Worldwide Tax News
According to recent reports, Saudi Arabia has issued internal guidance to its tax offices that for the purpose of withholding tax relief claims made under a tax treaty, a non-resident may be deemed to have a "virtual" service permanent establishment (PE) in the country. According to the guidance, a "virtual" PE may be deemed constituted if services are furnished under contract for a period exceeding the threshold set in the relevant tax treaty (generally 183 days within any 12-month period), even if there is no physical presence of employees or other engaged personnel in Saudi Arabia.
U.S. Tax Court Rules on the Validity of the Requirement that Stock-Based Compensation Costs be Included under Cost-Sharing Agreements
The U.S. Tax Court recently ruled on the validity of a 2003 Treasury final rule (sec. 1.482-7(d)(2)) that requires participants in qualified cost-sharing arrangements to share stock-based compensation costs in order to achieve an arm's-length result. The case involved a Delaware parent corporation and its subsidiary in the Cayman Islands. The two companies entered into an R&D cost-sharing agreement, which did not include the cost of the stock-based compensation for the parent company's employees.
For the tax years 2004 through 2007, the Cayman Islands subsidiary made cost-sharing payments to the parent company of approximately USD 648 million. After the parent company filed the tax returns for the years at issue, the IRS issued a notice of deficiency and increased the cost-sharing payments by approximately USD 80 million to reflect the stock-based compensation and achieve an arm's length result. The taxpayer appealed the adjustment.
In its decision, the Tax Court sided with the parent company. It found that Treasury:
- Failed to adequately explain the basis of the final rule;
- Failed to respond to significant comments when the rule was introduced; and
- Failed to support its belief that unrelated parties operating at arm's length would share stock-based compensation costs.
As a result, the Court held that the final rule is invalid.
Click the following link for the Court decision.
EU Special Committee Issues Draft Report on Tax Rulings and other Measures Similar in Nature or Effect
On 20 July 2015, the European Parliament Special Committee on tax rulings and other measures similar in nature or effect issued its draft report on its tax rulings investigation. The report includes a motion for a European Parliament resolution to:
- Express its full support for the prompt establishment of a compulsory EU-wide Common Consolidated Corporate Tax Base (CCCTB);
- Call for urgent reform of the Code of Conduct on business taxation and of the Group charged with its enforcement;
- Call on the Commission to adopt new guidelines, in the framework of its State Aid Modernisation (SAM) initiative, clarifying what constitutes tax-related state aid and ‘appropriate’ transfer pricing;
- Reiterate its position that MNCs should disclose in their financial statements, by Member State and by third country in which they have an establishment, a range of aggregated information, including their profit or loss before tax, taxes on profit or loss, number of employees, assets held, etc. (i.e. country-by-country reporting);
- Call on the Commission to propose establishing an EU legislative framework for the effective protection of whistleblowers and the like; and
- Call for a common EU approach to tax havens; calls on the Commission, in particular, to continue its work on a clear definition, a common set of criteria to identify tax havens and appropriate sanctions for countries cooperating with them.
Click the following link for the full 36 page report.
Following the release of a discussion draft for legislation to introduce an innovation box regime in the U.S. on 29 July 2015 (previous coverage), an announcement of support for the proposal was issued by U.S. Senators Rob Portman and Charles Schumer.
Today, U.S. Senator Rob Portman (R-Ohio) joined Senator Charles Schumer (D-New York) in recognizing the release of an innovation box framework by House Members Rep. Charles Boustany (D-Louisiana) and Rep. Richard Neal (D-Massachusetts). Senators Portman and Schumer recommended an innovation box in their bipartisan report to the Senate Finance Committee on an international tax reform framework.
"While other countries are using tax policies like innovation boxes to lure business and jobs to their shores, America is falling behind," Portman said. "Representatives Boustany and Neal’s innovation box framework should be carefully considered as we work towards developing policies that will keep intellectual property and its development here in the United States. If we don't reform our tax code soon with pro-growth, competitive policies, U.S. workers will suffer as businesses take their research and development activities, and the high-paying jobs that go along with those activities, to countries with more competitive tax regimes."
"If we don’t change our tax laws, companies abroad are going to keep pulling the rug right out from under the United States, taking our intellectual property and thousands of jobs right along with it," said Schumer. "I am grateful that Representatives Boustany and Neal have put forward their plan for an innovation box and hope that bipartisan support for this critical idea continues to grow in the coming weeks. We can’t afford to wait any longer to protect our research, development, and American jobs."
On 27 July 2015, officials from Barbados and South Korea met to discuss the negotiation of an income 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.
On 24 July 2015, the Belgian Council of Ministers approved for ratification the pending tax information exchange agreement with Jersey. The agreement, signed 13 March 2014, is the first of its kind between the two jurisdictions. It will enter into force once the ratification instruments are exchanged, and will generally apply from the date of its entry into force.
On 16 July 2015, Germany ratified the OECD-Council of Europe Convention on Mutual Administrative Assistance in Tax Matters as amended by the 2010 protocol. The original convention was signed by Germany on 17 April 2008, but not ratified until now, and the 2010 protocol was signed 3 November 2011. The convention as amended will enter into force in Germany on the first day of the third month following the deposit of the ratification instrument.