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Worldwide Tax News

Approved Changes (2)

OECD-United Nations

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IMF, OECD, UN and World Bank Establish Platform for Collaboration on Tax

On 19 April 2016, the OECD announced the establishment of the Platform for Collaboration on Tax.

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The International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD), the United Nations (UN) and the World Bank Group (WBG) announced today the details of their joint effort to intensify their co-operation on tax issues: the Platform for Collaboration on Tax. The Platform will not only formalise regular discussions between the four international organisations on the design and implementation of standards for international tax matters, it will strengthen their capacity-building support, deliver jointly developed guidance, and share information on operational and knowledge activities.

This effort comes at a time of great momentum around international tax issues, and was welcomed by the G20 finance ministers at their February meeting in Shanghai. Amid the growing importance of taxation in the debate to achieve the UN Sustainable Development Goals (SDGs), a major aim of the Platform is to better frame technical advice to developing countries as they seek both more capacity support and greater influence in designing international rules.

Among the Platform’s first tasks will be to deliver a number of 'toolkits' designed to help developing countries implement the measures developed under the G20/OECD Base Erosion and Profit Shifting Project and on other international tax issues. The first of these toolkits, focusing on tax incentives, was delivered in November. There will be an important link to the new BEPS implementation framework. Platform members will hold regular meetings with representatives of developing countries, regional tax organisations, banks and donors. Consultations with business and civil society will be organized as needed.

More information about the Platform for Collaboration on Tax is provided in the Concept Note, jointly developed by the four international organisations.

South Africa

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South Africa Increases Tax Board Appeals Threshold

South Africa has increased the threshold for the maximum amount of tax in dispute under which appeals may be heard by the Tax Board. The threshold is increased from ZAR 500,000 to ZAR 1 million effective 1 January 2016.

Under South Africa's tax appeals process, objections to disputed tax assessments are first filed with the South African Revenue Service (SARS). If SARS issues a disallowance of the objection, the taxpayer may then appeal to the Tax Court or to the Tax Board, which is less costly and involves less formal proceedings than appealing to the Court. The taxpayer and SARS must both agree that a matter be heard by the Tax Board.

Proposed Changes (3)

India

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India Publishes Draft Rules for the Granting of Foreign Tax Credits

On 18 April 2016, India's Central Board of Direct Taxes, published draft rules for the granting of foreign tax credits. Under India's Income Tax Act (ITA), general relief for foreign taxes paid is to be provided for resident taxpayers, but no detailed rules for the determination and granting of foreign tax credits have been provided until now.

Foreign Tax Credit Availability

The draft rules include that an Indian resident taxpayer is to be allowed a credit for the amount of foreign taxes paid, by way of a deduction or otherwise, in the year in which the corresponding income is taxable in India. For this purpose, foreign taxes include any taxes covered by a relevant tax treaty India has entered into, or in the absence of a tax treaty, any foreign tax in the nature of income tax including excess profits taxes or business profits taxes.

The foreign tax credit may offset the amount of tax, surcharge and cess payable under the ITA. However, a credit will not be available in respect of any sum payable by way of interest, fee or penalty under the ITA, or for any foreign tax that is disputed in any way by the taxpayer.

Foreign Tax Credit Determination

The foreign tax credit is the aggregate amounts of credit computed separately from each source of income on a country-by-country basis. The credit amount for each source of income is equal to the lower of the foreign tax paid or the tax that would be payable under the ITA using the currency exchange rate applicable on the date the foreign tax was paid or deducted.

Documentation Requirements

When claiming a foreign tax credit, the taxpayer must furnish certain documentation, including:

  • A certificate from the foreign tax authority that specifies the nature of the income and the amount of tax paid or deducted, or in the case of tax deducted at source, a similar certificate from the person responsible for deduction.
  • Proof of payment, whether paid online or through a bank; and
  • A declaration that the foreign tax paid is not in dispute.

Public Consultation

Click the following link for the draft rules, which are open for public comment until 2 May 2016.

United Kingdom

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UK Publishes Consultation on New Corporate Offence of Failure to Prevent the Criminal Facilitation of Tax Evasion

On 17 April 2016, UK HMRC published a consultation on draft legislation and guidance for the corporate offence of failure to prevent the criminal facilitation of tax evasion. The new offence is aimed at overcoming the difficulties in attributing criminal liability to corporations for the criminal acts of those who act on their behalf. The offence includes three main stages:

  • Stage one: criminal tax evasion by a taxpayer (either a legal or natural person) under the existing criminal law (for example an offence of cheating the public revenue, or fraudulently evading the liability to pay VAT);
  • Stage two: criminal facilitation of this offence by a person acting on behalf of the corporation, whether by taking steps with a view to: being knowingly concerned in; or aiding, abetting, counseling, or procuring the tax evasion by the taxpayer;
  • Stage three: the corporation’s failure to take reasonable steps to prevent those who acted on its behalf from committing the criminal act outlined at stage two.

The consultation does not seek feedback on the introduction of the new corporate criminal offence, but rather focuses on how the new offence outlined in the previous consultation response is best expressed in statute and guidance.

Click the following link for the consultation page on the Gov.UK site. Comments must be submitted by 10 July 2016.

United States

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Former U.S. Treasury Officials Urge Secretary Lew to Reconsider Latest Anti-Inversion Regs and Instead Focus on Tax Reform

In a letter dated 18 April 2016, several former U.S. Treasury Department officials urge current Treasury Secretary Jacob Lew to reconsider new regulations on inversions issued on 4 April (previous coverage) and instead focus on reform of the U.S. tax code, including lower rates and a territorial system. The following is the full text of the letter.

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Dear Secretary Lew:

As former Treasury Department officials, we urge you to reconsider the release on April 4 of temporary and proposed regulations aimed at preventing U.S. companies from merging with smaller foreign companies and adopting headquarters abroad -- a process known as inversion.

Concerns about retaining business headquarters in the United States are well-intentioned, but this unprecedented regulatory fix by your department is not the answer. It will likely make matters worse.

Inversions are a symptom. The disease is America's anomalous international tax code. There are two problems.

First, the U.S. has the highest corporate tax rate among all 34 members of the OECD, the organization of the largest free-market economies. Our combined federal and state rate is 39 percent. The average rate for an OECD nation is 25 percent. The rate is Ireland is 12.5 percent; in the U.K., 20 percent; in Korea, 24 percent.

Second, unlike the vast majority of OECD countries, the U.S. operates on a worldwide tax system. Wherever a U.S.-based company earns its profits, it must still pay corporate taxes in the United States. By contrast, 27 of the 34 OECD nations use a territorial system: companies pay taxes only to the country in which profits are earned.

Combined, these two tax policies put U.S. companies at a huge disadvantage to their foreign counterparts. Since 2000, there have been over 100 tax rate reductions of at least one percentage point by OECD countries. Many of them have also switched to territorial regimes. It's no wonder we now rank 32nd out of 34 OECD countries on the Tax Foundation's International Tax Competitiveness Index, ahead of only France and Italy. As a consequence, U.S. economic growth is suffering.

Lower taxes overseas entice U.S. firms to move their operations abroad – and to keep their earnings there. If profits are repatriated, then companies have to pay the much higher U.S. rate (after deducting what they paid abroad). Trillions of dollars that could be invested in the United States are "stranded" in other countries.

The remedy is not to erect higher barriers against inversions. That would simply lead to larger foreign companies buying up American businesses or force U.S. firms to move capital and employees abroad to comply with the new rules – and it would perpetuate the tax-based competitiveness gap with the rest of the world. Also, changing the rules of the game and applying those new rules retroactively, as some have proposed, creates added uncertainty and unpredictability, producing a chilling effect on investments in the United States.

This lack of predictability hurts US companies more than it does foreign companies operating here.  Those foreign companies enjoy the same benefits and protections of doing business in the United States without the double taxation or regulatory uncertainty suffered by U.S. firms.  This asymmetry helps explain the uptick in foreign acquisitions of U.S. companies, which, for the first quarter of 2016 set a record in dollar volume, 46 percent greater than the same period last year, according to Mergermarket.

This is why we believe the only sustainable remedy is to reform the U.S. tax code and create a level playing field with international competitors. With lower rates and a territorial system, we would not only increase domestic investment by U.S. companies, but also boost capital spending in the U.S. by foreign companies.

Current rules regarding corporate inversions don't need revision. Instead, we urge you to focus your attention on addressing the competitive disadvantages that are harming capital investment, employment, and economic growth in the United States.

As a bipartisan group of former Treasury officials, we don't underestimate the political difficulties your department faces in confronting the inversion issue. We are deeply concerned, however, that you appear to have chosen a route that bypasses the legislative process. We ask that you reconsider this decision and instead focus on urging Congress to do its proper duty and advocating an economic solution that takes the best interests of our great country to heart.

Sincerely,

George P. Shultz, Secretary, 1972-74

John Taylor, Under Secretary, international affairs, 2001-05

Curtis Hessler, Assistant Secretary, economic policy, 1980-81

Phillip Swagel, Assistant Secretary, economic policy, 2006-09

Anna Cabral, Treasurer of the U.S., 2004-09

Ernest Christian, Deputy Assistant Secretary, tax policy, 1974-75

Stephen Entin, Deputy Assistant Secretary, economic policy, 1981-88

David Malpass, Deputy Assistant Secretary, developing nations, 1986-89

Roger Kodat, Deputy Assistant Secretary, domestic finance, 2001-07

James E. Carter, Deputy Assistant Secretary, economic policy, 2002-06

Robert Stein, Deputy Assistant Secretary, macroeconomic analysis, 2003-06

Nada Eissa, Deputy Assistant Secretary, economic policy, 2005-07

Kimberly Reed, Senior Advisor to the Secretary, 2004-07

Michael Desmond, Tax Legislative Counsel, 2005-08

Ike Brannon, Senior Advisor, tax policy, 2007-08

Lawrence Goodman, Director, quantitative analysis, 2003-05

JD Foster, Economic Counsel, tax policy, 2001-02

John J. Kelly Jr., Special Assistant, tax policy, 2001-05

Treaty Changes (4)

China-Russia

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New Tax Treaty between China and Russia has Entered into Force

The new income tax treaty between China and Russia entered into force on 9 April 2016. The treaty, signed 13 October 2014, replaces the 1994 tax treaty between the two countries, which currently applies. A protocol to the new treaty also entered into force the same date. The protocol, signed 8 May 2015, replaces Article 11 (Interest) and amends Article 24 (Non-Discrimination).

Taxes Covered

The treaty covers Chinese individual income tax and enterprise income tax, and covers Russian tax on profits of organizations and tax on income of individuals.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services in a Contracting State through employees or other engaged personnel for the same or connected project for a period or periods aggregating more than 183 days within any 12-month period.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company directly holding at least 25% of the paying company's capital and the holding amounts to at least EUR 80,000 or equivalent in any other currency (meaning the total amount of initial/consecutive  investment in a company or acquisition of shares), otherwise 10%
  • Interest - 0% (as amended by the 2015 protocol - originally 5%)
  • Royalties - 6%

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.

Limitation on Benefits

Article 23 (Limitation on Benefits) of the treaty includes a number of provisions regarding treaty benefits eligibility, including that only qualified persons, as defined in the Article, are entitled to benefits. However, subject to certain conditions, a resident of a Contracting State that is not a qualified person may still be eligible for the benefits of the treaty if carrying on an active business in the person's State of residence and derives income from the other State that is in connection with, or is incidental to, that business.

In addition, the beneficial provisions of Articles 10 (Dividends), 11 (Interest), 12 (Royalties) and 21 (Other Income) will not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the shares, debt-claims or other rights in respect of which the dividends, interest, royalties or other income are paid was to take advantage of those Articles by means of that creation or assignment. The limitation is included in each of those Articles.

Effective Date

The new treaty and amending protocol apply from 1 January 2017. The 1994 tax treaty between China and Russia will cease to have effect once the new treaty applies.

Ethiopia-Korea, DPR-Portugal-Saudi Arabia

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Ethiopia Approves Tax Treaties with North Korea, Portugal and Saudi Arabia

On 14 April 2016, Ethiopia's House of People's Representatives approved the pending income tax treaties with North Korea, Portugal and Saudi Arabia. The respective treaties were signed 5 December 2012 with North Korea, 25 May 2013 with Portugal, and 28 February 2013 with Saudi Arabia. All are the first of their kind between Ethiopia and the respective countries, and will enter into force after the ratification instruments are exchanged.

Additional details will be published for each after their entry into force.

Gibraltar-Mauritius

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Tax Treaty between Gibraltar and Mauritius under Negotiation

According to an update from the Mauritius Revenue Authority, negotiations for an income tax treaty with Gibraltar are underway. Any resulting treaty would be the first of its kind between the two jurisdictions, and must be finalized, signed and ratified before entering into force.

India-Iran

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Tax Treaty between India and Iran to be Signed

On 17 April 2016, officials from India and Iran agreed to conclude negotiations and sign an income tax treaty. The treaty will be the first of its kind between the two countries, and must be signed and ratified before entering into force.

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