Worldwide Tax News
On 3 May 2017, the European Commission adopted and sent a Recommendation for a European Council Decision to open negotiations for the UK's exit from the EU under Article 50 of the Treaty on European Union. The recommendation proposes that the Council authorizes the Commission to open the negotiations for an agreement with the UK setting out the arrangements for its withdrawal from the European Union and from the European Atomic Energy Community, nominates the Commission as the Union negotiator, and addresses negotiating directives to the Commission.
The recommendation also include that the negotiations will be conducted in light of the guidelines adopted by the European Council (previous coverage), in line with the negotiating directives, and with due regard to the resolution of the European Parliament of 5 April 2017. There will be a phased approach to the negotiations, as set out in the European Council guidelines. The recommended negotiating directives for the first phase of the negotiations include:
- Citizens' rights;
- Single financial settlement related to the Union budget and to the termination of the membership of the United Kingdom of the institutions or bodies established by the Treaties, as well as to the participation of the United Kingdom in specific funds and facilities related to Union policies;
- Arrangements regarding goods placed on the market and ongoing procedures based on Union law;
- Arrangements relating to other administrative issues relating to the functioning of the Union; and
- Governance of the Agreement.
Negotiating directives may be amended and supplemented as necessary throughout the negotiations, in particular to reflect the European Council guidelines as they evolve and to cover the subsequent phase of the negotiations.
Hong Kong Board of Review Publishes Decision Concerning Offshore Profits from China and a Claimed Downward Transfer Pricing Adjustment
The Hong Kong Inland Revenue Board of Review has published a decision concerning a taxpayer's claim that profits derived from transactions with China should be considered to have arisen offshore and a claim that transactions were not at arm's length and should result in a downward transfer pricing adjustment. The case involved a company incorporated in Hong Kong (the Appellant) and its wholly-owned subsidiary in Mainland China (Company G). The two entities operated an import processing arrangement under which the Appellant would purchase raw materials from suppliers for sale to Company G and in turn purchase finished products from Company G for sale to customers. The Appellant earned its profits by selling raw materials to Company G and selling products to customers.
Following the issuance of profits tax assessments for 2007/08 and 2008/09 and additional profits tax assessment for 2002/03 and 2004/05 to 2006/07, the Appellant lodged objections with the tax authority, primarily based on the claim that for the sales to Chinese customers, the profits should be considered to have arisen offshore and not subject to tax in Hong Kong. After revised assessments were issued, the Appellant still disagreed, but a determination was issued by the Commissioner confirming the assessments.
The decision was then appealed to the Board of Review on the grounds that the profits should be considered offshore because the sales to Chinese customers were carried out by Company G and not the Appellant, and that Company G was in substance an agent of the Appellant. In addition, the Appellant argued that the assessments were excessive because the prices for the raw materials sold by the Appellant to Company G and for the finished products bought by the Appellant from Company G were not fair prices at arm’s length, and that a downward adjustment should be made.
Regarding whether the profits arose offshore, the Board held that although Company G was engaged in following up on orders with the customers and managing the sales process, these activities were simply antecedent or incidental to the Appellant’s profit-producing transactions, and therefore the source of the disputed profits could not be considered offshore. Further, if the activities resulted in Company G acting as an agent for the Appellant in Mainland China, this would have resulted in a Chinese enterprise income tax liability. However, no evidence was provided to support that the Appellant had been subject to or paid any enterprise income tax. As such, the Appellant's argument is rejected.
Regarding the downward adjustment, the Board held that an enterprise cannot unilaterally apply a transfer pricing methodology to reduce profits arising in or derived from Hong Kong. For a downward adjustment to be made, a corresponding upward adjustment must have been made by the Mainland tax authorities. Again, no evidence was provided to support that such an upward adjustment was made, and the Appellant's argument in this regard is also rejected.
India Ministry of Corporate Affairs Issues Notification on Commencement of Inbound and Outbound Merger Provisions under Companies Act, 2013
The Indian Ministry of Corporate Affairs has issued a Notification effective 13 April 2017 on the commencement of the provisions of section 234 of the Companies Act, 2013 regarding the merger or amalgamation between an Indian company registered under the Act and a foreign company, and vice versa. The Ministry also issued the Companies (Compromise, Arrangements and Amalgamation) Amendment Rules, 2017, which inserts Rule 25A and Annexure B in the Companies (Compromise, Arrangements and Amalgamation) Rules, 2016 on the application of the provisions of section 234.
Rule 25A provides that:
- Both inbound and outbound mergers require that prior approval is obtained from the Reserve bank of India (RBI) and that the provisions of Sections 320 to 322 of the Act be met:
- Section 230: Power to Compromise or Make Arrangements with Creditors and Members;
- Section 231: Power of Tribunal to enforce compromise or arrangement; and
- Section 232: Merger and amalgamation of companies;
- In order for an Indian company to merge with a foreign company, the foreign company must be incorporated in a jurisdiction meeting the conditions specified in Annexure B, which include:
- The jurisdiction's securities market regulator is a signatory to International Organization of Securities Commission’s Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to bilateral Memorandum of Understanding with Securities and Exchange Board of India;
- The jurisdiction's central bank is a member of the Bank for International Settlements; and
- The jurisdiction has not been identified in the public statement of the Financial Action Task Force (FATF) as:
- A jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or
- A jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the FATF to address the deficiencies;
- For the valuation, the transferee must ensure that the valuation is conducted by members of a recognized professional body in the jurisdiction of the transferee company and further that such valuation is in accordance with internationally accepted principles on accounting and valuation; and
- After approval is received from the RBI and the other conditions are met, the company concerned must file an application with the Tribunal for final approval.
Click the following link for the Companies (Compromise, Arrangements and Amalgamation) Amendment Rules, 2017, which includes the English language version in the second half of the document.
On 25 April 2017, the Isle of Man Tynwald (parliament) approved the Value Added Tax (Increase of Registration Limits) Order 2017, which increases the value added tax (VAT) registration and deregistration thresholds. With effect from 1 April 2017, the VAT registration threshold for taxable supplies of goods or services and intra-Community acquisitions is increased from GBP 83,000 in the previous 12-month period to GBP 85,000. The Order also provides that the deregistration threshold is increased from GBP 81,000 to GBP 83,000 with respect to taxable supplies and from GBP 83,000 to GBP 85,000 with respect to intra-Community acquisitions.
According to a release from the EU Parliament, the Economic and Monetary Affairs Committee has approved the EU Commission proposal to enable Member States to charge a reduced rate of VAT on e-books by a vote of 48 votes to 1 with 2 abstentions. Currently e-books and other e-publications are subject to a minimum standard rate of 15%, while printed publications may be subject to a reduced rate or even zero-rated. The proposal will be voted by Parliament as a whole the end of May or beginning of June.
The Commission proposal on allowing reduced rates is part of a larger plan to support e-commerce and online businesses in the EU (previous coverage).
According to recent reports, Israel's Ministry of Finance has approved draft regulations to ensure the country's IP regime is in line with the modified nexus approach developed as part of BEPS Action 5 (previous coverage). The main aspect of the regulation is the application of the nexus formula to determine the amount of IP-related income that qualifies for the reduced tax rates provided by the IP regime: (Qualifying R&D Expenditure x 130% (uplift) / Total R&D Expenditure) x Taxable Income from IP. The 30% uplift provides for the inclusion of a portion of the non-qualifying expenditure.
Qualifying expenditure includes expenses incurred for R&D activities performed by the Israeli taxpayer and for activities outsourced to other Israeli parties. It also includes expenses incurred for R&D activities performed outside Israel by:
- A foreign branch of the taxpayer;
- Employees working under the direction of the taxpayer, subject to certain conditions; and
- Unrelated third parties subcontracted by the taxpayer, and subject to certain conditions, third parties subcontracted by related Israeli parties.
In general, non-qualifying expenditure includes IP acquisition costs, royalties paid for IP rights, and R&D outsourced from non-Israeli related parties. However, in certain cases, IP acquisition costs may be excluded as non-qualifying expenditure, including where the IP is acquired or licensed from an Israeli company or from a non-Israeli company that performed the related development in Israel.
Subject to approval by the Finance Committee of the Knesset (parliament), the regulations will apply from 1 January 2017.
The Belarusian government announced on 29 April 2017 that the pending protocol to the 2004 income tax treaty with Pakistan has been approved by parliament. The protocol, signed 5 October 2016, is the first to amend the treaty and includes the following changes:
- Amends Article 2 (Taxes Covered) with respect to Belarusian taxes;
- Replaces Article 8 (Shipping and Air Transport) including expanded provisions;
- Amends Article 10 (Dividends) to increase the withholding tax rate from 10% to 11%; and
- Replaces Article 25 (Exchange of Information) to bring it in line with OECD standards.
The protocol will enter into force once the ratification instruments are exchanged, and will apply in Belarus from 1 January of the year following its entry into force and in Pakistan from 1 July of the year following its entry into force.
On 4 May 2017, the OECD announced the activations of automatic exchange relationships under the Multilateral Competent Authority Agreement on the Exchange of CbC Reports (CbC MCAA). The announcement includes a full list of automatic exchange relationships under the CbC MCAA, as well as under the EU Council Directive 2016/881/EU. Of the 57 signatories to the CbC MCAA, only 30 are included in the current list of activations, although the announcement notes that more jurisdictions will nominate partners with which they will undertake the automatic exchange of CbC Reports in the coming months. The list also includes the effective period for which automatic exchange under the CbC MCAA will apply for certain jurisdictions, including for Brazil, Liechtenstein, and Uruguay for taxable periods starting on or after 1 January 2017, and for Malaysia for taxable periods starting on or after 1 January 2018.
According to an update from the Inland Revenue Authority of Singapore, a competent authority agreement for the automatic exchange of financial account information was signed with Spain on 28 April 2017. Under the agreement, each country will automatically exchange information on accounts held in the respective country by tax residents of the other country based on the OECD Common Reporting Standard (CRS). The automatic exchange is to begin by September 2018 for information collected on the 2017 reporting year.