Worldwide Tax News
On 8 July 2016, the Chilean tax authorities (Servicio de Impuestos Internos) issued Circular No. 40 of 2016 on the country's controlled foreign company (CFC) rules. The Circular updates and replaces Circular No.30 of 2015 to incorporate the amendments/clarifications made by Law No. 20.899 in February 2016 to the CFC rules and other aspects of the 2014 tax reform (previous coverage). The main aspects of Law No. 20.899 incorporated in Circular No. 40 include:
- Clarification that the new CFC rules apply for passive income received or earned by controlled entities on or after 1 January 2016;
- Expansion of the available exemptions from the CFC rules, which include:
- When the passive income of the controlled entity does not exceed 10% of total income;
- When the value of the controlled entity's passive income producing assets does not exceed 20% of the value of its total assets;
- When the controlled entity's passive income has been taxed at an effective rate of at least 30% in the jurisdiction where it is domiciled, established or constituted; or
- The total passive income does not exceed 2,400 UF (~USD 96,000);
- Clarification on the availability and conditions for a credit for foreign taxes paid on the CFC income, including that the foreign tax paid is converted to Chilean currency at the end of the fiscal year concerned, and if there is a credit surplus, it may be carried forward and will be adjusted based on the consumer price index.
Click the following link for Circular No. 40 (Spanish language).
Hungary has reportedly approved amendments to modify the country's IP regime to bring it in line with the modified nexus approach as developed under Action 5 of the OECD BEPS Project (previous coverage). As amended, the IP regime benefit of a 50% deduction of qualifying taxable income is reduced by a nexus ratio. The ratio is equal to qualifying expenses (in-house and third party R&D costs) / total expenses, with a 30% uplift allowed for non-qualifying expenses (related party R&D and IP acquisition costs).
The new IP regime applies from 30 June 2016, with benefits claimed for IP prior to that date grandfathered to 30 June 2021.
On 14 July 2016, India's Central Board of Direct Taxes announced that the government has decided to adjust the payment deadline for the Income Declaration Scheme 2016 from full payment by 30 November 2016, to three installments as follows:
- A minimum amount of 25% of the tax, surcharge and penalty to be paid by 30 November 2016;
- A further amount of 25% of the tax, surcharge and penalty to be paid by 31 March 2017; and
- The balance amount to be paid on or before 30 September 2017.
Click the following link for the full press release.
On 14 July 2016, the UK published the Capital Allowances (Designated Assisted Areas) Order 2016, which sets out the designated assisted areas within Enterprise Zones. Companies that invest in plant or machinery for use primarily in designated assisted areas are eligible for 100% first-year capital allowances, provided the expenditure is incurred at a time when an area is designated.
Click the following link for the Capital Allowances (Designated Assisted Areas) Order 2016.
On 15 July 2016, U.S. IRS published an international practice unit on the source of income for FDAP Payments, which are generally subject to 30% withholding if from sources within the U.S. unless an exemption or reduction applies. The practice unit covers a five-step process to determine whether payments are subject to withholding:
- Is the payment made to a foreign person?
- If yes, is the income FDAP income?
- If yes, is the income U.S. source income?
- If yes, is there any exemption from chapter three withholding (CTW) tax available?
- If not exempt, is there a valid claim for a reduced tax rate under the code or an applicable income tax treaty?
Click the following link for FDAP Payments – Source of Income for the details.
International practice units are developed by the Large Business and International Division of the IRS to provide staff with explanations of general international tax concepts as well as information about specific transaction types. They are not an official pronouncement of law, and cannot be used, cited or relied upon as such.
Click the following link for the International Practice Units page on the IRS website.
South Africa's Proposed Amendments to Hybrid Debt Instrument Rules Concerning Non-Residents and Subordination Agreements
As previously reported, South Africa's 2016 Draft Taxation Laws Amendment Bill includes amendments to the anti-avoidance rules dealing with hybrid debt instruments. Under the current rules, interest payments made under hybrid instruments that include equity characteristics may be reclassified as dividends, which results in no deduction of the payments for the issuer and the levy of a 15% withholding tax on the deemed dividend. Two of the main amendments regarding the anti-avoidance rules are summarized as follows.
The anti-avoidance rules were expanded to cover non-resident debt issuers in 2013. An unintended result of the expansion is that non-resident issuers have intentionally included equity characteristics in order to take advantage of the reclassification of interest payments as dividends. The reclassification is an advantage because unless the non-resident is subject to South African taxation on the payments, the payments remain deductible as interest for the non-resident, while the deemed dividend received by the South African resident is exempt from normal tax and only subject to a dividends withholding tax, which is often subject to various exemptions or treaty benefits.
In order to curb the mismatch and discourage the intentional structuring of loans to trigger reclassification, it is proposed to amend the rules so that they only apply:
- In instances where the issuer is a resident company; and
- In respect of debt instruments that are solely attributable to a permanent establishment in South Africa or a controlled foreign company whose profits are attributed to a South African resident.
The proposed amendments will apply retroactively from 24 February 2016.
Amendments are also proposed regarding the anti-avoidance rules current application to subordination agreements entered into in respect of a debt instrument. Such subordination agreements are often entered into where it may be questionable whether a company is a going concern given its financial position. The terms of subordination agreements typically trigger reclassification under the anti-avoidance rules, which results in added pressures for companies since the deduction of interest paid or incurred is denied and withholding tax will be due on the deemed dividend.
It is proposed that the reclassification should not apply in instances where an issuer owes an amount to a company that forms part of the same group of companies as the issuer, and payments in respect of that amount are suspended due to the financial difficulties of the issuer. This concession for group debt that is subordinated in favor of third party creditors will result in the company continuing to be able to claim its interest deduction of the debt, with no liability for dividends withholding tax.
The proposed amendments will apply from 1 January 2017.
An income tax treaty between Montenegro and Portugal was reportedly signed during a meeting of officials from the two sides on 11 to 12 July 2016. 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.
On 13 July 2016, UK HM Treasury issued the orders ratifying the amending arrangements to the 1952 tax arrangement with Guernsey, 1955 tax arrangement with the Isle of Man and the 1952 tax arrangement with Jersey. The amending arrangements amend the respective tax arrangements in a way that clearly allocates the primary taxing right over profits from immovable property to the territory in which the property is situated.
The respective arrangements will enter into force once the ratification instruments are exchanged, and will apply retroactively from 16 March 2016.
On 24 June 2016, Uruguay ratified the pending income and capital tax treaty with Vietnam. The treaty, signed 9 December 2013, is the first of its kind between the two countries.
The treaty covers Uruguayan tax on business income, personal income tax, non-residents income tax, tax for social security assistance, and capital tax. It covers Vietnamese personal income tax and business income tax.
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.
- Dividends - 5% if the beneficial owner is a company directly holding at least 70% of the paying company's capital; otherwise 10%
- Interest - 10%
- Royalties - 10%
- Technical fees for services of a technical, managerial or consultancy nature - 10%
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 of the capital stock of a company, or other corporate rights in a company, including an interest in a partnership, trust or estate, which is a resident 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.
The treaty will enter into force 15 days after the ratification instruments are exchanged, and will apply from 1 January of the year following its entry into force.