Worldwide Tax News
The Australian Taxation Office has issued Tax Determination (TD) 2018/19, which provides that for the 2018-19 income year, the improvement threshold for capital gains tax (CGT) purposes is AUD 150,386. The threshold applies in relation to the CGT treatment of capital improvements to pre-CGT assets (those acquired before 20 September 1985). Such improvements are treated as separate assets and subject to CGT at the time the asset is sold (or other CGT event occurs) if the cost base of the improvement is more than the improvement threshold for the income year and more than 5% of the amount of consideration received.
European Commission Finds Luxembourg Granted Illegal State Aid to Gas Company Engie with Rulings on Hybrid Financing Arrangements
The European Commission has announced its decision that two tax rulings provided by Luxembourg to the Engie group provided undue tax advantages that are illegal under EU State aid rules. The decision concerns rulings granted in relation to two intra-group financing arrangements implemented in 2008 and 2010 for two Engie group companies in Luxembourg, Engie LNG Supply and Engie Treasury Management. Under each arrangement, financing was provided by another Luxembourg company, Engie LNG Holding, via an intermediary, Compagnie Européenne de Financement. This financing was in the form of convertible loans.
With the first ruling, Engie LNG Holding was allowed to treat the financing as an investment in return for shares (equity), while Engie LNG Supply was allowed to treat the financing as debt, and as such, make significant deductions from their taxable profits while not actually making any interest payments. This resulted in a payment of taxes on only about 1% of its profits, with the remaining 99% not taxed at the level of LNG Supply or at the level of Engie LNG Holding, which received the profits in cash after the loan converted and the shares were canceled.
In its decision, the Commission found that all income transferred to Engie LNG Holding should have been taxed either as profits of Engie LNG Supply or profits of Engie LNG Holding at the standard Luxembourg corporate tax rate of around 29%, meaning that Luxembourg must recover about EUR 120 million in unpaid tax, plus interest. With respect to the financing for Engie Treasury Management, the loan has not yet been converted, but once it has, the profits must also be taxed in line with the State aid decision.
Greek Parliament Approves Law Amending Change of Ownership Loss Rules, Dividend Credit Rules, VAT Rules, and Others
The Greek parliament approved Law 4549/2018 on 14 June 2018, which includes several amendments, including in relation to tax law. Some of the main tax-related changes include:
- New rules regarding the forfeiture of loss carryforwards upon change in ownership that include a new 50% or greater change in business activities test in addition to the 33% or greater change in direct or indirect ownership test, as well as the removal of the exemption where a change in ownership was for valid business or commercial reasons;
- Changes in the wording of the provision for the deduction (credit) of foreign tax in relation to dividends received from a tax resident of an EU Member State when the conditions for an exemption are not met, essentially providing that a credit may be claimed for the amount of tax due in respect of the underlying profit relating to the distributed profits, instead of the amount of tax paid, which alleviates practical difficulties such as providing proof of payment or timing mismatches;
- New transfer pricing adjustment rules in relation to VAT, which allow the tax authority to adjust the VAT base of transactions between related parties in cases where the price for a supply of goods or services is below the market (arm's length) price and either the supplier or the recipient does not have a full right to deduct input VAT;
- Amendments to the VAT small enterprise regime (exemption if turnover below EUR 10,000) to provide that:
- Persons may opt for the small enterprise regime in their first year of operations;
- The minimum two-year period before being allowed to opt out no longer applies; and
- Where the EUR 10,000 annual turnover VAT exemption threshold for small enterprises is exceeded, VAT obligations apply immediately, instead of the following year;
- The depreciation rate for vehicles for commodity transport is set at 12% for both domestic and cross-border transport, and the depreciation rate for passenger transport is set at 16%, except for aircraft, trains, and ships;
- New rules requiring that if a legal entity changes its bookkeeping from double-entry to single-entry, any non-distributed profits at the time of the change will be immediately subject to a 15% withholding tax;
- Amendments to the definition of a non-cooperative jurisdiction, including that a jurisdiction will be considered non-cooperative if the jurisdiction:
- Is not an EU Member State;
- Has not received at least a largely-compliant rating from the OECD on transparency and exchange of information standards;
- Has not concluded an agreement with Greece providing for administrative assistance or has not signed the Mutual Assistance Convention; and
- Has not committed to the exchange of financial account information under the OECD Common Reporting Standard by the end of 2018.
The changes generally apply from the 2018 fiscal year, although the loss forfeiture changes apply retroactively from 1 January 2014, the 15% withholding tax when changing to single-entry booking apply from 14 June 2018, and the small enterprise VAT changes apply from 1 January 2019.
On 19 June 2018, Nigeria's Federal Inland Revenue Service (FIRS) formally published the Income Tax (Country-by-Country Reporting) Regulations, 2018. Key points of the regulations are summarized as follows
- The CbC reporting requirement applies for resident parent companies of groups meeting an NGN 160 billion consolidated group revenue threshold in the previous year, as well as non-parent constituent entities resident in Nigeria if:
- The ultimate parent entity is not required to file a CbC report in its jurisdiction of tax residence;
- The parent's jurisdiction has an international agreement for exchange of information with Nigeria but does not have a competent authority agreement for the exchange of CbC reports by the filing deadline; or
- There has been a systemic failure for exchange and the non-parent constituent entity has been informed;
- Where more than one non-parent constituent entity would be required to submit a CbC report, one may be designated to fulfill the obligation, although, the local filing obligation will not apply if a surrogate parent entity has been designated to file and certain conditions are met, including that the report will be exchanged with Nigeria and notification has been provided;
- CbC notification must be provided to FIRS by the end of the reporting accounting year, including whether an entity is the ultimate or surrogate parent, and if neither, details of the identity and tax residence of the reporting entity;
- The content of the CbC report is in line with BEPS Action 13 guidelines and should be filed in English, with further guidelines to be issued by FIRS;
- The deadline for the CbC report is 12 months after the end of the reporting accounting year;
- Failing to comply with the CbC reporting requirements will result in the following penalties:
- Late filing of CbC report – NGN 10 million plus NGN 1 million per month of delay
- Filing an incorrect or false CbC report – NGN 10 million
- Failure to provide notification - NGN 5 million plus NGN 10,000 per day of delay
The CbC reporting regulations are effective for reporting accounting years beginning on or after 1 January 2018.
Note – Based on current exchange rates, Nigeria's CbC reporting threshold (~EUR 380 million) is significantly lower than the standard EUR 750 million threshold, but based on exchange rates as of January 2015, which is the basis period in the OECD guidance, the threshold is equivalent to approximately EUR 730 million.
U.S. Supreme Court Holds Physical Presence Not Required for Collection of Online Sales Tax by States
On 21 June 2018, the U.S. Supreme Court issued its decision in the case of South Dakota v. Wayfair Inc. concerning whether retailers can be required to collect sales taxes in states where they do not have a physical presence. The case follows a September 2017 South Dakota Supreme Court ruling against an economic nexus law introduced in 2016 that requires sellers without a physical presence in South Dakota to remit sales tax if sales exceeded certain thresholds. The South Dakota law was designed to be challenged so that it could reach the U.S. Supreme Court with the hope that the Supreme Court will review and overturn its 1992 decision in Quill Corp. v. North Dakota. The Supreme Court has done just that. In a vote of 5 to 4, the court overturned the decision, finding that the physical presence rule is unsound and incorrect.
Although the physical presence test has been overturned, other tests from Commerce Clause precedents addressing the validity of state taxes still apply, including that state taxes may be sustained as long as they (1) apply to an activity with a substantial nexus with the taxing state, (2) are fairly apportioned, (3) do not discriminate against interstate commerce, and (4) are fairly related to the services the state provides. The Supreme Court found that the South Dakota tax would generally meet these tests, although a decision was not made in this respect. Instead, it is up to the state court to decide.
Click the following link for the Supreme Court opinion on the case.
The German Ministry of Finance has published a position paper agreed to with France on 19 June 2018 concerning the proposed Directive establishing a common corporate tax base (the CCTB Directive). The paper notes that France and Germany support the CCTB Directive as well as the Directive for the common consolidated corporate tax base (the CCCTB Directive), although several changes are proposed. The changes are in respect of the CCTB Directive and include:
- Extending the scope of the CCTB Directive to all companies that are subject to corporate tax, irrespective of their legal form or their size;
- Supplementing the general principles for profit and loss recognition with a general rule providing that the tax base is determined on the basis of accounting principles and calculated by applying the business asset comparison method;
- Removing any tax incentives, including the tax incentives for research and development and equity financing, while possibly allowing Member States to provide other tax policy measures outside the scope of the CCTB Directive (e.g. tax credits) and regarding the approximation of corporate tax rates;
- Removing provisions on cross-border loss relief in the CCTB Directive, as they should be discussed at a second stage, as part of the negotiation on the CCCTB Directive;
- Adding a provision in the CCTB Directive that expressly states that national group taxation systems are to remain in force until implementation of the CCCTB Directive;
- Providing a reasonable transitional period of at least 4 years, with rules substantiated in the Directive;
- Restricting the deduction of special purpose levies (e.g. bank levies);
- Providing a flat-rate deduction of non-deductible operating expenses representing 5% of exempt distributions (parent-subsidiary regime) and capital gains (disposal of equity interests) under the participation-exemption rule of the CCTB Directive;
- Adding a definition of hidden profit distributions to capture cases where a taxpayer has waived appropriate payment for goods or services, and provide for their inclusion in the tax base;
- Allowing Member States to use other tax policy measures that achieve the same goal as the optional deduction for gifts and donations to charitable bodies;
- Removing pool depreciation because this goes against administrative simplification;
- Allowing Member States to gradually introduce tax depreciation of acquired goodwill, through depreciation of the goodwill recorded after the implementation date of the CCTB Directive;
- Adding provisions for a minimum taxation of profits, whereby loss carry-forwards are limited to a certain percentage (between 50 and 60%) of the taxable profit after deduction of a basic amount of EUR 1 million;
- Adding provisions for the possibility of a one-year loss carry-back in an amount of up to EUR 1 million;
- Improving the consistency of the provisions of the general anti-abuse rule, hybrid mismatch rules, and exit taxation rules of the CCTB Directive with the Anti-Tax-Avoidance Directive (ATAD), which incorporates similar provisions;
- Including a group escape clause in the interest limitation rule and allowing the carry-forward of unused interest deduction capacity, while removing exceptions for long-term public infrastructure projects and financial undertakings;
- Leaving transfer pricing in the competence of the Member States until the implementation of the CCCTB Directive;
- Adding provisions for effective minimum taxation in relation to controlled foreign company rules; and
- Adding a limitation rule on the deduction of interests, royalties and other remunerations paid in a country with a favorable tax regime (i.e. a tax regime leading to a tax rate below a certain percentage).
Click the following link for the full text of the position paper.
OECD Consults on Draft Toolkit for Developing Countries to Identify and Cost Potential Behavioural Responses by Mining Investors to Tax Incentives
The OECD has announced the launch of a consultation on a draft toolkit that will help developing countries to identify and cost potential behavioural responses by mining investors to tax incentives. The draft toolkit has been prepared by the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF), under a programme of co-operation with the OECD, to help governments anticipate and limit the cost of mining tax incentives. It is part of wider efforts to address some of the challenges developing countries are facing in raising revenue from their mining sectors.
According to a release from the Belarusian Ministry of Labour and Social Protection, officials from Belarus and Lithuania met 13 to 15 June 2018 for the second round of negotiations for a new social security agreement. The agreement must be finalized, signed, and ratified before entering into force and, once in force and effective, will replace the 1999 agreement between the two countries. The next round of negotiations is to take place in early 2019.
The Cyprus Ministry of Finance has announced that officials from Cyprus and Kazakhstan concluded the final round of negotiations for an income tax treaty on 30 May 2018. The treaty is the first of its kind between the two countries, although the treaty with the former Soviet Union had applied but was terminated. Details of the treaty will be published once available.
On 20 June 2018, Macau published Executive Order No. 148/2018 in the Official Gazette, which authorizes the signature of an amending protocol to the 1999 income tax treaty with Portugal. The protocol will be the first to amend the treaty and must be signed and ratified before entering into force.