International Tax News

Transcription

1 International Tax News Edition 30 August 2015 Welcome Keeping up with the constant flow of international tax developments worldwide can be a real challenge for multinational companies. International Tax News is a monthly publication that offers updates and analysis on developments taking place around the world, authored by specialists in PwC s global international tax network. We hope that you will find this publication helpful, and look forward to your comments. Shi-Chieh Suchi Lee Global Leader International Tax Services Network T: E: suchi.lee@us.pwc.com

2 In this issue Tax legislation Proposed legislative changes Administration & case law Treaties

3 Tax Legislation Tax Legislation Cyprus Introduction of a notional interest deduction (NID) on new corporate equity New corporate equity injected into a company as of January 1, 2015 in the form of paid-up share capital or share premium is eligible for an annual notional interest deduction (NID). New equity may be contributed in cash or in assets in kind. In the case of assets in kind, the amount of new equity may not exceed the market value of the asset. In a similar way that an interest expense on debt financing is generally calculated as an interest rate on loan principal, the annual NID is calculated as an interest rate on the eligible share capital / share premium. The NID interest rate is the yield on ten year government bonds (as at December 31 of the prior tax year) of the country where the funds are employed in the business of the company plus a 3% premium. This is subject to a minimum amount which is the yield of the ten-year Cyprus government bond (as at the same date) plus a 3% premium. The NID is tax deductible in a similar manner as actual interest expense, i.e. the NID is available for tax purposes when new equity is utilised to finance most types of business assets, with the proviso that the NID cannot exceed 80% of the taxable profit (as calculated prior to the NID). A taxpayer may annually elect not to claim part or all of the available NID. In order to tackle possible abuse of the NID, the law contains a general anti-avoidance provision for non-commercial transactions as well as a number of specific anti-avoidance provisions which may restrict the NID. The NID applies to Cyprus tax resident companies and to permanent establishments (PEs) in Cyprus of non-resident companies and is effective as of January 1, The aim of the amendment is to encourage new equity which in turn should increase the economic robustness of Cyprus companies through less reliance on debt financing, whilst keeping their competitiveness. Corporations should now consider how this amendment may impact the structure of their financing. This amendment is part of a package of measures aiming to enhance the corporate and personal tax competitiveness of Cyprus. Also included within this package are proposals for a simpler tax treatment of foreign exchange differences and fairer treatment of arm s length adjustments (refer to the Proposed Legislative Changes section) as well as enacted law to exempt certain income of non-domiciled individuals from tax in Cyprus and proposals to improve the exemptions available for high-earning expatriates working in Cyprus. Marios Andreou Stelios Violaris Joanne Theodorides Nicosia Nicosia Nicosia T: E: marios.andreou@cy.pwc.com T: E: stelios.violaris@cy.pwc.com T: E: joanne.theodorides@cy.pwc.com

4 Proposed Legislative Changes Proposed legislative changes Brazil Further changes to the application of PIS/COFINS on certain financial revenues On May 20, 2015, Decree No. 8,451/2015 was published amending Decree No. 8,426/2015 (issued at the beginning of April 2015) in relation to the application of Social Integration Program (PIS) and the Contribution for Social Security Financing (COFINS) on financial revenues earned by companies subject to the non-cumulative system to calculate PIS/COFINS. Brazilian taxpayers accruing financial revenues should consider the impact of Decree 8,426/2015 and 8,451/2015 on their particular circumstances to determine whether PIS/COFINS will apply to their transactions from July 1, Prior to Decree No. 8,426/2015, the PIS and COFINS rate on financial revenues was equal to 0%. On April 1, 2015, Decree No. 8,426/2015 reintroduced PIS/COFINS on financial revenue at the rate of 0.65% and 4% respectively. Decree No. 8,451/2015 provides that the 0% rate will continue to apply on financial revenues resulting from foreign exchange inflation adjustments relating to the export of goods and services to foreign operations. Foreign exchange derived from contractual obligations including loans and financing are also covered by the 0% rate. Decree No. 8,451/2015 also provides that the 0% rate should apply to financial revenues arising from hedging transactions conducted on stock exchanges, commodities and futures markets or contracted overthe-counter for the purpose of protecting against risks associated with fluctuations related to the operating activities of the entity and which can be allocated to the protection of such rights or obligations. Decree 8451/2015 will apply from July 1, 2015 (the same date as the earlier Decree restoring the 4.65% rate will take effect). Durval Portela Alvaro Pereira Mark Conomy São Paulo Salvador São Paulo T: E: T: E: T: E:

5 Proposed Legislative Changes Cyprus Tax neutral treatment of foreign currency exchange differences (forex) and extension of the arm s length principle to downwards adjustments A bill concerning the tax treatment of foreign currency exchange differences (forex) has been sent to the Cyprus Parliament for discussion and voting. The bill proposes for all forex to be tax neutral from a Cyprus income tax perspective (i.e. gains not taxable / losses not tax deductible) with the exception of forex arising from trading in forex, which remains taxable / deductible. The definition of forex includes gains / losses on foreign currency rights or derivatives. Regarding trading in forex, which remains subject to tax, this proposal introduces an option for taxpayers to make an irrevocable election whether to be taxed only upon realisation of forex rather than on an accruals / accounting basis. Regarding the arm s length adjustments, the income tax law currently only provides for unilateral upwards adjustments to profits in cases where taxable profits earned on related party transactions are below an arm s length (i.e. market value) amount. Further, in cases where two related Cyprus taxpayers transact and the Cyprus tax authorities make an upwards arm s length adjustment to one of the taxpayers, it is proposed that there will be a corresponding downwards adjustment for the other taxpayer. It is expected that the Parliament will discuss and vote on these proposals this coming September following the summer recess with their expected effective date to be January 1, Businesses with cross-border transactions usually incur forex. Forex is often difficult to predict, especially in the current global economic climate. The above proposal aims to simplify the income tax treatment of forex. Further the above proposals aim to be fairer to businesses in the tax treatment of their related party dealings. This amendment is part of a package of measures aiming to enhance the corporate and personal tax competitiveness of Cyprus. Also included within this package are amendments which have already been enacted in relation to the introduction of notional interest deduction (NID, refer to Tax Legislation section) and exemption of certain incomes of non-domiciled individuals as well as proposals to improve the exemptions available for high-earning expatriates working in Cyprus. The bill sent to Parliament also contains proposals to introduce the possibility for a downwards adjustment in cases where expenses / losses incurred with related parties are not at arm s length. Marios Andreou Stelios Violaris Joanne Theodorides Nicosia Nicosia Nicosia T: E: marios.andreou@cy.pwc.com T: E: stelios.violaris@cy.pwc.com T: E: joanne.theodorides@cy.pwc.com

6 Proposed Legislative Changes Latvia Administrative burden on Latvian tax residents working in EU to ease Proposals for amending the personal income tax (PIT) Act that were presented to Parliament on May 27, 2015 providing for exempting Latvian tax residents that have earned employment income elsewhere in the European Union (EU) from the obligation to file the annual income tax return in Latvia. Under current tax law, Latvian tax residents that have earned employment income outside Latvia must file the annual income tax return in Latvia. Based on experience, Latvian residents frequently seem to have difficulties to obtain written confirmation of the tax paid from foreign tax authorities because: the authorities do not see why such confirmation is necessary, given the automatic exchange of information (EoI) with the Latvian tax authorities, and different filing deadlines mean this confirmation might be received up to one year after the due date in Latvia. In this situation, the Latvian tax authorities recognise the taxpayer s income earned abroad but do not recognise the foreign tax paid, resulting in the taxpayer paying extra tax in Latvia. Thus, the proposals for amending the Latvian PIT Act provide that in future the annual income tax return will no longer need to be filed by Latvian tax residents having earned employment income and paid a similar income tax elsewhere in the EU. However, Latvian tax residents having derived any other type of income, such as deposit interest, dividends or capital gains, will still have to file the annual income tax return in Latvia. It is also important to note that the proposals provide for removing the administrative burden from Latvian tax residents employed only in the EU, given the automatic EoI among the member states. Latvian tax residents having earned employment income in a country that has concluded an effective double tax treaty (DTT) with Latvia (e.g. Russia, Switzerland, or Norway) will still have to file the annual income tax return in Latvia and confirmation from the foreign tax authorities. The proposals have been presented to the Parliamentary Budget and Finance (Taxation) Committee and are to be debated by Parliament in three readings. It is not yet known when the amendments might be enacted. The proposals would provide a reduction of administrative burden to Latvian tax residents earning employment income elsewhere in the EU, as they will no longer be required to file the Latvian annual tax return. Viktorija Kristholde-Luse Latvia T: E: viktorija.kristholde-luse@lv.pwc.com

7 Proposed Legislative Changes United Kingdom Conservative government s Summer Budget The Chancellor of the Exchequer delivered the Summer Budget on July 8, This is the first Budget of the new conservative government following the general election in May, and the second Budget for calendar year The Finance Bill containing draft legislation will be published on July 15, The key Budget measures of relevance to international tax include: The main UK corporation tax rate will be reduced from the current rate of 20% to 19% effective April 1, 2017, and to 18% effective April 1, The government has committed to publishing a business tax roadmap by April 2016 setting out its plans for business taxes over the rest of the Parliament. For profits arising on or after July 8, 2015, companies may no longer offset UK losses and expenses against profits taxable under the controlled foreign companies (CFC) rules. The surprise announcement of a cut in corporation tax rates signals that Britain is keen to remain competitive internationally and is open for business. There was a strong focus on tackling tax avoidance and aggressive tax planning. An array of piecemeal changes and new initiatives is intended to raise approximately 7 billion pounds (GBP) of revenue but with no big headline grabbers. The announcement that requires immediate attention is the restriction on the offset of losses against a CFC charge. Affected groups (i.e. loss-making groups with CFCs that are currently subject to a CFC charge) will need to analyse the impact of these changes. There were no changes to those areas currently under review as part of the Organisation for Economic Co-operation and Development s (OECD s) work plan. It appears therefore that the UK government will wait for the final base erosion and profit shifting (BEPS) recommendations before proposing any changes in this area. For acquisitions arising on or after July 8, 2015, no corporation tax relief will be available for the amortisation of purchased goodwill and certain customer-related intangibles. Several changes will be made to the taxation of corporate debt and derivative contract rules for companies, most of which will take effect for periods beginning on or after January 1, The link company requirements for consortium relief claims will be simplified with retrospective effect from December 10, Stella C Amiss London, Embankment Place T: E: stella.c.amiss@uk.pwc.com Jonathan Hare London, Embankment Place T: E: jonathan.hare@uk.pwc.com

8 Administration and case law Brazil Brazil Tax authorities release ruling regarding the deductibility of royalty payments On June 8, 2015, the Brazilian Federal Revenue Authorities (RFB) issued Tax Ruling No. 146/2015 providing that expenses relating to royalties and technical, scientific, administrative assistance should be deductible following registration and approval with the National Institute of Intellectual Property (INPI) back to the date of the request. In addition to the general deductibility requirements, deductibility of royalty payments relating to the use / exploitation of patents, trademarks and technical, scientific, administrative assistance is limited to a percentage varying from 1% to 5% of income or profits (less certain specific operational expenses). Further, the deductibility of royalties paid to a foreign beneficiary is conditioned to the registration of the relevant agreement with the Brazilian Central Bank (BACEN) and approval by the INPI. According to Tax Ruling No. 146/2015, the RFB considers that a deduction for such royalty payments should be available retroactively to the date the request of registration is filed with the INPI. On June 2, 2015, the Minister of National Revenue signed the international Multilateral Competent Authority Agreement (MCAA), an important step towards implementing the CRS. Brazilian taxpayers making royalty payments abroad should consider the impact of Tax Ruling No. 146/2015 on their particular circumstances to ensure that they are obtaining an appropriate deduction. Tax authorities publish a tax ruling regarding the imposition of PIS/COFINS on imports for remittances relating to license agreements On March 10, 2015, the Brazilian Federal Revenue Authorities (RFB) released Tax Ruling No. 71/2015 providing that the Social Integration Program (PIS) and the Contribution for Social Security Financing (COFINS) on imports should not be imposed on remittances limited to the license to use patents and trademarks. Under Brazilian law, PIS/COFINS on imports are social contributions applicable to the importation of certain goods and services. Following the introduction of Complementary Law no 116/2003 regulating Service Tax (ISS), which included the license to use trademarks and software in the list of activities considered to be triggering events for ISS purposes, there was some debate regarding whether PIS/COFINS should apply on such remittances. The ruling provides that in agreements which include services related to the license to use patents and trademarks, the respective amounts should be segregated. Otherwise the total amount should be deemed a service fee and taxed accordingly (service fees are typically subject to higher taxation in Brazil). Taxpayers making such remittances should review their current treatment of such payments to determine whether they may be able to benefit from the prescribed treatment set out in the ruling. It may represent a reduction of 9.25% on the amount of the importation. Durval Portela Alvaro Pereira Mark Conomy São Paulo Salvador São Paulo T: E: durval.portela@br.pwc.com T: E: alvaro.pereira@br.pwc.com T: E: conomy.mark@br.pwc.com Durval Portela Alvaro Pereira Mark Conomy São Paulo Salvador São Paulo T: E: durval.portela@br.pwc.com T: E: alvaro.pereira@br.pwc.com T: E: conomy.mark@br.pwc.com

9 Brazil Tax authorities publish a ruling regarding the obligation to register payments in the SISCOSERV On April 22, 2015, the Brazilian Federal Revenue Authorities (RFB) released Tax Ruling No. 105 providing that the subscriptions of shares using intangible assets should be registered in the Integrated System of Foreign Service Trade (SISCOSERV). By way of background, since August 2012, Brazilian individuals, legal entities and other entities are required to provide information to the Ministry for Development, Industry, and International Trade in relation to transactions carried out with non-residents involving services, intangibles, and other operations that produce changes to the Brazilian entity s net worth. Broadly, for the purposes of registration in the SISCOSERV, services should be understood as an activity that requires the service provider to perform something in benefit of the party contracting the service. Intangibles should be interpreted as a transferable and immaterial asset from which future economic benefits are expected. Finally, other operations that produce changes to the Brazilian entity s net worth are those operations that do not fall within the definition of service or intangible, but are included in the Nomenclature of Services (NBS) which sets out a list of codes in order to classify the activities for SISCOSERV purposes. In the present case, the RFB concluded that the subscription and the payment of subscribed shares in cash should not fall within the definition of services, intangibles nor in the NBS, and on this basis should not be registered with SISCOSERV. However, where the subscription of shares is made by a related party located abroad in consideration for intangible assets, the relevant information should be registered in the SISCOSERV. Foreign investors intending to subscribe for shares in Brazilian companies using intangible assets should consider their current registration and disclosure practices with respect to SISCOSERV in order to determine whether they may be impacted by Tax Ruling No Durval Portela Alvaro Pereira Mark Conomy São Paulo Salvador São Paulo T: E: durval.portela@br.pwc.com T: E: alvaro.pereira@br.pwc.com T: E: conomy.mark@br.pwc.com

10 Brazil Tax authorities release ruling confirming that payments to France in consideration for certain technical services should not be subject to withholding tax On June 17, 2015, the Brazilian Federal Revenue Authorities (RFB) released Tax Ruling No. 153/2015 providing that amounts paid or credited to individuals or entities domiciled in France in consideration for certain technical services / assistance should not be subject to withholding tax (WHT). By way of background, in June 2014, Interpretative Declaratory Act (ADI) 5/2014 was released detailing the tax treatment applicable to payments made by Brazilian entities in relation to technical assistance and services (with or without transfer of technology) to a company located in a country with which Brazil has signed a double tax treaty (DTT). Broadly speaking, ADI 5/2014 provided that where the relevant DTT or protocol treats technical services and / or assistance as royalties or the service relates to the technical qualification of a person or a group of persons, payments should be governed by the article dealing with royalties or independent personal services (generally Article 12 or 14 respectively). In these cases, the Brazilian DTTs generally grant taxing rights to Brazil. In other situations, payments should be governed by the article dealing with business profits (generally Article 7), in which case Brazil is prevented from taxing the profits of the foreign entity unless the entity carries on business in Brazil through a permanent establishment (PE). In the case of Tax Ruling No. 153/2015 being considered, the DTT signed between Brazil and France does not treat technical services and / or assistance as royalties and the particular services provided were not considered to fall within the definition of independent personal services. On this basis, the RFB considered that the remittances in relation to the services provided should not be subject to WHT. The ruling confirmed that the payments should still remain subject to Contribuição de Intervenção de Domínio Econômico (CIDE) at the rate of 10%. Multinational groups should examine whether they may be able to potentially lower or eliminate Brazilian WHT on payments to certain treaty countries in relation to technical assistance and service agreements. Durval Portela Alvaro Pereira Mark Conomy São Paulo Salvador São Paulo T: E: durval.portela@br.pwc.com T: E: alvaro.pereira@br.pwc.com T: E: conomy.mark@br.pwc.com

11 OECD Model documents for implementing country-bycountry reporting released On June 8, 2015, the Organisation for Economic Co operation and Development (OECD) released a Country by Country Reporting Implementation Package. The package includes model legislation the OECD suggests could be used by countries to mandate filing of country by country reports (CbCRs). The model legislation does not attempt to address the filing of the so-called master file or local file reports. The implementation package also includes three model competent authority agreements that could be used by each country, depending on whether it intends to affect exchange of CbCRs through the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, the exchange of information (EoI) article of a bilateral tax convention, or a bilateral tax information exchange agreement (TIEA). Neither the model legislation nor any of the model competent authority agreements contains additional guidance regarding the particular data that multinational enterprises need to provide in the CbCRs. Rather, the model legislation merely sets forth a general description of that data and provides that it should be provided in a form identical to, and applying the definitions and instructions contained in, the standard template set out either in the OECD Transfer Pricing Guidelines, the final report on Base Erosion and Profit Shifting (BEPS) Action 13, or an appendix to the legislation, once adopted. Presumably, the standard template referred to can be expected to look like the CbCR template set forth in the OECD s first report on Action 13 released on September 16, In this regard, however, the introduction to the implementation package indicates that, as a next step, an XML Schema and related User Guide will be developed with a view to accommodating the electronic exchange of the CbCRs. Additional guidance on the CbCR data requirements may emerge once this schema and user guide are issued. Helpfully, the model legislation and model competent authority agreements also reveal the OECD members current thinking on, among other things, (i) how a MNE group is to be comprised for purposes of the filing requirements, (ii) which small MNE groups would be excluded from the requirements, (iii) which entity in the MNE group would be expected to file the CbCR, and (iv) the intended government use and confidentiality of the CbCR information. Key takeaways are that the country-by-country (CbC) reporting obligation will fall on the ultimate parent entity. If, however, the ultimate parent is not obligated to file, or the jurisdiction of the ultimate parent does not have an EoI agreement in place, or there has been a systematic failure under that agreement, then the MNE group may appoint a Surrogate Parent Entity to do the filing in its country of tax residence. Furthermore, if in the above scenarios the MNE group does not appoint a surrogate, then each Constituent Entity will have to file the CbCR locally. The implementation package contains measures meant to address concerns of MNE groups regarding the lack of rigorous safeguards for the commercially sensitive information to be shared among tax authorities under the proposed CbC reporting requirements. Specifically, a Country Tax Administration shall preserve the confidentiality of the information contained in the CbCR report at least to the same extent that would apply if such information were provided to it under the provisions of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. Whether and how countries can actually implement and police these use and confidentiality restrictions, of course, necessarily remains to be seen. As the OECD has now finalised implementation through the model legislation and the next step is now at the local country level, MNEs should evaluate, if they have not done so already, whether they can timely comply with the CbC reporting proposal. Issues to consider include: (i) determining whether MNEs can gather the data (noting that the data points required require significant modification from ledger entries), (ii) performing various analytics on the CbC data to assess risks, and (iii) evaluating what, if any, issues must be addressed (including quality of data concerns and process and control issues). Isabel Verlinden Adam Katz Richard Stuart Collier Brussels New York London T: E: isabel.verlinden@be.pwc.com T: E: adam.katz@us.pwc.com T: E: richard.collier@uk.pwc.com

12 Switzerland United Kingdom Supreme Court: tax-privileged quasi merger is only granted if receiving company is issuing own shares Swiss Supreme Court denies qualification of a specific transaction as a so-called quasi-merger and hence as a Swiss tax-neutral restructuring In Switzerland, the quasi-merger is not stipulated under formal Swiss merger law. Yet, in the Swiss tax practice, quasi-mergers typically qualify as tax neutral restructurings (so-called tax privileged restructurings), if certain criteria are met. According to Circular Letter No. 5 Reorganisations of the Swiss Tax Administration, a Swiss tax-privileged quasi-merger usually requires that the receiving company takes over at least 50% of the target s voting power. In addition, the target s shareholders may, at a maximum, receive a fraction of 50% of the total consideration for their previously held shares in the target in cash and consequently at least a fraction of 50% of the total consideration must be paid in new shares (of the receiving company). Typically, the receiving company procures the shares for the share-exchange by way of a capital increase. In the case at hand, the individual A held 100% of the shares of X-AG and 50% of the shares in Y-AG in his private wealth. In 2007, A transferred his interest of 50% in Y-AG at book values to X-AG. Subsequently, A held his interest of 50% in Y-AG indirectly via X-AG. In its decision of June 10, 2015 (2C_976/2014), the Swiss Supreme Court confirmed Circular Letter No. 5 and ruled that in lack of a capital increase at the level of X-AG, the transfer of the Y-AG-shares does not qualify as quasi-merger for Swiss tax purposes. As a result, the difference between the market value and the book value of the 50% interest in the Y-AG-shares was subject to Swiss stamp duty on the issuance of capital. Companies and individuals engaging in quasi-mergers must therefore carefully structure the respective transactions in order to ensure qualification as a tax neutral reorganisation. Supreme Court judgment: UK resident member of US LLC - Entitlement to DTR for US tax The Supreme Court delivered its unanimous judgment in the case of Anson v HM Revenue & Customs (HMRC) on July 1, It held that the taxpayer, Mr. Anson, is allowed double taxation relief (DTR) in the UK for US tax paid on profits of the Delaware limited liability company (LLC) in which he is a member. Based on the First-tier Tax Tribunal s earlier finding of fact that the members of a LLC have an interest in the profits of the LLC as they arise, the Supreme Court held that the taxpayer s liability to UK tax is computed by reference to the same income as was taxed in the US, and he is therefore entitled to DTR under the UK double tax treaty (DTT) with US. This overturns the Court of Appeal s decision that the LLC should not be regarded as transparent for UK tax purposes, and that DTR for US tax should therefore be denied on the basis that the UK taxed a different source of income to the US. Although the case concerns the UK income tax treatment of a UK resident individual member of a Delaware LLC, from a corporate tax perspective it has led HMRC to consider whether their existing understanding of the nature of a LLC needs to be revised. Historically, HMRC have generally considered LLCs to be opaque entities akin to companies and in the vast majority of cases, to have issued ordinary share capital. For UK corporate groups this is an important consideration when looking at such matters as grouping and the substantial shareholdings exemption. HMRC are aware of the uncertainty created by this judgment and we expect them to communicate their view in a public statement in due course. Stefan Schmid Zurich T: E: stefan.schmid@ch.pwc.com Sarah Dahinden Zurich T: E: sarah.dahinden@ch.pwc.com Stella C Amiss London, Embankment Place T: E: stella.c.amiss@uk.pwc.com Jonathan Hare London, Embankment Place T: E: jonathan.hare@uk.pwc.com

13 United States IRS Chief Counsel s office provides guidance on economic substance analysis The internal revenue service (IRS) released Chief Counsel Advice (the CCA) on April 10, 2015, addressing the application of the common-law economic substance doctrine to the taxpayers participation in a transaction with an offsetting loan and contractual rights. The CCA analysis applies common law because the transaction in question predated the enactment of Section 7701(o) of the internal revenue code (IRC), which codified the economic substance doctrine. The CCA concludes that the IRS could disregard the transaction as lacking economic substance under both the objective and subjective prongs of the analysis. In reaching its conclusion, Chief Counsel s office considered case law and the case law-derived criteria enumerated in Directive LB&I (issued July 15, 2011). It should be noted that CCA is characterised as a supplemental CCA addressing an issue not previously dealt with in CCA , released January 2, 2015, regarding a leveraged forward contract. CCA confirms that the IRS continues to analyse transactions economic substance using common-law factors derived from case law when the transactions predate Section 7701(o). It also shows that the IRS is likely to measure a transaction s profit potential against its potential tax benefits, rather than respecting the existence of any profit potential as creating a valid business purpose. Chip Harter Tim Anson David H Shapiro Washington D.C. Washington D.C. Washington D.C. T: E: chip.harter@us.pwc.com T: E: tim.anson@us.pwc.com T: E: david.h.shapiro@us.pwc.com

14 Treaties Canada China Convention with New Zealand entered into force and TIEA with the Cook Islands signed The new Convention between Canada and New Zealand for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, and related protocols, entered into force on June 26, The new Convention with the First Protocol was signed on May 3, 2012, and the Second Protocol was signed on September 12, The new Convention limits the rate of withholding tax (WHT) to 5% for dividends paid where the beneficial owner is a company that holds directly at least 10% of the voting power in the payor company, to 15% for dividends paid in all other cases, to 5% for copyright royalties or other like payments and royalties for the use or right to use computer software or any patent or for information concerning industrial, commercial or scientific experience, and to 10% for payments of interest and all other royalties. The distributive articles of the new Convention specify that no relief shall be available where the main purpose or one of the main purposes of any person in undertaking certain actions is to take advantage of such articles. The new Convention further permits the taxation of income or gains realised on the disposition of shares or interests that derive, directly or indirectly, more than 50% of their value from immovable property situated in the jurisdiction seeking to tax the income or gains. Provisions reflecting the Organisation for Economic Co-operation and Development (OECD) standard for the exchange of tax information are also included. The new Convention with New Zealand replaces the tax convention signed on May 13, The new Convention and related protocols generally have effect in Canada in respect of tax withheld at the source on amounts paid or credited to non-residents on or after August 1, 2015, and in respect of other Canadian tax for taxation years beginning on or after January 1, Once the TIEA with the Cook Islands enters into force, Canada s exemption system can apply to the net earnings from an active business carried on in the Cook Islands by a controlled foreign corporation (CFC) resident in the jurisdiction. Multilateral Convention on Mutual Administrative Assistance in Tax Matters approved In August 2013, China signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the Convention) to join the network of international cooperation on tax administration. On July 1, 2015, the Standing Committee of the National People s Congress of China approved the signed Convention and clarified the application of relevant administrative provisions. The Convention shall apply to the tax jurisdiction of mainland China but not to Hong Kong and Macao Special Administration Regions. The Convention provides for all possible forms of administrative cooperation among the signed states, which include the exchange of information (EoI), assistance in recovery, service of documents, etc. in the assessment and collection of all categories of taxes, e.g. corporate income tax, individual income tax, value-added tax, consumption tax. Meanwhile, the Convention also provides flexibility for reservations regarding the taxes covered and the type of assistance to be provided. So far, China has made reservations in terms of tax recovery and document services. The approval of the Convention is a milestone in China s efforts to deepen and broaden the cooperation with the international tax community. It is also expected to have a significant impact on China s domestic administrative environment for international taxation. Now that China has one more channel under the Convention to improve tax transparency and counter tax avoidance and evasion, multinational companies operating in China need to be aware of this new development and review their strategy in terms of disclosure and tax transparency where necessary. Furthermore, Canada signed a tax information exchange agreement (TIEA) with the Cook Islands on June 15, This TIEA will enter into force at a later date. Kara Ann Selby Toronto T: E: kara.ann.selby@ca.pwc.com Maria Lopes Toronto T: E: maria.lopes@ca.pwc.com Matthew Mui China T: E: matthew.mui@cn.pwc.com

15 China China DTT with Chile signed On 25 May 2015, China and Chile signed a double tax treaty (DTT) and an accompanying protocol. If proper diplomatic procedures are to be completed within 2015, the DTT would apply to income derived on or after January 1, The DTT between China and Chile includes the following key features: Permanent establishment (PE) The time threshold for constituting a Construction PE should be six months. The time threshold for constituting a Service PE should be 183 days within any 12-month period. Shipping and Air transport It is clarified that the profits arising from the operation of ships or aircraft in international traffic should include profits from bare boat charter and container leasing if they are part of the international shipping or air transportation operations. Withholding tax (WHT) and Capital gains The restricted WHT rate on dividends paid to a beneficial owner (BO) meeting the prescribed requirements should be 10%. The restricted WHT rates on interests paid to a BO meeting the prescribed requirement should be 4% for interests received by banks or financial institutions and 10% for other situations. The restricted WHT rates on royalties paid to a BO for the use of industrial, commercial or scientific facilities should be 2% and 10% for other situations. Capital gains arising from the alienation of shares deriving, at anytime during the 36 months preceding to the alienation, more than 50% of their value directly or indirectly from immovable properties should be taxed in the source state. Other important features The article of Exchange of Information follows the 2010 Organisation for Economic Co-operation and Development (OECD) Model Tax Convention. A new article of Entitlement to Benefits is provided to allow qualified persons only to claim the treaty benefit. A Principal Purposes Test provision to attack treaty shopping is also included. Generally, the DTT between China and Chile follows the trend of other tax treaties concluded or re-negotiated by China in recent years. It also takes some recommendations reflected in the Base Erosion and Profit Shifting (BEPS) Project into consideration, such as adding the article of Entitlement to Benefits to combat the treaty shopping. The DTT will definitely provide a lot of treaty benefits to China / Chile businesses. Relevant investors are recommended to assess and adjust their current structures/arrangements in advance in order to fully take the advantage of this new DTT once it is enacted. New protocol amending the DTT with Russia signed On October 13, 2014, China and Russia signed a new double taxation treaty (DTT) and an accompanying protocol. On May 8, 2015, another protocol was concluded in order to amend the interest article in this DTT. In particular, the protocol gives the exclusive taxation right on interest to the resident country. The protocol will enter into force on the 30th day upon receipt of the notification for completing the respective internal legal procedures. The China-Russia DTT generally tends to allocate more tax to the resident country. The new Protocol on the revised interest article also reflects this general principle. It is a sign that the two countries are encouraging business from each other. So far, the China-Russia DTT has not entered into force. Relevant taxpayers are suggested to take this revision into consideration in advance when assessing their eligibility for treaty benefits. Matthew Mui China T: E: matthew.mui@cn.pwc.com Matthew Mui China T: E: matthew.mui@cn.pwc.com

16 Hong Kong Italy Exchange of Notes on the DTT with Japan entered into force The Exchange of Notes (the Notes) regarding the Exchange of Information (EoI) article in the Hong Kong - Japan double tax treaty (DTT) entered into force on July 6, The Notes expand the tax types in Japan that are covered under the EoI article of the HK-Japan DTT. The EoI article will now cover tax types other than Japanese income tax (i.e. the inheritance tax, the gift tax, and the consumption tax). The Notes will take effect in Hong Kong from April 1, By expanding the tax types in Japan that are covered under the EoI article of the HK-Japan DTT, Hong Kong shows its commitment to international tax cooperation and increased tax transparency. Other than the HK-Japan DTT, similar change has recently been made to the EoI article of the HK-China DTT by the signing of the Fourth Protocol, which expands the scope of information exchange under the HK-China DTT to cover certain non-income taxes in China. DTT with Hong Kong ratifiied The double tax treaty (DTT) between Italy and Hong Kong, signed on January 2013, has been ratified by the Italian parliament with Law n. 96/2015, published in the Italian Official Gazette n. 155 on July 7, Article 25 of the DTT provides for the exchange of information (EoI) on transactions performed between taxpayer residents in the two countries, according to Organisation for Economic Co-operation and Development (OECD) standards, triggering some relevant impacts in the Italian tax law framework. The ratification of the DTT would in principle have a significant impact for multinational enterprises (MNEs) operating in Italy, considering that: The withholding tax (WHT) rates on incomes realised in the other state are significantly reduced (e.g. dividends 10%, interest 12.5%, royalties 15%). Capital gains would be taxable only in the State where the seller is a resident (except for capital gains on real estate or a shareholding in which the value is mainly derived from real estate). Hong Kong should be no longer included in the Italian black lists identifying the tax haven countries relevant for the application of the controlled foreign company (CFC) regime and the corporate income tax (CIT) restrictive costs deduction regime. Hong Kong should be included in the white list relevant for the application of the notional interest deduction (NID) on capital contributions to Italian subsidiaries. Provided that the ratification process would be finalised in 2015, the DTT could produce its effects starting from January 1, In this regard, further legislative actions are expected to be executed to fully enact the DTT under the Italian tax law framework. Fergus WT Wong Hong Kong T: E: fergus.wt.wong@hk.pwc.com Franco Boga Milan T: E: franco.boga@it.pwc.com

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