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Approved Changes (5)

Bahamas

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Bahamas Begins Issuing Fines and Warning Letters for Late VAT Registration

According to a press release issued by the VAT Department of the Bahamas Ministry of Finance, the department has begun issuing fines and warning letters to businesses with declared turnover of BSD 100,000 that have submitted late registration applications. In general, any business that missed the 30 November 2014 deadline by more than 16 days will be subject to a fine of BSD 250 to BSD 10,000. Higher penalties may apply for any business required to register that has failed to do so by 15 January 2015.

VAT is first introduced in the Bahamas from 1 January 2015, the standard rate is 7.5% and applies to the supply of most goods and services in the country.

Ecuador

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Ecuador's Tax Havens List and the Impact on Tax Rates

The Ecuador Internal Revenue Service issued Resolution NAC DGERCGC15-052 on 28 January 2015, and it was published in the Official Registry 3 February. The resolution amends the country's list of jurisdiction considered to be tax havens, which includes over 80 jurisdictions. Two jurisdictions previously included in the list, Hong Kong and Qatar, have been removed.

The tax havens list is important in regard to recent tax reform in Ecuador that was approved and published in December 2014 and applies from 1 January 2015. One of the main changes under the reform is that Ecuadorian companies and branches of foreign companies in Ecuador will be subject to an increased tax rate when owned by residents of a tax haven. In such case, a 25% tax rate applies on income of the company or branch in proportion to the ownership by the tax haven resident. If the tax haven resident's ownership exceeds 50%, or the ownership is not disclosed, all income of the Ecuadorian company or branch is subject to the 25% rate. Ecuador's standard corporate tax rate is 22%

Tax haven residence also has an impact on the applicable withholding tax rates applied in Ecuador. Under the tax reform, a 13% withholding tax rate was introduced on dividends distributed to a resident of a tax haven or low-tax jurisdiction, which is a jurisdiction with a tax rate less than 60% of the Ecuador tax rate. In other cases the withholding tax on dividends is 0%. For other types of income, the withholding tax is generally 25% if paid to a resident of a tax haven or low-tax jurisdiction.

Finland

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Finland to Raise VAT Registration Threshold for 2015

As part of the Supplementary Budget for 2015 announced 9 February 2015, Finland will increase the registration threshold for value added tax (VAT) from annual turnover of €8,500 to annual turnover of €10,000 as part of a tax package to support small businesses. In addition to the increased threshold, the gradual tax relief provided for small businesses with turnover up to €22,500 is increased to up to €30,000.

The threshold only applies for taxpayers resident in Finland. Non-residents are generally required to register in Finland when making taxable supplies in the country regardless of the amount.

The change applies from 1 January 2016.

G20-OECD

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OECD Report To G20 Finance Ministers Published, Including Status Update of the BEPS Project

The OECD has published the Secretary-General Report To G20 Finance Ministers, which was drafted for the recent G20 meeting in Istanbul 9-10 February 2015. The report covers the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project; Tax transparency through information exchange; and Tax and Development. Project. The following summarizes some of the key elements of the report regarding BEPS.

The BEPS Project Overall Progress and Deliverables for 2015

The BEPS project includes 15 action items. Deliverable for the first 7 were completed and endorsed in September 2014, and the remaining 8 will be completed and presented the end of 2015.

The BEPS Project deliverables for 2015 include:

  • Strengthening the rules on controlled foreign corporations (Action 3);
  • Limiting base erosion from interest deductions and other financial payments (Action 4);
  • The second phase of work on countering harmful tax practices (Action 5),
  • Preventing artificial avoidance of 'Permanent Establishment' status (Action 7),
  • Assuring transfer pricing outcomes in line with value creation (Actions 8-10),
  • Establishing methodologies to analyze BEPS data and the actions to address BEPS (Action 11),
  • Requiring taxpayers to disclose aggressive tax planning arrangements (Action 12); and
  • Making dispute resolution more effective (Action 14)

The complete BEPS package will be ready by the G20 Finance Ministers meeting in October 2015, and delivered to the G20 Leaders at their Summit in November. After that, the implementation of the BEPS package will begin.

Aside from an overall update, the report focuses on 3 main elements of the BEPS Project, including:

  • Multilateral Instrument to give effect to BEPS measures (Action 15)
  • Transfer Pricing Documentation, including Country by Country Reporting (Action 13)
  • Countering Harmful Tax Practices (Action 5) - Patent Box Regimes

Multilateral Instrument to give effect to BEPS measures (Action 15)

The mandate to develop a multilateral instruments to give effect to the treaty related BEPS measures has been approved. The instrument will be used to modify existing bilateral tax treaties in order to swiftly implement the tax treaty measures developed in the course of the OECD/G20 BEPS Project.

An ad-hoc group for the drafting of the multilateral instrument will be hosted by the OECD with its first meeting by July 2015. The group is open to all interested States. The final draft of the instrument is to be completed by 31 December 2016, and the term of the mandate will end when the multilateral instrument is open for signature.

Transfer Pricing Documentation, including Country by Country Reporting (Action 13)

The key elements of transfer pricing (TP) documentation standards have been agreed upon, including:

  • The master file containing standardized information relevant for all MNE group members
  • The local file referring specifically to material transactions of the local taxpayer, and
  • The country by country (CbC) report containing certain information relating to the global allocation of the MNE group's income and taxes paid, together with certain indicators of the location of economic activity within the MNE group

Individual jurisdictions will need to implement the standards through domestic legislation, including that the that the master file and local file be filed directly with the tax administrations in each relevant jurisdiction. In regard to implementing CbC reporting standards, certain aspects have been defined, including:

Main CbC Reporting Requirements

  • The CbC report is to be filed by the ultimate parent entities of an MNE groups in their jurisdiction of residence. Key elements of statutory provisions for the requirement will be developed that can be adapted to each jurisdictions legal system.
  • The first fiscal year to which the CbC report requirement applies should be the fiscal year beginning on or after 1 January 2016.
  • MNEs should have 12 months following the close of their fiscal year to submit the report, i.e. first report by 31 December 2017 if following a calendar fiscal year.
  • For the purpose of the CbC report, the fiscal year relates to the consolidated reporting period for financial statement purposes, and not to taxable years or to the financial reporting periods of individual subsidiaries.
  • The recommended turnover threshold for MNEs to be obligated to file the CbC report is global turnover of EUR 750 million, or equivalent in domestic currency.
  • Aside from the revenue threshold, no exemptions should be provided, such as for certain industries, investments funds,  non-corporate entities or non-public corporate entities.

Automatic Exchange of CbC report

  • CbC reports should be automatically exchanged with jurisdictions in which the MNE group operates subject to certain conditions, including:
    • The jurisdiction has legal protections in place for confidentiality,
    • The data is used only for a high level analysis and not as basis to propose adjustments, and
    • Best efforts have been used to legally require MNE group ultimate parents resident in the jurisdiction to file CbC reports
  • In certain cases, when a jurisdiction is unable to provide CbC report information to another jurisdiction even though above conditions have been met, a secondary mechanism would be accepted as appropriate, through local filing or by moving the obligation for requiring the filing of the CbC reports and automatically exchanging these reports to the next tier parent country.

The final work plan for the implementation of the new standard will be developed by April 2015.

Countering Harmful Tax Practices (Action 5) - Patent Box Regimes

In regard to patent box regimes, it has been agreed by all OECD and G20 countries that for preferential tax treatment to apply, there must be nexus between the location of the activities generating the eligible income and the jurisdiction offering the preferential regime. Furthermore it has been agree that a grandfathering clause of 5 years may be applied for current regimes, and that no new entrants will be allowed for non-compliant regimes once new compliant regimes take effect, and no later than 30 June 2016. The latest abolition date of non-compliant current regimes is 30 June 2021.

Further work includes developing the approach to track and trace R&D expenditure, developing additional safeguards, and developing guidance for the definition of qualifying IP assets. This work is to be completed by June 2015.

Click the following link for the full 31-page report.

India

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Indian Tax Tribunal Rules that The Aggregation of Closely Linked Transactions for Transfer Pricing Purposes to be Allowed

In a recently published ruling, India's Pune Income Tax Appellate Tribunal held that related party transactions may be aggregated in certain cases when the transactions are closely linked. The case involved an indirect subsidiary of a U.S. engine company which performs various activities in India including after-sales service and spare part sales. In the tax year at issue, the subsidiary had several related party transactions, including import and export of spare parts, and supplies of IT support services and repair services. It also had a few unrelated party transactions involving spare parts.

When analyzing its transfer pricing, the subsidiary used the transactional net margin method (TNMM) and aggregated its related party transactions because they were considered to be closely linked. When comparing with public uncontrolled comparables, they determined that the transactions were at arm's length in accordance with Indian Tax Law. However, when the transfer pricing audit was conducted, the tax officer held that the transactions could not be aggregated and must be tested separately against the internal TNMM from exports to unrelated parties. Based on this, the related party transaction margins were much lower than the unrelated party transactions, and the tax officer made a transfer pricing adjustment increase of over 25%.

Upon appeal, the Tribunal sided with the taxpayer. According to the Tribunal, although transactions should be tested separately in general, when they are closely linked, aggregation should be allowed. Transactions can be considered closely linked when they originate from a common source, such as an order, contract or agreement, and the nature and terms of the transactions mainly flow from such common source. Based on such conditions, it was the Tribunal's view that the related party transactions were closely linked, and may therefore be aggregated. The tribunal also found that comparing with the internal unrelated party transactions was not appropriate because those transactions were infrequent and under different circumstances.

Treaty Changes (1)

Albania-Hungary

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SSA between Albania and Hungary Signed

According to recent reports, officials from Albania and Hungary signed a social security agreement on 10 December 2014. The agreement is the first of its kind between the two countries, and will enter into force after the ratification instruments are exchanged.

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