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International Tax NewsEdition 26April 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]
www.pwc.com/its
In this issue
Administration & case lawTax legislation TreatiesProposed legislative changes EU Law
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Fergus WT WongHong KongT: +852 2289 5818E: [email protected]
Tax LegislationHong Kong
Legislation on stamp duty exemption for exchange traded fund transactions enacted
The Stamp Duty (Amendment) Ordinance 2015 was gazetted on February 13, 2015 and came into effect on the same day.
Since 2010, the Hong Kong government had granted stamp duty exemption, on a case-by-case basis, to the trading of units or shares of exchange traded funds (ETFs) with registers of holders maintained in Hong Kong that track indices comprising not more than 40% in Hong Kong stocks. The Ordinance extends the stamp duty exemption to cover the purchase, sale or transfer of units, or shares of all Hong Kong listed ETFs irrespective of their underlying portfolios and dates of listing.
PwC observation:Extension of the stamp duty exemption to all Hong Kong listed ETFs provides a level playing field for all Hong Kong listed ETFs and puts Hong Kong on par with other major financial markets such as Japan, Singapore, and the US. The measure represents further efforts by the Hong Kong government in promoting the development, management, and trading of ETFs in Hong Kong, and strengthening Hong Kong’s role as an international financial and asset management centre.
Kuwait
Kuwait: New foreign direct investment (FDI) regime includes the ability for 100% ownership by foreign investors and tax holidays
Further executive regulations have now been issued concerning the application of the new foreign direct investment (FDI) Law which was introduced in June 2013, and came into force in December 2014.
The new regime offers foreign investors several incentives, including the ability to own or increase ownership in a Kuwaiti company to 100% (normally restricted to 49%), to operate through a 100% foreign owned branch, and to benefit from income tax and customs duty exemptions.
The regime can be considered for both existing and new operations and investments, except for activities in which foreign investment is prohibited or restricted. Such activities are included in the ‘negative list’ (e.g. oil extraction) that was issued recently.
In addition to the ‘negative list’, applicants will need to have regard to the benefits anticipated by the government:
• The transfer of technology.
• Stimulating the local market through engaging local suppliers for operational purchases.
• Creating job opportunities for local staff.
Other elements of the new law include the creation of the Kuwait Direct Investment Promotion Authority (KDIPA) coordinating with and comprising representatives of all relevant government entities, to streamline the approval and licensing process.
Fouad Douglas Sherif Shawki Jochem RosselKuwait Kuwait DubaiT: +965 2 227 5700E: [email protected]
T: +965 2 227 5775E: [email protected]
T: +971 304 3445E: [email protected]
PwC observation:The new regime appears to be a significant change and improvement from the previous FDI model in those sectors that can take advantage of it. Whilst further Executive Regulations and other guidance are expected to be issued, there appears to be enough information for foreign companies and investors to already consider the application of the new regime.
Profits earned by Kuwaiti private companies are, based on current practice in effect of law, subject to 15% income tax to extent foreign (non-Gulf Cooperation Council [GCC]) corporate shareholders entitled to such profits. Taxpayer is the foreign corporate shareholder who is required to file an income tax return and declare its share of the annual profits of its Kuwaiti subsidiary. The tax position of a foreign corporate shareholder in a private Kuwaiti company is therefore broadly the same as a foreign company that (directly) carries on business in Kuwait. The new FDI Law now offers the potential to obtain an exemption from foreign shareholder taxation in Kuwait, which will be granted on a case-by-case basis by the Kuwaiti tax authorities.
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Nigeria
New filing requirements for non-resident companies in Nigeria
The Federal Inland Revenue Service (FIRS) has issued a Public Notice informing non-resident companies carrying on business in Nigeria, to submit full income tax returns including audited accounts and actual profit tax computations.
Historically, the FIRS has accepted a deemed profit tax computation and a statement of turnover derived from Nigeria as sufficient for tax returns purposes by non-resident companies. Under the deemed profits approach, a profit rate of 20% on turnover was deemed by the FIRS and taxed at the corporate tax rate of 30% resulting in an effective tax of 6% on turnover. This approach evolved in practice and was in fact encouraged by the FIRS as it was simple and helped avoid disputes with FIRS regarding tax deductibility of costs. However, the deemed profits approach is meant to be applied only at the discretion of the FIRS where appropriate tax returns have not been filed.
The public notice officially confirms the FIRS’ position as all non-resident companies have been mandated to submit full tax returns commencing from the 2015 tax year (2014 financial year). However, the FIRS has indicated that it may still assess certain companies to tax based on the turnover (deemed profit) approach at its discretion.
Kenneth Erikume Taiwo Oyedele Chukwuemeka ChimeLagos Lagos LagosT: +234 805 609 9622E: [email protected]
T: +234 806 019 6593E: [email protected]
T: +234 802 594 7675E: [email protected]
PwC observation:The position of the FIRS is that tax returns that do not meet the full requirements of the law will be considered as invalid and will attract penalties accordingly. Failure to file returns within six months of the end of an accounting year attract a nominal fine on a monthly basis. The laws also stipulate that the responsible personnel may, be fined up to 100,000 Nigerian Naira (NGN) i.e. 500 United States dollars (USD) and/or a jail term of up to two years.
There are still many issues to clarify such as treatment of capital allowances, movement of assets into and out of Nigeria, head office expense allocations, and so on. It is expected that a detailed guideline will be issued in the following months.
Non-resident companies should take necessary steps to ensure full compliance and be prepared to substantiate their tax filing position and if necessary resolve their disputes with the FIRS through the established objection procedures including the Tax Appeal Tribunal and the courts.
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Agata OktawiecWarsawT: +48 22 746 4864E: [email protected]
Poland
Introduction of CFC rules
Based on the introduced provisions, a foreign corporation is considered as controlled foreign corporation (CFC) if:
• it is domiciled in a ‘tax haven’
• it is domiciled in a country which has neither concluded any international conventions double tax treaties (DTTs) with Poland, nor with the EU conventions, and
• meets jointly the following conditions:
• at least 25% of shares in its capital, or voting rights, or shares related to the right to participate in profits is owned directly or indirectly by a Polish taxpayer for an uninterrupted period of 30 days
• derives at least 50% of income from so called passive income (i.e. dividends, interest, royalties, capital gains resulting from sale of shares in companies or receivables), and
• at least one type of its passive income items is subject to a nominal tax rate lower than 14.25% or is exempt or excluded from taxation in the country of its domicile (unless the exemption results from the Council Directive 2011/96/UE on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States).
CFC regulations do not apply if the foreign corporation conducts real business activities. Also, the Company will not be subject to regulations concerning CFC if its annual income does not exceed 250,000 euros.
PwC observation:The legislative changes endeavour to discourage Polish taxpayers from investing outside of Poland purely for tax reasons and reduce tax planning structures which use CFC subsidiaries and permanent establishments (PE). Under this regime, the income earned by the CFC subsidiaries or the PEs should be subject to 19% income tax.
Portugal
Madeira International Business Centre reduced corporate income tax rate extended until 2027
On March 10, 2015, ‘SDM - Sociedade de Desenvolvimento da Madeira’, the entity responsible for the management, administration, and promotion of the Madeira International Business Centre (MIBC) announced that the European Commission has issued a formal authorisation for the fourth MIBC regime, extending the applicability of the reduced corporate income tax (CIT) rate of 5% until 2027, under the job creation and profit level brackets already applicable, to entities operating under the MIBC regime.
Furthermore, SDM informed that the regime now authorised by the European Commission will allow entities in the MIBC to benefit from the participation exemption regime including the exemption of withholding tax (WHT) on dividend payments (except to tax havens), as well as keeping the exemptions applicable on interest, royalties, and service payments. The exemptions on Stamp Duty, Surcharges, and Property Tax will be kept, but will be subject to an 80% limitation.
The fourth MIBC regime shall be included in the Portuguese domestic legislation in the near future.
PwC observation:The extension of the applicability of the MIBC’s special tax regime is a statement to Madeira’s increasing value as a stable and advantageous investment location for international investors. Investors should be aware that the benefits foreseen for the MIBC will be available until 2027, reinforcing the MIBC’s competitiveness with the added advantage that it is a regime fully approved by the European Commission.
Jorge Figueiredo Catarina NunesLisbon LisbonT: +351 213 599 618E: [email protected]
T: +351 213 599 621E: [email protected]
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Turkey
Technological product investments of the companies operating in Turkey are supported by the Turkish Ministry of Science, Industry, and Technology
Investment Support Programme for Technological Products has been initiated by the Turkish Ministry of Science, Industry, and Technology for commercializing the new product(s) developed as a result of research and development (R&D) and innovation activities, with the aim of leading technological product exports and supporting investments of enterprises located in Turkey.
The second term applications for the Investment Support Programme for Technological Products will be received until April 3, 2015 and other calls for proposals are expected to be open in the future.
The Investment Support Programme for Technological Products aims to provide subsidies to the companies operating in Turkey with regard to their investments for the production of technological products which are:
• developed as a result of R&D and innovation projects with the support of governmental institutions, foundations established under law, or international funds
• developed as a result of R&D and innovation projects which are successfully started and completed in Technology Development Zones, and [DE-68570: or]
• developed as a result of R&D activities carried in Turkey and abroad with own resources and obtained patent rights of the product.
The funding rates are defined according to the size of the applicant companies:
• Large-sized enterprises can only benefit from the machinery and equipment support subsidy and the upper limit of the investment subsidy is 2 million Turkish Lira (TRY).
• Medium-sized enterprises can benefit from both machinery and equipment subsidy and loan interest subsidy and the upper limit of the investment subsidies is TRY 10 million.
• Small-sized enterprises can benefit from machinery and equipment subsidy, loan interest subsidy, and operation costs subsidy and the upper limit of the investment subsidies is TRY 10 million.
Machinery and equipment subsidy:• The amount of investment project which is below TRY 10 million
is supported as investment expenditures.
Loan interest subsidy• The amount of the investment project to be supported can be
maximum TRY 50 million.
• Non-refundable interest rate subsidy is provided for the investment expenditures that are received from intermediaries for a minimum one year term.
• Interest rate subsidy is provided on the basis of scores agreed by Ministry.
• Upper limit of loan interest subsidy provided is TRY 10 million.
Operation costs support• Only small-sized enterprises can benefit from operation
costs subsidy.
• An application must be made to General Directorate within one year from the date of the ‘Completion Certificate’ has been obtained.
• Rental, energy, and personnel costs are covered.
PwC observation:Investment Support Programme for Technological Products has already taken the attention of many companies located in Turkey and carrying R&D and innovation activities, and the programme has encouraged these companies to make investment and commercialise their technological products which will strengthen the link between the R&D, innovation, and the market. Therefore, the programme will help R&D and innovation project results come into life with creating value for the economy and more Turkish technological products will be able to take part in international markets.
Kadir Bas Ozlem Elver KaracetinTurkey TurkeyT: +90 212 326 64 08E: [email protected]
T: +90 212 326 64 56E: [email protected]
Support Ratios
Imported Purchases Domestic Purchases
Large-sized enterprises
10% 20%
Medium-sized enterprises
30% 40%
Small-sized enterprises
40% 50%
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United States
Recent proposal to modify FIRPTA
On February 11, 2015, the Senate Finance Committee unanimously approved a bill that primarily would modify the application of the Foreign Investment in Real Property Tax Act (commonly referred to as FIRPTA) to foreign shareholders of real estate investment trusts (REITs).
Although the proposals would primarily impact REITs, the bill would, among other things, increase the 10% withholding tax (WHT) under Internal Revenue Code Section 1445 to 15% and create increased disclosure and reporting requirements for US real property holding corporations (USRPHCs) and add withholding requirements for brokers.
The proposal increases the amount of stock a foreign person may own under the Publicly Traded USRPHC Exception from 5% to 10% solely for publicly traded REITS (i.e. the proposal does not increase the percentage for publicly traded non-REITs that are USRPHCs). Additionally, the foreign ownership percentage is increased from 5% to 10% with respect to the Publicly Traded REIT Exception. Thus, any distribution from a publicly traded REIT to a less than 10% foreign shareholder would be treated as a dividend rather than effectively connected income (ECI) and would be subject to US federal income tax under Sections 871 or 881, which can be reduced under a US income tax treaty to the extent the foreign shareholder is eligible for the benefits of such treaty. Importantly, most US income tax treaties have additional requirements in order to receive a reduced rate of tax with respect to dividends from REITs.
Increased WHTUnder current law, the disposition of a USRPI is subject to a WHT equal to 10% of the amount realised. The proposal would increase the WHT to 15%. The increase would not apply to the sale of personal residences with respect to which the purchase price does not exceed 1 million United States dollars (USD) (increased from 300,000 USD). The increased WHT would apply to dispositions 60 days after the date of enactment.
Increased disclosureThe proposal contains new public disclosure requirements for any corporation that is or was a USRPHC at any time during the five-year period ending on the date on which the disclosure is made. The corporation must attach a statement to its annual tax return and include the disclosure in certain documents (websites, annual reports, Form 1099 sent to shareholders, etc.).
New withholding rules for brokersThe proposal amends the FIRPTA withholding rules to provide that in the case of any disposition of stock of a USRPHC involving a broker, the broker is required to deduct and withhold a tax equal to 15% of the amount realised on the disposition. Similar rules would apply to dispositions of publicly traded partnerships that would be USRPHCs if they were corporations.
Withholding is not required if an interest is not a USRPI under any of the USRPI exceptions.
Steve Nauheim Ilene W Fine Lauren M JanosyWashington Washington WashingtonT: +1 202 414 1524E: [email protected]
T: +1 202 346 5187E: [email protected]
T: +1 202 414 1890E: [email protected]
PwC observation:The bill would substantially increase the withholding, disclosure, and reporting requirements under FIRPTA. REITs should closely monitor the proposals and determine the impact to their structure. All USRPHCs should be aware of the increased reporting requirements and increased WHT to the extent these proposals are ultimately enacted.
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United States
US research credit extended through end of 2014
President Obama on December 19, 2014 signed into law the Tax Increase Prevention Act of 2014 (H.R. 5771), which extends, retroactively to January 1, 2014, the Section 41 research credit through December 31, 2014.
This simple one-year extension of the credit does not include changes to Section 41 of the Internal Revenue Code proposed in various research credit bills that moved through Congress during 2014. Such bills included H.R. 4438, passed by the House of Representatives on May 9, which would have made permanent a modified research credit, and the EXPIRE Act, approved by the Senate Finance Committee on April 3, which would have extended the credit retroactively , through the end of 2015 (i.e. a two-year extension).
Congressional action to pass a one-year tax extenders bill came after an unsuccessful effort in late November by House and Senate leaders to reach agreement on a roughly 450 billion US Dollars (USD) tax extenders package that included a permanent extension of the research credit and either permanent or two-year extensions of dozens of other provisions. Negotiations on that package ended soon after President Obama announced that, for various reasons, he would veto the bill.
It is widely expected that the new 114th Congress, which convened on January 6, 2015, will revisit a permanent extension of the research credit as part of a broader push toward business tax reform. If, in coming months, President Obama and Congress cannot reach an agreement on business tax reform, the new Republican-led Congress may make an effort in later 2015 to make permanent the research credit as part of separate legislation addressing temporary tax provisions.
PwC observation:The timing of the extension of the research credit for 2014 will require taxpayers to act quickly to estimate the amount of the research credit for financial statement purposes, while recent developments, such as the final Section 174 regulations, final, and temporary Section 41 regulations published in June allowing some taxpayers to elect the alternative simplified credit for a tax year on an amended return, the US Tax Court’s Suder decision (in which one of the key issues was whether the company engaged in ‘qualified research’), and potential guidance on internal-use software, provides opportunities for taxpayers to revisit their eligible activities.
Kendall Fox Sian Rayson Brett RitterNew York New York Tysons CornerT: +1 646 471 3261E: [email protected]
T: +1 646 471 5089E: [email protected]
T: +1 703 918 6689E: [email protected]
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Proposed legislative changesHong Kong
Tax proposals in the 2015/2016 Hong Kong budget
The Financial Secretary of Hong Kong delivered the 2015/2016 budget on February 25, 2015.
The budget does not propose any change to the Hong Kong profits tax rates, which remain at 16.5% (for corporations) and 15% (for incorporated businesses). However, a waiver of 75% of Hong Kong profits tax for year of assessment 2014/2015, subject to a ceiling of 20,000 Hong Kong dollars (HKD), was proposed in the budget.
In addition, the following tax incentives were proposed:
• Considering expanding the scope of tax deduction for capital expenditure incurred on the purchase of intellectual property (IP) rights to cover more types of IP rights as appropriate.
• Amending the tax law to allow, under specified conditions, interest deductions under profits tax for corporate treasury centres and reduce profits tax for specified treasury activities by 50% (i.e. applying a concessionary tax rate of 8.25%).
The implementation of the above budgetary proposals is subject to the enactment of the relevant legislative amendments.
Fergus WT WongHong KongT: +852 2289 5818E: [email protected]
PwC observation:The expansion of the scope of tax deduction for acquisition costs of IP rights would help to attract more technology companies to Hong Kong and promote IP trading and ownership. On the other hand, the proposed interest deductions on corporate treasury centres and the concessionary tax rate for specified treasury activities would help to attract more multinational enterprises to set up their corporate treasury services for their group companies in Hong Kong. These measures represent the Hong Kong government’s commitment to develop Hong Kong as an IP trading hub and to enhance the competitiveness of Hong Kong’s financial services industry.
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New Zealand
Officials’ Issues Paper on related parties debt remission
The New Zealand Inland Revenue recently released an Officials’ Issues Paper seeking feedback on proposed legislative changes to make the debt remission rules more transparent for taxpayers.
These proposals are of particular interest to multinational groups with New Zealand subsidiaries that may be considering debt recapitalisations.
A draft interpretation released by Inland Revenue in 2014 suggested that debt recapitalisations may be considered tax avoidance and, if so, would result in taxable debt remission income. That interpretation statement has recently been finalised with no material changes to the conclusion. The interpretation statement is included as an appendix to the Issues Paper.
The Issues Paper acknowledges that the Inland Revenue interpretation has created uncertainty for taxpayers on the tax implications of debt recapitalisations. In response to this uncertainty, the Issues Paper proposes changes to domestic legislation to make the debt remission rules more transparent for taxpayers.
The Issues Paper discusses proposed changes to the tax consequences of related parties debt remission in the following scenarios:
• Debt recapitalisation inside a wholly owned group.
• Debt remittance (or capitalisation) where the shareholders are New Zealand resident.
• Remittance (or capitalisation) of debt held by a controlled foreign company (CFC) of a New Zealand resident.
• Remittance (or capitalisation) of debt by a New Zealand company with a non-resident corporate shareholder.
The Issues Paper proposes that there should be no debt remission income for the debtor when (i) the debtor and creditor are both within the New Zealand tax base (including CFCs debtors - i.e. scenarios 1-3 above) and (ii) either the debtor and creditor are members of the same wholly owned group, or the debtor is a company or partnership and certain other features are met. The changes are proposed to apply retrospectively from the commencement of the 2006/07 [DE-68570: 2006/2007] tax year.
The Issues Paper considers the analysis of ‘inbound’ cross-border loans (i.e. scenario 4 above) to be complex as the creditor is not within the New Zealand tax base. Officials are still undertaking policy analysis on the implication of debt capitalisations in the inbound context (particularly in relation to the interaction with thin capitalisation and transfer pricing rules). The use of related party inbound debt is seen as a key Base Erosion and Profit Shifting (BEPS) concern. Submissions are being sought on this point and are due by April 14, 2015.
PwC observation:The Issues Paper and appendix set out Inland Revenue’s views in respect of debt capitalisation/remission. Many do not agree with the avoidance interpretation released by Inland Revenue in 2014 and this analysis has resulted in considerable uncertainty for restructuring between related parties. We are pleased to see Inland Revenue Officials listening to comments from interested parties, including PwC, and proposing legislative change to make these rules more certain for taxpayers. In the light of the uncertainty created by the 2014 interpretation and the potential for retrospective application, many taxpayers have been giving careful consideration to, and in some instances holding off, potential restructures until the rules were clarified.
While the Issues Paper provides some examples of debt recapitalisation/remittance scenarios, we would appreciate further Inland Revenue guidance that incorporates a wider spectrum of domestic recapitalisation scenarios.
We expect to see more comments and discussions in relation to inbound debt capitalisations/remissions, particularly in the light of the current BEPS debate.
Briar S Williams Nicola J Jones Kate L PearsonAuckland Auckland AucklandT: +64 9 355 8531E: [email protected]
T: +64 9 355 8459E: [email protected]
T: +64 9 355 8477E: [email protected]
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United States
2016 Budget proposes minimum tax on foreign income and adds other significant international tax proposals
The US Treasury Department’s ‘Green Book,’ released on February 2, 2015, outlines the Obama Administration’s Budget proposals for fiscal year 2016 (FY 2016).
It explains the mechanics of a new proposal for a 19% minimum tax on foreign income and a one-time 14% transition tax on previously untaxed foreign income. In addition, it contains significant changes to some international tax proposals made in previous Budgets. These changes include elimination of three large items: deferring foreign interest expense deductions, pooling foreign taxes for foreign tax credit (FTC) purposes, and the subpart F ‘excess return’ proposal. However, all of these items are addressed in some fashion within the foreign minimum tax proposal; in particular, the new regime includes partial or complete denial of many foreign interest deductions. The FY 2016 Budget also adds five new proposals in the international tax area beyond the minimum and transition taxes, including permanent extensions of the CFC look-through and active financing subpart F exceptions.
The FY 2016 Budget reaffirms President Obama’s support for ‘business tax reform’ that would lower the top US corporate tax rate to 28%, with a 25% rate for domestic manufacturing income. For US multinationals, the focus in the Administration’s FY 2016 Budget has shifted from outbound intangible property transfers and base erosion to the minimum and transition tax concepts that would fundamentally change the US international tax system.
While President Obama mentioned a ‘minimum tax on overseas profits’ in his 2012 business tax reform framework, the FY 2016 Budget is the first time the Administration has laid out specific proposals for a minimum tax on foreign earnings. Additional new international items include further subpart F tightening and immediate application of worldwide interest expense allocation. Other key international items include the far-reaching thin capitalisation proposal and base erosion proposals paralleling the Organisation for Economic Co-operation and Development (OECD) base erosion and profit shifting (BEPS) process.
Previous years’ Section 7874 proposal to limit corporate expatriation has expanded to include the sharing of tax return information with other US federal agencies but narrowed to exclude transactions where a US target’s stock has less value than the foreign acquirer’s stock. In addition, items in the international tax area include familiar proposals addressing business outsourcing/insourcing, outbound IP transfers, reinsurance premiums paid to foreign affiliates, sales of partnership interests, and various FTC reforms, including stricter rules for dual capacity taxpayers.
Tim Anson Michael Urse Chip HarterWashington Cleveland WashingtonT: +1 202 414-1664E: [email protected]
T: +1 216 875-3358E: [email protected]
T: +1 202 414-1308E: [email protected]
PwC observation:The FY 2016 Budget introduces significant new international tax proposals that could provide a basis for business tax reform efforts. In addition, the Budget retains items that reflect ongoing concerns with corporate expatriation or that coincide in part with the OECD’s BEPS initiative. That BEPS process may well affect US international tax law going forward, either directly or indirectly. With the focus now turning to the House Ways and Means Committee and Senate Finance Committee, companies should stay engaged in the tax reform discussion.
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Administration and case lawBrazil
Tax rulings issued dealing with the registration of payments in the Integrated System of Foreign Service Trade (SISCOSERV)
On February 25, 2015 and February 26, 2015, the Brazilian Federal Revenue Authorities (RFB) issued a number of rulings in response to formal consultations by taxpayers in relation to the registration of certain payments in the SISCOSERV.
By way of background, since August 2012, Brazilian individuals, legal entities and other entities without legal personality are required to provide information to the Ministry for Development, Industry, and International Trade in relation to transactions carried out with non-residents involving services, intangibles, and other operations that produce changes to the Brazilian entity’s net worth.
In response to ongoing uncertainty in relation to whether certain transactions should be registered in the SISCOSERV, the RFB have issued a number of rulings responding to formal consultations made by taxpayers.
On February 25, 2015, the RFB issued Tax Ruling No. 20/2015 in relation to whether salary and allowance payments made by Brazilian entities to their employees sent to work abroad should be registered in the SISCOSERV. Broadly, registration in the SISCOSERV will be required where the transaction is realised between a resident or entity/individual domiciled in Brazil and a resident or entity/individual domiciled abroad.
Brazilian workers abroad are generally considered residents in Brazil during the first 12 consecutive months of absence from the country. From the 13th consecutive month of absence from Brazil, the worker should be considered a non-resident for Brazilian tax purposes and therefore any payments made to this worker should be registered with SISCOSERV. The above treatment will also apply where the payments to the worker are made through intermediary agencies abroad.
On February 25, 2015, the RFB issued Tax Ruling No. 21/2015, providing guidance on registration requirements for payments made by Brazilian entities in relation to cost sharing arrangements, where the activity is classified under the Nomenclature of Services (NBS). The NBS sets out a list of codes in order to classify the activities for SISCOSERV purposes (some codes being quite specific while others are quite broad). Pursuant to the ruling, the RFB considers that where a foreign group entity acquires services from a third party, which are subsequently recharged to the Brazilian entity, information in relation to the payments made by the Brazilian entity to the foreign group entity should be registered in the SISCOSERV. Further, where the foreign group entity uses its own administrative structure to provide benefits to the group (including the Brazilian entity), information relating to the payments made by the Brazilian entity to the foreign group entity in relation to the provision of these services should be registered, on the basis that such transactions produce changes to the Brazilian entity’s net worth.
On February 26, 2015, the RFB issued Tax Ruling No. 32/2015 in relation to whether payments made by Brazilian entities with a ‘commercial presence’ abroad are obliged to register in the SISCOSERV, information related to the acquisition of services, intangibles, and other transactions producing a change in net worth. Under the General Agreement on Trade in Services (a treaty to which Brazil is a signatory) the expression ‘commercial presence’ includes representative offices of the Brazilian companies, located abroad. Therefore, where representative offices of Brazilian entities located abroad make acquisitions of services or intangibles or enter into other operations resulting in a change to the net equity, the relevant information should be registered in the SISCOSERV.
Durval Portela Philippe Jeffrey Mark ConomySao Paolo Sao Paolo Sao PaoloT: +55 11 3674 2582E: [email protected]
T: +55 11 3674 2271E: [email protected]
T: +55 11 3674 2519E: [email protected]
PwC observation:Brazilian entities or representative offices entering into transactions contemplated by the rulings should consider their current registration and disclosure practices with respect to SISCOSERV in order to determine whether they may be impacted by the rulings.
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Singapore
Research and development update
On January 22, 2015, the Singapore tax authorities (IRAS) issued a revised circular on the research and development (R&D) tax measures.
The circular incorporates a new Annex H to provide taxpayers in the food and beverage industry with guidance on how to ascertain if their projects qualify for the R&D tax measures.
PwC observation:Ascertaining whether projects qualify as R&D for tax purposes is frequently the subject of much uncertainty. It is hoped that the guidance will provide more clarity to taxpayers to determine if their projects are qualifying R&D projects.
Paul LauSingaporeT: +65 6236 3388E: [email protected]
Paul LauSingaporeT: +65 6236 3388E: [email protected]
Singapore
2015 Budget changes
Singapore’s 2015 Budget Statement was delivered on February 23, 2015. It included the following tax proposals:
• 30% corporate tax rebate for Years of Assessment (YAs) 2016 and 2017, capped at 20,000 Singapore dollars (SGD) per YA.
• A new tax incentive, the International Growth Scheme (IGS), which provides for a 10% concessionary tax rate for up to five years on incremental income from qualifying activities. This incentive is intended to encourage larger Singapore companies to expand overseas while anchoring key business functions in Singapore.
• Extension of the mergers and acquisitions (M&A) scheme which was due to expire on March 31, 2015, to March 31, 2020, and the following enhancements to the scheme, which take effect from April 1, 2015:
• Increase in the M&A tax allowance from 5% to 25% of the cost of qualifying share acquisitions, subject to a reduced cap of SGD 20 million (previously SGD 100 million) of the value of qualifying acquisitions per YA.
• Reduction in the stamp duty relief available on the transfer of unlisted shares in Singapore companies from SGD 200,000 (0.2% of SGD 100 million acquisition value) to SGD 40,000 (0.2% of SGD 20 million acquisition value) per financial year.
• Lowering of the minimum shareholding acquisition threshold to qualify for the scheme, although additional qualifying conditions are imposed.
• The double tax deduction for qualifying expenses incurred for certain market expansion and investment development activities will be expanded to cover qualifying manpower expenses incurred from July 1, 2015 to March 31, 2020 for Singaporeans posted to new overseas entities, capped at SGD 1 million for each approved entity a year.
• The minimum loan quantum for applications for the Approved Foreign Loan incentive, which provides for reduced withholding tax (WHT) rates or WHT exemption for interest payments on approved loans taken from non-residents to purchase productive equipment, has been increased from SGD 200,000 to SGD 20 million with effect from February 24, 2015.
• The approval window to award incentives under the Maritime Sector Incentive (MSI) scheme has been extended to May 31, 2021, and the following enhancements were introduced with effect from February 24, 2015:
• Tweaks to the incentives for ship operators to provide clarity on tax treatment on what constitutes qualifying income or activities. For example, certainty was needed on the scope of qualifying tax-exempt income to cover mobilisation fees, demobilisation fees and holding fees. The inclusion of incidental container rentals as exempt income will address the concerns of traditional liner operators which may face excess capacity during the troughs of global trade cycles and opportunities arise to keep assets productive. In addition, the incentive for operators of foreign-flagged ships can now enjoy tax exemption on remitted qualifying profits of approved foreign branches.
• The incentive for maritime lessors is expanded to cover income derived from finance leases treated as sale under taxation rules.
• The definition of qualifying ship management activities under the incentives for ship operators and providers of shipping-related support services will be updated to keep pace with industry changes.
• Existing incentive companies providing shipping-related support services will be allowed to renew their award tenure for another five years, subject to qualifying conditions and higher economic commitments.
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• The automatic WHT exemption on qualifying payments on loans taken to finance the construction or purchase of qualifying assets is extended to cover finance leases, hire-purchase arrangements, and loans used to finance equity injection into or intercompany loans to wholly-owned special purpose vehicles (SPVs) for the purchase or construction of vessels, containers, and intermodal equipment by the SPVs. The exemption is also extended to qualifying loans taken on or before May 31, 2021.
• The development and expansion incentive for international legal services has been extended for five years until March 31, 2020.
• A tax exemption will be introduced for non-resident mediators deriving income from mediation work carried out in Singapore from April 1, 2015 to March 31, 2020.
• The suite of tax concessions enjoyed by real estate investment trusts, with the exception of stamp duty remission for certain transfers of property, have been renewed until March 31, 2020.
• The tax deduction scheme for collective impairment provisions made by banks, merchant banks, and finance companies in order to comply with requirements imposed by the Monetary Authority of Singapore (MAS) was scheduled to lapse after YA 2016 or YA 2017 (depending on the financial year end of the bank or finance company). It has been extended by a further three years to YA 2019 (or YA 2020, as the case may be).
• Under the Enhanced-Tier Fund (ETF) tax incentive which provides for tax exemption for specified income derived from designated investments by approved fund vehicles, master-feeder fund structures may apply to meet the qualifying conditions for the ETF scheme on a collective basis. With effect from April 1, 2015, SPVs within a master-feeder fund structure may also be included in the fund’s application to meet the qualifying conditions on a collective basis.
• The tax exemption available to approved fund management companies managing approved venture capital funds will be withdrawn from April 1, 2015. It will be replaced with a 5% concessionary tax rate, for which approval may be granted from April 1, 2015 to March 31, 2020.
• The Angel Investors Tax Deduction scheme which allows an approved angel investor to deduct 50% of the cost of qualifying investments (capped at SGD 500,000 of investments a year) against his taxable income has been extended from March 31, 2015 until March 31, 2020. It has also been enhanced to include certain investments that are co-funded by government agencies under specified schemes.
• The offshore insurance business tax incentive schemes which provide for a 10% concessionary tax rate on qualifying income derived by approved offshore general insurers, approved offshore life insurers, and approved offshore composite insurers were due to expire on March 31, 2015. They have been extended until March 31, 2020. A renewal framework will also be introduced from April 1, 2015.
• Qualifying donations made to approved charities in 2015 are eligible for a 300% tax deduction. Qualifying donations made from 2016 to 2018 will be allowed a 250% tax deduction.
• The investment allowance schemes for energy efficiency and green data centres have been consolidated and extended until March 31, 2021.
• Review dates will be legislated for certain tax concessions to ensure their continued relevance, and certain tax concessions will be withdrawn. Most notably, this includes the 10% concessionary tax rate for income derived from offshore leasing of plant and machinery, which will be withdrawn with effect from January 1, 2016. This will mainly affect sectors such as oilfield services and consumer products, for which targeted incentives are not available.
PwC observation:This year’s Budget contains measures that continue to support economic restructuring through promoting productivity and innovation, as well as those that encourage Singapore enterprises to internationalise. Notably absent from the Budget, though, was anything specific for attracting inbound foreign direct investments (FDI).
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Peter Cussons Jonathan Hare Chloe PatersonLondon London LondonT: +44 207 804 5260E: [email protected]
T: +44 207 804 6772E: [email protected]
T: +44 207 213 8359E: [email protected]
United Kingdom
CJEU finds UK cross-border group relief legislation compatible with EU law
The Court of Justice of the European Union (CJEU) published its judgment in Commission vs United Kingdom (UK) (C-172/13) on February 3, 2015 regarding infringement proceedings issued by the European Commission against the UK’s cross-border group relief provisions which were introduced with effect from April 1, 2006 following the CJEU’s judgment in the Marks & Spencer case (December 2005).
The Commission argued that these provisions are in breach of both the Treaty on the functioning of the European Union (EU) and the European Economic Area (EEA) agreement on the basis that the conditions that must be met in order to be able to claim relief make it virtually impossible to obtain relief.
The CJEU dismissed the Commission’s action in its entirety. Firstly, it rejected the Commission’s assertion that the requirement in the UK legislation for the taxpayer to demonstrate the losses are final (i.e. that immediately after the end of the accounting period in which the loss is incurred, there’s no possibility of it being utilised overseas in past, current, or future periods), is disproportionate. The CJEU also determined that it is acceptable for cross-border loss relief claims to be denied where the loss-making company’s territory makes no provision for losses to be carried forward (e.g. Estonia). Finally, the CJEU rejected the Commission’s argument that the legislation does not provide relief for losses incurred prior to April 1, 2006, determining the fact that the UK has been allowing cross-border loss relief claims.
PwC observation:This decision will significantly limit claims for cross-border loss relief for losses from April 1, 2006 to those:
• where the foreign subsidiary has been put into liquidation in the relevant loss accounting period,
• where there is evidence of an intention to wind up a loss-making subsidiary and initiation of the liquidation process soon after the end of the loss accounting period, or
• where the trade has ceased and all income producing assets have been sold immediately after the end of the loss accounting period.
This decision should not impact claims for losses sustained prior to April 1, 2006, which according to the Supreme Court decision in the Marks & Spencer case can be made by demonstrating that the loss is ‘final’ at the time of the relevant group relief claim.
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EU LawFrance
French 3% contribution on distribution of profits: the European Commission launches infringement procedure against France
Further to a claim, the European Commission has launched an infringement procedure against France as regards the French 3% contribution on distribution of profits enacted in 2012 (so-called 3% contribution).
It applies to distributions of dividends and profits by companies subject to French corporate income tax (CIT) with the exception, in particular, of small and medium-sized enterprises (SMEs) (as defined by European Union [EU] law).
Pursuant to Article 258 of the Treaty on the Functioning of the EU, the European Commission sent a formal notice to France inviting it to submit its observations to the objections raised by the Commission against the 3% contribution. In principle, this exchange of views between the European Commission and France is not publicised.
Where France fails to convince the European Commission of the compliance of the 3% contribution with EU law, the Commission may then deliver a reasoned opinion asking France to amend the 3% contribution legislation to make the necessary amendment to the French provisions in order to comply with EU law. If France fails, the Commission could refer the case to the Court of Justice of the European Union (ECJ).
France received the formal notice of the European Commission just a few days after the Belgian Constitutional Court referred questions to the ECJ for a preliminary ruling with respect to the compatibility of the ‘Fairness tax’ with EU law, which has some similarities with the French 3% contribution.
Renaud JourffroyParisT: +33 1 56 57 42 29E: [email protected]
PwC observation:There are some arguments to consider that the 3% contribution would not be compliant with EU principles under certain circumstances. Some taxpayers have already introduced court procedures so as to challenge the 3% contribution on that ground. The procedure introduced by the European Commission raises the opportunity for other taxpayers to introduce similar claims prior to any potential changes in the 3% contribution regime.
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TreatiesChina
New China-France double taxation treaty (DTT) entered into force
The new double tax treaty (DTT) between China and France and its protocol entered into force on December 28, 2014 and will be applicable to income derived on and after January 1, 2015.
The new DTT and its protocol were signed on November 26, 2013, with the following new features as compared with the old one:
• Clarification on treaty application to partnership and other similar entities.
• The time threshold for constituting a construction permanent establishment (PE) increases from six months to 12 months while that for constituting a service PE is changed from six months to 183 days within any 12 month period.
• A reduced withholding tax (WHT) rate of 5% on dividends if the corporate beneficial owner directly holds at least 25% of the company paying the dividends.
• Further clarification on the circumstances where the source country could impose tax on capital gains arising from the equity transfer, including a 36 months look back period in determining whether the company being disposed of is a property-rich company; and a 12 months look back period for a non-property rich company in determining whether the transferor directly or indirectly holds at least 25% of the shares in that company.
• Anti-treaty shopping provisions are added to disregard abusive transactions or arrangements. In addition, a limitation of benefit paragraph is added to the articles of dividends, interest and royalties, denying benefits where the transaction was entered into in order to take the advantage of treaty benefits.
• The clause on tax sparing credit has been removed in the new DTT and French residents can only claim foreign tax credit on the amount of China WHT actually paid.
Matthew MuiChinaT: +86 10 6533 3028E: [email protected]
Fergus WT WongHong KongT: +852 2289 5818E: [email protected]
PwC observation:In general, the new DTT follows the development of the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention in many ways. It also includes articles and provisions that are found in new or updated DTTs which China or France have been pursuing with other jurisdictions in recent years. Obviously, the competent authorities in China and France would strengthen tax cooperation to tackle cross-border treaty-shopping transactions. With this new DTT entering into force, investors are suggested to revisit their current investment structure and business arrangements and assess the impact instantly.
Hong Kong
The second protocol to the Hong Kong-Vietnam double tax treaty entered into force
The second protocol to the double tax treaty (DTT) between Hong Kong and Vietnam entered into force on January 8, 2015. It will take effect in Hong Kong from April 1, 2016.
The protocol updated the Exchange of Information (EOI) article in the DTT to the more liberal 2004 version of the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention. The article requires the contracting parties, upon receipt of a valid request for information, to exchange information even when there is no domestic tax interest involved. However, the scope of information that can be exchanged is still restricted to information relating to the types of tax covered by the DTT.
PwC observation:Currently, there are two other Hong Kong DTTs that still impose a domestic tax interest requirement for exchanging information under the EOI article (i.e. the DTTs with Belgium and Thailand). It is understood that Hong Kong is currently seeking to update the EOI articles in these two DTTs.
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Poland
Poland ratified the agreements on the exchange of information with Bermuda and the Cayman Islands
In December 2014, the ratification procedures of Poland s tax agreements on the exchange of information (TIEA) with Bermuda and the Cayman Islands had been completed.
The Agreement with the Cayman Islands entered into force on December 11, 2014 and the Agreement with Bermuda is entered into force on March 15, 2015.
From a Polish perspective, the agreement between Poland and the Cayman Islands includes corporate and individual income taxes and for the Cayman Islands it covers all taxes. The agreement between Poland and Bermuda is applicable to corporate and individual income taxes from a Polish perspective. For Bermuda it covers direct taxes, regardless of their type and name.
In accordance with the procedure provided for the exchange of information (EOI) on request, the parties may submit information regarding, inter alia, assessment and collection of taxes, the recovery and enforcement of tax arrears or the investigation or prosecution of tax matters in criminal tax offenses. In addition, the Agreements rule the EOI between banks and other financial institutions as well as aspects of confidentiality.
Poland neither has a double tax treaty (DTT) with Bermuda nor with the Cayman Islands. Furthermore, the Polish corporate income tax (CIT) Law does not provide for clear rules defining the ‘income derived from territory of Poland’. Therefore, Bermudan and Cayman entities investing in Poland are generally subject to 19% Polish CIT or 20% Polish withholding tax (WHT) on any income that can be treated as ‘derived from the territory of Poland’.
This means that not only capital gains on Polish securities and profits paid on such securities, but also gains and profits generated on more sophisticated financial instruments, including equivalents of Polish dividends paid within derivative contracts, may be considered subject to taxation in Poland by the Polish tax authorities.
PwC observation:TIEAs will allow the Polish tax authorities to effectively verify whether Bermudan or Cayman entities earn any income that should be treated as ‘derived from the territory of Poland’ and assessing their tax duties accordingly.
In view of the recent judgment of the European Court of Justice (ECJ) (C-190/12), investment funds established outside of the European Union (EU) might be exempt from taxation in Poland, provided that they are veritably comparable with Polish investment funds. When TIEAs are coming into force, it seems that the Polish tax authorities will be able to verify the comparability of foreign investment vehicles with the Polish investment funds. Thus, if such entities are in fact comparable to the Polish investment funds, they should be exempt from taxation in Poland. If they already paid any taxes in Poland, they may also have a chance for applying for tax refunds.
Agata OktawiecWarsawT: +48 22 746 4864E: [email protected]
Jorge Figueiredo Catarina NunesLisbon LisbonT: +351 213 599 618E: [email protected]
T: +351 213 599 621E: [email protected]
Portugal
Tax treaty with Georgia is approved and ratified
On March 5, 2015, it was published in the Official Gazette that the tax treaty signed between Portugal and Georgia has been approved and ratified.
This tax treaty will limit the tax withheld at source to 10% on dividends (5% under certain conditions), to 10% on interest, and to 5% on royalty payments. The entrance into force of the above tax treaty is pending on the completion of all formalities required by both states.
PwC observation:The approval of this tax treaty is another step taken by the country to facilitate foreign investment and the investment of Portuguese entities abroad, as the extension of the treaty network allows for an increase of the withholding tax (WHT) reductions available. Following recent treaties concluded by the country, this tax treaty also establishes the foundations to the procedures of cooperation and exchange of information (EOI) regarding tax matters, increasing the effectiveness of the fight against tax fraud and tax evasion.
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Paul LauSingaporeT: +65 6236 3388E: [email protected]
Singapore
Tax treaties update
Singapore and France signed a revised treaty on January 15, 2015, which offers improved terms for businesses such as lower withholding tax (WHT) rates for dividends, i.e. 5% if the beneficial owner is a company holding (directly and/or indirectly) at least 10% of the share capital of the company paying the dividends, and 15% in all other cases.
Furthermore, the new treaty with France contains new anti-abuse provisions.
On the same date, Singapore and Uruguay signed a treaty which clarifies the taxation rights of both countries on all forms of income flows arising from cross-border business activities. Among other things, it provides for reduced WHT rates of 10% on interest and 5% on copyright royalties. Both treaties have not yet been ratified and do not have the force of law.
PwC observation:The treaties are expected to further enhance trade and investment flows once they enter into force. It should be noted that the anti-avoidance article in the Singapore-France treaty refers to a main purpose test, as opposed to the more broadly worded provision (including the principal purposes test) proposed in the Organisation for Economic Co-operation and Development (OECD) paper on base erosion and profit shifting action (BEPS) 6: preventing treaty abuse.
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