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Approved Changes (1)

Ireland-European Union

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Ireland's Response to 13 Billion Tax Order for Apple from the European Commission

Ireland's Department of Finance has announced that it will appeal the recent decision of the European Commission that Ireland provided illegal State aid to Apple and must recover up to EUR 13 billion in unpaid taxes (previous coverage). According to the press release, the Irish Minister for Finance Michael Noonan will seek Cabinet approval to appeal the Commission decision to the European Courts. Ireland has a period of two months and 10 days to bring an appeal.

As quoted in the announcement, the Minister for Finance has stated:

"I disagree profoundly with the Commission’s decision. Our tax system is founded on the strict application of the law, as enacted by the Oireachtas, without exception.

The decision leaves me with no choice but to seek Cabinet approval to appeal the decision before the European Courts. This is necessary to defend the integrity of our tax system; to provide tax certainty to business; and to challenge the encroachment of EU state aid rules into the sovereign Member State competence of taxation.

It is important that we send a strong message that Ireland remains an attractive and stable location of choice for long-term substantive investment. Apple has been in Ireland since the 1980s and employs thousands of people in Cork. The company has continued to expand its operations in Ireland in recent times."

In a separate release issued by Irish Revenue on the decision, Chairman of the Revenue Commissioners Niall Cody is quoted as saying, "While I cannot otherwise comment on the specific facts of this case, I can confirm that -

  • there was no departure from the applicable Irish tax law by Revenue;
  • there was no preference shown in applying that law; and
  • the full tax due was paid in accordance with the law."

Click the following links for the Department of Finance release and the Revenue release.

Proposed Changes (2)

Netherlands-United States

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Silicon Valley Tax Directors Group Urges Dutch Government to Maintain Current Tax Regime

A letter dated 16 May 2016 from the Silicon Valley Tax Directors Group (SVTDG) to the Dutch government has recently come to light concerning the current Dutch tax regime and potential reforms. The letter from the SVTDG, which includes major companies such as Apple, Facebook, Google and Microsoft, highlights several features of the Dutch tax regime that are seen as important drivers to attract U.S. investors, including:

  • Easy access to the Netherlands tax authorities;
  • The possibility to obtain advance tax rulings to obtain legal certainty on a tax position;
  • The favorable participation exemption regime;
  • The wide tax treaty network;
  • The absence of a withholding tax on interest and royalties;
  • The 30% tax ruling for expatriates; and
  • The incentives for R&D related activities.

The SVTDG cautions that if any of the features were to be eliminated, it would negatively impact both current and future investment from the U.S.

In addition, the SVTDG makes a number of recommendations on actions the Dutch government should take. Some of the main recommendations include:

  • Grandfathering existing structures and tax rulings if certain practices may no longer be continued;
  • Challenging the UK Diverted Profits Tax on the basis that it violates the Dutch-UK tax treaty and the EU freedom of establishment and movement of capital;
  • Continuing to press for the resolution of the State aid investigations that will preserve the ability of Dutch tax authorities to provide certainty to taxpayers;
  • Reducing the headline corporate tax rate in order to remain competitive; and
  • Clarifying how the modified nexus approach will be adopted for the innovation (IP) box regime and what the transitional regime will be for existing innovation box rulings.

Although the Dutch government has not publically responded to the SVTDG letter, it is expected that the government's position on several of the issues will be clarified when the annual budget is announced, which is scheduled for 20 September 2016.

Click the following link for the full letter as published on the SVTDG website.

Switzerland

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Swiss Canton of Geneva to Cut Corporate Tax Rate

The Swiss canton of Geneva announced on 30 August 2016 that it is planning to reduce its corporate tax rate from the current 24.2% to 13.49%, with an initial cut to 13.79% for a five-year interim period. The planned cuts are in relation to Switzerland's Corporate Tax Reform III (CTR III) (previous coverage), which is meant to bring Switzerland in line with international standards, and includes abolishing the privileged cantonal tax regimes the cantons use to attract investment. Although CTR III does provide for some new incentives, several canton's see rate cuts as needed in order to stay competitive.

Note - CTR III has been agreed to by parliament, but is pending a possible public referendum. Geneva's plans to cut the rate may also be subject to a referendum.

Treaty Changes (4)

Ethiopia-Netherlands

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Tax Treaty between Ethiopia and the Netherlands has Entered into Force

The income tax treaty between Ethiopia and the Netherlands entered into force on 1 September 2016, and the protocol to the treaty will enter into force on 30 September. The treaty and protocol were signed 10 August 2012 and 18 August 2014 respectively.

Taxes Covered

The treaty covers Netherlands income tax, wages tax, company tax and mining tax, as well as the Caribbean Netherlands (BES Islands) income tax, wages tax, property tax and revenue tax. It covers Ethiopian tax on income and profit imposed by the Income Tax Proclamation No. 286/2002, and the tax on income from mining, petroleum and agricultural activities.

Offshore PE

The treaty includes the provision that a permanent establishment will be deemed constituted if an enterprise carries on offshore activities in the territorial sea and any area beyond the territorial sea within the jurisdiction of a Contracting State for a period or periods aggregating more than 30 days within any 12-month period.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company directly holding at least 10% of the paying company's capital; otherwise 10% if the paying company is resident in Ethiopia and 15% if the paying company is resident in the Netherlands
  • Interest - 5%
  • 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 other comparable interests deriving more than 50% of their value directly or indirectly from immovable property situated in the other State, other than immovable property in which that company or the holders of those interests carry on their business - exemptions apply:
    • For shares traded on a recognized stock exchange;
    • Where the resident owned less than 50% of the shares or other comparable interests prior to the first alienation; and
    • Where the gains are derived in the course of a corporate reorganization, amalgamation, division or similar transaction

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

Double Taxation Relief

Ethiopia applies the credit method for the elimination of double taxation, while the Netherlands may apply the exemption or credit method depending on the type of income and the applicable provisions of its domestic law.

2014 Protocol

The 2014 protocol to the treaty add Article 21A (Limitation on Benefits), which includes the provision that a resident of a Contracting State will only be entitled to the benefits under Articles 10 (Dividends), 11 (Interest) and 12 (Royalties), if such resident is a qualified person. Qualified persons include:

  • An individual;
  • A contracting state, or a political subdivision or local authority thereof;
  • A pension fund; and
  • A company meeting certain conditions, including:
    • The company's shares are regularly traded on a recognized stock exchange, or at least 50% of its shares are directly owned by one or more companies whose shares are traded on a recognized stock exchange (subject to additional conditions); or
    • The company is engaged in an active trade or business in its Contracting State of residence (other than making or managing investments for the company's own account, unless these activities are banking or insurance carried on by a bank or an insurance company); or
    • The company is a headquarters company for a multinational corporate group which provides a substantial portion of the overall supervision, financing or administration of the group, and has, and exercises, independent discretionary authority to carry out these functions (subject to additional conditions).

Residents that are not qualified persons may still be entitled to the benefits if the competent authority of the Contracting State granting the benefits is satisfied that the establishment, acquisition or maintenance of such company, or of its entitlements to such benefits or the conducts of its operations does not have as its main purpose or one of its main purposes to secure such benefits.

The 2014 Protocol also replaces Article X of the protocol originally signed with the treaty to clarify that the 5% reduced withholding tax rate for dividends will apply as long as the Netherlands applies a full tax exemption to participation dividends that a company receives from a company resident in Ethiopia.

Effective Date

Both the treaty and protocol apply in Ethiopia from 8 July 2017 and in the Netherlands from 1 January 2017. However, the treaty includes that Article 26 (Exchange of Information) will only apply after Ethiopia has informed the Netherlands that it is capable of fulfilling the obligations of Article 26.

Germany-Turkmenistan

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Tax Treaty between Germany and Turkmenistan Signed

On 29 August 2016, officials from Germany and Turkmenistan signed an income and capital tax treaty. The treaty will enter into force after the ratification instruments are exchanged, and once in force and effective, will replace the 1981 tax treaty between Germany and the former Soviet Union, which generally continues to apply in respect of Germany and Turkmenistan.

Additional details will be published once available.

India-Mauritius

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India Issues Notification Highlighting Key Provisions of Protocol to Tax Treaty with Mauritius

On 29 August 2016, the Indian Ministry of Finance issued a notification on the protocol to the tax treaty with Mauritius that recently entered into force (previous coverage). The notification highlights the key provisions of the protocol concerning taxation in India, including:

  • The source-based taxation of capital gains arising from alienation of shares acquired on or after 1 April 2017 in a company resident in India with effect from financial year 2017-18 - prior investments grandfathered without capital gains taxation in India;
  • A transition period for the new source-based taxation of capital gains from 1 April 2017 to 31 March 2019, where the tax rate will be limited to 50% of the domestic tax rate of India - full domestic rate from 1 April 2019; and
  • The source-based taxation of interest income of banks, where interest arising in India to Mauritian resident banks will be subject to withholding tax in India at the rate of 7.5% in respect of debt claims or loans made after 31 March 2017 - interest income in respect of debt-claims existing on or before 31 March 2017 remain exempt from tax in India.

Click the following link for the notification.

Morocco-Albania-Saudi Arabia-Tunisia

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Morocco Ratifies Pending Agreements with Albania, Saudi Arabia and Tunisia

According to a government update published 29 August 2016, Morocco has ratified the following pending agreements:

  • The income tax treaty with Albania, signed 5 October 2015 (previous coverage);
  • The income tax treaty with Saudi Arabia, signed 14 April 2015 (previous coverage); and
  • The social security agreement with Tunisia, signed 19 October 2015.

The pending tax treaties with Albania and Saudi Arabia are the first of their kind with Morocco. The social security agreement with Tunisia will replace the current agreement signed in 1987.

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