World Tax Advisor. New Zealand IRD Audits: Survival of the Fittest. 3 October In this issue:

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1 International Tax World Tax Advisor 3 October 2008 In this issue: New Zealand IRD Audits: Survival of the Fittest... 1 Argentina: Court Issues Broad Ruling on Concept of Source... 2 Austria: Gift Notification Act Enters into Effect... 3 Czech Republic: Changes to Thin Cap Rules on Horizon... 4 France: Supreme Court Resolves Controversy Regarding Registration Duty on Share Capital Redemptions... 5 Greece: Changes to Dividend Withholding Tax and Corporate Income Tax Introduced... 6 South Africa: Dividend Withholding Tax to be Introduced... 6 Are You Getting Your Global Tax Alerts?... 7 New Zealand IRD Audits: Survival of the Fittest It has been several years since the New Zealand Inland Revenue Department (IRD) unveiled its risk-based approach to audits. As expected, there has been a shift in attitude and behavior by IRD auditors. To date, we have witnessed: Risk analysis questionnaires being issued to large corporate taxpayers; Real time audits being conducted on larger corporate taxpayers; Unyielding positions adopted in relation to tax avoidance schemes; and Targeted audits, specifically in relation to property investors, property-owning loss attributing qualifying companies, high wealth individuals and certain hybrid instruments. These activities all assist the IRD in obtaining intelligence on tax risks and ensuring that resources are appropriately committed to areas of high risk. So, although not every taxpayer will be equally at risk of an audit, all taxpayers should be prepared in the event of one. When faced with an audit, following some simple rules can help to ensure that the audit runs smoothly. How smoothly and cost efficiently will, to a large degree, be dictated by how the taxpayer manages the situation and the IRD team conducting the audit. Taxpayers need to consider their strategy at the outset and plan an approach. Overall, a cooperative approach generally works well but a more adversarial approach may be warranted on occasion. Some issues to consider include: World Tax Advisor 1 of 8 Copyright 2008, Deloitte Touche Tohmatsu.

2 The timing of the audit and which personnel will deal with the auditors; The provision of information to the auditors that needs to be carefully managed: taxpayers need to understand what information the IRD can legally request, relevant time frames and what rights a taxpayer has not to disclose information under either legal privilege or the non-disclosure rules; and Whether or not a voluntary disclosure should be made of any issues of which the taxpayer becomes aware after the tax return is filed. Any penalty arising is reduced by 40% for voluntary disclosures of tax shortfalls made post-notification of an audit. It should be noted, however, that to encourage taxpayers to come forward sooner, recent law changes now mean that shortfall penalties are reduced by 100% in some cases where voluntary disclosure is made prior to notification of an audit. Open dialogue from the IRD on potential issues identified during the fieldwork and the auditor s technical competence are significant factors that affect whether the process runs smoothly. While the IRD is committed to addressing concerns through the referral of complex technical issues to experts within the IRD and constantly reviewing procedures that focus on high levels of communication by the investigators, there is still some work to be done on this front. It goes without saying that the best defense to an IRD audit is to put measures in place to manage tax risk well before an audit is initiated. In readiness for any IRD activity, the following strategies should be considered: Document tax risk management policies, and more importantly, ensure that these policies are implemented and that best practice is followed; Ensure that an acceptable interpretation position is taken for all tax filing positions adopted; Obtain certainty from the IRD as to how the tax law will apply to proposed transactions (consider obtaining a binding ruling); and Manage risk by ensuring tax returns are timely filed and correct. The IRD regularly publishes common audit errors identified from audits. Implementation of some (or all) of these strategies should place taxpayers in a strong position to respond to any IRD audit activity and this is the best survival tip. Vina Hira (Hamilton) Deloitte New Zealand +64 (07) vhira@deloitte.co.nz Argentina: Court Issues Broad Ruling on Concept of Source The Argentine Federal Court of Appeals recently issued a decision in which it significantly expanded the concept of Argentine-source income where payments are made to foreign beneficiaries. The case involved payments made by Aerolíneas Argentinas SA, an Argentine taxpayer, to a Spanish service provider (Amadeus) for access to a foreign database and for booking and reserving airline, hotel and car rental services that were performed outside Argentina. To access the system, the airline signed two agreements, according to which, inter alia, the reservations system administrator would provide software to Aerolíneas Argentinas SA to enable it to access the system. The tax authorities took the position that the total payment made for processing reservations should be classified as a payment for the use of software and, therefore, subject to withholding tax World Tax Advisor 2 of 8 Copyright 2008, Deloitte Touche Tohmatsu.

3 under article 12 (royalties or fees) of the Argentina-Spain tax treaty. On appeal, the tax court reached the same conclusion but on the grounds that the services constituted technical assistance and were subject to withholding tax under article 12. According to section 5 of the Income Tax Law (ITL), Argentine-source income is deemed to include income arising from assets situated, placed or made available for economic use in the Argentine Republic, from the performance in the Argentine territory of any act or activity liable to produce benefits, or acts or events that take place within the Argentine border [emphasis added]. Section 12 of the ITL provides that fees or other remuneration paid for technical, financial or other types of advice carried out abroad will be considered Argentine-source income if provided for the benefit of an Argentine resident. If Argentine-source income is deemed to exist, the paying party (i.e. the Argentine company) is required to withhold tax. Based on these rules, services rendered abroad that do not include any type of advice previously were not considered Argentine-source income and, therefore, not subject to withholding tax. Decision of Federal Appeals Court The Federal Appeals Court concluded that the payments made by Aerolíneas Argentinas SA to Amadeus constituted Argentine-source income subject to withholding tax simply because they were economically used in Argentina. The Appeals Court did not consider whether there was a local use of software or whether the services involved technical assistance. In its decision, the Appeals Court introduced a new interpretation of the concept of source for services the economic use concept, which will give rise to Argentine-source income when payments are made to a foreign beneficiary for services rendered abroad and the services are economically used in Argentina. Before this decision, and according to article 5 of the ITL, the economic use test applied only to income arising from assets, not services. Finally, the Appeals Court did not comment on the application of article 7 (business profits) of the Argentina-Spain tax treaty. It is worth noting that Argentina is a civil law system under which previous court decisions may be used as guidance, but are not binding precedent. Moreover, another division of the Argentine tax court reached the opposite conclusion in a similar case (Austral Lineas Aereas) in 2007; the court held that payments for services rendered abroad that did not involve the use of software should not be classified as Argentine-source income. The taxpayer in the Aerolíneas Argentinas SA case has appealed the decision to the Supreme Court. Daniel Caracciolo (Buenos Aires) Deloitte Argentina +54 (11) dcaracciolo@deloitte.com Christian Fucinos (Buenos Aires) Director Deloitte Argentina +54 (11) cfucinos@deloitte.com Austria: Gift Notification Act Enters into Effect Effective 1 August 2008, the Gift Notification Act (2008) replaced the Austrian inheritance and gift tax, which was declared unconstitutional in The act imposes new reporting requirements on gifts and introduces special rules for private foundations. The reporting requirement arises where a gift between related persons has a fair market value exceeding EUR 50,000 within one year. A gift between unrelated persons is subject to the reporting requirement if the fair market value of the gift exceeds EUR 15,000 within five years. Transfers of World Tax Advisor 3 of 8 Copyright 2008, Deloitte Touche Tohmatsu.

4 cash, securities, shares, tangible and intangible assets and shares in partnerships are all subject to the reporting requirement. A contribution to an Austrian private foundation or to a comparable foreign foundation or trust is subject to a foundation entrance tax. The tax is triggered where a settlor maintains a residence or habitual place of abode in Austria, or if the recipient foundation is domiciled or has its place of management in Austria. The basic rate of the entrance tax is 2.5% of the value of the contribution, although the rate increases to 25% in the following situations: The recipient is a foreign foundation or trust that is not comparable to a private foundation established under Austrian private foundation law; The foundation (domestic or foreign) has not properly disclosed its statutes and bylaws to the tax authorities; or The country where the foreign foundation or trust is resident has not entered into an extensive administrative enforcement agreement with Austria. Donations of Austrian real estate are taxed at a rate of 3.5%. Where an Austrian private foundation or a foreign foundation/trust that is comparable to an Austrian private foundation distributes profits to beneficiaries who are subject to unlimited tax liability in Austria, tax must be withheld at a rate of 25%. Where a private foundation/trust distributes assets (that have been contributed to the foundation/trust) after 31 July 2008, the distribution is tax exempt if the distribution exceeds the net profits (including retained earnings and hidden reserves). Assets contributed to the foundation must be recorded in a specific account. A distribution of assets to a settlor when a private foundation is revoked is taxed in the same way as a distribution to beneficiaries. A settlor who contributed assets before 1 August 2008 may reduce the tax base of the assets to the value at the time the assets were donated to the foundation. A settlor can reduce its tax base on asset contributions made after 31 July 2008 to the current balance of the specific account. Erwin Holzer (Vienna) Deloitte Austria +43 (1) eholzer@deloitte.at Gabriele Holzinger (Vienna) Director Deloitte Austria +43 (1) gholzinger@deloitte.at Czech Republic: Changes to Thin Cap Rules on Horizon The Czech Republic Parliament is discussing proposed changes to the thin capitalization rules. Under the proposal, the thin capitalization rules would apply only to related party loans and borrowings and the current (complicated) guidance which brings all loans and borrowings within the scope of the rules would be abolished. The debt-to-equity ratio would remain 2:1 for nonbanking entities but the cap on the deduction of financing expenses (set at a single interest rate increased by four percentage points) would be eliminated. Financing expenses related to profitparticipating loans, as well as financing expenses arising from subordinated debt, would be nondeductible. Loans secured by a related party would continue to be considered related party loans and subject to the thin capitalization rules. Transition rules would make the changes applicable to tax periods beginning in 2008, thus putting taxpayers in a difficult situation since the proposed amendments likely will not be approved until the end of This situation requires monitoring and comprehensive planning, specifically where World Tax Advisor 4 of 8 Copyright 2008, Deloitte Touche Tohmatsu.

5 the company records nondeductible financing expenses arising from loans and borrowings provided by unrelated entities. Miroslav Svoboda (Prague) Deloitte Czech Republic France: Supreme Court Resolves Controversy Regarding Registration Duty on Share Capital Redemptions The French Supreme Court issued a decision on 23 September 2008 concluding that the redemption of share capital does not constitute a division for tax purposes and, therefore, does not give rise to the 1.1% registration duty. The Court s decision puts an end to a long-standing debate between the tax authorities and companies regarding the applicability of the registration duty on share capital redemptions. Under French domestic law, a division (e.g. estate distribution, division of joint estate, etc.) generally gives rise to the 1.1% duty assessed on the net value of the assets concerned. In the case of companies, the duty clearly is applicable when the company is liquidated. There has been a dispute, however, as to the applicability of the duty where assets are allocated to the shareholders during the company s life through a redemption of share capital. (It is worth noting that a different tax regime applies to a company that purchases and subsequently cancels its own shares.) For more than 10 years, the French tax authorities have taken the position (despite some court decisions to the contrary) that the redemption of a company s share capital resulting in the allocation to the shareholders of certain company assets (including cash) constitutes a partial division that triggers the application of the 1.1% registration duty. Since there is no specific definition of a division for tax purposes, practitioners traditionally referred to the civil law definition, under which a division can arise only where there is an allocation by reason of a liquidation (i.e. once the legal entity has disappeared and its assets are jointly held by the shareholders). In its decision, the French Supreme Court noted that, under the Civil Code, the 1.1% registration duty is applicable only to allocations taking place on the date of the liquidation. In this case, the shareholders did not intend to liquidate the company and the Court found that the legal personality of the company continued after the redemption of its share capital. The Court also emphasized that such a redemption gives rise to company-issued debt to the shareholders (as opposed to debt between shareholders). As a result, the 1.1% duty was not due. Companies may now examine whether reimbursement by the French Treasury for tax unduly paid in the past can be sought (subject to the applicable statute of limitations). Such claims may be filed without waiting for the French tax authorities comments on the decision. Marie-Pierre Hôo (Paris) Director Taj +33 (1) mhoo@taj.fr Ambroise Bricet (Paris) Taj +33 (1) abricet@taj.fr World Tax Advisor 5 of 8 Copyright 2008, Deloitte Touche Tohmatsu.

6 Romain Grau (Paris) Manager Taj +33 (1) Greece: Changes to Dividend Withholding Tax and Corporate Income Tax Introduced A new tax law published in the Greek government gazette on 25 September 2008 introduces a 10% withholding tax on dividends distributed by Greek companies as well as dividends received by Greek resident individuals from foreign companies. Currently, dividends distributed by Greek companies are exempt and foreign dividends are taxed at the standard personal income tax rates. The new law also provides for a reduction of the corporate income tax rate. The 10% tax must be withheld on distributions by a Greek company (Societe Anonyme) unless the dividend qualifies for application of the EC Parent-Subsidiary Directive (i.e. the recipient of the dividend holds at least 10% of the payor (as from 1 January 2009) for at least two years). The withholding tax is applicable to all dividends approved for distribution by the general assembly of a company after 1 January Greek tax resident individuals receiving dividends from Greek or foreign companies will be subject to a 10% final withholding tax on dividends received after 1 January The new tax law also includes a gradual reduction of the 25% corporate income tax rate beginning in 2010, as follows: 24% in 2010, 23% in 2011, 22% in 2012, 21% in 2013 and 20% in The Ministry of Finance is expected to issue clarifications and guidance on the new provisions in the near future. Ioannis Tentes (Athens) Deloitte Greece +30 (210) itentes@deloitte.gr Konstantinos G. Roumpis (Athens) Senior Consultant Deloitte Greece +30 (210) kroumpis@deloitte.gr South Africa: Dividend Withholding Tax to be Introduced A draft bill was presented in August 2008 that sets out the fundamentals of the new dividend withholding tax that will replace the Secondary Tax on Companies (STC). In 2007, it was announced that South Africa would convert the STC regime to a dividend withholding tax. The estimated date of implementation of the new dividend tax is late 2009, subject to ratification of a number of tax treaties. Unlike most countries, which tax dividends at the shareholder level, the STC is a tax that is levied on a company declaring a dividend. The replacement of the STC with a dividend withholding tax is intended to align the taxation of dividends in South Africa with international practice. The new dividend tax will be levied at a rate of 10% on dividends paid by South African resident companies. The recipient of a dividend will be liable for the tax, which will be collected via a World Tax Advisor 6 of 8 Copyright 2008, Deloitte Touche Tohmatsu.

7 withholding obligation imposed on the dividend-paying company. In certain instances, the withholding obligation will be passed on to an intermediary, such as a nominee. Certain beneficial owners will be exempt from the dividend tax, including South African resident companies, the South African government and certain tax-exempt institutions. It has been decided that the STC credits will be maintained for a period of five years after implementation of the new dividend tax regime. As a result, companies with available STC credits may set these credits off against dividends declared and apply the 10% withholding tax to the balance remaining after set off. Issues that are not addressed in the draft bill include the taxation of foreign dividends and deemed dividends and the implementation of anti-avoidance measures these issues will be addressed in subsequent bills to be issued in Anne Bennett (Johannesburg) Director Deloitte South Africa +27 (0) anbennett@deloitte.co.za Are You Getting Your Global Tax Alerts? Throughout the week, Deloitte provides commentary and analysis on developments affecting crossborder transactions on a free subscription basis delivered straight to your . Read the recent alerts below or visit the archive. Subscribe: Archives: Luxembourg Draft Bill Would Eliminate Withholding Tax on Dividends A draft bill introduced into Parliament includes a proposal to abolish withholding tax on dividends paid to recipients resident in countries that have concluded a tax treaty with Luxembourg. [Issued: 1 October 2008] URL: URL: Netherlands Mutual Agreement Decree Issued and Revised Arbitration Article Included in New Treaty with U.K. The State Secretary of Finance has signed the country s first Mutual Agreement Decree and the Netherlands has signed a new tax treaty with the U.K., which contains a mandatory arbitration provision. [Issued: 1 October 2008] URL: URL: OECD OECD Issues Discussion Draft on Transfer Pricing Aspects of Business Restructurings The OECD issued a discussion draft on the transfer pricing aspects of business restructurings which evolved from the work of the Joint Working Group on Business Restructurings. [Issued: 22 September 2008] URL: World Tax Advisor 7 of 8 Copyright 2008, Deloitte Touche Tohmatsu.

8 Talk to Us If you have questions or comments about the content of World Tax Advisor, contact one of the tax professionals at a Deloitte Touche Tohmatsu office in your area or: Susan Lyons, Director Washington International Tax Services Deloitte Tax LLP +1 (202) slyons@deloitte.com - or - Connie Angle Washington International Tax Services Deloitte Tax LLP +1 (734) cangle@deloitte.com World Tax Advisor is a bulletin of international tax developments prepared by professionals in the member firms of Deloitte Touche Tohmatsu. These materials and the information contained herein are provided by Deloitte Touche Tohmatsu and are intended to provide general information on a particular subject or subjects and are not an exhaustive treatment of such subject(s). Accordingly, the information in these materials is not intended to constitute accounting, tax, legal, investment, consulting, or other professional advice or services. The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser. These materials and the information contained therein are provided as is, and Deloitte Touche Tohmatsu makes no express or implied representations or warranties regarding these materials or the information contained therein. Without limiting the foregoing, Deloitte Touche Tohmatsu does not warrant that the materials or information contained therein will be error-free or will meet any particular criteria of performance or quality. Deloitte Touche Tohmatsu expressly disclaims all implied warranties, including, without limitation, warranties of merchantability, title, fitness for a particular purpose, noninfringement, compatibility, security, and accuracy. Your use of these materials and information contained therein is at your own risk, and you assume full responsibility and risk of loss resulting from the use thereof. Deloitte Touche Tohmatsu will not be liable for any special, indirect, incidental, consequential, or punitive damages or any other damages whatsoever, whether in an action of contract, statute, tort (including, without limitation, negligence), or otherwise, relating to the use of these materials or the information contained therein. If any of the foregoing is not fully enforceable for any reason, the remainder shall nonetheless continue to apply. Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, 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 Touche Tohmatsu and its member firms. World Tax Advisor 8 of 8 Copyright 2008, Deloitte Touche Tohmatsu.