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Approved Changes (3)

Ecuador

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Ecuador Publishes Law Including Tax Changes to Balance Public Finances

On 29 April 2016, Ecuador published the Organic Law for the Balance of Public Finances in the Official Gazette. The law includes a number of various measures, including a 10% withholding tax on payments related to the extraction and sale of minerals; a 10-year tax exemption for foreign engineering, procurement or construction contractors; reductions in individual income tax benefits; and others (previous coverage).

The law applies from the date it was published.

India

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India Sets Tax Treatment of the Sale of Unlisted Shares as Capital Gains

On 2 May 2016, India's Central Board of Direct Taxes issued Instruction F No. 225/12/2016/ITA.II, which states that it has been decided that income arising from the transfer of unlisted shares is to be considered capital gains instead of business income irrespective of the holding period. The instruction is meant to avoid disputes/litigation relating to the treatment of such income. However, treatment as capital gains will not necessarily apply where:

  • The genuineness of a transaction of unlisted shares itself is questionable;
  • The transfer of unlisted shares is related to an issue pertaining to lifting of the corporate veil; or
  • The transfer of unlisted shares is made along with the control and management of the underlying business.

The instruction also notes Circular No. 6/2016, issued 29 December 2016, which applies for income from the transfer of listed shares or securities (previous coverage). According to that circular, such income is treated as capital gains only if held for at least 12 months. However, if the taxpayer treats the shares or securities as stock-in-trade, such income would be treated as business income irrespective of the holding period.

Puerto Rico

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Puerto Rico's Legislative Assembly Passes Legislation to Repeal New VAT Regime

On 5 May 2016, legislation to repeal Puerto Rico's new value added tax (VAT) regime was reportedly passed in the Senate. The legislation was passed in the House of Representatives on 2 May 2016. Puerto Rico's Governor Alejandro Garcia Padilla has already stated he intends to veto the legislation, although this may be overridden with a two-thirds majority in each house of the Legislative Assembly.

The new VAT regime was approved in May 2015 as part of Act 72-2015 (previous coverage), and is to replace the sales and use tax effective 1 June 2016. Details of how the repeal will be made effective will be published if the president chooses not to veto, or the veto is ultimately overridden.

Proposed Changes (2)

Australia

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Australia Consultation Paper on Diverted Profits Tax

On 3 May 2016, the Australian Treasury published a consultation paper on the implementation of the Diverted Profits Tax (DPT) announced in the 2016-17 Budget (previous coverage). Key aspects of the diverted profits tax from the consultation paper include that it will:

  • Impose a penalty tax rate of 40% on profits transferred offshore through related party transactions with insufficient economic substance that reduce the tax paid on the profits generated in Australia by more than 20%;
  • Apply where it is reasonable to conclude based on the information available at the time to the Australian Taxation Office (ATO) that the arrangement is designed to secure a tax reduction;
  • Provide the ATO with more options to reconstruct the alternative arrangement on which to assess the diverted profits where a related party transaction is assessed to be artificial or contrived;
  • Impose a liability when an assessment is issued by the ATO (that is, it will not operate on a self-assessment basis);
  • Require upfront payment of any DPT liability, which can only be adjusted following a successful review of the assessment; and
  • Put the onus on taxpayers to provide relevant and timely information on offshore related party transactions to the ATO to prove why the DPT should not apply.

Taxpayer's Subject to DPT

The DPT will only apply for significant global entities that are Australian residents or are foreign residents deemed to have Australian permanent establishments. Significant global entities are those with annual global income of AUD 1 billion or more or are part of group meeting that threshold. However, a de minimis threshold will exempt entities with Australian turnover of less than AUD 25 million.

Arrangements Subject to DPT

An arrangement with a related party will be subject to DPT if the transaction gives rise to an effective tax mismatch and the transaction has insufficient economic substance. For this purpose, an effective tax mismatch exists where the increased tax liability of a foreign related party resulting from a cross border transaction with an Australia taxpayer is less than 80% of the corresponding reduction in the Australian taxpayer's tax liability.

In determining whether a transaction has insufficient economic substance, the determination will be based on whether it is reasonable to conclude that the transaction was designed to secure a tax reduction. However, if the non-tax financial benefits of the arrangement exceed the financial benefit of the tax reduction, the arrangement will be taken to have sufficient economic substance.

Amount Subject to DPT

When DPT applies, the diverted profit amount is generally the best estimate of the diverted taxable profit that can reasonably be made by the ATO. However, two specific cases are provided for:

  • In cases where claimed deductions exceeds an arm's length amount, the diverted profit amount will be 30% of the transaction expense; and
  • In cases where debt levels fall within the thin capitalization safe harbor, only the pricing of the debt and not the amount of the debt will be taken into account in determining the DPT liability.

Effective Date

The DPT is to be effective from 1 July 2017, but will also apply for arrangements entered into prior to that date.

Click the following link for the consultation webpage, which includes a link to the full text of the consultation paper and instructions for submitting comments. Comments are due by 17 June 2016.

United States

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Exit Tax Bill Introduced in U.S. House of Representatives

U.S. Congressman Lloyd Doggett D-TX has introduced the Corporate EXIT Fairness Act. The legislation would impose an exit tax on inverting corporations before being recognized as reincorporated offshore for tax purposes. The exit tax would be equal to the greater of:

  • The tax owed on accumulated deferred foreign income of the corporation's controlled foreign corporations (CFC); or
  • The tax on the appreciation in value of the corporation's CFCs

The legislation is similar to the Pay What You Owe Before You Go Act introduced in the Senate in March (previous coverage), but also includes additional measures to apply the exit tax to all expatriating companies rather than just those that meet the definition of an inversion. It also includes measures from the proposed Stop Corporate Inversions Act (previous coverage), which disallow inverted companies from being treated as a foreign corporation if 50% or more of the equity or voting stock of the foreign company is held by former shareholders of the former U.S. corporation, or the management and control of the foreign corporation is exercised in the U.S.

Treaty Changes (3)

Colombia-Spain

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Colombia Clarifies that Payments for Legal Services Treated as Royalties under Tax Treaty with Spain

Colombia's National tax Authority (Dian) recently issued Ruling 5945 of 2016, which clarifies the tax treatment of payments for legal services under the 2005 income and capital tax treaty with Spain. Under Article 12 (Royalties) of the treaty, the definition of royalties includes payments for technical assistance, technical services and consulting services, while the protocol to the treaty also includes that in the case of Colombia, technical assistance includes advisory services.  

In the ruling, DIAN makes reference to the definition of the term advisor as provided by the Royal Spanish Academy to conclude that advisory services involve the provision of professional expertise in a particular field, including legal services. As a result of this interpretation, payments for legal services may be considered royalties and subject to withholding tax at a rate of 10% as provided for in the treaty. An earlier ruling that payments for legal services are to be treated as business income is revoked by Ruling 5945.

Czech Rep-Aruba-Cook Isl

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Czech Republic Ratifies TIEAs with Aruba and the Cook Islands

On 21 April 2016, the Czech Republic ratified the pending tax information exchange agreements with Aruba and the Cook Islands. The agreements, signed 29 June 2015 and 4 February 2015 respectively, are both the first of their kind between the Czech Republic and the respective jurisdictions and are in line with the OECD standard for information exchange.

The agreement with Aruba will enter into force on the first day of the third month after the ratification instruments are exchanged, and will apply for criminal tax matters from the date of its entry into force and for other matters for tax periods beginning on or after that date.

The agreement with the Cook Islands will enter into force once the ratification instruments are exchanged, and will apply for criminal tax matters from the date of its entry into force and for other matters for tax periods beginning on or after 1 January of the year following its entry into force.

Faroe Isl-Untd A Emirates

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TIEA between the Faroe Islands and the U.A.E. Signed

On 2 May 2016, officials from the Faroe Islands and the United Arab Emirates signed a tax information exchange agreement. The agreement is the first of its kind between the two jurisdictions, and will enter into force after the ratification instruments are exchanged.

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