Worldwide Tax News
ATO Issues Tax Alerts Concerning Cross-Border Round Robin Financing and the Use of Partnerships to Avoid the Multinational Anti-Avoidance Law
On 15 September 2016, the Australian Taxation Office (ATO) issued two tax alerts on arrangements currently being targeted for review. Links to the alerts and summaries of the targeted arrangements are as follows.
The ATO is reviewing cross-border round robin type arrangements that involve funding of an overseas entity or operations by an Australian entity, where the funds are subsequently provided back to the Australian entity or its Australian associate in a manner that purportedly generates Australian tax deductions while not generating corresponding Australian assessable income. Particular concerns include:
- That the taxpayer may not be entitled to a deduction because the borrowing may not have the sufficient necessary nexus with the requisite kind of income;
- That the arrangements are being used for the purpose, or for purposes which include, the claiming of Australian tax deductions or the artificial creation of conduit foreign income to avoid payment of Australian dividend withholding tax on unfranked dividends funded from Australian profits; and
- Whether the actual commercial or financial dealings between the Australian entities and the overseas related parties are on conditions that might be expected to operate between independent parties dealing wholly independently with each other or involve non-arm's length consideration.
The ATO is reviewing arrangements involving the use of partnerships to avoid application of the Multinational Anti-Avoidance Law (MAAL). The scheme involves interposing an entity described as a partnership between the foreign entity originally making supplies to Australian customers and the Australian customers. Particular concerns include that the arrangements:
- Are structured in an artificial and contrived manner solely to avoid the application of the MAAL and are not aligned with the MAAL's policy intent and commercial reality;
- Do not involve any substantive changes to the underlying business carried on by the multinational group in Australia and the functions undertaken by its constituent entities in relation to the supplies to Australian customers pre- and post-MAAL; and
- Are not effective in avoiding the MAAL's application.
European Commission Launches Work on Common EU List of Non-Cooperative Tax Jurisdictions
The European Commission has announced the launch of work to create the first common EU list of non-cooperative tax jurisdictions. The work began with the presentation of a scoreboard of indicators to Member State experts in the Council Code of Conduct Group on Business Taxation on 14 September 2016. The scoreboard is to help determine the potential risk level of each country's tax system in facilitating tax avoidance and includes both selection indicators and risk indicators for each country.
The selection indicators include:
- Strength of economic ties with the EU: To see how strong the economic ties are between the third country and the EU, indicators such as trade data, affiliates controlled by EU residents and bilateral FDI flows were examined;
- Financial activity: To determine if a jurisdiction had a disproportionately high level of financial services exports, or a disconnection between their financial activity and the real economy, indicators such as total FDI, specific financial income flows and statistics on foreign affiliates were used; and
- Stability factors: To see if the jurisdiction would be considered by tax avoiders as a safe place to place their money, general governance indicators such as corruption and regulatory quality were examined.
The risk indicators include:
- Transparency and exchange of information: The jurisdictions' status with regard to the international transparency standards, i.e., exchange of information on request and automatic exchange of information;
- The existence of preferential tax regimes: The existence of potential preferential regimes, identified by the Commission on the basis of publicly available information; and
- No corporate income tax or a zero corporate tax rate: The existence of a tax system with no corporate income tax or a zero corporate tax rate.
The Code of Conduct Group will decide on the relevant jurisdictions to screen, which should be endorsed by finance ministers before the end of the year. The screening of the selected countries should then begin next January, with a view to having a first EU list of non-cooperative tax jurisdictions before the end of 2017.
OECD Publishes Comments Received on BEPS Involving Interest in the Banking and Insurance Sectors
On 15 September 2016, the OECD published comments received on the public discussion draft on approaches to address BEPS involving interest in the banking and insurance sectors. The discussion draft was been issued as part of the follow-up work for BEPS Project Action 4 (Limiting Base Erosion Involving Interest Deductions and Other Financial Payments). The draft focuses on:
- The risks posed by banking and insurance groups to be addressed under Action 4;
- Approaches to address risks posed by banks and insurance companies; and
- Approaches to address risks posed by entities in a group with a bank or insurance company.
Panama Publishes List of Designated VAT Withholding Agents
Panama has published the list of designated withholding agents for value added tax (VAT) purposes in the Official Gazette. The withholding requirement was introduced under Executive Decree 493 in 2015 (previous coverage). Under the decree, taxpayers that have acquired goods or services of at least PAB 10 million in the previous year must withhold 50% of the VAT due as indicated in each invoice in the current year.
Click the following link for the 2017 list.
Vietnam Announces Tax Rules for Uber and Its Drivers
Vietnam's General Department of Taxation has issued a release announcing that Dutch-based Uber International Holding BV must pay taxes as a foreign establishment on its revenue from Vietnam. The car service app company will be taxed using the direct method at rates of 3% for value added tax (VAT) and 2% for corporate income tax on revenue. At the same time, Uber drivers will be taxed at rates of 3% for VAT and 1.5% for individual income tax. The organization that is authorized to declare and pay tax for Uber will also represent the drivers for declaration and payment.
Germany Considering New Loss Carry Forward Rules for Change of Ownership
The German Cabinet has approved proposed legislation that would allow the use of carried forward losses upon change of ownership in certain cases. Currently, the losses of a company are generally forfeited where there is a change of ownership of 50% or more, and a reduction in available losses where there is a change of ownership between 25% and 50%. Under the proposed legislation, the carry forward of losses would be allowed, provided that the restructured company had been operating exclusively with the same business purpose for the three years immediately prior to the change in ownership or since the date of its incorporation. The legislation now goes to the Bundestag (parliament) for consideration.
U.S. to Limit Foreign Tax Credit Availability in Relation to Foreign Adjustments
Notice 2016-52 was published on 15 September 2016 announcing that the U.S. Treasury Department and the IRS intends to issue regulations under section 909 in relation to section 902 corporations that pay foreign income taxes resulting from foreign-initiated adjustments.
The planned regulations are in response to foreign-initiated adjustments that may arise under European Union (EU) State aid law, to the extent EU State aid payments result in creditable foreign taxes. Specifically, before a payment is made pursuant to a foreign-initiated adjustment, a taxpayer may attempt to change its ownership structure or cause the section 902 corporation to make an extraordinary distribution so that the subsequent tax payment creates a high-tax pool of post-1986 undistributed earnings that can be used to generate substantial amounts of foreign taxes deemed paid, without repatriating and including in U.S. taxable income the earnings and profits to which the taxes relate.
The Treasury Department and the IRS have determined that guidance to address these transactions is appropriate under section 909, which is intended to prevent the separation of creditable foreign taxes from related income generally by deferring the right to claim credits until the related income is included in U.S. taxable income. The planned regulations under section 909 will identify two new splitter arrangements relating to section 902 corporations that pay foreign income taxes pursuant to foreign-initiated adjustments. The regulations will apply similar rules to taxpayers that take the position that taxes paid by a U.S. person pursuant to a foreign-initiated adjustment to the tax liability of a section 902 corporation are eligible for a direct foreign tax credit under section 901.
The regulations will apply to foreign income taxes paid on or after 15 September 2016.
Click the following link for Notice 2016-52. Comments on the regulations are requested must be received by 14 December 2016.
Indian AAR Holds Italian Merger Involving Indian Assets Exempt from Capital Gains Tax by Virtue of Tax Treaty Non-Discrimination Provisions
India's Authority for Advance Rulings (AAR) recently issued a ruling on whether the merger of two Italian companies with underlying assets held through a branch in India is subject to Indian capital gains tax. The merger involved three Italian companies; Banca Sella Holding (Hold Co) and its subsidiaries Banca Sella (Sub A - wholly owned by Hold Co) and Sella Servizi Bancari (Sub B - 80% owned by Hold Co and 15% by Sub A). Sub A is a banking and financial services company, and Sub B provided support services to the Sella Group.
In 2010, Sub B established a branch office in India that took over the information technology business of an Indian subsidiary of Hold Co as a going concern, for which the Indian subsidiary paid capital gains tax. In 2011, Sub A and Sub B were merged as part of a restructuring, with all assets and liabilities going to Sub A, including the assets of Sub B's Indian branch office. Sub A then sought a ruling from the AAR on whether a capital gains tax liability existed for any party involved, and if so, whether Article 25 (Non-Discrimination) of the 1993 India-Italy tax treaty would confer the exemption for mergers provided by Section 47(vi) of the Income Tax Act, 1961 (ITA).
The Indian tax authority position on the matter was that the merger resulted in a taxable capital gain the transfer of Sub B's Indian branch. In its ruling, however, the AAR found that there was no taxable gain for any of the parties involved. Regarding Sub B, the AAR found that there was a capital gain, but the exemption provided under the ITA for domestic companies in such a merger also applies for Italian companies by virtue of Article 25 (Non-Discrimination) of the tax treaty. Regarding Sub A, the AAR found that its 15% stake in Sub B was ceded as part of the merger without receiving any consideration, and therefore no taxable gain arose. Regarding Hold Co and other minority shareholders in Sub B, the AAR found that a capital gain had accrued, but the gain is not subject to tax in India by virtue of Article 14 (Capital Gains) of the tax treaty because the value of the shares in Sub B was not derived substantially from assets held in India.
Romania to Sign New Tax Treaty with Spain
On 14 September 2016, the Romanian government authorized the signature of a draft income tax treaty with Spain. The treaty must be signed and ratified before entering into force, and once in force and effective, will replace the 1979 tax treaty between the two countries. Details of the new treaty will be published once available.