Recap of tax developments in Japan for 2011

Transcription

1 International Tax World Tax Advisor 2 December 2011 In this issue: Recap of tax developments in Japan for European Union: EC proposes amendments to IRD, publishes communication on double taxation/non-taxation... 3 Germany: Court rules income from U.K.-based private equity fund exempt from German taxation... 5 India: AAR grants capital gains tax exemption under Mauritius tax treaty... 7 Indonesia: New measures announced to enhance tax collection... 9 Libya: Tax filing deadlines extended Netherlands: Second Chamber passes interest limitation on certain debt-funded acquisitions Peru: Regulations issued on new tax rules on financial derivatives Are You Getting Your Global Tax Alerts? Recap of tax developments in Japan for was a roller-coaster ride for Japan. Taxpayers optimistically began the year with high hopes for an approximately 5% drop in Japan s effective corporate income tax rate from the current rate of approximately 41%, among the highest in the world. However, a catastrophic earthquake and a tsunami derailed the first tax reform bill and forced the government to shelve the proposed tax cut for further consideration. Japan s national Diet enacted on 22 June 2011 a pared down 2011 tax reform law that included tax incentives for special zones, research and development and regional headquarters, as well as amendments to the transfer pricing and consumption tax rules. The government later veered toward proposed temporary tax increases to fund earthquake-related reconstruction, including a 10% temporary corporate surtax. On the international front, Japan s tax agreements with Hong Kong and Saudi Arabia entered into force. Looking ahead, a consumption tax increase may be on the horizon. Taxpayers eagerly await the entry into effect of an attractive new tax treaty with the Netherlands and a treaty protocol with Switzerland. For U.S. and Japanese multinationals, the highlight of the year was the start of U.S.-Japan treaty negotiations. Domestic tax changes Struggling to recover from severe conditions triggered by the global financial crisis, the earthquake and tsunami, and a strong yen, Japan is rolling out the red carpet for foreign investors in a bid to jumpstart its economy. The 2011 tax reform law provides new tax incentives to encourage investment in special zones for internationally strategic business activities. A designated corporation that acquires machinery, equipment or other assets for an approved business in a special zone and satisfies the prescribed conditions can claim special initial depreciation of 50% (25% in the case of buildings, fixtures and structures) or a special tax credit of 15% (8% in the case of buildings, fixtures and structures) up to a limit of 20% of the amount of its corporation tax for that fiscal year. Alternatively, a designated corporation that conducts an approved business in a special zone can deduct 20% of the income attributable to that business for five fiscal years. The 2011 tax World Tax Advisor Page 1 of 13 Copyright 2011, Deloitte Global Services Limited.

2 reform law also offers a tax incentive for multinational companies to set up an R&D center or a regional headquarters in Japan, in the form of a deduction of 20% of the income attributable to approved business activities for five fiscal years. A corporation that files a blue return may qualify for a job creation tax credit of JPY 200,000 per additional employee that it hires, subject to a limit of 10% of its corporate tax liability (20% in the case of a small or medium-size enterprise). A bluereturn corporation may also be able to claim 30% special depreciation (or a 7% tax credit in the case of a small or mediumsize enterprise) if it acquires machinery or equipment that promotes energy efficiency. Consistent with amendments to the OECD transfer pricing guidelines, the government abolished the priority of the three basic transfer pricing methods and now allows a taxpayer to use the most appropriate method. The government also clarified, or will clarify, the use of variations of the profit split method, arm s length ranges, and secret comparables and included provisions on arbitration procedures in line with recently concluded tax treaties, such as the new Japan- Netherlands tax treaty. The government introduced an important exception to the general two-year consumption tax holiday. An individual or a company whose taxable sales in the first half of the preceding taxable period are more than JPY 10 million will become a consumption taxpayer effective from fiscal periods starting on or after 1 January Enterprises whose taxable sales are more than JPY 500 million will no longer be able to rely on the 95% taxable sales ratio exception. Other changes include easier tax-deferred conversions of Japanese branches of foreign corporations to subsidiaries; expanded exemptions for some financial transactions, including Shariah-compliant equity-type bonds; amendments to, or clarification of, the rules regarding real estate investment trusts, tokutei mokuteki kaisha, foreign tax credits and controlled foreign corporations; and extensions of special R&D tax credits and the 18% corporation tax rate and other special provisions for small and medium-size enterprises. On November 30, the national Diet passed two tax bills, which, at the time of writing, had not yet been promulgated as law in the official gazette. One includes the original proposed permanent reduction of Japan s effective corporate income tax rate by approximately 5%, which was not enacted on 22 June. The other includes a temporary 10% corporate surtax and a 4% income surtax to help pay for earthquake-related reconstruction. Thus, there would be a reduction of the effective corporate income tax rate in two phases: first by approximately 2.7% points for three years and another 2.3% points thereafter, from the current approximately 41% to approximately 36%. Under another new rule, only 80% of a company s taxable income for a fiscal year could be offset by net operating losses (NOLs). In other words, at least 20% of the taxable income for a fiscal year would be subject to corporate tax, even if a company has NOL carryforwards greater than its taxable income for the fiscal year. The new rule would apply to fiscal years starting on or after 1 April A small or medium-sized company would be exempt from the new NOL restrictions (a small or medium-sized company is a company whose share capital is JPY 100 million or less and that is not wholly owned by one or more companies whose share capital is JPY 500 million or more). The impact on deferred tax assets/liabilities with respect to Japanese operations would need to be considered in light of the reduced tax rates and the changes to the NOL rules. Tax treaties Japan s double taxation agreement with Hong Kong, which entered into force on 14 August 2011, limits withholding tax rates for dividends (5% or 10%), interest (0% or 10%) and royalties (5%) paid to qualifying residents and is Japan s second tax agreement (after the new treaty with the Netherlands) to include a mandatory binding arbitration procedure. Unlike Japan s tax treaty with the U.S. and the pending new tax agreements with the Netherlands and Switzerland, the Hong Kong treaty does not provide zero withholding tax rates for dividends and royalties. However, Hong Kong may become a popular Asian gateway for investments into Japan because the treaty is one of Japan s most favorable tax agreements in Asia, Hong Kong has a low-tax pure territorial tax system, and many multinationals already have substantial business operations in Hong Kong. Japan s tax treaty with Saudi Arabia and tax information exchange agreements (TIEA) with the Bahamas and the Isle of Man also entered into force. Japan signed a TIEA with the Cayman Islands and reached agreements in principle for TIEAs with Guernsey and Jersey. It signed the 1988 OECD-Council of Europe Convention on Mutual Administrative Assistance in Tax Matters and the 2010 protocol, which provide for the mutual exchange of tax information and assistance in the recovery of taxes and the service of documents. World Tax Advisor Page 2 of 13 Copyright 2011, Deloitte Global Services Limited.

3 A peek into the crystal ball Japan s 5% consumption tax rate is one of the lowest value added tax rates in the OECD, but the OECD and the IMF have recommended that Japan raise its consumption tax rate to pay off its large national debt. A future consumption tax increase may be inevitable, given Japan s aging population. Taxpayers are looking forward to the entry into effect of Japan s new tax treaty with the Netherlands and the tax treaty protocol with Switzerland in Both tax agreements include zero withholding tax rates for dividends and royalties and a general tax exemption for any capital gain realized on a sale of shares in a non- real property rich company, if the prescribed conditions (such as residency, anti-conduit, and limitation on benefits provisions) are satisfied. The new treaty with the Netherlands will eliminate the current tax exemptions for any capital gain realized on a sale of shares in a real property rich company and for tokumei kumiai distributions, which have made the Netherlands a popular jurisdiction for holding investments in Japanese real property. The U.S. and Japanese governments began the first formal round of negotiations of amendments to the U.S.-Japan income tax treaty on 8 June in Washington. The goal is to bring the existing tax treaty into closer conformity with the current tax treaty policies of the U.S. and Japan. Although the agenda was not disclosed to the public, recent Japanese and U.S. tax treaties suggest that it may include a lower threshold for a zero dividend withholding tax rate, a new zero interest withholding tax rate, a mandatory binding arbitration procedure and exchange of information provisions consistent with the internationally agreed tax standard. U.S. respondents to the National Foreign Trade Council s 2011 survey also 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), the LOB provision for withholding tax (respondents wanted to be able to satisfy the treaty conditions in one year, instead of the preceding three years), and the inability of the mutual agreement process and competent authority to resolve issues of double taxation. The negotiations have important implications for both countries because 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 Linda Ng (New York) Director Deloitte Tax LLP ling@deloitte.com European Union: EC proposes amendments to IRD, publishes communication on double taxation/nontaxation On 11 November 2011, the European Commission proposed a directive to amend the EU Interest and Royalties Directive (IRD) to bring it more in line with the Parent-Subsidiary Directive (PSD), tabled a comprehensive overview and proposed solutions to the issues relating to double taxation and announced that it will launch a consultation on double non-taxation within the EU. Amendments to IRD The IRD, which came into effect in 2004, generally eliminates source country taxation of interest and royalty payments made between associated companies (as well as permanent establishments of associated companies) of different EU Member States. To obtain benefits under the IRD (i.e. an exemption from tax), both the claimant and the payer must be 25% associated companies. That is, one of the companies must hold directly 25% or more of the capital or voting rights of the other company or a third company must hold directly 25% or more of the capital or voting rights of each of them. The main changes to the IRD are as follows: World Tax Advisor Page 3 of 13 Copyright 2011, Deloitte Global Services Limited.

4 Expanding the scope to include most legal entities qualifying for application of the PSD, i.e. most entities under the domestic laws of the Member States, as well as the Societas Europaea (SE) and the Societas Cooperativa Europaea (SCE). The Annex to the IRD lists the types of company to which the IRD may apply and currently refers primarily to public limited companies and private limited companies established under the laws of the Member States (companies incorporated outside the EU are excluded). Reducing the participation requirement from 25% to 10% and abolishing the requirement that the shareholding be held directly. Currently, only payments between directly held shareholdings or companies with a common direct parent fall within the scope of the IRD; under the amended directive, all qualifying intra-group payments of interest and royalties will benefit from the exemption provided there is an indirect chain of ownership of no less than 10%. No additional reservations have been made regarding the residence of the intermediary companies so that intermediate companies resident in third countries also may be part of the ownership chain. Updating the transitional rules (that allow certain Member States to continue to impose a withholding tax for a specified period) to take into account the fact that the transition periods for some countries have expired. Because the changes to the IRD are merely technical amendments, Member States will have to implement the new directive into their domestic legislation by 1 January 2012 (and therefore it will apply as from that date). Communication on avoidance of double taxation and double non-taxation In its communication on preventing double taxation in the internal market, the Commission noted that unrelieved double taxation in a cross-border context impedes the functioning of the internal market, increases the overall tax burden and can have a detrimental impact on capital investments. However, the Commission noted that the four economic freedoms of EU law (i.e. free movement of capital, people, goods and services) do not preclude the existence of double taxation where the double taxation is the result of parallel tax sovereignty (i.e. where Member States exercise their rights to impose taxation in areas in which no EU harmonization has taken place), with the result that double taxation arises (a disparity ). Double taxation can impede the ability of residents of a Member State from exercising their EU freedoms, and three recent public consultations on general double taxation, on double taxation regarding inheritance taxes and on the IRD have addressed this issue. The European Commission has concluded that the only way to prevent disparities is by harmonizing the tax laws of the Member States, and it recommends the following solutions: Strengthen existing measures, e.g. by broadening the scope of the IRD to eliminate any remaining cases of double taxation; Broaden the coverage and scope of tax treaties, e.g. by providing assistance to ensure that all Member States have concluded tax treaties with each other. The Commission also wants to examine triangular situations and the treatment of EU resident entities that are not covered by tax treaties. The main focus would be on expanding the inheritance tax treaty network and eliminating any obstacles; Ensure more consistent interpretation and application of tax treaties. Because double taxation can arise from differences in the interpretation of treaty provisions, the Commission recommends that the EU develop methods to ensure more consistent interpretation (with reference made to the Commentaries to the OECD and UN model treaties). The Commission also proposes the introduction of a Code of Conduct on double taxation; and Ease and accelerate the settlement of tax disputes. The mutual agreement procedure (MAP) often takes more than two years to complete and does not guarantee the resolution of a dispute. Despite the length of time involved, the Commission has taken the position that a MAP should at least be speedy, so it is recommending the binding resolution procedure found in the latest version of article 25 of the OECD model treaty. More specifically, the Commission intends to: Present possible solutions to tackle cross-border inheritance tax obstacles within the EU as soon as possible (without referring to the specific form of the solution); Present possible solutions to the issue of cross-border double taxation of dividends paid to portfolio investors in 2012; Continue to make use of the recently renewed joint transfer pricing forum to address double taxation issues; Work on developing the options set out above; and World Tax Advisor Page 4 of 13 Copyright 2011, Deloitte Global Services Limited.

5 Launch a fact-finding consultation to determine the extent of double taxation and use the results of this consultation to develop an appropriate policy response. Interested stakeholders are invited to express their views and recommendations to the Commission. Avoidance of double non-taxation resulting from profit participating loans and hybrid entities The Commission also announced it will launch a public consultation on situations of double non-taxation. The Commission wants to conduct an in-depth examination of this issue, which causes a considerable loss of revenue, and develop, during the course of 2012, appropriate and effective measures to prevent double non-taxation. The EU Code of Conduct Group has reached a broad (but not unanimous) consensus that the issue of profit participating loans and hybrid entities creates inefficiencies in the internal market. The group has asked the Commission to come up with a legislative proposal in 2012 to address this issue. The Commission has announced a public consultation on situations of double non-taxation as a first step. This development is closely linked with the discussion on harmful tax planning. It is the position of the EU Tax Commissioner and many members of the European Parliament that aggressive tax planning may not be illegal, but it is undesirable in the current socio-economic climate. While the influence of the European Parliament and the members of the Economic and Monetary Affairs Committee is indirect, it has increased since the Lisbon Treaty came into force in December The public consultation will be launched in the coming months and will provide a basis for the Commission to determine how to formulate proposals to counter double non-taxation in the EU. Hans van den Hurk (Eindhoven) Deloitte Netherlands HvandenHurk@deloitte.nl Jasper Korving (Eindhoven) Manager Deloitte Netherlands Jkorving@deloitte.nl Germany: Court rules income from U.K.-based private equity fund exempt from German taxation The Federal Tax Court (BFH) recently ruled that income derived by German tax resident investors in a U.K.-based private equity fund is exempt from German taxation. The decision is likely to have a significant impact on the taxation of German investors in domestic and foreign private equity funds, as well as on the taxation of German-source income received by nonresident investors via private equity funds. In its decision, the BFH commented on the criteria to distinguish between business partnerships and asset management partnerships and, for the first time, expressed doubts that the criteria applied by the German tax authorities are correct. Background of the case The case involved two German tax resident limited liability companies (GmbHs) that were amongst other institutional investors limited partners of a U.K.-based private equity fund in the legal form of a limited liability partnership (E-LP). E-LP owned shares in several portfolio companies that it held on average for about four years. E-LP did not have its own office premises in the U.K.; instead, it concluded a management agreement with EV-Ltd., which belonged to the same group as the general partner of E-LP and which had office premises and personnel in the U.K. The directors of the general partner of E-LP were also directors and non-executive directors of EV-Ltd. EV-Ltd. or its directors, respectively, obtained the necessary permission to arrange financial transactions for E-LP. The GmbHs did not file U.K. tax returns because the U.K. does not levy tax on the income of investors in a U.K. private equity fund. However, the GmbHs claimed in their German tax returns that the income derived from the participation in E- LP is tax exempt in Germany because it is allocable to a U.K. permanent establishment (PE) and, therefore, the U.K. would have the exclusive right to tax the PE income under the Germany-U.K. tax treaty. World Tax Advisor Page 5 of 13 Copyright 2011, Deloitte Global Services Limited.

6 BFH decision The BFH agreed with the GmbHs, concluding that the income from the participation in E-LP is business income that is allocable to a U.K. PE and, therefore, tax exempt in Germany under the treaty. The BFH held that the acquisition, management and disposal of the portfolio companies by E-LP qualified as own business activities, and that the activities exceeded what would be considered a pure asset management function; in particular, the length of time of the holdings (i.e. four years) and the leverage at the fund level supported the conclusion that E-LP traded the shares in the portfolio companies. In addition, E-LP used the premises, personnel and regulatory authority of EV-Ltd. According to the BFH, the business activities of E-LP are allocable to a U.K. PE, the results of which are attributed pro rata to the limited partners of E-LP. The BFH attributed the office premises of the management company to E-LP and, therefore, to the investors. Hence, it is not necessary for the fund itself to be the owner or lessee of the office premises to create a PE. The BFH also made it clear that a German domestic treaty override rule, which seeks to allow German taxation where income is exempt under a treaty but is not taxed in the other contracting state, does not affect the U.K. s exclusive right of taxation with respect to any income deriving from a U.K. PE, even if the income will not be taxed in either state. The scope of the treaty override rule is limited to situations in which the contracting states have different interpretations of the provisions of the treaty. As a result, Germany will not be able to claim taxation rights if the non-taxation of income is based on a unilateral measure. Potential impact for private equity funds In addition to clarifying the international taxation issues, the BFH decision is important because, for the first time, the court has commented on the criteria for classifying a private equity fund as either a business fund or an asset management fund for German tax purposes. This classification is significant for German-based private equity funds since business partnerships are subject to the German municipal trade tax, and certain investor groups may be subject to tax disadvantages when investing in business partnerships. In a decree issued in 2004, the German tax authorities set out the criteria for qualifying as a pure asset management fund: No leverage at the fund level; No comprehensive organization needed at the fund level to manage the portfolio companies; No use of a market and no use of own professional experience; No offerings of the portfolio companies to a broader public; No short-term holding of the portfolio companies; No reinvestment of the proceeds from the disposal of portfolio companies; and No active involvement in the (day-to-day) management of the portfolio companies. The BFH has taken the position that the typical business model of a private equity fund is not pure asset management ( buy and hold ), but rather the realization of capital gains from the disposal of portfolio companies ( buy to sell ). Without providing any further explanation, the BFH analogized the tax treatment of private equity funds to that of aircraft leasing funds, which are regarded as business partnerships by both the German tax authorities and the BFH. Hence, it is likely that the BFH will classify as business funds private equity funds that, under the criteria developed by the German tax authorities in the past, would qualify as asset management funds. If, in future, private equity funds would be treated as business partnerships simply on the basis of their business model (which represents a deviation from the current practice of the German tax authorities), German trade tax would apply at the level of the fund if the fund is deemed to have a PE in Germany. This may have detrimental tax consequences for German tax-exempt investors, private individual investors and nonresident investors of domestic private equity funds. Foreign private equity funds should be examined to determine whether they create a PE in Germany, the results of which would be attributed to their investors, especially where the investors have entered into management agreements with German resident entities. Market participants will have to await the reaction of the German tax authorities, as the view taken by the BFH contradicts the position of the tax authorities in decrees that are still in effect. Although there is no need for immediate action to World Tax Advisor Page 6 of 13 Copyright 2011, Deloitte Global Services Limited.

7 restructure existing fund structures, they should be reviewed to analyze the potential impact resulting from a potential requalification for the funds and their investors. Christoph Roeper (Duesseldorf) Deloitte Germany croeper@deloitte.de Marcus Roth (Munich) Deloitte Germany mroth@deloitte.de India: AAR grants capital gains tax exemption under Mauritius tax treaty India s Authority for Advance Rulings (AAR) ruled on 14 November 2011 that the capital gains tax exemption under the India-Mauritius tax treaty cannot be denied to Mauritius companies (Ardex Investments Mauritius Ltd). Relying on case law of the Indian Supreme Court and guidance issued by the Central Board of Direct Taxes (CBDT), the AAR reaffirmed that a Mauritius company can claim treaty benefits on the basis of a valid tax residence certificate. Background Article 13(4) of the treaty provides that capital gains derived by an entity are taxable only in the state in which the recipient is resident. Thus, gains derived by a Mauritius company from the sale of shares in an Indian company are not taxable in India under the treaty. Such gains are not taxable in Mauritius either because Mauritius does not tax capital gains under its domestic law. Many investors in India have relied on the treaty provision in conjunction with the Mauritius exemption from capital gains tax, and these claims have given rise to controversies and debate amidst various pronouncements in India. The Indian tax authorities have raised several challenges to exemption claims by Mauritius companies, resulting in the denial of treaty benefits on the grounds that the companies were not the beneficial owners of the shares and, therefore, not entitled to the exemption. Guidance issued by the CBDT in 2000 (Circular 789) provides that a certificate of residence issued by the Mauritius authorities to a Mauritius company is sufficient for the company to prove beneficial ownership. The circular instructs the Indian tax authorities to accept certificates of residence and reiterates that companies incorporated in Mauritius are liable to tax under the laws of Mauritius and, therefore, are deemed to be residents of Mauritius for purposes of claiming treaty benefits. Accordingly, such companies would not be taxable in India on capital gains arising in India on the sale of shares under the treaty. Circular 789 was challenged on the grounds that it exceeded the scope of the CBDT s authority, but in a decision issued in 2003 in the case of Azadi Bachao Andolan, the Indian Supreme Court upheld the validity of Circular 789 and confirmed that residents of Mauritius would not be liable to capital gains tax in India. The Supreme Court also stated that, in the absence of a limitation-on-benefits provision, an attempt by a resident of a third country to take advantage of the provisions of the treaty is not illegal. Facts of the case Ardex Investments Mauritius Limited (Applicant), a Mauritius company, proposed to sell its shares in an Indian company to another nonresident group company, Ardex Germany. The Applicant sought a ruling from the AAR on the tax treatment of the proposed sale under the capital gains provision of the India-Mauritius tax treaty. The Applicant took the position that gains would not be liable to capital gains tax based on Circular 789 (i.e. the tax residence certificate issued by the Mauritius tax authorities was sufficient to claim treaty benefits with India), as well as on the Supreme Court decision in Azadi Bachao Andolan and the 2010 ruling of the AAR in E*Trade Mauritius Limited (in which the AAR also granted the capital gains tax exemption). The Indian tax authorities, however, argued that the Applicant was a wholly owned subsidiary of Ardex UK Limited, a U.K. company that actually funded the Applicant s purchases of the Indian company s shares. The Mauritius company was merely a shell company with no revenue whose sole purpose was to hold the shares of the Indian company on behalf of the U.K. parent company. The Mauritius company would undertake the proposed transfer on the instructions of the U.K. parent company. The Indian tax authorities were of the view that the Applicant was established as a façade to enable the U.K. parent to make investments in India and avoid taxation under the India-U.K. tax treaty by taking advantage of the World Tax Advisor Page 7 of 13 Copyright 2011, Deloitte Global Services Limited.

8 India-Mauritius tax treaty. The authorities claimed that the U.K. parent was the real beneficial owner of the shares and decided to pierce the corporate veil, with the result that the India-U.K. tax treaty would apply and, hence, the transaction would be liable to capital gains tax in India. AAR ruling The AAR confirms that the Indian tax authorities are not in a position to levy capital gains tax on the transfer of shares in an Indian company by a Mauritius tax resident as a result of the provisions of the India-Mauritius tax treaty, Circular 789 and case law of the Supreme Court. In reaching its conclusion, the AAR noted that the shares in the Indian company were purchased on behalf of the U.K. company, but that it is not clear how far back in time one would have to go to conclude that the U.K. parent company was the beneficial owner of the shares, since the shares in the Indian company had been purchased almost 10 years previously and the shareholding had steadily increased since that time. The AAR stated that, when shares are held for a considerable period of time before they are sought to be sold in a regular commercial transaction, it is not possible to inquire into factors, such as the source of the original investment. In addition, the proposed transfer of shares in this case did not involve a gift or a transfer of shares without consideration and the sale was proposed to be undertaken at fair market value. While the AAR noted that the Mauritius company may have been established to take advantage of the India-Mauritius treaty, this fact cannot be viewed or characterized as objectionable treaty shopping. The AAR further observed that, since the proposed sale of shares would otherwise have been taxable under Indian domestic law, the taxpayer should file a tax return in India even if the income is exempt under the treaty. Comments Although the AAR ruling is only binding on the Applicant and the tax authorities in respect of the transaction for which the ruling is sought, it has more general persuasive value. The ruling affirms the earlier proposition upheld by the Supreme Court that the benefits of article 13(4) of the India-Mauritius tax treaty are available to tax residents of Mauritius that hold tax residence certificates. The AAR made some ancillary, but significant, remarks in its ruling that are worth mentioning. The AAR suggests that the concept of piercing the corporate veil to determine beneficial ownership should not apply to general commercial transactions where control had been held for a long period of time. The AAR ruling draws a thin line between permissible treaty shopping and tax avoidance in commenting that the arrangement is not one that has come about all of a sudden. Finally, the AAR indicates that there should not be any investigation of the source of an investment when the principles of the Azadi Bachao Andolan case are satisfied. The Ardex ruling has been welcomed by foreign investors as it provides some interim respite, though not complete certainty in light of other cases that still are pending. It will be interesting to see if the Indian tax authorities try to distinguish this ruling in other cases where the facts are not identical to those in Ardex. Further, the impending Direct Taxes Code Bill, 2010 and any proposed tax treaty re-negotiations would need to be taken into account in applying the rationale of this ruling to future transactions. Anil Talreja (Mumbai) Deloitte India atalrejai@deloitte.com Rajesh Gandhi (New York) Client Service Executive Deloitte Tax LLP rgandhi@deloitte.com Shailendra Sharma (Singapore) Manager Deloitte Singapore shaisharma@deloitte.com World Tax Advisor Page 8 of 13 Copyright 2011, Deloitte Global Services Limited.

9 Indonesia: New measures announced to enhance tax collection The Indonesian government recently unveiled two measures aimed at boosting the collection of tax revenue: Using a National Tax Census as a tool to identify potential tax subjects, unregistered taxpayers and taxpayers with outstanding tax liabilities; and Using an exchange of information between the tax offices throughout the country. Both initiatives will result in more intense scrutiny of taxpayers and whether they are complying with their tax obligations. National Tax Census The Minister of Finance launched a National Tax Census on 20 September 2011 to collect data and information from corporate entities and individuals, which can be used by the tax authorities to ensure compliance with the tax laws. The census is being conducted by the Director General of Taxation (DGT) via personal visits to each tax subject. Respondents will be required to complete a two-page census that includes tax-related data and document requests, such as: Tax ID number; Confirmation letter of a VAT-registered entrepreneur if the respondent claims it is registered; Deed of establishment; Electricity customer number; Land and/or building tax return; ID number/passport/working permit of personnel at the management level; and Annual turnover. The tax office has discretion to use the information obtained from the survey to follow up on potential tax liability in accordance with the tax laws and regulations. The tax census will be carried out through 2012, with the goal of reaching all tax subjects in the country and ultimately boosting the collection of tax revenue from potential and registered taxpayers. Exchange of information The DGT recently issued an internal circular to all tax service offices on the execution of the Feeding Program, as part of the authorities effort to increase tax collection. The Feeding Program is an exchange of taxpayer information between two or more tax offices via a computer system, using the taxpayers profile database as the basis. The program will start with taxpayers registered with the Large Tax Office (LTO) and the Regional Tax Office, and 1,500 Large Taxpayers in the Pratama Tax Office. The initiative targets, in particular, corporate shareholders and management that do not yet have a tax ID number. The types of data exchanged include information on: Shareholders; Managers (directors and branch chief); Related parties and/or relationships with affiliates; Customers: Suppliers; Withholding tax; and Creditors and debtors. When a tax office receives taxpayer information, it may request that a taxpayer amend a previously filed tax return or recommend a tax audit. World Tax Advisor Page 9 of 13 Copyright 2011, Deloitte Global Services Limited.

10 Firdaus Asikin (Jakarta) Deloitte Indonesia Connie Chu (Jakarta) Senior Technical Advisor Deloitte Indonesia Libya: Tax filing deadlines extended The year 2011 has proven to be extremely challenging for businesses operating in Libya, and many questions have been raised with respect to compliance with tax return filing and payment deadlines during the unrest. The Libyan tax authorities and relevant ministries are aware of the difficulties, particularly for foreign firms operating in Libya with limited senior management residing in Libya as a result of the political events. As a result, the Ministry of Finance and Oil recently announced that the tax return filing deadline for the 2010 calendar year has been extended to 31 December The announcement also confirmed there should be no late filing penalties imposed for failure to make payroll tax-related payments for the 2011 calendar year. Additionally, there should be no late filing penalties for failure to make timely tax installment payments for the period 1 February 2011 to 31 December Tax installments are rescheduled to commence as from 19 March Ali Kazimi (Dubai) Deloitte United Arab Emirates alikazimi@deloitte.com Brandon George (Dubai) Senior Manager Deloitte United Arab Emirates brageorge@deloitte.com Netherlands: Second Chamber passes interest limitation on certain debt-funded acquisitions The Dutch Chamber of Deputies on 17 November 2011 passed, with two major amendments, a draft regulation proposed in September by the Ministry of Finance to impose new limits on interest deductions on excessively leveraged acquisitions. The Senate (Upper Chamber) must still pass the regulation, but is not expected to make major changes. Current rules Interest expense on loans obtained to acquire shares in a Dutch Target currently may be offset against the operating income of the Target within a fiscal unity (or in the context of a merger/demerger) if certain interest limitation rules do not apply (e.g. base erosion and thin capitalization rules). The typical post-acquisition structure can be depicted as follows: World Tax Advisor Page 10 of 13 Copyright 2011, Deloitte Global Services Limited.

11 New interest deduction limitation rules As proposed in September, the new rules would apply to intercompany and third-party loans (or comparable agreements) and are designed to prevent the deductibility of excess interest expenses against the profits of an acquired Dutch Target by way of a fiscal unity. The interest limitation would apply only to excessive interest expense, which is defined as the lower of: The interest expense reduced by (i) the acquiring company s own profits (i.e. the profits of the acquisition vehicle/existing fiscal unity) and (ii) EUR 1 million; or The interest expense due on a loan where the debt to equity ratio of the fiscal unity exceeds 2:1 (the thin cap escape, which was subsequently replaced). The draft bill passed by the Chamber of Deputies contains two major changes to the initially proposed regulation. 1. The thin cap escape is replaced by a maximum percentage rule. According to the amended regulation, the limitation will not apply where the acquisition loan does not exceed a percentage of the acquisition price. This percentage is 60% of the acquisition price in the first year the acquired company is included in a fiscal unity with the acquisition vehicle. Subsequently, the percentage will decrease annually by five points (i.e. 55% for year two and 50% for year three), but will not decrease below 25%. 2. As initially proposed, the new limits on interest deductions for excessively leveraged acquisitions would have applied only where a fiscal unity between the acquired company and the acquisition vehicle is formed after 31 December The Dutch Chamber of Deputies changed this date to 15 November While there is a mechanism to form a fiscal unity (under certain conditions and subject to certain limitations) with retroactive effect, it is unclear whether the new regulations would apply to a fiscal unity benefitting from such a mechanism. Comments Companies should review the potential impact of the new regulation on their tax position where an acquisition has been executed but the acquired company has not yet been included in the fiscal unity, as well as for acquisitions under consideration or set in motion but not yet completed. Peter Willeme (New York) Client Service Executive Deloitte Tax LLP pewilleme@deloitte.com Arthur Goedkoop (Amsterdam) Deloitte Netherlands agoedkoop@deloitte.com Aart Nolten (Utrecht) Deloitte Netherlands anolten@deloitte.nl Peru: Regulations issued on new tax rules on financial derivatives Peru s Ministry of the Economy and Finance issued a decree on 29 November 2011 (Supreme Decree EF) that clarifies the test for determining when the result from a financial derivative obtained by a nonresident would fall within the scope of the Peruvian tax net. This guidance follows from a law published on 27 July 2011 (Law 29773) that reinstated a previous narrower regime (under Law 29492) for the tax treatment of such gains. Law was supposed to enter into effect on the day following that on which the necessary regulations were published; hence, the law now applies as from 30 November World Tax Advisor Page 11 of 13 Copyright 2011, Deloitte Global Services Limited.

12 Background Under Law 29492, which applied to financial derivative contracts entered into on or after 1 January 2010, results from financial derivatives obtained by nonresident taxpayers were considered sourced in Peru and, therefore, within the scope of the Peruvian tax net, if the following criteria were met: The derivative contract was entered into with a Peruvian resident; The underlying asset to which the derivative was linked was exchange differences between the Peruvian currency and any foreign currency; and The effective term of the instrument was less than the ceiling threshold established by regulations at 60 calendar days. Law 29663, enacted on 15 February 2011, expanded the scope to include the results obtained from financial derivatives contracts negotiated on a market located in Peru, whether or not centralized, in accordance with rules that were to be established by regulations. Such regulations were never published, giving rise to differing interpretations as to the scope of application of the rules; for instance, that the results obtained from any financial derivative contract entered into by a nonresident that meets the criteria provided in the law qualify as Peruvian-source income subject to tax in Peru, and conversely, that the rules cannot apply because the required regulations were not issued. The government responded by enacting Law 29773, which basically reinstates the rules under Law Law established that the ceiling threshold for bringing a foreign exchange derivative within the scope of Peruvian taxation is to be established by future regulations (which may not exceed 180 calendar days). The 29 November decree provides for a ceiling threshold of 60 calendar days. With the issuance of the new decree, nonresidents will be subject to tax in Peru on results obtained from foreign exchange derivative contracts entered into on or after 30 November 2011 only if the criteria is met (e.g. agreements signed with an effective term of 61 calendar days or more should be excluded from the scope of the regime). Comments Until further official clarifications are issued by the tax authorities, several regimes could apply in 2011, making it necessary for nonresidents to take a position regarding the tax treatment applicable to each derivative contract entered into: Agreements signed from 1 January 2010 through 15 February 2011 Those agreements within the scope of Law with a ceiling threshold of 60 calendar days will fall within Peru s tax net; Agreements signed from 16 February 2011 through 29 November 2011 (the date on which new regulations under Law were published) Those agreements within the scope of Law may be within the scope of Peruvian taxation depending on the tax interpretation adopted regarding the application of the legal provisions in absence of regulations; and Agreements signed from 30 November 2011 (the application date of the new regulations) Those agreements within the scope of Law (as reinstated by Law 29773) will fall within Peru s tax net. Gustavo Lopez-Ameri (Lima) Deloitte Peru glopezameri@deloitte.com Ana Luz Bandini (New York) Senior Manager Deloitte Tax LLP anbandini@deloitte.com 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 World Tax Advisor Page 12 of 13 Copyright 2011, Deloitte Global Services Limited.

13 European Union ECJ rules Dutch exit charge is disproportionate and infringes EU law The European Court of Justice has ruled that the Netherlands, in principle, may impose an exit charge on unrealized gains upon the transfer of an entity s place of effective management to another EU Member State, but the requirement that the exit charge be paid immediately upon the transfer of seat, without the possibility of deferral of tax collection, constitutes an infringement of the freedom of establishment in the EU Treaty. [Issued: 30 November 2011] URL: URL: Have a question? If you have needs specifically related to this newsletter s content, send us an at clientsandmarketsdeloittetax@deloitte.com to have a Deloitte Tax professional contact you. 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 13 of 13 Copyright 2011, Deloitte Global Services Limited.