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Approved Changes (2)

Slovak Republic

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Slovak Republic Expands Issues that may be Covered by a Binding Tax Ruling

The Slovak Republic has approved amendments expanding the scope of issues for which binding tax rulings can be given. The amendments entered into force 15 September 2015.

The additional issues include:

  • Adjustments to the tax base for overdue liabilities;
  • The deductibility of costs;
  • Withholding taxes;
  • The deduction of losses; and
  • Fixed establishments for VAT purposes.

The above are in addition to the list of issues approved in 2014 ({News-2014-09-07/A/3- previous coverage}).

Binding tax rulings were made available in the Slovak Republic from 1 September 2014. Rulings on the above issues are available from 1 September 2015.

Venezuela

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Venezuela Regulates Changes in Tax Determination for Banks, Financial Institutions, and Insurance Companies

On 11 September 2015, Venezuela published Resolution SNAT/2015/0021 in the Official Gazette. The resolution regulates the change included in the tax reform published November 2014 (previous coverage) that inflation adjustment requirements will no longer apply for banks, financial institutions, and insurance and reinsurance companies. In addition, previous losses resulting from inflation adjustment may not be carried forward.

Proposed Changes (2)

China

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China Issues Draft Implementation Measures for Special Tax Adjustments for Public Comment

On 17 September 2015, China's State Administration of Taxation (SAT) issued a discussion draft of the Implementation Measures for Special Tax Adjustments that updates upon and would replace trial measures introduced in Circular No. 2/2009. The draft covers a number of areas including, transfer pricing, advance pricing agreements, cost-sharing agreements, controlled foreign companies, thin capitalization, and GAAR.

Some of the main changes introduced in the draft are summarized as follows.

Expanded Scope of Transactions Covered

The scope of transactions that may be subject to special adjustment is expanded to include the transfer of financial assets, such as accounts receivable, notes receivable, loans, other receivables, stock and debt investments, and assets forming derivative financial instruments. The current scope of transactions includes the transfer or license of tangible and intangible assets, financing, and services.

Documentation Requirements

The level of documentation required is increased overall. The changes include new group documentation requirements similar based on guidelines developed as part of Action 13 of the OECD BEPS project, additional local documentation requirements, and new special documentation requirements.

Group Documentation

The required group documentation (master file) includes:

  • An organizational chart including geographic location of all group members;
  • A description of the group's business operations, including profit drivers, top products or services, supply chain, major market conditions, group restructuring activities, and other information;
  • Details of intangible assets, including overall strategy, ownership, R&D activities, cost-sharing agreements, and other information;
  • Details of inter-company and third party financing arrangements; and
  • Details of the group's financial and tax results.

A country-by-country report form included in the Disclosure Form of Annual Related Transactions must also be submitted if the Chinese resident taxpayer is the ultimate parent of a multinational group with aggregate revenue of RMB 5 billion in the previous year, or the local taxpayer has been designated to file the report. The local taxpayer will also be required to submit the report if the Chinese tax authorities are not able to obtain the report from the parent company's jurisdiction.

Local Documentation

Local documentation requirements are similar to current requirements, but include the following additional requirements:

  • An analysis of the group's global value chain;
  • Disclosures on foreign investment projects; and
  • Disclosures on related party equity transfers.

Special Documentation

Contemporaneous documentation will be required for taxpayers that:

  • Engage in related party service transactions;
  • Take part in cost-sharing agreements; or
  • Are in breach of thin capitalization rules.

In the above cases, the standard related party transaction thresholds for documentation preparation do not apply (purchase/sales transactions exceeding RMB 200 million or other transactions exceeding RMB 40 million).

"Other" Transfer Pricing Methods Defined

The main transfer pricing methods allowed remain the same, which include the comparable uncontrolled price method; the cost-plus method; the resale price method; the profit split method; the transactional net margin method; and other methods. However, "other methods" are now defined to include:

  • The value contribution allocation method; and
  • The asset valuation method, including the cost approach, market approach and income approach.

Additional Transfer Pricing Investigation Targets

The scope of transfer pricing investigation targets is expanded to include taxpayers that:

  • Are engaged in a significant amount or numerous types of related party transactions (current target);
  • Have long-term consecutive losses, low profitability, or a fluctuating pattern of profits/ losses (current target);
  • Have profitability lower than industry standards, or profitability that does not match functions/risks (current target);
  • Have transactions with related parties in tax havens (current target);
  • Have failed to prepare contemporaneous documentation or disclose related-party transactions (current target);
  • Have a debt-to-equity ratio for debts received from related parties exceeding the standard established in the thin capitalization rules - 5:1 for financial institutions and 2:1 in all other cases;
  • Have established  CFCs in low-tax jurisdictions;
  • Have participated in an arrangement without reasonable business purposes; and
  • Other situations indicating a violation of the arm’s-length principle.

Intangible Assets Benefits Allocation

It is required that the allocation of benefits of intangible assets among related parties be based on the economic activities and value contribution of each party. In determining the allocation, the following factors will be taken into account:

  • The functions performed for the development, enhancement, maintenance, protection, exploitation, and promotion of the intangibles;
  • The risks assumed; and
  • The contribution of capital, manpower, and other resources

In determining the benefits, an overall analysis of the global business operations of the group should be performed. This includes taking into account the interaction between the intangibles and other global business functions, assets and risks, market premium, cost savings and other regional factors, and value creation factors resulting from synergies within the group.

Royalty Payment Deduction Limitations

The draft includes that adjustments should be made to royalties paid to related parties in the following circumstances:

  • The value of the intangibles has changed substantially;
  • The license agreement allows for an adjustment under normal business practice;
  • The functions performed and risks assumed by the related parties have changed during the use of the intangibles; or
  • The licensee subsequently contributes to the development, enhancement, maintenance, protection, exploitation, or promotion of the intangibles

In addition, when royalties are paid to a related low-function entity that has only contributed funds to the development of the intangibles, the payment will only be partially deductible. If no contribution to the development has been made by the low-function entity, no deduction for the payment will be allowed.

Service Fee Deduction Limitations

For service fees to be deductible, the services must provide a direct or indirect economic benefit to the service recipient, and the payment must be at arm's length. Specific cases where service fees will not be deductible include:

  • The services are not relevant to the taxpayer's functions, risks, or business activities;
  • The services are for the control, management and supervision of the taxpayer in order to protect the interests of the taxpayer's direct or indirect investors;
  • The services are duplicated, i.e. already supplied by a third party or carried out by the taxpayer itself;
  • Although the taxpayer received additional benefits due to services being provided in its group by related parties, no specific services were provided to the taxpayer itself;
  • Compensation for the services was paid through other related-party transactions; or
  • Any other case where the taxpayer did not receive any direct or indirect economic benefits from the service.

In addition, service fees will not be deductible in any case when paid to low-function entities.

Consultation Period

The consultation period ends 16 October 2015. Click the following link for the draft Implementation Measures for Special Tax Adjustments (Chinese language), including instruction for submitting comments.

European Union

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EU Parliament Publishes Draft Report on Bringing Transparency, Coordination and Convergence to Corporate Tax policies in the EU

On 4 September 2015, the European Parliament published a draft report from the Committee on Economic and Monetary Affairs with recommendations to the European Commission on bringing transparency, coordination and convergence to corporate tax policies in the EU. Recommendations include:

  • Implementing country-by-country reporting for all sectors by multinational companies based on the guidelines developed as part of Action 13 of the OECD/G20 BEPS project;
  • Introducing the mandatory notification of new tax measures whereby Member States are must inform other Member States if they intend to introduce a new allowance, relief, exception, incentive or similar measure;
  • Extending automatic exchange of information on tax rulings to all corporate tax rulings and to a certain extent make tax rulings public;
  • Implementing a Common Corporate Tax Base in the EU in 2016, with an initial exemption for small and medium-sized enterprises and companies with no cross-border activity;
  • Coordinating national controlled foreign corporation rules, permanent establishment rules and transfer pricing rules;
  • Improving cross-border taxation dispute resolution mechanisms; and
  • Several others.

Click the following link for the Committee on Economic and Monetary Affairs Draft Report.

Treaty Changes (2)

Albania-Georgia

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Tax Treaty between Albania and Georgia under Negotiation

According to recent reports, officials from Albania and Georgia have begun negotiations for an income tax treaty. Any resulting treaty will be the first of its kind between the two countries, and must be finalized, signed and ratified before entering into force.

Andorra-Estonia-Latvia-Lithuania

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Andorra to Negotiate Tax Treaties with Estonia, Latvia and Lithuania

Officials from Andorra have recently met with officials from Estonia, Latvia and Lithuania to begin tax treaty negotiations. Any resulting treaties would be the first of their kind between Andorra and the respective countries, and must be finalized, signed and ratified before entering into force.

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