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Approved Changes (4)

Ecuador

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Ecuador Gazettes Legislation Increasing VAT and Introducing Special Contributions to Fund Earthquake Reconstruction

Ecuador published the law to fund reconstruction following the recent earthquake in the Official Gazette on 20 May 2016. The legislation increases the value added tax rate from 12% to 14% for one year beginning 1 June 2016, and introduces a number of special equity and profit based contributions for both resident and non-resident taxpayers (previous coverage).

France-Luxembourg

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McDonald's French Offices Searched as Part of Tax Fraud Probe

McDonald's France has reportedly confirmed that French investigators searched its offices on 18 May 2016. The search is part of an investigation into possible aggravated tax fraud concerning McDonald's France's royalty payments to Luxembourg-based holding company McD Europe Franchising Sàrl for the use of the McDonald's brand and franchising rights. The investigation began in 2013 and involves a French assessment for approximately EUR 300 million in unpaid taxes.

The confirmation from McDonald's follows a 24 May raid of Google France's offices, which involves an investigation into Google's tax practices and a much larger French assessment of approximately EUR 1.6 billion (previous coverage).

Lebanon

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Lebanon Extends Deadline to File 2015 Tax Return

Lebanon's Ministry of Finance has announced that the deadline to file the 2015 corporate tax return is extended from 31 May 2016 to 30 June. Any tax due, however, must be paid by the standard deadline.

Puerto Rico

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Puerto Rico Governor Veto of VAT Repeal Overridden

On 26 May 2016, Puerto Rico's Senate voted to override Governor Alejandro Garcia Padilla's veto of legislation to repeal the change from sales and use tax (SUT) to value added tax (VAT). The veto was overridden by the House of Representatives on 23 May. The legislation to repeal the change to VAT was passed on 5 May 2016, and vetoed by the Governor shortly thereafter.

With the veto overridden in both houses, the change to VAT will no longer apply from 1 June 2016 as planned (originally to apply 1 April). However, certain aspects of the transition to VAT will remain, which include the increase in the Central SUT rate to 10.5% that was effective 1 July 2015 and the 4% SUT rate for certain B2B professional services that was introduced 1 October 2015 (previous coverage).

Additional details of the effects of the repeal will be published once the expected guidance from the tax authorities is issued.

Proposed Changes (2)

New Zealand

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New Zealand Budget 2016 Delivered including SME-Friendly Tax Package

On 26 May 2016, New Zealand's Finance Minister Bill English delivered the country's Budget 2016. The tax-related measures of the Budget are mainly limited to an SME-friendly tax package, which includes that:

  • Provisional tax will be reformed, with a new pay-as-you-go option allowing small businesses to pay tax as they earn income from 1 April 2018;
  • Use-of-money interest will be eliminated or reduced for most taxpayers;
  • Contractors will be able to more easily choose a withholding tax rate that suits their needs; and
  • The ongoing 1% monthly penalty will be scrapped from 1 April 2017 for new debt – although immediate penalties and interest charges for late payments will continue.

Click the following links for the Budget 2016 speech and the Budget 2016 overview as provided by the New Zealand government.

United Kingdom

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UK Launches Consultation on Reforms to Corporation Tax Loss Relief

On 26 May 2016, UK Treasury and HMRC launched a public consultation on the reforms to corporation tax loss relief proposed in the 2016 Budget. The reforms include two main changes:

  1. Losses arising from 1 April 2017 can be carried forward and set against the taxable profits of different activities within a company and the taxable profits of its group members (currently, certain carried-forwarded losses can only be set against profits from the activities to which they relate) ; and
  2. The amount of annual profit that can be relieved by carried-forward losses will be limited to 50% from 1 April 2017, subject to an allowance of GBP 5 million per group (currently, there is no restriction on the amount of profit that can be relieved, although there are restriction on the type of profit that can be relieved)

The consultation seeks views on:

  • The proposed model and calculations for the new rules;
  • Specific rules for banks;
  • Specific rules for groups; and
  • Specific rules regarding exclusions, insurance and new entrants (start-ups).

Click the following link for the consultation document - Reforms to corporation tax loss relief: consultation on delivery. Comments are due by 18 August 2016.

Treaty Changes (4)

Azerbaijan-San Marino

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Tax Treaty between Azerbaijan and San Marino has Entered into Force

The income and capital tax treaty between Azerbaijan and San Marino entered into force on 2 May 2016. The treaty, signed on 8 September 2015, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Azerbaijan tax on profit of legal persons, income tax of physical persons, tax on property, and land tax. It covers San Marino general income tax on individuals and on bodies corporate and proprietorships.

Permanent Establishment

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.

The protocol to the treaty, signed the same date, includes that a server located in a Contracting State may be considered a permanent establishment.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company directly holding at least 25% of the paying company's capital and the investment in that company amounts to at least EUR 250,000 or equivalent in another currency; otherwise 10%
  • Interest - 10%
  • Royalties - 5% for royalties paid for the use of, or the right to use, computer software or any patent, trade mark, design or model, plan, secret formula or process or for the use or right to use any industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience; otherwise 10%

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 or other corporate rights in a company the assets of which directly or indirectly consist mainly of immovable property situated in the other State; and
  • 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 other property by a resident of a Contracting State may only be taxed by that State.

Double Taxation Relief

Azerbaijan applies the credit method for the elimination of double taxation, while San Marino generally applies the exemption with progression method. However, in respect of income covered by Articles 10 (Dividends), 11 (Interest) and 12 (Royalties), San Marino applies the credit method.

Limitation on Benefits

Article 29 (Limitation on Benefits) includes the provision that any reduction in or exemption from tax provided for by the treaty will not apply for a resident of a Contracting State if the main purpose or one of the main purposes of the creation or existence of such resident or any person connected with such resident is to obtain the benefits of the treaty that would not otherwise be available.

In addition, a company that is entitled to special fiscal treatment under the provisions of any legislation or administrative practice of either Contracting State will not be entitled to the benefits of the treaty. The same applies to income received by a resident of a Contracting state from companies that are entitled to such special fiscal treatment, or in respect of shares or other corporate rights in the capital of such companies.

Effective Date

The treaty applies from 1 January 2017.

Costa Rica-Ecuador

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Costa Rica Approves TIEA with Ecuador

On 24 May 2016, Costa Rica's Legislative Assembly approved the pending tax information exchange agreement with Ecuador. The agreement, signed 4 June 2013, 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 tax matters from 1 January of the year following its entry into force.

Czech Rep-United States

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Protocol to the SSA between the Czech Republic and the U.S. has Entered into Force

The protocol to the social security agreement between the Czech Republic and the U.S. entered into force on 1 May 2016. The protocol, signed 23 September 2013, is the first to amend the agreement. It amends Article 2 (Material Scope) so that the agreement covers health insurance contributions under the Czech Republic's Act on Public Health Insurance, in addition to Czech pension and social insurance contributions as originally covered.

India-Mauritius

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Indian Tribunal Holds Time Spent on Projects may Not be Aggregated for PE Purposes Unless Specifically Provided for in Tax Treaty

The Mumbai Income Tax Appellate Tribunal has recently issued its decision on whether time spent on separate projects may be aggregated for the purpose of determining the existence of a permanent establishment under the India-Mauritius tax treaty. The case involved a Mauritius-based company that was engaged in installation and construction work for offshore oil exploration platforms. The company entered into three separate contracts with an unrelated party for projects in three different locations in India. In its tax return, the company determined that it had no permanent establishment (PE) in India, because the time spent for each project was less than the nine-month threshold provided in Article 5 (Permanent Establishment) of the India-Mauritius tax treaty. However, when reviewing the return, the assessing officer determined that the time spent for all projects should instead be aggregated. Since the aggregate time spent exceeded nine months, a PE was deemed constituted and tax was levied on the fees charged for the projects in accordance with Article 7 (Business Profits) of the India-Mauritius tax treaty. This was appealed.

In its decision, the Tribunal sided with the Mauritius company. It found that separate projects may only be aggregated for the purpose of determining if a PE exists under a treaty if the relevant treaty specifically provides for such aggregation. Because the projects were separately contracted and the India-Mauritius tax treaty does not include specific provisions for aggregation of time spent, no PE existed for the Mauritius company and the fees could not be taxed as business profits in India.

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