Japan, U.S. negotiate tax treaty amendments

Transcription

1 International Tax World Tax Advisor 10 June 2011 In this issue: Japan, U.S. negotiate tax treaty amendments... 1 Austria: Participation exemption for portfolio dividends to be amended to conform to EU law... 3 Canada: Measures proposed in prior budget confirmed... 4 China: Government further clarifies registration requirements for Equity Investment Enterprises... 5 France: New premium dividend to be granted to employees... 6 France: Supreme Court issues opinion on compatibility of withholding tax on dividends paid to foreign investment and pension funds... 7 Vietnam: Update on foreign contractor withholding tax... 8 In brief... 9 Are You Getting Your Global Tax Alerts? Japan, U.S. negotiate tax treaty amendments The U.S. and Japan began the first round of formal negotiations on 8 June 2011 in Washington, D.C., to amend the existing income tax treaty. The aim is to bring the existing income tax treaty (which entered into force in 2004) into closer conformity with the current tax treaty policies of the U.S. and Japan. The landmark announcement of negotiations has important implications for both countries because, as ranked by the U.S. Census Bureau, Japan is the fourth largest trading partner of the U.S., with U.S. exports to Japan totaling more than USD 60 billion and U.S. imports from Japan totaling more than USD 120 billion in Although the U.S. Treasury Department s press release on 2 June 2011 did not provide the agenda for negotiations, recent tax treaties concluded by Japan, feedback from U.S. multinationals and other recent developments provide clues regarding possible amendments that the Japanese and U.S. governments may seek. The discussion below is based upon the authors speculation and the outcome of the negotiations may be different. Dividend withholding tax The Japanese government may seek a lowering of the threshold for qualifying for the zero withholding tax rate for dividends. Article 10(3)(a) of the existing tax treaty provides an exemption from withholding tax if the beneficial owner of the dividends is a company that: is a resident of the other contracting state; has owned, directly or indirectly through one or more residents of either contracting state, more than 50% of the voting stock of the company paying the dividends for the period of 12 months ending on the date on which entitlement to the dividends is determined; and has met the specified limitation on benefits (LOB) provisions in article 22. That means that a company that owns 50% of the voting stock in a 50:50 joint venture company cannot qualify for the zero rate for dividends. World Tax Advisor Page 1 of 10 Copyright 2011, Deloitte Global Services Limited.

2 Recent tax agreements concluded by Japan, however, set a lower threshold. For example, the Japan- Switzerland income tax treaty protocol signed on 21 May 2010 and the new Japan-Netherlands income tax treaty signed on 25 August 2010, both of which are awaiting ratification, only require a company to have owned, directly or indirectly, for the period of six months ending on the date on which entitlement to the dividends is determined, shares representing at least 50% of the voting power of the company paying the dividends (or shares representing at least 50% of the capital or of the voting power of the company paying the dividends if it is a resident of Switzerland). Japan s new treaty with the U.K. also contains an at least 50 percent requirement for zero dividend withholding tax, whereas the Japan-Australia income tax treaty has an at least 80 percent requirement. Provided the requirements of its LOB article are met, the Japan-France income tax treaty, as amended, provides a zero dividend withholding tax rate if the recipient is the beneficial owner of the dividends that is a resident of the other contracting state, and is: a) either a company liable to corporation tax that controls directly or indirectly at least 15% of the capital of the company paying the dividends during the entire period of six months ending on the date of establishment of the rights to the dividends, where that company is a resident of France; b) or a company that controls directly at least 15% or, directly or indirectly, at least 25% of the voting power of the company paying the dividends during the entire period of six months ending on the date of establishment of the rights to the dividends, where that company is a resident of Japan. The 2006 U.S. model income tax treaty does not include a zero withholding tax rate for dividends, but such provisions are individually negotiated on a case-by-case basis and can be found in many recent U.S. treaties. Mandatory binding arbitration procedure The Japanese government may also seek to incorporate mandatory arbitration provisions into article 25 of the existing tax treaty. Two recently concluded Japanese income tax agreements, for the first time in Japanese history, include mandatory binding arbitration provisions to ensure that mutual agreement procedure (MAP) cases subject to those provisions will be resolved within a limited time period. They are the pending tax treaty with the Netherlands (see above) and the pending double taxation agreement with Hong Kong signed on 9 November Both tax agreements provide that if a person has presented a case pursuant to the MAP to the competent authority of a contracting state (or a contracting party in the case of the double taxation agreement with Hong Kong) on the basis that the actions of one or both of the contracting states have resulted for that person in taxation not in accordance with the provisions of the tax agreement, and the competent authorities are unable to reach an agreement to resolve the case within two years from the presentation of the case to the competent authority of the other contracting state, any unresolved issues arising from the case shall be submitted to arbitration if the person so requests. The unresolved issues shall not, however, be submitted to arbitration if a decision on these issues already has been rendered by a court or administrative tribunal of either contracting state. Unless a person directly affected by the case does not accept the mutual agreement that implements the arbitration decision, that decision shall be binding on both contracting states and shall be implemented notwithstanding any time limits in the domestic laws of these contracting states. The competent authorities of the contracting states shall by mutual agreement settle the mode of application of the provisions regarding the mandatory arbitration procedures. The 2006 U.S. model treaty does not include a mandatory binding arbitration provision because the U.S. Senate had not yet approved such provisions when the 2006 U.S. model treaty was issued. However, some U.S. tax treaties, such those with Belgium, Canada and Germany, include mandatory binding arbitration provisions, while U.S. treaties with some other countries, including Mexico and the Netherlands, incorporate authority for establishing voluntary binding arbitration procedures. Over the past few years, the U.S. Treasury Department has carefully studied various types of mandatory arbitration procedures that could be used as part of the competent authority mutual agreement process. In particular, it has examined the experience of countries that adopted mandatory binding arbitration provisions with respect to tax matters. Many of them report that the prospect of impending mandatory arbitration creates a significant incentive to compromise before commencement of the process. Based on the U.S. Treasury Department s review of the U.S. experience with arbitration in other areas of the law, the success of other countries with arbitration in the tax area, and the overwhelming support of the business community, the U.S. Treasury Department has concluded that mandatory binding arbitration as the final step in the competent authority process can be an effective and appropriate tool to facilitate mutual agreement under U.S. tax treaties (see Opening Statement of Manal Corwin Treasury International Tax Counsel Senate Committee on Foreign Relations, 10 November 2009.) Consequently, the U.S. may be open to considering a request from Japan to include a mandatory binding arbitration provision in the existing treaty. World Tax Advisor Page 2 of 10 Copyright 2011, Deloitte Global Services Limited.

3 Exchange of information Other amendments that the Japanese government may seek include an update of article 26 of the existing treaty to conform to the internationally agreed standard on exchange of information. For example, both article 25 of the new Japan-Netherlands treaty and article 19 of the Japan-Switzerland tax treaty protocol expressly provide that, if information is requested by a contracting state in accordance with the article regarding the exchange of information, the other contracting state shall use its information-gathering measures to obtain the requested information, even though that other contracting state may not need such information for its own tax purposes. A contracting state is not permitted to decline to supply information solely because it has no domestic interest in such information. A contracting state also cannot decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person. The U.S. government likely would agree to the inclusion of those provisions because they are same as paragraphs 4 and 5 of article 26 of the 2006 U.S. model treaty. On a related note, Japan is likely to sign the OECD s Multilateral Convention on Mutual Administrative Assistance in Tax Matters, as amended by the 2010 Protocol. That would require legislative change in Japan and, once in force, would require Japan to assist other contracting states in collecting unpaid tax and to provide information pursuant to the Convention. Possible U.S. wish list The U.S. government has its own set of negotiating priorities to help U.S. multinationals doing business in Japan, the world s third largest economy. Although the U.S. Treasury Department s press release did not disclose the U.S. government s agenda, some of U.S. multinationals pet peeves may be gleaned from other sources. Interestingly, Japan was ranked in the second tier (with 20%-36% of the votes) on the tax treaty wish list of respondents to the National Foreign Trade Council s 2010 survey. Respondents named residence, interest and the MAP process as important items. Respondents had issues with the residence clause of the current treaty, specifically in substantiating the tax treatment of pass-through entities that are eligible for treaty benefits. Respondents requested a zero withholding rate with Japan (likely for interest, although the summary of the survey results is not clear on this point). Respondents also requested that the LOB provision for withholding tax be changed to permit a taxpayer to satisfy the treaty conditions in one year, instead of the three preceding tax years included in the treaty. The inability of the MAP and competent authority to resolve issues of double taxation was cited frequently with reference to Japan, which suggests that a mandatory binding arbitration provision would be helpful. Therefore, the announcement of the start of bilateral tax treaty negotiations is good news for the U.S. business community. The U.S. government may also seek to update the existing treaty to conform to the 2006 U.S. model treaty after the existing treaty was concluded, among other changes. Jonathan Stuart-Smith (Hong Kong) Deloitte Hong Kong jstuartsmith@deloitte.com Linda Ng (New York) Director Deloitte Tax LLP ling@deloitte.com Austria: Participation exemption for portfolio dividends to be amended to conform to EU law Draft amendments to Austria s Federal Tax Law 2011 include a change to the participation exemption to bring it into line with EU law. The participation exemption of the Corporate Income Tax Act would be extended to apply to international portfolio dividends received from third countries following the European Court of Justice s (ECJ) decision in the joined Haribo/Salinen cases, and changes would be made to the requirements to benefit from the exemption. World Tax Advisor Page 3 of 10 Copyright 2011, Deloitte Global Services Limited.

4 Under current rules, dividends received from a domestic portfolio investment (i.e. dividends from a shareholding of less than 10% in an Austrian company) are tax exempt under the Corporate Income Tax Act. Portfolio dividends received from an EU/EEA company also are exempt provided that, in the case of an EEA country that is not an EU Member State (i.e. Iceland, Liechtenstein and Norway), the country has concluded a comprehensive agreement with Austria on mutual assistance, including cooperation in administrative matters and enforcement assistance. The exemption for both EU and EEA portfolio dividends will be denied, however, if the distributing company is low taxed (i.e. at a rate less than 15%) or if it benefits from substantial tax exemptions. In that case, the Austrian switch over clause will be triggered and the dividends will be taxed at the Austrian corporate income tax rate, with a credit granted for any foreign tax paid on the income. The taxpayer in such cases is required to prove a number of facts (such as the foreign tax rate and tax actually paid) to benefit from either the exemption or the credit. Where portfolio dividends are received from countries outside the EU/EEA, the dividends are fully taxed in Austria with no credit available. The ECJ held in Haribo/Salinen that Austria s taxation of portfolio dividends from third countries, specifically the requirement of enforcement assistance in the case of certain EEA countries and the absence of tax credit carryforwards in loss situations was incompatible with EU law. The draft amendment would abolish the requirement that there be a comprehensive mutual assistance agreement, i.e. enforcement assistance would no longer be required. However, the existence of an agreement for mutual assistance with regard to administrative matters is consistent with EU law and continues to be a prerequisite under the new rules. Further, the switch over from the exemption method to the credit method also would apply to portfolio dividends from third countries under the same conditions as currently exist for EU/EEA countries. Further, an unlimited carryforward of credits for foreign corporate income tax exceeding the Austrian minimum corporate income tax would be available on application from the taxpayer. Tax treatment of portfolio dividends Distributing company Current law Proposed rules EU/non-low taxed Exempt Exempt EU/low taxed Switch over Switch over EEA (non-eu)/non-low taxed Exempt if mutual assistance agreement with enforcement and administrative assistance Exempt if mutual assistance agreement with administrative assistance EEA (non-eu)/low taxed Switch over Switch over with carryforward Non-EU/EEA/non-low taxed Fully taxable (no credit) Exempt if mutual assistance agreement with administrative assistance Non-EU/EEA/low taxed Fully taxable (no credit) Switch over Finally, under the draft, foreign corporate income tax paid would be credited under a priority system. Thus, foreign withholding taxes would be able to be credited, but only after any foreign corporate income tax was credited. If, in any year, all potential for the setting off of foreign tax credits were exhausted by credits for foreign corporate income tax, any available credit for foreign withholding taxes would be lost and would not be able to be carried forward for set off in future years. As the bill does not include a specific effective date for the new rules, they will become effective on the day following announcement in the Federal Gazette. However, as the Austrian tax authorities must apply the ECJ s decision to all tax years not yet assessed, we believe that they will handle such cases along the lines of the pending bill. Michael Weismann (Vienna) Deloitte Austria mweismann@deloitte.at Petra Apfelthaler (Vienna) Senior Manager Deloitte Austria papfelthaler@deloitte.at Canada: Measures proposed in prior budget confirmed Canada s Minister of Finance presented his budget in the House of Commons on 6 June A prior budget, tabled on 22 March, was not adopted before the dissolution of Parliament following the defeat of the minority government World Tax Advisor Page 4 of 10 Copyright 2011, Deloitte Global Services Limited.

5 in a non-confidence vote. The newly elected majority government has now tabled a budget that confirms the measures presented in the March budget. There are no tax increases contained in the budget, nor any changes to previously promised corporate tax rate reductions. (Thus, the federal general corporate income tax rate became 16.5% effective 1 January 2011, and will decrease to 15% as from 1 January 2012.) However, like the March budget, the new version proposes changes that include preventing the deferral of tax by the use of partnerships and limiting the use of the capital gains exemption when flow-through shares are donated to a charity. No changes are proposed for the Scientific Research and Experimental Development tax credit system, although there had been hope that the program would be expanded. Albert Baker (Vancouver) Deloitte Canada abaker@deloitte.ca China: Government further clarifies registration requirements for Equity Investment Enterprises On 21 March 2011, the National Development and Reform Commission (NDRC) published on its website documentation requirements for the registration of Equity Investment Enterprises (EIEs), as well as standard templates/forms to be used in the registration process (Registration Guidance). The Registration Guidance further clarifies the requirements issued earlier this year in Notice 253 (Notice on Further Regulating the Development and Administration of Registration of Equity Investment Enterprises in Pilot Locations), which requires domestic and foreign-invested EIEs in specified trial areas to register with the NDRC and to disclose certain information. The Registration Guidance offers more detailed instructions on the required documents and the application process to facilitate the registration of EIEs. Scope of exemption from registration requirements The Registration Guidance expands the scope of EIEs that are not required to register. Under Notice 253, EIEs that have a total capital (including contributed capital and capital that has been committed but not yet paid-in) of less than RMB 500 million (or its foreign currency equivalent) are not required to register. The Registration Guidance further provides that if the total committed capital of an EIE exceeds RMB 500 million (or its foreign currency equivalent), but the capital actually contributed is less than RMB 100 million, the EIE is exempt from the registration requirement. This clarification may reduce the administrative costs of EIEs that are in the early stage of fund raising and operations. Fund raising Notice 253 provides that an EIE may raise capital only through a private placement to investors with the capability of risk identification and risk management, and investors can only subscribe capital with their legitimate self-owned funds. In a separate section on the prospectus of an EIE, the Registration Guidance stipulates more specific requirements: The number of investors in an EIE may not exceed 200 if the EIE is established as a joint stock limited company, and may not exceed 50 if the EIE is in the form of a limited liability company or limited partnership; The minimum capital subscription of each individual investor may not be less than RMB 10 million; and An investor may not invest in an EIE by entrusting other investors to hold the shares on its behalf. Compliance requirements for operation of EIE The standard templates in the Registration Guidance indicate that the supervisory authorities may impose a prudent administration and compliance requirement on an EIE, given the unique operation mechanism and investment practices of the industry. For instance, the prospectus must contain information on income, expenses, performance-based compensation and the income distribution method, etc., of an EIE, and must include: World Tax Advisor Page 5 of 10 Copyright 2011, Deloitte Global Services Limited.

6 Source of the income and how the income is accounted for; Management fees: o If an EIE is self-managed, the ratio of management fees to the total managed assets or actual investment amount, as well as the quarterly control target and calculation method (which should be agreed upon in advance); o If an EIE outsources its management activities, the management company s charge rate, calculation method and method of payment; and o If an EIE appoints a custodian, the custodian s charge rate, calculation method and method of payment; With respect to performance-based compensation, the principle and percentage of profit sharing, implementation plan and procedure, etc; Set up costs and other expenses borne by the EIE; Methods of loss recovery; and Method and procedures for the distribution of profits to investors. Guidance on partnerships For an EIE that is established as a limited partnership, the Registration Guidance reiterates that, pursuant to the PRC ship Law, wholly state-owned companies, state-owned enterprises, listed companies and charitable organizations are not permitted to be general partners of an EIE. To manage the EIEs more effectively, the Registration Guidance further suggests the partnership agreement should not contain any provision enabling the limited partners to be involved, directly or indirectly, in the management and decisionmaking of the investment portfolios. Comments Timeframe for registration Under Notice 253, when the local authorities receive a registration package, they must submit their preliminary opinion to the NDRC within 20 business days. The NDRC then has 20 business days to review the application. If the application is approved, the name and general information of the EIE will be published on the NDRC s website. It is notable that several EIEs and their management companies have already registered with the NDRC, according to information on the NDRC website, thus demonstrating that the new procedure is both effective and efficient. Registration system for foreign-invested funds and fund of funds Pursuant to Notice 253 and the Registration Guidance, the new registration procedures also apply to foreign-invested EIEs and funds of funds (enterprises investing in EIEs). For example, Notice 253 stipulates that those registered in the pilot areas with the Administrative Department for Industry and Commerce that have invested in a non-public company and in other EIEs are required to register. The Registration Guidance specifically addresses foreign investment (including offshore organizations, foreign individuals and offshore foreign investment institutions, etc.), and investment in other EIEs. Thus, it is likely that all investment entities in the private equity (PE) industry will fall within the scope of the new registration requirements, which will significantly facilitate the development of China s PE industry. Gary Chan (Shanghai) Deloitte China garychan@deloitte.com.cn Julie Zhang (Shanghai) Senior Manager Deloitte China julzhang@deloitte.com.cn France: New premium dividend to be granted to employees The French government has decided to introduce a measure that would require French companies that increase dividend payments to their shareholders to grant a bonus to all of their employees. Parliament will begin debate on the bill on 14 World Tax Advisor Page 6 of 10 Copyright 2011, Deloitte Global Services Limited.

7 June. While not a tax provision as such, the proposal could impact dividend distributions of French companies as it may affect the dividend distribution strategy of groups. Based on the latest information available, the rules would apply to companies that have more than 50 employees and that distribute a dividend per share higher than the average dividend per share of the previous two years. The bonus would be optional for companies with less than 50 employees. For companies belonging to a group, the increased dividend distribution would be assessed at the level of the ultimate parent company in the group (dominant company), rather than at the level of the distributing entity. If the ultimate company is established abroad, the comparison would be made at the level of the top French company in the group. If that company had increased its dividend distributions, all employees of the subsidiaries in the French group would be entitled to the bonus. The amount of the bonus (which could be granted in cash or in kind, such as free shares) would have to be negotiated with employee representatives and would have to be paid within three months of the general meeting deciding a dividend distribution (or within three months following the implementation of the new regime for dividends paid in 2011 before the new rules became effective). The bonus would be exempt from social security contributions up to EUR 1,200 per employee per year. If enacted, the law would apply to distributions decided in 2011 and thereafter. Affected companies should monitor the progress of the bill. Malik Douaoui (Paris) Taj mdouaoui@taj.fr France: Supreme Court issues opinion on compatibility of withholding tax on dividends paid to foreign investment and pension funds On 23 May 2011, France s Supreme Administrative Court rendered an opinion on some issues raised by cases pending before a lower administrative court on the compatibility of the French withholding tax paid by foreign investments funds with EU law. The Court requested a preliminary ruling from the European Court of Justice (ECJ) on whether the different tax treatment of French-source dividends paid to resident and nonresident investment funds established in the EU is compatible with the Treaty on the Functioning of the EU (TFEU) and EEA. As regards dividends paid to non-eu funds, the Administrative Court opined that the differing treatment may violate the free movement of capital principle. This latter opinion may open opportunities for non-eu funds to file a claim for a refund of withholding tax paid in France. Under existing law, French investment funds are exempt from French tax on dividends received from a French company, but foreign investment funds are subject to a 25% withholding tax, unless the tax is reduced under an applicable tax treaty. The case originally was referred to the Supreme Administrative Court in December 2010 by the Administrative Lower Court of Montreuil, which had been asked to rule on 10 test cases relating to French-source dividends paid to Belgian, German, Spanish and U.S. investment funds. Because of the number of withholding tax reclaims (around 15,000) pending before the French administrative courts (pursuant to ECJ decisions, in particular, the 2009 decision in the Aberdeen case) and the total amount at stake (EUR 1.9 billion), the lower court decided to defer its decision and instead ask for the opinion of the Supreme Administrative Court. With respect to EU investment funds, the Court has decided that the ECJ should ultimately rule on whether the relevant analysis of the comparability test between nonresident investment funds and French funds has to be made at the level of the fund, the investors or at a global level. World Tax Advisor Page 7 of 10 Copyright 2011, Deloitte Global Services Limited.

8 With respect to non-eu funds, the question referred to the Supreme Administrative Court concerned the applicability of the standstill clause in the TFEU; even if not expressly confirmed, the Court seemed to consider that the levy of a French withholding tax on dividends paid by French companies to funds established outside the EU may violate the free movement of capital principle. (Under the standstill clause, a restriction of the free movement of capital as it relates to third countries is permissible if an EU Member State s law was in force before 31 December 1993.) Since units in investment funds cannot be regarded as direct investment within the meaning of the standstill clause, the Court moved on to other factors that could justify the restriction. The French tax authorities argued that the discriminatory treatment was justified by the inability of the French government to carry out efficient tax audits outside the EU. However, the Court rejected this argument for situations in which France has concluded tax treaties that contain mutual assistance provisions (e.g. France-U.S. treaty). Consequently, the Supreme Administrative Court s opinion provides a basis on which affected non-eu investment funds could file a claim for a refund of tax withheld. The Court also indicated that any kind of documentation evidencing payment of the withholding tax, the date and the paying agent would be sufficient to support a refund claim. However, it specifically held that the extended statute of limitations period for making refund claims (under an ECJ decision and for which a claim can be made for withholding tax paid up to three years before the relevant event) would not apply if the claim is based on EU case law that does not concern French legislation. Instead, claims must be filed within the normal period, i.e. the end of the year (or in certain cases, the end of the second year) following the year tax was withheld. Finally, it should be noted that just before the Supreme Administrative Court issued its opinion (i.e. on 19 May 2011), the European Commission referred France to the ECJ with respect to its tax discrimination of foreign pension and investment funds. This referral was made further to a reasoned opinion sent to France on 18 March 2010 on the basis that France does not grant a withholding tax exemption on dividends distributed by French companies to investment and pension funds established in the EU and the EEA, whereas it grants such an exemption if the investment and pension funds are established in France. Although France introduced new legislative provisions in 2010, according to which dividends distributed to nonprofit organizations (including pension funds) are taxed at a flat rate of 15% regardless of whether the fund is established in France, the European Commission noted that the changes have not been applied in practice because of the absence of detailed administrative guidelines setting out the implementing rules. Etienne Genot (Paris) Taj egenot@taj.fr Marie-Charlotte Mahieu (Paris) Manager Taj mmahieudemolliens@taj.fr Vietnam: Update on foreign contractor withholding tax Vietnamese authorities have recently issued two sets of guidance on the tax treatment of foreign contractors. In an official letter issued on 5 April 2011, the General Department of Taxation (GDT) expressed its interpretation that income from design services provided by a foreign contractor is considered royalty income and, thus, subject to foreign contractor withholding tax (FCWT) at a 10% corporate income tax rate and no VAT. FCWT is a tax levied on payments for services provided by a foreign contractor (whether an entity or individual) in Vietnam based on a contract between the foreign contractor and a Vietnamese party. The FCWT has both a corporate income tax and VAT elements, which are combined into a single withholding tax on income subject to the FCWT. The GDT s interpretation appears to be inconsistent with a circular issued by the Ministry of Finance (MOF) in 2008, which provides that the FCWT rate on design works is a 5% corporate income tax and a 5% VAT. Further guidance from the tax authorities is expected; however, since the circular prevails over the official letter, which only expresses a view of the GDT on particular cases, it is our opinion that a 5% corporate income tax and a 5% VAT would still apply to design services. The official letter also states that eligibility for an exemption under Vietnam s tax treaties may be limited. For treaty purposes, it is possible that design fees could be classified as royalty income depending on the specific provision in the relevant treaty. World Tax Advisor Page 8 of 10 Copyright 2011, Deloitte Global Services Limited.

9 In another official letter, dated 16 May 2011, the MOF clarified the use of the hybrid method used by foreign contractors to comply with their FCWT obligations. Under the hybrid method, foreign contractors file VAT under the conventional deduction method (and, hence, can claim an input VAT credit), but pay corporate income tax on a withholding basis on the gross value of the contract. The hybrid method had been omitted as an option in a MOF circular issued in 2009, but was reintroduced by the MOF in an amending circular issued in October Subsequently, there was some confusion as to whether qualified foreign contractors could retroactively use the hybrid method in respect of contracts signed between 1 January 2009 and 22 November 2009 (the date the amending circular became effective), because the GDT and some provincial tax authorities disallowed the use of the method during this transition period. The official letter now allows the hybrid method to be adopted by a qualified foreign contractor for a contract signed during this transition period. This positive development may create an opportunity for foreign contractors who wish to use the hybrid method for contracts signed during this 11-month period, but who already adopted other FCWT filing methods. Thomas McClelland (Ho Chi Minh City) Deloitte Vietnam tmcclelland@deloitte.com Tuan Bui (Hanoi) Deloitte Vietnam tbui@deloitte.com Lynn Tastan (Ho Chi Minh City) Deloitte Vietnam ltasten@deloitte.com Minh Bui (Hanoi) Deloitte Vietnam mbui@deloitte.com In brief Austria The deadline for filing a VAT refund claim (for qualifying relief for 2010) is 30 June 2011 for foreign entrepreneurs that do not have a seat in the EU. The foreign entrepreneur must submit its application for a refund of Austrian input VAT to the tax office in Graz-Stadt and must include the refund form, original invoices and the original certificate indicating VAT status. Late applications generally are not accepted. European Union The European Commission has issued a reminder that only tax administrations in each EU Member State can issue VAT numbers. It appears from the release that businesses have been receiving proposals to obtain a valid VAT number by making an upfront payment to a VAT registration service. Although some of the invitations might be from genuine providers aiming to secure proper VAT registrations from the relevant tax authorities, this release suggests that others might either be providing false registration numbers or simply not delivering once payment has been made. Ireland A second reduced VAT rate of 9% will be introduced to replace the current 13.5% rate on supplies of certain goods and services during the period 1 July 2011 to 31 December Among other things, the new rate will apply to restaurant and catering services; hotel and holiday accommodation; admissions to cinemas, theatres, certain musical performances, museums and art gallery exhibitions, fairgrounds or amusement park services; the use of sporting facilities; and printed matter. Korea The Korean tax authorities have rules that, where a nonresident registers with the Korean open market (cyber mall) as a seller, takes orders from Korean customers through that market and delivers the goods directly from overseas to the customer in Korea, the open market does not constitute a place of business of the nonresident for Korean VAT purposes and, therefore, the sales of goods through the open market are not subject to VAT in Korea. United States The Internal Revenue Service revised its frequently asked questions on the 2011 Offshore Voluntary Disclosure Initiative (OVDI) on 2 June 2011, thereby informally announcing that taxpayers may request up to a 90-day extension of the 31 August 2011 deadline to submit their full voluntary disclosure package, but must demonstrate a good faith attempt to comply and fulfill other criteria. OVDI offers an opportunity for taxpayers with unreported income from undisclosed foreign accounts, foreign assets or foreign entities to become current with their federal income tax obligations while avoiding certain potentially substantial civil penalties and generally eliminating the risk of criminal prosecution. World Tax Advisor Page 9 of 10 Copyright 2011, Deloitte Global Services Limited.

10 Are You Getting Your Global Tax Alerts? Throughout the week, Deloitte provides commentary and analysis on developments affecting cross-border transactions on a free subscription basis delivered straight to your . Read the recent alerts below or visit the archive. Subscribe: Archives: s_ _tax_wta Italy Tax authorities supplement guidance on CFC rules The tax authorities have issued guidance on the application of the CFC rules to subsidiaries of Italian companies located in non-low-tax jurisdictions, which potentially have been caught by the CFC regime since [Issued: 2 June 2011] URL: x_wta_ URL: Talk to Us If you have questions or comments about the content of Global InSight, or would like to contact a member of the IAS Newsletter Editorial Board, contact: Susan Lyons, Director Washington International Tax Services Deloitte Tax LLP slyons@deloitte.com -or- Connie Angle Washington International Tax Services Deloitte Tax LLP cangle@deloitte.com About Deloitte Deloitte refers to one or more of Deloitte Global Services Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Global Services Limited and its member firms. Deloitte is the brand under which tens of thousands of dedicated professionals in independent firms throughout the world collaborate to provide audit, consulting, financial advisory, risk management, and tax services to selected clients. These firms are members of Deloitte Touche Tohmatsu Limited (DTTL), a UK private company limited by guarantee. Each member firm provides services in a particular geographic area and is subject to the laws and professional regulations of the particular country or countries in which it operates. DTTL does not itself provide services to clients. DTTL and each DTTL member firm are separate and distinct legal entities, which cannot obligate each other. DTTL and each DTTL member firm are liable only for their own acts or omissions and not those of each other. Each DTTL member firm is structured differently in accordance with national laws, regulations, customary practice, and other factors, and may secure the provision of professional services in its territory through subsidiaries, affiliates, and/or other entities. Disclaimer This publication contains general information only, and none of Deloitte Global Services Limited, its member firms, or its and their affiliates are, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your finances or your business. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. None of Deloitte Global Services Limited, its member firms, or its and their respective affiliates shall be responsible for any loss whatsoever sustained by any person who relies on this publication. World Tax Advisor Page 10 of 10 Copyright 2011, Deloitte Global Services Limited.