Worldwide Tax News
On 30 October 2015, China's Ministry of Finance and State Administration of Taxation (SAT) jointly issued Circular 118/2015, which expands the scope of exported services that are zero-rated for value added tax purposes (VAT). Currently, the zero rate regime only covers research and development, design, and international transportation services.
The additional services that will be zero-rated when provided by domestic entities to foreign entities include:
- The creation and issuing of radio, film, and television content;
- Services for the transfer of the ownership of, or the right to use, patents or technical know-how;
- Development, testing, and maintenance services for software, and related consulting;
- Design and testing services for integrated circuit and electronic circuit products, and related technical support services;
- IT-related services including information system integration, network management, data and hosting center services, and others; and
- Contract energy management services for contracted projects outside China.
Offshore outsourcing services that are currently exempt under the model city incentives regime will also be eligible for the zero rate VAT regime, including IT outsourcing services, business process outsourcing services and knowledge process outsourcing services.
The SAT is expected to issue administrative measures for the expanded scope in the near future, and the change is to apply from 1 December 2015.
On 15 October 2015, El Salvador's National Assembly approved amendments to the country's Tax Incentives Law for the Promotion of Renewable Energy Used in the Generation of Electricity. The amendments expand the availability of the incentives, which include:
- A 10-year income tax exemption for projects producing up to 10 megawatts from renewable energy sources;
- A 5-year income tax exemption for projects producing more than 10 megawatts from renewable energy sources; and
- A 10-year customs duties exemption for imported equipment, machinery and materials used for the construction of renewable energy projects.
The main amendments include:
- The 20 megawatt eligibility cap for the 5-year income tax exemption and customs duties exemption is removed;
- The incentives are made available for new investments in projects involving the expansion of existing power plants, substations and transmission lines;
- The renewable energy sources qualifying for the incentives are expanded to include marine sources and biogas, as well as any other source identified as renewable in the future; and
- The period for the relevant government agencies to issue approval of a project and the granting of incentives is extended from 10 business days to 45 business days.
The changes will enter into force after the associated decree is published in El Salvador's Official Gazette.
According to recent unconfirmed reports, the EU Commission has ordered the Dutch authorities to submit information on tax rulings granted to at least 14 MNEs including Microsoft, GlaxoSmithKline, Pfizer and Kraft Foods. The information requests are based on EU State aid rules, which prohibit the granting of any advantages favoring certain undertakings or economic sectors that can potentially distort competition within the internal market. Requests of this type are generally, but not necessarily, followed by a formal investigation which may lead to declaring the aid illegal and ordering its recovery as in the recent case of Starbucks and others.
The EU Commission apparently did not wish to comment on the news reports, other than to say that 300 such requests have been issued to 23 Member States.
Indian Tribunal Rules Transactional Net Margin Method to be Method of Last Resort in Cases of Imperfect Data
In a decision issued 30 October 2015, the Indian Income Tax Appellate Tribunal in Ahmedabad ruled on the most appropriate transfer pricing method to be used in a case where comparable data was limited. The case involved an India glass mosaic products manufacturing company (taxpayer) and the determination of the arm's length price of exports made to its associated enterprises abroad during the 2007-08 and 2008-09 assessment years.
In determining the arm's length price, the taxpayer used the transaction net margin method (TNMM) for both assessment years using manufacturers of various glass products as comparables. Upon reviewing the taxpayer's transfer pricing, the tax authorities determined that the TNMM was not appropriately applied because the comparables were not similar enough to the taxpayer's products. Furthermore, because appropriate comparable data was limited, the internal cost plus method (CPM) should be used instead.
Based on this determination, the CPM was used by the tax authorities for the 2008-2009 assessment year, but for the 2007-08 assessment year the tax authorities decided that the uncontrolled price method (CUP) was appropriate because sufficient comparable data was not available to use the CPM. The comparables used by the tax authorities for the CUP method, however, were transactions with associated enterprises of the taxpayer that are resident in India. The tax authority took the position that the use of the controlled transactions for the CUP method was appropriate in this case because the nature of the transactions provided no motive for tax avoidance since the enterprises are resident in India, and no other comparables were available.
Based on the methods used by the tax authorities, adjusted assessments were issued, which the taxpayer appealed. The case was first heard by the Dispute Resolution Panel, which sided with the tax authority, and then went on to the Tribunal.
In Its decision, the Tribunal sided with the taxpayer, ruling that for both years of assessment the TNMM is the most appropriate method. It found that, regardless of rationale, in no circumstances should the CUP method be applied using any comparable transactions other than uncontrolled transactions as defined by law, which excludes transactions with associated enterprises. Regarding the use of the CPM for the 2008-09 assessment year, the Tribunal could not understand the logic of applying the CPM in the absence of sufficient comparable data for applying the TNMM. It held that on the basis of imperfect data, the TMNN should be used as "the method of last resort" and not the CPM. Furthermore, the Tribunal held that in using the TNMM in such cases, if there are differences between the products manufactured by the taxpayer and the comparables available in the public domain, only broad similarity in the product and economic similarity in the conditions are needed.
During the 29 to 30 October meeting of the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes, new peer review reports for 15 jurisdictions were published. The reports and their results are as follows:
- Phase 1 report for Azerbaijan - moves on to Phase 2
- Phase 1 report for Gabon - moves on to Phase 2
- Phase 1 report for Romania - moves on to Phase 2
- Phase 1 report for Senegal - moves on to Phase 2
- Phase 1 supplementary report for Brunei Darussalam - moves on to Phase 2
- Phase 1 supplementary report for Dominica - moves on to Phase 2
- Phase 1 supplementary report for Panama - moves on to Phase 2
- Phase 2 report for Colombia - found to be Compliant
- Phase 2 report for Latvia - found to be Largely Compliant
- Phase 2 report for Liechtenstein - found to be Largely Compliant
- Phase 2 report for Costa Rica - found to be Partially Compliant
- Phase 2 report for Samoa - found to be Partially Compliant
- Phase 2 supplementary report for Cyprus - upgraded from Non-Compliant to Largely Compliant
- Phase 2 supplementary report for Luxembourg - upgraded from Non-Compliant to Largely Compliant
- Phase 2 supplementary report for Seychelles - upgraded from Non-Compliant to Largely Compliant
The reports are produced as part of a two-phase review process for compliance with the international standard for information exchange. The Phase 1 report includes an evaluation of a jurisdiction's legal and regulatory framework for transparency and exchange of information, and provides recommendations for improvement. Jurisdictions deemed to have a sufficient framework in place move on to Phase 2, which includes an evaluation of the actual implementation of the standard for information exchange, with a compliance rating given along with recommendations for improvement. The compliance ratings include Non-Compliant, Partially Compliant, Largely Compliant or Compliant.
Click the following link for an overview of the compliance ratings provided for the 34 jurisdictions that have only completed Phase 1 and the 86 jurisdictions that have completed Phase 2.
The Algerian Cabinet of Ministers has reportedly approved a new draft investment law. The new law is intended to improve the business climate for foreign investment in Algeria overall, and includes the following main measures:
- A number of requirements concerning foreign investment will be abolished, including:
- The requirement that for foreign investments made prior to 2009, the foreign ownership must be adjusted to meet the 49% foreign ownership cap (introduced in 2009) when a change is introduced in the commercial registration;
- The requirement that domestic funding be used for a contribution in an Algerian company;
- The requirement that an excess foreign currency must be generated during the period of a project; and
- The requirement that transfers of shares in Algerian companies must be reported if a foreign investor holds a participation in the company;
- The pre-emption procedure will be replaced with a pre-authorization procedure for the transfer of shares in an Algerian company to a foreign investor;
- The threshold for investments requiring National Investment Council review will be increased from DZD 2 billion to DZD 5 billion (~USD 46.8 million); and
- A minimum equity requirement will be introduced to guarantee the right to repatriate profits of a foreign invested Algerian company, or repatriate the proceeds from the transfer of a participation or liquidation of a foreign invested Algerian company.
The new investment law must be approved by parliament before entering into force.
On 27 October 2015, Russian Finance Minister Anton Siluanov announced that the government is considering new rules for the taxation of oil companies. Currently, oil companies in Russia are taxed based on the amount of oil extracted, with no deduction allowed for expenses incurred for the development and extraction activities. Under the proposed rules, oil companies would be taxed on an estimated value of proceeds, less expenses including customs duties, transport costs, capital and operating expenditures, and other taxes. The expenses would be limited to USD 20 per barrel of oil and the rate of tax would be 70%.
The proposal is still in its draft phase, and must be finalized by the government, approved by parliament, and signed by the president before entering into force.
On 2 November 2015, the South African government published a draft Carbon Tax Bill for public comment. Under the proposed legislation, a carbon tax would be levied at a rate of ZAR 120 per ton of carbon dioxide from 1 January 2017. It would be implemented through a two-phase approach, with the first phase including an exemption for the first 60% of carbon dioxide emitted up to 2020. The proposed legislation also includes a number of additional tax-free allowances, including:
- A 10% allowance for process emissions (greenhouse gas emissions other than combustion emissions);
- A variable allowance up to 10% for trade-exposed sectors;
- An allowance of up to 5% for early actions and /or efforts to reduce emissions that beat the industry average;
- A carbon offsets allowance of up to 10%; and
- A 5% allowance for companies participating in the carbon budgeting system during phase 1 (up to 2020).
The combined effect of the above tax-free allowances including the 60% exemption would be capped at 95% during phase 1, with the effective carbon tax rate ranging between ZAR 6 and ZAR 48 per ton. After 2020, the allowances would be phased down.