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Approved Changes (3)

Australia

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Australia Publishes Finalized Guidelines on Small Business Restructuring Roll-over

On 13 July 2016, the Australian Taxation Office published two finalized law companion guidelines on the new Small Business Restructuring Roll-over (SBRR) rules, which received royal assent on 8 March 2016 (previous coverage). The guidelines explain the income tax consequences and adjustments that occur when the transferor and transferee choose to apply the SBRR, as well as the determination of a genuine restructure of an ongoing business in relation to the new rules.

Click the following link for the guidelines:

The new SBRR rules and the guidelines apply for transfers occurring on or after 1 July 2016.

Philippines

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Philippine Tax Commissioner Suspends Order on Automatic Treaty Benefits and Other Recent Revenue Issuances

On 1 July 2016, the Philippine Commissioner of Internal Revenue issued Revenue Memorandum Circular (RMC) No. 69-2016, which suspends with immediate effect all revenue issuances issued during June 2016. The suspension is reportedly to allow the new Commissioner, Caesar R. Dulay, to review all "midnight issuances" issued by his predecessor. One of the main issuances suspended is Revenue Memorandum Order (RMO) 27-2016, which sets out new procedures for claiming tax treaty benefits on Philippine source income and provides for automatic treaty rates on dividends, interest and royalties (previous coverage). With the suspension, the previous procedures apply until further notice.

On the same date, the Commissioner also issued RMC No. 70-2016, which suspends with immediate effect all field audit and other field operations of the Bureau of Internal Revenue (BIR). RMC No. 70-2016 also provides that no written orders for an audit or investigation should be issued or served, although certain exceptions are provided for in the circular.

Click the following links for RMC No. 69-2016, RMC No. 70-2016, and all revenue issuances on the BIR website.

Portugal-Ireland-European Union

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CJEU Holds Portugal Must Allow Non-Resident Financial Institutions to Deduct Expenses on Interest Income Received in Portugal

On 13 July 2016, the Court of Justice of the European Union (CJEU) issued its judgment concerning Portugal's differing tax treatment of interest income received in Portugal by resident and non-resident financial institutions.

The case involved Portugal-based Brisal - Auto Estradas do Litoral SA (Brisal) and KBC Finance Ireland (KBC). In 2004, Brisal entered into an external financing agreement with a syndicate of banks, which was later expanded to include KBC. As a non-resident bank, KBC was subject to tax withholding on the gross interest income received in Portugal, while the resident banks that were part of the agreement were subject to tax on the net interest income. At the time, the applicable withholding tax rate for non-resident financial institutions was 20%, unless reduced by a tax treaty, and the tax rate for resident financial institutions was 25%.

Brisal and KBC filed an administrative appeal for a review of the withholding tax, arguing that the differing treatment resulted in an increased tax burden for non-resident financial institutions that violates the freedom to provide services and the free movement of capital under the Treaty on the Functioning of the EU (TFEU). The appeal made its way to Portugal's Supreme Administrative Court, which decided to stay the proceedings and to refer to the CJEU for a preliminary ruling on possible restrictions on the freedom to provide services. The free movement of capital aspect was not referred as it was considered to be a consequence of possible restrictions on the freedom to provide services and not a primary issue.

In its decision, the CJEU found that Portugal may levy a withholding tax on interest payment to non-resident financial institutions, but must also allow non-residents to deduct related business expenses in the same manner as resident financial institutions. In particular, the CJEU found that:

  • Article 49 EC does not preclude national legislation under which a procedure for withholding tax at source is applied to the income of financial institutions that are not resident in the Member State in which the services are provided, whereas the income received by financial institutions that are resident in that Member State is not subject to such withholding tax, provided that the application of the withholding tax to the non-resident financial institutions is justified by an overriding reason in the general interest and does not go beyond what is necessary to attain the objective pursued;
  • Article 49 EC precludes national legislation, such as that at issue in the main proceedings, which, as a general rule, taxes non-resident financial institutions on the interest income received within the Member State concerned without giving them the opportunity to deduct business expenses directly related to the activity in question, whereas such an opportunity is given to resident financial institutions;
  • It is for the national court to assess, on the basis of its national law, which business expenses may be regarded as being directly related to the activity in question.

Note - the decision is made in reference to Article 49 of the European Community (EC) Treaty because the currently relevant Article 56 of the TFEU was not in force at the time of the case.

Click the following link for the full text of the CJEU judgment.

Proposed Changes (3)

Germany

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German Federal Cabinet Approves Legislation to Implement CbC Reporting Requirements and other BEPS Measures

On 13 July 2016, the German Federal Cabinet (Bundeskabinett) approved the draft legislation for the implementation of Country-by-Country (CbC) reporting requirements and other BEPS-related measures (previous coverage). The legislation will now be sent to parliament for approval. Once approved and in force, the legislation will generally apply from 1 January 2017, although CbC reporting for German MNE groups will apply from 1 January 2016.

Click the following link for the legislation as approved by the Federal Cabinet (German language).

Liechtenstein

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Liechtenstein Consults on Exchange of CbC Reports

The Liechtenstein government has reportedly launched a public consultation on the law needed to implement the exchange of Country-by-Country reports. Although Liechtenstein has not yet adopted CbC reporting requirements, it has signed the Multilateral Competent Authority Agreement for the exchange of CbC reports in January 2016 and launched a consultation on the introduction of BEPS-related measures in May that includes CbC reporting (previous coverage). It is expected the requirements will apply from 1 January 2017.

New Zealand

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New Zealand Government Adopts Trust Disclosure Recommendations

On 13 July 2016, the New Zealand Government announced that it will adopt the recommendations included in the recently published inquiry into foreign trust disclosure rules (previous coverage) with a few modifications. The needed legislation to implement the recommendations will be introduced in August 2016.

Click the following links for the press release and a summary of the government response and modifications.

Treaty Changes (1)

Malaysia-Slovak Republic

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Tax Treaty between Malaysia and the Slovak Republic has Entered into Force

According to an announcement from the Slovak Ministry of Foreign and European Affairs, the income tax treaty with Malaysia entered into force on 11 April 2016. The treaty, signed 25 May 2015, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Malaysian income tax and petroleum income tax, and covers Slovak income tax.

Withholding Tax Rates

  • Dividends - 0% if the beneficial owner is a company directly holding at least 10% of the paying company's capital for an uninterrupted period of at least 12 months; otherwise 5%
  • Interest - 10%
  • Royalties - 10%
  • Fees for Technical Services (any services of a technical, managerial or consultancy nature) - 5%

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 deriving more than 50% of their value directly or indirectly from immovable property situated in the other State; 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.

Double Taxation Relief

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

Provisions are also included for a tax sparing credit whereby Slovakia will treat as Malaysian tax paid any tax that would have been payable but was reduced or exempted through special incentives under Malaysia law for the promotion of economic development of Malaysia. Eligible incentives that may result in the credit include those that were in force on the date of signature of the treaty and similar incentives subsequently introduced if agreed by the competent authorities of the Contracting States.

Effective Date

The treaty will apply from 1 January 2017.

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