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Approved Changes (2)

Brazil

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Brazil Revokes Provisional Measure on Payroll-based Social Security Tax

On 9 August 2017, Brazil published Provisional Measure 794/2017 in the Official Gazette, which revokes Provisional Measure 774/2017 (PM 774). PM 774 was originally published 30 March 2017 and reestablished the 20% payroll-based social security tax (INSS) for most companies effective 1 July 2017 (previous coverage).

Malawi

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Malawi Announces New Tax Measures Effective July 2017

On 15 August 2017, the Malawi Revenue Authority (MRA) announced that new tax measures are effective 1 July 2017. Most of the measures were included in the 2017/18 Budget Statement and were implemented through the relevant Amendment Acts for 2017 that were published in the Official Gazette on 25 July 2017. The main measures of the Amendment Acts are summarized as follows:

Taxation (Amendment) Act, 2017

One of the main changes is the introduction of new harmonized tax-related penalties, including:

  • A penalty of 20% of the amount outstanding for late payment in the first month, plus interest on the amount outstanding equal to 5% plus the prevailing bank lending rate per annum for each month, or part of a month, the tax remains unpaid;
  • A penalty of MWK 200,000 for failing to comply with a notice, for giving incorrect information, for failing to keep records, books, or accounts, etc., plus MWK 50,000 per month, or part of a month, the failure continues;
  • A penalty of MWK 300,000 for failing to furnish a return of income, a return of payments to shareholders, and certain other documents, plus MWK 50,000 per month, or part of a month, the failure continues;
  • A penalty of 20% of the amount of tax unpaid as a result of an omission of income, an unlawful deduction/offset, an undue allowance claim, or the failure to deduct (remit) tax when required, plus interest on the amount unpaid equal to 5% plus the prevailing bank lending rate per annum for each month, or part of a month, the tax remains unpaid;
  • A penalty of MWK 200,000 or twice the amount of tax due or imprisonment for one year when the above violations are committed with the intent to defraud;
  • And several other penalties for specific actions, including for assisting in the preparation or delivery of incorrect returns, accounts, declarations, etc.

Another important change is the replacement of prior transfer pricing rules section with new, more specific rules, which include that:

  • Malawi residents (subject to Malawi tax) and permanent establishments in Malawi of non-residents that are engaged in transactions with related parties (controlled transactions) must determine their taxable income consistent with the arm's length principle;
  • Where controlled transactions are not consistent with the arm's length principle, the taxable income will be computed as if the transactions are consistent with the arm's length principle;
  • Two persons are considered related where one participates directly or indirectly in the management, control, or capital of the other, or a third person participates directly or indirectly in the management, control, or capital of both - conditions considered met where the person:
    • Owns directly or indirectly more than 50% of the share capital of the other person; or
    • Has the practical ability to control the business decisions of the other person;
  • The transfer pricing rules apply regardless of two parties being related when transactions are engaged with persons resident in a jurisdiction providing a beneficial tax regime to such person.

Note - The MRA has separately published the Taxation (Transfer Pricing) Regulations 2017 and the Taxation (Transfer Pricing Documentation) Regulations 2017 in relation to the above changes (previous coverage).

Other changes include:

  • A change in the term "bank interest" under the Taxation Law to just "interest" in order to increase coverage of withholding tax to nonbank institutions;
  • An increase in the tax-free threshold and a new rate for high income earners, resulting in individual employment income tax brackets as follows:
    • up to MWK 360,000 - 0%
    • over MWK 360,000 up to 420,000 - 15%
    • over MWK 420,000 up to 36,000,000 - 30%
    • over MWK 36,000,000 - 35%
  • An increase in the tax-free threshold for individual income other than employment income, resulting in the following brackets:
    • up to MWK 360,000 - 0%
    • over MWK 360,000 up to 420,000 - 15%
    • over MWK 420,000 - 30%

Value Added Tax (Amendment) Act, 2017

Changes include:

  • A new penalty of MWK 300,000 for failure to submit VAT returns, plus MWK 50,000 per month, or part of a month, the failure continues;
  • A new penalty of  20% of the amount outstanding for late payment in the first month, plus interest on the amount outstanding equal to 5% plus the prevailing bank lending rate per annum for each month, or part of a month, the VAT remains unpaid;
  • The reclassification of dairy products, animal and vegetable fats and oils, and certain other goods as VAT exempt.

Customs and Excise (Amendment) Act, 2017

Only one change is made, which is the addition of the following within the scope of excise tax (duties): airtime, TV subscriptions, and gaming and betting, including lotteries.

Proposed Changes (2)

Australia

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Australia to Lower Income Threshold for Public Disclosure of Tax Information by the ATO

Draft legislation is currently before the Australian Senate that would lower the income threshold for the public disclosure of corporate tax information of private Australian companies by the Australian Taxation Office (ATO). The legislation is meant to align the threshold for private corporate entities with that of public corporate entities by lowering the threshold from AUD 200 million to AUD 100 million in total reported income.

The disclosure of private company tax information has changed a few times in recent years, with an initial threshold of AUD 200 million for the 2013-14 income year that was later reduced to AUD 100 million, followed by an amendment to exempt private companies and then an amendment to set the threshold back to AUD 200 million.

Click the following link for the Taxation Administration Amendment (Corporate Tax Entity Information) Bill 2017 page on the Australian Parliament website, which includes the legislation and an explanatory memorandum. Subject to approval, the reduced threshold is to apply from the 2017-18 income year.

New Zealand

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Summary of New Zealand Government's Key BEPS Decisions

On 14 August 2017, New Zealand Inland Revenue published a summary of the Government's key BEPS policy decisions, which were announced earlier in the month (previous coverage). The summary provides an overview of the policy proposals, the comments received, and the Government's decision for each. As provided in the summary document, the key policy proposals and decisions are as follows:

Strengthening interest limitation rules

Interest rate cap

The Government has agreed to replace the interest rate cap proposal with a restricted transfer pricing rule. This approach will usually produce the same result, as it will require the interest rate to:

  • be in line with the parent's cost of borrowing on the assumption that the borrower is supported by its foreign parent in the event of a default; and
  • be set on the basis that it is "vanilla" – disregarding any features or terms that could push up the interest rate.

Thin capitalization non-debt liability adjustment

The government has agreed in principle with a proposal to reduce a taxpayer's assets by the amount of its non-debt liabilities for the purpose the thin cap rules (allowed debt limited to 60% of assets).

Infrastructure projects exemption

The government has agreed in principle with a proposal to exempt certain infrastructure projects funded entirely with third-party limited recourse loans from interest limitation rules.

Removing the net current valuation method for thin capitalization

The Government has agreed to modify this proposal to allow taxpayers to retain the ability to use asset values for thin capitalization that differ from those reported in their financial accounts, but will develop clearer legislative requirements for when this option is used.

Removing the option to measure debt and assets at year-end for thin capitalization

This proposal will not proceed. The Government has instead agreed to develop an anti-avoidance rule that applies when a taxpayer substantially repays a loan just before the end of the year.

Transfer pricing and permanent establishment avoidance

Permanent establishment avoidance rule

The Government has agreed that the rule should be more narrowly targeted at avoidance arrangements. The Government will consult further with submitters on options to achieve this result.

Anti-avoidance income source rule

The Government has agreed that the rule should be more narrowly targeted. The modified rule will broadly provide that, where another group member carries on a non-resident's business in New Zealand, the non-resident will be deemed to carry on that business itself for the purpose of determining whether its income from New Zealand customers has a New Zealand source.

Life insurance (no deduction for the reinsurance of life policies if the premium income is not taxable in New Zealand)

The Government considers that the proposed reinsurance amendments are necessary to ensure that the rules apply as intended and to protect the tax base.

Time bar for transfer pricing

The Government has agreed with the original proposal to extend the time bar limiting Inland Revenue's ability to adjust a taxpayer's transfer pricing position from four years to seven years.

Burden of proof

The Government has decided that the burden of proof will be shifted onto the taxpayer for transfer pricing matters.

Power of reconstruction

The Government has agreed that the test for reconstructing a transfer pricing arrangement should align with the OECD's transfer pricing guidelines, instead of the proposal to base reconstruction rules on Australian provisions.

Paying tax upfront

The Government has decided not to proceed with this proposal, given that Inland Revenue already charges use-of-money interest on tax owing, which provides a sufficient disincentive for multinationals to prolong disputes.

Tax collected from the New Zealand member of a multinational group

The Government has decided to proceed with the original proposal. However, it has agreed that the rule should only apply if the non-resident fails to pay the tax itself. Also, the rule should only apply if the New Zealand member and the non-resident are part of the same wholly owned group.

Information collection (request information held offshore by a related group member)

The Government considers that the information collection powers are necessary to ensure that the multinational group is required to provide Inland Revenue with the information required to determine its tax obligations. There also needs to be appropriate incentives for the multinational to comply with these requests (penalty up to NZD 100,000). Further, the consequences of non-compliance with the proposals will be economically borne by the multinational which controls the relevant information. However, the Government has agreed to allow taxpayers to appeal the penalty.

Addressing hybrid mismatch arrangements

Scope of rules

The Government has decided that the best approach is a comprehensive adoption of the OECD recommendations with suitable modifications for the New Zealand context. The Government does not consider that a general de minimis is needed for the hybrid rules. (Although see below as to the specific de minimis for foreign trusts and limited partnerships.)

Foreign trusts

The Government has decided that foreign trusts will be included within the scope of the rules where their treatment outside of New Zealand means income of the trust is not taxed anywhere in the world. A specific de minimis will be provided such that foreign trusts and limited partnerships are not subject to the rules if their foreign-sourced income does not exceed a certain threshold.

Foreign branches of New Zealand companies (no deduction for foreign branch losses)

The Government has agreed to vary the OECD recommended initial proposal so that taxpayers who have simple foreign branch structures that do not present a hybrid mismatch problem are not covered by the rules.

Regulatory capital

The Government has decided that there will be no general exclusion for regulatory capital.

Imported mismatches

The Government has agreed that the imported mismatch rule will be introduced in full, but its application will be deferred for non-structured imported mismatch arrangements until 1 January 2020.

Treaty Changes (4)

Andorra-Untd A Emirates

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

The income tax treaty between Andorra and the United Arab Emirates entered into force on 1 August 2017. The treaty, signed 28 July 2015, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Andorran corporate income tax, personal income tax, tax on income of non-residents, and capital gains tax on immovable property transfers. It covers U.A.E. income tax and corporate tax.

Income from Hydrocarbons

Article 3 (Income from Hydrocarbons) provides that the treaty will not affect the right of either one of the Contracting States to apply their domestic laws and regulations related to the taxation of income and profits derived from hydrocarbons and its associated activities situated in the territory of the respective Contracting State.

Withholding Tax Rates

  • Dividends - 0%
  • Interest - 0%
  • Royalties - 0%

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 deriving more than 50% of their value directly or indirectly from immovable property situated in the other State (exemption for shares listed on a recognized stock exchange of either Contracting State and shares alienated as part of a corporate reorganization).

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 2018.

Moldova-Turkey

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Moldova Approves Pending SSA with Turkey

The Moldovan Cabinet of Ministers reportedly approved the ratification of the pending social security agreement with Turkey on 10 August 2017. The agreement, signed 5 May 2017, is the first of its kind between the two countries and will enter into force after the ratification instruments are exchanged.

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OECD Publishes Comments Received on the 2017 Draft Update to the Model Tax Convention

The OECD has published the comments received on the draft contents of the 2017 update to the OECD Model Tax Convention, which was published for comments on 11 July 2017. The update includes several changes to the Model Convention that were for the most part approved as part of the BEPS project. Only certain specific parts of the update were open for comment (previous coverage).

Russia

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Russian Supreme Court Overview of Court Practices for Settling Foreign Investor Disputes

The Russian Supreme Court has recently published an overview of court practices dated 12 July 2017 for the settling of disputes related to the defense of foreign investors. The overview provides general guidelines that lower courts can follow with respect to claims for reduced withholding tax rates under tax treaties and certain other matters. Some of the main points include:

  • Reduced withholding tax rates on dividends provided under a tax treaty may still be applied where the dividend income recipient has ceased being a shareholder at the time the dividends are actually paid, provided that the requirements for the reduced rate under the treaty were met at the time the decision for the dividend payment (decision on profit distribution) was made;
  • Where a foreign investors makes an investment in a Russian company that meets the requirements for a reduced withholding rate under a tax treaty and that investor is subsequently involved in a merger with another foreign company, the treaty benefit (reduced rate) may still apply for the successor company;
  • Asset contributions are to be considered in determining if the investment threshold for a reduced withholding rate under a tax treaty is met; and
  • Royalty payments to a treaty country under a sublicense agreement are not eligible for treaty benefits when the actual license holders are resident in a country that does not have a tax treaty with Russia, the treaty country recipient is essentially acting as a conduit, and the parties involved (payer, recipient, license holder) are related.

Click the following link for the Supreme Court overview (Russian language).

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