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Worldwide Tax News

Proposed Changes (2)

Japan

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Japan Tax Reform Plans Include Major CFC Changes and Others

Japan's ruling coalition has agreed on its tax reform plans, which include a number of changes.

CFC Regime

Some of the main changes planned are for Japan’s controlled foreign company (CFC) regime. Amendments to the CFC regime include the replacement of the current conditions (20% effective tax rate and condition activity exception tests) with new conditions that include:

  • No income inclusion if:
    • Effective tax rate for the foreign company is at least 30%; or
    • Effective tax rate for the foreign company is at least 20% and all economic activity tests are met (business, substance, control, location, unrelated party);
  • Passive income inclusion if effective tax rate less than 20% but all economic activity tests are met (exception if passive income does not exceed JPY 20 million); and
  • Full income inclusion if:
    • Effective tax rate is less than 20% and at least one of the economic activity tests is failed; or
    • The foreign company is a paper company, a cash box company, or company located in a black-list country.

The reform plans also includes new requirements for the economic tests, as well as an expanded scope of passive income.

Other Changes

Other changes in the reform plans include:

  • The introduction of a de facto control test for the purpose of determining if a foreign company is a related party (current 50% direct or indirect ownership test maintained);
  • The de facto control test noted above would also apply in determining whether a Japanese taxpayer is required to report the income of foreign related parties;
  • The revision of the determination of indirect ownership of a foreign company from the current multiplication method to a 50% chain of ownership, i.e., A Co is related to C Co if A Co holds at least 50% of B Co (foreign intermediary), which holds at least 50% of C Co (foreign company);
  • The R&D tax credit range will be changed from 8%-10% to 6%-14% based on ratio of the incremental increase in R&D costs; and
  • New rules regarding spin-off taxation, including that the following types of transactions for unrelated parties will be treated as non-recognition transfers if there is a continuity of business operation by at least 80% of current employees after the transaction and certain other conditions:
    • When the transferor transfers some businesses to a newly incorporated unrelated company; and
    • When the transferor distributes the shares of a wholly owned subsidiary to its shareholders.

Effective Date

Subject to approval by the Japanese Diet (legislature), the reform measures are to apply from 1 April 2018.

Peru-OECD

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Peru Joins Inclusive Framework for Implementation of BEPS Measures

According to a 14 December 2016 update from the OECD, Peru has joined the Inclusive Framework for the global implementation of the BEPS Project, bringing the total number of participants to 91. As a member of the Framework, Peru has committed to the implementation of four minimum standards, including those developed under Action 5 (Countering Harmful Tax Practices), Action 6 (Preventing Treaty Abuse), and Action 14 (Dispute Resolution), as well as Country-by-Country (CbC) reporting under Action 13 (Transfer Pricing Documentation).

Click the following link for the list of participants.

Treaty Changes (9)

Australia-New Zealand

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New SSA between Australia and New Zealand Signed

The Australian Ministry of Social Services has announced the signing of a revised social security agreement with New Zealand on 8 December 2016. The agreement will enter into force after the ratification instruments are exchanged, and once in force and effective will replace the 2001 social security agreement between the two countries.

Azerbaijan-Israel

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Tax Treaty between Azerbaijan and Israel Signed

On 13 December 2016, officials from Azerbaijan and Israel signed an income tax treaty. The treaty is the first of its kind between the two countries and will enter into force after the ratification instruments are exchanged.

Additional details will be published once available.

Costa Rica-Ecuador

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TIEA between Costa Rica and Ecuador in Force

The tax information exchange agreement between Costa Rica and Ecuador entered into force on 17 September 2016. The agreement, signed 4 June 2013, is the first of its kind between the two countries and is in line with the OECD standard for information exchange. It applies for criminal tax matters from the date of its entry into force and for other matters from 1 January 2017.

Finland-Korea, Rep of

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SSA between Finland and South Korea to Enter into Force

The social security agreement between Finland and South Korea will enter into force on 1 February 2017. The agreement, signed 9 September 2015, is the first of its kind between the two countries and will generally apply from the date of its entry into force.

Finland-Untd A Emirates

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Finland Ratifies TIEA with the U.A.E.

On 9 December 2016, Finland ratified the pending tax information exchange agreement with the United Arab Emirates. The agreement, signed 27 March 2016, is the first of its kind between the two countries and will enter into force 30 days after the ratification instruments are exchanged. It will apply for criminal tax matters from the date of its entry into force and for other matters from 1 January of the year following its entry into force.

Monaco-OECD

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Monaco Deposits Ratification Instrument for Mutual Assistance Convention

On 14 December 2016, Monaco deposited the ratification instrument for the OECD-Council of Europe Convention on Mutual Administrative Assistance in Tax Matters as amended by the 2010 protocol. Monaco signed the convention as amended on 13 October 2014.

According to the OECD overview of signatories to the convention, the convention will enter into force for Monaco on 1 April 2017.

Montenegro-Portugal

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Update - Tax Treaty between Montenegro and Portugal

The pending income tax treaty between Montenegro and Portugal was signed 12 July 2016. The treaty 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 Montenegrin corporate profit tax and personal income tax.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company directly or indirectly holding at least 5% of the paying company's capital; otherwise 10%
  • Interest - 10%
  • Royalties -
    • 5% for the use of, or the right to use any copyright of literary, artistic, or scientific work, including cinematographic films and recordings on tape or other media used for radio or television broadcasting or other means of reproduction or transmission or computer software;
    • 10% for the use of, or the right to use any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial, or scientific experience.

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 27 (Entitlement to Benefits) includes the provision 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 Contracting State.

Article 27 also includes the provision that the benefits of the treaty will not apply if the main purpose or one of the main 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 those benefits by means of such creation or assignment.

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.

Romania-Untd A Emirates

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New Tax Treaty between Romania and the U.A.E. has Entered into Force

The new income tax treaty between Romania and the United Arab Emirates entered into force on 11 December 2016. The treaty, signed 4 May 2015, replaces the 1993 tax treaty between the two countries.

Taxes Covered

The treaty covers Romanian tax on income and tax on profit and covers U.A.E. income tax and corporation tax.

Withholding Tax Rates

  • Dividends - 3%
  • Interest - 3%
  • Royalties- 3%

Limitation on Benefits

The provisions of Articles 10 (Dividends), 11 (Interest), and 12 (Royalties) will not apply if the main purpose or one of the main purposes of any person concerned with the creation or assignment of the shares, debt-claims, or other rights in respect of which the income is paid was to take advantage of those Articles by means of that creation or assignment. The limitation is included in each of the Articles.

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; 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 generally apply the credit method for the elimination of double taxation.

Effective Date

The new tax treaty applies from 1 January 2017. The 1993 tax treaty between the two countries is terminated and ceases to have effect from that date.

Russia-OECD

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Russia to Sign Multilateral Agreement for the Exchange of CbC Reports

According to recent reports, the Russian government has authorized the signing of the Multilateral Competent Authority Agreement (MCAA) for the exchange of Country-by-Country (CbC) reports. As part of the conditions for signing the CbC MCAA, signatories must be a party to the OECD Council of Europe Convention on Mutual Administrative Assistance in Tax Matters and have enacted (or commit to introduce) CbC reporting requirements. Russia has proposed to introduce CbC reporting requirements that will apply for fiscal years beginning on or after 1 January 2017.

Click the following link for the list of the CbC MCAA signatories to date.

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