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International Tax NewsEdition 34December 2015
WelcomeKeeping up with the constant flow of international tax developments worldwide can be a real challenge for multinational companies. International Tax News is a monthly publication that offers updates and analysis on developments taking place around the world, authored by specialists in PwC’s global international tax network.
We hope that you will find this publication helpful, and look forward to your comments.
Shi‑Chieh ‘Suchi’ LeeGlobal Leader International Tax Services NetworkT: +1 646 471 5315E: [email protected]
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In this issue
Tax Administration and Case LawTax legislation TreatiesProposed Tax Legislative Changes
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Tax LegislationChina
Refining the Super Deduction Policy for Research and Development (R&D) Expenses
The Ministry of Finance, State Administration of Taxation and Ministry of Science and Technology jointly issued Caishui [2015] No.119 (Circular 119) refining the policy of super deduction of R&D expenses for corporate income tax (CIT) purpose. It will take effect from January 1, 2016.
Circular 119 was issued on November 2, 2015, with the following new features as compared with the old policy:
• Increased categories of eligible R&D expenses able to be deducted for CIT purposes, and expanded scope of eligible R&D activities through an ‘exclusion’ list with all other activities and industries being able to apply for the super deduction treatment.
• For the calculation of the super deduction, a limitation of 80% will be applied to expenses incurred through outsourced R&D.
• Reduced burden from accounting perspective by replacing the previous requirement for a separate account for R&D expenses to enterprises by the requirement to record an auxiliary account.
• Ability to retrospectively enjoy the super deduction treatment (up to the last three years) for enterprises having eligible R&D expenses by completing the relevant record‑filing procedures. Previously, companies were not able to look back to prior years if the opportunity had not been identified at the time. However, this measure is future dated to allow only those expenses incurred from January 1, 2016 onwards to form such ‘retrospectively claimed’ expenses.
• Simplified application procedure by replacing formal approval process by a record filing process. However, tax authorities will enhance post-administration and increase regular examination to not less than 20% of claimant enterprises.
PwC observation:Circular 119 resolves a large number of practical issues over the years and will benefit various major industries with R&D activities. However, Circular 119 also puts in place the higher requirements for enterprises regarding R&D identification, internal‑control, tracking of R&D expenses, etc. Enterprises shall well attend to these requirements while enjoying the R&D super-deduction preferential treatment.
Roger DiChinaT: +86 10 6533 2268E: [email protected]
Kenya
No tax on the sale of listed securities
Following various legislative amendments, the position regarding the transfer or sale of securities on the Nairobi Stock Exchange (‘NSE’) is now clear, namely such transactions are exempt from capital gains tax and withholding tax (WHT) in Kenya.
PwC observation:These legislative amendments provide certainty regarding the transfer or sale of securities on the NSE.
David LermerCape TownT: +27 21 529 2364E: [email protected]
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Kuwait
New incentives for foreign investors in listed securities
A series of amendments have been made to the Capital Markets Authority (‘CMA’) Law (‘Law’) of Kuwait designed to help attract foreign investors and other objectives. These changes will enter into force on November 10, 2015.
Key elements of the amendments surround the ability of foreign investors to invest in securities traded in the Kuwait Stock Exchange (‘KSE’), the possibility of investment funds to be listed on the KSE and added measures designed to increase investor protection. The amendments also prescribe criteria for Investment Portfolio Managers (‘IPMs’) and for diversifying portfolio investors.
Tax exemption on yields and withholding taxes (WHTs)
One of the features of the Law is a proposed exemption from taxation on dividends for investing in securities of companies, funds, and portfolios listed on the KSE effective from November 10, 2015.
Under Kuwaiti income tax law, capital gains from trading in companies listed on the KSE are exempted from taxation. Now, as a result of Law No. 22 of 2015, ‘yields’ from securities listed on the KSE are also not subject to WHT in Kuwait as of November 10, 2015, regardless of whether the issuer is a Kuwaiti or non-Kuwaiti listed company.
We understand that the term ‘yield’ should include dividends for the purpose of claiming tax exemption, and that there will be an exemption from WHT on dividend distributions to Non-Gulf Cooperation Council (non-GCC) corporate shareholders. However, further clarification is awaited.
As there is no corresponding amendment under the Kuwait Income Tax Law, an official clarification is awaited from the Kuwait Tax Authority (‘KTA’) along with related compliance procedures (if any). In the meantime, the KTA has started seeking information from the Kuwaiti companies listed on the KSE regarding dividends distributed from 2008 to 2014 to non-GCC foreign corporate shareholders to ensure all tax related to the above activities are collected before any exemption is applied as of 2015.
PwC observation:Together with the improved regulatory framework, these tax amendments may well prove effective in attracting increased foreign investment in securities on the KSE. Further official guidance on the tax treatments is expected. As such, there is not yet total clarity on the tax exemption positions. In the meantime, investors should consider the impact of these changes.
Sherif ShawkiKuwaitT: +965 2 227 5775E: [email protected]
Hossam AfifyKuwaitT: +965 2 227 5776E: [email protected]
Shankar PBKuwaitT: +965 2 227 5787E: [email protected]
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South Africa
Cross border service arrangements
South African Revenue Service (SARS) continues its focus on cross‑border payments due to the risk and impact of base erosion and profit shifting (BEPS) from substantial amounts of money flowing from South Africa on an annual basis as payments for management and related fees.
In order to better control and mitigate this risk, non-resident service providers must register and submit income tax returns if they derive income from services performed in South Africa. This requirement is applicable to companies that have a financial year ending during the 2014 calendar year.
The non-residents can claim treaty relief from South African tax in the tax returns that must be submitted. Additionally, the withholding tax (WHT) of 15% on service fees that was introduced in 2013, and was to come into effect on January 1, 2016, has recently been deferred to 2017. It is our understanding that WHT on service fees may be removed in its entirety in the 2016 Budget Speech; something to watch out for next February 2016.
South Africa
Place of Effective Management Guidelines Released
South African Revenue Service (SARS) recently released an Interpretation Note 6, Issue 2, (‘IN6’) on November 3, 2015.
In IN6, SARS provides guidance on the interpretation and application of the term ‘place of effective management’ (‘POEM’) for use in determining the tax residency of a company. Per IN6, a company’s POEM will be where the key management and commercial decisions for the conduct of the company’s business as a whole are in substance made, i.e. the place where the real top level of management or realistic, positive management of the company is exercised. IN6 makes an important distinction between operational, day-to-day management, and the real, top level strategic management of a company (with the latter being where the POEM is located). IN6 will be effective for years of assessment beginning on or after November 3, 2015.
South Africa
Withdrawal of special tax credit for service fees
South Africa (SA) applies foreign tax credit to foreign withholding tax (WHT) levied in respect of services performed from South Africa.
South Africa is currently the only country that provides for this tax concession which was introduced to support SA business incurring this WHT on payments from Africa. Effectively it gives treaty partners the taxing right over income not sourced in that country defeating the whole purpose of the tax treaty. According to the South African Revenue Service (SARS) Explanatory Memorandum, this has resulted in a significant compliance burden on SARS.
Accordingly, the special tax credit for services are to be withdrawn. Once the credit is withdrawn, all tax treaty disputes relating to this issue will need to be resolved through the mutual agreement procedure available in the tax treaties.
David LermerCape TownT: +27 21 529 2364E: [email protected]
David LermerCape TownT: +27 21 529 2364E: [email protected]
David LermerCape TownT: +27 21 529 2364E: [email protected]
Nasiema RawootCape TownT: +27 21 529 2300E: [email protected]
PwC observation:These amendments will place a significant tax compliance burden on multinational groups who have foreign employees working in South Africa on a temporary / ‘fly in’ basis as such services will trigger a requirement for the non-resident employing company to register for tax in South Africa.
The likely removal of WHT on service fees is welcomed but will probably be replaced with additional disclosure requirements for service fees payable by South African residents to non-residents.
PwC observation:The new IN6 is now more aligned with international and Organisation for Economic Co-operation and Development (OECD) established principles of looking to the real top level strategic management rather than the day to day management in determining the POEM of a company.
PwC observation:The withdrawal of this relief, where there is no treaty in point, is a blow to the use of South Africa as a headquarter location for Africa, since without it double taxation is triggered.
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South Africa
Change in the interpretation of the definition of immovable property
South African Revenue Service (SARS) has changed its interpretation of what constitutes immovable property for the purpose of treaty application.
In particular, SARS wants to exercise its rights to tax gains on disposals of shares in ‘realty rich’ entities. In terms of this new SARS interpretation, a non-resident will be subject to capital gains tax on the disposal of immovable property situated in South African if that non-resident directly or indirectly holds at least 20% of the equity shares in a company where 80% or more of the market value of those equity shares is attributable to immovable property in South Africa (commonly referred to as ‘realty rich’ companies). Accordingly, the disposal of ‘realty rich’ shares will be treated as a disposal of ‘immovable property’ situated in South Africa to which South African tax on capital gains will apply.
Furthermore, section 35A imposes a withholding tax (WHT) to be deducted at source by a purchaser acquiring immovable property (including ‘realty rich shares’) from a non-resident seller.
South Africa
Claw Back of certain rules
South African Revenue Service (SARS) has identified potential base erosion strategies using the foreign participation exemption (capital gains tax [CGT] exemption for disposal of certain foreign company shares) and has accordingly amended the foreign participation exemption so that the exemption is not available to South African residents that dispose of foreign shares to a non‑resident related person (previously, the exclusion from the exemption was limited to disposals to South African controlled foreign companies).
In addition, where a South African resident changes its tax residency, any capital gain benefits enjoyed during the three year period prior to ceasing to be a resident will be subject to tax. The aggregate gain or loss will be included in the taxable income of the resident at the companies’ inclusion rate. Any participation exemption enjoyed in respect of foreign dividends in the three year period prior to ceasing to be a resident will also be subject to tax upon exit at an effective tax rate of 15%.
PwC observation:This change in SARS interpretation and practice does not appear to be supported by domestic or international tax provisions and therefore is likely to trigger significant tax controversy and uncertainty for non-residents holding ‘realty rich’ shares through a treaty resident holding company (e.g. Netherlands, Cyprus, and Luxembourg).
PwC observation:This legislative change may increase the tax cost of moving foreign companies from underneath a South African holding company. The use of a South African headquarter company will therefore become more important for holding non South African qualifying investments as this change does not apply to a South African headquarter company.
David LermerCape TownT: +27 21 529 2364E: [email protected]
David LermerCape TownT: +27 21 529 2364E: [email protected]
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Proposed Tax Legislative ChangesLuxembourg
Luxembourg proposes additional tax measures for corporations and individuals for 2015 and 2016
At the occasion of the 2016 budget announcement, the Luxembourg government has released bill 6900 (‘budget bill’) and bill 6891 (‘the tax measures bill’), both on October 14, 2015.
If approved by Parliament, those measures would amend the Luxembourg net wealth tax (‘NWT’) regime and include a decreasing scale for this tax, would recast the Luxembourg intellectual property (IP) regime and would make other changes to the country’s corporate and individual tax rules.
Modification of the NWT regime and repeal of the minimum corporate income tax (CIT)
Luxembourg companies are currently subject to NWT, effectively on a base defined by net asset value after adjustments, exemptions, and exclusions provided for by the NWT law, at a uniform rate of 0.5%. The tax measures bill proposes to introduce a digressive scale of rates for NWT as from January 1, 2016, as follows:
• 0.5%, up to an NWT base of 500 million euros (EUR).• For an NWT base of more than EUR 500 million, NWT of the sum
of EUR 2.5 million plus 0.05% of the portion of the NWT base above EUR 500 million.
• No cap is set.
The minimum CIT would be abolished by the Tax Measures Bill. Instead, a minimum NWT charge would be implemented for all corporate entities having their statutory seat or central administration in Luxembourg.
For entities for which the sum of fixed financial assets, transferable securities, and cash at bank exceeds 90% of their total gross assets and EUR 350,000, the minimum NWT charge would be set at EUR 3,210.
For all other corporations having their statutory seat or central administration in Luxembourg which do not fall within the scope of the EUR 3,210 minimum charge noted above, the minimum NWT charge would range from EUR 535 to EUR 32,100, depending on a company’s total gross assets.
The minimum NWT charge due by a tax unity group would be capped at EUR 32,100.
Repeal of the IP regime – transitional period
The Budget Bill repeals the existing IP regime (set forth by Article 50bis of Luxembourg Income Tax Law and §60bis BewG ‘the old IP regime’) as of July 1, 2016 for CIT / municipal business tax (and as from January 1, 2017 for NWT) in order to align it with the modified nexus approach as agreed between the European Union (EU) member states and described in Base Erosion of Profit Shifting (BEPS) Action 5 of October 5, 2015.
Taxpayers currently benefitting from the old IP regime would still continue to benefit from it during a transitional period until June 30, 2021. Some other transitional measures are foreseen in this Budget Bill as well.
The details of a new IP regime, complying with the ‘modified nexus’ approach, are not set out in the Budget Bill, but are expected to be announced in a separate Bill in the coming months.
PwC observation:If enacted, those measures would take effect as from January 1, 2016.
Sami DouéniasLuxembourgT: +352 49 4848 3060E: [email protected]
Sandrine BuisseretLuxembourgT: +352 49 4848 3124E: [email protected]
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Poland
Draft amendment of CIT Law – introduction of exit tax
New draft amendment to the corporate income tax (CIT) law developed by the governing party has just been published.
Among others, the amendments are:
• Actual and planned operations aimed at achieving tax benefits will need to be disclosed.
• New reporting obligations will be introduced.• Cross-border transfer of assets will be additionally taxed.• New investment relief will be introduced.
The draft introduces also taxation on the transfer of taxpayer’s property abroad (‘exit tax’). Exit tax will occur in case of the chargeable disposal of taxpayer’s property as a result of which, in the given fiscal year, the taxpayer’s taxable corporate income is decreased or exempt from taxation, compared with its income tax in the previous fiscal period.
For the purposes of exit tax, a chargeable disposal of taxpayer’s property means a transfer (in any form) of the assets used for the business purposes, if the transfer is made by:
• A taxpayer with its registered seat or management office in Poland, if the transfer is made to a foreign permanent establishment (PE).
• A taxpayer with its registered seat or management office outside of Poland, if the transfer is made to another entity that operates in the country of the seat or management office of the taxpayer. In such case, exit tax is imposed only to the part to which Polish CIT taxation is reduced as a result of the transfer.
Exit tax is not to be imposed if the chargeable disposal of taxpayer’s property is transferred to a European Company or a European Cooperative Society.
Additionally, according to the draft, the following events will be considered as a taxpayer’s liquidation:
• The transfer of the taxpayer’s seat or place of management to another jurisdiction.
• The loss of tax residency status in Poland in the terms of double tax treaties (DTTs) being a result of transfer of seat or place of management.
PwC observation:In practice, this regulation may entail Polish taxation on the transfer of the taxpayer’s seat or place of management (currently no tax is imposed on such events). Thus, the legislative procedure of this project should be observed.
Agata OktawiecWarsawT: +48 22 746 4864E: [email protected]
Weronika MissalaWarsawT: +48 502 18 4863E: [email protected]
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United Kingdom
New UK 45% corporation tax rate on restitution interest
The UK government added a new clause to the Summer Finance Bill at the report stage to introduce a new 45% rate of corporation tax on the interest element of restitution payments made to companies in respect of claims for tax paid under a mistake of law or for tax unlawfully collected by Her Majesty’s Revenue & Customs (HMRC).
The new 45% rate of corporation tax has effect in relation to payments of restitution interest that are finally determined by a court (with no further right of appeal), or paid by HMRC under a settlement, on or after October 21, 2015. For payments made on or after October 26, 2015, HMRC will withhold the tax at source. The restitution interest which is subject to the 45% tax rate is effectively ring-fenced, with no reliefs or set-offs available.
PwC observation:In practice, this new tax is most likely to impact on the interest element of common law claims made for repayment of taxes (both direct and indirect) paid in breach of European Union (EU) law (for instance, repayments of compound interest on value-added tax (VAT) refunds following the Littlewoods case, and repayments of corporation tax and advance corporation tax following the franked investment income group litigation order). However, the interaction of the new 45% corporation tax rate itself with EU law is not straight forward and will require further consideration.
Companies which have made (or are considering making) such claims to recover tax where it has been shown this was not due should consider the impact of the new tax on amounts to be recovered, the accounting treatment of the new tax, and whether further analysis into the extent to which the new tax is compatible with EU law is appropriate.
Jonathan HareLondonT: +44 20 7804 6772E: [email protected]
Mark WhitehouseLondonT: +44 20 7804 1455E: [email protected]
Chris OrchardLondonT: +44 20 7213 3238E: [email protected]
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United Kingdom
HMRC consultation on rules for revised UK patent box from July 1, 2016
The UK Patent Box gives companies effectively a reduced rate of tax on their profits from patents and similar intellectual property (IP). On October 22, 2015, Her Majesty’s Revenue & Customs (HMRC) and HM Treasury published a joint consultation paper seeking views on how the UK can form a set of rules for the Patent Box that will comply with the new international framework for preferential IP regimes from July 1, 2016.
Representations are invited by December 4, 2015. Due to the Organisation of Economic Co-operation and Development (OECD) timescale (requiring the closure of existing preferential IP regimes from June 30, 2016, subject to the application of grandfathering rules), draft legislation will be published in December 2015 for inclusion in Finance Bill 2016. A response to the consultation will be published in Spring 2016 along with any necessary amendments to the draft legislation.
The new international framework is set out by the OECD under Action 5 of its base erosion and profit shifting (BEPS) action plan. Its fundamental principle is that for a business to gain the benefit of a preferential regime, it should have conducted the substantial activities which generated the income benefitting from that regime. The agreed (nexus) approach uses research and development (R&D) expenditure as a proxy for substantial activity and links benefits to the proportion of R&D expenditure undertaken by the company to develop the IP. The fraction used is:
company R&D* + third party R&D*/company R&D + third party R&D + connected party subcontracted R&D + acquisition costs.
*subject to a 30% uplift to compensate companies with connected party subcontracted R&D and/or acquisition costs
Under the grandfathering rules, companies which have elected into the existing Patent Box regime for an accounting period commencing prior to June 30, 2016 may continue to enjoy the benefits of that regime for existing IP assets until June 30, 2021. The usual two year time limit applies for the election. However, IP transferred directly or indirectly from a related party on or after January 1, 2016 that did not already qualify for an existing IP regime, will not qualify for grandfathering beyond 31 December 2016.
PwC observation:The outcome of this consultation will affect UK businesses which hold and exploit patents, or patent-like rights.
Groups that wish to transfer IP to the UK in order to benefit from the existing Patent Box regime under the grandfathering rules will need to do so before January 1, 2016.
Groups that wish to benefit from the new nexus Patent Box regime from July 1, 2016 should consider whether they need to restructure in order to ensure IP ownership and R&D activities are aligned. Taxpayers will also need to consider how they will track and trace R&D expenditure, IP assets and income to be able to calculate and apply the nexus fraction.
Angela BrowningEast MidlandsT: +44 1509 604274E: [email protected]
Adrian GregoryLondonT: +44 20 7213 4942E: [email protected]
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United Kingdom
HM Treasury consultation on tax deductibility of corporate interest expense
Her Majesty’s Treasury (HMT) published a consultation on October 22, 2015 on the Organisation for Economic Co‑operation and Development’s (OECD’s) recommendations under Action 4 of its base erosion and profit shifting (BEPS) project concerning interest deductions and other financial payments.
HMT is seeking views on a series of specific questions to help them frame their response to the OECD Action 4 paper and determine what form of interest deductibility rules would be appropriate for the UK, bearing in mind the variety of options introduced in the OECD paper. Comments are invited by January 14, 2016 and the government will consider responses in the development of a future business tax roadmap (to be published by April 2016).
It is noted that the UK government believes the OECD’s proposals are an appropriate response to BEPS. The UK consultation also states that any changes in this area are unlikely to take effect in the UK before April 1, 2017.
PwC observation:The breadth of options included in the OECD paper means that there are likely to be a variety of approaches to interest deductibility across different territories. We will have to wait for the outcome of the UK consultation to see how the UK decides to implement these proposals.
If the UK implements the OECD’s Action 4 recommendations, they are likely to result in a reduction in the tax relief given for interest expense in many UK companies (particularly where a group has net external finance expense at a UK head office level but is unable to reallocate the debt to its overseas operating subsidiaries).
UK companies are likely to be significantly impacted in a number of ways:
• increased effective tax rate, including the real risk that groups may not be able to deduct the full amount of their external interest expense for tax purposes
• tax rate volatility arising from the annual movements in figures which drive the allocation of interest across a group
• increased compliance burden in applying the rules, and• uncertainty in forecasting and decision making.
We recommend that groups model the impact of the various proposals on their funding and cash management arrangements. It is also likely they will need to:
• reassess their capital structure to still be able to obtain a full deduction for third party finance expense
• focus on surplus cash and how this can be repatriated to avoid double taxation, and
• consider the impact of these proposals on potential future key business decisions such as corporate acquisitions or long term contracts where debt finance is involved.
Neil EdwardsLondonT: +44 20 7213 220E: [email protected]
Thomas ReesBirminghamT: +44 1908 353055E: [email protected]
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Tax Administration and Case LawBelgium
Recent case law on the notional interest deduction and the deduction of business expenses
In a recent judgement, one of Belgium’s Court of Appeal decided that a Belgian finance company was entitled to benefit from the notional interest deduction (‘NID’), notwithstanding the fact that the company was considered to be incorporated for the purpose of benefitting from the NID.
With this judgement, the Court seems to counter a previous position taken by the Belgian tax authorities where the application of the NID was challenged in situations where the tax authorities considered that the company was incorporated with the main purpose to benefit from the NID. It needs to be seen if this decision in the underlying case can be seen as a changed position of the Belgian courts, which will be followed by other courts.
In addition, the Belgian Supreme Court recently judged that for the deductibility of business expenses it would not be required that expenses are incurred for the business activity as determined by the company’s by-laws. This position goes against a long standing position that expenses incurred by a Belgian company can only be deducted if these expenses relate to an activity which is explicitly mentioned in the by-laws of the company. The recent case law of the Belgian Supreme Court thus seems to counter this position.
PwC observation:This decision is important for clients who have ongoing discussions regarding the deductibility of certain business costs.
Axel Smits Pascal JanssensBrussels AntwerpT: +32 3 259 3120E: [email protected]
T: +32 3 2593119E: [email protected]
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Kuwait
New supporting evidence requirements concerning ‘Service PEs’
Under Kuwait’s ‘source’ based taxation laws, Non‑Gulf Cooperation Council (non‑GCC) foreign corporates are liable to tax on income earned from service contracts with Kuwaiti customers (whether performed inside or outside Kuwait) and from services executed in Kuwait. Kuwait has signed tax treaties with various countries, under many of which the foreign taxpayer should be physically present in Kuwait for a minimum number of days (e.g. 182 days) before being construed as having taxable presence in Kuwait (referred to as Service permanent establishment [‘Service PE’]).
Accordingly, a non-GCC foreign corporate taxpayer who is a resident of a tax treaty country and rendering services in Kuwait can claim tax exemption under the relevant tax treaty on a ‘No (Service) PE’ basis if the presence of employees/other personnel of the corporate taxpayer in Kuwait is for a period not exceeding the threshold prescribed in the said tax treaty.
Recently, the Kuwait Tax Authority (KTA) has moved to a position of requiring detailed supporting documentation and information from non-GCC foreign corporate taxpayers from service contracts when seeking to claim tax treaty exemption on the basis of not having a Service PE in Kuwait. The interpretation of what constitutes a Service PE by the KTA continues to be based on the actual physical presence of employees or other personnel.
Taxpayers may also be required to prove that they have settled applicable taxes on the same income in their home country and are therefore seeking relief from double taxation as opposed to exemption from tax in both countries (i.e. Kuwait and the home country).
Nigeria
Taxation of business profits of a foreign company
In JGC Corporation vs FIRS, the Court held that payments sourced from Nigeria without a tax presence in‑country would not subject a foreign company to Nigerian income tax.
To be liable to tax, the foreign company must have a fixed base in Nigeria and the profits to be taxed are those attributable to the fixed base in Nigeria and not the entire profits of the foreign company. The judgment overturns a previous decision at the Tax Appeal Tribunal that had reached a different conclusion.
PwC observation:The ‘source’ based rules of Kuwait have the potential to catch businesses by surprise, resulting in tax liabilities from services/income from Kuwait that might not be the case in many jurisdictions without such a regime.
Now, in addition, companies operating in Kuwait face an increased burden to substantiate the basis of accessing treaty protection. Companies should consider appropriate, effective mechanisms of demonstrating duration of employees’ presence in Kuwait and other factors.
Sherif ShawkiKuwaitT: +965 2227 5775E: [email protected]
PwC observation:This decision clarifies the rules on taxation of foreign companies in Nigeria and is in line with Nigerian tax laws as well as the best practice from other countries.
David LermerCape TownT: +27 21 529 2364E: [email protected]
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OECD
BEPS Action 6: The (not quite) final report on preventing treaty benefits in inappropriate cases
The Organisation for Economic Co‑operation and Development (OECD) on October 5, 2015 issued its Final Report on Action 6: ‘Preventing the Granting of Treaty Benefits in Inappropriate Cases’ (the Report) as part of the complete package covering all 15 Base Erosion and Profit Shifting (BEPS) Action Plans.
The Report broadly recommends a minimum standard for treaties, comprising a Limitation on Benefits (LOB) clause plus anti‑conduit rules, a principle purpose test (PPT) or a LOB in combination with a PPT. It also proposes a number of additional targeted rules dealing with specific circumstances.
While titled ’final’, the Report identifies several critical areas for future action to address in ’the first part of 2016’, in time for inclusion in the proposed multilateral income tax convention. These areas include:
• the final formulation of a model LOB article• further consideration of new proposals recently made public by
the US Treasury on denial of treaty benefits for income subject to special tax regimes and partial termination of treaties when a treaty partner substantially reduces its income tax after signature of the treaty, and
• treaty eligibility for regulated funds, real estate investment trust (REITS), other collective investment vehicles, and pension funds.
There is a concern that the recommended actions will, even after this further work, create a level of uncertainty, and potential for double taxation that might impede global economic growth.
PwC observation:Critical parts of Action 6 remain a work in process. The OECD apparently is giving strong deference to the United States on the LOB formulation and possibly on the proposals regarding special tax regimes and partial termination.
The US proposals have attracted several comments questioning many aspects of the proposals. If the US proposals are finalised substantially as proposed, the resulting fundamental changes in tax policy would impact many stakeholders. Adding to this concern is the OECD’s intent to include the final versions in the multilateral tax convention; meaning that unlike previous additions to the OECD’s Model Tax Convention, these provisions would not just be the starting point for future treaty negotiations, they would also be the ending point for immediate treaty modifications. Essentially, they would be ’set in stone’ for those countries signing on to the final versions included in the multilateral tax convention.
While the Report provides some illustrative guidance on the PPT‘s application, that guidance does not offer taxpayers a reasonable level of assurance of whether treaty benefits will be available in many common commercial transactions. This concern is increased by the later discussion of general anti-abuse principles, which can be read as suggesting that the PPT is implicitly present in treaties that do not explicitly include the test.
A fundamental role of income tax treaties is promotion of international trade and investment. Key to that goal is a set of treaty rules that provide a high level of certainty and predictability. While recognising the importance of addressing BEPS concerns and, in particular, inappropriate tax treaty use, the recommendations under Action 6 would appear to create an unacceptable level of uncertainty and potential for double taxation. This could significantly impede global economic growth. While the work under Action 6 might further achieve the goal of the BEPS project to prevent ‘double non‑taxation,’ it could do so at the price of significantly increasing double taxation and inhibiting cross-border trade and investment, ultimately reducing economic growth.
With the October 5, 2015 Final Reports, the work of the OECD and its members is said to shift to the implementation stage. However, much work remains to be done on setting the standards, particularly in regard to Action 6.
Stakeholders need to continue to take an active role in shaping the work yet to be done through input to the OECD and local tax authorities.
Steve NauheimWashingtonT: +1 202 414 1524E: [email protected]
Suchi LeeNew YorkT: +1 646 471 5315E: [email protected]
Calum M DewarNew YorkT: +1 646 471 5254E: [email protected]
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OECD
Multinationals receive OECD recommendations on BEPS proposals for G20 and wider take‑up
Multinational enterprises (MNEs) received on October 5, 2015 final recommendations from the Organisation for Economic Co‑operation and Development’s (OECD’s) base erosion and profits shifting (BEPS) project. The G20 Finance Ministers already agreed on these OECD recommended changes to the international tax rules and to implementation plans. A number of non‑G20 countries have also been involved in work on the Action Plan and contributed to the proposals.
The OECD’s BEPS Action Plan categorised its various areas of focus into three themes: addressing substance; coherence of the international tax system; and transparency. Substance actions seek to align taxing rights with the relevant value-adding activity. Coherence actions aim to remove gaps and ‘black holes’. Transparency actions look to provide significant additional disclosure. In addition to the various actions grouped under these three themes, the BEPS Action Plan also seeks to address digital business, improve dispute resolution and create a multilateral instrument for rapid updating of bilateral tax treaties. Finalised proposals on all of these areas are now included in the package of measures just released by the OECD.
There might be three fundamental ways in which this OECD BEPS work will have a practical impact. First, and most obvious, there will be the direct application of the BEPS package itself, whether in the shape of changes to tax treaties (through amendment of the OECD Model Tax treaty and/or the multilateral instrument) and the Transfer Pricing Guidelines or through changes to domestic legislation as a result of individual recommendations of the BEPS action points.
Second, there will be the change the OECD does not want to see, namely unilateral actions by states. Countries adopting such alternative unilateral measures will typically be doing so because they disagree with the direction the BEPS package is taking or think the recommendations don’t go far enough. Third, and perhaps the most important direct impact of BEPS, is its behavioural impact, specifically in emboldening the behaviour of tax administrations over the world. This is likely to lead to tougher and more protracted anti-avoidance challenges, higher thresholds for rulings, etc.
The policy formulation stage of BEPS Action Plan will conclude at the end of this year, although it has been agreed that certain follow-on actions will take place during 2016 and beyond. The major focus of 2016, however, will shift to the implementation and monitoring of the package.
Suchi LeeNew YorkT: +1 646 471 5315E: [email protected]
David SwensonWashingtonT: +1 202 414 4650E: [email protected]
Mike DanilackWashingtonT: +1 202 414 4504E: [email protected]
PwC observation:There are a number of legislative and other regulatory changes which will result from the BEPS package, but the biggest issue is likely to be the impact on the behaviour of tax authorities, which are increasingly emboldened in their approach to dealing with MNEs.
For taxpayers, the most significant impacts are likely to be in the following areas:
• Tax treaty access being more widely constrained and in some cases uncertain.
• Huge system requirements for transfer pricing documentation and the wider transparency agenda.
• An increased focus on conduct as a relevant test in assessing transfer pricing compliance.
• Materially wider permanent establishment (PE) risks and challenges; especially the increased proliferation of PEs and erratic interpretation of PE attribution rules.
• A wide variety of responses related to restrictions in the relief for interest and other financial payments.
• Overall, a significant rise in the levels of controversy and numbers of disputes.
All taxpayers will be affected in some way by the BEPS package. Typically, we would expect one or more immediate vulnerabilities will need urgent consideration and possibly remediation (e.g. specific treaty access or PE issues).
There will of course also be the need to address general systems issues raised by the broad transparency and documentation requirements. A wider consideration of the business of the group and group structure and financing arrangements, etc., in light of the BEPS changes is also likely to be warranted. It will also be useful to monitor the response of the tax authorities in the states where businesses conduct key operations given the possible variety in standards of enforcement and application of the BEPS package from country to country.
Tax departments will need to ensure they are equipped to deal with the expected uptick in levels of controversy and dispute in the post BEPS environment. Finally, it will be important to ensure all parts of business understand the general impacts of the BEPS project regarding required substance and other standards underpinning their tax and business strategy.
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Poland
Possibility to claim interest on WHT refunded based on Focus Bank claims
On November 4, 2015, the Provincial Administrative Court in Wroclaw (‘PAC’) issued the first ever judgment in Poland on the calculation of interest on taxes withheld in breach of the European Union (EU) law.
The issue
In line with Treaty on the Functioning of the European Union (‘TFEU’) and the most recent Court of Justice of the European Union (‘CJEU’) judgments, withholding taxes (‘WHTs’) levied in breach of the EU law have to be refunded and interest has to be paid by the authorities for the whole period during which the taxpayer was not able to use the amount of tax withheld (interest on overpayment of WHT). However, as the Polish Tax Ordinance Act (‘PTOA’) does not explicitly allow the calculation of interest on WHT levied on non-residents, such taxes (including those withheld in breach of EU law) were refunded net of any interest.
PAC’s judgment
A Dutch based pension fund filed in August of 2014 the first ever interest on overpayment of WHT claim in Poland. The claim followed a previously won Focus Bank claim and was based on the discriminatory application of the PTOA provisions by the Polish Tax Authorities to non-resident investment and pension vehicles.
As the Polish Tax Authorities were reluctant to pay any interest, a negative decision was issued. However, the client appealed the decision. On November 4, 2015, the PAC issued a judgment, confirming that denying interest in case of taxes withheld in breach of EU law constitutes an infringement of EU law.
Agata OktawiecWarsawT: +48 22 746 4864E: [email protected]
Weronika MissalaWarsawT: +48 502 18 4863E: [email protected]
PwC observation:Following the arguments presented by the PAC, all entities which suffered from WHT in Poland levied in breach of EU law on dividend or interest income are entitled to interest on overpayment of WHT calculated on the amount of tax suffered from the day that the tax was unduly withheld. Considering that the applicable interest on overpayment rate is relatively high (i.e. 11% – 13%), the amounts at stake are often high (in some cases reaching the amount of tax initially withheld and already refunded).
The verdict in question provides for an additional justification of our claims and should make it easier to resolve proceedings regarding the interest on overpayment of WHT from the day that the tax was unduly withheld in favour of taxpayers.
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Neil O’BrienQatarT: +974 4419 2812E: [email protected]
Sajid KhanQatarT: +974 4419 2803E: [email protected]
Garrett GrennanQatarT: +974 4419 2967E: [email protected]
Qatar
Temporary Qatar Branches – registration of new/existing contracts
Law No. 13 of 2000 (‘the Foreign Investment Law’) and the amendment made to it in 2010 (Law No. 1 of 2010) stipulates that foreign investment can be made in most sectors in Qatar provided that a legal presence is registered in Qatar. One of the common options used by foreign investors seeking to set up a legal presence in Qatar is a project or contract specific (‘temporary’) branch in the State of Qatar.
A foreign company is generally only permitted to set up a temporary branch in Qatar if it has a governmental or quasi-governmental contract. The branch is set up in respect of a specific contract and requires ministerial approval. It is possible for the branch to perform additional governmental/quasi-governmental contracts, but this is subject to obtaining approval for each contract to be added to the branch’s Commercial Registration (CR).
Recently, we have noticed two key developments in relation to the requirement for additional contracts to be added to the temporary branch’s CR.
Greater scrutiny of branch CR by Qatar ‘Principals’ (i.e. governmental bodies or state‑owned companies)
An increasing number of Qatar Principals are now routinely scrutinising the CR and tax card provided to them by temporary branches to whom they subcontract work. If the contract being performed for them by the branch does not appear on the branch’s CR, the Qatar Principal may apply withholding tax (WHT) on payments and submit WHT statements to the Public Revenues & Taxes Department (PRTD). This can result in a significant cash flow impact for the tax payers even though the revenue for these contracts was being reported in the branch’s corporate income tax return.
Increased queries by PRTD
In the course of reviewing a tax return, the PRTD has requested temporary branches to provide a list of contracts performed by the branch and a breakdown of revenues by contract. This can be used to compare it to the contracts registered on the branch’s CR. Where the two do not reconcile, the PRTD may report any omissions from the CR to the Ministry of Economy & Commerce.
PwC observation:There appears to be a new drive within government circles in Qatar to ensure compliance. Potential consequences for temporary branches that are not compliant could include double taxation, release of retention amounts and possible fines or imprisonment. Given this development, if taxpayers have a Qatar temporary branch they may wish to review their current operations and Qatar contracts to make them compliant. Alternatively, taxpayers may consider alternative structures to do business in Qatar.
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Jonathan HareLondonT: +44 20 7804 6772E: [email protected]
Chloe PatersonLondonT: +44 20 7213 8359E: [email protected]
United Kingdom
UK tax treatment of US Limited Liability Companies
In June 2015, the UK Supreme Court found in the case of Anson v HMRC that an individual was allowed double taxation relief (DTR) in the UK for US tax paid on profits of a Delaware Limited Liability Company (LLC) in which he was a member.
This decision ran counter to the long-established practice of the UK tax authority, HM Revenue & Customs (HMRC), which is to treat LLCs as companies such that profits are only taxable when distributed, and for corporation tax purposes (but not income tax) DTR is available for underlying US tax paid in respect of the distributed profits.
HMRC published their response to the Supreme Court’s decision on September 25, 2015. In it they indicate that they believe that the decision in the case is specific to the facts in that case, and that where LLCs have been treated as companies in the past they will continue to be treated as companies. HMRC also proposes to continue its existing approach to determining whether a US LLC should be regarded as issuing share capital.
PwC observation:Groups that have LLCs should review the impact of the case and the HMRC statement on their group structures, and where they wish an LLC to be treated as opaque and/or to have issued share capital, ensures that the terms of the LLC agreement are appropriately drafted.
HMRC’s response also indicates that where individuals claim DTR relying on the Supreme Court decision, the position ‘will be considered in a case by case basis’. However, it is unclear from this when look through treatment can be applied, and from our discussions with HMRC it seems likely that their view is that this will only apply in very limited cases (if at all).
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TreatiesHong Kong
The Hong Kong‑South Africa double tax treaty entered into force
The Hong Kong‑South Africa double tax treaty (DTT) entered into force on October 20, 2015. The DTT will take effect in Hong Kong as of April 1, 2016.
PwC observation:The conclusion of a DTT with South Africa may help in promoting a closer economic tie between Hong Kong and South Africa. Given that Hong Kong does not currently impose any withholding tax (WHT) on dividends and interest paid to non-residents and the WHT rate on royalties under Hong Kong domestic law (4.95%) is lower than that under the Hong Kong-South Africa DTT (5%), the major benefit of the Hong Kong‑South Africa DTT for South African resident corporations investing in Hong Kong will be the protection against Hong Kong profits tax exposure as long as their business activities carried out in Hong Kong do not create a permanent establishment (PE) in Hong Kong.
Fergus WT WongHong KongT: +852 2289 5818E: [email protected]
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