International Tax News Welcome

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International
Tax News
Edition 22
November 2014
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Welcome
Keeping up with the constant flow of
international tax developments worldwide
can be a real challenge for multinational
companies. International Tax News is a monthly
publication that offers updates and analysis
on developments taking place around the
world, authored by specialists in PwC’s global
international tax network.
We hope that you will find this publication
helpful, and look forward to your comments.
Canada
OECD
Canadian legislative
developments
OECD report on Action 2 hybrid mismatches
Brazil
France
Brazilian Ministry of Finance
extends list of activities
receiving beneficial treatment
under new CFC rules
Protocol covering taxation
of capital gains on shares in
‘real estate-rich’ companies
amends France-Luxembourg
double tax treaty
Tony Clemens
Global Co-leader International Tax Services Network
T: +61 2 8266 2953
E: [email protected]
Suchi Lee
Global Co-leader International Tax Services Network
T: +1 646 471 5315
E: [email protected]
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In this issue
Tax legislation
Proposed legislative changes
Administration & case law
Treaties
Canada
Canadian legislative developments
Ireland
Budget 2015: Significant changes to
corporate tax residence and enhancement
of IP regime
Brazil
Brazilian Federal Revenue Authorities issue
ruling on exemption of withholding tax on
certain remittances abroad
Austria
Austria-Montenegro double tax treaty
is signed
Luxembourg
Lock-up of bearer shares
OECD
OECD report on Action 2 hybrid mismatches
Brazil
Brazilian Ministry of Finance extends list
of activities receiving beneficial treatment
under new CFC rules
Austria
Double tax treaty between Austria and
Taiwan is signed.
Nigeria
Tribunal’s ruling allows interest on intercompany loans as deductible for upstream
oil companies
OECD
OECD finalises guidance on transfer
pricing documentation and country-bycountry reporting
Brazil
Interpretative Declaratory Act regarding
incidence of withholding tax on
local transactions
France
Protocol covering taxation of capital gains on
shares in ‘real estate-rich’ companies amends
France-Luxembourg double tax treaty
Poland
Bill to amend the date of entry into force of
the CFC rules to January 2015
Spain
Spain proposes major tax reforms
Brazil
Normative Instruction regulating tax
treatment of dividends and interest on net
equity and the equity-pick up method
Spain
Spain-Dominican Republic double tax
treaty enters into force
Poland
New thin capitalisation rules
Switzerland
Swiss Corporate Tax Reform III: CTR III
Consultation Draft published by Swiss
Federal Department of Finance
Netherlands
Decree provides further guidance on
the application of the Dutch Innovation
Box regime
Taiwan
Treaties with Kiribati and Luxembourg to
come into effect
Turkey
Five-year time limit for benefiting from
Social Security Premium Support for each
R&D and support personnel is repealed
United Kingdom
The Scottish Referendum from
tax perspective
OECD
OECD guidance on transfer pricing aspects
of intangibles
United Kingdom
UK government’s response to BEPS
September 2014 deliverables
Qatar
Implementation of new tax
administration system
United States
IRS imposes restrictions on
‘inversion’ transactions
European Union
European Commission explains State aid
investigations in Ireland and Luxembourg
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Tax Legislation
Canada
Canadian legislative developments
On October 10, 2014, the Canadian Department of Finance
released a Notice of Ways and Means Motion (NWMM)
that will implement various tax measures, including
several of the draft legislative proposals previously released
for consultation on July 12, 2013, August 16, 2013, and
August 29, 2014, as well as part of the Canadian federal
budget released on February 11, 2014.
•
Amendments to the ‘non-qualifying country’ definition, which
is part of the FAPI regime, to exclude countries or jurisdictions
for which the Convention on Mutual Administrative Assistance
in Tax Matters is in force and effect, and to avoid unintended tax
consequences with respect to the British Overseas Territory of
the British Virgin Islands, which now has a comprehensive tax
information exchange agreement with Canada.
•
Amendments modifying certain imputed income rules.
•
Amendments to better accommodate foreign affiliate structures
that include partnerships.
•
Amendments to address taxes paid by shareholders of fiscally
transparent entities.
•
Amendments providing ownership rules for foreign non-share
corporations, such as limited liability companies and
•
Amendments to the functional currency rules.
These proposals include:
•
A new anti-avoidance rule in respect of withholding tax (WHT)
on interest payments, and an amendment to an existing avoidance
measure in the thin capitalisation rules, to address certain backto-back loan arrangements where third party intermediaries
are inserted between a Canadian borrower and a foreign related
party lender.
•
Amendments to the base erosion rule relating to the offshore
insurance of Canadian risks.
•
Narrowing of the exception in the ‘investment business’ definition
for regulated foreign financial institutions to eliminate the use
of this exception by Canadian taxpayers that are not financial
institutions to avoid foreign accrual property income (FAPI)
treatment for certain passive income.
•
Amendments to the foreign affiliate dumping rules.
Kara Ann Selby
Toronto
T: +1 416 869 2372
E: [email protected]
Maria Lopes
Toronto
T: +1 416 365 2793
E: [email protected]
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PwC observation:
Canadian corporations with foreign affiliates may be affected by these proposals,
many of which were the subject of comfort letters previously issued by the Department
of Finance. These proposals have different effective dates, and in certain cases,
elections are available to change the effective dates at the option of the taxpayer.
The Department of Finance has offered no further guidance on how it may be
proposing to curtail treaty shopping. On September 16, 2014, the Organisation
for Economic Co-operation and Development (OECD) released its report with
recommendations for addressing treaty abuse in connection with Action 6 of its Action
Plan on Base Erosion and Profit Shifting (BEPS), largely adopting a treaty based
approach in addressing treaty abuse. It is unclear what direction will be taken by the
Department of Finance, as a domestic anti-treaty shopping rule had originally been
proposed as part of the federal budget released on February 11, 2014.
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Luxembourg
•
Lock-up of bearer shares
The Grand-Duchy of Luxembourg has introduced a lockup mechanism for bearer shares based on a law of July 28,
2014 (the Law).
The Law answers to the requirements of the Financial Action Task
Force and the Global Forum on Transparency and Exchange of
Information for Tax Purposes in relation to the identification of holders
of bearer shares. Such a lock-up mechanism will ensure the availability
of the information on the identity of the shareholders to judicial and
tax authorities, while keeping confidentiality towards third parties.
The Law applies to public limited liability companies (sociétés
anonymes), partnerships limited by shares (sociétés en commandite
par actions), and contractual funds (fonds communs de placement)
which have issued bearer shares (the Concerned Entities).
Lock-up mechanism
The management of the Concerned Entities will appoint a custodian
who will keep the bearer shares for the account of the bearer
shareholders and maintain a bearer shares register.
The custodian cannot be a shareholder of the Concerned Entity
and will be a Luxembourg-based professional practicing one of the
following professions:
•
Credit institution.
•
Wealth manager.
•
Distributor of UCI shares and units.
Sami Douénias
Luxembourg
T: +352 49 48 48
E: [email protected]
Sandrine Buisseret
Luxembourg
T: +352 49 48 48
E: [email protected]
Professionals of the financial sector (PSF) accredited by the
Luxembourg Financial Surveillance Authority (Commission de
Surveillance du Secteur Financier or CSSF) as:
i.
family office,
ii.
corporate domiciliation agent,
iii. professional providing company incorporation and
management services,
iv. registrar agent, or
v.
professional depositary of financial instruments.
•
Fully qualified lawyer registered with the Luxembourg Bar in list
I or IV.
•
Luxembourg notary public.
•
Approved statutory auditor.
•
Chartered accountant.
The name of the custodian will be filed with the Trade and Companies
Register and published. It will further appear on the Trade and
Companies Register’s extract of the Concerned Entity.
In addition to their lock-up, bearer shares will no longer be transferred
by mere delivery. A transfer will require a registration in the bearer
shares register based on a document or notification recording the
transfer of shares between the seller and the buyer.
Entry into force and transitional period
The Law came into force on August 17, 2014. As of this date, the
Concerned Entities have a six-month period (the Appointment Period)
to appoint a custodian, while bearer shareholders have an 18-month
period to deposit their bearer shares with the appointed custodian (the
Lock-Up Period). Notwithstanding the above, it is recommended to
lock-up bearer shares within the Appointment Period as the attached
voting rights will be suspended and distributions differed as from the
end of this period up until the lock-up of the bearer shares.
PwC observation:
Bearer shares that will not be locked-up within the Lock-Up Period
will be cancelled and the Concerned Entity will have to proceed
with a corresponding share capital reduction.
To ensure the effective implementation of the mechanism, penalties
are introduced. Failure to comply with the new rules may be
punished by a fine between 5,000 euros (EUR) and EUR 125,000
which may be applied to management bodies of the Concerned
Entities, as well as custodians.
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Nigeria
Tribunal’s ruling allows interest on inter-company
loans as deductible for upstream oil companies
Historically, there was an ambiguity on whether upstream
petroleum companies can obtain a tax deduction for
interest payable on loans to related parties.
This ambiguity was as a result of two conflicting provisions in the
tax law: Section 13(2) of the Petroleum Profits Tax Act (PPTA),
which prohibits the tax deduction of interest on inter-company
loans, and has been part of the PPTA since its enactment in 1959;
and Section 10(1)(g) which provides that interest on inter-company
loans are tax deductible if they are obtained under prevailing market
conditions (i.e. based on the London Inter-Bank Offer Rate [LIBOR]).
Many multinational companies affected by this issue have historically
made some provisions for the tax uncertainty regarding interest on
related party loans.
PwC observation:
Although the FIRS may appeal
the Tribunal’s decision, we
however take the view that
there is a high likelihood that
the decision will be upheld.
The critical issue, as is the
case with other related party
transactions, is to justify the
arm’s-length nature.
In an action between a taxpayer (Appellant) and the Federal Inland
Revenue Service (FIRS), the Tax Appeal Tribunal on September 18,
2014 decided that interest payments on inter-company loans is tax
deductible provided the loan was obtained on arm’s-length terms.
Appellant had taken a deduction for the interest but the FIRS had
disallowed the interest and imposed additional taxes on the basis of
Section 13(2). The Tribunal held that the provisions of both S. 13(2)
and 10(1)(g) appear inconsistent but are not contradictory and should
be read harmoniously to arrive at the true intention of the PPTA.
Kenneth Erikume
Nigeria
T: +234805609622
E: [email protected]
Ugochukwu Dibia
Nigeria
T: +2348094474852
E: [email protected]
Folajimi Olamide Akinla
Nigeria
T: +2348028463369
E: [email protected]
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Poland
Bill to amend the date of entry into force of the CFC
rules to January 2015
On September 17, 2014, the Polish President signed a bill
amending the Corporate Income Tax (CIT) Act, Personal
Income Tax (PIT) Act and other acts introducing, inter alia,
the Controlled Foreign Corporation (CFC) rules.
The amending bill was published in the Journal of Laws on
October 3, 2014. By the operation of a special provision in the bill,
the bill’s official publication after September 30, 2014 resulted in
delayed entry into force of the CFC rules. As such, foreign corporations,
which are calendar year taxpayers, would not be subject to CFC tax
before January 1, 2016. However, a parliamentary bill, introduced
on October 16, 2014, seeks to correct this situation by reinstating
January 1, 2015 as the date when the CFC rules would become
effective. This will most probably happen; final confirmation will be
known by the end of November.
CFC - purpose and scope
The legislative changes endeavour to discourage Polish taxpayers
from investing outside of Poland purely for tax reasons and reduce
tax planning structures which use CFC subsidiaries and permanent
establishments (PE).
Slawomir Krempa
Warsaw
T: +48 22 746 6874
E: [email protected]
In particular, the foreign corporation will be considered as CFC if:
•
It is domiciled in a tax haven.
•
It is domiciled in a country with which Poland has not concluded
any international conventions, in particular double tax treaties
(DTTs), or the European Union (EU) has not concluded any
international conventions.
•
It meets jointly the following conditions:
––
At least 25% of shares in its capital, or voting rights, or shares
related to the right to participate in profits is owned directly or
indirectly by a Polish taxpayer for an uninterrupted period of 30
days.
––
It derives at least 50% of income from so-called passive income
(i.e. dividend, interest, royalties, capital gains resulting from sale
of shares in companies or receivables).
––
At least one type of its passive income is subject to lower than
14.25% nominal tax rate or is exempt or excluded from taxation in
the country of its domicile (unless the exemption results from the
Council Directive 2011/96/UE on the common system of taxation
applicable in the case of parent companies and subsidiaries of
different member states).
The regulations will be applied appropriately to activities in the form
of foreign PEs.
CFC regulations will not apply if the foreign corporation conducts real
business activities.
Magdalena Zasiewska
Warsaw
T: +48 22 746 4867
E: [email protected]
Rafal Drobka
Warsaw
T: +48 22 746 4864
E: [email protected]
PwC observation:
The parliamentary bill, introduced on October 6, 2014, seeks to
amend the original bill introducing the CFC rules, by repealing the
original provision regarding the date of the entry into force of the
CFC rules (i.e. Art. 17 paragraph 1). According to the original bill,
the CFC rules were to enter into force on the first day of the fourth
month after their official publication (that is January 1, 2015, as
long as the bill is published before the end of September 2014).
The parliamentary bill proposes to make the CFC rules applicable
to foreign entities owned by Polish corporate and individual
taxpayers for the fiscal year of foreign entities starting after
December 31, 2014.
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Poland
New thin capitalisation rules
On January 1, 2015, substantial amendments to the
Corporate Income Tax (CIT) and Personal Income Tax (PIT)
Law will be enforced.
The proposed amendments change thin capitalisation rules, introduce
controlled foreign corporation (CFC) regulations as well as other
changes in Polish tax law that may prove significant for companies
operating in Poland.
New thin capitalisation regulations will substantially affect the
tax reconciliations of Polish companies benefitting from debt
financing received from related parties as well as currently operated
shareholder structures, including those involving indirect shareholders
who were considered so far a tool for reducing the impact of thin
capitalisation limitations.
Planned changes
In practice, the new regulations may result in increased CIT burdens
for taxpayers.
The proposed regulations will:
•
change the current method of determining the amount of interest
to be recognised as tax deductible costs
•
expand the range of companies where thin capitalisation rules
will apply, and
•
introduce a new, optional method of determining the limit of
interest tax deductibility that takes into account not only intragroup debt but also debt to non-related parties.
Slawomir Krempa
Warsaw
T: +48 22 746 6874
E: [email protected]
Changes in the existing ‘thin capitalisation’ rules
In line with the new versions of the existing rule (Art. 16 sec. 1 p. 60
and 61 of the Polish CIT Law), thin capitalisation restrictions will apply
to loans granted by a much broader group of related parties (currently,
in simplified terms, this method relates to only parent and sister
companies). Beginning January 1, 2015, the group of qualified lenders
will be expanded to all (min.25%) indirectly related parties.
The proposed rules may also significantly limit the interest recognised
as tax deductible due to the fact that instead of 3:1 debt-to-share
capital ratio, now the thin capitalisation limit will be 1:1 but with
respect to debt vs. equity (not share capital). Some equity parts will be
also excluded.
New optional method
Based on the newly introduced provisions, taxpayers that received
loans from qualified lenders can decide to apply the new method
of thin capitalisation calculation. The method will be based on the
tax value of assets, as well as reference rate of the National Bank of
Poland and will apply to costs of loans received from both related and
unrelated entities. Based on this rule, interest on loans (including
loans from unrelated entities) in the amount not exceeding the tax
value of assets multiplied by a specific interest rate (the reference rate
of the National Bank of Poland increased by the index of 1.25%) can be
recognised as a tax deductible cost for CIT purposes.
Additionally, in this method, during a given tax year, a taxpayer can
treat as tax deductible cost only interest on loans not exceeding 50% of
operational profit.
Rafal Drobka
Warsaw
T: +48 22 746 49 94
E: [email protected]
Mieczyslaw Gonta
Warsaw
T: +48 22 746 49 07
E: [email protected]
PwC observation:
Taxpayers doing business in Poland should consider the available
options and carry out the respective analysis and calculations as
soon as possible to estimate if and how the new regulations impact
the effectiveness of their financing
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Turkey
Five-year time limit for benefiting from Social Security
Premium Support for each R&D and support personnel
is repealed
In April 2008, Research and Development (R&D) Law No.
5746 was enacted to provide incentives for R&D activities
in Turkey. According to R&D Law No. 5746, companies in
Turkey that carry out R&D activities can benefit from tax
incentives and supports.
The concept of an R&D Centre, which is organised as a separate unit
within the organisational structure of capital companies in Turkey, has
also been introduced by this R&D law.
Social Security Premium Support is one of the main incentives
introduced by the R&D law. With the Social Security Premium Support,
half of the employer portion of social security premiums for R&D and
support personnel (a maximum 10% of the number of full time R&D
personnel) is declared to be funded by the Ministry of Finance for five
years for each R&D and support personnel.
Under the current amendments by Law No. 6552, the statement of ‘for
five years for each R&D and support personnel’ in Article 3 of R&D Law
No. 5746 has been abolished. As a result, with the new change, the
social security premium support for each R&D and support personnel
is extended until December 31, 2023, which is the expiration date of
the R&D Law No. 5746 without any time limitations.
Kadir Bas
Turkey
T: +90 (212) 326 64 08
E: [email protected]
Ozlem Elver Karacetin
Turkey
T: +90 (212) 326 64 56
E: [email protected]
PwC observation:
Before the enactment of Law No. 6552, companies were not allowed
to benefit from the social security premium support for R&D and
support personnel who had already fulfilled the five-year period
defined by law. Therefore, with respect to the date from which
R&D Law No. 5746 was enforced (i.e. from the end of April 2013)
there have been R&D and support personnel who have fulfilled the
five-year period, causing an increase in the employer cost. With the
new change, from September 11, 2014, companies in Turkey will
be able to benefit from the social security premium support for
R&D and support personnel until the end of 2023 without any
time limitations.
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Proposed legislative changes
Ireland
Budget 2015: Significant changes to corporate tax
residence and enhancement of IP regime
The Minister specifically confirmed that the 12.5% rate is settled policy
and stated that the 12.5% rate never has been and never will be up
for discussion.
On October 14, 2014 the Irish Minister for Finance
announced the 2015 Budget. As part of this process, he
published a policy statement entitled ‘A Road Map for
Ireland’s Tax Competitiveness’ which provides an overall
international tax strategy context for the announcements
made in the Budget.
To further enhance the transparency of the Irish tax regime, changes to
the corporate tax residence rules were announced. Following changes
last year on ‘Stateless Companies’, broader corporate tax residence
reform will be introduced with the result that Irish incorporated
companies can only be considered non-Irish tax resident under the
terms of a double tax treaty (DTT). These new provisions will apply to
new companies from January 1, 2015.
The package of tax measures announced should provide certainty on
the Irish tax regime for both existing and new investors alike. These
announcements should ensure that Ireland remains competitive and
attractive as a location in which to align intellectual property (IP),
profits, and substance. More details should follow with publication of
the Finance Bill on October 23, 2014.
During last year’s Budget, the Minister published a tax policy document
which detailed Ireland’s corporation tax regime for the foreign
direct investment (FDI) sector. As part of Budget 2015, an update on
Ireland’s tax strategy was published, titled ‘A Road Map for Ireland’s
Tax Competitiveness’. This document outlines other commitments
that will be of relevance to multinationals, such as strengthening
the capabilities of Ireland’s transfer pricing competent authority,
expansion of the tax treaty network, and maintaining an open and
transparent tax regime.
The Minister in his budget reaffirmed the government’s 100%
continued commitment to maintaining Ireland’s well established and
competitive 12.5% corporation tax rate for active trading income.
Denis Harrington
Ireland
T: +353 1 792 8629
E: [email protected]
To give certainty to companies with existing operations in Ireland, a
grandfathering period to the end of 2020 will be provided.
The government also announced its intention to introduce a
‘Knowledge Development Box’ tax regime for intangible assets in 2015,
and will open a public consultation process on its development later
this year. Further details will be provided with the regime likely to be
‘best in class’ and will be transparent, sustainable, and competitive.
In addition, Ireland’s existing IP tax amortisation regime for
expenditure on intangible assets will be enhanced. The current
restriction on the deduction of allowances and related interest
expenses to 80% of the related income will be removed. In addition,
the current definition of qualifying intangible assets will be amended
to explicitly include customer lists.
Both of these proposals are welcome enhancements to Ireland’s
existing IP offering, and will add to the attractiveness of Ireland as the
location of choice in which to create, manage, and exploit IP.
The Minister proposed further enhancements to Ireland’s existing
research and development (R&D) tax credit regime which is
recognised as one of the leading R&D incentive regimes globally.
Currently, Ireland’s 25% (refundable) R&D tax credit applies to
incremental expenditure with reference to expenditure incurred in a
fixed base period of 2003. This base year limitation is being removed
from January 1, 2015 with the R&D tax credit being calculated in
future entirely on a volume basis. Although this does not impact new
investors without a ‘base year’, this is a positive development for
multinationals that are well established in Ireland.
Ireland’s SARP regime was first introduced in 2009 to attract
executives from abroad to work in Ireland by offering an effective 30%
reduction on income tax on salaries within a certain threshold.
The programme is being extended until the end of 2017 and the upper
salary threshold is being removed. In addition, the requirement to have
been employed abroad by the employer before moving to Ireland has
been reduced to six months.
Ireland’s international financial services sector is, in a global context,
extremely competitive. The Finance Minister announced that a new
‘Strategy for Financial Services in Ireland’ is currently being developed
and will be launched next year to help support further growth in
this sector.
PwC observation:
The changes proposed are positive for international groups with
operations in Ireland. The Minister has stated that Ireland ‘plays
fair, but plays to win’ in the competitive global foreign direct
investment market and this Budget supports that position.
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OECD
OECD report on Action 2 - hybrid mismatches
The Organisation for Economic Co-operation and
Development (OECD) published on September 16, 2014
an agreed report on hybrid mismatches. That report was
approved by G20 Finance Ministers at their meeting on
20/21 September.
The OECD’s March 2014 papers on hybrids (dealing separately with
treaty issues and domestic law issues) were among the most complex
and lengthy of its proposals to date.
The initial proposals for changes to domestic laws dealt separately
with hybrid instruments and transfers, hybrid entity payments and
imported mismatches, and reverse hybrids.
The discussion left open a number of important points on which
responses were requested. The chief open issue was the type of
approach, i.e. whether a ‘top-down’ or ‘bottom-up’ approach should be
adopted. Other questions posed related to the clarity and scope of the
rules and the particular treatment that should be applied in the case of
regulatory capital.
Categories of hybrid mismatch arrangements
The fundamental principles of the deliverable have not changed
from the discussion draft, notwithstanding the change in how the
recommendations are organised.
The two main types of mismatches identified are payments that:
i.
are deductible under the rules of the payer and not included in the
income of the recipient (deduction/no inclusion (D/NI outcomes),
and
ii.
give rise to duplicate deductions from the same expenditure.
The deliverable also adds a third type of mismatch, where non-hybrid
payments from a third country can be set off against hybrid mismatch
arrangement deductions and thus are not included in the income of the
recipient (indirect deduction/no inclusion or ‘indirect D/NI’ outcomes).
Within these three categories of hybrid mismatch arrangements are
the different types of hybrid transactions and entities specifically
addressed by the deliverable.
PwC observation:
Whilst there have been some welcome changes from the previous
draft version of the Hybrid report, this final version still maintains
many of the policy features which led to multiple comments being
submitted to the OECD/G20.
These include:
•
concern over the complexity and workability of rules that
required taxing authorities to know, in detail, the taxation
treatment in other jurisdictions
•
the lack of a motive or purpose test giving rise to the potential
that the outcome of the application of the rules could result
in taxation arising in a manner that may be even more
‘inappropriate’ than the current hybrid impact is perceived to
be by the OECD/G20
•
a continued lack of explanation as to why it is necessary to
address hybrids specifically rather than allow the issue to
be addressed through other, potentially more relevant and
coherent work streams, such as interest deductibility and
CFCs, and
•
a lack of recognition that a jurisdiction’s hybrid rules or
lack thereof are just one part of the overall fiscal policy of a
jurisdiction that has been set to achieve the specific economic
aims of the jurisdiction and are no different to other tax and
non-tax levers such as, for example, the overall corporate tax
rate, tax incentives and legal and fiscal governance.
The discussion paper has been turned into a comprehensive set of
proposed rules (the deliverable) with more work to occur in 2015
on imported mismatches, repos, interaction with controlled foreign
companies (CFCs), regulatory capital, and collective investment
vehicles, and to take account of deliverables from other work streams.
The domestic law recommendations now made by the OECD generally
have relatively minor changes from the March 2014 draft noted above.
The principle of automatic application with no motive or purpose test,
and a structure of primary and defensive linked rules with a hierarchy,
has been preserved.
Having noted the above it is important that countries follow the
recommendation implied by this final report that implementation
be effectively deferred until September 2015 when:
Pam Olson
Washington
T: +1 202 414 1401
E: [email protected]
iii. the remaining items for further discussion can be concluded.
Calum M Dewar
New York
T: +1 646 471-5254
E: [email protected]
i.
the output of other relevant working groups will be known
ii.
the OECD/G20 will have produced their detailed commentary,
and
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OECD
OECD finalises guidance on transfer pricing
documentation and country-by-country reporting
On September 16, 2014, the Organisation for Economic
Co-operation and Development (OECD) finalised its
guidance in relation to transfer pricing documentation
and country-by-country (CbC) reporting.
The final report is broadly consistent with the Discussion Draft
released by the OECD on January 30, 2014, although it has pared back
some proposals in response to concerns of the business community and
clarified a number of questions raised by the Discussion Draft.
The guidance from this report will replace the transfer pricing
documentation guidance contained in Chapter V of the OECD Transfer
Pricing Guidelines for Multinational Enterprises (MNEs) and Tax
Administrations (OECD Guidelines). In summary, this guidance
seeks to provide a coherent and consistent framework under which
MNEs should prepare global transfer pricing documentation, while
simultaneously improving the ability of tax authorities to make
better informed risk assessments and to conduct better targeted
transfer pricing audits. Some of the details around implementation
mechanisms, including timing, will be developed further over the
next few months and for many OECD countries there may be a need
to implement this new approach to transfer pricing documentation
through changes to domestic law before this fully comes into effect.
However, it is clear that there is a strong commitment to implement
and this will represent a significant shift to the way in which MNEs
currently prepare and renew transfer pricing documentation. In fact,
the UK became the first country to formally commit to implementing
the CbC report.
Pam Olson
Washington
T: +1 202 414 1401
E: [email protected]
David Ernick
Washington
T: +1 202 414 1491
E: [email protected]
PwC observation:
While this report answered many of the
questions posed by the Discussion Draft, the
package continues to be heavily skewed towards
tax authorities with respect to the amount of
information and level of detail required. It
seems unlikely that the improved consistency
of reporting will materially reduce MNE
compliance costs due to the sheer increase in
information required. Tax authorities with
current tax return disclosure requirements may
not eliminate their requirements or conform
them to the OECD’s new guidance. In addition,
the upfront costs in upgrading information
systems to capture the new data required will be
significant for many MNEs.
It is important for the business community
and tax professionals to ensure an appropriate
phase-in of this new approach to documentation.
It is also strongly advisable that MNEs review
their internal processes and systems to confirm
efficient and accurate capture of the increased
information required by the tax authorities.
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Tax Legislation
Proposed Legislative
Changes
Administration
& Case Law
Treaties
•
On August 6, 2014 the Spanish government published some
bills to amend the main taxes in the country. Those bills are
currently under parliamentary review for approval, which is
expected to occur before the end of 2014.
Among others, the main amendments in the Corporate Income Tax (CIT)
and the Non-resident Income Tax are the following:
•
The CIT rate would be reduced from 30% to 28% in 2015 and
to 25% in 2016 and onwards (also applicable to permanent
establishments [PEs]).
•
The requirements for the participation exemption, which
is also extended to Spanish-resident subsidiaries, would be
slightly modified.
•
The annual offset of net operating losses would be limited to 60%
of the company’s taxable base (1 million euros [EUR] could be
offset in any case).
•
The tax consolidation group would include dependent companies
held through a non-resident company.
•
The withholding tax (WHT) rate on dividends and interest paid
to non-residents would be reduced to 20% in 2015 and 19% in
2016; the same rate would apply to capital gains realised by nonresidents or to the branch profit tax; other income generated by
non-residents would be taxed at a 24% rate (except for European
Union [EU] taxpayers, in which case the 24% would be substituted
by 20% in 2015 and 19% as of 2016).
Ramón Mullerat Prat
Spain
T: +34 915 685 534
E: [email protected]
In this issue
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Spain
Spain proposes major tax reforms
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The EU Parent-Subsidiary Directive would be more restrictive than
the one currently in force when the immediate EU shareholder
is owned, directly or indirectly, by a non-EU resident; under the
proposal, in this case it must be proved that the EU shareholder was
incorporated for valid economic and substantive business reasons.
PwC observation:
Multinationals should consider their possible impact when
reviewing existing or future investment structures in Spain.
Carlos Concha Carballido
Spain
T: +34 915 684 365
E: [email protected]
Luis Antonio González González
Spain
T: +34 915 685 528
E: [email protected]
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Switzerland
Swiss Corporate Tax Reform III: CTR III Consultation
Draft published by Swiss Federal Department
of Finance
On September 19, 2014, the Swiss Federal Council adopted
the draft legislation of the Federal Law on Measures
to Maintain the Competitiveness of Business Location
Switzerland (Law on Swiss Corporate Tax Reform III,
CTR III). After the publication of the draft bill and the
corresponding explanatory report, political parties,
interested associations as well as the Swiss Cantons
have been invited to provide their comments to the
Consultation Draft.
This will be achieved with the following measures:
Key points of CTR III Consultation Draft
• Replacement of current privileged cantonal tax regimes by
measures with increased international acceptance:
Interested-adjusted profit taxation (i.e. Notional Interest
Deduction on surplus equity at federal and cantonal level).
General decrease in cantonal income tax rates in the discretion of
the cantons.
•
Further measures to increase the consistency of Swiss tax law,
in particular:
•
Armin Marti
Zurich
T: +41 58 792 4343
E: [email protected]
Swiss Patent Box at cantonal level and
––
•
The proposed abolition of the privileged tax regimes (namely holding,
administrative and mixed company regimes, as well as the principal
taxation and the Swiss Finance Branch practice on federal level)
forced by increased international pressure would result in significant
competitive disadvantages. In this context, CTR III aims at maintaining
Switzerland’s competitiveness as a business location despite the
abolition of the current regimes.
Stefan Schmid
Zurich
T: +41 58 792 4482
E: [email protected]
––
––
Maintain legal and investment security by way of tax
systematic realisation in case of change of tax status with
subsequent tax-effective depreciation of hidden reserves.
––
Adoption of annual capital tax on participations, intangibles,
and group loans.
––
Abolition of issuance stamp tax on equity capital.
––
Introduction of unrestricted use of tax loss carry forwards
(currently limited to seven years) with limitation of 80% of
annual taxable income.
––
Change to direct participation exemption system, abolition
of minimal participation quota and minimum holding
period.
––
Reduction of partial taxation on dividend income of
individuals to 70% and extension of application to portfolio
investments.
––
Introduction of a capital gains tax on privately held
investments in participations by individuals.
Adoption of the current system of financial equalisation
among cantons.
What next?
The CTR III Consultation Draft includes a wide variety of proposed
measures. Political discussions about the questions which adoptions
in which form will be included in the final Draft Law have just begun.
The consultation process will last until January 31, 2015.
Subsequently, the Swiss Federal Council will release an updated
version of the Draft Law together with an explanatory report for
parliamentary debates presumably by June 2015. As a next step,
pre-discussions by the Economic Committees of both parliamentary
chambers (WAK-S/WAK-N) will start, followed by discussions in the
parliamentary chambers itself. Eventually it is likely that the final
reform will be subject to popular vote.
Entry into force of any new tax measures is not expected before 2018
to 2020.
PwC observation:
The CTR III is of major importance for Switzerland. The country
would benefit from the fiscal attractiveness for corporates that the
reform is intended to maintain not only fiscally and financially,
but also, and to a great extent, economically. The legislative
consultation document in principle contains all the elements
required to maintain Switzerland’s international competitiveness,
the stability of its tax revenues, and its acceptability with current
international standards.
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United Kingdom
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United Kingdom
The Scottish Referendum from tax perspective
The outcome of the Scottish Referendum held on September
18, 2014 has confirmed that Scotland will remain part of
the United Kingdom (UK).
Notwithstanding the outcome of the Referendum, the debate as to the
future direction of Scotland continues. The main UK political parties
have committed to further devolution and there are already changes in
progress through the Scotland Act 2012.
Under the Scotland Act 2012, the Scottish Parliament will have powers
in April 2016 to set the rate of income tax for Scottish taxpayers, plus
control from April 2015 over tax on property sales (Land and Buildings
Transaction Tax - LBTT) and Landfill tax. The rates and bands for the
LBTT and Landfill tax were announced in the Draft Budget Statement
on October 9, 2014. They are subject to Parliamentary approval.
The further powers which are proposed mainly concern income tax.
Value added tax (VAT), corporation tax, and national insurance
contributions are unlikely to be devolved. The main parties have
agreed a timetable for the delivery of such powers under which draft
legislation would be ready by January 25, 2015 and would be enacted
after May 2015. Implementation dates are unknown as yet.
David A Glen
Glassgow
T: +44 (0) 141 355 4053
E: [email protected]
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Gwyneth Scholefield
Edinburgh
T: +44 (0) 131 260 4134
E: [email protected]
PwC observation:
There are wide-ranging human resource (HR) issues that any
companies with operations in Scotland will need to consider. For
instance, companies which have staff who work in Scotland will need
to ensure their payroll systems are set up to manage the application of
both UK and Scottish tax withholding and compliance requirements.
Employers will need to provide information to Her Majesty’s Revenue
and Customs (HMRC) on both Scottish and UK taxpayers.
Since the timetable set out for the devolution of further tax-raising
powers to Scotland is fast paced, it is important for companies to keep
abreast of developments.
UK government’s response to BEPS September 2014
deliverables
The UK government will publish a consultation at the
Autumn Statement on December 3, 2014 on the UK’s
implementation of the OECD’s Base Erosion and Profit
Shifting (BEPS) recommendations for rules to counter
hybrid mismatch arrangements.
As part of the consultation, the government will consider the
case for special provisions for banks’ and insurers’ hybrid
regulatory capital instruments, which will recognise their unique
regulatory requirements.
In a separate HM Treasury press release, the government formally
committed to implementing the new country-by-country reporting
template, just days after it was unveiled by the OECD.
PwC observation:
These announcements are the latest in a series of clear statements
from the UK government that they intend to be at the forefront of
implementing the BEPS proposals. However, at the same time, the
UK has repeatedly said that it does not wish to move ahead alone
and recognises the value in coordinating the implementation of
the proposed measures. As such, the consultation paper to be
published in December demonstrates a continuing commitment to
implementing the rules. A similar approach has been taken with
respect to the proposals regarding country by country reporting
with an early pledge to implement the rules.
Michael J Cooper
London
T: +44 (0) 20 721 35212
E: [email protected]
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Administration and case law
Brazil
Brazilian Federal Revenue Authorities issue
ruling on exemption of withholding tax on certain
remittances abroad
On August 25, 2014, the Brazilian Federal Revenue
Authorities (RFB) released Tax Ruling No. 230 providing
that remittances to foreign entities relating to educational,
scientific, or cultural activities should not be subject to
withholding tax (WHT).
It is important to note that the ruling does not extend to remittances
concerning the provision of services related to the preparation
of technical and economic feasibility studies to be used for the
implementation of complex industrial processes.
PwC observation:
Brazilian taxpayers remitting such amounts abroad or those entities
receiving payments in relation to such services from Brazil should
consider whether they could benefit from the exemption provided
by the RFB.
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Brazil
Brazilian Ministry of Finance extends list of activities
receiving beneficial treatment under new CFC rules
On September 29, 2014, the Ministry of Finance published
ordinance 427/2014 (MF 427/2014) extending the benefits
provided under the controlled foreign corporation (CFC)
legislation to certain additional industries.
PwC observation:
MF 427/2014 should increase the ability for Brazilian
multinationals to compete in foreign jurisdictions in relation
to these particular activities. Brazilian multinationals that are
currently engaged in or intend to engage in such activities should
consider whether they could benefit from the application of
MF 427/2014.
Among other measures, in May 2014, Law 12,973/2014 introduced
new rules relating to the taxation of profits earned by CFCs.
Specifically, the law provides that until calendar year 2022, Brazilian
parent companies may deduct up to 9% as a presumed/deemed credit
on the CFC’s taxable profit, generated by investments abroad that are
engaged in the manufacture of food and beverage products and in the
construction of building/infrastructure works.
Broadly, under the new Brazilian CFC laws, CFCs will be subject to tax
at a rate of 34% on profits calculated under the CFC’s local accounting
standards. The Brazilian parent company is then provided a credit
in respect of any tax paid in the foreign jurisdiction. As noted above,
for CFCs undertaking certain activities, an additional 9% presumed/
deemed credit is available which reduces and in some cases may
eliminate the obligation to pay Brazilian tax in respect of that CFC.
On September 29, 2014, MF 427/2014 was published for the purpose of
extending this benefit to the following activities performed by the CFC:
Durval Portela
São Paulo
Manufacturing.
•
Mineral extraction.
•
Exploitation, under public concession contracts, of public assets
located in the country of residence of the CFC entity.
MF 427/2014 became effective from the date of its publication.
T: +55 11 3674 2582
E: [email protected]
Philippe Jeffrey
São Paulo
T: +55 11 3674 2271
E: [email protected]
•
Mark Conomy
São Paulo
T: +55 11 3674 2519
E: [email protected]
Durval Portela
São Paulo
T: +55 11 3674 2582
E: [email protected]
Philippe Jeffrey
São Paulo
T: +55 11 3674 2271
E: [email protected]
Mark Conomy
São Paulo
T: +55 11 3674 2519
E: [email protected]
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Brazil
Interpretative Declaratory Act regarding incidence of
withholding tax on local transactions
On September 3, 2014, the Brazilian Federal Revenue
Authorities (RFB) published Interpretative Declaratory Act
No. 8/2014 (ADI No 8/2014) confirming that the triggering
event for the incidence of withholding tax (WHT)
should be the time at which the remittance is credited for
accounting purposes.
PwC observation:
Although ADI No 8/2014 is
only applicable to internal
transactions, this Interpretative
Declaratory Act may be
indicative of the position to be
taken by the RFB on crossborder transactions.
The triggering event for the incidence of WHT on local transactions in
Brazil has previously been the subject of some uncertainty. Broadly,
the relevant legislation provides that the liability for withholding is
triggered at the time an amount is ‘paid, credited, delivered, employed,
or remitted to the beneficiary’. Given the breadth of the relevant
definition, parties would often take different positions as to when the
relevant triggering event occurred.
According to ADI No 8/2014, the RFB has taken the position that the
relevant tax event will occur on the date the journal entry is made
by entity/legal person making the local remittance in consideration
for professional services, or creating a payable to the relevant service
provider for accounting purposes. The RFB also considers that the
retention of WHT on amounts remitted should be affected on the date
the services are recognised as a liability for accounting purposes.
Durval Portela
São Paulo
T: +55 11 3674 2582
E: [email protected]
Philippe Jeffrey
São Paulo
T: +55 11 3674 2271
E: [email protected]
Mark Conomy
São Paulo
T: +55 11 3674 2519
E: [email protected]
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Brazil
Normative Instruction regulating tax treatment of
dividends and interest on net equity and the equitypick up method
In May 2014, this Provisional Measure was converted into law by Law
No. 12.973/2014 (new law).
On September 18, 2014, the Brazilian Federal Revenue
Authorities (RFB) published Normative Instruction
1,492/2014 (NI1,492/2014) amending Normative
Instruction 1,397/2013 (NI 1,397/2013), to regulate
changes in respect of the tax treatment of dividends and
interest on net equity (INE) and the equity pick-up method,
that were introduced in May 2014.
•
Taxpayers that opt to apply the new law from January 1, 2014
will be subject to the RTT until December 31, 2013. For those
taxpayers adopting the law from January 1, 2015, they will be
subject to the RTT until December 31, 2014.
•
For purposes of calculating INE, the method to be used for
determining the annual profits and accumulated profits should
be based on the Tax Balance Sheet or alternatively based on the
method adopted by Law No. 6404/1976 (Corporations Law).
Where the taxpayer has elected to adopt the new law from
January 1, 2014, it is required to calculate the limit in accordance
with the Corporations Law.
By way of background, in 2007, Law No. 11.638/2007 amended the
Brazilian accounting rules to align Brazilian generally accepted
accounting principles (GAAP) with International Financial Reporting
Standards (IFRS), effective from 1 January 2008. To ensure that this
accounting change was tax neutral, the Transitional Tax Regime (RTT)
was introduced by Law No. 11.941/2009.
NI 1,397/2013 which was published in September 2013, provided
guidance on the RTT and, broadly speaking, required taxpayers to
maintain two sets of books, one for accounting purposes and another
prepared in accordance with the pre- January, 1 2008, accounting
principles (referred to herein as the ‘Tax Balance Sheet’). NI
1,397/2013 also explained how certain differences between the two
sets of books should be treated for tax purposes.
NI 1,492/2014 amends NI 1,397/2013 to reflect the changes introduced
by the new law, specifically:
•
The value of investments in subsidiaries and affiliate entities
should be valued based on the methodology adopted under preJanuary, 1 2008, accounting principles. Where the taxpayer has
elected to adopt the new law from January 1, 2014, it is required
to calculate the value of investment in subsidiaries or affiliates
in accordance with the value of net equity calculated pursuant to
Corporations Law. For the 2014 calendar year, where a taxpayer
has not adopted the new law, however, participation in an entity
that has adopted the new law, the value of that investment should
also be calculated under the Corporations Law.
In November 2013, the Executive Branch of the Brazilian government
published Provisional Measure 627/2013 which revoked the RTT and
amended other aspects of the tax law.
Durval Portela
São Paulo
T: +55 11 3674 2582
E: [email protected]
Philippe Jeffrey
São Paulo
T: +55 11 3674 2271
E: [email protected]
Mark Conomy
São Paulo
T: +55 11 3674 2519
E: [email protected]
•
Dividends calculated in excess of the tax balance sheet accruing
between January 1, 2008 and December 31, 2013, is not subject
to taxation. Excess profits accruing between January 1, 2014, and
December 31, 2014, will be subject to withholding tax (WHT)
at 15% (or 25% where a foreign beneficiary is located in a tax
haven). In the event that the recipient is a Brazilian entity the
excess portion will be subject to corporate tax. Any WHT levied
on the payment to a Brazilian resident should be creditable
against the corporate tax due.
PwC observation:
NI 1,492/2014 provides practical regulation to taxpayers trying to
navigate Law No. 12.973/2014.
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The Innovation Box is a corporate tax facility enacted to
stimulate Research & Development (R&D) activities and the
ownership of Intellectual Property (IP) in the Netherlands.
If a company qualifies for the Innovation Box its effective tax rate
in the Netherlands can be reduced from 25% to 15% in practice.
On September 1, 2014, the State Secretary of Finance issued a
Decree which provides for further guidance on the application of the
Innovation Box regime.
Background
Income derived from IP is, under certain conditions, taxable at 5%,
which is significantly lower than the standard corporate tax rate of
25%. Since its introduction in 2007, the Dutch Innovation Box has
provided significant benefits to companies.
Conditions
There are three basic requirements a company needs to fulfil to qualify
for the Innovation Box:
i.
the Dutch entity legally owns patents or the Dutch entity
has obtained an R&D certificate (S&O Verklaring) for its
R&D activities;
ii.
the IP should be economically owned by the Dutch entity; and
Impact of the Decree
To apply for the Innovation Box, the company needs to check a box in
its tax return. In practice it is required to conclude a ruling with the
tax authorities on the amount of profit attributable to the Innovation
Box. Over the years, the tax authorities have developed a policy for the
application of the regime. However, it was often unclear whether they
would be eligible for the Innovation Box and what the potential tax
savings would be. The Decree issued by the State Secretary is primarily
a formal capture of the policy applied by the Dutch tax authorities.
Since the conditions for applications are written down in a formal
Decree, it provides more guidance and up-front certainty to taxpayers
considering applying for the beneficial regime.
PwC observation:
Together with other R&D incentives like the RDA tax credit (a 60%
additional corporate tax deduction of R&D investments, resulting
in an additional net benefit of 15%) and the S&O tax credit (a wage
tax credit for Dutch R&D employees, a benefit for the company),
substantial tax savings could be achieved if R&D activities are
performed in the Netherlands and an application for the Dutch
Innovation is made. With the Decree it becomes easier for taxpayers
to assess up-front whether application of the Innovation Box may be
successful and what the potential savings will be.
iii. the IP should be newly developed.
A company fulfilling all three requirements can attribute part of
its profit to the Innovation Box. The level of profit attributable to IP
depends on the importance and the level of the R&D activities within
the company, as well as the number of patents and R&D certificates.
Jeroen Schmitz
Amsterdam
T: +31(0)8879 27352
E: [email protected]
Richard Hiemstra
Amsterdam
T: +31(0)8879 27618
E: [email protected]
In this issue
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Netherlands
Decree provides further guidance on the application of
the Dutch Innovation Box regime
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Ramon Hogenboom
Amsterdam
T: +31(0)8879 26717
E: [email protected]
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OECD
Qatar
OECD guidance on transfer pricing aspects
of intangibles
On September 16, 2014, the Organisation for Economic
Co-operation and Development (OECD) published its final
and interim revisions in relation to Chapters I, II, and VI
of the OECD Transfer Pricing Guidelines for Multinational
Enterprises and Tax Administrations.
These revisions have been developed in connection with Action 8 of the
Action Plan on Base Erosion and Profit Shifting (BEPS) that is focused
on assuring that transfer pricing outcomes with respect to intangibles
are in line with value creation activities.
The revisions to the OECD Guidelines:
•
clarify the definition of intangibles
•
provide guidance on identifying transactions
involving intangibles
•
provide supplemental guidance for determining arm’s-length
conditions for transactions involving intangibles, and
•
contain guidance on the transfer pricing treatment of local market
features and corporate synergies.
Given that some of the transfer pricing issues related to intangibles
are closely related to the work that will be performed by the OECD as
part of Action 9 (‘Risks and Capital’) and Action 10 (‘Other high-risk
transactions’) of the BEPS Action Plan in the course of 2015, key
elements of the work on intangibles have not been finalised yet and
thus need to be viewed as interim guidance.
Pam Olson
Washington
T: +1 202 414 1401
E: [email protected]
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In addition, the OECD has also recognised that with respect to the work
to be performed next year related to the transfer pricing treatment of
‘hard to value’ intangibles, it will consider both the application of the
arm’s-length principle and special measures beyond the arm’s-length
principle to identify effective responses to the concerns raised in the
BEPS Action Plan.
PwC observation:
Given the close interaction between the work performed on the
ownership of intangibles under Action 8 of the BEPS Action Plan
and the work to be performed by the OECD as part of the BEPS
Action Plan in 2015 in relation to risk, re-characterisation of
transactions and hard to value intangibles, the takeaway is that the
key sections of guidance on transfer pricing aspects of intangibles
have not been finalised yet.
The ultimate goal of the OECD appears to be clear and from that
perspective, one can only conclude that functional value creation
remains at the forefront of the revised guidance. An analysis of
the multinational enterprise (MNE) group global value chain that
provides a clear understanding of the MNE’s global business process
and how intangibles interact with other functions, risks and assets
that comprise the global business will form the starting point of any
transfer pricing analysis involving intangibles going forward.
The above combined with the special measures that will be
developed by the OECD in 2015 will be aimed at ensuring that
an MNE group member that merely provides funding without
performing and controlling all of the important functions,
providing all assets and bearing and controlling all risks in relation
to the development, enhancement, maintenance, protection, and
exploitation of the intangibles would only be entitled to a riskadjusted rate of anticipated return on its funding but not more.
David Ernick
Washington
T: +1 202 414 1491
E: [email protected]
Horacio Pena
New York
T: +1 646 471 1957
E: [email protected]
Implementation of new tax administration system
The Qatar Ministry of Finance introduced a new Tax
Administration System (TAS) with effect from September
28, 2014.
The TAS provides an electronic basis for taxpayers to comply with
their tax obligations (i.e. corporate income tax [CIT] and withholding
tax [WHT]), and to communicate with the tax authority. The main
objectives of introducing the new system are to modernise and
transform the tax administration function, enhance the performance
of the tax authority by reducing processing time, and increase
transparency and taxpayer satisfaction.
The TAS offers the following e-services:
•
E-registration.
•
Online filing of tax returns.
•
Online submission of requests.
•
Monitoring the status of taxpayers’ obligations.
PwC observation:
We expect the new initiative will enhance overall efficiency
of the tax authority and speed up finalisation of tax cards,
tax assessments, and tax clearance. It will also provide more
transparency to inbound investors.
Upuli Kasthuriarachchi
Qatar
T: +974 44192807
E: [email protected]
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United States
IRS imposes restrictions on ‘inversion’ transactions
The Internal Revenue Service (IRS) issued Notice 201452 (the Notice) addressing certain cross-border business
combination transactions, termed ‘inversions’ in the Notice.
Second, Notice 2014-52 addresses post-transaction steps that taxpayers
may undertake with respect to US-owned foreign subsidiaries, under
Sections 304(b)(5)(B), 956(e), and 7701(l), making it more difficult to
access foreign earnings without incurring added US tax.
•
The Section 304 guidance would tighten the limitation under
Section 304(b)(5)(B) and thereby further limit the ability to
bypass the former US parent company (with the controlled
foreign corporation’s [CFC] earnings and profits) where the new
foreign parent sells shares of the former US parent company to a
lower-tier CFC.
•
The Section 956(e) guidance would treat as ‘US property’ postinversion acquisitions by CFCs of debt or equity interests in the
new foreign parent corporation or certain foreign affiliates,
regardless of whether the funds involved were made available to a
US shareholder.
•
The Section 7701(l) guidance would maintain CFC status for
existing foreign subsidiaries of the US company even when
the new foreign parent or another foreign affiliate makes an
equity investment that gives it a majority interest. Specifically,
the foreign acquirer would be treated as though it had made
the investment in the US parent company and not the CFC
(introducing deemed equity interest including through
intervening legal entities if necessary).
The IRS views such transactions as motivated in substantial part by the
ability to undertake post-transaction steps that the IRS characterise as
tax avoidance transactions.
The Notice announces the intention to issue regulations under five
Internal Revenue Code (the Code) sections, and it takes a two-pronged
approach. First, it addresses the treatment of cross-border business
combination transactions themselves under Sections 7874 and 367.
That guidance involves the following:
•
Disregarding certain stock of a foreign acquiring corporation
that holds a significant amount of passive assets for purposes of
the ownership continuity test ratio, meaning transactions with
foreign corporations without active businesses are no longer
possible and preventing contributions of passive assets to increase
the size of the foreign acquirer.
•
Disregarding certain non-ordinary course distributions by the US
company, also for purposes of the ownership continuity test ratio,
meaning US companies cannot attempt to shrink their size in
advance of a transaction.
•
Changing the treatment of certain transfers of the stock of the
foreign acquiring corporation, such as in a spin-off that will not
qualify for the Section 7874 ‘expanded affiliated group’ exception,
meaning a US company will not be able to use a spin off to
effectuate a re-domiciliation.
Michael A DiFronzo
Wasington
T: +1 202 312 7613
E: [email protected]
The Notice’s guidance generally applies only to business combination
transactions completed on or after September 22, 2014, except for
the Section 304 provision, which applies to all stock acquisitions
completed on or after September 22, 2014 that meet Section 304
criteria. The Notice indicates that future guidance in this area will
apply prospectively from the date of issuance, and only to groups
that completed their business combination transactions on or after
September 22, 2014.
Carl Dubert
Wasington
T: +1 202 414 1873
E: [email protected]
Timothy Lohnes
Wasington
T: +1 202 414 1686
E: [email protected]
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PwC observation:
Notice 2014-52 is major administrative guidance that announces
the IRS’s intention to issue regulations setting forth new rules that
will apply in the inversion context, as well as one rule that applies
more broadly to certain restructuring transactions undertaken
within a foreign-parented group. The rules announced are very
complex and are intended to further limit the types of business
combinations that may qualify as an inversion under Section 7874,
as well as eliminate, for a period of ten years, certain common
US tax planning opportunities undertaken once an inversion
has occurred.
Notice 2014-52 reflects the Administration’s stated views that
certain US-to-foreign transactions should be curtailed now to
prevent losses to the US tax base while talks regarding corporate
tax reform continue. Although Treasury has publicly stated that
legislative action is needed with respect to inversions, it has been
exploring the scope of its administrative authority to address
such transactions. In this regard, the IRS bases its authority for
the future regulations announced in Notice 2014-52 on several
different Code provisions. Some of the rules announced provide
surprising US tax consequences, and arguably are based on an
overly expansive interpretation of the government’s administrative
authority. Companies and tax practitioners considering these
types of transactions, as well as certain inbound restructuring
transactions, will need to carefully consider the full scope,
coordination, and possible adverse US consequences arising
from the application of these new rules. In the meantime, the
Administration and certain members of Congress are expected to
continue to discuss potential legislation in this area, while other
members point to the need for comprehensive US tax reform.
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European Union
European Commission explains State aid
investigations in Ireland and Luxembourg
Key reasons
The European Commission specifies a number of aspects of the
agreements which it considers to be relevant in the present context:
On 30 September 2014 the European Commission published
its opening decisions in the formal investigations into
transfer pricing agreements between Apple and, allegedly,
Fiat and - respectively - Ireland and Luxembourg.
•
The approach taken in the agreements seems to have been the
result of a negotiation process (i.e. not a proper transfer pricing
analysis);
•
There is in the Irish ruling, a general failure to explain the
methodology which applies;
•
The Irish agreements are open -ended and do not provide for
adjustment in the event of the evolution of sales;
•
The Luxembourg ruling appears to depart from the at arm’s
length approach.
The European Commission had already communicated these
investigations through a press release issued on 11 June 2014. The
current decisions explain the reason for these investigations, and
specify the additional information which the European Commission
has requested from the aforementioned Member States.
These decisions do not yet provide the outcomes of the European
Commission’s ongoing, formal investigations in this matter.
Background
Both the Irish and the Luxembourg formal investigations pertain to the
use of tax rulings on the application of transfer pricing rules. In each
case, the European Commission holds the view that agreements made
between the taxpayer and the Member State may not reflect a price
which corresponds with the ‘at arm’s length’ standard. The European
Commission refers to the standards set by the OECD’s Transfer Pricing
Guidelines.
The European Commission notes that the current agreements do not
so much reflect the application of transfer pricing rules as a targeted
approach towards reaching a particular (favourable) tax base.
Sjoerd Douma
Netherlands
T: +31 887924253
E: [email protected]
Anne A. Harvey
Ireland
T: +353 1 792 8643
E: [email protected]
PwC observation:
The European Commission asserts that “if the method of taxation
for intra-group transfers does not comply with the arm’s length
principle, and leads to a taxable base inferior to the one which
would result from the correct implementation of that principle, it
provides a selective advantage to the company concerned.”
Whilst this is not the first time that the European Commission has
targeted transfer pricing arrangements, the European Commission’s
current view is likely to prove controversial. If this position is
confirmed in the final decisions in these cases, further litigation
before the European Courts is likely. For additional background on
this topic, see our EU fiscal State aid briefing document.
Alina Macovei
Luxembourg
T: +352 49 48 48 3122
E: [email protected]
Peter Cussons
United Kingdom
T: +44 (0)20 7804 5260
E: [email protected]
Emmanuel Raingeard
France
T: +33 1 56 57 40 14
E: [email protected]
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Austria
Austria-Montenegro double tax treaty is signed
The Austria-Montenegro double tax treaty (DTT) was
signed on June 16, 2014. The legal procedure to bring the
agreement into force is now being followed.
The main treaty provisions are:
•
A 10% withholding tax (WHT) on dividends generally applies.
A reduced WHT rate of 5% applies if the beneficial owner (not a
partnership) holds a qualifying participation of at least 5%.
•
A 10% WHT on interest applies. Exemptions are available for
loans owed to or guaranteed by the contracting state, political
subdivision, or export financing agency thereof.
•
For royalties received for the use of any copyright of literary,
artistic, or scientific work, a 5% WHT rate applies and a 10% WHT
rate applies for the use of patents, trademarks, and information
concerning industrial, commercial, or scientific experience.
•
A permanent establishment (PE) is constituted by a building site
or installation project lasting more than 12 months.
•
Capital gains on the alienation of shares are taxable only in the
state where the alienator is resident.
Austria generally uses the credit method to eliminate double taxation.
The exemption method is applied for business profits and income from
employment. Montenegro applies the credit method (also for business
profits and income from employment).
PwC observation:
The treaty is expected to enhance economic co-operation between
both countries when it enters into force.
Guelay Karatas
Vienna
T: +43 1 501 88 3336
E: [email protected]
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Christof Woerndl
Vienna
T: +43 1 501 88 3335
E: [email protected]
Double tax treaty between Austria and Taiwan
is signed
The Austria-Taiwan double tax treaty (DTT) was signed
on July 12, 2014 and is now subject to the ratification
procedure in both countries.
The DTT follows, to a large extent, the provisions of the United Nations
Model Double Taxation Convention.
The key provisions of the DTT are:
•
A withholding tax (WHT) of not more than 10% applies for
dividends, interest, and royalties. Exemptions are available for
interest payments within the public sector, for bank guarantees as
well as interbank loans. The definition of royalties does not include
leases of industrial, commercial, and scientific equipment.
•
A construction site and related supervision services exceeding six
months create a permanent establishment (PE).
•
A services-based PE is assumed where services are performed by an
enterprise of a contracting state in the other contracting state for
more than six months.
Taiwan agreed on a most-favoured nation clause. The above WHT rates
will be renegotiated in case Taiwan agrees on a more favourable rate
with another Organisation for Economic Co-operation and Development
(OECD) member state.
Austria applies the exemption method to eliminate double taxation and
the credit method in case of dividend, interest, and royalty payments.
Taiwan generally applies the credit method.
Guelay Karatas
Vienna
T: +43 1 501 88 3336
E: [email protected]
Christof Woerndl
Vienna
T: +43 1 501 88 3335
E: [email protected]
PwC observation:
The treaty is expected to
enhance economic cooperation between both
countries when it enters
into force.
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France
Protocol covering taxation of capital gains on shares
in ‘real estate-rich’ companies amends FranceLuxembourg double tax treaty
On September 5, 2014, the Finance Ministers of France and
Luxembourg signed a Protocol to the France-Luxembourg
double tax treaty (DTT).
The protocol contains only one substantive clause adding a new
paragraph to the immoveable property article of the treaty, and
granting taxing rights on gains arising from disposals of shares in ‘real
estate-rich’ companies solely to the state in which the underlying real
estate is sited.
The Protocol brings about a change to taxing rights which was not
entirely unexpected.
Text of the Protocol
The paragraph of text that the Protocol introduces will add further
provisions to the existing Article 3 of the treaty, specifying (nonbinding unofficial translation) that:
“Gains arising from the disposition of shares, units, or other rights in
a company, trust, or any other institution or entity, whose assets or
property constitute more than 5o% of their value, or which derive more
than 50% of their value directly or indirectly via the interposition of one
or more companies, trusts, institutions, or entities from immoveable
property situated in a Contracting State or rights deriving from such
property, shall only be taxed in that State. In applying this provision,
immoveable property attributable by such a company to the activities of
its own enterprise shall not be taken into consideration”.
Renaud Jouffroy
Paris
T: +33 1 56 57 42 29
E: [email protected]
The new paragraph goes on to reconfirm that the new provisions apply
equally to disposals by companies of such shares, units, or other rights.
It also explicitly confirms that the provisions do not override any
application of the European Union (EU) Mergers Directive
(2009/133/CE).
The Protocol will come into force on the first day of the month
following confirmation by Luxembourg or France (whichever is the
later) that all the necessary legislative procedures needed to bring
the Protocol into force have been accomplished. The provisions of the
Protocol will then apply for each calendar year or accounting period
commencing after the calendar year in which the Protocol comes
into force. In any situation where withholding tax (WHT) obligations
arise, the Protocol will apply from the beginning of the calendar year
following the Protocol coming into force.
Analysis and practical consequences
While the text of the Protocol applies equally to situations involving
real estate sited in France or in Luxembourg, in practice the great
majority of situations will concern French real estate.
The primary intention of the Protocol is to seek to put an end to the
current double non-taxation that arises in many cases when a French
or Luxembourg company owning, as its main asset, real estate sited in
France, is sold.
The new provisions deal specifically with this ‘real estate-rich’ or
‘prépondérance immobilière’ situation. The general rules dealing with
the taxing rights on disposals of shares are superseded by a specific
rule that covers share sales of companies (and other types of legal
entity) which derive more than half of their value from real estate. In
such a situation, the taxing rights are allocated solely to the country
where the real estate is sited.
Emmanuelle Veras
Marseille
T: +33 4 91 99 30 36
E: [email protected]
Hence, a gain arising on a sale by a Luxembourg entity of shares or
similar interests in a French entity, or a Luxembourg entity, or an entity
resident in any other jurisdiction, which has as its main asset French
real estate, will, once the Protocol has effect, be taxable in France, and
only in France. In many cases, this will mean that the gain arising will
be taxed once, in France, rather than not at all.
However, in cases where the gain would otherwise have been
taxable in Luxembourg (e.g. where the ‘participation exemption’
under Luxembourg tax law does not apply), then under the Protocol
Luxembourg will no longer have taxing rights.
The disposal of an interest in a French société civile immobilière (SCI)
by a Luxembourg company is a particular case in point. The Protocol
will cause any gain that arises to fall within the scope of the new
provisions (as these cover disposals of companies without reference to
the French taxation status of the company concerned, and also ‘other
institutions and entities’) to be taxable in France, rather than having
taxing rights allocated only to Luxembourg under the ‘other income’
provisions of Article 18 of the treaty as has hitherto been the case.
The text of the Protocol explicitly extends the scope of the provisions to
shares that only indirectly derive their value from real estate.
The Protocol features a specific exclusion from the new provisions for
real estate attributable to the activities of a company’s own enterprise.
It should also be noted that in the Protocol there is no specific exclusion
for disposals of shares in quoted companies, or shares that are
publicly traded.
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The provisions of the protocol are broadly in line with Article 13 (4) of
the Organisation for Economic Co-operation and Development (OECD)
Model Tax Convention.
The provisions are also consistent with the position that French treaty
negotiators have secured in concluding negotiations for almost all of
France’s other DTTs, such as, for example, the France-US and FranceUK treaties.
Lastly, it is significant that the text of a treaty will in this case, most
unusually, explicitly recognise the subordinate status of a DTT to an
EU Directive.
PwC observation:
It is expected that both Luxembourg and France will seek to pass
the legislation necessary to ratify the Protocol before the end of
2014. Consequently, the Protocol could take effect as early as
January 1, 2015. Any potential action in view of mitigating or
avoiding a taxation risk should be implemented as soon as possible.
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Treaties
The double tax treaty (DTT) between Spain and the
Dominican Republic, signed on November 16, 2011 entered
into force on July 25, 2014.
PwC observation:
The treaty provisions are broadly consistent with those recently
concluded with other jurisdictions. Spain continues to expand its
treaty network, specially with Latin American jurisdictions.
The main highlights are:
•
The withholding tax (WHT) on dividends is capped at 10% when
the recipient is the beneficial owner or at 0% if this beneficial
owner is a company (other than a partnership) that directly holds,
at least, 75% of the capital of the paying company.
•
The WHT on interest is capped at 10% when the recipient is the
beneficial owner or at 0% when this beneficial owner is the State,
Central Bank or a public institution, or a pension scheme whose
income is exempt, or the interest is paid due to a sale on credit of a
machinery, equipment, or services.
•
The WHT on royalties is capped at 10% when the recipient is the
beneficial owner.
•
The WHT on certain services (mainly technical assistance or
advisory services) is capped at 10% except for the case where the
recipient has a permanent establishment (PE) in the country where
those services are supplied.
•
The capital gains arising from the alienation of shares or other
rights deriving, in more than 40%, directly or indirectly, from
immovable property, may be taxed in the State where the property
is located.
•
The Protocol of the treaty specifically includes that articles 10
(Dividends), 11 (Interest), 12 (Royalties) and 13 (Services) would
not be applicable if the main purpose of the transaction is to obtain
the treaty benefit
Ramón Mullerat Prat
Spain
T: +34 915 685 534
E: [email protected]
Carlos Concha Carballido
Spain
T: +34 915 684 365
E: [email protected]
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Spain
Spain-Dominican Republic double tax treaty enters
into force
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Luis Antonio González González
Spain
T: +34 915 685 528
E: [email protected]
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Taiwan
Treaties with Kiribati and Luxembourg to come
into effect
Taiwan signed double taxation treaties (DTTs) with
Kiribati and Luxembourg on June 23, 2014 and
July 25, 2014 respectively.
The DTTs will come into force as of January 1, 2015.
Based on the respective DTT, the prescribed withholding tax (WHT)
rates for each are as follows:
Kiribati
• WHT rates on dividends, interest, and royalties will be 10%.
Luxembourg
• WHT rates on dividends and interest will be limited to 10%; but
for dividends or interest 15% will apply if the beneficial owner
of the dividends or interest is a collective investment vehicle
established in the other territory and treated as a body corporate
for tax purposes in that other territory.
•
The WHT rate on royalties will be 10%.
PwC observation:
Multinational companies operating in countries impacted by
the new tax treaties will have increased options in their holding
structures. However, the substance of operations must be taken into
consideration when considering eligibility for treaty benefits.
Elaine Hsieh
Taipei
T: +886 2 27295809
E: [email protected]
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Contact us
For your global contact and more information on PwC’s
international tax services, please contact:
Anja Ellmer
International tax services
T: +49 69 9585 5378
E:[email protected]
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Corporate taxes 2013/14
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