruguay
T: +598 291 60 463E: [email protected]
Eliana Sartori
Uruguay
T: +598 291 60 463E: [email protected]
Judicial
Abrogation of French anti-hybrid provisions results in possible litigation
The former French anti-hybrid provisions prohibited the tax deduction of interest if the related company (whether established in France or not) which loaned the funds was not subject to a tax on the corresponding interest that was at least equal to a quarter of the French CIT.
Prima facie these provisions were applicable to all lenders, established in France or abroad. In practice, French lenders falling within the scope of these provisions were very rare (e.g. innovative companies subject to a preferential tax regime). Therefore, doubts appeared on their conformity with EU law since the Court of Justice of the EU sanctions texts what are a priori of general application, but which de facto discriminate between internal operations and cross-border operations.
These provisions could be considered to introduce an indirect discrimination contrary to the European freedoms, since the minimum tax condition favors in practice the activity of related lenders established in France and encourages borrowers to use their services rather than those of non-resident related lenders. The explanatory statement of the Draft Finance Act for 2020 confirmed this rationale as it stated that these provisions could be regarded
as a disproportionate restriction of European freedoms. These concerns were amongst the reasons why the Finance Act for 2020, which implemented the ATAD 2 anti-hybrid provisions, repealed the former French anti-hybrid provisions.
France
PwC observation:Companies having been subject to the former French anti-hybrid provisions should assess the opportunity to challenge these provisions and obtain a refund of the corresponding corporate income tax.
Guilhem Calzas
Paris
T: +33 0 1 56 57 15 40E: [email protected]
Farah Slimani
Paris
T: +33 0 1 56 57 44 05E: [email protected]
Renaud Jouffroy
Paris
T: +33 0 1 56 57 42 29E: [email protected]
OECD/G20 Inclusive Framework moves forward on new tax rules
Following the conclusion of a two-day meeting on January 29-30, the OECD/G20 Inclusive Framework on BEPS (the ‘Inclusive Framework’) issued a package of documents that update the state-of-play regarding work on tax challenges arising from the digitalization of the economy, and set forth a revised work program. The Inclusive Framework endorsed the OECD Secretariat’s concept of a ‘Unified Approach’ to Pillar One on profit allocation/nexus rules and committed to achieving agreement within 2020. Whether Pillar One will apply only as a safe harbor will be held for ultimate decision until the key design features have been agreed, as countries’ views strongly differ on this point – although it is agreed that unilateral measures will need to be withdrawn.
Please see our PwC Insight for more information.
The OECD Secretariat hosted a webcast on February 13 in which it presented preliminary findings on economic analysis of Pillars One and Two of the digitalizing economy project. The OECD analysis suggests that the combined effects of the two pillars, based on assumptions without prejudging key policy design features of the framework, results in an initial estimate of a 4% increase of corporate income tax revenue collected – about $100 billion annually across all jurisdictions – with little effect on investment costs. The OECD will continue to refine these findings as new data is shared. Policymakers will be discussing the analysis as the Inclusive Framework continues discussions to reach a consensus solution on the key design features by July 2020.
Please see our PwC Insight for more information.
OECD
EU/OECD
Stef van Weeghel
Netherlands
T: +31 0 88 7926 763E: [email protected]
Edwin Visser
Netherlands
T: +31 0 88 7923 611E: [email protected]
Will Morris
Netherlands
T: +1 202 213 2372E: [email protected]
PwC observation:The next full Inclusive Framework meeting will take place at the beginning of July; there is an ambition that the IF will be able to sign off on a complete political agreement covering Pillars One and Two at this time, allowing the OECD to deliver a report to the G20 Leaders at their November meeting. Further work to determine the technical mechanics of the political framework will occur and implementation will require several years for countries to put in place requisite legislation and multilateral instruments. An implementation package is therefore unlikely to be ready before the end of 2021 (or later).
The Inclusive Framework is doubling down on its ambitious timeline to come up with a consensus solution by the end of 2020; this creates significant strain as inability to bridge gaps among countries through additional negotiation time makes it harder to achieve consensus. Explicit mention of removing unilateral measures as a condition for consensus is a welcome acknowledgement, but there is lack of clarity on which measures will be affected. Tax certainty is key to achieving the project’s goals, but there is not yet a clear view on how to achieve binding resolution.
Tax treaty between China and New Zealand entered into force
The tax treaty between China and New Zealand,signed on April 1, 2019, entered into force on December 27, 2019. It will apply to the taxes withheld at source in respect of amounts paid on or after January 1, 2020, and other taxes for any taxable year beginning on or after January 1, 2020. The key changes as compared to the tax treaty concluded in 1986 include:
• A clarification of treatment on income derived by or through an entity or arrangement that is treated as fiscally transparent is added to ‘Persons Covered’ article.
• The time threshold for constituting a Construction PE increases from 6 months to 12 months, and that for the exploitation of natural resources to become a PE is extended from 1 month to 183 days within any twelve-month period.
• The restricted tax rate on dividends paid to a beneficial owner meeting the prescribed requirements is reduced from 15% to 5%.
• The taxing right of the source state on alienation property is narrowed, only taxing rights on (1) gains derived from the alienation of property rich shares and (2) gains derived from the alienation of non-property rich shares, if the alienator has, at any time during the
twelve-months period preceding the alienation, owned, directly or indirectly, at least 25% of the shares of that company, are allocated to the source state.
• Addition of an article of Entitlement to Benefits, denying benefits where one of the principal purposes for entering into certain transactions or arrangements was to secure a more favourable tax position.
Fifth Protocol to the Mainland China and Hong Kong tax treaty enters into force
Mainland China and Hong Kong signed the fifth protocol to the their tax treaty on July 19, 2019. China's State Taxation Administration (STA), in December 2019, issued STA Public Notice [2019] No.51 to announcing the fifth protocol entered into force on December 6, 2019. The fifth protocol is applicable to income in the Mainland derived in any taxable year beginning on or after January 1, 2020, and income in HK derived in any fiscal year beginning on or after April 1, 2020. Compared to the existing Mainland China /Hong Kong tax treaty, the Protocol mainly introduces changes in the following areas:
• Incorporating the recommendations in the OECD BEPS) action reports, including amending the preamble and articles such as Resident, Permanent establishment, Capital gains, etc., and adding a new ‘principal purposes test’ (PPT) article on prevention of treaty abuse.
• Adding a new ‘Teachers and researchers’ article to grant tax exemption to teachers or researchers of one side for eligible remuneration received for services performed in the other side.
Please see our China Tax/Business News Flash 2019 for more information.
China China
Treaties
Long Ma
China
T: +86 10 6533 3103E: [email protected]
Long Ma
China
T: +86 10 6533 3103E: [email protected]
PwC observation:The extension of time threshold for constituting a PE, lower WHT rate for dividends, and the taxing right allocation for capital gains should attract more investments in either country and benefit the investors in both countries. Besides, the strengthening of the anti-treaty abuse provisions reflect the determination of both China and New Zealand to counteract treaty abuse. Investors shall consider their own business arrangements and make legitimate use of the tax treaty.
PwC observation:The fifth protocol puts forth more stringent requirements on anti-tax avoidance. Investors who wish to enjoy the treaty benefits for their cross-border business in the Mainland and Hong Kong should be mindful of the anti-treaty abuse measures in the fifth protocol.
Besides, the relevant tax benefit provided by the newly added ‘Teachers and Researchers’ article can facilitate the flow of teachers and researchers between the Mainland China and Hong Kong. It is beneficial for the development of education mechanism, science and technology in both Mainland China and Hong Kong, particularly the cooperative education project in the Guangdong – Hong Kong – Macao Bay Area (GBA).
Brexit puts treaty claims at risk
Brexit – the United Kingdom’s departure from the European Union – took effect at 11pm UK time on January 31. While this development has many social, political, and economic implications, one seemingly collateral effect is its potential impact on qualification for treaty benefits for some UK-parented groups under certain US income tax treaties.
A resident of a country that is a party to a US income tax treaty and wishes to avail itself of the treaty benefits generally must satisfy the treaty’s anti-treaty shopping provisions, found in the limitation on benefits (LOB) article of most US tax treaties. One way companies can meet this test is based on ultimate ownership by an owner that, under a US tax treaty with the owner’s country of residence, would qualify for an equivalent benefit if the US income were paid directly to that owner (an ‘equivalent beneficiary’), as well as by satisfying a base erosion test. This is the ‘derivative benefits’ test.
Certain treaties define a qualifying owner for this purpose is by reference to a person being a resident of an EU member state, or of a country that is a party to the North American Free Trade Agreement (NAFTA). There are 16 in-force US treaties that contain a similar description: those with Belgium, Bulgaria, Denmark, Finland,
France, Germany, Iceland, Ireland, Luxembourg, Malta, Mexico, Netherlands, Spain, Sweden, Switzerland, and the United Kingdom.
In a typical fact pattern, a UK tax resident publicly traded company owns (directly or indirectly) a European subsidiary, e.g., as a subsidiary that is tax resident in Luxembourg. The Luxembourg subsidiary receives US-source payments (e.g., interest) from a US affiliate. If the interest were paid directly from the US affiliate to the UK parent, under the UK-US income tax treaty, provided all requirements are met, US taxation of the interest is limited to a rate of 0%. Under the Luxembourg-US income tax treaty’s derivative benefits provision, the Luxembourg subsidiary may qualify under the LOB based on it being 100% owned by the UK parent, to the extent that the UK parent is a resident of a state that is an EU member State, and a base erosion test is satisfied.
Now that the United Kingdom is not a member of the EU, a UK company that has been an equivalent beneficiary with respect to a subsidiary may no longer meet that definition. Although there is uncertainty about how transition rules related to Brexit may apply, companies relying on a UK owner being a resident of an EU member state should evaluate the need for further treaty analysis.
Please see our PwC Insight for more information.
United Kingdom
Gareth Hughes
United Kingdom
T: +646 385 2159E: [email protected]
Dan redrupp
United Kingdom
T: +347 491 2990E: [email protected]
Oren Penn
United States
T: +202 413 4459E: [email protected]
PwC observation:Amid the varied consequences potentially wrought by Brexit, taxpayers relying on applying the benefits of a US income tax treaty based on having a UK tax-resident parent company that satisfies certain requirements may no longer qualify. The same soon may be true for US, Canadian, and Mexican-parented groups. Taxpayers should review their structures and evaluate the need for further analysis and alternative ways to satisfy the requirements for treaty eligibility.
Glossary
Acronym Definition
ATAD Anti-Tax Avoidance Directive
ATO Australian Tax Office
BEPS Base Erosion and Profit Shifting
CFC controlled foreign corporation
CIT corporate income tax
CJEU Court of Justice of the European Union
DAC6 EU Council Directive 2018/822/EU on cross-border tax arrangements
DST digital services tax
DTT double tax treaty
EBITDA Earnings before interest, tax, depreciation and amortization
Acronym Definition
EU European Union
LOB Limitation on benefits
MLI Multilateral Instrument
MNC Multinational corporation
NAFTA North American Free Trade Agreement
PE permeant establishment
OECD Organisation for Economic Co-operation and Development
R&D Research & Development
TZS Thematic Zones of Services
WHT withholding tax
For your global contact and more information on PwC’s international tax services, please contact:
Bernard Moens Global Leader International Tax Services Network
T: +1 703 362 7644 E: [email protected]
Geoff JacobiInternational Tax Services
T: +1 202 414 1390E: [email protected]
www.pwc.com/its
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