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Worldwide Tax News

Approved Changes (2)

India

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India Extends Use of Simplified GST Return through 2017

In addition to further extending the GST return deadlines for the month of July (previous coverage), India has also extended the possible use of the simplified GST return (Form GSTR-3B) until the month of December 2017. Initially, the simplified form was to be used only for the months of July and August. These and other transitional GST changes were approved by the GST Council on 9 September and listed out in a release from the Ministry of Finance.

Venezuela

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Further Increase in Venezuela Minimum Monthly Salary

On 7 September 2017, the Venezuelan government reportedly announced a further 40% increase in the country's minimum monthly salary from VEF 97,531.56 to 136,544.18. The increase is effective 1 September 2017 and impacts the basis cap for social security contributions, unemployment insurance, and other benefits. For employer social security contributions, the rates are 9%, 10%, or 11% based on the risk qualification of the company with a basis cap of five minimum monthly salaries. For employer unemployment insurance contributions, the rate is 2% with a basis cap of 10 minimum monthly salaries.

Proposed Changes (3)

Australia

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Australia Consultation on Improving Cost Setting Rules when an Entity Leaves or Joins a Tax Consolidated Group

The Australian Treasury has launched a public consultation on a draft bill that includes measures designed to remove anomalous tax outcomes that arise under the tax cost setting rules when an entity leaves or joins a tax consolidated group. The draft bill would amend the Income Tax Assessment Act 1997 (ITAA 1997) to improve the integrity of the consolidation regime by:

  • Removing a double benefit which can arise in respect of certain deductible liabilities held by an entity that joins a consolidated group by excluding the value of deductible liabilities from the entry allocable cost amount, with effect from 1 July 2016;
  • Simplifying the operation of the entry and exit tax cost setting rules by ensuring that deferred tax liabilities are disregarded, with effect from the date of introduction of the amending legislation;
  • Removing anomalies that arise when an entity that has securitized assets joins or leaves a consolidated group by modifying the tax cost setting rules to disregard liabilities relating to the securitized assets, with effect from:
    • 13 May 2014 for authorized deposit-taking institutions and financial entities; and
    • 3 May 2016 for all other entities;
  • Switching off the entry tax cost setting rules for a joining entity where a capital gain or capital loss made by a foreign resident owner when it ceases to hold membership interests in the joining entity is disregarded and there has been no change in the majority economic ownership of the joining entity for a period of at least 12 months before the joining time, with effect from 14 May 2013;
  • Clarifying the operation of the Taxation of Financial Arrangements (TOFA) provisions by setting a tax value for an intra-group asset or liability that is, or is part of, a Division 230 financial arrangement when the asset or liability emerges from a consolidated group because a subsidiary member leaves the group, with effect from 14 May 2013; and
  • Removing anomalies that arise when an entity leaves a consolidated group holding an asset that corresponds to a liability owed to it by the old group by ensuring that the amount taken into account under the exit tax cost setting rules for the asset is aligned with the tax cost setting amount for the corresponding asset of the leaving entity, with effect from 14 May 2013.

Click the following link for the Treasury consultation page, which includes links to the exposure draft of the bill and the explanatory memorandum. The closing date for submissions is 6 October 2017.

European Union-France-Germany-Italy-Spain-Estonia

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Proposals for Taxation of Digital Companies in the EU

Two proposals for the taxation of digital companies in the EU are to be put forward during the upcoming EU Finance Ministers meeting scheduled for 15 to 16 September 2017. One proposal is being supported by the Finance Ministers of France, Germany, Italy, and Spain, which in a recently published letter have asked the European Commission to explore EU law compatible options and propose effective solutions based on the concept of establishing a so-called equalization tax that would be levied on the turnover generate by digital companies in the EU. However, Estonia, which currently holds the EU presidency, has reportedly voiced concerns with the potential negative effects of such a tax on turnover, such as the effect on loss-making companies, and will be putting forward a different proposal to tax the profits derived by digital companies from the EU, which would include the concept of a virtual permanent establishment.

Although the proposals are in their early stages, it is likely that EU measures for the taxation of digital companies will be implemented relatively quickly based on a recent comment from Commission President Jean-Claude Juncker that he is strongly in favor of moving to qualified majority voting (instead of a more difficult unanimous vote) for certain tax decisions. The comment was made in Junker's 2017 State of the Union Address in relation to the common consolidated corporate tax base, the financial transaction tax, and fair taxes for the digital industry.

Hong Kong

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Hong Kong Report Published Recommending Introduction of Group Loss Relief

The Hong Kong Government has announced the release of a report from the Financial Services Development Council that proposes the introduction a group tax loss transfer regime in Hong Kong that would allow for unutilized tax losses of a group company to be transferred and set off against the taxable income of another company within the same corporate group. The key features of the loss transfer regime proposed in the report include:

  • Companies within a wholly owned group (including Hong Kong branches of wholly owned group companies) should be able to offset tax losses via a tax loss grouping / transfer system;
  • The companies within the wholly owned group need to have the same accounting year;
  • For the tax losses to be grouped and offset, the tax losses must arise at the time the companies are in the same wholly owned group;
  • Where the loss company is subject to tax at a lower rate than the profit company, the tax losses transferred would be adjusted to reflect the tax benefit of those tax losses to the loss company (adjustment approach preferred over alternate ring fencing approach);
  • Specific anti-abuse measures may need to be implemented to counteract tax-avoidance arrangements effected to take advantage of group tax losses that were incurred prior to the implementation of group tax loss relief;
  • Where a company within a wholly owned group does not elect to transfer the tax losses for offset, or has excess tax losses, the losses would be retained by the company and treated in the same manner under the ordinary tax loss rules (i.e., tax loss carry forward); and
  • The company would continue to account for taxable income and deductible losses in the ordinary manner (i.e., there would be no tax consolidation).

Click the following link for the full report.

Treaty Changes (4)

Austria-Germany-European Union

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CJEU Finds it has Jurisdiction and Issues Judgment in Dispute Involving Austria-Germany Tax Treaty

On 12 September 2017, a judgment was issued from the Court of Justice of the European Union (CJEU) regarding the interpretation of the interest provisions in the 2000 Austria-Germany tax treaty, as well as the limits of the CJEU's jurisdiction in resolving such disputes. Addressing the limits of jurisdiction is an important aspect of the judgment as this is the first time a Member State has brought before the Court, pursuant to Article 273 TFEU, a dispute between it and another Member State that relates to a tax treaty.

Question of Jurisdiction

With respect to having jurisdiction in resolving the dispute, the judgment notes that for the CJEU to have jurisdiction, a dispute between Member States must exist, which in this case is beyond doubt. Further, the dispute must be related to the subject matter of the governing treaties of the EU. For the purpose of this condition, "related to" must be understood as a link rather than a requirement that the subject matter be the same. In this case, the dispute clearly has an objectively identifiable link in light of the beneficial effect of the mitigation of double taxation on the functioning of the internal market that the European Union seeks to establish. Lastly, for the CJEU to have jurisdiction, the dispute must be submitted under a special agreement between the parties. This condition is met by Article 25(5) (Mutual Agreement Procedure) of the Austria-Germany tax treaty, which provides that a dispute regarding the interpretation or application of the treaty should be brought before the CJEU if it cannot be resolved by the competent authorities by mutual agreement within three years.

The Case Itself

The case concerns the taxing rights of interest under the Austria-German tax treaty from registered certificates known as 'Genussscheine' that were acquired by an Austrian bank from a German bank. The certificates essentially provide for a fixed rate of interest predetermined at the time of purchase, which may be reduced to 0% if the debtor incurs a loss. Austria, as the State of residence of the beneficial owner, claims that it alone is entitled to tax the interest income pursuant to Article 11(1) (Interest) of the Austria-German treaty, while Germany claims it also has a right to tax the income because the interest must be classified as income from rights or debt-claims with participation in profits, which pursuant to Article 11(2) may be taxed in the State of origin. The differing interpretations and claims on taxing rights led to double taxation for the Austrian bank for the financial years between 2003 and 2009.

In its judgment, the CJEU found that 'debt-claims with participation in profits' refers to financial products the remuneration of which varies, at least partially, according to the debtor’s annual profits, while the certificates at issue are remunerated annually on the basis of a fixed percentage of their nominal value, which is itself fixed. In this regard, the fact that remuneration may be reduced or suspended when the debtor incurs a loss is not sufficient for the certificates to be considered ‘debt-claims with participation in profits’ as referred to in Article 11(2) of the treaty. As such, Germany would not have taxing rights.

Ivory Coast-Portugal

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Tax Treaty between the Ivory Coast and Portugal has Entered into Force

On 8 September 2017, Portugal published Notice no. 108/2017 in the Official Gazette, announcing the entry into force of the income tax treaty with the Ivory Coast on 18 August 2017. The treaty, signed 17 March 2015, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Portuguese personal income tax, corporate income tax, and surtaxes on corporate income tax. It covers the following Ivory Coast taxes:

  • Tax on industrial and commercial profits and agricultural profits;
  • Tax on non-commercial profits;
  • Tax on wages, salaries, pensions and annuities;
  • Tax on income from movable capital;
  • Tax on income from debt;
  • Property tax; and
  • General income tax.

Withholding Tax Rates

  • Dividends - 10%
  • Interest - 10%
  • Royalties - 5%

Note the definition of royalties includes technical assistance and related services not covered by Articles 14 (Independent Personal Services) and 15 (Dependent Personal Services).

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

Both countries apply the credit method for the elimination of double taxation.

Entitlement to Benefits

Article 30 (Entitlement to Benefits) provides that the benefits of the treaty will not be granted to a resident of a Contracting State that is not the beneficial owner of the income derived from the other State. In addition, the benefits of the treaty will not apply if the principal purpose or one of the principal purposes of any person concerned with the creation or assignment of the property or right in respect of which the income is paid was to take advantage of the benefits by means of such creation or assignment.

Effective Date

The treaty applies from 1 January 2018.

Kuwait-Turkey

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Protocol to Tax Treaty between Kuwait and Turkey under Negotiation

According to a release from Turkey's Revenue Administration, officials from Kuwait and Turkey met 7 to 9 September 2017 for the first round of negotiations for an amending protocol to the 1997 income and capital tax treaty between the two countries. Any resulting protocol would be the first to amend the treaty, and must be finalized, signed, and ratified before entering into force.

United States-Lithuania

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U.S. Signs CbC Exchange Arrangement with Lithuania

According to an update to the IRS Country-by-Country Reporting Jurisdiction Status Table, the U.S. signed a competent authority arrangement on the exchange of Country-by-Country (CbC) Reports with Lithuania on 30 August 2017. It is effective from the date it was signed.

The arrangement provides that pursuant to the provisions of Article 27 (Exchange of Information and Administrative Assistance) of the 1998 income tax treaty between the two countries, each competent authority intends to automatically exchange CbC reports received from each reporting entity resident for tax purposes in its jurisdiction, provided that, on the basis of the information provided in the CbC report, one or more constituent entities of the MNE group of the reporting entity are resident for tax purposes in the jurisdiction of the other competent authority, or are subject to tax with respect to the business carried out through a permanent establishment situated in the other jurisdiction.

With respect to fiscal years beginning on or after 1 January 2016, CbC reports are to be exchanged as soon as possible and no later than 18 months after the last day of the fiscal year of the MNE Group to which the CbC report relates. With respect to fiscal years beginning on or after 1 January 2017, reports are to be exchanged no later than 15 months after the last day of the fiscal year.

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