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International Tax NewsEdition 48February 2017
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]
www.pwc.com/its
In this issue
Tax Administration and Case LawTax legislation Proposed Tax Legislative Changes EU Law Treaties
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Tax LegislationAzerbaijan
2017 Tax Code Amendments
The Azerbaijani President on December 23, 2016, signed a law introducing amendments to the Tax Code. The law takes effect as of January 1, 2017.
Significant changes include:
• Introduction of transfer pricing rules on cross-border transactions with related parties and parties from tax haven/offshore countries.
• Introduction of obligatory issuance of electronic invoices by suppliers within the country.
• Reduction of permitted cash operations. • Application of withholding tax (WHT), and • Introduction of advance tax ruling mechanism.
PwC observation:When compared to the changes over the past few years, the 2017 changes are more significant. They bring Azerbaijan’s tax principles more in line with international tax trends by tightening control over the cash economy, widening the scope of taxable cross-border transactions, and increasing tax transparency.
Ulkar KazimovaPricewaterhouseCoopers Central Asia and Caucasus B.V. Azerbaijan Republic branchT: +994 12 497 25 15E: [email protected]
Rizvan GubiyevPricewaterhouseCoopers Central Asia and Caucasus B.V. Azerbaijan Republic branchT: +994 12 497 25 15E: [email protected]
Arif GuliyevPricewaterhouseCoopers Central Asia and Caucasus B.V. Azerbaijan Republic branchT: +994 12 497 25 15E: [email protected]
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Brazil
Brazil updates list of privileged tax regimes to apply to the concept of ‘significant economic activities’ to Austrian holding regimes
The Brazilian tax authorities (RFB) on December 30, 2016, published Normative Instruction (NI) 1.683/2016, limiting the situations in which the regime applicable to Austrian holding companies may be regarded as a privileged tax regime.
The RFB on June 4, 2010, issued NI 1,037/2010, updating the list of countries considered tax havens (black list) and adding regimes to the list of privileged tax regimes (grey list).
The grey list, which has been subject to several changes over the past few years, has recently been updated to add the regime applicable to Austrian holding companies (NI 1,658/2016, dated September 14, 2016).
NI 1.683/2016, which updates the grey list, establishes that the regime applicable to Austrian holding companies should be regarded as a privileged tax regime when no significant economic activities are carried out by the entity.
According to NI 1,658, a foreign holding company is deemed to carry out significant economic activities if it has, in its country of domicile, operating capacity to manage and make decisions regarding (i) activities with the purpose of generating income from its assets or (ii) management of equity interests with the purpose of generating income in the form of profit distributions and capital gains.
Operating capacity would be measured by (i) the existence of physical facilities and (ii) qualified employees to manage and make decisions according to the complexity of the tasks to be performed.
PwC observation:This change, together with the application of the Brazilian controlled foreign corporation (CFC), transfer pricing, and thin capitalisation rules, among others, may have significant impacts on international structures involving Brazilian entities and Austrian holding companies. Multinationals are encouraged to analyse how this change will impact their specific structures.
Brazil
Brazil issues new rules on Service Tax
The Brazilian Congress on December 30, 2016, published Complementary Law 157/2016 (LC 157/2016) establishing new rules related to the Service Tax (ISS).
LC 157/2016 was published on December 30, 2016, to amend Complementary Law 116/2003 (LC 116/03), which sets forth the general rules for ISS taxation. ISS is a service tax levied on the local rendering of services in Brazil. Although ISS is a municipal tax, the federal government has the power to issue general standards that municipalities must follow when creating local legislation.
Changes made by LC 157/2016 were mainly two-fold: (i) inclusion of new services on the ISS services list and (ii) introduction of a minimum effective ISS tax rate.
Considering that only services expressly listed in the LC 116/2003 can be taxed by municipalities, the taxation of digital solutions has been a controversial subject between taxpayers and municipal tax authorities (e.g. online streaming of digital content).
To address this issue, LC 157/2016 amended the list of services to expressly include:
• processing, storage or hosting of data, texts, images, videos, electronic pages, apps, information systems, and similar services
• software programming, including electronic games, for any platform, including tablets and smartphones, and
• online streaming of audio, video, image, and text without definitive assignment through the internet, except for books, newspapers, and journals, which are exempt.
Further, LC 157/2016 also sets a minimum ISS effective tax rate of 2%, forbidding municipalities to grant any tax benefit that could reduce this rate in practice, except for specific activities, such as civil construction and intra-municipal transportation of passengers.
PwC observation:Entities providing the services listed in LC 157/2016 or benefitting from any reductions in the ISS effective tax rate should monitor developments in the ISS legislation in the relevant municipalities.
Ruben GottbergSão PauloT: +55 11 3674 6518E: [email protected]
Ruben GottbergSão PauloT: +55 11 3674 6518E: [email protected]
Fernando GiacobboSão PauloT: +55 11 3674 2582E: [email protected]
Fernando GiacobboSão PauloT: +55 11 3674 2582E: [email protected]
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Cyprus
Cyprus introduces rules to implement country-by-country reporting requirements
The Cyprus Minister of Finance (MoF) on December 30, 2016, issued a decree that introduces a mandatory country-by-country reporting ((CbCr) requirement for multinational enterprise (MNE) groups generating consolidated annual turnover exceeding EUR 750 million. The decree is in line with European Union (EU) Directive 2016/881 amending Directive 2011/16 regarding the mandatory automatic exchange of information (EoI) in the field of taxation and the Organisation for Economic Co-operations and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action 13 report on transfer pricing documentation and CbCr.
CbC report filing obligationMNE Groups with an ultimate Cyprus tax resident parent are required to file electronically with the Cyprus tax authorities (CTA) on an annual basis a CbC report that includes specific financial data covering income, taxes, and other key measures of economic activity by territory. Under certain conditions, a CbC reporting requirement may also apply to Cyprus tax resident entities included in an MNE Group that has a non-Cyprus tax resident ultimate parent. The format of the CbC report is consistent with the template published by the OECD as part of the BEPS project (Action 13) and the EU Directive 2016/881.
The first CbC report should be prepared for the MNE Group’s tax year beginning on or after January 1, 2016.
CbC reporting notificationsPer the decree, Cyprus tax resident constituent entities of an MNE Group should notify the CTA as to whether they are the reporting entity and if they are not, the details of the MNE Group’s reporting entity. The first notifications should be made by October 20, 2017.
Exchange of CbC reportsIn line with the relevant EU Directive and the OECD’s Multilateral Competent Authority Agreement on the Exchange of CbC Reports (MCAA), the CTA will apply the automatic EoI mechanism to exchange CbC reports filed by MNE Groups in Cyprus. The reports will be exchanged with the tax authorities of the other EU Member States in which the MNE Group operates and all other jurisdictions that have signed the MCAA.
PwC observation:The introduction of CbCr requirements in Cyprus will affect Cyprus-parented MNE Groups or potentially Cyprus tax resident subsidiaries or permanent establishments (PEs) of non-Cyprus-parented MNE Groups as they begin to collect and analyse the information required to prepare a CbC report.
Given the potentially significant impact on the MNE Group’s tax profile, the preparation of the CbC report should be viewed as part of the MNE Group’s strategic tax risk management, rather than simply as a compliance burden for its tax department.
Stelios ViolarisNicosiaT: +357 22 555300E: [email protected]
Joanne TheodoridesNicosiaT: +357 22 553694E: [email protected]
Marios AndreouNicosiaT: +357 22 555266E: [email protected]
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Korea
Korea tax law changes for 2017
The Korean National Assembly has approved amendments to tax laws for 2017 that include some changes to the proposals announced in July 2016. Supporting details of the tax law changes have also been released in proposed amendments to relevant enforcement decrees. The main corporate tax law changes that Korean inbound investors should be aware of are summarised below.
Qualified corporate mergers Under current tax law, a merger between Korean companies qualifies for deferral of capital gains tax only if certain prescribed conditions are satisfied. Under the revised tax law, mergers between wholly owned Korean subsidiaries of a common parent company will qualify for capital gains tax benefits without having to satisfy these conditions. The revised law applies to mergers taking place on or after January 1, 2017.
Introduction of country-by-country reporting (CbCr) The tax law changes introduce CbCr requirements for the ultimate Korean parent company of a multinational group if the consolidated revenue for the preceding year exceeds KRW 1 trillion (approx. USD 850 million). The Korean subsidiary or branch of a multinational group may be required to file the CbC report if the foreign ultimate parent company’s tax jurisdiction does not have CbCr rules in place, or if it is not possible for the Korean National Tax Service to electronically exchange the CbC report with the ultimate parent company’s tax jurisdiction due to reasons such as the lack of a double tax treaty (DTT) between Korea and the ultimate parent company’s territory. The CbCr requirements apply for fiscal years commencing on or after January 1, 2016 and the CbC reports should be submitted within 12 months of the fiscal year-end.
Changes to Master File and Local File requirements The amendments also extend the submission deadline for the Combined Report of International Transactions (including Master File, Local File, and CbC report) to within 12 months after the end of the fiscal year. The deadline was previously three months after the end of the fiscal year.
Tax on excess corporate earnings Korean corporations are currently subject to a 10% additional tax on excess corporate earnings if the use of corporate earnings falls short of certain threshold amounts computed using one of two methods:
Method A: [(adjusted taxable income for a year x 80%) – (the total amount of investment, wage increases, and dividend payments)] x 10%; or
Method B: [(adjusted taxable income for a year x 30%) – (the total amount of wage increases and dividend payments)] x 10%
Certain changes have been made to the rules including allowing companies to change its election from Method B to Method A when calculating whether the qualifying expenditure thresholds are met. Previously a company could not revoke its election for three years. Other changes include the application of a weighting of 150% on the amount of payroll increases provided the number of regular employees has increased during the year, and the application of a weighting of 50% on the amount of dividends paid. This is a reduction from the original proposal that an 80% weighting be applied to dividends.
Limitation on utilisation of tax losses Under changes to the tax law effective January 1, 2016, tax losses carried over from prior years that can be utilised by a Korean company in a year are limited to 80% of the company’s current year taxable income. Under the revised tax laws, the same restriction will apply to Korean branches of foreign companies for fiscal years starting on or after January 1, 2017.
PwC observation:The tax law changes are intended to encourage corporate investment, job creation, and facilitate corporate restructuring. Foreign invested companies in Korea should assess how they may be impacted by the changes.
Most of the changes have effect for fiscal years beginning on or after January 1, 2017. Some of the details regarding the laws are included in enforcement decrees that may be subject to minor modifications before being finalised, which is expected to take place in February 2017.
Henry AnSeoulT: +82 2 3781 2594E: [email protected]
Sang‑Do LeeSeoulT: +82 2 709 0288E: [email protected]
Robert BrowellSeoulT: +82 2 709 8896E: [email protected]
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Korea
Ministry of Strategy and Finance announces Korea’s 2016 tax reform proposals
Reform of foreign investment tax Incentives for high-technology businesses Korea has comprehensively reformed the existing foreign investment tax incentives for high-technology industries to encourage foreign direct investment in new growth-engine businesses. The reforms are summarised below. These changes will apply to foreign investment for which a tax incentive is applied on or after the effective date of the Amended Presidential Decree of the Special Tax Treatment Control Law (STTCL).
• The scope of businesses eligible for foreign investment tax incentives - 497 types of high technology businesses and 153 types of industry-supporting service businesses will be reformed to include the pre-designated new growth-engine and core technologies. In addition, technologies used for the manufacturing process of new growth engine industry-related materials will be designated and specified in the detailed rules for the implementation of the STTCL.
• To qualify for the tax incentive, a foreign investor must meet a new minimum investment requirement. The minimum investment threshold shall be set forth by the detailed rules after certain factors, such as industry characteristics and average foreign investment amount, are taken into account.
Limitation on utilisation of tax loss of foreign corporation Currently, the tax losses of a foreign corporation - a Korean branch of a foreign corporation - can be carried forward to the next ten years. A domestic company’s tax losses carried over from prior years are limited to 80% of the company’s taxable income in the year, but there is no limitation on the utilisation of the tax losses of a foreign corporation. This has been amended so that a foreign corporation would be subject to the same limitation as domestic companies.
Changes in special tax treatment for foreign workers The amended law will extend the existing five-year time limit for the application of the flat tax rate, which is scheduled to sunset as of December 31, 2016, by an additional two years. The flat tax rate will therefore apply to those who start working in Korea no later than December 31, 2018, one year earlier than the initially proposed date or December 31, 2019. In addition, there will be no exception to the rule for the five-year time limit in applying the flat tax rate. Before the amendment, an exception to this rule was granted to those who started to work in Korea prior to January 1, 2014 (i.e. those foreign workers could claim the flat tax rate for the year up to December 31, 2018). The flat tax rate will be adjusted from 17% to 19%, excluding local income tax.
PwC observation:The National Assembly in December 2016 approved the bills to amend 12 Korean tax laws, including the corporate income tax law with several changes from the tax reform proposals that the Ministry of Strategy and Finance (MoSF) announced last July. In a subsequent move, in January 2017, the government announced bills to amend the corresponding presidential decrees of the tax laws to set forth details delegated by the amended tax laws. If approved, the bills to amend the presidential decrees are expected to be proclaimed in early February 2017. The latest amendment includes changes that could affect foreign investment or foreign invested companies in Korea.
Alex Joong‑Hyun LeeSeoulT: +82 2 709 0568E: [email protected]
YunJung YangSeoulT: +82 2 709 0568E: [email protected]
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Saudi Arabia
Zakat and tax profile of Saudi listed companies will now be impacted by shares listed on Tadawul
The General Authority for Zakat and Tax (GAZT) on December 4, 2016, issued a new circular (5/3/1438 AB, ‘the Circular’) that introduces a completely new approach in regulating the zakat and tax profile of listed companies.
Prior approach Some of the key components of the zakat base - such as capital, retained earnings, and certain types of liabilities have to remain on the books of a zakat payer for an entire year to be included in the zakat base. The share of such items attributable to Gulf Cooperation Council (GCC) shareholders would participate in determining zakat liability.
Listed shares may change ownership multiple times during a year, including changes between GCC and non-GCC persons. As such, application of zakat to the share of zakat forming items corresponding to listed shares was not possible – they may be owned by non-GCC persons. At the same time, they may still be owned by GCC persons, which would preclude application of tax.
Therefore, before the Circular was issued, companies listed on Tadawul were generally subject to zakat and tax based on their founding member’s ownership per their articles of association. The impact of listed shares was not considered in determining zakat base.
Key changes Pursuant to the Circular, listed companies will be subject to zakat and tax per their actual percentage ownership shown in the ‘Tadawulaty System’ at year end.
Listed companies can obtain a report from the Tadawulaty System that clarifies the details of the security ownership records, information about the investor including the nationality, type, address, and category (whether resident or not).
The new Circular specifically mentions the following requirements:
• Listed companies should file zakat/tax returns according to actual ownership percentages at the end of the company’s fiscal year with an attached statement that shows the actual ownership percentage of company’s shares by Saudis, non-Saudis, and GCC nationals.
• Listed companies must make advance payments in the following year based on the amount of taxes shown in the company’s return.
The requirements in the Circular are applicable to companies whose fiscal year ends after the issuance date of the Circular (December 4, 2016). Therefore, it is applicable to all listed companies with a December 31, 2016 year-end.
The Circular further states that prior years should not be impacted by the new requirements.
Other key implications of the new rules If information from Tadawulaty System reports non-GCC ownership in a listed company, which has historically been subject to zakat only, the following key issues should be considered by the company:
• The company will not be allowed to consolidate its subsidiaries in its zakat return; all members of the group would have to file separate zakat and tax returns. This will add significant administration burden and increase compliance costs. Further, it will potentially add in zakat costs resulting from intercompany transactions otherwise eliminated in consolidation.
• Some key cost items that are fully deductible from zakat base have limitations in tax regulations, which include loan charges, maintenance, and repairs. The company would have to enhance its systems to a level that will generate details sufficient to determine the limitations.
• Ownership structure of taxpayers is reflected in the recently introduced online registration system (ERAD). Listed companies may have to change data at the end of each year to update the ownership ratio between GCC and non-GCC persons.
• Listed companies should consider the effect of the change to their financial statements. In particular, they should find a way to determine the amount of tax provisions in their interim reports, given that the share of tax will depend on year-end ownership structure.
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At the same time, inclusion of listed shares in the calculation of zakat and tax may have the opposite effect in companies which already have non-GCC shareholders among its founding shareholders and therefore already subject to tax in non-GCC share. Assuming GCC persons represent majority of owners of listed shares on the market, adding listed shares to the formula may increase overall GCC ownership in such company, hence zakat/tax ratio will change in favour of zakat; however, it will not eliminate tax completely.
And finally, the following two groups of entities should closely monitor clarifications of GAZT on the implementation of this Circular and future changes:
Saudi subsidiaries of GCC listed companies The Circular is silent about application of the new rules to exchanges outside of Saudi Arabia; however, GAZT may be expected to take the same approach to such companies.
CMA licensed investment funds These entities have not been subject to either zakat or tax at all due to the same reason of frequent change of unitholders during a year; however, as GAZT has now decided to use ownership structure as of year-end for listed companies, it may use the same approach to investments funds and start subjecting them to tax or zakat.
PwC observation:Clearly, the Circular introduces some important new rules and requirements concerning listed companies in Saudi Arabia. Companies are advised to review the origin of their current (and expected as of year-end) shareholders to assess the impact of the new rules. The Circular refers to the Tadawulaty System as a source of information and states that all investors (whether resident or not) would be included in the Tadawulaty System report. As such, we understand that all non-GCC share of ownership in listed companies would now be subject to tax. Advance planning and preparation should help with (i) assessment of monetary impact of the new approach and (ii) adequate and timely compliance with the requirements.
Mohammed YaghmourJeddahT: +966 2 610 4400 ext. 2228E: [email protected]
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Fernando GiacobboSão PauloT: +55 11 3674 2582E: [email protected]
Ruben GottbergSão PauloT: +55 11 3674 6518E: [email protected]
Proposed Tax Legislative ChangesBrazil
Brazilian government launches new Tax Regularisation Program
The Brazilian government on January 5, 2017, released Provisional Measure No. 766/2017 (MP 766/2017), introducing the Tax Regularisation Program (Programa de Regularização Tributária or PRT).
Brazil issued MP 766/2017 on January 5, 2017, to allow individuals and legal entities to settle both tax and non-tax indebtedness administered by the Brazilian Revenue Service (RFB) and National Treasury’s Attorney General’s Office (PGFN), and due by November 30, 2016.
Enrolment in the program should occur within 120 days of the enactment of the regulation to be issued by the RFB and PGFN. Taxpayers may settle their debts through one of the different settlement schemes provided by MP 766/2017. Taxpayers would also forfeit any lawsuit or administrative procedure initiated to challenge the debts.
Under certain instalment payment schemes, a taxpayer may use either (i) its own net operating losses (NOLs), or (ii) NOLs from other companies in the same economic group (local companies) to pay off their debts, provided that the NOLs are both accrued by December 31, 2015 and declared by June 30, 2016. Further, taxpayers may also use federal tax credits to settle their debts.
It is important to emphasise that MP 766/2017 does not provide any reduction or relief in potential interest and penalties included in the outstanding balances.
A Provisional Measure is a provisionary law issued by the Executive Branch of the Brazilian government. Provisionary law has the authority of law until it is passed by the Brazilian Congress within a prescribed 60-day period. If Congress does not act within this initial period, then it expires unless it is extended for an additional 60-day period.
PwC observation:Companies with debts to the Brazilian government should analyse whether they are eligible and if they could benefit from enrolling in the Tax Regularisation Program.
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Tax Court, reversing earlier position, holds that Rev. Proc. 99-32 accounts receivable are not related-party indebtedness under Section 965
The US Tax Court held in Analog Devices, Inc. v. Commissioner, 147 T.C. No. 15 (November 22, 2016), that an account receivable established to repatriate a transfer pricing adjustment under Rev. Proc. 99-32, 1999-2 C.B. 296, does not constitute related-party indebtedness (RPI) for purposes of the Section 965(b)(3) related-party debt rule. Under that rule, the amount qualifying for the one-time Section 965 dividends received deduction (DRD) is reduced by increased RPI.
This decision is a reversal of the court’s position in BMC Software, Inc. v. Commissioner (BMC Software I), 141 T.C. 224 (2013), which itself was reversed by the Fifth Circuit, 780 F.3d 669 (2015). Taxpayers outside the Fifth Circuit (Louisiana, Mississippi and Texas) can now count on a favourable decision in the Tax Court on the question of the interpretation of Section 965 on this issue. Further, the decision could have important implications regarding other code sections for taxpayers that elect Rev. Proc. 99-32 treatment. The decision therefore should be of substantial interest to all US multinational entities.
Tax Administration and Case LawUnited States
PwC observation:This decision will benefit companies that took advantage of the Section 965 repatriation incentive and also took (or plan to take) advantage of Rev. Proc. 99-32. In general, the practice of establishing and paying Rev. Proc. 99-32 receivables is becoming more common as taxpayers’ transfer pricing arrangements are subject to increasingly intense scrutiny and adjustment by the internal revenue service (IRS) and other tax authorities. Rev. Proc. 99-32 receivables can be established both with respect to IRS-initiated adjustments (as a result of an examination), and to reflect a self-initiated transfer pricing adjustment that the taxpayer reports on its tax return.
Marty CollinsWashington, D.C.T: +1 202 414 1571E: [email protected]
Jeffrey DorfmanWashington, D.C.T: +1 202 312 7979E: [email protected]
Alan L. FischlWashington, D.C.T: +1 202 414 1030E: [email protected]
Chip HarterWashington, D.C.T: +1 202 414 1308E: [email protected]
Michael UrseWashington, D.C.T: +1 216 875 3358E: [email protected]
Michael TurgeonWashington, D.C.T: +1 646 471 8361E: [email protected]
United States
IRS augments anti-abuse rule to limit taxpayers anticipating Section 987 regulations’ effective date
The US Treasury Department and IRS on December 22, 2016, issued Notice 2017-07, augmenting the deferral or loss anti-abuse rule in Temp. Treas. Reg. sec. 1.987-12T(j)(2). The new Section 987 regulations already limit the recognition and deferral of a qualified business unit’s foreign currency gain or loss in connection with a deferral event or outbound loss event. Temp. Treas. Reg. sec. 1.987-12T(j)(1) provides that those deferral rules generally apply to any deferral event or outbound loss event that occurs on or after January 6, 2017.
Notice 2017-07 announces that the anti-abuse rule in Temp. Treas. Reg. sec. 1.987-12T(j)(2) will be modified so that the deferral or outbound loss rules will also apply to any deferral or outbound loss event undertaken with a principal purpose of recognising Section 987 gain or loss that occurs as a result of an entity classification election that is filed:
• on or after December 22, 2016, and that is effective before December 7, 2016, and
• on or after January 6, 2017, and that is effective before January 6, 2017.
PwC observation:It is expected that implementing and accounting for the Section 987 regulations will be a challenging exercise. Companies should be prompt in taking steps to ensure that the appropriate processes and internal controls are in place to meet financial reporting and disclosure requirements regarding the regulations.
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EU transparency rules for tax rulings now in effect
The European Commission (EC) on January 3, 2017, announced that, beginning on January 1, 2017, European Union (EU) Member States must automatically exchange information on cross-border tax rulings they issue. Every six months, national tax authorities will upload tax rulings to a central depository that will be accessible by all Member States. Each Member State then will have the opportunity to query the issuing Member State regarding the details of particular tax rulings. The first exchange is expected to occur by September 1, 2017. By January 2018, each Member State also will be required to upload each tax ruling issued since January 1, 2012.
The EC press release can be found here.
EU LawBelgium
PwC observation:This new rule highlights the EC’s focus on tax transparency. Stakeholders should continue to monitor developments in this area and the potential implications on tax rulings issued in European countries.
Aamer RafiqLondonT: +44 0 20 7212 8830E: [email protected]
Jonathan HareLondonT: +44 20 7804 6772E: [email protected]
Stef van WeeghelAmsterdamT: +31 0 88 7926 763E: [email protected]
Suchi LeeNew YorkT: +1 646 471 5315E: [email protected]
Pam OlsonWashington, D.C.T: +1 202 414 1401E: [email protected]
Sjoerd DoumaAmsterdamT: +31 88 7924 253E: [email protected]
Ireland
EC publishes Apple State aid decision
The European Commission (EC) on December 19, 2016, published the non-confidential version of its final decision announced on August 30, 2016, on the State aid investigation into the profit attribution arrangements and corporate taxation of Apple in Ireland. In its final decision, the EC concluded that the two rulings granted in 1991 and 2007 on the attribution of profits to the Irish branch of two Irish-incorporated, non-resident companies constitute unlawful State aid, and ordered immediate recovery of the aid. Both Ireland and Apple have appealed this EC final decision before the General Court of the European Union (EU) on November 9, 2016, and December 19, 2016, respectively.
Following the EC’s press release on August 30, 2016 (see our October 2016 version of this newsletter), the non-confidential version of the final decision contains additional details on Apple’s structure and intercompany arrangements, financial data, and other information made available to the EC. It also contains the EC’s arguments behind its conclusion that two tax rulings issued by Ireland to Apple were unlawful State aid.
PwC observation:As expected, this decision has been appealed before the General Court and the position taken has been strongly defended in public by both the Irish government and Apple. In addition, the decision was strongly criticised by the US Treasury in its statement on December 19, 2016, and in its white paper ‘The European Commission’s Recent State Aid Investigations of Transfer Pricing Rulings’ published on August 24, 2016.
This decision should be seen in the light of a number of recent EC investigations with respect to the use of tax rulings concerning the application of transfer pricing and the arm’s length principle. As with those cases, the decision contains very detailed observations on the transfer pricing methodology used. Companies may wish to review these comments in view of their own facts and circumstances.
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Luxembourg
Non-confidential version of the EC’s State aid opening decision in GDF Suez
The European Commission (EC) on January 5, 2017, published its opening decision in the formal investigation into Luxembourg tax rulings obtained by entities of GDF Suez. The opening decision, dated September 19, 2016, explains why the EC initiated the formal investigation and requested additional information from Luxembourg in order to reach a final conclusion. This decision represents therefore the opening, not the outcome, of the EC’s formal investigation into this matter.
The formal investigation pertains to Luxembourg’s granting of several tax rulings between 2008 and 2013 to several GDF Suez Luxembourg entities. The rulings relate to the tax treatment of certain interest-free convertible instruments (‘ZORAs’).
The EC believes that, at this stage, the treatment applied to the entities involved in the financing arrangement can lead to State aid based on the following preliminary grounds:
• According to the EC, when the ZORA issuers’ deducted the accretion amount on the ZORAs, they were not correctly applying two specific Luxembourg Income Tax Law (LITL) articles. The EC believes these two articles serve as the reference framework in this case (although the direct application to the case is not clear). The EC further believes that this treatment is not a correct application of the Luxembourg accounting rules. The EC questions in this respect the possibility for recognising the annual accretion amount as a deductible expense and whether independent parties would have agreed to the ZORAs’ terms.
• As subsidiary arguments, which are not discussed in detail, the EC considers that, in a situation where the accretion amount could be deductible, (i) it should have led to a taxable event for the ZORA holders (ii) the margin calculation is not considered in line with the arm’s-length principle, and (iii) the application of the participation exemption at the level of the prepaid forwards’ beneficiaries is questioned on both double non-taxation grounds and application of the Luxembourg anti-abuse provisions.
Suchi LeeNew YorkT: +1 646 471 5315E: [email protected]
Jonathan HareLondonT: +44 20 7804 6772E: [email protected]
Sjoerd DoumaAmsterdamT: +31 88 7924 253E: [email protected]
PwC observation:If the EC’s approach is confirmed in its final decision, further litigation before the European Courts is likely. According to the Luxembourg government’s January 5, 2017 press statement, Luxembourg is confident that the State aid allegations in this case are unsubstantiated. Luxembourg further believes that it will convince the EC that it granted no particular tax treatment or selective advantage.
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Spain
CJEU sets aside General Court decision in the Spanish financial goodwill and amortisation cases
In a decision delivered on December 21, 2016 (joined cases C-20/15 P Autogrill v. Commission, and C-21/15 P Banco Santander and Santusa v. Commission), the Court of Justice of the European Union (CJEU) set aside two judgments of the General Court (GC) of the European Union (EU) that had found that the Spanish financial goodwill amortisation regime did not constitute State aid. The CJEU referred both cases back to the GC.
In 2009, the European Commission (EC) found that the Spanish rules allowing companies to amortise for tax purposes the financial goodwill arising from acquisitions of non-Spanish EU shareholdings were incompatible with the State aid rules (’the First Decision’). In a second decision dated January 2011, the EC concluded that the scheme was also incompatible with regard to acquisitions of non-EU shareholdings (’the Second Decision’).
The EC ordered the recovery of the unlawful aid, but taking into account the existence of legitimate expectations, the recovery only affected aid granted in connection with acquisitions made after December 21, 2007 (or May 21, 2011, in the case of certain non-EU acquisitions).
The taxpayers appealed the First and Second Decisions to the GC which, in November 2014, annulled them both on the basis that the EC failed to demonstrate that the Spanish measure at issue was selective. The EC appealed the GC’s judgment in both cases with the CJEU.
The CJEU concluded that the fact that the EC failed to identify a particular category of undertakings that benefitted from the financial goodwill amortisation was not an appropriate ground for annulling the EC decisions, and that the GC should have instead examined whether the EC had effectively analysed and established that the measure at issue was discriminatory. The CJEU therefore set aside the November 2014 decisions of the GC (though the CJEU did not itself give a final judgment) and referred the cases back to the GC for a second hearing.
PwC observation:Companies may wish to consider the implications of the CJEU’s interpretation of the condition relating to selectivity of a tax measure with respect to such measure’s classification as State aid, including the potential impact on various European tax structures. Affected companies should monitor developments closely over the coming months.
Suchi LeeNew YorkT: +1 646 471 5315E: [email protected]
Jonathan HareLondonT: +44 20 7804 6772E: [email protected]
Sjoerd DoumaAmsterdamT: +31 88 7924 253E: [email protected]
www.pwc.com/its
Double tax treaty (DTT) between China and Chile enters into force
China and Chile signed a double tax treaty (DTT) together with its protocol on May 25, 2015. In December 2016, China’s State Administration of Taxation (SAT) issued SAT Public Notice [2016] No. 79 to announce that the DTT and its protocol entered into force on August 8, 2016 and will be applicable to income derived on and after January 1, 2017. The most important features of the China-Chile DTT include:
• The time threshold for constituting a construction permanent establishment (PE) is six months while the threshold for a service PE is 183 days within any 12 month period
• For passive income, the restricted withholding tax (WHT) rates are as follows: dividends, 10%; interest, 10% (except for interests received by banks or financial institutions, which is 4%); and royalties, 10% (except for royalties for the use of industrial, commercial or scientific facilities, which is 2%);
• For capital gains, there is a look back period of 36 months from the date of disposition for determining whether a company is a property-rich company
• The article ‘exchange of information’ (EoI) follows the 2010 Organisation for Economic Co-operation and Development (OECD) Model Tax Convention, and
• A new stand-alone article ‘entitlement to benefits’ has been included to prevent treaty shopping, where only a ‘qualified person’ is entitled to the treaty benefit. It also contains a ‘principal purposes test’ provision to deny the granting of treaty benefit if one of the principal purposes of putting in place any arrangement is to take advantage of the treaty benefit.
China
Double tax treaty (DTT) between China and Zimbabwe enters into force
China and Zimbabwe previously signed a double tax treaty (DTT) on December 1, 2015. In December 2016, China’s State Administration of Taxation (SAT) issued SAT Public Notice [2016] No. 90 to announce that the DTT entered into force on September 29, 2016 and will be applicable to income derived on and after January 1, 2017. The key points in the China-Zimbabwe DTT include:
• Withholding tax (WHT) rates are as follows: dividends, 2.5% for a corporate which holds directly or indirectly at least 25% shares of the company paying the dividends and 7.5% for all other cases; 7.5% for interests and 7.5% for royalties
• ‘Principle purpose test’ provision in the dividends, interest, and royalties articles to deny the granting of treaty benefits if the main purpose or one of the purposes of the arrangement is to take advantage of the treaty benefit, and
• Capital gains arising from the transfer of property-rich company shares and shares that represent a participation of at least 50% in a company in the source State may be taxed in the source State. In other cases of share transfers, the taxing right lies with the residence State.
TreatiesChina
PwC observation:In addition to following the trend of other tax treaties recently concluded or renegotiated by China, the China-Chile DTT has adopted certain recommendations proposed in the Base Erosion and Profit Shifting (BEPS) Project, such as adding the article on ‘entitlement to benefits’. Investors who wish to enjoy the treaty benefits for their cross-border business should be mindful of the anti-treaty abuse measures in the DTT.
PwC observation:The China-Zimbabwe DTT indicates China’s intention to put it on par with other tax treaties concluded or renegotiated by China in recent years. The relatively low WHT rates on dividends, interest, and royalties will undoubtedly attract more investments into Zimbabwe and bring great benefits to the investors in both countries, which promote the business cooperation between China and Africa.
Matthew MuiChinaT: + 86 10 6533 3028E: [email protected]
Matthew MuiChinaT: + 86 10 6533 3028E: [email protected]
www.pwc.com/its
China
The third protocol to the double tax treaty (DTT) between China and Macao enters into force
China and Macao on July 19, 2016, signed the third protocol to the China-Macao double tax treaty (DTT) (the Protocol). In December 2016, China’s State Administration of Taxation (SAT) issued SAT Public Notice [2016] No. 89 to announce that the Protocol entered into force on December 12, 2016. The highlights of the Protocol include:
• Clarification of the value-added tax exemption treatment for international transportation business conducted in China
• Reduction of the withholding tax (WHT) rate on royalties paid for aircrafts and ships leasing activities, and
• Additional anti-treaty abuse measures related to the dividends, interests, royalties, and capital gains articles.
PwC observation:Now that the Protocol is effective, taxpayers will enjoy more tax benefits from the reduced WHT rate for rentals from aircraft leasing and ship chartering. At the same time, taxpayers should be mindful of the newly added anti-treaty abuse measures.
Matthew MuiChinaT: + 86 10 6533 3028E: [email protected]
www.pwc.com/its
Cyprus
India removes Cyprus as a notified jurisdictional area and new DTT enters into force
In a press release dated December 16, 2016, the Indian government announced that it rescinded Cyprus’ classification as a notified jurisdictional area (NJA) on December 14, 2016. The rescission is effective retroactively from November 1, 2013 - the date that Cyprus was previously classified as an NJA by the Indian authorities.
The new double tax treaty (DTT) and accompanying protocol between Cyprus and India, signed in November 2016, also entered into force on December 14, 2016. The new DTT is effective January 1, 2017 in Cyprus and April 1, 2017 in India.
The new DTT provides for a 10% withholding tax (WHT) rate on dividends. The Protocol clarifies that, in India, this rate does not apply currently under Indian domestic law, which does not impose WHT on dividends paid by Indian companies to its shareholders.
A 10% WHT rate also applies on interest, royalties, and fees for technical services, except for interest where the beneficial owner is the government, a political sub-division, or a local authority of the other State or any other institution agreed upon between the two States.
For capital gains, the new DTT provides for source-based taxation on the disposition of shares in the following cases:
• Shares of a resident of the source State.• Shares of a company whose property consists
principally, directly or indirectly, of immovable property situated in the source State.
Importantly, the protocol provides a ‘grandfathering’ clause for investments in shares acquired prior to April 1, 2017 where it has been agreed that the taxation of a future disposal of such shares remains exclusively with the State of residence of the seller in all cases.
PwC observation:The grandfathering of investments in shares acquired prior to April 1, 2017 is a welcome development and provides clarity to taxpayers holding existing investments. In cases where a Cyprus tax resident is the seller of such grandfathered investments, under the new DTT, the exclusive taxing rights on gains realised will remain with Cyprus.
The rescission of Cyprus’ NJA status with retroactive effect from November 1, 2013 is also a welcome development. Taxpayers that have suffered the mandatory levy of WHT in India due to the previous classification of Cyprus as an NJA should now consider making applications for refunds.
We note that irrespective of the WHT rates provided in this DTT on dividend, interest, royalty payments, and fees for technical services, the Cyprus domestic tax legislation does not apply WHT on dividend and interest payments to non-Cyprus tax residents at all times, and only applies WHT on royalty payments and fees for technical services to non-Cyprus tax residents for rights or activities used or performed within Cyprus.
Marios AndreouNicosiaT: +357 22 55 52 66E: [email protected]
Stelios ViolarisNicosiaT: +357 22 55 53 00E: [email protected]
Joanne TheodoridesNicosiaT: +357 22 55 36 94E: [email protected]
www.pwc.com/its
Cyprus
Russia-Cyprus: Postponement of the application of the provisions of the protocol amending Article 13 Capital Gains of the DTT
The Cyprus Ministry of Finance (MoF) announced on December 29, 2016, that the relevant authorities in Russia and Cyrpus have reached an agreement for postponing the application of amendments to Article 13 (Gains from Alienation of Property) of the1998 Cyprus-Russia double tax treaty (DTT) that were contained in a 2010 amending protocol to the DTT.
Regarding Article 13 of the DTT, the 2010 amending protocol provides for the source State to have taxing rights on gains derived from the disposal of shares or similar rights deriving more than 50% of their value from immovable property situated in the source State, whereas the 1998 DTT provides for taxing rights in such cases only in the State of the seller.
The announcement notes that another protocol to the 1998 DTT is being finalised, which intends to provide for the postponement of the 2010 Protocol Article 13 amendments until such time that similar provisions are introduced in other bilateral agreements for the avoidance of double taxation between the Russian Federation and other European countries.
PwC observation:In the case of a Cyprus tax resident disposing shares or similar rights in a Russian company, such a postponement would mean that, during the postponement period, the exclusive taxing rights would remain with Cyprus, as provided for in the 1998 DTT. This includes cases where the disposed-of shares or similar rights derive more than 50% of their value from immovable property situated in Russia. Potentially affected taxpayers should carefully follow this development.
Stelios ViolarisNicosiaT: +357 22 55 53 00E: [email protected]
Marios AndreouNicosiaT: +357 22 55 52 66E: [email protected]
Charalambos SergiouNicosiaT: +357 22 55 36 61E: [email protected]
www.pwc.com/its
Hong Kong
The Hong Kong-Romania double tax treaty (DTT) enters into force
The Hong Kong-Romania double tax treaty (DTT) entered into force on November 21, 2016. The DTT took effect in both Hong Kong and Romania with respect to income derived on or after January 1, 2017.
PwC observation:The conclusion of a DTT with Romania should foster closer economic and trade links between Hong Kong and Romania. Hong Kong does not currently impose any withholding tax (WHT) on dividends, interest, commissions, and service fees paid to non-residents. Thus, one of the major benefits under the Hong Kong-Romania DTT for Romanian resident corporations is the reduced WHT rate of 3% (as opposed to the domestic rate of 4.95%) on royalties derived from Hong Kong. Taxpayers may also benefit from the tax exemption of business profits where there is no permanent establishment (PE) in Hong Kong.
Fergus WT WongHong KongT: +852 2289 5818E: [email protected]
www.pwc.com/its
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