Worldwide Tax News
European Commission Publishes Taxation Trends Report 2017
On 11 July 2017, the European Commission published the 2017 edition of the report, Taxation Trends in the European Union - Data for the EU Member States, Iceland and Norway. The following is from the press release on the report.
Revenues from consumption taxes including VAT and excise duties were up for the EU-28 as a percentage of GDP in 2015, a study published today by the European Commission has found.
However, the share of consumption taxes of total revenue rose only slightly to 28.7% compared to 28.5% in 2014. The findings are in the 2017 edition of the Taxation Trends report which takes stock of tax systems in the EU, Iceland and Norway with extensive and comparable data on the different tax structures and rates of Member States.
For instance, the report also shows that the average top level of corporate tax fell from 22.5% to 21.9% from 2016-2017. It also provides an analysis on the medium- to long-term evolution of these trends.
Taxation is a top priority for the Juncker Commission and providing quality data is a must if we want to develop robust and effective tax policies for the future. This report, published annually, offers a breakdown of comparative tax levels in the EU and of tax revenues raised from consumption, labour and capital. It also contains data on energy, environmental and property taxation and on the top rates for personal and corporate income taxes.
France Publishes List of Countries for CbC Report Local Filing Exemption
France has published the Order of 6 July 2017, which includes a list of jurisdictions in relation to the exemption from local filing provided in the French Country-by-Country (CbC) reporting rules. Under the rules, a local constituent entity of a group may be required to submit a CbC report for its group unless its ultimate parent is resident in a listed jurisdiction or a surrogate parent has been appointed in a listed jurisdiction. Listed countries are those that have adopted CbC reporting requirements, have concluded an agreement for the exchange of CbC reports with France, and comply with such exchange agreements.
For fiscal years beginning on or after 1 January 2016, the list includes all EU Member States, as well as Australia, Bermuda, Brazil, Canada, Chile, China, Guernsey, Indonesia, Jersey, Mexico, New Zealand, Norway, South Africa, and South Korea. For fiscal years beginning on or after 1 April 2016, India and Japan are also included in the list.
Malaysia Transfer Pricing Guidelines Updated to Reflect BEPS Project Outcomes including Master File Requirements
The Inland Revenue Board of Malaysia (IRBM) has published updates to the 2012 Transfer Pricing Guidelines that reflect the outcomes of the OECD BEPS Project, including with respect to BEPS Actions 8 to 10, and Action 13. Updates have been made to the following chapters of the guidelines:
- Chapter II - The Arm's Length Principle, which includes that the application of the arm's length principle will mainly focus on achieving transfer pricing outcomes that are in line with value creation, and the addition of a risk analysis framework setting out the process or steps for analyzing risk in a controlled transaction in order to accurately delineate the actual transaction in relation to risk;
- Chapter VIII - Intangibles, which includes new guidance on the identification and categories of intangibles, and new guidance in relation to the analysis of the development, enhancement, maintenance, protection, and exploitation (DEMPE) of intangibles assets;
- Chapter X - Commodity Transactions, which is a new chapter that focuses on the application of the comparable uncontrolled price (CUP) method for commodity transactions; and
- Chapter XI - Documentation, which includes expanded guidance overall, including in relation to contemporaneous documentation and related penalties, as well as the introduction of Master file requirements in line with BEPS Action 13 that apply for taxpayers subject to the Country-by-Country reporting rules (previous coverage), with the requirement to submit along with the transfer pricing documentation when requested (subsidiaries should also provide copy of Master file if prepared by the group parent).
Click the following link for the transfer pricing page on the IRBM website for the updated guide.
Overview of Norwegian Tax and Other Changes from July
The Norwegian Ministry of Finance has published an overview of rule changes from 1 July 2017, including those in the Revised Budget for 2017 issued in May. Some of the main changes are in relation to the financial activity tax, which include:
- Changes to prevent groups from making arrangements to circumvent the higher ordinary income tax rate that was maintained for financial companies (25%), and
- A change in the exemption from the salary-based financially activity tax (5%) by removing the exemption where financial activities are less than 30% of total activities and basically maintaining the exemption where at least 70% of total salary is related to activities subject to VAT.
Also included is a new tax incentive scheme for long-term investments in start-ups, which provides for an annual deduction of up to NOK 500,000 for investments made by individuals or their investment companies into active start-ups that are at most six years old. The minimum required investment is NOK 30,000 and the maximum is NOK 1.5 million per company, and the investment must be held for at least three consecutive years. The investee company must have less than 25 employees (annual average), have an annual social security (wage) basis of at least NOK 400,000, and its income and total assets may not exceed NOK 40 million.
Click the following link for the overview of the changes (Norwegian language), which also includes various other tax and non-tax changes.
Singapore Publishes Updated e-Tax Guide on CbC Reporting
The Inland Revenue Authority of Singapore (IRAS) has published the second edition of the e-Tax Guide on Country-by-Country (CbC) reporting. Singapore's CbC reporting requirements apply for fiscal years beginning on or after 1 January 2017 for Singapore MNE groups (ultimate parent tax resident in Singapore) that have subsidiaries or operations in at least one other jurisdiction and consolidated group revenue of at least SGD 1.125 billion in the previous year.
The updates in the second edition include additional questions/answers in the FAQ, including that:
- In determining if the reporting threshold is met when the previous period is less than 12 months, the consolidated revenue amount should be adjusted to correspond to a 12-month period, e.g., consolidated revenue for a 6-month accounting period would be multiplied by 2;
- All of the revenue reflected in the consolidated financial statements should be included in determining if the reporting threshold is met, except for extraordinary income not accrued under normal business circumstances (for entities that do not reflect the gross amounts with respect to certain revenue items under applicable accounting rules, the net amount of item(s) considered similar to revenue should be included);
- Companies can choose to report either actual figures or rounded figures in their CbC report, but should ensure that the rounding does not have a material impact in terms of understanding the CbC report; and
- Income tax paid (on a cash basis) should be reported as net of tax refunds received in the year.
Click the following link for IRAS e-Tax Guide: Country-by-Country Reporting (Second Edition).
Finland Consults on New Transparency-Related Measures for Dividends Withholding Tax
The Finnish Ministry of Finance has launched a public consultation on draft legislation that would introduce new transparency-related measures in relation to dividends withholding tax. The draft provides for the following:
- A 50% withholding tax on dividends paid on nominee registered shares to unidentified entities (35% if recipient's country of residence has been provided, but other required information has not, including beneficial ownership information);
- New requirements for dividend payers to verify eligibility for reduced rates provided under applicable tax treaties;
- Increased liability for dividend payers for tax improperly withheld; and
- New refund procedures for excess tax withheld.
Indian Court Holds Service PE may be Constituted even in the Absence of Physical Presence under U.A.E. Treaty
The Bangalore Income Tax Appellate Tribunal has recently issued a decision in a case that involved a taxpayer based in the United Arab Emirates that engaged in regional service activities for ABB Group legal entities under a regional headquarters service agreement that covered India, as well as Africa and the Middle East. The service activities included consulting services for an India-based entity that involved providing access to confidential information of the ABB Group. For this purpose, employees were sent to India in 2010 for a period of 25 days to setup the access.
The taxpayer claimed that the payment for the services was not taxable in India as per the India-U.A.E. tax treaty, which does not cover fees for technical services (FTS), and further that it had no PE in India to which the payments could be attributed. However, the assessing officer held that despite the absence of FTS provision in the treaty, the payments could still be taxed as FTS, or alternatively, taxed as royalties. This position was appealed to the dispute resolution panel, which sided with the assessing officer and also determined that the taxpayer did have a PE in India as a result of the services.
In its decision, the Tribunal actually dismissed the appeal on the grounds that that taxpayer was not eligible for treaty benefits because it had not filed a certificate of residence for the years concerned and failed to demonstrate that it was wholly owned and controlled in the U.A.E. However, the Tribunal went on to evaluate other aspects of the case individually, including whether the taxpayer had a service PE and whether the service payments could be considered royalties.
With respect to having a service PE, the Tribunal found that in order to meet the conditions for a service PE under the treaty (activities continue more than 9 months within a 12-month period), it is not required that employees stay in India for the whole period, but only that the services or activities are rendered for a period exceeding 9 months. This condition can be considered to be met through various virtual modes, including email, remote access, and other means of rendering services with modern technology.
With respect to treatment as royalties, the Tribunal found that the service (providing access to information) was not actually a rendered service, but rather, the payments could be considered royalties for the use of, or the right to use, information concerning industrial, commercial, or scientific experience as covered in Article 12 (Royalties) of the treaty. It is unclear how this aspect of the decision coincides with the findings that a service PE existed, and it appears that the Tribunal has essentially provided two different approaches to taxing such service income in the absence of treaty FTS provisions; as payment for services attributed to a PE or as royalties.
The decision of the Tribunal can be appealed.
Indonesia and Netherlands Sign Agreement on Transparent Treatment of Dutch Closed Mutual Funds
The Dutch Ministry of Finance has announced the signing of a competent authority agreement with Indonesia on the treatment of closed mutual funds (fondsen voor gemene rekening - FGR). An FGR is a pooled investment vehicle established under Dutch law. They can be established as closed, which are treated as transparent for Dutch tax purposes, or open, which are taxable. In general, an FGR qualifies as closed if the participations in the FGR are not transferable other than to the FGR itself through redemption or the participations are only transferable with the consent of all participants.
The competent authority agreement clarifies that for the purpose of the 2002 Dutch-Indonesia tax treaty, closed FGRs are to be treated as transparent and are not to be considered resident in the Netherlands. Further, any treaty benefits in respect of income arising in Indonesia may be claimed by the FGR on behalf of its participants, provided that the participants are resident in the Netherlands and otherwise meet the conditions for treaty benefits. A qualifying participant may also claim treaty benefits itself, in which case the FGR may not make such claim.
The competent authority agreement was signed 23 June 2017 and entered into force the same day. The Netherlands also has similar agreements with Canada, Denmark, Norway, the United Kingdom, the United States, and Switzerland, as well as related provisions in the tax treaty with Germany.
Kenya Ratifies Pending Tax Treaty with the U.A.E.
According to recent reports, Kenya has ratified the pending income tax treaty with the United Arab Emirates. The treaty, signed 21 November 2011, is the first of its kind between the two countries.
The treaty covers Kenyan income tax chargeable in accordance with the provisions of the Income Tax Act and covers U.A.E. income tax and corporation tax.
The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services through employees or other engaged personnel in a Contracting State if the activities continue for a period or periods aggregating more than 4 months within any 12-month period.
Article 6 (Income from Hydrocarbons) provides that the treaty will not affect the right of either one of the Contracting States to apply their domestic laws and regulations related to the taxation of income and profits derived from hydrocarbons and its associated activities situated in the territory of the respective Contracting State.
- Dividends - 5%
- Interest - 10%
- Royalties - 10%
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; and
- Gains from the alienation of movable property forming part of the business property of a permanent establishment 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
Both countries apply the credit method for the elimination of double taxation.
The final protocol to the treaty includes a limited FoA clause, which provides that if an enterprise of a Contracting State sells goods or merchandise of the same or similar kind as those sold by the permanent establishment, or carries out business activities of the same or similar kind as those carried out by the permanent establishment, the profits of such sales or activities may be attributed to the permanent establishment if it is demonstrated that these profits are related to the activities of the permanent establishment. An additional condition for attribution is that such sales and activities are not meant to obtain benefits under the treaty. However, this is assumed to be an error in the English version of the treaty considering that an exemption from attribution is typically provided with such FoA clauses when it can be demonstrated that such sales and activities are not meant to obtain benefits under the treaty.
The treaty will enter into force once the ratification instruments are exchanged and will apply from 1 January of the year following its entry into force.
OECD Consults on the 2017 Draft Update to the OECD Model Tax Convention
The OECD has announced the release of the draft contents of the 2017 update to the OECD Model Tax Convention by the Committee on Fiscal Affairs. The OECD is seeking comments are certain parts of the draft update, which include:
- Changes to paragraph 13 of the Commentary on Article 4 related to the issue whether a house rented to an unrelated person can be considered to be a "permanent home available to" the landlord for purposes of the tie-breaker rule in Article 4(2) a).
- Changes to paragraphs 17 and 19 of, and the addition of new paragraph 19.1 to, the Commentary on Article 4. These changes are intended to clarify the meaning of "habitual abode" in the tie-breaker rule in Article 4(2) c).
- The addition of new paragraph 1.1 to the Commentary on Article 5. That paragraph indicates that registration for the purposes of a value added tax or goods and services tax is, by itself, irrelevant for the purposes of the application and interpretation of the permanent establishment definition.
- Deletion of the parenthetical reference "(other than a partnership)" from subparagraph 2 a) of Article 10, which is intended to ensure that the reduced rate of source taxation on dividends provided by that subparagraph is applicable in the case where new Article 1(2) would have the effect that a dividend paid to a transparent entity would be considered to be income of a resident of a Contracting State because it is taxed either in the hands of the entity or in the hands of the members of that entity. That deletion is accompanied by new paragraphs 11 and 11.1 of the Commentary on Article 10.
Comments are not being sought on parts already approved as part of the BEPS Project, which include:
- Changes contained in the Report on Action 2 (Neutralizing the Effects of Hybrid Mismatch Arrangements), the Report on Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances), the Report on Action 7 (Preventing the Artificial Avoidance of Permanent Establishment Status) and the Report on Action 14 (Making Dispute Resolution Procedures More Effective), as well as changes developed in the follow-up work on those Actions.
- Changes to the Commentary on Article 5 integrating the changes resulting from the work on BEPS Action 7 with previous work on the interpretation and application of Article 5. The proposals that resulted from that earlier work – which was based on the pre-2017 update version of Article 5 – were originally published in an October 2011 discussion draft, discussed at a 7 September 2012 public consultation and subsequently released in a revised October 2012 discussion draft.
- Changes to Article 8, related changes to subparagraph 1 e) of Article 3 (the definition of "international traffic") and paragraph 3 of Article 15 (concerning the taxation of the crews of ships and aircraft operated in international traffic), and consequential changes to Articles 6, 13 and 22. These changes also include related Commentary changes. These proposed changes were released in a November 2013 discussion draft.
- Changes to paragraph 5 of Article 25, related Commentary changes and amendments to the "Sample Mutual Agreement on Arbitration" contained in an Annex to that Commentary. These changes are intended to reflect the MAP arbitration provision developed in the negotiation of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the Multilateral Instrument or "MLI") adopted on 24 November 2016.
- Consequential changes required as a result of the contents of the 2017 update described above.
Click the following link for the draft contents of the 2017 update. Comments are due by 10 August 2017. The final 2017 update will be submitted for the approval of the Committee on Fiscal Affairs and of the OECD Council later in 2017.
Portugal Ratifies Pending SSA with the Philippines
According to a recent release, Portuguese President Marcelo Rebelo de Sousa signed the decree for the ratification of the pending social security agreement with the Philippines on 10 July 2017. The agreement, signed 14 September 2012, is the first of its kind between the two countries and will enter into force on the first day of the second month following the exchange of the ratification instruments.