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Approved Changes (4)

Brazil

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Brazil Clarifies Taxation of Capital Gains Derived by Non-resident from the Exchange of Shares

The Brazilian tax authority recently published Ruling No. 88 of 25 January 2017, which clarifies the tax obligations in relation to capital gains derived by a non-resident from transactions involving the exchange of shares in Brazil. According to the ruling, any capital gain resulting from the exchange of shares is subject to tax at the rate of 15%. For this purpose, the capital gain is equal to the positive difference between the value of the shares issued by the incorporating company in Brazil and the acquisition cost of the shares transferred by the non-resident (values to be in Brazilian reais). The tax is to be withheld and remitted by the incorporating company in Brazil.

Canada

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Canada Updates Income Tax Folio for Principal-business Corporations in Resource Industries

The Canadian Revenue Agency has published an updated income tax folio for principal-business corporations (PBC) in resource industries. The folio discusses the criteria for determining whether a corporation qualifies as a PBC, as well as the significance of PBC status and the related benefits, which include:

  • Deduction for certain PBCs in respect of cumulative Canadian exploration expense (CEE);
  • Deduction for certain PBCs that engage in trading in resource properties;
  • Exemption from certain provisions dealing with loss restriction events (change of control, etc.);
  • Flow-through shares; and
  • Investment tax credits for certain expenditures of PBCs.

Click the following link for the income tax folio: S3-F8-C1, Principal-business Corporations in the Resource Industries.

India

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Indian Court Holds Definition of Associated Enterprise should be Read based on the Law's Intent and Not Literally

A decision of the Chennai Income Tax Appellate Tribunal was recently published concerning how the definition of associated enterprises under the Income Tax Act, 1961 (ITA) should be read. The case involved India-based Orchid Pharma Limited (Orchid), a global pharmaceutical company engaged in research, manufacturing, and marketing.

In order to sell its products in developed markets, such as the EU and the U.S., Orchid entered into distribution channel arrangements with certain entities, including an agreement with Ireland-based Northstar Healthcare Ltd (Northstar). Under the agreement, the profit generated was split evenly between Orchid and Northstar after the deduction of actual marketing expenditure incurred by Northstar and the deduction of an agreed price for cost of goods sold. Orchid also entered into a second agreement with Northstar and a U.S.-based company, Actavis Elizabeth LLC (Actavis). Under this agreement, Northstar handled distribution, Actavis performed research activities, and Orchid manufactured the product. The profit was determined in a similar manner and split as follows: Northstar 50%, Actavis 25%, and Orchid 25%.

While performing an audit of Orchid, the transfer pricing officer determined that Orchid and its distribution partners were associated enterprises and that the agreed price for the products was not at arm's length. As a result, the transfer pricing officer made an adjustment to Orchid's taxable income. Orchid appealed on the basis that it and its distribution partners do not meet the definition of associated enterprise in Section 92A of the ITA.

Under Section 92A(1), enterprises are deemed associated if one participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other. Under Section 92A(2), deeming provisions are set out for specific cases, including the holding of shares, the advance of loans, the appointment of board members, etc. These deeming provisions generally include a certain quantitative threshold, but the deeming provision at issue does not:

  • 92A(2)(i) the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise.

The Income Tax Appellate Tribunal held that the lack of threshold in 92A(2)(i) is an inadvertent omission and that the provision must not be read literally. The Tribunal states that " if this clause is interpreted literally, even when sales of one enterprise to the other enterprise constitute less than one percent and that other enterprise can influence the prices at which the goods are sold, these two enterprise will be treated as associated enterprises on account of commercial relationship. That is clearly incongruous and in fact absurd because the level of commercial relationship, in such a situation, will be so insignificant that there cannot be any "control" by one of the enterprise over the other." Further, the Tribunal states that "Given the fact that the assessee's (Orchid's) exports through the distribution part constitutes less than 5% of its entire exports, and less than 6% of its entire sales, Northstar is certainly not in a position to exercise any dominant influence, over the assessee." According to the Tribunal, in order for the enterprises to be deemed associated based on Section 92A(2)(i), it must be established that there is dominant influence amounting to de facto control by one enterprise over the other, which in this case there is not.

Kazakhstan

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Kazakhstan Issues List of Priority Business Activities for SEZ Benefits

On 24 January 2017, the Kazakhstan government issued Resolution No. 10 of 2017, which provides the list of priority business activities for the purpose of the country's special economic zone (SEZ) benefits. Companies registered in SEZs may enjoy exemptions from corporate income tax, value added tax, land tax, and property tax. In order to obtain the benefits, a company must be engaged in one of the prescribed priority business activities, which vary depending on the particular SEZ (there are 10). Activities include manufacturing of various products, chemical and petrochemical production, research and development, and information technology, as well as related logistics and construction services.

Click the following link for Resolution No. 10 (Russian language).

Proposed Changes (3)

European Union

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EU Parliament Legal Affairs Committee Concludes Majority Vote Sufficient to Implement Public CbC Reporting

The European Parliament Legal Affairs Committee has published a legal opinion dated 17 January 2017 on the appropriate legal basis for the implementation of the proposed amendment to the EU Accounting Directive (2013/34/EU) for public Country-by-Country (CbC) reporting. The opinion concludes that the appropriate legal basis is Article 50(1) of the Treaty on the Functioning of the EU (TFEU), which supports the legal basis provided for in the latest draft of the public CbC proposal published in December 2016 (previous coverage), and is counter to a EU Council's Legal Service opinion given in November 2016 that the legal basis should be Article 115 TFEU. The key distinction between the two articles as the legal basis is that Article 50(1) would only require a qualified majority in the EU Council to amend the Accounting Directive, while Article 115 would require unanimous consent. Council Directive (EU) 2016/881, which provides for the standard CbC reporting requirements in the EU, was based on Articles 113 and 115 TFEU.

Assuming the proposed legal basis remains Article 50(1), this means approval of public CbC reporting in the EU will require the support of at least 55% of Member States (16 out of 28) representing at least 65% of the EU population. An alternate method may also be used until 31 March 2017, where approval is required by at least 15 Member States and a minimum of 260 weighted votes are cast in favor (out of 352). Weighted votes approximate population, with each Member State allocated a certain amount.

France-Panama

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Conditions for Panama's Removal from French Blacklist

The French Ministry of Economy and Finance has published a release following the meeting between officials from France and Panama concerning the removal of Panama from the French blacklist of non-cooperative states or territories. Panama was added to the list in April 2016, with effect from 1 January 2017 (previous coverage). According to the release, Panama will be removed from the list if the following three conditions are met:

  • Panama signs the OECD-Council of Europe Convention on Mutual Administrative Assistance in Tax Matters and complies with the automatic exchange of financial information according to OECD standards (CRS);
  • Panama provides total transparency in the exchange of information for tax purposes; and
  • Panama agrees to amend the 2011 income tax treaty with France in order to remove any barriers to the exchange of information and bring it in line with international standards.

In relation to meeting the conditions, legislation has already been submitted to Panama's National Assembly in September 2016 to implement the framework for the automatic exchange of financial account information under CRS and Panama signed the Mutual Assistance Convention in October 2016. Panama has also recently announced a fiscal transparency compliance policy covering the steps it has and will take regarding transparency in general.

Regarding the next steps for Panama's removal from the French blacklist, the release notes that officials from the French tax administration will visit Panama in the near future to continue the work begun in the first meeting.

Philippines

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Philippine President Supports Tax Reform including Second Package with Corporate Tax Rate Cut

The Philippine government has published a release announcing that President Duterte has given his full backing to the Comprehensive Tax Reform Program (CTRP). The first package of measures for the CTRP was submitted to parliament in January, including major adjustments to the individual income tax brackets and rates, as well as the expansion of the value added tax base by removing most exemptions and other changes (previous coverage). According to the announcement, a second CTRP package will be submitted that includes lowering the corporate tax rate from 30% to 25%. It is hoped that all reforms under the CTRP can be completed within the first two and a half or three years of the Duterte administration, which would mean by June 2019.

Treaty Changes (3)

Austria-India

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Protocol to Tax Treaty between Austria and India Signed

On 6 February 2017, officials from Austria and India signed a protocol to the 1999 income tax treaty between the two countries. According to a release from the Indian government, the protocol will broaden the scope of the existing framework of exchange of tax related information and enable mutual assistance in collection of taxes.

Netherlands-BES Island-Curacao-Sint Maarten-Estonia-Finland-Slovenia-United Kingdom

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Netherlands Terminates Savings Tax Agreements with Respect to the Former Netherlands Antilles

The Netherlands has signed exchange of notes with Estonia, Finland, Slovenia, and the UK for the termination of the former Netherlands Antilles Savings Tax Agreements with those countries. The termination of the agreements is effective 1 January 2017 with respect to the BES Islands (Bonaire, Sint Eustatius, and Saba) and Curaçao. With respect to Sint Maarten, however, the agreements continue to apply. The reason for the termination is the repeal of the EU Savings Directive, which was replaced by the amended provisions of the EU Administrative Assistance Directive.

Switzerland-Albania-Austria-Belgium-Bulgaria-Chile-China-Colombia-Cyprus-Czech Rep-Estonia-France-Hong Kong-Hungary-Iceland-India-Italy-Japan-Liechtenstein-Malta-Mexico-Morocco-Netherlands-Oman-Peru-Portugal-Qatar-Russia-Slovenia-Spain-Taiwan-Untd A Emirates-United Kingdom-United States

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Swiss Tax Treaties with Anti-Abuse Provisions

The Swiss Federal Tax Administration has published a document providing an overview of all tax treaties/agreements that contain specific anti-abuse provisions. These include treaties/agreements with:

Albania; Australia; Belgium; Bulgaria; Chile; China; Colombia; Cyprus; the Czech Republic; Estonia; France; Hong Kong; Hungary; Iceland; India; Italy; Japan; Liechtenstein; Malta; Mexico; Morocco; Netherlands; Oman; Peru; Portugal; Qatar; Russia; Slovenia; Spain; Taiwan; the United Arab Emirates; the United Kingdom; and the United States.

Click the following links for the French language or German language versions of the document.

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