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Approved Changes (2)

Italy

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Italian Parliament Approves 2017 Budget Measures

The Italian Ministry of Economy and Finance (MEF) has announced the approval of the 2017 Budget measures by parliament (Bill No. 2611). Key measures include:

  • A reduction in the corporate tax (IRES) rate from 27.5% to 24% (previously scheduled);
  • The introduction of a business profits tax (IRI) at a rate of 24% for non-corporate businesses, such as partnerships and sole traders;
  • An extension of the depreciation allowance of 140% for new plant and machinery through 31 December 2017 (30 June 2018 if ordered by 31 December 2017 and with at least a 20% payment);
  • The introduction of a 250% depreciation allowance for investments in digital technology;
  • An increase in the tax credit for additional research and development expenditure from 25% to 50% and an increase in the credit cap from EUR 5 million to EUR 20 million; and
  • The allocation of funds in order to not trigger safeguard clauses that would have increased the value added tax and excise tax rates if fiscal targets were not met.

Click the following link for the MEF overview of the measures (Italian language), which will enter into force after the budget legislation is published and will generally apply from 1 January 2017.

United Kingdom

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UK Consults on Draft Guidance on New Hybrid Mismatch Rules

UK HMRC has published draft guidance on hybrid and other mismatches for public consultation. The draft guidance concerns new rules based on guidance developed as part of BEPS Action 2. The following is a brief summary of the rules and guidance.

The New Rules

The new rules apply to several hybrid mismatch types, including hybrid and other mismatches from financial Instruments, hybrid transfer mismatches, hybrid payer mismatches, hybrid payee mismatches, and others. Although specific rules apply for each mismatch type, the primary response in general is the disallowance of a deduction in the case of a UK payer and the inclusion as ordinary income in the case of a UK payee where the other jurisdiction has not disallowed a deduction.

Anti-Avoidance Rule

The new rules include a targeted anti-avoidance rule (TAAR) to counteract arrangements where:

  • The main purpose, or one of the main purposes, of those arrangements is to enable any person to obtain a tax advantage by avoiding the hybrid and other mismatches rules, or any overseas equivalent; and
  • If the TAAR did not apply, the arrangements would achieve that purpose.

In the event the TAAR counteracts such arrangements, an adjustment may be made by means of assessment, modification of an assessment, amendment, disallowance of a claim, or other adjustment as provided for by the TAAR.

Effective Date

The rules will apply for hybrid payments made on or after 1 January 2017 involving hybrid entities or instruments that give rise to hybrid mismatch outcomes, including:

  • Deduction/non-inclusion mismatches arising from payments made on or after that date;
  • Deduction/non-inclusion mismatches arising from quasi-payments in a payment period beginning on or after that date;
  • Double deduction mismatches for accounting periods beginning on or after that date;
  • Imported mismatch payments arising from payments made on or after that date; and
  • Imported mismatch payments arising from quasi-payments in a payment period beginning on or after that date.

For payment periods and accounting periods that begin before 1 January 2017 and end after that date, transitional rules apply where the payment/accounting period is treated as two separate taxable periods with one ending on 31 December 2016, and the other beginning on 1 January 2017. The amounts are apportioned to each of these periods on a time basis, unless it produces a result that is unjust or unreasonable, in which case the amounts are apportioned on a just and reasonable basis.

Click the following link for Hybrid and Other Mismatches - draft guidance for consultation. Comments are due by 10 March 2017.

Proposed Changes (2)

United Kingdom-Austria-Belgium-Bulgaria-Canada-Czech Rep-Denmark-Finland-Germany-Hungary-Israel-Kenya-Mexico-Netherlands-Norway-Pakistan-Slovak Republic-South Africa-European Union

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Legislators Urge Public CbC Reporting at Tax Transparency Summit

Legislators from several jurisdictions taking part in the recent Global Tax Transparency Summit held in the UK have signed a so-called concordat on greater transparency for the international tax system. The concordat, which is an open letter to governments, includes a call for public Country-by-Country reporting. In particular, the concordat states:

"The OECD BEPS project and the EU Commission 'country-by-country reporting' initiative will lay the foundations of a modern international tax framework under which profits are taxed where economic activity and value creation occur.

But we want to enable the citizen to have access to this information. We, therefore, urge our Governments to support a measure that would show, for each tax jurisdiction in which multinational companies do business:

  • Their revenue; their profit before income tax; the income tax paid and accrued; total employment; capital; retained earnings, and tangible assets.

We would also expect companies to identify each entity in the group that is doing business in a particular tax jurisdiction and to provide an indication of the business activities in a selection of broad areas that each entity is engaged in.

We want to see this information published so that our citizens can see for themselves what tax multinationals pay so that not only will our national tax authorities see the full picture but so will our citizens."

Signatories to the concordat include legislators from Austria, Belgium, Bulgaria, Canada, Czech Republic, Demark, Finland, Germany, Hungary, Israel, Kenya, Mexico, Netherlands, Norway, Pakistan, Slovakia, and South Africa, as well as the European Parliament.

Click the following links for the summit announcement and a list of signatories to the concordat.

United States

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U.S. Senator Proposes Progressive Consumption Tax Act

U.S. Senator Ben Cardin (D-MD) has published a revised version of the Progressive Consumption Tax Act (PCTA) originally introduced in 2014. The revised version is to be reintroduced in the 115th congress, which will begin 3 January 2016. The revised bill includes:

  • A 10% consumption tax on supplies of both goods and services, with a zero-rate for exports, as well as exemptions for financial supplies, residential housing, residential rent, and small businesses with annual revenue below USD100,000;
  • Individual income tax reforms, including an individual income tax exemption of USD 50,000 for single filers, and three marginal tax bracket, set at 15%, 20%, and 28%; and
  • Corporate income tax reforms, including a flat 17% tax rate.

Click the following link for the PCTA page on Senator Cardin's website, which includes the text of the bill, an FAQ, and other information.

Treaty Changes (5)

China-Pakistan

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Protocol to Tax Treaty between China and Pakistan Signed

On 8 December 2016, officials from China and Pakistan signed a protocol to the 1989 income tax treaty between the two countries. The protocol is the third to amend the treaty and will enter into force after the ratification instruments are exchanged. Additional details will be published once available.

Japan-Switzerland

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Japan and Switzerland Exchange Notes on the Automatic Exchange of Financial Account Information

The Japanese Ministry of Foreign Affairs has announced the exchange of notes between the Government of Japan and the Swiss Federal Council on 8 December 2016 concerning the automatic exchange of financial account information. The information exchange will be carried out based on the OECD Common Reporting Standard (CRS) and is to begin in 2018 in respect of tax periods beginning on or after 1 January 2017.

Kosovo-Luxembourg

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Kosovo to Negotiate Tax Treaty with Luxembourg

On 7 December 2016, the Kosovo government authorized the negotiation of an income tax treaty with Luxembourg. 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.

Netherlands-Andorra-Liechtenstein-Panama-Belgium-France-India-Iran-United States

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Dutch Tax Treaty Negotiation Plans

The Dutch Ministry of Finance has announced its tax treaty negotiation plans for 2017. The plans include the start of tax treaty negotiations with:

  • Andorra - would be the first of its kind;
  • Liechtenstein - would be the first of its kind; and
  • Panama - would revise or replace the current 2010 tax treaty.

In addition, negotiations are expected to continue in 2017 for tax treaties with:

  • Belgium - would revise or replace the current 2001 tax treaty;
  • France - would revise or replace the current 1973 tax treaty;
  • India - would revise or replace the current 1988 tax treaty;
  • Iran - would be the first of its kind; and
  • The U.S. - would revise or replace the current 1992 tax treaty.

Any resulting treaties or protocols to revise current treaties will need to be finalized, signed, and ratified before entering into force. Details of each will be published once available.

Russia-France

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Russia Clarifies Foreign Exchange Gain/Loss Treatment of PE under French Tax Treaty

The Russian Ministry of Finance recently published Letter No. 03-07-03/47566, which clarifies the tax treatment of foreign exchange gains/losses of a French resident's permanent establishment (PE) in Russia.

As provided under Article 7 (Business Profits) of the 1996 France-Russia tax treaty, if an enterprise of one Contracting State carries on business in the other State through a permanent establishment, the other State may tax the profits attributed to the PE. Based on Article 7 of the treaty and the provisions of Russian Tax Code regarding the taxation of permanent establishments, non-operating income/expense, including foreign exchange differences, are included in determining the taxable amount attributed to the PE. As such, positive foreign exchange differences will be treated as income for Russian tax purposes, and negative foreign exchange differences will be treated as an expense.

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