International Tax News Welcome

Tax Legislation
Proposed Legislative
Changes
Administration
& Case Law
International
Tax News
Edition 9
September 2013
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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.
Belgium
Israel
Belgium publishes new tax
measures, including new
‘fairness tax’
New Israeli tax legislation
could increase tax burden on
multinationals
OECD
Italy
OECD publishes sweeping
Action Plan on Base Erosion
and Profit Shifting (BEPS)
Italy approves important new
tax forms
Tony Clemens
Global Leader International Tax Services Network
T: +61 2 8266 2953
E: [email protected]
Tax Legislation
Proposed Legislative
Changes
Administration
& Case Law
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In this issue
Tax legislation
Proposed legislative changes
Administration and case law
Treaties
Belgium
Belgium publishes new tax measures,
including new ‘fairness tax’
Canada
Canada releases draft legislative proposals
Italy
Italy approves important new tax forms
Canada
Second protocol to Canada-Austria tax
treaty addresses exchange of information
United States
Internal Revenue Service memo on American
Depositary Receipts payments highlights importance
of income characterisation under treaties
Belgium
New Belgian tax legislation makes
imposition of secret 309% commission tax
less rigid
OECD
OECD publishes sweeping Action Plan on
Base Erosion and Profit Shifting (BEPS)
United Kingdom
International Tax Services webcast
highlights benefits of the UK as a
business hub
Cyprus
Ukraine and Portugal ratify tax treaties
with Cyprus
Uruguay
Uruguay tax treaty update
Cyprus
Cyprus tax authorities clarify treatment of
tax losses incurred by a qualifying exempt
foreign PE
Spain
Spanish draft law for entrepreneurs would
amend patent box regime
United States
US appeals court confirms that income
inclusions under US anti-deferral rules are
not dividends
Hong Kong
Hong Kong-Kuwait double tax treaty enters
into force; takes effect in 2014
Hong Kong
Hong Kong enacts tax legislation
promoting Islamic finance
Uruguay
Uruguayan Parliament considers bill
to expand corporate tax exemption for
income from logistic activities
Uruguay
Uruguayan Tax Office addresses
application of tax treaty with Switzerland
Netherlands
Netherlands tax treaty update
Israel
New Israeli tax legislation could increase
tax burden on multinationals
Uruguay
Modifications to Uruguay’s Free Zones law
Taiwan
Taiwan introduces a simpler advance tax
ruling system
New Zealand
New Zealand signs tax treaty with Vietnam
Panama
Panama as a holding company location:
increasing double tax treaty network
United Kingdom
UK and Panama sign new double tax treaty
Tax Legislation
Proposed Legislative
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Administration
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Tax Legislation
Belgium
Belgium publishes new tax measures, including new
‘fairness tax’
A bill containing various new Belgian tax measures recently
was published in the Belgian Official Gazette.
The most notable of the new measures is the ‘fairness tax’ discussed in
the previous issue of International Tax News. These measures are now
part of the Belgian tax law.
Commencing in the 2014 tax year, large Belgian resident companies
(as well as Belgian branches of non-resident companies) will, in
specific circumstances, be subject to a non-deductible fairness tax of
5.15% on their distributed dividends. The fairness tax is applied to
the positive difference between gross dividends distributed during
the tax period and the taxable amount that is effectively subject to the
nominal corporate tax rate of 33.99%. The positive difference is then
reduced by the amount of any dividends that resulted from previously
taxed reserves built up during tax year 2014 or prior periods, based on
the last-in, first-out (LIFO) method. The amount so determined then
is limited by a percentage equal to a fraction in which the nominator
equals tax losses carried forward plus notional interest deduction
that were used during the relevant tax period, and the denominator
equals the same period’s taxable profits (less tax-exempt impairments,
accruals, and capital gains).
Pascal Janssens
Antwerp
T: +32 3 259 31 19
E: [email protected]
Axel Smits
Brussels
T: +32 3 259 31 20
E: [email protected]
Another of the new provisions - a consequence of the European Court
of Justice (ECJ) case Commission v. Belgium (see International Tax
News, December 2012) amends the withholding tax (WHT) regime
for Belgian investment companies. Commencing in the 2014 tax year,
the WHT regime for Belgian investment companies is equated with
the regime for non-resident investment companies. As a consequence,
Belgian taxpayers no longer may benefit from a credit or refund of the
WHT levied on Belgian-source dividends paid to resident investment
companies other than Belgian pension funds.
PwC observation:
These new tax measures could have a substantial impact on some
taxpayers. Companies should analyse these new measures to
anticipate how they could affect their businesses going forward. In
particular, multinational companies with Belgian subsidiaries or
branches should consider the potential impact of the new fairness
tax before eventually deciding on any dividend distribution,
because the timing of a distribution may have a significant impact
on the fairness tax ultimately due.
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Belgium
Cyprus
New Belgian tax legislation makes imposition of secret 309% commission tax
less rigid
Cyprus tax authorities clarify treatment
of tax losses incurred by a qualifying
exempt foreign PE
The Belgian tax authorities can levy a secret commission tax of 309% when a company
does not duly report fringe benefits, fees, and other qualifying payments that have been
granted or paid on individual summary statements (such as fee form 281.50).
Until now, a company granting benefits could avoid this separate tax assessment if the benefits were
included in the recipient’s timely filed tax return. If this exception applied, the Belgian tax authorities
generally accepted that the expenses were deductible, although Belgian tax law did not state this explicitly.
New legislation clarified in a circular letter introduces two measures to make the secret commission tax
more flexible, commencing in the 2014 tax year. Regarding the above-described exception, the tax law now
explicitly provides for the deductibility of the underlying expenses.
The new law adds a second exception as well. If the amount of the benefit was not included in the
beneficiary’s tax return, the 309% assessment will not be levied if the benefit is included in an assessment of
the beneficiary within the normal assessment period of three years.
Thus, the secret commission tax will in principle be levied only when effective personal income taxation of
the beneficiary becomes impossible. However, unlike with the first exception, the related expenses will not
be deductible by the company granting the benefit.
PwC observation:
Although it remains to be seen how the new legislation and circular letter will be applied in practice, it
should have a positive effect for companies that previously have not complied with Belgian reporting
standards in the past. Taxpayers should analyse the new law to determine whether they could benefit
from the new exception.
Pascal Janssens
Antwerp
T: +32 3 259 31 19
E: [email protected]
Axel Smits
Brussels
T: +32 3 259 31 20
E: [email protected]
In this issue
Upon meeting simple conditions - active
income or the ‘subject to foreign tax’
test - a foreign permanent establishment
(PE) of a Cyprus company is exempt
from tax in Cyprus under the country’s
domestic legislation.
PwC observation:
This is a welcome development because the
circular clarifies uncertainties under possible
interpretations of existing law in a taxpayerfavourable manner.
Nevertheless, If a foreign PE has tax losses, those
losses can be used in Cyprus on the condition that
they will be recaptured through the taxation by
Cyprus of future PE profits equal in amount to those
losses if the foreign PE is profitable in the future.
The Cyprus tax authorities now have clarified
through a circular that the recapturing of such
losses would occur only when the original tax losses
actually were used in Cyprus and did not simply
expire because of the general five-year limit on
carrying tax losses forward.
The Cyprus tax authorities also have clarified in this
circular that foreign PE losses are eligible for tax loss
group relief in Cyprus when the other conditions for
group relief are met.
Stelios Violaris
Nicosia
T: +357 22555300
E: [email protected]
Nicos Chimarides
Nicosia
T: +357 22555270
E: [email protected]
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Hong Kong
Israel
Hong Kong enacts tax legislation promoting
Islamic finance
New Israeli tax legislation could increase tax burden
on multinationals
The Inland Revenue and Stamp Duty Legislation
(Alternative Bond Schemes) (Amendment) Ordinance 2013,
which implements a taxation framework for Islamic bonds
(sukuk) in Hong Kong, took effect on July 19, 2013.
The Israeli Parliament on July 29, 2013, passed the 2014
budget legislation, which includes significant tax measures
that could affect multinationals (MNCs).
The Ordinance contains various amendments to the Hong Kong tax
legislation to level the playing field for the five most common types
of sukuk in the global market - (i) Ijarah (lease arrangements),
(ii) Musharakah and (iii) Mudarabah (two types of profit-sharing
arrangements), (iv) Murabahah (purchase-and-sale arrangements)
and (v) Wakalah (agency arrangements) -- vis-à-vis their conventional
counterparts for profits tax, property tax, and stamp duty purposes.
The Ordinance achieves this by applying special tax treatments to
certain qualifying bond and investment transactions or arrangements
in a typical sukuk structure.
PwC observation:
While enactment of the Ordinance marks a major milestone
for developing Islamic finance in Hong Kong, investors who are
interested in tapping into this new market must be aware of the
potential challenges and uncertainties arising from interpretation
and application of the complicated provisions under the taxation
framework for sukuk. We expect the Hong Kong tax authority to
issue additional guidance to clarify some of the issues arising from
implementation of this novel tax regime in Hong Kong.
Fergus WT Wong
Hong Kong
T: +852 2289 581
E: [email protected]
In this issue
The provisions of the legislation generally will take effect as of January
1, 2014. Key sections of the legislation include the following:
•
The regular statutory corporate income tax (CIT) rate will
increase from 25% for 2013 to 26.5% for 2014 and later years.
•
The beneficial corporate tax rates applicable to so-called
Approved Enterprises (AEs) will increase from 6%-7% to 9% in
national priority areas and from 12%-12.5% to 16% in the rest of
the country.
•
The domestic withholding tax (WHT) rates on dividends
distributed out of the AE earnings will increase from 15% to 20%,
subject to lower rates in applicable treaties.
•
The legislation introduces a new provision imposing corporatelevel tax on distributions of dividends out of certain types of
accounting earnings, e.g. as a result of a revaluation of assets.
These distributions previously have not been subject to tax.
•
Significant amendments to the regime governing the taxation
of trusts will limit significantly the tax benefits associated with
cross-border tax planning using trusts.
•
In addition to the budget legislation, significant amendments to
the Israeli controlled foreign corporation (CFC) regime have been
proposed and are expected to be enacted before the end of 2013.
Details will follow.
Doron Sadan
Israel
T: +972 3795 4584
E: [email protected]
Omri Yaniv
Israel
T: +972 3795 4924
E: [email protected]
PwC observation:
The new legislation could affect MNCs in a number of ways.
The increase in corporate tax rates and in domestic WHT rates on
dividends distributed out of the AE earnings obviously could affect
an MNC holding Israeli stock from both a cash-tax perspective as
well as a financial accounting perspective. The new provisions
imposing a corporate tax on previously untaxed accounting profits
could have a significant impact on profit repatriation from Israeli
subsidiaries. Because the new legislation generally will take effect
as of January 1, 2014, MNCs should consider repatriating earnings
out of Israel before the end of 2013.
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Taiwan
Taiwan introduces a simpler advance tax ruling system
When seeking an advance tax ruling under Taiwan’s
previous advance tax ruling system, taxpayers previously
have had to satisfy several requirements before they could
file an application - for example, the taxpayer had to
show whether the ruling request related to cross-border
transactions or investments, whether the transaction
amount exceeded a certain threshold, and whether it
generated important economic benefits for Taiwan.
The amendment to Article 12-1 of the Tax Collection Act that was
announced by the Presidential Office on May 29, 2013, has introduced
a more lenient advance tax ruling system that eliminates the
requirements of the previous system. Also under the new system, the
tax office must issue a response within six months after an application
has been filed.
PwC observation:
The new system will make it easier for taxpayers - including
corporations and individuals - to file advance tax ruling applications
with the tax office, together with the relevant supporting
documents, to clarify their tax positions before initiating a
transaction.
Rosamund Fan
Elaine Hsieh
Taipei
Taipei
T: +886 2 27296007
E: [email protected]
T: +886 2 27295809
E: [email protected]
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Tax Legislation
Proposed Legislative
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Proposed legislative changes
Canada
The Canadian Department of Finance on July 12, 2013,
released a package of draft legislative proposals.
The key proposals would:
•
modify certain imputed income rules
•
ensure that various foreign affiliate rules better accommodate
structures that include partnerships
•
narrow the scope of certain base-erosion rules
•
ensure an income inclusion for stub-period foreign accrual
property income on dispositions of foreign affiliate shares
•
address taxes paid by shareholders of fiscally transparent entities
•
provide ownership rules for foreign non-share corporations, such
as limited liability companies, and
•
amend the functional currency rules (e.g., by providing an earlier
election deadline).
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. Although released
on July 12, 2013, these proposals have different effective dates, and
in certain cases, elections are available to change the effective dates
at the option of the taxpayer.
As a result of the recent enactment of Bill C-48 on June 26, 2013, and
the release of these proposals, for the first time in more than ten years
Canadian taxpayers with foreign affiliates finally may have certainty
regarding the tax laws governing transactions involving foreign affiliates.
Comments on the proposals must be submitted to the Department
of Finance by September 13, 2013.
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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OECD
OECD publishes sweeping Action Plan on Base Erosion
and Profit Shifting (BEPS)
The Action Plan calls for fundamental changes to the current
mechanisms and the adoption of new consensus-based approaches,
including anti-abuse provisions, designed to prevent and counter BEPS.
The Organisation for Economic Co-operation and
Development (OECD) published an Action Plan on
July 19, 2013, that addresses the perceived flaws in the
international tax rules that were discussed in the OECD’s
February 2013 BEPS report.
These approaches generally fall under the following three areas:
The 40-page Action Plan contains 15 separate action points or
workstreams, some of which are further split into specific actions
or outputs.
Unlike the typical OECD project, the G20 has driven the BEPS project,
and many of its members’ revenue authorities have participated
actively in the development of the Action Plan. The Plan was presented
to finance ministers at the Moscow G20 meeting and will be formally
submitted to the summit of the G20 leaders on September 5-6.
According to the Plan, most of the actions will take one to two (or
more) years to complete. However, it may take considerably longer
to fully apply these changes in practice. There are indications that
the BEPS project and related developments already are leading to a
material shift in the behaviour of tax authorities.
Governments, revenue authorities, and business will all have a
material role to play over the coming months if the proposed changes
are to be implemented.
•
New international standards must be designed to ensure the
coherence of corporate income taxation at the international level.
•
A realignment of taxation and relevant substance is needed
to restore the intended effects and benefits of international
standards, which may not have kept pace with changing business
models and technological developments.
•
The actions implemented to counter BEPS cannot succeed
without further transparency as well as certainty and
predictability for business.
PwC observation:
Taxpayers should monitor the progress of the OECD workstreams,
especially with regard to the OECD’s specific focus areas. Taxpayers
proactively should perform internal risk assessments of their
existing and planned structures, considering the increased focus
on ‘substance’ and the potential for more transparency and public
disclosure of their tax return information and allocation of profits
around the world.
Because this project is moving on a more accelerated timetable
than traditional OECD projects, taxpayers also should engage with
domestic policy makers quickly and explain the potential impact
of these changes on business. Given that many of the Action Plan’s
changes are directed at US businesses, they might be affected by the
Plan more than businesses in other countries.
Action
Deadline*
1. A
ddress the tax challenges of the digital economy
September 2014
2. Neutralise the effects of hybrid mismatch
arrangements
September 2014
3. Strengthen CFC rules
September 2015
4. L
imit base erosion via interest deductions and
other financial payments
December 2015
5. Counter harmful tax practices more effectively,
taking into account transparency and substance
December 2015
6. P
revent treaty abuse
September 2014
7. P
revent the artificial avoidance of PE status
September 2015
8. A
ssure that transfer pricing outcomes are in line
with value creation - intangibles
September 2015
9. Assure that transfer pricing outcomes are in line
with value creation - risks and capital
September 2015
10. A
ssure that transfer pricing outcomes are in line
with value creation - other high-risk transactions
September 2015
11. E
stablish methodologies to collect and analyse
data on BEPS and the actions to address it
September 2015
12. R
equire taxpayers to disclose their aggressive tax
planning arrangements
September 2015
13. Re-examine transfer pricing documentation
September 2014
14. M
ake dispute resolution mechanisms more
effective
September 2015
15. D
evelop a multilateral instrument
December 2015
*Some actions have multiple deadlines. The chart above reflects the latest deadline.
Pam Olson
Washington, DC
T: +1 202 414 1401
E: [email protected]
Richard Stuart Collier
London
T: +44 207 212 3395
E: [email protected]
Tony Clemens
Sydney
T: +61 2 8266 2953
E: [email protected]
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Spain
Uruguay
Spanish draft law for entrepreneurs would amend patent box regime
Uruguayan Parliament considers bill
to expand corporate tax exemption for
income from logistic activities
The Spanish government recently approved draft tax legislation that would, among other
provisions, amend the Spanish patent box regime by increasing the tax exemption for
income from the licensing of intangible assets from 50% to 60% of the amount received.
However, the 60% reduction would be calculated on income net of related expenses, while the current 50%
exemption is calculated on gross licensing income.
To qualify for the revised exemption, at least 25% of the asset would have to be developed by the licensor.
If the licensee is a related party, the payment for the use of the intangible cannot constitute a deductible
expense. The licensee cannot reside in a tax heaven. The current Spanish patent box regime limits the
application of the exemption when the prior year’s income arising from the intangible exceeds six times the
cost associated to the creation of the intangible. The draft legislation would eliminate that limitation.
This new wording would apply to licenses of intangible assets performed after the legislation take effect.
The draft legislation is currently making its way through parliamentary proceedings for approval before
being incorporated into Spanish tax law.
PwC observation:
Even though the proposed modifications in the law appear favourable, the actual effect might be limited
in comparison to current law, under which taxpayers get an exemption for 50% of gross licensing
income (without considering the related expenses). Taxpayers should analyse their related expenses to
determine the net income to which the reduction would be applicable.
The Uruguayan Parliament is considering
a bill that would eliminate the requirement
to be a non-resident to benefit from the
corporate income tax (Impuesto a las
Rentas de las Actividades Economicas or
IRAE) exemption for certain income derived
from logistic activities.
Under the bill, income from activities undertaken
in customs areas and in Free Zones pertaining to
goods of foreign origin that are declared in transit
or deposited in these customs areas would be
exempt from IRAE if the national customs territory
is not their final destination. The bill also would
clarify that if such goods enter Uruguayan customs
territory in an amount that exceeds the threshold of
5% of the total flow of goods traded by the taxpayer
benefiting from the tax exemption, the exemption
still would apply to all goods to be exported to
third countries.
PwC observation:
This modification would improve Uruguay’s
attractiveness for regional logistic activities by
equalising the treatment of resident and nonresident companies.
Ramon Mullerat
Madrid
T: +34 915 685 534
E: [email protected]
Anna Mallol Jover
Barcelona
T: +34 932 537 166
E: [email protected]
In this issue
Eliana Sartori
Zonamerica
T: +598 25182828
E: [email protected]
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Modifications to Uruguay’s Free Zones law
The most important provisions of the pending legislation are
the following:
Uruguay in 2012 celebrated the 25th anniversary of the
country’s Free Zones (FZ) regime. On July 22, 2013, a bill of
law was submitted to Congress that would modify existing
FZ legislation.
•
Reduction of the requirement of local labor force for services from
the current 3:1 ratio of Uruguayans to foreigners to 1:1.
•
Creation of ‘Thematic Zones of Services’, which would allow
the existence of projects related to activities involving health,
entertainment, and related amusement areas.
The purpose is to update the current regulatory framework and to
introduce new objectives to which the FZ regime should contribute,
such as encouraging the performance of high-technology and
innovation activities, decentralising the economy, and increasing the
skills of the national labor force.
•
Limitations on the performance of new industrial projects in the
metropolitan area (the area within 40 kilometres of the centre
of Montevideo), allowing only expansion of existing projects in
this area while encouraging the development of these activities
outside the metropolitan area.
•
Control and surveillance of the introduction, existence and exit
of goods in the FZ by the by the National Direction of Customs, to
enhance logistics activities.
Eliana Sartori
Zonamerica
T: +598 25182828
E: [email protected]
In this issue
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Uruguay
While the bill would change the FZ name to Special Economic Zones
(SEZs), it is important to point out that the current FZ law is not being
repealed. The bill would modify some provisions but not affect the
rights acquired by those who operate under FZ regime, who enjoy the
guarantees granted by the Uruguayan Government.
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PwC observation:
This bill would modify a law that has been used by multinational
companies doing international business from Uruguay.
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Administration and case law
Italy
Italy approves important new tax forms
The Italian Tax Administration on July 10, 2013, approved
three new tax forms.
Taxpayers will use the new forms to:
•
claim an exemption from Italian tax, or to claim a reduced tax
rate, under a double tax treaty (DTT), or
•
claim an exemption from Italian tax on Italian-source dividend,
interest, royalty, or other income under the European Commission
(EC) Parent-Subsidiary Directive or the EC Interest-Royalty
Directive.
The new forms also allow taxpayers to apply for reimbursement of
Italian tax when payments of income were made net of Italian tax
withheld at source.
The new forms require a statement from the recipient of the income
that the recipient is the beneficial owner of that income.
The new forms must be completed and signed by the recipient of the
income. The new forms also must be signed and stamped by the tax
administration of the state in which the recipient of the income is
resident in the section regarding the satisfaction of certain conditions
(e.g. tax residency).
The new forms and the related instructions are available on the Italian
Tax Administration web site.
Franco Boga
Italy
T: +39 02 91605400
E: [email protected]
Pasquale A Salvatore
Italy
T: +39 02 91605810
E: [email protected]
Application under a DTT for exemption or reduced rate
The form must be submitted to the Italian payer of the income with
the authority to apply the exemption or reduced rate provided by
the applicable DTT. The Italian payer that is acting as withholding
agent shall keep the documentation received until the expiration of
the ordinary statute of limitation for Italian taxpayers (generally
the fourth year following the one in which the tax return is filed).
The declaration of the foreign tax administration is valid until the
end of the tax period in which it is issued.
Application under a DTT for refund
The form must be submitted to the Italian Tax Administration Office of Pescara by the recipient of the income. The deadline for the
claim is 48 months from the remittance of the Italian tax. The claim
shall include all necessary documentation to support entitlement
to the refund under the DTT. The declaration of the foreign tax
administration can cover several tax years.
Application under EC Parent-Subsidiary Directive or EC
Interest-Royalty Directive for exemption
The form must be submitted to the Italian payer of the income before
any dividend, interest, or royalty payment is made. The Italian payer
that is acting as withholding agent shall keep the documentation
received until the expiration of the ordinary statute of limitation
for Italian taxpayers noted above. The declaration of the foreign tax
administration is valid for one year from the date on which it is issued.
Application under EC Parent-Subsidiary Directive or the EC
Interest-Royalty Directive for refund
The form must be submitted to the Italian Tax Administration - Office
of Pescara by the recipient of the income. The deadline for the claim is
48 months from the remittance of Italian tax. The claim shall include
all necessary documentation to support entitlement to the refund
under the EC Parent-Subsidiary Directive or the EC Interest-Royalty
Directive. The declaration of the foreign tax administration can cover
several tax years.
PwC observation:
The new forms replace some old forms provided by the Italian Tax
Administration to apply for claiming total or partial exemption
under the EC Parent-Subsidiary Directive, the EC Interest-Royalty
Directive, and under DTTs with certain countries.
The new forms provide guidelines to both resident and non-resident
applicants for exemption or refund under a DTT, the EC ParentSubsidiary Directive, and the EC Interest-Royalty Directive.
Because the new forms require the recipient of the income to be
the beneficial owner of any income for which an application is
made, it is clear that the fulfillment of this condition has become
crucial and that it should be taken into consideration in any
structuring operations.
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United Kingdom
United States
International Tax Services webcast highlights benefits of the UK as a business hub
US appeals court confirms that income
inclusions under US anti-deferral rules
are not dividends
Specialists from PwC’s UK and US International Tax Services practices hosted a webcast on
July 10, 2013, in which they discussed the fundamental changes to the UK tax system and
the incentives and opportunities available for companies investing in the UK.
The one-hour webcast covered:
•
Why the UK can be an attractive location for groups looking to centralise activities, given increased
focus on substance-based models.
•
Recent changes to the UK tax system, all a part of the Government’s ‘UK Open for Business’ strategy.
•
Details of UK incentives available, including patent box and research and development (R&D) credit.
•
Details of the UK regime as it relates to financing and the holding of intellectual property.
•
The new positive approach of the UK tax authorities (Her Majesty’s Revenue & Customs or HMRC) to
giving businesses certainty over their tax position when investing in the UK.
To access a recording of the webcast, please view http://pwc.blogs.com/tax/, open the item dated
July 10, 2013, follow the link, and complete the registration form.
PwC observation:
This webcast will be of interest to any group considering whether to invest in the UK or expand its
existing footprint in the UK. PwC UK can help businesses engage with HMRC to obtain the certainty
needed when considering whether to invest.
Matthew A Ryan
Birmingham
T: +44 (0)121 265 5795
E: [email protected]
Diane Hay
London
T: +44 (0)207 212 5157
E: [email protected]
In this issue
In a decision issued on July 5, 2013,
the US Court of Appeals for the Fifth
Circuit, affirming the US Tax Court’s
decision in Osvaldo and Ana Rodriguez v.
Commissioner, held that US anti-deferralregime (subpart F) income inclusions
are not dividends and therefore are not
qualified dividend income.
PwC observation:
The Fifth Circuit’s Rodriguez decision supports
the Internal Revenue Service’s position that
subpart F income inclusions are not treated
as dividends except to the extent specified
in statutory language. More generally, the
decision reminds us that taxpayers have very
limited ability to rescind or recharacterise,
for US federal income tax purposes, the
transactions they undertake. Thus, taxpayers
and their advisers need to be mindful of the
implications of decisions that they cannot change
retroactively, such as the payment (or nonpayment) of dividends.
Accordingly, the tax rate applicable to subpart F
income inclusions is the ordinary income rate, not
the reduced rate for qualified dividend income
(15%).
The holding in Rodriguez could have broader
relevance for individuals earning income through
foreign corporations. Although the opinion
addresses an income inclusion with respect to a
controlled foreign corporation’s (CFC) investment
in US property, the opinion is equally applicable
to subpart F inclusions without respect to a CFC’s
investment in US property, and also may inform the
final analysis of the proper application of the net
investment income tax.
Carl Dubert
Washington
T: +1 202 414 1873
E: [email protected]
Phyllis E Marcus
Washington
T: +1 202 312 7565
E: [email protected]
Alexandra K Helou
Washington
T: +1 202 346 5169
E: [email protected]
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Uruguay
Uruguayan Tax Office addresses application of tax
treaty with Switzerland
The Uruguayan Tax Office has published a response to
a consultation from a taxpayer regarding application
of the double tax treaty (DTT) between Uruguay
and Switzerland.
A Swiss company with no permanent establishment in Uruguay leases
movable property to a company resident in Uruguay in exchange
for a fee. The leased machinery is the only asset owned by the Swiss
company in Uruguay.
The tax administrator has concluded that amounts paid for services
or for the use or right to use of industrial, commercial, or scientific
equipment, constitute business profits covered by Article 7 of the DTT.
Uruguay therefore may not apply the non-resident income tax (IRNR)
to payments to the Swiss company.
PwC observation:
This is one of the first opinions of the fiscal authorities regarding the
application of DTTs in Uruguay.
Eliana Sartori
Zonamerica
T: +598 25182828
E: [email protected]
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Cyprus
Second protocol to Canada-Austria tax treaty
addresses exchange of information
The Canadian Department of Finance announced on
July 24, 2013, that the Second Protocol amending the
Convention between Canada and the Republic of Austria
for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion with Respect to Taxes on Income and on
Capital will enter into force on October 1, 2013.
The Second Protocol was signed on March 9, 2012.
PwC observation:
The Second Protocol includes provisions reflecting the OECD
standard developed for the exchange of tax information.
New double tax treaty between Cyprus and Ukraine ratified
The new double tax treaty (DTT) between Cyprus and Ukraine,
which was signed in November 2012, was ratified by the Ukrainian
Parliament in July 2013. The treaty was ratified by Cyprus in March
2013. As a result of the ratification by both countries, the new treaty is
expected to take effect January 1, 2014. The old USSR-Cyprus DTT, as
applicable to Cyprus and Ukraine, will be terminated on that date.
The following withholding tax rates will apply under the new DTT:
•
Dividends: 5% with a minimum participation of 20% or minimum
investment of €100k; 15% in all other cases
•
Interest: 2%
•
Royalties: 5%; 10% for royalties from computer software and
from some other types of intangibles
Cyprus retains the exclusive taxing right on disposals of Ukrainian
shares, including shares in property-rich companies.
Regardless of the withholding tax rates under the new DTT, Cyprus
continues not to apply withholding tax to dividend, interest, and
royalty payments out of Cyprus, pursuant to domestic tax legislation.
Double tax treaty between Cyprus and Portugal ratified
The DTT between Cyprus and Portugal, which was signed in November
2012, was ratified by Portugal in July 2013. The treaty was ratified by
Cyprus in March 2013. As a result of the ratification by both countries,
the treaty will take effect January 1, 2014.
The following withholding tax rates will apply under the new treaty:
Ken Buttenham
Toronto
T: +1 416 869 2600
E: [email protected]
In this issue
Maria Lopes
Toronto
T: +1 416 365 2793
E: [email protected]
•
Dividends: 10%
•
Interest: 10%
•
Royalties: 10%
Panicos Kaouris
Nicosia
T: +357 22555290
E: [email protected]
Stelios Violaris
Nicosia
T: +357 22555300
E: [email protected]
Cyprus retains the exclusive taxing right on disposals of Portuguese
shares except when the disposed-of shares derive more than 50% of
their value directly or indirectly from immovable property situated
in Portugal.
Regardless of the withholding tax rates under the new DTT, Cyprus
continues not to apply withholding tax on dividend, interest, and
royalty payments out of Cyprus, pursuant to domestic tax legislation.
EU Directives also may apply to reduce withholding taxes on payments
from Portugal to Cyprus.
PwC observation:
The new treaty with Ukraine, combined with the beneficial
provisions of Cypriot tax legislation, ensures that Cyprus remains
a favorable jurisdiction for Ukrainian inbound and outbound
investments. Companies may want to consider timing of payments
that qualify for a zero Ukrainian withholding tax rate under the
existing treaty.
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Hong Kong
Netherlands
Hong Kong-Kuwait double tax treaty enters into force;
takes effect in 2014
Netherlands tax treaty update
The Hong Kong-Kuwait double tax treaty (DTT) entered
into force on July 24, 2013. Its effective date will be April
1 of the calendar year following the year in which the DTT
entered into force - April 1, 2014.
PwC observation:
Given that Hong Kong does not currently impose any withholding
tax on dividends and interest paid to non-residents and the
withholding tax rate on royalties under Hong Kong domestic law
(4.95%) is lower than the rate under the Hong Kong-Kuwait DTT
(5%), the major benefit of the Hong Kong-Kuwait DTT for Kuwaitresident corporations will be the protection against Hong Kong
profits tax exposure so long as their business activities carried out in
Hong Kong do not create a permanent establishment in Hong Kong.
In this issue
Double tax treaty negotiations planned in 2013
The Dutch Ministry of Finance has announced that negotiations are scheduled in 2013 with respect to
the renewal of existing double tax treaties (DTTs) between the Netherlands and Bangladesh, Ghana,
Philippines, Uganda, and Zambia.
Netherlands – British Virgin Islands exchange of information agreement enters into force
The exchange of information agreement (TIEA) between the Netherlands and the British Virgin Islands (as
agreed upon in 2009) entered into force on July 1, 2013.
PwC observation:
It is anticipated that the forthcoming treaty negotiations will be in line with the Dutch tax treaty policy
document published by the Dutch Ministry of Finance in 2011, and that the Dutch Ministry of Finance
will likely seek:
•
the inclusion of an extensive exchange of information provision;
•
the inclusion of anti-abuse provisions; and
•
the use of the OECD Model as a starting point.
The TIEA with the British Virgin Islands provides for the exchange of information only upon request,
including exchange of information held by financial institutions and information regarding the legal
and beneficial ownership of entities. The requested information generally should be exchanged within
90 days.
Fergus WT Wong
Hong Kong
T: +852 2289 5818
E: [email protected]
Jeroen Schmitz
Amsterdam
T: +31 8879 27352
E: [email protected]
Ramon Hogenboom
Amsterdam
T: +31 8879 26717
E: [email protected]
Pieter Ruige
Amsterdam
T: +31 8879 23408
E: [email protected]
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New Zealand
Panama
New Zealand signs tax treaty with Vietnam
Panama as a holding company location: increasing
double tax treaty network
New Zealand and Vietnam signed a new double tax treaty on August 5, 2013.
The agreement includes lower withholding taxes on interest, dividend, and royalty payments between the
two countries. However, unlike other recent New Zealand double tax treaties the treaty does not provide for
a 0% withholding tax on dividends. A reduced rate of 5% is available for dividends if the beneficial owner
of the dividend holds at least 50% of the voting power in the company (in contrast to other treaties under
which only 10% voting power is required). The treaty provides for reduced rates of withholding tax of 10%
on royalties and interest.
The treaty will enter into force once both countries have given it legal effect. In New Zealand, this will occur
through an Order in Council. In New Zealand, the treaty will apply to withholding taxes from January 1 of
the year following the date the treaty enters into force and from April 1 of the year following the date the
treaty enters into force for other taxes.
PwC observation:
Trade between New Zealand and Vietnam has increased steadily over recent years. We are pleased to
see New Zealand’s treaty network develop and grow to reflect new trading partners. The withholding
tax rates in the treaty represent a departure from those in some of New Zealand’s other recent treaties.
However, treaty withholding tax rates are a matter for negotiation between the two countries and we
understand that in this instance Vietnam may have wished to preserve its source-country taxing rights.
Elizabeth A Elvy
Auckland
T: +64 9355 8683
E: [email protected]
Nicola J Jones
Auckland
T: +64 9355 8459
E: [email protected]
Michelle D Redington
Auckland
T: +64 9355 8014
E: [email protected]
Panama’s growing network of double tax treaties (DTTs)
recently expanded with the entry into force of DTTs with
France, South Korea, Portugal, and Ireland.
This growing treaty network provides another reason why
Panama should be considered a location for holding companies of
multinational corporations.
In addition to Panama’s growing network of DTTs (currently 11 are in
force), advantages of setting up a holding company in Panama include:
•
no taxation on dividends, interest, or royalties received from
foreign companies - they are all considered foreign-source income
•
no taxation on capital gains derived from the sale of subsidiaries
of the holding entity
•
no withholding taxes (WHT) on distribution of dividends derived
from tax-exempt foreign-source income
•
no thin capitalisation rules
•
no controlled foreign corporation (CFC) or anti-tax-haven
legislation
•
possible application of the multinational headquarter companies
regime (MHQ Regime), under which the rendering of services to
other entities of the group that are located abroad is subject to tax
in Panama, and
•
access to the second largest free trade zone area in the world, the
Colon FTZ.
Francisco Barrios
Panama
T: +507 206 9200
E: [email protected]
Pedro Anzola
Panama
T: +507 206 9200
E: [email protected]
PwC observation:
Panama’s favourable location,
its growing economy, its
developing infrastructure,
expansion of the Canal, and
the country’s use of the United
States dollars (USD) as its
currency make Panama an
attractive location in which to
establish a holding company
for multinationals with
investments in Latin America
that could serve as a link
between Asia, Europe, and
the Americas.
Ricardo Madrid
Panama
T: +507 206 9200
E: [email protected]
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United Kingdom
United States
UK and Panama sign new double tax treaty
Internal Revenue Service memo on American
Depositary Receipts payments highlights importance of
income characterisation under treaties
The first double taxation treaty (DTT) between the UK
and the Republic of Panama was signed on July 29, 2013.
The DTT will enter into force once both countries have
completed their legislative procedures.
PwC observation:
The new DTT generally follows the Organisation for Economic
Co-operation and Development (OECD) model and includes the
following reduced withholding tax (WHT) rates:
•
Dividends: 15%, reduced to 0% in certain circumstances.
•
Interest: 5%, reduced to 0% in certain circumstances.
•
Royalties: 5%.
The DTT also includes the latest OECD exchange of information
article and a mutual agreement procedure.
David J Burn
Manchester
T: +44 161 247 4046
E: [email protected]
Chloe Paterson
London
T: +44 (0)207 213 8359
E: [email protected]
The Internal Revenue Service (IRS) Office of Chief Counsel
on July 12 published a memorandum, AM 2013-003 (the
2013 memorandum), that addresses the characterisation
of payments made by a domestic depositary institution on
behalf of a foreign corporation in consideration for a grant
of the exclusive right to offer American Depositary Receipts
(ADRs), and how such payments should be treated under
US income tax treaties. While the memorandum does not
have precedential value, it is an indication of IRS thinking
on this issue.
ADRs are used by non-US corporations to make their stock more
accessible to US investors. In a typical ADR program, the foreign
issuer will place its stock with a US financial institution that acts as
a depositary institution with respect to the stock. The depositary
institution then offers interests in the issuer’s stock in the form of ADRs
to investors in the US market. The 2013 memorandum concludes that
such payments are compensation to the foreign corporation for its
transfer of a property interest in the United States, are sourced within
the United States and accordingly are subject to 30% withholding
under Section 1442 unless reduced by an income tax treaty, and are
treated as ‘other income’ - not royalties or business profits - under both
the US and Organisation for Economic Co-operation and Development
(OECD) model income tax treaties.
Bernard E. Moens
Washington
T: +1 202 414 4302
E: [email protected]
In this issue
The US tax treatment of such payments previously was addressed by
the IRS in a 2010 memorandum, which concluded that ADR payments
similar to those at issue in the 2013 memorandum constituted income
to the ADR issuer and should be characterised as US-source income
subject to the 30% tax. However, the 2010 memorandum did not
address how such payments should be characterised for income tax
treaty purposes.
PwC observation:
The IRS’s conclusion in the 2013 memorandum with respect to the
application of tax under Section 882 does not come as a surprise,
because it is consistent with the 2010 memorandum’s conclusion.
With respect to how such payments should be characterised for
treaty purposes, the 2013 memorandum illustrates that the treaty
definition of royalties differs from the definition in the source rule
under Section 861.
While the 2013 memorandum addresses a narrow class of
payments, taxpayers generally should keep in mind that US federal
income tax categorisations of types of income do not necessarily
match up with treaty equivalents. The 2013 memorandum
demonstrates the importance of the ‘other income’ article in tax
treaties. Because some treaties allocate primary taxing jurisdiction
over ‘other income’ to the source state, while other treaties allocate
exclusive taxing jurisdiction to the residence state, the impact of
income being characterised as other income may vary considerably,
depending on the residence of the recipient.
Steve Nauheim
Washington
T: +1 202 414 1524
E:[email protected]
Ronald A. Bordeaux
Washington
T: +1 202 414 1774
E: [email protected]
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Uruguay
Uruguay tax treaty update
The India-Uruguay income and capital tax treaty entered
into force on June 21, 2013. This treaty will apply
beginning April 1, 2014, in India and January 1, 2014,
in Uruguay.
Regarding tax information exchange agreements (TIEAs), the
International Affairs Committee of the Uruguayan Senate on
July 11, 2013, approved the pending treaties with Australia, Canada,
and Brazil. These agreements are still in the parliamentary ratification
process, and will enter into force upon completion of the exchange of
notes between the parties’ foreign ministries.
PwC observation:
These treaties are relevant for residents of these countries doing
business in Uruguay or that are considering investing in Uruguay.
Eliana Sartori
Zonamerica
T: +598 25182828
E: [email protected]
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International tax services
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