Taiwan s Supreme Administrative Court rules on amortization of goodwill from merger

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1 International Tax World Tax Advisor 1 July 2011 In this issue: Taiwan s Supreme Administrative Court rules on amortization of goodwill from merger... 1 Comparison of EU tax loss regimes shows Italian companies at a disadvantage... 3 Costa Rica: Government presents major tax reform bill... 4 European Union: ECJ rules Polish capital duty on shareholder loans incompatible with EU law... 5 Germany: Tax group denied in case of atypical silent partnership at level of group subsidiary... 6 Japan: Some tax reform measures enacted, others postponed... 6 Netherlands: Domestic court extends ECJ decision on tax consolidation to fiscal unity regime and European Commission takes action... 8 In brief... 9 Are You Getting Your Global Tax Alerts?... 9 Taiwan s Supreme Administrative Court rules on amortization of goodwill from merger The Taiwan Supreme Administrative Court recently issued two landmark decisions confirming taxpayers entitlement to claim an income tax deduction on the amortization of goodwill resulting from a merger transaction. The decisions, issued on 13 and 23 May 2011, involve a telecommunications company and a bank, respectively, and are particularly relevant to private equity funds and multinationals that have M&A activities in Taiwan. Background Under Taiwan s Generally Accepted Accounting Principles (GAAP), the purchase price method of accounting should be used to record a merger between two unrelated parties. Under this method, the purchase price should be allocated to identifiable tangible and intangible assets of the target based on the fair market value (FMV) of the assets, with any amount not so allocated being recorded as goodwill. The Merger and Acquisition Law allows goodwill recognized from an M&A transaction to be amortized over a period not exceeding 15 years. The amount of such goodwill is usually significant, as is the tax benefit from amortization and, therefore, typically subject to a challenge from the Taiwan tax authorities. The most common areas challenged are as follows: The taxpayer could not provide evidence, such as valuation reports, to support the reasonableness of the acquisition price; The valuation reports to support the FMV of the identifiable assets do not detail the FMV of each asset acquired; The reasonableness of the valuation model; World Tax Advisor Page 1 of 10 Copyright 2011, Deloitte Global Services Limited.

2 Whether the goodwill is acquired through a purchase transaction, as required by the Assessment Rules of Profit-Seeking Enterprises Income Tax (Assessment Rules). The Assessment Rules allow the amortization of business rights, trademarks, copyrights, patents, other franchises and goodwill over a specified number of years if the assets are acquired through a purchase transaction. In practice, there typically is a time lag between the time an acquisition takes place and the time the merger is finally effectuated. Goodwill is recognized when the merger is effectuated, so the tax authorities often raise a challenge on the grounds that goodwill is merely an accounting entry when the merger takes place, rather than a direct result of the acquisition, which takes place long before the merger; and The lag between the time of an acquisition and the effectuation of the merger also has prompted the tax authorities to argue that, before the merger takes place, the acquirer holds the majority of the shares in the target, so the parties are already related and, therefore, the purchase method of accounting should not be used; in other words, goodwill should not be recognized in a related party merger. In most cases involving the amortization of goodwill from a merger, the tax authorities have disallowed the amortization and issued an assessment notice to the taxpayer. In Taiwan, if a taxpayer disagrees with a tax assessment notice, the taxpayer can request a re-examination by the governing tax office, followed by an appeal to the Ministry of Finance (MOF). If the appeal still does not give satisfactory result, the taxpayer has the option to commence administrative litigation with the High Administrative Court, or further to the Supreme Administrative Court. A decision of the Supreme Administrative Court is final, unless further challenged and the Grand Jury is applied to for a constitutional interpretation, which is very rare. According to publicly available information, there have been more than 30 disputed cases relating to the amortization of goodwill stemming from mergers dealt with at the High Administrative Court level alone. The two recent decisions involving a telecommunications company and a bank are the first taxpayer favorable decisions made by the Supreme Administrative Court (and the first where the taxpayer was represented by Deloitte). Supreme Administrative Court ruling In its decision, the Supreme Administrative Court upheld several arguments advanced by the taxpayers: In any M&A deal, the final purchase price usually depends on the value determined by the buyer based on its expectations and calculation of the value of the target, as well as negotiations between the parties. Since multiple sellers are not involved in an M&A deal, it is not possible to obtain a reasonable comparable price. Thus, unless the tax authorities can prove that the purchase price is not at arm s length, it is not reasonable to ask the taxpayer to prove the reasonableness of the acquisition price. Further, if the purchase price of a merger already has been accepted by various competent authorities as required under Taiwan law, it is not reasonable to question the purchase price solely for tax revenue collection purposes. In both of the decided cases, the purchase price had been determined when the buyer and the target were still unrelated parties. The fact that a buyer becomes the majority shareholder and, hence, a related party of the target before the merger is effectuated, should not be used as a basis to challenge the reasonableness of the purchase price. Taiwan GAAP requires the buyer to objectively determine the FMV of the identifiable assets of the target. In practice, the buyer and target could not possibly negotiate the purchase price of each asset and then add up all of the prices to arrive at the total purchase price. The tax authorities should not simply read the language of the relevant GAAP without looking at the substance and reality of the situation and request a taxpayer to obtain the FMV for each identifiable asset acquired and liability assumed. Goodwill is calculated as follows: Goodwill = purchase price FMV of identifiable net assets If the tax authorities argue that the goodwill is overvalued and should be reduced because the purchase price is fixed, they should allow the taxpayer to recognize the corresponding increase in the FMV of the identifiable net assets and corresponding increase in the depreciation/amortization of identifiable assets or bad debt expense. (Because the application of the purchase method of accounting was confirmed by the Accounting Research and Development Foundation to be appropriate, this particular issue was not a point of debate during the administrative litigation process). World Tax Advisor Page 2 of 10 Copyright 2011, Deloitte Global Services Limited.

3 Comments Although the outcome of these two cases has been welcomed by many tax practitioners, it is important to note that the decisions are not binding on other cases involving the amortization of goodwill from merger transactions. It also is notable that the decisions were issued by the same panel of judges; a different panel could reach a different conclusion, so it is far from clear whether a consensus on this matter has been reached among the judges in the Supreme Administrative Court. It will be interesting to see how other appeals pending before the MOF and local high administrative court level are resolved. Nevertheless, the two decisions of the Supreme Administrative Court are significant and, as noted above, particularly relevant to many private equity funds and multinationals with M&A activities in Taiwan. Although the amortization of goodwill is allowed under the M&A Law, it is clear from the number of cases that the tax authorities will not simply accept an income tax deduction without mounting a challenge, particularly when the authorities are under tremendous revenue collection pressure. It is important for companies that have experienced similar issues to be represented in the administrative litigation process by a seasoned team and to continue to monitor developments. Glendy Yuan (Taipei) Tax Partner Deloitte Taiwan glendyyuan@deloitte.com.tw Arthur Chen (Hong Kong) Senior Manager Deloitte AP ICE, Limited, Taiwan Tax Services artchen@deloitte.com Comparison of EU tax loss regimes shows Italian companies at a disadvantage With many EU Member States having passed specific provisions to facilitate the use of tax losses incurred during the worldwide economic crisis, Italy now finds itself with one of the most disadvantageous tax loss regimes among those EU countries with essentially similar characteristics in terms of such factors as market size and industrial economic systems. Article 84 of the Italian Income Tax Code allows taxpayers to offset the losses incurred in a tax period against the taxable income of the following five tax years, after which the losses cannot be used. An exception to the five-year carryforward period applies if the losses are incurred during the first three years of, and relate to, a new business activity, in which case the carryforward is unlimited. The limited nature of the five-year carryforward in Italy is the first obstacle to offsetting the significant losses many companies incurred in the 2008 and 2009 tax years, particularly considering that 2010 was not a recovery year for many businesses, leaving Italian companies fewer years to generate taxable profits up to the amount of the available tax losses. The second obstacle is the absence of a carryback provision in the Income Tax Code to allow losses of a tax year to reduce the taxable income of preceding years. Carryback provisions are rather common worldwide and allow companies to receive a tax credit for income taxes paid with reference to years preceding a loss year. As indicated in the table below, only two of the other six EU Member States examined have a time limit on tax loss carryforwards. At nine years for the Netherlands and 15 years for Spain, both are more generous than Italy s five-year limit. The other countries considered (except Belgium and Spain) also allow the carryback of losses (ranging from one to three years), with attribution of a tax credit for the income taxes paid on prior years taxable income that is then offset by the tax loss. Several countries introduced favorable rules to support resident companies in using the tax losses incurred during the economic crisis. For example, following the lead of the U.S., which extended its carryback period from two to five years for tax losses incurred by resident companies in , the Netherlands and the U.K. extended the ordinary time limit from one year to three for the carryback of tax losses incurred in and , respectively. The Dutch and U.K. extensions, however, are limited by value and, in the Netherlands, impact the available carryforward period. Comparison of select EU tax loss regimes Jurisdiction Carryforward Carryback Basket limitations Minimum taxation Tax consolidation or group relief Belgium Unlimited No No No No France Unlimited 3 years No No Tax consolidation Germany Unlimited Prior year 1 No No 2 Tax consolidation World Tax Advisor Page 3 of 10 Copyright 2011, Deloitte Global Services Limited.

4 Comparison of select EU tax loss regimes Jurisdiction Carryforward Carryback Basket limitations Minimum taxation Tax consolidation or group relief Italy 5 years 3 No No No Tax consolidation Netherlands 9 years Prior year No No Tax consolidation Spain 15 years No No No Tax consolidation U.K. Unlimited Prior year Yes No Group relief 1 Limited to EUR 511, However, if the tax base exceeds EUR 1 million, 40% of the excess cannot be offset by the prior year s tax losses. 3 Losses incurred in the first three years are subject to unlimited carryforward if they relate to a newly established business activity. Given that Italy s tax loss regime is generally on parity with the other countries examined in terms of allowing a tax consolidation or group relief, not imposing minimum taxation and having no basket limitations, it is up to the government to ease the restrictions on the carryforward and carryback of losses. The impact of these restrictions on companies is twofold. First, if the restrictions were eliminated or lessened, the tax burden on companies would be reduced and their cash flow benefited. Second, companies that reasonably expect to use their tax losses could book a deferred tax asset in their financial statements. This option is not available to companies that do not expect with reasonable certainty to generate a sufficient taxable base within the carryforward time limits. Booking the deferred tax asset in the financial statement enhances the net equity of resident companies, which is one of the Italian government s goals in other recent new law provisions (such as the corporate assets step-up provisions). To achieve the government s goal, increase the competitiveness of Italian companies and reduce the gap between Italy and other EU countries, it is imperative that the government amend the tax loss regime. This article is a translation of the authors article appearing in Il Sole 24 Ore on 1 May Fabrizio Cavalli (Genoa) Equity Partner Studio Tributario e Societario fcavalli@deloitte.it Stefano Schiavello (New York) Client Service Executive Deloitte Tax LLP stschiavello@deloitte.com Costa Rica: Government presents major tax reform bill Costa Rica s Secretary of the Treasury formally presented a tax reform bill to the National Congress on 21 June 2011 that contains major and aggressive changes to the Income Tax Law and the Value Added Tax Law, with a view to collecting more than CRC 2 billion per year. The bill has been coined Plan B because it follows a bill proposed in January that failed to win the votes of the Congress. The main proposals under the bill are as follows: A new general withholding tax rate of 15% would apply to dividends, interest and royalties paid to a nonresident company. However, payments made to a nonresident with respect to transportation, telecommunications and insurance premiums would be subject to a lower rate of 5.5%. The current rate for dividends, professional fees and interest, which is 15%, would remain unchanged (although the 0% rate applicable to certain types of interest would be abolished), but the current 25% rate on royalties and technical and management advice fees would benefit from the lower 15% rate. Capital gains derived by Costa Rican residents would be subject to a 15% tax if the gains do not arise from the disposal of assets used in a normal trade or business. The rate for nonresidents would be 3%. Under current law, capital gains are not subject to taxation unless the gains arise from habitual transactions or from the transfer of an asset subject to depreciation or amortization in the case of intangibles. Foreign exchange gains and losses would be considered taxable/deductible for income tax purposes in the fiscal year during which they are realized. Existing law is unclear as to whether such gains are taxable or nontaxable income, and several cases are pending before the national tax courts. Formal transfer pricing rules that follow the OECD guidelines would be introduced for the first time. World Tax Advisor Page 4 of 10 Copyright 2011, Deloitte Global Services Limited.

5 Formal thin capitalization rules that include a 3:1 debt-to-equity ratio would be introduced. Costa Rica currently does not have any restrictions on interest deductions if interest rates on related party debt are in accordance with market standards. The tax on the transfer of immovable property would increase from 1.5% to 3%, and the rate on movable assets rate would increase from 2.5% to 3%. The double taxation relief rule would be abolished. The rule currently allows companies in certain countries (including Mexico and the U.S.) to obtain a 100% exemption from withholding tax on dividends, interest, royalties, commissions and insurance premiums. The free trade zone regime would remain unchanged. The standard rate of VAT would increase from 13% to 14% and the list of exempt products would be reduced from 900 to 233. The provision of services, with limited exceptions (i.e. certain cases of public transportation), would be brought within the scope of VAT. Even though the government feels confident that Plan B will be discussed and approved by the National Congress during 2011, the bill is likely to be debated vigorously and may be subject to further changes. Rafael Gonzalez (San Jose) Partner Deloitte Costa Rica rafgonzalez@deloitte.com Sergio Chacon Barrantes (New York) Senior Manager Deloitte Tax LLP schaconbarrantes@deloitte.com European Union: ECJ rules Polish capital duty on shareholder loans incompatible with EU law The European Court of Justice (ECJ) ruled on 16 June 2011 that Poland s capital duty levied on shareholder loans granted to a company are incompatible with EU law (Logstor ROR Polska v. Poland). The decision may provide refund opportunities for companies that previously paid the tax. The EU Capital Directive aims to abolish capital duty throughout the EU, although the tax can continue to apply to certain transactions if a Member State levied capital duty on 1 July Poland levied capital duty on loans granted to a company by its shareholders as of that date. Poland abolished capital duty on such loans on the date it became an EU Member State (i.e. 1 May 2004), but then reintroduced the tax in Taxpayers have claimed that Poland did not have the right to reinstitute capital duty on shareholder loans to a company. The Regional Administrative Court of Poland referred the case to the ECJ to determine whether the reintroduction of capital duty was consistent with the Capital Directive. The ECJ said that Member State may continue to levy capital duty that was in effect on 1 July 1984 only if the taxation is uninterrupted a state cannot abolish the tax and then restore it. Hence, the reintroduction of capital duty on shareholder loans in 2007 was incompatible with EU law. Affected companies can seek to obtain a refund of overpaid tax for the years A number of proceedings seeking a refund have already been filed, but they were suspended until the ECJ issued its decision. These proceedings can now resume. Taxpayers that were unsuccessful in the their refund cases can request that their cases be re-opened (provided such requests are made within one month from the date the ECJ decision is published in the EU Official Journal). Tomasz Konik (Katowice) Partner Deloitte Poland tkonik@deloittece.com Krzysztof Gil (Katowice) Senior Consultant Deloitte Poland kgil@deloittece.com World Tax Advisor Page 5 of 10 Copyright 2011, Deloitte Global Services Limited.

6 Germany: Tax group denied in case of atypical silent partnership at level of group subsidiary Germany s Federal Tax Court (BFH) ruled in a recently published decision that the transfer of the profits of a controlled entity in a tax group, except for a portion of the profits remitted to an atypical silent partner, is not sufficient to meet the requirement that all of the subsidiary s profits be transferred to the parent company to qualify as a tax group. A German GmbH concluded an agreement to establish an atypical silent partnership with a non-shareholder (a third party) and agreed to transfer a specific share of its profits to that third party. The profit share was defined as the profits earned by the sole foreign permanent establishment (PE) of the GmbH. A couple of years after the agreement was entered into, the GmbH concluded a profit and loss pooling agreement (PLPA) with its sole shareholder, a German corporation, in order to enter into a tax group. Under the PLPA, the GmbH committed to surrender its entire profit to its shareholder and the shareholder agreed to compensate the GmbH for any losses incurred by the GmbH. The BFH concluded that the tax group was invalid because the GmbH only transferred the profits remaining after a portion of its profits had been paid to the atypical silent partner it failed to meet the requirement that the entire profit be transferred. According to the BFH, it is irrelevant whether or not the profits generated by the PE are exempt from German tax under a tax treaty because the exemption does not reduce the actual profits of the subsidiary. Consequently, the effects of the tax group were denied so that the profit transfers were recharacterized as constructive dividends and the compensation of losses recharacterized as hidden contributions. Taxpayers should ensure that the subsidiary in a tax group transfers its entire profit both from a contractual and a factual perspective. Any profit-participating partnership-type instruments at the level of a subsidiary in a tax group should be reviewed carefully before they are implemented to determine whether they may adversely affect the effectiveness of the tax group. Nicola Selack (Frankfurt) Director Deloitte Germany nselack@deloitte.de Japan: Some tax reform measures enacted, others postponed Japan s government enacted tax reform provisions on 22 June 2011 that respond to the country s current severe economic situation. These provisions include new tax incentives to promote employment and environmental investment, tax credits for certain qualified donations, changes to consumption tax and new foreign investment incentives. They also include a further extension of select special measures, such as the 18% corporate income tax rate for small and medium-size enterprises (SMEs) until 31 March The original tax reform proposals announced in December 2010 were amended in June 2011, but have not been enacted and further discussions on the proposals are expected. The proposals include a reduction of the effective corporate tax rate by approximately five percentage points and reducing some deductions for personal income tax and inheritance tax. Key provisions enacted Employment and environmental investment incentives A qualified corporation can claim tax credits for additional new employment for the period starting between 1 April 2011 and 31 March Tax credits are calculated as JPY 200,000 times the incremental standard number of employees, but the credits are limited to 10% (20% for SMEs) of the corporate income tax liability for the period. Additionally, when a foreign corporation filing a blue return acquires machinery and equipment to promote environmental protection between 22 June 2011 and 31 March 2014, the corporation can claim 30% special depreciation. (The blue return is available to electing taxpayers that fulfill certain criteria, such as maintaining their accounting records World Tax Advisor Page 6 of 10 Copyright 2011, Deloitte Global Services Limited.

7 to acceptable standards.) As an alternative, SMEs can claim a 7% tax credit on such machinery and equipment up to 20% of their tax liability for the period. Foreign investment incentive measures Qualified corporations doing business in the special zones for international strategy (SZIS) may claim the following tax incentives: A corporation acquiring and placing certain (as yet unidentified) assets in service in the SZIS between 22 June 2011 and 31 March 2014 may claim special depreciation of 50% (25% for buildings) or a tax credit of 15% (8% for buildings), up to 20% of its tax liability for the period; or A corporation engaging in certain (as yet unidentified) business activities approved between 22 June 2011 and 31 March 2014 in the SZIS may claim a deduction of 20% of income attributable to the activities for five years after the approval. Consumption tax A corporation generally is exempt from having a consumption tax obligation if its consumption taxable sales in the base period (i.e. the two prior business years) do not exceed JPY 10 million. The exemption will not apply for the tax period starting after 1 January 2013 if the corporation has more than JPY 10 million taxable sales in the first six months of the prior business year. Similarly, if a corporation s taxable sales ratio is 95% or more, 100% of input consumption tax on taxable purchases has been creditable. This rule will not apply if the corporation has more than JPY 500 million of taxable sales. Investment/income gains The reduced withholding tax rate on dividend income and capital gains from listed shares due to expire on 31 December 2011 has been extended for a further two years through 31 December Extended special measures Special measures extended until 31 March 2012 include the 18% corporate income tax rate for SMEs with taxable income up to JPY 8 million; R&D credits up to 30% of corporate income tax liability; and bad debt relief special provisions for SMEs. Donations Individuals making qualified donations to designated nonprofit organizations may claim tax credits equal to 40% of the donations in excess of JPY 2,000, up to 25% of their income tax liability for the period. Amended proposals The following items included in the amended proposals have not yet been enacted. Further discussions are expected and additional details will be provided as they become available. Corporate income tax The effective tax rate of corporate income tax would be reduced by approximately five percentage points; carried forward tax losses would be limited to 80%, but the loss carryforward period would be extended from seven to nine years; accelerated tax depreciation in early years would be reduced; and SMEs would receive a further reduction of their corporate income tax. Personal income tax The employment income deduction would be limited; the adult dependents deduction would be abolished; and the qualifications for the retirement income exclusion for directors would be changed. Inheritance tax The basic exemption would be reduced and the tax rates would be restructured. Conclusion The measures passed on 22 June represent a number of positive changes and extensions for many taxpayers in Japan. Taxpayers should pay close attention, however, to the amendments to the consumption tax, which may have significant practical implications for certain taxpayers. Opportunities to take advantage of the SZIS incentives should be attractive for international corporations in particular. Nicholas Walters (Tokyo) Director Deloitte Japan nicholas.walters@tohmatsu.co.jp World Tax Advisor Page 7 of 10 Copyright 2011, Deloitte Global Services Limited.

8 Netherlands: Domestic court extends ECJ decision on tax consolidation to fiscal unity regime and European Commission takes action The Tax Court of First Instance of Haarlem issued a decision on 9 June 2011 (X BV) allowing a fiscal unity between a Dutch parent company and its lower tier subsidiaries that were held by two German intermediary companies. Basing its decision on the 2008 European Court of Justice (ECJ) ruling in the Papillon case, the Haarlem court held that the Dutch fiscal unity regime violates the freedom of establishment in the EU Treaty. In Papillon, the ECJ had to rule on the compatibility of the French tax consolidation rules with EU law. Those rules allowed an indirectly held French subsidiary to be included in the French parent company s tax consolidation only if the intermediary company also was included in the consolidation, and to be included in a tax consolidation, a company had to be established in France. The ECJ held that a French parent company and a French sub-subsidiary should be permitted to form a consolidation even if an intermediary company is resident in another EU Member State, and that the denial of such a consolidation violates the freedom of establishment principle. Comparable to the French regime at issue in Papillon, the Dutch fiscal unity regime aims at consolidating the results of group companies, allowing the offset of profits and losses of group companies and neutralizing intra-fiscal unity transactions. Following the ECJ decision, Dutch taxpayers requested authorization to form fiscal unities between Dutch group entities without consolidating intermediary companies from other EU Member States. However, the Dutch tax authorities considered Dutch law substantially different from French law and, therefore, disallowed the consolidations. The Haarlem Tax Court of First Instance concluded that the disallowance of the fiscal unity regime based only on the place of residence of the intermediary company is an infringement of EU law. The fact that a fiscal unity between a parent company and its sub-subsidiary also is impossible if the intermediary company is a Dutch resident (without being consolidated) was considered irrelevant. Although the court found that the restriction could be justified based on the coherence of the tax system (primarily because of rules avoiding double loss compensation in domestic situations), the restriction was considered disproportionate because the Dutch tax authorities can request information from the tax authorities in other EU Member States if they consider the information relevant for Dutch tax purposes and because alternative anti-abuse measures are available that are preferable to a general exclusion on granting a fiscal unity. Thus, the Haarlem tax court ruled that the disallowance of a fiscal unity between a Dutch parent company and its Dutch subsubsidiary without consolidating the EU intermediary company is an infringement of the freedom of establishment principle and consolidation should be allowed. The Dutch State Secretary of Finance is expected to appeal this decision. Beyond the fate of the court s decision in X BV on appeal, taxpayers also are left with the question of whether a fiscal unity should be granted in the case of two or more Dutch resident companies held (at least 95%) by the same EU parent company without the parent company being consolidated. In analogy to the Papillon case, the position could be taken that two subsidiaries should be allowed to form a fiscal unity without the common EU parent company being consolidated as well. Since there is no direct shareholding relationship between the consolidated companies, it is not yet fully certain that this fiscal unity has to be allowed. In an unpublished decision, the Haarlem Tax Court of First Instance already decided that this does not infringe EU law. The European Commission, on the other hand, recently requested the Netherlands to amend its fiscal unity legislation on the grounds that a denial of a fiscal unity between subsidiaries without consolidating the common EU/EEA parent company would infringe the freedom of establishment (by reference to Papillon). Hans van den Hurk (Eindhoven) Partner Deloitte Netherlands hvandenhurk@deloitte.nl Jasper Korving (Eindhoven) Manager Deloitte Netherlands jkorving@deloitte.nl World Tax Advisor Page 8 of 10 Copyright 2011, Deloitte Global Services Limited.

9 In brief Austria The Constitutional Court issued a press release on 24 June 2011 stating that the timeline for the new capital gains tax withholding obligation for banks to become effective (i.e. 1 October 2011) is unconstitutional because it leaves insufficient time for banks to set up the necessary systems to carry out their withholding obligations. The new 25% tax on gains from the sale of securities (regardless of the participation level or holding period) was included in the Finance Act of Several Austrian banks challenged the effective date for their withholding obligation, as well as the imposition of an obligation to withhold tax. The latter claim was rejected by the court. European Union The European Court of Justice (ECJ) has ruled that Austria s tax rules allowing a deduction for donations to research and educational institutions only for institutions established within Austria infringe the free movement of capital. The Austrian government attempted to justify this infringement on a number of grounds, for instance, that extending deductibility to institutions established in other Member States could displace gifts directed to Austrian institutions and adversely affect their budgets. The arguments were rejected. India India and the OECD have announced plans to enhance cooperation on tax-related issues through the development of a three-year partnership. The main issues for the project include tax administration, adapting transfer pricing and tax treaty rules to the current international environment and improved understanding of tax evasion. The transfer pricing of intangibles is a key topic. The OECD hopes that India will become a full member of the tax committee in due course. Lithuania The transition period under the EU Interest and Royalties Directive expired on 30 June Under that rule, Lithuania was not required to grant an exemption for qualifying interest and royalty payments made to another EU Member State; instead, it was permitted to impose a 5% and 10% withholding tax, respectively. New Zealand The Minister of Revenue announced that the government has decided to allow a deduction for the development costs of unsuccessful software so as not to inhibit productivity and innovation. This announcement comes as a result of the 1 April 2011 notice issued by Inland Revenue advising taxpayers that it was withdrawing its 1993 policy regarding deducting unsuccessful software development costs with effect from the 2012 income year. The amendment, confirming that expenditure on failed software is deductible, will be in tax legislation due to be introduced in September and will be backdated to ensure that expenditure incurred in 2011 is deductible. Spain The transition period under the EU Interest and Royalties Directive expired on 30 June Under that rule, Spain was not required to grant an exemption for qualifying royalty payments made to another EU Member State; instead, it was permitted to impose a 10% withholding tax. 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 Taiwan Guidance issued on thin capitalization rules The Ministry of Finance has issued further guidelines defining the scope of related parties, debt and equity, as well as the permissible debt-to-equity ratio for the thin capitalization rules approved in January [Issued: 23 June 2011] URL: x_wta_ URL: World Tax Advisor Page 9 of 10 Copyright 2011, Deloitte Global Services Limited.

10 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.