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Approved Changes (3)

India

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Indian Court Rules Transfer Pricing Adjustment not Allowed without a Demonstrated International Transaction

On 11 December 2015, the High Court of Delhi issued its decision concerning a transfer pricing adjustment related to excessive advertising, marketing, and sales promotion expenses (AMP). The case involved Maruti-Suzuki India Ltd. and its affiliated enterprise Suzuki Motor Corp. headquartered in Japan.

In the year concerned, Maruti-Suzuki India was considered to have incurred excessive AMP expenses in India on behalf of Suzuki Motor Corp. based on the assumed existence of an international transaction and the bright-line test. As a result, the tax authorities made a transfer pricing adjustment. This decision was appealed to the Income Tax Appellate Tribunal, which sided with the tax authorities that a transfer pricing adjustment was needed due to the excessive AMP. An appeal was made with the High Court.

In order to make a transfer pricing adjustment, four steps must be taken:

  1. The existence of an international transaction must be demonstrated;
  2. The price of the transaction must be determined;
  3. The arm's length price of the transaction must be determined by applying one of five discovery methods specified in Indian transfer pricing rules; and
  4. The transaction price and the arm's length price must be compared and the transfer pricing adjustment made accordingly.

The High Court found that the tax authorities had failed to meet the first condition by failing to show that an agreement, arrangement or other understanding between Maruti-Suzuki India and Suzuki Motor Corp existed that would obligate the former to incur excessive AMP expenses on behalf of the latter. In addition, although a transfer pricing adjustment was allowed in a similar past case involving Sony Ericsson, that case involved assesses that were merely distributors in India, while Maruti-Suzuki India is actually involved in the production of vehicles. Based on this, the High Court ruled that no transfer pricing adjustment could be made because no international transaction existed.

Korea, Rep of

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Korea Enacts Legislation for 2016 Tax Reform including New Transfer Pricing Reporting Requirements

On 15 December 2015, Korea reportedly enacted the 2015 Tax Revision Bill, which includes tax reform measures for 2016. Some of the main measures are summarized as follows.

New Master File and Local File Requirements

New transfer pricing reporting requirements are introduced for multinational enterprises, including domestic Korean companies and permanent establishments in Korea of foreign companies. Under the new requirements, a report must filed by the due date for the annual tax return that includes transfer pricing information on the taxpayer and its group that is in line with the Master File and Local File guidelines developed as part of Action 13 of the OECD BEPS Project.

The requirement will apply for tax years beginning on or after 1 January 2016 based on certain thresholds, which have not yet been issued (first report due in 2017). Failure to comply will result in a penalty of KRW 10 million (~USD 8,490).

The Country-by-Country reporting requirement developed under Action 13 is not implemented, but is expected to be in the future.

Loss Utilization Limitation

Under current rules, net operating losses may be carried forward up to 10 years without limitation. Under the reform, the utilization of carried forward losses is limited to 80% of taxable income per year. However, this limit does not apply for small and medium-sized companies and companies under court receivership.

The loss limitation applies for tax years beginning on or after 1 January 2016.

VAT Changes for Foreign Supplies of E-Services

The scope of VAT on e-service supplies from foreign suppliers has been limited to B2C supplies only, and will no longer apply for B2B supplies as long as the Korean business is registered for VAT. Under the VAT Law, which applies from 1 July 2015, foreign suppliers of e-services to Korean customers must register for and charge VAT (10%) on their supplies, including games, music, video, electronic documents, software, etc.

R&D and Energy Savings Investment Credit Reduction

The reform extends the sunset clause for granting research and development (R&D) investment tax credits by three years, but reduces the available credit amount as follows:

  • Large companies - reduced from 3% to 1%;
  • Medium-sized companies - reduced from 5% to 3%; and
  • Small-size companies - reduced from 10% to 6%

The reduced rates apply for tax years beginning on or after 1 January 2016. The same rate reductions also apply for investments in energy saving facilities, but only for investment made in 2016 without affecting the sunset clause.

Enforcement Decrees

Enforcement decrees will be issued in the near future that will provide additional details on the changes and their implementation. Such details will be published once available.

Sweden

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Sweden Adopts Legislation Amending Participation Exemption and Anti-Avoidance Rules

Sweden has adopted legislation that includes changes to the country's participation exemption rules and expands the anti-avoidance rules under the Coupon Tax Act (CTA). The legislation is based on changes made to the EU Parent-Subsidiary Directive concerning hybrid mismatches and anti-avoidance, and includes:

  • The participation exemption rule is changed to deny the exemption on dividends received if deductible as interest or similar by the distributing foreign entity; and
  • The anti-avoidance provisions in the CTA are expanded to cover all situations where a foreign person or entity receives dividends, if the holding of the shares is intended to provide an illegitimate tax advantage for someone else.

The legislation also provides for advance rulings concerning dividends withholding tax, provided the ruling is requested no later than four months following the distribution.

The changes apply from 1 January 2016.

Proposed Changes (2)

Japan

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Japan's Proposed 2016 Tax Reform includes Lower Corporate Tax Rates and CbC Reporting Requirements

The tax commission of Japans ruling coalition has approved a draft outline of 2016 tax reform proposals. The main proposals are related to corporate tax rates, tax losses and transfer pricing documentation requirements.

Corporate Tax Rates

As previously reported, it is proposed that the standard effective corporate tax rate be cut to 29.97% in 2016, although the cut to 29.74% would not apply until 2018. These effective rates are for companies with paid-in capital of more than JPY 100 million. The detailed changes proposed include:

  • Reducing the statutory corporate rate from 23.9% to 23.4% for tax years beginning between 1 April 2016 and 31 March 2018, and reducing the rate to 23.2% for tax yeas beginning on or after 1 April 2018;
  • Reducing the top effective enterprise tax rate to 3.6% (including the special local corporation tax) from 1 April 2016 and abolishing the special corporation tax from 1 April 2017 while setting the enterprise tax rate at 3.6%; and
  • Reallocating the inhabitants tax and local corporation tax rates to provide a larger portion of local corporation tax while maintaining the 17.3% standard combined rate.

In addition, it is proposed that the added-value levy and the capital levy that applies for companies subject to size-based enterprise tax be increased to 1.2% and 0.5% respectively for tax years beginning on or after 1 April 2016.

Tax Losses

For tax years beginning in the period between 1 April 2016 and 31 March 2017, it is proposed that the utilization limit for carried forward tax losses be reduced from 65% of taxable income to 60%. For tax years beginning in the period between 1 April 2017 and 31 March 2017, the utilization limit would be reduced to 55%, and for tax years beginning on or after 1 April 2018, the utilization limit would be reduced to 50%.

SMEs, newly established companies (under 7 years old) and certain others would not be subject to the limits. However, new companies directly or indirectly held by a large company with capital of JPY 500 million or more or held by two or more large companies as part of a group would be subject to the limits.

In addition, the extension of the carry forward period from 9 years to 10 years from 1 April 2017 as approved in the 2015 reform would be delayed to 1 April 2018.

New Transfer Pricing Documentation Requirements

It is proposed that new transfer pricing documentation requirements be implemented in line with the guidelines developed as part of Action 13 of the OECD BEPS Project. This includes the requirement that the either the ultimate parent entity of a multinational group or surrogate parent entity file a Country-by-Country (CbC) report if resident in Japan. If not resident in Japan, the CbC report may still need to be filed in Japan if the Japanese tax authorities are not able to obtain the CbC report from the parent/surrogate entity's jurisdiction of residence. In such case, a Japanese group entity or permanent establishment in Japan of a foreign group entity would be required to file the report.

The CbC report would be due within 1 year following the close of the fiscal year of the ultimate parent entity.

Additional requirements include:

  • A Master File must be filed within 1 year following the close of the fiscal year of the ultimate parent entity by a Japanese group entity or permanent establishment in Japan of a foreign group entity (if multiple Japanese entities, only one required to file); and
  • A Local file must be filed by the due date for the final tax return by an entity engaged in transactions with foreign related parties.

The CbC report and Master File requirements would apply for fiscal years beginning on or after 1 April 2016 for groups with annual consolidated revenue of JPY 100 billion or more in the previous year. The Local file requirement would apply for fiscal years beginning on or after 1 April 2017 for companies with intangibles transactions with foreign related parties amounting to JPY 300 million or more in the previous fiscal year, or other transactions with foreign related parties amounting to JPY 5 billion or more in the previous year.

The proposals are expected to be submitted to parliament in January as part of the 2016 Budget, and are subject to change.

Russia

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Russia Considering VAT on Foreign E-Service Supplies

According to recent reports, the Russian government is considering a draft law that would impose value added tax (VAT) on e-services supplied by foreign suppliers to Russian customers. The law would change the place of supply rules for e-services so that the place of supply would be Russia, and therefore subject to VAT, for both B2C and B2B supplies. For B2C e-service supplies, the foreign supplier would be required to register with the Russian tax authorities and pay the VAT due.

If approved, the changes would apply from 1 January 2017.

Treaty Changes (3)

Austria-Turkmenistan

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Tax Treaty between Austria and Turkmenistan to Enter into Force

According to an announcement from the Austrian Ministry for European and International Affairs, the income and capital tax treaty between Austria and Turkmenistan will enter into force on 1 February 2016. The treaty, signed 12 May 2015, will replace the 1981 income and capital tax treaty between Austria and the former Soviet Union, which currently applies in respect of Austria and Turkmenistan.

Taxes Covered

The treaty covers Austrian income tax, corporation tax, land tax, the tax on agricultural and forestry enterprises, and the tax on the value of vacant plots. It covers Turkmen profits tax, individual income tax, and property tax.

Withholding Tax Rates

  • Dividends - 0% if the beneficial owner is a company directly holding at least 25% of the paying company's capital; otherwise 15%
  • Interest - 10%
  • Royalties - 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 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.

Double Taxation Relief

Both countries generally apply the credit method for the elimination of double taxation, However, Austria will apply the exemption method for income covered by Article 7 (Business Profits) for Austrian residents with substantive active business operations in Turkmenistan.

MFN Clause

A protocol to the treaty, signed the same date, includes the provision that if Turkmenistan applies a lower rate on royalties under a tax treaty in relation to an EU Member State, such lower will apply for the purpose of the Austria-Turkmenistan tax treaty. This provision will expire five years after the Austria-Turkmenistan tax treaty enters into force.

Effective Date

The treaty applies from 1 January 2017.

Luxembourg-Serbia

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Tax Treaty between Luxembourg and Serbia Signed

On 15 December 2015, officials from Luxembourg and Serbia 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.

Monaco-China-OECD

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Monaco and China Sign the OECD Agreement on Automatic Exchange of Financial Information

The OECD has announced that Monaco and China have signed the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information, becoming the 76th and 77th countries to sign respectively. Both countries intend to begin the first information exchange in September 2018.

Click the following links for the multilateral agreement, the list of the signatories to date, and the list of countries that have committed to the automatic exchange of information.

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