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Approved Changes (4)

Colombia

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Colombian Tax Authority Clarifies Position on Taxation of Transfer of Assets in Relation to a Merger or Spin-Off

Colombia's National Tax Authority (DIAN) recently published a ruling that clarifies the taxation of the transfer of Colombian assets in relation to an international merger or spin-off. Under Colombia's general income tax rules, such transactions would be tax neutral provided that the Colombian assets owned by the group of companies taking part in the transaction do not exceed 20% of total assets based on the consolidated balance sheet of the group's ultimate parent company. The ruling clarifies that in determining if the 20% threshold is met, all Colombian assets owned by the group must be considered in comparison to total group assets, and not just those Colombian assets transferred as part of the merger or spin-off transaction. Where the 20% threshold is exceeded, the transfer would be considered a taxable event.

Cyprus

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Cyprus Publishes Reference Rates for Notional Interest Deduction

The Cyprus Tax Department has recently published the reference rates to be used in determining the notional interest deduction for new equity investments. The notional interest deduction applies for tax years beginning on or after 1 January 2015. The deduction is equal to 3% plus a reference rate equal to the higher of the Cyprus 10-year government bond yield or equivalent bond yield of the country in which the assets funded by the new equity are utilized. The reference rates are determined as of 31 December of the year preceding the tax year.

United States

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IRS Releases Practice Unit on Foreign and Domestic Loss Impacts on the Foreign Tax Credit

On 1 March 2017, the U.S. IRS published an international practice unit: Summary of Foreign and Domestic Loss Impacts on the Foreign Tax Credit. The practice unit provides a general overview as well as detailed explanations of the rules regarding loss allocation, recharacterization, and recapture for:

  • Overall Foreign Loss (OFL);
  • Separate Limitation Loss (SLL); and
  • Overall Domestic Loss (ODL).

International practice units are developed by the Large Business and International Division of the IRS to provide staff with explanations of general international tax concepts as well as information about specific transaction types. They are not an official pronouncement of law and cannot be used, cited, or relied upon as such.

Click the following link for the International Practice Units page on the IRS website.

Venezuela

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Update - Venezuela Publishes Administrative Provision for Increase in Tax Unit Value

Venezuela published Administrative Provision No. SNAT/2017/0003 in the Official Gazette on 24 February 2017, which increases the tax unit (unidad tributaria) value from VEF 177 to 300. As previously reported, the tax unit is used as a basis for various tax purposes, including the corporate income tax brackets. The change in value applies for the 2017 tax year if following the calendar year. If following an alternate year, the increased value applies if it has been in effect for at least 183 days during the year.

Proposed Changes (2)

European Union

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European Commission Issues White Paper on the Future of Europe

The European Commission has a issued a White Paper on the Future of Europe, which forms the Commission's contribution to the Rome Summit of 25 March 2017. The paper presents five scenarios for how the Union could evolve by 2025 depending on how it chooses to respond as a Europe of 27 (Member States). As provided in a release on the paper, these include:

Scenario 1: Carrying On - The EU27 focuses on delivering its positive reform agenda in the spirit of the Commission's New Start for Europe from 2014 and of the Bratislava Declaration agreed by all 27 Member States in 2016.

Scenario 2: Nothing but the Single Market – The EU27 is gradually re-centred on the single market as the 27 Member States are not able to find common ground on an increasing number of policy areas.

Scenario 3: Those Who Want More Do More – The EU27 proceeds as today but allows willing Member States to do more together in specific areas such as defence, internal security or social matters.

Scenario 4: Doing Less More Efficiently - The EU27 focuses on delivering more and faster in selected policy areas, while doing less where it is perceived not to have an added value. Attention and limited resources are focused on selected policy areas.

Scenario 5: Doing Much More Together – Member States decide to share more power, resources and decision-making across the board. Decisions are agreed faster at European level and rapidly enforced.

Click the following link for the Commission press release for more information, including the full white paper.

United Kingdom

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UK OTS Issues Interim Report for Consultation on Review of VAT

The UK Office of Tax Simplification (OTS) has launched a public consultation on an interim report identifying areas of complexity in the UK VAT regime. As provided in the report, there are eight main areas identified:

  1. Identifying the implications of a high registration threshold | The UK VAT registration threshold, at GBP 83,000, is much higher than most other countries' (generally closer to GBP 20,000 across all countries with a VAT system or equivalent). This influences and distorts business behaviour. Would it be less distortive if the UK's threshold were lowered to bring in more businesses? If so, how would those small businesses cope? What would be the impact of raising the limit to remove more businesses from VAT? Or could the 'cliff edge' of registration be managed better?
  2. Multiple rates: Causes of complexity | The UK currently has in effect four different VAT rates: the standard 20% rate, the 5% reduced rate, a zero-rating, and exempt goods and services. The definitions—and practical application of definitions—of items within each rate cause a lot of complexity. How might this be simplified?
  3. Partial exemption, option to tax and capital goods scheme | These have been raised as some of the most complicated areas of VAT. Many more businesses now seem to be affected. Can they be simplified? Or are there ways to amend them to reduce their range and impact?
  4. Special Accounting Schemes | There are several schemes, including the flat rate scheme, retail schemes, tour operators margin scheme and annual accounting scheme, generally designed to simplify the VAT regime. Business practices and technology have changed significantly since they were designed, so are these schemes working appropriately today? Do they need improving – or are any in fact no longer needed?
  5. VAT admin, penalty and appeals processes | Many have reported complications ranging from unclear guidance to opaque penalty regimes and resource-consuming appeals processes. The OTS has begun identifying specific complexities in the VAT machine and is open to any suggestions on how this might be simplified, increasing certainty for businesses.
  6. Formal ruling system | The OTS has already had suggestions that uncertainties around VAT treatment can delay or prevent many business decisions, especially when bringing a new product to market. A rulings system sounds a possible route but how would it work? Would it provide enough simplification to justify its introduction, given the demands it would place on HMRC?
  7. VAT and Making Tax Digital (MTD) | HMRC's MTD plans encompass VAT so that brings opportunities and risks. Which areas of the VAT regime need to be simplified to better fit into MTD? And what simplification could MTD bring to the VAT regime – how would the special accounting schemes be affected?
  8. Further areas for investigation | The OTS has also identified some further issues including sector specific considerations. What other complexities are out there that need to be addressed?

Click the following link for the full OTS VAT interim report, which goes into greater detail for each area and poses specific questions. Submissions and comments are due by 30 June 2017.

Treaty Changes (5)

Indonesia-Laos

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Tax Treaty between Indonesia and Laos in Force

The income tax treaty between Indonesia and Laos reportedly entered into force on 11 October 2016. The treaty, signed 8 September 2011, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Indonesia income tax, and Lao tax on profits (income) of enterprises and organizations, and tax on income of individuals.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services in a Contracting State 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.

Withholding Tax Rates

  • Dividends - 10% if the beneficial owner is a company directly holding at least 10% of the paying company's capital; otherwise 15%
  • Interest - 10%
  • Royalties - 10%

Article 10 (Dividends) also provides that a Contracting State may impose an additional 10% tax on profits of a permanent establishment, unless the permanent establishment reinvests such branch profit in that Contracting State.

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 of the capital stock of a company, or of an interest in a partnership or a trust, the property of which consists principally of immovable property situated in the other State.

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

Limitations on Benefits

The beneficial provisions of Articles 10 (Dividends), 11 (Interest), 12 (Royalties), and 13 (Capital Gains) will not apply if the main purpose or one of the main purposes of any person concerned with the creation or assignment of any share, debt-claim, property or right in respect of which the income is paid or gains are derived was to take advantage of these Articles by means of that creation or assignment. The limitation is included in each of the Articles.

Double Taxation Relief

Both countries apply the credit method for the elimination of double taxation. In respect of dividends received by a Laos resident company that owns at least 10% of the shares of the paying company, the credit will take into account the Indonesia tax paid on the profits out of which the dividends are paid.

A tax sparing credit is also provided for tax that would have been paid if not exempted or reduced in accordance with the special incentive laws designed to promote economic development in the respective Contracting State.

Effective Date

The treaty applies in respect of withholding taxes from 1 January 2017 and in respect of other taxes from 1 January 2018.

Romania-China-Uzbekistan

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Romanian Lower House Passes Bills to Ratify Pending Tax Treaty with China and Protocol to Tax Treaty with Uzbekistan

On 28 February 2017, the Romanian Chamber of Deputies approved and forwarded to the Senate the bills to ratify the pending income tax treaty with China and the pending protocol to the tax treaty with Uzbekistan.

The treaty with China, signed 4 July 2016 (previous coverage), 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. Once in force and effective, it will replace the 1991 tax treaty between the two countries.

The protocol to the treaty with Uzbekistan, also signed 4 July 2016 (previous coverage), will enter into force once the ratification instruments are exchanged and will apply from 1 January of the year following its entry into force.

Saint Lucia-OECD

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Mutual Assistance Convention has Entered into Force for Saint Lucia

According to an update from the Council of Europe, the OECD-Council of Europe Convention on Mutual Administrative Assistance in Tax Matters as amended by the 2010 protocol entered into force for Saint Lucia on 1 March 2017. The Convention generally applies in Saint Lucia from 1 January 2018, although it may apply for earlier periods with another signatory if agreed to, and applies in relation to any period regarding criminal matters.

Sint Maarten-Cayman Islands-BES Island-Curacao-Neth Antilles

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Sint Maarten Ratifies TIEA with Cayman Islands

On 20 February 2017, Sint Maarten published Decree No. 10/2017 for the ratification of the pending tax information exchange agreement with the Cayman Islands. The agreement was signed 29 October 2009 between the Cayman Islands and the former Netherlands Antilles. With the dissolution of the Netherland Antilles, the agreement will apply with respect to the Cayman Islands and the BES Islands (Bonaire, Sint Eustatius, and Saba), Curaçao, and Sint Maarten. The agreement will enter into force on the first day of the second month after the ratification instruments are exchanged, and will apply in respect of criminal tax matters from 1 January 2010 and for other matters form the date of its entry into force.

South Africa-Sweden

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South Africa Issues Ruling that Dividend Withholding Exemption under Kuwait Treaty Applies with Respect to Treaty with Sweden (MFN Clause)

On 1 March 2017, the South African Revenue Service published Binding Private Ruling (BPR) 267 concerning dividends withholding tax under the 1995 tax treaty with Sweden, which was amended by the 2010 protocol including the addition of an MFN clause. According BPR 267, the MFN clause added by the 2010 protocol is triggered by the 2004 Kuwait-South Africa tax treaty, which provides an exemption for withholding tax on dividends paid by a company resident in a Contracting State to a resident of the other State that is the beneficial owner. As such, dividends paid by a South African company to a Swedish resident company are not subject to withholding tax, provided that the Swedish company is the beneficial owner and documentary requirements are complied with.

BPR 267 itself is valid for a period of three years from 7 December 2016, although it is assumed the withholding tax exemption provided via the MFN clause is applicable from the 2010 protocol's effective date, 18 March 2012. The MFN clause would also apply in respect of dividends paid by a Swedish company to South Africa, although Sweden does not generally impose withholding tax under domestic rules, except in the case of listed shares, which require that certain conditions be met for the domestic exemption to apply.

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