Worldwide Tax News
Brazil Publishes Normative Instruction on Capital Gains Withholding Tax for Non-Residents
Brazil has published Normative Instruction No. 1732 of 25 August 2017, which sets out the application of the new progressive withholding tax rates on capital gains derived by non-resident legal entities on the sale of non-current assets and rights located in Brazil. The new rates were introduced by Law 13,259/2016 as follows:
- up to BRL 5 million - 15%
- over BRL 5 million up to 10 million - 17.5%
- over BRL 10 million up to 30 million - 20%
- over BRL 30 million - 22.5%
Some of the main points of the Normative Instruction include:
- The tax should be paid by the last business day of the month follow the gain;
- The person responsible for withholding is:
- The buyer, if resident or domiciled in Brazil; or
- The proxy of the buyer, if resident or domiciled abroad;
- Capital gains withholding is subject to the provisions of applicable tax treaties between Brazil and the country of residence of the seller;
- The 15% withholding tax rate continues to apply for capital gain events that occurred up to 31 December 2016.
The Normative Instruction is in force from the date it was published, 29 August 2017.
Colombia Clarifies Transfer of Shares through Spin-Off does not Qualify as Non-Taxable Event
Colombia's National Tax Authority (DIAN) recently published a ruling that clarifies the taxation of the transfer of shares through a spin-off. Under Colombia's tax-free reorganization rules, a spin-off is generally not a taxable event when there is a transfer of assets, provided that the assets transferred qualify as a business unit or a business establishment and the acquiring or resulting entity is a Colombian resident. With respect to a transfer of shares through a spin-off, DIAN's position is that shares cannot qualify as a business unit or a business establishment and therefore the transfer does not qualify as a non-taxable event.
Mexico Provides Increased Deduction Limits to Support Hydrocarbon Production
On 18 August 2017, Mexico published a Decree in the Official Gazette that provides increased deduction limits under the Hydrocarbon Revenue Act in order to incentivize and support hydrocarbon production. The Decree entered into force the day after it was published and provides the following increased limits for cost, expense, and investments based on the percentage of the annual value of hydrocarbons and area of extraction:
- 40% of the annual value of hydrocarbons, other than non-associated natural gas and its condensates, extracted in terrestrial (land) areas;
- 35% of the annual value of hydrocarbons, other than non-associated natural gas and its condensates, extracted in sea areas with a depth less than 500 meters;
- 85% of the annual value of non-associated natural gas and its condensates extracted from non-associated natural gas fields; and
- 75% of the annual value of hydrocarbons, other than non-associated natural gas and its condensates, extracted in the Chicontepec paleocanal.
Click the following link for the Decree (Spanish language). For the 2017 tax year, application for the increased deduction limit incentive must be made within three months following the Decree's entry into force.
Denmark to Extend Expatriate Individual Income Tax Flat Rate Scheme and Increase the Rate
According to recent reports, the Danish government is planning to extend the availability of the individual income tax flat rate scheme for expatriate workers from a maximum of five years to a maximum of seven years, along with an increase in the rate from 26% to 27%. The current scheme is available for skilled expatriate workers, subject to a number of conditions. Under the scheme, expatriate income is subject to the standard 8% labor market tax and a 26% flat tax, resulting in an effective tax rate of 31.92%, which is much lower than the standard effective rates that can easily exceed 50%.
UK Treasury Publishes Responses on Simplifying the Computation of Corporation Tax and Stamp Duty System for Paper Transactions
On 29 August 2017, UK HM Treasury published the government’s responses to the Office of Tax Simplification’s (OTS) reports on simplifying the computation of corporation tax and stamp duty on paper documents. The response letters are from Chancellor of the Exchequer Philip Hammond.
Key points of the response on recommendations for simplifying the computation of corporation tax are summarized as follows:
- With respect to minimizing the number of adjustments required to calculate taxable profits and aligning tax definitions with accounting definitions, the government agrees that the recommendation would simplify the regime for small companies and requests that the recommendations be considered further in light of their impact on the Exchequer;
- With respect to replacing the schedular system with a whole business approach, the government recognizes the existing complexities, but given the significant changes needed, has no current plans for reform and requests further study to better understand the challenges over a longer timeframe;
- With respect to the use of accounting depreciation instead of capital allowances, the government requests additional study on the associated issues from such a change, including fiscal cost, avoidance opportunities, and likely winners and losers; and
- With respect to increased certainty for large companies, the government encourages the OTS to engage in the consultation on HMRC's process for risk profiling large businesses and promoting stronger compliance, which will include looking at potential opportunities to promote taxpayer certainty.
With respect to stamp duty on paper documents, the response includes overall support for moving towards a modern digital footing for stamp duty and the retirement of stamping machines. Specific recommendations will require additional consideration.
Brazil and Paraguay to Move Forward on Tax Treaty Negotiations
According to a recent release from the Brazilian Ministry of Foreign Affairs, the presidents of Brazil and Paraguay, Michel Temer and Horacio Cartes, met 21 August 2017 and announced their intent to move forward in negotiations for the conclusion of new income tax treaty. It is uncertain if the negotiations are for amendments to the tax treaty signed between the two countries in September 2000, but not yet ratified, or the drafting of an entirely new treaty.
Tax Treaty between Estonia and Japan Signed
Japan's Ministry of Finance has announced that officials from Estonia and Japan signed an income tax treaty on 30 August 2017. The treaty is the first of its kind between the two countries.
The treaty covers Estonian income tax, and covers Japanese income tax, corporation tax, special income tax for reconstruction, local corporation tax, and local inhabitant taxes.
If a company is considered resident in both Contracting States, the competent authorities of both States will determine its residence for the purpose of the treaty through mutual agreement based on its place of head or main office, its place of effective management, the place where it is incorporated or otherwise constituted, and any other relevant factors. If no agreement is reached, the company will not be entitled to any relief or exemption from tax provided by the treaty.
The PE article includes anti-PE avoidance measures as per BEPS Action 7.
- Dividends - 0% if the beneficial owner is a company that has directly or indirectly owned at least 10% of the paying company's voting power for a period of at least 6 months ending on the date on which entitlement to the dividends is determined; otherwise 10%
- Interest - 10%
- Royalties - 5%
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; and
- Gains from the alienation of shares or comparable interests if, at any time during the 365 days preceding the alienation, the shares or comparable interests derived at least 50% of their value directly or indirectly from immovable property situated in the other State (exemption if the shares or comparable interests are traded on a recognized stock exchange and the alienator together with related parties own in the aggregate 5% or less of the shares or comparable interests).
Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.
Article 20 (Silent Partnership) provides that any income and gains derived by a silent partner in respect of a silent partnership (in the case of Japan, Tokumei Kumiai) contract or another similar contract may be taxed in the Contracting State in which such income and gains arise and according to the laws of that Contracting State.
Article 22 (Entitlement to Benefits) includes substantial provisions regarding a resident's entitlement to benefits under the treaty. This includes that a resident of a Contracting State will only be entitled to the withholding tax exemptions provided under Articles 10 (Dividends) and 11 (Interest) if the resident is a qualified person, which includes:
- An individual;
- A qualified governmental entity;
- A company, provided that its principal class of shares is regularly traded on one or more recognized stock exchanges;
- A pension, provide that at least 50% of its beneficiaries, members, or participants are individuals who are residents of either Contracting State;
- A person other than an individual, provided that at least 50% of its voting power or other beneficial interest is directly or indirectly owned by residents of either Contracting State that meet the conditions for qualified persons above.
Provisions are also included whereby a resident of a Contracting State may still be entitled to the exemption benefits, subject to certain conditions, as well as when the competent authority of the Contracting State to which the benefit is claimed determines that the establishment, acquisition, or maintenance of such resident and the conduct of its operations did not have as one of the principal purposes the obtaining of such benefit.
Article 22 also includes a general anti-abuse provision, which provides 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, unless it is established that granting that benefit would be in accordance with the object and purpose of the relevant provisions of the treaty.
Estonia applies the exemption method for the elimination of double taxation, while Japan applies the credit method
Article 25 (Mutual Agreement Procedure) includes the provision that where taxation disputes have not been resolved through the consultation between the tax authorities of the Contracting States within two years, the unresolved issue will be resolved pursuant to a decision of an arbitration panel composed of third parties.
The treaty will enter into force 30 days after the ratification instruments are exchanged, and will apply from 1 January of the year following its entry into force.
Iraq to Sign Tax Treaty with South Korea
On 23 August 2017, the Iraq Council of Ministers authorized the signing of a revised income tax treaty with South Korea. The treaty, which was originally approved for negotiation and signing in November 2016, will be the first of its kind between the two countries, and must be finalized, signed, and ratified before entering into force.
United States-Colombia-Czech Rep-Finland-France-Germany-Hungary-India-Israel-Italy-Jersey-Liechtenstein-Lithuania-Luxembourg-Mauritius-Mexico-Poland-Portugal-Slovenia-Spain-Sweden
U.S. IRS Updates CbC Exchange Status Table to Include Negotiations Status
The U.S. IRS has published an updated version of its Country-by-Country Reporting Jurisdiction Status Table, which now also includes the status of jurisdictions with which the U.S. is negotiating competent authority arrangements (CAAs) on the exchange of CbC reports. The table includes those jurisdictions that are in negotiations for a CAA, have satisfied the United States’ bilateral data safeguards and infrastructure review, and have consented to be listed. The IRS notes, however, that taxpayers cannot rely on this information for assurances that CAAs with the competent authorities of these jurisdictions will be concluded by the end of 2017.
Jurisdiction with which negotiations are underway include: Colombia; the Czech Republic; Finland; France; Germany; Hungary; India; Israel; Italy; Jersey; Liechtenstein; Lithuania; Luxembourg; Mauritius; Mexico; Poland; Portugal; Slovenia; Spain; and Sweden.