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Approved Changes (4)

Cyprus

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Cyprus Abolishes Immovable Property Tax and Makes Transfer Fee Reduction Permanent

The Cyprus parliament has adopted changes to the immovable property tax regime, including:

  • The progressive property tax rates of 0.6% to 1.9% based on 1 January 1980 market values are abolished effective 1 January 2017, and for 2016, property tax payable is reduced by up to 75% depending on when the tax is settled;
  • The 50% reduction in the transfer fee for immovable property introduced in 2015 is made permanent (was scheduled to expire the end of 2016).

A proposed replacement of the 1980-based property tax with a flat rate based on 2013 market values was rejected.

Germany

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German Investment Tax Reform Act Published

The German Investment Tax Reform Act has been approved by parliament and published in the Official Gazette on 26 July 2016. The two main measures are summarized as follows.

Domestic Investment Funds

Domestic investment funds will no longer be treated as transparent with regards to German source dividend income, rental income and real estate capital gains, with the 15% corporate tax plus surcharge applying on such income at the level of the fund. However, other income, such as interest and non-German source income, generally remains exempt. In addition, current trade tax exemptions for funds generally continue to apply.

Investors in domestic funds are subject to tax on distributions and capital gains from fund unit redemptions at normal income or corporate tax rates as the case may be. In order to address double taxation issues, a certain percentage of income from a fund is exempt depending on the nature of the fund and the nature of the investor as follows:

  • Equity funds (minimum 51% investment in stocks):
    • 30% exemption for private individual investors
    • 60% for business individual investors
    • 80% for corporate investors
  • Real estate funds (minimum 51% investment in real estate or real estate companies):
    • 60% exemption if invested in German real estate or real estate companies
    • 80% if invested in non-German real estate or companies invested in non-German real estate
  • Mixed funds (minimum 25% investment in stocks)
    • 15% exemption for individual private investors
    • 30% for individual business investors
    • 40% for corporate investors

In addition to tax on distributions and redemptions, an annual lump-sum tax will be levied at the level of the investor. The lump-sum tax is calculated based on the value of the investor's interest in the fund at the beginning of the year multiplied by 70% of the base interest rate. This pre-determined tax basis is limited to the actual increase in value of the fund for the year. The exemptions outlined above apply, and distributions/redemptions are deducted from the tax basis.

The change in tax treatment of domestic investment funds will apply from 1 January 2018.

Dividend Tax Credit Restriction

Tax credits or refunds for German dividends are no longer allowed unless the shares have been acquired no less than 45 days before the dividend distribution and are held for at least 45 days after the distribution. In addition, the beneficial owner of the shares must bear at least 70% of the economic risk from the shares during the period. The new restriction is meant to address so-called cum/cum trades, where a foreign investor would temporarily loan shares to a German bank or fund in order to obtain a credit or refund on a dividend payment not otherwise available to the foreign investor.

The new restriction applies retroactively from 1 January 2016.

Click the following link for the Investment Tax Reform Act (German language).

India

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Indian Tax Tribunal Holds Customs Valuation May be Used for Transfer Pricing Purposes

The Pune Income Tax Appellate Tribunal recently issued a decision on whether an independent customs valuation may be accepted for transfer pricing purposes. The case involved India-based GKN Sinter Metals Pvt. Ltd., a manufacturer of metal powder precision components.

In the 2007-08 fiscal year, GKN purchased secondhand machinery from its associated enterprise GKN Sinter Metals Lichfield, UK. The transaction was selected for scrutiny and a notice was issued to GKN. In response, GKN held that the transaction was at arm's length based on the customs valuation certificate for the machinery, which had been issued by an independent chartered engineer. However, in reviewing the transaction, the transfer pricing officer (TPO) rejected the certificate and determined that the comparable uncontrolled price method should be applied to determine the arm's length price. This resulted in an upward adjustment and an assessment order being issued, which GKN appealed.

In its decision, the Income Tax Appellate Tribunal sided with GKN. The Tribunal held that if the TPO had any doubt over the valuation, the TPO should have been referred to the departmental valuation officer to determine the correct value. However, no effort was made by the TPO to seek expert opinion and determine the accurate price of the machinery. The Tribunal also noted that a customs valuation from the same independent chartered engineer had been accepted by the TPO in the subsequent year. As a result, the assessment order was overturned.

Pakistan

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Update - Pakistan Budget 2016/17 Sales Tax Changes

The sales tax changes introduced in Pakistan's Budget 2016/17 are effective from 1 July 2016. One of the main changes is an increase in the sales tax registration threshold for manufacturers from total revenue of PKR 5 million to total revenue of PKR 10 million in the previous 12 months. However, the registration requirements in other cases remain unchanged, including:

  • Manufactures whose utility bills exceed PKR 800,000 in any tax period in the previous 12 months;
  • Retailers with total revenue exceeding PKR 5 million in the previous 12 months; and
  • The following businesses regardless of their revenue amount:
    • Importers;
    • Wholesalers and distributors;
    • Commercial exporters (in order to claim input tax refunds on zero-rated exports); and
    • Taxable service providers.

In addition, to the manufactures registration threshold change, a new simplified sales tax regime is introduced for qualifying tier-1 retailers effective 1 July 2016. Under the simplified regime, qualifying retailers may opt to apply sales tax at a rate of 2% on total turnover (standard rate 17%), but lose the ability to claim any input tax on their supplies. For the purpose of the simplified regime, total turnover includes turnover related to both taxable and exempt supplies.

Proposed Changes (2)

Thailand

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Thailand Planning to Extend 7% VAT Rate and Considering VAT Requirements for Non-Resident E-Service Suppliers

The government of Thailand is reportedly planning to extend the 7% value added tax (VAT) rate for an additional year. The current 7% VAT rate is the result of special economic measures taken after the 1997 Asian financial crisis. The reduced rate has been extended multiple times and is currently set to expire 30 September 2016, after which the standard rate of 10% would apply.

In addition to extending the 7% VAT rate, the government is also considering ways to expand the VAT base and improve collections. One approach being considered is the introduction of VAT requirements for non-resident e-service suppliers similar to the requirement introduced in Korean and Japan, which require non-resident suppliers to register for and pay VAT (consumption tax) on B2C e-service supplies made to residents.

United Kingdom

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UK Consultation on Proposals to Clarify Tax Treatment of Partnerships

On 9 August 2016, UK HMRC published a consultation document on areas concerning the tax treatment of partnership that the government has identified as unclear or producing an inappropriate outcome. The main areas and requested feedback include:

  • Clarification of who is the partner chargeable to tax - feedback requested on a proposal that a person will be treated as a partner in a partnership for tax purposes if they are notified to HMRC as partners in the partnership return;
  • Business structures that include partnerships as partners - feedback requested on a proposal that those responsible for paying the tax on a share of partnership profit are treated as partners in the first partnership for the purposes of income tax, capital gains tax and corporation tax;
  • Investment income - tax administration - feedback requested on how administration of partnerships with investment income could be improved, including possible legislative amendments to cater for partnerships solely with investment income;
  • Trading and property income - tax administration - feedback requested on options to protect the Exchequer where details of partners entitled to trading or property business partnership profits are not provided by the partnership, including the option that a payment be made on account to HMRC on behalf of any unidentified partners;
  • Allocation and calculation of partnership profit - feedback requested on proposals to introduce legislation:
    • To confirm that the profit sharing arrangements as set out in the partnership or LLP agreement are the determining factor in identifying the partners’ profit shares;
    • To provide that the basis of allocation of tax adjusted profit should be the same as the allocation of the accounting profit or loss between the partners; and
    • To provide that the profits of company partners liable to income tax will be calculated as if a non- UK resident company were carrying on the business.

Click the following link for the consultation page. The consultation closes 1 November 2016.

Treaty Changes (1)

Czech Rep-Iran

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Tax Treaty between the Czech Republic and Iran has Entered into Force

The income tax treaty between the Czech Republic and Iran entered into force on 4 August 2016. The treaty, signed 30 April 2015, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Czech tax on income of individuals and tax on income of legal persons. It covers Iranian income tax.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted if an enterprise furnishes services in a Contracting 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%
  • Interest - 0% on interest paid in connection with the sale on credit of any merchandise or equipment, and on any loan or credit of whatever kind granted by a bank; otherwise 5%
  • Royalties - 8%

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 or other interests in a company resident 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.

Effective Date

The treaty applies from 1 January 2017.

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