Worldwide Tax News
Colombia's National Tax Authority (DIAN) recently issued a ruling that clarifies the deduction restrictions for overseas payments. Under domestic law, the deduction of overseas payments is generally limited to 15% of net income if the payments have not been subject to withholding tax and certain other cases. According to the ruling, however, the deduction restriction does not apply if a payment to a foreign recipient is not subject to withholding tax due to the provisions of an applicable tax treaty.
On 23 June 2016, Irish Revenue issued guidelines on the operation of the new bilateral advance pricing agreement (APA) program, which is effective from 1 July 2016. In the past, the Irish Revenue Commissioners have generally been willing to enter into APAs on an ad-hoc basis where treaty partners are involved, but had no formal program. The main aspects of the new program are as follows:
- All taxpayers are allowed to apply for an APA in respect of transactions between separate business enterprises and transactions between parts of the same business enterprises operating in different countries (e.g., between a head office and permanent establishment (PE) or between two PEs);
- An APA will be granted in respect of a specific fixed period of time, typically between 3 and 5 years (excluding any roll-back years), although other fixed periods may be considered;
- The roll-back of APAs will be provided for in appropriate cases, subject to the applicable time limits of both countries which are party to the APA and provided that that facts and circumstances in the roll-back period are the same;
- The APA process is made up of five distinct stages:
- Pre-filing meeting with the Transfer Pricing Branch (handles APAs) to discuss whether an APA would be suitable;
- Formal APA application, which is to be filed before the beginning of the period to be covered by the APA, although applications may be accepted in certain circumstances after this time;
- Evaluation of application and negotiation, which involves phase 1, an evaluation of the transfer pricing methodology, comparables, assumptions, etc., and possible requests for additional information from the applicant; followed by phase 2, negotiations with the competent authority of the foreign tax administration;
- Formal agreement, which involves Revenue notifying the applicant within 30 days of reaching agreement with the foreign tax administration, after which the applicant has 30 days to reply as to whether or not the terms are accepted or request additional consultation to modify the agreement (APAs to be concluded within 24 months of application); and
- Annual reporting, which will typically include a statement of compliance, a statement that critical assumptions remain valid, financial data for the period to compare actual results of transactions covered by the APA, etc.
Click the following link for the Bilateral Advance Pricing Agreement Guidelines.
On 23 June 2016, the Philippines Bureau of Internal Revenue (BIR) Issued Revenue Memorandum Order (RMO) 27-2016, which sets out new procedures for claiming tax treaty benefits on dividend, interest and royalty income from sources within the Philippines. It replaces RMO 72-2010.
Under RMO 27-2016, the basic procedures and requirements for preferential treaty rates are as follows:
- Preferential withholding tax rates under a treaty are granted outright using the applicable rates shown in Annex A to the RMO;
- The preferential withholding rates applied by the withholding agent must be reported in the appropriate BIR Forms No. 1601-F and 1604-CF, which will be checked as part of regular audit investigations by the Revenue District Office where the agent is registered; and
- The withholding agent must maintain specified supporting documentation substantiating a claim for preferential rates that must be made available in the event of an audit investigation (required documentation depends on the nature of the income and additional documentation may be requested).
RMO 27-2016 also includes the requirements for the reduced 15% rate on intercorporate dividends paid to a corporation resident in a jurisdiction with no effective tax treaty with the Philippines. For the reduced rate to apply:
- Such jurisdiction must have a worldwide system of taxation;
- The jurisdiction must allow a credit for the dividend taxes deemed to have been paid in the Philippines equivalent to 15%; and
- A separate application and supporting documentation must be filed with the International Tax Affairs Division of the BIR.
Failing to comply with any of the provisions of RMO 27-2016 will result in penalties provided under Section 250 of the Revenue code, which includes penalties of PHP 1,000 per infraction for failing to keep/submit required documentation and penalties equal to any amount not properly withheld or remitted. In addition, RMO 27-2016 includes that failing to submit accurate and complete information in Forms No. 1601-F and 1604-CF will result in a denial of the preferential rates and the disallowance of the pertinent expenses of the withholding agent.
On 16 June 2016, Poland's parliament passed legislation that further delays the entry into force of the Law on Tax Administration to 1 January 2017. The law, which was enacted 31 July 2015, establishes:
- The National Tax Information Office, which is empowered to issue tax rulings;
- The Central Register of Tax Data; and
- Tax information centers where taxpayers can submit tax declarations, enquire on the application of tax law, apply for certificates, etc.
It is the second delay for the entry into force of the Law, which was originally to apply from 1 January 2016 and was subsequently delayed to 1 July 2016.
High Level Working Party Recommends Suspending Technical Work on EU Interest and Royalties Directive
The EU Council's High Level Working Party on Tax Questions (HLWP) has reportedly recommended suspending technical work on amendments to the EU Interest and Royalties directive (2003/49/EC) in a June 23 report to the European Council. Under the Directive, group interest and royalty payments between member states are exempt from withholding tax subject to certain conditions.
The HLWP work concerns amendments to the Directive to expand the scope of eligibility while introducing certain subject-to-tax conditions, which include a clause on minimum effective taxation (MET) on its own or in combination with an economic activity test (possibly based on OECD nexus approach). However, although general consensus for an MET clause has been reached among EU Member States, there has been little progress on sorting out the technical and political issues of the MET clause, and whether there should be any exemptions based on economic activity. Given the diverging views, it was concluded that further technical work would not be helpful and should be suspended.
According to a recent announcement from the Russian Federal Tax Service (FTS), foreign suppliers of electronic services and content (e-services) to Russian customers will be subject to value added tax (VAT) effective 1 January 2017. The announcement follows the passage of the legislation for the change (Bill no. 962487-6) in the State Duma (lower house of parliament) on 17 June 2016.
For VAT purposes, e-services include:
- Online software access, including games and databases;
- Online advertising services;
- Online sales platforms;
- Webhosting and domain services;
- Access to e-books and other electronic publications;
- Access to music and video; and
- Various other services provided online.
Foreign suppliers providing such services to Russian customers (B2C) will be required to register for VAT electronically through the FTS website and submit electronic returns by the 25th day of the monthly following each period. For B2B supplies, the reverse charge will apply. When due, the rate used is 15.25%, which assumes the invoice issued by the foreign supplier is inclusive of VAT (standard rate 18%).
Although the FTS has already announced the effective date of the new VAT rules, the legislation must still be passed by the Federation Council (upper house of parliament), signed by the president, and published in the Official Gazette before entering into force. Details of the final rules will be published once available.
According to a briefing paper published by the UK House of Commons, the tax-related implications of the UK exiting the European Union mainly concern indirect taxation. The impact on indirect taxation is due to EU law that has established common rules regarding value added tax (VAT), which limits the UK's ability to set particular rates for various goods and services, as well as the ability to provide exemptions. Regarding other forms of taxation, the paper states that no such direct rules exist, although the overarching provisions of the Treaty for the Functioning of the EU, which provides for the free movement of goods, persons, services and capital across the single market and the prohibition of discrimination, would no longer apply for the UK. In addition, the UK would no longer need to comply with EU State aid rules.
One area the briefing paper overlooks is the benefits of the EU Parent-Subsidiary Directive and the Interest and Royalties Directive, which provide for withholding tax exemptions on dividends distributions and interest and royalty payments respectively. Such benefits would no longer be available to UK groups once the UK leaves the EU, although depending on how the exit is ultimately negotiated, certain benefits may be maintained.
Click the following link for the briefing paper on the UK parliament website.
According to recent reports, officials from Cambodia and Vietnam agreed during a 15 June 2016 meeting to accelerate negotiations for an income tax treaty. The treaty will be the first of its kind between the two countries, and must be finalized, signed and ratified before entering into force. Details of the treaty will be published once available.
According to a 24 June 2016 update from the South African Revenue Service, the new income tax treaty with Lesotho entered into force on 27 May 2016. The treaty, signed 18 September 2014, replaces the 1995 tax treaty between the two countries.
The treaty covers Lesotho taxes imposed under the Income Tax Act, 1993 (as of 18 September 2014), and covers South African normal tax, dividends tax, withholding taxes on interest and royalties, and tax on foreign entertainers and sportspersons.
If a person, other than an individual, is a resident of both Contracting States, the competent authorities will determine the person's residence for the purpose of the treaty through mutual agreement. If no agreement is reached, the person will not be entitled to any relief or exemption from tax provided by the treaty.
The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services within a Contracting State through employees or other engaged personnel for the same or connected project for a period or periods aggregating more than 90 days within any 12-month period.
- Dividends - 10% if the beneficial owner is a company directly holding at least 10% of the paying company's capital; otherwise 15%
- Interest - 10%
- Royalties - 10%
- Technical fees for services of a technical, managerial or consultancy nature - 7.5%
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 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.
Both countries apply the credit method for the elimination of double taxation. Provisions are also provided for a sparing credit for taxes that would have been paid, but an exemption or reduction was granted in accordance with laws that establish schemes for the promotion of economic development.
The protocol to the treaty, signed the same date, includes the provision that if Lesotho and any other country enter into a tax treaty that provides for a lower rate of withholding tax in regard to Articles 11 (Interest), 12 (Royalties) or 13 (Technical Fees), then such lower rate will apply to the Lesotho-South Africa treaty.
The treaty applies from 26 June 2016. The 1995 treaty between the two countries ceases to have effect from that date.
The South Korean Ministry of Foreign Affairs has announced that officials from Luxembourg and South Korea concluded negotiations with the initialing of a social security agreement on 16 June 2016. The agreement is the first of its kind between the two countries, and will enter into force after it is signed and ratified.