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Approved Changes (3)
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OECD Publishes Comments Received on Public Discussion Draft on the Group Ratio Rule under BEPS Action 4

On 25 August 2016, the OECD published the comments received on the public discussion draft on follow up work for BEPS Action 4 (Limiting Base Erosion Involving Interest Deductions and Other Financial Payments) concerning the design and operation of the group ratio rule, with a focus on:

  • Approaches to calculate a group’s net third party interest expense;
  • A definition of group-EBITDA; and
  • Approaches to deal with the impact of losses on the operation of the group ratio rule.

The purpose of the group ratio rule is to allow entities in groups that are highly leveraged for non-tax reasons to deduct interest expense that would otherwise be limited by the fixed ratio rule.

Click the following link for the discussion draft and the comments received.

Russia

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Russia Clarifies Application of Treaty Benefits for Dividends Paid through a Foreign Intermediary

Russia's Ministry of Finance recently published Guidance Letter No. 03-08-05/46320, which clarifies the application of treaty benefits for dividends paid through a foreign intermediary. According to the letter, in order for the beneficial provisions of a treaty to apply, a non-resident must provide the Russian tax agent (dividend payer) a certified confirmation of permanent residence in the relevant treaty partner jurisdiction. If the non-resident direct participant (intermediary) in the Russian dividend payer recognizes that it is not the beneficial owner and does not seek the beneficial provisions, the beneficial provisions may apply for the next level direct participant in the intermediary, provided the abovementioned confirmation of residence of the next level participant has been provided to the tax agent.

United States-European Union

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U.S. Treasury White Paper on European Commission’s State Aid Investigations

The U.S. Treasury has released a white paper on the European Commission’s State aid investigations, which according to Treasury threaten to undermine progress made in the area base erosion and profit shifting and could create an unfortunate international tax policy precedent. The main issues and areas addressed in the white paper include:

  • The Commission’s Approach Is New and Departs from Prior EU Case Law and Commission Decisions:
    • The commission’s newly adopted approach collapses the requirements of advantage and selectivity;
    • Under prior decisions an advantage available only to multinationals is not necessarily selective;
  • The Commission Should Not Seek Retroactive Recoveries Under Its New Approach:
    • Retroactive recoveries are inconsistent with EU legal principles;
    • The commission should decline to impose retroactive recoveries;
  • The Commission’s New Approach Is Inconsistent with International Norms and Undermines the International Tax System:
    • Background on the OECD’s role in setting transfer pricing standards;
    • The commission’s actions undermine the international consensus on transfer pricing;
    • The commission’s actions call into question the ability of member states to honor bilateral tax treaties; and
    • The investigations undermine progress made under the BEPS project.

Click the following link for the Treasury White Paper.

Proposed Changes (2)

Barbados

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Barbados 2016 Budget Proposals

Barbados Minister of Finance and Economic Affairs Christopher Sinckler delivered the 2016 Financial Statement & Budgetary Proposals on 16 August 2016. The main tax and business-related proposals include:

  • The introduction of a BBD 50,000 reimbursable grant to incentivize local companies to obtain international standards certification for product and service quality;
  • The creation of a BBD 50 million fund to provide grants and soft loans to support existing small and medium sized businesses and business start-ups;
  • The introduction of a National Social Responsibility Levy at a rate of 2% on all imports from 1 September 2016;
  • An extension and increase of the Bank Asset Tax from 0.2% to 0.35% effective from 1 April 2016; and
  • The introduction of a tax amnesty regime for value added tax, income tax and land tax for all taxpayers from 15 September 2016, which will include the waiving of all penalties, interest and other charges incurred up to 14 September 2016 as long as the outstanding principal is paid by 15 February 2017.

Click the following link for the Financial Statement & Budgetary Proposals 2016.

United Kingdom

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UK Consultation on Penalties for Failure to Correct Offshore Tax Liabilities

On 24 August 2016, UK HMRC published a consultation document on a new offshore penalties framework for taxpayers that fail to correct their outstanding tax liabilities relating to offshore interests. The consultation is in relation to strengthened efforts to counter offshore evasion, including the OECD Common Reporting Standard (CRS) for the exchange of financial account information, which the UK has committed to adopt.

According to the consultation document, for taxpayers that correct their outstanding tax liabilities by 30 September 2018 (the date by which HMRC expects to receive CRS data from all committed jurisdictions), the penalties under current statutes for the relevant tax years will apply. After September 2018, two penalty framework models are proposed:

  • Model 1 - a simplified penalties framework that includes:
    • A minimum tax geared penalty of 100% of the tax that has not been corrected and a maximum penalty of 200%;
    • An asset based penalty of up to 10%; and
    • An enhanced penalty of 50% of the amount of the standard penalty if HMRC can show that assets or funds had been moved to attempt to avoid either reporting under the CRS, or under the requirement to correct;
  • Model 2 - a more prescriptive framework where the level of penalty applied would depend on certain circumstances:
    • Penalties charged at 3 defined levels (Lower, Standard and Higher), with rates up to 50% if the correction is unprompted and up to 200% if prompted;
    • Two categories for prompted penalties, including lower penalty rates in relation to jurisdictions signed up to automatic exchange of information (Category 1) and higher penalties for other jurisdictions (Category 2);
    • An asset based penalty for taxpayers that fall into the higher penalty category; and
    • An enhanced penalty of 50% of the amount of the standard penalty if HMRC can show that assets or funds had been moved to attempt to avoid either reporting under the CRS, or under the requirement to correct

Click the following link for the consultation document - Tackling offshore tax evasion: A Requirement to Correct. The deadline to submit comments is 19 October 2016.

Treaty Changes (4)

France-Portugal

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Protocol to Tax Treaty between France and Portugal Signed

On 26 August 2016, officials from France and Portugal signed a protocol to the 1971 income tax treaty between the two countries. According to a release from Portugal's Ministry of Finance, the protocol updates Article 27 (Exchange of Information) to bring it in line with the OECD standard for information exchange and adds provisions for assistance in the recovery of taxes.

The protocol is the first to amend the treaty and will enter into force after the ratification instruments are exchanged.

Iran-Afghanistan

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Tax Treaty between Iran and Afghanistan under Negotiation

During a meeting held 10 August 2016, Iran expressed its intent to conclude negotiations for an income tax treaty with Afghanistan. Any resulting treaty would be the first of its kind between the two countries, and must be finalized, signed and ratified before entering into force.

Ireland-United States

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Ireland Consults on Updating Tax Treaty with the U.S.

On 25 August 2016, Ireland's Department of Finance announced a consultation on updating the 1997 income and capital tax treaty with the U.S. as amended by the 1999 protocol. According to the consultation announcement, discussions are underway to update the treaty in regard to the treaty-related outcomes of the OECD BEPS Project and the 2016 update of the U.S. Model Tax Treaty (previous coverage).

Details of the revisions to the treaty will be published once available.

Japan-Panama

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TIEA between Japan and Panama Signed

On 25 August 2016, officials from Japan and Panama signed a tax information exchange agreement. The agreement is the first of its kind between the two countries and is in line with the OECD standard for information exchange. It will enter into force 30 days after the ratification instruments are exchanged, and will apply for criminal tax matters from the date of its entry into force and for other matters from 1 January 2013.

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