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Approved Changes (4)

Australia

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Australian Parliament Passes Legislation for Diverted Profits Tax, Increased Penalties for SGEs, and Latest OECD Transfer Pricing Guidance

On 27 March 2017, the Australian Senate passed two pieces of BEPS-related legislation after being passed in the House of Representatives:

Most of the measures are included in the TLA Bill, while the specific rate of the Diverted Profits Tax is included in the DPT Bill.

Diverted Profits Tax

The Diverted Profits Tax (DPT) is introduced at a rate of 40% that will be imposed on profits that have been artificially diverted from Australia by multinationals with global revenue of AUD 1 billion or more (Significant Global Entities - SGEs). In general, the DPT will apply if:

  • It is reasonable to conclude that a scheme (or any part of a scheme) was carried out for a principal purpose of, or for more than one principal purpose, that includes a purpose of:
    • Enabling a taxpayer (the relevant taxpayer) to obtain a tax benefit, or both to obtain a tax benefit and reduce a foreign tax liability; or
    • Enabling the relevant taxpayer and another taxpayer (or other taxpayers) to obtain a tax benefit, or both to obtain a tax benefit and reduce a foreign tax liability;
  • The relevant taxpayer is an SGE; and
  • The scheme is entered into or carried out with a foreign associate entity, or the foreign associate is otherwise connected with the scheme.

The DPT will not apply if it is reasonable to conclude that one of the following tests applies to the relevant taxpayer:

  • The AUD 25 million income test — this test will generally apply if the sum of the following does not exceed AUD 25 million:
    • The assessable income, exempt income and non-assessable non-exempt income of the relevant taxpayer;
    • The assessable income of another entity that is an associate of the relevant taxpayer, if both are members of same SGE group; and
    • The amount of the DPT tax benefit, if the DPT tax benefit relates to an amount not included in assessable income.
  • The sufficient foreign tax test — this test will generally apply if the increase in the foreign tax liabilities of foreign entities resulting from the scheme is 80% or more of the reduction in the Australian tax liability of the relevant taxpayer.
  • The sufficient economic substance test — this test will generally apply if the profit made as a result of the scheme by the relevant taxpayer and by associate entities involved in the scheme, reasonably reflects the economic substance of the entity’s activities in connection with the scheme.

The DPT will also not apply for certain entity types, including:

  • a managed investment trust;
  • a foreign collective investment vehicle with wide membership;
  • a foreign entity owned by a foreign government;
  • a complying superannuation entity; and
  • a foreign pension fund.

If a DPT assessment is issued, the taxpayer will be required to pay the DPT amount within 21 days. However, the taxpayer may challenge a DPT assessment by providing additional information as to why the amount should be reduced. In general, the review period for additional information is 12 months. If after 12 months the taxpayer still disagrees with the DPT assessment or amended assessment, the taxpayer will have 60 days to make an appeal to the Federal Court of Australia.

The DPT applies for income years beginning on or after 1 July 2017 (whether or not the tax benefits arise in connection with a scheme that was entered into, or was commenced to be carried out, before 1 July 2017).

Increased Penalties for SGEs

The failure to lodge penalty is increased by a factor of 100 for SGEs, which results in a maximum penalty of AUD 450,000 (AUD 525,000 with increase in the penalty unit to AUD 210 from 1 July 2017). In addition, the administrative penalties for statements for SGEs are doubled.

Click the following link for details of the SGE penalty increases, which generally apply from 1 July 2017.

Latest OECD Transfer Pricing Guidance

The references to the OECD transfer pricing guidelines in Australia’s transfer pricing rules in Division 815 are updated to include the 2016 amendments to the guidelines resulting from the BEPS project, including in relation to three key areas:

  • Transfer pricing issues relating to transactions involving intangibles;
  • Contractual arrangements including the contractual allocation of risks and corresponding profits, which are not supported by activities actually carried out and the resulting allocation of profits to those risks; and
  • The level of returns to funding provided by a multinational enterprise group member, where those returns do not correspond to the level of activity undertaken by the funding company.

The updated guideline references apply for income years beginning on or after 1 July 2016.

New Zealand

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New Zealand Publishes Special Report on New Foreign Trust Disclosure Rules

New Zealand Inland Revenue's Policy and Strategy group has published a special report on the new foreign trust disclosure rules that were introduced in the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017 (previous coverage). Under the rules, new foreign trusts formed after the enactment of the rules (21 February 2017) must apply for registration within 30 days, while existing trusts must apply for registration by 30 June 2017. Resident trustees of a foreign trust are also required to file annual disclosure returns. If the new registration requirements are not complied with, the exemption provided for foreign-sourced income derived by a New Zealand-resident trustee will not be available.

Click the following link for the Special report: Foreign trust disclosure rules.

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OECD Publishes Comments Received on Interaction between BEPS Action 6 and Treaty Benefits for non-CIV Funds

The OECD has published the comments received on the discussion draft on the follow-up work regarding the interaction between the tax treaty provisions of the report on BEPS Action 6 and the treaty entitlement of non-CIV funds. In particular, the discussion draft provides three examples for comment on the application of the principal purposes test (PPT) rule included in the Report on Action 6 with respect to common transactions involving non-CIV funds.

Click the following links for the discussion draft and the comments received.

Saudi Arabia

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Saudi Arabia Cuts Oil and Gas Corporate Tax Rate

The Saudi Government has announced a cut in the corporate tax rate for oil and gas companies from 85% to 50%. The cut is reportedly meant to benefit the planned IPO of Saudi oil giant Aramco, which is the only oil and gas production company in Saudi Arabia. The cut is effective from 1 January 2017.

Proposed Changes (1)

European Union

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EU Parliament Draft Report on Directive Allowing Reduced VAT Rate on Digital Publications

A draft report has been published from the EU Parliament Committee on Economic and Monetary Affairs Rapporteur, Tom Vandenkendelaere, on the draft directive that would allow Member States to apply a reduced VAT rate on the supply of digital publications. In particular, books, newspapers, and periodicals. Currently, reduced rates are limited to printed publications, while digital publications are considered within the scope of the supply of digital services, for which reduced VAT rates are not allowed. The draft report was discussed at a meeting of the Committee on Economic and Monetary Affairs on 27 March 2017, and although no vote was held during the meeting, it is expected to be approved in the near future.  

Treaty Changes (3)

Andorra-Portugal

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Tax Treaty between Andorra and Portugal to Enter into Force

The income tax treaty between Andorra and Portugal will enter into force on 23 April 2017. The treaty, signed on 27 September 2015, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Andorran corporate income tax, personal income tax, tax on income of non-residents, and capital gains tax on immovable property transfers. It covers Portuguese personal income tax, corporate income tax, and surtaxes on corporate income tax.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company that has directly held at least 10% of the paying company's capital for a period of at least 12 months ending the date entitlement to the dividends is determined; otherwise 15%
  • Interest - 10%
  • Royalties - 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 movable property forming part of the business property of a permanent establishment in the other State; and
  • Gains from the alienation of shares or comparable interests deriving more than 50% of their value directly or indirectly from immovable property situated in the other State (exemption for shares listed on a recognized stock exchange of one or both of the Contracting States where such shares do not represent 25% or more of the capital of the listed company).

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.

Entitlement to Benefits

Article 28 (Entitlement to Benefits) includes a number of provisions regarding entitlement to the benefits of the treaty, including that:

  • The treaty does not prevent the application of domestic anti-avoidance provisions;
  • The treaty does not prevent the application of domestic controlled foreign company (CFC) rules;
  • The benefits of the treaty will not be granted to a resident of Contracting State if it is not the beneficial owner of the income derived from the other State;
  • The provisions of the treaty will not apply if the main purpose or one of the main purposes of any person concerned with the creation or assignment of the property or right in respect of which the income is paid was to take advantage of those provisions by means of such creation or assignment;
  • If an item of income is only taxable in a Contracting State under the treaty, it may still be taxable in the other State if it has not been subject to tax in the first-mentioned State; and
  • If an item income is taxed in a Contracting State by reference to the amount remitted or received in that State and not by reference to the full amount, then any reduction or exemption from tax provided for the income by the treaty in the other State will be limited to the amount taxed by the first-mentioned State.

Effective Date

The treaty applies from 1 January 2018.

France-Singapore

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France and Singapore Sign Agreement for Automatic Exchange of Financial Account Information

According to an update from the Inland Revenue Authority of Singapore, a competent authority agreement for the automatic exchange of financial account information was signed with France on 27 March 2017. Under the agreement, each country will automatically exchange information on accounts held in the respective country by tax residents of the other country based on the OECD Common Reporting Standard (CRS). The automatic exchange is to begin by September 2018 for information collected on the 2017 reporting year.

Guernsey-Turks Caics

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Protocol to TIEA between Guernsey and Turks and Caicos Islands has Entered into Force

The amending protocol to the 2014 tax information exchange agreement between Guernsey and the Turks and Caicos Islands entered into force on 23 March 2017. The protocol, signed 15 August 2016 by Guernsey and 29 June 2016 by Turks and Caicos, is the first to amend the agreement. It adds Article 5A (Automatic Exchange of Information) and Article 5B (Spontaneous Exchange of Information), and revises paragraph 1 of Article 11 (No Prejudicial or Restrictive Measures) and paragraph 2 of Article 13 (Mutual Agreement Procedure).

The protocol generally applies from the date of its entry into force.

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