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Approved Changes (4)

Australia

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Australian Parliament Approves Hybrid Mismatch Bill

On 16 August 2018, the Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) Bill 2018 was passed by both houses of the Australian Parliament and is currently awaiting Royal Assent to be enacted. The Bill mainly includes amendments to the Income Tax Assessment Act (ITAA) 1997 and the Income Tax Assessment Act (ITAA) 1936 to introduce rules targeting hybrid mismatches.

OECD Hybrid Mismatch Rules

Part 1 of Schedule 1 of the Bill amends the ITAA 1997 by inserting the hybrid mismatch rules resulting from Action 2 of the OECD BEPS Project into Division 832. The hybrid mismatch rules prevent entities that are liable to income tax in Australia from being able to avoid income taxation, or obtain a double non-taxation benefit, by exploiting differences between the tax treatment of entities and instruments across different countries. Broadly, a hybrid mismatch will arise if:

  • An entity enters into a scheme that gives rise to a payment; and
  • The payment gives rise to:
    • a deduction/non-inclusion mismatch where a deduction is provided for a payment in one country, but the corresponding income is not included as assessable income in the recipient country; or
    • a deduction/deduction mismatch where a business receives a deduction in two countries for the same payment.

A mismatch is covered by the hybrid mismatch rules if it is:

  • a hybrid financial instrument mismatch;
  • a hybrid payer mismatch;
  • a reverse hybrid mismatch;
  • a branch hybrid mismatch;
  • a deducting hybrid mismatch; or
  • an imported hybrid mismatch.

If a mismatch arises, it is neutralized by:

  • Disallowing a deduction; or
  • Including an amount in assessable income.

Further, a targeted integrity rule will prevent multinational groups from compromising the effect of the hybrid mismatch rules by using interposed conduit type vehicles to invest into Australia, as an alternative to investing into Australia using hybrid instruments or entities. This integrity rule targets intra-group financing arrangements within multinational groups that involve:

  • Routing of funds through foreign interposed entities which result in an Australian income tax deduction (such as interest on a loan); and
  • The imposition of foreign income tax on the payment at a rate of 10%

The hybrid mismatch rules generally apply to arrangements involving related parties (same control group) and structured arrangements for income years starting on or after 1 January 2019. However, the imported mismatch rules only apply from 1 January 2019 if the importing payment is made under a structured arrangement. Otherwise, the imported mismatch rules apply for income years starting on or after 1 January 2020.

OECD Hybrid Mismatch Rules: Branch Mismatch Arrangements

Part 2 of Schedule 1 of the Bill amends the ITAA 1936 to implement the OECD recommendations on neutralizing the tax effects of branch mismatch arrangements. This includes measures to:

  • Limit the scope of the exemption for foreign branch income so that foreign branch income that is branch hybrid mismatch income derived by the Australian resident company will be assessable income; and
  • Prevent a deduction from arising for payments made by an Australian branch of a foreign bank to its head office in some circumstances, including for notional payments of interest made to the foreign bank or an amount paid in respect of a notional derivative transaction for an income year unless the payment gives rise to dual inclusion income in that income year, although a deduction may be allowed in a later income year in which the Australian branch derives dual inclusion income.

The branch mismatch rules apply for income years starting on or after 1 January 2019.

OECD Hybrid Mismatch Rules: Other Effects of Foreign Income Tax Deductions

Schedule 2 of the Bill amends the ITAA 1997 to implement hybrid mismatch rules that are consistent with BEPS Action 2 to:

  • Deny imputation benefits on franked distributions made by an Australian corporate tax entity if all or part of the distribution gives rise to a foreign income tax deduction; and
  • Prevent a foreign equity distribution from a foreign company that is received, directly or indirectly, by an Australian corporate tax entity that holds a participation interest of at least 10% in the foreign company from being non-assessable non-exempt income if all or part of the distribution gives rise to a foreign income tax deduction.

The rules apply to deny imputation benefits apply in relation to distributions made on or after 1 January 2019, although certain transitional rules apply for regulatory capital of authorized deposit-taking institutions (ADI's).

Other Measures

In addition to the hybrid mismatch rules, the Bill also includes amendments to:

  • Ensure that the producer offset is better targeted at supporting the Australian film industry when an offshore location is used for principal photography, effective in relation to films that commenced principal photography on or after 1 July 2018;
  • Provide income tax and withholding exemptions for the ICC World Twenty20 (cricket competition) for assessable income derived from 1 July 2018 and to interest, dividend, and royalty withholding tax liabilities from 1 July 2018; and
  • List the Melbourne Korean War Memorial Committee Incorporated as a Deductible Gift Recipient under the income tax law, effective between 1 January 2018 and 31 December 2019 inclusive.

For more information, click the following links for the revised explanatory memorandum for the Bill as passed.

Colombia

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Colombia Publishes Final Resolutions on Submission of Informative Transfer Pricing Return, CbC Notification, Local File, and Master File

The Colombian tax authority (DIAN) has published the final resolutions on the submission of Form 120 (informative transfer pricing return), Country-by-Country (CbC) report notifications, and Local and Master files via DIAN's electronic information service. The resolutions are largely unchanged from the prior draft versions (previous coverage).

Resolution No. 000038 of 17 July 2018 sets out the procedure for the submission of the Local file (format 1729) and Master file (format 5231), which must be submitted in PDF format. The main details are provided in the annex to the resolution.

Resolution No. 000040 of 26 July 2018 sets out the procedure for the submission of Form 120, which must be prepared in XML format and submitted electronically. Form 120 also includes a section for the CbC notification. If a Colombian taxpayer is not required to submit Form 120 but is a member of a group subject to CbC reporting, the CbC notification is instead submitted via email in an excel format available on the DIAN website. The annex to the resolution sets out the detailed XML requirements.

Form 120, the CbC notification, and the Master and Local file for 2017 are due 11 September to 24 September 2018, depending on the taxpayer's tax number (NIT) (previous coverage).

Malta

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Malta Publishes Updated Notional Interest Deduction Guidelines

The Malta Commissioner for Revenue has published updated guidelines in relation to the Notional Interest Deduction (NID) Rules (previous coverage). The NID Rules apply from the year of assessment 2018 and provide that an undertaking is entitled to an optional deduction equal to a reference rate times the risk capital of the undertaking for the accounting period ending in the year preceding the year of assessment. The updated guidelines cover:

  • Determination of the Reference Rate;
  • Approval for Claiming the NID;
  • Attribution of the Deemed Interest Income;
  • Exchange of Information;
  • The Invested Risk Capital;
  • Deducting the NID (Direct and Indirect Attribution);
  • NID First Deducted against Deemed Interest Income;
  • Deduction and Carry Forward of NID;
  • Partial Deduction of NID with Carry Forward; and
  • Certain Scenarios involving Multiple Funding Sources.

Click the following link for the updated NID guidelines.

Slovak Republic

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Slovak Republic Publishes Law Introducing New Insurance Tax Regime

The Slovak Republic has published Law No. 213 of 20 June 2018, which introduces a new tax regime for non-life insurance. Key points include:

  • The standard tax rate is 8% and applies for non-life insurance products where:
    • The insured property is in the Slovak Republic, except goods in commercial transport;
    • The insurance covers any means of transport that is or should be registered in the Slovak Republic;
    • The policy is for short-term coverage in connection with travel or holiday; and
    • Other cases where the policyholder has a habitual residence in the Slovak Republic and where the policyholder is a legal person with a registered office or establishment in the Slovak Republic;
  • An exemption (0% rate) applies for motor vehicle liability insurance;
  • The taxable person is generally the insurer, although in certain cases the policyholder may be held liable, including where premiums are paid to a foreign insurance company with no branch office in the country; and
  • The tax period is the calendar quarter, with tax returns required electronically by the end of the month following each quarter.

The new insurance tax regime applies in respect of periods beginning after 31 December 2018.

Proposed Changes (2)

Philippines

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Philippines Planning Tax Incentives for Schools and Hospitals as Part of Corporate Tax Reform

The Philippines Department of Finance has announced that under the proposed corporate income tax (CIT) reform, tax incentives will be provided for schools and hospitals. In particular, non-profit private schools and hospitals that perform well and adhere to high standards of service will continue to enjoy the reduced tax rate of 10%. The legislation for the reform, known as the Tax Reform for Attracting Better and High-quality Opportunities (TRABAHO) Act, is currently before the House of Representatives and contains several measures, including a cut in the corporate tax rate and an overhaul of the country's tax and investment incentives.

United States-China

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U.S. Senators Pushing Fair Trade with China Enforcement Act

U.S. Senator Tammy Baldwin (D-WI) has announced the unveiling of the Fair Trade with China Enforcement Act together with Senator Marco Rubio (R-FL). The text of Bill S.2826 was first introduced by Senator Rubio in May 2018 (previous coverage) and includes measures meant to protect U.S. industry from unfair competition by China. According to the announcement, the legislation would:

  • Prohibit the sale of national security sensitive technology and intellectual property to China;
  • Update an income tax treaty signed in the 1980s and tax China on their investment in the U.S., including their holdings of the national debt;
  • Prepare duties on, and impose Chinese investor shareholding caps on U.S. companies producing, goods targeted by the Made in China 2025 plan; and
  • Prohibit the federal government, or subsidiaries/contractors, from purchasing telecommunications equipment or services from Huawei and ZTE.

A document has also been published that outlines the current problems and the solution provided in the legislation.

Treaty Changes (4)

Latvia-Vietnam

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Update – Tax Treaty between Latvia and Vietnam

The income tax treaty between Latvia and Vietnam entered into force on 6 August 2018. The treaty, signed 19 October 2017, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Latvian enterprise income tax and personal income tax and covers Vietnam personal income tax and business income tax.

Service PE

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

Natural Resources Exploitation PE

The treaty includes the provision that permanent establishment will be deemed constituted where activities are carried on offshore in a Contracting State in connection with the exploration or exploitation of the seabed and subsoil and their natural resources. No minimum period of activity set in the treaty.

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 on by a PE maintained by that resident in the first-mentioned Contracting State, provided that it is established that such sales or activities were structured in a manner intended to take advantage of the treaty.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company directly holding at least 70% of the paying company's capital; otherwise 10%
  • Interest - 10%
  • Royalties – 10%
  • Fees for Technical Services (managerial, technical, or consultancy) – 7.5%

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 shares in a company or of a comparable interest in a partnership, trust or other similar entity deriving more than 50% of their value directly or indirectly from 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; and
  • Gains from the (direct) alienation of shares, other than the above, of not less than 15% of the entire shareholding of a company that is a resident of the other State.

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

Note – The final protocol to the treaty includes an MFN clause, which provides that if either Contracting State signs a tax treaty or amendment to a tax treaty with another state that is a member of the EU or the OECD and such treaty or amendment provides for the taxation of gains from the indirect alienation of shares of a company resident in a Contracting State, then the fourth point above will read as gains from the direct or indirect alienation of shares from the date the other treaty or treaty amendment is effective.

Double Taxation Relief

Latvia generally applies the exemption method for the elimination of double taxation, while Vietnam applies the credit method. However, Latvia applies the credit method in respect of income that may be taxed in Vietnam in accordance with Articles 10 (Dividends), 11 (Interest), and 12 (Royalties and Fees for Technical Services).

A provision is also included for a tax sparing credit for tax that would have been payable as Vietnamese tax for any year but for an exemption or reduction of tax granted under provisions of Vietnamese law specified in the treaty and any subsequent laws agreed by the competent authorities of the Contracting States. The relief will apply for a period of ten years beginning the date the treaty becomes effective.

Effective Date

The treaty applies from 1 January 2019.

Moldova-Untd A Emirates

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Tax Treaty between Moldova and the UAE has Entered into Force

Moldova's Ministry of Finance has announced that the income and capital tax treaty with the United Arab Emirates entered into force on 26 July 2018. The treaty, signed 10 July 2017, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Moldovan income tax, and UAE income tax and corporation 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 in a Contracting State if the activities continue for a period or periods aggregating more than 6 months.

Withholding Tax Rates

  • Dividends - 5%
  • Interest - 6%
  • Royalties - 6%

Limitation on Benefits

The provisions of Articles 10 (Dividends), 11 (Interest), and 12 (Royalties) will not apply if the main purpose or one of the main purposes of any person concerned with the creation or assignment of the shares, debt-claims, or other rights in respect of which the income is paid was to take advantage of those Articles by means of that creation or assignment. The limitation is included in each of the Articles.

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; and
  • Gains from the alienation of shares in a company whose capital stock is formed, directly or indirectly, of more than 50% by immovable property situated in the other State (exemption for shares listed on a recognized stock market).

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

Income from Hydrocarbons

Article 22 (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 and its associated activities situated in the territory of the respective Contracting State.

Double Taxation Relief

The treaty provides for the exemption method for the elimination of double taxation, except in the case of items of income taxed under Article 10 (Dividends) and 11 (Interest), for which the credit method is applied.

Effective Date

The treaty applies from 1 January of the year it was signed; 1 January 2017.

Switzerland-Saudi Arabia

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Swiss Federal Council Approves Pending Tax Treaty with Saudi Arabia

On 15 August 2018, the Swiss Federal Council adopted the dispatch for the approval of the pending income and capital tax treaty with Saudi Arabia. The treaty, signed 18 February 2018 (previous coverage), is the first of its kind between the two countries and will enter into force on the first day of the second month following the exchange of the ratification instruments and will apply from 1 January of the year following its entry into force.

United States-Uruguay

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SSA between the U.S. and Uruguay to Enter into Force

The pending social security agreement between the U.S. and Uruguay will reportedly enter into force on 1 November 2018. The agreement, signed 10 January 2017, is the first of its kind between the two countries and generally applies from the date of its entry into force.

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