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Approved Changes (4)

Australia

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Australian High Court Holds Offshore Companies are Resident in Australia in Tax Evasion Case

On 16 November 2016, the High Court of Australia dismissed the appeals of four offshore companies that had been assessed tax in 2010 on gains from the sale of shares in companies listed on the Australia Stock Exchange (ASX). The assessments were issued based on the determination that the companies were resident in Australia for tax purposes because they were managed and controlled by an Australian resident accountant.

The following is the judgment summary from the High Court.

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Today the High Court unanimously dismissed appeals by four companies ("the appellants") from a decision of the Full Court of the Federal Court of Australia. The High Court held that the appellants were Australian residents for income tax purposes during the relevant years and were thus liable to tax in Australia.

All but one of the directors of three appellants - Bywater Investments Ltd, Chemical Trustee Ltd and Derrin Brothers Properties Ltd - were resident in Switzerland. When meetings of directors were held, they took place in Switzerland. Hua Wang Bank Berhad, the other appellant, was incorporated in Samoa and most of its directors were employees of a Samoan international trustee and corporate service provider. In August 2010, the Commissioner of Taxation issued assessments to the appellants in respect of profits derived from the purchase and sale of shares listed on the ASX. The appellants objected to the assessments on the basis, inter alia, that they were not Australian residents under s 6(1) of the Income Tax Assessment Act 1936 (Cth) ("the Act"). Their objections were substantially disallowed by the Commissioner and the appellants appealed to the Federal Court of Australia.

The primary judge found that, notwithstanding the overseas location of the formal organs of each company, the real business of the appellants was conducted by an Australian resident, Mr Gould, from Sydney, without the involvement of the directors of the appellants. The primary judge held that the "central management and control" of each appellant therefore was situated in Australia in the terms of s 6(1) of the Act, rendering each appellant liable to tax as an Australian resident. On appeal, the Full Court of the Federal Court rejected the appellants' argument that their central management and control was situated abroad because the meetings of their boards of directors were held abroad. The Full Court found no reason to doubt the primary judge's findings of fact, and no error in the conclusion that each appellant was a resident of Australia for income tax purposes.

By grant of special leave, the appellants appealed to the High Court. The Court held that, as a matter of long-established principle, the residence of a company is a question of fact and degree to be answered according to where the central management and control of the company actually abides, and that is to be determined by reference to the course of the company's business and trading, rather than by reference to the documents establishing its formal structure. The Court held that the fact that the boards of directors were located abroad was insufficient to locate the residence of the appellants abroad in circumstances where, on the findings of the primary judge, the boards of directors had abrogated their decision-making in favour of Mr Gould and only met to mechanically implement or rubber-stamp decisions made by him in Australia. The Court held that the appellants could not escape liability for income tax in Australia on the basis that they were resident abroad. Nor could Bywater Investments, Chemical Trustee or Derrin Brothers Properties rely on applicable double taxation agreements on the basis that their "place of effective management" was other than in Australia. The High Court unanimously dismissed the appeals.

China

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China Expands Eligible Cities for the Tax Concessions for Advanced Technology Service Enterprises

China's State Administration of Taxation has issued Circular No. 108/2016, which expands the number of cities eligible for the tax concessions for advanced technology service enterprises. The additional cities include Shenyang, Changchun, Nantong, Zhenjiang, Fuzhou (including the Pingtan zone), Nanning, Urumqi, Qingdao, Ningbo, and Zhengzhou. Subject to certain conditions, enterprises established in these cities that provide qualifying outsourcing services are eligible for the following incentives:

  • A reduced tax rate of 15% (standard rate 25%);
  • An increased deduction cap for employee education expenses; and
  • VAT zero-rating for exported services.

The Circular is effective from 1 January 2016 until 31 December 2018.

India

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India Limits Depreciation Rates to 40%

India's Central Board of Direct Taxes has issued Notification No. 103/2016 concerning the maximum rate of depreciation for domestic companies that opt for the reduced 25% corporate tax rate introduced in the Finance Act, 2016. The 25% rate (plus surcharge and cess) is available for companies solely engaged in manufacturing/production or related research that are established on or after 1 March 2016 and applies for assessment years beginning on or after 1 April 2017 (subject to certain conditions). For companies that opt for the 25% rate, any block of assets entitled to a rate of depreciation greater that 40% will be restricted to 40% on the written down value of the block of assets. The restriction is effective from 1 April 2016.

Notification No. 103/2016 also stipulates that any depreciation rate of 50%, 60%, 80%, or 100% as included in New Appendix I will be replaced with 40% with effect from 1 April 2017. As written, this change appears to apply to all taxpayers, and not only those opting for the 25% rate.

Sri Lanka

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Sri Lanka Publishes Schedule of VAT Exempt Goods and Services

On 16 November 2016, Sri Lanka's Inland Revenue Department published an updated schedule of goods and services that are exempt from value added tax (VAT). The schedule is broken down into three sections, including goods and services that are exempt on import or supply, only on supply, and only on import.

Click the following link for the VAT exemption schedule, which is effective from 1 November 2016.

Treaty Changes (4)

Argentina-Switzerland

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Argentina and Switzerland Sign Joint Statement on the Automatic Exchange of Financial Account Information

On 16 November 2016, officials from Argentina and Switzerland signed a joint declaration on the automatic exchange of financial account information on a reciprocal basis, according to a press release from the Swiss Federal Council. The information exchange will be carried out based on the OECD Common Reporting Standard (CRS). Argentina and Switzerland intend to start collecting data in 2018 and to exchange it from 2019.

Georgia-Kyrgyzstan

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Update - Tax Treaty between Georgian and Kyrgyzstan

The income tax treaty between Georgia and Kyrgyzstan was signed on 13 October 2016. It is the first of its kind between the two countries.

Taxes Covered

The treaty covers Georgian profit tax and income tax. It covers Kyrgyz tax on income and profits of legal persons and income tax on individuals.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company directly holding at least 25% of the paying company's capital; otherwise 10%
  • Interest - 5%
  • 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 apply the credit method for the elimination of double taxation.

Entry into Force and Effect

The treaty will enter into force once the ratification instruments are exchanged and will apply from 1 January of the year following its entry into force.

Liechtenstein-Austria

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Liechtenstein Approves Protocol to Tax Treaty with Austria

The Liechtenstein parliament has approved the pending protocol to the 1969 income and capital tax treaty with Austria. The protocol, signed 15 September 2016, is the second to amend the treaty. The protocol:

  • Replaces the Title and Preamble of the treaty;
  • Replaces Article 25 (Mutual Agreement Procedure);
  • Adds Article 26A (Entitlement to Benefits), which includes that a benefit under the treaty will not be granted in respect of an item of income or capital if it is reasonable to conclude that obtaining the benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting the benefit would be in accordance with the object and purpose of the relevant provisions of the treaty; and
  • Specifies that the 2013 additional protocol to the treaty will be entitled "Additional Protocol 1" and adds "Additional Protocol 2" concerning the application of Article 19 (Government Service).

The protocol will enter into force once the ratification instruments are exchange and will generally apply from 1 January of the year following its entry into force. However, the changes in relation to Article 19 (Government Service) will apply from 1 January 2015.

Peru-Argentina-Bolivia-Brazil-Chile-Ecuador-El Salvador-Paraguay-Portugal-Spain-Uruguay

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Ibero-American Social Security Convention has Entered into Force for Peru

The Ibero-American Social Security Convention entered into force for Peru on 20 October 2016. The multilateral convention has been signed by 15 countries and is currently in force for Argentina, Bolivia, Brazil, Chile, Ecuador, El Salvador, Paraguay, Peru, Portugal, Spain, and Uruguay.

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