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Approved Changes (1)

China

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China Amends Conditions for Integrated Circuit and Software Sector Incentives

On 4 May 2016, China's Ministry of Finance and State Administration of Taxation jointly issued Circular 49 (2016), which amends the conditions for the tax incentives for integrated circuit (IC) and software sectors. The incentives and previous conditions were originally included in Circular 27 (2012).

IC Production Enterprises

Incentive

The main incentives for IC production are based on the width of the circuit the enterprise is producing as follows:

  • If producing products that are 0.8 microns or narrower, the incentives include a five-year tax holiday with a two-year enterprise income tax (EIT) exemption followed by a 50% reduced EIT rate for three years.
  • If producing products that are 0.25 microns or narrower and the enterprise invests at least CNY 8 billion, the incentives include a reduced EIT rate of 15%, and if the business operations will last at least 15 years, the tax holiday will be extended to ten years, with a five-year EIT exemption followed by a 50% reduced EIT rate for five years.

The tax holidays apply from the first profit-making year before 31 December 2017. In addition, IC production enterprises are eligible to reduce the depreciation period for machinery and equipment from the standard ten years to three years.

Conditions

Under Circular 49, in order to qualify for the above incentives, the IC production enterprise must be a resident enterprise incorporated in China that is primarily engaged in the production of monolithic, multichip, and hybrid ICs. In addition, the following conditions must be met for each relevant tax year:

  • At least 40% of the enterprise's employees must have a college or postgraduate degree, and at least 20% must be employed in R&D;
  • The enterprise must own the core, crucial technology used to carry out its business;
  • Total R&D expenses must equal at least 5% of the enterprise's gross income from business operations;
  • At least 60% of the enterprise's total R&D expenses must be R&D expenses incurred in mainland China;
  • At least 60% of the enterprise's gross income must be from the manufacture and sale of IC products;
  • The enterprise must possess certification for its products from an international standards/quality organization; and
  • The enterprise must have not caused a serious safety or quality accident or a serious violation of environmental law.

General IC Design and Software Enterprises

Incentive

Newly established IC design and software enterprises are eligible for a five-year tax holiday with a two-year EIT exemption followed by a 50% reduced EIT rate for three years. The tax holiday applies from the first profit-making year before 31 December 2017. In addition, 100% of staff training expenses can be deducted. Qualifying software enterprises are also allowed to exclude from taxable income any value added tax refunds received in connection with supplies used solely for the development of software products and the expansion of production.

Conditions

Under Circular 49, in order to qualify for the above incentives, the IC design or software enterprise must be a resident enterprise incorporated in China that is primarily engaged in the design of IC products or development of software products, as the case may be. In addition, the following conditions must be met for each relevant tax year:

  • At least 40% of the enterprise's employees must have a college or postgraduate degree, and at least 20% must be employed in R&D;
  • The enterprise must own the core, crucial technology used to carry out its business and own core proprietary intellectual property rights;
  • Total R&D expenses must equal at least 6% of the enterprise's gross income from business operations;
  • At least 60% of the enterprise's total R&D expenses must be R&D expenses incurred in mainland China; and
  • The enterprise must not have caused a serious safety or quality accident or a serious violation of environmental law.

The following conditions must also be met:

  • For an IC design enterprise: At least 60% of the enterprise's gross income must be from the design of IC products (including out-sourced design), and at least 50% of gross income must be from IC products designed in-house;
  • For a software enterprise: At least 50% of the enterprise's gross income must be from the development of software products (including out-sourced development), and at least 40% of gross income must be from software products developed in-house.

Key IC Design and Software Enterprises

Incentive

Qualifying key IC Design and software development enterprises are eligible for a reduce EIT rate of 10% for years where the above tax holiday exemption above does not apply.

Conditions

Under Circular 49, for an IC design enterprise to qualify, the general conditions for IC design covered above must be met, as well as one of the following:

  • The enterprise's gross income from its products must be at least CNY 200 million, its taxable income must be at least CNY 10 million, and at least 25% of employees must be employed in R&D; or
  • The enterprise's gross income from its products must be at least CNY 20 million, its taxable income must be at least CNY 2.5 million, at least 35% of employees must be employed in R&D, and at least 70% of its total R&D expenses must be R&D expenses incurred in mainland China.

For a software enterprise to qualify, the general conditions for software covered above must be met, as well as one of the following:

  • The enterprise's gross income from its products must be at least CNY 200 million, its taxable income must be at least CNY 10 million, and at least 25% of employees must be employed in R&D; or
  • The enterprise's gross income from its products must be at least CNY 50 million, its taxable income must be at least CNY 2.5 million, at least 25% of employees must be employed in R&D, and at least 70% of its total R&D expenses must be R&D expenses incurred in mainland China; or
  • The enterprise's gross income from exports of its products must be at least USD 8 million and represent at least 50% of its entire gross income, and at least 25% of employees must be employed in R&D.

Incentives Administration

Under Circular 49, the administration of incentives for IC and software enterprises is changed from a prior approval process, to requiring the benefiting enterprise to submit documentation along with its annual EIT return that demonstrates that the conditions for the incentives are met. The documentation will then be examined by the relevant government departments in charge of the national development plan and information technology to confirm whether or not the conditions have been met. In the event the conditions have not been met, any tax due resulting from the loss of the incentives must be paid and penalties will be imposed.

Proposed Changes (1)

Netherlands

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Netherlands Launches Public Consultation on Amendments to Innovation Box

On 19 may 2016, the Dutch government launched a public consultation on proposed amendments to the country's innovation (IP) box regime. Under the regime, royalty income derived in respect of self-developed intangible assets is eligible for a reduced tax rate of 5% subject to certain conditions. Under the proposed amendments, the 5% rate will remain, but several changes are made to bring the regime in line with the modified nexus approach developed as part of Action 5 of the OECD BEPS Project.

The main proposed changes concern qualifying intangible assets and qualifying income.

Qualifying Intangible Assets

Under the proposed amendments, the determination of qualifying intangible assets is different for small and medium-sized enterprises (SME) and for all other taxpayers. For SMEs, qualifying intangible assets included self-developed assets for which R&D wage tax certificates have been obtained from the competent Dutch governmental agency. For this purpose, an SME is defined as an enterprise that:

  • Has derived benefits from qualifying intangible assets of less than EUR 37.5 million in the current and preceding four fiscal years combined; and
  • Has net turnover less than EUR 25 million in the current and preceding four fiscal years combined.

If the SME is part of a group, the net turnover of the entire group is considered.

For other taxpayers, qualifying intangible assets include:

  • Patents and plant rights;
  • Copyrighted software programs;
  • Marketing authorizations for human and veterinary medicinal products;
  • Other intangible assets that are related to the above qualifying assets; and
  • Exclusive licenses to use the above qualifying assets.

Qualifying income

The initial determination of income from qualifying intangible assets will be largely unchanged from the methods used under the current regime, which commonly includes the use of the profit split method. However, once the initial determination is made, the amount of qualifying income for the purpose of the reduced rate will be limited based on the amount of R&D activities outsourced to other members of the taxpayers group and the amount of R&D activities undertaken by the taxpayer itself or outsourced to unrelated parties (Nexus Ratio).

The Nexus Ratio is equal to the taxpayers qualifying R&D expenditure (in-house and third party) / total R&D expenditure. A 30% uplift is allowed for non-qualifying R&D expenditure (group related) for determining the nexus ratio.

Effective Date

The public consultation will run through 16 June 2016, after which the legislative proposal will be finalized and included as part of the 2017 budget. The legislation for the changes is not expected to enter into force until 1 January 2017, although the effect will apply from 1 July 2016, with the current regime grandfathered through 2021 for qualifying intangible assets developed prior to that date.

Additional details will be published once finalized.

Treaty Changes (5)

India-Slovenia

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Protocol to Tax Treaty between India and Slovenia Signed

According to an announcement from India's Central Board of Direct Taxes and Slovenia's Ministry of Finance, officials from the two countries signed a protocol to their 2003 income tax treaty on 17 May 2016. The protocol amends Article 26 (Exchange of Information) to bring it in line with the OECD standard for information exchange and adds a new article on assistance in the collection of taxes. It is the first to amend the treaty and will enter into force after the ratification instruments are exchanged.

Isle Of Man-Cayman Islands

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Update - TIEA between Isle of Man and Cayman Islands

On 14 March 2016, officials from the Isle of Man and the Cayman Islands signed a protocol to the pending 2015 tax information exchange agreement between the two jurisdictions. The protocol amends Article 13 (Entry into Force) by changing the effective date of the agreement for non-criminal tax matters from 1 January of the year follow the agreements entry into force to 1 January 2016. The agreement as amended by the protocol will enter into force 30 days after the ratification instruments are exchanged.

Jamaica-Mexico

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Tax Treaty between Jamaica and Mexico Signed

On 18 May 2016, officials from Jamaica and Mexico signed an income tax treaty. The treaty is the first of its kind between the two countries, and will enter into force after the ratification instruments are exchanged.

Additional details will be published once available.

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Multilateral Instrument for Implementation of BEPS Treaty Measures to be Ready by End of the Year

On 19 May 2016, OECD Centre for Tax Policy and Administration Director Pascal Saint-Amans announced that the text of the Multilateral Instrument being developed under action 15 of the OECD BEPS Project will be completed by the end of 2016 and will be open for signature in January 2017. The Multilateral Instrument will provide for the implementation of the tax treaty-related measures of the BEPS Project into the thousands of current bilateral treaties that exist, without the need for each individual country to amend its treaties with each of its treaty partners. Currently, 96 countries are taking part in the ad-hoc group for the development of the Multilateral Instrument.

The main BEPS measures to be included in the Multilateral Instrument are in relation to Action 2 (Neutralizing Effects of Hybrid Arrangements), Action 6 (Preventing Treaty Abuse) and Action 14 (Making Dispute Resolution Mechanisms More Effective). Click the following link for additional information on the OECD website.

Peru-Korea, Rep of

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Negotiations for SSA between Peru and South Korea Concluded

Peru's Ministry of Foreign Affairs has announced that officials from Peru and South Korea concluded negotiations for a social security agreement on 11 May 2016. The agreement is the first of its kind between the two countries, and must be signed and ratified before entering into force.

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