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Approved Changes (4)

European Union-Luxembourg

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European Commission Publishes Non-Confidential Version of Decision Letter for the State Aid Investigation Concerning Luxembourg and Amazon

On 16 January 2015, the European Commission published a non-confidential version of the decision letter issued to Luxembourg on 7 October 2014 for the launch of a formal investigation into whether or not Luxembourg's tax treatment of Amazon constituted a breach of the EU's state aid rules. The decision letter includes the facts of the case, including details of Amazon's request concerning the transfer pricing arrangement and structure, and the resulting ruling from Luxembourg.

Luxembourg's Ruling for Amazon

The initial request concerning the transfer pricing arrangement made by Amazon was dated 23 October 2003, and the request by Amazon's tax advisor on the structure was dated 31 October. The response and approval for both issued by the Luxembourg tax authorities was dated 6 November 2003.

The basic structure involved two US parent companies of Amazon Europe Technologies Holding SCS (SCS), a Luxembourg limited liability partnership form that is considered a transparent entity. SCS wholly owns Amazon EU Sarl (LuxOpCo), a Luxembourg limited liability company, which operates all of Amazon’s European websites and acts as Amazon headquarters in Europe recording Amazon's European profits.

Under the ruling issued by the Luxembourg tax authorities, Amazon was approved to establish this structure with SCS licensing Amazon's IP for use in Europe to LuxOpCo, a tax deductible expense for LuxOpCo. Further, the royalty income of SCS is not subject to tax in Luxembourg because it is a transparent entity, and neither it nor the US partners are deemed to have a permanent establishment in Luxembourg, confirmation of which was requested by Amazon and included in the ruling.

For the transfer pricing arrangement of the license fee, Luxembourg allowed Amazon to base the fee each year on the EU operating profit less a LuxOpCo return equal to the lesser of 4-6% of LuxOpCo’s total EU Operating Expenses for the year or the total EU Operating Profit attributable to the websites. A further condition was included where the LuxOpCo return could not be less than 0.45% of EU revenue or more than 0.55% of EU revenue.

European Commission's Doubts

The main issues the Commission has with the ruling are in regard to the transfer pricing arrangement. According to the decision letter, the main doubts regarding the compliance of the ruling are summarized as follows:

  1. Luxembourg did not provide the Commission any transfer pricing report concerning the determination of the approved transfer pricing arrangement.
  2. The method proposed by Amazon in the ruling request does not correspond to any method prescribed in the OECD guiltiness, and the Commission doubts that the Luxembourg tax authorities properly confirmed that the arrangement was in line with market conditions.
  3. The determination of the royalty payment was not in line with OECD guidelines as it is not calculated in the form of a royalty rate over revenue, but instead calculated as a residual profit.
  4. The ruling request indicates that the royalty rate will be expressed as a percentage of revenues, when it should be calculated based on revenues. The reason for its acceptance given by Luxembourg was that LuxOpCo performed less complex operations. This reason is given despite the fact that an extensive functions and risk analysis was not included in the request and the IP was not described in order to make that conclusion.
  5. Based on information submitted to the Commission, it does not appear that there was any comparability analysis to determine that 4-6% of operating expenses is sufficient remuneration. In addition, the 0.55% cap seems too low.
  6. According to the information provided by Luxembourg, the ruling was still in force as of 24 June 2014 and the remuneration is still accepted as being at arm's length, even though no revisions have been made since the ruling was issued.

Based on the information provided and the resulting doubts, the formal investigation was launched into whether the ruling made for Amazon by Luxembourg conferred a selective advantage resulting in a lower tax liability, which constitutes illegal State aid.

Click the following link for the full 23 page decision letter to launch the State aid investigation.

Malaysia

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Malaysia Individual Income Tax Rates for 2015

Malaysia's individual Income tax rates for 2015 are reduced overall, the top rate bracket threshold is increased, and two brackets are added. The brackets and rates are as follows:

  • up to MYR 5,000 - 0%
  • over MYR 5,000 up to 20,000 - 1%
  • over MYR 20,000 up to 35,000 - 5%
  • over MYR 35,000 up to 50,000 - 10%
  • over MYR 50,000 up to 70,000 - 16%
  • over MYR 70,000 up to 100,000 - 21%
  • over MYR 100,000 up to 250,000 - 24%
  • over MYR 250,000 up to 400,000 - 24.5%
  • over MYR 400,000 - 25%

The new rates apply from 1 January 2015.

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OECD Publishes Discussion Draft Comments on BEPS Action 6: Preventing Treaty Abuse and Action 7: Preventing the Artificial Avoidance of PE Status

On 12 January 2015, the OECD published the comments received in response to the public discussion drafts on the Base Erosion and Profit Shifting (BEPS) Project follow-up work on Action 6: Preventing Treaty Abuse (PDF), and on Action 7: Preventing the Artificial Avoidance of PE Status(PDF). Over 750 pages of comments were received for Action 6, and over 840 for Action 7.

A public consultation meeting will be held on 22 January 2015 concerning the comments received for Action 6, and on 21 January 2015 concerning Action 7. Both meetings will be broadcast live via http://video.oecd.org/ from 9:30 am to 6 pm CET.

Ukraine

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Update - Ukraine Tax Reform Measures for 2015

On 28 December 2014, the Ukrainian parliament approved tax reforms as part of the 2015 budget. In addition to the new transfer pricing rules previously covered, the following changes are made in regard to individual and corporate taxation.

Individual Income Tax and Social Contribution Tax

The top individual income tax rate is increased from 17% to 20%.

For qualifying companies, the social contribution tax rate may be reduced by a coefficient as low as 0.4. The conditions include:

  • The average payroll of the company must have increased by at least 30% from the average payroll in 2014
  • The average social security contribution amount per employee may not be less than UAH 700
  • The average employee salary of the company may not be less than 3 minimum salaries (minimum salary = UAH 1,218 monthly)

If the conditions are met, the coefficient applied for the reduction is equal to the ratio of the 2014 average monthly taxable amount / current monthly taxable amount, with a minimum coefficient of 0.4.

Participation Exemption

The participation exemption for dividends applies only to dividends received from companies subject to Ukrainian corporate income tax (CIT).

Advance CIT on Dividends

Ukraine requires the payment of advance CIT on dividends when distributions are made, which may then be used to offset CIT liabilities in future periods. With the tax reform for 2015, only distributions in excess of taxable profits for the period for which the dividends are paid will be subject to advance CIT.

Interest Expense Deduction Limit

A 3.5:1 thin capitalization debt-to-equity ratio is introduced in regards to the deductibility of interest expenses paid to related non-residents. When the ratio is exceeded, the deductibility of the interest payment is limited to the taxpayer's interest income plus 50% of pre-tax profit (excluding interest income and expenses).

Royalty Expense Deduction Limit

The deduction limit for royalty expenses paid to non-residents is increased from the previous limit of 4% of revenue from the previous year, to 4% of revenue from the previous year plus the amount of royalty income of the taxpayer.

If it can be shown that the payments are in accordance with the arm's length principle, the deduction limit does not apply.

Expenses Paid to Tax Havens Deduction Limit

Ukraine limits the deductibility of expenses paid residents of jurisdictions that have been designated as tax havens. With the 2015 tax reform, the allowed deduction for such expenses is reduced from 85% of the payments to 70%.

If it can be shown that the payments are in accordance with the arm's length principle, the deduction limit does not apply.

Treaty Changes (3)

France-Singapore

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New Tax Treaty between France and Singapore Signed

On 15 January 2015, officials from France and Singapore signed a revised income tax treaty. Once in force and effective, the new treaty will replace the 1974 income tax treaty between the two countries.

Taxes Covered

The treaty covers French income tax, corporation tax, contributions on corporation tax, and widespread social security contributions and contributions for the reimbursement of the social debt. It covers Singapore income tax.

Service PE

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 365 days in any 15 month period.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company directly or indirectly holding at least 10% of the paying company's capital, otherwise 15%
  • Interest - 10%, with an exemption for interest paid by an enterprise of one of the Contracting States to an enterprise of the other Contracting State when the recipient is the beneficial owner
  • Royalties - 0%
  • Capital Gains - generally exempt, except for
    • Gains from the alienation of immovable property in a Contracting State,
    • Gains from the alienation of movable property forming part of the business property of a permanent establishment in a Contracting State, and
    • Gains from the alienation of shares or other rights in a company, trust or any other institution or entity when 50% or more of the value of the assets or property of the entity is directly or indirectly derived from immovable property in a Contracting State or connected rights (excluding immovable property pertaining to business carried on by such company)

Double Taxation Relief

France generally applies the credit method for the elimination of double taxation, while Singapore applies the credit method if the conditions for exemption under the Singapore Tax Act are not met.

However, both countries will apply the exemption method for dividends paid to a company that directly owns at least 10% of the capital of the company paying the dividends, and for profits attributable to a permanent establishment.

Limitation on Benefits

The treaty includes a limitation on benefits provision under Article 28 Miscellaneous. According to the provision, the benefits of any reduction in or exemption from tax provided for in the treaty will not apply when the main purpose for entering into certain transactions or arrangements was to secure a more favorable tax position and obtaining such treatment would be contrary to the object and purpose of the relevant provisions of the treaty.

Entry into Force and Effect

The treaty will enter into force on the first day of the second month following the day the ratification instruments are exchanged.

The treaty will apply in Singapore in respect of tax chargeable for any year of assessment beginning on or after 1 January of the second year following its entry into force, and for other cases from 1 January of the year following its entry into force. It will apply in France after the year in which it enters into force.

Once in force and effective, the new treaty will replace the 1974 income tax treaty between the two countries.

Lithuania-Untd A Emirates

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

On 19 December 2014, the income tax treaty between Lithuania and the United Arab Emirates entered into force. The treaty, signed 30 June 2013, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Lithuanian profit tax and income tax, and covers U.A.E. income tax and corporate tax.

Service PE

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 in any 12 month period.

Withholding Tax Rates

  • Dividends - 0% if the beneficial owner is a company directly holdings at least 10% of the paying company's capital, otherwise 5%
  • Interest - 0%
  • Royalties - 5%
  • Capital Gains - generally exempt, except for gains from the alienation of immovable property, and gains from the alienation of movable property forming party of the business property of a permanent establishment or fixed base in a Contracting State

Double Taxation Relief

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

Limitation on Benefits

The treaty includes a limitation on benefits article with the provision that the relief provided for under the treaty will not apply if the main purpose or one of the main purposes of the creation or existence of residency by a resident of a Contracting State or a connected person was to obtain the benefits of the treaty.

Effective Date

The treaty applies from 1 January 2015.

Oman-Malta

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Tax Treaty between Malta and Oman under Negotiation

According to recent reports, officials from Malta and Oman recently met to negotiate an income tax treaty. Any resulting treaty would be the first of its kind between the two countries and must be finalized, signed and ratified before entering into force.

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