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Approved Changes (4)

European Union-Italy-France

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EU Court of Justice Holds Pro-rata Limitation of Tax Credit Compatible with EU Law

On 4 February 2016, the Court of Justice of the European Union issued its order in the case of Baudinet and Others (C-194/15). The order was in reply to prejudicial questions put forth to the Court by the Provincial Tax Commission of Turin, Italy.

The case concerned resident Italian persons who held stock in French corporations and received dividends from those corporations. Pursuant to the France-Italy treaty, a 15% withholding tax was levied on the distribution of the dividends in France. The tax withheld qualifies as a credit for the recipient in Italy. Pursuant to Italian law as it then stood, dividends received from Italian or foreign sources were to be added to ordinary taxable income but for 40% of their amount only. The recipients added 40% of the dividends received from france to their taxable income in Italy and then applied a credit for the full 15% French withholding tax. The Italian Revenue rejected the full credit and only permitted the set off of 40% of the French withholding tax as a credit. The logic of the Revenue was that since 60% of the dividends are exempt in the hands of the recipient, then 60% of the credit should be equally be forfeited. The taxpayers disputed the position of the Revenue before the Provincial Tax Commission on the grounds that it creates a discriminatory treatment that is prohibited under the EU Freedom of capital movement. According to the taxpayers, the limitation of the credit available to French dividends to 40% ultimately results in a better treatment for Italian-source dividends Vs. French or other foreign-source dividends.

The Court recognized that the combination of the withholding tax in France and the pro rata limitation of the credit in Italy ultimately results in a more favourable treatment for Italian-source dividends. However, the Court further reasoned that the ultimate result is not a consequence of a discriminatory Italian tax rule –indeed Italian law as it then stood treated foreign and domestic-source dividends alike by assessing only 40% of their amount to tax-. Rather, the ultimate result is a consequence of the parallel application of the tax laws of two Member States. The Court, therefore, held that since that parallel application is not prohibited by EU law, the resulting outcome is not incompatible with EU law either. As a result, the Italian rule providing for a pro rata limitation of the credit available to foreign-source dividends was upheld as compatible with EU law.

Interestingly, even though the prejudicial question was put forth by reference to the Freedom of capital movement, the Court addressed it under the heading of the Freedom of establishment. The Court reiterated in this regard its position that the Freedom of establishment deals more with substantial investments underlying an economic activity, whilst portfolio investments would more likely fall under the Freedom of capital movement.


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India to Vodafone: Pay-up or Face Asset Seizure

Vodafone's India judicial saga continues with the Indian Income Tax department issuing a notice to the UK telecom group on 04 February 2016 to pay US$ 2.1 billion in taxes or face the seizure of any assets in India. The notice caused widespread reactions because it came while the dispute between Vodafone and the Indian Revenue is in the process of international arbitration. Whilst there is no official confirmation one way or the other, the notice could be a formalistic correspondence routinely sent out when tax arrears are not settled without there being a formal request and formal decision to stay collection.

The dispute originates in the acquisition by Vodafone in 2007 of a 67% stake in Hong Kong Hutchinson’s mobile business JV in India for US$ 11 billion. The complex deal waters down to the acquisition by a Dutch entity of the Vodafone group of all the shares of CGP, a company incorporated in Hong Kong but tax resident in Cayman, from Hutchinson, resulting in the acquisition of control of 67% of the Indian telecom JV Hutch-Essar by Vodafone. The Indian Revenue took the position that the deal, whilst concerning the transfer of shares in a foreign company by two non-residents, in effect translates in the transfer of Indian assets and, thus, gives rise to a chargeable capital gains tax in India, which Vodafone, as the buyer, failed to withhold and remit to the Indian treasury as required by Indian law. The Indian Revenue consequently issued a tax reassessment of US$ 2.5 billion to Vodafone. Vodafone disputed the charge on the grounds that it did not carry out any taxable transaction in India and was eventually vindicated by a 2012 decision of the Indian Supreme Court. The Indian government then moved to change the law. The legislated change allows India to tax such indirect transfers and effectively reverses the Supreme Court ruling by providing that the change applies retrospectively. Vodafone then submitted a notice for international arbitration based on the India-Netherlands Investment Promotion and Protection Agreement. Both India and Vodafone appointed their arbitrator to the panel, but both parties are reportedly yet to agree on the appointment of third independent arbitrator.

The controversy emerged in public a fortnight after India's Prime Minister addressed the "Make in India" week, an event organized to promote India as a manufacturing hub. In his address, the Prime Minister said "we have carried out a number of corrections on the tax front. We have said we will not resort to retrospective taxation and I repeat this commitment once again. We are also swiftly working towards making our tax regime transparent, stable and predictable".


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Proceeds from Share Buybacks not a Dividend

The Income-tax Appellate Tribunal (ITAT) rendered its decision in the case of Goldman Sachs (India) Securities Pvt. Ltd. v. ITO.

The case concerned a buyback of shares by Goldman Sachs securities India (GSSI) from its sole stockholder Goldman Sachs Mauritius (GSM). The taxpayer considered that the difference between the face value of the stock and the buyback value qualifies as a capital gain which, pursuant to Art. 13 of the India-Mauritius tax treaty, is exclusively taxable in the country of residence of the seller, i.e. Mauritius. The Indian Revenue disputed this position and held that the proceeds should be characterized as a dividend subject to the payment of dividend distribution tax (DDT) in India. The Revenue reasoned that the scheme resulted in a reduction of capital amounting to the distribution of accumulated profits to the sole stockholder, and was moreover a "colourable" device put in place to avoid the payment of DDT. The Revenue based its position on a 2010 decision by the Authority for  Advance Rulings which held in similar circumstances that the proceeds qualify as dividends subject to DDT.

ITAT held for the taxpayer and ruled that the proceeds from the buyback qualify as a capital gain and not as a dividend. Consequently, India cannot levy DDT on the proceeds. Further, since the gains were realized by a resident of Mauritius, no capital gains tax may be levied in India pursuant to Art. 13 of the India-Mauritius tax treaty which attributes the exclusive taxation of capital gains to the country of residence. Finally, ITAT held that the scheme cannot be qualified as a "colourable device". The Tribunal reasoned that as long as the transaction entered into by the taxpayer does not violate any provision of the Tax Act for a particular year, then the transaction cannot be qualified as a "colourable device" even if it results in the non-payment or the payment of a lesser amount of tax for that particular year.

Isle Of Man

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2016-2017 Budget Approved

The Isle of Man 2016-2017 Budget was approved on 17 February 2016.

The Budget maintains unchanged the headline income tax rates of 10% and 20%. Salient features include:

  • A £1,000 increase in individual’s income tax personal allowance, to £10,500;
  • The 10% income tax band is retained but will apply to the first £8,500 of an individual’s taxable income, instead of the current £10,500 limit;
  • A new Land Development Tax Holiday offering income tax exemption for up to five years for new commercial developments; and
  • A (yet to be defined) penalty will be introduced for those found to have avoided Manx income tax in contravention of general anti-avoidance provisions

Treaty Changes (1)

Argentina-Untd A Emirates

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TIEA signed between Argentina and UAE

Argentina and the United Arab Emirates signed a tax information exchange agreement on 5 February 2016 in Buenos Aires.


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