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Worldwide Tax News

Approved Changes (2)

Israel

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Israel to Employ Significant Digital Presence Position to Tax Facebook and Google

According to recent reports, Israel's tax authority is preparing to issue tax assessments within a year to Facebook and Google based on their digital presence in Israel. In speaking with Israeli Newspaper Haaretz, Israel Tax Authority (ITA) Director General Asher Mosher has said that the work has begun on calculating taxes based on the position set out in 2016 regarding significant digital presence. The position of the ITA was issued as Circular No. 4/2016 (previous coverage), including that a foreign supplier may be deemed to have a permanent establishment in Israel based on its digital presence, which is determined based on a number of factors in relation to the use of digital services by Israeli customers.

Norway

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Norway Clarifies New Documentation Requirements for Reduced Withholding Tax on Dividends

The Norwegian tax administration has published an interpretation statement regarding new documentation rules in order to benefit from a reduced withholding tax rate on dividends paid by companies whose share are not registered with the VPS central securities depository in Norway. The interpretation statement clarifies that in such case, shareholders may benefit from a reduced withholding tax rate if they supply statutory documentation verifying their tax status directly to the company paying the dividends. Further, a reduced withholding tax rate may be applied without the submission of documentation, provided that the company already has the required information to determine the shareholder's tax status. Where the tax status is not known or verified through documentation, the standard 25% withholding tax should be applied. If a dividend-paying company applies a lower rate and is found to be negligent in determining status, the company will be held liable for non-withholding.

The documentation requirements are part of stricter policies regarding dividend withholding tax that will apply from 1 January 2018. With respect to VPS-registered shares, tax status documentation must be submitted to the VPS account operator or custodian in order for a reduced withholding rate to apply. The type of documentation includes a certificate of residence, as well as a prior approval for a withholding tax refund or pre-approval for a lower rate from the tax administration, etc.

Proposed Changes (2)

Hungary

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Hungary to Raise VAT Registration Threshold

Hungary's Ministry for National Economy has announced plans to increase the value added tax (VAT) exemption threshold for small businesses to HUF 12 million in annual turnover. Under Hungary's VAT rules, all businesses are generally required to register, but for those with annual turnover below the threshold, application may be made for exemption status. When exemption status is granted, the business may not charge VAT on its supplies or recover input VAT on purchases, and is generally not subject to VAT return requirements.

Subject to approval from the European Commission, the increased exemption threshold is to apply from 1 January 2019.

United States

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U.S. House of Representative Passes Tax Reform Bill

On 16 November 2017, the U.S. House of Representatives passed its version of the Tax Cuts and Jobs Act, Bill H.R.1, with a vote of 227 for and 205 against (previous coverage). The Senate must now pass its version of the Tax Cuts and Jobs Act, which includes a number of differences, and then the two bills must be reconciled. The Senate bill is still in the Finance Committee, and is expected to be voted on after the Thanksgiving holiday.

Treaty Changes (6)

Andorra-Hungary

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Tax Treaty between Andorra and Hungary under Negotiation

According to a release from the Hungarian Ministry of Foreign Affairs and Trade, officials from Andorra and Hungary have agreed to begin negotiations for an income tax treaty. Any resulting treaty would be the first of its kind between the two countries, and must be finalized, signed, and ratified before entering into force.

Ireland-Kazakhstan

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Ireland Ratifies Pending Tax Treaty with Kazakhstan

Ireland has published the Order (S.I. No. 479 of 2017) for the ratification of the pending income tax with Kazakhstan. The treaty, signed 26 April 2017, is the first of its kind between the two countries (previous coverage). It will enter into force once the ratification instruments are exchanged and will apply from 1 January of the year following its entry into force.

Kuwait-Turkey

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Update - Protocol to Tax Treaty between Kuwait and Turkey

The amending protocol to the 1997 income and capital tax treaty between Kuwait and Turkey was signed on 14 September 2017. The protocol is the first to amend the treaty and includes the following changes:

  • Replaces the title and preamble, including language developed as part of the BEPS project;
  • Amends Article 4 (Resident) with respect to an individual resident in Kuwait;
  • Amends Article 7 (Business Profits) to remove the restriction on the deduction by a permanent establishment in determining profits of amounts paid to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights or by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the permanent establishment;
  • Replaces Article 10 (Dividends), including a withholding tax rate of 5% if the beneficial owner is the Government of the other Contracting State, any governmental institutions created in the other State, or an entity established in the other State that is wholly owned by the other State; otherwise 10%;
  • Replaces Article 26 (Exchange of Information) to bring it in line with the OECD standard for information exchange;
  • Replaces Article 27 (Mutual Agreement Procedure), including the introduction of a three-year time limit for a case to be presented, and a provision that any agreement reached shall be implemented notwithstanding any time limits in the domestic law of the Contracting States; and
  • Adds a new 29A (Entitlement of Benefits), 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 protocol will enter into force once the ratification instruments are exchanged and will apply from the date of its entry into force.

Mexico-Guatemala

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Mexico Approve Pending Tax Treaty with Guatemala

On 14 November 2017, Mexico's Senate approved the pending income tax treaty with Guatemala. The treaty, signed 13 March 2015, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Guatemalan income tax and solidarity tax, and covers Mexican federal income tax.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services through employees or other engaged personnel if the activities continue for the same or connected project within a Contracting State for a period or periods aggregating more than 6 months within any 12-month period.

Substantially similar activities carried on in a Contracting State by an associated enterprise will be considered in determining if the period limit has been met.

Limited Force of Attraction Provision

Article 7 (Business Profits) includes a limited force of attraction provision whereby taxing rights are granted to a Contracting State on profits attributable to the sale of goods or merchandise or other business activities carried on in that Contracting State by a resident of the other State if the same or similar goods or merchandise or business activities are also sold or carried out by a PE maintained by that resident in the first-mentioned Contracting State.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company directly holding at least 25% of the paying company's capital; otherwise 15%
  • Interest - 5% if paid to a financial institution or pension fund; otherwise 15%
  • Royalties - 10%

Note - A maximum rate of 5% is included in Article 10 (Dividends) for the additional taxation of repatriated profits attributed to a permanent establishment.

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;
  • 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 shares deriving more than 50% of their value directly or indirectly from immovable property situated in the other State; and
  • Gains from the alienation of shares of a company resident in the other State, if the alienator has directly or indirectly held at least 25% of the capital of the company at any time in the 12-month period preceding the alienation.

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

Hydrocarbon PE

Article 21 (Hydrocarbons) includes the provision that a permanent establishment will be deemed constituted if an enterprise carries on business activities related to the exploration, production, refining, processing, transportation, distribution, storage or marketing of hydrocarbons situated in the other Contracting State for a period or periods aggregating more than 1 month within any 12-month period.

Substantially similar activities carried on by an associated enterprise will be considered in determining if the period limit has been met.

Limitation on Benefits

Article 23 (Limitation on Benefits) includes a number of provisions for the determination of whether the treaty benefits may apply. The provisions of the article are summarized as follows with respect to a company.

The benefits of the treaty will only apply for a company incorporated in a Contracting State if:

  • The company's shares are listed on a recognized stock exchange; or
  • At least 50% of the company's voting rights or shares are directly or indirectly held by one or more individuals resident in a Contracting State and/or other persons incorporated in a Contracting State (the voting rights or shares in such other persons must also be directly or indirectly held by one or more individuals resident in a Contracting State).

Notwithstanding the above, the benefits will be denied if:

  • More than 50% of a company's gross income is paid directly or indirectly to persons that are not resident in either Contracting State; and
  • Such payments are deductible in computing a tax covered by the treaty in the person's State of residence.

However, the above limitations will not apply if the competent authorities agree that the company claiming the benefits carries on an active business in a Contracting State, and the conduct of its operations do not have the principal purpose of obtaining the benefits of the treaty.

Article 23 also provides that the benefits of the treaty will not apply for a resident of a Contracting State if:

  • The income of that resident is exempt or subject to tax at a lower rate than would be applicable to the same income earned by other residents of that State; or
  • That resident receives concessions or benefits in regard to foreign taxes paid that are not provided for other residents of that State.

In any of the above cases, the competent authorities of the Contracting States will consult each other before the treaty benefits are denied.

Lastly, Article 23 includes the provision that the benefits of the treaty will not apply if the application would result in double non-taxation.

Double Taxation Relief

Mexico applies the credit method for the elimination of double taxation. Mexico also allows a credit for Guatemalan tax paid on profits out of which dividends are paid if the beneficial owner holds at least 10% of the capital of the Guatemalan company paying the dividends. Specific elimination of double taxation provisions are not included with respect to Guatemala, as Guatemala has a territorial tax system and does not provide relief for foreign income taxes paid under domestic law. The final protocol to the treaty provides that if Guatemala adopts a worldwide taxation system, the domestic double taxation relief provisions of such system would apply for the purpose of the treaty.

Entry into Force and Effect

The treaty 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.

Romania-Chile

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Romania to Negotiate SSA with Chile

On 15 November 2017, the Romanian government authorized the negotiation of a social security agreement with Chile. Any resulting agreement would be the first of its kind between the two countries, and must be finalized, signed, and ratified before entering into force.

Switzerland-Kosovo

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Swiss Federal Council Approves Pending Tax Treaty with Kosovo

On 15 November 2017, the Swiss Federal Council adopted the dispatch for the approval of the pending income tax treaty with Kosovo. The treaty, signed 26 May 2017, is the first of its kind between the two countries and will enter into force once the ratification instruments are exchanged (previous coverage).

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