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Worldwide Tax News

Approved Changes (3)

Australia

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Australian Parliament Passes Legislation on Capital Gains Tax Treatment of Earnout Rights and CGT Withholding Obligations

On 22 February 2016, the Australian Senate passed the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Bill 2015, following passage by the House of Representative on 4 February. The legislation includes changes in the capital gains tax (CGT) treatment of earnout rights and introduces CGT withholding obligations for purchases of certain Australian assets from foreign residents.

CGT on Earnout Rights

Earnout rights are rights to future payments linked to the performance of an asset or assets after sale. Under the new rules, capital gains and losses arising in respect of look-through earnout rights will be disregarded. Instead, payments received or paid under the earnout arrangements will affect the capital proceeds and cost base of the underlying asset or assets to which the earnout arrangement relates.

CGT Withholding

Under the new rules, purchasers of the following asset types are required to withhold 10% of the payment as a non-final withholding tax when the vendor is a foreign resident:

  • Taxable Australian real property, which includes real property situated in Australia; and a mining, quarrying or prospecting right, if the minerals, petroleum or quarry materials are situated in Australia;
  • An indirect Australian real property interest; or
  • An option or right to acquire such property or interest

Exemptions from the CGT withholding requirement include:

  • Transactions involving taxable Australian real property and certain indirect interests valued at less than AUD 2 million;
  • Transactions conducted through a stock exchange or crossing system;
  • An arrangement that is already subject to an existing withholding obligation;
  • A securities lending arrangement; and
  • Transactions involving vendors who are subject to formal insolvency or bankruptcy proceedings.

Exemptions may also apply if the vendor has obtained a clearance certificate or has declared that they are an Australian resident for tax purposes.

Effective Date

The new rules regarding earnout rights are effective in relation to look-through earnout rights created on or after 24 April 2015. The new rules regarding CGT withholding are effective for acquisitions made on or after 1 July 2016.

Click the following links for the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Bill 2015 as passed, and the Explanatory Memorandum.

Bermuda

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Bermuda's 2016-2017 Budget Statement Presented

Bermuda's 2016-2017 Budget Statement was presented on 19 February 2016. The main tax related measures include:

  • Increasing the payroll tax to from 14.5% to 15.5% in 2016/2017 (amount recoverable from employees increased from 5.5% to 6.0%), and restructuring the payroll tax system with a more progressive system to be implemented in 2017/18;
  • Introducing a new General Services Tax at rate of 5% from 1 April 2017 (at the earliest) with an exemption for banking, insurance and health care services, and small service providers; and
  • Increasing excise duties on alcohol, tobacco, and gas in 2016/2017, and simplifying the customs tariff.

Click the following link for Bermuda's 2016-2017 Budget Statement.

Finland

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Finland to Follow Transfer Pricing Guidelines under Action 8-10 of the OECD BEPS Project

On 22 February 2016, the Finnish tax authority published a notice that it will follow the transfer pricing guidelines developed as part of Actions 8-10 of the OECD BEPS Project as included in the final report Aligning Transfer Pricing Outcomes with Value Creation. These guidelines cover:

  • Guidance for Applying the Arm's Length Principle;
  • Commodity Transactions;
  • Guidance on the Transactional Profit Split Method;
  • Intangibles;
  • Low Value-adding Intra-group Services; and
  • Cost Contribution Arrangements.

According to the notice, Finland takes the position that the updated guidance under Actions 8-10 applies from the date the final reports were published (5 October 2015). As such, Finland will use the new guidance going forward, but will not apply the guidelines retroactively if detrimental to the taxpayer or inconsistent with earlier interpretations.

Proposed Changes (1)

United States

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U.S Congressman Hopes for Passage of Legislation in 2016 Restricting the Exchange of CbC Reports

During an event held in Washington D.C. on 23 February 2016 on the effects of the OECD BEPS Project, House Tax Policy Subcommittee Chair Charles W. Boustany Jr. R-LA stated that he hopes a bill introduced in December 2015 restricting the exchange of Country-by-Country (CbC) reports would pass in 2016. The bill (H.R. 4297) includes the requirement that the U.S. Treasury suspend the exchange of CbC reports with a jurisdiction if it is determined that the jurisdiction is:

  • Abusing Master File documentation requirements; or
  • Failing to safeguard the confidentiality of information required in the Master File.

The bill also includes that Treasury may not require CbC reports for tax years beginning before 1 January 2017.

Proposed U.S. CbC reporting regulations were issued in December 2015 with an annual group revenue reporting threshold of USD 850 million (previous coverage).

Treaty Changes (4)

Bulgaria-OECD

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Bulgaria Ratifies Mutual Assistance Convention and Multilateral Agreement on Automatic Exchange of Financial Account Information

On 19 February 2016, Bulgaria published in its Official Gazette the decrees ratifying the OECD-Council of Europe Convention on Mutual Administrative Assistance in Tax Matters as amended by the 2010 protocol, and the Multilateral Competent Authority Agreement (MCAA) on Automatic Exchange of Financial Account Information.

Bulgaria signed the Mutual Assistance Convention as amended on 26 October 2016, and it will enter into force in Bulgaria after the ratification instrument is deposited. Bulgaria signed the MCAA on 29 October 2014, and intends to begin the exchange of financial account information in 2017.

Cayman Islands-Ukraine

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TIEA between the Cayman Islands and Ukraine to be Signed

On 11 February 2016, the Ukrainian government approved for signature a tax information exchange agreement with the Cayman Islands. The agreement will be the first of its kind between the two jurisdictions, and must be finalized, signed and ratified before entering into force.

Jersey-Romania

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TIEA between Jersey and Romania has Entered into Force

The tax information exchange agreement between Jersey and Romania entered into force on 2 February 2016. The agreement, signed 1 December 2014, is the first of its kind between the two jurisdictions and is in line with the OECD standard for information exchange. It generally applies from the date of its entry into force.

Luxembourg-Senegal

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Update - Tax Treaty between Luxembourg and Senegal

The income and capital tax treaty between Luxembourg and Senegal was signed 10 February 2016. The treaty is the first of its kind between the two countries.

Taxes Covered

The treaty covers Luxembourg individual income tax, corporation tax, capital tax and communal trade tax. It covers Senegalese corporate income tax, minimum corporate tax, individual income tax, contributions payable by employers, and capital gains tax on developed and undeveloped land.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted if an enterprise furnishes services in a Contracting State through employees or other engaged personnel for a period or periods aggregating more than 6 months within any 12-month period.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company directly holding at least 20% of the paying company's capital; otherwise 15%
  • Interest - 10%
  • Royalties - 6% for the use of, or the right to use, industrial, commercial or scientific equipment; otherwise 10%

Limitation on Benefits

The provisions of Articles 10 (Dividends), 11 (Interest), 12 (Royalties) and 22 (Other Income) will not apply if the main purpose or one of the main purposes of any person concerned with the creation or assignment of the shares, debt-claims or other rights in respect of which the dividends, interest, royalties or other income are paid was to take advantage of those Articles by means of that creation or assignment. The limitation is included in each of the Articles.

In addition, Article 30 (Entitlement to Benefits) includes the provision that the benefits of the treaty will not be granted in respect of an item of income or capital if it is reasonable to conclude that obtaining the benefits (directly or indirectly) was the primary purpose of an arrangement or transaction, unless it is established that granting the benefits would be consistent with the object and purpose of the treaty.

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

  • Gains from the alienation of immovable property situated in the other State;
  • Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State;
  • Gains from the alienation of shares deriving more than 50% of their value directly or indirectly from immovable property situated in the other State (exemption for shares listed on a recognized stock exchange, shares alienated as part of a corporate reorganization, and shares whose value is derived from immovable property in which business is carried on); and
  • Gains from the alienation of shares, other than the above, representing an interest exceeding 50% in a company resident in the other State (tax rate limited to 25%)

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.

Double Taxation Relief

Senegal applies the credit method for the elimination of double taxation, while Luxembourg generally applies the exemption with progression method. However, in respect of income covered by Articles 10 (Dividends), 11 (Interest), 12 (Royalties), 13 (Capital Gains - from shares) and 17 (Artistes and Sportspersons), Luxembourg applies the credit method.

Entry into Force and Effect

The treaty will enter into force once the ratification instruments are exchanged, and will apply from 1 January of the year following its entry into force.

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