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Approved Changes (7)

Canada

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Canada Budget Implementation Act, 2016 No. 2 Receives Royal Assent, including CbC Reporting

The Canadian Budget Implementation Act, 2016 No. 2 received Royal Assent on 15 December 2016. The Act includes measures of the budget not already passed (previous coverage), including several measures on anti-avoidance and BEPS.

CbC Reporting

Canada's implementation of Country-by-Country (CbC) reporting requirements is based on BEPS Action 13. The main CbC reporting provisions of the Act include:

  • The reporting requirements apply for fiscal years beginning after 2015 for MNE groups meeting a EUR 750 million consolidated group revenue threshold in the previous year;
  • The report must be filed in the prescribed manner by:
    • The ultimate parent entity of the MNE group, if it is resident in Canada in the reporting fiscal year; or
    • A constituent entity of the MNE group — which is not the ultimate parent entity of the MNE group — with respect to the reporting fiscal year of the MNE group, if the constituent entity is resident in Canada in the reporting fiscal year, and one of the following conditions applies:
      • The ultimate parent entity of the MNE group is not obligated to file a country-by-country report in its jurisdiction of residence;
      • The jurisdiction of residence of the ultimate parent entity of the MNE group does not have a qualifying competent authority agreement in effect to which Canada is a party on or before the time specified for filing the country-by-country report for the reporting fiscal year; or
      • There has been a systemic failure of the jurisdiction of residence of the ultimate parent entity and the constituent entity has been notified of the systemic failure;
  • If more than one constituent entity of the MNE group would be required to file a CbC report as above, one of the constituent entities may be designated — by the deadline to file — to file the report on behalf of all such constituent entities;
  • A constituent entity that is not the ultimate parent will not be required to file if a surrogate parent entity of the MNE group files a CbC report in its jurisdiction of residence by the deadline to file in Canada, and the jurisdiction of residence of the surrogate parent entity:
    • Requires filing of country-by-country reports;
    • Has a qualifying competent authority agreement in effect to which Canada is a party on or before the deadline to file in Canada in respect of the reporting fiscal year;
    • Is not in a position of systemic failure; and
    • Has been notified by the surrogate parent entity that it is the surrogate parent entity;
  • The deadline for filing a CbC report is 12 months after the last day of the reporting fiscal year, or in the case of systemic failure, 30 days after the notification of systemic failure has been received by the constituent entity.

The Act does not include further details, such as the method of filing or notification requirements regarding the reporting entity.

Other Anti-Avoidance Measures

Other anti-avoidance measures include:

  • Introducing rules to prevent the avoidance of the shareholder loan rules using back-to-back arrangements;
  • Introducing rules so that any accrued foreign exchange gains on a foreign currency debt will be realized when the debt becomes a parked obligation;
  • Preventing the misuse of an exception in the anti-avoidance rules in the Income Tax Act for cross-border surplus-stripping transactions;
  • Amending the anti-avoidance rules in the Income Tax Act that prevent the multiplication of access to the small business deduction and the avoidance of the business limit and the taxable capital limit;
  • Ensuring that an exchange of shares of a mutual fund corporation or investment corporation that results in the investor switching between funds will be considered for tax purposes to be a disposition at fair market value;
  • Clarifying the application of anti-avoidance rules in the Income Tax Act for back-to-back loans to multiple intermediary structures and character substitution;
  • Introducing rules to prevent the avoidance of withholding tax on rents, royalties and similar payments using back-to-back arrangements;
  • Implementing the OECD Common Reporting Standard (CRS) for the automatic exchange of financial account information between tax authorities; and
  • Strengthening the test for determining whether two corporations, or a partnership and a corporation, can be considered closely related for GST/HST purposes.

Click the following link for the Budget Implementation Act, 2016, No. 2.

European Union-Spain

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EU Court Finds in Favor of the European Commission in Spanish Goodwill State Aid Case

On 21 December 2016, the Court of Justice of the European Union (CJEU) issued its judgment concerning the 2009 and 2011 decisions of the European Commission that Spain's goodwill amortization rules violated EU State aid rules. The rules in question allow a Spanish taxpayer to amortize goodwill resulting from an acquired shareholding in a foreign company if the shareholding is at least 5% and is held for at least one year. However, such amortization is not allowed for similar acquisitions of a Spanish company. The European Commission considered this a selective advantage that constituted illegal State aid.

The Commission decisions were appealed and subsequently annulled by the General Court of the European Union (EGC) in November 2014. The annulment was based primarily on the EGC's more limited interpretation of what can be considered a selective advantage under the conditions set out in the Treaty on the Functioning of the European Union (TFEU). The European Commission appealed to the CJEU and requested that the judgments of the EGC be set aside, claiming that the EGC erred in law in its interpretation of the condition relating to selectivity.

In its judgment, the CJEU found in favor of the European Commission, setting aside the two judgments and referring the cases back to the EGC. The following is a summary of the judgment as provided in a press release from the CJEU.

The Court holds that, in applying the condition relating to selectivity – one of the conditions that must be satisfied if a measure is to be classified as ‘State aid’ within the meaning of Article 107(1) TFEU –, the General Court erred in law in annulling the contested decisions of the Commission on the ground that the Commission had failed to identify a category of undertakings that was exclusively favoured by the tax measure. The Court states that the only relevant criterion in order to establish the selectivity of a national tax measure consists in determining whether that measure is such as to favour certain undertakings over other undertakings which, in the light of the objective pursued by the general tax system concerned, are in a comparable factual and legal situation and who accordingly suffer different treatment that can, in essence, be classified as discriminatory. Contrary to the ruling of the General Court, it cannot be deduced from that case-law that, in order to demonstrate the selectivity of a national measure, the Commission is always required to identify a particular category of undertakings that exclusively benefit from that measure.

The Court states that the Commission classified the measures as selective on the ground that those measures derogate from the general Spanish corporation tax system and discriminate between undertakings that are in a comparable situation in the light of the objective pursued by that system: companies that are resident in Spain that acquire a 5% shareholding in another company resident in Spain cannot receive the tax advantage conferred by the measure at issue. In contrast, the benefit of the measure at issue is reserved exclusively to undertakings that make acquisitions of at least 5% shareholdings in a foreign company. The Court adds that a condition for the application of aid may be ground for a finding that it is selective if it represents discrimination against undertakings that are excluded from it. Consequently, the Court holds that the General Court erred in law in that, having failed to determine whether the Commission had established that the measure at issue was discriminatory, the General Court concluded that the measure was not selective on the ground that the Commission had not identified a particular category of undertakings exclusively favoured by the tax measure concerned.

Click the following link for the full text of the judgment.

Germany

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German Federal Council Adopts Legislation to Implement CbC Reporting Requirements and other BEPS Measures

On 16 December 2016, the German Federal Council (upper house of parliament - Bundesrat) adopted the legislation for the implementation of Country-by-Country (CbC) reporting requirements and other BEPS-related measures.

CbC Reporting

The CbC reporting requirements are in line with the guidelines developed under BEPS Action 13  and the amendments to the EU Directive on administrative cooperation in the field of taxation (2011/16/EU) concerning the exchange of Country-by-Country (CbC) reports as per Council Directive (EU) 2016/881. The main aspects include:

  • The requirement to submit a CbC report applies for fiscal years beginning after 31 December 2015 for German resident ultimate parents of MNE groups meeting a consolidated group revenue threshold of EUR 750 million in the previous year;
  • The requirement to submit a CbC report applies for fiscal years beginning after 31 December 2016 for German resident non-parent constituent entities that are members of MNE groups meeting the threshold 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 force for automatic exchange of CbC reports with Germany by the date the report is due; or
    • There is a systemic failure of the jurisdiction of residence of the ultimate parent for automatic exchange and notification of the failure was provided to the German constituent entity;
  • The required CbC report information is in line with the BEPS Action 13 guidance and must be submitted within 12 months following the close of the fiscal year reported on (one month after receiving notice in the case of a systemic failure as above);
  • All constituent entities resident in Germany must provide notification along with their tax return on whether the entity is the ultimate parent of the group or acting as surrogate, or if neither, the identity and residence of the entity submitting a CbC report on behalf of the group (non-reporting entities may be held responsible for submission of the CbC report if they fail to provide the notification); and
  • Failing to comply with the CbC reporting requirements will result in penalties of up to EUR 10,000.

Other Measures

Other important measures in the legislation include:

  • The introduction of a Master file requirement in line with BEPS Action 13 for taxpayers with revenue of EUR 100 million or more in the previous year (submitted upon request in line with current documentation submission practices);
  • The amendments made to the EU Directive on administrative cooperation in the field of taxation (2011/16/EU) are transposed concerning the exchange of cross border tax rulings as per Council Directive (EU) 2015/2376;
  • The Trade Tax Act is amended so that CFC income of German residents is explicitly brought within the scope of trade tax and that the 5% inclusion for dividends received by a subsidiary in a tax consolidated group under the participation exemption will also apply for trade tax purposes; and
  • The treaty-overriding switch-over rule of the Income Tax Act is amended to eliminate any opportunity to obtain a treaty based exemption of foreign source income which is only partially taxed by a foreign treaty jurisdiction.

Click the following link for the latest draft of the legislation, which will enter into force after it is published in the Official Gazette. Additional details will be published once available.

India

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India Q&A Clarifying Indirect Transfer Provisions

On 21 December 2016, the Indian Central Board of Direct Taxes issued Circular No. 41 of 2016 to provide clarifications on indirect transfer provisions under the Income Tax Act 1961 (ITA) through a series of question and answers (Q&A). The Q&A sets out different scenarios in which income will be deemed to accrue or arise in India, taking into account the provisions of section 9(1Xi) of the ITA and the explanations to those provisions, including:

  • Explanation 5, which clarifies that any share or interest in a company or entity registered or incorporated outside India is deemed to be situated in India if the share or interest derives, directly or indirectly, its value substantially from assets located in India.
  • Explanation 6, which provides that Explanation 5 applies if on the specified date the value of such assets exceeds INR 100 million and represents at least 50% of the value of all the assets owned by the company or entity; and
  • Explanation 7, which provides that Explanation 5 does not apply to small investors holding no right of management or control of the company or entity and holding less than 5% of the total voting power, share capital, or interest of the company or entity that directly or indirectly owns the assets situated in India.

Click the following link for Circular No. 41.

Norway

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Norway Tax Rule Changes for 2017

On 22 December 2016, the Norwegian Ministry of Finance published an overview of tax rule changes for 2017 following the completion of the budget process in parliament on 20 December. The main changes include:

  • A reduction in the ordinary income tax rate for individuals and companies from 25% to 24%, and an increase in the rates and brackets for the progressive individual income surtax as follows:
    • up to NOK 164,100 - 0%
    • over NOK 164,100 up to 230,950 - 0.93%
    • over NOK 230,950 up to 580,650 - 2.41%
    • over NOK 580,650 up to 934,050 - 11.52%
    • over NOK 934,050 - 14.52%
  • The elimination of the supplementary initial depreciation of machinery;
  • The introduction of a financial activity tax that is comprised of a 5% wage-based tax on gross salaries paid and a 25% ordinary tax on income of financial undertakings (i.e., remain subject to 2016 rate) - an exemption applies for companies where financial activities are less than 30% of total activities or at least 70% of the financial activities are otherwise taxed;
  • The introduction of Country-by-Country reporting requirements (previous coverage); and
  • An increase in the maximum deductibility basis cap for the Skattefunn R&D incentive scheme from NOK 20 million to 25 million for internal R&D costs, and from NOK 40 million to 50 million for costs incurred for outsourced R&D.

Click the following link for the overview (Norwegian language).

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OECD Updates BEPS Action 4 Report with Additional Guidance on the Design and Operation of the Group Ratio Rule and Banking and Insurance Sectors

On 22 December 2016, the OECD announced the release of an updated version of the BEPS Action 4 Report (Limiting Base Erosion Involving Interest Deductions and Other Financial Payments). The update provides additional guidance on two areas:

  • The design and operation of the group ratio rule - The 2015 Action 4 Report set out a common approach to address BEPS involving interest and payments economically equivalent to interest. This included a 'fixed ratio rule' which limits an entity's net interest deductions to a set percentage of its tax-EBITDA and a 'group ratio rule' to allow an entity to claim higher net interest deductions, based on a relevant financial ratio of its worldwide group. The report included a detailed outline of a rule based on the net third party interest/EBITDA ratio of a consolidated financial reporting group, and provided that further work would be conducted in 2016 on elements of the design and operation of the rule. The updated report does not change any of the conclusions agreed in 2015, but provides a further layer of technical detail to assist countries in implementing the group ratio rule in line with the common approach. This emphasizes the importance of a consistent approach in providing protection for countries and reducing compliance costs for groups, while including some flexibility for a country to take into account particular features of its tax law and policy.
  • Banking and insurance sectors - The 2015 report also identified factors which suggest that the common approach may not be suitable to deal with risks posed by entities in the banking and insurance sectors. The updated report examines regulatory and commercial requirements which constrain the ability of groups to use interest for BEPS purposes, and limits on these constraints. Overall, a number of features reduce the risk of BEPS involving interest posed by banking and insurance groups, but differences exist between countries and sectors and in some countries risks remain. Each country should identify the risks it faces, distinguishing between those posed by banking groups and those posed by insurance groups. Where no material risks are identified, a country may reasonably exempt banking and/or insurance groups from the fixed ratio rule and group ratio rule without the need for additional tax rules. Where BEPS risks are identified, a country should introduce rules appropriate to address these risks, taking into account the regulatory regime and tax system in that country. The updated report considers how these rules may be designed, and includes a summary of selected rules currently applied by countries. In all cases, countries should ensure that the interaction of tax and regulatory rules and the possible impact on groups is fully understood.

Click the following link for the updated Action 4 Report.

United Kingdom

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Top Ten Excuses for Late Filing of a UK Individual Income Tax Return

UK HMRC has published the top ten excuses actually used in unsuccessful appeals against HMRC penalties for late returns.

  1. "My tax return was on my yacht…which caught fire"
  2. "A wasp in my car caused me to have an accident and my tax return, which was inside, was destroyed"
  3. "My wife helps me with my tax return, but she had a headache for ten days"
  4. "My dog ate my tax return…and all of the reminders"
  5. "I couldn’t complete my tax return, because my husband left me and took our accountant with him. I am currently trying to find a new accountant"
  6. "My child scribbled all over the tax return, so I wasn’t able to send it back"
  7. "I work for myself, but a colleague borrowed my tax return to photocopy it and lost it"
  8. "My husband told me the deadline was the 31 March"
  9. "My internet connection failed"
  10. "The postman doesn’t deliver to my house"

The deadline for sending 2015-16 self assessment tax returns is 31 January 2017.

Proposed Changes (1)

Australia

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Australia Publishes Draft Ruling on Cross Border Supply GST Liability

The Australian Taxation Office has published a draft ruling for overseas-based suppliers making supplies of services, digital products, or rights to Australian consumers. The ruling is in relation to the new GST requirements for such supplies that apply from 1 July 2017 (previous coverage). The ruling is meant to assist overseas-based suppliers to determine whether they need to account for GST on their supplies and register for GST

Click the following link for the draft ruling - GSTR 2016/D1. Comments on the draft may be submitted by 17 February 2017.

Treaty Changes (3)

Andorra-European Union

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Agreement for the Exchange of Financial Account Information between Andorra and the EU to Enter into Force

On 20 December 2016, Andorra deposited the ratification instrument for the agreement with the EU providing for the automatic exchange of tax information on financial accounts of each other’s residents. The agreement was signed on 12 February 2016 and replaces the 2004 agreement whereby Andorra agreed to put in place measures equivalent to those provided for by the EU Savings Directive. The revision of the 2004 agreement became necessary now that the EU Savings Directive has been repealed and replaced by the amended provisions of the EU Administrative Assistance Directive.

The agreement will enter into force and generally apply from 1 January 2017.

Singapore-Ireland-Latvia

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Singapore Signs Agreements for Automatic Exchange of Financial Account Information with Ireland and Latvia

According to an update from the Inland Revenue Authority of Singapore, competent authority agreements for the automatic exchange of financial account information have been signed with Ireland and Latvia on 20 December 2016. Under the agreements, each country will automatically exchange information on accounts held in the respective country by tax residents of the other country based on the OECD Common Reporting Standard (CRS). The automatic exchange is to begin by September 2018 for information collected on the 2017 reporting year.

Tanzania-Untd A Emirates

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Tax Treaty between Tanzania and the U.A.E. under Negotiation

Officials from Tanzania and the United Arab Emirates met 20 December 2016 to discuss bilateral relations, including the need to conclude 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.

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