Worldwide Tax News
On 12 April 2016, Irish Revenue published eBrief No. 36/16 on updates to the Tax and Duty Manual concerning payment and receipt of interest without deduction of income tax.
Revenue's Tax and Duty Manual Part 08-03-06 (PDF, 75KB), which provides guidance on when interest payments can be paid without deduction of withholding tax, as otherwise required by Section 246 TCA 1997, has been updated to:
- Confirm that no withholding tax need be operated on interest payments to the European Investment Bank; and
- Provide guidance on when Revenue will use its powers under Section 246(3)(d) TCA 1997 to issue authorisations to companies to pay interest without the deduction of withholding tax in cases where a bank has assigned or novated a loan to a non-banking entity.
The Ukraine State Fiscal Service recently published guidance letter N 3035/Н/99-95-42-01-14 on the determination of whether the value added tax (VAT) registration threshold is met. Under Ukraine's VAT rules, taxpayers are required to register for VAT if their taxable supplies exceed UAH 1 million (~USD 39,000) in the previous 12 months, excluding VAT. The guidance letter clarifies that only supplies outside the scope of VAT are excluded in determining if the threshold is met, while all supplies that are subject to the standard 7% VAT rate, are zero-rated or are VAT exempt are to be included.
Australia Issues Exposure Draft on Relaxing Access to Past Losses after Change of Ownership for Public Consultation
On 6 April 2016, the Australian Treasury published exposure draft legislation that would allow businesses that have changed ownership to access past year tax losses if they satisfy a similar business test instead of the same business test. The same business test would still exist, but would be supplemented by the new similar business test to determine access to past losses and for certain other purposes where the same business test currently applies.
Under the proposed similar business test, a company that has undergone a change of ownership or control may access losses from years preceding that change if its current business is a similar business to its former business, having regard to:
- The extent to which the assets (including goodwill) that are used in its current business to generate assessable income were also used in the company’s former business to generate assessable income;
- The extent to which the sources from which the current business generates assessable income were also the sources from which the former business generated assessable income; and
- Whether any changes to the former business are changes that would reasonably be expected to have been made to a similarly placed business.
If adopted, the new similar business test would apply for income years beginning on or after 1 July 2015.
Click the following link for the consultation page, which includes the exposure draft, explanatory memorandum, and instructions for submitting comments. Comments are due by 22 April 2016.
The Swiss Federal Council announced on 13 April 2016 that it has initiated a consultation on the Multilateral Competent Authority Agreement (MCAA) for the automatic exchange of Country-by-Country (CbC) reports and the federal act required for its implementation. Switzerland was one of 31 countries that signed the CbC MCAA during the signing ceremony on 27 January 2016 (previous coverage).
The announcement states that subject to parliamentary approval and possible referendum, multinational groups in Switzerland will have to draw up CbC reports starting from 2018 with the first automatic exchange taking place in 2020. However, for tax periods before 2018, groups may submit CbC reports to the Federal Tax Administration (FTA) if they wish, and the FTA may voluntarily transmit submitted reports to individual countries.
Click the following link for the Federal Council press release.
The new income and capital tax treaty between China and Germany entered into force on 5 April 2016. The new treaty, signed 28 March 2014, replaces the 1985 income and capital tax treaty between the two countries.
The treaty covers Chinese individual income tax an enterprise income tax. It covers German income tax, corporation tax, trade tax and capital tax.
The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services within a Contracting State through employees or other engaged personnel for the same or connected project for a period or periods aggregating more than 183 days within any 12-month period.
- Dividends - 5% if the beneficial owners is a company directly holding at least 25% of the paying company's capital; 15% if paid out of income or gains derived directly or indirectly from immovable property by an investment vehicle which distributes most of this income or gains annually and is exempted from tax; otherwise 10%
- Interest - 0% for interest paid in connection with a sale on credit of commercial or scientific equipment; otherwise 10%
- Royalties - 6% (10% on 60% of the gross amount) for royalties paid for the use of, or the right to use, any industrial, commercial or scientific equipment; otherwise 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;
- 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 shares deriving more than 50% of their value directly or indirectly from immovable property situated in the other State; and
- Gains from the alienation of shares of a company resident in the other State if the direct or indirect ownership of the shares amounted to at least 25% of the total shares at any time during the 12-month period preceding the alienation, with an exception for shares substantially and regularly traded on a recognized stock exchange, provided that the total of the shares alienated during the fiscal year of alienation does not exceed 3% of the quoted shares
Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.
China applies the credit method for the elimination of double taxation, while Germany generally applies the exemption method. However, Germany may apply the credit method for dividends, interest, royalties and certain other items of income in accordance with German tax law.
Article 29 (Miscellaneous Rules) includes a limitation on benefits provision whereby the benefits of the treaty will not be available if the main purpose for entering into certain transactions or arrangements was to secure the treaty benefits and obtaining those benefits would be contrary to the object and purpose of the relevant provisions of the treaty.
The treaty applies from 1 January 2017. The 1985 income and capital tax treaty between China and Germany expired on the date the new treaty entered into force, but its provisions will continue to apply to all tax cases that occurred prior to the entry into force of the new treaty, and in any case will continue to apply until the new treaty is effective.
The Ethiopian government has announced that a Memorandum of Understanding (MoU) was signed with Hungary on 12 April 2016. The MoU covers avoidance of double taxation, mutual protection of investment, and waiver of diplomatic and service visas.
Additional details will be published once available.
Officials from France and Senegal have reportedly signed a protocol to the 1974 social security agreement between the two countries. The protocol is the second to amend the agreement and will enter into force after the ratification instruments are exchanged.
On 13 April 2016, officials from Hong Kong and Latvia signed an income tax treaty. The treaty is the first of its kind between the two jurisdictions.
The treaty covers Hong Kong profits tax, salaries tax and property tax. It covers Latvian enterprise income tax and personal income tax.
If a company is considered resident in both Contracting Parties, the competent authorities will determine the company's residence for the purpose of the treaty through mutual agreement. If no agreement is reached, the company will not be entitled to claim any benefits provided by the treaty.
The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services within a Contracting Party through employees or other engaged personnel for the same or connected project for a period or periods aggregating more than 6 months within any 12-month period.
- Dividends - 0% if the beneficial owner is a company or a pension fund; otherwise 10%
- Interest - 0% if the beneficial owner is a company or a pension fund; otherwise 10%
- Royalties - 0% for royalties paid for the use, or the right to use, industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience if the beneficial owner is a company; otherwise 3%
The following capital gains derived by a resident of one Contracting Party may be taxed by the other Party:
- Gains from the alienation of immovable property situated in the other Party;
- Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other Party; and
- Gains from the alienation of shares or a comparable interest of any kind deriving more than 50% of their value directly or indirectly from immovable property situated in the other Party, with an exception for:
- Shares quoted on a stock exchange as may be agreed to by both Parties, or
- Shares alienated or exchanged in the framework of a reorganization of a company, a merger, a division or a similar operation
Gains from the alienation of other property by a resident of a Contracting Party may only be taxed by that Party.
Both Parties apply the credit method for the elimination of double taxation.
The treaty will enter into force once the ratification instruments are exchanged, and will apply in Hong Kong from 1 April of the year following its entry into force and in Latvia from 1 January of the year following its entry into force.
On 6 April 2016, the Russian government approved the signing of a protocol to the 2000 income and capital tax treaty with Austria. The protocol will be the first to amend the treaty and will reportedly update Article 26 (Exchange of Information) to bring it in line with the OECD standard for information exchange and add a new limitation on benefits article.
The protocol must be finalized, signed and ratified before entering into force.
The Russian Arbitration Court for Moscow recently issued its decision on the availability of treaty benefits for interest paid by a Russian legal entity to a Luxembourg entity acting as a financing intermediary.
The case involved interest paid by Russian Bank Intesa to Intesa Sanpaolo Holding International in Luxembourg (IS Lux) on loans that were financed by Intesa Sanpaolo Milan Spa in Italy (IS Italy), which is a controlling shareholder of both the Russian and Luxembourg entities. For the period 2010 through 2011, Bank Intesa withheld no tax on the interest payments to IS Lux based on the exemption provided in the 1993 Luxembourg-Russia tax treaty.
When auditing Bank Intesa for the period, the tax authorities found that because the interest payments were on a loan that was financed by IS Italy, IS Lux was not the actual beneficial owner of the interest and therefore the withholding tax exemption under the Luxembourg-Russia tax treaty does not apply. As a result, Bank Intesa was held liable for failure to act as a tax agent and withhold the corporate tax due on its interest payments, and was required to pay 10% tax on the interest payments as provided for in the Italy-Russia tax treaty, as well as fines and penalties. Bank Intesa appealed the decision and the case made its way to the Arbitration Court, which sided with the tax authorities.
In reviewing the case, the Court focused mainly on the financing granted by IS Italy to IS Lux. It found that the terms of the loans granted by IS Italy to IS Lux were virtually the same as the terms of the loans granted by IS Lux to Intesa Bank. It also found that IS Lux paid no tax in Luxembourg on the disputed interest payments. Based on this, the Court determined that IS Lux was only used by IS Italy as an intermediary to obtain an undue tax benefit, and agreed with the tax authorities that the actual beneficial owner was IS Italy. The Court also held that it was Intesa Bank's responsibility, as the tax agent, to confirm the beneficial ownership of the interest payments and withhold tax accordingly.