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Approved Changes (3)

Australia

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Australia Developing Marketing Hub Transfer Pricing Guide

On 8 July 2015, the Australian Tax Office (ATO) announced it is developing a guide on the self-assessment of transfer pricing in respect to related party offshore marketing hubs, which is an area facing issues with arm's length compliance. The following is from the ATO.

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What are we doing?

We are committed to providing taxpayers with ways to mitigate their risk and help them with self-assessment and compliance. We will be developing a practical guide so taxpayers can assess the compliance risk associated with their marketing hub arrangements.

We will consult with interested parties from August to develop and issue the guide. It will aim to provide practical information for taxpayers including framing questions and quantitative indicators ('risk flags') that taxpayers should consider when assessing their level of compliance risk.

We are also reviewing a number of hub arrangements. In examining the economic substance of these arrangements, we are considering:

  • all of the facts and circumstances, such as the economic and commercial context of the arrangement
  • the hub's object and effect, from a practical and business point of view
  • the conduct of all parties, including the functions performed, assets used and risks assumed by each of them
  • whether independent parties operating in comparable circumstances would enter into similar arrangements.

What is our concern?

In some circumstances it appears the amount charged by the marketing hub to the Australian company is not what arm’s length (or independent) parties would pay.

In particular, we are concerned that:

  • the economic substance of these arrangements may be materially different to the associated legal form
  • the pricing for the functions performed, assets used and risks assumed in a marketing hub do not reflect conditions that would operate between independent entities dealing wholly independently with one another in comparable circumstances.

Where that is the case, the transfer pricing provisions will apply to substitute arm’s length conditions.

While transfer pricing is often the primary compliance issue, our inquiries are not limited to an examination of these issues. Other provisions, including the capital gains tax, controlled foreign companies and the general anti-avoidance provisions, may also be relevant.

What should you do?

If you have entered into, or are contemplating entering into, an arrangement of this type, we recommend you review the arrangement and assess your compliance with the transfer pricing rules. If you have any of the hallmarks discussed above or have concerns about the risk profile of the arrangement you should:

  • discuss your situation with us by emailing offshorehubs@ato.gov.au
  • seek independent advice.

Once available the practical guidance will assist you in assessing your level of compliance risk.

Austria-Ukraine

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Austria Removed from Ukraine's Tax Havens List

On 1 July 2015, Ukraine issued Decision 667-r, which removes Austria from the country's tax haven list. The list applies primarily to transfer pricing rules, where transactions with a resident in a jurisdiction on the list will be subject to the rules whether related or not if the transction threshold is exceeded.

The list also affects the deductibility of cross border expense payments, which are limited to 70% of the expense if paid to a resident in a jurisdiction on the list (reduced from 85% beginning 2015). However, if it can be shown that the payments are at arm's length, the deduction limit does not apply.

The removal of Austria from the list is effective 1 August 2015.

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OECD Launches Public Consultation on Options for Low Income Countries’ Effective and Efficient Use of Tax Incentives for Investment

On 9 July 2015, the OECD released a consultation paper on options for low income countries’ effective and efficient use of tax incentives for investment.

BACKGROUND

The G20’s Development Working Group (DWG) has invited four International Organisations (IMF, OECD, UN and World Bank) to write a report on options for low income countries’ effective and efficient use of tax incentives for investment. The underlying concern of the DWG is that low income countries often face acute pressures to attract investment by offering tax incentives, which then erode the countries’ tax bases with little demonstrable benefit in terms of increased investment. The International Organisations are asked to use their shared expertise—based on many years of country interactions and analysis—to assist low income countries in making better use of tax incentives.

Drawing on recent country experiences and an extensive range of academic and other studies, the report aims to take a fresh look at tax incentive policies in low income countries. The aim is to develop principles for the design and governance of tax incentives and to provide guidance on good practices in these areas. Since much of the pressure to offer incentives stems from an awareness of those offered by other countries, the report also discusses options for international coordination to address the risk of mutually damaging spillovers from such tax competition. Finally, a separate background document reviews practical tools and models that can help assess the costs and benefits of tax incentives, which is essential to enhance transparency and support informed decision making.

CALL FOR COMMENTS

We are soliciting your comments and feedback on the draft Options Paper below. We would also be interested in further case studies in low income (or other) countries and systematic evidence. The OECD team will review all submitted comments and share them with the other International Organisations collaborating. When submitting your comments, please include the following information so that your comments are registered: name of sender; organisation you represent; address; country; phone number; and e-mail address. Senders may request that their comments remain confidential.

Please send comments to: TaxandDevelopment@oecd.org. Input should be submitted no later than 5 August 2015.

NEXT STEPS AFTER THIS CONSULTATION

The final paper will be submitted to the G20 for its Leader Summit in November 2015 and made public through posting on the websites of the International Organisations involved. The report will then be used as a reference point and as guidance in supporting developing countries on effective and efficient use of tax incentives for investment.

Treaty Changes (4)

Bahrain-Hungary

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Tax Treaty between Bahrain and Hungary has Entered into Force

The income tax treaty between Bahrain and Hungary entered into force on 19 June 2015. The treaty, signed 24 February 2014, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Bahrain income tax payable under Amiri Decree No. 22/1979, and Hungarian personal income tax and corporate tax.

Withholding Tax Rates

  • Dividends - 0% if the beneficial owner is a company (other than a partnership that is not liable to tax), otherwise 5%
  • Interest - 0%
  • Royalties - 0%

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

  • Gains from the alienation of immovable property situated in the other State;
  • Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State; and
  • Gains from the alienation of shares or comparable interests deriving more than 50% of their value directly or indirectly from immovable property situated in the other State

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.

Double Taxation Relief

Bahrain applies the credit method for the elimination of double taxation, while Hungary generally applies the exemption method. However, in the case of income covered by Article 10 (Dividends), Hungary applies the credit method.

Limitation on Benefits

The treaty includes a limitation of benefits article (27), which includes the provision that a resident of a Contracting State shall not receive the benefit of any reduction in or exemption from tax provided for by the treaty if the competent authority determines that the main purpose or one of the main purposes of such resident or a person connected with such resident was to obtain the benefits of the treaty.

The limitation may only apply after the competent authorities of both Contracting State have consulted with each other.

Effective Date

The treaty applies from 1 January 2016.

Georgia-Korea, Rep of

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Tax Treaty between Georgia and South Korea under Negotiation

On 3 June 2015, officials from Georgia and South Korea met to begin negotiations for an income tax treaty. Any resulting treaty will be the first of its kind between the two countries, and must be finalized, signed and ratified before entering into force.

Liechtenstein-Switzerland

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Tax Treaty between Liechtenstein and Switzerland Signed

On 10 July 2015, officials from Liechtenstein and Switzerland signed an income and capital tax treaty. Once in force and effective, the treaty will replace the 1995 income tax agreement between the two countries, which is currently in force.

Additional details will be published once available.

New Zealand-Samoa

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Tax Treaty between New Zealand and Samoa Signed

On 8 July 2015, officials from New Zealand and Samoa signed an income tax treaty. The treaty is the first of its kind between the two countries.

Taxes Covered

The treaty covers New Zealand income tax and Samoa income tax.

Residence

If a company is considered resident in both Contracting States, the competent authorities will determine the company's residence for the purpose of the treaty through mutual agreement based on its place of effective management, the place where it is incorporated or otherwise constituted, and any other relevant factors. If the authorities cannot reach mutual agreement, the company will not be entitled to claim any relief or exemption from tax provided by the treaty.

Permanent Establishment

A permanent establishment will be deemed constituted if an enterprise for more than 183 days:

  • Carries on activities which consist of, or which are connected with, the exploration for or exploitation of natural resources, including standing timber, situated in a Contracting State; or
  • Operates substantial equipment in a Contracting State.

A permanent establishment will also be deemed constituted when an enterprise performs services within a Contracting State:

  • Through an individual who is present in that other State for a period or periods exceeding in the aggregate 183 days in any 12-month period, and where the services performed in that other State through that individual are professional services or other activities of an independent nature; or
  • For a period or periods exceeding in the aggregate 183 days in any 12 month period, and these services are performed for the same project or for connected projects through one or more individuals who are present and performing such services in that other State.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company directly holding at least 10% of the voting power of the company paying the dividends; otherwise 15%
  • Interest - 10%
  • Royalties -  10%

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

  • Gains from the alienation of immovable property situated in the other State;
  • Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State; and
  • Gains from the alienation of shares directly or indirectly deriving more than 50% of their value from immovable property situated in the other State

Entitlement to Benefits

Article 21 (Entitlement to Benefits) of the treaty includes the provision that a benefit under the treaty will not be granted if it is reasonable to conclude that obtaining the benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in the benefit.

Double Taxation Relief

Both countries apply the credit method for the elimination of double taxation. Provisions are also included for a tax sparing credit whereby New Zealand will treat as Samoan tax paid any tax that would have been payable but was reduced or exempted under Samoan law. Such credit will only apply in relation to years of income agreed by the Governments of both Contracting States in letters exchanged for this purpose.

Entry into Force and Effect

The treaty will enter into force once the ratification instruments are exchanged. In respect of withholding tax, it will apply in both countries from the first day of the second month following its entry into Force. In respect of other taxes, it will apply in New Zealand from 1 April following its entry into force and will apply in Samoa from 1 January following its entry into force.

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