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Approved Changes (1)

United States

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U.S. Treasury Issues Final Debt-Equity Regulations

Despite efforts to delay them, the U.S. Treasury announced on 13 October 2016 the issuance of the final debt-equity regulations under section 385 to address corporate inversions and earnings stripping. The regulations are scheduled to be published in the Federal Register on 21 October 2016 and will generally apply 90 days after being published, although certain aspects will not apply until 1 January 2018.

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WASHINGTON - Today, the U.S. Department of Treasury and the Internal Revenue Service (IRS) issued final regulations to address earnings stripping. This action will further reduce the benefits of corporate tax inversions, level the playing field between U.S. and non-U.S. businesses, and limit the ability of companies to lower their tax bills through transactions involving debt that do not support new investment in the United States. These regulations also require large corporations claiming interest deductions to document loans to and from their affiliates, just as businesses of all sizes do when they borrow from unrelated lenders. The rules were proposed in April along with temporary anti-inversion regulations. The final rules announced today are the product of extensive public comment and engagement.

"This administration has long called for legislative action to fix our broken tax system. In the absence of Congressional action, it is Treasury’s responsibility to use our authority to protect the tax base from continued erosion. We have taken a series of actions to make it harder for large foreign multinational companies to avoid paying U.S. taxes and reduce the incentives for U.S. companies to shift income and operations overseas. Such tax avoidance practices are wrong and should be stopped." said Treasury Secretary Jacob J. Lew.

"Today’s final regulations are an important step in addressing earnings stripping, a commonly used technique to minimize taxes after an inversion. Throughout our rulemaking process, we sought comments to help narrow the rule and avoid any unintended consequences. We engaged extensively with businesses, tax experts, the public, and lawmakers and carefully considered their comments and recommendations. As a result of this process, the final rule effectively addresses stakeholder concerns by more narrowly focusing the regulations on aggressive tax avoidance tactics and providing certain limited exemptions."

Coupled with Treasury’s previous actions to address corporate inversions, today’s final regulations balance the operational needs of companies while preventing the erosion of our U.S. corporate tax base. Specifically, today’s final regulations narrowly target problematic earnings stripping transactions – transactions that generate deductions for interest payments on related-party debt that does not finance new investment in the United States – while minimizing unintended consequences for regular business activities.

  • Exempting cash pools and short-term loans: Treasury requested comments in the proposed regulations on whether special rules are warranted for cash pools, cash sweeps, and similar arrangements. In response to thoughtful feedback, Treasury is providing a broad exemption for cash pools, which are essentially common funding accounts for related businesses. Treasury is also providing an exemption for loans that are short-term in both form and substance.
  • Providing limited exemptions for certain entities where the risk of earnings stripping is low:  Transactions between foreign subsidiaries of U.S. multinational corporations and transactions between pass-through businesses are exempt from the final regulations. Financial institutions and insurance companies that are subject to regulatory oversight regarding their capital structure are also excluded from certain aspects of the rules.
  • Expanding exceptions for ordinary business transactions: Treasury has significantly expanded the exceptions for distributions to generally include all future earnings and allowing corporations to net distributions against capital contributions. Treasury is also including additional exceptions for ordinary course transactions, such as acquisitions of stock associated with employee compensation plans.
  • Easing documentation requirements:  Treasury has relaxed the intercompany loan documentation rules for U.S. borrowers. The regulations also extend the deadline by one year until January 1, 2018.  

Earlier this year, Treasury issued temporary regulations to limit inversions by disregarding foreign parent stock attributable to recent inversions or acquisitions of U.S. companies – the third step Treasury has taken since 2014 to limit inversions. The temporary regulations prevent a foreign company (including a recent inverter) that acquires multiple U.S. companies in stock-based transactions from using the resulting increase in size to avoid the current inversion thresholds for a subsequent U.S. acquisition. Treasury continues to work to finalize these regulations, which went into effect on April 4, 2016.

Treasury continues to believe that the best way to address both inversions and earnings stripping is to fix our broken business tax system, which is why we released an updated business tax reform framework in April and why we have continued to urge Congress to move forward on reform.

For more information on today’s action, see Treasury’s fact sheet.

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Click the following link for the text of the final regulations (TD 9790).

Treaty Changes (6)

Belarus-Hong Kong

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Tax Treaty between Belarus and Hong Kong to be Negotiated

According to an update from the Hong Kong Inland Revenue Department, officials from Belarus and Hong Kong will meet for the first round of negotiations for an income tax treaty on 17 to 21 October 2016. Any resulting treaty would be the first of its kind between the two jurisdictions, and must be finalized, signed and ratified before entering into force.

Belgium-Japan

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New Tax Treaty between Belgium and Japan Signed

On 12 October 2016, officials from Belgium and Japan signed a new income tax treaty. Once in force and effective, the new treaty will replace the 1968 tax treaty between the two countries.

Taxes Covered

The treaty covers Belgian individual income tax, corporate income tax, income tax on legal entities, income tax on non-residents, and withholding tax on immovable property. It covers Japanese income tax, corporation tax, special income tax for reconstruction, local corporation tax, and local inhabitant tax.

Withholding Tax Rates

  • Dividends - 0% if the beneficial owner is a company that has directly or indirectly owned at least 10% of paying company's voting power for a 6-month period ending the date on which entitlement to the dividends is determined; otherwise 10%
  • Interest - 0% for interest paid by an enterprise of a Contracting State and beneficially owned by an enterprise of the other State; otherwise10%
  • 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 shares or comparable interests if, at any time during the 365 days preceding the alienation, the shares or comparable interests derived at least 50% of their value directly or indirectly from immovable property situated in the other State (exemption if the shares or comparable interests are traded on a recognized stock exchange and the alienator together with related parties own in the aggregate less than 5%); and
  • Gains from alienation of any property, other than immovable 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.

Entitlement to Benefits

Article 22 (Entitlement to Benefits) includes substantial provisions regarding a resident's entitlement to the exemptions from withholding tax provided in Articles 10 (Dividends), 11 (Interest) and 12 (Royalties). In general, a resident of a Contracting State will only be entitled to the exemption benefits if it is a qualified person, which includes:

  • An individual;
  • A governmental entity;
  • A company, if its principal class of shares is regularly traded on one or more recognized stock exchanges;
  • A bank, an insurance company or a securities dealer that is established and regulated under the laws of a Contracting State;
  • A pension fund, subject to certain conditions;
  • An organization established and operated exclusively for a religious, charitable, educational, scientific, artistic, cultural or public purpose, subject to certain conditions; and
  • A person other than an individual, if at least 50% of its voting power or other beneficial interests is directly or indirectly owned by residents of either Contracting State that meet the conditions for qualified persons above.

Provisions are also included where the benefits may still apply for a resident that is not a qualified person, provided certain other conditions are met.

Double Taxation Relief

Japan applies the credit method for the elimination of double taxation, while Belgium generally applies the exemption method. However, subject to the provisions of Belgian law, Belgium will apply the credit method for interest and royalty income, and for dividend income not otherwise exempted.

Entry into Force and Effect

The treaty will enter into force 30 days after the ratification instruments are exchanged, and will apply from 1 January of the year following its entry into force. The 1968 tax treaty between the two countries will cease to be applicable from the date the new treaty applies.

Costa Rica-Korea, Rep of

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TIEA between Costa Rica and South Korea Signed

On 12 October 2016, officials from Costa Rica and South Korea signed a tax information exchange agreement. The agreement is the first of its kind between the two countries, and will enter into force after the ratification instruments are exchanged.

European Union-Monaco

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EU Council Approves Financial Account Information Exchange Agreement with Monaco

On 11 October 2016, the Council of the European Union approved the agreement with Monaco providing for the automatic exchange of tax information on financial accounts of each other's residents. The agreement was signed on 12 July 2016 and will replace the 2004 agreement between the EU and Monaco whereby the latter agreed to put in place measures equivalent to those provided for by the EU Savings Directive. The revision of the 2004 agreement became necessary now that the EU Savings Directive has been repealed and replaced by the amended provisions of the EU Administrative Assistance Directive.

Guernsey-Anguilla-Bahrain-Bermuda-Colombia-Gibraltar-Ghana-Kenya-Malawi-Malaysia-Panama-Untd A Emirates-United Kingdom-Zambia

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Guernsey Update on TIEA and Tax Treaty Negotiations

On 12 October 2016, Guernsey published an update of its policy on tax information exchange agreements (TIEA) and tax treaties, including the status of negotiations.

TIEA Negotiations

Negotiations are underway for a protocol to the pending 2014 TIEA with Montserrat.

TIEA negotiations have been concluded with:

  • Ghana;
  • Kenya;
  • Malawi; and
  • Zambia.

In addition, Guernsey has virtually concluded TIEA negotiations with:

  • Anguilla; and
  • Malaysia.

TIEA negotiations with Colombia have been suspended as Colombia prefers an exchange of information relationship with Guernsey to be managed through the Convention on Mutual Administrative Assistance in Tax Matters.

Tax Treaty Negotiations

Tax treaty negotiations have been concluded with:

  • Bahrain, and
  • Bermuda

Tax treaty negotiations will shortly commence or have commenced and are ongoing with:

  • Gibraltar;
  • Panama;
  • United Arab Emirates; and
  • United Kingdom (renegotiation of existing treaty).

Ireland-Pakistan

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Tax Treaty between Ireland and Pakistan has Entered into Force

The income tax treaty between Ireland and Pakistan entered into force on 11 October 2016. The treaty, signed 16 April 2015, replaces the 1973 income tax treaty between the two countries.

Taxes Covered

The treaty covers Irish income tax, universal social charge, corporation tax and capital gains tax. It covers Pakistani income tax.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company directly holding at least 25% of the paying company's capital; otherwise 10%
  • Interest - 10%
  • Royalties - 10%
  • Fees for technical services (managerial, technical or consultancy) - 10%

Provisions of the 1973 tax treaty that provide for greater relief than the new treaty will continue to apply for a period of 12 months (see below). In respect of dividends, domestic rates generally apply under the 1973 treaty. In respect of interest and royalties, an exemption applies under the 1973 treaty. Fees for technical services are not covered by the 1973 treaty.

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 shares in a company or an interest in a partnership or trust, the property of which consists directly or indirectly principally (value exceeding 50% of total asset value) of immovable property situated in the other State (an exemption applies for shares listed on a recognized stock exchange and where the immovable property is used in the business activities of the company, partnership or trust); 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.

Offshore PE

Article 22 (Offshore Activities) includes the provision that a permanent establishment will be deemed constituted if an enterprise carries on offshore activities in connection with the exploration or exploitation of the seabed and subsoil and their natural resources situated in a Contracting State for a period or periods aggregating more than 30 days within any 12-month period.

Double Taxation Relief

Both countries apply the credit method for the elimination of double taxation. In respect of dividends received by an Irish resident company that directly or indirectly controls at least 5% of the voting power in the paying company, Ireland will also provide a credit for the Pakistani tax payable on the profits out of which the dividends are paid.

Effective Date

The new tax treaty applies in Ireland from 1 January 2017 and in Pakistan from 1 July 2017.

The 1973 tax treaty between Ireland and Pakistan ceases to have effect on the dates the new treaty becomes effective. However, any provisions of the 1973 tax treaty that provide for greater relief from tax than provided for in the new treaty will continue to apply for a period of 12 months following the effective date of the new treaty, while the provisions for the Irish tax credit included in Article XV of the 1973 treaty will continue to apply for 5 years. The tax credit provisions include a tax sparing credit for Pakistani tax that would otherwise be payable but has been reduced or exempted under legal provisions included in clauses (126D), (126E) and (133) of Part 1 of the Second Schedule to the Pakistan Income Tax Ordinance 2001.

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