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Approved Changes (4)

Australia

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Australian Court Holds Australian Company Not to be Treated as "Orphan" in Determining Arm's Length Rate for Intra-Company Loan

On 21 April 2017, the full bench of the Australian Federal Court delivered its judgment to dismiss an appeal seeking to overturn a ruling from the Australian Taxation Office (ATO) that Chevron incorrectly priced an intra-company loan to shift profits offshore and avoid tax on Australian income. The case involved Chevron Australia Holdings Pty. Ltd. (Chevron Australia), which received a high-interest loan in 2003 from its U.S. subsidiary, Chevron Texaco Funding Corp.

The main issue for the AUD 2.5 billion loan was whether the interest rate was at arm's length. The rate paid by Chevron Australia was equal to the one-month interbank rate plus a margin of 4.14% (approximately 9%), while the U.S. sub only paid approximately 1.2% on the funds it raised for the loans in the U.S. through the issuance of commercial paper. A guarantee was provided for the commercial paper, but not for the intra-company loan. In reviewing the arrangement, the ATO found that the 9% rate was far higher than could be justified on an arm's length basis, and issued an assessment in 2010 of approximately AUD 340 million related to excess deductions for the years 2004 to 2008, including penalties and interest. The main argument of Chevron against the ATO assessment was that in determining the arm's length rate, Chevron Australia should be treated as an "orphan" company, separate from the rest of the Chevron group. If treated as such, it was argued that the approximate 9% rate would be appropriate if lending from an independent party given Chevron Australia's claimed weak BB rating.

In its decision, the full Federal Court found in favor of the ATO and upheld a previous Federal Court decision. The Court found that Chevron Australia cannot be treated as a hypothetical orphan in determining what the arm's length rate would be with an independent party, as this would undermine the purpose of substituting as a comparable a real world arm’s length rate that could predictably have been agreed to. Given the facts of the case, including that the Chevron group has a general policy to provide a third party guarantee for external financing, the arm's length rate for the intra-company loan should take into account such a guarantee. As such, the Court upheld the ATO's position and subsequent assessment, and the appeal is dismissed. Chevron may further appeal the decision to the High Court.

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Oman Clarifies Application of New Dividend Withholding Tax

The Oman Capital Markets Authority (CMA) has reportedly published Circular E/3/2017 to clarify the application of the withholding tax on dividends as introduced in Royal Decree 9/2017 (previous coverage). The Royal Decree provides for a 10% withholding tax on dividends paid to a non-resident without a permanent establishment in Oman. According to Circular E/3/2017, the 10% withholding tax only applies for dividends paid by Omani joint-stock companies, and to dividends paid in accordance with the provisions of the Commercial Companies Law. This has been interpreted as meaning that the 10% withholding tax does not apply for dividends paid by Omani limited liability companies. In addition, the withholding tax does not apply for dividends paid to nationals of other Gulf Cooperation Council (GCC) Member States, which include Bahrain, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates. However, it is unclear if this exemption extends to entities wholly-owned by GCC nationals in other GCC States. Where a tax treaty provides for a lower rate, such lower rate applies.

Taiwan

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Taiwan Clarifies VAT Registration Obligation for Suppliers of Cross-Border Electronic Services from 1 May

On 21 April 2017, Taiwan's Ministry of Finance published an English-language release clarifying that from 1 May 2017, foreign suppliers of cross-border electronic services to domestic individuals will need to register and account for VAT if their annual sales amount exceeds TWD 480,000. For determining the annual sales amount, the accumulated sales amount to domestic individuals is on the basis of the calendar year. If the annual sales amount of this year or the previous year is over the threshold, the supplier has to apply for taxation registration by itself or appoint a tax-filing agent, which may be an individual residing within the territory of Taiwan, or an enterprise, institution, group, or organization that has a fixed place of business within the territory of Taiwan. Suppliers will be able to register for VAT via the Ministry of Finance eTax Portal on 1 May.

United States

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IRS Releases Practice Unit on Expense Allocation/Apportionment in Calculation FTC Limitation

On 21 April 2017, the U.S. IRS published an international practice unit: Overview - Expense Allocation/Apportionment in Calculation of the IRC 904 FTC Limitation. The practice unit provides a general overview, relevant key factors, detailed explanation, and examples for calculating the limitation for the Foreign Tax Credit (FTC) a taxpayer can utilize each year considering the allocation and apportionment of expenses.

International practice units are developed by the Large Business and International Division of the IRS to provide staff with explanations of general international tax concepts as well as information about specific transaction types. They are not an official pronouncement of law and cannot be used, cited, or relied upon as such.

Click the following link for the International Practice Units page on the IRS website.

Treaty Changes (4)

Bermuda-Italy

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TIEA between Bermuda and Italy has Entered into Force

The tax information exchange agreement between Bermuda and Italy entered into force on 3 April 2017. The agreement, signed 23 April 2012, is the first of its kind between the two countries. It applies on the date of its entry into force in respect of criminal tax matters, and generally applies for other tax matters for periods beginning on or after that date.

Bosnia Herz-Romania

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Bosnia and Herzegovina Approves Pending Tax Treaty with Romania

On 19 April 2017, the Bosnia and Herzegovina House of Representatives approved for ratification the pending income tax treaty with Romania. The treaty, signed 6 December 2016, will enter into force after the ratification instruments are exchanged, and once in force and effective will replace the 1986 tax treaty between Romania and the former Yugoslavia as it applies in respect of Bosnia and Herzegovina and Romania.

India-Spain

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Update - Protocol to Tax Treaty between India and Spain

The amending protocol to the 1993 income and capital tax treaty between India and Spain was signed 26 October 2012. The protocol:

  • Amends the taxes covered in respect of Spain to include income tax on individuals, corporation tax, income tax on non-residents, and capital tax;
  • Adds paragraph 2 to Article 10 (Associated Enterprises) concerning corresponding adjustments with respect to the taxation of profits in a Contracting State as the result of an arm's length adjustment;
  • Replaces Article 28 (Exchange of Information) to bring it in line with the OECD standard;
  • Adds Article 28A (Assistance in the Collection of Taxes);
  • Adds Article 28B (Limitation of Benefit), which provides that the benefits of the treaty shall not be granted to a person that is not the beneficial owner; that the treaty does not prevent application of domestic CFC rules; and that the benefits of the treaty shall not be available to a resident of a Contracting State, or with respect to a transaction undertaken by such resident, if the main purpose or one of the main purposes of the creation, existence, incorporation, registration or presence of such a resident or of the transaction undertaken, was to obtain benefits under the treaty that would not otherwise be available; and
  • Adds paragraphs 11, 12, and 13 to the original final protocol to the treaty to clarify the application of the new Articles 28, 28A, and 28B.

The protocol, which is the first to amend the treaty, will enter into force two months after the ratification instruments are exchanged and will generally apply from the date of its entry into force.

Untd A Emirates-OECD

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U.A.E. Signs Mutual Assistance Convention

The OECD has announced that on 21 April 2017, the United Arab Emirates signed the OECD-Council of Europe Convention on Mutual Administrative Assistance in Tax Matters as amended by the 2010 protocol. The Convention must now be ratified by the United Arab Emirates and the ratification instrument deposited before entering into force in the country.

Click the following link for the signatories to the Mutual Assistance Convention to date.

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