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International Tax NewsEdition 44October 2016
WelcomeKeeping up with the constant flow of international tax developments worldwide can be a real challenge for multinational companies. International Tax News is a monthly publication that offers updates and analysis on developments taking place around the world, authored by specialists in PwC’s global international tax network.
We hope that you will find this publication helpful, and look forward to your comments.
Shi‑Chieh ‘Suchi’ LeeGlobal Leader International Tax Services NetworkT: +1 646 471 5315E: [email protected]
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In this issue
Tax Administration and Case Law EU Law TreatiesTax legislation Proposed Tax Legislative Changes
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Tax LegislationSingapore
R&D Technical Advisory Panel and pre-claim evaluation of R&D projects
The Singapore government has research and development (R&D) incentives and measures in place to encourage taxpayers to undertake R&D activities in Singapore. The Inland Revenue Authority of Singapore (IRAS) has introduced a R&D Technical Advisory Panel and a ‘pre-claim evaluation’ process for R&D projects.
Technical Advisory PanelThe IRAS established a Technical Advisory Panel (the ‘Panel’) to advise the IRAS and enhance their ability in the process of reviewing taxpayer R&D applications. This will help to improve the review and assessment process of Singapore taxpayers’ R&D tax claims. R&D cases will be referred to the Panel in the following instances:
• when a taxpayer specifically requests the referral, or• when the IRAS rejects the R&D claim submitted by taxpayers
after two rounds of review and the taxpayers are still interested in pursuing the claim.
For cases that are referred to the Panel, details of the R&D project, including both the taxpayers’ and the IRAS’ views, supporting documents, and the correspondence between the IRAS and the taxpayer will be submitted to the Panel for review. Following the review, input, and advice from the Panel, the IRAS will make a final decision on the taxpayers’ R&D tax claims.
Pre-claim evaluationThe IRAS recently introduced a pre-claim evaluation scheme for large and complex R&D projects to provide taxpayers with upfront certainty regarding their R&D claims. Under the pre-claim evaluation scheme, large and complex projects are defined as projects with estimated R&D costs exceeding 20 million Singapore dollars (SGD). The pre-claim evaluation is a structured evaluation process, whereby taxpayers are able to submit details of their R&D projects to the IRAS for evaluation prior to the commencement of or during the R&D project.
PwC observation:Based on taxpayer feedback, the IRAS introduced the measures above to facilitate taxpayers’ R&D tax claims, particularly where R&D expenditures are substantial. The pre-claim evaluation scheme serves as an avenue for taxpayers to obtain certainty.
Ching Ne TanSingaporeT: +65 6236 3608E: [email protected]
Lianne WL CheongSingaporeT: +65 6236 7352E: [email protected]
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Proposed Tax Legislative ChangesBelgium
Belgium may reduce corporate income tax rate to 20% by 2020 in context of broader tax reform
The Belgian government is working on a proposal for a corporate tax reform. The current proposal includes, amongst others, a progressive reduction of the corporate income tax (CIT) rate from 33.99% to 20% by 2020, full exemption of capital gains on shares — replacing the current tax rate of 0.412% on such gains and an increase in the participation regime for incoming dividends from the current 95% to 100%.
Until today, the government also is discussing various ‘compensatory’ measures to make the reform budget-neutral. These measures may include reducing or abolishing the notional interest deduction and investment deduction regimes, limiting tax loss carryforwards, and reducing the ability for increased fiscal depreciations.
As mentioned above, the CIT reform is currently in the proposal phase and has not yet been incorporated in a draft bill of law.
Pieter DeréGhentT: +32 9 2688 321E: [email protected]
Maarten TemmermanAntwerpT: +32 3 2593 021E: [email protected]
PwC observation:Companies should closely monitor the potential outcome of the proposed reform and assess the impact it may have on their business.
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OECD releases discussion draft on branch mismatch structures
On August 22, 2016 the Organisation for Economic Co-operation and Development (OECD) published, for discussion, recommendations for domestic laws that would neutralise the effect of payments involving certain branch mismatch arrangements.
This expansion of the final Base Erosion and Profit Shifting (BEPS) Action 2 paper, ‘Neutralising the Effects of Hybrid Mismatch Arrangements’, issued on October 5, 2015, adds even more complexity to that very long and complicated hybrid mismatch guidance.
The new discussion draft applies the analysis and recommendations set out in the Action 2 report to mismatches that can arise through the use of branch structures. It identifies five basic types of branch mismatch arrangements and sets out preliminary recommendations for domestic rules that would neutralise the resulting mismatch in tax outcomes.
The OECD states in the discussion draft that it seeks to ensure that the branch mismatch rules and hybrid entity/instrument rules would operate together in a coherent and coordinated way and prevent taxpayers from responding to the implementation of the recommendations in chapter 3 of the Action 2 report by switching to branch structures that provide them with the same tax advantages.
The discussion draft repeatedly refers to avoiding the risk of economic double taxation or disturbing any of the other tax, commercial, or regulatory outcomes. However, there appears to be a serious risk that this may still occur.
Tax Administration and Case LawOECD
Stef van WeeghelAmsterdamT: +31 88 7926 763E: [email protected]
Aamer RafiqLondonT: +44 20 721 28830E: [email protected]
Suchi LeeNew YorkT: +1 646 471-5315E: [email protected]
PwC observation:The complexity of these additional rules make an already complex action item very difficult for countries to fully enact and implement in practice.
If the OECD finally recommends these rules in a consensus document, to the extent countries choose to adopt all or part of them, companies will have to carefully consider whether any of their current arrangements may be adversely affected.
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OECD
OECD releases discussion draft on interest deductions in banking, insurance sectors
On July 28, 2016, the Organisation for Economic Co-operation and Development (OECD) released a discussion draft relating to deductions for interest in the banking and insurance sectors. This is part of the ongoing work for Base Erosion and Profit Shifting (BEPS) Action 4, ‘Limiting Base Erosion Involving Interest Deductions and Other Financial Payments’, which was released as a final report in October 2015.
Chapter 10 of the final report recognises that the circumstances of the banking and insurance sector require special caution, and careful study and deliberation, in the context of developing rules with respect to debt-equity issues and the deductibility of interest on debt. Such precautions are necessary to avoid unintended adverse regulatory and commercial consequences. Paragraph 16 of the final report states that the fixed ratio rule should not prevent businesses from raising the debt finance needed for their business. The discussion draft reflects some of these additional considerations uniquely required for banking and insurance companies.
The discussion draft does not set forth overly prescriptive rules, but rather describes potential ways to address interest for two basic categories: i) category consists of banks and insurance companies and ii) category consists of entities in a group that includes a bank or insurance company.
The first category recognises that the banking and insurance sectors differ markedly from other industries with respect to interest. To banks, interest essentially is cost of goods sold. To the insurance sector, while having a different business model with less leverage than banks, interest income is generated by investment of premiums. Both sectors are highly regulated, and while the discussion draft considers whether the increased focus on more robust regulatory capital requirements should be sufficient to provide an ordinary-course type exception, the discussion draft does not propose this. Moreover, the rationale for separate treatment of the banking and insurance sectors apparently is because the rules prescribed in the final report would be ineffective, not because such rules could have commercial implications and other government agencies are regulating the balance sheet.
The second category – groups that include a bank or insurance company, along with a significant nonbank or insurance group – occupies much of the draft, including all five examples in the Annex.
PwC observation:Groups with, and groups of, banks or insurance affiliates should consider the implications of the proposals and respond accordingly. Note that the draft is not a consensus view of the OECD’s Committee of Fiscal Affairs or its subsidiary bodies; rather, it is meant to trigger comments to the OECD to advance its work.
Stef van WeeghelAmsterdamT: +31 88 7926 763E: [email protected]
Aamer RafiqLondonT: +44 20 721 28830E: [email protected]
Suchi LeeNew YorkT: +1 646 471-5315E: [email protected]
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United States
US Treasury publishes White Paper on EU State aid investigations
The United States Department of the Treasury (US Treasury) on August 24, 2016, published a White Paper (the White Paper) setting forth its view on the State aid investigations of income tax matters.
The White Paper outlines that, beginning in June 2014, the European Commission (EC) announced that certain transfer pricing rulings given by Member States to particular taxpayers may have violated the EU’s restriction on State aid. The US Treasury states that these investigations, if continued, have considerable implications for the US — for the US government and US companies — in the form of potential lost tax revenue and increased barriers to cross-border investment. Per the US Treasury, the investigations also undermine the multilateral progress made through the Organisation for Economic Co-operation and Development’s (OECD’s) Base Erosion and Profit Shifting (BEPS) project towards reducing tax avoidance.
The White Paper raises a number of arguments as to why the EC is wrong to pursue the current investigations. The arguments are a mixture of ‘technical’ and ‘political’ points. The White Paper sets out the following arguments and refers back to judicial precedents where appropriate:
• The EC’s analysis mixes up ‘selectivity’ and ‘advantage’.• Provisions available only to multinational enterprises (MNEs) are
not necessarily selective.• Retroactive recoveries are inconsistent with European Union (EU)
legal principles.• The EC’s actions undermine the international consensus on
transfer pricing.• The EC’s actions threaten existing treaties.• The investigations undermine BEPS.
The White Paper was released shortly before the EC issued a controversial decision in the Apple investigation, which is discussed in a separate article within this newsletter. Following the decision’s press release, there have been negative reactions to the EC from the Administration, both White House and US Treasury, as well as from politicians on both sides of the House and Senate.
PwC observation:The State aid area is very complicated and rapidly developing. It is an uncertain area with limited jurisprudence regarding certain of the issues raised in the current cases. We encourage companies to fully understand their risk profile and to be able to answer the challenge in the various countries in which they operate, as well as understand the State aid implications of their structures.
Jonathan HareLondonT: +44 20 7804 6772E: [email protected]
Sjoerd DoumaAmsterdamT: +31 88 7924 253E: [email protected]
Suchi LeeNew YorkT: +1 646 471 5315E: [email protected]
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European Commission finds that Ireland has granted unlawful State aid to Apple
In its press release issued on August 30, 2016, the European Commission (EC) announced the adoption of its final decision in the formal State aid investigation into the profit attribution arrangements and corporate taxation of Apple in Ireland. The EC concluded that, in its opinion, Apple benefitted from unlawful State aid granted by Ireland, and it orders full recovery of the aid in an amount of up to 13 billion euros (EUR) plus compound interest.
The EC’s investigation related to two rulings on the attribution of profits to the Irish branches of two Irish incorporated, non-resident companies ultimately owned by Apple Inc. These rulings were granted in 1991 and 2007. The EC’s position is that the agreements made between the taxpayer and Ireland do not reflect economic reality with regards to profit attribution. The EC concluded that the rulings deviated from the arm’s length principle in a manner which was selective and, thus, constituted unlawful State aid.
The EC has stated that the decision does not call into account Ireland’s general tax system or its corporate tax rate and notes also that no other companies in Ireland are subject to this decision. It also states that the amount of State aid could be reduced by taxes imposed by other countries on Apple’s profits.
EU LawIreland
PwC observation:The EC concluded that, in its view, the tax rulings issued by Ireland endorsed an artificial allocation of Apple’s sales profits to their ‘head offices’, enabling Apple to pay substantially less tax than other companies. The EC claims that this is unlawful under European Union (EU) State aid rules. The EC’s full reasoning will only be apparent when the detailed non-confidential decision is published. The recovery order is subject to a limitation period of ten years.
Jonathan HareLondonT: +44 20 7804 6772E: [email protected]
Sjoerd DoumaAmsterdamT: +31 88 7924 253E: [email protected]
Suchi LeeNew YorkT: +1 646 471 5315E: [email protected]
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Brazil releases Public Consultation on mutual agreement procedures
On August 18, 2016, the Brazilian tax authorities released Public Consultation 008/2016 (PC 008/2016), regulating the application of mutual agreement procedures (MAPs) in the context of the conventions for the avoidance of double taxation (CDTs) signed by Brazil.
By way of background, where a company considers that the actions of one or both of the contracting states results or will result in taxation that is not in accordance with the provisions of a CDT, they may present a case to a competent authority. Said competent authority shall endeavour to resolve it by mutual agreement with the competent authority of the other contracting state — if it is not able to arrive at a satisfactory solution itself — with a view to the avoidance of taxation that is not in accordance with the CDT (2014 Organization for Economic Co-operation and Development (OECD) Model Tax Convention, Art. 25).
PC 008/2016 provides that, in order to have access to a MAP, the application must include the following information:
• identification of the applicant, who should be the taxpayer,• identification of taxes and periods involved, which should be the
same covered by the CDT,• identification of tax authorities and actions leading to taxation not
in accordance with the CDT,• identification of direct and ultimate controller,• supporting documentation, including copies of agreements with
foreign tax authorities — e.g. rulings, advance pricing agreements etc., and
• confirmation of whether the actions leading to taxation not in accordance with the CDT have already been submitted to administrative or judiciary appreciation. If so, supporting documents must be included.
PC 008/2016 states that requests will not be processed when there is an administrative or judiciary decision. It also states that there will be no reconsideration or appeal to MAPs decisions.
Finally, the memorandum refers to the OECD Base Erosion and Profit Shifting (BEPS) project, specifically to Action 14, which addresses MAPs as mechanisms for the resolution of disputes between tax authorities of different states.
TreatiesBrazil
PwC observation:This initiative demonstrates that Brazil is closely following the BEPS Action plans. Multinational enterprises (MNEs) with Brazilian entities should consider how this initial guidance will help them access MAPs under the CDTs signed by Brazil.
Fernando GiacobboSao PauloT: +55 11 3674 2582E: [email protected]
Ruben GottbergSao PauloT: +55 11 3674 6518E: [email protected]
Alvaro PereiraSao PauloT: +55 11 3674 2954E: [email protected]
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PwC observation:The third protocol to the China-Macao DTT brings benefits as well as obligations to taxpayers. The reduced Chinese WHT rate for aircraft and shipping rentals puts Macao on par with Hong Kong, the other Chinese Special Administrative Region, and should be welcomed by taxpayers in Macao. On the other hand, the strengthening of the anti-treaty abuse provisions reflect the determination of both Mainland China and Macao to counteract treaty abuse. Taxpayers who wish to enjoy the benefits under the China-Macao DTT are obligated to make legitimate use of the DTT and refrain from treaty shopping.
PwC observation:These recent updates signal Ireland’s commitment to expanding and strengthening its double taxation treaty (DTT) network. Ireland has signed comprehensive DTTs with 72 countries, 70 of which are now in effect and negotiations are ongoing with other territories at this time.
China
Mainland China and Macao sign the third protocol to the China-Macao DTT
Mainland China and Macao signed a third protocol to the existing double tax treaty (China-Macao DTT) on July 19, 2016. Key amendments to the China-Macao DTT include:
• clarifying value-added tax (VAT) exemption treatment for international transportation business conducted in China
• reducing the withholding tax (WHT) rate for rentals arising from aircraft leasing and ship chartering from 7% to 5%, and
• introducing the main purpose test to the dividends, interest, royalties, and capital gains articles as an additional anti-treaty abuse measure.
The third protocol will enter into force after the completion of the ratification procedures on both sides.
Ireland
Ireland-Ethiopia tax treaty enters into force
The Ireland-Ethiopia tax treaty was signed on November 3, 2014 and entered into force on August 12, 2016. The treaty provides that dividends, interest, and royalties will be taxed at a maximum of 5% in the jurisdiction of the paying entity. The treaty will be effective from January 1, 2017 in Ireland and July 8, 2017 in Ethiopia.
Matthew MuiChinaT: +86 10 6533 3028E: [email protected]
Denis HarringtonDublinT: +353 1 792 8629E: [email protected]
Peter HopkinsDublinT: +353 1 792 5512E: [email protected]
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Spain
Exchange of interpretative letters on the Spain-Morocco tax treaty
Through the exchange of interpretative letters, published in the Spanish official gazette on July 15, 2016, Spain and Morocco have formally agreed on the interpretation of certain aspects of the double tax treaty (DTT) of 1978.
The main highlights are:
• With regard to the concept of royalties as foreseen in paragraph 2c) of article 12, it has been agreed that the words ‘technical or economic studies’ include any kind of analysis or research of an economic or technical nature in which one party undertakes to use its own knowledge, skills, and expertise to carry out said analysis or research, without transferring such knowledge to the other party so that the latter is not able to use them on its own. This would cover financial studies, for example.
Under the treaty, royalties paid as consideration for technical or economic studies are subject to a 10% withholding tax (WHT). According to Spanish domestic legislation, the WHT would be 24% and the Morocco legislation foresees a 10% WHT in line with the DTT.
• Payments made by a resident of a contracting State to a permanent establishment (PE) situated in such State in respect of services rendered by the PE will not be subject to WHT, as long as the payments are attributable to that PE according to article 7 of the DTT.
• Lastly, the tax authorities have highlighted the importance of issuing tax certificates of residence for residents of a contracting State to be entitled to the benefits of the DTT.
PwC observation:The new definition of technical or economic studies will increase the certainty for the application of royalties in accordance with the Spain-Morocco DTT.
Ana JimenaMadridT: +34 648 051 275E: [email protected]
Carlos ConchaMadridT: +34 628 129 680E: [email protected]
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