global tax newsletter...global tax newsletter no. 9: november 2013 2belgium featured article belgium...

Global tax newsletter

Welcome to this edition of the Globaltax newsletter where we will look atwhat some of the tax authorities havebeen up to for the past few months.

You will see in our tax policy tab that theOrganisation for Economic Co-operationand Development’s (OECDs) BusinessAdvisory Committee (BIAC) issued adocument covering suggested best practicesfor engaging with tax authorities in developingcountries, and a statement covering taxprinciples for international business.

In this edition we also have threedifferent feature articles: recent changes inBelgium for the taxation of Belgiancorporate repatriations; a recent decisionin the United States (US) concerningsoftware transactions in foreignsubsidiaries and the ability to defer suchrevenue streams; and finally significantnew tax proposals in Mexico.

In our regional updates there are anumber of cases recently dealing with exittaxation, controlled foreign corporate regimes,and thin capitalisation developments. It isinteresting to note that these are also agendaitems for the OECD in its Base ErosionProfit Shifting (BEPS) working party.

Global tax newsletter No. 9: November 2013 1

Welcome Belgiumfeatured article

Mexico featured article

United States featured article

EMEA news APAC news Americas news

Transferpricing news

Indirect taxesnews

Treaty news Tax policy Who’s who

Go to page…

2 Belgium featured article

3 Mexico featured article

4 United States featured article

5 EMEA news

14 APAC news

20 Americas news

26 Transfer pricing news

29 Indirect taxes news

32 Treaty news

34 Tax policy

37 Who’s who

Our transfer pricing tab has aninteresting discussion of a French casedealing with the emigration of a treasurycentre which could have widespreadapplicability to many kinds of captivespecial purpose corporate vehicles.

The indirect tax tab includes theFinnish supreme court dealing with thequestion of an input tax credit paid by the taxpayer’s parent corporation, afrequent transaction occurring in anymulti-national group.

Finally, in our treaty tab there is adiscussion of what the Netherlandsintends to do with its tax transparencyprogramme in terms of its treaties withdeveloping countries.

I hope you find this edition of theGlobal tax newsletter to be both enjoyableand informative.

Francesca LagerbergGlobal leader – tax servicesGrant Thornton International Ltd


Belgium featured article

Belgium recentlyenacted new changes to the taxation of

liquidation proceeds; withholding tax on dividends linked to newlycontributed share capital, the notionalinterest deduction and the patent income deduction.

reduction would take place beforeexpiry of that period of 8 (or 4)years, an additional withholding taxof 15%, 10% or 5% will apply,depending on the number of yearswhich have already expired since the transformation

• anti-abuse legislation has been putinto place for dividend transactions

• a 20% withholding tax will apply todividends distributed out of theprofit allocation of the secondfinancial year following the financialyear of contributions

• the rate will be further reduced to15% for dividends distributed out ofthe profit allocation as of the thirdfinancial year following the financialyear of the contribution

• a number of conditions have to bemet in order to benefit from thereduced withholding tax rates

• anti-abuse legislation for reductionsof share capital

• the notional interest deduction thatgrants companies a deduction againstprofits for the cost of equity

• the value of shares held as financialassets should currently be deductedfrom the ‘equity’ on which the notionalinterest is calculated. As of tax year2013, that provision will be extended to the shares held as an investment ofwhich the dividends benefit from theparticipation exemption

• the benefit of the patent incomededuction (leading to an average taxrate of 6.8%) is currently subject tothe requirement that the researchand development (R&D) departmentof the company should be structuredas a branch of activity. Thatcondition will be abolished forsmall- and medium-sized companiesas of tax year 2014.

A summary of the changes includes:• liquidation proceeds to be subject to

a 25% withholding tax (compared tothe actual 10%) in order to bring itin line with the standard withholdingtax rate of 25% that applies todividend payments

• exemptions or reductions based oninternal tax law or due to doubletaxation agreements (DTAs) thatremain in place

• an established transitional regimeoffering the possibility to transformtaxed reserves (ie carried forwardprofits) into share capital whereby a10% withholding tax will be dueimmediately

• taxed reserves which are transformedinto share capital under thistransitional regime can be distributedto the shareholders tax free, by wayof a share capital reduction (subjectto conditions). Where a share capital

Belgium has recently enacted new changes to

taxation.






Indirect taxesnews




Last September theMexican Presidentsubmitted amendments

to the tax legislation that could beapplicable for the 2014 tax year. Ingeneral terms, it includes the issuance ofa new income tax law, severalmodifications to other tax laws andprovisions, the repeal of the flat tax law,as well as the repeal of the cash depositslaw. Some of the more significantincome tax proposals include:• to repeal the actual Mexican income

tax law that has been in force since2002, and issue a new law that willbe in force from 1 January 2014

• to include a new procedure whichwill allow the tax authorities torequest information of residentsabroad for double taxation reliefunder DTAs

• a prohibition for the deduction ofpayments made to related partiesbeing Mexican residents or residentsabroad, where the correspondingincome is not taxed to such relatedparties, or if the income is taxed at alower rate than the 75% income taxthat would be generated in Mexico

• with respect to employeesallowances, which are either exemptor partially exempt items, thededuction for these employerexpenses would be limited to only41% over such exempt items

• to eliminate the tax incentive with apossibility to apply an accelerateddeduction of new asset investmentsand eliminate the linear taxdepreciation, 100% deductible, overthe machinery and special equipmentacquisitions for controllingenvironmental pollution

• to eliminate the tax consolidationregime

• to eliminate the tax incentive oftaxpayers dedicated to build and sell real-estate through which theyare able to deduct 100% of theacquisition cost of the land

• to establish a 10% income tax rateover dividends distributed toshareholders. The tax will be payableby the entity which issues thedividends payment

• that in order to be able to continueworking as a ‘maquila entity’ it mustexport at least 90% of the totalinvoicing of the entity

• entities of residents abroad whichoperate through a ‘maquila shelter’can remain under the terms of suchregime for a maximum period ofthree tax years, counted when suchentities start operations in Mexico.After that, it is considered that theresident abroad will have toincorporate a subsidiary in Mexico

• foreign tax credit carry forwards can be used for ten years, although newforeign tax credit limitations will beimposed

• to eliminate the preferential ValueAdded Tax (VAT) rate of 11%applicable to all transactions andservices carried out in the border region

• to repeal the obligation that certaintaxpayers have in regard with filing thetax report (dictamen fiscal) before thetax authorities

• to create substance over formprovisions concerning invoicing fornon-existent goods and services.

Mexico has submitted

amendments to the tax legislation thatcould be applicable

for the 2014 tax year.






Indirect taxesnews




The Inland RevenueService (IRS) issuedadvice that a controlled

foreign corporation’s (CFCs) incomefrom software transfers to customerswas foreign personal holding companyincome (FPHCI) and as such immediatelytaxable to the US shareholder of the CFC. The advice is important to US based companies in the softwareindustry with offshore subsidiaries.

The taxpayer, a CFC, transferredsoftware to customers under perpetual,nonexclusive and transferable (thoughonly to affiliates of the customer)licenses. Under a license agreement, acustomer paid a one-time fee for eachuser and annual maintenance andsupport fees based on the total numberof users. After one year, a customercould terminate the agreement as well asthe maintenance and support fees,provided that the customer certified inwriting that it no longer used thesoftware. The taxpayer had seven

customers; two of those customers wereacquired by the taxpayer when one of itsaffiliates closed.

The taxpayer had two employees, afinancial controller and a software mediaproduction assistant, as well as threedirectors, one of whom (the executivedirector) was treated as an employeebased on his duties. At different pointsof time the taxpayer did not employ theproduction assistant. The employees’backgrounds were in accounting, financeand technology and their job functionswere largely administrative (egbookkeeping, tracking payments,ordering the ‘software keys’ to transferto customers and filing tax returns).While there was some indication that theexecutive director assisted withmarketing and worked with an affiliatecompany to promote sales, theemployees did not track time spent onspecific activities. The maintenance andsupport services provided to customersunder the license agreements arecontracted out to affiliates of the CFC.

The taxpayer and the IRS agreed tocharacterise the income stream as rentalincome from the lease of copyrightedarticles. This characterisation reflectsthat copyright rights in the software norbenefits and burdens of owning thesoftware are transferred under theagreements. Unless an exception applies,rents generally constitute FPHCI, whichis currently taxable to US shareholders.

Rents derived in the active conductof a business and received fromunrelated persons are excluded from thedefinition of FPHCI (the ‘active leasingexception’). Rents are consideredderived in an active business if the CFCleases one of four types of property,only one of which, the ‘active marketingexception’, is relevant. The activemarketing exception applies if propertyis leased as a result of a CFC lessor’smarketing function if the lessor, throughits own officers and employees in aforeign country, maintains and operatesan organisation in that country that is:

• regularly engaged in the business of marketing (ormarketing and servicing) the leased property

• substantial in relation to the amount of rents from leasing the property.

The exception also extends to leases acquired by the CFC if the CFC performs active and substantial management,operational and remarketing functions with respect to theleased property.

The IRS found little evidence that the taxpayer regularlyengaged in a marketing business. The taxpayer did not employanyone with marketing expertise, compensate employees formarketing activity or success, or document the time itspersonnel spent on marketing. Related entities producednearly all of the press releases for the parent’s website and hadeven won international marketing awards. The agreementbetween the taxpayer and its parent company indicated thatthe taxpayer was not a marketing company, and the taxpayerhad signed only one of its customers in the years at issue. TheIRS concluded that the taxpayer mainly collected passiverents, especially considering that a huge proportion of itsincome was funnelled to the parent company. Consequently,the taxpayer’s rents constituted FPHCI because no activebusiness was conducted and was therefore immediatelytaxable to the US shareholder of the CFC.






Indirect taxesnews



EMEA news

AustriaAn Austrian residentjoint stock company(company G) acquired

via its 100% owned subsidiary(subsidiary E) a 100% participation in alimited liability company resident in theSlovak Republic (company Z). From2006, all three companies were part of atax group, where G functioned as parentcompany of the group. After a legalmerger in 2008 between G and E,company G became the legal successorof E, ie the sole shareholder of Z. In theannual tax return for 2006, Z claimeddepreciation of goodwill in relation tothe acquired participation in Z. Whenthe tax authorities denied the claim for depreciation, G appealed against the decision.

Under the Austrian group taxationregime, write-offs in respect ofparticipations in group members are notdeductible for corporate income taxpurposes. Instead, the group parent maydepreciate the goodwill derived from theacquisition of the participation in anoperating resident group subsidiary.Goodwill is determined as the lower of:• the difference between the

acquisition price and the accountingequity of a group subsidiary,increased by unrealised capital gains

• 50% of the acquisition price, spreadover 15 years.

Under the Austrian group taxationregime, a non-resident company can alsobe a group member, provided that it iscomparable to a resident stock company,limited liability company or cooperative.The court ruled in favour of the taxpayer.

DenmarkThe Danish corporateincome tax act states thatany cross-border transfer

of assets and liabilities out of the Danishtax jurisdiction will be subject to Danishexit taxation. The transfer of assets outof the Danish tax jurisdiction will betreated as a sale at market value, and anycapital gain arising from it will besubject to Danish corporate income taxat a rate of 25%.

The European Court of Justice(ECJ) held that this legislation violatesthe treaty on the functioning of theEuropean Union (EU) regarding thefreedom of establishment. The ECJdeemed the Danish rules to bedisproportionate because they imposeimmediate capital gains taxation onunrealised assets at the time of transferwithout any possibility of deferringtaxation to a later point in time.

Denmark argued that it isproportionate to impose taxation onunrealised non-financial assets at thetime of transfer if the assets are used in abusiness and are subject to depreciation.If taxation could be deferred to the timeof realisation, taxpayers could avoidtaxation completely, Denmark argued,because such assets will often not berealised at all.

The ECJ rejected this argument andstated that even though it isproportionate for a member state todetermine the tax due on the unrealisedgains at the time when its power oftaxation regarding the assets in questionceases to exist; taxation at the time oftransfer without an option to defertaxation is disproportionate.






Indirect taxesnews



FinlandA Finnish company,(company P), applied todeduct losses, despite a

change of ownership. Under Finnishincome tax law, the change in ownershipwould prohibit the carry forward of thelosses. However, tax authorities mayallow the deductions for special reasons.The change in ownership restriction is very common around the world as a means to limit trafficking in loss companies.

P’s application was rejected by thetax authorities and its appeal wasrejected by a Helsinki administrativecourt. P then appealed to the supremeadministrative court, which referredquestions to the ECJ asking whether theFinnish scheme constituted state aid andwould therefore be prohibited.

The ECJ held that the Finnish taxlaw does not prohibit the Finnish losscarry forward scheme because itconstitutes existing aid and may remainin place until the European Commission(EC) finds it to violate EU law and theECJ supports that finding.

The court wrote that the loss carryforward provision does not violate EUlaw because it is not new aid, but ratherexisting aid, having come into forcebefore Finland joined the EU in 1995.Only new aid must be reported to theEC, existing aid, such as the loss carryforward scheme, may be lawfullyimplemented as long as the EC has notfound it to be incompatible with EU law.

If the Finnish loss carry forwardscheme had been amended, it could beclassified as new aid, in which case thedecision would be against Finland.

FranceFrance is expected tohold hearings based onthe ‘Council of

Ministers’ publication on a new set ofanti-avoidance measures to fight againsttax fraud. The key elements of thispublication are summarised below. • Reporting obligations – to harden

the fight against tax havens, largecompanies, banks and wealthyindividuals will bear new reportingobligations. French banks andcompanies will be required to reportannually the list of their foreignsubsidiaries, including specific detailson the nature of their business,transactions, sales, employees,profits, taxes paid and public aid received.

• Investigative powers – thegovernment plans to increase thepolice and judiciary authoritiesspecialising in tax investigation staffand create a new prosecuting officefor major corruption and tax fraud.

• Penalties for tax fraud – thegovernment will increase criminalpenalties for major tax fraud and tax evasion.

• List of non-cooperative states orterritories (NCSTs) – thegovernment proposes to addcountries to the NCSTs list that willnot cooperate actively with France.Currently, countries that have signedan exchange of informationagreement with France are notincluded on the list even though inpractice assistance is not given. Themain consequence for being on theFrench NCSTs list is that thewithholding tax on interest,dividends and royalties paid toresidents of an NCST is increased to 75%.






Indirect taxesnews



GermanyThe federal ministry offinance in Germanyreleased a draft regulation

on the attribution of permanentestablishment (PE) profits in accordancewith the OECD guidelines. Given thelevel of foreign firms operating inGermany with German branches, thesedraft regulations are important as theywill ultimately provide the guidancenecessary to calculate German branchtaxable profits.

The OECD focuses on function,assets, risks and capital, and Germany’snew draft regulation contains provisionsrelating to the classification of PEincome as well as the calculation andattribution of that income. Theregulation would be a reliableinstrument for investors in connectionwith the classification and attribution ofbusiness profits in general, regardless ofwhether they choose a Germancorporation or partnership instead of aPE for investing in Germany.

The regulation would cover: • how the income of a PE is calculated;

there would be an ‘auxiliarycalculation’ that requiresdocumentation relating to theattribution of assets and liabilities,equity (allotted free capital), andrelevant business transactions

• the circumstances under which civillaw contracts (dealings) would berecognised under German tax law

• details about certain business sectors,such as banking, insurance,construction and mineral exploration.

Greece A new Income Tax Code(ITC) was announced inthe introductory report

as part of Greek Government’s effort tooverhaul the Greek fiscal systemtowards enhancing transparency andcombatting tax avoidance and evasion.The new ITC is expected to becomplemented with a new frameworkfor the rationalisation of existing (butfragmented) tax incentives and specialtax regimes. The ITC becomes effectivein respect of revenues and expensesoccurring in fiscal years starting on orafter 1 January 2014.

The ITC adopts rules and definitionsalready existing in the EU andinternational tax materials (eg theOECD model tax convention, the EUmerger directive, the EU councilresolution regarding CFCs and thincapitalisation rules).

For combatting tax evasion andavoidance, the ITC contains rules onCFC and thin capitalisation, imputationof income, disallowance of payments tonon-cooperating jurisdictions andpreferential tax regimes.

The new ITC retains the principle of income taxation onthe basis of worldwide income in respect of domestic taxresidents and Greek source income in respect of non-domestictax residents.

There are new earnings-stripping rules, including: • net deductible interest is limited to 25% of Earnings

Before Interest, Taxes, Depreciation, and Amortisation(EBITDA) (under Greek accounting principles and therelevant tax adjustments)

• net interest, the amount by which interest expenses exceedinterest revenues

• limitation does not apply to business taxpayers that are notpart of a group of companies and the net interest does notexceed €1 million per year

• interest expenses disallowed can be carried forward to thefollowing five fiscal years

• credit institutions are exempt from such rules.

In terms of CFC legislation, undistributed profits earned by aCFC are added to the taxable profits of the shareholder, underthe following conditions:• shareholder directly or indirectly controls the

foreign corporation• CFC is a tax resident in a non-cooperative jurisdiction

or in a jurisdiction with a preferential tax regime• more than 30% of the income earned by the CFC is

classified as passive income (interest, royalties, dividends etc.)

• CFCs established in EU member states are outside thescope of the rule, provided profits have not been artificiallydiverted there for tax evasion purposes.






Indirect taxesnews



HungaryThe European Court ofHuman Rights (ECHR)gave its decision in a case

with unusual circumstances. The facts ofthe case dealt with a Hungarian nationaland former civil servant.

The ECHR found that the applicant,who was entitled to statutory severance,was subjected to a tax whose rateexceeded about three times the generalpersonal income tax rate of 16%. TheECHR observed that the 98% surtax: • entailed an excessive and individual

burden on the applicant’s side • targeted only a certain group of

individuals, who were singled out bythe public administration in itscapacity as employer

• made the applicant bear an excessiveand disproportionate burden, whileother civil servants with comparablestatutory and other benefits were notrequired to contribute to a comparableextent to the public burden

• was applied without affording theapplicant a transitional period withinwhich to adjust to the new scheme

• was imposed on income related toactivities prior to the material taxyear and realised in the tax year, onthe applicant’s dismissal.

The ECHR concluded that the specificmeasure, as applied to the applicantcannot be justified by the legitimatepublic interest relied on by theHungarian Government.

IrelandIrish tax authorities issuedan anti-avoidance measuredesigned to combat

schemes whereby an employer placesfunds in trusts or other arrangements(generally offshore) and under suchschemes, payments/loans, benefits orassets are provided to a director oremployee or to an individual connected toa director or employee. Where loans areinvolved, they are generally rolled overand not repaid. The new measure imposesa charge to income tax where it was nototherwise chargeable:• in the case of a current or former

director or employee, on the amountof such payment/loan, the cost ofproviding (or the value of) suchbenefit, or the value of the asset

• in the case of an individual, thoughnot a director or employee at thetime of receipt of the payment/loan,benefit or asset, who subsequentlybecomes a director or employee, onthe amount of such payment/loan,the cost of providing (or the value of)such benefit, or the value of the asset

• in the case of a current or formerdirector or employee, on an amountcalculated as if the benefit-in-kindprovisions apply as regards a loan oruse of an asset.

IsraelThe Israeli Government proposed a number ofmajor changes to the Israeli tax system, includingamendments that could be particularly relevant

to new immigrants and companies doing business in Israel.Among the measures proposed are:• a corporate tax increase from 25% to 26.5%• increases in all tax brackets for individuals by 1.5% so that

the highest marginal tax rate would be 49.5%, plus apotential surcharge of 2%, for a total of 51.5%

• significant changes to the CFC regime• the cancellation, for new immigrants, of a tax exemption for

proceeds from the sale of residential apartments in Israel, anda narrowing of the exemption for Israeli residents

• changes to the ‘family company’ regime so that Israelicompanies that are considered to be transparent undercertain conditions could no longer be treated as transparent if they have foreign shareholders

• a narrowing of the tax exemption provided to foreignresidents on the sale of Israeli companies and the denial ofthe exemption if the Israeli company holds natural resources.

In addition to these proposals, the bill calls for significantchanges in the taxation of trusts and new immigrants in Israel.






Indirect taxesnews



ItalyA recent court case involved an Italiancompany that distributed software producedby a US entity. The Italian subsidiary of a US

based multinational was subject to assessment for corporateincome tax purposes.

During the assessment the Italian tax authoritieschallenged the deduction of a significant part of the royaltiespaid by the Italian subsidiary to its US parent by claiming thesubstantially higher transfer pricing was not in line with thearm’s length standards. The tax inspectors recomputed thetransfer pricing for the royalties as 7% of the proceeds, basedon the guidelines of the ministry of economy and finance.

The taxpayer successfully argued against the taxassessment before the tax court in the first instance, and theItalian tax authorities then appealed the decision. The secondtax court reversed the previous judgment and validated the taxinspectors’ action that disallowed the deduction of asubstantial portion of the royalties paid.

The court rejected the appeal concerning the transferpricing applied to the payment of royalties for the license ofsoftware. The supreme court upheld the position of the Italianrevenue agency.

LiechtensteinRecent activity from the US departmentof justice has sent a stern pre-ForeignAccount Tax Compliance Act (FATCA)warning to US taxpayers holdingoffshore bank accounts with US taxevasion intentions.

In a US department of justiceannouncement, the assistant attorneygeneral for the tax division, announced abank based in Vaduz, Liechtenstein hasagreed to pay more than $23.8 million tothe US and entered into a non-prosecution agreement (NPA). TheNPA provides that the bank will not becriminally prosecuted for opening andmaintaining undeclared US taxpayers’bank accounts from 2001 through 2011,at a time when the bank assisted asignificant number of US taxpayers inevading their US tax obligations, byfiling false federal tax returns with theIRS and otherwise hiding accounts heldat the bank from the IRS. The NPArequires the bank to forfeit $16,316,000,representing the total gross revenuesthat it earned in maintaining theseundeclared accounts and to pay$7,525,542 in restitution to the IRS,representing the approximate unpaidtaxes arising from the tax evasion by the bank’s clients.

The assistant attorney general stated“this non-prosecution agreementaddresses the past wrongful conduct ofthe bank in Vaduz in allowing UStaxpayers to evade their legal obligationsthrough the use of undisclosedLiechtenstein bank accounts, while alsoacknowledging the extraordinary effortsof the bank in bringing about significantchanges in Liechtenstein law. As a resultof new Liechtenstein legislation, UStaxpayers who thought that they hadobtained the benefit of Liechtenstein’stax secrecy laws have learned that theirbank files were turned over on therequest of the department of justice.”

NetherlandsStock options continueto be used by employersas a means of non-cash

compensation for executives. In a recentcase, a Dutch resident individual whowas a managing director for a Dutchlimited liability company, A B.V. wasawarded warrants by A B.V., which gavehim the right to buy a specific numberof shares in A B.V. at a certain priceduring selected periods. The taxpayerexercised his warrants from which hederived a net taxable gain of€326,475.36. A B.V. withheld theapplicable marginal wage tax rate of52% on this amount. The shares weretransferred into the taxpayer’s personalinvestment account. The price of theshares in A B.V. had, however, droppedsince the warrants were exercised. Atthis point, the net gain was €240,084. Inthe taxpayer’s tax return for 2007, thetaxpayer included a negative income of€86,391, ie €326,475.36 (the net gain) –€240,084 (the net gain of the shares).

The tax inspector rejected thededuction of the negative income,assessing a taxable income of €424,373.The taxpayer appealed the assessment tothe lower court of The Hague and theappeal was rejected.






Indirect taxesnews



PortugalThe PortugueseGovernment amended itscorporate tax law to

include a withholding tax exemptionwhen the beneficial owner of a royaltyor interest payment is a company or PEin another EU member state.

The change completes Portugal’stransition of the EU interest androyalties directive, which eliminateswithholding tax on interest and royaltypayments made between associatedcompanies of different member states.

Also, Portugal will exemptwithholding tax on payments to a Swisscompany or Swiss PE under the 2004EU-Switzerland savings tax agreement,which provides for measures equivalentto those on the taxation of savingsincome in the form of interest payments.

RomaniaThe ministry of financepublished a draft of anordinance, introducing

lump-sum taxation for certaincompanies deriving income fromactivities specified by the law.

The lump-sum tax, which wouldreplace the current 16% corporateincome tax or 3% turnover tax, would beimposed on resident companies that, on31 December of the preceding tax year: • carried on, as main activity, services

of maintenance and repair of cars,tourism, bars and public alimentation

• derived income from the mainactivity in an amount exceeding 70%of the total income

• had a net annual turnover of lessthan €50 million or owned totalassets of a maximum value of €43 million

• had less than 250 employeesannually, on average

• were not under liquidation.

If, on 31 December of the tax year, theconditions for applying lump-sumtaxation are no longer met, the taxpayermust report this to the tax authorities by31 March of the following year.

The lump-sum tax would bedetermined based on computationformulas which are different for eachtype of activity.

Lump-sum tax would be payable ona current year basis, with quarterlydeclarations and payments, by the 25thday of the month following each quarter.

RussiaThe presidium of the Supreme ArbitrationCourt (SAC) held in a case involving a Russiantelecommunications company, that deductible

interest expenses on controlled loans must be calculatedquarterly and cannot be recalculated for subsequent changes inthe taxpayer’s balance sheet position.

The issue of the litigation was the legitimacy of a taxpayer’srecalculation of the thin capitalisation ratio on a cumulativebasis in subsequent reporting periods. Profits tax returns arenormally filed for the first quarter of a calendar year, the firstsix months, the first nine months and the year as a whole(unless the taxpayer opts for monthly reporting). The taxpayerhad recalculated interest deductions for each period coveredby a tax return. This resulted in the recognition of increaseddeductible interest.

The tax inspector did not accept the recalculation ofinterest for periods covered by previous tax returns. The lowercourts concluded that tax law did not prohibit the adjustment(recalculation) of deductible interest expenses, but the case wasreferred to the SAC for a supervisory review.

The SAC supported the tax authorities’ position, holdingthat the deductible interest expenses have to be calculated on aquarterly basis and should not be recalculated for every periodcovered by the tax return.






Indirect taxesnews



South AfricaIn a recent ruling issuedby the South AfricanRevenue Service (SARS),

various wealth transfer tax issues were addressed.

The descendants of a testator are thedesignated residuary heirs under the willof the deceased. The will also bequeathscertain legacies to the surviving spouseof the deceased. The applicant of theruling request, who is the executor of adeceased estate, anticipates that estateduty will become leviable on the netvalue of the estate. The descendantspropose to renounce their inheritances.

The SARS ruled that:• the renunciations will not result in

the levying of any donations tax• the renunciations will not

be ‘disposals’ • the estate duty act will apply to the

inheritances that will accrue byoperation of law to the survivingspouse by virtue of the proposedrenunciations.

In another ruling, SARS issued a bindingprivate ruling dealing with the questionas to whether the cancellation andextinguishment of a right to claiminterest on a shareholder loan willtrigger a capital gains tax liability.

A listed public company sold itsmajority shareholding of 74% in aprivate company (the co-applicant) toanother public company (the applicant).The co-applicant and the applicant,which are both incorporated and taxresident in South Africa, were notconnected parties prior to this equity acquisition.

As part of the equity acquisition, theapplicant acquired a loan claim to thevalue of ZAR 4.161 billion owed by theco-applicant to a financing company.The applicant paid ZAR 1.1 billion forthe loan claim. The co-applicant,however, continues to owe the applicantthe total ZAR 4.161 billion amount.Interest is charged at the Johannesburginterbank agreed rate plus 4.9% perannum. The co-applicant is not in aposition to service all the interest on theloan claim due to the applicant.

The applicant proposes splitting theloan claim into two parts. Interest willcontinue being charged on the ZAR 1.1billion, while interest on ZAR 3.061billion, reflecting the discounted portionof the loan claim, will be cancelled. TheZAR 3.061 billion amount willsubsequently become an ‘interest free portion’.

In addition, the loan claim will besubordinated in order to restore thesolvency of the co-applicant and toallow them to be in a position tonegotiate better credit terms with otherfinancial institutions.

SARS ruled that:• since the co-applicant and the

applicant were not connected partiesprior to the equity acquisition, theZAR 1.1 billion paid for the loanclaim will represent an arm’s length price

• the cancellation and extinguishmentof the applicant’s right to interestbased on the interest free portion ofthe loan claim will not trigger anycapital gains tax liability

SwedenThe Swedish parliament has passed a lawwhereby foreign employers must report to theauthorities their employees that are seconded

to Sweden. The law requires a contact person in Sweden to beregistered and authorised to receive notices on behalf of theemployer and provide documents to show that requirementsunder Swedish law regarding stationed employees are met.The authorities have issued brief regulations detailing thereporting requirements that apply from 1 July 2013 and affectforeign employers inside and outside the EU. The notificationmust be filed no later than when the employees begin theirwork in Sweden.

The notification shall include the following information:• the employer’s name, mailing address and residence• information on an authorised representative of the

employer, including their name, Swedish personal identitynumber if existing (or if not their birth date), mailingaddress, telephone number, and email address

• the type or types of services to be provided in Sweden• period during which the services will be provided

in Sweden• the place or places in Sweden at which the services will

be provided• name and Swedish personal identity number if existing, or

if not, birth date of the employee(s) that are stationed towork in Sweden.






Indirect taxesnews



TurkeyTurkish tax authoritiesissued a ‘resolutioncommuniqué’ providing

guidance for incentives in Turkey. Theobjective of the resolution is to explainthe principles and procedures of how to: • orient savings to investments with

high added value• boost production and employment• encourage regional, large-scale, and

strategic investments with greatercontent of research and development

• enhance internationalcompetitiveness

• attract more foreign direct investment• deal with regional developmental

discrepancies.

Investment incentive certificates need tobe obtained by individual investors toactivate whatever investment benefitswill be granted to them. Thus, thisdocument, issued upon request ofinvestors, specifies which benefits willbe granted and utilised in whatinvestment-related circumstances underthe relevant provisions of the resolution.

Any investment project to begranted with an investment incentivecertificate goes through an elaborate andextensive process carried out by therelevant central/local authority.

The ‘General Directorate ofIncentive Implementation and ForeignCapital’, affiliated with the ‘Ministry ofEconomy’, is the central, if not the sole,public body vested with authority toissue investment incentive certificates.But there are also local authorities suchas chambers of industry, developmentagencies, and other chambers thatoperate as local branches of the Unionof Chambers and CommodityExchanges of Turkey to issue investmentincentive certificates pertaining toinvestments under TRY 10 million andfalling within the scope of the generalinvestment incentive scheme. Fourprincipal categories of investmentincentives are: • general investment incentive scheme• regional investment incentive scheme • large-scale investment incentive

scheme• strategic investment incentive

scheme.

UkraineThe Ukrainian ministryof revenue issued aguidance in which it

clarified the corporate deductibility ofexpenses incurred in transactions withinterdependent (related) persons. Theministry indicated that the followingpersons should be qualified as related: • legal entities, if one of them controls

the other(s) or if two or more legalentities are controlled by a third legal entity

• a natural person, his familymembers, and a legal entity if thatnatural person or his familymembers control that legal entity

• managers and other executiveofficers of a legal entity, as well astheir family members, who areauthorised to undertake actions onbehalf of the legal entity that willcreate, modify, or terminate the legalentity’s legal relations

• members of any association of legalentities carrying on businessactivities through such association.

For tax purposes, the term ‘control’ means: • a direct possession or possession through related natural

persons or legal entities of a stake of at least 20% in thetaxpayer’s capital

• a direct influence or influence through related naturalpersons or legal entities of a taxpayer’s business activities as a result of:– obtaining corporate rights permitting the exercise of

decisive influence on the formation and decision-making of the taxpayer’s managing bodies

– filling posts in the taxpayer’s supervisory and executivebodies with persons who already occupy similar postsin other legal entities

– obtaining a right to enter into contracts authorising theimposition of conditions for exercising the taxpayer’sbusiness activities, to make obligatory instructions forthe taxpayer, or to delegate to third persons the powersand functions of the taxpayer’s managing bodies.

The ministry held that any expenses incurred by a taxpayer inconnection with the sale or exchange of goods, performance ofworks, or provision of services to persons considered affiliatedwith the taxpayer may be recognised to the extent they do notexceed the income gained from those transactions. It furtherheld that the taxpayer may not register losses on thosetransactions in its tax accounting.






Indirect taxesnews



United KingdomIn the House of Lords, a select committee on economic affairs issued a report ‘Tacklingcorporate tax avoidance in a global economy:

is a new approach needed?’ In the report, the committee noted that:1. The UK faces a serious problem of avoidance of

corporation tax, due in part to the complexity of the taxregime in the UK, but mainly because the international taxsystem gives multinational companies opportunities toshift profits between countries in ways that reduce theirliabilities in the UK. This damages the economy andundermines trust in the tax system.

2. Under the present international framework of corporatetaxation, companies operating globally can make theirtaxable profits arise in low-rate jurisdictions, such asIreland and Luxembourg, even when their customers arein the UK or elsewhere. The amount of corporation tax acompany pays in any one country, such as the UK, can bedetermined by how aggressively the company seeks toshift its profits to other lower-taxed countries. The effect is to make corporation tax payments in a given countrylargely voluntary for multinational companies.

3. The UK faces the prospect of losing much-needed revenuethrough avoidance of corporation tax. There are alsodistortions in the market place: there is no level playingfield between, say, a UK-based retailer which has to paycorporation tax in the UK and a global rival selling in the UK but paying corporation tax somewhere else at alower rate.

UzbekistanThe President signed a decree establishing anew Free Industrial and Economic Zone(FIEZ) in the Djizzak region. The decree

introduces a special fiscal, customs and administrative regime available for residents of the Djizzak FIEZ, for aperiod of 30 years.

Legal entities registered in the FIEZ are provided withexemption from corporate income tax, property tax,infrastructure development tax, unified tax payment for smallcompanies and contributions to the Republican Road Fund.

The decree provides a relief for customs payment (with theexception of customs clearance fees) on imported equipment,raw materials and spare parts, not produced in Uzbekistan andimported into the Djizzak FIEZ as part of the projects, whichare approved by the cabinet of ministers.

The above-mentioned exemptions are granted for theperiod of:• three years, if the investments made in the region equal

USD 300,000 to USD 3 million• five years, if the investments equal USD 3 million to

USD 10 million• seven years, if the investments equal over USD 10 million.






Indirect taxesnews


Therefore the committee recommended:• Parliament should establish a joint

committee made up of Members ofParliament and Peers, to exercisegreater parliamentary oversight ofHer Majesty’s Revenue and Customs(HMRC) and the settlements itreaches with multinationals. Like theIntelligence and Security Committee,the new committee would examineconfidential evidence in private

• the treasury should urgently reviewthe UK’s corporate taxation regimeand report back within a year withproposed changes to be made athome and pursued internationally,especially through the OECD

• the review should re-examine somefundamentals of the UK’scorporation tax regime, includingdifferential tax treatment of debt andequity and the scope for introductionof an allowance for corporate equity

• HMRC should be better resourcedto deal effectively with the tax affairsof complex and well-resourcedmultinationals.

APAC news

AustraliaA recent decision dealtwith foreign currencydenominated

transactions. The News CorporationLimited (TNCL), incorporated inAustralia, was the parent company ofthe News group; News Finance Pty Ltd(NF), News Limited (NL) and NewsPublishing Holdings Pty Ltd (NPHP),wholly owned subsidiaries and NewsPublishing Investments Pty Ltd (NPIP)was a subsidiary of NPHP. NL had builtup a large debt (its capital and reserveswere negative AUS$239 million) infunding the foreign expansion of theNews Group through its interest inNews Publishers Limited (NPL)incorporated in Bermuda. NL was aborrower and guarantor of external debtand its accounts were publicly disclosed.To address this problem, News groupundertook a reorganisation with theobjective of reducing NL’s debt.

NF loaned funds to NPHP which itused to subscribe for shares in NPIP.NF and NPHP accounted for thistransaction as three separate loans inAUD, USD and GBP although thecheque was in AUD. NPIP then usedthe funds to acquire NL’s interest inNPL and NL used the proceeds of thatsale to retire debt. Other financingtransactions were also consummated inthe group.

The News Group undertook a globalreorganisation of its operations inresponse to a downturn in the economyand a liquidity crisis. The restructureinvolved NPIP disposing of its interest inNPL by that company redeeming andbuying back the redeemable preferenceshares and ordinary shares held by NPIPand assigning or endorsing a series ofpromissory notes to various companieswithin the News Australia group.

NPHP claimed a forex loss occurredwhen it endorsed the two USDpromissory notes to NPIP and when itpresented the promissory note to NPIPin final satisfaction of the loan.

The commissioner had submitted acurrency exchange loss that could berealised without a related exchange,being necessarily a payment or outgoinginvolving exchanges of foreign andAustralian currency. The commissionerargued that more was required than an exchange of promissory notes and an extinguishment of liabilities in foreign currencies.

The full court noted that the term‘currency exchange loss’ was defined as‘a loss to the extent to which it isattributable to currency exchange ratefluctuations’. Considering the definition,the loss must be attributable tofluctuations in the currency exchangerate; and noted that the explanatorymemorandum also supported thatinterpretation. Had it not been sodefined they acknowledged that anargument that an actual exchange ofcurrency was required for the section tobe activated might have a plausible basis.

ChinaThe Shanghai free trade zone, proposed by theministry of commerce and Shanghai municipalgovernment, contains special liberal rules that

will apply to the new zone in respect of: • setting up foreign investment enterprises (new sectors open

to foreign investment and less restriction on participationrates in certain sectors)

• customs clearance• financial sector (including abolition of foreign exchange

control of the Chinese currency on capital accounts,interest rate, overseas portfolio investment and foreignparticipation in future trading etc.)

• preferential tax rate and other incentives.

The Shanghai Government published its ‘Plan for theGuidance of the State Council on Financial Support forEconomic Restructuring, Transformation and Upgrading’ tolaunch a financial reform which will be experimented in thenew zone. The financial reform will cover cross-bordersettlements, credit asset securitisation, use of CNY ininternational trade, investment and insurance, direct foreigninvestment by Chinese enterprises and individuals.

If the plan is carried out, the new zone is considered to beone of the biggest transformations of the Chinese economyand financial sector in Chinese history.







Indirect taxesnews


Hong KongGiven the constant flowof executives into and outof Hong Kong, the issue

of tax residency becomes important. The ‘State Administration of Taxation’issued an announcement regarding theprocedure for issuing a Hong Kong tax residence certificate.

The mainland tax authority maydetermine Hong Kong tax residentstatus on the basis of the certificate ofincorporation/registration issued by theHong Kong registrar of companies orthe business registration certificate whenthe applicant for the treaty benefit is alegal entity. In cases where the applicantis an individual, the followingdocuments must be presented: • Hong Kong identity card• Hong Kong resident travel pass to

the mainland• Hong Kong tax clearance certificate

of the preceding tax year.

However, in the following cases, a taxresidence certificate issued by the HongKong tax authority is required:• the Chinese tax authority is

suspicious about the applicant’sresident status

• the documents presented by theapplicant are not sufficient to provethe resident status

• the applicant applies for the residentstatus on the basis of automaticrecognition of resident status forlisted companies, including higher-tier companies of the listed companies

• the applicant, who is an individual,applies for the application of the taxarrangement on capital gains.

To obtain a Hong Kong tax residencecertificate, the following documentsmust be submitted to the Hong Kongtax authority:• a letter of request issued by the

mainland tax authority (at county or higher level) to the Hong Kongtax authority

• the application form for residentstatus issued by the Hong Kong taxauthority (for legal entities there aretwo forms available, (i) forcompanies incorporated in HongKong and (ii) for companiesincorporated outside Hong Kong.Hong Kong will, as the case may be, issue the respective tax residence certificate).

IndiaGenerally transferpricing applies to relatedparty sales, services,

leases, licenses and loans. Usually theissuance of shares between relatedparties and most jurisdictions would noteven raise a related party share issuanceas a transfer pricing issue, although the Indian tax authorities have beenlooking into a recent transaction asoutlined below.

Shell Oil is an interesting Indianview of transfer pricing legislation. ShellIndia issued around 870 million sharesto its Dutch parent at a price of INR 10per share. The capital was infused intothe Indian company as foreign directinvestment (FDI) in compliance withIndian exchange control regulations. Inthe course of transfer pricing assessmentproceedings, Indian tax authoritiesclaimed that Shell India significantlyundervalued its shares. According to the tax authority, Shell India’s sharesshould have been valued at around INR 180 per share.

The tax authority contended thatcapital infusion or a subscription ofshares of an Indian company by theforeign parent is well within the scrutinyof transfer pricing regulations. The taxauthority claimed that Shell India hadissued more shares to its parent than theamount invested. It sought to tax theshortfall of around INR 150 billionwhich according to the tax authoritywas receivable by Shell India from itsDutch parent on an arm’ s length basis.

Shell India has challenged the taxauthority’s order before the Bombayhigh court on the basis that the taxauthority does not have jurisdiction toinvoke transfer pricing regulations fortaxing subscription to shares of acompany, which is a capital transactionthat should not have tax consequences.







Indirect taxesnews


JapanPermanent residents arenow required to annuallyreport on their overseas

assets worth more than JPY 50 millionin the aggregate for the purposes ofincome and inheritance taxes. Apermanent resident is either a Japanesenational or a foreign individual whoresided in Japan for more than five yearsin the preceding ten years.

The overseas assets, regardless oftheir business or private use, include:real properties, bank accounts,brokerage accounts, securities (sharesand bonds), equity rights (stock options)not exercised or disposed, interest inpartnerships and trusts, antiques,jewellery and other valuables.

Overseas assets are valued at eitherfair value or estimated value as of 31December. The fair value can be thevalue assessed by a professionalappraiser or the price published in thefinancial market. The estimated value isthe value computed according to thereasonable benchmarks, such as theacquisition price or the sale price of thesimilar asset.

The overseas asset report is subjectto inspection by the tax authority, andnon-compliance with the reportingrequirement may trigger a fine up toJPY 500,000 or, in serious cases, oneyear imprisonment.

KoreaUnder revisedregulations, the foreignexchange that will be

exempt from reporting duties are:• net settlements of less than USD 1,000• payments to third parties• all kinds of settlement practices

usually used in the global market• small transactions and transactions

that are difficult to report, such asrent payments by individualsworking overseas and transfers ofinvestment due to bankruptcy.

The following foreign exchange relatedtransactions must be reported:• capital increases and sales of overseas

subsidiaries as well as theirestablishments

• investments of holding companies inall their subsidiaries

• tax payments of real estate sales byforeigners when they send revenuesfrom real estate sales in Korea overseas.

In addition, the reporting exemptiongiven to individuals with permanentresidence rights overseas will beremoved to prevent the avoidance oftax on overseas direct investments.

Information regarding foreignexchange transactions will be sharedmore extensively among governmentagencies such as the National TaxService, the Korea Customs Service andthe Financial Supervisory Service. Suchcooperation is expected to help preventoverseas tax evasion and illegal foreignexchange transactions.







Indirect taxesnews


MalaysiaMalaysia has publishedrules on the deductibilityof costs for the

acquisition of foreign-ownedcompanies. A qualifying locally ownedcompany may deduct as expenses 20%of the costs of acquiring a foreign-owned company in the basis year for ayear of assessment. The acquisition mustbe completed within three years fromthe date an application for deduction issubmitted to the Malaysian investmentdevelopment authority. The deductionwill be withdrawn if the paid-upordinary shares issued by the acquiredforeign-owned company are disposed of within five years following the date of completion of the acquisition.

The new rules cover locally ownedcompanies that: • have obtained the approval of the

Malaysian investment developmentauthority regarding an applicationfor deduction submitted on or after 3 July 2012, but no later than 31 December 2016

• acquire more than 51% of the paid-up ordinary shares issued by a foreign-owned company

• use the high technology transferredfrom the foreign company in theiroperational activities in order tocreate or increase the demand forMalaysian-originated products orservices provided in Malaysia (thetechnology must be used for theproduction or the improvement ofmaterial, devices, products, orprocesses or for the improvement ofprocessing or quality of services)

• have not been granted any incentivesunder the promotion of investmentacts, except for pioneer status or theinvestment tax allowance as a high-technology company.

New ZealandA white paper, entitled‘R&D tax losses’, inviteddiscussion on proposed

changes to the tax rules to assist start-upcompanies undertaking R&D. It willbe interesting to see what comes out of the discussion in terms of legislative amendments.

The paper suggests that suchcompanies be allowed a refund inrespect of 100% of their eligible taxlosses, instead of these losses beingcarried forward and offset against thecompany’s net income in future years.The eligible losses will be capped atNZD 500,000 initially (equivalent to atax refund of NZD 140,000, at the 28% corporate tax rate) and risingincrementally each year to a maximumof NZD 2 million (a refund of NZD 560,000).

To qualify for the refund, a company(and also a group, if the company is partof a group) would:• pay R&D wages and salaries of at

least 20% of its total expenditure onwages and salaries

• be in a tax loss position for theincome year

• be resident in New Zealand • not be a look-through company,

listed company, qualifying companyor special corporate entity.

The paper has proposed that R&Dexpenditure be based on the definition in the New Zealand equivalent ofInternational Accounting Standard 38,with certain activities excluded, such asexpenditure incurred in a post-development phase or related to routinework. It is also proposed to excludeinterest expenses related to R&D, thepurchase of existing R&D assets, R&Dundertaken offshore, lease payments,and any expenditure funded bygovernment or other research grants.







Indirect taxesnews


PhilippinesRegulations have been published dealing with anew excise tax and a requirement for theadvance payment of VAT and corporate income

tax by entities selling gold and other metallic minerals toforeign corporations and to non-resident individuals who arenot engaged in business in the Philippines.

The regulation was imposed by the bureau of internalrevenue to stop growing revenue leakages resulting fromunreported sales of gold, other metallic minerals, and jewelleryto foreign individuals and entities that come to the Philippinesfor a limited period of time for the sole purpose of makingcash purchases of those products.

The 2% excise tax will be levied either on the actual marketvalue of the gross output at the time of excavation, in the caseof locally extracted gold (and other metallic minerals), or thevalue established by the bureau of customs in computingtariffs and duties on imports.

The VAT will be 12% if the gross selling price exceeds thethreshold set by the tax code and other relevant rules andregulations (currently PHP 1,919,500). Otherwise, the rate will be 3%.

The standard corporate income tax rate will be 30%, andindividual income tax will be levied at progressive ratesranging from 5% to 32%. The regulation does not specifywhen the advance payments of VAT and corporate income taxare to be made.

SingaporeSingapore’s inland revenue authority publishednew guidance clarifying the tax rules for theproductivity and innovation credit (PIC) regime.

PIC is an incentive that allows businesses that invest inspecified activities enhanced tax deductions, allowances anddeferred tax payments. The regime is available from tax year2011 through tax year 2015.

PIC grants businesses that invest in specified productivityand innovation activities enhanced deductions and allowanceson as much as $400,000 of qualifying expenditure incurred foreach activity. These benefits are in addition to the deductionsand allowances provided under the general tax rules. The totaldeductions and allowances amount, in effect, to 400% perdollar of qualifying expenditure.

Eligible activities are as follows: • the acquisition or leasing of specific information

technology and automation equipment • the acquisition or licensing of intellectual property rights• the registration of certain intellectual property rights• R&D• training• design.

TaiwanTaiwan’s parliament amended the capital gainstax on stock trading. The original capital gainstax, which was passed requiring taxpayers to

pay a progressive tax ranging from 0.02% to 0.06% wheneverthe Taiwan capitalisation weighted stock index hit or exceeded8,500 points. There is no 8,500 point threshold under theamended capital gains tax. Rather, it is levied at 0.1% onannual sales at or above NT $1 billion (about $33.2 million).Taxpayers can choose to pay a 15% capital gains tax on theactual gains/losses if doing so would create a lower overall tax burden.

The capital gains tax on initial public offerings will remainthe same. Investors are required to pay a 15% tax on anycapital gains from a sale of more than 10,000 shares in anIntellectual Property Office (IPO). The 15% rate also appliesto capital gains from a sale of 100,000 (or more) shares of anemerging stock or unlisted company. However, if the sharesare retained for more than one year, the taxpayer will receive a50% discount.







Indirect taxesnews


ThailandThe Thai Minister ofFinance announced plansto enhance the country’s

tax incentives for research anddevelopment. Currently, Thai entitiesperforming in-house R&D activities areallowed to deduct double the costsincurred from those activities whencomputing their income taxes. Thecorporate tax rate is scheduled to dropfrom 23% to 20% on 1 January andhad been as high as 30% in 2011. Thisfurther reduction will reduce the actualsavings from the R&D deductions so thegovernment is proposing to allowtaxpayers to claim a triple deduction of R&D expenses. The government is also planning to extend the R&D tax incentive to activities performed by external researchers, hired firms, or joint development projects with other businesses.

VietnamThe Vietnamese ministryof finance issued aCircular, which clarifies

the tax treatment of foreign individualsworking in Vietnam and other non-resident individuals with Vietnamesesource income.

Under the circular, an individual isconsidered to be tax resident in Vietnamif he stays in Vietnam for a minimumperiod of 183 days during a tax year orhas a permanent or long-term residencein Vietnam, including a house lease for aminimum period of 183 days in a taxyear. Currently, the minimum period fora house lease is 90 days.

An individual with a permanentresidence in Vietnam who stays inVietnam fewer than 183 days during atax year may be considered non-residentfor income tax purposes if the taxpayercan provide sufficient evidence that he isa tax resident in another jurisdiction.Evidence can include a certificate ofresidence or, if an individual is residentin a country that does not have anincome tax treaty with Vietnam, a copyof the individual’s passport.

The new circular provides a taxexemption for specific income andbenefits in kind granted to expatriatesworking in Vietnam and to Vietnamesepersons working abroad. The exemptitems include, for example, a relocationallowance, round-trip airline ticketsfor annual leave, and educationexpenses. The circular also specifiesdetails concerning:• gross-up rules for net income • treatment of housing benefits• consequences of benefits-in-kind.

To simplify management of the taxstatus of foreigners working for foreigncontractors and subcontractors inVietnam, the new circular requires suchforeigners to register for tax codes inVietnam for filing purposes.

Finally, a 10% withholding tax ratewill apply to every payment exceedingVND 2 million (about $94,000) to aresident individual if the payment is not specified in a short-term labourcontract (covering a maximum period of three months).







Indirect taxesnews


Americas news


ArgentinaTax reform measuresA package of Argentinetax reform measures

announced in August entered into forceon 23 September. The reforms will affectboth personal and corporate taxpayers,as well as cross-border and domestictransactions. With the repeal of a 20-year-long tax exemption, capital gainsderived from the sale of depreciablemovable assets, shares, quotas andparticipations, bonds and othersecurities will now be subject to incometax in Argentina. If the sale is performedby an individual, the applicable tax ratewill generally be 15%, applied on a netbasis. If the sale of securities isperformed by a foreign legal entity, thewithholding tax rate will be 13.5% onthe gross sale price (unless thetransaction is subject to a differenttreatment under an applicable incometax treaty).

Dividends paid by Argentine legalentities to Argentine individual residentsand non-residents and to non-residentlegal entities will now be subject to a10% tax unless a tax treaty applies, inwhich case the treaty will govern(previously, dividends generally were taxexempt). Dividends paid by Argentinelegal entities to other Argentine legalentities will remain non-taxable.

Once the new change will be in forcethe effective rate for investors willincrease at 41.5% according to thefollowing calculation:

Income typeIncome 100Corporate income tax -35Net income to be distributed 65Withholding tax on distribution -6.50Net Income 58.50

Recent landmark rulingIn other news the Argentine supremecourt of justice recently delivered alandmark ruling. In the case, IESAmerged with another company,IMASUR that was part of the sameeconomic group. IESA served notice ofthe reorganisation to the tax authoritiesas a merger.

The federal tax agency (AFIP) foundthat the reorganisation did not qualify astax-free because IMASUR did not meetthe relevant requisites. It also held thatreorganisation cannot be characterised asboth reorganisation and a goods transferor sale within the same economic group.

After the national tax court andnational chamber of appeals both ruledin favour of IESA, the tax authoritybrought the case before the supremecourt, which also sided with IESA,holding that: the fact that the taxpayerinitially filed the reorganisation as amerger, but failed to meet the relevantrequirements does not prevent thereorganisation from being analysedunder another provision, therequirements of which were fulfilled by the taxpayer.






Indirect taxesnews



BoliviaA temporary tax onforeign currencytransactions (IVME) was

approved by the chamber and must nowbe approved by the senate. Features ofthe IVME include:• it will apply for a 36-month period• only financial institutions and

foreign exchange businesses will besubject to tax

• a rate of 0.7% will be applicable on the profits from the sale offoreign currencies

• foreign exchange businesses will paythe tax on only 50% of the tax base

• profits derived from the sale offoreign currencies by the centralbank of Bolivia will be tax exempt

• it will not be deductible from the net profit subject to corporateincome tax

• it will enter into force on the dayfollowing the day on which thedecree is published.

In another development a recentresolution passed indicating that the taxauthorities may now request thepayment of tax debts from directors,managers and legal representatives in thefollowing cases:

• Enforceable tax obligations – taxesdue that have not been paid ordisputed before the tax authorities,as well as tax debts which have beendisputed before the tax authoritiesand the tax courts, where the rulingor decision obtained was not infavour of the corporate taxpayer.

• Partial payment of tax due – eventhough the tax authorities haveattempted to collect the tax duedirectly from the corporate taxpayer(frozen bank accounts, assetforfeiture), the funds available areinsufficient to pay the tax debt infull. In this case, the tax authoritiesmay collect the full amount of taxdue or the corresponding differencefrom directors, managers and legal representatives.

• Reasoned decision – once the taxauthorities have declared that thefunds available are insufficient orthat the corporate taxpayer isinsolvent, it shall issue a reasoneddecision including the enforceabletax obligations, wrongful actsperformed by the legal representativeor person in charge of administeringthe assets and equity, and thedeadline for replying to this decision.

BrazilA published ruling heldthat capital gains realisedby non-residents are

taxable in Brazil even when bothcontracting parties are non-resident andthe only link to Brazil is the location ofthe relevant asset. The ruling clarifiedthat a 15% withholding tax applies tocapital gains ‘arising from thedisposition of property and rightslocated in Brazil by non-resident legalentities, except where otherwiseprovided in conventions to avoid doubletaxation signed by Brazil’.

In a disposition involving a Brazilianproperty where both purchaser andseller are non-resident in Brazil, theruling cited the statutory authorityrequiring the Brazilian representative ofthe foreign purchaser to withholdincome tax on the capital gains realisedby the foreign seller and to remit it tothe government even if no payment hasbeen made within Brazil.

In a transaction where no paymentwas made within or from Brazil, it couldbe argued that no Brazilian withholdingtax should apply because the source ofpayment is not Brazilian. However,absent taxpayer challenge, Brazil adoptsthe ‘source of payment’ principle fortaxing cross-border transactions, so theabsence of payment in or from Brazil ina transaction taking place outside thecountry should not trigger any Braziliantax on capital gains realised by non-residents. In practice, the foreignpurchaser’s Brazilian representative maynot be aware of, or have access to, detailsof the transaction, such as the purchaseprice or, more importantly, the seller’sacquisition cost and/or the amount ofcapital gains realised by the non-residentseller. However, under Brazilian law, heis required to calculate and pay thewithholding tax and, is personally liablefor tax levied on a transaction in whichthe representative might not have beendirectly involved.






Indirect taxesnews



CanadaAs taxpayer transparency efforts continue toexplode globally, the minister of nationalrevenue announced the launch of a

strengthened ‘Foreign Income Verification Statement’ (formT1135), to crack down on international tax evasion andaggressive tax avoidance. Starting in 2013, Canadians whohold foreign property with a cost of over CAD 100,000 will berequired to provide additional information to the CanadaRevenue Agency (CRA). The criterion for those who must fileform T1135 has not changed, however, the new form has beenrevised to include more detailed information on foreignproperty. Increased reporting requirements include:• the name of the specific foreign institution or other entity

holding funds outside Canada• the specific country to which the foreign property relates• the income generated from the foreign property.

The CRA will use the additional information to ensure alltaxpayers comply with Canadian tax laws, through activitiesincluding education and audit. Failure to report income fromdomestic or foreign sources is illegal, and Canadians shouldknow that the CRA actively pursues cases of non-compliance.Tax evasion and aggressive tax avoidance can lead to significanttaxes, interest and penalties.

ChileThe Chilean IRSconfirmed that theindirect transfer rules

that were introduced in 2012 will notapply to the trading of Chilean companyAmerican Depositary Receipts (ADRs).The Chilean IRS also confirmed thatcapital gains arising from the disposal ofADRs should not be subject to Chileanincome tax provided that both thetransferor and the depositary bank forthe ADRs are neither domiciled nor taxresident in Chile.

The indirect transfer rules, whichapply to the indirect sale or otherdisposal of Chilean company shares viathe transfer of an upper-tier non-resident owner, were introduced as partof last year’s tax reform. In accordancewith these rules, gain that is realised inconnection with certain indirecttransfers of Chilean shares may besubject to tax. In the ruling, the ChileanIRS states that the trading of ADRs willnot be considered an indirect transfer of a Chilean company for this purposebecause an ADR does not constitute an asset representing capital in a foreign entity.

For the indirect transfer rules toapply, the indirect transfer of a Chileancompany must be executed via the directtransfer of ‘rights, titles, shares, quotas,etc’ or similar items representing capitalin a foreign entity. Because ADRs donot represent rights or titles in a foreignentity, but rather in a Chilean company,the trading of ADRs should not fallwithin the indirect transfer tax rules.

The Chilean IRS also confirmed thatcapital gains derived from the disposal ofADRs should not be subject to incometax in Chile provided that both thetransferor and the ADR’s depositarybank are neither domiciled nor taxresident in Chile. The reason is that anycapital gain arising should be deemed tobe derived from foreign sources forChilean tax purposes and, therefore, not taxable in Chile.






Indirect taxesnews



ColombiaThe government clarifiedthe classification ofresident individuals into

two categories: employees and self-employed and issued a decree that containsdefinitions of the following terms:• employee• self-employed• individuals subject to ordinary

income tax regime• liberal profession• technical service.

The government issued decree regulatesthe withholding tax on employmentincome and provides the scope ofapplication of the simplified minimumtax for employees and self-employedindividuals.

According to the National Tax Code(NTC), individuals must be classified as‘employees’ when deriving more than80% of their income from the provisionof personal services or from aneconomic activity carried out on behalf of an employer or a contractorunder a labour contract or any othertype of contract.

Individuals must be classified as‘self-employed’ when receiving morethan 80% of their income from any ofthe specified economic activitiesindicated the NTC.

In order to determine if an individualis employed or self-employed, thedecree establishes that he must providethe following information to the payeror withholding agent, each year before31 March: • whether the income received in the

previous year derives from theprovision of personal services or aneconomic activity carried out onbehalf of an employer or contractorin more than 80% of the totalincome received during the year

• whether the income received in theprevious year derives from theprovision of professional or technicalservices (that does not require theuse of specialised materials, supplies,specialised machinery or equipment)in more than 80% of the totalincome received during the year

• whether the individual is obliged tofile an income tax return for theprevious year

• whether the income received in the previous year is higher thanspecified thresholds.

Costa RicaCosta Rica, a popular lowtax conduit jurisdiction,has finally succumbed to

the passage of transfer pricing rules. Thenew transfer pricing rules apply totransactions between related parties. Aspecial transfer pricing information formmust be included with affected taxpayersincome tax returns for the 2013 taxperiod and thereafter. Tax authoritiesmay make adjustments to taxableincome if they determine that thetransactions were not conducted at arm’s length.

There are several definitions of relatedparties the more important of which is a25% ownership threshold. The approvedmethods for determining the arm’s-lengthprice of a transaction are: • the comparable uncontrolled price

(CUP) method or, alternatively, the valuation ofgoods based on international pricequotations (which is not an OECD-approved method)

• the cost plus method • the resale price method • the profit split method • the transactional net margin method.

The new regime provides for AdvancePricing Agreements (APAs) that arevalid for three years. Transfer pricingdocumentation should be preparedannually in Spanish and must besubmitted to tax authorities upon request.






Indirect taxesnews



JamaicaThe house ofrepresentatives approved abill in order to provide the

tax administration with mechanisms topromote tax compliance, and collect anduse the information required to assesstaxpayers. The main objectives are to: • increase and facilitate access to

information to allow for an efficientand effective investigation, audit,assessment, collection andenforcement by the tax administration

• improve the quality and usefulness ofinformation supplied to the taxadministration on a periodic basis

• provide the commissioner generalwith power to request informationfrom taxpayers

• extend the definition of taxpayer toinclude persons who might not beunder examination by the taxauthorities and persons who may beof interest to a requesting state actingin pursuance of an internationalagreement, in order to empower thetax authorities to obtain informationon these persons

• allow tax authorities to request andobtain information in urgentcircumstances without priornotification to the taxpayer

• prescribe a minimum retention periodof seven years for books, records andother documents relevant todetermine the person’s tax liability.

PanamaThe government issued adecree to introduce newrules with respect to

withholding agents for taxes,contributions, and any other kind oflevies on commercial and industrialactivities derived in Panama.

A withholding agent must meet the following conditions:• be a taxpayer in Panama• derive at least PAB 5 million of

gross income during the previousfiscal year.

The local treasury office suggests on amonthly basis a list of taxpayers whomay be designated as withholding agentsby the decision-making administrativebody. Withholding agents are subject tothe following main mandatoryassignments: • be liable for any deficiency of

withholding• transfer the withholding tax to the

tax authorities by the last day of themonth following the month ofpayment. In the case of delay, after aperiod of 60 days, the withholdingagent is subject to legal proceedings.

PeruThe local tax authoritieshave publishedregulations with respect

to the tax incentives created to promoteproductivity. The tax incentivesregulations relate to: • scientific and technological

research expenses • technological innovation expenses • credit for employees’ training expenses.

The provisions will be in force effectiveas of 1 January 2014.






Indirect taxesnews



Puerto RicoThe 2013 ‘Tax BurdenRedistribution andAdjustment Act’ has

amended the 2011 tax code bydisallowing various deductions. Thefollowing are now regarded as non-deductible expenses: • expenses related to the use,

maintenance and depreciation ofresidential property located outsidePuerto Rico

• expenses related to the ownership,use, maintenance and depreciation ofautomobiles (with exceptions)

• a percentage of the followingpayments made abroad if suchexpenses are not subject to incometax in Puerto Rico (provided thatsuch income is not exempt under atax incentive act or any other lawgranting income tax exemptions): – 51% of expenses incurred or paid

to related legal entities locatedoutside Puerto Rico. For thepurposes of this rule, homeoffices are deemed related legal entities

– 100% of expenses incurred orpaid to a partner, member orshareholder that holds more than50% of the interest in the company.

United StatesThe US tax court heard acase that involved a UScorporation that

repatriated funds from its wholly ownedCFC and claimed a dividend receiveddeduction (DRD), which provided atemporary one year DRD to UScorporations equal to 85% of cashdividends repatriated from their CFCsand resulted in a maximum tax rate of5.25% on such dividends.

The US IRS determined that certainroyalty payments from the UScorporation to the CFC were not atarm’s length under internal revenue codesection 482, dealing with transferpricing. The parties made the primaryadjustments that reduced the royaltypayments, thereby increasing the UScorporation’s income.

The primary adjustments requiredthe US corporation to make secondaryadjustments, which would have beendeemed capital contributions from theUS corporation to the CFC. Instead, theUS corporation elected to establishinterest-bearing accounts receivablefrom the CFC to the US corporation.

Under the DRD provisions, anyrelated party debt reduced the amountof the dividend and thus the loweffective rate of taxation.

The IRS determined that the related-party debt rule applied to the twoaccounts receivable established as aresult of the transfer pricingadjustments. The IRS thus disallowedthe corresponding amount of theclaimed DRD.

The US tax court rejected the UScorporation’s argument that the related-party debt rule applies only tointentionally abusive transactions. The US tax court explained thatcongress did not incorporate such an intent requirement.

The US tax court then held that thetwo accounts receivable qualified asincreased related-party indebtedness forthe purpose of the related-party debtrule. Accordingly, the US tax courtaffirmed the IRS’s determination anddenied the DRD for the amount of therelated party debt attributable to thetransfer pricing adjustments.






Indirect taxesnews


Transfer pricing news


FranceAn interesting case washeard concerning theemigration of a captive

treasury centre. Although the courtscould have raised the issue of anoutbound intangible asset transfer for acaptive service provider, the courtsbypassed this issue entirely leaving thequestion open as to whether or notintangible value exists in a captiveservice provider.

A French entity (SNFF) was incharge of carrying out a cash poolingactivity for the exclusive benefit of theentire group in Europe. SNFFtransferred this activity to a relatedSwiss entity, Treasury Centre Europe(TCE). SNFF did not receive anycompensation for the transfer of its cashpooling activity to the Swiss entity.

The French tax authoritiesconsidered that the transfer of the cashpooling activity of a group out of Franceto a related party in Switzerlandqualifies as an indirect transfer of profits,for an amount equal to the market valueof this activity. Consequently, the taxauthorities reassessed the taxable incomeof the French company and also applieda withholding tax on the correspondingdeemed distribution.

The administrative courts took aposition on the withholding tax and onthe corporate income tax, respectively.They ruled that the transfer of a businessactivity had a value, even if it was anadministrative function which was onlyrendered for the internal benefit of thegroup (with accordingly a ‘captive’clientele) and not vis-a-vis third parties.

The administrative courts reducedthe amount of the reassessment andstated that the reassessment should bebased on the average gross margins ratioof SNFF.

The administrative court of appealoverturned these decisions, but did nottake a position on the existence of anintangible asset transfer. It merelypointed out the lack of reliability of therates that the tax authorities used to settheir reassessment. The tax authoritieshad not provided any information onthe identity of their comparables, nor onthe way they operate; moreover, the taxauthorities did not consider that thelower rates retained by theadministrative courts were relevant.

IndiaIn a recent case, theassessee, a wholly ownedmanufacturing and

distribution subsidiary of a Dutchparent, imports fully built cars and carkits from its parent company. Theassessee entered into an importagreement with its parent company thatcovered India’s responsibilities for themarketing and promotion of the parentcompany’s cars.

The assessee applied the resale pricemethod as the primary method, and thetransactional net margin method as thesecondary method, to establish that itstransactions with the parent companywere at arm’s length.






Indirect taxesnews



The tax officer argued that theassessee had contributed to the branddevelopment of the parent company byincurring high spending, and they askedthe Indian subsidiary to show why theparent company had not compensated itfor expenses relating to its brandpromotion, which resulted in thecreation of marketing intangibles for the parent.

The Indian subsidiary argued it had asignificantly high profit margin from itsdistribution operations, and there wasno need for further compensation fromthe parent company. The assesseeappealed to the dispute resolution panel,which upheld the tax officer’sadjustment. However, the panel directedthe tax officer to exclude after-salessupport costs and sales bonuses from theassessee’s costs in India, therebybringing the assessee’s expenditurescloser into line with the spending of the comparables.

The tribunal held that a distributor’sprofits are generally based on pricingarrangements, although it can becompensated over and above that if itrenders additional services and pricingadjustments have not covered the costsof the routine services it renders.

The tribunal held that unlike aroutine distributor, the assessee alsoperformed the functions of salespromotion and advertising and had agreater role in the company and moreresponsibility than the companies thatwere used as comparables. The tribunaltherefore accepted the assessee’sargument that its expenditures forwarehousing, sales promotion, andadvertising were necessary and justified.

The tribunal held that thecompensation for additional servicesprovided by the Indian subsidiary wereembedded in the contract. After adetailed functional analysis of the Indiansubsidiary and the terms of itsimportation agreement with its parent,the tribunal held that no furthercompensation was required from theparent for the assessee’s extra expensesbecause that compensation had alreadybeen received. The tribunal thereforerejected the tax officer’s transfer pricing adjustment.

PolandThe Polish minister offinance prepared a draftregulation (decree)

making several modifications to thetransfer pricing regulations to bring therules in line with the OECD transferpricing guidelines and therecommendations of the EU jointtransfer pricing forum.

One of the changes proposed is toreplace the hierarchy of transfer pricingmethods and adopt a ‘most appropriatemethod’. To assess income under thatmethod, the tax authorities would firsttake into account the nature of thetransaction, the degree of comparability,as well as the reliability of comparability,and the availability of information on comparables.

The proposal stresses the significanceof the comparability analysis. The draftdecree also addresses restructuringoperations. There will also be proposednew regulations on low value-addingintragroup services. Under the proposedregulations, if the taxpayer provides adescription of a transaction involvingsuch services, the tax authorities shouldexamine the transaction based on thedescription presented.

The draft decree provides a broadoutline of the description and listsexemplary services that qualify as lowvalue-adding intragroup services (forexample, administrative andmanagement services, technical support,information technology services,marketing, and legal services).

The draft decree defines shareholdercosts that should not be charged torelated entities as costs relating toshareholding that are of no actual benefitto a related entity (and therefore do notjustify charging the costs tosubsidiaries). The draft decree listsexemplary shareholders’ costs andincludes the cost of increases in sharecapital, the cost of consolidated financialreporting, costs of boards of directorsassociated with the statutory duties ofthe directors, and so on.






Indirect taxesnews



UkraineThe Ukrainian ministryof revenue clarified thecorporate deductibility of

expenses incurred in transactions withinterdependent (related) persons. Theministry said the following personsshould be qualified as related: • legal entities if one of them controls

the other(s) or if two or more legalentities are controlled by a third legal entity

• a natural person, his familymembers, and a legal entity if thatnatural person or his familymembers control that legal entity

• managers and other executiveofficers of a legal entity, as well astheir family members, who areauthorised to undertake actions onbehalf of the legal entity that willcreate, modify, or terminate the legalentity’s legal relations

• members of any association of legalentities carrying on businessactivities through such association.

For tax purposes, the term ‘control’ means: • a direct possession or possession

through related natural persons orlegal entities of a stake of at least20% in the taxpayer’s capital

• a direct influence or influencethrough related natural persons orlegal entities of a taxpayer’s businessactivities as a result of: – obtaining corporate rights

permitting the exercise ofdecisive influence on theformation and decision-makingof the taxpayer’s managing bodies

– filling posts in the taxpayer’ssupervisory and executive bodieswith persons who alreadyoccupy similar posts in otherlegal entities

– obtaining a right to enter intocontracts authorising theimposition of conditions forexercising the taxpayer’s businessactivities, to make obligatoryinstructions for the taxpayer, orto delegate to third persons thepowers and functions of thetaxpayer’s managing bodies.

The ministry held, that any expensesincurred by a taxpayer in connectionwith the sale or exchange of goods,performance of works, or provision ofservices to persons considered affiliatedwith the taxpayer may be recognised tothe extent they do not exceed theincome gained from those transactions.It further held that the taxpayer may notregister losses on those transactions inits tax accounting.






Indirect taxesnews



Indirect taxes news

BulgariaA recent Bulgarian caseinvolves a companyincorporated under

Bulgarian law (the taxpayer) and theirmain economic activity is the trade inanimals. The taxpayer declared nineinvoices concerning the supply of calvesfor slaughter, in order to obtain, in theform of a tax credit, the deduction of theVAT relating to those invoices.

In addition, the taxpayer declaredthat it had exported live calves toAlbania and provided proof of theirpurchase by invoices and by producingcustoms declarations, veterinarycertificates indicating the animals’ eartags and veterinary certificates for thetransportation of the animals on national territory.

In order to provide proof of theacquisition of the animals, in addition tothe nine invoices, the taxpayer producedweight certificates, bank statementsrelating to payment of those invoicesand the contract concluded for thesupply of calves.

The taxpayer was subject to a taxinvestigation and the Bulgarian taxauthorities requested the supplier toprovide information on the supplieswhich it had invoiced to the taxpayer.

The taxpayer revealed certain gaps inits accounting and in its compliance withthe veterinary formalities relating, inparticular, to titles of ownership of theanimals and to their ear tags. The taxauthorities took the view that it had notbeen proven that those supplies had infact been carried out and that,consequently, the taxpayer was notentitled to claim a right to deduction ofthe VAT relating to those supplies.

Accordingly, the Bulgarian taxauthorities denied the taxpayer the rightto deduct, in the form of a tax credit, theVAT relating to the invoices issued by supplier.

The taxpayer lodged anadministrative appeal against thatdecision refusing the deduction and thenappealed against the tax assessment. Inparticular, it claimed before that court,that the information which it hadcommunicated was sufficient to provethat the supplies invoiced by supplierhad been carried out.

The administrative court for the cityof Sofia decided to stay the proceedingsand to refer the following questions to thecourt of justice for a preliminary ruling.

The ECJ held that for purposes ofclaiming VAT input tax deductions,satisfaction of formal ownership rules isnot required to prove the supply ofgoods was made.

ChinaChina’s stateadministration oftaxation released a

bulletin which clarifies the scope of theVAT exemption on exported servicesunder the VAT pilot programme.

The bulletin lists various sub-categories and related requirements for:• international transportation services• exported technology services• technology-related information

services• innovative services • transportation-related ancillary

services • leasing of tangible-movable property• certification and consulting services• radio, film, and television services.






Indirect taxesnews



To qualify for the tax exemption,Chinese taxpayers must sign agreementswith the foreign recipients of the tax-exempt services. All income from theservices must be obtained from outsideChina. Taxpayers are also required toseparate tax-exempt income from otherincome and to accurately calculate theinput VAT paid in connection with theprovision of the tax-exempt services.Also, taxpayers must submit documentsto the competent tax authority.

FinlandThe Finnish supremecourt addressed the issueof whose VAT input is

it anyway? A Finnish parent company (FI Oy)

had paid an invoice issued by a Germanconsulting firm (DE Co) which did nothave a fixed establishment in Finland andwhich had not voluntarily registereditself to the Finnish VAT register. Theinvoice was addressed to FI Oy andrelated to a due diligence investigationwhich DE Co had performed on aGerman company, whose shares in aGerman subsidiary of FI Oy (DE Sub)had been acquired. The tax authoritiesimposed VAT on FI Oy based on thereverse charge mechanism. The issue waswhether services which related to thesubsidiary’s business activity (ieacquiring another subsidiary), but where paid by a parent company, weredeductible for the parent company.

The court held that FI Oy did nothave the right to deduct the VAT as theconsulting services did not have a directlink to FI Oy’s own business but thebusiness activities of its German subsidiary.

FranceIn a recent case the ECJheld that a companyprincipally established in

a member state may not take intoaccount the turnover of its branchesestablished abroad when determiningVAT deductibility.

The taxpayer is a bank which has itsprincipal establishment in France andbranches in EU member states and inthird states.

Following an examination of theaccounts of the taxpayer, the taxadministration decided the taxpayer hada tax deficiency for VAT. Those arrearsresult from the administration’s refusalto take account of the interest on loansgranted by taxpayer’s establishment ofits branches established outside France.

The taxpayer objected to thedeclaration claiming that the amount ofthe interest in question could be takeninto account in calculating thedeductible proportion of VAT.

Those complaints were rejected bythe tax administration and the taxpayerappealed to the tribunal and then to theFrench council of state.

In support of its appeal the taxpayerclaimed that, in order to determine thedeductible proportion of expenses of itsprincipal establishment for VATpurposes, the income of its branchesestablished in other EU member statesand in third states should be taken intoaccount as a single taxable person.

The taxpayer maintained that thebranches established in an EU memberstate are themselves subject to VAT and must be taken into account, indetermining their own deductibleproportions of VAT.

The court held that the fixedestablishment situated in a member stateand the principal establishment situatedin another member state constitute asingle taxable person subject to VAT andit follows that a taxpayer is subject, inaddition to the system which applies inthe state of its principal establishment, toas many national systems of deductionas there are member states in which ithas fixed establishments. Under thetaxpayer’s position there would be over-crediting of input tax. Thus the foreignbranches were to be ignored in thecalculation of the input tax credit.






Indirect taxesnews



IndonesiaThe government issuedregulations on theexemption of VAT and

sales tax on luxury goods for diplomaticmissions and international organisationsas well as their officials. The regulationapplies to: • importation of taxable goods• supply of taxable goods • rendering of taxable services.

A ‘diplomatic mission’ includes aconsular representative that has beenaccredited to the IndonesianGovernment, including permanentrepresentatives and/or diplomaticmissions accredited to the association ofSoutheast Asian nations secretariat. Theofficials of a diplomatic mission who areeligible for exemption are the head andthe staff of the mission. An internationalorganisation refers to the representativeof an institution under the UnitedNations, a foreign diplomatic mission or any foreign organisation domiciled in Indonesia.

The officials eligible for theexemption are the head, staff and expertswho have received a permit to work inIndonesia. The exemption is not given tostaff of diplomatic missions orinternational organisations who areIndonesian nationals. The exemptionapplies (with restrictions) tointernational organisations that are not subject to income tax and obtain arecommendation from the ministry of state secretariat.

NetherlandsThe ECJ held that a

company may be entitledto deductions of input

VAT paid on pension fund managementfees if it can show a ‘direct andimmediate link’ between the paymentsand its sales transactions.

The taxpayer established a pensionfund for the employees that was separatefrom taxpayer (from a legal and fiscalpoint of view). Netherlands law that wasin force at the time left it to employersto choose whether to set up such a fundthemselves, or to entrust theperformance of their obligations to aninsurance company to which theywould pay their contributions and thatwould be responsible for payingpensions to retired employees. Therewas no option, however, for them toretain an internal pension scheme.

A subsidiary of a taxpayer enteredinto contracts with suppliers of servicesestablished in the Netherlands relatingto the administration of the pensionsand the management of the assets of thepension fund. The costs associated withthose contracts were paid by thatsubsidiary and not passed onto thepension fund. The taxpayer deductedthe amounts of VAT relating to thosecosts as input tax.

The principal issue was whether a taxable person who hasestablished a separate pension fund for the purpose ofsafeguarding the pension rights of their employees and formeremployees can deduct the tax paid on the basis of servicessupplied in respect of the implementation of the pensionprovision and the operation of the pension fund.

For a taxable person to be accorded the right to deductinput VAT, and in order to determine the extent of that right,the existence of a direct and immediate link between aparticular input transaction and an output transaction ortransactions giving rise to the right to deduct is, in principle, necessary.

Whether there is a direct and immediate link will dependon whether the cost of the input services is incorporated eitherin the cost of particular output transactions or in the cost ofthe goods or services supplied by the taxable person as part ofhis economic activities.

A taxable person who has set up a pension fund in theform of a legally and fiscally separate entity, such as that atissue in the main proceedings to safeguard the pension rightsof their employees and former employees, is entitled to deductthe VAT paid on services relating to the management andoperation of that fund, provided that the existence of a directand immediate link is apparent from all the circumstances ofthe transactions in question.






Indirect taxesnews



Treaty news

Korea/India

A South Korean company’s incomefrom the offshore supply of goods andservices used in a power plant project inIndia is not attributable to thecompany’s Indian permanentestablishment and is therefore nottaxable in India the Delhi income taxappellate tribunal has held.

The taxpayer was executing aturnkey power plant project in Indiathat involved the offshore supply ofplant and machinery and services such asengineering, fabrication, and so on, aswell as onshore supplies of plant andmachinery and installation andcommissioning services. The Indianclient paid for each service in a lumpsum. The taxpayer was responsible forall risks associated with the project untilthe plant was transferred to the Indianclient, and the assessee provided awarrant to that effect.

The taxpayer constituted aninstallation PE in India under the India-Korea income tax treaty. Therefore, inits Indian return, the company dividedthe total revenue and attributed itseparately to offshore supplies andonshore supplies of goods and services.The taxpayer maintained that theincome for the offshore supplies werenot attributable to the Indian PE andwas therefore not taxable in India. Thetaxpayer computed its taxable incomefor the onshore supplies after deductingits onshore contractor costs from itsonshore revenue. During the audit, thetax officer held that the offshore andonshore supplies and revenue wereindivisible and therefore held thattaxpayer’s income from the project wasIndian-source income attributable to theassessee’s installation PE in India.

The tribunal disagreed with the taxofficer. For income to be consideredIndian source, the underlying activitiesmust have a nexus with India. Althoughthe offshore supplies were an essentialpart of the project, no portion of theincome derived from the offshoreactivities could be attributed to theIndian PE, unless the tax officer was ableto show either that the price of theoffshore supplies was not at arm’s lengthor that the Indian PE was somehowinvolved in them. Without that evidence,the revenue from the offshore suppliescould not be taxed in India, the tribunal held.

The NetherlandsThe Netherlands will improve tax transparencyand update tax treaties with low-incomecountries and low middle-income countries.

Tax treaties with Zambia and 22 other developing countrieswill be revised to allow the incorporation of anti-abuse clauses where necessary. The government is taking thefollowing measures: • substantial activity requirements (companies must run

genuine risks in the Netherlands and the actualmanagement of the company must be conducted in theNetherlands) will apply to more companies

• the Netherlands will inform its treaty partnersspontaneously when, in retrospect, a company turns outnot to meet the substantial activity requirements. Thanksto this improved information exchange with the sourcecountry, that country will be in a position to deny thetreaty benefits to a company

• information exchange will also apply to particularfinancing companies that have obtained advance certainty

• the tax administration will process requests for a tax rulingfrom holding companies (these companies receivedividends from non-residents and pay out dividends tonon-residents) if the group in which they operate hassufficient ties with the Netherlands.






Indirect taxesnews



RussiaThe Russian ministry offinance issued guidancein which it clarified the

corporate tax regime for interestpayments that a Russian legal entitymakes to a non-resident legal entitylocated in a jurisdiction that does nothave a tax treaty with Russia. Theministry of finance held that the payermust withhold from each paymentcorporate tax at a 20% rate.

The ministry of finance stated thatunder the tax code, the corporate taxbase for foreign legal entities that do notoperate in Russia through a PE consistsof income derived from Russian sources.The ministry of finance held that incomein the form of interest that a non-resident legal entity receives from aRussian legal entity should be qualifiedas income gained from the Russiansources for corporate tax purposes.

US/BelgiumThecompetentauthorities

of the US and Belgium entered into anagreement regarding the application of‘Article 7’ (business profits) of theconvention between the governments of the US and Belgium for the avoidanceof double taxation and the prevention of fiscal evasion with respect to taxes on income. Specifically the agreementauthorises:• the use of the OECD authorised

approach to determine the profits ofa business enterprise attributable to a PE

• the agreement also authorises doubletaxation relief is to be applied wherethe OECD approach results in a taxliability at the PE.

The competent authorities of the US andBelgium agree that paragraph 1, Article7 of the convention is to be interpretedin a manner entirely consistent with thefull OECD approach as set out in theOECD report. This means a transferpricing profit considering the PEsfunctions, assets, and risks must be considered.

The provisions of the conventionthat require a determination of whetheran asset or amount is effectivelyconnected or attributable to a PE arealso to be interpreted in a mannerentirely consistent with the full OECDapproach as set out in the report.

Where, in accordance with the fullOECD approach a contracting stateadjusts the profits that are attributable toa PE of an enterprise of one of thecontracting states and taxes accordinglythe profits of the enterprise that havebeen charged tax in the other state, thecompetent authorities of the US andBelgium agree that the other contractingstate shall (to the extent necessary toeliminate double taxation) make anappropriate adjustment if it agrees withthe adjustment made by the first-mentioned state. If the other contractingstate does not so agree, the contractingstates shall eliminate any double taxationresulting therefrom by mutual agreement.

When double taxation arises due tothe application of the principles of thefull OECD approach, the US willcontinue to eliminate double taxation byallowing the foreign tax credit providedby the laws of the US, subject to thelimitations of those laws. Where ataxpayer can demonstrate to the UScompetent authority that such doubletaxation has been left unrelieved afterthe application of mechanisms under USlaw such as the utilisation of foreign taxcredit limitation created by othertransactions, the US will relieve suchadditional double taxation.






Indirect taxesnews



Tax policy

OECDThe BIAC to the OECD has released a statement coveringvarious tax best practices for engaging with tax authorities indeveloping countries.

The tax best practices identified in this statement areintended to support responsible business tax management andto enhance co-operation, trust and confidence between taxauthorities in developing countries and international business,understanding that business must comply with the laws andregulations of the jurisdiction in which it operates.

These tax best practices aim to promote stability, certaintyand consistency in the application of tax principles as well asto support the capacity building for efficient and effective taxauthorities in developing countries. This will foster cross-border trade, investment and sustainable growth for thebenefit of all.






Indirect taxesnews


Tax best practices 1. Businesses should be open and

transparent with tax authoritiesabout their tax affairs and providerelevant, reasonably requestedinformation that is necessary toenable a balanced assessment ofpossible tax risks.

2. Businesses should commit toresponding to reasonable taxauthority enquiries and makepayment of their tax liabilities withinestablished due dates, or within areasonable time-frame where nosuch due dates are established.

3. Where tax authorities ask reasonable, specific and legitimatequestions, businesses should commit to answering thosequestions in a straight-forward and transparent manner.

4. If questions or assessments from the tax authorities appear not to be legitimate or are based onmisunderstandings of the facts or thelaw, businesses should work with taxauthorities where possible to identifythe issues and explore options toresolve misunderstandings.

5. Where relevant, reasonablyrequested information is notavailable, businesses should inform the tax authorities and exploremutually acceptable alternatives in a timely manner.

6. Businesses should workcollaboratively with tax authoritiesto achieve early agreement ondisputed issues and certainty on areal-time basis, wherever possible.

7. Businesses may utilise tax incentivesthat are transparent, publiclypublished and endorsed by the hostnation legislation.

8. Businesses should refrain fromclaiming or accepting exemptionsnot contemplated in the statutory,regulatory, or administrativeframework related to taxation,financial incentives, or other issues.

9. Businesses should follow establishedand agreed upon procedures andchannels when dealing with taxauthority officials.

10. Businesses should consider how bestto explain fully to the public, theireconomic contribution and taxespaid in the jurisdictions in whichthey operate, where they determinethat such explanation would be helpful in building trust in the tax system.


OECDThe BIAC to the OECD has released astatement covering tax principles forinternational business. The statement oftax principles is intended to promoteand affirm responsible business taxmanagement by international businesses.These principles are based on five key observations: 1. Public trust in the tax system is a

vital part of any flourishing societyand growing economy.

2. Most businesses comply fully withall applicable tax laws andregulations, recognising theobligations of governments toprotect a sustainable tax base.

3. International businesses contributesignificantly to the global economyand pay a substantial amount of taxcomprising not only corporation tax,but also labour taxes, socialcontributions and other taxes such asenvironmental levies and VAT.

4. Transparency, open dialogue and co-operation between tax authoritiesand business contributes to greatercompliance and a better functioningtax system.

5. Tax is a business expense whichneeds to be managed, like any other,and therefore businesses maylegitimately respond to tax incentivesand statutory alternatives offered by governments.

The objectives • to enhance co-operation, trust and

confidence between tax authorities,business taxpayers and the public inregard to the operation of the globaltax system

• to promote the efficient working of the tax system to fund publicservices and promote sustainablegrowth

• to support stability, certainty andconsistency in global tax principlesthat will foster cross-border tradeand investment.

Tax planning principles • international businesses should only

engage in tax planning that is alignedwith commercial and economicactivity and does not lead to anabusive result

• international businesses mayrespond to tax incentives and exemptions

• international businesses shouldinterpret the relevant tax laws in areasonable way, consistent with arelationship of ‘co-operativecompliance’ with tax authorities

• in international tax matters, businesses should follow theterms of the applicable DTA and relevant domestic andOECD guidance. Businesses should engage constructivelyin international dialogue on the review of global tax rulesand the need for any changes.

Transparency and reporting principles Relationships between international businesses and taxauthorities should be transparent, constructive, and based onmutual trust with the result that tax authorities and businessesshould treat each other with respect, and with an appropriatefocus on areas of risk. International businesses should, therefore: • be open and transparent about their tax affairs with the tax

authority in each jurisdiction and provide the relevant,reasonably requested information (subject to appropriateconfidentiality provisions) that is necessary to enable areasonable review of possible tax risk

• work collaboratively with the tax authorities to achieveearly agreement on disputed issues and certainty on a real-time basis, wherever possible

• where necessary seek to increase public understanding ofthe tax system in order to build trust

• where they determine explanations in order to build publictrust in the tax system, they should consider how best toexplain to the public their economic contribution and taxespaid in the jurisdictions in which they operate.






Indirect taxesnews


The BIAC to the OECD has

released a statementcovering tax principlesfor international

business.


South Africa The minister of financeannounced members ofthe tax review committee

as well as the committee’s terms ofreference. The committee’sappointments give effect to the minister’sannouncement in February that thegovernment will initiate a tax review thisyear ‘to assess the tax policy frameworkand its role in supporting the objectivesof inclusive growth, employment,development and fiscal sustainability’.

The terms of reference for the taxreview committee are to inquire into therole of the tax system in the promotionof inclusive economic growth,employment creation, development andfiscal sustainability. The committee willin its work take into account recentdomestic and global developments and,in particular, the long term objectives ofthe national development plan.

The committee will makerecommendations to the minister offinance. Any tax proposals arising fromthese recommendations will beannounced as part of the normal budgetand legislative processes. As with all taxpolicy proposals, such proposals will besubject to the normal consultation andparliamentary oversight.

The committee should evaluate theSouth African tax system against theinternational tax trends, principles andpractices, as well as recent internationalinitiatives to improve tax complianceand deal with tax base erosion.

The following aspects should receivespecific attention from the committee: • an examination of the overall tax

base and tax burden including theappropriate tax mix between: directtaxes, indirect taxes, provincial andlocal taxes

• the impact of the tax system in thepromotion of small and medium sizebusinesses, including analysis of taxcompliance costs, the possiblefurther streamlining of taxadministration and simplification oftax legislation

• a review of the corporate tax systemwith special reference to: – the efficiency of the corporate

income tax structure– tax avoidance (eg base erosion,

income splitting and profitshifting, including the tax bias infavour of debt financing)

– tax incentives to promotedevelopmental objectives

– the average (and marginal)effective corporate income taxrates in the various sectors of the economy.






Indirect taxesnews



Who’s whoGrant Thornton International Ltd

Francesca LagerbergGlobal leader – tax servicesT +44 (0)20 7728 3454E [email protected]

Claude LedouxExecutive director – tax operationsT +1 312 602 8522E [email protected]

Bill ZinkExecutive director – tax quality and trainingT +1 312 602 9036E [email protected]

Guenter SpielmannExecutive director, EMEA – tax services T +49 (0) 163 895 2434 E [email protected]

Regional tax resourcesWinston Romero Senior tax development manager – AmericasT +1 312 602 8349E [email protected]

Mirka VaicovaTax development manager – APAC and Middle EastT +852 3987 1403E [email protected]

Jessica Maguren Tax development manager – Europe and AfricaT +44 (0)20 7391 9573E [email protected]

Global coordinatorsAgata EysymonttCoordinator – tax specialist servicesT +44 (0)20 7391 9557E [email protected]

Francie KaufmanGlobal project coordinator – training and qualityT +1 262 646 3060 E [email protected]

© 2013 Grant ThorntonInternational Ltd.“Grant Thornton” refers tothe brand under which theGrant Thornton memberfirms provide assurance,tax and advisory services totheir clients and/or refersto one or more memberfirms, as the contextrequires. Grant ThorntonInternational Ltd (GTIL) andthe member firms are not a worldwide partnership.GTIL and each member firmis a separate legal entity.Services are delivered bythe member firms. GTILdoes not provide servicesto clients. GTIL and itsmember firms are notagents of, and do notobligate, one another and are not liable for one another’s acts or omissions.

MarketingRussell BishopSenior marketing executive – taxT +44 (0)20 7391 9549E [email protected]






Indirect taxesnews


mailto:[email protected]










global tax newsletter...global tax newsletter no. 9: november 2013 2belgium featured article belgium...

Documents