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Approved Changes (5)

Australia

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Australia Publishes Guidance on CGT Withholding for Indirect Property Interests

On 9 May 2017, the Australian Tax Office (ATO) published brief guidance on indirect Australian real property interests for the purpose of foreign resident capital gains tax withholding. Subject to certain conditions, the 10% non-final withholding tax applies for Australia property disposals under contracts entered into from 1 July 2016. This includes disposals of indirect Australian real property interests, which are membership interests in an entity that, subject to exclusions, satisfies two tests:

  • Non-portfolio interest test; and
  • Principal asset test.

Membership interests include shares and units in taxable Australian real property rich (over 50%) trusts or companies.

Transactions involving indirect interests may be excluded if on an approved stock exchange or crossing system, the market value of company title interests is less than a specified value, or the vendor is in external administration.

Denmark

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Danish Ruling Holds Limited Supervisory Activities for Subcontracted Project Do Not Constitute PE

On 9 May 2017, the Danish tax authority (SKAT) published a binding ruling concerning the existence of a permanent establishment in Denmark as a result of supervisory activities for subcontracted construction work. The rulings was requested by Y BV, a company resident in country A that won a contract that included the construction of a special structures in Denmark (company name and country not provided). Since Y BV was unable to construct the special structure in Denmark itself, it subcontracted the work and sent employees to Denmark to supervise and monitor the process and report back. Time spent in Denmark on the project was approximately 18 months.

In the ruling, the Tax Board found that no PE existed for Y BV. The Tax Board determined that although the time spent may result in a PE, the actual activities of the employees were limited and included no decision-making power. As such, it was determined that the activities should be considered auxiliary in nature and as per paragraph 4 of Article 5 (Permanent Establishment) of the tax treaty with country A (based on the OECD Model), no PE existed.

Hungary

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Hungary to Implement Online Sales Invoicing System on Trial Basis from July 2017 with Full Implementation in 2018

The Hungarian Ministry for National Economy has announced it is planning to launch the new online sales invoice data reporting system on a trial basis from 1 July 2017, while delaying the full requirement to 1 July 2018. The announcement also notes that existing summary reporting requirements will continue to apply unchanged and the HUF 1 million threshold will not be reduced to HUF 100,000 as planned.

The new online system requires real-time reporting of all B2B transaction invoices where value added tax (VAT) of HUF 100,000 (~USD 350) or more is charged; essentially all B2B invoices of HUF 370,000 (~USD 1,300) or more net of VAT at standard 27% rate. The requirements will apply for domestic companies, as well as foreign companies registered for VAT in Hungary, including where invoicing is managed overseas. Failing to comply with the new requirements may result in fines of up to HUF 500,000 (~USD 1,750) per invoice.

India

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India Tax Tribunal Holds No Notional Interest on Convertible Loan

A recent decision of the Ahmedabad Income Tax Appellate Tribunal has been published concerning whether an adjustment may be made for notional interest on a convertible loan granted by an Indian parent to its foreign subsidiary. The case involved India-based Cadila Healthcare Ltd. (Cadila), a pharmaceuticals company, and the granting of convertible loans to its Irish subsidiary Zydus International Pvt. Ltd. (Zydus). Under the terms of the loans, Cadila had the option for repayment with interest from the date the loans were granted or for conversion into equity at par at any time until the date of maturity.

In reviewing the arrangements, the transfer pricing officer determined that because interest had not paid in the years concerned, an adjustment must be made for notional interest income at the prevailing market rate. Such notional interest should be accounted for regardless of any subsequent exercise of the option to convert into equity. The officer also found that the Zydus had unduly benefited from the receipt of interest and dividend income from loans granted and investments made in other entities using the funds loaned by Cadila while not paying any interest to Cadila.

In its decision, the Income Tax Appellate Tribunal found in favor of Cadila. The Tribunal held that the loans cannot be considered as simple loans but rather as quasi-capital whose actual benefit is not the potential interest income but the opportunity to own capital on favorable terms. In the event the option to convert to equity is not made, Cadila will then be entitled to interest at market rates. Regarding the claim that interest should be paid given the interest and dividend income of Zydus, the Tribunal held that any income derived from the use of funds has no relevance in determining the arm's length price in raising the funds. As such, the Tribunal determined no adjustment for notional interest should be made.

Russia

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Russia Clarifies Controlled Transaction Notification Requirement for Guarantees

The Russian Ministry of Finance has issued Letter No. 03-12-11/1/26759, which clarifies the notification requirements for controlled transactions with regard to the provision of guarantees. Under Russian Law, taxpayers are required to notify the tax authority on controlled transactions executed during the year, which may include guarantees. However, the letter clarifies that due to changes introduced by Law No. 401-FZ effective 1 January 2017 (previous coverage), the provision of guarantees are no longer considered controlled if all parties to the transaction are Russian legal entities that are not banks, and in such case the transaction no longer needs to be notified to the tax authority (regardless of the date the relevant contracts were concluded).

Proposed Changes (1)

United Kingdom

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UK Labour Party Planning Reverse of Corporation Tax Cuts to Fund Education

The UK Labour Party has announced plans to reverse cuts in the corporation tax rate in order to fund various education measures and programs. The plan includes increasing the corporation tax rate from its current 19% to 21% in 2018-19, 24% in 2019-20 and 26% in 2020-21. The small profits rate, payable by firms with profits below GBP 300,000, would be 20% in 2018-19 and 21% in 2020-21.

Note - The UK corporation tax rate has been steadily reduced from 30% over the past 10 years, with the most recent reduction from 20% to 19% effective 1 April 2017 and a further reduction to 17% scheduled to be effective 1 April 2020. The previous small profits rate of 20% effectively ceased to apply with the reductions in the standard rate.

Treaty Changes (2)

Jordan-Thailand

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Jordan and Thailand Continue Tax Treaty Negotiations

Officials from Jordan and Thailand met 9 to 11 May 2017 for the second round of negations for an income tax treaty. The treaty will be the first of its kind between the two countries, and must be finalized, signed and ratified before entering into force.

Romania-China-Uzbekistan

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Romania Ratifies Pending Tax Treaty with China and Protocol to Tax Treaty with Uzbekistan

On 8 May 2017, Romanian President Klaus Iohannis signed the decrees ratifying the pending income tax treaty with China and the pending protocol to the tax treaty with Uzbekistan.

The treaty with China, signed 4 July 2016 (previous coverage), will enter into force 30 days after the ratification instruments are exchanged and will apply from 1 January of the year following its entry into force. Once in force and effective, it will replace the 1991 tax treaty between the two countries.

The protocol to the treaty with Uzbekistan, also signed 4 July 2016 (previous coverage), will enter into force once the ratification instruments are exchanged and will apply from 1 January of the year following its entry into force.

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