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Approved Changes (7)

European Union-Ireland

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European Commission Publishes Non-Confidential Version of Apple State Aid Decision / Ireland Publishes Grounds for Appeal

On 19 December 2016, the European Commission published the non-confidential version of the final negative decision adopted on 30 August 2016 concluding that Ireland gave illegal tax benefits to Apple worth up to EUR 13 billion (previous coverage). On the same date, Ireland's Department of Finance published an explanation of the main lines of argument in Ireland’s application lodged with the General Court of the European Union on 9 November 2016 to annul the Commission decision.

European Commission Decision

In its decision, the Commission found that Irish tax rulings (opinions) concerning internal profit allocation issued to Apple in 1991 and 2007 provided a selective advantage resulting in a substantially low amount of tax being paid. The rulings benefited Apple Sales International (ASI) and Apple Operations Europe (AOE), which were both incorporated in Ireland but not considered resident. The rulings essentially allowed an internal allocation of sales profits to "Head Offices" within ASI and AOE that were not subject to tax, while allocating a small portion to ASI and AOE's Irish branches, which were subject to tax.

Ireland's Argument Against the Decision

Ireland's explanation of the main lines of argument state that the Commission has misunderstood the relevant facts and Irish law by:

  • Wrongly asserting that the opinions involved a departure from Irish law;
  • Mischaracterizing the activities and responsibilities of the Irish branches of ASI and AOE; and
  • Wrongly attributing Apple’s intellectual property licenses to the Irish branches of AOE and ASI.

The explanation also makes eight additional points against the Commission decision, including that :

  • The Commission has misapplied State Aid law;
  • The Commission has wrongly applied the arm’s length principle;
  • The Commission has wrongly concluded that the tax treatment of ASI and AOE was not consistent with arm’s length principle;
  • The Commission’s alternative line of reasoning misunderstands Irish law;
  • The Commission has failed to follow required procedures;
  • The Commission wrongly invokes novel legal rules;
  • The Commission has exceeded its powers and interfered with national tax sovereignty; and
  • The Commission has failed to provide proper reasons for its decision.

Click the following links for the non-confidential version of the Commission decision and Ireland's arguments against the decision.

France

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France Implements EU Beneficial Ownership Registry Amendments and Amends Access to Trust Register

France has reportedly published an ordinance in the Official Gazette to transpose Directive (EU) 2015/849, which includes new anti-money laundering rules including the requirement that all EU Member State maintain a central register of Information on beneficial ownership. This central register must be accessible to competent authorities, financial intelligence units, obliged entities such as banks, and any other person or organization that can demonstrate a legitimate interest (previous coverage).

In addition to transposing the EU Directive, the ordinance also amends access to the French Trust Register. In June 2016, access to the register was made available to the public, but was later ruled unconstitutional in a decision issued by the French Constitutional Council (Conseil Constitutionnel) in October 2016 (previous coverage). As amended, access to the register is now limited to certain authorities, including the French financial intelligence desk (TRACFIN), judiciary authorities, customs authorities, and tax authorities, as well as persons that can demonstrate a legitimate interest as per the EU Directive.

Hong Kong

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Hong Kong Revises Guidance on Court-Free Company Amalgamations

On 16 December 2016, the Hong Kong Inland Revenue Department published revised guidance on the profits tax consequences of a court-free amalgamation. The guidance covers:

  • Amalgamation with sale of assets of the amalgamating company;
  • Amalgamation without sale of assets of the amalgamating company, which covers the tax treatment of both the amalgamating and amalgamated companies;
  • The utilization of tax losses brought forward, which depends on certain conditions, including:
    • The financial resources test;
    • The trade continuation test;
    • The post entry test; and
    • The same trade;
  • Profits tax return requirements in respect of the amalgamating companies; and
  • The rights and obligations undertaken by the amalgamated company.

The guidance also notes that if the Commissioner is satisfied that the court-free amalgamation is not carried out for the purpose of obtaining tax benefits, the anti-abuse provisions in Sections 61A or 61B of Chapter 112 of the Inland Revenue Ordinance will not be made applicable to the amalgamation, and the amalgamated company will generally be treated as far as possible as if it is the continuation of and the same person as the amalgamating company. Section 61A concerns the Commissioner's authority to counteract transactions where the sole or dominant purpose was to obtain a tax benefit, and Section 61B concerns the Commissioner's authority to disallow the setoff of losses where the sole or dominant purpose of a change in shareholding was to utilize a loss.

Click the following link for the full guidance.

Jersey

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Jersey Approves 2017 Budget Measures and Regulations for CbC Reporting

On 14 December 2016, the Jersey States Assembly approved the budget measures for 2017, the regulations for Country-by-Country (CbC) reporting, and the ratification of the Multilateral Competent Authority Agreement on the Exchange of CbC Reports.

2017 Budget Measures

The main tax-related budget measures include:

  • The introduction of unilateral double taxation relief on the basis of domestic legislation for companies subject to tax at 10% or 20% from 2017 (currently relief generally only granted under a tax treaty);
  • Amendments to the Income Tax Law in order to give the Comptroller the power to obtain details of the profits chargeable to tax at the rate of 0% from all companies resident in Jersey beginning with the 2016 tax year (currently only required where a Jersey resident individual ultimately owns more than 2% of the shares of the company);
  • The extension of the deadline for a company to submit the information return to 31 December following the tax year in order to align it with the income tax return deadline, which was extended in the previous budget (companies not required to submit an income tax return must submit an information return); and
  • An increase in the standard personal income tax exemption thresholds to GBP 14,550 for single taxpayers and GBP 23,350 for married couple/civil partnership (higher exemption thresholds apply for those aged 65 and older).

CbC Reporting

The final CbC reporting regulations are in line with BEPS Action 13 with some differences, and are largely unchanged from the draft version lodged in October (previous coverage).

Key aspects of the CbC regulations include:

  • The CbC reporting requirements apply for accounting periods starting on or after 1 January 2016 for MNE groups meeting a EUR 750 million consolidated revenue threshold in the previous 12-month accounting period;
  • The CbC report is due within 12 months following the close of the accounting period reported on;
  • Ultimate parent entities resident in Jersey must file a CbC report in line with the model template in Annex III of the OECD Action 13 Final Report;
  • A "Jersey entity" that is not the ultimate parent must file a "Jersey CbC report" if any one of the following conditions are met:
    • Its ultimate parent entity is in a jurisdiction where it is not required to file the equivalent of a CbC report;
    • No exchange arrangements exist between the Comptroller and the appropriate authority in the jurisdiction in which the ultimate parent entity is resident; or
    • Exchange arrangements between the Comptroller and appropriate authority in the jurisdiction in which the ultimate parent entity is resident are not operating effectively;
  • Exemptions from filing a "Jersey CbC Report" apply if:
    • Another constituent entity of the group intends to file a report with the Comptroller that includes the information required in the "Jersey CbC Report"; or
    • Another constituent entity of the group intends to file a CbC report in another jurisdiction that includes the information required in the "Jersey CbC Report" and there are effective information exchange arrangements operating between the Comptroller and the appropriate authority of the other jurisdiction;
  • A "Jersey CbC Report" is also in line with the Action 13 template, but includes the CbC reporting information of the "Jersey entity" and, where applicable, the constituent entities in respect of which the "Jersey entity" is required to prepare consolidated financial statements or would be so required if its equity interests were traded on a public securities exchange;
  • A Jersey entity is required to notify the Comptroller on or before the last day of the accounting period concerned of its intention to file a CbC report, and if not filing, must notify the Comptroller of the identity of the constituent entity that will file the report (including jurisdiction of tax residence and jurisdiction of filing, if filing outside Jersey);
  • Penalties for failing to comply with the CbC reporting requirements will apply as follows:
    • GBP 300 for failing to file a CbC report or provide notification;
    • GBP 60 per day for continued failure to file a CbC report after being notified of the initial penalty (daily penalty may be increased up to GBP 1,000 if the failure continues for more than 30 days); and
    • GBP 3,000 for providing inaccurate information in the CbC report if known to be inaccurate at the time of filing or subsequently discovered and no action is taken to correct.

Click the following link for the Taxation (Implementation) (International Tax Compliance) (Country-by-Country Reporting: BEPS) (Jersey) Regulations 2016. The regulations enter into force on 21 December 2016.

Luxembourg

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Luxembourg Parliament Approves 2017 Tax Reform Legislation

On 14 December 2016, the Luxembourg parliament reportedly approved the legislation to implement the tax reform measures for 2017 (Law No. 7020). Some of the main reform measures are summarized as follows:

Reduced Corporate Tax Rates

  • The standard corporate tax rate is reduced from 21% to 19% in 2017 and to 18% in 2018; and
  • The reduced corporate tax rate for small businesses is reduced from 20% to 15%, and the threshold for the reduced rate is increased from EUR 15,000 to EUR 25,000 in taxable income.

Increased Investment Tax Credits

  • The tax credit for increased investments in tangible depreciable assets is increased from 12% to 13%,
  • The tax credit for the first EUR 150,000 of qualifying new investments is increased from 7% to 8%; and
  • The tax credit for the first EUR 150,000 of qualifying new investments in assets approved for the special depreciation regime is increased from 8% to 9%.

Increased penalties

  • The administrative fine for the filing of incorrect/incomplete tax returns and non-filing  is set at a minimum of 5% and a maximum of 25% of the underpaid tax or undue refund; and
  • The maximum penalty for late filing of returns is increased to EUR 25,000.

Other Important Measures

  • The carry forward of losses is limited to 17 years for losses realized in financial years ending after 31 December 2016 (prior year's losses may still be carried for indefinitely);
  • An optional deferral is introduced for the deduction of annual depreciation, which may instead be carried forward, but must be used by the end of the asset's useful life;
  • The fixed minimum net wealth tax increased from EUR 3,210 to EUR 4,815 for specific resident investment vehicles if financial assets exceed 90% of the total balance sheet in a given year and such assets exceed EUR 350,000;
  • The requirement to electronically file corporate tax returns is introduced; and
  • Managers/administrators of taxable companies are made jointly and personally liable for the value added tax liabilities of the company they manage/administrate if they fail to fulfill their legal requirements.

Effective Date

The 2017 tax reform measures generally apply from 1 January 2017. Additional details will be published once available.

Singapore

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Singapore Publishes Guide on Total Asset Method for Interest Adjustment

On 16 December 2016, the Inland Revenue Authority of Singapore published an e-tax guide on the application of the total asset method (TAM) for interest adjustment.

Under Singapore's Income Tax Act (ITA), interest expense and borrowing costs incurred on loans are only deductible if the loan is specifically taken up to finance income-producing assets or assets that are employed in acquiring income. If the asset does not produce income, the interest expense and borrowing costs are not tax deductible. In cases where the taxpayer is unable to identify and track the use of an interest-bearing loan to specific assets financed by the loan, and not all the assets are income-producing, the TAM may be adopted to attribute the common interest expense to the assets.

The TAM can be used to determine the amount of interest expense to be disallowed using the following formula:

  • Interest expense to be disallowed = (Cost of non-income producing assets / Cost of total assets) x Common interest expense

The TAM can also be used to determine the common interest expense attributable to an asset producing a certain income stream using the following formula:

  • Interest expense to be allowed against the specific income stream = (Cost of the asset / Cost of total assets) x Common interest expense

For the purpose of the formulas, the Cost of the assets is the cost in the balance sheet as at the relevant financial year end, and the Common interest expense refers to interest expense other than those arising from loans taken to fund specific assets.

Click the following link for e-Tax Guide Income Tax: Total Asset Method for Interest Adjustment for more information.

United States

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U.S. Final Regulations Published Concerning Treatment of Certain Transfers of Property to Foreign Corporations

On 16 December 2016, Final Regulations (TD 9803) were published in the U.S. Federal Register concerning the treatment of certain transfers of property by U.S. persons, including foreign goodwill and going concern value, to foreign corporations in non-recognition transactions described in section 367 of the Internal Revenue Code (the Code). The regulations are effective the date they were published. The following is the summary/background as provided with the Final Regulations (TD 9803) as published.

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This document contains final regulations issued under sections 367 and 6038B of the Code. Temporary regulations were published on May 16, 1986 (TD 8087, 51 FR 17936) (the 1986 temporary regulations). Proposed regulations under these sections were published on September 16, 2015 (80 FR 55568) (the proposed regulations).

The proposed regulations generally provided five substantive changes from the 1986 temporary regulations:

  1. Eliminating the favorable treatment for foreign goodwill and going concern value by narrowing the scope of the active trade or business exception under section 367(a)(3) (ATB exception) and eliminating the exception under § 1.367(d)-1T(b) that provides that foreign goodwill and going concern value is not subject to section 367(d);
  2. allowing taxpayers to apply section 367(d) to certain property that otherwise would be subject to section 367(a);
  3. removing the twenty-year limitation on useful life for purposes of section 367(d) under § 1.367(d)-1T(c)(3);
  4. removing the exception under § 1.367(a)-5T(d)(2) that permits certain property denominated in foreign currency to qualify for the ATB exception; and
  5. changing the valuation rules under § 1.367(a)-1T to better coordinate the regulations under sections 367 and 482 (including temporary regulations under section 482 issued with the proposed regulations (see § 1.482-1T(f)(2)(i), TD 9738, 80 FR 55538).

Specifically with regard to the ATB exception, the proposed regulations revised the categories of property that are eligible for the ATB exception so that foreign goodwill and going concern value cannot qualify for the exception. Under the 1986 temporary regulations, all property was eligible for the ATB exception, subject only to five narrowly tailored exceptions. In addition to limiting the scope of the ATB exception, the proposed regulations also implemented changes to the ATB exception that were intended to consolidate various provisions and update the 1986 temporary regulations in response to subsequent changes to the Code.

The proposed regulations did not resolve the extent to which property, including foreign goodwill and going concern value, that is not explicitly enumerated in section 936(h)(3)(B)(i) through (v) (enumerated section 936 intangibles) is described in section 936(h)(3)(B) and therefore subject to section 367(d) or instead is subject to section 367(a) and not eligible for the ATB exception. All property that is described in section 936(h)(3)(B) is referred to at times in this preamble as “section 936 intangibles.” Nonetheless, the proposed regulations permitted taxpayers to apply section 367(d) to such property. Under this rule, a taxpayer that has historically taken the position that goodwill and going concern value is not described in section 936(h)(3)(B) could apply section 367(d) to such property.

These regulations generally finalize the proposed regulations, as well as portions of the 1986 temporary regulations, as amended by this Treasury decision. Although minor wording changes have been made to certain aspects of those portions of the 1986 temporary regulations, the final regulations are not intended to be interpreted as making substantive changes to those regulations.

Treaty Changes (3)

Japan-Lithuania

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Tax Treaty between Japan and Lithuania under Negotiation

Officials from Japan and Lithuania began the first round of negotiations for an income tax treaty on 19 October 2016. Any resulting treaty will be the first of its kind between the two countries and must be finalized, signed and ratified before entering into force.

Singapore-Malta

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Singapore and Malta Sign Competent Authority Agreement for Exchange of Financial Account Information

According to an update from the Inland Revenue Authority of Singapore, a competent authority agreement for the automatic exchange of financial account information was signed with Malta on 15 December 2016. Under the agreement, each country will automatically exchange information on accounts held in the respective country by tax residents of the other country based on the OECD Common Reporting Standard (CRS). The automatic exchange is to begin by September 2018 for information collected on the 2017 reporting year.

Singapore-South Africa

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New Tax Treaty between Singapore and South Africa has Entered into Force

The new income tax treaty between Singapore and South Africa entered into force on 16 December 2016. The treaty, signed by South Africa on 23 November 2015 and by Singapore on 30 November, replaces the 1996 tax treaty between the two countries.

Taxes Covered

The treaty covers Singapore income tax, and South African normal tax, dividends tax, withholding tax on interest, withholding tax on royalties, and tax on foreign entertainers and sportspersons.

Residence

The treaty includes the provision that if a company is considered resident in both Contracting States, the competent authorities will determine the company's residence for the purpose of the treaty through mutual agreement. If no agreement is reached, the company will be considered to be outside the scope of the treaty except for the provisions of Article 24 (Exchange of Information).

Permanent Establishment

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

The treaty also includes the provision that a permanent establishment will be deemed constituted when an enterprise carries on activities that consist of, or that are connected with, the exploration for or exploitation of natural resources situated in a Contracting State for more than six months.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company holding at least 10% of the paying company's capital; otherwise 10%
  • Interest - 0% for interest paid in respect of any debt instrument listed on a recognized stock exchange; otherwise 7.5%
  • Royalties - 5%

Limitation on Benefits

The provisions of Articles 10 (Dividends), 11 (Interest), and 12 (Royalties) will not apply if 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 income is paid was to take advantage of those Articles by means of that creation or assignment. The limitation is included in each of the Articles.

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. In the case of dividends paid to a Singapore company, the credit will also take into account the taxes on the profits out which the dividends are paid, provided that the Singapore company directly or indirectly owns at least 10% of the share capital in the South African company.

MFN Clause

The final protocol to the treaty includes the provision that if South Africa enters into an agreement with a third State that provides for a lower withholding tax rate on dividends, South Africa must then inform Singapore and enter into negotiations with a view to providing comparable treatment as may be provided for the third State.

Effective Date

The treaty applies in Singapore from 1 January 2017 with regard to withholding taxes, and from 1 January 2018 for other taxes. It applies in South Africa from 1 January 2017.

The 1996 tax treaty between the two countries ceases to have effect on the dates the new treaty is effective.

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