International Tax Alert international...The new TCC will take effect from 1 July 2012. Traditionally, ... News in Brief. Angola Update The new Private Investment Law and more tax reform

International Tax Alert Issue nine

Spring 2012

Chairman’s NoteWelcome to the April 2012 edition of the PKF International TaxAlert (ITA), an online publication that summarises the latest keytax changes from selected countries around the world. In thisseventh edition, there are contributions from PKF member firms’tax experts in 28 countries.

The ITA is issued three times per year and can be downloadedfrom the PKF International website at www.pkf.com

News in Brief 3

Angola 5

Jose Ramos on Angola’s new Private Investment Law

Australia 7

Lance Cunningham and the tax team set out changes to Transfer Pricing Rules and GAAR and shipping industry reforms

Austria 11

Michaela Moosbrugger explains the key elements of the 2012 Austerity Budget

Belgium 12

Chris Peeters sets out the changes to withholding tax

China 13

Edmund Chan and Qinghua Liu report on the ShanghaiPilot Arrangement to change to VAT

Hungary 14

Vadkerti Krisztián summarises the 2012 final tax legislation

India 15

S. Santhanakrishnam reports on three court cases with significant international taxation implications

Ireland 20

Catherine McGovern describes the changes to R & D, Corporation Tax Relief and Capital Gains Tax

Italy 22

Walter Bonzi reviews the changes to the treatment of tax losses

Jordon 23

Ali Al-Qudah summarises eight changes to the Jordanian tax law

Kenya 25

Martin Kisuu discusses the latest situation on employeecontracts and the overhaul of VAT

Malaysia 27

Chin Chin Lau and Manharlal Gathani summarise recent developments and 2012 Budget highlights

Malta 30

George Mangion explains the new rules for High Net Worth Individuals and Highly Qualified Persons

Mexico 33

Mario Camposllera and Veronica Barba set out the taxchanges to the Maquiladora industry. Octavio Lara explainsthe tax consequences of dual nationality

1 // PKF International Tax Alert Issue 9 Spring 2012All Regions

Jon Hills, Chairman PKF International Tax Committee

Namibia 26

Uwe Wolff and Beatrice Johr report on relevant tax amendments for investors in Namibia

Romania 37

Andreea Tudose describes the most significant changes to 2012 local legislation

Russia 39

Nadejda Orlova summarises the new transfer pricing regulations and income tax changes

Rwanda 40

Martin Kisuu heralds Rwanda’s rise in the global rankings for ease of doing business

Singapore 41

GOH Bun Hiong highlights the significant tax-related proposals in the 2012 Budget

Slovak Republic 42

Richard Budd previews the anticipated changesto the tax regime when the new Government is formed

South Africa 43

Eugene Du Plessis describes the amendments to the Company Dividend Tax (DT)

Spain 47

Santiago Gonzalez summarises the Spanish wealth tax for non-residents

Uganda 49

Martin Kisuu explains the changes to the VAT law and its implications for taxpayers

UK 50

Jon Hills discusses the draft legislation for a new controlled foreign companies (CFC) regime

USA 54

Leo Parmigiani explains the latest US efforts to ensure tax compliance involving offshore financial assets and accounts

USA 55

John Forry looks at foreign deferred compensation and IRS guidance for US citizens living abroad



New Turkish Commercial Code (TCC)The new TCC will take effect from 1 July 2012. Traditionally,bookkeeping and commercial accounting are heavily affectedby tax regulations in Turkey but commercial accounts will bekept according to the Turkish Accounting Standards in compliance with the International Accounting Standardsfrom 1 January 2013. The financial statements have to beprepared in conformity with the Turkish Financial ReportingStandards in line with International Financial Reporting Standards (IFRS).

Foreign companies operating in Turkey no longer have tokeep accounts according to tax legislation and convert intoIFRS. Single IFRS reporting will be acceptable for your international consolidated financial reports and local needs.

Incentives in TurkeyWith effect from 28 February 2009, a reduction of up to 80%in the corporate income tax rate is available for earnings derived from production of plants in specific sectors locatedin cities specified by the Council Ministers (usually in regionsprioritised for development).

Investment projects started in 2012 in certain regions alsohave support for employer insurance premiums for betweenthree and five years. Reduced corporate tax to be applied toinvestments in 2012 is as follows on the table.

For more information please contact:

Selman Uysal Sun Denetim YMME: [email protected]

Argentina revokes tax treaty with Switzerland Argentina has given Switzerland a notice of termination ofthe Tax Treaty that had been in effect since 2001. The noticewas sent through diplomatic channels on 16 January 2012.

The Official Authority said that, even though the notice oftermination was sent, they will keep negotiating withSwitzerland for a new Treaty.

It is considered that the advantage given in royalties (specially on trademarks, patents and technical assistance)triggered the decision.

The convention ceased to have effect in respect for taxationyears beginning 1 January 2013.

For further information please contact:

Gustavo DirectorTax PartnerPKF Villagarcía & AsociadosE: [email protected]

News in Brief

Regional Implementation Large-scale Investment

Region

I

II

III

IV

InvestmentContribution rate

(%)

10

15

20

25

The corporate tax or income tax

reduction rates (%)

25

40

60

80

InvestmentContribution rate

(%)

25

30

40

45

The corporate tax or income tax

reduction rates (%)

25

40

60

80

New regime to formalise tradingbetween Paraguay’s second cityand BrazilParaguay is a founder partner of the MERCOSUR with a free and open market economy. Its second largest city, Ciudad del Este, is the third major free-trade zone of theworld - after Miami and Hong Kong – and conveniently located at the convergence of the borders of three countries, Brazil, Argentina and Paraguay.

A new regime has been introduced to formalise commercialactivities between Ciudad del Este and Brazil. This will increase the transparency of the operations and stimulategreater competiveness between companies. This regulationhas the following characteristics:

� A 25% rate of the tax will be applied

� The amount of purchases will be limited to 110.000 reales per year divided into four quarters

� The trading companies must be registered with the Treasury Department and fully compliant with all tax and labour legislation

� The eligible products categories are: IT components, electronics and telecommunications products.

For further information, please contact:

Silvia Raquel Aguero PartnerPKF Controller Contadores & AuditoresT: + 595 21 44 28 52 Int.195E: [email protected] W: www.pkf-controller.com.py


News in Brief

Angola UpdateThe new Private Investment Lawand more tax reform Against a background of international financial turmoil, theAngolan economy, rich in natural resources such as diamondsand oil, constitutes an exceptional case of consistentgrowth, with an average annual increase of the GDP overthe last five years of more than 10%. Its capital, Luanda,considered to be the most expensive city in the world, hostsa wide range of expatriate individuals, potential investorsand traders seeking an opportunity in this emerging market.

The Private Investment Law

The Private Investment Law (PIL), published on May of last year, sets out the rules and a tax benefits regime for investment projects exceeding USD 1 million, aimed at attracting new investments to the country, especially thoseconsidered highly relevant for the strategic development ofthe national economy.

The benefits available include:

Reduction of the corporate income tax rate (up to 50% of the standard rate) or exemption from corporateincome tax up to a maximum period of 10 years. Themaximum duration of the benefit is defined according tothe location of the investment (up to 5, 8 or 10 years, forprojects located in well developed, medium developedor less developed regions, respectively).

Exemption or reduction of taxes on dividend distributions up to a maximum period of 9 years. Themaximum duration of the benefit is defined according to the location of the investment (up to 3, 6 or 9 yearsfor projects located in well developed, medium developed or less developed regions, respectively).

Exemption from real estate transfer tax.

The graduation of the benefits is based on the predictablesocial and economic impact of the investment, taking intoconsideration the following factors: (i) net exchange balance(ii) number of objectives effectively achieved(iii) number of jobs created and training to be provided

to Angolan workers(iv) amount of the investment(v) volume of goods to be produced or of services to be

rendered(vi) type of technology used(vii) profits to be reinvested(viii) creation of production lines.

For projects declared of high relevance for the strategic development of the national economy, the following factorsare taken into consideration:

(a) the importance of the activity concerned

(b) the localisation and amount of the investment and

(c) its contribution to the reduction of regional imbalances.

Further incentives and tax benefits may be negotiated if oneof the following conditions is met:

the investment is capable of generating (or maintaining) a minimum of 500 jobs for national citizens

the investment is capable of contributing, in a quantifiable and certifiable manner, to a positive boost in terms of scientific research and technologic innovationin the country

the investment generates annual exports of no less thanUSD 50 million.

In order to have access to the regime of tax benefits and incentives introduced by the Private Investment Law, taxpayers are required to maintain their accounting recordsduly organised and certified by an external auditor.


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Tax reform is on the way

In parallel, as part of the Tax Reform announced by the Angolan Government, the publication of new legislation introducing significant changes to the tax laws in force is expected to occur at any moment.

According to the press releases about the tax reform, thenew legislation will introduce changes in respect of (i) taxrates, (ii) computation of taxable income, (iii) special rules forlarge size corporate taxpayers (including tax consolidationand transfer price rules), (iv) invoicing requirements, (v) stamp duty, (vi) taxation of investment income and (vii) personal income tax.

Technical Assistance Agreements

In the context of said tax reform, a new ruling on ForeignManagement and Technical Assistance Services was published last October (Presidential Decree 273/11, of 27 October 2011). This new ruling imposes new obligationsregarding the agreements supporting such type of services,which must be prepared in Portuguese language and communicated to the Economy Ministry. Contracts with anamount exceeding USD 300,000 or with a duration of morethan 12 months are subject to approval. Moreover, companies incorporated under the new Private InvestmentLaw are not allowed to sign this type of contract with theirforeign associated entities, except in special cases duly authorised by the National Private Investment Agency (ANIP).


José RamosTax PartnerPKF Portugal T: + 351 213 182 720E: [email protected]

Angola Update continued


Australia Update

Proposed reforms of the Australian Transfer Pricing Rules In November 2011, the Australian Government announceda proposal to reform the current transfer pricing rules.These reforms are expected to address issues that arose in recent Court decisions which highlighted the difficultiesfaced by multinational organisations when pricing intra-grouptransactions. The proposed amendments are designed toaddress inconsistencies between the current Australian legislation and the approach to transfer pricing based onthe revised OECD Guidelines.

Australia’s current transfer pricing rules use the internationallyaccepted arm's length principle and focus on pricing individualtransactions. Consequently, the overall profits may not reflectthe economic contributions of the various parties. As part of the revision of the transfer pricing rules, the pricing oftransactions will be broadened to incorporate the arm'slength outcome for the full dealings between parties to appropriately reflect the contributions of each party. This reflects the 2010 revision to the OECD Guidelines which explicitly acknowledges that the profit based methodsshould be used wherever they are the most appropriatemethod.

The new rules are also expected to resolve a number of uncertainties. Firstly, in relation to the role of the OECDGuidelines in applying the transfer pricing rules, the Courtsin Australia have not yet formally endorsed a direct resort tothe Guidelines. However, evidence based on the approachtaken in the Guidelines has been accepted by the Courts.

A clearer legislative pathway for the use of the Guidelines is expected to be included in the new rules.

A second area of uncertainty is whether the Associated Enterprises article in the tax treaties provides a power tomake transfer pricing adjustments independently of domesticlegislation. The new legislation will confirm that the taxtreaties do operate as an alternative to the domestic rules.Finally, the amendments will also clarify that the applicationof the tax treaty articles should be done in a manner that isconsistent with the OECD Guidelines. This aspect of the reforms will operate retroactively from 1 July 2004.

The Government is currently undertaking consultation withstakeholders in relation to these reforms and the actual legislation may yet be a few years away. However, the application date for these changes may be retroactive to the date these proposals were announced. From a practicalperspective, the alignment of Australia's transfer pricingrules with international transfer pricing standards should be a positive step as it is expected to reduce uncertainty,minimise compliance and administrative costs, and reducethe risk of double taxation for multinational enterprises.

For more information on this issue see the PKF CorporateTax Essentials on the PKF Australia website:http://www.pkf.com.au/Pages/default.aspx

Or further information from:

David Blake or Kaajri Vaughan PKF MelbourneE: [email protected] or [email protected]

General Anti-Tax AvoidanceRewrite (GAAR) The Australian Government has recently announced its intention to introduce changes to protect the integrity ofAustralia's tax system by introducing amendments to thegeneral anti- tax avoidance provisions of Part IVA of the income tax law.

The genesis for this announcement appears to be the recent success enjoyed by various taxpayers in successfullydefending their commercial transactions from Part IVA.


Australia Update continued


Broadly, Part IVA will apply to a scheme or arrangementwhere the taxpayer obtained a tax benefit that would nothave been available if the scheme had not been enteredinto and it could be objectively concluded that a person/sentered into that scheme for the sole or dominant purposeof obtaining that tax benefit.

The Part IVA rules have been slated to be rewritten forsometime. In November 2010 the Government announceda review of GAAR to pave the way for a rewrite to “improvethe integrity, certainty and simplicity of the income tax laws”.

However, since that announcement, the Commissioner haslost a number of Part IVA cases, notably where there hasbeen a huge tax saving (or benefit) in the area of internalcorporate group reconstructions or re-organisations. Themost recent case was decided by the Full Federal Court inRCI v FCT [2011] FCAFC 104 decided in August 2011.

RCI involved a restructure of the US assets of the JamesHardie Group. The Group wanted to move its US assetswithin the group but the transfer of the assets could result in a substantial taxable capital gain. As an alternative, a dividend of US$318 million (equal to the increase in value of the assets reflected in the asset revaluation reserve) waspaid to the taxpayer. This dividend was not taxable incomein Australia. This resulted in a significant reduction in thevalue of the assets, thereby reducing the capital gain realised on the transaction. The Tax Office argued Part IVAapplied because an assessable gain was converted to anon-assessable amount. The Tax office alleged this comprised the Part IVA tax benefit.

For Part IVA to be successful, the Tax office has to identify a counterfactual arrangement that the taxpayer would haveundertaken but for the tax benefit. The Court found that,while the Tax Office had succeeded in presenting an alternative form of the transaction that would have resultedin a higher tax liability, the Court rejected that alternative asnon-commercial.

The Court considered the contemporaneous evidence produced by the company during the course of the restructure and concluded that, had the company not entered the transaction in the form it had, it would not haveproceeded with the transaction i.e. it would not have notsold the shares. The Court noted the alternative advancedby the Tax Office was completely impractical, as the transactions costs involved in that restructure meant the

transaction would not have proceeded at all.

Soon after the final appeal in the RCI case, the Governmentannounced the intention to amend Part IVA to counter theargument that a taxpayer did not obtain a " 'tax benefit' because, without the scheme, they would not have enteredinto an arrangement that attracted tax".

Although the announcement contains very little detail of theproposed amendments or any specifics of what form theywill take, they will apply to schemes entered into or carriedout after the date of the announcement (being 1March 2012).

Taxpayers are on alert to be extremely careful if contemplatingany business group restructures or reorganisations pendingthe release of further details on this Part IVA rewrite.

Further information from:

Lance Cunningham and Marinda WallerPKF AustraliaE: [email protected] or [email protected]

Proposed reforms of Living Away from Home Allowancesand BenefitsIn November 2011, the Government announced a proposalto reform the current Fringe Benefits Tax (FBT) concessionsfor "living away from home" (LAFH) allowances and benefits(FBT is paid by employers on benefits provided to employees).As well as a broader desire to raise revenue, the AustralianGovernment has commented that the LAFH concessionsare being exploited in a manner that is outside the originalintent of the legislation.

Currently, housing costs and food allowances (generally upto a limit) are FBT free if the employee in question is LAFHfrom their usual place of residence and intends to return tothat residence on conclusion of their temporary duties atanother location. There are currently few restrictions onwhich employees may qualify as being LAFH as long asthey meet the criteria mentioned above.

The proposed reforms will deny tax free housing and foodallowance to nearly all "temporary resident" employees.Broadly, temporary residents are foreign nationals that hold(and their spouse holds) a temporary migration visa.

However, the tax free status will continue for temporary resident employees that maintain a home for their own usein Australia, from which they are living away for work purposes (which is not many), and Australian citizen andpermanent resident employees that are genuinely livingaway from home for work purposes in Australia or abroad.

Those employees that continue to qualify for tax free housingand food allowances will be required to substantiate their actual expenditure on accommodation and food (beyond a statutory amount).

In addition, benefits provided by way of a cash allowance -as opposed to a specific reimbursement, will no longer beconsidered to be a fringe benefit (on which an employercould pay FBT), but instead will form part of an employee’sassessable income (on which an employee could pay income tax). However, a corresponding deduction is allowed for substantiated expenses of eligible employeesonly. The proposed changes will take effect from 1 July2012 and no transitional arrangements have been proposed.

The Government has received many responses to its proposal - most requesting a softening of the proposal andtransition arrangements to allow employers and employeestime to consider how to deal with an expected increasedtax burden of AUD770m. To date the Government has notindicated whether it will change its proposals.


Kumar Krishnasamy and Ernie ThaiPKF MelbourneE: [email protected] or [email protected]

Reform of shipping industryThe Federal Government has announced plans to reformthe Australian shipping industry, including plans to exemptqualifying operators from Australian income tax on theirshipping profits from 1 July 2012.

The reforms are aimed at making Australian shipping moreinternationally competitive and to facilitate Australian competition on international routes. Access to the concessions will be restricted to operators who are certifiedas qualifying operators. The following are being consideredas criteria for qualifying operators:

Location of the company

Management and training

Shipping activities undertaken by the vessel.

In the context of the taxation of shipping income, the following rules currently apply:

Shipping companies pay income tax at the rate of 30%

Ships are depreciated with an effective life for tax purposes of 20 years

When a ship is sold, the gain or loss realised on the sale of that depreciated ship is included in the operator'staxable income in the year in which the sale occurs

If a shipping company has net exempt income in any year, it must reduce its tax losses by all of the company’snet exempt income from all sources

All salaries and wages paid to “seafarers” are deductiblein the year in which the salary and wages is paid.



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Under the proposed reforms, the general rules that willapply to certified operators will include:

Income tax exemption - an income tax exemption will be introduced for qualifying shipping income derived by certified operators. The activities that will be exemptfrom income tax include:

� Carrying cargo or passengers� Crewing ships� Carrying goods on board for the operation of the ship (provisions for crew and passengers)

� Providing containers for use to carry cargo on the ship� Loading and unloading cargo.

Accelerated depreciation - qualifying ships will have aneffective life of 10 years

Roll-over relief - where a depreciable ship is sold for again, the operator has two years after the sale to purchase a replacement ship. Where a replacement shipis not purchased, the gain on the original ship will thenbecome taxable

Losses - the loss provisions will be amended such thatonly 10% of the exempt income derived from qualifyingshipping operations will be applied to reduce tax lossesclaimed or carried forward

Seafarer tax offset - a refundable tax offset (tax credit)of 27% will be provided to qualifying operators for salaryand wages paid to seafarers employed on overseas voyages where their employment exceeds 91 days. For example, assume the operator pays $100,000 inqualifying salaries and is entitled to an offset. They willreceive a tax offset of $27,000 (27% of $100,000). Thisoffset reduces the operator’s tax payable and any excess is payable in cash to operator

Royalty withholding tax exemption - payments madeby Australian resident companies for bareboat leases ofqualifying ships will not be subject to Australian royaltywithholding tax.


Lance CunninghamDirector of TaxationPKF Australia LimitedT: +61 2 9251 4100E: [email protected]: www.pkf.com.au



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Key elements of 2012 AusterityBudget To consolidate its budget, the Austrian government hasdrawn up an austerity budget which is currently in draftstage (the parliamentary decision is scheduled for 28 March 2012). Key changes to the draft are not expected.

1. Solidarity contribution for higher earnersEmployees earning more than EUR 185,000 gross per yearwill lose the preferential tax rate of 6% on 1/6th of their annual income. The tax on these earnings will be raised on a sliding scale up to 50%.

The equivalent in the self-employed sector (13% tax-free allowance) will, accordingly, be reduced on a sliding scaledown to zero for profits of EUR 175,000 or above.

These measures are planned for a limited period from 2013to 2016.

2. Property sales taxTo date, taxes on property sales profits in the private sector were untaxed after expiry of a speculation period of tenyears. From 1 April 2012 these profits will be taxed at 25%.

In terms of constitutional law, the new regulation appears tobe problematic regarding its retroactive applicability, as eventhose properties that were already outside this speculationperiod – and therefore tax-exempt – would, under this ruling,be liable for taxation if sold after 1 April 2012. A lower taxrate would, however, apply in these cases.

Under the new ruling, it will be possible to balance lossesfrom the profits of property sales only with gains from propertysales and not with profits from other income. Furthermore,expenses will not be offsettable.

As before, tax exemptions are to apply for speculation withprincipal residences and self-erected buildings.

This property sales profits tax is to apply to tax payers bothwith full and with limited tax liability (i.e. tax payers who ownproperty but do not have a residence or habitual abode inAustria).

In the commercial sector, sales profits from property werealready taxable. Here, the tax rate will be reduced from the previous level of up to 50% down to 25% to equaliseproperty sales tax in the private and commercial sectors.

Following the introduction in 2011 of the general taxation of sales profits from capital assets, this almost completelyremoves any options for keeping the profits from the sale of private assets free from taxation.

3. Group taxationFor foreign group members the options for utilisation of losses will be limited. Foreign loss must already be convertedto Austrian conditions. As of 2012, the loss is to be limitedwith the foreign sum, i.e. even if the loss as converted to anAustrian scale is higher than the foreign loss, only the foreignloss can be utilised.

4. VATIn letting business premises it was, to date, possible to opt for VAT liability on the rent income to take advantage of aninput tax deduction from the purchase or erection of theproperty. After the expiry of the ten-year observation period,a switch to tax-free letting was possible without losing theinput tax deduction applicable at the time.

As of 1 April 2012, the option of tax liability is to be possibleonly if the tenant qualifies for full tax deduction). Furthermore,the period in which the input tax must be paid back aliquot(observation period) will be extended from currently 10 yearsto 20 years.

5. Research premiumStricter reviews of the eligibility for receipt of the premiumare planned; in this context contract research (research carried out not in-house but subcontracted to another organisation) is to be raised from currently EUR 100,000p.a. to EUR 1 million p.a. (as of 2012).


Michaela MoosbruggerPKF Corti & Partner GmbHT: +43 316 826082-22 E: [email protected]: www.pkf.at

Austria Update



Changes in Belgian withholdingtax As of 1 January 2012, certain Belgian withholding tax rateshave been increased.

1. Withholding tax on dividendsThe standard rate of 25% tax withholding tax on dividendshas been maintained.

Dividends benefitting in the past from a favourable rate of15% will now be liable to 21% withholding tax.

Dividends distributed via an acquisition of own shares willalso be subject to 21% instead of 10% withholding tax.

Existing exemptions or reductions, both based on internallaw (including the advantages of the EU Parent-subsidiaryDirective) and Double Tax Treaties remain completely intact.

Private persons having a combined dividend and interest income exceeding EUR 20,000 per annum will be subject to a total of 25% income tax on the part of the income exceeding EUR 20,000.

2. Withholding tax on interestThe standard rate of 15% tax withholding tax on interesthas been increased to 21%.

Existing exemptions or reductions, both based on internallaw (including the advantages of the EU Interest-royalty Directive) and Double Tax Treaties remain completely intact.

Private persons having a combined dividend and interest income exceeding EUR 20,000 per annum will be subject to a total of 25% income tax on the part of the income exceeding EUR 20,000. .


Chris Peeters PKF accountants en belastingconsulenten CVBA T: +32 (0)3 235 88 88 F: +32 (0)3 235 22 22 E: [email protected]: www.pkf.be

Belgium Update

The Shanghai Pilot Arrangementfor the transition from BusinessTax to Value Added TaxThe long-simmering reform of Change from Business Tax to Value-Added Tax has started. On 16 November 2011,The Ministry of Finance and State Administration of Taxation announced the “Pilot Proposals for the Change from Business Tax to Value-Added Tax” and issued a number ofcirculars setting out the Shanghai VAT pilot arrangement.

It was confirmed that the pilot arrangement for Business Taxto Value Added Tax would start in transportation industryand some modern service industries such as R & D, IT andtechnology services, cultural and creative services and movable property leasing in Shanghai from 1 January 2012.After the change from Business Tax to Value-Added Tax, inaddition to the existing VAT rates of 17%(standard tax rate)and 13% (low rate), there will be new rates of 11% and16% (both are low rate). The rate of 17% is applicable formovable property leasing. For transportation services, therate of 11% is applicable. For other modern service industries,the rate of 6% is applicable.

Since executing the transition of VAT in 2009, this is anotherbig reform of the goods and service tax system, and it isalso an important measure for structured tax reduction. Thereform has contributed to eliminating the problem of doubletaxation by levying VAT and business tax on goods andservices separately. Optimizing the tax structure and reducingthe tax incidence has created a more favourable system forpromoting industrial (diversification) and modern service

development, which will contribute to accelerating economicdevelopment and adjusting the economic structure.

The Shanghai pilot arrangement provides an example forthe whole nation. The scope of the pilot will be expandedand the reform will be promoted to the whole nation step bystep. Beijing has been approved for the pilot and Tianjing,Chongqing, Jiangsu and Shenzhen are also applying to beincluded in the pilot.

Many large and medium sized state owned enterprises areconcerned that the reform will influence enterprise’s tax burden dramatically and affect their profits. Some of theseenterprises are inviting us to calculate the tax burden aftertax system reform so that they develop long-term strategiesfor business development and adjust their business models.


Edmund ChanPartnerPKF ChinaT: +86-21 52929998 ext. 208E: [email protected] LiuPKF Daxin T：+8610 82330590E: [email protected]

China Update


The expected tax changes for 2012 listed in the last TaxAlert have now been modified. Summarised below are themain features of the final tax legislation for 2012.

Corporate income taxThe tax rate remains 10% up to 500m HUF tax base and19% above. Deferred losses can only be offset against theprofits up to 50% of the tax base from 2012. Deferredlosses in the case of company transformations and acquisitions are now subject to certain limitations.

From 2012, the profit from the sale of a “registered intangible”will be exempted from corporate income taxation if the intangible is held for at least one year. The legislation appliesto intangibles on which royalty can be charged. In order totake advantage of this exemption, the intangible needs tobe registered at the Tax Office within 60 days from the acquisition. If a company sells or otherwise disposes of anintangible that is not registered (on which royalty can becharged), the tax base can be decreased by the profit if apledged reserve is created. This reserve has to be spent onanother intangible within three years.

Personal income tax (PIT)The PIT rate is decreased to 16% on the tax base below202,000 HUF monthly. However, the tax credit that ensuredthe exemption of the minimum wage is no longer available.

The range of fringe benefits has changed significantly and thebenefits are now subject to 11.9% healthcare contribution.The rate of personal income tax of such benefits remains 19.04%.

Representation and business gifts are taxed at 51.17%.There is no limit on the value of business gifts.

Other changes

The rate of value added tax has been increased from25% to 27%

The VAT on car rental fees is now deductible if the car is used for activities subject to VAT

The sale of real property between related companies isnow exempted from transfer duty

A new “car accident tax” has been introduced. This is30% of the mandatory insurance premium for the car.

The rates of excise duty and game tax have been significantly increased

Any company may choose a fiscal year different from the calendar year if it is reasonable due to the businesscycles or the information needs of the parent company.


Vadkerti KrisztiánPKF HungaryT: 36 1 391 4220F: 36 1 391 4221E: [email protected]: www.pkf.hu

Hungary Update


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Recent court cases with important implications for international taxationIndia’s tax authorities recently made three important decisions in cases relevant for international taxation.

1. Taxability of Capital Gains on transfer ofshares of a foreign company by a non-residentto another non-resident

In the case of Vodafone International Holdings, Netherlandsvs Govt of India, [2012] 17 taxmann.com 202 (SC), theSupreme Court has ruled that transfer of shares of a foreigncompany by a non-resident to another non-resident doesnot attract Capital Gains tax in India, even if the transfer results in the acquisition of Indian assets held by the foreigncompany. The decision has put to rest a raging controversyrelating to taxability of offshore transfers using the mediumof special purpose vehicles. While the verdict in this case wasbased on the facts and circumstances of the transaction,the judgment has laid down clear and predictable guidelinesdistinguishing what is permissible and what is not. By placingthe burden of proof on the Revenue, the Supreme Courthas coupled discretion with accountability.

The Court has also ruled on interpretation of Section 195. In the Eli Lily case, it was decided that, even if the paymentis made outside India in respect of services rendered in India,the liability to deduct tax would arise on the Indian employerin respect of the payment made outside India by virtue ofprovisions of Section 192. It should be noted that, eventhough the payment was not made by a resident, it was liable to tax. This could lead to confusion in the interpretationof provisions of Chapter XVIIB considering that both the decisions are coming from the highest court of the land.

The excerpts from the Judgment are as follows:

Case FactsA Cayman Island company called CGP Investments (CGP)held 52% of the share capital of Hutchison Essar Ltd(HEL), an Indian company engaged in mobile telecombusiness in India. The shares of CGP were, in turn, heldby another Cayman Island company called HutchisonTelecommunications (HTIL).

In 2007, the assessee – Vodafone International HoldingsBV (VIH) - a Dutch company, acquired the shares in CGPfrom HTIL for a total consideration of US$ 11.08 billion(approx Rs. 55,000 crore).

The AO issued a show-cause notice u/s 201, taking the view that, as the ultimate assets acquired by the assessee were shares in an Indian company, the assessee ought to have deducted tax at source undersection 195 on the capital gains, while making paymentto the vendor. The tax liability was assessed at approxRs.11,000 crore.

The main contention of the Revenue was that CGP wasinserted at a late stage in the transaction in order to bringin a tax-free entity and, thereby, avoid capital gains tax.

This notice was challenged by a Writ Petition but wasdismissed by the Bombay High Court in 2008. On appeal, the Supreme Court remitted the matter to theRevenue to first determine whether the transaction cameunder the jurisdiction of Indian tax authorities.

The Revenue opined that, since CGP was a mere holdingcompany and could not conduct business in Cayman Islands, the situs of the CGP share existed where theunderlying assets were situated, that is, in India. Hence,the Revenue determined that the transaction was underthe jurisdiction of the Indian tax authorities.

This order was challenged by the assessee by a Writ Petition which was dismissed by the High Court (329ITR 126 (Bom) in 2010. The assessee then appealed to the Supreme Court.

Key questions before the Apex Court:Could the Revenue Authorities ignore the series of down-stream subsidiaries and look through the transaction inorder to ascertain the 'substance' thereof?

Was the off-shore transaction under the jurisdiction ofthe Indian tax authorities thereby attracting the provisionsof Section 195 relating to withholding taxes?

Was such a structure created to attract the benefits ofTreaties and curtailing the tax liability an acceptablemode of tax planning or it can be ignored consideringthe same as a 'sham' or a 'colourable device'?

India Update


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Observations of the Supreme CourtA strategic foreign direct investment is to be viewed in aholistic manner. Certain factors such as business purposeand period of business operations in India are to be considered in determining whether the transaction is adevice to avoid taxes. The Hutchison Group structurehad been in place since 1994 and could not be said tobe created as a sham or tax avoidant. In fact, from2002-03 to 2010-11 the Hutchison Group had contributed an amount of Rs. 20,242 crore towards direct and indirect taxes to the Indian exchequer. Hence,the holding companies were not a “fly by night” operatoror short term investor.

CGP was incorporated in 1998 in Cayman Islands. It wasin the Hutchison structure from1998. The transaction inthe present case was of divestment and, therefore, thetransaction of sale was structured at an appropriate tierso that the buyer really acquired the same degree ofcontrol as was hitherto exercised by HTIL. VIH agreed to acquire companies and the companies it acquiredcontrolled 67% interest in HEL. CGP was thus an investment vehicle.

The Revenue’s argument that u/s 9(1)(i) it could “lookthrough” the transfer of shares of a foreign companyholding shares in an Indian company and treat the transferof shares of the foreign company as equivalent to thetransfer of the shares of the Indian company on thepremise that sec. 9(1)(i) covered direct and indirecttransfers of capital assets was not acceptable. Sec. 9(1)(i)(unlike the corresponding provision in the Direct TaxesCode Bill, 2010) did not use the word “indirect transfer”.

The argument that CGP had no business or commercialpurpose and that its situs was not in the Cayman Islandsbut in India (where the assets were) was also not acceptable. The situs of the shares transferred was theplace where the registered office of the company wassituated.

This transaction was one of sale of shares and not of underlying assets. It had to be viewed from a commercialand realistic perspective. As it was not a sale of assetson an itemised basis, the entire structure, as it existed,ought to be looked at holistically. A transfer of sharescould not be broken up into separate individual components, assets or rights, such as right to vote,management rights, controlling rights etc as shares constituted a bundle of rights. The sum of US$ 11.08 bn

was paid for the “entire package” and it was not permissible to split the payment and consider a part of it attributable to individual items.

The sale of CGP’s shares to VIH was for a commercialor business purpose and not with the ulterior motive ofevading tax. The sale of the CGP shares was a genuinebusiness transaction not a fraudulent or dubious methodto avoid capital gains tax. The situs of the shares was inthe Cayman Islands.

Section 195 applied only if payments were made from a resident to another non-resident and not between twonon-residents. This transaction was between two non-resident entities through a contract executed outsideIndia, consideration for which passed outside India. Thetransaction had no nexus with the underlying assets inIndia. In order to establish a nexus, the legal nature ofthe transaction had to be examined and not the indirecttransfer of rights and entitlements in India.

The object of Section 195 was to ensure that tax duefrom non-resident persons was secured at the earliestpoint of time so that there was no difficulty in collectingtax subsequently at the time of regular assessment. Thepresent case concerned an outright sale between twonon-residents of a capital asset (shares) outside India.Further, the said transaction was entered into on a principal to principal basis. Therefore, no liability todeduct tax at source arose.

ConclusionThe Offshore Transaction between HTIL (a Cayman Islands company) and VIH (a Dutch company) for thetransfer of CGP (a company incorporated in Cayman Islands) shares is a bonafide, structured FDI investmentinto India. As It falls outside the ambit of India's territorialjurisdiction, it is not liable to tax in India

The 2010 judgment of the Bombay High Court is set aside.

2. Taxability of sale of software

In recent times, the taxability of software payments is one ofthe most debated topics in the field of international taxation.The debate is whether payment for the use of computersoftware can be termed as royalty as per provisions of section 9(1)(vi) of the Income Tax Act, or under the provisions

India Update continued


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of relevant double tax avoidance agreement (DTAA). Therehave been a number of cases on this issue, some of whichanalyse the taxability of software payments under IncomeTax Act and some under DTAAs.

In December 2011, the High Court gave its ruling in thecase of Samsung Electronics (ITA No. 2808-2005) on thiscontentious issue.

Case FactsThe assessee (Samsung Electronics, India) was engagedin the development of computer software. It importedsoftware from non-resident companies in USA, Franceand Sweden and exported such software to its head office located in South Korea.

The assessee had made payments for importing softwareto non-resident companies in USA, France and Sweden.However, it did not apply any Tax Deduction at Source(TDS) on such payments.

According to the assessee, since it had imported shrink-wrap software and had not customised it, the paymentwas not in the nature of royalty under sec 9(1)(vi) of theIT Act and so no tax was payable.

Also, the payment made by it was business income inthe hands of the non-resident companies but, becausethey did not have a Permanent Establishment in India,this income was not taxable in India under the DTAAswith US, Sweden and France respectively.

The AO held that the payments were in the nature of royalty,so TDS should have been deducted under sec 195(1) of the Act. CIT(Appeals) also confirmed the AO’s order.

Upon appeal to ITAT Bangalore, the Tribunal ruled infavour of the assessee by holding that the paymentswere not royalty and hence not taxable. The Revenuethen appealed to the High Court (HC). The DivisionBench of the HC set aside the ruling of the Tribunal andordered that TDS needs to be deducted unless a certificate is taken by making an application under sec 195(2) that there is no liability to deduct tax.

Aggrieved by this order, the assessee (and others) approached the Supreme Court. The SC set aside theorder of the Division Bench, and referred the matter tothe HC.

Issue involvedWhether payment made to foreign software supplierswas royalty or not.

Observations of the Bangalore High CourtAs per the Copyright Act, 1957, computer software is a ‘literary work’ and is therefore covered by copyrightprovisions. In this case, the copyright for the computersoftware is held by the original developer.

Unless the owner of the copyright gives specific permission (licence) under an agreement to another person to use the software for some specific purpose, or to make copies out of it, any such action by the otherperson would be considered as infringement of copyright.

In this case, the licence granted to the assessee wasused by it for making a copy of the shrink-wrapped /off-the-shelf software into a hard-disk of the designatedcomputer and to take a copy for backup purposes.There was no other right granted to the assessee.

If there had been no such licence granted to the assessee, making a copy would have been consideredan infringement of the copyright. Thus, by granting the licence, the copyright owner had passed on a part of itsexclusive right to the assessee.

Any payment made by the assessee to obtain this partof the copyright is to be treated as royalty.

DecisionPayment made by the assessee to non-resident companies is royalty and, therefore, TDS needs to bededucted from such payments.

Although there are other contradictory judgments, theBangalore High Court has taken the same view for theSamsung Electronics case as that taken by other authorities in the cases of Microsoft, Gracemac and Millennium IT Software Ltd. This indicates that the opinionis hardening that payments for software import fromnon-resident companies are in the nature of ‘royalty’ andthus TDS needs to be deducted on them. It is to beseen if the highest authority decides to come out with a judgment that can decide the matter once and for all.



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3. Taxability of Reinsurance Services

The case of Guy Carpenter & Co Ltd vs Adit, New Delhi(2011-TII-190-ITAT-DEL-INTL), discusses the taxability of thepayment received by a foreign reinsurance company froman Indian insurance company and determines that such apayment does not constitute fees for technical service.

The excerpts from the judgment is given below:

Case FactsThe assessee company incorporated in United Kingdomand tax resident of UK was a recognised insurance brokerin London and licensed as an International ReinsuranceIntermediary (broker) by the Financial Services Authority(FSA) of the United Kingdom.

The assessee had earned brokerage income from Indianinsurance companies for rendering reinsurance intermediation services outside India. The assessee hadvarious agreements with Indian insurance companies, entered in conjunction with J B Boda Reinsurance BrokersP. Ltd. of Mumbai, which was duly licensed by InsuranceRegulatory & Development Authority (IRDA), India totransact reinsurance business in India.

It was stated that the assessee, through M/s J B Boda,helped the originating insurer in India receive competitiveproposals from international reinsurers including other primary brokers and various syndicates. Based on the decisions made by the originating insurer in India, the policy terms were agreed and the risk was placed withthe International Reinsurers.

As per normal industry practice, the reinsurance premiumnet of brokerage at a mutually agreed rate of 10 % as perthe policy contract was then remitted to the assessee, asreinsurance broker for onward transmission to the choseninternational reinsurers.

The assessee had thus received commission from its Indian clients for rendering services of reinsurance intermediation outside India. It was stated that the assessee did not maintain any office in India and some of its employees had made occasional business visits to India to maintain general business awareness and reinforce business contracts/relationships.

The assessee had filed its return of income showing niltaxable income, as it considered that the commission it

had received for services rendered outside India wouldneither qualify as fee for technical services as definedunder Explanation 2 to sec. 9(1)(vii) nor under Article 13 of the Indo-UK treaty. It explained that it acted as a brokernot engaged in managerial or technical consultancy.

Issue involvedWhether the consideration received by the assesseeacting as an intermediary in the reinsurance process canbe qualified as a consideration received for renderingany financial analysis related consultancy services, ratingagency advisory services and risk based capital analysis.

Whether, when an assessee engaged in reinsurancebusiness renders only intermediary services while actingas an intermediary/facilitator in getting the reinsurancecover for an Indian insurance company, it can be saidthat the assessee was rendering any kind of technical/consultancy service within the meaning of Article 13 ofthe DTAA.

Whether to fit into terminology “make available”, thetechnical knowledge, skills, know-how or processesmust remain with the person receiving the services evenafter the particular contract comes to an end.

ObservationsThe AO held that the assessee had provided advisoryand consultancy services to Indian insurance companiesby helping them to understand the complexities of reinsurance, as well as the selection of the appropriatereinsurance company in the international market. Thiscame within the definition of fees for technical servicesunder the Act as well as under the DTAA and it was taxable at a reduced rate of 15 of the gross amount offee as provided under Article 13 of the tax treaty.

In appeal, the CIT(A) confirmed the AO’s order. In appealbefore the Tribunal, the assessee submitted that the receipts were in the nature of ‘transaction fee’ not involvingtechnical and managerial services. Moreover, withoutprejudice to this contention, the assessee also contendedthat, if the amount was treated as fee for technical servicesunder the Act, it was not liable for tax in India under Article 13 of the tax treaty as it did not make availableany technical knowledge, experience, skill, knowhow orprocesses or consist of development and transfer of atechnical plan or technical design.



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DecisionThe Tribunal held that:

It is an admitted position that the assessee is a tax resident of the UK and, therefore, eligible to claim shelterunder DTAA between India and UK to the extent morebeneficial than the corresponding provisions of the Income Tax Act.

From the role played by the assessee in the reinsuranceprocess, it is evident that the assessee was renderingonly intermediary services while acting as an intermediary/facilitator in getting the reinsurance cover for New IndiaInsurance Co. There is no basis to conclude that the assessee was rendering any kind of technical/consultancyservice within the meaning of Article 13 of Indo-UK treaty.The consideration received by the assessee acting as an intermediary in the reinsurance process cannot bequalified as a consideration received for rendering any financial analysis related consultancy services, ratingagency advisory services, risk based capital analysis etc.as alleged by the A.O.

To fit into terminology “make available”, the technicalknowledge, skills, know-how or processes must remainwith the person receiving the services even after the particular contract comes to an end. In other words,payment of consideration would be regarded as fees fortechnical services only if the twin test of rendering servicesand making technical knowledge available at the sametime is satisfied;

Thus, it was held that the payment received by the assessee from the Insurance Company in India, cannotbe brought to tax in India as fees for technical services.


S. SanthanakrishnanPKF Sridhar & SanthanamT: +91 44 2811 2895E: [email protected]: www.pkfindia.in

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Research and development A credit of 25% applies to qualifying R&D expenditurewhere the expenditure is incurred in an accounting periodcommencing on or after 1 January 2009.

R&D for the purposes of the relief includes basic research,applied research or experimental development. These activities must seek to achieve scientific or technologicaladvancement and involve the resolution of scientific or technological uncertainty.

A company which carries on a trade in Ireland, undertakesR&D activities in Ireland or within the EEA and incurs the expenditure shall be entitled to the R&D tax credit.

If the company does not have a Corporation Tax liability,then it is possible to receive a refund of the Research and Development tax credit, up to certain limits, over a 33 monthtimeframe.

Finance Act 2012 introduced a number of changes to theR&D tax credit scheme as follows:

Volume basis: The R&D credit applies to incrementalexpenditure with reference to a fixed base period of 2003.This has been revised so that the first €100,000 of qualifying R&D expenditure will benefit from the 25%R&D tax credit on a volume basis. The tax credit willcontinue to apply to incremental R&D expenditure in excess of €100,000.

Outsourcing limits: At present, sub-contracted R&Dcosts are eligible where they do not exceed 10% of totalcosts or 5% in the case of sub-contracting to third levelinstitutions. This limit can disproportionately affectsmaller companies who may have greater need to outsource R&D work than larger multinationals withgreater internal resources. The outsourcing limits forsub-contracted R&D costs are being increased to thegreater of 5% or 10% as appropriate or €100,000.

Use of the credit to reward R&D employees:Companies in receipt of the R&D credit will have the option to use a portion of the credit to reward key employees who have been involved in the developmentof R&D. The credit will be a tax-free payment in thehands of the employee (although they will be taxed asnormal on their other income).

Corporation Tax relief for start-upcompanies New companies incorporated in Ireland or an EEA Stateafter 14 October 2008 and commencing a new trade will beexempt from corporation tax on income and certain charge-able gains for the first three years. The relief is now limitedto the amount of employer’s PRSI paid by a company in anaccounting period subject to a maximum of €5,000 peremployee and an overall limit of €40,000.

Ireland Update


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Ireland Update continued


Marginal relief will apply where corporation tax payable by a new company for a period is between €40,000 and€60,000. This relief will not apply where an existing trade isacquired. It will also cease to apply where part of a newlyestablished trade is passed to a connected party. Companiescarrying on excepted trades and close service companieswill not qualify for this exemption.

Relief is being extended to include start-up companieswhich commence a new trade in 2012, 2013 or 2014.

Capital Gains Tax (CGT) The rate of Capital Gains Tax has increased from 25% to30%. This increase applies in respect of disposals madeafter 6 December 2011.

A new incentive relief from CGT has been introduced for the first seven years of ownership for properties bought between 7th December 2011 and the end of 2013, wherethe property is held for more than seven years. The relief willbe granted by relieving any gain on the disposal of the landor buildings by the same proportion that the period of sevenyears bears to the period of ownership.

VAT With effect from 1 January 2012, the standard rate of VATincreased from 21% to 23%.

Stamp Duty Multiple Stamp Duty rates for non-residential property wereabolished. A new lower rate of 2% has been introduced.The single rate will apply to the entire amount of the consideration. The new rate applies to instruments executedon or after 7th December 2011.


Catherine McGovernPKF Tax Consulting LtdE: [email protected]

Italy Update


1. Use of tax losses generated by Italian resident companies (Article 84 of the Italian Income Tax Code (TUIR)

Article 1 of the Law Decree 98/2011 (converted by Law111/2011) has introduced significant rule changes for carryforward tax losses. According to the previous rules, it waspossible to:

carry forward tax losses generated in a particular taxyear for the five following tax years

offset the entire amount of tax losses against the amountof taxable income of each subsequent fiscal year.

The new rules now allow companies to:

carry forward the losses without any time limit

offset said losses up to only 80% of the taxable incomeamount of each successive fiscal year

carry forward losses exceeding 80% of the annual taxable income, thus reducing the taxable income ofsubsequent tax periods.

It is to be noted that the Law has not modified the treatmentof any tax losses undergone in the first three tax periodsfrom the date of the company’s incorporation. That is, theycan still be carried forward without any time limit and theentire taxable income of any subsequent years can be offset,provided they have resulted from the start-up phase of anew business.

Needless to say, these changes are likely to result in a different approach to assessing priority for the use of thelosses. Whereas previously it was more convenient for acompany to use the “ordinary” losses first (that otherwisewould have expired after five years), now it would be moreappropriate to utilise those made at the beginning of its activity (ie in the three first years). For the sake of clarity, wewould point out that our legislation does not contemplatetax losses being carried back.

Enforcement of the new rulesThe new regime applies to tax losses produced during thetax year in progress at 6 July 2011. Companies whose taxperiod matches the calendar year (1 January – 31 December)must calculate their tax burden for 2011 in accordance withthe new rules. In other words, only the tax losses generatedin fiscal years 2006, 2007, 2008, 2009 and 2010 can beoffset against the abovementioned threshold of 80% of the

taxable income for 2011. Losses generated in 2005 are notallowed to be carried forward.

2. Non-operating and loss-making companies(Law Decree 138/2011 paragraph 2)

An increase of 10.5% will be applied to corporate tax effectiveas of FY 2012, thus leading to an overall corporate tax rateof 38.0 %. This tax rate increase applies to:

a) Non-operating companies (Art. 30 of Law of 23 December 1994)

b) Companies whose revenues exceed the minimum threshold foreseen by non-operating companies, whichdeclare a loss for corporate tax purposes for three consecutive financial years

c) Companies that, in a three year time-frame, made taxlosses in two years and in the other year declared profitslower than the minimum established by the rulesgoverning non-operating companies.

Companies falling under a), b) and c) above can file for a rulingby the Tax Authorities to claim for the non-applicability ofthe rule, either fully or partially, on the basis of particularfacts and circumstances.

3. Exit tax news (Article 166 of the Income Tax Law, paragraph 2 – quarter )

As a general rule, Italian companies that decide to transfertheir tax residence abroad are assumed to having realisedtheir assets at “fair value” unless they maintain a permanentestablishment in Italy.

In accordance with the new rules, if the tax residence istransferred to European Union countries or to States includedin a specific “white list”, without leaving a permanent establishment in Italy, companies are allowed to requestsuspension of such taxation up to when the taxable incomerelating to the business transferred abroad has been produced.


Walter BonziMGP Studio Tributario e SocietarioT: +39 02 43981751E: [email protected]: www.mgpstudio.it

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1. Return Amendment is acceptableA taxpayer may amend the Income Tax Return if he findsthat there is a mistake in it. In this case, the taxpayer is required to pay the tax and the due late fines resulting fromthat amendment and the taxpayer is not considered to havecommitted a violation or a crime unless the Tax Departmentdiscovered the mistake before him or the auditor has issueda notice of audit about this Return.

2. Interim Income Tax Return is requireda. The first Return covers the first half of the financial period. The Return has to be declared and the tax paidin full during the period of 30 days from the first half ofthe tax period.

b. The second Return covers the second half of the financial period. The Return has to be declared and thetax paid in full during the period of 30 days from the second half of the tax period.

3. Tax Rates are reduced a. Tax shall be imposed on a physical person’s taxableincome according to the following rates:

i. 7% for each Jordanian Dinar (JOD) of the first 12,000 JOD

ii.14% on each 1 JOD over 12,000 JOD.

b. Tax shall be imposed on a legal person’s taxable income according to the following rates:

i. 14% for all legal persons except those mentioned in subparagraphs (ii, iii) below

ii. 24% on financial companies (including exchangecompanies), financial intermediary companies,insurance companies, legal persons carrying out financial lease businesses and main communicationcompanies

iii. 30% on banks.

4. Physical Person exemptions To calculate the taxable income, the following exemptionsshall be deducted from the gross income of a physical resident person:

a. 12,000 JOD for the taxpayer

b. 12,000 JOD for the dependents regardless of their number.

5. Incentives for foreign companies toregister within Kingdom of Jordan

The Council of Ministers issued a decision number (742)dated 3 February 2010 containing the exemption ofsalaries and wages paid by the company’s headquartersand representative offices to non-Jordanian workers withinthe kingdom of Jordan. The business is carried outside theKingdom of Jordan in order to encourage foreign companiesto register the headquarters or the representative officeswithin the Kingdom of Jordan.

Jordan Update


6. Withholdings on Non-Resident Income A. Income from investment, royalties and any other non-exempted income paid by a resident directly or indirectlyto a non-resident person is subject to the rate of 7% instead of previous figure of 10% and the withheld amountshall be considered a final tax.

B. All the services provided by a local service provider are subject to 5% instead of the previous figure of 2% withholding tax on the due date of payment or paymentwithin 30 days, whichever comes first.

The following services are exempt from the 5% deduction:

� Air services

� Bank services

� Cargo services

� Cleaning services

� Clearance services

� Energy services provided by the Electricity Corporation

� Financial lease services provided by licensed companies

� Health services provided by hospitals

� Hospitality services

� Information Technology services provided by companies

� Insurance services

� Maintenance services

� Media services

� Programming service provided by companies

� Security services

� Telecommunication services

� Tourism services provided by professionals

� Training courses delivered by companies

� The umbrella of services provided by Registered Companies within the Income and Sales Tax Department.

7. Previous expenses A taxpayer may deduct the previous tax periods’ expensesunless they were defined and final. Expenses of the previousfour years are cancelled from the amended law.

8. New penalties raised If it has been proven that there is missing information in thesubmitted tax declaration by the taxpayer, a penalty shall be imposed at the following rates:

a. 15% if the difference is more than 20% and does not exceed 50% of the due tax

b. 80% of the tax difference if it exceeds 50% of thedue tax.

If the taxpayer accepts the auditing decision, the administrative assessment decision or the committee’s decision issued by the Tax Department, then the taxpayershall only pay 25% off the penalty.


Ali Al-QudahPartnerPKF Planning Tax Advisory T: +962 6 5627129 Ext.125F: +962 6 5606344E: [email protected]: www.pkf.jo

Jordon Update continued



Kenya Update

Employee vs Consultant – ‘Substance over form’ principle re-emphasised

Both local and foreign Investors in Kenya are still battlingwith matters relating to their human capital and, specifically,whether to have in place ‘contracts of services’ or ‘contractsfor services’ with individuals for provision of services. Thedifference lies in the manner in which tax is computed onthe two modes of contracting. Employees are taxed underthe Pay As You Earn (PAYE) scheme which provides specifictax bands for taxing purposes with the highest band beingtaxed at 30%. On the other hand, consultants are taxed viathe withholding tax mechanism at either 10% (residents) or20% (non-residents of countries with whom Kenya does nothave a Double Tax Agreement (DTA)).

In a case decided late last year, the Kenyan courts re-emphasised the need for employers to look at the principleof ‘substance over form’ in determining whether persons intheir ‘employment’ are actually employees or consultants.The particular case in point involved a Kenyan taxpayer whofiled a case in court disputing an assessment raised by theKenya Revenue Authority due to the payments made andPAYE not accounted for by the taxpayer.

The Kenya Revenue Authority demanded tax from a

taxpayer on the basis that it underpaid its taxes as a resultof accounting for tax in the form of withholding tax as opposed to PAYE on an individual it deemed a consultant.In its ruling in favour of the revenue authority, the courtsstated that “there was a lack of independence in the performance of his (the consultant) duties and he (the consultant) was totally answerable to the applicant (the taxpayer)”. This is despite the individual being contracted as a consultant by the taxpayer.

This ruling demonstrated that the tax authority in Kenya andthe courts have fully embraced the “substance over form”approach in assessing disputes involving the treatment ofindividuals deemed consultants. In light of this ruling companies investing in Kenya should consider carefully how they contract and deal with their consultants and contractual workers.

Proposed VAT lawThe Government is looking at overhauling the existing VATlaw and introduce a new and simpler piece of legislation inits place aimed at removing inconsistencies in treatment ofvarious VATable items and reducing the VAT burden placedon the revenue authority. The first draft released for publicview in July 2011 contained various positive proposals but,at the same time, was widely criticized for not taking intoaccount the existing environment in Kenya. The second

Kenya Update continued


draft issued early this year (2012), on the other hand, was a major improvement to the first draft but still contains thefollowing provisions that may significantly affect investmentin Kenya:

a) Scrapping of VAT Remissions

The second draft of the new VAT law has confirmed thescrapping of VAT remission schemes which remains a majorincentive to investors in Kenya. Consequently, all capital expenditure will now be subject to 16% VAT (where applicable)payable upfront either upon importation or local purchase ofthe same. Previously, VAT remission was available on thepurchase of capital goods worth KShs 1,000,000 andabove for investment or expansion of investments. This provision is likely to increase the cost of financing projectsand would deter investments.

b) Deferring of Input VAT

Under Section 23 of the current VAT Act, input tax at the endof the tax period can be deducted by a registered personfrom the tax payable by him on supplies by him in that period. This allows companies to claim input VAT, freeing upfunds in terms of VAT and thereby encouraging investment inlong term projects. The proposed VAT law now seeks to deferthe recover of input VAT incurred until the time when themachinery/plant is first put to use or until production begins.In the absence of the VAT remission scheme, investors inlong term capital-intensive projects will suffer significantcash flow problems as they may be forced to finance hugeVAT costs which will only be recoverable once productioncommences. This would increase the costs of productionand further deter long term investment.

c) Lodging and payment of refund claims

The draft VAT law also proposes to have all taxpayers filetheir VAT refund claims within three months and goes furtherto provide for payment of the refund claims within threemonths of the submitted VAT claims. This is a major improvement to the existing VAT Act which left payment of refund claims to the discretion of the revenue authority. In addition to this, the law also provides for a 2% per monthcompounded interest on refunds falling due for payment.The proposal will now compel the Government to pay refund claims and will address companies’ cash flow challenges brought on by the need for them to finance theVAT costs at the outset of any purchase. It will also increasegoodwill between the investors/taxpayers and the Government.

The second draft of the proposed VAT law is still undergoingamendments and is expected to be released one more timeto members of the public before being presented beforeParliament for legislation into law.


Martin KisuuRegional Tax PartnerPKF Eastern AfricaT: +254 020 427 0000M: +254 717 077 824F: +254 020 444 7233E: [email protected]

Malaysia Update


Here is a summary of recent developments in Malaysia andthe 2012 Budget highlights.

Tax exemption on income derived from qualifying professional services rendered in Labuan - Income Tax (Exemption) (No.6) Order 201)

Effective from Year of Assessment (YA) 2011 – YA 2020

A new tax incentive which provides 65% income tax exemption of statutory income (SI) for person providingqualifying professional services such as legal, accounting,financial or secretarial services rendered in Labuan bythat person to a Labuan entity.

Tax exemption on directors’ fees received from a LabuanEntity - Income Tax (Exemption) (No.7) Order 2011

Effective from YA 2011 – YA 2020

Income tax exemption on directors’ fees received bynon-Malaysian citizen in Labuan.

Tax exemption for income from employment in a managerial capacity with a Labuan entity, co-located office or marketing office - Income Tax (Exemption) (No. 8) Order 2011)

Effective from YA 2011 – YA 2020

Income tax exemption on 50% of gross income for a

non-Malaysian citizen who is exercising an employmentin a managerial capacity with a Labuan entity in Labuan,co-located office or marketing office.

Service Tax exemption for Free Zones, Duty Free Islandsand Joint Development Area

The Ministry of Finance has announced that effective 1 January2012, exemption of service tax will be granted on all taxableservices:

i. provided by any person in free zones and supplied toany person in free zones

ii. provided by any person in free zones and supplied toany person in the principal customs area

iii. provided by any person in the principal customs areaand supplied to any person in free zones

iv. provided by any person in the principal customs areaor free zones in connection with any matters in Langkawi,Tioman, Labuan and the Joint Development Area.

The exemptions listed shall be granted until the Goods andServices Tax comes into force.

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2012 Budget HighlightsThe 2012 Budget was presented by the Malaysian PrimeMinister cum Minister of Finance on 7 October 2011. TheBudget highlighted the direction of Government policies inenhancing Malaysia’s business environment, strengtheningcompetitiveness of industries, fostering economic diversifications as well as ensuring the well-being of theRakyat and Nation.

In line with the theme of the 2012 Budget – National Transformation Policy: Welfare For the Rakyat, Well-BeingOf The Nation, it focuses on five key areas:

1. Accelerating investment

2. Generating human capital excellence, creativity and innovation

3. Rural transformation programme

4. Strengthening the Civil Service

5. Easing inflation and enhancing the well-being of the Rakyat.

The key budget changes announced and introduced areoutlined below:

1. Tax incentive for Treasury Management Centre (TMC)

A new tax incentive has been introduced to encouragemultinational corporations to set up a regional treasurymanagement hub or TMC in Malaysia.

Key features of the incentive are as follows:

a) 70% income tax exemption on the SI arising from thequalifying treasury services rendered for a period of five years

b) Withholding tax exemption on interest payments for borrowings made in relation to qualifying activities

c) Stamp duty exemption on all loan agreements andservice agreements in relation to qualifying activities

d) Expatriates working in a TMC are taxed only on theportion of their chargeable income attributable to thenumber of days in Malaysia.

2. New tax incentive for new 4 and 5 star hotels in Peninsular Malaysia

The Government has proposed that investors undertaking newinvestments in 4-star and 5-star hotels in Peninsular Malaysia be given Pioneer Status or Investment Tax Allowance incentivesubject to certain conditions being met.

3. Tax incentive for providers of industrial design services in Malaysia

Generally, industrial design service is the professional service of creating and developing concepts and specifications that optimise the function, value and appearance of products andsystems. It was proposed in the 2012 Budget that providers of industrial design services be given pioneer status with an income tax exemption of 70% of statutory income for five yearssubject to terms and conditions being met.

4. Tax incentive for profit-oriented private schools and international schools

A new tax incentive has been given to the following categories of private schools and international schools registered and fulfilling the requirements stipulated by Ministry of Education.

Profit oriented private schools:

Income tax exemption of 70% for a period of five yearsor

Income tax exemption equivalent to Investment Tax Allowance of 100% of the qualifying capital expenditureincurred within a period of five years to be set off against70% of statutory income

Effective for applications received by MIDA from 8 October 2011 until 31 December 2015.

Profit oriented international schools:

Income tax exemption of 70% for a period of five yearsas an additional option to the current tax incentive available (i.e ITA of 100% on the qualifying capital expenditure to be set off against 70% of statutory income)

Effective for applications received by MIDA from 8 October 2011 until 31 December 2015.

Profit oriented private schools and international schools:

Exemption from import duty and sales tax on educationalequipment – effective for applications received by MIDAfrom 8 October 2011

Double tax deduction for overseas promotional expenses – effective YA 2012.

5. Tax incentives for Kuala Lumpur International FinancialDistrict (KLIFD)

KLIFD has been identified by the Government as an EarlyEntry Point in its Economic Transformation Programme.

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This crucial component of the Greater Kuala Lumpur initiativeunder the National Key Economic Area (NKEA) is aimed attransforming Kuala Lumpur into an international hub forbanking and finance as well as related professional services.

A proposal has been made in the 2012 Budget that the following tax incentives are given to accelerate developmentof KLIFD:

a) 100% income tax exemption for a period of 10 yearsand exemption from stamp duty on loan and serviceagreements for KLIFD status companies

b) Industrial building allowance and accelerated capitalallowance for KLIFD Marquee Status Companies

c) 70% income tax exemption for a period of five yearsfor property developers in KLIFD.

6. Real property gains tax (RPGT)

With effect from 1 January 2010, the RPGT has been re-introduced where the effective RPGT rate of 5% is leviedon gains arising from disposal of real property or shares inReal Property Companies within five years of acquisition.

However, with effect from 1 January 2012, the RPGT rateshave been further revised as per the table below for the revised RPGT rate:

7. Revision of Reinvestment Allowance (RA) incentive

RA is a capital-based incentive granted to manufacturingcompanies which undertake qualifying projects and incurqualifying capital expenditure for their manufacturing business.In the past few years, the conditions set for a company toqualify and enjoy this RA incentive has been further tightened.The following changes have been introduced:

1) The definition of “manufacturing” activities and “factory” are provided in the relevant provisions of law

2) Exclusion of “processing” activities for RA claims

3) Income Tax (Prescription of Activity Excluded from theDefinition of “manufacturing”) Rules 2012 further clarifiesthe IRB’s stand on the types of activities which do notqualify for RA claims.

8. Duty to furnish particulars of payment made to agents,dealers and distributors

With effect from 1 January 2012, the prescribed form(CP 58) containing relevant particulars of payment needsto be prepared and sent to agents, dealers or distributorsnot later than 31st March of the following year.

“Agent”, “dealer” or “distributor” is defined as any personauthorised by a company to act in such capacity and receives payment from the company arising from sales,transactions or schemes carried out by him as an agent,dealer or distributor.

9. Compensation for Late Refund of Income Tax

Effective from YA 2013.

Compensation of 2% per annum (daily rest) on theamount of tax refunded late by the IRB will be given to taxpayers who have filed their tax returns within thestipulated timeframe.

Compensation is payable to taxpayers where theamount refunded is made after:

i) 90 days from the due date for e-Filing or

ii) 120 days from the due date for manual tax filing.

10. Enhancement of Employee Retirement Scheme (EPF)

With effect from 1 January 2012, the employer’s contribution of EPF for an employee who receives monthlywages /salary of RM5,000 and below is increased by 1%from 12% to 13%.

The employee’s contribution rate remains at 11%.


M. B. GathaniExecutive Director of Tax DivisionPKF Malaysia T: +603-2032 3828E: [email protected]

Ms Chin Chin LauPrincipal of Tax DivisionPKF MalaysiaT: +603-2032 3828E: [email protected]: www.pkfmalaysia.com

Malaysia Update continued


Holding Period

Within two years

Exceeding two years but not exceeding five years

Exceeding five years

RPGT Rates

10%

5%

0%

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Malta Update


High Net-Worth Individuals Rules and HighlyQualified Persons Scheme

Below are the key points of the new rules for High NetWorth Individuals and Highly Qualified Persons.

1. High Net Worth Individuals Rules (HNWI)

The High Net worth Individual (HNWI) regulations introducedin terms of Legal Notice 400 and 403 in 2011 have replacedthe Residence Scheme Regulations. The process for an individual to become resident in Malta depends on whetherthe said individual is a national of an EU country (includingEEA and Swiss Nationals) or of a third country.

i. Individuals residing in EU/EEA/Swiss nationals:

PropertyApplicants are required to own property in Malta at thetime of application with a value of not less than€400,000, serving as the applicant’s habitual residenceAlternatively, the applicant may opt to rent property inMalta for not less than €20,000 per annum.

Financial Resources and InsuranceThe applicant must also be in receipt of stable and regular resources which are sufficient to support himself/herself as well as any accompanying dependents. Applicants must therefore be economically self-sufficientand both the applicant and any dependents must holdadequate health insurance covering the EU territory. A new requirement is that the individual must satisfy a“fit and proper test” in order to be granted a permitunder this scheme.

Tax Treatment The permit holder is given special tax status carrying the right to pay tax at a beneficial rate of 15% on foreignsource income received in Malta together with the possibility of claiming double taxation relief

This is subject to a minimum yearly tax of €20,000 and€2,500 per accompanying dependent after claiming anyapplicable double tax relief

Other chargeable income of the beneficiary (and that ofhis or her spouse) that is not taxed at the special rate of

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15% will be taxed at 35%. A beneficiary of this schemeand his or her spouse cannot opt for a separate taxcomputation.

ii. Individuals residing in Non-EU/EEA /Swiss Nationals

PropertyApplicants who are non-EU/EEA/Swiss nationals are required to own property in Malta at the time of application. Such “qualifying property holding” musthave a value of not less than €400,000 and must serveas the applicant’s habitual residence and that of any accompanying family members

Alternatively, the applicant may opt to rent property inMalta for not less than €20,000 per annum.

Financial Resources and InsuranceThe applicant must not already benefit from the Residence Scheme Regulations or from the Highly Qualified Individual Rules. As in the case of EU/EEA/Swiss nationals, the applicant must also be in receipt of stable and regular resources which are sufficient tosupport himself/herself as well as any accompanying dependents and be in possession of adequate health insurance cover for himself/herself and any accompanyingdependents covering the EU Territory. A new requirementis that the individual must satisfy a “fit and proper test” in order to be granted a permit under this scheme.

Tax TreatmentA 15% rate of tax is charged in respect of foreign income remitted to Malta with the possibility of claimingdouble tax relief

The minimum annual tax stands at €25,000 with anadded €5,000 per dependent, after claiming any doubletax relief

Other chargeable income of the beneficiary (and that ofhis or her spouse) that is not taxed at the special rate of15% will be taxed at 35%. A beneficiary of this schemeand his or her spouse cannot opt for a separate taxcomputation.

A onetime registration fee of €6,000 is levied by the Government. Such fee is, however, waived in the case ofapplications for special tax status under the HNWI rules.This concession will continue to apply in respect of applications submitted until 15 September 2012.

Recent Changes to HNWI RulesThe HNWI rules and guidelines have recently been amendedby means of Legal Notices 41 and 42 of 2012. The mainchanges are the following:

1. Minimum residence rules removed: The conditionwhich required an applicant to reside in Malta for a minimum period of 90 days in a calendar year has beenremoved. However, individuals must ensure that they donot reside in another jurisdiction for more than 183 daysin a calendar year.

2. With respect to Non-EU/EEA/Swiss nationals: an applicant must state at the outset whether he/she will be applying as a long-term resident or not. In the eventthat the applicant’s intention is not to be a long-termresident, then such person cannot stay in Malta for morethan nine months in a calendar year. If they stay longer,they will be considered a long-term resident and will berequired to enter into a ‘Qualifying Contract’ with theGovernment of Malta.

In the case of long-term residents, the requirement tocontribute an amount to the Government of Malta of€500,000 and €150,000 for each dependent has beenremoved from guidelines. However, reference to thisconcept is still made in a generic manner. Details suchas the amount thereof and the circumstances in which it would be imposed have not yet been published.

3. One of the most important requirements to be satisfiedfor eligibility for the residence status is the ownership ofqualifying owned property or the lease of qualifyingrented property. Pursuant to the amendments, propertyis also deemed to be qualifying owned property if it waspurchased after 1 January 2011, thus widening thebracket and including property purchased between January and 14 September 2011.

2. Highly Qualified Persons Scheme

In 2011, the Government implemented a scheme for highlyqualified persons to attract them to occupy “eligible office”with companies licensed and/or recognised by the Malta Financial Services Authority and Lotteries and Gaming Authority.

“Eligible office” comprises employment in one of the followingpositions: Actuarial Professional, Chief Executive Officer,Chief Financial Officer, Chief Insurance Technical Officer,

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Malta Update continued


Chief Investment Officer, Chief Operations Officer, Chief RiskOfficer, Chief Technology Officer, Chief Underwriting Officer,Head of Investor Relations, Head of Marketing, PortfolioManager, Senior Analyst (including Structuring Professional),and Senior Trader/Trader.

Qualifying Contract of EmploymentAn individual may benefit from the 15% tax rate if he satisfiesall of the following employment conditions:

1. Derives employment income subject to income tax in Malta

2. Employment contract is subject to the laws of Maltaand proves to the satisfaction of the Malta FinancialServices Authority (in the case of Financial Services) andthe Lotteries and Gaming Authority (in the case of GamingServices) that the contract is drawn up for exercisinggenuine and effective work in Malta

3. Proves to the satisfaction of the Malta Financial Services Authority (in the case of Financial Services) or the Lotteries and Gaming Authority (in the case ofGaming Services) that he is in possession of professional qualifications and has at least five years’ professional experience

4. Has not benefitted from deductions available to investment services expatriates with respect to relocationcosts and other deductions (under article 6 of the Income Tax Act)

5. Fully discloses for tax purposes and declares emoluments received in respect of income from a qualifying contract of employment and all income received from a person related to his employer payingout income from a qualifying contract as chargeable to tax in Malta

6. Proves to the satisfaction of the Malta Financial Services Authority (in the case of Financial Services) or the Lotteries and Gaming Authority (in the case of Gaming Services) that he performs activities of an eligible office

7. Proves that:

i. he is in receipt of stable and regular resources whichare sufficient to maintain himself and the members ofhis family without recourse to the social assistancesystem in Malta

ii. he resides in accommodation regarded as normalfor a comparable family in Malta and which meets thegeneral health and safety standards in force in Malta

iii. he is in possession of a valid travel document

iv. he is in possession of sickness insurance in respectof all risks normally covered for Maltese nationals forhimself and the members of his family.

Tax Treatment under the Highly Qualified Persons SchemeEmployment Income - subject to tax at a flat rate of 15%provided that the income amounts to at least €75,000.Over €5,000,000 is exempt from taxThe 15% tax rate applies for a period of five years.


George MangionPKF MaltaT: +356 21 484 373F: +356 21 484 375E: [email protected]: www.pkf.malta.com

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Presidential decree of tax benefits to companiesof the Maquiladora industry

On 12 October 2011, a Decree originally published on 5 November 2007 was amended. These amendments relateto various tax benefits which will now be effective from 31 December 2013. The Federal Government has issued aseries of measures for the Maquiladora industry which wasoriginally in force until 31 December 2011 as follows:

There will be a tax incentive to companies that carry outassembly operations (Maquila activity) and determinetheir income based on Article 216-Bis of the Income Tax Law (ITL)

The benefit consists in determining the credit of the Single Business Tax Rate (flat tax), considering as thebasis for the calculation of the flat tax, the same taxprofit determined for income tax (ISR)

According to the Decree, the result of multiplying the taxprofit determined for the income tax at flat tax rate (17.5%).

Highlights:

I. The application of tax incentives relating to Tax Rate(IETU) for companies carrying out assembly (Maquila) operations is extended to 31 December 2013.

II. Effective 1 January 2012 and up until 31 December 2013,tax incentives may be applied provided that:

Companies file the federal tax statements they are required to file

Companies have not been charged with a tax credit

Companies must submit their audited financial statements

Companies file a Statement (Information) reporting anytransactions with third parties (DIOT) under the termsand conditions provided by the tax provisions

Companies file a Statement on Manufacturing,Maquiladora and Export Services (DIEMSE) in the termsand conditions provided by the tax provisions

Company’s Federal Taxpayer Registry is current and active

Data provided to the Federal Registry of Taxpayers arenot false or non-existent

All the supporting documentation of foreign trade operations is available

Companies address the requirements of the authoritiesto submit documentation and information demonstratingcompliance with their tax or customs obligations in relation to assembly (Maquila) operations

The name or tax address of the supplier, producer, consignee or purchaser abroad, stated in the pedimentoor invoice, is not false or non-existent.

The Decree is good news for the maquiladora industry butthere are still outstanding issues that need to be addressedby the tax authorities.

Resolution of the federal court of fiscal and administrative justice

The court found and published in December 2011 that, when the tax authorities publish in the Official Journal of the Federation comments on the interpretation of the OECDModel Agreement to avoid Double Taxation and Preventionof Fiscal Evasion, individuals may rely on those commentsin interpreting and applying Treaties signed by Mexico provided the Treaty in question is consistent with the Model Treaty.

2012 FISCAL IMPROVEMENT

In December 2011, the legislative bodies approved somechanges to tax provisions applicable in 2012. These include:

Income Tax LawThe tax incentive for the final consumption of diesel remains. This consists of crediting the tax paid for theacquisition of fuel against Income Tax for the year. It applies to taxpayers engaged in farming, forestry andpublic and private transport activities

The tax incentive for the payment of fees for the use ofnational roads also remains. This consists of crediting50% of such payments against Income Tax.

Tax CodeSeveral dispositions which govern the legal environmenthave been updated including:

It is established that when the accounting information isexpressed in a language other than Spanish, or valuesare entered in foreign currency, the Tax Authorities mayrequest a Spanish translation or the provision of the exchange rate used

Requirements for the issuance of digital invoices aresimplified.

Setting up proof requirements for tourists to obtain a refund of VAT paid in Mexico.

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Mexico Update


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Tax OffenceEstablishing new statute of limitations for criminal proceedings in the case of tax offences

The failure to submit final statements for more than 12 consecutive months would be equal to tax fraud.


Mario CamposlleraPartnerPKF MexicoT: +33 3634 7159E: [email protected]

Veronica BarbaAsesoria FiscalPKF MexicoT: +33 3634 7162| E: [email protected]: www.pkfmexico.com

Tax Consequences of Dual Nationality

Dual nationality is the legal status enjoyed by certain individualswho are recognised as nationals simultaneously by two States.Dual nationality means that an individual is a national (or citizen) of two countries at the same time. However,each country has its own laws in this regard. While somecountries allow it, others do not and, in some cases, thereare even countries that have no specific laws on this concept.Although dual nationality automatically occurs in somecases – for instance by birth - it might also occur in othercircumstances such as social, cultural, family and work,without taking into account that this status can sometimeslead to inadvertent or unwanted tax consequences.

Referring in particular to the case of the United States andMexico, it is important to note that dual nationality was expressly prohibited in both countries until 1868 in theUnited States and 1998 in Mexico but dual nationality isnow legal in both countries.

However, having such status may cause several problems,as individuals with dual national owe allegiance to bothstates and are obliged to obey the laws of both countries.

Tax implicationsIn order to understand the issues that may arise as a resultof having dual nationality, it is necessary to refer to the way

in which individuals are subject to tax in Mexico and in theUnited States.

Legislation of different countries bases its tax jurisdiction onseveral items, mainly residence, citizenship and nationality.Thus, while some countries tax income of their nationals,others feel that they must comply with the requirement ofbeing citizens and, for some others, it is enough to be aresident which, in most cases, depend on where the personhas a permanent residence or carries out activities whichgenerate most of its revenue.

In the case of Mexico, the right of taxation (on income) isgoverned by the concept of residence. An individual shallbe a resident of Mexico if his home is in this country, while if he has a home also in another country, it will depend onwhere he has his centre of vital interests, which depends on where he gets most of his income, or where he carrieson his professional activities. If this determines he is residentof Mexico, this individual will be required to pay income taxon all income, regardless of its source.

In the United States, tax law is governed by the concept of citizenship. This does not mean that the concept of residence is irrelevant, since resident aliens in the UnitedStates are taxed in the same way as citizens, while non-resident aliens are taxed according to special rules. Thus, in principle, an American citizen is obliged to pay incometax on all income regardless of its source. For these purposes, in general, an individual is a US citizen by birth or naturalisation.

In addition, for tax purposes, if an individual is not a citizenof the United States, it must be determined whether he is a resident alien or a non-resident alien. If an individual is analien, he shall be considered non-resident unless he meetsone of the two burdens of proofs of residence provided bylaw for that purpose or if he chooses to be considered aresident alien for tax purposes.

Therefore, non-residents pay tax only on income from asource in the United States, besides being subject to specialtax rates and able to apply the exemptions and benefits ofinternational treaties to avoid double taxation. On the otherhand, a resident for tax purposes in the United States willbe under the same rules as an American citizen, whichmeans he will pay taxes on all income regardless of where it is derived from.

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Mexico Update continued


In this sense, we can conclude that both countries set theirtax base on a global basis (worldwide income), which meansthat, once a person becomes a resident of one of the twocountries, he must report the total income regardless of itssource. On the other hand, while not being a resident, hewould only be required to pay taxes on income obtained from a source located in said country (source income).

A person born in the United States of Mexican parents wouldhave US citizenship by being born on US soil (AmendmentXIV, Section 1 of the US Constitution) and the Mexican citizenship derived from being born abroad as son /daughterof Mexican parents (Section II of Article 30 of the MexicanConstitution). Immigration laws provide that when the personreaches legal age, he will have to decide to have both nationalities. Under this scenario, dual nationality may be a result of the choice made by the individual (under certainconditions), for example, a Mexican by birth who has alwaysresided in Mexico and is the son of US parents.

Under these conditions and complying with certain requirements contained in the Immigration and NationalityAct, a person may obtain US citizenship and get "by choice"dual nationality, Mexican by birth and American by bloodright. This choice, in many cases (if not all), relates to social,cultural, family, work issues, among others. Thus, individualswith dual citizenship could be acquiring tax obligations in bothcountries without knowing it and paying taxes on all income.

Similarly, many Mexicans do not foresee that, when acquiringthe "green card", they become US residents for tax purposes,which means that annual tax returns must be filed in theUnited States as well as in Mexico, his country of residence.

Some of these issues are dealt by Articles 4 and 24 of theConvention for the avoidance of double taxation concludedbetween Mexico and the United States. An individual shouldcarefully review the facts when facing dual nationality/citizenship and whether the income obtained is taxed by the two States.

In conclusion, while the domestic laws of Mexico and theUnited States allow dual nationality/citizenship status, when electing such status the individual should take intoconsideration not only the social, cultural, labour, immigration, issues, etc but also the tax implications, since having dual citizenship implies being subject to all their laws, tax included.


Octavio LaraPartnerArmando Aguirre AssociatesE: [email protected]

Relevant tax amendments for future Namibia investorsThe Namibian Government via its Government Gazette hasissued a number of income tax and other related amendmentswhich became effective on 30 December 2011. Listed beloware the changes which are considered to be of particularimportance to future investors to Namibia.

Income tax amendments

The following income tax amendments were introduced effective 30 December 2011 for:

Corporate taxpayer: Years of assessment commencingon or after 1 January 2012

Individuals and trusts: Years of assessment commencingon or after 1March 2012.

The amendments relate to:

a) Key-man policy proceeds

b) Deductibility of premiums for key man policies

c) Proceeds on the disposal of mining and exploration licences

d) Deemed source amounts with regards to the sale of a mineral licence or the right to mine. Amounts are deemed to be from a Namibia source

e) Recoupment of allowances and deductions. Assets are to be valued at market value in order to calculate the relevant recoupment

f) Educational policies

g) Building allowances – the initial 20% and 4% (non-manufacturer) or 8% (manufacturer) are claimable in the same year

h) Special exporters’ allowances – all goods which aremanufactured in Namibia qualify for an 80% allowance.

Ring-fencing

The new amendment now ring-fences a loss from a trade to that specific trade. The loss of a particular trade is nowlimited to the income for that trade. Losses cannot be offsetagainst income from another trade. This change is only applicable to natural person taxpayers.

Withholding tax on services

Withholding tax at 25% is now also payable by a residentperson to a non-resident person (who has no permanentestablishment in Namibia) in the following instances:

Management fees paid

Consultation fees

Directors’ fees

Entertainment fees.

The withholding tax is payable by the resident within 20 days from the end of the month during which theamount has been withheld.

A practice note set the effective date as 1 January 2012with the first payment to be effected by 20 March 2012.This includes all invoices dated on or after 30 December2011 to 28 February 2012. Thereafter payments are to beeffected by the 20th of the following month for the precedingmonth ended.

The possibility exists that DTAs in place might override section 35A with regards to withholding tax. DTAs shouldbe reviewed in order to assess the possibility. Uncertainty in this respect currently exists and it is advised that clientsobtain specific tax directives from the Inland Revenue. Permanent establishment refers to office, branch, fixedplace available to non-resident from where the trade can be exercised.

Prospective clients wishing to commence business inNamibia are advised to obtain professional advice in orderto ensure that all tax implications are clearly pointed out and researched before further steps are taken.


Uwe WolffPartnerM:+264 81 127 6323E: [email protected]

Beatrice JohrTax ManagerE: [email protected]

PKF NamibiaT: +264 61 220 662

Namibian Update


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Recent tax changes

Romanian Tax Authorities have recently made significantchanges to the relevant local legislation which come into effect in 2012. Some of the most important changes are set out below.

Amendments regarding the deductibility of the fuel expenses

From1January 2012, taxpayers will be entitled to deduct50% of the expense incurred for fuel for public transportmotor vehicles weighing up to 3,500 kg and up to nine passenger seats including the driver’s which are owned orused by the taxable person. Also, 50% of the VAT incurredfor the acquisition of vehicles and of fuel for such vehiclesmay also be deducted.

From an individual income tax perspective, 50% of the expense incurred for the fuel can be deducted when determining the annual net income from freelancing activities.As before, the vehicles used for emergency services, repairs, security, delivery, sale or transportation of personsare not subject to the abovementioned limitation of the deductibility right.

Cancellation of the registration for VAT purposes

New options under which a taxpayer’s registration for VATpurposes can be cancelled have been also introduced.Among others, tax authorities may cancel a taxpayer's registration for VAT purposes if no VAT returns were submitted during a calendar semester or if no acquisitions

or deliveries of goods / provision of services have been reported in the VAT returns submitted during a calendar semester. Taxpayers whose VAT number are cancelled do not have the right to reclaim VAT. They are, however, subject to payment obligations in respect of VAT for the taxable operations performed.

Amendments regarding certain forms

The statement regarding the deliveries and acquisitions performed in the national territory by entities registered forVAT purposes (Form 394) has been modified. Consequently,taxable transactions for which the reverse charge mechanismapplies must be included in the form. In particular, separatelists have been prepared in order to highlight transactionswith cereals and technical plants.

For all operations performed from January 2012, the reportingperiod shall be the fiscal period declared for the submissionof the VAT return (Form 300), which may be monthly, quarterly, etc.

The VAT return (Form 300) has been also amended. Consequently, new rows have been introduced for the taxable transactions with Romanian legal persons to whichthe reverse charge mechanism applies. Additionally, the newform contains two new rows where the taxpayer must disclosetaxable transactions (supply of goods and provision of services/acquisitions of goods and services) performed inside thecountry for which invoices have been issued/received fromentities registered for VAT purposes in Romania.

Romania Update


Romania Update continued


Amendments regarding the deadline for submitting the profit tax return

The deadline for submitting the annual profit tax return will be25 March of the following year.

As before, non-profit organisations and taxpayers obtainingincome from cereal crops and technical plants must submittheir profit tax return by 25 February of the following year.

Amendments regarding the personal income tax due by individuals receiving income other than salaries

Individuals for which taxable income is determined based on income norms and who have registered an annual grossincome of more than the equivalent in lei of EUR 100,000,must determine the taxable income on an actual basis startingwith the next fiscal year.

For income derived from renting agricultural property, a 16%tax will be withheld at the moment of payment, the tax beingfinal (if the taxpayer cannot choose to calculate the taxableincome on an actual basis). However, if the taxpayer choosesto determine the taxable income on an actual basis, the payment of the tax due will be made annually based on a tax decision issued by the tax authorities.

Amendments regarding the social security contributions

From 1 July 2012, the administration of the mandatory social contributions due from individuals receiving incomefrom freelance’ activities, agricultural activities and unincorporated associations will be transferred to the National Agency of Fiscal Administration.

Pension contributions will be due for the indemnity receivedby companies’ administrators and for the amounts receivedby the representatives within the board of directors.

Income received by employees participating in a company’sprofit will also be subject to social security contributions.

There has been a clarification regarding the treatment ofthe expenditure which is not deductible from the profit taxperspective. Consequently, this type of revenue shall not besubject to social security contributions.

The list of benefits in kind not subject to social security contributions has been restricted.

For more details, please contact:

Andreea TudosePartnerPKF ConsultorT: +40 21 252 38 80E: [email protected]

Andreea ArcereanuTax ConsultantPKF Audit SRLT: +40 21 252 38 80E: [email protected]

This update covers new transfer pricing regulations, changesto income tax and the latest tax treaties.

New transfer pricing regulations

New rules for the taxation of transactions between relatedpersons came into force in 2012.

The following five methods for determination of income(profit, revenue) from transactions between related personshave been introduced:

1) method of comparable market prices2) method of the subsequent sale price3) cost method4) method of compared profitability5) method of profit distribution.

Two or more of these methods may be used at the same time.

Transactions shall be treated as controlled when they are effected between related persons. Cross-border transactionsinvolving goods traded on commodity markets and transactions where one of the parties is registered, lives oris a tax resident of the state or the territory included into theList of States and Territories adopted by the Ministry of Finance of the Russian Federation shall be treated as transactions between related persons.

This list includes Cyprus, Hong Kong, Liechtenstein, andthe Channel Islands (Guernsey, Jersey, Sark, Alderney).

A taxpayer shall notify local tax authorities about an effectedcontrolled transaction. The notification shall be submitted tothe tax authorities not later than 20 May of the year followingthe year in which the controlled transaction occurred.The notification shall contain the following information:

1) the calendar year when the transaction occurred2) the subject of the transaction3) information on the participants (company’s name or a name of a natural person, tax number, citizenship)

4) information on the amount of income received and/or expenses incurred (or losses sustained) under the controlled transaction so that all incomes and expenses under transactions where the prices are being regulated by the state shall be revealed.

Income Tax changes

From June 2011 all income received by a foreign companyfrom the sale of shares in Russian companies where morethan 50 % of the assets consist of immovable property located in the territory of the Russian Federation and fromfinancial instruments derived from such shares shall not betreated as income of a foreign company, received by it fromsources in the Russian Federation and shall not be subjectto taxation, provided such shares are recognised as sharestraded on an organised stock market.

Securities are recognised as traded on an organised stockmarket only if all the following conditions are observed:

1) they are admitted into circulation by any one of thetrade organisations which have the right to do so in accordance with national legislation

2) information on their prices (quotations) is published in the mass media (including electronic) or if it may be supplied by the trade organisation or by another authorised person to any interested person in the period of three years after the date of the performanceof transactions in the securities

3) the market quotation is calculated by them within thethree months before the date of the transaction, whenthis is required by the corresponding national legislation.

International tax treaties

The Convention between the Government of the Republicof Chile and the Government of the Russian Federation forthe avoidance of double taxation and the prevention of fiscal evasion dated 19 November 2004, was ratified on 28 February 2012.

The Protocol dated 7 October 2010 amending the Agreement between the Government of the Russian Federation and the Government of the Republic of Cyprusfor the avoidance of double taxation with respect to taxeson income and on capital dated 5 December 1988 wassigned on 28 February 2012.

For more details, please contact:

Nadejda OrlovaTax and Law PartnerFBKT: + 7 495 737 53 53F: +7 495 737 53 47E: [email protected]


Russia Update

Rwanda rises in the global rankings for ease of doing business

Rwanda has been rated by the World Bank as one of themost improved countries for the ease of doing business.Rwanda moved up from rank 70 in the global rankings inDoing Business 2010 to rank 58 in Doing Business 2011.

The country has had a steady improvement from 2008 whenit was ranked 150th.

In Africa, Rwanda is ranked by the World Bank as the fourtheasiest place to do business after Mauritius, South Africaand Botswana. It is ranked as the easiest place to do business in the East African region.

In the more recently published Doing Business report 2012,Rwanda has also improved its rating in a number of areas.Some of the areas in which that Rwanda is ranked highly are:

The ranking for paying taxes has improved due to administrative reforms introduced to ease the payments oftaxes, including:

Online tax registration and declarations

Quarterly paying of VAT and PAYE for Small and Medium Enterprises

Installation of software to calculate taxes and fines.

Rwanda also improved in the “trading across borders” rankingmainly due to the following reforms:

Harmonization of customs administration procedures withthe East African Community

Introduction of 24 hour border operations

Reduction of documentation necessary for clearance of goods

Establishment of an integrated border management system.

PKF expands tax services offered in Rwanda

PKF has expanded its tax services’ offering in Rwanda toserve the growing number of clients in the market. PKF nowhas a resident Tax Manager stationed at Kigali.

Tax services offered by PKF Rwanda include:

a) Tax compliance services

b) Tax advisory services which includes tax litigation, employee compensation structuring, tax optimization reviews, tax training, tax lobbying, mergers, acquisitionsand re-organisations; and

c) Cross-border tax advisory services which includes investor tax advisory and due diligence review, transferpricing policy reviews and cross-border tax planning.


Martin KisuuRegional Tax PartnerPKF Eastern AfricaT: +254 020 427 0000M: +254 717 077 824F: +254 020 444 7233E: [email protected]

Rwanda Update


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2012 ranking

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2011 ranking

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Singapore Budget 2012 HighlightsThe Finance Minister delivered the 2012-13 Budget on 17 February 2012. However, unlike previous years, theBudget this year focused on social equality as opposed tofiscal competitiveness. Significant tax-related proposals areas follows:

Disposal of equity investments : Safe harbour rulesGains from the disposal of equity investments are not taxableif the buyer holds a minimum of 20% shares for at least 24months prior to the disposal. This applies to gains realisedfrom 1 June 2012.

Gold Trading HubThe supply of investment grade gold and other precious metals will be exempt from Goods & Services Tax (GST) from1 October 2012.

Cash grant for Small and Medium Enterprises (SME)Automatic one-off cash grant, pegged at 5% of the company’s revenue for the Year of Assessment 2012 (fiscalyear 2011), capped at S$5,000. The company must havemade Central Provident Fund (CPF) contributions for at leastone employee during the year.

Enhanced Productivity and Innovation Credit (PIC) SchemeA 400% tax deduction on S$400,000 expenditure on oneany of the qualifying activities:

� purchase/lease of automation equipment

� training

� investment in research and development

� approved design

� acquisition or registration of intellectual property.

This is available from the Year of Assessment 2011 to 2015.Companies can also opt for a 60% cash pay out for up toS$100,000 of the qualifying expenditure.

Mergers and Acquisitions AllowanceIn addition to the current allowance, a 200% tax allowanceon up to S$100,000 of the transaction costs for each yearof assessment is proposed. This allowance may be writtendown in a single year and is applicable to transactions between 17 February 2012 and 31 March 2015.

Extension of the GST Temporary Import periodGoods imported for approved purposes such as exhibitions,fairs, auctions, repairs, stage performances, testing, experiments and demonstrations may be imported withoutGST if they are re-exported within six months. This does notapply to imports of alcoholic beverages and tobacco.

Renovation and Refurbishment Deduction SchemeWith effect from the year of assessment 2013, the ceiling israised to S$300,000 for costs incurred every three years.

Double tax deductions: Helping companies internationaliseAutomatic deductions without prior approval for up toS$100,000 on the following expenditure:

� overseas business development trips

� overseas investment study trips

� overseas trade fairs and approved local trade fairs.

Revisions to Vehicle Tax RegimeThe Green Vehicle Rebate Scheme (GVR) for commercial vehicles and motorcycles will be extended to 2014. AdditionalTransfer Fees (ATF) on used vehicle transactions will also beremoved. Low carbon emission vehicles will enjoy rebates ofup to S$20,000 while high carbon emission vehicles are subject to a surcharge of up to S$20,000. Euro-V compliantdiesel vehicles will also enjoy reduced taxes.

Enhanced Special Employment Credit (SEC) and revisedCentral Provident Fund (CPF) contributionsIn the effort to encourage employers to engage older Singaporean employees above the age of 50, an SEC of upto 8% of wages will be given. Older workers will also enjoy an increase in CPF contribution rates.


GOH Bun Hiong (吴文雄)Director of TaxesPKF-CAP Advisory Partners Pte T: +65 6500 9359F : +65 6225 8840E: [email protected]: www.pkfsingapore.com


Singapore Update

Major tax regime changes expected after ParliamentaryelectionA combination of the overwhelming victory by the left-wingSMER party in elections held on 10 March, guaranteeingthem an absolute majority in the Slovak National Council, and the continuing effort by the Slovak Republic to lower its national budget deficit to below 3% spells certain changes in Slovak tax law. Although the new Government has not yetbeen put in place, it is expected that there will be a higher income tax bracket of 25% for personal and corporate income tax for earnings over a certain level, probably EUR 33,000, and a tax on dividends.

Currently, dividends are taxed as regular income, and dividends to non-residents are not taxed in Slovakia.

The general value-added tax rate of 20%, which was to havebeen a temporary measure, will probably be permanent, witha higher rate for luxury items. These changes are expectedto be in place by the end of 2012. Please note that the information presented above is based on news reports in the business press, the party program and conversationswith experts. The laws have not yet been passed by the National Council.

Finance leasing of PPEIn an amendment to the Income Tax Act, effective from 1 March 2012, finance-leased property, plant and equipmentwill be depreciated by the lessee over the term of the leaseup to 100% of the value of principal plus acquisition-relatedcosts incurred by the lessee until the asset is put into use. Ifthe lease is assigned to another person, consideration paid in excess of total stipulated payments will be straight-line depreciated as part of the initial price over the remaining period of the lease. If the term of the finance lease is extended or shortened, depreciation already recognised willnot be retroactively adjusted and remaining write-offs will beon a straight-line basis over the newly-contracted period untilthe finance lease expires. The intention here is to clarify questions regarding finance leasing.


Richard Clayton BuddPKF SlovenskoT: +421 2 5828 2711E: [email protected]: www.pkf.sk


Slovak Update


South Africa Update

Amendments to Company Dividends Tax

On 20 December 2011 the Minister of Finance Gazetted that,with effect from 1 April 2012, Secondary Tax on Companies(STC) will be replaced with a dividends tax to be levied at shareholder level, except in respect of dividends in speciewhich would remain the liability of the company. Thus with theimminent introduction of this new dividends tax (DT), taxpayersare left with only a short time in which to adequately prepare for the DT.

The main reason given by SARS for the change from STC toDT is that STC (as a tax on companies) created the impressionthat South Africa's corporate tax rate was higher than that ofother emerging markets, thereby disincentivising inbound foreign investment.

Furthermore, the introduction of DT aligns South Africa with international standards and best practice where the recipient of the dividend is liable to the tax relating to the dividend andnot the company paying it.

Broadly, DT is a tax imposed on shareholders or rather beneficial owners (being the person entitled to the benefit of the dividend and not necessarily the registered shareholder) at a rate of 10%on dividends paid by the company. STC, on

the other hand, is a tax imposed on companies (at a rate of10%) on the declaration of dividends.

DT is categorised as a withholding tax, as, with exception fordividends in specie, collection of the tax is withheld and paid to SARS by the company paying the dividend or by a regulatedintermediary (RI) (a RI is defined, in the Income Tax Act, No. 58of 1962 ("The Act”), and includes for example brokers andbanks) on behalf of the beneficial owners.

The basic principles of dividends tax

Dividends, other than dividends in specieIn respect of dividends, other than dividends in specie, DT isborne by the beneficial owner at a rate of 10%. DT will onlyapply in respect of dividends or foreign dividends paid bySA resident companies or non-resident JSE listed companiesin respect of JSE listed shares. In this regard, foreign with-holding taxes paid on the dividends paid by these non-residentlisted companies, may be deducted from any DT due.

However, it is important to note that the beneficial owner,the company and the RI are all jointly and severally liable forthe payment of DT until the liability is discharged. Further,the company or RI will be the first point of call for DT as aresult of their withholding obligations.

For the purposes of DT a dividend is deemed to be paid on the earlier of the date on which the dividend is paid orbecomes payable by the company declaring the dividend("payment basis”).

In the previous legislation which introduced DT, the dividendwas deemed to be paid when it accrued to the beneficialowner ("accrual basis”), and, generally, it accrued to thebeneficial owner when it was declared by the company.

The reason for the change from an accrual basis to a payment basis is that SARS recognises that there may be a delay between the date of declaration and the date ofpayment of the dividend, for example, a closely held company may declare a dividend far in advance of cashavailable to distribute the profits, before the introduction ofnew shareholders. Furthermore, a RI cannot practically beexpected to withhold cash on dividends without receipt ofsuch cash. Hence the change from an accrual basis to apayment basis in respect of the timing of the DT liability.

The DT liability must be paid by the last day of the monthfollowing the month in which the dividend was deemed tobe paid.

Dividends in specieThe taxing of dividends in specie is different. In this case, the DT liability remains the liability of the resident companyand does not shift to the beneficial owner.

The timing as to when the DT liability arises is the same asany ordinary dividend, dealt with above. The amount of thein specie dividend represents the market value of the asseton the date that the dividend is deemed to be paid.

Exemptions from dividends tax

The following beneficial owner's are exempt from DT:

A South African resident company. It should be noted, fordividends paid between SA resident companies, there is no requirement for these companies to be within the samegroup of companies

The Government

Public benefit organisations

An institution, board or body that conducts research, provides services to the State or general public or that promotes commerce, industry or agriculture as contemplated in s 10(1)(cA)of the Act

A closure rehabilitation trust, as contemplated in s 37A ofthe Act

Pension, provident and similar funds

A parastatal exempt in terms of s 10(1)(t) of the Act

A shareholder in a registered micro business, to the extentthat he aggregate amount of the dividends paid by that registered micro business to its shareholders during theyear of assessment in which that dividend is paid does notexceed the amount of R200,000

A natural person upon receipt of an interest in a primaryresidence as envisaged in paragraph 51A of the EighthSchedule to the Act; and

A non-resident receiving a dividend from a non-residentcompany which is listed on the JSE.

The same exemptions apply to dividends in specie.

Obligations in respect of DT

The DT, in essence, requires the company declaring the dividend to withhold DT, either on behalf of the beneficial owneror in the case of dividends in specie, for its own account, onpayment of the dividend.

However, liability for DT shifts if the dividend is paid to a RI, andthe dividend is not a dividend in specie, so that the primarywithholding obligation falls with the RI.

RI's include central securities depository participants (CSDP),brokers, collective investment schemes in securities and listedinvestment service providers.

Obligation of companies declaring and paying dividends.The obligation to either withhold DT at a rate of 10%, on behalfofthe beneficial owner, or to pay DT at a rate of 10%, in thecase of dividends in specie, may be avoided/reduced if thecompany:

Has a written declaration from the beneficial owner that thebeneficial owner either: • Qualifies as an exempt person as listed above; or• Qualifies for tax treaty relief (or would have qualified fortax treaty relief had the dividend not been a dividend in specie); and

Has a written undertaking from the beneficial owner to inform the company, in writing, should the beneficialowner dispose of the share.


South Africa Update continued

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The company is automatically exempt from withholding DTwhere the company:

Pays the dividend (other than a dividend in specie) to aRI (the RI then becomes liable for withholding DT) in thecase of dividends paid in respect of listed shares; or

Forms part of the same group of companies (as definedin s 41of the Act) as the company receiving the dividend, i.e. a dividend within a resident group of companies.

These are exemptions and no written declarations are required.The written declarations referred to above will have to be in aform as prescribed by SARS.

The written declaration and undertaking in the case of dividends other than dividends in specie, must be submitted at the earlier of the date set by the company or the date ofpayment of the dividend. Late declarations and undertakingscan still be used in order to claim refunds.

In the case of dividends in specie, the written declaration andundertaking must be submitted by the date of payment of thedividend. If the declarations and undertakings are not timeouslysubmitted there is no mechanism whereby the companycan obtain a refund.

It should be noted that if an unlisted company does notwithhold and pay DT as required, every shareholder or director of the company, who controls or is regularly involved in the overall management of the financial affairs of the company, becomes personally liable for the tax aswell as any additional tax, interest or penalties levied.

Obligations of RIsWhere a company pays a dividend to a RI, the RI is liable towithhold DT at a rate of 10% unless:

The dividend constitutes a dividend in specie

Another person has paid the tax

The beneficial owner is exempt, or qualifies for a reductionin terms of a double tax treaty (any person who qualifies for an exemption or reduction must submit a written declaration and undertaking, as referred to above, to the RI);or

The dividend is payable to another RI.

The same timing rules applicable to companies in respect ofthe written declarations and undertakings apply to RIs.

Refunds of DT withheld due to late declarations

Refunds of DT withheld by companiesWhere DT is withheld in respect of a dividend (other than adividend in specie) a beneficial owner who qualifies for anexemption but did not submit a declaration to the companyin time, has 3 years after payment of the dividend to submitthe declaration.

The company must refund and pay over the DT that is refundable to the beneficial owner out of:

DT withheld on any subsequent dividend paid within one year from the submission of the declaration; or

Where the refundable DT exceeds the DT withheld or no subsequent dividend is paid, the refundable DT orthe balance thereof must be recovered from SARS.

No refund may be claimed after four years from the datewhen the DT was withheld.

Revised dividend definition

With effect from 1 January 2011, the definition of dividendwas changed in anticipation of the introduction of the newDT regime. In the Taxation Laws Amendment Act 24 of2011 (TLAA) there are two categories of amendments, thefirst which is applicable retrospectively to 1 January 2011and the second which is effective from 1 April 2012. Theonly noteworthy amendment falling within the first categoryis that a foreign dividend is excluded from the definition of dividend.

Taking into account the TLAA amendments, from 1 April2012 "dividend” means, any amount transferred or appliedby a company that is a resident, for the benefit or on behalfof any person in respect of any share in that company,whether that amount is transferred or applied by way of adistribution made or as consideration for the acquisition ofany share (share buy-back). Specifically excluded from thedefinition of dividend is an amount transferred or appliedwhich:

Results in a reduction of contributed tax capital (CTC)

Constitutes shares in that company, i.e. a capitalisationissue; or

A general share buy-back by a JSE listed company subject to certain specific JSE requirements.

The amount transferred may consist of money as well as



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the market value of any asset distributed. The distribution of a company's own shares, i.e. a capitalisation issue, is not within the dividend definition on the basis that these distributions do not result in an outflow of overall value from the company as all the underlying assets remain within the company.

It should be noted that where a company transfers anamount to a shareholder, it will not constitute a dividend tothe extent that it represents a general repurchase by a listedcompany of its own securities, in terms of certain specificJSE requirements. Therefore, the shareholder will pay capital gains tax (CGT) and there will be no DT on such a distribution.

This exemption does not apply in respect of an unlistedcompany and any dividend arising from such an acquisitioncould be subject to DT in the hands of the shareholder(subject to exemption if applicable) and not CGT. The reason for this is that, practically, the shareholder in a listedcompany cannot distinguish this purchase from any otherJSE market purchase.

Conclusion

It is apparent that the introduction of DT will result in yet another set of complex administrative rules and regulationsincreasing the already heavy compliance burden of the taxpayer. It would appear that the supporting data that willbe required to be included in the DT return is substantialand whether SARS, never mind the taxpayer, will be able to cope will have to be seen.


Eugene du PlessisDirectorPKF JohannesburgT: +27 11 384 8116E: [email protected]: www.pkf.co.za

Spain Update


Spanish Wealth Tax for non-residents

The Wealth Tax was approved by the Law 19/1991 of 6 June 2011. The Law 4/2008 (23 September) eliminatedthe obligation to contribute to Wealth Tax without repeal.Nevertheless, Spanish Parliament has restored it for years2011 and 2012 by Royal Decree Law 13/2011 of 16 September.

The Tax is charged on 31 December 2011 and 2012 andthe obligation falls on net assets (assets and rights with thededuction of charges and taxes).

The minimum exemption for residences increases from EUR 150,253.03 to EUR 300,000 and the tax exemptionbase increases from EUR 108,182.18 to EUR 700,000.

Non-residents with patrimony (real estate, usually on the coast) in Spain are required to:

File the Tax if the property value exceeds EUR 700,000(if individual) or EUR 1,400,000 (jointly owned by spouses).

Appoint a Tax Representative in Spain to act as treasurer.The responsibility is joint and several. Breaching this obligation is a punishable act.

Compulsory filing (after tax deductions and credits) for

taxpayers with zero quota whose assets exceeds EUR2,000,000. It also will be mandatory to non-residents inSpanish territory with zero quota if their net assets exceed EUR 2,000,000.

The legislation states that this tax is managed by the Autonomous Governments. Amounts payable depend of the volume of assets and the Region where the property located.

There are some Autonomous Governments with specificreductions (eg Madrid).

The filing deadline is 30 June 2012 (for 2011 Tax) and30 June 2013 (for 2012 Tax).

We are available to provide advice and management servicesto anyone in this situation.

Other tax changes Royal Decree Law 20/2011 on urgenttax matters was issued in December 2011 and contains significant amendments.

Other tax changes

1. Corporate tax ratesThere is a special low rate for companies with an annualturnover not exceeding EUR 5 million. These micro companieswill pay 20% on the first EUR 300,000 of taxable income for

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Spain Update continued


years 2011 and 2012. Those with fewer than 25 employeeswill need to maintain or create jobs. Tax is charged at 25%on profits in excess of the above mentioned limits.

2. PrepaymentsThese are payments based on the forecast taxable income of the period. During 2011, 2012 and 2013, there is a generalrate rise to 24% for companies whose annual turnover is between EUR 20,000,000 and EUR 60,000,000 and 27% for those with more than EUR 60,000,000.

3. Rise in withholding tax ratesWithholding rates rise from 19% to 21% in the general caseand from 35% to 42% for remuneration of managers andboard members.

4. Value added taxThe super reduced 4% tax for first time buyers has been extended to December 2012.

5. Income taxGeneral Base

There is a new tax scale for General Base for 2012 and 2013.

Savings Base

There is a new tax scale for Savings Base for 2012 and 2013,as follows:

Withholding rates are amended for labour income (payroll) according to the above tables.

Withholding rates rise from 19% to 21% for other payments.

6. ResidenceRelief by acquisition of residence has been restored sinceJanuary 2012.

7. Wealth TaxThe Spanish Wealth Tax has been reactivated only for 2011and 2012 (see article above). The date of filing the Tax endson 30 June 2012 (for 2011 Tax) and 30 June 2013 (for 2012 Tax).

8. Land TaxTax rates have been increased between 4% and 10% for2011 and 2012, depending on the date in which cadastralvaluation was made.

9. Non-residents income taxTax rates applicable to income obtained by non-residentshave risen from 24% to 24.75%.

The tax rate applicable to the transfer abroad of the incomeof permanent establishments and to dividends, interestsand capital gains obtained by non-residents rises from 19% to 21%.

For more information, please contact:

Santiago GonzálezE: [email protected] Álvaro Beñarán E: [email protected] ATTEST

Income inexcess of(EUR)

0.00

17,707.20

33,007.20

53,407.20

120,000.20

175,000.20

300,000.20

Tax quota assessment

(EUR)

0.00

4,249.73

8,533.73

16,081.73

44,716.73

69,466.73

115,716.73

Alternative tax basis(EUR)

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15,300.00

20,400.00

66,593.00

55,000.00

125,000.00

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Tax Rate

%

24

28

37

43

44

45

45

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6

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(2)Temporary rise only during 2012 and 2013.

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6,000.00

24,000.00

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(EUR)

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18,000.00

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Tax Rate

%

19

21

21

Additionalrate (1)

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2

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Uganda Update


Accounting for VAT on importedservices in UgandaBackgroundThe Value Added Tax (VAT) Act, CAP 349 of the Laws ofUganda provides under Section 4(c) that VAT is applicable on the supply of any imported services by any person. This is called VAT on imported services or “Reverse VAT” in some jurisdictions. In view of the above, any person who importsservices in Uganda is obliged to declare such services, compute and pay VAT thereon, within the calendar month of importation.

Until 1 July 2011, The VAT Regulations under Paragraph 13 provided as follows:

13 (1) A registered taxpayer who receives a supply of services from a foreign supplier shall account for the taxdue on the supply, and the taxpayer shall account for thattax when performance of the service is completed, orwhen payment for the service is made, or when the invoice is received from the foreign supplier, whichever is the earliest.

Paragraph 14 of the same regulations provided as follows:

(3) Tax accounted for on imported services may beclaimed as a credit under the provision of Section 28 ofthe Act, provided the recipient of the service prepares a self-billed tax invoice to account for tax due on the supply; the claim for credit is subject to the conditionsspecified in Section 28 of the Act.

The above provisions meant that, upon importation of VATableservices in Uganda, the importer would load VAT on the invoice value, file a return with the Uganda Revenue Authority(URA) and pay VAT thereon. This VAT would then be claimedas input VAT in the taxpayer’s subsequent VAT return.

The changes to the VAT lawThe Commissioner General of URA has now notified the general public in a public notice issued on 20 January 2012of the following changes in law on VAT on imported servicesin Uganda with effect 1 July 2011.

1. Any person who receives imported services other than an exempt service shall account for the tax due on thesupply, and the person shall account for that servicewhen performance of the service is completed, or whenpayment for the service is made, or when the invoice isreceived from the foreign supplier, whichever is the earliest.

2. That NO credit will be allowable to any person for VAT paid on imported services.

3. That persons not registered for VAT who import servicesother than exempt services will also be required to file aVAT return and pay VAT for the period the supply was made.

The implicationsThe above amendment means that, from 1 July 2011, taxpayers will no longer claim VAT on importation of servicesinto Uganda as has been the case in the past. This movecertainly makes importation of services more expensive onthe side of the importer as the VAT component becomes partof the cost of the goods. It will, however, encourage andboost consumption of services provided by local serviceproviders. Any VAT paid before 1 July 2011 on imported serv-ices can still be claimed as input VAT by the taxpayer.


Martin KisuuRegional Tax PartnerPKF Eastern AfricaT: +254 020 427 0000M: +254 717 077 824F: +254 020 444 7233

United Kingdom Update


Controlled foreign companies changes

Draft legislation has been published setting out a redesignedcontrolled foreign companies (CFC) regime that will take effect for accounting periods beginning on or after 1 January 2013.

As with other CFC regimes around the world, the aim is to tax income which has been hived offshore into overseascompanies which are controlled by UK companies andwhich pay tax at a lower rate than in the UK. The mechanismemployed is to deem UK companies with an interest in theCFC to have received a proportionate share of the CFC’sprofits, thereby bringing them within the charge to UK tax.The new regime has been designed as a response to criticisms of the existing rules in recent years.

Entity level exemptions

There are a number of exemptions from the current regime:overseas companies can be exempted based on the size oftheir profits, the tax rate in their territories of residence andthe activities carried out. Some of these exemptions are retained with changes and a company can be exempt fromthe new regime where:

the foreign tax suffered by the CFC is at least 75% of theequivalent UK tax on the taxable profits of the CFC

the CFC has less than £500,000 of trading profits and£50,000 of investment income per annum

the CFC is resident in a territory on the ‘excluded territories’list. These are broadly territories with a headline rate ofmore than 75% of the UK main corporation tax rate(subject to conditions relating to the CFC’s amount andtype of income and a motive test)

the CFC has profits of no more than 10% of relevant

operating expenditure (including the cost of goods to bedelivered to the CFC’s territory of residence but excludingintra-group expenditure).

There will also be a temporary exemption period of up totwo years from the date a company becomes a CFC as aresult of certain corporate acquisitions and reorganisations.

Trading profits - gateway test

With regards to non-financial trading profits, a key componentof the new regime is the gateway test which is designed totest whether profits have been artificially diverted from theUK. This test is passed (and therefore the CFC is inside theregime) if it does not meet any of conditions A - D.

A. The CFC’s management and control of its risks and assets is not carried out to any significant extent throughUK activities undertaken by connected companies, or byitself in the UK, otherwise than through a permanent establishment.

B. The CFC has the capability to replace any such activitiesas are carried out by connected companies in the UK, either itself or by obtaining support from unconnectedcompanies. The condition is met provided these replacement activities would allow the CFC to be a commercially effective stand-alone company.

C. The arrangement does not have as its main purpose, or one of its main purposes the reduction or elimination of a UK tax liability; or it is reasonable to suppose that thearrangement would have been made in the absence of all tax advantages that result from it.

D. The company’s profits consist only of non-trading finance profits or property business profits.

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United Kingdom Update continued


Previously, the CFC regime worked on an all or nothingbasis whereas under the new regime, profits will only besubject to the charge to the extent that they relate to UK‘significant people functions’ (SPFs). The process is as follows:

1. Identify the assets held and risks borne by the CFC

2. Determine which are managed in the UK by the CFC(other than through a UK permanent establishment) or acompany connected with the CFC

3. Determine the extent to which profits have been generated by those UK SPFs on the assumption thatthose UK SPFs were carried out by a UK permanent establishment of the CFC (in other words, attributingprofits to those assets and risks using OECD guidelines).

Only those profits will be subject to the CFC charge. Therewill also be a number of safe harbours which will completelyexempt the attributed profit from a CFC charge if:

the CFC has premises in its territory of residence whichare, or are intended to be, occupied and used with areasonable degree of permanence and from which itsactivities are wholly or mainly carried on

not more than 20% of the CFC’s relevant trading income derives from UK residents or UK permanent establishments of UK companies

not more than 20% of the CFC’s total related management expenditure (i.e. the cost of employing staff to carry out management duties) is UK based.

the CFC’s profits do not include any amounts arisingfrom significant transfers of intellectual property to the CFCin the last six years from UK persons or UK permanentestablishments of non-UK resident companies.

not more than 20% of the CFC’s trading income arisesfrom goods exported from the UK (other than goods exported from the UK to the CFC’s territory of residence).

There will be an anti-avoidance provision which deems anyof these tests not to have been met if the CFC’s group hasorganised any part of its business in a particular way withthe main purpose, or one of the main purposes, to ensurethat one of the tests is met.

Non-trading finance profits

The tests described above relate specifically to trading profits,but there will be a separate test for non-trading finance

income, which seeks to tax only those profits that are:

financing income which would meet each of the tests referred to above regarding business profits

derived from funds invested directly or indirectly from the UK

from loans made by a CFC to a connected UK residentcompany where it is reasonable to assume that there aretax reasons for making the loan rather than a distribution.

If the profits pass through this ‘finance income gateway’,then a claim can be made to tax only 25% of those profits(making the effective tax rate on them only 5.75% for 2014).It is proposed that the taxable amount will also be limited tothe aggregate net borrowing costs of the UK members ofthe group. For example, if chargeable financing profits are£400m and UK group members have net borrowing costsof £60m this would reduce the CFC charge to apply to profits of only £60m.

There will also be a full exemption for finance profits arisingfrom a loan funded from qualifying resources. These include:

profits the CFC generates from making loans to membersof the CFC’s group which are used solely for the purposesof the debtor in its territory of residence

sums derived from the issue of shares issued by a ‘topcompany’ to unconnected shareholders

dividends and other share-related distributions receivedfrom group members

certain proceeds from the issue of shares to group companies as well as from shares held in group companies.

A group will be free to focus on either the entity level exemptions or the gateway test to determine whether, or to what extent, its overseas subsidiaries’ profits are subjectto a CFC charge.

UK VAT from ‘dollar one’ for inbound businesses

Historically, non-UK businesses have been able to sell in theUK without registering for VAT unless and until their turnoverexceeds the UK’s VAT registration threshold (currently£73,000). However, the rules will change on 1 December2012, meaning that businesses not established in the UKthat are supplying taxable goods and services within the UKmust register for VAT here – no matter how small theirturnover may be.

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The new measure will affect businesses that sell goods andservices in the UK from a temporary presence here, e.g. ata trade fair or other event. For example, a US-based businesswhose employees bring its products into the UK to sell tocustomers from an exhibition stand would be required tocharge VAT on its sales right from the start. Equally, non-UKtraders taking part in a Christmas or specialty market wouldneed to consider the rules carefully.

Broadly speaking, the changes will not apply to businessesthat ship goods or sell services directly to UK customersfrom abroad, although some of these organisations may already be required to register for VAT in the UK under different rules. Also unaffected are vendors of electronicmedia sold to private customers in the UK, provided theyare already VAT registered - either in the UK only or underthe EU wide ‘special scheme for electronic services’. However, those that have opted out of the special schemeand are not UK VAT registered could well be required to account for VAT on their sales of electronic media andshould seek advice on their position.

Overseas businesses that sell to their customers from a permanent UK presence will not be affected by the newrules and will not need to register unless their turnover exceeds the normal UK VAT registration threshold. However, they would need to consider their UK income or corporation tax obligations.

Place of supply of services for VAT

In 2011 there were two VAT developments of interest to UKcompanies which organise or attend exhibitions, conferencesand training events.

January 2011 changes

For many years, activities of a ‘cultural, artistic, sporting, scientific, educational or entertainment’ nature have formeda specific category when determining the VAT position ofcross border services. Apart from the commercial eventslisted above, the term also includes concerts, music festivals,theatrical and sporting events, repair, valuation and otherwork on goods, some scientific and technical work andmany other services that involve a ‘physical performance’.

Until 2011, these services were treated for VAT purposes astaking place in the country where the work was physicallycarried out. This required companies in these sectors to register

for VAT in other EU member states where they operated.

The EU VAT rules changed on 1 January 2011 and where thistype of service is provided on a B2B basis, it is now deemedfor VAT purposes to take place in the country where the customer belongs. Instead of the service provider registeringfor VAT overseas, the recipient now accounts for VAT on itsown VAT return under the reverse charge mechanism.

There are exceptions though: B2C supplies of this nature andB2B admission charges for events continue to be subject toVAT in the country where the event takes place. So far, thebiggest challenge the new system presents is to identifywhich income constitutes an admission charge.

October 2011 European Court ruling

A judgment in the European Court of Justice (ECJ) has created more uncertainty for the events sector, this time overthe VAT position of the hire of stands or space at exhibitions.

For many years, HMRC has treated exhibition stand hire asa temporary rental of land, provided the exhibitor is giventhe right to a defined area of the exhibition hall. As a result,some exhibition organisers have treated these lets as VATexempt while others have opted to tax their interest in theexhibition hall and charged VAT on the hire.

The ‘rental of land’ approach also means that the hire of astand at a UK venue is a UK supply for VAT purposes so,where VAT is charged, it applies whether the client is a UKor overseas based exhibitor. Other cross border exhibitionrelated services, such as general event organisation, aresubject to the post - 2011 place of supply rules – i.e. VAT is accounted for by the customer as a reverse charge. Puttogether, these factors have resulted in an inconsistent application of VAT across the industry.

In the Inter-Mark Group decision, the ECJ says that the VAT treatment of exhibition stands depends on the precisedetails of the hire and could constitute advertising services,a hire of equipment or ‘exhibition services’.

The key area of uncertainty arising from the judgment lies inits statement that the hire of a stand is NOT a supply relatedto land, meaning the UK’s approach of allowing VAT exemption for defined stand locations could be wrong.However, Inter-Mark was in the business of designing, providing and setting up stands rather than letting the



space they occupy. It is unclear whether this statement willalso apply to businesses that simply hire out defined areasof an exhibition hall.

Businesses in the sector should seek advice on their UKVAT position to ensure they are dealing with VAT correctlyand efficiently under the current rules.

Capital allowances

FixturesFrom April 2012, where a business purchases a secondhand building which includes fixtures, it must make a claimfor capital allowances in respect of those fixtures beforethey are sold on, disposed of or transferred to another person (so that a company or business cannot make aclaim for assets it no longer owns).

Within two years of the acquisition of a building, both thepurchaser and the seller must agree a purchase price attributable to the fixtures which they must then notify toHMRC by way of a joint election (which is currently optional). If the parties cannot agree the attribution figures,the matter must be referred (by either party) to the Tribunal if this appears material to the tax liability of either (currently it must be material to both).

In addition, a new measure is proposed on the interactionbetween the fixtures rules and the business premises renovation allowances (BPRA) scheme. From April 2012, if a taxpayer sells a building on which BPRAs have beenclaimed within seven years and, as a result, allowancesclaimed on expenditure on fixtures are clawed back, thepurchaser will be entitled to claim capital allowances onthose fixtures instead. It has also been confirmed that thecurrent BPRA relief at 100% will continue until April 2017.

Solar subsidyFrom April 2012, expenditure on solar panels will be treatedas special rate expenditure for capital allowances purposes.Where such expenditure is not covered by the annual investment allowance, it will only attract capital allowancesat 8%. In addition, where there is expenditure on plant andmachinery which is used to generate electricity and thebusiness receives a feed-in tariff payment in respect of thatexpenditure (in the same year or in later years); no enhancedcapital allowances (100% relief upfront) may be claimed.The same rule applies in respect of incentives receivedunder the renewable heat incentives scheme as a result of

heat generated, or gas or fuel produced by the plant andmachinery concerned. However, where this consists of acombined heat and power system, the restriction will onlyapply to expenditure incurred from April 2014.

Special zonesBusinesses based in the following zones will qualify for100% capital allowances on investment in plant and machinery from April 2012 to March 2017:

� the Black Country

� Humber

� Liverpool

� the North East

� Sheffield

� Tees Valley.

Statutory residence testThe legislation to introduce a statutory residence test for individuals (covered in the July 2011 issue of InternationalTax Alert) has been delayed and will not take effect until 6 April 2013. It is understood that the Government is working to clarify a number of the key definitions used in the proposed rules and draft legislation is expected to bepublished with Budget 2012.


Jon HillsPartner - Tax servicesPKF (UK) LLP Accountants and business advisersT: +44 (0) 20 7065 0000 E: [email protected]: www.pkf.co.uk

USA Update


US efforts to ensure tax compliance involvingoffshore financial assets and accounts

Over the last several weeks the US Treasury has released additional guidance with respect to the reporting by US taxpayers of non-US domiciled financial assets. The most recent guidance has come in the form of newly issued proposed regulations governing the implementation of theFATCA rules, which were added to the Internal Revenue Code by the HIRE Act of 2010.

These voluminous proposed regulations cover many topics,including expanding the categories of foreign financial institutions that are “deemed compliant”, the phase-in of requirements over a newly extended time frame, and the reduction of certain of the burdens placed on foreign institutions associated with identifying US accounts.

Also released were the final Form 8938 and related instructions, which are to be used by individuals to reportspecified foreign assets for the 2011 tax year and beyond.

What this means is that the US Treasury framework to ensure full disclosure of all non-US financial assets held bythose subject to US taxation is now comprised of four independent and sometimes overlapping regimes.

These four regimes are:

1) Report of Foreign Bank and Financial Accounts (FBAR) is required to be filed annually to disclose all foreign accounts over which a US taxpayer has a financial interest or retains signature authority (Form TD F 90-22.1).

2) Various Entity Disclosure Forms are required to be filedannually to disclose ownership of certain offshore entities,including offshore corporations (Forms 5471, 8621, 926,etc.), partnerships (Form 8865) and trusts (Forms 3520 and 3520A).

3) Statement of Specified Foreign Financial Assets (Form8938) is required to be filed annually by US individual taxpayers disclosing offshore ownership of certain financial assets in excess of applicable thresholds. The requirements are expected to be extended to US entitiesin the near future.

4) Foreign Account Tax Compliance Act (FATCA) institutes a new disclosure and withholding regime whereby foreignfinancial institutions will be required to provide financial

information to the US Treasury with respect to their USaccounts and both US and foreign institutions will beforced to withhold on payments between noncompliant or non participating institutions.

Together, these four regimes represent a formidable attempton the part of the US Treasury to maintain awareness of allnon-US financial assets of any person subject to US taxation,regardless of the domicile of either the asset or the taxpayer.

The annual FBAR and entity disclosures (Numbers 1 and 2above) have been in existence for many years and their provisions are familiar to most practitioners.

The annual Form 8938 filing requirement (Number 3 above)became effective for the 2011 US tax year as described inour previous article in the PKF International Tax Alert. As anupdate to our recent article, the US Treasury released the finalversion of the 2011 Form 8938, along with full instructionson 21 December 2011. The digital links to both the Form8938 and its related instructions are as follows:

http://www.irs.gov/pub/irs-pdf/f8938.pdf

http://www.irs.gov/pub/irs-pdf/i8938.pdf

The new FATCA legislation (Number 4 above) essentially‘deputizes’ all foreign financial institutions (FFIs) in theworldwide search for unreported income taxable in the US.On 8 February 2012 the US Treasury issued almost 400 pagesof Proposed Regulations (REG-121647-10) in connectionwith these new requirements and their provisions begin tophase in for the 2013 tax year. The digital link to thesenewly proposed regulations is as follows:

http://www.irs.gov/pub/newsroom/reg-121647-10.pdf

Briefly, the new FATCA framework contains two distinctcomponents; a disclosure component and a withholdingcomponent. With respect to disclosure, foreign financial institutions meeting certain parameters will be required toreport annually to the US Treasury on their holdings of assets owned by persons subject to US taxation. With respect to withholding, the payment of US source incomeby US payors and made to a ‘non-compliant’ FFI will besubjected to 30% withholding at source. In addition, a 30%withholding will be levied on ‘pass-through’ payments’ between and among FFIs. A non-compliant FFI is generallyany institution which does not adhere to the disclosure requirements under FATCA. A ‘pass- through’ payment’ is

USA Update continued


generally any withholdable payment made between FFIs. A participating FFI would be required to enter into an ‘FFI Agreement’ with the US Treasury, whereby it agrees toannually provide the subject information, as well as undertakedue diligence and other internal procedures to ensure compliance, both on the disclosure and the withholding side.

Key components of the newly proposed Regulations

The Proposed Regulations offer relief to FFIs since they provide additional time to phase-in implementation of FATCAprocedures and contain many provisions to ease complianceefforts and costs associated with FATCA.

Revisions to Compliance and Due Diligence Procedures

The newly proposed regulations:

would distinguish between pre-existing and new accountsand provide exemptions for accounts that do not exceedspecified balances

would allow for increased reliance on the FFI's current duediligence procedures for identifying account owners

provide an expanded list of Deemed Compliant FFIs to include certain banks which conduct business only withlocal clients; identified low-risk entities or other participatingFFIs, and

describe when electronically searchable records are sufficient and when "enhanced reviews" are required including manual reviews of files and inquiries with the FFI relationship manager.

The implementation time schedule for selected FATCA provisions includes the following:

2013 tax year: FFIs need only provide the name, address,TIN, account number and account balance of each US account; withholding on the payment of US source incometo noncompliant FFIs begins.

2015 tax year: Income reporting will be added to the required disclosure.

2016 tax year: Gross proceeds from asset sales reportingwill be required.

2017 tax year: Withholding on foreign ‘pass-through’ payments begins.

As one might expect, the framework is extremely complexand it will place a substantial burden on financial institutionsboth within and outside of the US. In partial recognition ofthis fact, the US Treasury announced in February of 2012that it had entered into agreements with the governments offive Eurozone countries - the UK, France, Germany, Italyand Spain - whereby each of these governments will collectthe sought after information from its own financial institutionsand forward it directly to the US Treasury. This means thatFFIs in those countries would escape some of the moreonerous provisions of FATCA, such as entering into FFIAgreements, withholding on ‘pass-through’ payments (payments between FFIs), and closing recalcitrant accounts.The US hopes that this can become a model approachgoing forward, in effect delegating FATCA enforcement tothe country where a particular FFI is located.

As noted, these regulations are proposed and more guidanceis expected.


Leo ParmegianiPKF LLPT: +1 212 867 8000E: [email protected] W: pkfnewyork.com

Other US international tax matters

Foreign Deferred Compensation

As the global economy becomes increasingly integrated,many US middle-market companies find themselves expanding into foreign markets including manufacturing,sales and distribution facilities abroad. In addition to hiringlocal nationals, they often must assign US executives/employees, or third country nationals, to work in these new markets.

Among the host of issues confronting such companies, deferred compensation – whether for retirement or as partof executive agreements – is one of the most important but,at the same time, complex and frustrating.

In an article on “IRC Section 409A and Foreign DeferredCompensation” in the Journal of Compensation and

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USA Update continued


Benefits, we provide an important summary of the impact of US regulations on deferred compensation plans for international operations.

2011 Voluntary Compliance Program for Employee vs. Independent Contractor Exposure

The US Internal Revenue Service (IRS) has unveiled a Voluntary Compliance Program (VCP) that offers relief forbusinesses which may have misclassified workers as independent contractors rather than employees. Such employers are potentially liable for significant additionaltaxes, penalties and interest.

For a foreign business which has classified US individualsconducting US activities (perhaps incorrectly) as independentcontractors, reclassifying them as employees may create asubstantial risk of the foreign business being engaged in aUS trade or business or having a permanent establishmentin the US for US income tax purposes, resulting in increasedUS taxation.

IRS Guidance for US citizens and dual citizensliving abroad

The IRS understands that some US citizens – includingsome who are also citizens of another country – who are residing outside the US have failed to file federal US incometax returns as well as Foreign Bank Account Reports(FBARs) to report their foreign financial holdings. While these individuals may be complying with tax filings and

payments in their foreign countries of residence, they are not filing returns in the US. On 13 December 2011, the IRSissued updated guidance in the form of Fact Sheet FS2011-13 with two principal aims:

To clarify the issues facing US citizens described abovewho wish to commence complying with US law regardingtheir income tax returns and FBARs; and

To offer a no-penalty opportunity for such compliance bythose individuals.

In essence, this guidance provides that US citizens or dualcitizens residing abroad will not be assessed late filing orlate payment penalties if they are either:

1. with “no balance due” income tax returns – due for example to foreign tax credits or the US foreign earned income exclusion

2. with “balance due” income tax returns but where the failure to file was due to reasonable cause.

In addition, there will be no penalties assessed on thosesame individuals with respect to late FBAR filings, if the failure to comply was due to reasonable cause.


John ForryEisnerAmperT:+1 212 949 8700E: [email protected] W: www.eisneramper.com

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IMPORTANT DISCLAIMER: This publication has been distributed on the express termsand understanding that the authors are not responsible for the results of any actionswhich are undertaken on the basis of the information which is contained within thispublication, nor for any error in, or omission from, this publication.

The publishers and the authors expressly disclaim all and any liability and responsibilityto any person, entity or corporation who acts or fails to act as a consequence of any reliance upon the whole or any part of the contents of this publication.

Accordingly no person, entity or corporation should act or rely upon any matter or information as contained or implied within this publication without first obtaining advicefrom an appropriately qualified professional person or firm of advisors, and ensuring thatsuch advice specifically relates to their particular circumstances.

PKF International is a network of legally independent member firms administered by PKF International Limited (PKFI). Neither PKFI nor the member firms of the networkgenerally accept any responsibility or liability for the actions or inactions on the part ofany individual member firm or firms

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Spring 2012

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