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Approved Changes (2)

Taiwan

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Taiwan Adopts CFC and Place of Effective Management Rules

On 12 July 2016, Taiwan’s Ministry of Finance announced that the Legislative Yuan has adopted anti-avoidance amendments to the Income Tax Act, including new controlled foreign company (CFC) rules and new rules for the determination of place of effective management (PoEM) for foreign companies.

CFC Rules

Under the new CFC rules, a foreign company located in a low-tax jurisdiction will be considered a CFC of a Taiwan company if the company together with related parties directly or indirectly holds more than 50% of the foreign company's shares or otherwise controls the foreign company. For this purpose, low-tax jurisdictions include jurisdictions with a corporate tax rate below 11.9% (70% of Taiwan rate). An exemption from the rules applies if:

  • The foreign company has sufficient substance and an active trade or business in the foreign jurisdiction; or
  • The earnings of the foreign company and its affiliates do not exceed a yet to be announced threshold.

When the CFC rules apply, a Taiwan company is required to include in their taxable income their pro rata share of the CFC's income, and any CFC losses may be carried forward up to ten years to offset CFC income. CFC income already taxed under the CFC rules is exempt from corporate income tax when repatriated to Taiwan, and taxes imposed on CFC distributions may be claimed as a foreign tax credit.

PoEM Rules

Under the new place of effective management rules, foreign companies may be deemed to have their place of effective management in Taiwan based on the following criteria:

  • Key business decision makers reside in Taiwan or major business decisions are made in Taiwan (general management, financial management and HR management);
  • Financial statements, accounting books and records, or board or shareholder meeting minutes are prepared or stored in Taiwan; and
  • Principal business activities are executed in Taiwan.

When a foreign company is deemed to have its PoEM in Taiwan, it will be subject to tax on its worldwide income.

Although the MoF announcement did not indicate an effective date, it is expected that the new rules will not apply until 2018.

Ukraine

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Ukraine Clarifies Obligations for Controlled Transactions through an Agent

Ukraine's State Fiscal Service (SFS) recently published guidance letter No. 14510/6/99-99-15-02-02-15, which clarifies the treatment of transactions as controlled when through an agent. According to the letter, when a Ukrainian resident sells goods to a non-resident buyer through a resident agent, the transaction is not considered controlled for the resident seller regardless of the parties being related. However, the transaction may be considered controlled for the resident agent if:

  • Its annual revenue exceeds UAH 50 million;
  • Its related party transactions exceed UAH 5 million; and
  • The non-resident buyer is related to the resident agent; or
  • The non-resident buyer is resident in a low-tax jurisdiction (effective rate 5% or more lower than the Ukraine rate).

In such case, the resident agent must include the transaction in its annual controlled transactions report, which is generally due 1 May of each year.

Proposed Changes (4)

Brazil

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Brazilian Parliament Considers Suspending Financial Transactions Tax Increase

The Brazilian Chamber of Deputies is currently reviewing Bill 353/2016, which would suspend Decree No. 8,731/2016. Decree No. 8,731, issued 2 May 2016 (previous coverage), increased the financial transactions tax (IOF) on purchases of foreign currencies and ended the zero-rating for repurchase agreements between financial institutions and their affiliates.

European Union

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EU Council Slovak Presidency Issues Roadmap on Tackling BEPS Issues

On 14 July 2016, the Slovak Presidency of the EU Council issued its roadmap on future work regarding base erosion and profit shifting (BEPS). The work the Slovak Presidency will focus on in the short-term includes:

  • Exploring a different path in order to reach a possible political agreement on anti-avoidance amendments to the EU Interest and Royalties Directive;
  • Beginning technical work on proposals to amend the Anti-Money Laundering Directive and the Directive on Administrative Cooperation to improve transparency, including of beneficial ownership;
  • Making progress in developing an EU list of non-cooperative jurisdictions by (1) validating the indicators which should be used to identify relevant third countries to be prioritized for screening, (2) determining the criteria for assessing the compliance of screened third countries and (3) exploring possible common EU defensive measures;
  • Seeking agreement on the key elements that should be contained in a clause on good governance in tax matters to be inserted in agreements between the EU and third countries; and
  • Working on a legislative proposal to address hybrid mismatches involving third countries.

Medium-term work includes:

  • Monitoring changes in EU Member States' patent box regimes to bring them in line with the modified nexus approach;
  • Supporting the work of the Code of Conduct Group on business taxation;
  • Examining the proposals to improve dispute resolution mechanisms and for the Common (Consolidated) Corporate Tax Base in the EU, which are to be presented by the EU Commission by November 2016;
  • Identifying potential problems that arise when payments are made from the EU to a third country (outbound payments);
  • Developing guidance on mandatory disclosure rules targeting specific offshore tax evasion schemes; and
  • Developing guidelines on the conditions and rules for the issuance of tax rulings by EU Member States.

The Slovak presidency began 1 July 2016 and runs for 6 months. Click the following link for the BEPS: Presidency roadmap on future work.

South Africa

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South Africa Issues Revised Special Voluntary Disclosure Program

On 20 July 2016, the South African National Treasury published revisions to the Special Voluntary Disclosure Program (SVDP) as included in the revised 2016 Draft Rates and Monetary Amounts and Amendment of Revenue Laws Amendment Bill and 2016 Draft Rates and Monetary Amounts and Amendment of Revenue Laws (Administration) Bill. The SVDP is intended to give non-compliant taxpayers one last chance to disclose their offshore activities before the exchange of financial account information begins under the OECD's Common Reporting Standard (CRS).

Key aspects of the SVDP include:

  • The program will be available from 1 October 2016 to 31 March 2017;
  • Both individuals and companies may apply (trusts generally excluded);
  • Persons aware of pending audit or under audit in respect of foreign assets or foreign taxes are generally not eligible;
  • The benefits of the SVDP include:
    • 50% of the highest value of the aggregate of all assets situated outside South Africa between 1 March 2010 and 28 February 2015 that were derived from undeclared income will be included in taxable income and subject to tax in South Africa;
    • The undeclared income that originally gave rise to the assets above will be exempted from income tax, although future income will be fully taxed;
    • No understatement penalties will be levied where an application under the SVDP is successful; and
    • Criminal prosecution for a tax offence will not be pursued where an application under the SVDP is successful.

Click the following links for additional information, including the media release, explanatory memorandum, and the draft legislation.

The revised bills are to be submitted to parliament for approval in the second half of August 2016.

United Kingdom

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UK Publishes Finance Bill 2016 Amendments Concerning Hybrid Mismatches and GAAR

On 21 July 2016, UK HM Treasury published a number of government amendments in the report stage of Finance Bill 2016. The main amendments concern hybrid and other mismatches, and the General Anti-Abuse Rule.

Amendments 1 to 131 to Clause 65: Hybrid and other mismatches

The key changes include:

  • Amendments in relation to mismatches involving permanent establishments (PEs), which clarify the interaction between the hybrid mismatch rules and the existing UK foreign PE exemption rules;
  • Amendments that clarify the treatment of income and expenses allocated within a company;
  • Amendments that clarify the interaction between the hybrid mismatch rules and the existing UK rules in relation to foreign PE losses to ensure that excess deductions incurred in an overseas PE can continue to be claimed against other UK profits, so long as those excess deductions are not used overseas against the profits of another person;
  • Amendments that deal with certain timing differences, which clarify the circumstances in which timing differences are outside the scope of the hybrid and other mismatches legislation; and
  • Amendments that deal with a number of technical issues, including the treatment of certain investment funds, the application of existing UK loan relationship legislation, and the interaction with existing UK anti-avoidance rules.

Amendments 136 and 137 to Clause 155: General Anti-Abuse Rule: Provisional Counteractions

These amendments ensure that the General Anti-Abuse Rule (GAAR) procedural changes work as intended, and ensure that consequences that already result from a provisional GAAR counteraction apply equally for the new GAAR counteraction procedures.

Click the following link for the Explanatory Notes published on the UK.Gov website.

Treaty Changes (2)

Bulgaria-Italy

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Bulgaria to Sign New Tax Treaty with Italy

On 20 July 2016, the Bulgarian government authorized the signature of a draft income tax treaty with Italy. The treaty must be signed and ratified before entering into force, and once in force and effective, will replace the 1988 tax treaty between the two countries, which is currently in force.

India-Netherlands

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Indian Tribunal Holds Domestic Royalty Definition under Income Tax Act Not Applicable under Tax Treaty with Netherlands

The Mumbai Income Tax Appellate Tribunal recently issued a decision on whether India's domestic definition of royalties as amended applies under the 1988 income and capital tax treaty with the Netherlands. The case involved Netherlands-based Baan Global BV (Baan), which develops and sells software.

In the 2008-09 tax year, Baan had a distribution agreement with its Indian subsidiary for the sale of software to Indian customers. Under the agreement, the subsidiary was only responsible for taking orders and accepting payment for the software from the customers, and then remitting payment to Baan less an arms-length commission. In its tax return for the year, Baan held the payments were considered business profits, and since it had no permanent establishment in India, no tax was due.

In auditing Baan's return, the assessing officer determined that the payments were not business profits, but rather royalties subject to withholding, and issued a tax assessment. The determination was made based on the definition of royalties under the tax treaty read in conjunction with amendments to the explanation of the definition of royalties in the Income Tax Act, which was introduced in 2012 and applies with retroactive effect from June 1976. The assessment was appealed, and made its way to the Income Tax Appellate Tribunal.

In its decision, the Tribunal sided with Baan. The Tribunal determined that for the payments to be considered royalties, the key factor is whether the payments meet the definition of royalties under the tax treaty, specifically the use of or right to use the copyright. As copyright is not clearly defined in the tax treaty, the Tribunal referred to the definition of copyright under the Copyright Act, 1957, which includes a number of rights that must be granted in relation to a copyright for payments to fall within the right to use a copyright in software. Based on this, the payments could not be considered royalties because the end user only had the right to use the software as a product, and had no right to use the process (source code) in the software, or to sublicense or modify the software. Regarding the application of the amended domestic definition of royalties, the Tribunal held that such changes under domestic law cannot be applied in relation to the treaty unless the treaty is amended to reflect such change. As a result, the Tribunal overturned the assessment.

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