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Approved Changes (4)

Argentina

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Argentine Court Holds Transfer Pricing Regulations May Not be Enforced Retroactively

In a recent decision of the Argentine Tax Court, the Court ruled on whether the tax authority may impose a revised assessment based on transfer pricing regulations not yet in force for the year concerned. The case involved an Argentine pharmaceuticals company engaged in manufacturing, distribution, and import/export, which for the 1999 fiscal year submitted a transfer pricing study using the resale price method to support its transfer pricing policy. In 2005, the tax authority challenged the company's transfer pricing method and performed an adjustment based on the use of the transactional net margin method and interquartile range of comparables for each segment of the company's operations, resulting in an assessment being issued. The company appealed the assessment, arguing mainly that the tax authorities approach could not be taken because it was based on aspects of Argentina's transfer pricing regulations that were not in place prior to 2001; in particular the segmentation of operations and the use of interquartile range of comparables.

In its decision, the Tax Court found in favor of the company. In particular, the Court found that although it could be argued that the transactional net margin method was more appropriate, the tax authority failed to demonstrate that it would be the most appropriate method for the year concerned and could not require the company to apply the method. Further, the Court found that because the use of segmented data and interquartile range was not required under the pre-2001 regulations, the tax authority could not base an adjustment/assessment on this approach. Lastly, reference was made to the OECD guidelines, which did support the tax authorities approach during the year concerned. However, the Court found that the OECD guidelines had no relevance in the case since Argentina is not a member of the OECD and that the guidelines can only be used to interpret regulation in force for the year concerned and not expand on the regulation.

Australia

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Australia Publishes Additional Instruction on Local File Part A and Part B

On 10 August 2017, The Australian Taxation Office published Local file instructions: Part A and Part B. The Local file requirement forms part of Australia's Country-by-Country (CbC) reporting, which also includes the CbC report and the Master file. The Local file collects information and relevant documentation for international related party dealings and must be submitted electronically via one of the following mechanisms:

The Local file is due within 12 months following the taxpayer's year-end, although Part A may be submitted with the tax return in lieu of labels 2 to 17 of the international dealings schedule (IDS). This administrative solution is provided in order to avoid duplication of information in the Local file and IDS.

Indonesia

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New Indonesian Regulation Issued on Deemed Dividends from CFCs

The Indonesian Ministry of Finance issued a new regulation on 27 July 2017 concerning deemed dividends from unlisted controlled foreign companies (CFCs), which updates and replaces Regulation 256/PMK.03/2008. The new regulation provides that a foreign company, other than a company listed on a stock exchange, is considered a CFC where at the end of the Indonesian shareholder's tax year, the shareholder:

  • Holds a capital participation of at least 50% in the total paid-up shares of the foreign company; or
  • Jointly holds together with other resident taxpayers a capital participation of at least 50% in the total paid-up shares of the foreign company.

Paid-up shares are the total value of shares issued by the CFC or the total value of shares with voting rights.

Further to the above, the regulation provides a new condition that a foreign company will be considered to be a CFC if indirectly owned by Indonesian shareholder(s) through one or multiple CFCs meeting the above conditions. Indirect ownership in such case is based on the percentage ownership in the indirect CFC by the direct CFC(s), and not the effective ownership in the indirect CFC by the Indonesian shareholder(s). In other words, if the Indonesian shareholder(s) hold 50% in CFC A, which holds 50% of CFC B, CFC B is an indirect CFC of the shareholder(s) even though the effective ownership is just 25%.

Where the conditions for a CFC are met, a deemed dividend will be considered distributed to the resident taxpayer:

  • At the end of the 4th month following the expiration of the tax return deadline for the CFC; or
  • At the end of the 7th month following the end of the CFCs fiscal year if the CFC has no tax return obligation or there is no set deadline for the return.

The deemed dividend amount is determined based on the after tax profit of the CFC in proportion to the Indonesia taxpayer's percentage participation and must be declared in the resident taxpayer's tax return for the year in which the dividend was deemed distributed. Dividends actually received are also taxable, but the amount may be reduced based on the amount of deemed dividends received in the current and prior four years. A foreign tax credit is available for the amount of actual dividends received that exceeds the deemed dividend amount. The credit must be determined on a per jurisdiction basis and is limited to the lesser of the amount payable in accordance with a tax treaty, the amount payable in the foreign jurisdiction, or the Indonesian tax payable based on the proportion of actual dividends received to the total taxable income (including deemed dividends). In order to claim a credit, the credit calculation must be submitted with the tax return, along with the CFC's financial statements, a copy of the CFC's tax return (if applicable), calculation of profit after tax, and proof of tax payment or deduction.

Click the following link for the CFC Regulation 107/PMK.03/2017 (Indonesian language), which is effective from the 2017 fiscal year.

United States

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IRS Now Accepting Country-by-Country Reports

On 11 August 2017, the U.S. IRS announced it is now accepting Form 8975, Country-by-Country Report.

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Parent entities of U.S. multinational enterprise (MNE) groups with $850 million or more of revenues in a previous annual reporting period can now file Form 8975, Country-by-Country Report, with their annual income tax return. Form 8975, and attached Schedules A, will report a U.S. MNE group’s income, taxes paid, and other indicators of economic activity on a country-by-country basis.

Proposed Changes (1)

Luxembourg

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Draft legislation for New IP Regime Submitted to Luxembourg Parliament

The Luxembourg Government has submitted draft legislation to parliament for the introduction of a new intellectual property regime to replace the regime that was abolished effective 1 June 2016 because it was not in compliance with the modified nexus approach of BEPS Action 5 (previous coverage). Main points of the draft legislation are as follows:

  • The regime will provide for an 80% corporate income tax exemption on qualifying net income derived from the commercialization of qualifying IP assets/rights, and a 100% net wealth tax exemption (similar to prior regime);
  • Qualifying IP assets, which must be created, developed, or improved through R&D activities after 31 December 2007, include:
    • IP Assets protected under existing national or international provisions by a patent, a utility model, a supplementary protection certificate for a patent on pharmaceutical product or plant protection (phytopharmaceutical) product, an extension of a supplementary protection certificate in respect of medicinal product for pediatric use, a plant variety (breeder's rights)certificate, or an orphan drug designation; and
    • Software copyrighted under national or international agreements in force;
  • Qualifying expenditure includes:
    • Expenditure incurred by the taxpayer itself, including expenditures incurred by a foreign branch in an EU/EEA Member State that is not benefiting from a similar IP regime;
    • Expenditure incurred by the taxpayer from R&D outsourcing to unrelated parties (can be through related party if no margin realized by the related party); and
    • Expenditure incurred for general or speculative R&D and expenditure for unsuccessful R&D, subject to conditions;
  • Qualifying net income includes:
    • Income received for the use of, or the right to use, qualifying IP assets;
    • Capital gains from the sale of qualifying IP assets;
    • Income directly related to IP assets included in the sales price of products and services;
    • Compensation received in the course of legal proceedings or arbitration related to qualifying IP assets;
  • The qualifying amount eligible for the 80% exemption is determined based on the nexus ratio as follows: Qualifying R&D Expenditure x 130% (uplift) / Total R&D Expenditure (including acquisition and related party expenditure), multiplied by the total qualifying amount of net income (nexus ratio may not exceed 100%); and
  • To apply the exemption, documentation must be maintained in relation to each qualifying asset, or in the case of multiple assets with complex R&D, documentation may be maintained by product or service type, or by family of products or services.

As proposed, the new IP regime would apply from the 2018 tax year. Taxpayers that have been grandfathered under the old regime may choose to apply the new regime or the grandfathered regime until it expires 30 June 2021. Once chosen, the choice is irrevocable.

Treaty Changes (3)

China-New Zealand

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New Tax Treaty between China and New Zealand under Negotiation

According to a release from the New Zealand Government, officials from China and New Zealand will meet during the week of 14 August to discuss the signing of a new income tax treaty. Any resulting treaty would replace the 1986 tax treaty between the two countries, and must be finalized, signed, and ratified before entering into force.

Kenya-India

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Kenya Ratifies Pending Tax Treaty with India

On 4 August 2017, Kenya published Legal Notice 147 of 2017 in the Official Gazette, which ratifies the pending income tax treaty with India. The treaty, signed 11 July 2016, will enter into force once the ratification instruments are exchanged, and once in force and effective, will replace the 1985 income tax treaty between the two countries (previous coverage).

Switzerland

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Swiss People's Party Announces Opposition to Automatic Exchange of Financial Account Information

On 10 August 2017, the Swiss People's Party (SVP/UDC) announced its opposition to the agreements approved by the Swiss Federal Council in June 2017 (previous coverage) for the automatic exchange of financial account information under the OECD Common Reporting Standard (CRS). In particular, the SVP takes issue with the agreements entered into with states and territories that are under regimes seen as corrupt or not respecting the principles of the rule of law, which according to the SVP could have serious consequences not only for foreigners keeping assets in Switzerland, but also for Swiss nationals living abroad. To address these concerns, two main proposals will be put forward during the 14 to 15 August meeting of the Economic Affairs and Taxation Committee, including:

  • An immediate suspension of the conclusion of new CRS agreements until the functioning of existing agreements is clarified and it is determined whether the U.S. will be involved; and
  • Conditions for the ratification of CRS agreements based on the Transparency International corruption index or the Freedom House freedom index, which would include that an agreement would not be ratified if the jurisdiction has a corruption rating below 45 or freedom rating of "not free".

According to the SVP, if the conditional ratification was adopted, it would affect Switzerland's exchange agreements with Argentina, Brazil, China, Colombia, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, and the United Arab Emirates. The SVP also proposes holding off on ratification of the agreement with New Zealand until a social security agreement is in place.

Click the following link for the SVP announcement (French language), which also includes certain other proposals to support Switzerland as a financial center.

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