Worldwide Tax News
On 13 September 2016, Brazil published Normative Instruction RFB No. 1658/2016 in the Official Gazette, which amends Normative Instruction RFB No. 1037/2010 (list of low tax jurisdictions and privileged tax regimes). The main amendments include:
- The addition of Curacao, Ireland and Sint Maarten as low tax jurisdictions (black list), and the removal of the Netherlands Antilles;
- The addition of the Austrian holding company regime as a privileged tax regime (grey list); and
- The addition of a definition for substantial economic activity in relation to Danish and Dutch holding company regimes (grey listed), which essentially states that a holding company is considered to have substantial economic activity if it has the appropriate operational capacity, as evidenced by the existence of a sufficient number of employees and adequate physical facilities, for the exercise of management and effective decisions on:
- The development of activities in order to obtain income derived from its assets; or
- The administration of equity in order to obtain income arising from the distribution of income and capital gains.
Inclusion in the black list or grey list impacts several areas of Brazilian taxation, including withholding tax rates, the deductibility of expenses, thin capitalization rules, CFC rules and transfer pricing.
Click the following links for Normative Instruction RFB No. 1658/2016 and Normative Instruction RFB No. 1037/2010 as amended. The changes are effective from 1 August 2016.
In a recently published decision, Germany's Federal Supreme Finance Court found that a U.S. based company operating an online dating platform is subject to value added tax (VAT) in Germany. As part of the service the company provides, members are charged a fee for access to upload their own information and to search and contact other members. Such access to a database is considered an electronically supplied service, which under German law is subject to VAT if it is the primary business of the company. In an attempt to escape the VAT obligation, the U.S. argued that its primary business was not the access, but rather other services it provided, including chat functions, a newsletter and a telephone help desk.
In its decision, the Federal Supreme Finance Court upheld a lower court decision rejecting the U.S. company's argument. The Court found that the access was the primary service and that the other services argued by the company were ancillary services that had no bearing on the VAT treatment of the primary service. As such, the membership fees charged to German consumers by the company are subject to the standard German VAT rate of 19%.
According to a 12 September 2016 release from the Indian Ministry of Finance, the Indian (Union) Cabinet has approved the creation of the Goods and Services Tax (GST) Council. The GST Council will be a joint forum of the Centre (federal government) and the States, and is responsible for making recommendations on important issues related to India's new National GST regime, including:
- The goods and services that may be subjected or exempted from GST;
- Model GST Laws;
- Principles that govern place of supply;
- Threshold limits;
- GST rates; and
- Other special provisions.
The new GST regime is to be implemented from 1 April 2017. Click the following link for the release.
The French government has announced further details on its plans to introduce a reduced corporate tax rate of 28% (previous coverage). In addition to providing the reduced rate for smaller businesses, the government is planning to make the 28% rate the standard rate by 2020 (current rate 33.33%). The 28% rate is to be implemented and applied as follows:
- On profits up to EUR 75,000 for SMEs from 2017;
- On profits up to EUR 500,000 for all companies from 2018;
- On all profits for companies with annual turnover below EUR 1 billion from 2019; and
- On all profits for all companies from 2020.
The planned 28% rate is to be included in the 2017 Finance Bill
On 12 September 2016, Panama's Ministry of Finance to submitted legislation to the National Assembly that will require offshore companies not carrying on operations within Panama to keep accounting records. The legislation is part of an initiative to increase transparency, and will require that account records be kept for a minimum of five years.
Italy Supreme Confirms Legal and Economic Control of Dividend Income Required for Rate Benefit under Tax Treaty
The Italian Supreme Court issued a ruling in May 2016 concerning whether a UK company qualified as the beneficial owner of dividends to receive the benefit of the Italy-UK tax treaty. The UK Company is part of a group ultimately owned or controlled by a U.S. corporation. In 2001 and 2002, the UK company received dividends from an Italian subsidiary (99.83% holding), which at the time withheld 27% tax on the dividend payments. The UK company then applied for a refund based on the 5% withholding tax rate under the tax treaty, which is available if the beneficial owner is a company that directly or indirectly controls at least 10% of the voting power in the company paying the dividends. To demonstrate that it was the beneficial owner, the UK company provided proof of residence and proof that the dividends were reported as its own income in the UK.
The Italian tax authority rejected the refund claim. The tax authority found that the UK company lacked economic substance and merely acted as holding company to collect the dividends from the group's affiliated companies and distribute them along. As such, the company did not qualify as the beneficial owner. To support this position, the tax authority noted that the UK company did not report any income other than financial dividends and gains, and reported only a minimal amount of general and administrative expenses. The position of the tax authority was appealed, with both the tax court and the regional tax court siding with the UK Company. The lower courts found that the proof provided by the UK company was sufficient to show beneficial ownership.
In its decision, however, the Italian Supreme Court sided with the tax authority. The court found that in determining beneficial ownership for the purpose of the treaty benefit, a formulistic approach based solely on residence and report of income should not be used. Instead, the recipient of the dividends must prove that it has the legal and economic control of the dividend, which includes that the recipient received the dividend for its own economic benefit with no obligation to distribute to other persons. Because the UK company failed to prove its legal and economic control, the refund is denied.
Kazakhstan's lower house of parliament approved the pending income tax treaty with Serbia on 14 September 2016. The treaty, signed 28 August 2015, is the first of its kind between the two countries and provides for the following withholding tax rates:
- Dividends - 10% if the beneficial owner is a company directly holding at least 25% of the paying company's capital; otherwise 15%
- Interest - 10%
- Royalties - 10%
The treaty will enter into force once the ratification instruments are exchanged, and apply from 1 January of the year following its entry into force.
Additional details will be published one available.
On 9 September 2016, the Pakistani Cabinet approved for signature the protocol to the South Asian Association for Regional Cooperation (SAARC) income tax treaty. The protocol will be the first to amend the treaty, which was signed 13 November 2005 by the SAARC member countries, which include Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.
The new income tax treaty between Singapore and South Africa was signed by South Africa on 23 November 2015 and by Singapore on 30 November. Once in force and effective, the treaty will replace the 1996 tax treaty between the two countries.
The treaty covers Singapore income tax, and South African normal tax, dividends tax, withholding tax on interest, withholding tax on royalties, and tax on foreign entertainers and sportspersons.
The treaty includes the provision that 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 be considered to be outside the scope of the treaty except for the provisions of Article 24 (Exchange of Information).
The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services through employees or other engaged personnel if the activities continue for the same or connected project within a Contracting State for a period or periods aggregating more than 183 days within any 12-month period.
The treaty also includes the provision that a permanent establishment will be deemed constituted when an enterprise carries on activities that consist of, or that are connected with, the exploration for or exploitation of natural resources situated in a Contracting State for more than six months.
- Dividends - 5% if the beneficial owner is a company holding at least 10% of the paying company's capital; otherwise 10%
- Interest - 0% for interest paid in respect of any debt instrument listed on a recognized stock exchange; otherwise 7.5%
- Royalties - 5%
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.
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
Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.
Both countries apply the credit method for the elimination of double taxation. In the case of dividends paid to a Singapore company, the credit will also take into account the taxes on the profits out which the dividends are paid, provided the Singapore company directly or indirectly owns at least 10% of the share capital in the South African company.
The new treaty will enter into force once the ratification instruments are exchanged. It will apply in Singapore from 1 January of the year following its entry into force in respect of withholding taxes, and from 1 January of the second year following its entry into force for other taxes. It will apply in South Africa from 1 January of the year following its entry into force.
The 1996 tax treaty between the two countries will cease to have effect once the new treaty is effective.