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Worldwide Tax News

Approved Changes (2)

China

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China Announces that Transition of Remaining Sectors to VAT to be Completed in May

On 5 March 2016, China's Premier Li Keqiang announced that the remaining sectors still subject to business tax will be transitioned to value added tax (VAT) effective 1 May 2016. The announcement was made during China's annual National People's Congress, and followed by comments from Minister of Finance Lou Jiwei that the 1 May deadline would be met as long as no unforeseen complications arise.

The transition from business tax to VAT began in 2012 as a pilot program, with most sectors transitioning to VAT in 2014. According to the Minister of Finance, the transition for the remaining sectors has been delayed due to the large number of taxpayers and the associated technical difficulties in switching tax systems. The remaining sectors include the construction, real estate, financial and consumer services sectors. The exact VAT rates have not yet been issued, however it is expected the rates will be 11% for construction and real estate and 6% for financial and consumer services.

United States-European Union

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U.S. Treasury Responds to Senate Request to Consider Tougher Response to Perceived Targeting of U.S. Companies in EU State Aid Investigations

In a letter dated 2 March 2016, U.S. Treasury Assistant Secretary for Legislative Affairs responded to a request from the Senate Finance Committee for a tougher response to the perceived targeting of U.S. companies in recent EU State aid investigations (previous coverage). A particular area of note is that Treasury is reviewing whether the State aid investigations amount to discriminatory taxation under Internal Revenue Code Section 891. Section 891 was enacted in the Revenue Act of 1934 and includes the provision that if the president finds that a corporation of the U.S. is being subject to discriminatory or extraterritorial taxes in a foreign country, the president may double the rate of U.S. taxes imposed on corporations of such foreign country.

The letter states that Section 891 has never been invoked, but Treasury is considering all potential modes of engagement to express its view that the European Commission should reconsider its approach.

Click the following link for the text of Section 891.

Proposed Changes (3)

European Union

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European Council Agrees on Exchange of CbC Reports in the EU

On 8 March 2016, the EU's Economic and Financial Affairs Council (ECOFIN) announced that it has agreed on the draft directive that would require the exchange of Country-by-Country (CbC) reports between EU Member States. The draft directive was issued as part of a package of anti-avoidance measures based on the outcome of the OECD BEPS Project in January (previous coverage) and would amend the EU Directive on Administrative Cooperation in the Field of Taxation (Directive 2011/16/EU) for the purpose of the exchange.

The CbC exchange directive is pending consultation of the EU and UK parliaments. After national parliamentary reservations have been lifted and the text is finalized in all languages, it will be adopted by the Council. Once adopted, all EU Member States will be required to transpose the rules into domestic law, and the first exchange of CbC reports will take place in the beginning of 2018 in respect of the 2016 fiscal year.

Final adoption by the European Council is expected in May.

Russia

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Russian Lower House of Parliament Adopts Draft Bill for VAT on Foreign E-Services

On 26 February 2016, Russia's State Duma (lower house of parliament) adopted a draft bill in its first reading that would impose value added tax (VAT 18%) on e-services supplied by foreign suppliers to Russian customers. The bill includes a change in the place of supply rules for e-services so that the supplies made to Russian consumers would be considered made in Russia and subject to VAT. Foreign suppliers making such supplies would be required to register with the Russian tax authorities, account for the VAT due, and file periodic returns. As proposed, the requirements would only apply for foreign suppliers of B2C e-services, while B2B supplies would be subject to reverse charge.

The types of e-services that would be subject to VAT include online video game access, online sales platforms, online advertising, electronic content (music, books, etc.), streaming video/audio, webhosting services, and access to trading platforms.

The draft bill must be adopted by both houses of parliament and signed into law by the president before entering into force. The changes are to apply from 1 January 2017.

United Kingdom

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UK Office of Tax Simplification Proposes Alignment of Income Tax and National Insurance Contributions

On 7 March 2016, the UK Office of Tax Simplification’s (OTS) published a report in which it proposes an alignment of income tax and national insurance contributions (NICs). The proposal is meant to simplify the system for the benefit of both businesses and individual taxpayers, and includes:

  1. Moving to an annual, cumulative and aggregate basis for NICs;
  2. Basing employers NICs on whole payroll costs and renaming the charge;
  3. Aligning the self-employed NICs more closely with the employees’ NICs – and benefits;
  4. Improving transparency for NICs and the contributory principle;
  5. Aligning the definition of both earnings and expenses for income tax and NICs;
  6. Bringing taxable benefits in kind into Class 1 NICs; and
  7. Having a joined up approach for income tax and NICs laws and practice.

Click the following links for the report and the related news release.

Treaty Changes (2)

India-Singapore

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Indian Tribunal Holds that Payments for Packaged Software Not Royalties under India-Singapore Tax Treaty

Mumbai's Income Tax Appellate Tribunal recently ruled on whether a payment for packaged off-the-shelf software constitutes a royalty payment under the 1994 India-Singapore income tax treaty.

The case involved Capgemini Business Services (India) Ltd. (Capgemini), which purchased packaged accounting software for its own use from a vendor resident in Singapore and claimed a deduction for the purchase. In reviewing Capgemini's return for the year concerned, the assessing officer took the position that the purchase was for the use of copyright and should have been subject to withholding tax for royalties. Since no tax was withheld, the deduction was denied and Capgemini appealed.

In coming to its decision,  the Tribunal first looked at whether the tax treatment of the software purchase should be evaluated under the India-Singapore tax treaty or under the India Income Tax Act, 1961(ITA). It found that the treaty provides a more narrow definition of royalties than the ITA, and because the treaty definition is more beneficial to Capgemini in this case, Capgemini is entitled to apply the treaty definition.

The Tribunal then evaluated whether the software constituted a royalty under the treaty. The tax authority argued that the software should be considered a copyright of a literary work, which is included under the definition of royalties under the treaty, and should be taxed as such. However, although the Tribunal agreed that the software is a literary work, it determined that the purchase of the software in this case is more similar to a sale of goods than a payment for the use of a copyright. Based on this determination and the fact that the Singapore vendor does not have a permanent establishment in India, the Tribunal ruled that the payment is not subject to tax in India as a royalty or otherwise.

Italy-Romania

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Update - New Tax Treaty between Italy and Romania

The new income tax treaty between Italy and Romania was signed 25 April 2015. Once in force and effective, the treaty will replace the 1977 tax treaty between the two countries, which is currently in force.

Taxes Covered

The treaty covers Italian personal income tax, corporate income tax and regional tax on productive activities (IRAP). It covers Romanian tax on income and tax on profit.

Residence

If a company is considered resident in both Contracting States, the competent authorities will determine its residence for the purpose of the treaty through mutual agreement. If no agreement is reached, the company will not be entitled to claim any relief or exemption from tax provided for by the treaty.

Withholding Tax Rates

  • Dividends - 0% if the beneficial owner is a company directly holding at least 10% of the paying company's capital for an uninterrupted period of at least two years in which that date of payment falls; otherwise 5%
  • Interest - 5%
  • Royalties- 5%

Limitation on Benefits

The provisions of Articles 10 (Dividends), 11 (Interest) and 12 (Royalties) will not apply if the main purpose or one of the main purposes of any person concerned with the creation or assignment of the shares, debt-claims or other rights in respect of which the dividends, interest or royalties are paid was to take advantage of those Articles by means of that creation or assignment. The limitation is included in each of the Articles.

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 the 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% of 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.

Entry into Force and Effect

The treaty will enter into force once the ratification instruments are exchanged, and will apply from 1 January of the year following its entry into force.

The 1977 tax treaty between the two countries will terminate on the date the new treaty enters into force, and will cease to be effective from the date the new treaty is in effect.

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