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Approved Changes (3)

Austria

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Austrian Parliament Approves New Transfer Pricing Documentation Requirements including CbC Reporting

On 14 July 2016, the Austrian parliament approved the EU Tax Amendment Act, which provides for new three-tiered transfer pricing documentation requirements in line with Action 13 of the OECD BEPS Project, as well as the exchange of cross border tax rulings and advance pricing agreements in the EU (previous coverage), and certain other measures. The new transfer pricing documentation requirements include Country-by-Country (CbC) reporting, Master file and Local File. The main aspects of the new requirements are summarized as follows.

CbC Reporting

The CbC reporting requirements are in line with the guidelines developed under Action 13, and the requirements included in the EU directive for the exchange of CbC reports (previous coverage). The requirements apply for fiscal years beginning on or after 1 January 2016 for MNE Groups operating in Austria with consolidated group revenue in the previous year meeting a EUR 750 million threshold.

If the ultimate parent of the MNE group is resident in Austria, it is responsible for submitting the CbC report. If the ultimate parent is not resident in Austria, a secondary filing requirement will apply if:

  • The ultimate parent is not required to file a CbC report in its jurisdiction of residence;
  • The ultimate parent's jurisdiction of residence does not have a competent authority agreement in place for automatic exchange of CbC reports with Austria; or
  • There is a systemic failure of the jurisdiction of residence of the ultimate parent for automatic exchange.

If any of the above three conditions is met, a constituent entity of the group resident in Austria must be designated as a surrogate parent entity to fulfill the reporting obligation. However, the obligation may be waived if a constituent entity in another jurisdiction has been designated as a surrogate to file a CbC report for the fiscal year, Austria is able to obtain the report from such other jurisdiction through exchange, and proper notification has been provided by the end of that fiscal year.

The new requirements also include that all constituent entities resident in Austria must provide notification to the Austrian tax authorities on:

  • Whether the entity is the ultimate parent of the group or acting as surrogate; or
  • The identity and residence of the entity submitting a CbC report on behalf of the group.

The notification must be provided by the end of the fiscal year concerned.

When required, the CbC report must be submitted electronically within 12 months following the end of the ultimate parent's fiscal year. An ordinance will be issued that sets out the exact method and form of filing.

Master and Local File

The new Master file and Local file requirements are also in line with Action 13 guidelines. The main aspects of requirements include:

  • The Master and Local file requirements apply for fiscal years beginning on or after 1 January 2016;
  • Constituent entities of a group resident in Austria must prepare a Master and Local file if their revenue exceeded EUR 50 million in two previous years;
  • A Master file is required regardless of meeting the revenue threshold if a group entity in another jurisdiction has prepared a Master file; and
  • When required, the Master and Local file must be submitted within 30 days of request (no earlier than 30 days from the annual tax return due date).

The content of the Master file must include:

  • The organizational structure of the MNE group;
  • A description of the group's business;
  • Documentation of the group's intangible assets;
  • Documentation of the group's intercompany financing activities; and
  • Documentation of the group's financial and tax positions.

The content of the Local file must include:

  • A description of the local constituent entity;
  • Documentation of controlled group transactions; and
  • Financial Information.

Detailed content requirements will be issued through separate regulation.

Language and Penalties

Under the new requirements, the documentation may generally be in German or English language, although a regulation may be issued to require that certain aspects of the CbC report be prepared in English for exchange purposes.

Failing to comply with the new requirements may result in penalties of up to EUR 50,000.

Entry into Force

The new requirements will enter into force after the legislation is approved by the president and published in the Federal Gazette. Click the following link for the text of the EU Tax Amendment Act (German language) as published on the Austrian parliament website.

Netherlands-European Union

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Netherlands Recovers State Aid from Starbucks

The Dutch government has reportedly recovered back taxes from Starbucks amounting to EUR 25.7 million for the years 2008 to 2014 as a result of the European Commission's decision that the Netherlands had granted Starbucks illegal State aid. The Commission's decision, issued in October 2015 (previous coverage), concerned a 2008 advance pricing agreement (APA) concluded with Netherlands-based Starbucks Manufacturing EMEA BV. According to the decision, the APA did not reflect market conditions, resulting in an estimated reduction of Starbucks' Dutch tax burden by EUR 20 to 30 million since 2008.

United States

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U.S. IRS Publishes Practice Units on Qualified Business Units, Nonfunctional Currency Transactions and Exchange Gain/Loss on Currency Transactions

On 20 July 2016, the U.S. IRS published three international practice units, including:

International practice units are developed by the Large Business and International Division of the IRS to provide staff with explanations of general international tax concepts as well as information about specific transaction types. They are not an official pronouncement of law, and cannot be used, cited or relied upon as such.

Click the following link for the International Practice Units page on the IRS website.

Treaty Changes (5)

China-Macao

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Protocol to Tax Arrangement between China and Macau Signed

On 19 July 2016, officials from China and Macau signed a protocol to the 2003 income tax arrangement between the two jurisdictions. It reportedly reduces the withholding tax on royalties paid to aircraft and ship leasing businesses from 7% to 5%, and adds certain anti tax evasion provisions. The protocol is the third to amend the arrangement, and will enter into force after the ratification instruments are exchanged.

Additional details will be published once available.

Iceland-Liechtenstein

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Update - Tax Treaty between Iceland and Liechtenstein

The income and capital tax treaty between Iceland and Liechtenstein was signed on 27 June 2016. The treaty is the first of its kind between the two countries.

Taxes Covered

The treaty covers Icelandic income tax to the state and income tax to the municipalities. It covers Liechtenstein personal income tax, corporate income tax, real estate capital gains tax and wealth tax.

Withholding Tax Rates

  • Dividends - 0% if the beneficial owner is a company that has held at least 10% of the paying company's capital for at least one year prior to the payment of the dividends, or if the beneficial owners is a pension fund or qualified charitable entity; otherwise 15%
  • Interest - 0%
  • Royalties - 5% for royalties paid for the use of or the right to use any patent, trademark, design or model, plan, secret formula or process; otherwise 0%

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

Iceland generally applies the credit method for the elimination of double taxation, while Liechtenstein generally applies the exemption method. However, Iceland will exempt income that is taxable only in Liechtenstein under the treaty, and Liechtenstein will allow a credit in respect of Icelandic tax on income covered by Articles 10 (Dividends) and 12 (Royalties).

Limitation on Benefits

Article 28 (Entitlement to Benefits) includes the provision that a benefit under the treaty will not be granted in respect of an item of income or capital if it is reasonable to conclude that obtaining the benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit. In such case, a benefit may still be granted if it is established that granting the benefit would be in accordance with the object and purpose of the relevant provisions of the treaty.

Entry into Force and Effect

The treaty will enter into force 30 days after the ratification instruments are exchanged, and will apply from 1 January of the year following its entry into force.

Kenya-Turkey

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Kenya and Turkey Conclude Tax Treaty Negotiations

The Turkish Revenue Administration has announced that officials from Turkey and Kenya concluded negotiations with the initialing of an income tax treaty during a 14 to 15 July 2016 meeting. The treaty will be the first of its kind between the two countries, and must be signed and ratified before entering into force.

Russia-Cyprus

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Russian Court Confirms Interest Withholding Tax Exemption under Cyprus Treaty Only Applies for Beneficial Owners

The Moscow Federal Arbitration Court has recently issued a decision concerning the beneficial ownership requirement for the enjoyment of the withholding tax exemption on interest under the 1998 Cyprus-Russia income and capital tax treaty.

The case involved Russia-based MDM Bank, which in 2011 and 2012 made interest payments on bonds issued to Cyprus-based MDM Investments Ltd. (MDM Cyprus) and BrokerCreditService (Cyprus) Ltd. (BCS Cyprus). MDM Bank withheld no tax on the interest payments based on the provisions of the Cyprus-Russia treaty, which includes that interest arising in a Contracting State and paid to a resident of the other Contracting State is taxable only in that other State.

In auditing MDM Bank, the Russian tax authorities determined that MDM Cyprus and BCS Cyprus were not the beneficial owners of the interest income, and therefore the exemption from withholding tax under the tax treaty did not apply. As a result, MDM Bank was required to pay the corporate tax due with penalties. MDM Bank appealed the decision, which was upheld by a series of lower courts and eventually made its way to the Moscow Federal Arbitration Court. In the appeal, MDM Bank argued whether MDM Cyprus and BCS Cyprus could be considered beneficial owners, and whether the beneficial ownership requirement even applied under the Cyprus-Russia tax treaty.

In its decision, the Court sided with the tax authorities. Regarding beneficial ownership, the Court determined that MDM Cyprus and BCS Cyprus could not be considered the beneficial owners because they did not qualify the interest as their own income in their accounting and were acting only as brokers and nominal holders for the payments received for the actual beneficial owners (investors). Because MDM Bank did not have any information on the actual beneficial owners, including proof of residence, it should have withheld tax at the standard 20% rate when the payments were made.

Regarding the beneficial ownership requirement under the tax treaty, the Court dismissed MDM Bank's argument. The Court determined that although the interest provision of the tax treaty does not expressly state the beneficial ownership requirement, the treaty must be read and applied in line with the commentary to the OECD Model Tax Convention, which establishes that requirement.

As a result, the decisions of the tax authority and the lower courts were upheld.

Ukraine-Luxembourg

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Ukraine to Sign Protocol to Pending Tax Treaty with Luxembourg

On 13 July 2016, the Ukrainian government approved for signature a draft protocol to the income and capital tax treaty with Luxembourg, which is not yet in force. Once signed, the protocol and the treaty will enter into force after the ratification instruments are exchanged.

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