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Worldwide Tax News

Approved Changes (4)

China

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China Clarifies Application and Requirements for Incentives for High and New Technology Enterprises

The China State Administration of Taxation has published Notice No. 24 of 16 June 2017, which clarifies the application and requirements for the incentives for high and new technology enterprises (HNTE) (previous coverage). The first part of the notice clarifies that:

  • The incentives apply from the year the HNTE status certificate is issued and the enterprise completes all filing procedures;
  • In the year the HNTE status certificate is to expire, the enterprise must make a tax prepayment at the rate of 15% (HNTE incentive rate); and
  • If the HNTE status certificate is not renewed by the end of the year it expires, an additional payment must be made for the difference between the reduced rate and the standard rate (25%).

The second part of the notice clarifies that if an enterprise is suspected of no longer meeting the HNTE status conditions, the enterprise will be subject to review. If confirmed as not meeting the requirements, the HNTE status of the enterprise will be canceled and the tax benefits enjoyed will be recovered.

And lastly, the third part of the notice outlines the documentation that an enterprise must maintain, including:

  • The HNTE status certificate;
  • Documentation supporting that the HNTE status conditions are met;
  • Documentation on the intellectual property;
  • Documentation confirming the main products and services are within the scope of the HNTE incentive scheme;
  • Documentation on total personnel and R&D personnel;
  • Documentation on R&D expenses for the current and previous two years; and
  • Other information that may be required by the provincial tax authority.

The notice applies for the final settlement of tax for the 2017 tax year and subsequent years.

Malaysia

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Malaysia GST Relief on Supplies of Services in Connection with Goods for Export

On 30 June 2017, the Royal Malaysian Customs Department published Minister's Relief 1/2017 for the Goods and Services Tax (GST), which concerns relief from charging of GST on the supplies of services in connection with goods for export to overseas customers. The relief document sets out the supplies and conditions for relief broken down into four main groups:

  • Group 1 – the supply of services directly in connection with goods for export to an overseas customer;
  • Group 2 - the supply of services by a company licensed under section 65A of the Customs Act, 1967 or operating in a free zone, directly in connection with goods for export to an overseas customer;
  • Group 3 - the supply of services directly in connection with goods involved in R&D to an overseas customer; and
  • Group 4 - the supply of tools or machines and services directly in connection with such tools or machines to an overseas customer.

Click the following link for Minister's Relief 1/2017 for the Goods and Services Tax (GST), which is effective from 1 July 2017.

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OECD Releases 2017 Edition of Transfer Pricing Guidelines

On 10 July 2017, the OECD announced the release of the 2017 edition of the Transfer Pricing Guidelines. The 2017 edition incorporates the following revisions of the 2010 edition into a single publication:

  • The substantial revisions introduced by the 2015 BEPS Reports on Actions 8-10 Aligning Transfer Pricing Outcomes with Value Creation and Action 13 Transfer Pricing Documentation and Country-by-Country Reporting. These amendments, which revised the guidance in Chapters I, II, V, VI, VII and VIII, were approved by the OECD Council and incorporated into the Transfer Pricing Guidelines in May 2016;
  • The revisions to Chapter IX to conform the guidance on business restructurings to the revisions introduced by the 2015 BEPS Reports on Actions 8-10 and 13. These conforming changes were approved by the OECD Council in April 2017;
  • The revised guidance on safe harbours in Chapter IV. These changes were approved by the OECD Council in May 2013; and
  • Consistency changes that were needed in the rest of the OECD Transfer Pricing Guidelines to produce this consolidated version of the Guidelines. These consistency changes were approved by the OECD's Committee on Fiscal Affairs on 19 May 2017.

Click the following link for full version of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017.

Slovenia-Liechtenstein

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Slovenia Removes Liechtenstein from List of Non-Cooperative Jurisdictions

Slovenia has published Decision No. 1606 of 7 June 2017 in the Official Gazette. The Decision terminates Decision No. 3537 of 21 July 2008, which had added Liechtenstein as a non-cooperative jurisdiction with respect to information exchange. The effect of the removal is in relation to Articles 59 and 70 of the Corporate Income Tax Act, which include certain tax relief on charitable donations paid, including to EU/EEA countries, and tax relief on dividends paid to EU/EEA countries, subject to conditions. Both of the Articles include the provision that the relief will not apply if paid to a country that does not exchange information that enables the monitoring of payments and taxation of income.

Decision No. 1606 is effective from 17 June.

Proposed Changes (1)

France

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French Constitutional Court to Decide on whether Lack of Tax Credit Carry Forward is Constitutional

According to recent reports, the French Council of State (Conseil d'État - Supreme Administrative Court) has referred to the French Constitutional Council (Conseil Constitutionnel - Constitutional Court) for a preliminary ruling on whether the inability of taxpayers to carry forward excess tax credits is unconstitutional (for foreign or domestic tax withheld). As provided in the General Tax Code, a tax credit for tax withheld on investment income may generally be used in the year in which the income is received, which the Council of State has interpreted as meaning only in the year in which the income is received without the possibility of carry forward. The treatment of tax credits has been challenged several times over the years, and this recent challenge is made on the basis that the lack of carry forward is contrary to the Constitutional principles of equality and property. The Constitutional Council's decision on the matter is expected in the next few months and will be published once available.

Treaty Changes (7)

Austria-OECD

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Austrian Parliament Approves BEPS Multilateral Instrument

According to an Austrian Parliament update, the Federal Council (Bundesrat) approved the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) on 5 July 2017. The MLI was signed by Austria on 7 June 2017, and was approved by the National Council (Nationalrat) on 29 June. Austria must now complete the ratification process and deposit its instrument of ratification in order for the MLI to enter into force. the BEPS MLI will become effective for a particular Austrian bilateral tax treaty:

  • With respect to withholding taxes from 1 January of the year following the MLI's entry into force for both parties; and
  • With respect to all other taxes for tax periods beginning on or after the expiration of a period of six months following the MLI's entry into force for both parties.

Note - For the MLI to apply for a particular treaty, it must be included in Austria's list of covered agreements, as well as in the list of covered agreements of the respective treaty partner. Click the following link for Austria's MLI position, which includes a provisional list of covered agreements (38) and Austria's reservations/notifications on the application of the MLI. The definitive position will be provided when the instrument of ratification is deposited.

Brazil-Belgium

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Brazilian Court Holds Payments for Procurement Services Not Involving Transfer of Technology May Not be Treated as Royalties

A Brazilian Federal Court of Appeals has reportedly issued a decision concerning the treatment of payments for procurement services under the 1972 Belgium-Brazil tax treaty as amended by the 2002 protocol. In particular, the decision concerns the provision added by the 2002 protocol that Article 12 (Royalties) paragraph 3 (definition of royalties) covers payments received for technical assistance or the provision of technical services, and that the tax on remuneration for such assistance/service may not exceed 10% of the gross amount. In a dispute with a taxpayer, the Brazilian tax authority held that procurement services would fall under that provision and would be subject to withholding tax. However, the Court held that payments for procurement services may not be considered royalty payments unless involving the transfer of technology or know-how. If not involving such transfer, payments for procurement services must be treated in accordance with Article 7 (Business Profits), and therefore only taxable in Brazil if attributed to a permanent establishment in Brazil.  

Colombia-Chile-Mexico-Peru

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Pacific Alliance Trade Group Concludes Tax Agreement on Pension Funds

According to recent reports, the Pacific Alliance trade group concluded negotiations for a tax agreement on pension funds during meetings held 29 to 30 June 2017. The trade group includes Colombia, Chile, Mexico, and Peru. The agreement provides for double taxation relief for pension funds and a maximum tax rate of 10% on pension fund investment returns. The agreement will enter into force after the ratification procedures have been completed by each of the respective countries.

Liechtenstein-Monaco

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Update - Tax Treaty between Liechtenstein and Monaco

The income and capital tax treaty between Liechtenstein and Monaco was signed on 28 June 2017. The treaty is the first of its kind between the two countries.

Taxes Covered

The treaty covers Liechtenstein personal income tax, corporate income tax, real estate capital gains tax, and wealth tax. It covers Monaco profit tax on commercial income levied from individual persons and profit tax levied from companies.

Withholding Tax Rates

  • Dividends - 0%
  • Interest - 0%
  • Royalties - 0%

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

Liechtenstein generally applies the exemption method for the elimination of double taxation, while Monaco applies the credit method.

Entitlement to Benefits

Article 27 (Entitlement to Benefits) provides that a benefit under the treaty shall not be granted in respect of an item of income or capital if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the treaty.

Entry into Force and Effect

The treaty will enter into force 30 days after the ratification instruments are exchanged and will apply from 1 January of the year following its entry into force. However, requests for information under Article 25 (Exchange of Information) may be made in relation to taxable periods for which requests for information may have been made under the 2009 Agreement for the exchange of information in tax matters between Liechtenstein and Monaco (taxable periods beginning on or after 1 January 2010).

Mexico-Spain

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Protocol to Tax Treaty between Mexico and Spain to Enter into Force

On 7 July 2017, Spain published in the Official Gazette the amending protocol to the income and capital tax treaty with Mexico as ratified. The protocol, signed 17 December 2015, is the first to amend the treaty and will enter into force on 27 September 2017. The protocol provides for the following changes to the treaty, including certain BEPS-related changes:

  • The preamble is replaced to include a statement that the intention of the Contracting States is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance;
  • Article 2 (Taxes Covered) is amended with respect to the taxes covered for both countries;
  • Article 3 (Definitions) is amended with respect to the terms "competent authority" and "pension fund";
  • Article 4 (Resident) is amended with revisions to the general definition of "resident of a Contracting State" and the addition of provisions regarding dual residence, including that in such cases, residence for the purpose of the treaty will be determined by mutual agreement between the competent authorities;
  • Article 9 (Associated Enterprises) is replaced to include an additional provision requiring that corresponding adjustments be made in a Contracting State when an arm's length adjustment has been made in the other State;
  • Article 10 (Dividends) is amended to provide a 0% withholding tax rate if the beneficial owner is a company directly holding at least 10% of the paying company's capital or is a pension fund; otherwise the rate is 10% (originally 5% rate if holding at least 25%; otherwise 15%);
  • Article 11 (Interest) is amended to provide a 4.9% withholding tax rate in the case of interest paid on a loan of any kind granted by a bank or other financial institution, including investment banks and savings banks, and insurance companies, as well as interest payments on bonds and other debt securities that are regularly and substantially traded on a recognized stock exchange; otherwise 10% (originally - due to an MFN clause - a 5% rate applies on interest derived by banks or insurance companies, and on bonds or securities that are regularly and substantially traded on a recognized stock exchange; a 10% rate applies if the beneficial owner is not a bank or insurance company and the interest is paid by a bank or a purchaser of machinery and equipment in connection with a sale on credit; otherwise 15%);
  • Article 12 (Royalties) is amended with the deletion of paragraph 8, which provides that the provisions of the Article shall not apply when the right or property for which the royalties are paid was agreed to or assigned principally for the purpose of taking advantage of this Article or not for sound commercial reasons;
  • Article 13 (Capital Gains) is amended:
    • To clarify that a Contracting State may tax gains from the alienation of shares deriving at least 50% of their value directly or indirectly from immovable property situated in that Contracting State; and
    • To remove the 25%/12-month ownership thresholds for the taxation of gains from the alienation of shares of a company resident in a Contracting State, while introducing a maximum 10% rate on such gains and providing an exemption if the alienator is a financial institution, an insurance company, a pension fund, or the shares are regularly traded on a recognized stock exchange (exemption not applicable for listed shares of real estate investment companies);
  • Article 22 (Hydrocarbons) is added to provide that a permanent establishment will be deemed constituted when a resident of a Contracting State carries out business activities in the other State consisting of the exploration, production, refining, processing, transportation, distribution, storage, or marketing of hydrocarbons situated in the other Contracting State for a period or periods aggregating more than 30 days within any 12-month period - substantially similar activities carried on by an associated enterprise will be considered in determining if the period limit has been met (subsequent Articles are renumbered accordingly);
  • Article 24 (Elimination of Double Taxation) is replaced (renumbered), which maintains that both Contracting States apply the credit method for the elimination of double taxation, but sets a 10% ownership requirement with respect to Mexico for the credit for Spanish tax on profits out of which dividends are distributed, and in general simplifies the provisions with respect to Spain for the credit for Mexican tax on profits out of which dividends are distributed;
  • Article 27 (Exchange of Information) is replaced to bring it in line with the OECD standard for information exchange (renumbered);
  • Article 28 (Assistance in the Collection) is added (subsequent Articles are renumbered accordingly); and
  • A number of amendments are made to the original final protocol to the treaty, including the addition of a general principal purpose test for treaty benefits, a new MFN clause with respect to Articles 11 (Interest) and 12 (Royalties), and the addition of conditions for an exemption from the taxation of gains from the alienation of shares within group transactions.

The protocol generally applies from the date of its entry into force.

Russia-Serbia

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SSA between Russia and Serbia under Negotiation

According to a release from the Serbian Ministry of Labour, Employment, Veteran and Social Affairs, officials from Russia and Serbia met 6 July 2017 to discuss bilateral relations, including the negotiation of a social security agreement. Any resulting agreement would be the first of its kind between the two countries, and must be finalized, signed, and ratified before entering into force.

Russia-United Kingdom

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Russia Clarifies Existence of a PE under Tax Treaty with the UK

The Russian Ministry of Finance recently published Letter No. 03-08-05/36799 of 14 June 2017 concerning the existence of a permanent establishment of a UK company's representative in Russia under the 1994 income and capital tax treaty between the two countries. In accordance with paragraph 1 of Article 5 (Permanent Establishment), the term "permanent establishment" means a fixed place of business through which an enterprise of a Contracting State wholly or partly carries on business in the other Contracting State. According to the letter, this includes the following conditions:

  • The existence of a place of business, that is, premises or equipment;
  • The place of business is fixed, that is, established in a certain place with a certain degree of permanence; and
  • Commercial activity of the enterprise is implemented through the permanent establishment, meaning that persons who are in some way dependent on the enterprise (personnel) carried out the enterprise's activity in the State through the fixed place of business.

The letter provides that the term "place of business" means any premises, facilities, equipment or installations used for the business enterprise, regardless of whether they are used exclusively for this purpose or not. Place of business may also exist without separate premises, and only requires that sufficient space be available. Also, the commercial activity does not have to be of a productive nature and does not have to be constant, that is carried out without interruption in operations, but the operations must be regular.

Lastly, the letter notes that If the foreign company carries out activities in the Russian Federation of a preparatory and (or) auxiliary character for the benefit of third parties resulting in the formation of a permanent establishment, and there is no compensation provided for such activity, the tax base is determined at the rate of 20% of the expenses of the permanent establishment associated with such activities as per paragraph 3 article 307 of the Russian Tax Code.

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