Worldwide Tax News
Pakistan Publishes Finance Supplementary (Amendment) Act 2018 Including Individual Income Tax Rate Changes
Pakistan's Federal Board of Revenue has published the Finance Supplementary (Amendment) Act 2018, which was approved by the National Assembly on 4 October 2018 and subsequently assented by the president. One of the main measures of the Act is the amendment of the individual income tax brackets introduced as part of the Finance Act 2018, which includes replacing the top 15% rate with additional progressive rates of up to 29% or 25%, depending on the portion of taxable income derived as salary income. With immediate effect, the brackets/rates are as follows, unless salary income exceeds 50% of taxable income:
- up to PKR 400,000 – 0%
- over PKR 400,000 up to 800,000 – PKR 1,000 minimum tax
- over PKR 800,000 up to 1.2 million – PKR 2,000 minimum tax
- over PKR 1.2 million up to 2.4 million – 5%
- over PKR 2.4 million up to 3.0 million – 15%
- over PKR 3.0 million to 4.0 million – 20%
- over PKR 4.0 million to 5.0 million – 25%
- over PKR 5.0 million – 29%
If a taxpayer's salary income exceeds 50% of taxable income, the following brackets/rates apply:
- up to PKR 400,000 – 0%
- over PKR 400,000 up to 800,000 – PKR 1,000 minimum tax
- over PKR 800,000 up to 1.2 million – PKR 2,000 minimum tax
- over PKR 1.2 million up to 2.5 million – 5%
- over PKR 2.5 million up to 4.0 million – 15%
- over PKR 4.0 million to 8.0 million – 20%
- over PKR 8.0 million – 25%
The Finance Supplementary (Amendment) Act 2018 also makes various other amendments, including an increase in the tax rate on banking transactions by non-filers from 0.4% to 0.6%, the introduction of sales tax exemptions for certain medical products and for energy conserving bulbs and components, and other customs and excise duty amendments.
U.S. IRS Publishes Draft Instructions for Forms on Form for Base Erosion Minimum Tax and GILTI and FDII Deduction
The U.S. IRS has published the draft version of the Instructions for Form 8991, Tax on Base Erosion Payments of Taxpayers with Substantial Gross Receipts. Form 8991 is used to determine an applicable taxpayer’s tax on its base erosion minimum tax (BEAT) amount for the year under section 59A as introduced by the Tax Cuts and Jobs Act (TCJA). Applicable taxpayers are those that meet the following three criteria:
- The taxpayer is a corporation other than a regulated investment company, a real estate investment trust, or an S corporation;
- The taxpayer has average annual gross receipts for the 3-tax-year period ending with the preceding taxable year that are at least USD 500 million (the "gross receipts test"); and
- The taxpayer has a base erosion percentage for the tax year of 3% or higher; 2% or higher for a taxpayer that is a member of an affiliated group which includes a bank or a registered securities dealer as defined in section 59A(b)(3).
The U.S. IRS has also published the draft version of the Instructions for Form 8993, Section 250 Deduction for Foreign Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI). Form 8993 is used to figure the amount of the eligible deduction for FDII and GILTI under section 250 as introduced by the TCJA, which is allowed only to domestic corporations (not including real estate investment trusts (REITs), regulated investment companies (RICs)) and S corporations.
On 18 October 2018, Ireland's Minister for Finance, Paschal Donohoe announced the publication of the Finance Bill 2018, which provides for the implementation of the tax measures announced as part of the 2019 Budget (previous coverage).
The Minister for Finance, Paschal Donohoe T.D., today (Thursday), published Finance Bill 2018.
Finance Bill 2018, which runs to 61 sections, implements the taxation changes announced on Budget Day as well as introducing some necessary anti-avoidance measures and technical changes to the tax code.
The Bill provides for the Budget Day announcements of a reduction to 4.5% in the 4.75% rate of USC, an increase to the ceiling of the band on which the 2% rate of USC will be payable, an increase in the income tax standard rate band, the increase in the home carer tax credit and the earned income tax credit. The Bill also provides for the change in the 9% VAT rate for hotels, restaurants and a range of other services to 13.5%, as well as an increase in the excise duty on cigarettes of 50 cents.
In line with the Budget Day announcement, the Bill introduces changes to the KEEP incentive (Key Employee Engagement Programme) on the exercise of the share options by employees, as well as significant reforms in the administration of the Employment and Investment Incentive (EII) and Start-up Refunds for Entrepreneurs (SURE) schemes. Provision is also made in the Bill for enhancements to the Film Relief Scheme including the extension of the scheme to end-2024 and introducing a regional uplift.
In line with the recently published Roadmap on Corporate Taxation, the Bill provides for the introduction of a Controlled Foreign Company (CFC) regime as required by the EU Anti-Tax Avoidance Directive (ATAD). CFC rules are an anti-abuse measure, designed to prevent the diversion of profits to offshore entities (the CFCs) in low- or no-tax jurisdictions. The Bill also provides for the introduction of a new ATAD-compliant exit tax regime as announced in the Budget. The rate for the new regime is 12.5%.
Further changes to VRT rates for diesel cars and preferential regimes for hybrid and electric vehicles are also provided for in the Bill including the introduction of a new fixed term VRT scheme for certain leased or hired vehicles on foot of a European Court of Justice ruling.
Commenting on the publication of the Bill, Minister Donohoe stated that:
"The Finance Bill 2018 sets out the legislative provisions to bring effect to the tax measures announced in Budget 2019 as we build resilience in our economy and work to further support its long term growth. We are doing this by balancing the books, making steady and sustainable investment in day to day services and putting money back in people’s pockets in a way that is affordable for the State. The Bill also contains a number of anti-avoidance and administrative changes to the tax code in order to protect and enhance the integrity of our tax base. I look forward to bringing this important legislative instrument through the Oireachtas over the coming weeks."
Details of the Bill are set out in the accompanying Notes to Editors and Appendix.
The Moroccan government reportedly tabled the draft Finance Bill for 2019 in parliament on 19 October 2018. Some of the key measures of the bill include:
- A reduction in the corporate tax rate for the second bracket by 2.5%, resulting in the following brackets/rates
- up to MAD 300,000 - 10%
- over MAD 300,000 to 1 million – 17.5%
- over 1 million - 31%
- The introduction of a 2.5% solidarity contribution on companies with taxable profits exceeding MAD 40 million;
- An increase in the minimum tax on turnover from 0.5% to 0.75% for loss-making companies, with an exemption for the first three years after a company is established;
- The introduction of the possibility for Moroccan companies to claim foreign tax credits under domestic law, limited to the amount of Moroccan tax payable (currently, foreign tax credits only available under applicable tax treaties);
- The introduction of transfer pricing documentation requirements in line with international standards (possibly Local and Master file requirements); and
- The abolition of preferential tax regimes for offshore banking and offshore holding companies.
The Moroccan Ministry of Finance is to formally present the Finance Bill in parliament on 22 October and then to the public. Additional details will be published once available.
According to an update from the OECD, Andorra and San Marino signed the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (CbC MCAA) on 18 October 2018 and 10 October 2018, respectively. Based on the OECD's website for CbC exchange relationships, the CbC MCAA has not yet been activated in respect of either country, although it is expected that this will be updated in the near future with respect to Andorra, given that its CbC requirements apply for fiscal years beginning on or after 1 January 2018. With respect to San Marino, CbC reporting requirements have not yet been implemented, although the country is committed to implementation as a BEPS Inclusive Framework member and exchange will be activated after implementation is completed.
On 17 October 2018, the Dominican Republic Senate approved the ratification of the OECD-Council of Europe Convention on Mutual Administrative Assistance in Tax Matters as amended by the 2010 protocol. The Convention, signed by the Dominican Republic on 28 June 2016, will enter into force for the country on the first day of the third month after the ratification instrument is deposited and will generally apply from 1 January of the year following its entry into force.
On 14 October 2018, the Iraq Council of Ministers approved the signing of a new income tax treaty with Egypt. The treaty must be signed and ratified before entering into force and, once in force and effective, will replace the 1968 tax treaty between the two countries, which is currently in force.
Japan's Ministry of Finance has announced the signing of a new income tax treaty with Spain on 16 October 2018. Once in force and effective, the new treaty will replace the 1974 tax treaty between the two countries.
The treaty covers Japanese income tax, corporation tax, the special income tax for reconstruction, and local corporation tax. It covers Spanish income tax on individuals, corporation tax, and income tax on non-residents.
If a company is considered resident in both Contracting States, the competent authorities of both States will determine its residence for the purpose of the treaty through mutual agreement based on its place of head or main office, its place of effective management, the place where it is incorporated or otherwise constituted, and any other relevant factors. If no agreement is reached, the company will not be entitled to any relief or exemption from tax provided by the treaty.
- Dividends –
- 0% if the beneficial owner is a company that has directly or indirectly owned at least 10% of the paying company's voting power for a period of at least 12 months ending on the date on which entitlement to the dividends is determined, or the beneficial owner is a recognized pension fund, subject to certain conditions (unless the dividends are deductible);
- 5% in other cases (unless the dividends are deductible)
- 10% if the dividends are deductible in computing the taxable income of the paying company
- Interest - 0%, although a rate up to 10% may apply on interest that is determined by reference to receipts, sales, income, profits or other cash flow of the debtor or a related person, to any change in the value of any property of the debtor or a related person or to any dividend, partnership distribution or similar payment made by the debtor or a related person, or any other interest similar to such interest
- Royalties - 0%
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;
- Gains from the alienation of any property, other than immovable property, forming part of the business property of a permanent establishment in the other State;
- Gains from the alienation of shares or comparable interests if, at any time during the 365 days preceding the alienation, the shares or comparable interests derived at least 50% of their value directly or indirectly from immovable property situated in the other; and
- Gains from the alienation rights that directly or indirectly entitle the owner of such rights to the enjoyment of immovable property situated 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.
Article 20 (Silent Partnership) provides that any income derived by a silent partner resident in Spain in respect of a silent partnership (Tokumei Kumiai) contract or another similar contract may be taxed in Japan according to the laws of Japan, provided that such income arises in Japan and is deductible in computing the taxable income of the payer in Japan.
Both countries apply the credit method for the elimination of double taxation. In the case of dividends, Spain will also allow an indirect credit for the tax effectively paid by the company distributing the dividends on the profits out of which the dividends are paid.
Article 24 (Mutual Agreement Procedure) includes the provision that if the competent authorities are unable to reach agreement to resolve a case within two years from the date all required information has been provided to both competent authorities, the person that submitted the case may then request that any unresolved issues be submitted to arbitration. 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.
Article 28 (Entitlement to Benefits) includes several provisions regarding a resident's entitlement to benefits under the treaty. This includes that a resident of a Contracting State will only be entitled to the withholding tax exemptions provided under Articles 10 (Dividends), 11 (Interest), and 12 (Royalties) if the resident is a qualified person (as defined in the treaty) or meets certain other conditions. However, the competent authority of the Contracting State in which an exemption would otherwise be denied may still grant the benefit to a resident of the other State if it is demonstrated that the establishment, acquisition, or maintenance of such resident and the conduct of its operations did not have as one of its principal purposes the obtaining of such benefit.
Article 28 also includes the provision that the benefits of the treaty may be denied when a resident of one Contracting State derives income from the other State and:
- The first-mentioned State treats the income as attributable to a permanent establishment of that resident in a third jurisdiction;
- The profits attributable to the permanent establishment are exempt from tax in the first-mentioned State; and
- The tax paid on the income in the third jurisdiction is less than 60% of the tax that would have been paid in the first-mentioned State had the income not been attributable to the permanent establishment.
In addition, Article 28 provides that where a resident of a Contracting State is only subject to tax in that State by reference to the amount of income remitted to or received in that State, and not the full amount, then any relief or exemption from tax provided for under the treaty in the other State will only apply to the amount of income that is taxed in the first-mentioned State.
Lastly, Article 28 includes a general anti-abuse provision, which provides that a benefit under the treaty will not be granted in respect of an item of income if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit would be in accordance with the object and purpose of the relevant provisions of the treaty.
The treaty will enter into force on the first day of the third month following the exchange of the ratification instruments and will generally apply from 1 January of the year following its entry into force. However, Articles 25 (Exchange of Information) and 26 (Assistance in the Collection of Taxes) will apply from the date of entry into force without regard to the date on which the taxes are levied or the taxable year to which the taxes relate.
The 1974 tax treaty between Japan and Spain will cease to apply from the dates the new treaty applies and will terminate on the last such date.
On 11 October 2018, Paraguay's Senate approved for ratification the pending income and capital tax treaty with Uruguay. The treaty, signed 8 September 2017, 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 generally apply from 1 January of the year following its entry into force (previous coverage).