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Approved Changes (4)

Ecuador

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Ecuador Provides Guidance on Requesting a Higher Deduction Threshold for Certain Related Party Expenses

Ecuador has set out the process for a consultation request for taxpayers seeking to apply a higher threshold for the deduction limit on expenses for certain services paid to related parties.

The deduction limit rules were introduced in the Organic Law to Promote Production and Prevent Tax Fraud published 29 December 2014, and generally apply from 1 January 2015. Under the rules, the deduction of expenses for royalties, and technical, administrative, advisory and similar services paid to related parties in total is limited to 20% of the taxpayer's corporate income tax base including the value of the expenses. However, taxpayers are allowed to request a higher percentage threshold through a consultation request.

If a request is filed by the last business day of March of the tax year and approved, the higher threshold will apply from the date the request was filed. If a request is approved but not filed by the March deadline, the higher threshold will apply from the year following the year in which the request was filed.

Taxpayers are also allowed to file a request concerning a previous assessment. If approved, an amended or substituting return must then be filed based on the higher threshold.

G20-OECD

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G20 Calls on OECD to Prepare BEPS Project Implementation Framework

Following a meeting in Ankara, Turkey held 4-5 September 2015, a G20 finance ministers communiqué was issued that, among other matters, includes a call for the OECD to prepare a framework for the implementation of the outcomes of the BEPS Project by early 2016. The final deliverables of the BEPS project will be presented to the G20 finance ministers on 8 October 2015 and to the G20 leaders during the summit held in Turkey 15-16 November 2015.

The following is the text of the communiqué concerning BEPS.

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In line with our commitments to reach to a globally fair and modern international tax system, we are in the final phase of delivering the G20/OECD Base Erosion and Profit Shifting (BEPS) Action Plan. The final package of all 15 action items is expected by October, and at our next meeting in Lima, we will review this package to submit it to our Leaders in Antalya. The effectiveness of the project will be determined by its widespread and consistent implementation. We will continue to work on an equal footing as we monitor the implementation of the BEPS project outcomes at the global level, in particular, the exchange of information on cross-border tax rulings. We call on the OECD to prepare a framework by early 2016 with the involvement of interested non-G20 countries and jurisdictions, particularly developing economies, on an equal footing. We welcome the efforts by the IMF, WBG, UN and OECD to provide appropriate technical assistance to interested developing economies in tackling the domestic resource mobilization challenges they face, including from BEPS. We continue to work to enhance the transparency of our tax systems, and reaffirm our previously agreed timelines for the implementation of automatic exchange of information. We reiterate our commitment to implement the G20 High-Level Principles on Beneficial Ownership Transparency and look forward to further progress on country implementation. We support the efforts made for strengthening non-G20 economies’ engagement in the international tax area and welcome the decisions taken under the Addis Ababa Action Agenda on international cooperation on tax matters.

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Click the following link for the full Communiqué.

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OECD Publishes Report on Taxation of SMEs in OECD and G20 Countries

On 5 September 2015, the OECD published a report - Taxation of SMEs in OECD and G20 Countries. The following is a summary of the report as provided by the OECD.

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Small and medium sized enterprises (SMEs) are important for their contribution to employment, innovation, economic growth and diversity. This report examines the tax treatment of SMEs, the case for SME preferences, and the use of tax preferences and simplification measures for SMEs in thirty-nine OECD and G20 countries. It finds that many of the tax systems examined provide incentives to incorporate and to distribute income in certain types of capital form. Ideally, taxes should be neutral with regard to the business decisions of SMEs, including decisions related to their creation, form and growth. However, certain features of the tax system may disproportionately affect SMEs, for example, the asymmetric treatment of profits and losses, a bias toward debt over corporate equity, and the higher fixed costs of tax and regulatory compliance for small businesses. This report recommends that measures designed to address these concerns be carefully targeted to affected firms and seek to avoid introducing further distortions and complexity.

United States

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U.S. Publishes Regulations on CFCs, Foreign Partnerships and Active the Rents and Royalties Exception

On 2 September 2015, the U.S. Department of Treasury and IRS published final and temporary regulations concerning CFC anti-avoidance rules, foreign partnerships distributions funded by a CFC, and eligibility for the active rents and royalties exception.

Modifications of Anti-Avoidance Rule in § 1.956-1T(b)(4)

The anti-avoidance rule in § 1.956-1T(b)(4), which generally applies to treat one CFC as holding property actually held by another CFC when one funds the other, is modified to also apply when funded other than through capital contributions or debt. In addition, § 1.956-1T(b)(4) is expanded to include transactions involving partnerships that are controlled by a CFC.

New Rule Governing Foreign Partnership Distributions Funded by CFCs

§ 1.956-1T(b)(5) is added, which treats a loan made by a CFC to a foreign partnership as an obligation (United States property) of a U.S. partner if such partner is also a shareholder of the CFC, and the partnership makes a distribution to that U.S. partner that would not have been distributed if it weren't for the loan.

Active Rents and Royalties Exception to FPHCI

The regulation confirms that for the active rents and royalties exception to apply, a CFC must meet the relevant activities test using its own officers or staff of employees, and allows the relevant activities to be performed in more than one foreign country. For the purpose of the active development tests and the active marketing tests, it is clarified that cost-sharing payments made by a CFC will not cause the CFC's officers and employees to be treated as undertaking the activities of the controlled participant to which the payments are made.

Effective Date

The regulations are effective 2 September 2015.

Click the following link for full details on the U.S. Federal Register website.

Proposed Changes (1)

Taiwan

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Taiwan Considering Changes Concerning the Digital Economy and Transfer Pricing Documentation

According to recent reports, Taiwan's Ministry of Finance (MoF) is currently considering changes in the taxation of e-commerce and transfer pricing documentation requirements based on the outcomes OECD BEPS Project Actions 1 and 13 respectively.

Regarding the digital economy (Action 1), the MoF is considering a number of options, including:

  • Treating a non-resident as having a fixed place of business in Taiwan if it is engaged in e-commerce in the country, even if it has no physical presence;
  • Requiring non-residents engaged in e-commerce in Taiwan to appoint a tax agent for income tax purposes;
  • Introducing a withholding tax system for e-commerce;
  • Introducing a bandwidth-based tax system for e-commerce; and
  • Introducing a VAT registration requirement for non-residents for B2C sales.

Regarding transfer pricing documentation (Action 13), the MoF is considering introducing a master file requirement based on the new OECD guidelines in addition to its current requirements, which include a local file. It is uncertain if the MoF is considering implementing the country-by-country reporting requirement at this time.

Treaty Changes (3)

Armenia-Slovak Republic

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Update - Tax Treaty between Armenia and Slovakia

The income and capital tax treaty between Armenia and Slovakia was signed on 15 May 2015. The treaty is the first of its kind between the two countries.

Taxes Covered

The treat covers Armenia profit tax, income tax and property tax. It covers Slovak income tax on individuals and income tax on legal persons.

Service PE

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

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company directly holding at least 10% of the paying company's capital; otherwise 10%
  • Interest - 10%
  • Royalties - 5%

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 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.

Limitation on Benefits

The treaty includes a limitation on benefits provision (Article 28), which states that the benefits of the treaty will not be granted to companies of either Contracting State if the purpose of such companies was to obtain benefits under the treaty that would not otherwise be available.

Entry into Force and Effect

The treaty will enter into force on the first day of the third month after the ratification instruments are exchanged, and will apply from 1 January of the year following its entry into force.

Azerbaijan-San Marino

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Tax Treaty between Azerbaijan and San Marino Signed

On 8 September 2015, officials from Azerbaijan and San Marino signed an income and capital 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.

Belarus-France

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Tax Treaty between Belarus and France under Negotiation

On 2 September 2015, officials from Belarus and France met to begin negotiations for an income tax treaty. Any resulting treaty will replace the 1985 tax treaty between France and the former Soviet Union, which currently applies in respect of Belarus. The new treaty must be finalized, signed and ratified before entering into force.

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