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Worldwide Tax News

Approved Changes (4)

France-Panama

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France Reincludes Panama in Blacklist as a Result of "Panama Papers" Leak

On 5 April 2016, French Finance Minister Michel Sapin announced that Panama will be put back on the blacklist of uncooperative states or territories. The announcement follows the recent leak of the so-called "Panama Papers". The papers include over 11.5 million documents from Panamanian law firm Mossack Fonseca that detail offshore entities and structures used by thousands of individuals around the world.

Panama had been removed from the blacklist in 2012 after entering into an income tax treaty with France. Its reinclusion is not solely due to the leak, but can be seen as the final straw for France to decide to put it back on the blacklist. In response, Alvaro Aleman, chief of staff to Panama's President Juan Carlos Varela, reportedly stated, "in the case of France, or any other country that includes Panama on a gray (black) list, the national government will have to analyze the situation and take a series of measures, which of course could include reciprocal measures".

The general tax effects of a jurisdiction's inclusion in the blacklist include increased withholding tax rates on passive income (75%), stronger anti-avoidance and disclosure rules, and denial of certain exemption regimes. It is unclear what impact Panama's reinclusion in the blacklist will have on the application of the France-Panama tax treaty, in particular with regard to withholding tax rates.

Lithuania

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Lithuania Adopts Amendments to the EU Parent-Subsidiary Directive

The Lithuanian parliament adopted legislation on 22 March 2016 to implement amendments made to the EU Parent-Subsidiary Directive into Lithuania's Law on Corporate Income Tax. The amendments include that the participation exemption provided for in the Directive will not be granted if:

  • A profit distribution made by a subsidiary to its parent company is deductible in the Member State of the subsidiary (hybrid mismatch rule); or
  • An arrangement or a series of arrangements are put in place with the main purpose or one of the main purposes to receive a tax benefit and not for valid commercial reasons that reflect economic reality (anti-abuse rule).

The changes entered into force on 26 March 2016.

United States

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U.S. Issues New Regulations on Inversions and Earnings Stripping

On 4 April 2016, the U.S. IRS issued final and temporary regulations (T.D. 9761) and proposed regulations (REG-135734-14). The regulations include previous rules on inversions included in Notice 2015-79 and Notice 2014-52 (previous coverage) and new rules targeting inversions and earnings stripping.

New Anti-Inversion Rules

The new rules on inversions allow the IRS to disregard foreign parent stock attributable to recent inversions or acquisitions of U.S. companies in the previous three years. This is meant to limit inversions by preventing foreign companies that acquire multiple U.S. companies in stock-based transactions from using the resulting increase in size to avoid the current inversion thresholds for a subsequent U.S. acquisition. In general, if there is a continuity of ownership of 80% or more following an inversion, the inverted foreign company is treated as a U.S. domestic company for tax purposes. If there is a continuity of ownership of ownership over 60% and less than 80%, the inverted company will be treated as foreign, but certain tax disadvantages apply unless a substantial activities test is met.

The new rule will affect certain pending inversion deals, such as Pfizer Inc.'s takeover of Allergan Plc. Since Allergan's acquisitions in the past three years would be disregarded in determining if the inversion thresholds are met, original Pfizer shareholders would potentially own over 80% of the combined company.

Earnings Stripping Rules

The new rules on earnings stripping target transactions that generate large interest deductions by increasing related-party debt without financing new investment in the U.S. The rules allow the IRS to divide debt instruments into part debt and part equity, rather than the current system that treats them as one or the other.

The new rules also require certain large corporations to do up-front due diligence and documentation with respect to the characterization of related-party financial instruments as debt. If the requirements are not met, the financial instruments would be treated as equity for tax purposes.

Click the following links for T.D. 9761 and REG-135734-14, and the associated Treasury press release.

Venezuela

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Venezuela Extends Income Tax Exemption for Agriculture, Animal Husbandry and Forestry Sectors

On 28 March 2016, Venezuela published Decree 2,287 in the Official Gazette, which extends and modifies an income tax exemption that expired the end of 2015 for taxpayers engaged in specified activities in the agriculture, animal husbandry and forestry sectors. The conditions for the exemption include:

  • The taxpayer must be registered for the exemption;
  • The amount of tax exempted must be reinvested in the following year into research and development, productivity improvements, or capital assets directly related to the exempted activity (investment must be reported within 15 days of making the investment);
  • An informative return must be filed annually with the relevant government department overseeing the activity that details the amount of tax exempted, the investments made in the current year, and the investments planned for the following year; and
  • Certain other conditions.

For taxpayers performing mixed activities (exempt and non-exempt), common expenses and deductions must be apportioned accordingly. In addition, net losses of exempt activities may not be used to offset taxable income from non-exempt activities.

Decree 2,287 applies from 1 January 2016 until 31 December 2018.

Proposed Changes (1)

Australia

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Council of Australian Governments Withdraws Consideration of State Personal Income Tax

Australian Prime Minister Malcolm Turnbull has announced that his proposal allowing individual states and territories to levy their own personal income taxes has been withdrawn from consideration by the Council of Australian Governments. The withdrawal is due to a lack of consensus in the Council, which is comprised of Australian state and territory leaders. As a result, the Australian government will develop new alternate proposals to provide greater autonomy in how states and territories may use their allocation of tax revenue instead of the current grants systems.

Treaty Changes (3)

Chile-Uruguay

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Tax Treaty between Chile and Uruguay Signed

On 1 April 2016, officials from Chile and Uruguay signed an income tax treaty. The treaty is the first of its kind between the two countries, and will enter into force after the ratification instruments are exchanged.

Additional details will be published once available.

Note - Previous reports indicated that the treaty had been signed 21January 2016. However, that was the date the treaty was initialed (negotiations concluded).

Saudi Arabia-OECD

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Mutual Assistance Convention has Entered into Force for Saudi Arabia

On 1 April 2016, the OECD-Council of Europe Convention on Mutual Administrative Assistance in Tax Matters as amended by the 2010 protocol entered into force for Saudi Arabia. The Convention, signed by Saudi Arabia on 29 May 2013, generally applies from 1 January 2017. However, it may apply for earlier periods between Saudi Arabia and another signatory if agreed to, and applies in relation to any period regarding criminal matters.

Ukraine-Austria-Belgium-Netherlands-United Kingdom-Switzerland

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Ukraine Planning to Negotiate Protocols to the Tax Treaties with Austria, Belgium, the Netherlands, the United Kingdom and Switzerland

Ukraine's Ministry of Finance announced in a release dated 31 March 2016 that it is planning to begin negotiations for protocols to amend the tax treaties with Austria, Belgium, the Netherlands, the United Kingdom and Switzerland. The negotiation of the protocols is part of Ukraine's plans to bring its tax treaties in line with current OECD guidelines. Any resulting protocols would be the first to amend the treaties with the respective countries, and must be finalized, signed and ratified before entering into force.

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