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Approved Changes (3)

Australia

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Australia Issues Update on Tax Avoidance Taskforce's Work on e-Commerce and Digital Economy Industry

The Australian Taxation Office has issued release providing an update on the work of the Tax Avoidance Taskforce in addressing issues with the e-commerce and digital economy industry.

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Taskforce focus on e-commerce and digital economy industry

As part of the work undertaken by the Tax Avoidance Taskforce, we have done substantial compliance work focusing on the e-commerce and digital economy industry.

Multinational enterprises (MNEs) operating in this industry have significantly increased the profits declared and the tax they pay in Australia as result of our efforts.

Of the various business models adopted in this industry sector, our compliance approach extended to IT/digital economy sub-industries, including:

  • IT hardware and software
  • IT consulting/technical services
  • online advertising
  • online retailing
  • payment processing
  • cloud and data hosting services
  • digital platforms – online marketplaces, online gambling/gaming and the sharing economy.

The evolving nature of this industry has transformed the way MNEs conduct their operations, resulting in new business models. This has created a unique set of challenges for us to address, and we are proud of our achievements.

At 30 June 2018, some of the key achievements include:

  • over $1 billion in cash collections
  • future revenue effects of more than $580 million over the next four years
  • the completion of many complex audits on industry leading e-commerce MNEs.

Key technical issues

Our active compliance efforts across the e-commerce and digital economy industry focused on examining several key technical issues to achieve forward and past compliance. These included, but were not limited to:

  • Transfer pricing – we have undertaken extensive compliance activities in determining the arm’s length conditions that operate for Australian subsidiaries of e-commerce MNEs with inbound supply chains.
  • Permanent establishments (PE) – as well as using the transfer pricing rules to arrive at the arm’s length outcome, in some major audits we applied the PE rules under the relevant double tax agreement. The work done in these audits introduced new laws to combat structures designed to avoid a taxable presence in Australia. The Multinational Anti-Avoidance Law (MAAL) has since eased concerns associated with these structures with many e-commerce taxpayers restructuring into MAAL compliant buy/sell arrangements.
  • Royalty withholding tax – in light of the emergence of software distribution models involving the provision of digital products and services, we considered the characterisation of payments made by Australian software distributors to offshore licensors and the royalty withholding tax implications.
  • General anti-avoidance laws – prior to the introduction of the MAAL, we considered the application of Part IVA to arrangements where Australian customer revenue was derived by a non-resident.
  • Goods and services tax (GST) amendments – recent law changes have had an impact on the taxation of cross-border e-commerce under the GST regime. From 1 July 2017, GST was extended to cross-border supplies of digital products and other services imported by Australian consumers to create a level playing field for domestic suppliers with their offshore counterparts.

Puerto Rico

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Puerto Rico Tax Reform Bill Signed into Law

On 10 December 2018, Puerto Rico Governor Ricardo Rosselló signed into law Bill No. 1544 as Law No. 257 of 10 December 2018. Some of the main measures of the law include:

  • A reduction in the basic corporate tax rate from 20% to 18.5%, resulting in a top rate of 37.5% (additional surtax, with a top rate of 19%, is maintained), as well as related adjustments in the alternative minimum tax;
  • The introduction of optional fixed tax rates for corporations whose source of income comes substantially from the provision of services that has been subject to withholding tax or estimated payment:
    • up to USD 100,000 – 6%
    • over USD 100,000 up to 200,000 – 10%
    • over USD 200,000 up to 300,000 – 13%
    • over USD 300,000 up to 400,000 – 15%
    • over USD 400,000 up to 500,000 – 17%
    • over USD 500,000 – 20%
  • An increase in the withholding tax on services from 7% to 10%, with several exemptions;
  • The introduction of a special 7% sales and use tax (SUT) rate for prepared foods, which requires that certain standards be met by the business;
  • An increase in the exemption threshold for the 4% SUT on business and professional services to annual sales of USD 200,000 (threshold applies at controlled group level);
  • The introduction of new rules for the determination of a controlled group, which generally includes a 50% ownership of one entity by another or 50% common ownership by a third entity;
  • The introduction of a general 5% individual income tax discount (credit);
  • The amendment of the alternative minimum tax rates for individuals with progressive rates of 1% to 24% (currently 10% to 24%); and
  • The introduction of optional fixed tax rates for individuals carrying on a business with progressive rates of 6% to 20%, subject to the condition that the business income has been subject to withholding tax or estimated payment.

The changes are to generally apply for periods beginning after 31 December 2018, although the increase in the exemption threshold for the SUT on services is to apply from 1 March 2019. Further, it should be noted that the law is subject to review by the Financial Oversight and Management Board in relation to Puerto Rico's budget issues, and changes may occur.

Additional details, including any changes, will be published once available.

United States

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U.S. IRS Publishes Q&A on Tax Year 2018 Reporting and Payments Arising under Section 965

The U.S. IRS has published a Q&A document that provides answers to questions related to tax year 2018 return filing and payment obligations arising under section 965 (transition tax), including reporting and payment obligations resulting from amounts included in income for the 2017 tax year. The Q&A document currently includes six questions concerning how installment payments are made, whether refunds or credits for overpayments may be received, how estimated tax payments are applied, and what forms are required for the 2018 return.

Proposed Changes (3)

Ecuador-OECD

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Ecuador Begins Process to Join the OECD

Ecuador President Lenín Moreno has issued an executive decree to begin the process of joining the OECD, which includes the establishment of a committee tasked with coordinating the procedures and establish a roadmap for the accession process. The accession process, which can take several years, involves a rigorous review and may require legislative changes in Ecuador to comply with OECD tax and transparency standards.

Saudi Arabia

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Saudi Arabia Consulting on Transfer Pricing Bylaws Including Three-Tiered Documentation Requirements

The Saudi General Authority of Zakat and Tax (GAZT) has announced the implementation of transfer pricing in Saudi Arabia based on international standards. For this purpose, draft transfer pricing bylaws have been published for public consultation. The bylaws generally follow the OECD guidelines, including rules on comparability, accepted transfer pricing methods, arm's-length range, etc. The bylaws also include disclosure and documentation requirements, which include:

  • The requirement to submit an annual disclosure form on controlled transactions with the annual tax return;
  • The requirement to prepare transfer pricing documentation, including a Master file and Local file, if the arm's length value of controlled transactions meets an SAR 6 million (~EUR 1.4 million) threshold in any 12-month period and in certain other cases, with the documentation to be submitted within 30 days of request (7 days for the Local file); and
  • The requirement to submit a Country-by-Country (CbC) report within 12 months following the end of a reporting fiscal year if annual consolidated group revenue exceeds SAR 3.2 billion (~EUR 750 million), including secondary local filing requirements and the requirement to submit CbC notifications within 120 days following the reporting fiscal year.

As drafted, the transfer pricing bylaws would be effective from the date published in the Official Gazette, although the documentation requirement would be effective from 31 December 2018 and the provisions applicable to controlled transactions would apply from the fiscal year ending 31 December 2018.

Comments on the transfer pricing bylaws may be submitted up to 9 January 2019.

United Kingdom

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Scottish Government Announces Budget Plans for 2019-20

On 12 December 2018, the Scottish Government issued a release on the budget plans for 2019-20, which were delivered in the Scottish Parliament by Finance Secretary Derek Mackay. According to the release, Secretary Mackay has set out plans to:

  • Maintain the current rates of income tax for the coming year;
  • Increase the Additional Dwelling Supplement for Land and Buildings Transaction Tax from 3% to 4% for the purchase of an additional property;
  • Reduce the lower rate of non-residential Land and Buildings Transaction Tax (LBTT) from 3% to 1%, increase the upper rate from 4.5% to 5%, and reduce the starting threshold of the upper rate so it applies from above GBP 250,000;
  • Introduce a below-inflation increase in the non-domestic rates poundage, ensuring more than 90% of properties in Scotland will be charged a lower rate, set at 49p, than other parts of the UK;
  • Maintain the Small Business Bonus Scheme and transitional support for businesses in hospitality, and for office premises in Aberdeen and Aberdeenshire as part of a GBP 750 million package of rates reliefs; and
  • Increase the standard rate of Scottish Landfill Tax (SLfT) to GBP 91.35 per tonne and the lower rate of SLfT to GBP 2.90 per tonne in 2019-20, in line with RPI inflation and Landfill Tax charges in the rest of the UK.

The Government has also published an Income Tax factsheet that explains the rates and bands for Scottish income tax in financial year 2019-2020.

Treaty Changes (5)

Argentina-United States

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Argentina Clarifies No Local CbC Report Filing Requirement for Constituent Entities of US MNEs for 2017 Reporting Fiscal Year

Argentina's tax authority (AFIP) has updated its Country-by-Country (CbC) reporting FAQs to include a question on whether constituent entities in Argentina of U.S. MNEs have a local CbC reporting filing obligation in respect of the 2017 reporting fiscal year. The answer provides that a local constituent entity is not required to submit a CbC report in respect of the 2017 reporting fiscal year mainly because there is no international agreement between Argentina and the United States providing for the automatic exchange of information that is in force for 2017.

Note, however, that for the 2018 reporting fiscal year, an agreement providing for automatic exchange will be in force, and local filing will apply unless Argentina and the U.S. sign a competent authority agreement for CbC exchange.

Costa Rica-Mexico

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Costa Rica Approves Pending Tax Treaty with Mexico

On 10 December 2018, Costa Rica's Legislation Assembly announced its approval of the bill for the ratification of the pending income tax treaty with Mexico. The Treaty, signed 12 April 2014 (previous coverage), is the first of its kind between the two countries and will enter into force 30 days after the ratification instruments are exchanged and will apply from 1 January of the year following its entry into force.

Germany-United States

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Joint Statement between Germany and the U.S. Signed on the Spontaneous Exchange of CbC Reports for 2017

According to an update to the IRS Country-by-Country Reporting Jurisdiction Status Table, Germany and the U.S. signed a joint statement on 13 December 2018 for the spontaneous exchange of Country-by-Country (CbC) reports for reporting fiscal years beginning in 2017. Although not available at the time of writing, the joint statement is likely in line with the statement for 2016 to provide that CbC Reports for fiscal years of MNE Groups commencing on or after 1 January 2017 and before 1 January 2018 will be spontaneously exchanged pursuant to Article 26 (Exchange of Information and Administrative Assistance) of the 1989 Germany-U.S. income and capital tax treaty, as amended.

Luxembourg-Belgium

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Luxembourg Approves Pending Protocol to Tax Treaty with Belgium

Luxembourg's Council of Ministers has reportedly approved a pending protocol to the 1970 tax treaty with Belgium. The protocol, signed 5 December 2017, is the third to amend the treaty and replaces paragraph 8 of the final protocol to the treaty as amended through 2009. Paragraph 8 clarifies the treatment of dependent personal services. The protocol will enter into force once the ratification instruments are exchanged and will apply from 1 January 2015.

San Marino-Untd A Emirates

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San Marino Ratifies Pending Tax Treaty with the UAE

San Marino has published Council Decree No. 165 in the Official Gazette, which provides for the ratification of the pending income tax treaty with the United Arab Emirates. The treaty, signed 11 July 2018, is the first of its kind between the two countries.

Taxes Covered

The treaty covers San Marino taxes imposed under the general income tax on individuals and persons other than individuals and covers UAE income tax and corporate tax.

Income from Hydrocarbons

Article 3 (Income from Hydrocarbons) provides that the treaty will not affect the right of either one of the Contracting States to apply their domestic laws and regulations related to the taxation of income and profits derived from hydrocarbons situated in the territory of the respective Contracting State.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted if an enterprise furnishes services through employees or other engaged personnel in a Contracting State and the activities continue for a period or periods aggregating more than 12 months.

Withholding Tax Rates

  • Dividends – 0%
  • Interest – 0%
  • Royalties – 10%

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

  • Gains from the alienation of immovable property situated in the other State; and
  • Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State.

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.

Double Taxation Relief

Both countries apply the credit method for the elimination of double taxation.

Arbitration

Article 24 (Mutual Agreement Procedure) includes the provision that any unresolved issues within a period of three years from the presentation of a case may be submitted to arbitration at the request of the person that presented the case. Unresolved issues may not, however, be submitted to arbitration if a decision on the issues has already been rendered by a court or administrative tribunal of either Contracting State.

Limitation of Benefits

Articles 26 (Limitation of Benefits) includes the provision that the benefits of the treaty will not be available to an investor who establishes a legal entity in either Contracting State for the sole purpose of getting the benefits of the treaty without having a bona fide business activity or to such companies that are directly or indirectly controlled by a third person who is not a resident of either Contracting State, if such benefits would not otherwise be available to that person.

Entry into Force and Effect

The treaty will enter into force once the ratification instruments are exchanged and will apply from 1 January of the year following its entry into force.

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