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Worldwide Tax News

Approved Changes (1)

United States

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U.S. Court Affirms that Economic Substance Doctrine Applies to the Foreign Tax Credit Regime

On 9 September 2015, the U.S. Court of Appeals for the Second Circuit issued a combined opinion affirming that the economic substance doctrine applies to the foreign tax credit regime generally. The opinion is in regard to two cases: The first involving a trust transaction of New York Mellon Corp and alleged tax deficiencies of approximately USD 215 million, and the second involving cross border transactions of American International Group and a refund claim of USD 306.1 million. In its opinion, the Court made the following key points:

  • The economic substance doctrine can be applied to disallow a claim for foreign tax credits, as its purpose is to ensure that a taxpayer's use of a tax benefit complies with Congress's purpose in creating that benefit.
  • A two-prong analysis is employed to consider a transaction's economic substance, which includes:
    • Whether the taxpayer had an objectively reasonable expectation of profit, apart from tax benefits, from the transaction; and
    • Whether the taxpayer had a subjective non‐tax business purpose in entering the transaction.  
  • In calculating pre‐tax profit, it is appropriate for a court both to include the foreign taxes paid and to exclude the foreign tax credits claimed.

Click the following link for the full opinion - Bank of N.Y. Mellon v. Comm'r; Am. Int'l Grp., Inc. v. United States.

Proposed Changes (2)

European Union

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President of the European Commission Delivers State of the Union Address to Parliament

On 9 September 2015, President of the European Commission Jean-Claude Juncker delivered the 2015 State of the Union address to parliament. In the address, Juncker highlighted five domains for which proposals will be presented before the end of the year. Concerning taxation in the EU, Juncker stated the following:

"We need to enhance fairness in our taxation policies. This requires greater transparency and equity, for citizens and companies. We presented an Action Plan in June, the gist of which is the following: the country where a company generates its profits must also be the country of taxation. |P One step towards this goal is our work on a Common Consolidated Corporate Tax Base. This simplification will make tax avoidance more difficult. |P We are also working hard with the Council to conclude an agreement on the automatic exchange of information on tax rulings by the end of the year. |P At the same time, we expect our investigations into the different national schemes to yield results very soon. |P And we are fighting hard to get Member States to adopt the modalities of a Financial Transaction Tax by the end of the year."

Click the following link for the full text of State of the Union 2015: Time for Honesty, Unity and Solidarity.

Iceland

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Iceland Issues 2016 Budget Proposal Including Personal Income Tax Cuts

On 8 September 2015, Iceland's Ministry of Finance and Economic Affairs published the National Budget proposal 2016, which has been submitted to parliament for approval. The tax-related measures of the budget include the cancellation of most import duties and a reduction in individual income tax.

Import Duties

From 2016, the import duties on clothing and footwear will be canceled, and from 2017, all import duties will be canceled expect for those imposed on specified foods.

Individual Income Tax

The lower individual income tax bracket rate will be reduced from 22.86% to 22.68% for 2016, and to 22.50% for 2017(the additional 14.4% municipal rate is unchanged). The middle tax bracket will also be changed, with the additional tax charged in the middle bracket halved in 2016, and the middle bracket removed in 2017.

Treaty Changes (5)

Ecuador-Singapore

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Ecuador Approves Tax Treaty with Singapore

On 8 September 2015, Ecuador's National Assembly approved the pending income tax treaty with Singapore. The treaty, signed 27 June 2013, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Ecuadorian income tax and Singapore income tax.

Residence

If a company is considered resident in both Contracting States, then the competent authorities of both States will determine the company's residence for the purpose of the treaty through mutual agreement. If no agreement is reached, the company will not be considered a resident of either State for the purpose of enjoying the benefits of the treaty.

Permanent Establishment

The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services within a Contracting State through employees or other engaged personnel for the same or connected project for a period or periods aggregating more than 183 days within any 12-month period.

A permanent establishment will also be deemed constituted when an insurance enterprise collects premiums in a Contracting State or insures risks situated in a Contracting State through a non-independent agent. An exemption applies for re-insurance.

Withholding Tax Rates

  • Dividends - 5%
  • Interest - 10% (exemption applies where the beneficial owner is a financial institution)
  • Royalties - 10%

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

Singapore applies the credit method for the elimination of double taxation, while Ecuador generally applies the exemption method. However, for income covered by Articles 10 (Dividends), 11 (Interest) and 12 (Royalties), Ecuador applies the credit method.

Limitation on Benefits

Article 27 (Miscellaneous Provisions) includes limitation on benefits provisions.

The provisions include that the beneficial provisions of Articles 10 (Dividends), 11 (Interest) and 12 (Royalties) will not apply if it was the main purpose of any person concerned with the creation or assignment of the shares, debt-claims or other rights in respect of which the dividends, interest or royalties are paid was to take advantage of those Articles by means of that creation or assignment.

In addition, a resident of a Contracting State will not receive the benefit of any reduction in or exemption from tax provided by the treaty if the conduct of operations of such resident or any person concerned with the operations had the main purpose of obtaining the treaty benefits.

Entry into Force and Effect

The treaty will enter into force once the ratification instruments are exchanged. It will apply in Ecuador from 1 January of the year following its entry into force. It will apply in Singapore in respect of withholding taxes from 1 January of the year following its entry into force and for other taxes from 1 January of the second year following its entry into force.

In respect of Article 25 (Exchange of Information) it will apply in both countries from the date of its entry into force for requests made concerning tax periods beginning on or after 1 January of the year following its entry into force

Finland-Korea, Rep of

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SSA between Finland and South Korea Signed

On 9 September 2015, officials from Finland and South Korea signed a social security agreement. The agreement is the first of its kind between the two countries, and will enter into force after the ratification instruments are exchanged.

Iran-Iraq

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Protocol to Tax Treaty between Iran and Iraq Signed

On 6 September 2015, officials from Iran and Iraq signed a protocol to the 2011 income and capital tax treaty between the two countries. The protocol is the first to amend the treaty, which was signed 6 July 2011 and has not yet entered into force. Both will enter into force after the ratification instruments are exchanged.

Norway-Switzerland

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Protocol to the Tax Treaty between Norway and Switzerland Signed

On 4 September 2015, officials from Norway and Switzerland signed a protocol to the 1987 income and capital tax treaty between the two countries. The protocol is the third to amend the treaty and includes the following main changes:

  • Amends the competent authority in Article 3 (General Definitions);
  • Adds an arbitration clause to Article 25 (Mutual Agreement Procedure); and
  • Replaces Article 26 (Exchange of Information)

The protocol will enter into force once the ratification instruments are exchanged, and will generally apply from that date. However, the protocol provisions regarding Articles 25 and 26 will apply 1 January of the year following its entry into force.

Oman-Spain

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Tax Treaty between Oman and Spain to Enter into Force

The income tax treaty between Oman and Spain will enter into force on 19 September 2015. The treaty was signed 30 April 2014, and is the first of its kind between the two countries.

Taxes Covered

The treaty covers Omani income tax and Spanish individual income tax, corporate income tax, income tax on non-residents, and local income taxes.

Withholding Tax Rates

  • Dividends - 0% if the beneficial owner is a company directly holding at least 20% of the paying company's capital, otherwise 10%
  • Interest - 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;
  • Gains from the alienation of shares or comparable interests deriving more than 50% of their value directly or indirectly from immovable property situated in the other State; and
  • Gains from the alienation of shares or other rights, which directly or indirectly entitle the owner of such shares or rights to the enjoyment 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.

Double Taxation Relief

Both countries apply the credit method for the elimination of double taxation.

Limitation on Benefits

A protocol to the treaty, signed the same date, includes limitation on benefits provisions.

Under the provisions, no treaty relief will be provided in regard to income covered by Article 10 (Dividends), Article 11 (Interest), Article 12 (Royalties), or Article 13 (Capital Gains) if the main purpose or one of the main purposes of any person concerned with the creation or assignment of any shares, debt-claims or other rights or properties from which the income arises was to take advantage of the benefits provided by those articles.

In addition, the provisions of Articles 10, 11, 12 and 13 will not apply if an entity of a Contracting State paying dividends, interest, royalties or capital gains to a resident in the other State has derived its income from a jurisdiction that does not have a Double Taxation Agreement with that other State, and that income is exempt from or not subjected to tax in the first-mentioned Contracting State.

However, this limitation will not apply if the competent authorities of both Contracting States mutually agree that the establishment of the paying entity and the conduct of its operations are founded on sound business reasons and not for the primary purpose of obtaining the treaty benefits.

Effective Date

The treaty applies from the date of its entry into force, 19 September 2015.

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