Worldwide Tax News
The Danish Ministry of Taxation has announced that an agreement has been reached in parliament on strengthening efforts to combat international tax evasion. The agreement includes the establishment of a new tax evasion center that will oversee the anti-evasion activities and data collection, and will act as the single point of entry and exit for the exchange of information from abroad. The agreement also includes, among others:
- Signing the BEPS Multilateral Instrument for treaty-related BEPS measures in June 2017;
- Implementing measures of the EU anti-tax avoidance directive, including those in relation to anti-abuse and CFCs;
- Establishing registers for beneficial ownership;
- Cooperating on the development of the EU and OECD blacklists of tax havens;
- Reviewing and strengthening current legislation to address tax evasion, including in relation to measures for tax advisors based on BEPS Action 12 (Mandatory Disclosure Rules), abuse of limited partnership structures, and withholding tax on dividends to foreign investors in tax havens; and
- Implementing better protections for whistleblowers.
Click the following link for the full text of the agreement (Danish language).
On 15 May 2017, Hungary published Law XL of 2017 in the Official Gazette, which amends Act XXXVII of 2013 for the implementation of Country-by-Country (CbC) reporting in line with BEPS Action 13 and the requirements of EU Council Directive (EU) 2016/881. Main points include:
- Standard reporting threshold of EUR 750 million consolidated group revenue in the previous year (or equivalent in HUF based on exchange rate published by Hungarian National Bank);
- Hungarian ultimate (surrogate) parent entities required to submit CbC report for fiscal years beginning on or after 1 January 2016;
- Hungarian non-parent entities required to submit CbC report for fiscal years beginning on or after 1 January 2017, subject to standard local filing conditions: foreign ultimate parent not required to submit; no CbC exchange agreement with parent's jurisdiction; or systemic failure for exchange;
- When a non-parent entity is required to submit, information is to be requested from the ultimate parent for a complete CbC report, and if not provided, a report must still be submitted based on available information and the tax authority must be notified of the parent's refusal to provide all information;
- A non-parent entity will not be required to submit a CbC report if another member of the group has submitted a report in another jurisdiction for the reporting year, subject to certain conditions, including that the report will be exchanged with Hungary;
- Group entities resident in Hungary must notify the tax authority on whether they are the ultimate parent or surrogate parent, and if neither, the identity and tax residence of the reporting entity for the group;
- CbC reports are due within 12 months following the close of the reporting fiscal year and notifications are due by the end of the reporting fiscal year (a temporary extension to 31 December 2017 will apply for notification on 2016 fiscal year - unconfirmed);
- Report and notification will be submitted electronically through forms provided by the State Tax Authority;
- A penalty of up to HUF 20 million (~EUR 64,000) will apply for late/non filing of CbC report and notification, as well as for incomplete/incorrect filing.
Click the following link for Law XL of 2017 as published in the Official Gazette No. 69 (Hungarian language). The Law will enter into force on 31 May 2017.
On 18 May 2017, India's GST Council finalized the GST rates for over 1,200 goods and on 19 May finalized the rates for services. Under India's new GST regime, a four-rate structure applies, including a standard 18% rate, reduced rates of 5% and 12%, and an increased rate of 28%. Certain goods and services will also be exempt.
The applicable rates/exemption for certain goods include:
- Exemption for basic food stuffs, including fresh meat, fish and poultry, fresh fish, eggs, fresh vegetables and fruit, flour, and bread, as well as printed books and newspapers;
- 5% rate for cream, skim milk powder, frozen vegetables, coffee, tea, spices, kerosene, coal, and lifeboats;
- 12% rate for frozen meat products, cheese, butter and other fats, packaged dry fruits, sausage, fruit juices, Ayurvedic medicines, coloring and picture books, umbrellas, sewing machine, and cell phones;
- 18% rate for most goods including, pasta, cornflakes, pastries and cakes, preserved vegetables, jams, sauces, soups, ice cream, instant food mixes, mineral water, tissues, envelopes, note books, steel products, printed circuits, cameras, speakers and monitors;
- 28% rate for chewing gum, molasses, chocolate not containing cocoa, waffles and wafers coated with chocolate, aerated water, paint, deodorants, shaving creams, after shave, hair shampoo, dye, sunscreen, wallpaper, ceramic tiles, water heaters, dishwashers, washing machines, ATMs, vending machines, vacuum cleaners, shavers, hair clippers, automobiles, motorcycles, and aircraft for personal use.
The applicable rates/exemption for certain services include:
- Exemption for most services currently exempt from service tax, including healthcare and education services, as well as accommodation below INR 1,000 per night;
- 5% rate for transport services, including rail and air (economy class), print advertising, and tour operators;
- 12% rate for non-air conditioned restaurants, air travel (other than economy class), construction, temporary transfer/licensing of IP;
- 18% rate for telecom, banking, insurance, restaurants with air conditions and/or liquor license, and accommodation between INR 2,500 and INR 5,000 per night;
- 28% rate for entertainment, including cinema, theme parks, water parks, etc., gambling, accommodation above INR 5,000 per night, restaurants located in 5-star or above rated hotels, and other services not specified.
Mexico's Administrative Rules for Master File, Local File, and CbC Report Published in Official Gazette
On 15 May 2017, Mexico's administrative rules for Master file, Local file, and Country-by-Country (CbC) report were published in the Official Gazette. Under Mexico's requirements, which apply from 1 January 2016, a Master file and Local file are required from companies with annual revenue in the preceding year exceeding approximately MXN 645 million (threshold adjusted yearly), and CbC reports are required from MNE groups meeting an MXN 12 billion threshold in the previous year. Key points of the final administrative rules are summarized as follows:
Key points regarding the master file include:
- A Master file will be accepted if prepared in accordance with BEPS Action 13 guidelines, including if prepared outside of Mexico, and will be accepted in Mexico in English or Spanish;
- It is clarified that Master file should include information on the five main products or services, as well as products or services representing 5% of the MNE group’s total revenues;
- Information in the master file may be presented in a foreign currency, and by line of business if the taxpayer prefers; and
- It is clarified that one group member can submit a single Master file on behalf of all other Mexican group members subject to the Master file requirement, provided that the names and tax ID numbers of the other group members are provided with the submission.
The Local file, which must be prepared in Spanish (certain exceptions - see below), is more in line with BEPS Action 13 than the original draft rules, but still requires some additional information. In particular, the Local file should include:
Information on the structure and the activities of the taxpayer, including:
- A description of the organizational and management structure,
- A detailed description of the activities and business strategies of the taxpayer, including any restructurings or transfers of intangible assets affecting the taxpayer;
- A description of the MNE group’s supply chain, including the taxpayer’s participation and location, whether activities are routine or value added, and the transfer pricing policies used to allocate profits; and
- A list of the taxpayer’s main competitors.
Information on transactions with related parties, including:
- Detailed description of transactions with both domestic and foreign related parties;
- Description of transfer pricing policy for each transaction type;
- Description of the MNE group’s strategy for the development, enhancement, maintenance, protection, and exploitation of intangible assets (DEMPE);
- Copies of contracts with related parties, which may be in English or Spanish;
- Justification of the selection of the tested party and reasons for rejection of the counterparty;
- Analysis of the functions performed, risks assumed, and assets used by the taxpayer and its related parties for each type of transaction, as well as the comparability analysis for each type of transaction, including an analysis of the DEMPE functions of the taxpayer and related counterparty;
- A detailed description and justification for the transfer pricing method selected;
- Detail and justification of the use of financial information of comparable companies covering more than one year;
- Details of the search and selection process for comparable companies and transactions, including information source, criteria for selection/rejection, the profit level indicator selected, adjustments made, etc. (descriptions of comparable companies may be in English)
- Segmented financial information of the taxpayer and analyzed parties - with respect to foreign related parties, financial and tax information should include current assets, fixed assets, sales, costs, operating expenses, net income, taxable base, and tax payments (final rules removed requirement for full financial statements and tax returns of foreign related parties); and
- A list of advance pricing agreements and other tax rulings to which the Mexican tax authority (SAT) is not a party that are related to the transactions entered into by the taxpayer with related parties during the fiscal year, including copies if in the possession of the taxpayer.
The final rules also clarify that the information contained in the Local file is evidence of compliance with the arm's length principle. Additionally, taxpayers that have entered into an APA with the SAT covering one or several intercompany transactions and maquiladoras that opted for an APA may choose to not submit the corresponding information with the Local file.
With respect to CbC reports, the final administrative rules clarify certain aspects, including that only a single CbC report is required and should be submitted by ultimate parent entities in Mexico, and that the CbC report may be submitted using a foreign currency. The rules also clarify that the deadline for submission is generally 12 months after the end of the fiscal year concerned, but in cases where a local entity of a foreign-parented group would be required to submit a CbC report, the deadlines are based on the month in which foreign parent's year ends as follows:
- If ends in June, July, August, September, October, November or December, the deadline is 31 December of the year immediately following the fiscal year;
- If ends in January, the deadline is 31 January of following year;
- If ends in February, the deadline is 28 (29) February of following year;
- If ends in March, deadline is 31 March following year;
- If ends in April, deadline is 30 April of following year; and
- If ends in May, deadline is 31 May of following year.
Note - Local CbC submission is generally only required when a local subsidiary or PE of a non-Mexico parented MNE group has been designated to submit the CbC report, but may also be required if Mexico is unable to obtain a CbC report covering Mexican entities through exchange. In such case, a notification may be issued to a local entity, after which the entity has 120 days to comply. The deadlines for CbC report also apply for Master file for foreign-parented groups.
The SAT will require submission of the Master file, Local file, and CbC report via a new electronic tool/portal.
Click the following link for the administrative rules as published in the Official Gazette (Spanish language - begins at 3.9.11).
UK Tribunal Finds Place of Effective Management of Guernsey Trust with Mauritius Trustee is in the UK in "Around the World" Scheme
The UK First Tier Tribunal recently issued its decision concerning the place of effective management (PoEM) at the time of a transaction involving Guernsey based trusts with two UK settlors and a Mauritius based trustee. The case involved the transfer of shares through a transaction executed by the Mauritius trustee and whether, at the time of the transaction, the PoEM should be considered Mauritius or the UK.
The two UK settlors had formed a company, Cellular Operations Limited (COL), the shares of which were jointly held by two Guernsey based holdings companies. An additional company, Cellops Limited (Cellops), also held 40% of COL and was jointly held by the two holdings companies. Two Guernsey based trusts were also established by the UK settlors that held the whole holding structure, with the trustee based in Guernsey. In the year concerned, a call option was executed for the sale of shares of the two holdings companies by the two trusts to Vodafone. Prior to the sale, the UK settlors appointed a new trustee based in Mauritius, which executed the transaction. Shortly after the transaction was executed, the UK settlors again changed the trustee, with the appointment of a trustee based in the UK.
This "around the world" scheme is meant to take advantage of the UK-Mauritius tax treaty, which would provide taxing rights of the transaction to Mauritius instead of the UK (Mauritius does not tax capital gains). For the scheme to work, the PoEM must be in Mauritius at the time of the transaction.
In its decision, the Tribunal found that the PoEM of the trusts at the time of the transactions was the UK. In coming to this decision, the Tribunal looked at where the important decisions regarding the transaction were made. In particular, the Tribunal looked at the Mauritius trustee's role in the transaction, finding that the trustee had no real role in the negotiation of the transaction or a real understanding of the transaction. Further, it was found that although the trustee was technically able to independently reject the execution of the agreement for the transaction, it was very unlikely it would do so. Overall, the Tribunal found that the trustee had merely acted on the advice of the UK settlors, which effectively constituted instruction, and as such, the decisions were deemed taken in the UK.
Canadian Government Proposes Federal Carbon Pricing Backstop for Provinces that Do Not have Own System in Place by 2018
The Canadian government has issued a technical paper for consultation that outlines a proposed federal carbon pricing option for provinces that choose not to have their own system in place in 2018. The so-called federal carbon pricing backstop would be introduced through new legislation and regulations and would entail two key elements:
- A carbon levy applied to fossil fuels; and
- An output-based pricing system for industrial facilities that emit above a certain threshold, with an opt-in capability for smaller facilities with emissions below the threshold.
The backstop will apply in a jurisdiction that does not have a carbon pricing system in place, and will also supplement (or "top-up") systems that do not fully meet Canada's carbon pricing benchmark. Direct revenues generated will be returned to the jurisdiction of origin.
The Polish government is reportedly consulting on proposed amendments that would further increase the tax relief incentives that were increased the end of 2016 (previous coverage). The proposal would increase the additional deduction allowed for R&D expenses from the current 50% or 30% (depending size of company and expense type) to an additional deduction of 100% regardless of the company size and the R&D expense type. The proposal would also expand the scope of R&D related employment expenses eligible for the additional deduction, and introduce new additional deductions for R&D centers. Additional details will be published once available.
On 19 May 2017, officials from Cyprus and San Marino signed an income tax treaty. The treaty will enter into force after the ratification instruments are exchanged, and once in force and effective, will replace the 2007 income tax treaty between the two countries, which currently applies.
The Indian Government has announced that the Union Cabinet has approved the signing of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), which is scheduled to take place in Paris on 7 June 2017. The BEPS MLI is for the purpose of implementing the treaty-related measures developed as part of the BEPS Project without needing to separately amend each bilateral treaty. This includes measures developed as part of BEPS Action 2 (Hybrid Mismatches), Action 6 (Preventing Treaty Abuse), Action 7 (Preventing Artificial Avoidance of a PE), and Action 14 (Improving Dispute Resolution).
On 15 May 2017, officials from Malaysia and Maldives met for the first round of negotiations for an income tax treaty. Any resulting treaty would be the first of its kind between the two countries, and must be finalized, signed, and ratified before entering into force.