International Tax News Welcome

Tax Legislation
Proposed Legislative
Changes
Administration
& Case Law
International
Tax News
Edition 12
December 2013
EU Law
Treaties
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In this issue
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.
Norway
Korea
Norway’s new rules
on limitation of
interest deductions
Proposed change in Korean
CFC rule
Brazil
Canada
Joint communiqué on
the recently published
Normative Instruction
Canada-Poland treaty
and protocol
Tony Clemens
Global Leader International Tax Services Network
T: +61 2 8266 2953
E: [email protected]
Tax Legislation
Proposed Legislative
Changes
Administration
& Case Law
EU Law
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Treaties
In this issue
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In this issue
Tax legislation
Proposed legislative changes
Administration & case law
EU law
Treaties
Aruba
Aircraft registry and taxes in Aruba
Belgium
Legislative changes announced following
ECJ’s Argenta case
Brazil
Joint communiqué on the recently
published Normative Instruction
United Kingdom
EU Code of Conduct challenge to UK
patent box regime
Canada
Canada-Serbia treaty and protocol
Norway
Norway’s new rules on limitation of
interest deductions
France
France: Draft FY14 finance bill - related
party financing
United Kingdom
Taxation of foreign portfolio dividends High Court decision
Canada
Canada-Switzerland agreement
United States
Base erosion and profit-shifting: OECD and
Ways & Means start taking action
Ireland
2014 Irish budget announcement
United States
IRS releases draft ‘FFI agreement’
under FATCA and related guidance
Canada
Canada-Poland treaty and protocol
Italy
Italian coalition government - proposed
tax agenda
China
China issues new guidelines on mutual
agreement procedure
Korea
Proposed limitation for foreign
investment benefits
Cyprus
Double tax treaty between Cyprus and
Estonia enters into force
Korea
Proposed change in Korean CFC rule
Hong Kong
Hong Kong-Canada double tax treaty
Ireland
Ireland signs double tax treaty
with Thailand
Tax Legislation
Proposed Legislative
Changes
Administration
& Case Law
EU Law
Treaties
Aruba is an attractive and popular jurisdiction for the
registration of private and commercial aircraft.
The island, which forms part of the Dutch Kingdom, is politically
stable, has a proper legal framework, is a member of the Geneva
Convention and Cape Town Convention, and has a favourable
tax system.
A special-purpose vehicle (often an Aruba Exempt Company, or
AVV) may hold the ownership rights of the aircraft, and the aircraft
may then be leased to a foreign airline operator. A local trust
company may be appointed to perform the AVV’s statutory (nonoperational) management.
PwC observation:
Besides the favourable tax system for aircraft registration,
Aruba is a category 1 country rated by the US Federal Aviation
Administration (FAA) and meets International Civil Aviation
Organization requirements.
In addition, Aruba:
•
is an Organisation for Economic Co-operation and
Development (OECD) - approved tax jurisdiction
•
does not have an insurance premium tax
•
does not impose a transfer tax on aircraft transfer, and
•
does not have WHT other than as stated above.
The AVV may opt for fiscal transparency status so that, in principle,
it would not have a taxable presence (through a permanent
establishment [PE] or permanent representative) in Aruba, because the
aircraft would not be physically present on Aruba and no operational
management would occur on the island.
If there is no taxable presence, the AVV would have:
•
no corporate income tax (CIT) (28%)
•
no dividend withholding tax (WHT) (10%)
•
an exemption from the foreign exchange commission (1.3%)
•
an exemption from the turnover tax (1.5%), and
•
no import duty.
Hans Ruiter
Aruba
T: +297 522 1647
E: [email protected]
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Tax Legislation
Aruba
Aircraft registry and taxes in Aruba
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Anushka Lew Jen Tai
Aruba
T: +297 522 1647
E: [email protected]
Jordi van den Heiligenberg
Aruba
T: +297 522 1647
E: [email protected]
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Norway
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United States
Norway’s new rules on limitation of interest deductions
In the 2014 Amended Fiscal Budget, the new Norwegian
government has amended slightly its previous proposal
for new rules limiting the interest deduction between
related parties.
The main conditions of the proposed interest deduction limitation
rules are:
•
The rule application threshold is 5m Norwegian kroner (NOK).
If exceeded, the rules will apply to the full amount.
•
The interest limitation threshold is 30% of taxable earnings
before interest, taxes, depreciation, and amortisation (EBITDA).
•
The carryforward period is ten years.
•
External interest costs generally are deductible, but may displace
the deduction of internal interest.
•
External loans secured with guarantees from a related party
will be considered internal loans; the government will propose
additional regulations on this issue.
•
Tax losses carried forward by the company itself or within the tax
group cannot offset any increased taxable income resulting from
the interest deduction capping.
•
The rules will not apply to upstream petroleum companies under
the Special Tax regime or to financial institutions.
The final Fiscal Budget for 2014 is expected to be passed by Parliament
in December 2013 and to enter into force effective January 1, 2014.
Hilde Thorstad
Oslo
T: +47 95 26 05 48
E: [email protected]
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Anders Nytrøen
Oslo
T: +47 95 26 06 58
E: [email protected]
PwC observation:
The new rules will have a significant impact on the tax position
of Norwegian companies financed by intra-group loans.
We recommend that companies analyse their financing structures
and consider potential restructuring opportunities as soon
as possible.
Base erosion and profit-shifting: OECD and Ways &
Means start taking action
Base erosion and profit-shifting (BEPS) continues to be a
high priority for the Obama Administration, US Congress,
and leading international economic organisations.
We have recently seen significant action seeking to address BEPS
concerns. On June 13, the US House Ways and Means Committee held a
hearing in which Committee Chairman Dave Camp discussed the antibase-erosion options included in his international tax reform discussion
draft released on October 26, 2011. On July 19, the Organisation
for Economic Cooperation and Development (OECD) issued a
Comprehensive Action Plan (Plan) to address BEPS issues. And leaders
of the G20 countries publicly endorsed outline proposals to address
BEPS during their summit in St. Petersburg on September 5/6, 2013.
PwC observation:
Although the most aggressive activities on tax scrutiny have occurred
outside the United States, there are three significant reasons why the
senior management of US subsidiaries should focus on BEPS:
•
Unlike many US companies, foreign parent companies are
more likely to see an increase in scrutiny, thereby heightening
concerns for the group as a whole.
•
The United States has already taken action to increase
transparency and implement information reporting regimes,
and is likely to take further action in this area.
•
The global focus on corporate tax payments is influencing the
political and public debate in the United States; this may affect
potential legislative tax reform.
Oren Penn
Washington, DC
T: +1 202 444 4323
E: [email protected]
Tax Legislation
Proposed Legislative
Changes
Administration
& Case Law
EU Law
Treaties
Proposed legislative changes
Belgium
Legislative changes announced following ECJ’s
Argenta case
On July 4, 2013, the European Court of Justice (ECJ)
rendered its judgment in the Argenta case, in which
it ruled that the Belgian Notional Interest Deduction
(NID) legislation, and in particular the refusal to apply
the NID to a foreign permanent establishment’s (PE)
net assets, violates the European Union (EU) freedom
of establishment.
As a result, the Belgian government recently announced an
amendment to the NID legislation in order to align it with EU law.
According to the proposed changes, the existence of foreign PEs
located in a treaty country no longer would result in a correction to the
NID calculation basis. Instead, the correction would occur at a later
stage as the NID calculated on the higher calculation basis would be
reduced by:
(i) t he lower amount of the result of the foreign PE or real estate and
the net asset value multiplied by the NID rate, for PEs within the
European Economic Area (EEA); or
(ii) t he net asset value of the PE or real estate multiplied by the NID
rate, for PEs outside the EEA.
These legislative changes would be effective beginning with
assessment year 2014 (accounting years ending December 31, 2013, or
later). For prior years, the Belgian legislation remains contrary to the
freedom of establishment, thereby allowing taxpayers to take action
and reclaim NID on EEA PE assets.
Pascal Janssens
Antwerp
T: +32 3 259 31 19
E: [email protected]
Axel Smits
Brussels
T: +32 3 259 31 20
E: [email protected]
PwC observation:
The above - mentioned legislative changes are still in the draft
stage, and therefore are subject to change. Nevertheless, we invite
clients to discuss the content in more detail to anticipate how these
changes, if enacted, could affect their business going forward. This
decision could be of significant importance for Belgian taxpayers
that have foreign EU branches/foreign real estate and that have
corrected the NID calculation basis to account for the assets of these
foreign branches/real estate.
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Tax Legislation
Proposed Legislative
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Administration
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The draft 2014 French Finance Bill
adds a new test to existing rules
governing interest deduction for
related - party financing.
Under the proposed changes, interest
deductibility would be allowed only if the
borrower demonstrates that the lender
is, for the current fiscal year, subject to a
corporate income tax (CIT) on the interest
income that equals 25% or more of the CIT
that would be due under French tax rules.
When the lender is a foreign tax resident,
the corporate tax determined under French
law equals the tax liability that the lender
would have owed had it been tax resident
in France. Therefore, the French borrower
would have to prove that the interest
income is included in the taxable base of
the foreign lender and subject to a local
CIT of at least 8.33%.
Renaud Jouffroy
Paris
T: +33 1 56 57 42 29
E: [email protected]
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Ireland
France
France: Draft FY14 finance bill related party financing
EU Law
The French taxpayers would have to
provide documentation to support the
corporate tax calculation if requested by
the French tax authorities. This test would
have to be checked annually.
2014 Irish budget announcement
The new measure would apply to tax years
ending on or after September 25, 2013,
and would apply to existing financing.
In his announcement, the Minister reaffirmed the government’s 100%
commitment to maintaining Ireland’s established and competitive
12.5% corporation tax rate for active trading income, noting that its
objective is to maintain an open, stable, and competitive tax regime.
This commitment to the 12.5% rate is reinforced through its inclusion
in Ireland’s newly published International Tax Charter.
PwC observation:
There is a high probability that the
measure will be enacted before the
end of the year. This new measure
continues a trend that puts the burden
of proof on the French taxpayer. Despite
a number of uncertainties, taxpayers
have to carefully consider the impact
of this new measure on their existing
financing structure, since the measure
is retroactive.
On October 15, 2013, the Minister for Finance announced
the 2014 Irish budget.
The Minister confirmed that he plans to address the disparity in the
Finance Bill (published October 24) in relation to ‘Stateless companies’.
These companies refer to Irish incorporated companies that due
to a mismatch between Ireland’s tax residency rules (based on a
management and control test) and the residency rules in countries
where tax residency is determined by place of incorporation, are not
resident in any jurisdiction. This concept of ‘statelessness’ applies to
a small number of companies incorporated in Ireland; and the new
rules will not affect companies that have established tax residency in
another jurisdiction.
Also, a comprehensive review of the research and development (R&D)
tax credit regime resulted in a number of beneficial amendments
to enhance the scheme’s attractiveness. The R&D credit currently
applies to incremental expenditures since 2003. Successive Finance
Acts have provided that the first 200k euros (EUR) of qualifying R&D
expenditure benefitted from the 25% R&D tax credit on a volume basis.
This threshold has been increased to EUR 300k. The Minister also
indicated that the base year will be phased out. Further, the amount of
subcontracted R&D costs eligible for the tax credit has been increased
from 10% of total costs to 15%.
Denis Harrington
Dublin
T: +353 1 792 8629
E: [email protected]
PwC observation:
During the 2014 budget announcement, the
Minister published a policy statement on
Ireland’s international tax strategy that, together
with a number of measures in the budget will
interest, and should benefit, multinational
companies that operate in, or are looking to
invest in, Ireland. The new international tax
strategy statement provides a clear and accurate
picture of Ireland’s corporation tax regime
for the foreign direct investment sector. The
Minister reaffirmed that Ireland is ‘open for
business’ and has a strong record of attracting
companies of real substance. The Minister is
committed to maintaining an open, stable,
and competitive tax regime that scores well in
terms of good governance and transparency. In
addition, the Minister highlighted that Ireland
is committed to full exchange of tax information
with its treaty partners and to actively contribute
to Organisation for Economic Co-operation and
Development (OECD) and European Union (EU)
efforts to tackle harmful tax competition.
Tax Legislation
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•
Companies may elect a tax step-up of the higher values implicitly
embedded in the controlling participations acquired through
extraordinary transactions or going concerns. Such acquisitions
must have occurred since tax year 2012 and must have
been allocated to goodwill or other intangible assets in the
consolidated financial statements. The tax step-up is recognised,
only for amortisation tax purposes, over ten tax years, by
paying by the CIT due date a substitute tax of 16% of the higher
values. The step-up is effective in the second tax year following
the payment. Specific provisions apply to an early disposal of:
the participations, or of the goods underlying the higher values
implicitly embedded in the participations.
•
The Notional Interest Deduction (NID) rate would increase from
the current 3% to 4% for 2014, 4.5% for 2015, and 4.75% for
2016. NID is calculated by applying the rate to the net increase of
the equity contributed in Italian companies; excess NID may be
carried forward indefinitely.
•
Beginning with the current tax year on December 31, 2013,
companies may deduct, for CIT purposes, 20% of the Real Estate
Property Tax (Imposta Municipale Propria or IMU) paid by
companies on business related properties.
On October 15, 2013, the Italian government issued the draft 2014
Financial Bill providing new tax policy for the coming years and
proposing some tax opportunities, as follows:
•
Companies may jointly:
(i) elect for the accounting step-up of tangible assets (other
than goods representing inventory) and intangible assets
(other than those such as goodwill and capitalised costs) as
well as participations, resulting in the financial statements as of
December 31, 2012; and
(ii) elect for the tax recognition of those higher values by paying
by the corporate income tax (CIT) due date a substitute tax
ranging from 12% (non-depreciable/non-amortisable goods) to
16% (depreciable/amortisable goods) of the higher values. Tax
recognition of the higher values starts from the third tax year
following the one in which the substitute tax is paid. Steppedup assets disposed of prior to the tax recognition are subject
to the tax recapture rule. In addition, companies may elect
tax recognition of the equity reserve – derived from the assets
accounting step-up – by paying the substitute tax of 10%. This
recognition allows the free distribution of such equity reserve.
PwC observation:
The tax agenda included in the draft 2014 Financial Bill adds some
incentives for investors in Italian companies to sustain the overall
Italian economic recovery. The proposals, awaiting enactment by
the Italian parliament, are subject to amendments, so taxpayers
should monitor the legislative process.
Franco Boga
Milan
T: +39 02 91605400
E: [email protected]
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Italy
Italian coalition government - proposed tax agenda
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Pasquale A Salvatore
Milan
T: +39 02 91605810
E: [email protected]
Alessandro Marzorati
Milan
T: +39 02 91605408
E: [email protected]
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Korea
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Korea
Proposed limitation for foreign
investment benefits
According to the Korean Special Tax Treatment
Control Law (STTCL), qualifying Foreign Invested
Companies (FIC) can enjoy the following two types
of tax benefits:
•
FIC level: FIC can enjoy a 100% exemption
from income tax for the first three to five years
and a 50% exemption for the subsequent
two years.
•
FIC shareholder level: A FIC’s foreign investors
can enjoy tax benefits such as a withholding tax
(WHT) exemption on dividends from the FIC.
Under proposed amendments to this law, the
exemption from WHT on the dividends would not
be granted for foreign investment made on or after
January 1, 2014. In addition, to receive tax benefits,
the foreign investments would have to come from
entities in jurisdictions that have a tax treaty
with Korea.
PwC observation:
The amendments would apply
investments made on or after
January 1, 2014. Foreign
investments made before
December 31, 2013, would
still enjoy the tax benefits
regardless of the proposed
change. Therefore, foreign
investments should be made
by the end of 2013 if possible.
Also, it is important to choose
a jurisdiction that has a tax
treaty with Korea in order to
qualify for the tax benefits.
Proposed change in Korean CFC rule
If a Korean company has a subsidiary in a
country where the subsidiary’s effective tax
rate is less than 15%, and the subsidiary’s
income consists primarily of passive income
such as royalties, interest, and dividends,
then the subsidiary’s income is deemed to be
distributed to its Korean parent company
and taxed as a dividend at the parentcompany level under Korea’s Controlled
Foreign Company (CFC) rule.
Currently, the CFC rule applies when a subsidiary’s
passive income is more than 50% of its total income.
According to the proposed amendment, even if the
subsidiary’s passive income is less than 50 percent
of its total income, the CFC rule would still apply,
effective after January 1, 2015. The details of the
change have not been released.
PwC observation:
Supplemental guidelines with more detail should
be available soon. Note that the threshold rate
could be as low as 10%. The threshold ratio
would be finalised through subsequent tax
law changes.
Alex Joong-Hyun Lee
Seoul
T: +82 2 709 0598
E: [email protected]
Changho Jo
Seoul
T: +82 2 3781 3264
E: [email protected]
Dong-Youl Lee
Seoul
T: +82 2 3781 9812
E: [email protected]
Alex Joong-Hyun Lee
Seoul
T: +82 2 709 0598
E: [email protected]
Changho Jo
Seoul
T: +82 2 3781 3264
E: [email protected]
Dong-Youl Lee
Seoul
T: +82 2 3781 9812
E: [email protected]
Tax Legislation
Proposed Legislative
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Treaties
After an October 3, 2013, meeting, a joint communiqué
presented the Receita Federal do Brasil’s (RFB’s) position
regarding the debate about the recently published
Normative Instruction (NI) No. 1.397/13.
In summary, the NI provides that for purposes of assessing tax-exempt
distributable dividends and deductible interest on net equity (INE)
expenses, the equity balances to consider are those based on the
accounting practices in force up to December 31, 2007, and not those
based on the new Internation Foreign Reporting Standards (IFRS)based accounting rules in force after that date.
The RFB stated that the Transitional Tax Regime (RTT), introduced by
Law. No. 11.941/09, provides that adopting the new accounting criteria
related to the recognition of revenues, costs, and expenses computed
on the assessment of net profits should not trigger any adverse
consequences. This also should apply to the payment of dividends
and INE.
Moreover, the NI’s text could cause taxpayers to believe that the
taxation of dividend payments exceeding the tax balance sheet could
be retroactive, given the fact that NIs are interpretations of legislation
and as such may have retroactive effect.
To clarify the matter, the joint communiqué, reflecting the RFB
Secretary’s opinion, states that separate balance sheets will not be
required and that no taxation of dividends and INE arising from a
difference in tax and accounting criteria shall occur until December
2013. Therefore, only an amendment to the corporate balance sheets
would be required and no retroactive taxation of dividend/INE
payments shall occur only for differences arising on payments made
beginning in December 2013.
The Secretary also revealed that efforts are underway to review the
wording of the NI as well as publish a provisional measure (to be later
converted into law) that would bring the RTT to an end.
PwC observation:
Further guidance and debate are still expected regarding the effects
of the NI.
Taxpayers therefore believed that they would have to prepare two
separate balance sheets, one according to old accounting practices
for tax computation purposes (tax balance sheet) and one according
to new accounting practices (corporate balance sheet). Also, the
NI provided that dividends paid to non-resident beneficiaries that
exceed those calculated on the tax balance sheet would be subject to
withholding income tax. In addition, the portion of INE paid in excess
of what would be calculated on the tax balance sheet no longer would
be deductible for income tax 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]
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Administration and case law
Brazil
Joint communiqué on the recently published
Normative Instruction
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Carolina Ibarra
Campinas
T: +55 19 3794 5414
E: [email protected]
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United Kingdom
Taxation of foreign portfolio dividends - High
Court decision
The High Court delivered its judgment in Prudential
Assurance Company v. HM Revenue & Customs on
October 24, 2013.
This is a test case in the CFC & Dividend group litigation in which
claimants are challenging the compatibility of the UK’s former rules on
the taxation of portfolio dividends with European Union (EU) law.
The High Court decision concerns the UK taxation of dividends
received from foreign portfolio (less than 10% of voting power)
investments and certain insurance company-specific tax issues.
The relevant UK provisions treated such dividends as taxable with
credit only for foreign withholding tax (WHT). The High Court has
now held that such dividends should have been taxable with credit
for underlying tax at the nominal foreign statutory rate in addition to
credit for foreign WHT (but limited to the amount of UK corporation
tax on the gross dividend). The decision applies not only to EU/
European Economic Area (EEA) portfolio dividends but also to thirdcountry (non-EU) portfolio dividends.
Peter Cussons
London
T: +44 (0)20 7804 5260
E: [email protected]
Mark X Whitehouse
London
T: +44 (0)20 7804 1455
E: [email protected]
PwC observation:
This decision could be
appealed and certain of its
issues addressed. For example,
limitation periods for claims
still await an EU Court of
Justice decision in the Franked
Investment Income group
litigation. However, UK groups
or subgroups that received
foreign portfolio dividends
prior to July 1, 2009, should
now consider reclaiming
any excess UK corporation
tax paid on those dividends.
Groups with excess expenses,
and therefore wasted double
tax relief, should consider
whether they can get a more
effective remedy than carried
forward excess unrelieved
foreign tax. Any High Court
claims must be made before
January 17, 2014.
Chloe Paterson
London
T: +44 (0)207 213 8359
E: [email protected]
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United States
IRS releases draft ‘FFI agreement’ under FATCA and
related guidance
The Internal Revenue Service (IRS) on October 29, 2013,
released Notice 2013-69 (the Notice) addressing foreign
financial institution (FFI) agreements and related issues
under the Foreign Account Tax Compliance Act (FATCA) and
accompanying regulations. The Notice provides guidance
to FFIs and branches of FFIs, including those treated as
reporting financial institutions under an applicable Model 2
intergovernmental agreement (IGA).
The Notice has been anticipated and provides guidance for
stakeholders, but it also contains some surprising twists.
The Notice reiterates that certain entities or branches will enter into an
FFI agreement with the IRS, while other types of entities must simply
comply with its terms. The Notice also provides clarifications relating
to certain Model 2 FFIs, branches, and the impact of non-compliant
related entities. In addition, it introduces new concepts which the
IRS will address in forthcoming regulations (e.g. the introduction
of direct reporting non-financial foreign entities (NFFEs) and new
coordinating principles between FATCA withholding and Section 3406
backup withholding).
Importantly, the Notice includes a draft version of the FFI agreement
and describes an FFI’s general responsibilities. These responsibilities
are substantially similar to the provisions set forth in the FATCA
regulations but some new ones have been added.
Stuart Finkel
New York
T: +1 646 471 0616
E: [email protected]
The Notice also provides miscellaneous guidance such as the
application of a 90-day rule to the expiration of documentation,
withholding requirements on preexisting accounts through certain
due diligence time periods, and adjustments for underwithholding and
overwithholding.
The Notice also indicates that the FFI agreement will be finalised by
December 31, 2013.
PwC observation:
Notice 2013-69 should provide stakeholders with a greater
understanding of their FATCA obligations, specifically with respect
to FFI agreements. One critical question is how this guidance will
impact their overall FATCA compliance plan, including changes
to procedures and internal controls. For example, how will the
branches of FFIs be treated pursuant to the new guidance? Will
any passive NFFEs want to pursue direct reporting to the IRS? Will
PFFIs want to elect to satisfy their FATCA withholding obligations
for recalcitrant account holders by imposing Section 3406 backup
withholding instead?
As more guidance is released, stakeholders should re-evaluate their
compliance plans or previously completed analyses. Key milestones
are approaching, but hopefully the additional guidance will be
published with sufficient time for taxpayers to pursue appropriate
actions. A critical date is July 1, 2014, which is the start of FATCA
withholding. However, January 1, 2014, is the start of the final
submissions for FATCA registration. This is prompting taxpayers to
complete their legal entities analysis as soon as possible.
Scott Dillman
New York
T: +1 646 47 5764
E: [email protected]
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Tax Legislation
Proposed Legislative
Changes
Administration
& Case Law
EU Law
Treaties
The European Commission (EC) has carried out a formal
assessment of the UK patent box regime at the request
of the European Union (EU) Code of Conduct Group on
Business Taxation.
The EC published its report in advance of a meeting of the Code of
Conduct Group held on October 22, 2013, finding that in their view
the regime triggers two of the five criteria for identifying potentially
harmful preferential tax regimes:
•
Criterion 3 - ‘whether advantages are granted even without
any real economic activity and substantial economic presence
within the member state offering such tax advantages’. The EC’s
view is that fulfilment of the active management condition
for contracted-out research and development (R&D) may not
necessarily ‘involve real economic activities and a substantial
economic presence within the UK for these purposes.
•
Criterion 4 - ‘whether the rules for profit determination in
respect of activities within a multinational group of companies
depart from internationally accepted principles, notably the rules
agreed upon within the Organisation for Economic Co-operation
and Development (OECD).’ The EC’s view is that the calculation
of profits subject to a lower level of tax is not in line with
internationally agreed principles. This is because income may
qualify for the patent box regime when there is a patent included
in a product so that in some circumstances the qualifying income
is not confined to income attributable to relevant patents.
Peter Cussons
London
T: +44 20 7804 5260
E: [email protected]
We understand that there was no consensus among the 28 member
states in the Code of Conduct Group meeting on October 22 and,
therefore, the issue has been remitted to the next Code of Conduct
Group meeting at the end of November. If there is still no consensus,
the issue will be remitted to the December Economic and Financial
Affairs Council (ECOFIN) meeting. This requires unanimity for any tax
measures and thus for making any changes to the patent box regime.
PwC observation:
The issues raised concern the design of the patent box regime,
and not whether the patent box regime should be removed. The
UK Treasury and Her Majesty’s Revenue & Customs (HMRC) are
confident that the regime does not breach the Code of Conduct, but
it is difficult to predict the outcome of the current challenge. If the
Code of Conduct Group or ECOFIN endorse the concept of patent/
intellectual property (IP) boxes, then the UK likely will make
either no modifications or only minor prospective modifications
to the patent box regime. Alternatively, there may be deadlock
at the ECOFIN level, because the United Kingdom can veto any
tax matters.
For completeness, Code of Conduct Criterion 3 would appear to be
contrary to EU law because it requires that the economic activity
occur in the United Kingdom. This is presumably because the five
Code criteria were imported from the OECD. We understand this
point has been raised with the European Commission.
Adrian Gregory
London
T: +44 20 7213 4942
E: [email protected]
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EU law
United Kingdom
EU Code of Conduct challenge to UK patent box regime
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Diarmuid JD MacDougall
Uxbridge
T: +44 1895 52 2112
E: [email protected]
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Treaties
Canada
Canada
Canada
Canada - Serbia treaty and protocol
Canada - Switzerland agreement
Canada-Poland treaty and protocol
The Convention between Canada and the Republic of Serbia
for the Avoidance of double taxation with respect to Taxes
on Income and on Capital and related protocol entered into
force on October 31, 2013.
The Agreement concerning the interpretation of Article
25 of the Convention between the Government of Canada
and the Swiss Federal Council for the Avoidance of double
taxation with respect to Taxes on Income and on Capital
(the Canada-Switzerland treaty), signed at Berne on
May 5, 1997, as amended by the protocol signed at Berne on
October 22, 2010, entered into force on October 31, 2013.
The Convention between Canada and the Republic of
Poland for the Avoidance of double taxation and the
Prevention of Fiscal Evasion with respect to Taxes on
Income and related protocol entered into force on October
30, 2013.
Originally signed on April 27, 2012, this Convention is based on
the Organisation for Economic Co-operation and Development
(OECD) Model Tax Convention and includes an exchange of
information article.
PwC observation:
This convention limits the rate of withholding tax (WHT) to 5% for
dividends paid between affiliated companies, to 15% for dividends
paid in all other cases, and to 10% for payments of interest
and royalties.
Ken Buttenham
Maria Lopes
Toronto
Toronto
T: +1 416 869 2600
E: [email protected]
T: +1 416 365 2793
E: [email protected]
PwC observation:
This agreement modifies the Interpretative Protocol of the Canada
- Switzerland treaty to ensure that the interpretation of Article 25
of the Canada-Switzerland treaty is consistent with the standard
developed by the OECD for the exchange of tax information.
Originally signed on May 14, 2012, this convention replaces the
predecessor convention signed in 1987. Based on the OECD Model Tax
Convention, it includes an exchange of information article.
PwC observation:
Under the predecessor convention, a 15% WHT rate applied to
dividends and interest and a 10% WHT rate applied to royalties,
with copyright royalties being exempt.
Under the new convention, WHT rates apply as follows:
Ken Buttenham
Toronto
T: +1 416 869 2600
E: [email protected]
Maria Lopes
Toronto
T: +1 416 365 2793
E: [email protected]
•
5% for dividends paid between affiliated companies and 15%
on other dividends.
•
5% for copyright royalties and on know-how royalties.
•
10% for interest and all other royalties.
Ken Buttenham
Toronto
T: +1 416 869 2600
E: [email protected]
Maria Lopes
Toronto
T: +1 416 365 2793
E: [email protected]
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China
Cyprus
Hong Kong
China issues new guidelines on mutual
agreement procedure
Double tax treaty between Cyprus and Estonia enters
into force
The Hong Kong - Canada double tax treaty (DTT)
entered into force on October 29, 2013.
Recently, China issued amended Implementation Guidelines
for Mutual Agreement Procedures (MAP) under tax treaties
(the Guidelines).
The double tax treaty (DTT) between Cyprus and Estonia
came into force on October 8, 2013. The treaty will take
effect January 1, 2014.
Its effective date in Hong Kong will be April 1 of the calendar
year following the year in which the DTT entered into force, i.e.
April 1, 2014.
The new Guidelines replace the 2005 MAP temporary rule, effective
November 1, 2013.
Under the treaty, dividends, interest, and royalties shall be taxable only
in the contracting state in which the person receiving them is resident.
Unlike the temporary rule, which applied only to the MAP initiated by
Chinese residents, the Guidelines are more comprehensive in that they
cover MAP requests not only initiated by China but also those received
by China. In addition, the Guidelines set out the detailed criteria and
procedures for MAP applicants and Chinese tax authorities to follow.
This will make the MAP process more transparent and efficient.
Cyprus retains the exclusive taxing right on disposals of Estonian
shares except when the disposed - of shares derive more than 50% of
their value from immovable property situated in Estonia.
PwC observation:
The Guidelines represent the State Administration of Taxation’s
(SAT) effort to improve the efficiency of its MAP. Chinese
companies investing overseas as well as foreign companies doing
business in China may consider initiating a MAP as an alternative to
protect themselves from unfair treatment and double taxation.
PwC observation:
Cyprus is expanding its treaty network and the above treaty
is another new or revised Cyprus treaty that will be effective
January 1, 2014, along with those with Austria, Finland, Portugal,
and Ukraine.
PwC observation:
Some of the major benefits for Hong Kong-resident companies
under the Hong Kong-Canada DTT are the reduced withholding
tax (WHT) rates on dividends, interest, and rental income from
movable property received from Canada. The reduced WHT rate of
5% on dividends for non-portfolio investment and the reduced WHT
rate of 10% on interest received from a related Canadian entity
under the DTT are among the lowest compared to the treaties that
Canada has with other Asian countries.
Comparatively speaking, MAP is more widely adopted in the area
of advance pricing arrangements and corresponding adjustment in
terms of transfer pricing (TP) in China at this stage. Note however,
that the Guidelines do not apply to MAP for special tax adjustments,
such as TP adjustments. We expect the SAT to release a separate
circular to address these issues in the future.
Matthew Mui
PwC China
T: +86 10 6533 3028
E: [email protected]
Nicos Chimarides
Nicosia
T: +357 22555270
E: [email protected]
Stelios Violaris
Nicosia
T: +357 22555300
E: [email protected]
Fergus WT Wong
Hong Kong
T: +852 2289 5818
E: [email protected]
Tax Legislation
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Changes
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Ireland
Ireland signs double tax treaty (DTT) with Thailand
Ireland has signed a double tax treaty with Thailand that
will enter into force upon ratification by both countries.
The treaty, signed on November 4, 2013, provides for withholding tax
(WHT) of 10% on dividends and interest, and between 5% and 15% on
royalties depending on the nature of the royalty.
PwC observation:
These recent ratifications signal Ireland’s continuing commitment
to expanding and strengthening its DTT network. Ireland has
signed comprehensive DTTs with over 70 countries, 64 of which are
now in effect, and negotiations are ongoing with other territories.
DTTs seek to eliminate and reduce double taxation that might arise
for companies operating cross-border. They are an essential tool
for achieving international tax efficiencies. The agreements cover
income tax, corporation tax, and capital gains tax.
Denis Harrington
Dublin
T: +353 1 792 8629
E: [email protected]
EU Law
Treaties
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Contact us
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international tax services, please contact:
Anja Ellmer
International tax services
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E:[email protected]
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Design Services 28430 (11/13).