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Approved Changes (3)

India

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India Issues Notification that New Digital Services Equalization Levy in Force

The India government has issued a notification that the country's new equalization levy for digital services is in force from 1 June 2016. The levy was introduced as part of the 2016-2017 Union Budget, and included in the Finance Act, 2016, which was enacted 14 May (previous coverage). While initially only applying for online advertising services, the scope of the levy may be expanded to cover other digital service types as well.

Under the new rules, Indian resident companies and permanent establishments (PE) in India must deduct a 6% levy at source on cross border payments made for online advertising services for business purposes if such payments exceeded INR 100,000 per year. The amount deducted is to be remitted on a monthly basis. However, the levy does not apply if the foreign provider has a PE in India and the services are effectively connected with such PE.

The equalization levy is a final tax on gross payment, and was specifically designed not to be an income tax. As such, the levy is not subject to the provision of India's income tax treaties, and therefore a foreign company providing such services will not be able to claim a tax credit for any levy deducted unless provide for under the domestic law of its jurisdiction of residence. The exemption for foreign providers with a PE in India and the lack of double taxation relief is meant to encourage digital services providers to create a PE in India in order to be taxed on net income, while creating disincentives to artificially avoid a PE.

Click the following link for the government notification.

Japan

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Japan Confirms Further Delay of Consumption Tax Increase

On 1 June 2016, Japan's Prime Ministry Shinzo Abe announced that the increase in the country's consumption tax rate from 8% to 10% will be delayed to 1 October 2019. The tax was first increased from 5% to 8% in April 2014, and was to be increased to 10% from October 2015. However, due to the perceived negative economic effects of the first increase and global economic uncertainty, the increased was delayed to 1 April 2017. The further delay to 1 October 2019 is based on the same reasoning.

Poland

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Polish Parliament Approves new GAAR

On 19 May 2016, Poland's Senate (upper house of parliament) approved legislation introducing a new general anti-avoidance rule (GAAR). The Sejm (lower house) approved the GAAR legislation on 13 May. The approval follows several years of development to replace the previous GAAR, which was ruled unconstitutional in 2004.

The new GAAR will apply if a taxpayer uses artificial legal actions with the primary purpose of obtaining tax benefits not in line with the object and purpose of the law. In particular, but not limited to, the use of hybrid instruments, the use of offshore entities in low tax jurisdictions, the use of debt instruments to produce high interest expenses with corresponding withholding tax exemptions under tax treaties, etc. If it is determined that the main purpose of a transaction is to obtain a tax benefit, the tax authorities may recharacterize the transaction as if an appropriate transaction had occurred, and in certain cases may disregard a transaction entirely.

The GAAR provides for a PLN 100,000 (~USD 25,400) tax benefit threshold, under which it will not be applied. It also provides that if a taxpayer is unsure if the GAAR may apply to a particular transaction, a formal opinion from the Ministry of Finance may be obtained. However, such an opinion is not a ruling, and offers no protection from the GAAR being applied.

The GAAR legislation must now be signed into law by the president, and will enter into force 30 days after published in the Official Gazette. The GAAR may be applied for tax benefits received from the date of its entry in force, regardless of when the related transaction was entered into.

Proposed Changes (1)

Germany

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Germany's Draft Legislation to Implement CbC Reporting Requirements and other BEPS Measures

Germany's Ministry of Finance has reportedly issued draft legislation for the implementation of Country-by-Country (CbC) reporting requirements and other BEPS-related measures.  

The CbC reporting requirements are in line with the guidelines developed under Action 13 of the OECD BEPS project, and the requirements included in the recently adopted EU directive for the exchange of CbC reports (previous coverage). Under the draft legislation, the CbC reporting requirement will apply for fiscal years beginning on or after 1 January 2016 for German-parented MNE groups meeting the standard consolidated group revenue threshold of EUR 750 million in the previous year. The draft legislation also provides for secondary reporting requirements, whereby a CbC report will need to be filed by a constituent entity in Germany or a surrogate parent entity, if Germany is unable to obtain a CbC report through exchange from the ultimate parent's jurisdiction of residence. However, such secondary reporting requirements will only apply for fiscal years beginning on or after 1 January 2017.

When required, the CbC report must be filed within 12 months following the end of the fiscal year concerned. In addition, German entities must indicate in their tax return for the year whether it is the ultimate parent of the group, has been designated as a surrogate parent, or is a domestic constituent entity of a group with a foreign parent. For domestic constituent entities, the entity must also indicate in its return which group entity will be filing the CbC report and in which jurisdiction. Failure to provide the information will result in mandatory local filing.

Failure to comply with the CbC reporting requirements will result in penalties of up to EUR 5,000.

The other main measures of the draft legislation include:

  • Current transfer pricing documentation requirements are amended in line with the Master and Local file requirements developed under Action 13 for fiscal years beginning on or after 1 January 2016, with a Master file preparation threshold of EUR 100 million total revenue in the previous year;
  • Amendments are made to provide for the implementation of the directive for the mandatory automatic exchange of information between EU Member States on advance cross-border tax rulings and advance pricing agreements (previous coverage);
  • The treaty-overriding switch-over rule of the Income Tax Act is amended to eliminate any opportunity to obtain a treaty based exemption of foreign source income which is only partially taxed by a foreign treaty jurisdiction;
  • The definition of the arm’s length principle is strengthened under the Foreign Tax Act so that it is applied in a uniform way and will take precedence over tax treaty-based interpretations in cross border situations; and
  • The Trade Tax Act is amended so that CFC income of German residents is explicitly brought within the scope of trade tax, and that the 5% inclusion for dividends received by a subsidiary in a tax consolidated group under the participation exemption will also apply for trade tax purposes.

The legislation must now be finalized and sent to parliament for approval, which is expected in the second half of 2016. Unless otherwise indicated above, the changes are generally to apply from 1 January 2017.

Treaty Changes (5)

Brazil-OECD

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Brazil Deposits Ratification Instrument for Mutual Assistance Convention

On 2 June 2016, Brazil deposited the ratification instrument for the OECD-Council of Europe Convention on Mutual Administrative Assistance in Tax Matters as amended by the 2010 protocol. Brazil signed the convention as amended on 3 November 2011.

According to the OECD overview of signatories to the convention, the convention will enter into force in Brazil on 1 October 2016.

Costa Rica-Bermuda-Panama-Korea, Rep of-Untd A Emirates-United States

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Costa Rica Negotiating TIEAs with Bermuda, Panama, South Korea and the U.A.E. and Protocol to TIEA with the U.S.

According to a recent release from the Costa Rica government, negotiations are underway for tax information exchange agreements (TIEA) with Bermuda, Panama, South Korea, and the United Arab Emirates. Any resulting agreements will be the first of their kind between Costa Rica and the respective countries. In addition, Costa Rica is currently negotiating a protocol to amend the 1989 TIEA with the U.S.

Additional details will be published once available.

France-Singapore

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New Tax Treaty between France and Singapore has Entered into Force

The new income tax treaty between France and Singapore entered into force on 1 June 2016. The treaty, signed 15 January 2015, replaces the 1974 tax treaty between the two countries.

Taxes Covered

The treaty covers French income tax, corporation tax, contributions on corporation tax, and social security contributions and contributions for the reimbursement of the social debt. It covers Singapore income tax.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services within a Contracting State through employees or other engaged personnel for the same or connected project for a period or periods aggregating more than 365 days within any 15-month period.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company directly or indirectly holding at least 10% of the paying company's capital, otherwise 15%
  • Interest - 0% for interest paid by an enterprise of one Contracting State to an enterprise of the other State when the recipient is the beneficial owner; otherwise 15%
  • Royalties - 0%

Note - Distributions made by an investment vehicle that derives income or gains from immovable property, is not taxed on the income or gains, and distributes most of its income annually, are treated as dividends for the purpose of the treaty. However, if the beneficial owner directly or indirectly holds at least 10% of the investment vehicle's capital, domestic rates apply instead of the rates mentioned above.

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 rights in a company, trust, or other institution or entity, the assets or property of which consists of or derives more than 50% of their value directly or indirectly from immovable property situated in the other State or from rights connected with such immovable property (excluding immovable property pertaining to business carried on by such 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 generally apply a modified version of the credit and exemption methods for the elimination of double taxation.

Limitation on Benefits

Article 22 (Limitation of Relief) includes that where the treaty provides that French source income is to be exempted or taxed at a reduced rate in France, and such income is subject to tax under Singapore law by reference to the amount remitted to or received in Singapore, then the exemption or reduction provided in France will apply only to the amount of income remitted to or received in Singapore.

Article 28 (Miscellaneous) includes that the benefits of any reduction in or exemption from tax provided for in the treaty will not apply when the main purpose for entering into certain transactions or arrangements was to secure a more favorable tax position and obtaining such treatment would be contrary to the object and purpose of the relevant provisions of the treaty.

Effective Date

The treaty applies in France from 1 January 2017. It applies in Singapore in respect of tax chargeable for any year of assessment beginning on or after 1 January 2018, and in all other cases from 1 January 2017. The provisions of the 1974 income tax treaty between the two countries cease to have effect from the date the corresponding provisions of the new treaty are effective.

Jamaica-Uruguay-OECD

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Jamaica and Uruguay Sign Mutual Assistance Convention

The OECD has announced that on 1 June 2016, Jamaica and Uruguay signed the OECD-Council of Europe Convention on Mutual Administrative Assistance in Tax Matters as amended by the 2010 protocol. Each country must now complete the required ratification procedures and deposit the ratification instrument to bring the Convention into force.

Switzerland-Australia-European Union

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Switzerland Approves Automatic Exchange of Finance Account Information with Australia and the EU

On 31 May 2016, the Swiss parliament approved the joint declaration on automatic exchange of information with Australia and the protocol to the 2004 EU savings tax agreement. The agreement and the protocol both provide for the automatic exchange of financial account information in line with OECD standards. Collection of the information will begin 1 January 2017, with the first exchanges to take place in 2018.

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