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Approved Changes (3)

France-European Union-Luxembourg

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CJEU Holds EU Law Precludes French Anti-Abuse Restrictions on Dividend Exemption under Parent-Subsidiary Directive

On 7 September 2017, a judgment was issued from the Court of Justice of the European Union (CJEU) concerning the French anti-abuse provision that limits the dividend exemption where dividends are paid to a parent company resident in another EU Member State and that parent is controlled by residents of a non-EU State. In its judgment, the CJEU agreed with an earlier Advocate General opinion that the French anti-abuse provision is not consistent with EU Law (previous coverage).

The case involves a French resident company wholly owned by a Luxembourg company that was indirectly controlled by a company resident in Switzerland by way of a Cyprus intermediary company. In 2005 and 2006, dividend distributions were made by the French company to its Luxembourg parent, for which an exemption was claimed. However, the French tax authorities denied the exemption based on the anti-abuse provision included in Article 119b(3) of the French General Tax Code. Article 119b(3) provides that the exemption does not apply where the distributed dividends are for the benefit of a legal person controlled directly or indirectly by one or more residents of States that are not members of the EU, unless that legal person provides proof that the principal purpose or one of the principal purposes of the chain of interests is not to take advantage of the exemption. Because the beneficiary was unable to provide proof, the exemption was denied.

In its judgment, the CJEU ruled that:

Article 1(2) of Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, as amended by Council Directive 2003/123/EC of 22 December 2003, first, and Article 49 TFEU, second, must be interpreted as precluding national tax legislation, such as that at issue in the main proceedings, which subjects the grant of the tax advantage provided for by Article 5(1) of that directive — namely, the exemption from withholding tax of profits distributed by a resident subsidiary to a non-resident parent company, where that parent company is directly or indirectly controlled by one or more residents of third States — to the condition that the parent company establish that the principal purpose or one of the principal purposes of the chain of interests is not to take advantage of that exemption.

India

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India Extends Deadline for Filing GST Returns for July 2017

Due to technical issues with India's GST filing portal, the GST Council reportedly decided on 9 September 2017 to extend the due date for Form GSTR-1 (return on outward supplies) for the month of July to 3 October 2017 for taxpayers with aggregate turnover in excess of INR 1 billion and to 10 October 2017 for other taxpayers. For Forms GSTR-2 (return on inward supplies) and GSTR-3 (final monthly return), the deadlines for July are extended to 31 October and 10 November 2017, respectively. Deadline extensions for the month of August will be communicated later.

Note - According to a notification from the Central Board of Excise and Customs (CBEC) dated 5 September 2017, the initial deadline for July was extended to 10 September and the initial deadline for August was extended to 5 October. Notification of the additional extension made by the GST Council was not posted on the CBEC website at the time of writing, but will likely be posted in the near future.

Pakistan

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Update - Pakistan Publishes Overview of Finance Act 2017 Amendments

The Pakistan Federal Board of Revenue has published Circular No. 4 of 2017, which provides an overview of amendments made in the Income Tax Ordinance 2001 by the Finance Act 2017, which was published in the Official Gazette on 21 June 2017 (previous coverage). The overview covers 54 amendments. The main amendments include:

  • The introduction of an online marketplace concept, which includes a 0.5% minimum tax and an advance tax of 5% on brokerage and commission for a person running an online marketplace, which is a final tax;
  • The introduction of the concept of technology start-ups, which subject to certain conditions are eligible for a three-year tax exemption and certain other benefits;  
  • The extension of the super tax for the 2017 tax year at a rate of 3% for every person (other than a banking company) with income of PKR 500 million or more and 4% for every banking company;
  • A change in the undistributed profits tax for public companies from the 2017 tax year, so that a tax of 7.5% of accounting profit before tax will apply if the company fails to distribute at least 40% of its after tax profits in the form of cash or bonus shares within 6 months of the end of the tax year;
  • The abolition of the fixed tax regime for builders and developers, with the normal tax regime applying from the 2018 tax year;
  • An increase in the allowed deduction of advertisement and publicity expense of pharmaceutical companies from 5% of turnover to 10% of turnover;
  • The withdrawal of 3% tax credit for manufacturers that make at least 90% of their sales to sales tax registered persons;
  • The extension of the tax credit for companies that list on any registered Pakistan stock exchange to a 20% credit for two years plus a 10% credit for an additional two years;
  • An increase in the rate of minimum tax from 1.0% to 1.25%, with the reduced rates for certain classes of taxpayers remaining intact;
  • The effective replacement of the concept of provisional assessment in the case of failure to submit a tax return, for which no appeal could be made, with the tax authority now empowered to make a best judgment assessment in case of failure to submit a complete return;
  • The extension of the facility of exemption certificates for non-residents with a permanent establishment in Pakistan to allow the tax authority to issue exemption certificates with respect to payments received for the execution of a contract or sub-contract under a construction, assembly or installation project in Pakistan, including supervisory services, as well as for related construction or service contracts and contracts for advertising services rendered by TV satellite channels;
  • The introduction of new provisions with regard to the reporting of financial account information by financial institutions for the purpose of the OECD Common Reporting Standard;
  • The establishment of a new Directorate-General of Transfer Pricing to conduct transfer pricing audits for the determination of arm's length pricing between associated parties (separate from general tax audit);
  • The introduction of new penalties in relation to the documentation requirements introduced by the Finance Act 2016 (Master/Local file, CbC report, and other documentation) (previous coverage) including a penalty of PKR 2,000 per day of delay for failure to furnish information or a CbC report (minimum penalty of PKR 25,000), and a penalty of 1% of the value of transactions for which documentation should be maintained if not maintained;
  • The extension of the scope of advance ruling to included non-resident taxpayers with a permanent establishment in Pakistan; and
  • The amendment of several tax rate schedules, including:
    • An increase in the tax rate on dividend income from a mutual fund to 12.5% if the dividend amount is greater than PKR 2.5 million; otherwise the rate remains 10%;
    • An increase in the standard tax rate on dividend income from 12.5% to 15% (for advance tax the rate is 15% for filers and 20% for non-filers);
    • An increase in the advance tax on dividends to be deducted by a stock fund to 12.5%, while the rate of tax to be deducted by a money market fund, income fund, REIT scheme or any other fund remains 25% for companies;
    • A change in the tax rate on capital gains from the disposal of securities acquired on or after 1 July 2016 to a flat rate of 15% for filers and 20% for non-filers;
    • A reduction in the withholding tax rates on payments to distributors of fast moving consumer goods from 3% and 3.5% to 2% and 2.5% for companies and non-companies respectively; and
    • An increase in non-filer withholding tax rates by 1% to 2.5% for several different transactions, including certain transactions involving payments to non-residents or their permanent establishments.

Most changes generally apply from 1 July 2017.

Proposed Changes (2)

Singapore

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Singapore Summary of Responses to Public Consultation on Draft Income Tax (Amendment) Bill 2017

On 7 September 2017, the Singapore Ministry of Finance issued a release on the summary of responses to the public consultation on the draft Income Tax (Amendment) Bill 2017 (previous coverage).

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1. The Ministry of Finance held a public consultation exercise on the draft Income Tax (Amendment) Bill 2017 from 19 June - 10 July 2017. The draft Bill proposes legislative amendments to effect tax changes announced in Budget 2017 and to introduce Transfer Pricing Documentation requirements, as well as other changes arising from the periodic review of the income tax system.

2. Most of the feedback received focused on the following tax changes:

  • Clarify the Comptroller’s power, and introduce a surcharge to enforce arm’s length principle for transfer pricing
  • Introduce transfer pricing documentation requirements and penalties for non-compliance
  • Introduce a tax framework for company re-domiciliation
  • Introduce Financial Reporting Standard ("FRS") 109 tax treatment

Common feedback are highlighted in Annex A.

3. Of the 131 suggestions received, 56 were accepted and consequent revisions were made to the draft text of the Bill. The remaining suggestions were not accepted, as they were inconsistent with the legislative drafting conventions or the policy objectives of the proposed legislative changes.

4. MOF would like to thank all individuals and organisations who have taken the time and effort to provide their inputs.

United Kingdom

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UK Parliament Publishes Finance Bill 2017-19

On 8 September 2017, the UK Parliament published the Finance Bill 2017-19 as introduced in the House of Commons. As previously reported, the Bill includes several measures that were intended to be adopted as part of the Finance Act 2017 but were removed, including new loss relief provisions, interest deduction restrictions, and others, which in most cases will apply with retrospective effect from April 2017. After it is approved by the House of Commons, the Bill must then be approved by the House of Lords before receiving Royal Assent, which is expected near the end of the year.

For more information, click the following link for the Finance Bill 2017-19 webpage on the UK Parliament website.

Treaty Changes (4)

Argentina-Singapore

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Tax Treaty between Argentina and Singapore to be Signed

Argentina's Ministry of Foreign Affairs has announced that on 4 September 2017, officials from Argentina and Singapore met to discuss bilateral relations, including the signing of an income tax treaty that has been under negotiation. The treaty will be the first of its kind between the two countries, and must be finalized, signed, and ratified before entering into force.

Bahamas-Georgia

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TIEA between Bahamas and Georgia has Entered into Force

According to recent reports, the tax information exchange agreement between the Bahamas and Georgia entered into force on 1 September 2017. The agreement, signed 27 October 2016 by the Bahamas and 4 November 2016 by Georgia, is the first of its kind between the two countries and generally applies from the date of its entry into force.

Japan-Russia

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Tax Treaty between Japan and Russia Signed

On 7 September 2017, officials from Japan and Russian signed a new income tax treaty. Once in force and effective, the new treaty will replace the 1986 tax treaty between Japan and the former Soviet Union as it applies in relations between Japan and Russia.

Taxes Covered

The treaty covers Japanese income tax, corporation tax, special income tax for reconstruction, local corporation tax, and local inhabitant taxes. It covers Russian tax on profits of organizations and tax on income of individuals.

Residence

If a company is considered resident in both Contracting States, the competent authorities of both States will determine its residence for the purpose of the treaty through mutual agreement based on its place of head or main office, its place of effective management, the place where it is incorporated or otherwise constituted, and any other relevant factors. If no agreement is reached, the company will not be entitled to any relief or exemption from tax provided by the treaty.

Permanent Establishment

The PE article includes anti-PE avoidance measures as per BEPS Action 7.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company that has directly owned at least 15% of the paying company's voting power for a period of at least 365 days ending on the date on which entitlement to the dividends is determined; otherwise 10%
  • Interest - 10% on interest that is determined by 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, or any other interest similar to such interest; otherwise 0%.
  • Royalties - 0%

Note - Article 10 (Dividends) also includes the provision that dividends derived by a resident of a Contracting State from shares of a company or comparable interests may be taxed in the other State at a rate up to 15% if, at any time during the 365 days preceding the payment of the dividends, the shares or comparable interests derived at least 50% of their value directly or indirectly from immovable property situated in the other State.

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 any property, other than immovable property, forming part of the business property of a permanent establishment in the other State; and
  • Gains from the alienation of shares or comparable interests if, at any time during the 365 days preceding the alienation, the shares or comparable interests derived at least 50% of their value directly or indirectly from immovable property situated in the other State (exemption if the shares or comparable interests are traded on a recognized stock exchange and the alienator together with related parties own in the aggregate 5% or less of the shares or comparable interests).

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.

Entitlement to Benefits

Article 21 (Entitlement to Benefits) includes substantial provisions regarding a resident's entitlement to benefits under the treaty. This includes that a resident of a Contracting State will only be entitled to the withholding tax exemptions provided under Articles 10 (Dividends), 11 (Interest), and 12 (Royalties) if the resident is a qualified person, which includes:

  • An individual;
  • A Contracting State, any subdivision or local authority thereof, or an agency or instrumentality of such Contracting State, subdivision or local authority;
  • A company or other entity, if its principal class of shares is regularly traded on one or more recognized stock exchanges;
  • A pension, if at least 50% of its beneficiaries, members, or participants are individuals who are residents of either Contracting State; and
  • A person other than an individual, if, on at least half of the days of any 12-month period during which the benefit would otherwise be accorded, at least 50% of the shares of the person are directly or indirectly owned by residents of the same Contracting State that meet the conditions for qualified persons above.

Provisions are also included whereby a resident of a Contracting State may still be entitled to the exemption benefits, subject to certain conditions, including for pension funds and when engaged in certain business activity, as well as when the competent authority of the Contracting State to which the benefit is claimed determines that the establishment, acquisition, or maintenance of such resident and the conduct of its operations did not have as one of the principal purposes the obtaining of such benefit.

Article 21 also includes the provision that the benefits of the treaty may be denied when a resident of one Contracting State derives income from the other State and:

  • The first-mentioned State treats the income as attributable to a permanent establishment of that resident in a third jurisdiction;
  • The profits attributable to the PE are exempt from tax in the first-mentioned State; and
  • The tax paid on the income in the third jurisdiction is less than 60% of the tax that would have been paid in the first-mentioned State had the income not been attributable to the permanent establishment.

Lastly, Article 21 includes a general anti-abuse provision, which provides that a benefit under the treaty will not be granted in respect of an item of income 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 would be in accordance with the object and purpose of the relevant provisions of the treaty.

Double Taxation Relief

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

Arbitration

The final protocol to the treaty includes the provision that if Russia agrees to include an arbitration provision in an agreement or convention with a third jurisdiction signed after the date of signature of the Japan-Russia tax treaty, then the governments of Japan and Russia will begin negotiations for an amending protocol to insert an arbitration provision in the Japan-Russia treaty.

Entry into Force and Effect

The treaty will enter into force 30 days after the ratification instruments are exchanged, and will generally apply from 1 January of the year following its entry into force. However, Articles 25 (Exchange of Information) and 26 (Assistance in the Collection of Taxes) will apply from the date of the treaty's entry into force without regard to the date on which the taxes are levied or the taxable year to which the taxes relate. The 1986 tax treaty between Japan and the former Soviet Union will cease to apply between Japan and Russia from the date the new treaty applies and will terminate on the last such date.

Paraguay-Spain

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Paraguay and Spain to Resume Tax Treaty Negotiations

According to a release from the Paraguay Ministry of Finance, officials from Paraguay and Spain met 5 September 2017 to discuss bilateral relations, including Spain's willingness to move forward with negotiations for an income tax treaty. Any resulting treaty would be the first of its kind between the two countries, and must be finalized, signed, and ratified before entering into force.

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