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Approved Changes (2)

China

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China Centralizes Export Tax Rebate Payments

On 3 march 2015, China's State Council announced that the Central government will be in charge of paying 100% of export tax rebates effective from 1 January 2015. Any rebates due up to the end of 2014 will be paid under the previous system, which includes a 7.5% share of the rebate paid by local authorities to the central government, which then provides the rebate in full to the exporter.

The rebate applies for value added tax and in some cases business tax on exports.

Hong Kong

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Hong Kong to Accept 2013/2014 Profits Tax Returns with Profits Computed on a Fair Value Basis

On 3 March 2015, the Hong Kong Inland Revenue Department (IRD) issued the following press release announcing that 2013/2014 profits tax returns will be accepted with profits computed using the fair value basis.

IRD Press Release:

Subsequent to the judgment of the Court of Final Appeal in Nice Cheer Investment Limited v CIR, the Department has agreed, as an interim administrative measure while pending review, to accept 2013/14 profits tax returns in which the assessable profits are computed on a fair value basis.

The Department is prepared to extend the interim administrative measure to the filing of 2014/15 profits tax returns while pending completion of review.  That is, the Department agrees to accept the 2014/15 returns in which the assessable profits are computed on a fair value basis.

Similarly, the Department agrees to re-compute the 2014/15 assessable profits computed on a fair value basis if the taxpayers subsequently adopts the realization basis.  However, any request for re-computation should be made within the time limits laid down in sections 60 or 70A (6 years) of the Inland Revenue Ordinance.

Proposed Changes (3)

Luxembourg

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Luxembourg to Adopt Nexus Approach for its IP Regime

Luxembourg's Finance Minister Pierre Gramegna has stated that Luxembourg will pass legislation in 2015 for the introduction of a new IP regime in line with the recently agreed upon modified nexus approach proposed by the OECD. The modified nexus approach has been agreed upon by all OECD and G20 countries.

Under the modified nexus approach, in order for preferential tax treatment to apply, there must be nexus between the location of the activities generating the eligible income and the jurisdiction offering the preferential regime. Furthermore it has been agree that a grandfathering clause of 5 years may be applied for current regimes, and that no new entrants will be allowed for non-compliant regimes once new compliant regimes take effect, and no later than 30 June 2016. Current non-compliant regimes must be abolished by 30 June 2021.

New Zealand

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New Zealand Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Bill

On 26 February 2015, New Zealand introduced intro parliament the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Bill. The main measures cover R&D expenditures, GST for bodies corporate and CFC rules, and are summarized as follows:

“Cash Out” for Research And Development Tax Losses

The bill proposes to allow loss-making research and development start-up companies to “cash out” their tax losses arising from qualifying research and development expenditure from 1 April 2015.

In order to qualify, the company must be a New Zealand resident, must not be part of a group that includes a foreign company, and their R&D expenditure must be at least 20% of their total labor expenditure. If part of a group, the group must have a net loss in aggregate, and meet the 20% R&D expenditure requirement. Look-through companies and qualifying companies are excluded.

The cashed out amount is limited to the lower of 28% (the current company tax rate) of:

  • The company’s net loss for the year,
  • A yearly net loss cap, which will be NZD 500,000 for the 2015-2016 tax year, increased by NZD 300,000 per year over the next 5 years to NZD 2 million,
  • The company’s total research and development expenditure for the year, or
  • 1.5 times the company’s labor costs for research and development for the year

When businesses make a return on their research and development, they will be required to repay some or all of the amounts cashed out. New deductions will reinstate corresponding losses that will be available to offset future income. Triggers for the repayment of amounts cashed out include the sale of research and development assets, liquidation or migration of the company, or the sale of the company.

"Black Hole" Expenditures

A number of changes will be made in regard to previously non-deductible and non-depreciable expenditures incurred on or after 7 November 2013. The changes will apply from the beginning of the 2015-2016 tax year, and include the following.

  • Capitalized development expenditure incurred relating to a patent, patent application or plant variety rights will be allowed to be included as part of the depreciable costs of the relevant depreciable intangible asset when the asset is acquired through a taxpayer's own R&D
  • Capitalized development expenditure incurred relating to intangible assets developed through a taxpayer's own R&D that is not depreciable for tax purposes will be allowed an income tax deduction. The deduction will be allowed the year in which the intangible asset is written off for accounting purposes. In the event the asset is sold or is used or becomes available for use, the deduction will be clawed-back.
  • Registered designs, applications for the registration of a design, and copyright in an artistic work that has been applied industrially will be made depreciable.

GST for Bodies Corporate

Member's fees for services by bodies corporate will be considered supplies for consideration for the purpose of goods and services tax (GST), and bodies corporate will be required to register for GST if the NZD 60,000 GST registration threshold is met. However, in determining if the threshold is met, only supplies to non-members will be included. If a body corporate is required to register or does so voluntarily, a one-time GST cost will apply on any funds held at the time of registration, and subsequent income will be subject to GST normally.

CFC Rules

A number of changes are made in regard to controlled foreign companies (CFC). The main changes include the following.

  • Taxpayers will only be able to change the fair dividend rate (FDR) method applied once every four years for each foreign investment fund (FIF), which includes the usual 5% method and the more accurate unit-valuing method.  Since the choice is made retrospectively, the change is being made to keep taxpayers from just choosing the most beneficial method each year. The amendment will apply from the tax year beginning 1 April 2016.
  • The prepayment rules will be applied to CFCs, where taxpayers may not take an immediate deduction for expenses incurred when such amounts should be spread out over several years (separate from but similar to depreciation rules). The amendment will apply from the tax year beginning 1 April 2016.
  • The Australian FIF exemption average ownership test (10%) will be changed so that the test only applies for the period of the year that the taxpayer holds an interest in the FIF. The amendment will apply to income years starting on or after 1 July 2011.
  • An anti-avoidance rules will be introduced to keep taxpayers from using the CFC tax grouping rules to gain an unintended tax advantage, such as grouping passive income CFCs with active income CFCs to take advantage of the active income exemption, but not group when the passive income CFC has a loss which can be carried forward. The amendment will come into force on 1 April 2016.

Click the following links for the full Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Bill, and the Commentary published by New Zealand Inland Revenue.

United States

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U.S. Senator Sends Letter to President Obama Requesting Executive Action on 6 Tax "Loopholes"

U.S. Senator Bernie Sanders, the ranking member of the US Senate Budget Committee has sent a letter to President Obama requesting executive action to eliminate 6 tax "loopholes." According to Senator Sanders, the loopholes can be eliminated through direct executive action or through specific provisions authorizing the Treasury Department to issue regulations countering the loopholes. The estimated positive revenue impact over 10 years is over USD 100 billion.

The 6 loopholes as set out in the letter and summarized in a separate release include:

Check-the-Box Loophole

This loophole allows multinational companies to characterize their offshore subsidiaries in different ways to different governments so that their profits are ultimately taxed by no government at all.

Carried Interest Loophole

The carried interest loophole allows Wall Street hedge fund managers to characterize their compensation (which they earn for managing other people’s money) as capital gains, which is taxed at a lower rates than other types of income.

Corporate Inversions

A corporate inversion takes place when a corporation merges with a (usually much smaller) foreign company and then reincorporates as a foreign company to avoid U.S. taxes even as it continues to operate and be managed in the U.S.

Valuation Discounts that Reduce Estate and Gift Taxes

Gifts and bequests of ownership rights in family businesses sometimes includes formal restrictions on what the recipient can do (for example, preventing a business from being sold outside the family) that are actually meaningless but which are claimed to dramatically reduce the value for estate tax or gift tax purposes.

Corporate Offshore Tax Avoidance Using Short Term Loans

American corporations are supposed to pay U.S. taxes on their offshore profits when those profits are brought to the U.S., but companies like Hewlett-Packard have avoided this by having offshore profits circulated to the U.S. by a continuous series of short term “loans” from subsidiaries in tax havens like the Cayman Islands.

Real Estate Investment Trust Loophole

IRS administrative rulings have created a loophole allowing private prisons, billboard companies, casinos and other businesses to claim that they are making money from rents and structure themselves as real estate investment trusts (REITs) which do not pay the corporate income tax.

Click the following links for the letter sent to President Obama, and the Senate Budget Committee press release.

Treaty Changes (2)

France-Tajikistan

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Tax Treaty between France and Tajikistan Terminated

On 4 march 2015, the notice for the termination of the 1985 income tax treaty between France and the former Soviet Union as it applies for Tajikistan was published in the French Official Journal. The termination was agreed to through the exchange of letters in August and December 2014, and the treaty ceases to apply in respect of France and Tajikistan from 31 December 2014.

Kazakhstan-Vietnam

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Kazakhstan Approves Tax Treaty with Vietnam

On 4 March 2015, Kazakhstan's lower chamber of parliament approved for ratification the pending income tax treaty with Vietnam. The treaty, signed 31 October 2011, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Kazakhstan individual income tax and corporate income tax, and covers Vietnamese personal income tax and business income tax.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted if an enterprise furnishes services in a Contracting State through employees or other engaged personnel for the same or connected projects for a period or periods aggregating more than 6 months within any 12 month period.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company directly holding at least 70% of the paying company's voting power, otherwise 15%
  • Interest - 10%
  • Royalties - 10%
  • Fees for technical, consultancy and managerial services - 15%
  • Capital gains - the following gains derived by a resident of one Contracting State may be taxed by the other State:
    • Gains from the alienation immovable property situated in the other State,
    • Gains from the alienation of shares or comparable interests in a company whose assets consist wholly or principally of immovable property situated in the other State,
    • Gains from the alienation of shares representing 25% or more of the shares of a company resident in the other State, and
    • Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State

Double Taxation Relief

Both countries apply the credit method for the elimination of double taxation.

Entry into Force and Effect

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.

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