Germany- Philippines revised income tax treaty enters into force

Transcription

1 4 March 2016 Global Tax Alert Germany- Philippines revised income tax treaty enters into force EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary On 18 December 2015, the revised income tax treaty between Germany and the Philippines (Revised Treaty) entered into force, replacing the existing 1983 treaty (1983 Treaty). Significant provisions in the Revised Treaty include the following: Expanded definition of resident (Article 4) Definition of permanent establishment (PE) (Article 5) Income from immovable property (Article 6) Shipping and air transport (Article 8) Corresponding adjustment to relieve double taxation (Article 9) Withholding taxes for dividends, interest and royalties (Articles 10, 11, 12) Taxes on capital gains (Article 13) Elimination of double taxation (Article 24) Exchange of information (Article 27) Procedural rules for taxation at source (Article 28) Use of domestic general anti-avoidance rules (GAAR) and anti-treaty shopping rules (Article 29) The Revised Treaty became effective for both countries on 1 January This Alert summarizes the key provisions of the Revised Treaty.

2 2 Global Tax Alert Detailed discussion Expanded definition of a resident Article 4 The Revised Treaty expands the definition that a partnership is deemed to be a resident of the Federal Republic of Germany by adding if its place of effective management is situated in Germany. PE definition Article 5 The Revised Treaty includes a service PE provision in which the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, would create a PE if the service activities continue for the same or a connected project within a Contracting State for period or periods aggregating more than 6 months within any 12-month period. The Revised Treaty eliminates from the definition of PE, a person acting in a Contracting State on behalf of an enterprise of the other Contracting State (other than an independent agent) who has no authority to conclude contracts on behalf of the enterprise but habitually maintains in the first-mentioned State a stock of goods or merchandise, from which he regularly delivers goods or merchandise on behalf of the enterprise. In addition, the term no longer applies to an insurance enterprise if it collects premiums in the territory of that State or insures risks situated therein through an employee or through a representative who is not an agent of independent status. Income from immovable property Article 6 The Revised Treaty includes in the definition of immovable property, property that is accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provision of general law respecting landed property apply and usufruct of immovable property Shipping and air transport Article 8 The Revised Treaty adds a new paragraph related to a determination of the residency of a ship. Under the paragraph, if the place of effective management of a shipping enterprise is abroad, a ship is deemed to be situated in the Contracting State in which the home harbor of the ship is situated, or if there is no such home harbor, in the Contracting State of which the operator of the ship is a resident. Corresponding adjustment to relieve double taxation Article 9 Aligning with the provision in the Organisation for Economic Co-operation and Development Model Tax Convention (OECD Model Tax Convention), the Revised Treaty provides that an appropriate corresponding adjustment will be made to eliminate double taxation in transfer pricing cases and recommends that the competent authorities consult each other if necessary to determine the corresponding adjustments. Dividends, Interest and Royalties Articles 10, 11 and 12 The Revised Treaty adds to the existing 10% and 15% rates, a new 5% preferential tax rate on dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 70% of the capital of the company paying the dividends. Under the Revised Treaty, in general, a 10% withholding tax applies to interest. Exclusive resident country taxation is provided to interest in connection with the sale of commercial or scientific equipment on credit or sale of goods by an enterprise to another enterprise on credit, if the recipient is also the beneficial owner. The Revised Treaty provides a fixed 10% withholding tax on royalties. The Revised Treaty allows both countries to impose a 10% tax on branch profit remittances. 1 Capital gains Article 13 Under the Revised Treaty, a Contracting State may tax gains from the disposition of shares only if the assets of the company consist, directly or indirectly, principally of immovable property situated in that State. This is a standard feature of all newly concluded German tax treaties. Elimination of double taxation Article 24 In the Philippines, the Revised Treaty provides that German tax payable in respect of income derived from Germany will be allowed as credit against the Philippine tax payable in respect of that income, subject to the laws and limitation under the Philippine law. Germany applies, with some exceptions, generally the exemption method on income derived in the Philippines, including dividends paid by a company which is a resident

3 Global Tax Alert 3 of the Philippines, if they are paid to a German resident company (other than partnerships) holding directly at least 10% (previously 25%) of the capital of the Philippine company and were not deducted when determining the profits of the company distributing these dividends. Article 24 includes a standard switch over clause, which allows Germany to apply the credit method on income which remains untaxed in the Philippines because of a treaty qualification conflict. Exchange of information Article 27 This Article has been updated to reflect changes to the same Article in the OECD Model Tax Convention. This provides that, if information is requested by a Contracting State in accordance with the Article, the other Contracting State will use its information gathering measures to obtain the requested information, even though it may not need such information for its own tax purposes. Procedural rules for taxation at source Article 28 New Article 28 grants the right of the Contracting States to withhold tax at source and provides treaty protected taxpayers with a refund procedure. The statute of limitations (SOL) period for a refund claim under Article 28 is within two years from the date of payment for the withholding tax, which is substantially shorter than Germany s ordinary SOL for refund claims of at least four years. Use of domestic GAAR and anti-treaty shopping rules Article 29 New Article 29 allows in essence both Contracting States to apply domestic GAAR and anti- treaty shopping rules. Double taxation issues arising from such practice will be dealt with by initiating a mutual agreement procedure pursuant to Article 26 (3) of the Revised Treaty. Endnote 1. Germany however does not currently impose any branch profit tax.

4 4 Global Tax Alert For additional information with respect to this Alert, please contact the following: Ernst & Young Philippines (SGV & Co.), Makati City Wilfredo U. Villanueva wilfredo.u.villanueva@ph.ey.com Ma. Fides A. Balili ma.fides.a.balili@ph.ey.com Fidela T. Isip-Reyes fidela.t.isip-reyes@ph.ey.com Ernst & Young LLP, German Tax Desk, New York Joerg Brodersen joerg.brodersen@ey.com Thomas Eckhardt thomas.eckhardt@ey.com Tobias Appl tobias.appl1@ey.com Frauke Reifarth frauke.reifarth1@ey.com Denis Ahluwalia denis.ahluwalia1@ey.com Sabrina Kadenbach sabrina.kadenbach1@ey.com Ernst & Young LLP, Asia Pacific Business Group, New York Chris Finnerty chris.finnerty@ey.com Kaz Parsch kazuyo.parsch@ey.com Bee-Khun Yap bee-khun.yap@ey.com Ernst & Young LLP, Asia Pacific Business Group, Houston Trang Martin trang.martin@ey.com

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