Worldwide Tax News
Brazil Clarifies Withholding Tax Obligation for Payments for Technical Services to Canada and the U.S.
On 18 January 2017, brief guidance from Brazil's Federal Revenue Department was published concerning the withholding tax obligation on payments for technical services made to Canada and the U.S. The guidance states that such payments made to an individual or legal entity domiciled in either country for technical services rendered are subject to tax at source at the rate of 15%.
The Ecuador Internal Revenue Service (SRI) has issued Resolution No. NAC-DGERCGC16-00000536, which was published in the Official Gazette on 10 January 2017. The resolution regulates the requirements for the submission of a shareholders annex form for 2017, which is in connection with Ecuador's increased tax rate for companies that have shareholders resident in tax havens or low-tax jurisdictions (previous coverage).
The shareholders annex form must generally be submitted by all Ecuador resident entities with foreign shareholders, as well as branches and permanent establishments in Ecuador of foreign companies. The required information is for each shareholder through the end of the reporting period, including shareholder name, tax ID number, residence/nationality, etc. The requirements for 2017 are generally unchanged from the resolution issued for 2016 (previous coverage).
The deadlines for the shareholders annex form in 2017 fall between February 10 and February 28, with the exact date depending on the ninth digit of the taxpayer's tax ID number (RUC). If a taxpayer fails to submit the annex, an increased corporate tax rate of 25% will apply on all taxable income of the taxpayer. If submitted incomplete, the 25% rate will apply on a percentage of the entity's taxable income equal to the percentage of the entity's shareholders that are unreported. If the percentage unreported exceeds 50%, all taxable income of the entity will be subject to the 25% rate. Ecuador's standard rate is 22%.
Click the following link for Resolution No. NAC-DGERCGC16-00000536 (Spanish language).
EU Advocate General Opinion that EU Law Precludes French Restrictions on Dividend Exemption under Parent-Subsidiary Directive
On 19 January 2017, the opinion of Advocate General Juliane Kokott of the Court of Justice of the European Union (CJEU) was published concerning French dividend exemption restrictions in relation to the EU Parent-Subsidiary Directive.
The case involves a French resident company that was wholly owned by a Luxembourg company that was in turn indirectly controlled by a Swiss company. In 2005 and 2006, dividend distributions were made by the French company to its Luxembourg parent, for which an exemption was claimed. However, the French tax authorities denied the exemption based on the anti-abuse provision included in Article 119b(3) of the French General Tax Code. Article 119b(3) provides that the exemption does not apply where the distributed dividends are for the benefit of a legal person controlled directly or indirectly by one or more residents of States that are not members of the Union, unless that legal person provides proof that the principal purpose or one of the principal purposes of the chain of interests is not to take advantage of the exemption. Due to lack of proof, the exemption was denied.
The decision was appealed, and the dispute made its way to the French Council of State (Conseil d'État), which referred to the CJEU on questions of EU Law concerning a Member State's discretion in applying anti-abuse provisions and in particular the French provision.
In her opinion, Advocate General Kokott found that the French anti-abuse provision is not consistent with EU Law and concluded the following:
Article 1(2) of Council Directive 90/435/EEC and Article 43 EC in conjunction with Article 48 EC preclude a Member State rule that imposes on a non-resident company directly or indirectly controlled by persons resident in a non-member State the burden of proving, for the granting of an exemption from withholding tax under Article 5 of the Parent-Subsidiary Directive, that the reasons for the structuring of the chain of interests are not tax-based, without the authorities being obliged to provide sufficient indications of wholly artificial arrangements which do not reflect economic reality and whose purpose is to obtain a tax advantage.
Click the following link for the full text of the opinion.
Finland has published in the Official Gazette the law that transposes amendments made to the EU administrative cooperation Directive (2011/16/EU) concerning the exchange of cross border tax rulings and advance pricing agreements between EU Member States as per Council Directive (EU) 2015/2376. The law applies from 1 January 2017.
Ukraine's State Fiscal Service (SFS) recently published guidance letter No. 79/6/99-99-15-02-02-15 concerning withholding tax on income of a non-resident from the sale of corporate rights. According to the letter, income paid from Ukraine sources from the sale of securities, derivatives, or other corporate rights are subject to the standard 15% withholding tax, which must be withheld by the Ukrainian resident paying the income (the tax agent). However, if a tax treaty is in effect between Ukraine and the relevant jurisdiction, the tax agent may independently apply the beneficial provisions of the treaty, provided that the non-resident provides the tax agent confirmation of its residence issued by the foreign competent authority, as well as any other documentation confirming the non-residents eligibility for the treaty benefits.
The Australian Taxation Office (ATO) has published draft taxation ruling TR 2017/D1 on the depreciation of composite assets, which are assets made up of a number of components that are capable of separate existence. The draft ruling sets out the Commissioner's views on:
- How to determine whether a composite item is itself a depreciating asset or whether its components are separate depreciating assets for the purposes of Division 40 (capital allowances), and
- Whether an 'interest in an underlying asset' for the purposes of section 40-35 requires an entity to have an interest in all parts of a depreciating asset, or whether an interest in any part of the asset is enough.
Click the following link for TR 2017/D1. The deadline for comments is 17 February 2017.
China's State Council has issued Circular 2017/5, which sets out plans to boost foreign investment. Some of the main aspects of the circular include:
- Revising the catalog of foreign investments, including relaxed restrictions on foreign investment in the service industry, manufacturing industry, and mining industry;
- Granting foreign investments access to the Made in China 2025 policy measures, which support high-end manufacturing, intelligent manufacturing, and green manufacturing, as well as related industrial services;
- Supporting the participation of foreign capital in energy, transportation, water, and environmental infrastructure projects;
- Supporting foreign investment in R&D centers and technology enterprise centers, including access to the related R&D tax incentives;
- Allowing foreign-invested companies to list on Chinese stock exchanges, and to issue certain debt instruments in China;
- Abolishing registered capital requirements for foreign invested enterprises and unifying the registered capital system for both domestic and foreign invested enterprises; and
- Allowing local governments to introduce preferential policies to attract foreign investment.
Click the following links for a government release on the plans (English language) and the State Council Circular 2017/5 (Chinese language).
Costa Rica's Legislative Assembly has reportedly approved Bill No. 19.818 in its first reading on 9 January 2017 and will make a final vote after a constitutional review. The legislation revises the rules for the country's annual registration tax on companies, which were found unconstitutional in January 2015 (previous coverage). As revised, the registration tax would be levied as follows:
- For companies, including branches of foreign companies, that are registered in the register of legal entities but are neither declarants nor taxpayers, the registration tax is equal to 15% of the monthly base salary;
- For companies with declared gross income of less than 120 monthly base salaries in the tax period, the registration tax is equal to 25% of the base salary;
- For companies with declared gross income of 120 monthly base salaries up to 280 base salaries in the tax period, the annual registration tax is equal to 30% of the base salary; and
- For companies with declared gross income exceeding 280 monthly base salaries in the tax period, the annual registration tax is equal to 50% of the base salary.
The monthly base salary in 2017 is CRC 426,200 (~USD 770).
Dutch State Secretary of Finance Eric Wiebes has introduced legislation to the House of Representative to transpose into domestic law the amendments made to the EU administrative cooperation Directive (2011/16/EU) concerning the exchange of Country-by-Country (CbC) reports as per Council Directive (EU) 2016/881. Since the Dutch CbC reporting requirements are already generally in line with the EU requirements, the amendments to implement Council Directive (EU) 2016/881 are relatively limited, and include:
- The addition of an article in the law on international assistance in the field of taxation that sets out the basic provisions for CbC exchange in the EU, including that the reports will be exchanged within 15 months of the close of the fiscal year (18 months for the first year); and
- Amendments to the corporate income tax law, including that if a constituent entity is required to file locally and the ultimate parent has not provided all required information, a CbC report must still be filed using available information and notification of the parent entity's refusal to provide the information must be made.
Once approved, the legislation will enter into force on 5 June 2017, and will apply retroactively from 1 January 2016.
The U.S. Treasury Office of Tax Analysis has published a working paper entitled What Would a Cash Flow Tax Look Like For U.S. Companies? Lessons from a Historical Panel. The paper presents a prototype destination basis cash flow tax to replace the existing corporate income tax to gain some insight into the potential consequences in the U.S., which is the type of destination-based consumption tax (border adjustment) proposed by Congressional Republicans in the A Better Way Tax Plan. In general, the report finds that such a tax system could be promising, but that a number of issues need to be sorted out. The following is the conclusion as presented in the report:
Given limited experience with cash flow taxes, there is little to guide policy makers on design questions or to help them understand the possible dislocations caused by moving to this alternative base for business taxation. This study attempts to help bridge the gap between economic theory and practice by using a rich set of administrative data to simulate what a cash flow tax might look like for U.S. firms in a steady state. This simulation indicates that a border adjusted cash flow tax base would have been significantly larger than the tax base that was in place over the 2004 through 2013 period for our sample of firms before considering behavioral responses. This tax base is also slightly less cyclical in aggregate than the income tax base. The propensity of firms to be in loss under the cash flow tax looks to be very similar to the propensity under an income tax but the magnitude of losses is greater. An important caveat to all these findings is that this was simulated over the period that included the great recession, thus the underlying data has more firms in loss than is typical.
Our findings, coupled with the potential advantages that a cash flow tax provides in terms simplicity, incentives for growth, potential progressivity, and fewer distortions on firm location choices, lead us to conclude that this style of reform is promising. Further analysis is needed regarding the implications for financial firms and pass-throughs, both of which are excluded from our analysis. The method of analysis used in this study can be usefully applied to pass-throughs, however there are additional complications in this case. For one, partnerships do not explicitly compensate general partners for their labor contribution. Additionally, the wages paid to owners in S corporations may not accurately reflect their labor compensation. As demonstrated by our results, careful consideration needs to be given to the treatment of losses when designing a cash flow tax. This choice needs to balance the needs of the tax administrator with sufficient generosity so that the border adjustment operates in a manner consistent with placing the burden of taxation on domestic consumption. Finally, after resolving these issues regarding the core characteristics of a destination cash flow tax, the difficult issues of the appropriate transition rules must be specified. While this is daunting list of issues that remain to be resolved the findings of this paper should provide optimism to policy makers that tackling these issues is a worthwhile undertaking.