Worldwide Tax News
Chile published Law No. 20.899 in the Official Gazette on 8 February 2016. The legislation simplifies and clarifies certain provisions of the 2014 tax reform (Law No. 20.780), which includes two new tax regimes, the standard attribution regime (AIS) and the partially integrated regime (PIS), as well as new CFC and thin capitalization rules, a new general anti-avoidance rule (GAAR) and others.
The main measures in Law No. 20.899 are summarized as follows.
The AIS regime will apply from 2017 with a 35% withholding tax on taxable income, whether distributed or not, but with a full imputation credit for first category tax (FCT) paid (25% from 2017). Law No. 20.899 includes that the AIS regime is only available to the following entity types if owned by final taxpayers (domiciled individuals or non-residents entities or individuals):
- Personal holding companies with limited liability;
- Permanent establishments of non-residents;
- Limited liability companies (excluding limited joint-stock companies); and
- Stock corporations, provided the bylaws establish that the transfer of the shares to a non-final taxpayer requires the authorization and approval of all other shareholders
In the event a non-final taxpayer becomes an owner/shareholder during the year, the PIS regime will apply from 1 January of that year.
The PIS regime also applies from 2017 with the 35% withholding tax, but only when the profits are distributed. However, higher FCT rates apply (25.5% 2017 and 27% from 2018) and only 65% of the FCT paid may offset the tax, unless the owner/shareholder is resident in jurisdiction with which Chile has a tax treaty in effect.
Law No. 20.899 includes that the PIS regime applies to corporations, limited joint-stock companies, and any other entities not meeting the conditions for the AIS regime. Entities eligible for the AIS regime may also elect to apply the PIS regime. Law No. 20.899 also includes a transition period for the treaty requirement to obtain the full imputation credit for FCT, so that a qualifying treaty need only be signed before 1 January 2017. This transition period will apply up to 31 December 2019, after which the requirement that the treaty be in force will apply.
The optional 32% final tax regime that was introduced for 2015 as part of a transition to the new AIS and PIS regimes, is extended under Law No. 20.899. Under the optional regime, taxpayers can apply a final tax at a rate of 32% on their FUT ledger balance, and the relevant amounts can be withdrawn/distributed without further taxation. Law No. 20.899 also removed the limit that the amount eligible for the 32% rate is the amount exceeding the average withdrawals/distributions in the past three years.
The tax must be declared and/or paid by the end of April 2017.
The new CFC rules are effective from 1 January 2016 (previous coverage). Law No. 20.899 provides that the CFC rules will not apply if:
- The value of the CFC's passive income producing assets does not exceed 20% of the total assets; and
- The passive income of the CFC is subject to an effective tax rate of at least 30% in the jurisdiction where the CFC is domiciled, established or incorporated.
The 2014 tax reform amendments made to the thin capitalization rules generally apply from 1 January 2015. Law No. 20.899 amends the rules by including that that debt between unrelated parties with a maturity period of 90 days or less will be not be included in the annual total indebtedness determination for the purpose of the thin capitalization rules.
In addition, the scope of excessive interest payments to non-resident related parties subject to 35% tax under the thin capitalization rules is expanded to include any payments subject to withholding tax at a rate less than 35% due to a reduction, deduction or exemption established by local law or a tax treaty, and not only payments subject to the reduced 4% withholding tax.
The scope of the GAAR, which applies from 30 September 2015, is limited to transactions executed or concluded on or after that date, even if the transactions have tax consequences after that date. However, if modifications are made to the characteristics or elements of the transaction after that date that would be considered abusive, the GAAR may apply.
A tax credit under the general foreign tax credit rules will be allowed for foreign taxes paid in a jurisdiction where the taxpayer has an indirect investment, with the condition that Chile has entered into a tax treaty or tax information exchange agreement with the jurisdiction.
On 5 February 2016, Resolution Nº DGT-R-01-2016 was published in Costa Rica's Official Gazette. The resolution sets out the audit targets for 2016, which include taxpayers that:
- Have a ratio of net taxable income to gross income that is lower than the industry average;
- Declare nil taxable income or loss for the year;
- Have a ratio of output VAT to input VAT that is lower than the industry average;
- Declare 10% or more of their total income as exempt; or
- Made asset acquisitions during the audit period that are inconsistent with the income declared.
The resolution also sets out the specific industries/sectors to be targeted, including transportation and freight services, telecommunications, tourism services, real estate, construction, agricultural activities, wholesale and retail trade, and several others. In addition, taxpayers in any industry/sector will be targeted if they have filed an amended return as the result of a past audit.
Click the following link for Resolution Nº DGT-R-01-2016 (Spanish).
Australia Launches Public Consultation on Implementation of Transfer Pricing Guidelines under Actions 8-10 of the OECD BEPS Project
On 11 February 2016, the Australian Treasury launched a public consultation on the implementation of the transfer pricing guidelines developed as part of Actions 8-10 of the OECD BEPS Project, which focus on aligning transfer pricing outcomes with value creation. The new guidelines focus on:
- Transfer pricing issues relating to transactions involving intangibles (Action 8);
- Contractual allocation of risks and the resulting allocation of profits to those risks, as well as the level of return on funding provided by group members based on the level of activity undertaken by the funding company (Action 9); and
- Addressing profit allocations resulting from transactions which are not commercially rational, targeting the use of transfer pricing methods in a way which results in diverting profits from the most economically important activities of the MNE group, and neutralizing the use of certain payments to erode the tax base in the absence of alignment with value creation (Action 10).
Click the following link for additional information on the Treasury website, including the consultation paper and instructions for submitting comments. Comments are due by 26 February 2016.
On 9 February 2016, the Obama administration's U.S. Budget proposals for 2017 were released. The main proposals regarding corporate taxation and international reform are summarized as follows.
This proposal includes a 19% minimum tax on foreign income of U.S. multinationals that would be reduced by 85% of the effective foreign tax rate imposed on that income (not below zero). Under the minimum tax, foreign earnings would be subject to tax immediately when earned. The minimum tax is meant to address the indefinite deferral under current law that incentivizes multinationals to locate production overseas and shift and maintain profits abroad.
This proposal includes a one-time transition charge of 14% on untaxed foreign earnings that U.S. companies have accumulated overseas. The earnings subject to the one-time tax could then be repatriated without any further taxation.
This proposal targets inversions by broadening the definition of an inversion under the law, thereby limiting the ability of domestic entities to invert. Under current rules, the tax consequences of inversion transactions depends on the percentage of the shares of the new foreign parent owned by the shareholders of the former U.S. parent following the transaction:
- If the continuing ownership is 80% or more, the transaction is disregarded and the company continues to be treated as a U.S. corporation for U.S. tax purposes; and
- If the continuing ownership is at least 60% but less than 80%, the transaction is treated as an inversion for tax purposes and the foreign status is respected, but other tax penalties apply.
The proposal would broaden the definition of an inversion in two ways:
- The 80% shareholder continuity threshold for domestic corporation status would be reduce to a 50% threshold, and the 60% threshold would be eliminated; and
- Regardless of the level of shareholder continuity, a transaction would be considered an inversion if:
- The fair market value of the stock of the domestic entity is greater than the fair market value of the stock of the foreign acquiring corporation, and
- The affiliated group that includes the foreign acquiring corporation is primarily managed and controlled in the U.S. and does not have substantial business activities in the foreign country.
This proposal would address over-leveraging of a foreign-parented group’s U.S. operations relative to the rest of the group’s operations. This would be achieved by limiting U.S. interest expense deductions to the U.S. subgroup’s interest income plus the U.S. subgroup’s proportionate share of the group’s net interest expense.
This proposal is intended to prevent inappropriate shifting of income from the U.S. to low or no-tax jurisdictions. The proposal would provide that the definition of intangible property for these purposes also includes workforce in place, goodwill, and going concern value, and any other item owned or controlled by a taxpayer that is not a tangible or financial asset and that has substantial value independent of the services of any individual.
This proposal addresses tax avoidance techniques that exploit inconsistencies between U.S. tax law and the tax laws of foreign countries to create double non-taxation. The proposal would deny deductions for interest and royalty payments when such payments are made to related parties pursuant to transactions involving hybrid arrangements that result in income that is not subject to tax in any jurisdiction. In addition, the proposal would eliminate exceptions under current law that lead to situations where shareholders are not subject to tax in either the U.S. or in the related firm’s foreign jurisdiction because an entity is considered a separate corporation under U.S. tax law and a pass-through entity in the other jurisdiction. Such payments would be subject to current U.S. taxation.
This proposal includes the creation of a new general business credit against income tax equal to 20% of the eligible expenses paid or incurred in connection with insourcing a U.S. trade or business. In addition, it would disallow deductions for expenses paid or incurred in connection with outsourcing a U.S. trade or business.
Click the following link for the full Greenbook, which provides explanations of all the 2017 Budget proposals.
On 10 February 2016, officials from Azerbaijan and Sweden signed an income tax treaty. The treaty is the first of its kind directly between the two countries, although the 1981 income and capital tax treaty between Sweden and the former Soviet Union had applied in respect of Azerbaijan, but was terminated.
The treaty will enter into force after the ratification instruments are exchanged. Additional details will be published once available.
On 9 February 2016, officials from Colombia and the United Arab Emirates signed a tax information exchange agreement. The agreement is the first of its kind between the two countries, and will enter into force after the ratification instruments are exchanged.