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Approved Changes (2)

China

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China Notice on Continued VAT Exemption for Domestic R&D Equipment

China's Ministry of Finance, Ministry of Commerce, and State Administration of Taxation have published Notice 121/2016 on the continued value added tax (VAT) exemption for domestic research and development (R&D) equipment purchased by R&D institutions. The exemption applies from 1 January 2016 to 31 December 2018 for approved domestic R&D institutions and foreign-funded R&D centers, subject to certain conditions.

For foreign-funded R&D centers, specific conditions for the VAT exemption depend on when the R&D center was established:

  • For R&D centers established on or before 30 September 2009, the following conditions apply:
    • Total investment of at least USD 5 million, and annual R&D expenses of at least CNY 10 million;
    • At least 90 full-time research and development personnel; and
    • Total equipment purchases of at least CNY 10 million since the establishment of the center.
  • For R&D centers established after 30 September 2009, the following conditions apply:
    • Total investment of at least USD 8 million (no annual expense condition);
    • At least 150 full-time research and development personnel; and
    • Total equipment purchases of at least CNY 20 million since the establishment of the center.

Before the exemption can apply, the R&D center must be examined and approved by the competent authority as to whether the conditions are met.

Click the following link for Notice 121/2016 (Chinese language), which replaces the previous notice on the exemption, Notice 88/2011.

United States

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U.S. GAO Finds New Debt-Equity Regs in Compliance with Promulgation Rules

On 28 November 2016, the U.S. Government Accountability Office (GAO) released its report on the compliance of the IRS's promulgation of new debt-equity rules to address corporate inversions and earnings stripping. The rules were published in the Federal Register as final and temporary regulations entitled "Treatment of Certain Interests in Corporations as Stock or Indebtedness" on 21 October 2016 (previous coverage).

The rules, which were strongly opposed by trade groups and lawmakers on both sides of the aisle, establish threshold documentation requirements that ordinarily must be satisfied in order for certain related-party interests in a corporation to be treated as indebtedness for federal tax purposes, and treat as stock certain related-party interests that otherwise would be treated as indebtedness for federal tax purposes.

In the GAO review, the only issue was the immediate effective date of the new rules, which as a major rule, require at least a 60-day delay in the effective date from the date the rules were published in accordance with the Congressional Review Act. However, despite the lack of delay in the effective date, the GAO determined that the IRS has complied with applicable requirements because the new rules do not apply until 19 January 2017 (90-day transition period provided in the rules).

Click the following links for the GAO report and the new debt-equity rules as published

Proposed Changes (4)

Australia

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Australia Consults on Draft Diverted Profits Tax Legislation

On 29 November 2016, the Australian Treasury published draft legislation for consultation on the introduction of a Diverted Profits Tax (DPT) (previous coverage). The DPT is a penalty tax imposed at a rate of 40% on profits that have been artificially diverted from Australia by multinationals. In particular, the DPT would apply to an entity (relevant taxpayer) 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 a significant global entity — that is, broadly, a member of a group with a member that is a global parent entity whose annual global income is at least AUD 1 billion; and
  • The relevant taxpayer obtains a tax benefit in connection with a scheme involving a foreign associate.

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 turnover test — this test will apply if, broadly, the sum of the Australian turnover of the relevant taxpayer and the Australian turnover of any other Australian entities that are part of the same significant global group does not exceed AUD 25 million;
  • The sufficient foreign tax test — this test will apply if, broadly, 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; or
  • The sufficient economic substance test — this test will apply if, broadly, the income derived, received, or made as a result of the scheme by each entity that entered into or carried out the scheme or any part of the scheme, or that is otherwise connected with the scheme or any part of the scheme, reasonably reflects the economic substance of the entity’s activities in connection with the scheme.

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 30 days to make an appeal to the Federal Court of Australia.

Click the following link for the DPT consultation page, which includes the draft legislation and explanatory memorandum. Comments are due by 23 December 2016.

Brazil

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Brazilian Chamber of Deputies Considering Draft Law to Reopen Voluntary Disclosure Program

On 28 November 2016, the draft law to reopen the Currency and Tax Compliance Special Regime (Regime Especial de Regularização Cambial e Tributária, RERCT) was accepted in the Brazilian Chamber of Deputies. The draft law was approved by the Senate on 23 November.

The current draft of the law provides for the disclosure of assets held abroad as of 30 June 2016 with a 17.5% tax on the disclosed assets plus a 17.5% penalty (15%/15% under original regime). The reopening of the regime would begin 30 days after the law is published in the Official Gazette and remain open for 120 days.

Click the following link for the draft law (Portuguese language).

Cyprus-OECD

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Cyprus Announces Signing of CbC Report Exchange Agreement and Plans for Implementation of CbC Reporting Requirements

On 25 November 2016, the Cyprus Press and Information Office issued a press release announcing that the Republic of Cyprus signed the Multilateral Competent Authority Agreement on the Exchange of Country by Country (CbC) Reports on 1 November 2016. The signing brings the total number of signatories to 50, although the OECD list of signatories to the agreement has not yet been updated to reflect the addition of Cyprus.

The press release also notes that Cyprus will be implementing CbC reporting requirements for MNE group with consolidated group revenue of more than EUR 750 million per year. The Ministry of Finance has already begun the development of the legal and regulatory framework for the CbC reporting requirements through the development of a Decree. Although the press release does not state the effective date of the CbC reporting requirements, as an EU Member State, Cyprus is required to implement requirements that apply for fiscal years beginning on or after 1 January 2016, unless Cyprus elects to apply the one year deferral option for MNEs with a non-EU ultimate parent, in which case reporting for the latter will only be required from 1 January 2017.

Hungary

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Hungary to Cut Social Tax Rate

Hungary's Ministry of Economy has announced planned reductions in the country's social tax rate. Currently, Hungarian companies are required to make social security contributions equal to 28.5% of employees' gross salary, including a 27% social tax contribution and a 1.5% training fund contribution. As proposed by the government, the 27% social tax rate will be reduced to 22% in 2017 and 20% in 2018.

Treaty Changes (5)

Belgium-Canada-Poland-United Kingdom

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Belgium Approves Pending Protocols to Tax Treaties with Canada, Poland, and the UK

On 24 November 2015, the Belgian Chamber of Representatives approved for ratification the pending protocols to the tax treaties with Canada, Poland, and the UK.

The protocol to the 2002 tax treaty with Canada was signed on 1 April 2014. It replaces Article 26 (Exchange of Information) to bring it in line with the OECD standard for information exchange. The protocol will enter into force once the ratification instruments are exchanged and will apply retroactively from 1 January 2006 with respect to criminal tax matters and from 1 January 2013 in respect of all other matters.

The protocol to the 2001 tax treaty with Poland was signed on 14 April 2014. The main changes include amendments to Articles 10 (Dividends) and 11 (Interest), as well as the replacement of Article 26 (Exchange of Information) and the addition of Article 28A (Limitation of Benefits) (previous coverage). The protocol will enter into force once the ratification instruments are exchanged and will apply from 1 January of the year following its entry into force

The protocol to the 1987 tax treaty with the UK was signed on 13 March 2014. It clarifies that the amendments made in the 2009 protocol to the treaty are applicable not only to federal taxes, but also taxes levied by the regions and communities in each country. It also confirms that regional and communal Finance Ministers are recognized as competent authorities. The protocol will enter into force once the ratification instruments are exchanged and will apply retroactively from 1 January 2013.

China-Finland

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SSA between China and Finland to Enter into Force

The social security agreement between China and Finland will enter into force on 1 February 2017. The agreement, signed 22 September 2014, is the first of its kind between the two countries and generally applies from the date of its entry into force.

Israel-Poland

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SSA between Israel and Poland Signed

According to an update from the Polish Ministry of Family, Labour and Social Policy, a social security agreement was signed with Israel on 22 November 2016. The agreement will enter into force on the first day of the third month following the exchange of the ratification instruments

Note - a previous report that Israel had signed a social security agreement with Portugal on 22 November has been corrected.

Liechtenstein-Switzerland

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Tax Treaty between Liechtenstein and Switzerland to Enter into Force

The income and capital tax treaty between Liechtenstein and Switzerland will enter into force on 22 December 2016. The treaty, signed 10 July 2015, replaces the limited tax agreement between the two countries signed in 1995.

Taxes Covered

The treaty covers Liechtenstein personal income tax, corporate income tax, real estate capital gains tax, wealth tax, and coupon tax. It covers Swiss federal, cantonal, and communal taxes on income and capital.

Withholding Tax Rates

  • Dividends - 0% if the beneficial owner is a company that has directly held at least 10% of the paying company's capital for an uninterrupted period of at least one year prior to payment (if the holding period condition is met after payment, a refund of tax withheld may be requested); otherwise 15%
  • Interest - 0%
  • Royalties - 0%

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 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 deriving more than 50% of their value directly or indirectly from immovable property situated in the other State, with an exemption for:
    • The alienation of shares quoted on a stock exchange established in either Contracting State or other exchanges if agreed to; and
    • The alienation of shares in a company that carries on its business in the immovable property from which the share value is derived.

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 generally apply the exemption with progression method for the elimination of double taxation. However, Liechtenstein applies the credit method in respect of income covered by Articles 10 (Dividends) and 16 (Directors' Fees); and Switzerland may allow a deduction of the Liechtenstein tax, a lump sum reduction of the Swiss tax, or a partial exemption in respect of income covered by Article 10 (Dividends).

Limitation on Benefits

The final protocol to the treaty includes that the beneficial provisions of Articles 10 (Dividends), 11 (Interest), 12 (Royalties), and 21 (Other Income) will not apply for income paid under a transaction or derived by an entity if the main purpose, or one of the main purposes, of the transaction or establishment of the entity was to obtain the benefits of those Articles.

Effective Date

The treaty applies from 1 January 2017. The 1995 tax agreement between Liechtenstein and Switzerland ceases to have effect on the date the new tax treaty is effective.

Madagascar-Vietnam

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Madagascar and Vietnam to Negotiate Tax Treaty

During a meeting held 25 November 2016, officials from Madagascar and Vietnam discussed their intent 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.

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