Worldwide Tax News
On 26 September 2016, the Italian tax authority issued Circular No. 39/E, which clarifies the changes in the restrictions on the deductibility of payments made to residents of blacklisted jurisdictions (tax havens). The Circular summarizes the restrictions and requirements, which generally apply as follows:
- Through 2014, payments to listed jurisdictions are generally not deductible unless the taxpayer provides proof of the business substance of the transactions and that they were actually executed;
- For the 2015 tax year, such payments are deductible without the burden of proof up to a safe harbor limit equal to the fair market value of the transaction (introduced by Legislative Decree No. 147/2015); and
- From the 2016 tax year, the restriction no longer applies (repealed by Law No. 208/2015) and such payments are subject to standard deductibility rules.
Click the following link for Circular No. 39/E (Italian language).
The Australian Department of Industry, Innovation, and Science has released for public consultation a review paper on the R&D Tax Incentive. The review was undertaken to identify opportunities to improve the effectiveness and integrity of the R&D Tax Incentive, including the encouragement of additional R&D spending in Australia. The current incentive provides for a 45% refundable tax offset for eligible entities with an annual turnover below AUD 20 million and a non-refundable 40% tax offset for all other eligible entities (proposed to be reduced to 43.5% and 38.5% respectively).
To improve the R&D Tax Incentive, six main recommendations are set out in the review paper:
- Recommendation 1. Retain the current definition of eligible activities and expenses under the law, but develop new guidance, including plain English summaries, case studies and public rulings, to give greater clarity to the scope of eligible activities and expenses;
- Recommendation 2. Introduce a collaboration premium of up to 20% for the non-refundable tax offset to provide additional support for the collaborative element of R&D expenditures undertaken with publicly-funded research organizations. The premium would also apply to the cost of employing new STEM PhD or equivalent graduates in their first three years of employment. If an R&D intensity threshold is introduced (see below), companies falling below the threshold should still be able to access both elements of the collaboration premium;
- Recommendation 3. Introduce a cap in the order of AUD 2 million on the annual cash refund payable under the R&D Tax Incentive, with remaining offsets to be treated as a non-refundable tax offset carried forward for use against future taxable income;
- Recommendation 4. Introduce an intensity threshold in the order of 1% to 2% for recipients of the non-refundable component of the R&D Tax Incentive, such that only R&D expenditure in excess of the threshold attracts a benefit;
- Recommendation 5. If an R&D intensity threshold is introduced, increase the expenditure threshold to AUD 200 million so that large R&D-intensive companies retain an incentive to increase R&D in Australia; and
- Recommendation 6. That the Government investigate options for improving the administration of the R&D Tax Incentive (e.g. adopting a single application process; developing a single program database; reviewing the two-agency delivery model; and streamlining compliance review and findings processes), and to improve transparency, the Government should publish the names of companies claiming the R&D Tax Incentive and the amounts of R&D expenditure claimed.
Click the following link for the Review of the R&D Tax Incentive page, which includes links to the full review paper and related information. Comments must be submitted by 28 October 2016.
French Finance Minister Michel Sapin presented the 2017 budget plan to the National Assembly on 28 September 2016. The main tax-related measure of the budget plan is the introduction of a reduced corporate tax rate of 28%, which will apply for SMEs beginning in 2017 on taxable income between EUR 38,120 and EUR 75,000 (15% rate applies for income up to EUR 38,120). As previously reported, the plan includes a transition through 2020 to make the 28% rate the standard for all companies.
Other tax-related measures of the budget plan include tax cuts for lower income individuals, increasing the Competitiveness and Employment Tax Credit (CICE) to 7%, extending the JEI (Jeune Entreprise Innovante) scheme for innovative startups, and simplifying the tax system by removing certain small niche taxes. Click the following link for an overview of the main tax measures (French language).
UK HMRC has published a consultation on the introduction of a new penalty for participating in VAT fraud. The consultation presents two potential penalty options for those that knew or should have known their transactions were connected with VAT fraud based on the knowledge principle:
- Option A - a fixed rate 30% penalty for all cases where the knowledge principle is applied; and
- Option B - an ‘early payment’ system with a lower 25% rate for cases where the knowledge principle is applied, but with an increase to a 50% penalty if the case is appealed and the outcome is a finding of actual knowledge by the courts.
Alternate proposals for other options are welcome as well.
Click the following link for the consultation document: Penalty for participating in VAT fraud. Comments must be submitted by 11 November 2016.
On 22 September 2016, the German Bundestag (lower house of parliament) approved legislation for the implementation of the Multilateral Competent Authority Agreement (MCAA) on the exchange of Country-by-Country (CbC) reports. Germany signed the CbC MCAA on 27 January 2016.
Click the following link for the list of the CbC MCAA signatories to date.
Note- The approval of Germany's CbC reporting requirements is expected in the near future, with the requirements generally applying for fiscal years beginning on or after 1 January 2016 (previous coverage).
According to recent reports, Ghana has expressed interest in signing an income tax treaty with Russia during a session of the Ghana-Russia Joint Permanent Commission for Cooperation held 23 September 2016. 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.
According to an update on the Hong Kong Department of Justice site, the income tax treaty with South Korea entered into force on 27 September 2016. The treaty, signed 8 July 2014, is the first of its kind between the two jurisdictions.
The treaty covers Hong Kong profits tax, salaries tax, and property tax. It covers Korean income tax, corporation tax, the special tax for rural development, and local income tax.
If a company is considered resident in both Contracting Parties, it will be deemed to be a resident only of the Party in which its place of effective management is situated. In cases of doubt, 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 claim any benefits provided by the treaty, except for those provided by Articles 21 (Methods for Elimination of Double Taxation), 22 (Non-Discrimination), and 23 (Mutual Agreement Procedures).
- Dividends - 10% if the beneficial owner is a company directly holding at least 25% of the paying company's capital, otherwise 15%
- Interest - 10%
- Royalties - 10%
The following capital gains derived by a resident of one Contracting Party may be taxed by the other Party:
- Gains from the alienation of immovable property situated in the other Party;
- Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other Party; and
- Gains from the alienation of shares of a company deriving more than 50% of its asset value directly or indirectly from immovable property situated in the other Party
Both jurisdictions apply the credit method for the elimination of double taxation. In respect of dividends received by a Korean resident company that owns at least 10% of the voting shares issued by or the capital stock of the paying company, Korea will also provide a credit for the tax payable on the profits out of which the dividends are paid.
Article 26 (Limitation on Benefits) includes the provision that in respect of Articles 10 (Dividends), 11 (Interest), 12 (Royalties), 13 (Capital Gains), and 20 (Other Income), a resident of a Contracting Party will not be entitled to benefits of treaty if the main purpose or one of the main purposes of any person concerned with the creation or assignment of any share, debt-claim, property or right in respect of which the income is paid is to take advantage of these Articles by means of that creation or assignment.
In Hong Kong, the treaty applies from 1 April 2017. In South Korea, the treaty applies from 1 April 2017 for withholding taxes and from 1 January 2017 for other taxes.
According to a 27 September 2016 release from the Luxembourg Ministry of Foreign and European Affairs, officials from Luxembourg and New Zealand have agreed to continue negotiations for a tax treaty. 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.
Zimbabwe has ratified the pending tax treaty with China via Statutory Instrument 114 of 2016, which was published 23 September. The treaty, signed 1 December 2015, is the first of its kind between the two countries. It will enter into force once the ratification instruments are exchanged and will apply from 1 January of the year following its entry into force.
Click the following link for details of the treaty.