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Approved Changes (5)

Belgium

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Belgium Issues Decree on Advance Tax Payments and Related Surcharge for Insufficient Payments for 2016

On 31 March 2016, Belgium published a Decree on advance tax payments in the Official Gazette. The main points of the Decree are summarized as follows.

Advance Tax Payment Schedule

Advance tax payments are due quarterly. For 2016, the payments are due on 12 April, 12 July, 11 October and 20 December for tax years ending 31 December 2016.

Surcharge for Insufficient Payments

When advance tax payments do not cover the final tax assessment for the year, a surcharge applies. For tax year 2016 (final assessment in 2017) the surcharge is 1.125%. For companies, the surcharge is levied on 103% of the tax due, less withholding taxes, domestic and foreign tax credits, and certain other tax prepayments.

Surcharge Credit

A credit is provided for timely advance tax payments. For tax year 2016, the credit is equal to 1.5% of the first payment, 1.25% of the second payment, 1.0% of the third payment, and 0.75% of the fourth payment. The total credit for the year is used to offset the surcharge due. If the credit exceeds the surcharge, the excess may be reimbursed to the taxpayer or included as advance tax payment in the following year.

India

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Indian Tax Tribunal Holds Equity Investment Cannot be Subject to Transfer Pricing Rules

The Income Tax Appellate Tribunal in Mumbai recently issued its decision on whether a company's equity investment into a subsidiary can be subject to transfer pricing rules and recharacterized as a loan.

The case involved an Indian taxpayer that was part of an affiliated group of an Indian security services provider. During the 2008-09 tax year, the taxpayer acted as the investor for the acquisition of a UK company using funds from an equity investment from the group's holding company. The acquisition was made by the taxpayer by purchasing shares in a Dutch entity that directly acquired the UK company.

In reviewing the tax return for the year, the assessing office referred the taxpayer's international transactions to a transfer pricing officer to determine the arm's length price. In reviewing the investment transaction, the Indian transfer pricing officer found that the purchase of the shares in the Dutch entity was made at a substantial premium over the book value, and determined that the investment was effectively an interest-free loan. As a result, the transfer pricing officer recharacterized the investment, including an adjustment equal to the premium over book value and an additional adjustment for notional interest of 15%. The taxpayer appealed, arguing that the investment does not generate income for the purpose of India's transfer pricing rules and should not be recharacterized as a loan.

In its decision, the Tribunal sided with the taxpayer. It found that the equity investment has no effect on income and therefore does not meet the condition that for an international transaction to be subject to transfer pricing rules, the transaction must give rise to income that is chargeable to tax under India's Income Tax Act, 1961. It also found that the investment was shown to be a bona fide equity investment for the taxpayer, and should not be recharacterized as a loan. Even if it had been appropriate to recharacterize the investment as a loan, the transfer pricing officer was wrong to treat book value as market value and failed to establish how the recharacterized investment could represent income.

OECD-Panama

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OECD Issues Q&A on "Panama Papers"

On 4 April 2016, the OECD published a brief Q&A on the so-called "Panama Papers" in the context of the work being done by the Global Forum on Transparency and Exchange of Information for Tax Purposes.

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What does the release of the “Panama Papers” actually tell us?

The Panama Papers describe in detail how a veil of secrecy is still allowing funds to be transferred between jurisdictions and held offshore, where it can be hidden from tax authorities. Panama’s consistent failure to fully adhere to and comply with international standards monitored by the Global Forum on Transparency and Exchange of Information for Tax Purposes is facilitating the use of offshore financial centres for hiding funds, depriving governments of tax revenue and often aiding and abetting criminal behaviour.

The Panamanian government says that the OECD has recognised its efforts to improve access to information about beneficial ownership of entities and its willingness to share such information with authorities in other jurisdictions. Is this actually true?

The OECD has been working for more than seven years to establish robust international standards on tax transparency and ensure their implementation. In 2009, when the initial objective of the Global Forum was to reach international agreement on the Exchange of Information on request, most countries and jurisdictions were quick to get on board, while a few, including Panama, were reluctant to make commitments or move forward along with the rest of the international community. After many years of resistance, Panama updated its domestic legislation in 2015, which provided the basis upon which to engage in the phase of the review process that assesses whether effective information exchange is actually taking place. Panama remains well behind most other comparable international financial centres.

To push the transparency agenda forward, the G20 identified Automatic Exchange of Information as a new international standard in 2014, and almost 100 jurisdictions and countries have already agreed to implement it within the next two years. Whilst almost all international financial centres including Bermuda, the Cayman Islands, Hong Kong, Jersey, Singapore, and Switzerland have agreed to do so, Panama has so far refused to make the same commitment. As part of its ongoing fight against opacity in the financial sector, the OECD will continue monitoring Panama’s commitment to and application of international standards, and continue reporting to the international community on the issue.

Is Panama the only outlier, or is it the tip of the iceberg? Are there other jurisdictions posing similar problems?

Having conducted well over 200 Phase 1 and 2 peer reviews in the past 7 years, the Global Forum has identified a number of member countries and jurisdictions whose legal and regulatory framework for the exchange of information are as yet not up to international standards. They include Guatemala, Kazakhstan, Lebanon, Liberia, Micronesia, Nauru, Trinidad and Tobago and Vanuatu. It is clear that there are other jurisdictions where a lack of information on beneficial ownership of corporate and other entities is facilitating illicit flows.

Portugal

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Portugal 2016 Budget Law Published

On 30 March 2016, Portugal published the 2016 Budget Law (Law n.º 7-A/2016) in the Official Gazette. The main tax-related measures of the budget are summarized as follows.

CbC Reporting

Country-by-Country (CbC) reporting requirements are introduced for fiscal years beginning on or after 1 January 2016 for MNE groups meeting a consolidated group revenue threshold of EUR 750 million in the previous year. The new requirements are in line with the guidelines developed as part of Action 13 of the OECD BEPS Project. Click the following link for previous coverage of Portugal's CbC requirements.

Patent Box Regime

The Budget Law provides for the amendment of the patent box regime to bring it in line with the modified nexus approach developed as part of Action 5 of the OECD BEPS Project. This includes that the benefits of the regime will apply in proportion to the actual activities performed by the taxpayer claiming the benefits.

The current regime will be closed for new applicants from 30 June 2016, but will be grandfathered to 30 June 2021. Additional details of the new amended regime will be published once available.

Participation Exemption

The conditions for the dividend and capital gains participation exemption regime are amended. The required holding period is reduced from two years to one year, but the required holding percentage is increased from 5% to 10%. The change is effective from 2016.

Loss Carryforward Limit

The standard net operating loss carryforward limit is reduced from 12 years to 5 years. The change is effective for losses incurred in tax periods beginning on or after 1 January 2017. However, for SMEs the 12-year limit continues to apply.

Asset Valuation Step-up

In 2016, taxpayers are allowed to revalue qualifying fixed assets and investment property for tax purposes. The revaluation is subject to tax at a lower rate of 14% to be paid in three equal installments in 2016, 2017 and 2018.

Click the following link for Law n.º 7-A/2016 (Portuguese language).

United States

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U.S. IRS Publishes Practice Units on Allocation of Income under IRC 482, Inbound Resale Price Method, and Computing Foreign Base Company Income

The U.S. IRS has recently published three international practice units, including:

International practice units are developed by the Large Business and International Division of the IRS to provide staff with explanations of general international tax concepts as well as information about specific transaction types. They are not an official pronouncement of law, and cannot be used, cited or relied upon as such.

Click the following link for the International Practice Units page on the IRS website.

Treaty Changes (4)

Albania-Kosovo

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Update - Tax Treaty between Albania and Kosovo

The income and capital tax treaty between Albania and Kosovo entered into force on 11 March 2015 and generally applies from 1 January 2016. The treaty, signed 24 March 2014, replaced the 2004 tax treaty between the two countries.

Taxes Covered

The treaty covers Albanian income taxes, including corporate profits tax, personal income tax and capital gains tax from the alienation of the movable or immovable property, and tax on small business activities and wealth tax. It covers Kosovo personal income tax, corporate income tax and property tax.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services in a Contracting State through employees or other engaged personnel for the same or connected project for a period or periods aggregating more than 3 months within any 12-month period.

Withholding Tax Rates

  • Dividends - 0%
  • Interest - 10%
  • Royalties - 10%

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

  • Gains from the alienation of immovable property situated in the other State;
  • Gains from alienation of movable property forming part of the business property of a permanent establishment in the other State; and
  • Gains from the alienation of shares deriving more than 50% their value directly or indirectly from immovable property situated in the other State

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.

Double Taxation Relief

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

Effective Date

The treaty applies from 1 January 2016. The 2004 tax treaty between the two countries ceased to have effect on that date.

Israel-Moldova

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SSA between Israel and Moldova under Negotiation

On March 28 to 31, officials from Israel and Moldova met for the second round of negotiations for a social security agreement. Any resulting agreement would be the first of its kind between the two countries, and must be finalized, signed and ratified before entering into force.

Russia-Germany

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Russia Clarifies Minimum Investment Conditions for Reduced Dividends Withholding Tax under Tax Treaty with Germany

Russia's Ministry of Finance recently published a guidance letter clarifying the minimum investment conditions for the reduced dividends withholding tax rate under the 1996 income and capital tax treaty as amended by the 2007 protocol. Under the treaty as amended, a reduced withholding tax rate of 5% applies for dividends if the beneficial owner holds at least 10% of the basic or common stock of the company paying the dividends and such capital share amounts to at least EUR 80,000 or the equivalent value in rubles.

The guidance clarifies that to determine whether the minimum participation amount is met, the determination is to be made at the time of the initial acquisition. For this purpose, the acquisition can be made through a single investment meeting the minimum participation or through multiple investments that in the aggregate meet the minimum participation. As long as the required participation has been maintained at the time the dividends are paid, the 5% rate can apply.

Senegal-Ethiopia

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Tax Treaty between Senegal and Ethiopia under Negotiation

Senegal's Ministry of Foreign Affairs has announced that negotiations for an income tax treaty with Ethiopia have begun. Any resulting treaty would be the first of its kind between the two countries, and must be finalized, signed and ratified before entering into force.

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