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Approved Changes (2)

United Kingdom

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UK to Follow BEPS Project Action 8-10 Guidelines in Transfer Pricing Audits

HMRC Deputy Director, Head of Transfer Pricing Maura Parsons has reportedly stated that HMRC will follow guidelines developed as part of Actions 8-10 of the OECD BEPS Project during transfer pricing audits. The statement was made to members of the International Bar Association during a recent conference held in London. Actions 8-10 deal with aligning transfer pricing outcomes with value creation and ensuring that the transfer pricing rules result in outcomes where operational profits are allocated to the economic activities that generate them (previous coverage).

According to Deputy Director Parsons, UK tax law, which currently refers to 2010 OECD transfer pricing guidelines, will be amended to include the new guidelines in the near future. However, it is her view that the legal change is not needed for HMRC to change transfer pricing practices that take into account the new guidelines.

United States-European Union

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U.S. Treasury Secretary Addresses Concerns with EU State Aid Investigations in Letter to European Commission President

In a letter to European Commission President Jean-Claude Juncker dated 11 February 2016, U.S. Treasury Secretary Jacob Lew addresses concerns with recent EU State aid investigations that appear to be targeting U.S. multinationals. In the letter, Treasury Secretary Lew sets out four principal concerns as follows:

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First, European Commission (EC) Directorate-General for Competition (DG COMP) has sought to impose penalties retroactively based on a new and expansive interpretation of state aid rules. We appreciate that the state aid doctrine is a longstanding component of EU competition law. We also recognize that the selective application of tax rules could potentially constitute impermissible state aid. Our team is not aware, however, of any previous instance -- in the many decades of state aid jurisprudence -- in which DG COMP has applied its current theory of selectivity. Instead, DG COMP appears to be adopting an entirely new legal theory and applying it retroactively in a broad and sweeping manner. This raises serious concerns about fundamental fairness and the finality of tax rulings throughout the entire European Union.

Second, DG COMP appears to be targeting U.S. companies disproportionately. The legal theory underlying its investigations logically should apply to all multinational firms, not just those based in the United States. Yet three of the four current transfer pricing cases reportedly involve Member State arrangements with U.S. firms. In addition, public reports suggest that DG COMP is seeking billions of dollars in penalties from U.S. firms -- far more than what it is seeking from non-U.S. companies.

Third, DG COMP's approach appears to target, in at least several of its investigations, income that Member States have no right to tax under well-established international tax standards. U.S. multinationals generally do not conduct the cutting-edge research and development that creates substantial value in the European Union, and as a result, comparatively little of their income is attributable to their European operations. We recognize that the U.S. system will only tax this income upon repatriation, and many U.S. firms are choosing to defer paying tax liabilities by keeping income overseas in low-tax jurisdictions. This is a serious problem that we seek to address through President Obama's business tax reform plan and the BEPS project. This problem, however, does not give Member States the legal right to tax this income. Doing so would directly harm U.S. taxpayers. When U.S. companies repatriate revenue -- as tax reform proposals from both U.S. political parties would require them to do within a fixed timeframe -- any assessments paid to Member States could be eligible for foreign tax credits. This loss of revenue would impose a direct cost on American taxpayers.

Fourth, DG COMP's approach could undermine U.S. tax treaties with EU Member States. As you know, Member States have exclusive authority over income tax under EU law. Accordingly, the United States does not have an income tax treaty with the European Union. DG COMP's new assertion of authority raises serious questions about this relationship and the finality of income taxation-related dealings with Member States. We expect that this new uncertainty could damage the business climate in Europe and deter foreign direct investment.

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Click the following link for the full text of the letter, which also includes Senate Finance Committee testimony given by Treasury Deputy Assistant Secretary Robert Stack on the issues.

Proposed Changes (1)

Portugal

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Portugal Announces Tax Reform for 2016 including CbC Reporting and Patent Box Regime Amendments

Portugal has announced several tax reform measures following the recent approval of its Budget for 2016 by the European Commission. The main measures include:

  • The introduction of Country-by-Country (CbC) reporting requirements based on the guidelines developed as part of Action 13 of the OECD BEPS Project;
  • Amendments to the patent box regime to bring it in line with the modified nexus approach developed as part of Action 5 of the OECD BEPS Project;
  • A reduction in the required holding period for the participation exemption regime from 2 years to 1 year, and an increase in the required holding percentage from 5% to 10%;
  • A reduction in the loss carry forward limit from 12 years to 5 years, effective from 2017; and
  • The phasing out of individual income tax surcharge from 2017.

Additional details on the tax reform measures will be published once available.

Treaty Changes (4)

Botswana-Ireland

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Tax Treaty between Botswana and Ireland has Entered into Force

The income tax treaty between Botswana and Ireland entered into force on 3 February 2016. The treaty, signed 10 June 2014, is the first of its kind between the two countries.

Taxes Covered

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

Permanent Establishment

The treaty includes the provision that a permanent establishment will be deemed constituted if 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 6 months within any 12-month period.

The treaty also 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.

Withholding Tax Rates

  • Dividends - 5%
  • Interest - 7.5%
  • Royalties - 5% for the use of or right to use industrial, commercial, or scientific equipment; otherwise 7.5%
  • Technical Fees (for any services of an administrative, technical, managerial or consultancy nature) - 7.5%

MFN Clause

Article 20 (Technical Fees) includes the provision that if Botswana enters into tax treaty with any country other than Ireland after the signing of the Botswana-Ireland treaty and such treaty provides for a lower rate of tax on technical fees, then such rate will apply under the Botswana-Ireland tax 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 movable property forming part of the business property of a permanent establishment in the other State; and
  • Gains from the alienation of shares or an interest in a partnership or trust if deriving more than 50% of their value from immovable property situated in the other State (exemption for shares quoted on a recognized stock exchange)

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 treaty applies in Botswana from 4 March 2016 in respect of withholding taxes, and from 1 July 2017 in respect of other taxes. It applies in Ireland from 1 January 2017.

Cape Verde-Angola-Brazil-Eq. Guinea-Ivory Coast-Luxembourg-Morocco-Seychelles-Singapore

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Cape Verde Negotiating Tax Treaties with Angola, Brazil, Equatorial Guinea, Ivory Coast, Luxembourg, Morocco, Seychelles, and Singapore

According to a recent release from the Cape Verde Ministry of Finance and Planning, tax treaty negotiations are underway with Angola, Brazil, Equatorial Guinea, Ivory Coast, Luxembourg, Morocco, Seychelles, and Singapore. Any resulting treaties would be the first of their kind between Cape Verde and the respective countries, and will need to be finalized, signed and ratified before entering into force.

Luxembourg-Senegal

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Tax Treaty between Luxembourg and Senegal Signed

On 10 February 2016, officials from Luxembourg and Senegal 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.

Qatar-South Africa

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Tax Treaty between Qatar and South Africa has Entered into Force

The income tax treaty between Qatar and South Africa entered into force on 2 December 2015 according to a recent update from the South African Revenue Service. The treaty, signed 6 March 2015, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Qatari income tax, and South African normal tax, withholding tax on royalties, dividends tax, withholding tax on interest, and the tax on foreign entertainers and sportspersons.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted if 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.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company holding at least 10% of the paying company's capital, otherwise 10%
  • Interest - 10% (exemption for interest paid in respect of any debt instrument listed on a recognized stock exchange)
  • Royalties - 5%

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 dividends, interest or royalties are 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;
  • 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 of the capital stock of a company the property of which consists directly or indirectly wholly or mainly of immovable property situated in the other State (does not apply if the immovable property is used for the purposes of carrying on an industrial or manufacturing activity)

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.

Effective Date

The treaty applies from 1 January 2016.

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