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Approved Changes (3)

India

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Indian Court Holds Payments for Software Not Royalties if for Resale

In a 25 January 2016 decision, the Delhi High Court ruled on whether payments for software intended for resale could be considered royalties. The case involved M Tech India (M Tech), which was involved in purchasing software from offshore vendors, making small customizations, and selling to Indian healthcare and hospitality companies.

In the year concerned, M Tech had value added seller agreements with several offshore vendors. Each vendor was paid for software purchased, and M Tech treated the amounts as deductible costs of goods sold. When assessing M Tech, the tax authorities determined that the payments for the software should instead be treated as royalty payments, and because M Tech did not withhold tax on the deemed royalties, the payments could not be deducted. M Tech appealed, and the case made its way to the High Court.

The Delhi High Court sided with M Tech. In coming to its decision, the Court evaluated the substance of the transactions. Since the intellectual property rights for the software remained with the vendors and the software was not purchased for M Tech's own use, the Court determined that the transactions were more similar to a purchase and resale of goods. Based on this and certain past cases, the Court held that payments for software in this case could not be considered royalty payments.

Ireland

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Ireland Publishes eBrief on Changes in the VAT Manual for Electronic Services

On 27 January 2015, Irish Revenue published eBrief No. 12/16 concerning an update in the VAT Manual reflecting that the Electronic Services Scheme (ESS) has been replaced with the Mini One Stop Shop (MOSS), which is used to account for VAT on telecommunications, broadcasting and electronic services B2C supplies.

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VAT on eServices Scheme (VOES) / Electronic Services Scheme (ESS)

The VAT Manual Part 05-62 (PDF, 57KB) has been updated to reflect that the VAT on eServices Scheme (VOES), or Electronic Services Scheme (ESS) as it is also known, is no longer in operation. A new scheme, the Mini One Stop Shop (MOSS), came into operation on 1 January 2015. Details on this scheme are available on the VAT MOSS – TBE Services 2015 page.

Traders who were registered under the VAT on eServices Scheme (VOES) in Ireland were automatically migrated to the new Non-Union MOSS Scheme. Traders or agents who have any questions or issues relating to pre-January 2015 VOES / ESS supplies should contact the Indirect Taxes Policy & Legislation Division for guidance.

Sri Lanka

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Sri Lanka Issues Instruction on Delay in the Application of the New VAT Rates

As previously reported, Sri Lanka had replaced the standard 11% value added tax (VAT) rate with a 12.5% rate and 8% rate. The change applied from 1 January 2016, but the Ministry of Finance decided to defer its implementation in a notice issued 14 January. As a result, suppliers that have already raised invoices to registered persons for either new rate from 1 January to 13 January 2016 must adjust the invoices and issue a tax credit note or tax debit note as the case may be. For invoices raised to non-registered persons within those dates, the value of the supply must be adjusted so that the amount of VAT charged is equal to 11%.

Click the following link for the notice from the Ministry of Finance and the instructions from the Inland Revenue Department.

Proposed Changes (1)

European Union

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EU Commission Presents Anti Avoidance Measures Package

On 28 January 2016, the European Commission presented a package of measures targeted at corporate tax avoidance in the EU. The package includes:

  • A draft anti tax avoidance Directive based on the outcomes of the OECD BEPS Project;
  • A draft revision of the administrative cooperation Directive that would required the exchange of Country-by-Country (CbC) reports;
  • Commission recommendations on the implementation of measures against tax treaty abuse; and
  • A Commission communication on an external strategy for effective taxation with measures against problematic tax jurisdictions outside the EU.

The main measures are the anti tax avoidance Directive and the revision of the administrative cooperation Directive for CbC report exchange, which are summarized as follows.

Anti Tax Avoidance Directive

Interest Limitation Rule

The interest limitation rules include a deduction limit equal to the higher of:

  • 30% of EBITDA (fixed ratio rule); or
  • EUR 1 million (de minimis rule).

The limit applies to interest expense exceeding interest income or other taxable income from financial assets.

Also included is a carve-out rule whereby EU Member States may allow a full deduction if the taxpayer's ratio of its equity over its total assets is equal to or higher than the equivalent ratio of the group.

Interest expense exceeding the limits may be carried forward to future years, and where the EBITDA limit is not fully absorbed, the difference may be carried forward as well.

The limits do not apply to financial undertakings.

Exit Tax

The exit tax rules include that tax will apply on the amount equal to the market value of transferred assets less their value for tax purposes in the following cases:

  • Assets are transferred from a head office to its permanent establishment in another EU Member State or in a third country;
  • Assets are transferred from a permanent establishment in a Member State to its head office or another permanent establishment in another Member State or in a third country;
  • The taxpayer's residence is transferred to another Member State or to a third country, except for those assets that remain effectively connected with a permanent establishment in the first Member State; and
  • A permanent establishment is transferred out of a Member State.

The rules include the option to defer the full tax payment by paying in installments over five years in certain cases. Interest may apply and a guarantee may be required.

Switch-over Clause

The switch-over clause includes that income received from:

  • a profit distribution from an entity in a third country;
  • proceeds from the disposal of shares in an entity in a third country; or
  • income from a permanent establishment (PE) in a third country;

may not be exempted from tax in an EU Member State if the tax rate on profits in the third country is lower than 40% of the tax rate that would have applied on the income in the Member State of the taxpayer. In such cases, a deduction of the foreign tax paid in the third country will be allowed.

GAAR

The general anti-abuse rule (GAAR) includes that an EU Member State may ignore an arrangement or a series of arrangements that have been put into place for the essential purpose of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, and not for valid commercial reasons that reflect economic reality.

CFC Rules

The controlled foreign company rules include that the tax base of a taxpayer in an EU Member State will include the non-distributed income of a foreign entity if:

  • The taxpayer itself or with related parties directly or indirectly holds 50% of the voting rights or capital of the foreign entity or is entitled to receive more than 50% of the profits of the foreign entity;
  • The tax rate on profits in the country of the foreign entity is lower than 40% of the tax rate that would have applied on the income in the Member State of the taxpayer;
  • More than 50% of the income accruing to the entity is derived from passive income types (interest, royalties, dividends and others as set out in the draft Directive); and
  • The foreign entity is not a company whose principal class of shares are regularly traded on one or more recognized stock exchanges.

The rules would generally not apply if the foreign entity is resident in a Member State or European Economic Area (EEA) country. However, the rules may apply if the establishment of the foreign entity is wholly artificial or the entity engages in non-genuine arrangements that have been put into place for the essential purpose of obtaining a tax advantage.

Hybrid Mismatch Rules

The hybrid mismatch rules are simpler than the rules initially proposed, and only cover hybrid mismatches involving EU Member States. Under the rules, if two Member States have differing interpretations of a hybrid entity leading to a double deduction of a payment, expense or loss, or a deduction of a payment without inclusion, then the interpretation of the Member State in which the payment has its source, the expense is incurred or the loss suffered will apply in both States.

Similarly, if two Member States have differing interpretations of a hybrid instrument leading to a deduction in the source State and non-inclusion in the other State, the interpretation of the source State will apply.

Click the following link for the draft anti tax avoidance Directive

CbC Report Exchange

The draft Directive to amend the administrative cooperation Directive (Directive 2011/16/EU) would require the exchange of Country-by-Country (CbC) reports between EU Member States based on guidelines developed as part of Action 13 of the OECD BEPS Project.

The draft Directive includes that each Member State must implement the requirement that a CbC report based on Action 13 guidelines be filed by an ultimate parent entity of an MNE group, or reporting entity, within 12 months following the fiscal year concerned if resident in that State. The explanatory memorandum in the draft also includes the EUR 750 million consolidated group revenue threshold for filing as recommended by the OECD.

The exchange does not require the existence of a tax treaty, tax information exchange agreement or any other instrument between the exchanging Member States. In addition, it does not require the conclusion of a competent authority agreement of any kind. The exchange will be done through the EU CCN network (Common Communication Network), which will be upgraded by the Commission for these purposes.

Although previously called for, the draft Directive does not include the public disclosure of CbC reports in any form.

If approved, all EU Member States will be required to transpose the Directive into domestic legislation by the end of 2016 and apply it from 1 January 2017. The first CbC reports to be exchanged, are those covering fiscal years beginning on or after 1 January 2016.

Click the following link for the draft Directive amending Directive 2011/16/EU.

Next Steps

Both draft Directives will be submitted to the European Parliament for consultation and to the Council for adoption.

Click the following link for the press release on the package, which includes links for further information.

Treaty Changes (5)

Armenia-India

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Protocol to the Tax Treaty between Armenia and India Signed

On 27 January 2016, officials from Armenia and India signed a protocol to the 2003 income tax treaty between the two countries. The Protocol is the first to amend the treaty. It amends Article 26 (Exchange of Information) to bring it in line with the OECD standard for information exchange, and will enter into force after the ratification instruments are exchanged.

Belarus-Ecuador

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Tax Treaty between Belarus and Ecuador Signed

On 27 January 2016, officials from Belarus and Ecuador 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.

Iran-Vietnam

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Tax Treaty between Iran and Vietnam has Entered into Force

According to a recent update from the Vietnamese government, the income tax treaty with Iran entered into force on 26 June 2015. The treaty, signed 14 October 2014, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Iranian income taxes on real estate, agriculture, salary, occupation (business), and legal persons. It covers Vietnamese personal income tax and business income tax.

Service PE

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

Withholding Tax Rates

  • Dividends - 10%
  • Interest - 10%
  • Royalties - 10%
  • Fees for Technical Services (technical, managerial or consultancy) - 8%

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 or other corporate rights in company, the assets of which directly or indirectly consist mainly of immovable property situated in the other State; and
  • Gains from the alienation of shares, other than those mentioned above, in a company resident 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 in Iran from 21 March 2016 (first day of Farvardin - Iranian calendar), and in Vietnam from 1 January 2016.

Malaysia-OECD

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Malaysia Signs OECD Agreement on Automatic Exchange of Financial Information

The OECD has announced that on 27 January 2016, Malaysia signed the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information. Malaysia is the 79th country to sign the agreement, and intends to begin the first information exchange in September 2018.

Click the following links for the multilateral agreement, the list of the signatories to date, and the list of countries that have committed to the automatic exchange of information.

Turkey-Turkmenistan

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Turkey and Turkmenistan Conclude Tax Treaty Negotiations

Officials from Turkey and Turkmenistan concluded negotiations for a new income tax treaty with the initialing of a new treaty on 22 January 2016. The treaty must be signed and ratified before entering into force, and once in force and effective will replace the 1995 income tax treaty between the two countries, which currently applies.

Additional details will be published once available.

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