Worldwide Tax News
The Belgian parliament has approved the new IP regime to replace the previous regime that was repealed effective 1 July 2016 due to its non-compliance with the modified nexus approach developed as part of BEPS Action 5. Under this approach, the availability of benefits under an IP regime requires a more direct connection with the activities of the taxpayer for IP development, while excluding costs with related parties.
The new IP regime provides an innovation deduction equal to 85% of the net qualifying IP income derived from qualifying IP assets. To determine the innovation deduction amount, the nexus ratio is calculated as: Qualifying R&D Expenditure x 130% (uplift) / Total R&D Expenditure (nexus ratio may not exceed 100%). The nexus ratio is then applied to the total qualifying income and multiplied by 85% to determine the deduction amount. If the deduction amount cannot be fully utilized, it may be carried forward indefinitely.
The new IP regime is effective from 1 July 2016, with the previous regime grandfathered through 30 June 2021, subject to certain conditions. Click the following link for previous coverage of the new regime for additional details.
According to recent reports, Bosnia and Herzegovina has adopted the three-tiered transfer pricing documentation requirements recommended under BEPS Action 13, including Country-by-Country (CbC) reporting, Master file, and Local file requirements. The CbC reporting and Master file requirements are to apply for fiscal years beginning on or after 1 January 2018 for MNE groups meeting a consolidated group revenue threshold of EUR 750 million in the previous year. The new Local file requirements are to apply for fiscal years beginning on or after 1 January 2016.
When required, the CbC report is to be submitted by 31 March of the following year, while the Master and Local files will be required within 45 days of request. Additional details of the new requirements will be published once available.
The action brought on 9 November 2016 by Ireland against the European Commission regarding the Apple State aid decision has been published in the EU Official Journal. The 9 pleas in law and main arguments included in the action are as follows:
1. First plea in law, alleging that the Commission has made manifest errors of assessment in misunderstanding Irish law and the relevant facts.
— The decision wrongly asserts that two Opinions given in 1991 and 2007 by the Irish Revenue Commissioners ‘renounced’ tax revenue that Ireland would have otherwise been entitled to collect from the Irish branches of Apple Sales International (ASI) and Apple Operations Europe (AOE). The Opinions involved no departure from Irish law. The ordinary tax rules applicable to branches in Ireland of non-resident companies are in Section 25 of the Taxes Consolidation Act 1997. The Opinions simply applied Section 25, which in accordance with the territoriality principle, taxes only the profits attributable to the branch, not the non-Irish profits of the company. The decision also mischaracterizes the activities and responsibilities of the Irish branches of ASI and AOE. These branches carried out routine functions, but all important decisions within ASI and AOE were made in the USA, and the profits deriving from these decisions were not properly attributable to the Irish branches of ASI and AOE. The Commission’s attribution of Apple’s intellectual property licences to the Irish branches of AOE and ASI is not consistent with Irish law and, moreover, is inconsistent with the principles it claims to apply, as is its stated refusal to take into account the activities of Apple Inc.
2. Second plea in law, alleging that the Commission has made manifest errors in its State aid assessment.
— The Commission’s assertion that ASI and AOE were granted an ‘advantage’ is incorrect. The Opinions did not depart from ‘normal’ taxation, because ASI and AOE did not pay any less tax than was properly due under Section 25. The Commission also wrongly claims that the Opinions were selective. The Commission’s reference system wrongly ignores the distinction between resident and non-resident companies. The Commission attempts to re-write the Irish corporation tax rules so that, in respect of Opinions, the Revenue Commissioners should have applied the Commission’s version of the arm’s length principle (‘ALP’). This principle is not part of EU law or the relevant Irish law in relation to branch profit attribution, and the Commission’s claim is inconsistent with Member State sovereignty in the area of direct taxation.
3. Third plea in law, alleging that the Commission’s application of the arm’s length principle is inconsistent and manifestly erroneous.
— Even if ALP were legally relevant (which Ireland does not accept) the Commission has failed to apply it consistently or to examine the overall situation of the Apple group.
4. Fourth plea in law, alleging that the Commission’s subsidiary line of reasoning is erroneous.
— The Commission wrongly rejected expert evidence submitted by Ireland showing that, even if ALP applied (which Ireland does not accept), the tax treatment of ASI and AOE was consistent with that principle.
5. Fifth plea in law, alleging that the Commission’s alternative line of reasoning is erroneous.
— The Commission is wrong to maintain that ALP is inherent in Irish law, that Section 25 was applied inconsistently or that Section 25 confers any impermissible discretion. Section 25 confers no such discretion on the Revenue Commissioners.
6. Sixth plea in law, alleging that the Commission has breached essential procedural requirements.
— The Commission never clearly explained its State aid theory during the Investigation, and the Decision contains factual findings on which Ireland never had the chance to comment. The Commission breached the duty of good administration by failing to act impartially and in accordance with its duty of care.
7. Seventh plea in law, alleging that the Commission has breached the principles of legal certainty and legitimate expectations.
— The Commission infringed the principles of legal certainty and legitimate expectations by invoking alleged rules of EU law never previously identified. These are novel and their scope and effect are wholly uncertain. The Commission invokes OECD documents from 2010, but (even if they were binding) these could not have been foreseen in 1991 or 2007.
8. Eighth plea in law, alleging that the Commission lacked competence to take the decision, and has breached Articles 4 and 5 TEU and the principle of fiscal autonomy of Member States.
— The Commission has no competence, under State aid rules, unilaterally to substitute its own view of the geographic scope and extent of the Member State’s tax jurisdiction for those of the Member State itself. The purpose of the State aid rules is to tackle State interventions which confer a selective advantage. The State aid rules by their nature cannot remedy mismatches between tax systems on a global level.
9. Ninth plea in law, alleging that the Commission has manifestly breached Article 296 TFEU and Article 41(2)(c) of the Charter of Fundamental Rights of the European Union.
— The Commission has manifestly breached its duty to provide a clear and unequivocal statement of reasons in its Decision, in relying simultaneously on grossly divergent factual scenarios, in contradicting itself as to the source of the rule that Ireland is said to have breached, and in suggesting that Ireland granted aid in relation to profits taxable in other jurisdictions.
The European Council has published the Maltese Presidency roadmap setting out work in the Council during the coming months in the field of Base Erosion and Profit Shifting (BEPS).
Short-term work includes:
- Reaching agreement on proposed rules to address hybrid-mismatches involving third countries;
- Reaching agreement on a proposal on the introduction of an effective and efficient framework for resolution of tax disputes;
- Finalizing the EU list of third country non-cooperative jurisdictions;
- Finalizing the text of the proposed Common Corporate Tax Base (CCTB);
- Reaching agreement on amendments to the Interest and Royalties Directive for the inclusion of a Minimum Effective Taxation clause and an ownership/base erosion test;
- Reaching agreement on the key elements of a good governance in tax matters clause to be inserted in agreements between the EU and third countries;
- Assessing the need for updating the mandate of negotiations for EU anti-fraud agreements with Andorra, Monaco, San Marino, and Switzerland, and for a possible relaunch of the negotiations on the EU anti-fraud agreement with Liechtenstein; and
- Exchanging views through the High Level Working Party on Tax Questions (HLWP) on the signature of the OECD multilateral instrument to modify tax treaties to address BEPS issues.
Medium-term work includes:
- Supporting the Code of Conduct Group in its task to continue monitoring the legislative process necessary to modify existing patent box regimes in line with the modified nexus approach;
- Supporting the Code of Conduct Group in its work on the implementation of the Council conclusions on the future of the Code of Conduct (Business Taxation);
- Identifying potential problems that arise when payments are made from the EU to a third country; and
- Examining possible approaches with regard to mandatory disclosure rules in relation to tax evasion and avoidance schemes.
Click the following link for the full text of the presidency roadmap.
On 2 February 2017, orders for the ratification of Belgium's pending social security agreements with Israel, Morocco, Tunisia, and Turkey were published in the Official Gazette. The agreements were signed 24 March 2014 with Israel, 18 February 2014 with Morocco, 28 March 2013 with Tunisia, and 11 April 2014 with Turkey. The agreements will enter into force after the ratification instruments are exchanged, and once in force and effective will replace the existing agreements between Belgium and the respective countries.
The protocol to the 2009 income tax treaty between Brunei and Kuwait was signed on 11 October 2016. The protocol is the first to amend the treaty and includes the following main changes:
- Article 2 (Taxes Covered) is amended with respect to Kuwaiti taxes covered;
- Article 4 (Resident) is amended to provide that an individual will be considered resident in Kuwait if present in the country for a period or periods totaling in the aggregate at least 183 days within any 12-month period; and
- Article 26 (Exchange of Information) is replaced to bring it in line with the OECD standard for information exchange.
The protocol also makes a number of corrections to fix certain typos and misreferences in the following Articles:
- Article 3 (General Definitions);
- Article 5 (Permanent Establishment);
- Article 9 (Associated Enterprises;
- Article 10 (Dividends);
- Article 11 (Interest);
- Article 15 (Dependent Personal Services); and
- Article 24 (Non-Discrimination).
The protocol will enter into force 30 days after the ratification instruments are exchanged.
On 1 February 2017, Senegal's Council of Ministers approved the pending income tax treaty with the United Arab Emirates. The treaty, signed 22 October 2015, is the first of its kind between the two countries and will enter into force after the ratification instruments are exchanged. Additional details of the treaty will be published once available.
According to recent reports, officials from the United Arab Emirates have met with officials from South Sudan to discuss bilateral relations, and have expressed their intent to negotiate an income tax treaty. 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.