Worldwide Tax News
China Updates Policy on Tax Treaty Benefits Eligibility for Non-Residents
On 11 September 2015, China's State Administration of Taxation (SAT) issued Announcement No. 60/2015 (dated 27 August). The announcement sets out new administrative measures concerning treaty benefit eligibility for non-resident entities and individuals.
The definition of treaty benefits is expanded to not only include an exemption from or reduction of tax provided for under an agreement for the avoidance of double taxation, but also such benefits provided for under international transportation agreements China has entered into with foreign jurisdictions.
When a claim for treaty benefits is made, the following documentation must be submitted:
- A tax residence status form;
- An entitlement to treaty benefits form;
- A certificate of residence issued by the competent authority of the non-resident's jurisdiction of residence;
- Documentation evidencing the generation and ownership of income, such as contracts, agreements, certificates of payment, etc.; and
- Any other documentation required under tax regulation
When a claim is made at the time of withholding, the documentation must be submitted to the withholding agent. If the documentation is sufficient, the withholding agent must adjust the amount of tax withheld accordingly and submit the documentation to the competent tax bureau.
When a non-resident taxpayer is required to file a tax return directly (self-reporting), the treaty benefit claim is made at the time of filing, and the documentation is submitted directly to the competent tax bureau.
In the event a taxpayer qualifies for treaty benefits but fails to claim them, a refund of the overpaid tax, plus bank deposit interest, may be claimed within three years following the date of payment.
The frequency of submitting the required documentation depends on the applicable article of the tax treaty for the benefit being claimed as follows:
- For articles covering independent personal services, employment income, government service, teachers/researchers and students, required documentation must be submitted for the first claim and when any of the information in the documentation has changed.
- For articles covering permanent establishment, business profits, shipping and air transport, dividends, interest, royalties and pensions, required documentation must be submitted for the first claim and every three years thereafter, as well as when any of the information in the documentation has changed.
- For articles covering capital gains, artistes and athletes, and other income, required documentation must be submitted for each claim.
If a change occurs and the conditions for treaty benefits are no longer met, the entitlement to benefits will cease the day the change occurs.
Announcement 60 instructs local tax bureaus to improve administration to counter abuses of treaty benefits. When a claim for treaty benefits is made, the competent tax authority may:
- Request additional documentation from the withholding agent or the non-resident when documentation is deemed insufficient or tax avoidance is suspected; and
- Initiate a GAAR investigation procedure, mutual agreement procedure or exchange of information procedure with the relevant treaty partner if needed.
If a non-resident has received a treaty benefit that is it is not entitled to, the tax authority will recover the amount of tax exempted or reduced. In such cases, late payment interest of 0.5% per day will be imposed on the amount underpaid from the date the payment was due until paid, and additional penalties of 50% to 500% of the underpaid amount may also apply.
Announcement 60 is effective 1 November 2015.
Romanian Tax Code Amendments Including Changes in Dividends Taxation, VAT, Thin Capitalization and other Matters
On 10 September 2015, Romania published Law No. 227/2015 in its Official Gazette. The Law amends provisions of the Tax Code concerning dividends taxation, value added tax, thin capitalization and other matters.
Changes made to dividends taxation include:
- The withholding tax rate on cross border dividend payments is reduced from 16% to 5% from 1 January 2017, and
- Dividends received by a resident company from another resident company are exempted from tax from 1 January 2016.
- The local buildings tax rate ranges are changed to 0.08% to 0.2% for residential properties and 0.2% to 1.3% for non-residential properties; and
- The 1% special constructions tax will be repealed effective 1 January 2017. (currently applies on most constructions that are not subject to buildings tax, such as oil and gas wells, drilling platforms, power stations, railways, roads, etc.)
The definition of deductible expenses is changed from costs incurred for the production of taxable income, to costs incurred for the carrying on of the taxpayer's economic activity.
The revenue-based determination for the maximum credit for sponsorship expenses is increased from 0.3% of revenue to 0.5%. Taxpayers may not deduct sponsorship expenses, but are allowed a credit up to the lower of 0.3% (0.5%) of revenue or 20% of corporate income tax due.
A 1% tax rate on income is introduced under the micro-enterprise tax regime for newly established micro-enterprises (standard rate 3%). In addition to the standard conditions for the regime, conditions for the 1% rate include:
- The micro-enterprise must be established for at least 48 months;
- Must have at least one employee; and
- The shareholders cannot own shares in any other companies.
In addition, the micro-enterprise tax regime is made optional for companies deriving income from exploitation, development and exploration of oil and gas. The regime was made mandatory from 1 February 2013, except for companies engaged in banking, insurance, consultancy, management and gambling activities.
A number of changes are made regarding VAT, including:
- The standard VAT rate is reduced from 24% to 20% with effect from 1 January 2016, and to 19% with effect from 1 January 2017;
- The VAT rate for books, newspapers, magazines and school manuals, and entrance to cultural sites, events, museums, etc. is changed from the 9% reduced rate to the 5% reduced rate;
- The application of the reverse charge mechanism is introduced for supplies of buildings and land, and for electronic devices such as mobile phones, laptops and tablets; and
- The maximum value of social housing qualifying for the 5% reduced VAT rate is increased from RON 380,000 to RON 450,000.
The maximum annual interest rate of foreign currency denominated loans for thin capitalization purposes is reduced from 6% to 4%. Amounts exceeding the rate are non-deductible and may not be carried forward.
Unless otherwise indicated above, the changes are generally effective 1 January 2016.
New Bill on Voluntary Disclosure Submitted to Brazilian Congress
On 10 September 2015, the Brazilian Chamber of Deputies received Bill Project No. 2960/2015 for review. Project 2960 is similar to Senate Law Project 298/2015 (PLS 298) (previous coverage). Both provide for the creation of a new voluntary disclosure program for unreported foreign assets: the Currency and Tax Compliance Special Regime (Regime Especial de Regularização Cambial e Tributária, RERCT), but with a number of key differences.
The main differences between Project No. 2960 and PLS 298 include:
- The definition of unreported assets eligible for RERCT disclosure is expanded to expressly include direct and indirect ownership, as well as fiduciary transactions;
- The exclusion of taxpayers from eligibility that have been indicted or convicted on charges of tax evasion, omission of tax information and certain other offenses under PLS 298 is limited just to taxpayers that have been convicted at the time the RERCT law is published;
- The 120 day limit from the date of the RERCT law's entry into force for taxpayers to file the RERCT statement and make the tax payment is extended to 180 days;
- The applicable tax rate of 17.5% and 17.5% penalty is the same as PLS 298, but the penalty base is increased by adding the U.S. dollar currency variation between 31 December 2014 and the date of filing of the RERCT statement; and
- Individual taxpayers would have to amend their annual tax returns from 2014 onward, and corporate taxpayers would have to include the assets reported in the RERCT in their accounting records for calendar year 2015.
The Chamber of Deputies has 45 days to review and vote on the project, after which it will be sent to the Senate with the same time limit.
New Zealand Launches Consultation on Loss Grouping and Dividend Imputation Credits
On 15 September 2015, the New Zealand government issued an officials’ issues paper for public comment concerning the tax consequences of the loss grouping regime and the imputation credit regime for dividends.
Issues arise when the two regimes interact where a non-wholly owned profit company is grouped with a loss company. Because less tax is paid, the profit company may not have enough imputation credits to fully impute dividends paid to a minority shareholder, resulting in an extra tax burden for the shareholder. In particular, this has a negative effect on a minority shareholder that has not benefited from the loss grouping.
The suggested solution is to allow companies engaging in a loss offset to perform an “imputation credit transfer”. This would involve the loss company debiting its imputation credit account and the profit company crediting its imputation credit account by the same amount at the same time the profit company pays the dividend; facilitating the full imputation of that dividend.
Click the following link for the Loss grouping and imputation credits officials’ issues paper, which includes instructions for submitting comments. Comments are due by 27 October 2015.
Swedish Government Submits Draft Legislation Amending Participation Exemption and Anti-Avoidance Rules
On 4 September 2015, the Swedish government submitted draft legislation to the Council on Legislation that includes changes to the country's participation exemption rules and expands the anti-avoidance rules under the Coupon Tax Act (CTA). In regard to the anti-avoidance rules, the latest proposal is changed from an April 2015 memorandum that proposed abolishing the rule under the CTA and expanding provisions of the Tax Avoidance Act to cover the CTA.
The proposed legislation is based on changes made to the EU Parent-Subsidiary Directive concerning hybrid mismatches and anti-avoidance, and includes:
- The participation exemption rule would be changed to deny the exemption on dividends if deductible as interest or similar by the distributing foreign entity.
- The anti-avoidance provision in the CTA would be expanded to cover all situations where a foreign person or entity receives dividends, if the holding of the shares is intended to provide an illegitimate tax advantage for someone else.
Subject to approval, the proposed changes are to enter into force on 1 January 2016.