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Approved Changes (4)

El Salvador

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Salvadoran Court Rules Minimum Income Tax Unconstitutional

On 17 April 2015, the Supreme Court of Justice of El Salvador ruled that the country's minimum corporate income tax of 1% on net assets is unconstitutional. The minimum tax was adopted in 2014 as a replacement to the minimum tax based on sales, which was ruled unconstitutional in 2013. The net assets based minimum tax was payable if the amount resulting from 1% of net assets was greater than the amount of tax determined using the standard corporate tax rules.

The Court's ruling is final and is effective as of tax year 2014. Minimum tax payments that have already been made will not be refunded.

Indonesia

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New Indonesian Investment Incentive Regulations Take Effect

On 6 May 2015, Indonesia's Regulation No. 18/2015 took effect, replacing Regulation No. 1/2007 as amended by Regulation No. 52/2011. The new regulation covers the incentives for domestic investment in certain sectors and regions by domestic legal entities.

Main Benefits

The main benefits of the incentive scheme include:

  • A reduction of taxable income of up to 5% of the asset investment amount per year over 6 years;
  • Accelerated depreciation and amortization;
  • A reduced withholding tax rate on dividends of 10% (standard 20% unless reduced by a tax treaty);
  • An extended loss carry-forward period of up to a maximum of 10 years (standard 5 years), with the extended amount based on meeting certain conditions, including:
    • An additional 1 year if the investment is in certain industrial or bonded zones;
    • An additional 1 year if the investment includes at least IDR 10 billion in economic or social infrastructure in certain locations;
    • An additional 1 year if at least 70% of the raw materials or components used in the invested business are from domestic sources;
    • An additional 1 year if employing at least 500 Indonesian workers for at least 5 years, and  2 years if employing at least 1000 employees;
    • An additional 2 years if at least 5% of the investment is invested in product R&D or production efficiency;
    • An additional 2 years if business expansion costs are funded by prior years' earnings after tax;
    • An additional 2 years if exports account for at least 30% of total sales

Basic Eligibility Requirements

The specific requirements vary by sector/region and additional guidelines are expected in the near future. However, the basic conditions can be summarized as follows:

  • The investment plan must include a substantial investment amount or investment in an export business;
  • The plan must include for substantial employment of local labor;
  • The plan must include for substantial use of local resources;
  • The investor may not be taking advantage of other incentives, including tax holidays; and
  • The relevant assets invested in may not be used for other purposes or transferred out during the incentive period

Two important conditions introduced under Regulation No. 52/2011 (GR-52) are abolished under Regulation No. 18/2015 (GR-18), including:

  • For Investments undertaken after the enactment of GR-52, at least 80% of the investment plan must be realized before the benefits may be used; and
  • For investment approval obtained prior to the enactment of GR-52, the investor must have a new investment plan of at least IDR 1 trillion, and have not yet entered into commercial production

Transition

Taxpayers already taking advantage of tax incentives under the regulations that have been replaced may continue to do so until the end of the period provided. Applications already submitted prior to 6 May 2015, will generally be processed according to GR-52. However, applicants may request the incentives under GR-18 subject to certain conditions.

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OECD Publishes Discussion Draft Comments on BEPS Action 3: Strengthening CFC Rules

On 5 May 2015, the OECD published comments received in response to the public discussion draft on the Base Erosion and Profit Shifting (BEPS) Project Action 3: Strengthening CFC Rules.

The Action 3 discussion draft considers all the constituent elements of CFC rules and breaks them down into the “building blocks” that are necessary for effective CFC rules. The majority of these building blocks include recommendations, and the building block that does not yet include a recommendation discusses possible options that could be included in effective CFC rules. The discussion draft also identifies specific questions where input is required in order to advance the work on CFC rules. The options and recommendations included in this discussion draft do not represent the consensus view of the Committee on Fiscal Affairs (CFA) or its subsidiary bodies, but they are intended to provide stakeholders with substantive options for analysis and comment.

Click the following links for the discussion draft and the over 570 pages of comments received broken down into two parts:

A public consultation meeting for Action 3 will be held at the OECD Conference Centre in Paris on 12 May 2015, from 10 am to 6:00 pm CET. The meeting will be broadcast live via http://video.oecd.org/. Click the following link for the agenda.

Poland

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Poland to Delay GAAR Implementation

The Polish Ministry of Finance has reportedly decided to delay the implementation of a new general anti-avoidance rule (GAAR). The draft GAAR was introduced in 2014 and was to apply from 1 January 2016. However, given the criticism of the draft for being too vague in how the tax authorities would be allowed to apply the rule and the fact that Poland's previous GAAR was ruled unconstitutional in 2004, the Ministry of Finance will now prepare a new draft.

Under the initial proposed draft, the GAAR would apply if a taxpayer uses an artificial legal structure with the primary purpose of obtaining substantial tax benefits. In such case, the tax authorities would be empowered to disregard the structure and take into account actual commercial activities and typical legal structures for re-determining the tax liability. The burden of proof lies with the tax authorities, who must justify that the use of a typical legal structure is applicable for the taxpayer's situation, and that the use of an artificial structure could not be for purposes other than tax benefits.

At this point it is unclear what the timing will be for the implementation of a new GAAR.

Proposed Changes (1)

United States

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U.S. IRS Issues Notice for Comments on New Withholding Tax Refund Regulations

On 28 April 2015, the U.S. Internal Revenue Service issued Notice 2015-10, concerning amendments to the regulations on refunds and credits under Chapter 3 (NRA withholding), Chapter 4 (FATCA withholding) and related withholding tax provisions. The purpose of the amendments is to resolve issues where a claim for a refund or credit is made based on the amount reported on Form 1042-S (Foreign Person's U.S. Source Income Subject to Withholding), but the withholding agent has not deposited the amount withheld or has not deposited the full amount.

The amended regulations to be issued will include the provision that a refund or credit will only be allowed to a claimant to the extent that the withholding agent has deposited the full amount withheld, and that deposited amount is in excess of the claimant’s tax liability. When a withholding agent has deposited only a portion of the tax withheld, a pro rata method will apply to determine the amount available for a refund or credit per claimant.

The pro rata method will involve determining the withholding agent's deposit percentage, which is equal to all tax withheld and deposited divided by all tax reported withheld (Form 1042-S). This percentage is then applied to the amount reported for a particular claimant in order to determine the deposit amount allocated to that claimant. The resulting deposit amount is solely for the purpose of determining the available refund or credit related to Chapter 3 and Chapter 4.

An example as provided in the notice: Withholding agent reports a total of USD 300 tax withheld and has deposited USD 225, so the agent's deposit percentage is equal to 75% (225/300). A particular claimant has had 30% withheld on a USD 100 payment and is claiming a refund based on a reduced withholding rate of 15% provided by a tax treaty. The amount of refund available is USD 7.5 (30 x 75% - 15).

The Treasury Department and the IRS are also considering including potential exceptions from the above rules, including an exception if the amount of the under-deposit of tax is de minimis or if the relevant withholding agent has a demonstrated history of compliance with its deposit requirements. However, even if the exceptions are adopted, a withholding agent would remain liable for the amount of tax required to be deposited and the associated interest and penalties.

Click the following link for Notice 2015-10, which includes instructions for submitting comments on the regulations.

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