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Proposed Changes (3)

European Union

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EU Parliament Votes for Revisions to Shareholder Rights Directive including New Transparency Requirements

On 8 July 2015, the European Parliament voted to approve revisions to the Shareholder Rights Directive (2007/36/EC) in order to strengthen transparency. The revisions include the requirement that large undertakings and public-interest entities publish country-by-country (CbC) information on profit or loss before tax, taxes on profit or loss, and public subsidies received; and the disclosure of tax rulings if certain conditions are met (previous coverage). These requirements are separate from the CbC reporting requirement developed as part of the OECD BEPS Project and the automatic exchange of information on tax rulings proposed by the European Commission.

Meetings between the European Parliament, the European Commission, and the European Council must be held before final approval of the revisions. Once approved, EU Member States will be required to implement the changes in domestic legislation.

United Kingdom

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UK Summer Budget 2015 Presented including Corporate Tax Rate Cut

On 8 July 2015, UK Chancellor of the Exchequer George Osborne presented the Summer Budget 2015. The main tax related measures of the budget are summarized as follows.

Tax Lock

  • The government will set a ceiling for the main rates of income tax, the standard and reduced rates of VAT, and employer and employee NICs rates, to ensure that they cannot rise above their current (2015-16) levels.

Corporate Taxation

  • The corporation tax rate will be cut from 20% to 19% in 2017 and to 18% in 2020;
  • The controlled foreign company (CFC) regime will be amended to restrict the offset of UK losses against tax on CFCs from 8 July 2015;
  • From April 2017, companies with annual profits exceeding GBP 20 million will be required to make tax payments in the third, sixth, ninth, and twelfth months of their accounting periods, instead of beginning the seventh month;
  • Companies will be no longer be allowed to claim an annual deduction for the acquisition cost of purchased goodwill and customer-related intangible assets for all acquisitions and disposals on or after 8 July 2015;
  • The Annual Investment Allowance will be increased to GBP 200,000 from January 2016; and
  • The Employment Allowance will be increased to GBP 3,000 from April 2016

Banking Taxation

  • A new 8% surcharge tax on banking profits will be introduced from January 2016, and
  • The bank levy rate will be reduced from 0.21% to 0.10% over the period 2016 to 2021: 0.18% in 2016, 0.17% in 2017, 0.16% in 2018, 0.15% in 2019, 0.14% in 2020, and 0.10% in 2021

Insurance Taxation

  • From 1 November, the standard rate of Insurance Premium Tax will be increased from 6% to 9.5%

Individual Taxation

  • The personal allowance will be increased to GBP 11,000 for the 2016-17 tax year and the higher rate threshold will be increased to GBP 43,000;
  • From April 2016, the dividend tax credit will be replaced with a GBP 5,000 tax-free dividend allowance, and dividend income tax rates will be set at 7.5% for basic-rate taxpayers, 32.5% for higher-rate taxpayers, and 38.1% for additional-rate taxpayers; and
  • Permanent non-domiciled status will be eliminated from April 2017 for individuals that have been resident in the UK for more than 15 out of the past 20 tax years, and such individuals will no longer be able to use the remittance basis for taxation

Anti-Avoidance Efforts

  • The government will invest  GBP 800 million to fund efforts to counter tax evasion and fraud, including tripling the number of criminal investigations that HMRC can undertake into serious and complex tax crime, with a focus on wealthy individuals and corporate; and
  • HMRC will be given the power to acquire data from online business intermediaries and electronic payment providers to help identify businesses that are trading but not declaring or paying tax

Click the following links for the Summer Budget 2015, an overview of the measures and an overview of tax legislation and rates.

United States

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U.S. Senate International Tax Reform Working Group Issues Final Report including Bipartisan Framework for Reform

The U.S. Senate Finance Committee's International Tax Reform Working Group released its Final Report on 8 July 2015. The Group was formed in January 2015 along with Tax Reform Working Groups for Business Income Tax, Individual Income Tax, Savings and Investment, and Community Development and Infrastructure.

The International Tax Reform Final Report covers a number of issues, including:

  • Reasons for Action;
  • International Principles of Taxation;
  • Present Law;
  • Prior International Tax Reform Efforts;
  • Bipartisan Framework for International Tax Reform; and
  • Miscellaneous Issues

While the report covers several issues, details on what actions should be taken for international tax reform are quite limited. The following provides a brief summary of the issues including excerpts on the positions taken by the working group co-chairs.

Ending the lock-out effect

One of the main areas of reform being considered is in regard to the lock-out effect that is caused by the nature of the U.S. worldwide system of international taxation. In order to promote repatriation of foreign earnings, the group looked at a dividend exemption or hybrid territorial-type system, paired with appropriate base erosion measures. In the report, the working group looked more at a dividend exemption and identified two main challenges for dividends exemption; the tax treatment of branches and S corporations.

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While the co-chairs are not yet issuing any formal recommendation regarding the treatment of branches, Congress faces two broad options: either 1) treat branches similar to controlled foreign corporations (CFCs) by allowing branch earnings to qualify for exemption treatment, or 2) subject branch earnings to immediate U.S. tax as under current law. If branches are to be treated as CFCs and have their earnings qualify for the exemption, consideration should be given to enactment of an appropriate one-time transition tax for the branches electing to be eligible for the dividend exemption. Under such a proposed transition tax, all of the assets used in the foreign branch’s active conduct of a trade or business, including intangible assets, would be treated as if such assets had been transferred to a CFC in a taxable transaction under Code section 367 and taxed at rates comparable to any accompanying deemed repatriation proposal.

While the co-chairs are not yet issuing any formal recommendation, we believe that careful consideration of the appropriate tax treatment of S corporations is warranted. The Tax Reform Act of 2014 (TRA14) made S corporation earnings ineligible for that proposal’s dividend exemption system. Other options might take a different approach, such as deferring tax on S corporation foreign earnings until distributed to shareholders and extending the exemption system (and any transition tax) to S corporations.

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Patent Box Regime

In regard to patent boxes, the report notes the modified nexus approach developed as part of Action 5 of the OECD BEPS Project and the impact it will have on IP in the U.S.

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The co-chairs agree that the anticipated impact of the new nexus requirements on innovation box regimes will have a significant detrimental impact on the creation and maintenance of intellectual property in the United States, as well as on the associated domestic manufacturing sector, jobs, and revenue base.

The co-chairs agree that we must take legislative action soon to combat the efforts of other countries to attract highly mobile U.S. corporate income through the implementation of our own innovation box regime that encourages the development and ownership of IP in the United States, along with associated domestic manufacturing. They continue to work to determine appropriate eligibility criteria for covered IP, a nexus standard that incentivizes U.S. research, manufacturing, and production, as well as a mechanism for the domestication of currently offshore IP.

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Base Erosion

In regard to base erosion, the report looks at the implementation of a minimum tax and the need for safeguards if a territorial system is implemented.

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Should there be a minimum tax, we (the co-chairs) believe that the type of income subject to a minimum level of tax and the rate applied to such income should meet the twin goals of preventing base erosion while ensuring that U.S. multinational companies are more competitive vis-à-vis their overseas rivals.

The co-chairs are committed to designing base-erosion proposals that protect the U.S. tax base and address the proliferation of tax havens, while not undermining the ability of American companies to compete abroad. This means creating clear, manageable standards that take into account the fact that losses can cause low effective tax rates in particular years and designing rules that dissuade companies from shifting money to tax haven jurisdictions.

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Interest Expense Limitations

The report references the interest deduction restrictions developed as part of Action 4 of the OECD BEPS Project, and highlights the need to set limits appropriately in order to allow legitimate intra-group lending.

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The co-chairs agree that it is important to design measures that discourage excessive leverage for both domestic companies operating globally and foreign companies operating in the U.S. to simply reduce their tax bills. They acknowledge concerns raised through the working group process and by experts in the field regarding the administrability of the President's proposed proportionality test and regarding TRA14, which, similar to current law, arguably doesn't provide sufficient limits in light of international norms and unilateral actions of other countries. As a result, the co-chairs will continue working to determine the appropriate net limitation necessary to allow for legitimate intra-group lending while at the same time stopping disproportionate leveraging to avoid U.S. taxation and gaming of interest expense limits in place. They are also committed to designing rules that keep inbound and outbound companies on a level playing field. Finally, the co-chairs will continue to examine the appropriate use of excess limitation and carryforward rules for disallowed interest expense; as well as whether additional limits should be placed on domestic companies that choose to invert.

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Deemed Repatriation

The report looks at transitioning to a new international tax system where a one-off tax for foreign profits would apply at a low rate payable over a number of years.

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The co-chairs have agreed to the framework contemplated by Chairman Camp and President Obama. They continue work to design a toll charge with the appropriate discounted rate, foreign tax credit treatment and ratable transition. Additionally, they continue to examine whether a multi-tiered rate structure is appropriate to account for income already permanently reinvested overseas.

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Miscellaneous Issues

The report also briefly examines tax issues related to:

  • CFC Look-Through;
  • The Active Financing Exception;
  • The Foreign Investment in Real Property Tax Act;
  • Foreign Affiliate Reinsurance;
  • Territories (Puerto Rico and the other U.S. possessions); and
  • Taxation of Overseas Americans

Click the following link for the Senate Finance Committee International Tax Reform Working Group: Final Report.

Treaty Changes (1)

United States-Vietnam

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Tax Treaty between the U.S. and Vietnam Signed

On 7 July 2015, officials from the U.S. and Vietnam signed an income tax treaty. The treaty is the first of its kind between the two countries.

Taxes Covered

The treaty covers U.S. Federal income taxes imposed by the Internal Revenue Code (excluding social security and unemployment taxes), and the Federal taxes imposed on the investment income of foreign private foundations. It covers Vietnam personal income tax and business income tax.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted when a resident of a Contacting State furnishes services in the other State through employees or other engaged personnel for the same or connected project for a period or periods aggregating more than 6 months within any 12-month period.

Withholding Tax Rates

  • Dividends (General) - 5% if the beneficial owner is a company that directly owns at least 25% of a U.S. paying company's voting stock or 25% of a Vietnam paying company's capital; otherwise 15%
  • Dividends (U.S. RICs and REITs, and Vietnam VREIF) - 15% if
    • Paid by a U.S. Regulated Investment Company (RIC);
    • The beneficial owner is an individual or pension fund holding an interest of not more than 10% in a Real Estate Investment Trust (REIT) or a Vietnamese Real Estate Investment Fund (VRIEF);
    • The dividends are paid with respect to a class of stock that is publicly traded and the beneficial owner of the dividends is a person holding an interest of not more than 5% of any class of the REIT's stock or the VREIF's stock; or
    • The beneficial owner of the dividends is a person holding an interest of not more than 10% in the REIT or VREIF and the REIT or VREIF is diversified (no single interest in immovable property exceeds 10% of total interests in immovable property)
  • Interest - 10%, although a 15% rate applies for interest determined with reference to receipts, sales, income, profits or other cash flow of the debtor or a related person, to any change in the value of any property of the debtor or a related person or to any dividend, partnership distribution or similar payment made by the debtor or a related person
  • Royalties -
    • 5% for royalties paid for the use of, or the right to use, industrial, commercial or scientific equipment; excluding (i) payments for the rental on a bareboat basis of ships or aircraft if such ships or aircraft are operated in international traffic by the lessee; or (ii) payments for the use, maintenance or rental of containers (including trailers, barges, and related equipment for the transport of containers), except to the extent that those containers are used for transport solely between places within the other Contracting State; and
    • 10% for royalties paid for the use of, or the right to use, any copyright of literary, artistic, scientific or other work (including cinematographic films, films or tapes used for radio or television broadcasting), any patent, trademark, design or model, plan, secret formula or process

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 a U.S. real property interest;
  • Gains from the alienation of the capital stock of a company, or of an interest in a partnership, trust or estate, the total asset value of which is comprised directly or indirectly principally (greater than 30%) of immovable property situated in Vietnam; and
  • 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 other property by a resident of a Contracting State may only be taxed by that State.

Limitation on Benefits

The treaty includes a substantial article limiting the benefits of the treaty; Article 23 (Limitation on Benefits). The Article includes the provision that the benefits of the treaty will only be available for a resident of a Contracting State if the resident is a qualified person, which includes:

  • An individual;
  • A Contracting State;
  • A company whose shares are listed on a recognized stock exchange in a Contracting State or where at least 50% of its shares are held by qualified persons, and
  • Other persons, subject to a number of different conditions

Subject to certain conditions, however, a resident that is not a qualified person may still be eligible for the treaty benefits.

Double Taxation Relief

Both countries generally 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. However, the provisions of Article 27 (Exchange of Information and Administrative Assistance) will apply from the date of its entry into force.

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