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Approved Changes (5)

Brazil-Austria

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Brazil Limits Treatment of Austrian Holding Companies as Privileged Regime

Brazil has published Normative Instruction RFB No. 1,683/2016 (NI 1,683), which amends Normative Instruction RFB No. 1037/2010 (the list of low tax jurisdictions and privileged tax regimes) with respect to the Austrian holding company regime. The Austrian regime was added as a privileged tax regime (grey list) in September 2016 (previous coverage). NI 1,683 amends the list to provide that Austrian holding companies will only be considered a privileged tax regime if not carrying on substantive economic activity.

Inclusion in the list of low tax jurisdictions and privileged tax regimes impacts several areas of Brazilian taxation, including withholding tax rates, the deductibility of expenses, thin capitalization rules, CFC rules and transfer pricing.

Cyprus

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Cyprus Incentive for Investment in Innovative and Start-up Companies

On 1 January 2017, a new incentive for investment in innovative and start-up companies entered into force in Cyprus for independent private investors. The incentive provides that a qualifying investment may be deducted from taxable income, with a limit equal to the lower of 50% of taxable income in a year or EUR 150,000. Any surplus may be carried forward for up to five years. Qualifying investments may be made directly or through an investment fund.

Qualifying conditions for an invested company include that the company is operating in Cyprus, has been approved by the Ministry of Finance as an SME, and has spent at least 10% of its operating capital in R&D in at least one of the past three years. For new companies, approval may be made based on business plans.

Czech Rep

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Czech Court Denies Toll Manufacture's Loss Resulting from Low Capacity Utilization in Transfer Pricing Case

The Czech Supreme Administrative Court has recently issued its decision regarding a loss realized by a toll manufacturer due to low capacity utilization. The case involved a Czech taxpayer engaged in toll manufacturer services for its German principal. In determining the transfer pricing for the services, the Czech company used the cost plus method, with the services charged based on a budget without a year-end true-up.

In 2008, the Czech company's capacity utilization was unexpectedly low due to poor market conditions, and as a result it was unable to absorb its fixed costs and realized a loss. However, the tax authority challenged the loss and performed its own benchmarking study using the transactional net margin method (TNMM) to determine the acceptable range of net cost plus mark-ups, and performed an adjustment of the taxpayer's taxable income. The taxpayer appealed, arguing that the loss was a result of market conditions and should be regarded as arm’s length.

In its decision, the court held that in cases of low risk toll manufacturing, the capacity utilization risk should be borne by the principal and not the manufacturer. As such, a low risk toll manufacturer may only end up in a loss position if extra costs result from its own manufacturing inefficiencies. As a result, the realized loss was denied. Regarding the transfer pricing method applied, the Court held that the cost plus method may be justified for companies engaged in low risk toll manufacturing, but ultimately upheld the tax authority's use of the TNMM.

Gibraltar

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Gibraltar Publishes Law for Tax Ruling Exchange in the EU

Gibraltar has published in the Official Gazette the law transposing amendments made to the EU Directive on administrative cooperation in the field of taxation (2011/16/EU) concerning the exchange of cross-border tax rulings and advance pricing agreements (APAs) as per Council Directive (EU) 2015/2376 (previous coverage). With the amendments, Gibraltar will exchange information on rulings or APAs issued, amended, or renewed from 1 January 2017, as well as past rulings and APAs going back to 2012, subject to certain conditions.

Singapore

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Singapore Publishes Fourth Edition Transfer Pricing Guidelines

The Inland Revenue Authority of Singapore (IRAS) has published the fourth edition of its transfer pricing guidelines. The main changes include:

  • Enhanced guidance on arm’s length principle and functional analysis, including:
    • That profits should be taxed where the real economic activities generating the profits are performed and where value is created; and
    • Amended guidance on risk analysis;
  • Enhanced guidance on transfer pricing documentation, including:
    • Reference to the e-Tax guide on Country-by-Country Reporting; and
    • The addition of the requirement to include a list and brief description of advance pricing agreements (APAs) and other tax rulings with the Group Level transfer pricing documentation, and the requirement to include copies of relevant APAs and tax rulings with the Entity Level documentation;
  • Enhanced guidance on MAP and APAs, including in relation to spontaneous exchange of information under BEPS Action 5;
  • The addition of administrative practice for indicative margins on related party loans (may be used as alternative to preparing documentation); and
  • The addition of the note that IRAS takes guidance from the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations as revised by the Actions 8-10: 2015 Final Reports.

Click the following link for the e-Tax Guide - Transfer Pricing Guidelines (Fourth Edition) on the IRAS website.

Proposed Changes (2)

Finland

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Finland Publishes Report on Corporate Tax System Including Recommendation for Improving Efficiency

On 11 January 2016, the Finnish government published a study on corporate taxation, investment, and productivity. The objective of the study was to analyze the problems of Finnish corporate and capital income taxation, and the options for developing the system from the point of view of investments, productivity, and economic growth. An English release on the report summarizes the current issues identified and possible solutions.

According to the study, the current corporate tax regime favors debt as a way of financing investments, increases the required return on equity on self-financed investments, and distorts the allocation of investments by favoring massive investments in machinery and equipment.

The most obvious problem in dividend taxation is the variable tax rates applied to dividends from non-listed companies. The eight-percent limit for return specified in the current tax system is very high, providing, in some cases, an excessive incentive to increase the net asset value of the company. It may have an adverse effect on the optimum allocation of investments.

The report also assesses several optional ways of alleviating the incentive problems associated with the existing regime. They can be divided into two categories:

  • Amendments that offer marginal improvements to the existing system (extension of the business loss relief system and reform of the depreciation and impairment system); and
  • Reforms that affect the fundamental structure of the tax regime (allowance for corporate equity, abolition of interest relief, corporate tax on distributed profits and various provisions models).

Click the following links for the English release and the full report (Finnish language).

Hong Kong

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Hong Kong Consulting on Enhanced Transparency of Beneficial Ownership and New Customer Due Diligence Requirements

The Hong Kong Financial Services and the Treasury Bureau (FSTB) has issued two public consultation documents concerning proposals on beneficial ownership and customer due diligence requirements. The proposals are made in an effort to meet prevailing international standards to combat money laundering and terrorist financing.

The beneficial ownership consultation document seeks views on amendments to the Companies Ordinance to enhance transparency of corporate beneficial ownership. This includes requiring companies incorporated in Hong Kong to provide beneficial ownership information or declare that there are no people with significant control.

The customer due diligence consultation document seeks views on amendments to the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance. This includes extending due diligence and record-keeping requirements to solicitors, accountants, real estate agents, and trust or company service providers.

Comments for both consultation documents are due by 5 March 2017.

Treaty Changes (2)

Germany-Macedonia

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Update - Protocol to Tax Treaty between Germany and Macedonia

The protocol to the 2006 income and capital tax treaty between Germany and Macedonia was signed on 14 November 2016. The protocol is the first to amend the treaty and provides for the replacement of Article 26 (Exchange of Information) to bring it in line with the OECD standard for information exchange. The protocol will enter into force once the ratification instruments are exchanged and will apply from 1 January of the year following its entry into force.

Lebanon-Saudi Arabia

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Tax Treaty between Lebanon and Saudi Arabia under Negotiation

According to a release from the Lebanese government, negotiations are underway for an income tax treaty with Saudi Arabia. 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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