Worldwide Tax News
As previously reported, amendments to the Belarus Tax Code were adopted on 30 December 2015, and entered into force on 1 January 2016. Included in the amendments is a change in the definition of service permanent establishment (PE) and the determination of taxable profit of a PE.
Under the new definition, a service PE will be deemed constituted in Belarus if a foreign enterprise furnishes services in the country for a period of 90 days within any 12-month period.
Regarding the determination of the taxable profit of a PE, the amendments include that non-operating expenses incurred outside Belarus may be deducted in addition to operating expenses incurred outside the country. For such non-operating expenses to be deductible, they must be deductible under standard Belarusian tax rules, and be confirmed by a foreign auditor including the expense type, expense amount and the date recorded as deductible in accordance with the tax laws of the jurisdiction of residence of the foreign company.
China recently published Circular 32/2016, which was jointly issued by the Ministry of Science and Technology, Ministry of Finance, and State Administration of Taxation. The Circular concerns revised conditions for high and new technology enterprise (HNTE) status, which provides for a lower enterprise income tax rate of 15% (standard 25%) and certain other benefits. It amends Circular 172/2008 and is effective from 1 January 2016.
Under Circular 32, an enterprise must meet the following conditions in order to obtain HNTE status:
- The enterprise must have existed for at least a year at the time it applies for HNTE status;
- The enterprise must own intellectual property (IP) rights of key technologies which show core support to their main products or services gained through independent R&D, purchase, transfer, donation or acquisition;
- The technology must be approved for use by the qualifying sector;
- The enterprise's R&D personnel carrying out related activities must represent at least 10% of the enterprise's total employees for the year concerned (reduced from 30%, and the condition that the personnel hold a college degree or above is removed);
- The ratio of the enterprise's R&D expenses to revenue in the past three years (or actual years if hasn't existed for three years) must be at least:
- 5% if revenue in the most recent year does not exceed CNY 50 million (reduced from 6%);
- 4% if revenue in the most recent year is up to CNY 50 million, but does not exceed CNY 200 million; or
- 3% if revenue in the most recent year exceeds CNY 200 million;
- R&D expenses in China must represent at least 60% of the enterprise's worldwide R&D expenses;
- Revenue from high/new-tech products or services must represent at least 60% of the enterprise's total revenue; and
- The enterprise must not have committed any serious violations regarding work safety or environmental law in the 12 months prior to applying for HNTE status.
Eligible sectors include:
- Electronic information;
- Biology and new medicine;
- New materials;
- High-tech services;
- New energy and energy savings;
- Resource and environmental protection; and
- Advanced manufacturing and automation.
In order to obtain HNTE status, the enterprise must apply with the competent authority and submit documentation demonstrating that it meets the conditions. An expert panel will review the documentation and provide comments to the competent authority, and if approved, the HNTE certificate will be issued.
Once issued, the enterprise will be eligible for the reduced tax rate and other benefits from the year the certificate is issued. If an enterprise subsequently fails to meet the conditions or commits serious violations regarding work safety or environmental law, the certificate will be revoked and the tax benefits will be canceled retroactively from the year the conditions were no longer met or the violation occurred.
On 17 February 2016, the U.S. Treasury Department issued a newly revised U.S. Model Income Tax Convention (2016 Model). The 2016 Model is the baseline text that will be used in tax treaty negotiations going forward and includes a number of provisions intended to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.
Key aspects of the 2016 Model include:
- A new triangular permanent establishment rule to address income treated by a residence country as attributable to a permanent establishment and subject to little or no tax, as well as income that is excluded from the tax base of the residence country and attributable to a permanent establishment located in a third country that does not have a tax treaty with the source country;
- Rules concerning special tax regimes (STR) that would deny treaty benefits on deductible payments of certain highly mobile income (related-party interest, royalties, and guarantee fees) that are made to a related beneficial owner that enjoys low or no taxation with respect to that income under an STR;
- Provisions to reduce the tax benefits of corporate inversions by denying reduced withholding taxes on U.S. source dividends, interest, royalties, and certain guarantee fees paid by U.S. companies that are expatriated entities when the beneficial owner is a connected person with respect to the expatriated entity;
- Revisions to Article 22 (Limitation on Benefits) including:
- An active-trade-or-business test requiring that the treaty-benefitted income "emanates from, or is incidental to," a trade or business that is actively conducted by the resident in the residence state;
- A derivatives benefits test requiring that 95% of the tested company’s shares be owned, directly or indirectly, by seven or fewer persons that are equivalent beneficiaries (with the removal of geographic restrictions);
- A headquarters-company rule that would entitle an active headquarters company of a multinational corporate group to treaty benefits with respect to dividends and interest paid by members of its group, provided the company exercises primary management and control functions in its residence country with respect to itself and its geographically diverse subsidiaries and certain other conditions are met; and
- Intermediate ownership rules that permit as an intermediate owner any company that is a resident of a country that has in effect a comprehensive tax treaty that contains rules addressing special tax regimes and notional interest deductions;
- Rules in Article 25 (Mutual Agreement Procedure) requiring that certain disputes between tax authorities be resolved through mandatory binding arbitration; and
- A new Article 28 (Subsequent Changes in Law) that obligates treaty partners to consult with a view to amending the treaty as necessary when changes in the domestic law of a treaty partner draw into question the treaty’s original balance of negotiated benefits and the need for the treaty to reduce double taxation.
The 2016 Model also includes rules based on certain recommendations from Actions 6 and 7 of the OECD BEPS Project, including:
- A revised preamble for tax treaties that makes clear that the purpose of a tax treaty is the elimination of double taxation with respect to taxes on income without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance;
- A rule intended to protect against contract-splitting abuses of the twelve-month permanent establishment threshold for building sites or construction or installation projects; and
- A twelve-month ownership requirement for the 5% withholding rate for direct dividends, with refinements to prevent companies from circumventing the ownership period.
Other BEPS Project recommendations are not included in the 2016 Model, such as the revised rules related to dependent and independent agents and the exemption for preparatory and auxiliary activities.
Click the following links for the 2016 U.S. Model Income Tax Convention and the preamble to the 2016 Model, which includes additional information on the changes. A detailed technical explanation of the 2016 model is expected to be released by Treasury later in the spring.
European Commission Launches Public Consultation on Improving Double Taxation Dispute Resolution Mechanisms
On 16 February 2016, the European Commission launched a public consultation on improving double taxation dispute resolution mechanisms. The consultation is in connection with the Commission's June 2015 Action Plan Action Plan for Fair and Efficient Corporate Taxation in the EU.
The main purpose of the consultation is to gather stakeholders' views on:
- The relevance of removing double taxation for enterprises operating cross border;
- The impact and effectiveness of current double taxation dispute resolution mechanisms, including bilateral treaties entered into by EU Member States and the EU multilateral Arbitration Convention (Convention 90/436/EEC );
- How these mechanisms can be improved; and
- The potential solutions (discussed in the consultation document), including:
- Improving the efficiency of bilateral and multilateral instruments by encouraging Member States to adopt or revise dispute resolution mechanism in their treaties based on conclusions reached by the EU Arbitration Convention at the level of the EU Joint Transfer Pricing Forum and Action 14 of the OECD BEPS Project;
- Improving the efficiency of bilateral and multilateral instruments by encouraging Member States to introduce a specific enforcement mechanism in their tax treaties that would empower the Court of Justice of the European Union to decide on any remaining double-taxation dispute between EU Member States after a limited period of time;
- Requiring Member States to implement measures that foresee reaching a decision or a mutual agreement on eliminating a double taxation case within a given time limit; and
- Introducing a new comprehensive EU legal instrument providing for an effective elimination of double taxation at the EU level.
Click the following link for the dispute resolution consultation webpage for additional information and the consultation document. Comments are due by 10 May 2016.
On 12 February 2016, officials from Belize and the Czech Republic signed a tax information exchange agreement. The agreement is the first of its kind between the two countries and will enter into force after the ratification instruments are exchanged.
The income tax treaty between Kyrgyzstan and the United Arab Emirates entered into force on 16 December 2015 according to a recent update from the Kyrgyzstan State Tax Service. The treaty, signed 7 December 2014, is the first of its kind between the two countries.
The treaty covers Kyrgyz tax on profits and income of legal persons and individual income tax, and covers U.A.E income tax and corporate tax.
- Dividends - 0%
- Interest - 0%
- Royalties - 5%
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.
Both countries apply the credit method for the elimination of double taxation.
The treaty applies from 1 January 2016.