Worldwide Tax News
U.S. IRS Publishes International Practice Units on Licensed IP to a Foreign Subsidiary and Deemed Annual Royalty Income
On 4 November 2015, the U.S. IRS published two new international practice units:
- License of Intangible Property from U.S. Parent to a Foreign Subsidiary; and
- Deemed Annual Royalty Income Under IRC 367(d)
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.
The French Finance Committee has approved a proposed amendment to the 2015 Finance Act (2016 Budget legislation) that would introduce country-by-country (CbC) reporting requirements for multinational enterprises. The CbC requirement was proposed on 4 November 2015, and is reportedly in line with the guidelines developed as part of Action 13 of the OECD BEPS Project.
The amendment will be put to a vote in a public session before being added to the 2015 Finance Act before the end of the year. Although not finalized, the requirement will likely include the standard EUR 750 million annual group revenue threshold included in the OECD guidelines and apply for tax years beginning on or after 1 January 2016.
On 4 November 2015, officials from Argentina and Mexico signed an income tax treaty. The treaty is the first of its kind between the two countries, and will enter into force after the ratification instruments are exchanged.
Additional details will be published once available.
On 4 November 2015, officials from the Isle of Man and Romania signed a tax information exchange agreement. The agreement is the first of its kind between the two jurisdictions. It will enter into force once the ratification instruments are exchanged, and will generally apply from that date.
On 4 November 2015, officials from Norway and the United Arab Emirates signed a tax information exchange agreement. The agreement is the first of its kind between the two countries, and will enter into force after the ratification instruments are exchanged.
According to an update published by the Philippine Bureau of Internal Revenue on 2 November 2015, the income tax treaty between the Philippines and Qatar entered into force on 19 May 2015. The treaty, signed 14 December 2008, is the first of its kind between the two countries.
The treaty covers Philippine income taxes imposed under the National Internal Revenue Code, and covers Qatari income tax.
The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise of one Contracting State furnishes services in the territory of the other State through employees or other engaged personnel for the same or connected project for a period or periods aggregating more than 90 days within any 12-month period.
- Dividends - 10% if the beneficial owner is a company directly holding at least 10% of the paying company's capital; otherwise 15%
- Interest - 10%
- Royalties - 15%
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;
- Gains from the alienation of ships or aircraft operated in international traffic or gains from the alienation of movable property pertaining to the operation of such ships or aircraft if the gains arise in the other State; and
- Gains from the alienation of shares of a company or an interest in a partnership or a trust, the property of which consists principally of 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.
Both countries apply the credit method for the elimination of double taxation.
The treaty applies from 1 January 2016.
The Swiss Federal Supreme Court recently published its May 2015 decision regarding beneficial ownership under the Denmark-Swiss tax treaty in a case involving total return swaps and dividend payments. The main question was whether a Danish bank that entered into swap contracts with clients in England, Germany, France and the U.S. was entitled to the beneficial withholding tax treatment on related dividends under the Denmark-Swiss tax treaty.
In an agreement entered into between the bank and its clients, the clients undertook to trade the entire return of a specific underlying asset (basket of Swiss shares) against a fixed stream of payments, which allowed the clients to obtain a stake in the underlying asset without having to directly invest. As consideration for the total return swap, the Danish bank was entitled to variable interest and a margin.
In order to hedge its obligations from the total return swap, the bank purchased the related basket of Swiss shares, which resulted in dividend payments to the bank from which tax was withheld. The bank sought reimbursement for the withholding tax on the dividends under the provisions of the Denmark-Swiss tax treaty, but the request was denied by the Swiss Federal Tax Authority (FTA) because, in the FTA's view:
- The bank lacked beneficial ownership of the dividends; and
- Such a request is an abuse of the tax treaty.
Specifically, the FTA argued that by entering into the total return swap agreement with its clients and hedging its obligations by purchasing the related shares, the bank had transferred all financial opportunities and risks to the clients and the claim for the beneficial withholding rate with such a structure could not be justified on economic grounds.
This decision of the FTA was initially appealed before the Federal Administrative Court in 2012. In its decision, the Court sided with the bank, confirming the bank's beneficial ownership and denying there was treaty abuse. However, the case was further appealed before the Supreme Court, which sided with the FTA.
In coming to its decision, the Supreme Court evaluated the effective right of use concept of beneficial ownership, which requires that the recipient have full control of the use and enjoyment of the dividend without restriction by any statutory or contractual obligation. It also concluded that in determining beneficial ownership, consideration must be made based on the full set of economic circumstances, taking into account any onward transfers of the Swiss dividend following the initial payment.
Although the banks purchase of the basket of Swiss shares and the resulting dividend payments did not include any legal or factual obligation for an onward payment, the Court determined that an interdependence existed between the dividends and the total return swap agreement. This is due to the fact that the shares were purchased only as a hedge against the bank's obligations under the agreement. As a result, the Supreme Court concluded that in the entire economic context, the bank merely acted as interposed entity that was required to pass on the dividends to its clients. Therefore, it could not be considered the beneficial owner nor eligible for the reduced withholding tax on dividends provided for under the Denmark-Swiss tax treaty.