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Approved Changes (2)

Cyprus

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Cyprus Clarifies New Equity and Other Aspects of Notional Interest Deduction

The Cyprus Tax Department recently issued a circular to clarify certain aspects of the country's notional interest deduction (NID), which is available for tax years beginning on or after 1 January 2015. The NID is equal to 3% plus a reference rate equal to the higher of the Cyprus 10-year government bond yield or equivalent bond yield of the country in which the assets funded by new equity are utilized.

New Equity

The circular clarifies that new equity includes any equity introduced from 1 January 2015 as paid-up share capital or a share premium, and may take the form of a contribution in cash or in kind. In addition, unpaid capital may qualify for the NID as long as it has been recorded as such, and existing reserves prior to 1 January 2015 may qualify if converted into capital and allocated to fund the acquisition of new taxable income producing assets.

Any capitalized amounts derived from the revaluation of movable or immovable property are specifically excluded from being treated as new equity for NID purposes.

Double Deduction Restrictions

In order to address issues of double deductions, where a company has new equity derived directly or indirectly from the new equity of another company, only one of the companies may be eligible to claim the NID. In addition, where new equity has been derived directly or indirectly from a loan obtained by another company that has benefited from a deduction of the actual interest incurred on the loan, the NID amount will be reduced by that actual interest amount.

Anti-Abuse

The circular includes that the Commissioner of Taxation may deny the NID if it is determined that an undertaking has no economic or commercial substance, and has the main purpose of evading tax.

Ukraine

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Ukraine Clarifies that Installation Services for Equipment Purchased from a Non-Resident Not Subject to Withholding Tax

Ukraine's State Fiscal Service (SFS) recently published guidance letter No. 15147/6/99-99-15-02-02-15, which clarifies the taxation of installation services in connection with equipment purchased from a non-resident. According to the letter, payments made to non-residents in connection with its business activities in Ukraine are generally subject to corporate withholding tax at a rate of 15% unless a tax treaty provides otherwise. For this purpose, the types of income subject to 15% withholding are specified under Article 141.4.1 of the Tax Code, including dividends, interest, royalties, lease/rental payment, proceeds from the sale of immovable property, and several other types of income. Article 141.4.1 also specifies that other income derived by a non-resident from business activities may be subject to tax, except for income from earnings or other compensation for the cost of goods, works or services provided by a non-resident to a resident. Based on this, the SFS has determined that installation services in connection with equipment falls within the scope of other goods, works or services and therefore the payment for such services are not subject to corporate withholding tax.

Proposed Changes (4)

Costa Rica

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Costa Rica Establishes Commission to Review BEPS Issues and Draft Needed Amendments

On 11 August 2016, Costa Rica published two resolutions in the Official Gazette concerning the establishment of a government commission to analyze the final reports of the OECD BEPS Project. In particular, the commission is responsible for evaluating Costa Rica's legal framework in relation to the BEPS Project, and draft proposals for any amendments needed to comply with the final BEPS reports.

Although no specific proposals have yet been issued, as a member of the OECD's inclusive framework for the global implementation of the BEPS Project, Costa Rica has committed to the implementation of at least the four minimum standards, which include 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).

Egypt

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Egypt to Introduce New Tax Dispute Settlement Process

The Egyptian government has approved draft legislation for the introduction of a new tax dispute settlement process to resolve approximately EGP 47 billion in outstanding disputes. Under the new process, pending tax disputes currently being handled through the courts would instead be settled through new independent committees separate from the tax authority. If a taxpayer wishes to have a case settled by an independent committee, a request is to be made with the tax authority, after which court proceedings are suspended for up to three months while the committee works to resolve the case.

The legislation is now subject to examination and approval by the parliament.

Iceland

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Iceland Finalizing CbC Reporting Requirements

Iceland's government is reportedly working to finalize regulations to introduce Country-by-Country reporting requirements, as well as Master and Local file requirements in line with Action 13 of the OECD BEPS Project. Although draft regulations are not yet available, it is expected the requirements will apply for fiscal years beginning on or after 1 January 2017.

Additional details of the requirements will be published once available.

South Africa

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South Africa Issues Draft Guide for Special Voluntary Disclosure Program

The South African Revenue Service (SARS) has issued a preliminary draft guide for the Special Voluntary Disclosure Program (SVDP), which is currently pending the enactment of the required legislation (previous coverage) and will be available from 1 October 2016 to 31 March 2017. The draft guide covers:

  • Eligibility;
  • Relief granted;
  • Required supporting documentation; and
  • SVDP application and processing.

Click the following link for the Draft Guide: Special Voluntary Disclosure Program (v1.0).

Treaty Changes (2)

Chile-Uruguay

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Update - Uruguay Approves Tax Treaty with Chile

The Uruguayan government approved the draft law for the ratification of the pending income and capital tax treaty with Chile on 1 August 2016. The treaty, signed 1 April 2016, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Chilean taxes imposed under the Income Tax Act, and covers Uruguayan tax on business income, personal income tax, non-residents income tax, tax for social security assistance, and capital tax.

Residence

If a company is considered resident in both Contracting States, 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 any relief or exemption from tax provided by the treaty.

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 within any 12-month period.

In determining if the 183-day threshold is met, substantially similar activities of an associated enterprise will be included, although the period during which two or more associated enterprise carry out concurrent activities will be counted only once.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company directly holding at least 25% of the voting rights or capital of the paying company; otherwise 15% (the rates set in the treaty will not limit Chile's application of the additional tax payable on dividends (35%), provided that the first category tax (FCT) is fully creditable in computing the amount of the additional tax)
  • Interest - 4% for interest paid in respect of a sale on credit of machinery and equipment, and loans with a period of at least three years granted by a bank to finance investment projects; otherwise 15%
  • Royalties - 10%
  • Fees for technical services - 10%

MFN Clause

The final protocol to the treaty, signed the same date, includes the provision that if Chile enters into another agreement with a third State that provides for a lower rate of withholding tax on interest, such lower rate will automatically apply under the Chile-Uruguay tax treaty from the date such other agreement is in effect. However, for the purpose of the Chile-Uruguay tax treaty, the rate applied may not be lower than 10%.

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 alienation of movable property forming part of the business property of a permanent establishment in the other State;
  • Gains from the alienation of shares or other participation rights that at any time during the 365-day period preceding the alienation directly or indirectly derived at least 50% of their value from immovable property situated in the other State; and
  • Gains from the alienation of shares or other participation rights that at any time during the 365-day period preceding the alienation directly or indirectly represented a participation in the capital of a company resident in the other State (if the participation was less than 20% for the entire 365-day period, the rate is limited to 16%)

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.

Entry into Force and Effect

The treaty will enter into force 15 days after the ratification instruments are exchanged, and will generally apply from 1 January of the year following its entry into force. However, Article 26 (Exchange of Information) will apply from the date of the treaty's entry into force.

India-France

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Indian Tax Tribunal Holds Commission Fees for Corporate Guarantee with French Bank Not Taxable in India

The Mumbai Income Tax Appellate Tribunal recently issued its decision on whether commission fees paid in relation to a corporate guarantee deposited in a French bank are subject to tax. The case involved the French multinational management consulting company Capgemini, and its Indian subsidiaries Capgemini India Pvt. Ltd. and Capgemini Business Services (India) Ltd.

In the 2011-12 fiscal year, Capgemini deposited a corporate guarantee with BNP Paribas in France on behalf of its global subsidiaries. With the guarantee, Capgemini's Indian subsidiaries were granted credit facilities by BNP Paribas' Indian branches and were charged a commission fee for the guarantee equal to 0.5% per year. While Capgemini held that the commission fees were not taxable in India, the assessing officer determined that the fees were taxable under Article 23 (Other Income) of the 1992 France-India tax treaty. Under Article 23, items of income of a resident of a Contracting State not dealt with in the treaty (guarantee commission fees are not), and arising in the other Contracting State may be taxed in that other Contracting State.

In its decision, The Mumbai Tribunal sided with Capgemini. The Tribunal reasoned that because the corporate guarantee for which the commission fees were paid was deposited by a French company with a French bank in France, there was no basis for the commission fee income to:

  • Be deemed to have accrued in India, as required under the Income Tax Act, 1961; or
  • Be deemed to have arisen in India, as required under Article 23 of the France-India tax treaty.

Based on this, the guarantee commission fees cannot be considered taxable in India.

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