Worldwide Tax News
On 31 January 2017, the Australia Taxation Office issued a Taxpayer Alert (TA) 2017/1 on the re-characterization of income from trading businesses. From the description of the TA:
We are reviewing arrangements which attempt to fragment integrated trading businesses in order to re-characterize trading income into more favorably taxed passive income. Our concern arises where a single business is divided in a contrived way into separate businesses. The income that might be expected to be subject to company tax is artificially diverted into a trust where, on distribution from the trust, that income is ultimately subject to no tax or a lesser rate than the corporate rate of tax.
These arrangements have the potential to erode the corporate tax base, particularly where they are promoted to overseas investors as a way to acquire tax advantages in Australia.
Click the following link for TA 2017/1.
The OECD on 1 February 2017 released the Terms of Reference and Methodology for conducting the peer review of two minimum standards under the BEPS Action Plan, namely (a) Country-by-Country reporting as per BEPS Action 13, and (b) the compulsory spontaneous exchange of tax rulings (“transparency framework”) as per BEPS Action 5.
The peer review and monitoring of the implementation of County-by-Country reporting will be conducted by an ad-hoc group consisting of delegates from Working Party 6 and Working Party 10, under the authority of the countries making up the Inclusive Framework. The Terms of Reference with respect to CbC are broken down in 3 categories dealing with:
- The domestic legal and administrative framework;
- The exchange of information framework; and
- Confidentiality and the appropriate use of CbC Reports.
The peer review and monitoring process for the transparency framework will be conducted by the Forum on Harmful Tax Practices (FHTP). The terms of reference in this regard are broken down in four categories dealing with:
- The information gathering process;
- The exchange of information;
- The confidentiality of information received; and
The IRS Large Business and International (LB&I) Division has issued a release announcing the identification and selection of 13 compliance campaigns. The release notes a move towards issue-based examinations and a compliance campaign process in which the organization decides which compliance issues that present risk require a response in the form of one or multiple treatment streams to achieve compliance objectives. The 13 campaigns and practice areas include:
- IRC 48C Energy Credit Campaign (Enterprise Activities);
- Offshore Voluntary Disclosure Program (OVDP) Declines-Withdrawals Campaign (Withholding & International Individual Compliance);
- Domestic Production Activities Deduction, Multi-Channel Video Program Distributors (MVPD’s) and TV Broadcasters (Enterprise Activities);
- Micro-Captive Insurance Campaign (Enterprise Activities);
- Related Party Transactions Campaign (Enterprise Activities);
- Deferred Variable Annuity Reserves & Life Insurance Reserves IIR Campaign (Enterprise Activities);
- Basket Transactions Campaign (Enterprise Activities);
- Land Developers - Completed Contract Method (CCM) Campaign (Enterprise Activities);
- TEFRA Linkage Plan Strategy Campaign (Pass-Through Entities);
- S Corporation Losses Claimed in Excess of Basis Campaign (Pass-Through Entities);
- Repatriation Campaign (Cross Border Activities);
- Form 1120-F Non-Filer Campaign (Cross Border Activities); and
- Inbound Distributor Campaign (Treaty and Transfer Pricing Operations).
These campaigns represent the first wave of LB&I's issue-based compliance work. More campaigns will continue to be identified, approved, and launched in the coming months. Click the following link for the full text of the release for additional information on each campaign.
The India Union Budget for 2017-18 was presented to Parliament on 1 February 2017. Significant proposals include the following:
- The corporate tax rate for domestic companies is to be reduced to 25%, but only if total turnover or gross receipts in fiscal year 2015-2016 does not exceed INR 500 million. Other corporate tax rates remain unchanged.
- Under current regulations, start-ups are allowed to deduct an amount equal to 100% of profits and gains derived from eligible business for 3 consecutive years within the 5-year period starting from their incorporation. The Budget proposes to extend the 5-year period to 7 years. The measure would enter into force from 1 April 2018.
- The budget proposes to incorporate the principle of secondary adjustment under Indian transfer pricing regulations. Where a primary transfer pricing adjustment is operated in various circumstances, the excess funds available with the associated enterprise, if not repatriated to India within a timeframe as may be prescribed, are deemed to be an advance made by the Indian assesse producing interest taxable in India. No secondary adjustment would be operated if the primary adjustment amount of the assesse in any previous year does not exceed INR 10 million. The new rules would enter into force from 1 April 2018.
- The Budget proposes to implement a limitation on interest deduction in line with BEPS Action item 4. Under the proposal, interest expense deduction on associated debt is capped at 30% of the debtor’s EBITDA, or interest paid or payable to associated enterprises, whichever lower. The provision is applicable to Indian companies as well as Indian permanent establishments of foreign companies. The definition of associated debt includes back-to-back loans and implicit or explicit guarantees. Excess interest would be permitted to be carried forward for 8 years, whilst a de minimis rule limits the application of the new rules to interest expenditure in excess of INR 10 million. The rules would enter into force from 1 April 2018.
- The withholding tax rate on payments for professional services or technical service fees will be reduced to 2% (from 10%) but only if the recipient is engaged in the business of operation of call centers. The amendment is to become effective from 1 June 2017.
- Currently, a reduced 5% withholding tax rate is due on interest paid on government bonds and rupee denominated corporate bonds, provided the interest rate does not exceed a maximum fixed by the government and the interest is paid to FIIs and QFIs and is due between 1 June 2013 and 1 July 2017. The budget extends this preferential treatment to interest due until 1 July 2020.
- The carry-forward of Minimum Alternate Tax / Alternate Minimum Tax (MAT/AMT) is to be increased to 15 consecutive years (from 10 consecutive years currently). The measure would become effective from 1 April 2018.
- The base year for determining the fair market value of assets for the purposes of computing capital gains is changed from 1981 to 2001.
- The personal income tax brackets are adjusted with the rate for the first taxable bracket reduced from 10% to 5% as follows:
- up to INR 250,000 - 0%
- over INR 250,000 up to INR 500,000 - 5%
- over INR 500,000 up to INR 1,000,000 - 20%
- over INR 1,000,000 - 30%
- A surtax is introduced at the rate of 10% if income exceeds INR 5 million but is less than INR 10 million, and at the rate of 15% where income exceeds INR 10 million.
Click the following link for the India Union Budget webpage for additional information.
According to a release from the Malaysian National News Agency (BERNAMA), Malaysia has joined the Inclusive Framework for the global implementation of the BEPS Project. As a member of the Framework, Malaysia is committed to the implementation of four minimum standards, including those developed under Action 5 (Countering Harmful Tax Practices), Action 6 (Preventing Treaty Abuse), and Action 14 (Dispute Resolution), as well as Country-by-Country (CbC) reporting under Action 13 (Transfer Pricing Documentation). Of the minimum standards, Malaysia has already introduced CbC reporting requirements (previous coverage).
On 30 January 2017, officials from Austria and Japan signed a new income tax treaty. Once in force and effective, the new treaty will replaced the 1961 tax treaty between the two countries.
The treaty covers Austrian income tax and corporation tax, and covers Japanese income tax, corporation tax, special income tax for reconstruction, local corporation tax, and local inhabitant tax.
If a company is considered resident in both Contracting States, the competent authorities of the Contracting States will determine its residence for the purpose of the treaty through mutual agreement based on its place of head or main office, its place of effective management, the place where it is incorporated or otherwise constituted, and any other relevant factors. If no agreement is reached, the company will not be entitled to any relief or exemption from tax provided by the treaty.
- Dividends - 0% if the beneficial owner is a company that has directly or indirectly held at least 10% of the voting power of the paying company for a period of at least six months ending the date on which entitlement to the dividends is determined (exemption does not apply if the dividends are deductible for the paying company); otherwise 10%
- Interest - Generally 0%, although the following may be taxed in the Contracting State in which it arises:
- In the case of Austria, income derived from debt-claims carrying a right to participate in profits, including income derived from profit participating loans and profit participating bonds; and
- In the case of Japan, interest determined by reference to receipts, sales, income, profits or other cash flow of the debtor or a related person, to any change in the value of any property of the debtor or a related person or to any dividend, partnership distribution or similar payment made by the debtor or a related person, or any other interest similar to such interest.
- Royalties - 0%
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 or comparable interests if, at any time during the 365 days preceding the alienation, the shares or comparable interests derived at least 50% of their value directly or indirectly from immovable property situated in the other State (exemption if the shares or comparable interests are traded on a recognized stock exchange and the alienator together with related parties own in the aggregate 5% or less of the shares or comparable interests);
- Gains from alienation of any property, other than immovable property, forming part of the business property of a permanent establishment in the other State; and
Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.
Article 20 (Silent Partnership) provides that any income and gains derived by a silent partner in respect of a silent partnership contract or another similar contract may be taxed in the Contracting State in which such income and gains arise and according to the laws of that Contracting State. For the purpose of Article 20, silent partnership means Tokumei Kumiai in the case of Japan and Stille Gesellschaft in the case of Austria.
Article 22 (Entitlement to Benefits) includes substantial provisions regarding a resident's entitlement to benefits under the treaty. This includes that a resident of a Contracting State will only be entitled to the withholding tax exemptions provided under Articles 10 (Dividends), 11 (Interest), and 12 (Royalties) if the resident is a qualified person, which includes:
- An individual;
- A qualified governmental entity;
- A company, if its principal class of shares is regularly traded on one or more recognized stock exchanges;
- A pension fund, subject to certain conditions;
- A person established and operated exclusively for a religious, charitable, educational, scientific, artistic, cultural, or public purpose, subject to certain conditions; and
- A person other than an individual, if at least 50% of its voting power or other beneficial interests is owned, directly or indirectly, by residents of either Contracting State that meet the conditions for qualified persons above during the twelve month period including the date of the payment.
Provisions are also included whereby a resident of a Contracting State will be entitled to the exemption benefits if:
- The resident is carrying on business in that Contracting State (other than the business of making or managing investments for the resident's own account, unless the business is banking, insurance, or securities business carried on by a bank, insurance company or securities dealer); and
- The item of income is derived in connection with, or is incidental to, that business.
Additional conditions apply regarding the above in relation to associated enterprises and partnerships.
Provisions are also included whereby the benefits may still apply for a resident that is not a qualified person or does not meet the conditions above, provided that the competent authority of the Contracting State to which the benefit is claimed determines that the establishment, acquisition, or maintenance of such resident and the conduct of its operations did not have as one of the principal purposes the obtaining of such benefit.
Lastly, a general anti-abuse provision is included, 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.
Japan applies the credit method for the elimination of double taxation, while Austria generally applies the exemption method. However, Austria will apply the credit method in respect of income taxed in Japan in accordance with the provisions of Articles 10 (Dividends), 11 (Interest), and 20 (Silent Partnership).
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. Article 27 (Exchange of Information), however, will apply from the date of the treaty's entry into force without regard to the date on which the taxes are levied or the taxable year to which the taxes relate.
The 1961 tax treaty between the two countries will cease to apply from the date the new treaty is effective and terminate on the last such date.
On 30 January 2017, officials from Japan and Slovakia signed a social security agreement. The agreement is the first of its kind between the two countries and will enter into force on the first day of the third month following the exchange of the ratification instruments.
Singapore Agreements for Exchange of Financial Account Information Enter into Force with Nine Countries
On 31 January 2017, Singapore's agreements for the automatic exchange of financial account information entered into force with Finland, Iceland, Ireland, Japan, Malta, Netherlands, Norway, South Africa, and the United Kingdom. With the entry into force of the agreements, Singapore financial institutions are now required to transmit financial account information to the Inland Revenue of Singapore for exchange purposes by 31 May 2018.