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Approved Changes (3)

Egypt

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Egyptian Parliament Approves VAT with an Initial Rate of 13%

On 29 August 2016, the Egyptian parliament approved the long-awaited legislation for the replacement of sales tax with a value added tax (VAT). As approved, VAT will be levied at an initial standard rate of 13% from 1 October 2016, and will be increased to 14% from the 2017-18 fiscal year. The standard rate will apply for most goods and services, although certain basic goods and services will be exempt.

Click the following link for recent coverage of the VAT legislation before parliament. Final details of the VAT regime as approved will be published once available.

European Union-Ireland

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EU Commission Illegal State Aid Decision: Ireland Ordered to Recover EUR 13 Billion from Apple

On 30 August 2016, the European Commission issued its decision concluding that Ireland granted Apple undue tax benefits of up to EUR 13 billion. The decision ends a two-year illegal State aid investigation into tax rulings provided by Ireland to Apple concerning internal profit allocation, which the Commission determined granted Apple a selective advantage resulting in a substantially low amount of tax being paid.

The tax rulings in question were issued in 1991 and 2007, and benefited Apple Sales International (ASI) and Apple Operations Europe (AOE), which were both incorporated in Ireland but not considered resident.

ASI was established to sell Apple products in Europe in such a way that customers were contractually buying products from ASI in Ireland rather than from the shops that physically sold the products. As allowed under the tax rulings, most of the sales profits were internally allocated to a "Head Office" within ASI that was not based in any country and did not have any employees or own premises, while only a small portion of the profits were allocated to ASI's Irish branch. As such, only the portion allocated to the Irish branch was taxed in Ireland, while the rest remained untaxed.

AOE was established for the manufacture of certain lines of computers for the Apple group. Based on the same rulings, AOE was also able to internally allocate most of its profits to a "Head Office", which remained untaxed.

According to the Commission’s decision, only the Irish branches of ASI and AOE had the capacity to generate any income, and therefore all sales profits should have been recorded with the Irish branches and taxed there. Based on this, the commission concluded that the tax rulings issued by Ireland endorsed an artificial internal allocation of profits that had no factual or economic justification. Because the tax rulings enabled Apple to pay substantially less tax than other companies in violation of EU State aid rules, Ireland is ordered to recover from Apple the unpaid taxes up to EUR 13 billion plus interest for the years 2003 to 2014.

Click the following link for the full press release on the decision.

India

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Indian Tribunal Holds Projected Figures Cannot be Replaced with Actual Figures for IP Transaction Valuation Adjustment

In a recently published decision, The Hyderabad Income Tax Appellate Tribunal ruled on whether a transfer pricing officer can replace projected cash flows with actual cash flows for transfer pricing purposes. The case involved India-based DQ International Ltd. (DQ India), a producer of animation, game art and other media content.

In the year concerned, DQ sold the IP rights for an animated series to an associated enterprise, DQ Entertainment Ireland (DQ Ireland). In determining the arm's length price of the transaction, DQ India used the average values of two independent valuation reports that were prepared using the discounted cash flow method based on cash flow projections. However, in reviewing the transactions, the transfer pricing officer replaced the projected figures with the actual figures from DQ Ireland's audited financial statements. As a result, an adjustment was proposed, which DQ India appealed

In its decision, the Hyderabad Tribunal sided with DQ India. The Tribunal held that the value of the IP rights should be determined based on the available information at the time the business decision for the sale is made. Although the method adopted and figures used must be consistent and subject to review, such review cannot include subsequently replacing the projected figures with actual figures.

Proposed Changes (3)

Estonia

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Estonia Law Amendments Proposed for Exchange of Tax Rulings and CbC Reports

The Estonia Ministry of Finance has put forward draft proposals to transpose into domestic law the amendments made to the EU Directive on administrative cooperation in the field of taxation (2011/16/EU) concerning the exchange of cross border tax rulings and advance pricing agreements (APAs) and Country-by-Country (CbC) reports. The amendments were made by Council Directive (EU) 2015/2376 (previous coverage) and Council Directive (EU) 2016/881 (previous coverage) respectively.

Regarding tax rulings and APAs, the proposal includes that Estonia will automatically exchange cross border tax rulings and APAs with other EU Member States from 1 January 2017. The exchange also includes rulings and APAs issued, amended or renewed prior to that date subject to certain conditions.

Regarding CbC reports, the proposal includes the implementation of CbC reporting requirements for MNE groups operating in Estonia meeting a consolidated annual revenue threshold of EUR 750 million in the previous year. The requirements will apply for fiscal years beginning on or after 1 January 2016.

The draft proposals must be finalized and approved by parliament before entering into force. Additional details will be published once available.

Morocco

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Morocco Issues Draft APA Procedures

The Moroccan Ministry of Economy and Finance has issued draft procedures for the conclusion of advance pricing agreements (APAs) introduced in the Finance Act 2015, which allows Moroccan taxpayers to enter into APAs with the tax authorities for transactions with non-resident related parties. To enter into an APA, the application to the tax authorities should include the following information where relevant:

  • Details of the transactions to be covered and the period to be covered;
  • Details of related parties, including organizational structure, capital structure, business activities, certified financial and tax documents, etc.;
  • Description of functions exercised, assets used, and risks assumed by the related parties;
  • Description of intangible assets held by related parties;
  • Cost-sharing and other relevant agreements between related parties;
  • APAs with foreign tax authorities and any private rulings; and
  • The proposed transfer pricing method(s) and the identification, analysis, and selection of comparables used and any adjustments made

Applications should be submitted at least six months before the beginning of the year to be covered, and if approved, may apply for up to four years. In addition, for each year the APA applies, the taxpayer must submit a monitoring report.

Click the following link for the draft procedures (French language).

United Kingdom

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UK Issues Three Consultation on Proposals to Tackle the Hidden Economy

On 26 August 2016, UK HMRC issued three consultations on proposals to tackle the hidden economy, promote tax compliance and create a level playing field for UK business. The consultations are as follows:

The deadline for comments for each consultation is 21 October 2016.

Treaty Changes (2)

Czech Rep-Turkmenistan

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Czech Senate Approves Tax Treaty with Turkmenistan

On 24 August 2016, the Czech Senate approved for ratification the pending income and capital tax treaty with Turkmenistan (previous coverage). The treaty, signed 18 March 2016, 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.

India-Cyprus

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India Approves Signing of New Tax Treaty with Cyprus

On 24 August 2016, the Indian Cabinet approved the signing of a new income tax treaty with Cyprus. One of the main revisions of the new treaty is allowing source-based taxation of capital gains arising in India. The treaty must be signed and ratified before entering into force, and once in force and effective, will replace the 1994 tax treaty between the two countries.

Additional details of the treaty will be published once available.

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