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Approved Changes (1)

Australia

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Australia issues Guideline on New CbC Reporting and Transfer Pricing Documentation Requirements

On 17 December 2015, the Australian Taxation Office (ATO) issued a Law Companion Guideline on the new Country-by-Country (CbC) reporting and transfer pricing documentation requirements. The new requirements are introduced in the Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015, which received Royal Assent on 11 December 2015. The main elements of the guideline are as follows.

Transfer Pricing Documentation (CbC Reporting) Requirements

CbC reporting applies to income years starting on or after 1 January 2016. Under CbC reporting, significant global entities are required to give the ATO Commissioner three statements, corresponding to the CbC report, Master File and Local File as outlined in the OECD guidance developed as part of Action 13 of the BEPS Project. Each of the three statements has a particular focus:

  • The CbC report provides information about where economic activity is undertaken and profits are reported by the multinational group;
  • The Master File provides a high-level description of the group's global business operations, including an outline of its organizational structure and use of intangibles and intercompany financial activities; and
  • The Local File provides information about a local entity's management structure and business strategy; specific cross-border related party transactional data, including information about how transfer pricing decisions have been made; and financial information, including the local entity's annual financial accounts.

Conditions for Reporting

An entity must lodge all statements if it is a significant global entity for the relevant period and is a resident for Australian tax purposes or carries on business operations through an Australian permanent establishment.

A significant global entity is:

  • A global parent entity (an entity not controlled by another entity) that has an annual global income of AUD 1 billion or more for a period, or
  • A member of a group of entities consolidated for accounting purposes as a single entity with a global parent entity that has an annual global income of AUD 1 billion or more for the same period.

A subsidiary of a global group that is not included in the global parent entity's consolidated financial statements will not meet the definition of a significant global entity and will therefore be outside the scope of CbC reporting.

Annual Global Income Determination

The annual global income of a global parent entity for a period is the group's total annual income as shown in its latest global financial statements for the relevant 12-month period in accordance with relevant accounting and auditing principles or, if not applicable, with commercially accepted principles.

Exemptions

The ATO Commissioner may exempt an individual entity, or specified class of entities, from lodging one or more statements. For an individual entity, such exemptions will be provided in limited cases and the entity will need to provide a written request for exemption. In each case, the Commissioner will consider:

  • The entity's risk profile, including the amount of its overseas dealings;
  • The compliance burden on the entity; and
  • Whether the relevant statement or statements will be received by alternative means, for example via exchange of information.

If an entity meets the requirements for being a significant global entity, but does not engage in international transactions, the entity can apply for an exemption from some or all of the CbC reporting requirements on the basis of their low risk profile.

The ATO is also considering other exemptions and is planning to issue guidance on:

  • Specific classes of entities that are exempted from providing one or more of the statements under CbC reporting, and
  • For individual entity exemptions, additional factors that will be taken into consideration on a general level as well as for specific types of entities and activities.

CbC Report and Master File Information Requirements

The approved form for the statements corresponding to the Master File and CbC report will include the information outlined in Annexes I and III of the OECD guidance respectively. For the CbC report, the approved form will be the OECD specified CbC XML schema.

Parent Entities in other Jurisdictions

In cases where a parent entity is resident in a jurisdiction that has implemented CbC reporting requirements but does not have an information sharing arrangement with Australia or otherwise fails to exchange with Australia, secondary mechanisms based on OECD guidance will apply. In such cases, CbC reporting documentation may be obtained from other jurisdictions, starting with the jurisdiction of the next tier parent country. However, it will be the Australian entity's responsibility to use its best endeavors to meet its CbC reporting obligations.

In cases where the parent entity is resident in a jurisdiction that has not yet implemented CbC reporting requirements, the secondary mechanisms will also apply. However, for the first year, it is possible for the Australian entity to request an exemption from filing the CbC report and/or Master File, although a Local File will still be required.

Local File Information Requirements

The approved form for the local file will be based on the information requirements outlined in Annex II of the OECD guidance. The ATO is finalizing the details of the information that will be required, and intends to provide differentiated approved forms to balance the cost of compliance with the information needed to adequately risk assess significant global entities. The proposed forms include:

  • A full local file: all three components of the local file based on the specified information in Annex II;
  • A simplified local file: all three components of the local file listed in Annex II but with less information than is required under a full local file; and
  • A short form local file: the first component of the local file listed in Annex II.

International Dealings Schedule (IDS)

IDS filing requirements continue to apply and are independent from CbC reporting. Completing the IDS will not discharge a significant global entity's CbC reporting obligations.

Subdivision 284-E Documentation

Subdivision 284-E documentation requirements continue to apply. Further guidance will consider any overlap between the Local File and the transfer pricing documentation requirements of Subdivision 284-E.

Click the following link for additional information on the CbC reporting and transfer pricing documentation requirements on the ATO website, including the full Law Companion Guideline.

For more on the OECD guidance for the information to be included in the documentation (statements), click the following link for Annexes I (Master File), II (Local File), and III (CbC Report) in the Final Action 13 Report.

Treaty Changes (7)

Andorra-Malta

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Tax Treaty between Andorra and Malta Initialed

On 16 December 2015, officials from Andorra and Malta concluded negotiations with the initialing of an income tax treaty. The treaty is the first of its kind between the two countries, and must be signed and ratified before entering into force.

Note - this article has been amended to reflect that the treaty was initialed on 16 December and not signed as previously reported.

Ecuador-Singapore

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Tax Treaty between Ecuador and Singapore has Entered into Force

On 18 December 2015, the income tax treaty between Ecuador and Singapore entered into force. The treaty, signed 27 June 2013, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Ecuadorian income tax and Singapore income tax.

Residence

If a company is considered resident in both Contracting States, the competent authorities of both States will determine the company's residence for the purpose of the treaty through mutual agreement. If no agreement is reached, the company will not be considered a resident of either State for the purpose of enjoying the benefits of the treaty.

Permanent Establishment

The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services within 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.

A permanent establishment will also be deemed constituted when an insurance enterprise collects premiums in a Contracting State or insures risks situated in a Contracting State through a non-independent agent. An exemption applies for re-insurance.

Withholding Tax Rates

  • Dividends - 5%
  • Interest - 10% (exemption applies where the beneficial owner is a financial institution)
  • Royalties - 10%

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 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

Singapore applies the credit method for the elimination of double taxation, while Ecuador generally applies the exemption method. However, for income covered by Articles 10 (Dividends), 11 (Interest) and 12 (Royalties), Ecuador applies the credit method.

Limitation on Benefits

Article 27 (Miscellaneous Provisions) includes limitation on benefits provisions.

The Article includes that the beneficial provisions of Articles 10 (Dividends), 11 (Interest) and 12 (Royalties) will not apply if it was the main purpose of any person concerned with the creation or assignment of the shares, debt-claims or other rights in respect of which the dividends, interest or royalties are paid was to take advantage of those Articles by means of that creation or assignment.

In addition, a resident of a Contracting State will not receive the benefit of any reduction in or exemption from tax provided by the treaty if the conduct of operations of such resident or any person concerned with the operations had the main purpose of obtaining the treaty benefits.

Effective Date

The treaty applies in Ecuador from 1 January 2016. It applies in Singapore in respect of withholding taxes from 1 January 2016 and in respect of other taxes from 1 January 2017.

Article 25 (Exchange of Information) applies in both countries from the date of its entry into force for requests concerning tax periods beginning on or after 1 January 2016.

Mexico-Spain

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Protocol to the Tax Treaty between Mexico and Spain Signed

On 17 December 2015, officials from Mexico and Spain signed a protocol to the 1992 income tax treaty between the two countries. The protocol is the first to amend the treaty. It reportedly amends provisions concerning dividends, interest and capital gains taxation, as well as the elimination of double taxation and exchange of information. It also adds provisions concerning hydrocarbons, assistance in tax collection, limitation on benefits, and anti-abuse measures.

Additional details will be published once available.

Norway-Zambia

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New Tax Treaty between Norway and Zambia Signed

On 17 December 2015, officials from Norway and Zambia signed a new income tax treaty. The treaty will enter into force after the ratification instruments are exchanged, and once in force and effective, will replace the 1971 income tax treaty between the two countries, which currently applies.

Additional details will be published once available.

Saudi Arabia-OECD

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Saudi Arabia Deposits Ratification Instrument for Mutual Assistance Convention

On 17 December 2015, Saudi Arabia deposited the ratification instrument for the OECD-Council of Europe Convention on Mutual Administrative Assistance in Tax Matters as amended by the 2010 protocol. Saudi Arabia signed the convention as amended on 29 May 2013.

According to the OECD overview of signatories to the convention, the convention will enter into force in Saudi Arabia on 1 April 2016.

South Africa-Untd A Emirates

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Update - Tax Treaty between South Africa and the U.A.E.

The income tax treaty between South Africa and the United Arab Emirates was signed on 23 November 2015. The treaty is the first of its kind between the two countries.

Taxes Covered

The treaty covers United Arab Emirates income tax and corporation tax. It covers South African normal tax, withholding tax on royalties, dividend tax, withholding tax on interest and tax on foreign entertainers and sportspersons.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services within a Contracting State through employees or other engaged personnel for the same or connected project for a period or periods aggregating more than 9 months within any 12-month period.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company directly holding at least 10% of the paying company's capital; otherwise 10%
  • Interest - 10%
  • Royalties - 10%

Limitation on Benefits

The beneficial provisions of Articles 10 (Dividends), 11 (Interest) and 12 (Royalties) 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 or royalties 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.

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; and
  • Gains from the alienation of movable property forming part of the business property of a permanent establishment 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.

A protocol to the treaty, signed the same date, further clarifies that gains from the alienation of shares in a company or of securities, bonds or debentures will only be taxable in the Contracting State of which the alienator is a resident.

Double Taxation Relief

South Africa applies the credit method for the elimination of double taxation, while the United Arab Emirates applies the exemption method.

Entry into Force and Effect

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

Spain-Ireland

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Spanish Court Takes Broad View in Determining that Dell's Sales Activities Constitute a Permanent Establishment in Spain

In a decision issued in June 2015, Spain's National Appellate Court took a broad view on what constitutes a permanent establishment (PE) under the 1994 Ireland-Spain tax treaty, upholding the decision of the Central Tax Tribunal that Dells sales activity in Spain constituted a PE for its Irish production facility, Dell Products (Dell Ireland). The case involved the sale of Dell Ireland's products through a local subsidiary in Spain (Dell Spain) under a commissionaire agreement. Although Dell Spain marketed and sold the products under its own name, it did so on account of Dell Ireland and was actively involved in the logistics, marketing, after-sales service and administration of Dell Ireland’s Spanish online store.

Tribunal Decision

The Spanish Tribunal originally determined that the activities of Dell Spain constituted a PE for Dell Ireland based on two factors:

  • Dell Ireland having a fixed place of business in Spain; and
  • Dell Spain being a dependent agent of Dell Ireland.

Regarding the fixed place of business, although Dell Ireland did not have facilities of its own in Spain, the facilities of Dell Spain were at Dell Ireland's disposal and the resources of Dell Spain were deemed to be devoted entirely to Dell Ireland's business. Regarding Dell Spain being a dependent agent, this conclusion was reached because of Dell Spain's engagement with Dell Ireland in the course of its ordinary business operations and because Dell Spain was economically dependent on Dell Ireland.

Appellate Court Decision

In its decision, the Appellate Court provided additional rationale based on Articles 5.1 and 5.4 (Permanent Establishment) of the Ireland-Spain tax treaty and the OECD Model Convention Commentary. Specifically, the Court interpreted that:

  • A fixed place of business constitutes a PE if it belongs to a subsidiary and is at the disposal of the parent company; and
  • The criteria for dependent agent are met if the establishment has the authority to conclude contracts that are binding on the parent company, even if the contracts are not concluded in the name of the parent company.

The approach of the Spanish Court goes beyond the technical definition of PEs included in the current Ireland-Spain tax treaty, and is in line with the outcome of Action 7 of the OECD BEPS Project, which takes a more functional and substance-based approach to the interpretation of a PE versus a strict legal definition.

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