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Worldwide Tax News

Approved Changes (3)

China

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China Revises Guidance on VAT Exemptions for Cross Border Service and Intangible Property Transactions

On 6 May 2016, China's State Administration of Taxation issued Public Notice 29 (2016), which provides guidelines for the value added tax (VAT) exemptions for cross border service and intangible property transactions when provided by China resident taxpayers. It expands upon and replaces Public Notice 49 (2014) (previous coverage). In general the previous exemptions specified under Notice 49 remain, while additional exemptions are specified with regard to services that transitioned from business tax to VAT effective 1 May 2016 (previous coverage). In particular, this includes exemptions for:

  • Construction services and construction supervision services for projects located outside China;
  • Financial Services in connection with funds financing and other financial activities between foreign entities if the services are unrelated to domestic goods, intangible assets, and immovable property; and
  • Insurance services provided for the purpose of exporting goods, including insurance for exported goods and export credit insurance.

Notice 29 also clarifies that unlike goods, the provision of services or intangible property to entities located in China's customs-supervised zones (outside customs territory) are not treated as exported, and therefore are not VAT exempt. The Notice also clarifies the general requirements for VAT exemption, which include:

  • The China resident taxpayer must have a service contract with foreign recipient, with an exemption from the requirement for certain services, including postal services, pickup, distribution, and delivery services, and insurance services (newly added);
  • All income from the transactions must be received from outside China;
  • The VAT exempt income from the transactions must be separated from all other income; and
  • Documentation supporting a VAT exemption claim must be submitted to the tax authorities when the claim is made, and must be retained by the taxpayer and made available to the tax authority upon request.

Circular 29 (2016) is effective 1 May 2016.

Italy

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Italy Publishes Decree on Tax Rulings for Significant Investments

On 12 May 2016, Italy published the implementing decree for advance tax rulings for qualifying new investments as introduced in Legislative Decree No. 147 in September 2015 (previous coverage). The new tax rulings cover the tax treatment of Italian investment plans for both resident and non-resident companies, provided the investment is at least EUR 30 million and will have a long-term positive impact on employment in Italy.

In order to obtain an investment tax ruling, the company must submit an application to the Central Directorate of Legislation, New Investments Rulings Office that includes:

  • The identification and contact details of the company;
  • A detailed description of the investment plan;
  • An indication of the relevant tax provisions to be evaluated; and
  • A description of the tax treatment the company expects will apply for the investment.

If any required information is missing from the application, the company will have 30 days to submit, after which the application will be automatically rejected. When the application is properly submitted, a tax ruling is to be issued within 120 days with a possible 90-day extension. If a ruling is not issued within that time limit, the company's proposed tax treatment would be considered accepted and binding on the tax authorities.

Malaysia

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Malaysia Publishes Public Ruling on Tax Treatment of Interest Income

On 16 May 2016, the Inland Revenue Board of Malaysia published Public Ruling No. 3/2016 on the tax treatment of interest income received by a person carrying on a business, including a company, a body of persons, a limited liability partnership and a corporation sole.

Sources of Interest Income

The ruling sets out the sources of interest income, which include:

  • Financial Deposit Product, including fixed deposit and savings accounts;
  • Negotiable Instruments of Deposit;
  • Repurchase Agreements;
  • Debentures, mortgages and loans; and
  • Gains or profits from savings accounts and investments with Islamic banks, which are treated as interest for tax purposes.

Tax Treatment of Interest Income

The ruling states that interest income is chargeable to tax under either paragraph 4(a) or 4(c) of the Income Tax Act (ITA).

Interest income is assessed as business income under paragraph 4(a) if:

  • The debenture, mortgage or other source to which the interest relates forms part of the stock in trade of a person; or
  • The interest is receivable by a person in the course of carrying on a business of lending money and that business is licensed under any written law.

Otherwise, interest income received by a person from the carrying on of a business other that the above is taxed as interest income under paragraph 4(c).

Transition of Tax Treatment from Business Income to Interest Income

From year of assessment 2013, interest income that is not from the carrying on of a money lending business but has been assessed as business income under paragraph 4(a) must instead be assessed as interest income under paragraph 4(c). The ruling provides that any loss in respect of such interest income that could not be fully absorbed in the year of assessment 2012 is to be carried forward and offset against statutory income from any other businesses source until fully absorbed. In the event there is no statutory income in the 2013 or subsequent years of assessment, the loss may be offset against adjusted income of non-business sources.

Click the following link for Public Ruling No. 3/2016 for additional details and several examples.

Proposed Changes (1)

India

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India Issues Draft Rules for Public Comment on the Valuation and Reporting of Indirect Transfers of Indian Assets

On 23 May 2016 India's Ministry of Finance issued a release stating that it is seeking comments and suggestions on draft rules and forms prepared for the determination of the fair market value of Indian and global assets and the associated reporting requirements.

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Under Section 9 of the Income-tax Act, 1961 (the Act), income arising from indirect transfer of assets situated in India is deemed to accrue or arise in India. The provisions of Section 9(1)(i) of the Act provides that if any share of or interest in, a foreign company or entity derives its value substantially from the assets located in India, then such share or interest is deemed to be situated in India. Thereby, any income arising from transfer of such share or interest is deemed to accrue or arise in India.

The share or interest is said to derive it value substantially from assets located in India, if fair market value (FMV) of assets located in India comprise at least 50% of the FMV of total assets of the company or entity. The computation of FMV of Indian and global assets is to be in the prescribed manner.

Further, Section 285A of the Act mandates reporting requirement on the Indian concern through or in which the foreign company or entity holds the assets in India. The information to be furnished and its manner is also required to be prescribed.

In this regard, draft rules and forms to be incorporated in the Income-tax Rules, 1962 have been formulated and uploaded on the Finance Ministry’s website (www.finmin.nic.in) and website of the Income-tax Department (www.incometaxindia.gov.in) for comments from stakeholders and general public.

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Click the following link for the draft rules and forms. Comments are due by 29 May 2016.

Treaty Changes (4)

Bulgaria-Romania

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Tax Treaty between Bulgaria and Romania has Entered into Force

The new income tax treaty between Bulgaria and Romania entered into force on 29 March 2016. The treaty, signed 24 April 2015, replaces the 1994 tax treaty between the two countries.

Taxes Covered

The treaty covers Bulgarian personal income tax and corporate income tax, and covers Romanian tax on income and tax on profit.

Residence

If a company is considered resident in both Contracting States, the competent authorities will determine its residence for the purpose of the treaty through mutual agreement. If no agreement is reached, the company will not be considered resident in either State for the purpose of claiming any benefits provided by the treaty.

Withholding Tax Rates

  • Dividends - 5%
  • Interest - 5%
  • Royalties- 5%

Limitation on Benefits

The provisions of Articles 10 (Dividends), 11 (Interest), 12 (Royalties) and 21 (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.

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; and
  • Gains from the alienation of shares deriving more than 50% of their value directly or indirectly from immovable property situated in the other State

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

Double Taxation Relief

Both countries apply the credit method for the elimination of double taxation.

Effective Date

The treaty applies from 1 January 2017. The 1994 tax treaty between the two countries ceases to have effect on that date.

Ghana-Japan

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Tax Treaty between Ghana and Japan to be Negotiated

According to a joint statement issued by Japan's Ministry of Foreign Affairs, Ghanaian President Mahama and Japanese Prime Minister Abe held a bilateral summit meeting in Tokyo on 18 May 2016, during which the two leaders recognized the need to conclude a tax treaty as early as possible. Any resulting treaty would be the first of its kind between the two countries.

Kosovo-Untd A Emirates

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Tax Treaty between Kosovo and the U.A.E. Signed

On 20 May 2016, officials from Kosovo and the United Arab Emirates signed an income tax treaty. The treaty is the first of its kind between the two countries, and will enter into force after the ratification instruments are exchanged.

Additional details will be published once available.

Untd A Emirates-United Kingdom

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Update - Tax Treaty between the U.A.E. and the U.K.

The income and capital tax treaty between the United Arab Emirates and the United Kingdom was signed on 12 April 2016. The treaty is the first of its kind between the two countries.

Taxes Covered

The treaty covers U.A.E. income tax and corporate tax, and covers UK income tax, corporation tax and capital gains tax.

Residence

If a company is considered resident in both Contracting States, the competent authorities will determine the company's residence for the purpose of the treaty through mutual agreement. If no agreement is reached, the company will not be entitled to the benefits of the treaty aside from those covered in Articles 21 (Elimination of Double Taxation), 22 (Non-Discrimination) and 23 (Mutual Agreement Procedure).

Withholding Tax Rates

  • Dividends - 15% if paid out of income (including gains) derived directly or indirectly from immovable property within the meaning of Article 6 (Income from Immovable Property) by an investment vehicle that distributes most of its income annually and whose income from such immovable property is exempted from tax (exemption if beneficial owner is a pension scheme); otherwise 0%
  • Interest - 0% if paid to:
    • A company whose principal class of shares are substantially and regularly traded on a recognized stock exchange;
    • A pension scheme;
    • A financial institution which is unrelated to and dealing wholly independently with the payer; and
    • Any other company, provided the competent authority determines that its main purpose or one of its main purposes was not to secure the benefits of Article 11 (Interest);
    • Otherwise domestic rates apply
  • Royalties - 0%

Limitation on Benefits

The provisions of Articles 10 (Dividends), 11 (Interest) and 12 (Royalties) 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 or royalties 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.

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 shares or comparable interests deriving the greater part of their value directly or indirectly from immovable property situated in the other State (exemption for shares regularly traded on a stock exchange); and
  • 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 other property by a resident of a Contracting State may only be taxed by that State.

Double Taxation Relief

Both countries generally apply the credit method for the elimination of double taxation. However, the UK will exempt dividends paid by a U.A.E. company to a company resident in the UK if the conditions for an exemption under UK law are met. Exemption may also apply for profits of a permanent establishment in the U.A.E. of a UK company if the conditions for an exemption under UK law are met.

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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