Worldwide Tax News
Colombia Enacts Major Tax Reform including New VAT and Corporate Tax Rates and BEPS Measures
On 29 December 2016, Colombian President Juan Manuel Santos signed Law No. 1819 of 2016, which includes the country's final tax reform measures following the reconciliation of separate versions approved by the Chamber of Representatives and the Senate last week. Some of the main measures include:
- The CREE tax and CREE surtax are eliminated;
- The overall corporate income tax rate is reduced to 33% for both residents and non-residents with a transitional rate of 34% in 2017;
- A transitional surtax is introduced for taxable income exceeding COP 800 million (~USD 266,000) at a rate of 6% in 2017 and 4% in 2018 (i.e., top effective rate equal to 40% in 2017 and 37% in 2018;
- The standard value added tax (VAT) rate is increased from 16% to 19%;
- Withholding tax rates are amended, including:
- A 5% withholding tax on dividends distributed to non-residents and to permanent establishments in Colombia of non-residents (applies for dividends paid out of profits generated in 2017 and subsequent years);
- A 10% withholding tax on capital gains; and
- A 15% withholding tax on payments for interest, royalties, commissions, consultancy services, technical services and assistance (whether rendered in or out of Colombia), and other payments unless specified at a different rate;
- The carry forward of losses is limited to twelve years;
- Controlled foreign company (CFC) rules are introduced that require taxpayers with a 10% or greater direct or indirect holdings in a CFC to include their pro-rata share of the CFC's passive income in their taxable income for the year (if 80% or more of the CFC's total income is passive, all income will be considered passive);
- Transfer pricing rules are aligned with the latest OECD guidance, including that for transactions involving raw materials and commodities, the most accurate transfer pricing method is the comparable uncontrolled price (CUP) method;
- New transfer pricing documentation requirements are introduced, including:
- Master and Local file requirements for taxpayers with gross equity exceeding UVT 100,000 (~USD 991,000) as of the last day of the respective year or gross revenue exceeding UVT 61,000 (~USD 605,000) in the respective year; and
- Country-by-Country (CbC) reporting requirements from the 2016 fiscal year for Colombian ultimate parents of MNE groups meeting a consolidated group revenue of UVT 81 million (~USD 803 million) in the previous year, as well as local constituent entities designated to file. Reporting requirement will also apply for non-parent local constituent entities when the following conditions are met:
- The local entities jointly have a share of at least 20% of the consolidated revenue of the MNE group;
- The ultimate parent has not submitted a CbC report for the year in its country of residence; and
- The UVT 81 million group revenue threshold is met in the previous year.
For the new documentation requirements, the deadlines, content, format, and method of filing will be provided in future instruction from the government. Additional details will be published once available.
Note - UVT (tax value unit or unidad de valor tributario) for 2016 is COP 29,753 (~USD 9.91 December 2016). The value is adjusted annually based on the accumulated variation in the retail price index.
Luxembourg 2017 Tax Reform/Budget Laws Published including New Arm's Length Rules
On 27 December 2016, the Luxembourg 2017 tax reform and budget laws were published in the Official Gazette. In addition to the tax reform measures introduced in Law 7020 (previous coverage), certain other tax measures are introduced in Law 7050 along with the actual budget provisions.
The main measure is the addition of Article 56bis to the Luxembourg Income Tax Law, which clarifies and strengthens the rules for the determination of the arm's length based on the OECD guidelines, including the latest guidance developed as part of the BEPS project. The new article includes the following:
- The general definitions of transactions, controlled transactions, the arm's length price, etc.;
- The provision that a company must carry out all transactions in accordance with the arm's length principle, and that when a transaction is not observed between independent parties, it does not necessarily mean that it is not at arm's length;
- The provision that the determination of the arm's length price must be based on comparability analysis using transactions that are sufficiently comparable;
- The provision that transactions are sufficiently comparable if there are no material differences that would significantly impact the price determination or where reasonably reliable adjustments could be made to eliminate the impact, with the analysis of comparability based on two main pillars:
- The identification of the commercial or financial relations between the related undertakings and the determination of the economic circumstances which relate to such relationships in order to accurately delineate the controlled transaction; and
- The comparison of the economically significant conditions and circumstances of the accurately delineated controlled transaction with those of comparable transactions on the open market;
- The provision that the economically significant conditions, circumstances, or comparability factors that must be identified include:
- The contractual terms of the transaction;
- The functions performed by each of the parties to the transaction, taking into account the assets used and the risks assumed and managed;
- The characteristics of the property transferred, the service rendered, or the undertaking entered into;
- The economic circumstances of the parties and of the market in which the parties operate; and
- The economic strategies pursued by the parties;
- The provision that the methods to be used for the determination of the appropriate comparable price must take into account the identified comparability factors and must be consistent with the nature of the accurately delineated transaction, and that the method used must be the method that provides the best approximation of the arm's length price; and
- The provision that where a transaction has been completed and all or part of the transaction contains elements that, in substance, are not commercially rational and significantly impact the arm's length price, such transaction or part of the transaction may be ignored in determining the arm's length price for the purpose of the arm's length principle.
In addition to the new article on the arm's length principle, Law 7050 also increases the value added tax (VAT) registration threshold from EUR 25,000 to EUR 30,000 in annual turnover for SMEs; abolishes the tax guarantee requirement for new taxpayers that move to Luxembourg from an EU/EEA country; and expands the real estate tax exemption for charitable entities resident in Luxembourg to also apply for non-resident charitable entities.
The measures generally apply from 2017.
Russia Clarifies Change in VAT Rules for Supplies of Electronic Intermediary Services by Non-Residents
The Russian Ministry of Finance recently published Letter No. 03-07-15/68380, which clarifies the application of value added tax (VAT) on supplies of electronic intermediary services by a non-resident not registered for tax in Russia. In particular, the letter addressed a query on whether an intermediary service would be subject to VAT when provided via the internet to connect Russian residents with customers for transportation services and to settle payment for those services.
According to the letter, such services are currently only considered to be supplied in Russia, and subject to VAT, if the supplier is operating in Russia. Since the non-resident is not operating in Russia, such intermediary services are not currently subject to VAT. However, with the amendments made to the VAT rules by Federal Law 244-FZ (previous coverage), such electronic intermediary services will be deemed to be supplied in Russia and subject to VAT effective from 1 January 2017, with the Russian resident held responsible to act as the tax agent in respect of the service and remit the VAT due.
Singapore Gazettes Income Tax (Amendment No. 3) Act 2016
On 29 December 2016, the Income Tax (Amendment No. 3) Act 2016 was published in Singapore's Government Gazette. The Act implements a number of Budget 2016 changes, as well as certain non-Budget changes. Some of the main measures of the Act include:
- Measures to enable the implementation of Country-by-Country (CbC) reporting, including to make regulation to require the submission of CbC reports and to exchange CbC reports with other jurisdictions;
- An increase in the allowance under the Merger & Acquisition scheme from SGD 20 million to SGD 40 million of the consideration paid for qualifying M&A deals per year of assessment;
- An extension of the double tax deduction for the Internationalization scheme to 31 March 2020;
- An extension of the exemption of gains or profits from the disposal of ordinary shares to 31 May 2022;
- A reduction of the concessionary tax rate under the Finance and Treasury Centre scheme from 10% to 8% for Centres approved after 24 March 2016, and an extension of the scheme to 31 March 2021;
- A change in the writing-down allowance in respect of intellectual property acquisitions in 2017 and subsequent years from the current 5 years, to an optional 5, 10 or 15 years; and
- An increase in the Corporate Income Tax rebate from 30% to 50% of corporate tax payable for Years of Assessment (YA) 2016 and 2017 (rebate cap of SGD 20,000 per year applies).
Note - Although the Act does not set out the detailed requirements for CbC reporting, the Inland Revenue Authority of Singapore (IRAS) has already provided that the requirements will apply for financial years commencing on or after 1 January 2017 for Singapore-headquartered MNE groups with global revenue exceeding SGD 1.125 billion in the previous year, with the CbC report due within 12 months from the last day of the financial year. In addition, the IRAS also intends to accommodate voluntary filing in Singapore for the 2016 financial year (previous coverage).
Taiwan Amendments for VAT on Cross-Border Electronic Services Enacted
Taiwan's Taxation Administration has published a notice announcing that the amendment to the VAT Act regarding cross-border electronic services was promulgated by the President on 28 December 2016. The announcement notes that the amendment includes:
- The addition of the definitions of taxpayer and business entity selling cross-border electronic services;
- The addition of the requirement for a business entity selling cross-border electronic services to apply for taxation registration with the competent tax authority and file a bimonthly VAT return or appoint a tax-filing agent to handle it; and
- A penalty on any tax-filing agent failing to file a VAT return and pay VAT on behalf of the taxpayer.
The announcement also notes that the implementation date of the amendment has yet to be prescribed by the Executive Yuan, and that the Ministry of Finance will plan for subsequent enactment or amendment of related regulations and for the establishment of a website for simplified business registration and VAT filing.
Germany to Disallow Deductions for Related Party Royalty Payments Benefiting from Harmful IP Regimes
The German government has proposed draft measures that would limit the deduction of royalty payments to related parties if the income is eligible for the benefits of an IP regime that is not compliant with nexus approach developed as part of BEPS Action 5. The nexus approach essentially requires that the benefits received under a regime be aligned with the actual activities performed by the taxpayer claiming the benefits. As proposed, the measure would apply for payments made after 31 December 2017.
Under the draft measures, the deduction of royalty payments to related parties would be limited if subject to an effective tax rate of less than 25%. The limit would be equal to the effective tax rate / 25%, i.e., 50% of the payment would be deductible if the effective tax rate was 12.5%, and no deduction would be allowed if the effective tax rate was 0%.
It is important to note that although the deduction limit would not apply for IP regimes that are compliant with the nexus approach, countries are allowed under BEPS Action 5 guidelines to grandfather their non-compliant regimes through 30 June 2021. As such, payments to taxpayers that have elected to continue to apply a grandfathered non-compliant regime will be subject to the deduction limitation.
Saudi Arabia Fiscal Balance Program Published including Tax Measures
The Saudi government has published its Fiscal Balance Program report, which includes planned budget measures through 2020 within the broader Vision 2030 strategy. The main revenue (tax) related measures include:
- Increasing the levy for expatriate employees by:
- Imposing the expat levy for dependents of expat employees with an initial levy of SAR 100 per dependent beginning in July 2017 (currently not subject to levy);
- Imposing the expat levy for all expat employees beginning in January 2018 (currently SAR 200 per expat employee imposed based on number of expat employees exceeding the number of Saudi employees); and
- Increasing the expat levy amount each year, with the levy in 2020 equal to SAR 400 per dependent, SAR 700 per expat employee not exceeding the number of Saudi employees, and SAR 800 per expat employee exceeding the number of Saudi employees;
- Implementing value added tax (VAT) at the rate of 5% in the first quarter of 2018, with certain exemptions (agreed to by all Gulf Cooperation Council (GCC) countries); and
- Implementing an excise tax on harmful products in the second quarter of 2017, including a 50% tax on soft drinks, and a 100% tax on tobacco and energy drinks (scope may be expanded to sugary snacks and certain other drinks that contribute to obesity/diabetes).
The report's graphic road map for implementation also mentions the implementation of a luxury tariff in the first quarter of 2018, although no description is provided.
Click the following link for the report, Fiscal Balance Program: Balanced Budget 2020.
Tax Treaty between Chile and Japan has Entered into Force
The income tax treaty between Chile and Japan entered into force on 28 December 2016. The treaty, signed 21 January 2016, is the first of its kind between the two countries.
The treaty covers Chilean taxes imposed under the Income Tax Act. It covers Japanese income tax, corporation tax, special income tax for reconstruction, local corporation tax, and local inhabitant taxes.
Article 4 (Resident) provides that if a company is considered resident in both Contracting States, 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 any reduction or exemption of tax provided by the treaty.
In addition, the Article includes the provision that if any income is taxed in a Contracting State by reference to the amount remitted or received in that State and not by reference to the full amount, any relief from tax provided by the treaty in the other State will be limited to the amount of income taxed by the first-mentioned State.
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 individuals when the activities continue for a period or periods aggregating more than 183 days within any 12-month period. For determining whether the 183-day threshold is exceeded, connected activities of associated enterprises in a Contracting State will be considered.
The withholding tax rate on dividends is 5% if the beneficial owner is a company that has directly held at least 25% of the voting power of the company paying the dividends for a period of at least six months ending on the date on which entitlement to the dividends is determined; otherwise 15%.
The rates set in the treaty do not limit Chile's application of the additional tax payable on dividends (35%). However, the final protocol to the treaty states that if the additional withholding tax exceeds 35% or the first category tax paid ceases to be fully creditable, the allowance of the additional withholding tax in Chile will no longer apply and the maximum withholding tax rate under the treaty will be 20%.
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.
Otherwise the rate is 10% (15% in the first two years the treaty is effective).
A provision is also included regarding back-to-back loans, where interest that would otherwise be eligible for the 4% rate will instead be subject to a 10% withholding rate if paid as part of an arrangement involving back-to-back loans or an arrangement with similar effect.
The withholding tax rate on royalties is 2% for royalties for the use of, or the right to use, industrial, commercial, or scientific equipment; otherwise 10%.
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 any property, other than immovable property, forming part of the business property of a permanent establishment in the other State;
- Gains from the alienation of shares, comparable interests, or other rights if:
- The alienator at any time during the 365 day preceding the alienation directly or indirectly owned shares, comparable interests, or other rights representing at least 20% of the capital of a company resident in the other State; or
- At any time during the 365 day preceding the alienation, the shares, comparable interests, or other rights directly or indirectly derived at least 50% of their value from immovable property situated in the other State; and
- Any other gains from the alienation of shares, comparable interests, or other rights representing the capital of a company resident in the other State, but the tax on such gains may not exceed 16%.
Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.
The final protocol to the treaty includes the provision that if Chile agrees to limit the application of its additional withholding tax (35%) in any other treaty, the Contracting States will consult with each other to amend the Chile-Japan treaty in order to reestablish the balance of benefits.
The protocol also provides that if Chile concludes a treaty with a third state that has a lower rate of withholding tax on interest or royalties, or further limits the right of taxation of capital gains, the Contracting States will consult with each other to amend the Chile-Japan treaty to incorporate such lower rates or limits on taxation of capital gains.
Article 22 (Limitation of Relief) includes the provision that a benefit under the treaty will 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.
Article 22 (Limitation of Relief) also includes the provision that the benefits of the treaty will not apply when a resident of one Contracting State derives income from the other State and the first-mentioned State treats the income as attributable to a permanent establishment of that resident in a third jurisdiction, if:
- The total tax actually paid on the income in the first mentioned State and the third jurisdiction is less than 60% of the tax that would have been paid in the first-mentioned State had the income not been attributable to the permanent establishment; or
- The third jurisdiction does not have a tax treaty in force with the other Contracting State from which the benefits of the treaty are being claimed, unless the income attributable to the permanent establishment is included in the tax base of the enterprise in the first-mentioned Contracting State.
When the above limitation applies, the income may be taxed in accordance with the domestic law of the other Contracting State. However, any tax on affected interest or royalty income is limited to 25%.
Both countries apply the credit method for the elimination of double taxation.
The treaty generally applies from 1 January 2017. However, Article 26 (Exchange of Information) applies from the date of its entry into force without regard to the date on which the taxes are withheld at source or the taxable year to which the matter relates.
TIEA between Grenada and Switzerland has Entered into Force
The tax information exchange agreement between Grenada and Switzerland entered into force on 21 December 2016. The agreement, signed 19 May 2015, is the first of its kind between the two countries. It applies from the date of its entry into force for requests made in relation to tax periods beginning on or after 1 January 2017.
Revisions to Tax Treaty between India and Singapore under Negotiation
On 30 December 2016, officials from India and Singapore reportedly met to begin negotiations for revisions to the 1994 income tax treaty between the two countries. Revisions are needed with regard to the 2005 protocol to the India-Singapore treaty, which effectively provided an exemption from tax on the gains from the alienation of shares in a company resident in a Contracting State, with the condition that the exemption under the India-Mauritius tax treaty remained in effect.
Under the 2016 protocol to the India-Mauritius tax treaty, gains from the alienation of shares acquired on or after 1 April 2017 in a company resident in a Contracting State may be taxed in that State (previous coverage). Therefore, the exemption under the 2005 protocol to the India-Singapore treaty would no longer apply and revisions to the treaty are needed.
SSA between Luxembourg and Ukraine under Negotiation
Officials from Luxembourg and Ukraine met 21-22 December 2016 for the first round of 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.