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Worldwide Tax News

Approved Changes (1)

United States

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IRS Announces Position on Mexican Unilateral APAs Involving Maquiladora Operations

The U.S. IRS has issued a release announcing that U.S. taxpayers with maquiladora operations in Mexico will not be exposed to double taxation if they enter into a unilateral advance pricing agreement (APA) with the Large Taxpayer Division of Mexico’s Servicio de Administración Tributaria (SAT) under terms discussed in advance between the U.S. and Mexican competent authorities. The terms are included in an update and extension of the 1999 agreement between the competent authorities on transfer pricing and other aspects of the tax treatment of maquiladoras of U.S. multinational enterprises.

For qualifying taxpayers with pending unilateral APA requests, the SAT will extend an election to apply the new agreed-upon transfer pricing framework. Qualifying taxpayers that decline the election may apply the safe harbors provided by the 1999 agreement or file a request for a bilateral APA with the U.S. and Mexican competent authorities.

Click the following link for the release.

Proposed Changes (4)

Australia

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Australia Consults on New Debt-Equity Rules for Aggregation of Multiple Schemes

The Australian Treasury has published draft legislation for consultation that introduces new rules for determining when schemes should be aggregated for the purpose of the debt-equity rules in Division 974 (previous coverage). The debt-equity rules are meant to ensure that interests arising from schemes are correctly classified as either debt or equity according to their economic substance, and include integrity rules designed to prevent taxpayers from splitting a single scheme into multiple schemes to achieve favorable tax outcomes that are different from economic reality.

The draft aggregation rules would replace the current related scheme rules and include that multiple schemes are aggregated if:

  • Their pricing, terms and conditions are interdependent in a way that would change their debt or equity treatment; and
  • It would be concluded that the schemes were designed to operate to produce their combined economic effect.  

Click the following link to the debt and equity tax rules consultation page, which includes the draft legislation and the explanatory memorandum. Comments are due by 21 November 2016.

Belgium

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Belgian Government Reaches Agreement on 2017 Budget Tax Measures

On 14 October 2016, the four parties of Belgium's governing coalition reportedly reached agreement on the tax measures for the 2017 Budget. The main measures include:

  • An increase in the top withholding tax rates on dividends and interest from 27% to 30%;
  • The repeal of the speculation tax for individuals (33%) on capital gains from the sale of listed shares if sold within 6 months of acquisition;
  • A change in the treatment capital contributions for tax purposes as a taxed reserve, which would be subject withholding tax if capital is subsequently decreased; and
  • The introduction of measures targeting tax fraud.

Additional details of the 2017 Budget plans will be published once available.

Luxembourg

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Additional Tax Reform Measures for 2017 Submitted to Luxembourg Parliament

Additional tax reform measures for 2017 were submitted to the Luxembourg parliament on 12 October 2016. The measures include:

  • The addition of Article 56bis to the Luxembourg Income Tax Law, which provides rules based on the OECD guidelines for the determination of the arm's length price for all transactions;
  • An increase in the value added tax (VAT) registration threshold from EUR 25,000 to EUR 30,000 in annual turnover for small enterprises;
  • The abolishment of the guarantee for the payment of taxes for new taxpayers that move to Luxembourg from an EU/EEA country without owning Luxembourg real estate; and
  • The expansion of the real estate tax exemption for Luxembourg entities engaged in charitable activities to non-resident charitable entities for their use of Luxembourg real estate.

As with the other tax reform measures (previous coverage), the additional measures will generally apply from 1 January 2017.

Ukraine

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Ukrainian Parliament Considering Industrial Park Incentives and Tax Exemption for Small Businesses

Draft legislation is currently before the Ukrainian parliament that would introduce new incentives for businesses established in industrial parks and tax exemptions for small businesses.

Industrial Park Incentives

The draft law would provide a number of incentives for businesses established in industrial parks, including:

  • A five-year corporate tax holiday;
  • A reduced corporate tax rate of 9% for five years following the tax holiday;
  • The right to defer value added tax (VAT) on imports used to carry out business activities in industrial parks; and
  • Possible exemptions/reductions of immovable property and land taxes decided at the local level.

Small Business Tax Exemption

The draft law would provide for a corporate tax exemption through 31 December 2021 for:

  • Businesses that have annual profits not exceeding UAH 3 million and pay an average monthly salary equal to at least two times the minimum monthly salary (minimum is UAH 1,450 for 2016); and
  • Businesses using the simplified tax system that have annual income not exceeding UAH 3 million, have no more than 20 employees, and pay an average monthly salary equal to at least two times the minimum monthly salary.

If in any reporting period the conditions are not met, corporate tax would be payable for the period as normally provided under the standard or simplified system as the case may be.

The draft legislation must be approved by parliament and signed into law by the president before entering into force.

Treaty Changes (3)

Azerbaijan-Liechtenstein

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Azerbaijan and Liechtenstein to Negotiate Tax Treaty

During an 11 October 2016 meeting between officials from Azerbaijan and Liechtenstein, the two sides stressed the importance of signing an income tax treaty, as well as other agreements to expand bilateral cooperation. Any resulting treaty would be the first of its kind between the two countries, and will need to be finalized, signed and ratified before entering into force.

Bulgaria-Pakistan

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Bulgaria to Sign Tax Treaty with Pakistan

On 12 October 2016, the Bulgarian government authorized the Ministry of Finance to negotiate and sign a draft income tax treaty with Pakistan. The treaty will be the first of its kind between the two countries, and must be finalized, signed and ratified before entering into force.

Germany-Japan

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New Tax Treaty between Germany and Japan to Enter into Force

The new income tax treaty between Germany and Japan will enter into force on 28 October 2016, according to a release from the Japanese Ministry of Finance. The treaty, signed 17 December 2015, replaces the 1966 tax treaty between the two countries.

Taxes Covered

The treaty covers German income tax, corporate income tax, trade tax and the solidarity surcharge. It covers Japanese income tax, corporation tax, the special income tax for reconstruction, local corporation tax, local inhabitant taxes and enterprise tax.

Residence

If a company is considered resident in both Contracting States, the competent authorities of both States will determine its residence for the purpose of the treaty through mutual agreement based on its place of effective management, its place of head or main office, the place where it is incorporated or otherwise constituted and any other relevant factors. If no agreement is reached, the company will not be entitled to any relief or exemption from tax provided by the treaty.

Withholding Tax Rates

  • Dividends -
    • 0% if the beneficial owner is a company that has directly owned at least 25% of the paying company's voting shares for a period of at least 18 months ending the date on which entitlement to the dividends is determined;
    • 5% if the beneficial owner is a company that has directly owned at least 10% of the paying company's voting shares for a period of at least 6 months ending the date on which entitlement to the dividends is determined;
    • Otherwise 15%
  • 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 shares or interests in a company, partnership or trust deriving at least 50% of the value of its property directly or indirectly from immovable property situated in the other State; and
  • Gains from alienation of any other property, other than immovable property, forming part of the business property of a permanent establishment 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.

Entitlement to Benefits

Article 21 (Entitlement to Benefits) includes substantial provisions regarding a resident's entitlement to benefits under the treaty. In general, a resident of a Contracting State will only be entitled to the benefits of the treaty if it is a qualified person, which includes:

  • An individual;
  • A qualified governmental entity;
  • A company, if its principal class of shares is listed or registered and is regularly traded on one or more recognized stock exchanges;
  • A pension fund or pension scheme, subject to certain conditions;
  • A person established and operated exclusively for a religious, charitable, educational, scientific, artistic, cultural or public purpose, subject to certain conditions; and
  • A person other than an individual, if at least 65% of its voting shares or other beneficial interests are owned, directly or indirectly, by residents of the same Contracting State that meet the conditions for qualified persons above.

Provisions are also included where benefits may still apply for a resident that is not a qualified person, provided certain other conditions are met, including that obtaining the benefits of the treaty is not one of the principal purposes of a resident.

Double Taxation Relief

Japan applies the credit method for the elimination of double taxation. Germany generally applies the exemption method, including for dividends when the beneficial owner is a German company that owns 10% or more of the voting power of the Japanese payer and the payer is not tax exempt or able to deduct the dividends. However, Germany applies the credit method for dividends not meeting the previous conditions, capital gains from shares or interests deriving at least 50% of their value from immovable property situated in the other State, and certain other items of income in accordance with German tax law.

Effective Date

The new treaty generally applies from 1 January 2017. However, Article 25 (Exchange of Information) applies from the date of its entry into force.

The 1966 tax treaty between the two countries will cease to be effective once the new treaty is effective, although in respect of capital taxes for which the 1966 treaty applies, it will cease to be effective from the date of the new treaty's entry into force.

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