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Worldwide Tax News

Approved Changes (2)

Ecuador

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Ecuador Decree on Reduction for Advance Tax Payment

On 20 November 2017, Ecuador President Lenín Moreno signed Executive Decree No. 210, concerning a reduction of income tax advance payments corresponding to the 2017 fiscal period. The Decree provides a 100% reduction for individuals and companies with annual sales or gross income below USD 500,000, a 60% reduction for those with annual sales or gross income up to USD 1 million, and a 40% reduction for those with annual sales or gross income over USD 1 million.

France

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French Constitutional Court Upholds Temporary Surcharge on Large Companies

On 29 November 2017, the French Constitutional Court (Conseil Constitutionnel) issued its decision that the recently approved temporary surcharge on large companies is in conformity with the Constitution. As such, the surcharge will apply as passed by parliament on 14 November (previous coverage). The surcharge is levied at rate of 15% for companies with gross revenue exceeding EUR 1 billion, with an additional 15% surcharge for companies with gross revenue exceeding EUR 3 billion.

Proposed Changes (2)

Australia

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Australia Consults on Hybrid Mismatch Rules

On 24 November 2017, the Australian Treasury launched a public consultation on the draft Treasury Laws Amendment (OECD Hybrid Mismatch Rules) Bill 2017, which provides for the implementation of the hybrid mismatch rules developed as part of BEPS Action 2. The draft legislation targets instances where tax is either deferred or not paid at all from the use of hybrid mismatch arrangements. The rules will apply broadly to related parties, members of a control group, and structured arrangements, and is designed to neutralize any hybrid double non-taxation benefits, including deduction/non-inclusion mismatches and deduction/deduction mismatches.

In particular, a mismatch will be covered by the hybrid mismatch rules if it is:

  • A hybrid financial instrument mismatch;
  • A hybrid payer mismatch;
  • A reverse hybrid mismatch;
  • A deducting hybrid mismatch; or
  • An imported hybrid mismatch.

If a mismatch arises, it is neutralized by:

  • Disallowing a deduction; or
  • Including an amount in assessable income.

In addition to the general hybrid mismatch rules, the draft legislation also includes measures to address other effects of foreign income tax deductions to:

  • Deny imputation benefits on franked distributions made by an Australian corporate tax entity if the entity was entitled to a foreign income tax deduction in respect of all or part of the distribution; and
  • Prevent certain foreign equity distributions received, directly or indirectly, by an Australian corporate tax entity from being non-assessable non-exempt income if the foreign company that made the distribution was entitled to a foreign income tax deduction in respect of the distribution.

As drafted, the rules will apply to payments made on or after the day that is six months after the day the Bill receives Royal Assent.

Click the following link for the Treasury consultation page, which includes the draft legislation and explanatory memorandum. The closing date for submissions is 22 December 2017.

India

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India Establishes Task Force to Review Income Tax Act and Draft New Direct Tax Law

India has established a task force to review the existing Income-tax Act, 1961 and to draft a new direct tax law. According to the office order issued by the Ministry of Finance establishing the task force, the task force is to draft appropriate direct tax legislation keeping in view:

  • The direct tax system prevalent in various countries;
  • The international best practices;
  • The economic needs of India; and
  • Any other related matters.

The Task Force report is to be submitted to the Government within six months.

Treaty Changes (6)

Chile-Czech Rep

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Chile-Czech Tax Treaty MFN Clause for Interest Triggered

The competent authorities of Chile and the Czech Republic have reportedly agreed that the MFN clause regarding interest in the 2015 tax treaty between the two countries has been triggered by the 2016 Chile-Japan tax treaty. The interest withholding tax rates are summarized as follows:

  • The withholding tax rate on interest is 4% if the beneficial owner is either:
    • A bank;
    • An insurance company;
    • An enterprise substantially deriving its gross income from the active and regular conduct of a lending or finance business involving transactions with unrelated persons, where the enterprise is unrelated to the payer of the interest;
    • An enterprise receiving interest payments with respect to the sale on credit of machinery or equipment; or
    • Any enterprise that in the three taxable years preceding the taxable year in which the interest is paid, derives more than 50% of its liabilities from the issuance of bonds in the financial markets or from taking deposits at interest, and more than 50% of the assets of the enterprise consist of debt-claims against unrelated persons;
  • The rate is 5% for interest paid to a bank or an insurance company if paid as part of an arrangement involving back-to-back loans or an arrangement with similar effect;
  • The rate is 10% for interest paid to an enterprise, other than a bank or insurance company, that would otherwise be eligible for the 4% rate if paid as part of an arrangement involving back-to-back loans or an arrangement with similar effect;
  • Otherwise, 15% in the first two years the treaty is effective, and then 10%.

The interest withholding tax rates are effective from 1 January 2017 (date the Chile-Japan treaty is effective).

Ethiopia-Korea, Rep of

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Tax Treaty between Ethiopia and South Korea has Entered into Force

The income tax treaty between Ethiopia and South Korea entered into force on 31 October 2017. The treaty, signed 26 May 2016, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Ethiopian tax on income and profit imposed by the Income Tax proclamation, and the tax on income from mining, petroleum, and agricultural activities. It covers Korean income tax, corporation tax, special tax for rural development, and local income tax.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company directly holding at least 25% of the paying company's capital; otherwise 8%
  • Interest - 7.5%
  • Royalties - 5%

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; 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.

Double Taxation Relief

Both countries 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 or capital stock of the paying company, South Korea will also provide a credit for the Ethiopian tax payable on the profits out of which the dividends are paid.

A provision is also included for a tax sparing credit for tax that would otherwise be payable but has been reduced or exempted for a limited period of time in a Contracting State in accordance with the laws and regulations of that State aimed at promoting economic development. This provision applies for 10 years from the date the treaty is effective, and may be extended if agreed to.

Limitation on Benefits

Article 28 (Limitation on Benefits) provides that a resident of a Contracting State will not be entitled to the benefits of the treaty in respect of Articles 10 (Dividends), 11 (Interest), 12 (Royalties), 13 (Capital Gains), and 22 (Other Income), if:

  • The resident is controlled directly or indirectly by one or more persons that are not residents of that Contracting State; and
  • The main purpose or one of the main purposes of any person concerned with the creation or assignment of a share, a debt-claim, or a right in respect of which the income is paid is to take advantage of these Articles by means of that creation or assignment.

Effective Date

The treaty applies in Ethiopia from 8 July 2018 and in South Korea from 1 January 2018. Article 27 (Assistance in the Collection of Taxes), however, will only apply when Ethiopia is capable of fulfilling the obligations of that Article and has informed South Korea.

Hong Kong-Pakistan

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Tax Treaty between Hong Kong and Pakistan has Entered into Force

The income tax treaty between Hong Kong and Pakistan entered into force on 24 November 2017. The treaty, signed 17 February 2017, is the first of its kind between the two jurisdictions.

Taxes Covered

The treaty covers Hong Kong profits tax, salaries tax, and property tax. It covers Pakistan income tax and super tax.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services within a Contracting Party through employees or other engaged personnel for the same or connected project for a period or periods aggregating more than 183 days within any 12-month period.

Withholding Tax Rates

  • Dividends - 10%
  • Interest - 10%
  • Royalties - 10%
  • Fees for technical services (managerial, technical, or consultancy) - 12.5%

Capital Gains

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.

Gains from the alienation of other property by a resident of a Contracting Party may only be taxed by that Party.

Double Taxation Relief

Both jurisdictions apply the credit method for the elimination of double taxation.

Limitation on Benefits

Article 28 (Miscellaneous Rules) provides that a benefit under the treaty shall not be granted in respect of an item of income if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit would be in accordance with the object and purpose of the relevant provisions of the treaty.

Effective Date

The treaty applies in Hong Kong from 1 April 2018 and in Pakistan from 1 July 2018.

Russia-Brazil

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Russia Confirms Entry into Force of Tax Treaty with Brazil

The Russian Ministry of Finance has issued a notice confirming that the income tax treaty with Brazil entered into force on 19 June 2017 and is effective from 1 January 2018. The treaty, signed 22 November 2004, is the first of its kind between the two countries (previous coverage).

Senegal-Spain

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SSA between Senegal and Spain under Negotiation

On 24 November 2017, officials from Senegal and Spain met and agreed to finalize negotiations for a social security agreement. Any resulting agreement will be the first of its kind between the two countries and must be finalized, signed, and ratified before entering into force.

Senegal-Untd A Emirates

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Update - Tax Treaty between Senegal and the UAE

The income tax treaty between Senegal and the United Arab Emirates was signed on 22 October 2015. The treaty is the first of its kind between the two countries.

Taxes Covered

The treaty covers Senegal corporate income tax, individual income tax, employer contribution, and capital gains tax on developed and undeveloped land. It covers UAE income tax and corporate tax.

Income from Hydrocarbons

Article 3 (Income from Hydrocarbons) includes the provision that the treaty will not affect the right of the UAE to apply its laws and regulations regarding the taxation of income, gains, and capital relating to the ownership, management, production, exploration, extraction, exploitation, transportation, and distribution of natural resources and hydrocarbons, including oil and gas and condensates, derivates and primary byproducts thereof.

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 a period or periods aggregating more than 6 months.

Withholding Tax Rates

  • Dividends - 5%
  • Interest - 5%
  • Royalties - 5%

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 shares deriving more than 50% of their value directly or indirectly from immovable property situated in the other State; and
  • Gains from the alienation of shares of a company resident in the other State if the alienator, at any time during the 12-month period preceding such alienation, held directly or indirectly at least 50% of the capital of the company.

Gains from the alienation of movable property forming part of the business property of a permanent establishment are taxable only in the place of effective management.

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.

Limitation on Benefits

The beneficial provisions of Articles 10 (Dividends), 11 (Interest), 12 (Royalties), and 20 (Other Income) will not apply if the main purpose or one of the main purposes of any person concerned with the creation or assignment of the shares, debt-claims, or other rights in respect of which the income is paid was to take advantage of those Articles by means of that creation or assignment. The limitation is included in each of those Articles.

Double Taxation Relief

Both countries apply the credit method for the elimination of double taxation.

Entry into Force and Effect

The treaty will enter into force once the ratification instruments are exchanged and will apply from 1 January of the year in which it was signed (1 January 2015).

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