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Approved Changes (5)

China

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China Introduces Tax Deferral for Noncash Investments

On 8 January 2015, China's Ministry of Finance and State Administration of Taxation issued Circular (2014) 116, which introduces tax deferral for resident enterprises to recognize gains from noncash investments over five years.

In China, investments made in the form of noncash property are separated into the disposal of the property and the investment. Prior to Circular 116, noncash investment resulted in full taxation of the gain from the disposal of the noncash property in the year of disposal (investment).

The key points of Circular 116 include:

  • Only China resident enterprises making noncash investments in other resident enterprises or for the establishment of new resident enterprises may recognize the gain over five years
  • The gain on noncash property investments is equal to the fair market value of the property less the tax basis of the noncash property
  • The gain is realized once the investment agreement has taken effect and the investment registration is completed, and the initial 1/5 of the gain recognized per tax year is included in the taxpayer's gross income in that year
  • The initial tax basis of the investment for the investor is equal to the tax basis of the noncash property and is increased by the amount of gains recognized by the investor in each of the five years
  • If the investor disposes of the investment, receives a return on the investment, or is liquidated within the five-year period, the deferral of the recognition of gains will be terminated and the remainder will be recognized immediately, while the tax basis of the investment will be increased by the amount of recognized gains

The provisions of Circular 116 apply from 1 January 2015, including for noncash property investments that have not yet been settled before that date.

Ecuador

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Ecuador's Regulations for Tax Stability Contracts for Large-Scale Investment Published and In Force

On 29 December 2014, Ecuador published the Organic Law to Promote Production and to Prevent Tax Fraud in the Official Gazette. The law includes  the regulations for tax stability contracts.

The regulations primarily apply for large-scale mining investments of at least USD 100 million, but can also apply to other sectors upon request. Companies with stability contracts benefit from a fixed 22% income tax rate when the investment is in metal mining exploitation, and a 25% income tax rate for other sectors. Fixed rates may also be provided for other direct and indirect taxes subject to certain conditions.

The regulations apply from 1 January 2015.

Egypt

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Egypt Requires E-Payment of Corporate Tax for Joint-Stock Companies and State-Owned Entities

On 16 December 2014, Egypt published Decree Law 201 2014 in the Official Gazette. The Decree Law introduces the requirement that joint-stock companies and state-owned enterprises settle their corporate tax liabilities via the country's e-payment system. The system was introduced in 2013 but is not obligatory aside from the recent change.

The Decree Law applies from the date it was published.

Italy

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Italy Missed the Implementation Deadline for the EU Telecommunications, Broadcasting, and Electronic Services VAT Changes

According to recent reports, Italy missed the deadline for implementing the required legal changes needed for the EU's change in the place of supply rules for B2C telecommunications, broadcasting, and electronic services made to persons located in the EU. Under the new rules, the place of supply is the location of the consumer.

Italy is the only EU country that failed to meet the deadline, which includes the establishment of the mini one stop shop (MOSS) through which companies can manage the VAT payments for all EU countries instead of registering in each one where they have B2C sales.

According to the reports, the required decree has been drafted and will be approved and published in the near future. It is expected the required changes will be applied retroactively from 1 January 2015.

Malaysia

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Malaysia Clarifies Qualifying Plant and Machinery for Claiming Capital Allowances

On 7 January 2015, the Inland Revenue Board of Malaysia posted Public Ruling 12/2014 (date 31 December 2014), which clarifies whether an asset is qualifying plant and machinery for the purpose of claiming capital allowances..

For determining statutory income, capital allowances, balancing allowances or balancing charges can be deducted from or added to the adjusted income of a business source for the basis period for a year of assessment. Capital allowances, which include initial and annual allowances, may be claimed by taxpayers who have incurred qualifying capital expenditure on assets used for business purposes.

In determining the capital allowance amount, Schedule 3 of the ITA and P.U.(A) 52/2000 includes the allowance percentages for the three main categories of assets as follows:

  • Heavy Machinery and Motor Vehicles - 20% Initial allowance and 20% Annual allowance
  • Plant and Machinery - 20% Initial allowance and 14% Annual allowance
  • Others (office equipment, furniture, etc.) - 20% Initial allowance and 10% Annual allowance

The rates generally apply regardless of industry, except for assets eligible for industrial building allowance, agriculture allowance, forest allowance and certain other specified assets.

In determining if an asset is considered plant and machinery for capital allowance purposes, the guidance defines plant as the equipment used by a person for carrying on his business but does not include stock in trade, and states that the basic characteristic of machinery is that it has moving parts. Whether an assets qualifies as machinery is easily determined, but certain tests should be applied when determining if an asset qualifies as plant. The tests include a functional test and a premise test:

Functional Test

Functional test or business use test is applied when the type of business carried on and the role of an asset in the business activity are taken into account. If an asset meets the function as a tool that must be used in carrying on a business, then the asset qualifies as plant eligible for capital allowances.

Premise Test

An asset that is used and functions as a premise or a setting within which a business is carried on is not eligible for capital allowances.

Click the following link for additional information in the full Public Ruling 12/2014, including examples.

Treaty Changes (2)

Bermuda-Poland

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TIEA between Bermuda and Poland to Enter into Force

According to recent reports, the ratification instruments for the tax information exchange agreement between Bermuda and Poland have been exchanged, and the agreement will enter into force on 15 march 2015. The agreement is the first of its kind between the two countries, and generally applies from the date of its entry into force.

Cook Isl-South Africa

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TIEA between the Cook Islands and South Africa Approves has Entered into Force

On 8 January 2015, the tax information exchange agreement between the Cook Islands and South Africa entered into force. The agreement, signed 25 October 2013, is the first of its kind between the two countries and applies for criminal tax matters from the date of its entry into force, and for other tax matters for tax periods beginning on or after that date.

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