GLOBAL TAX WEEKLYa closer look

ISSUE 30 | JUNE 6, 2013

SUBJECTS TRANSFER PRICING INTELLECTUAL PROPERTY VAT, GST AND SALES TAX CORPORATE TAXATION INDIVIDUAL TAXATION REAL ESTATE AND PROPERTY TAXES INTERNATIONAL FISCAL GOVERNANCE BUDGETS COMPLIANCE OFFSHORE

SECTORS MANUFACTURING RETAIL/WHOLESALE INSURANCE BANKS/FINANCIAL INSTITUTIONS RESTAURANTS/FOOD SERVICE CONSTRUCTION AEROSPACE ENERGY AUTOMOTIVE MINING AND MINERALS ENTERTAINMENT AND MEDIA OIL AND GAS

EUROPE AUSTRIA BELGIUM BULGARIA CYPRUS CZECH REPUBLIC DENMARK ESTONIA FINLAND FRANCE GERMANY GREECE

HUNGARY IRELAND ITALY LATVIA LITHUANIA LUXEMBOURG MALTA NETHERLANDS POLAND PORTUGAL ROMANIA SLOVAKIA SLOVENIA SPAIN SWEDEN SWITZERLAND UNITED KINGDOM EMERGING MARKETS ARGENTINA BRAZIL CHILE CHINA INDIA ISRAEL MEXICO RUSSIA SOUTH AFRICA SOUTH KOREA TAIWAN VIETNAM CENTRAL AND EASTERN EUROPE ARMENIA AZERBAIJAN BOSNIA CROATIA FAROE ISLANDS GEORGIA KAZAKHSTAN MONTENEGRO NORWAY SERBIA TURKEY UKRAINE UZBEKISTAN ASIA-PAC AUSTRALIA BANGLADESH BRUNEI HONG KONG INDONESIA JAPAN MALAYSIA NEW ZEALAND PAKISTAN PHILIPPINES SINGAPORE THAILAND AMERICAS BOLIVIA CANADA COLOMBIA COSTA RICA ECUADOR EL SALVADOR GUATEMALA PANAMA PERU PUERTO RICO URUGUAY UNITED STATES VENEZUELA MIDDLE EAST ALGERIA BAHRAIN BOTSWANA DUBAI EGYPT ETHIOPIA EQUATORIAL GUINEA IRAQ KUWAIT MOROCCO NIGERIA OMAN QATAR SAUDI ARABIA TUNISIA LOW-TAX JURISDICTIONS ANDORRA ARUBA BAHAMAS BARBADOS BELIZE BERMUDA BRITISH VIRGIN ISLANDS CAYMAN ISLANDS COOK ISLANDS CURACAO GIBRALTAR GUERNSEY ISLE OF MAN JERSEY LABUAN LIECHTENSTEIN MAURITIUS MONACO TURKS AND CAICOS ISLANDS VANUATU

COUNTRIES AND REGIONS

GLOBAL TAX WEEKLYa closer look

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Global Tax Weekly – A Closer Look

ISSUE 30 | JUNE 6, 2013

Substance Requirements Of A Foreign Permanent Establishment Of A Swiss Finance CompanyWalter H. Boss and Stefanie Monge, Poledna Boss Kurer AG, Zurich 5Trade And Economic Sanctions: Constantly Shifting Goal PostsAndrea Hamilton and David Levine, McDermott Will & Emery 9FATCA: An UpdateMichael G Bell, Editor-In-Chief, Global Tax Weekly 11Topical News Briefi ng: Dump AwayGlobal Tax Weekly Editorial Team 22

IC-DISC: Still Viable For Flow-Th rough EntitiesGeorge Koutouras, Partner and Lindsey Moore, Manager, Moss Adams LLP 24Current Transfer Pricing DevelopmentsMembers of Duff & Phelps LLC 28Topical News Briefi ng: Italy Between A Rock And A Hard PlaceGlobal Tax Weekly Editorial Team 34Payments To Related Foreign Persons: Beware Of State Addback ProvisionsMichael S. Schadewald 35Recurring Issues In African M & ANick Aziz and Tara Walsh, McDermott Will & Emery 50

GLOBAL TAX WEEKLYa closer look

CONTENTS

FEATURED ARTICLES

NEWS ROUND-UP

International Trade 54China, Germany Vow To Negotiate Away Trade Disputes

EU, China Hold Meeting On Trade Disputes

Chinese Trade Disputes Th e Focus Of WTO Meeting

Hong Kong To Join International Services Trade Agreement Talks

Caribbean Prepares For WTO Trade Policy Review

China Studying Possibility Of Joining TPP

Country Focus: Italy 61Italian Small Businesses Fearful Of VAT Rate Hike

Italy Exits From EU Excessive Defi cit Procedure

For article guidelines and submissions, contact GTW_Submissions@wolterskluwer.com

Real Estate and Property Taxes 63Ireland’s Revenue Chair Off ers Property Tax Update

French Property Tax Rules Under Fire

Italy To Renew Home Tax Credits

Scots Ponder Amendments To Property Sales Tax

FTT 67Centre For Policy Studies Raises Concerns Over FTT

FTT Scale-Back On Th e Cards?

Environmental Taxes 69European Commission Recommends Car Tax For Estonia

Brussels Challenges British Yacht Fuel Tax Breaks

Swiss Federal Council Rejects Energy Tax Initiative

SMEs 72Spain’s Fiscal Package Fosters ‘Entrepreneurial Culture’

Singapore Plugs Benefi ts For SMEs Of e-Filed Simplifi ed Tax Form

IRS Facilitates Extension Of US Empowerment Zones

TAX TREATY ROUND-UP 75CONFERENCE CALENDAR 77IN THE COURTS 89THE JESTER'S COLUMN 98Th e unacceptable face of tax journalism

ISSUE 30 | JUNE 6, 2013FEATURED ARTICLES

Substance Requirements Of A Foreign Permanent Establishment Of A Swiss Finance Company by Walter H. Boss and Stefanie Monge, Poledna Boss Kurer AG, Zurich

I. Introduction

On October 5, 2012 the Swiss Federal Supreme Court decided a leading case in the area of international tax allocation with respect to federal corporate income tax. 1 Th e issue was whether a foreign permanent es-tablishment ("PE") of a Swiss fi nance company with a rather lean infrastructure qualifi ed as a PE under Swiss domestic tax law if compared to the fi gures shown in the P&L statements of the Swiss company.

One should note that the Swiss company had ob-tained a ruling from the competent cantonal tax administration in which it had been agreed that the profi ts attributed to the foreign PE would be ex-empt from Swiss taxation.

II. Factual Background Th e company at issue, hereinafter referred to as X AG, was a Swiss company domiciled in the canton of Zug, belonging to a Swiss group of companies. Th e group holding company, of which X AG was a wholly owned subsidiary, was also domiciled in the canton of Zug. Th e statutory purpose of X AG was the fi nancing of the group. For that purpose X AG maintained a PE on the Cayman Islands with an offi ce and four part-time employees.

On August 10, 1999 the tax administration of the canton of Zug approved a ruling request submitted by the parent company of X AG. Th erein it was agreed that in case the group fi nancing would be done through a foreign PE of a Swiss fi nance group company, the profi ts attributed to the foreign PE would be exempt from taxation in Switzerland.

Up to the fi scal year 2004 the Zug tax administration allocated the net fi nancial income of X AG resulting from granting inter-company loans to the Cayman Islands PE, which in essence means that the net fi -nancial income of X AG was exempt from taxation in Switzerland. In the course of 2004 the Federal Tax Administration ("FTA") – the supervisory authority of the cantonal tax administrations with respect to federal income tax – instructed the Zug tax admin-istration to investigate concerning the existence of a PE on the Cayman Islands. In early 2005 the Zug tax administration informed X AG that the FTA was of the view that its business activity on the Cayman Islands did not meet the requirements of a PE. Con-sequently, as of January 1, 2005 the Zug tax admin-istration refused to exempt the net fi nancial income of X AG from federal corporate income tax.

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X AG appealed against the tax assessments regard-ing the federal corporate income tax for the fi scal years 2005 and 2006 issued by the Zug tax ad-ministration. Th e appeals commission of the tax administration approved the appeal and exempted the net fi nancial income of X AG for the fi scal years 2005 and 2006 from federal corporate income tax. Th e FTA, however, appealed against the decision of the appeal commissions in favor of X AG with the Swiss Federal Supreme Court.

III. Findings Of Th e Swiss Federal Supreme Court

Th e Federal Supreme Court considered that due to the lack of an applicable double taxation trea-ty between Switzerland and the Cayman Islands the matter had to be determined on the basis of Swiss domestic tax law, respectively the Federal Direct Tax Act ("FDTA"), whether X AG's Cay-man Islands PE did meet the requirements of a PE. Th e court determined that the legal basis for the question at issue was article 51, paragraph 2 of the FDTA. In the court's view the defi nition set forth in said article applies to both the Swiss PE of a foreign company and the foreign PE of a Swiss company.

Th e afore-mentioned article defi nes a PE as a fi xed place of business through which a company partial-ly or wholly carries on its business activity. Th e fact that X AG's Cayman Islands PE was a fi xed place of business had not been questioned by the FTA. Hence, the issue at hand was whether X AG partial-ly carried on its business activity in said fi xed place

of business as required by article 51, paragraph 2 of the FDTA in order for there to be a PE. Th is had been denied by the FTA.

In the court's opinion article 51, paragraph 2 of the FDTA does not set any requirements with re-spect to the quality or quantity of the business activity carried out in the fi xed place of business. As a rule, any and all business activities of a com-pany permitted under its statutory purpose fall within the scope of a "business activity partially or wholly carried on in the fi xed place of busi-ness," irrespective of their importance. Th e PE defi nition of article 51, paragraph 2 of the FDTA is therefore wider than the PE defi nition of the inter-cantonal case law. However, when inter-preting the vague concept of a "business activity partially or wholly carried on in the fi xed place of business," one must fi rst determine the function of this unilateral rule of Swiss domestic tax law. In so far as a Swiss PE of a foreign company is concerned, the unilateral rule determines to what extent Switzerland may subject the net profi t of the foreign company to Swiss taxation. In the re-verse case of a foreign PE of a Swiss company the unilateral rule determines to what extent the net profi t of a Swiss company must be exempt from Swiss taxation. Hence, depending on the factual situation, the unilateral rule of article 51, para-graph 2 of the FDTA pursues a diff erent objec-tive. In the court's view unilateral rules that aim at avoiding double taxation are to be interpret-ed in favor of the Swiss taxing power. In case of too extensive a Swiss authority to tax, the double

6

taxation treaties concluded by Switzerland func-tion as a correcting tool. With regard to the PE defi nition of article 51, paragraph 2 of the FDTA this means that the requirements of a foreign PE of a Swiss company may be somewhat stricter than the requirements of Swiss PE of a foreign company. Th erefore, in cases where it is question-able whether the foreign place of business qual-ifi es as a PE according to article 51, paragraph 2 of the FDTA, the decision should be taken in favor of the Swiss authority's power to tax, i.e. the foreign place of business shall not be recog-nized as a PE according to article 51, paragraph 2 of the FDTA. An imminent double taxation can be avoided by means of a double taxation treaty, provided that one applies.

The court was of the view that the lean infra-structure of the Cayman Islands PE – four part-time employees with a 20 percent workload each and an annual salary between USD10,000 and 20,000 each – was in clear contrast to the fig-ures shown in the 2005 and 2006 P&L state-ments of X AG. The balance sheet total of X AG as per end 2005 amounted to CHF365 mil-lion and as per end 2006 to CHF520 million. The loans granted to Swiss affiliated companies amounted to CHF497 million as per end 2005 and to CHF647 million as per end 2006. The income of X AG consisting solely of interest income amounted to CHF16 million in 2005 and CHF18 million in 2006. From the 2005 and 2006 P&L statements of X AG is was clear that the business activity of X AG consisted in

granting loans to Swiss affiliated companies; it was, however, not clear to the court what the added value of the Cayman Islands PE to X AG's business activity was. The court therefore ruled that the Cayman Islands PE lacked the necessary substance and did hence not qualify as a PE ac-cording to article 51, paragraph 2 of the FDTA.

Finally, X AG claimed that it was entitled to rely on the ruling of August 10, 1999, in which the Zug tax administration had agreed that in case the group fi nancing would be done through a foreign PE of a Swiss fi nance group company, the profi ts attributed to the foreign PE would be exempt from taxation in Switzerland. X AG argued that the ret-roactive denial of the Zug tax administration to exempt the 2005 and 2006 net profi ts from federal corporate income tax without granting X AG an adequate transitional period violated its protection of legitimate expectations. Th e court, however, did not rule on the violation of X AG's protection of legitimate expectations. Because the court of lower instance had upheld the existence of a foreign PE under Swiss domestic tax law, it had not addressed this issue. Th erefore, the court remitted the case to the court of lower instance in order to decide on the ruling the issue. However, the court stat-ed that in case the FTA had been involved by the Zug tax administration in the negotiation process of the ruling of August 10, 1999 – which based on the documentation submitted to the court did not seem to be the case – the retroactive denial of the Zug tax administration to exempt the 2005 and 2006 net profi ts 2005 from federal corporate

7

income tax, would have violated X AG's protec-tion to legitimate expectations under the ruling concluded with the Zug tax administration.

IV. Final Comments Based on the above described decision of the Fed-eral Supreme Court it is clear that a foreign PE of a Swiss company with a lean infrastructure which is in clear contrast to the fi gures shown in the P&L statements of the Swiss company, lacks the neces-sary substance in order to qualify as a PE under Swiss domestic tax law. In the absence of a double taxation treaty between Switzerland and the for-eign jurisdiction, the entire net income of the Swiss company is subject to Swiss taxation.

Additionally, one should note that in order to avoid a retroactive denial of a ruling concluded with a cantonal tax administration with respect to federal corporate income tax it appears to be important that the FTA is involved in the rul-ing negotiation process. From the above outlined ruling of the Federal Supreme Court it seems that the involvement of the FTA in the ruling process with the cantonal tax administration will grant the taxpayer the protection of legitimate expecta-tions under the ruling negotiated with the can-tonal tax administration.

ENDNOTE

1 BGE 2C_708/2011.

8

ISSUE 30 | JUNE 6, 2013FEATURED ARTICLES

Trade And Economic Sanctions: Constantly Shifting Goal Posts by Andrea Hamilton and David Levine, McDermott Will & Emery

Long used by governments to punish rogue coun-tries, regimes, entities and individuals, trade and economic sanctions impact an ever-widening range of goods, technology and services. Recent developments in Iran, Syria and Libya, for ex-ample, resulted in far-reaching sanctions by Aus-tralia, Canada, the European Union and its 27 Member States, the United Nations, the United States and others. Th e complexity of sanctions and the speed with which governments imple-ment them to address rapidly changing political situations create serious compliance challenges. Companies are therefore well advised to imple-ment compliance from management through all levels of sales, logistics and fi nance.

Th e stakes are extremely high because compliance failures – even unintentional ones – can result in the imposition of substantial fi nes, debarment from government contracts, damage to public reputation and even imprisonment. Recent penalties illustrate the risks and the high governmental enforcement priority for trade sanctions. Th ese include fi nes of up to USD536m imposed by US and UK regula-tors against fi nancial institutions and major busi-nesses. Individuals may also be subject to prison sentences of up to 10 years in the United States and the United Kingdom.

Anyone involved in cross-border transactions there-fore needs to determine if their conduct and that of persons acting on their behalf is regulated by trade sanctions. At a minimum, businesses must under-stand: which countries, regimes and individuals are targeted by trade sanctions; who is obliged to com-ply; which transactions are prohibited or restricted; and which authorizations may be available or re-quired for any restricted action.

Businesses should also consider the long reach of US and EU sanctions. US sanctions generally ap-ply to "US persons" wherever they are located in the world and to anyone located in the United States. Similarly, EU sanctions apply to "EU per-sons" wherever they are located in the world and to anyone located in the European Union. Adding to the breadth of coverage, US rules prohibit "facili-tation", which means neither persons nor compa-nies subject to the rules may support a transaction undertaken by another party, including a foreign affi liate, from which a US person would be prohib-ited from engaging in directly. EU rules likewise prohibit covered persons from infringing sanctions rules indirectly.

9

Companies should take appropriate steps to mini-mize the risk of infringing trade sanctions by intro-ducing the following safeguards:

Require due diligence in connection with all transactions. Th is should involve at least the screening of all counterparties against the everchanging sanctions lists that identify the countries, regimes, entities and persons black-listed. Trade sanctions can apply to goods, technology licensing and the provision of tech-nical assistance, and to ancillary services such as fi nancing, insurance and transport. Establish internal procedures to ensure prompt legal review in the event a transaction with a sanctioned party is identifi ed. Check that the due diligence checklist for merger or acquisition transactions includes an assessment for compliance with trade sanctions.

Th e Authors:

David Levine is a partner based in the Firm's Wash-ington, DC, offi ce, and a member of the Interna-tional Trade Group. He practices before interna-tional trade organizations, federal agencies and courts regarding international trade and related regulatory matters. David can be contacted on +1 202 756 8153 or at dlevine@mwe.com .

Andrea Hamilton is a partner based in the Firm's Brussels offi ce and a member of the Antitrust & Competition Practice Group. She has represented clients before the European Commission and the European Parliament, as well as the US Federal Trade Commission, the US Department of Justice and other US authorities. Andrea can be contacted on +32 2 282 35 15 or at ahamilton@mwe.com .

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ISSUE 30 | JUNE 6, 2013FEATURED ARTICLES

FATCA: An Update by Michael G Bell, Editor-In-Chief, Global Tax Weekly

Th e Rules And Th e Timing

Under FATCA, US taxpayers with specifi ed for-eign fi nancial assets that exceed certain thresholds must report those assets to the IRS. Th is report-ing will be made on Form 8938, which taxpayers attach to their federal income tax return, starting this tax fi ling season.

Foreign fi nancial institutions (FFIs) must enter into agreements with the IRS and Treasury to provide details of fi nancial accounts held by US taxpayers, or by overseas entities in which they hold a substan-tial ownership interest. Failure to disclose such in-formation will result in a requirement to withhold 30 percent tax on US-source income.

In order to be compliant with the legislation, FFIs must have registered with the IRS before the end of 2013, and the reporting requirement will com-mence in 2015 in respect of the year 2014 or in 2016 in respect of the year 2015, depending on the level of assets in individual accounts.

FATCA's Time-Line March 2010: the Foreign Account Tax Compliance Act was signed into law by President Obama as part of the Hiring Incentives to Restore Employment Act.

February 2012: Treasury and the IRS issued pro-posed regulations for FATCA implementation

July 2012: Treasury released a Model Intergovern-mental Agreement for FATCA implementation

January 2013: Treasury and IRS issued fi nal regula-tions for FATCA implementation

July 2013: FFIs may begin to use an on-line portal for FATCA registration

October 2013: Treasury will begin issuance of glob-al intermediary identifi cation numbers (GIIN) to FFIs which have registered

December 2013: Treasury will issue the fi rst list of registered FFIs

Treasury states that FFIs must have registered by October 2013 in order to be compliant with the January 1, 2014, start date; it is not clear how this reconciles to the statement made elsewhere that FFIs must have registered "by" the end of 2013.

11

Th e Inter-Governmental Agreements (IGAs)

From quite early on, it became clear that the bu-reaucratic load on FFIs would be such that many of them would simply refuse to have American clients, which wasn't exactly what the Treasury had in mind when it promoted FATCA; so the idea emerged of having agreements between the Treasury and foreign governments which would allow those governments to fulfi ll the requirements of FATCA by collecting the necessary data from their own FFIs and send-ing it in bulk to the IRS. Many governments turned out to be quite happy to collect extra information for their own benefi t as part of "helping" their FFIs, and the idea caught on rapidly, even leading some governments to impose their own "mini-FATCAS" on their FFIs and in the case of the UK, on its "off -shore" dependent territories (see below).

Th ere are now three types of IGA:

Model 1A 1 ; Model 1B 2 ; and Model 2 3

Model 2 merely agrees that the country concerned will ensure that its laws and regulations permit its FFIs to perform the reporting procedures laid out under FATCA. In the case of Switzerland, for in-stance, this would not have been the case without changes, which are being made.

Model 1 implements FATCA as drafted, but it comes in two forms: 1A, which is reciprocal, and 1B which is not.

"Reciprocal" means that US FFIs will have to mirror the requirements of FATCA in the reverse direction

in respect of nationals of the partner country. Th is may come as an unwelcome surprise to US fi nan-cial institutions, and some of the domestic diffi cul-ties raised by FATCA are explored below.

Both 1A and 1B straightforwardly place the part-ner government in the shoes of FFIs in the country concerned; but they are not completely standard-ized. From the beginning, the templates allowed for a degree of customization, and in fact there has been quite a lot of that in the IGAs which have so far been signed.

Th e Treasury says it is negotiating IGAs with more than 75 countries, of which it has listed about 50, but so far there seem to be just eight signed IGAs, of which just one is Model 2 (with Switzerland).

At the end of May, after signing its IGA with Ger-many, the Treasury said that in future it would limit the customizable aspects of IGAs, given that the fi -nal regulations issued earlier in the year were much more prescriptive than earlier texts.

Th e Foreign Response To FATCA At a guess, the Treasury must be quite pleased that foreign governments have keeled over and rushed to enter IGAs, when they might have been expect-ed to rear up and cry "extra-territorial legislation." Th e reason, surely, is that any tax collector who can say: "I have to ask you for information about your clients' assets because the mighty USA says I must," is surely going to grab at the chance. It's a short step from there to imposing a kind of local FATCA on your own FFIs, or in the case of the

12

UK, its off shore dependencies, and that is exactly what has happened.

Th e United Kingdom Th e UK is in fact in a good position to make use of a FATCA-like mechanism to forward the cause of international tax transparency: as a former colonial power, it retains some degree of control over many far fl ung dependent territories which also happen to be classifi ed as tax havens. Indeed the UK Gov-ernment has confi rmed its intention to secure a number of additional tax information sharing ar-rangements this year with its off shore dependen-cies which will compel foreign fi nancial institutions (many of which are based in the UK's overseas ter-ritories) to share information that could lead to the disclosure of information on untaxed assets.

Th e Isle of Man was the fi rst to engage with the Unit-ed Kingdom in the development of the maiden "son of FATCA" deal, released on February 19, 2013. In considering whether to follow the Isle of Man's lead, the Channel Islands (Guernsey and Jersey) voiced concern from the outset that the UK deal could lead to an uneven playing fi eld if the UK failed to achieve worldwide adoption. Subsequently however, the ter-ritories committed themselves to similar deals with the UK in March, also in exchange for concessionary penalty regimes for taxpayers that voluntarily settle irregularities, revised double tax agreements, and an alternative reporting regime for UK non doms.

According to the UK blueprint to tackle off shore evasion – included alongside its April budget

– the Government projects that the agreements with the three Crown Dependencies will raise around GBP1bn in new revenues over the next fi ve years. Th e document says the UK will draft additional "measures to encourage those with hid-den funds to come forward" and "will continue to seek agreements with other jurisdictions, in-cluding the Overseas Territories, building on the agreements reached with Liechtenstein, the Isle of Man, Guernsey and Jersey."

In fact the agreements the UK is making with its de-pendencies can be seen just as an extension of the EU Savings Tax Directive. Since 2005, off shore territo-ries have been required to levy and remit a withhold-ing tax on income received by UK taxpayers on assets held off shore, or share information on an automatic basis. Four territories (Aruba, Anguilla, the Cayman Islands and Montserrat) have exchanged informa-tion automatically with EU member states since July 1, 2005, while the Isle of Man and Guernsey adopt-ed automatic information exchange on July 1, 2011 (when transitional withholding tax rates ended with the imposition of a 35 percent rate), next followed by the British Virgin Islands on January 1, 2012, and Turks and Caicos Islands from July 1, 2012.

Th e UK's version of FATCA seeks to plug loop-holes in the EU's fl awed regime, which has proven easy to circumvent. Th e maiden agreement drafted with the Isle of Man contains provisions specifi cal-ly stating that: "any tax withheld under the Agree-ment between the UK and the Isle of Man provid-ing for measures equivalent to those laid down in

13

the European Union Savings Directive will be cred-itable and credited against any UK tax due under [the] disclosure facility."

Th e text of the Isle of Man agreement provides for a voluntary disclosure scheme that will likely be repli-cated in future agreements with other territories. It provides for a minimum penalty rate of 10 percent, mirroring that on off er under the Liechtenstein Disclosure Facility, providing a disclosure is made by September 30, 2016. Manx fi nancial intermedi-aries will be required to contact relevant persons to advise them of the facility, and ensure adherence to regulations preventing money laundering.

Article 10 of the Isle of Man's agreement provides for a "bespoke service" that allows initial anonymous contact by a professional adviser (including a fi nan-cial intermediary) to discuss with HM Revenue and Customs (HMRC) the circumstances of a person on a "no names" basis. It will be possible for a person or professional adviser acting on behalf of that person to have a single point of contact with a discrete HMRC team to ensure consistency of treatment. Th e option will be available in cases where a liability is disputed due to residence or domicile claims made by an indi-vidual, with full supporting evidence, the text states.

Th e Cayman Government has confi rmed that se-nior offi cials have attended recent meetings with the UK tax authority, HM Revenue and Customs in London to discuss the US Foreign Account Tax Compliance Act, and how the territory can support the UK's eff orts to implement a similar regime.

Th e Cayman Islands' Premier, Juliana O'Connor-Connolly told UK Prime Minister David Cameron that the territory will join the G5 automatic tax in-formation exchange pilot being spearheaded by the UK, in partnership with France, Germany, Italy and Spain. In a letter to Cameron, O'Connor-Connolly said that by joining the G5 pilot, Cayman is con-tinuing to demonstrate its global commitment on the exchange of information for tax purposes.

Regarding the pilot, she wrote: "We welcome these eff orts to promote an eff ective global mechanism for automatic exchange of information for tax pur-poses, in which all jurisdictions participate and where a common approach will not only ensure ef-fi ciencies of cost and resources, but will also avoid the risk of multiple competing standards."

"Accordingly, we would call on other jurisdictions to commit to this initiative, which will take us to a new level of tax transparency and remove hiding places for those who would seek to evade tax and dodge their responsibilities."

O'Connor-Connolly added in her letter that, in line with revised Financial Action Task Force recom-mendations and the recently issued methodology for assessing compliance with its standards on tack-ling money laundering and countering the fi nanc-ing of terrorism, the Cayman Islands is committed to reviewing its legal and regulatory framework."

"Th e Cayman Islands has always taken a leading role in the fi ght against money laundering, terrorist

14

fi nancing and all forms of fi nancial crime, as is evi-denced by [our] consistent compliance with the standards," she wrote. Adding that Cayman remains "committed and determined to remain at the fore-front of jurisdictions in respect of information and enforcement of standards, such as those on avail-ability of benefi cial ownership information."

Th e Bahamas' Minister for Financial Services Ryan Pinder has said that the local fi nancial services in-dustry must be prepared to accept and adapt to au-tomatic information exchange under the Foreign Account Tax Compliance Act, and similar regimes, as it becomes the "new normal."

Speaking at a "Complying with FATCA" one-day regional conference on April 9, 2013, Pinder point-ed out that FATCA is shaping up to be the "most signifi cant matter facing the international fi nancial services industry today."

"Th e global paradigm is shifting to an expectation of transparency globally," Pinder said. "We have been witnessing this evolution over the last 15 years from when legislative changes were made for anti-money laundering purpose since the early 2000s, to the imple-mentation of Tax Information Exchange Agreements, to the imposition of Organization for Economic Co-operation and Development and Financial Action Task Force recommendations, and now FATCA."

"We, however, have developed a signifi cant level of local expertise; we must be committed to compet-ing in this new normal. We can be industry leaders."

Pinder said, in recognizing the importance of the initiative: "We in the Ministry of Financial Services thought it wise, even before engaging the United States, to create a FATCA Task Force representative of some of the most progressive minds in the pri-vate sector of our fi nancial services industry."

"Th is FATCA Advisory Group had the mandate to review FATCA requirements and make recom-mendations for research and ultimate discussion and negotiation on matters particularly sensitive and relevant to the fi nancial services sector of the Bahamas," Pinder noted. "It was this FATCA ad-visory group of private sector representatives who would partner with my Ministry to prepare for the beginning of negotiations on FATCA. Having rec-ognized the areas of FATCA that have particular relevance to our fi nancial services industry, we are prepared to address them," he concluded.

Luxembourg In the context of its FATCA negotiations with the US, Luxembourg has chosen the Model I agreement, which will provide for the automatic exchange of information between Luxembourg and US tax au-thorities, on accounts held in Luxembourg fi nancial institutions by citizens and residents of the US. It is not yet clear whether the IGA will be reciprocal.

According to the Luxembourg Government, this decision will put Luxembourg's relations with the US in line with its declaration of April 10, 2013. On this date, Luxembourg announced that it will introduce, on January 1, 2015, within the scope of

15

the 2003 European Union Savings Directive, the automatic exchange of information within the Eu-ropean Union.

Concluding, the Government emphasized that Luxembourg "wishes to see the same conditions apply to all competing fi nancial centers and to see the automatic exchange of information accepted as the international standard." To this end it therefore agreed on May 14, 2013, to grant the European Commission a mandate to negotiate with Swit-zerland, Liechtenstein, Andorra, Monaco and San Marino, the Government pointed out.

Germany Germany signed its Model 1A (reciprocal) IGA with the Treasury on May 31. Th ere is also a con-temporaneous MOA which clarifi es some aspects of the IGA.

A declaration of understanding , also signed May 31, clarifi es several provisions in the Germany-U.S. IGA .

Switzerland Th e Swiss Committee for Economic Aff airs and Taxes of the Council of States (CEAT-S) has given its seal of approval to the FATCA Model 2 agree-ment (IGA) concluded with the US.

Th e Intergovernmental Agreement was concluded on February 14, 2013. On April 10, the Swiss Fed-eral Council approved the IGA, and forwarded the agreement to parliament for its approval.

Th e CEAT Committee examined the FATCA ac-cord following in-depth consultation with a num-ber of key stakeholders, including the Swiss-US Chamber of Commerce, the Swiss Bankers Associa-tion, the Swiss Insurance Association, and the Fed-eral Commissioner responsible for data protection.

Having carefully debated the problem that Switzer-land has limited scope to maneuver on the issue, the Committee assessed the concrete implications of rejecting the FATCA deal, on both the Swiss economy and on the Swiss fi nancial center. It also examined the agreement within the context of ef-forts to fi nd a solution to resolve the past.

Th e Committee fi nally approved the decree es-tablishing the accord and the federal law imple-menting the treaty, by six votes to three with two abstentions and by six votes to two with three ab-stentions respectively. A minority put forward the idea of returning the case to the Federal Council and tasking the Federal Council with negotiating a model one accord, providing for an automatic exchange of information.

Commenting on its decision to endorse the agree-ment at the time, the Swiss Government said that while the United States' extraterritorial legislation had not been well received, it was nevertheless ac-knowledged that it was favorable to sign an Inter-governmental Agreement with the United States to simplify compliance with the new regime for Swiss fi nancial institutions.

16

Th e Government pointed out in particular that the US-Swiss agreement ensures that accounts held by US persons with Swiss fi nancial institu-tions are disclosed to the US tax authorities either with the consent of the account holder or through normal administrative assistance channels. Con-sequently, information will not be transferred au-tomatically in the absence of consent, and instead will be exchanged only on the basis of the admin-istrative assistance clause in the two countries' double taxation agreement.

As the United States will phase in FATCA from January 1, 2014, Swiss fi nancial institutions will be forced to implement FATCA from this date, irre-spective of an agreement between Switzerland and the United States, if they do not want to be exclud-ed from the US capital market. Th e agreed simpli-fi cations will not apply if there is no agreement, the Government clarifi ed.

Th e Swiss Private Bankers Association (SPBA) has highlighted its objections to certain aspects of the Swiss Federal Council's bill implementing the revised Foreign Account Tax Compliance Act (FATCA) recommendations, notably the defi ni-tion of a punishable tax crime as a predicate to money laundering.

While supporting in principle a policy of tax con-formity, as well as plans to implement FATCA, the international standard in the fi ght against money laundering, the SPBA nevertheless warns that Swit-zerland must not profi t from this legislative revision

to introduce, "by the back door," internal legisla-tive reforms that are simply not required under the US FATCA legislation.

Th e SPBA opposes plans to extend the concept of tax fraud. Currently, this infraction arises from the use of false or falsifi ed documentation. Th e Fed-eral Council intends to unnecessarily extend the defi nition to include cases of "artful deception," the SPBA notes. Given that this concept is "very vague," applying the measure will pose unsolvable practical problems for the banks, the association ar-gues, making clear that banks simply do not have the means with which to detect such indications, in particular in the case of foreign clients.

Furthermore, for Swiss clients, introducing the concept of "artful deception," which could lead to a prison sentence of three years or more, would "profoundly modify relations between the citizen and the state," the SPBA stresses.

Finally, the Federal Council also aims to introduce the term "qualifi ed tax fraud," the SPBA explains, pointing out that this off ence constitutes a crime, punishable with a prison sentence of fi ve years, as well constituting a predicate off ence to money laun-dering. Th e SPBA laments the fact that the only qualifying element currently proposed by the Fed-eral Council is the presence of undeclared taxable assets in excess of CHF600,000 (USD624,035). According to the SPBA, it is simply not "appropri-ate" to base the crime of qualifi ed tax fraud merely on the taxable base, in view of the fact that this is

17

arbitrary, and given the large disparities between the Swiss cantons in terms of the tax rates applied. Th e SPBA therefore advocates instead that the amount of tax evaded should be used as a qualifying element.

Spain Spain's Finance Minister Cristóbal Montoro and US Ambassador to Spain Alan Solomont have re-cently signed an agreement between Spain and the US, designed to improve international fi scal com-pliance and implementing FATCA.

Approved at the end of last year, the accord between Spain and the US is reciprocal, providing that fi nan-cial institutions in both countries must provide their tax authorities with information relating to taxpay-ers of the other signatory state. Th is information will subsequently be exchanged automatically between the tax authorities through a standardized procedure.

Defending the treaty, the Spanish Finance Ministry highlighted the fact that "the agreement constitutes a milestone in the exchange of tax information at an international level, by laying the foundations for a new automatic, recurrent and standardized framework of international information exchange."

Th e Ministry stated: "In a context of economic and fi nancial globalization, and with the prolifera-tion of transactions involving goods and services between countries, it is essential to strengthen the exchange of information and administrative as-sistance between states and increase eff orts in the fi ght against tax havens."

It added: "In this regard, eff orts by tax authorities in both countries is important for increasing inter-national pressure on tax havens through a network of agreements on the exchange of information in line with international eff orts being made with the other OECD countries."

Spain, the UK, Germany, France, and Italy aim to ensure that the model agreed with the US is ad-opted multilaterally by a majority of countries in order to thus strengthen eff orts against tax fraud and so-called "tax havens."

Th e ministers therefore sent a letter to the European Commissioner for Taxation, Algirdas Šemeta, an-nouncing plans to work together on a pilot scheme for the multilateral exchange of tax information between the fi ve countries, based on the FATCA model, having invited the other European Union member states to participate.

Th e launch of such an initiative is intended to en-able Europe and the US to spearhead the promo-tion of a global system of automatic information exchange.

New Zealand Last October, New Zealand announced its intention to lodge an expression of interest in negotiating a FATCA intergovernmental agreement with the US. At the time, Revenue Minister Peter Dunne said that a deal would materially reduce FATCA com-pliance, and mean that fi nancial institutions would not have to provide information directly to the IRS.

18

Talks are now underway. Th e TIEA will authorize New Zealand businesses to provide the Inland Rev-enue Department (IRD) with the required infor-mation, which will then be passed on to the US.

Th e New Zealand Government has said that it is aware of compliance concerns regarding FATCA tax information exchange agreement currently be-ing negotiated with the US.

According to Dunne, New Zealand is negotiating the agreement on the same basis as its double tax and tax information exchange agreements. Howev-er, he did stress that the Government is "very aware of compliance cost issues and looking at how we can minimize any burden."

Th e agreement will be reciprocal, with the result that the US will also supply information about New Zealand investments in the US.

"FATCA is part of New Zealand's commitment as a good global citizen to doing its bit to clamp down on tax evasion and an important way of doing that is through tax information exchange agreements that we regularly enter into," Dunne said.

Austria Following a recent Council of Ministers meeting, Chancellor Werner Faymann revealed that the Aus-trian Government has adopted two resolutions de-signed to strengthen the fi ght against international tax evasion. Austria intends to sign an agreement with the US tax authorities, implementing the

Foreign Account Tax Compliance Act (FATCA), and to sign the OECD Convention on mutual as-sistance in tax matters, the Chancellor emphasized.

Underlining the fact that the Austrian Government is united in its stance and plans to negotiate to-gether, Faymann stressed that Austria is pursuing "a clear, constructive path in the fi ght against tax eva-sion." Austria is determined to ensure that both tax havens, such as the Channel Islands, and hidden ownership structures, such as trusts, are transpar-ent, the Chancellor made clear.

Highlighting the fact that Austria fi rmly supports negotiations between the European Commission and third states, Faymann concluded by underscor-ing that Austria is playing a pivotal, constructive, and clear role in combating tax fl ight.

At the time, Faymann and Spindelegger underlined that Austria is not a tax haven and highlighted the Government's commitment to ensuring that the international fi ght against tax fraud is successful and to ensuring that Austria plays a committed part in this fi ght.

FATCA's Problems Back in the US, Treasury and the IRS express them-selves happy with the progress being made towards the implementation of FATCA. But the path is not strewn with roses, due mostly to the reciprocal nature of many of the IGAs. Indeed, a plan to impose a re-ciprocal obligation on domestic fi nancial institutions was included in President Obama's April budget.

19

FATCA directly impacts on US citizens and in many people's eyes it seems a very "un-American" thing to do. With all the talk about the need to tackle evasion, concern about safeguarding the pri-vacy of the individual seems to have been lost, and this is why Kentucky Republican Rand Paul intro-duced a bill into the Senate on May 8 to repeal the anti-privacy provisions of FATCA, to eff ectively make the Act redundant.

According to Paul, FATCA not only infringes basic constitutional rights, but has also allowed the US Government to interfere with the sovereignty of independent nations. And most perplexing of all, when all is said and done, FATCA will probably end up costing the Treasury more than it takes in from Americans' foreign bank accounts. No doubt Paul's Republican colleagues would agree with his assessment of FATCA as a "textbook case of a bad law." Most Democrats probably do as well in their heart of hearts.

Paul's bill stands little chance of being enacted while President Obama is in the White House, but it is unlikely to be the last attempt to repeal FATCA, not least because the Congress can be ex-pected to object to the reciprocal nature of the IGAs that are being hammered out by the Treasury Department with multiple foreign governments. Th e original FATCA legislation did not include a specifi c reciprocal obligation: this is something that has emerged during inter-governmental dis-cussions. Th e Treasury says that the IGAs do not count as treaties, and that it does not therefore

have to submit them to the Senate for approval; others may disagree, and say that the Treasury has been making up law as it goes along.

Presumably President Obama's inclusion of a reciprocal FATCA in his budget was based on advice from worried lawyers that reciprocal IGAs may be unenforceable. For that matter, IGAs themselves may have legal problems in target countries: in May 2013, Canadian law-yers were beginning to suggest that a FATCA IGA might be unconstitutional, although other lawyers qualified this opinion. We may call the President's proposed measure DATCA - the Do-mestic Account Tax Compliance Act. Of course, nothing in any of the President's recent budgets has become law, so DATCA will presumably re-main just an intention. But the disjunction be-tween the reciprocal IGAs and domestic privacy remains. Sooner or later it will have to be re-solved, and it's hard to see how this should not involve the Congress.

Nobody knows what FATCA will achieve. In terms of revenue versus costs, there are all kinds of wild estimates, but even the Treasury doesn't seem to think it will reap more than a few billion a year, while recent estimates of the costs (for FIIs) have ball-parked around USD7.5bn. Anecdotally, something else FATCA is achieving is a reduction in the number of FIIs that are prepared to take on US clients; and it may be reasonable to suppose that US citizens and corporate investors are busy looking for, and presumably fi nding, loopholes

20

through which they can clamber in order to avoid FATCA. Altogether, the balance sheet says that great damage will be done to the functioning and profi tability of the international fi nancial sector and US interests in it, all in exchange for an uncer-tain benefi t to US tax revenue. Also not to forget that the administrative load on the Treasury and its IRS is immense: all of it being time and eff ort taken away from quotidian tax collection. Th ere is no budget for FATCA as such.

ENDNOTES

1 http://www.treasury.gov/resource-center/tax-policy/

treaties/Documents/FATCA-Model1A-Provision-

al-5-9-13.pdf

2 http://www.kpmg.com/LU/en/IssuesAndInsights/

Articlespublications/Documents/2012-nonreciprocal.

pdf

3 http://www.treasury.gov/resource-center/tax-policy/

treaties/Documents/FATCA-Model2-Agreement-

Preexisting-TIEA-or-DTC-5-9-13.pdf

21

ISSUE 30 | JUNE 6, 2013FEATURED ARTICLES

Topical News Briefi ng: Dump Away by the Global Tax Weekly Editorial Team

It's very unfortunate that the experts who crafted the WTO's rules designed in such a prominent role for action against "dumping," that is the sale of goods by one country into another at an un-fairly low price. Th e rules might be called a pro-tectionist's charter, and there have been countless instances in all countries of an uncompetitive in-dustry "capturing" the local government depart-ment concerned, which then proceeds to impose severe "anti-dumping" and "countervailing" du-ties on imports from another country where pro-duction is more effi cient.

Th e purist free-trader would say that protecting ineffi cient industries is contrary to the long-term interest of the country that does it, and that even if there is dumping, it should be welcomed, because it means cheaper goods for consumers. Th ere's not much chance of a "pure" free-trade regime in our imperfect world; but just for a moment consider whether dumping is actually very likely to take place. No company is likely to want to sell its wares at below cost price, i.e . at a loss, so dumping is only likely to take place with direct government support, as part of a deliberate campaign to damage com-peting industries in other countries, or at least to protect a domestic industry until it strong enough to compete on its own legs. But government subsi-dies to industry are specifi cally prohibited by WTO

rules (see for instance the long-running Airbus/Boeing saga in which both sides accuse the other of receiving unfair government subsidies).

So the conclusion has to be that so-called "anti-dumping" is almost always protectionist in nature, and we would all be better off without it. We are witnessing a classic case of it at present focused on China (see our news stories below).

Both sides are to blame: fi rst, China imposed an anti-dumping duty of 70.8 percent on a special type of steel imported from the EU. Now the arithmetic says that the EU must therefore have been selling the steel at 58 percent of cost. Th at is a ridiculous proposi-tion, especially given that China is a lower-cost producer than the EU. Th ere certainly is no EU subsidy given to steel production – heaven for-bid – and it's simply impossible to believe that the EU producer is selling at a 42 percent loss. then, the EU is about to impose (on Wednes-day this week) a ruinous anti-dumping duty of between 40 percent and 68 percent on so-lar panel imports from China. Similar logic applies; and another point is that while such duties may help the backward EU solar panel industry, the effect will be to halt alternative energy production in its tracks, and the ruin-ation will be for the downstream installation industry, which is said to be larger than the panel manufacturing sector.

22

fi nally, and most egregiously, the EU is going to impose on its own initiative anti-dumping duties on Chinese mobile telecoms network component imports.

Th is last and apparently unprovoked attack led Chancellor Merkel to agree with Chinese Premier Li Keqiang at a meeting last week that all such issues should be resolved by negotiation, instead of the gun-slinging approach being taken by the EU. "Shoot fi rst and ask questions afterwards"

seems to be the motto of the European Commis-sion's trade department.

No-one can blame manufacturing companies for wanting to protect their home and overseas markets from unfair competition, and it is rea-sonable for governments to want to use available weaponry to achieve such a result. But in the present situation the government departments concerned seem to be running out of control. It needs to stop.

23

ISSUE 30 | JUNE 6, 2013FEATURED ARTICLES

IC-DISC: Still Viable For Flow-Through Entities by George Koutouras, Partner, and Lindsey Moore, Manager, Moss Adams LLP

The interest charge domestic international sales corporation (IC-DISC) structure has gained popularity in recent years for tax planning be-cause of the income tax savings attained by eligi-ble companies. However, it's not a new concept – the domestic international sales corporation (DISC) and its corresponding export tax incen-tives was first introduced in 1971, 1 while the IC-DISC has existed in its current form with similar incentives to those in existence prior to this amendment since the Jobs and Growth Tax Relief Reconciliation Act of 2003 2 was signed into law. The Jobs Act was the legislation that also first lowered the taxation of qualified divi-dends (including IC-DISC dividends) from the ordinary income tax rate to the much lower cap-ital gains tax rate 3 .

Th e IC-DISC's policy aim remains the same as the DISC's: to motivate US manufacturers to make products domestically and stimulate US exports. However, since the 1970s the chang-ing business environment has led to an increased mobility of resources and expansion to new mar-kets – even for smaller US companies that may have historically limited their market to domes-tic customer sales – potentially undermining the IC-DISC's eff orts. 4

Basic Mechanics Of Th e IC-DISC

Typically, a fl ow-through entity forms an IC-DISC as a domestic subsidiary corporation through which all foreign sales of US goods and services are made. Th e tax benefi ts of the IC-DISC structure are gen-erated by the tax rate diff erential between ordinary income and dividend income for individuals. As a result of the structure, export income is subject to an eff ective tax rate of up to 23.8 percent 5 instead of the ordinary individual income tax rate of up to 39.6 percent. 6 Eff ectively, the operating corpo-ration receives a tax deduction for the commission payment to the IC-DISC, but the IC-DISC itself does not pay tax on the commission income. Th en the IC-DISC distributes its earnings to its share-holders, which are typically either individuals or a fl ow-through entity owned by individuals. Th e dis-tribution is treated as a qualifi ed dividend and, as such, taxed at capital gains rates.

In its basic form, an IC-DISC is a domestic, tax-exempt 7 corporation whose entity structure can be characterized as a "paper" corporation; that is, it's not required to perform services, have employees, have

24

offi ce space, or own tangible assets. 8 With certain exceptions noted below, the benefi t of an IC-DISC structure has been essentially eliminated for taxable corporations. It has, however, remained a viable tax planning tool for nontaxable entities or fl ow-through entities ( i.e., partnerships, LLCs taxed as partner-ships, or corporations subject to Subchapter S) 9 .

Key Characteristics To Materially Benefi t From Th e IC-DISC Structure

Th e IC-DISC must be directly owned by a fl ow-through company. A signifi cant amount of production must be per-formed domestically (with less than 50 percent of product components from foreign sources). A meaningful amount of gross receipts must be from export sales. If the IC-DISC can directly 10 pay foreign SG&A 11 expenses, the benefi t is increased. If the product exporter can factor its receivables to the IC-DISC, additional export revenue may be generated 12 .

Requirements For Forming An IC-DISC On the compliance front, a corporation must elect, using Form 4876-A, to be taxed under the IC-DISC rules 13 . Th ere are also the following qualitative and quantitative requirements a corporation must sat-isfy to be considered an IC-DISC and receive ben-efi cial tax treatment: 14

Th e corporation must be a domestic US entity, meaning it's incorporated in one of the 50 US states or the District of Columbia.

An IC-DISC must maintain a minimum capi-talization (par value for its stock) of at least USD2,500 every day of the year for which it seeks IC-DISC treatment. Th e IC-DISC may only have one class of stock (the par value of which, in the aggregate, must meet the capitalization minimum requirement stated above). Th e qualifi ed export receipts and qualifi ed ex-port assets tests must be met 15 to ensure that the IRS's objective in benefi ting and encourag-ing US-sourced exports is served. Th e qualifi ed export receipts test is satisfi ed if at least 95 per-cent of the IC-DISC's annual receipts are from qualifi ed export receipts (revenues from the sale or lease of qualifi ed export property and certain related services). 16 Qualifi ed export property is manufactured in the United States by someone other than an IC-DISC, with not more than 50 percent foreign content, and ultimately delivered outside the United States within a year from the sale and not further manufactured or processed. 17 Th e qualifi ed export assets test requires that at least 95 percent of the assets held by the IC-DISC at year-end are qualifi ed export assets (assets held in connection with exporting activities: the sale, lease, rental, storage, servicing, etc. of export property). 18 Th e IC-DISC must meet other administrative requirements, such as maintaining its own set of books and records (it's a best practice that it also has a separate bank account).

25

Calculating Th e Allowable IC-DISC Commission

Th e allowable IC-DISC reportable commission in-come is the greater of: a transfer price computed under the rules of IRC §482 (provided there is a contempo-raneous documentation study), 4 percent of the IC-DISC's qualifi ed export receipts on reselling the prop-erty, or 50 percent of the combined taxable income from export sales of the exporter and the IC-DISC – plus 10 percent of export promotion expenses. 19

Let's take a look at a hypothetical company to see how this plays out. We'll limit our calculation to a comparison of the second and third methods mentioned above. Th e fi rst method requires that a transfer pricing study be conducted, which is be-yond the scope of this article.

Illustration: S-corporation that domestically manufactures product for export

Hypothetical company fi nancials: Foreign trading gross receipts: USD5,000,000 Cost of goods sold: ( USD4,000,000 ) Gross margin: USD1,000,000 Sales, general, and administration expenses: ( USD700,000 ), includes USD300,000 of "export promotion expenses" Export sales net income: USD300,000

In this case, we'd take the greater of either: 4 percent of export gross receipts: USD5,000,000 × 0.04 = USD200,000 50 percent of export net income: USD300,000 × 0.5 = USD150,000

Because the export gross receipts fi gure is larger, a taxpayer would take USD200,000 (4 percent of exports) and add USD30,000 (10 percent of the USD300,000 export promotion expenses) to get an allowable IC-DISC commission of USD230,000.

Although it has been stated previously that the IC-DISC incentive is limited to materially ben-efi t fl ow-through entities, owners of C corpora-tions have implemented IC-DISCs by creating or using 20 a related fl ow-through entity, which would directly own the IC-DISC. Th e fl ow-through entity would need to be owned by in-dividuals whom the exporting company wishes to benefi t from the IC-DISC income taxation break. For example, the owners of a US C corpo-ration could set up a brother-sister corporation as an IC-DISC that's owned in the same propor-tion by a US LLC. 21

Th e calculation of commission income in this sce-nario would be the same as the one above, assum-ing the companies have the same fi nancial perfor-mance. In order for the taxpayer shareholders of a C corporation to benefi t from the intended tax savings, the IC-DISC would need to be owned by a separate pass through entity and the additional structuring would likely be required.

ENDNOTES

1 The original DISC law was codifi ed in IRC §§ 501 -507,

Revenue Act of 1971, Public Law No. 92-178, 85 Stat.

535 (1971).

2 The Jobs Act provision where under qualified

dividends are taxed at the capital gains rate was

26

extended for 2 years in December 2010. The IC-DISC

construct also gained popularity following the Jobs

Act because the Jobs Act eliminated the extraterrito-

rial income regime, which, in turn, had replaced the

foreign sales corporation.

3 In all cases, the capital gains rate is lower than the

corresponding income tax rate.

4 The World Trade Organization has imposed econom-

ic sanctions on certain export incentive predecessors

of the IC-DISC, including Extraterritorial Income

Exclusion, created by the American Jobs Creation

Act of 2004, which has since been repealed from

the code and phased out after 2006. The IC-DISC

structure has never been sanctioned or challenged

by the WTO or courts.

5 Starting in 2013, qualifi ed dividends are taxed at 0-20

percent, depending on the individual's federal income

tax bracket. Additionally, these dividends may be

subject to the 3.8 percent Medicare surtax.

6 Starting in 2013, federal income tax rates range from

10-39.6 percent, depending on the individual's federal

income level.

7 Although exempt for federal income taxation pur-

poses, state tax law may differ.

8 This relaxed standard for IC-DISC entities constitutes

a reduced level of corporate substance as compared

to other entity types. Treas. Reg. §1.992-1(a) explains

that these rules are specifi cally intended to relax the

ordinary rules of corporate substance.

9 It should be noted that closely held C corporations

may, in certain circumstances, use related companies

to route foreign sales through and benefi t from the IC-

DISC rules. A detailed discussion of the considerations

of such structures is outside the scope of this article.

10 Expenses may qualify to increase the commission

in certain cases where they are treated as incurred

by the IC-DISC but are not actually incurred by the

IC-DISC.

11 "SG&A" refers to sales general and administrative

expenses.

12 The discounted price the IC-DISC pays for the receiv-

able less the cash collections is qualifi ed as additional

export revenue.

13 See IRC §992(a)(1)(D) .

14 See IRC §992 .

15 If these tests are not met, certain additional require-

ments may be instead used, with respect to a defi -

ciency distribution under Treas. Reg. §1.992-3 .

16 An IC-DISC will meet this requirement as its commis-

sion income is wholly derived from export sales.

17 See IRC §§ 924 , 993(c) .

18 See IRC §993(b) .

19 IRC §994(c) . "Export promotion expenses" refers to

those expenses incurred by or on behalf of the IC-

DISC to advance the distribution or sale of export

property for use, consumption or distribution outside

the United States, excluding income taxes, a portion

of SG&A.

20 A new entity need not be created; an existing fl ow-

through entity will suffi ce for this planning method

if given ownership of the IC-DISC.

21 To the extent that the ownership is disproportionate,

then taxpayers should consider the implications of

estate and gift taxes that may be deemed to apply.

27

ISSUE 30 | JUNE 6, 2013FEATURED ARTICLES

Current Transfer Pricing Developments by members of Duff & Phelps LLC

OECD Issues Draft Handbook On Transfer Pricing Risk Assessment

by Dick de Boer (the Netherlands), Nelly Korsun (New York), Susan Fickling-Munge (Chicago), and Justin Radziewicz (Chicago)

On April 30, 2013, the Organization for Econom-ic Cooperation and Development ("OECD") re-leased a new Draft Handbook on Transfer Pricing Risk Assessment ("Handbook"). Th e new Hand-book, produced by the Steering Committee of the OECD Global Forum on Transfer Pricing, is a detailed, practical resource that countries can follow in developing their own risk assessment approaches aimed at (i) reducing "needless de-bates" among tax authorities, and (ii) effi ciently using taxpayer and tax authority resources. 1 Th e Handbook is open to public comment through September 2013.

In a previous publication from the OECD, 2 tax administrations, businesses, and advisors all agreed that eff ective transfer pricing risk identifi cation is essential for quicker, more cost-eff ective audits and inquiries. To this end, many countries have recently focused signifi cant attention on the means they use to identify and assess transfer pricing risk, as well as the tools they use for selecting cases for audit.

Although the Handbook is written for the tax ad-ministrator, it also off ers multinational enterpris-es ("MNEs") a framework under which to assess their transfer pricing exposure and vulnerability to a transfer pricing audit. Additionally, the Hand-book provides some insights into the OECD's (and therefore that of many member countries') thinking regarding additional steps that MNEs could take to document their intercompany prices.

We highlight a few of the factors that could lead to transfer pricing audit risks, as summarized in the Handbook:

Lack of appropriate transfer pricing documen-tation; Perceived misalignment of profi tability levels compared to industry standards (though it is noted that segmented data needs consideration, and "profi tability tests" should only be used to assess the "general reasonableness" of a return); 3 Recurring losses, "low profi ts," or signifi cant variations in year-to-year eff ective tax rates; Considerable transactions with companies in low-tax jurisdictions; Considerable intra-group services;

28

Financial transactions ( e.g. intercompany debt, interest expense) with related parties; and, Payments of royalties, transfers/valuations of intellectual property, and management fees to related parties in low-tax jurisdictions.

It is interesting to note that the OECD has the perception that intercompany services transac-tions, even those involving high value services, are " often not fully documented " (emphasis ours). 4 In addition, there are numerous references in the Handbook to transactions with low-tax jurisdic-tions. While the OECD is generally careful to ac-knowledge that simply having such transactions is not, on its face, inconsistent with the arm's length standard, it is clear that such transactions continue to receive greater scrutiny.

Th e OECD also points out some situations that indicate a low level of transfer pricing risk ( i.e. , a scenario where a MNE has "consistent trans-fer pricing policies which are compliant with the arm's length principle"). 5 Furthermore, the Hand-book summarizes where information can be found to prepare a transfer pricing risk assessment and suggests the use of information returns ( e.g. , 5471s / 5472s in the United States), company websites, public marketing materials, and transfer pricing documentation. Th e burden of providing such in-formation is on the taxpayers.

Th e information in the Handbook is consistent with prior guidance from regulators and transfer pricing practitioners, and provides MNEs with a

starting point in assessing their own transfer pricing profi le and potential risk for audit. We have seen a decided increase in transfer pricing activity around the world, so accurate self-assessment is more im-portant than ever.

Chinese Provide Further Comment On Location-Specifi c Advantages And Other TP Issues

by Emily Sanborn (Atlanta)

In October 2012, China's State Administra-tion of Taxation ("SAT") shared its view that the OECD Guidelines do not provide sufficient guidance for pressing issues faced specifically by developing countries, such as location-specific advantages ("LSAs"). 6 On March 11, 2013, at a conference sponsored in part by Bloomberg BNA, Liao Tizhong, deputy director general of international taxation for the SAT, further ex-pounded upon the importance of addressing LSAs caused by comparative market conditions. We highlight the key points of his comments be-low. According to Tizhong, the SAT uses a four-step approach to determine whether additional considerations should be examined with respect to LSAs: (1) Identifying whether an LSA exists. (2) Determining whether the LSA generates ad-

ditional profi t above the routine return. (3) Quantifying and measuring the additional

profi ts arising from the LSA. (4) Determining the transfer pricing method to ap-

propriately allocate the LSA additional profi ts.

29

Tizhong cautioned that while identifying and quantifying potential cost savings ( e.g., lower la-bor, capital, technology) generated by LSAs is rela-tively straightforward, it is more diffi cult to quan-tify the "market premium" ( i.e ., qualities such as market size and government incentives that could make a particular location more profi table) that certain LSAs may generate. Tizhong recommend-ed economic modeling as a fi rst step, with econo-metric analysis and game theory as other potential avenues to explore when attempting to determine a market premium generated by LSAs.

In addition to the challenges and importance of recognizing and measuring LSAs, Tizhong also ad-dressed several other transfer pricing matters that are at the forefront of the SAT's focus:

Lack of Comparables – As with most developing countries, China has a limited number of public companies. Th is is due to a manufacturing-based economy, a decreasing number of third-party arm's length transactions, the level of integration of a Chinese operation into the multinational parent company, and other factors. Th e SAT ad-dresses the lack of comparables by making transfer pricing adjustments to foreign comparables that take into account diff erences in geographic factors when using the transactional net margin method. Alternatively, the use of the CUP and profi t-split methods can alleviate this issue; unfortunately, these methods are not always available. Transfer Pricing Examinations – In China, trans-fer pricing cases are subjected to three levels of

panel reviews: (i) city (prefecture) level, (ii) pro-vincial level, and (iii) the SAT. Th e city review addresses whether the case should be selected for additional review or closed. Th e provincial level then conducts the second level of review, and the SAT conducts the fi nal review and has the ability to overturn decisions made by lower-level expert panels (however, this is rare). Th e three-level review is designed to promote fair-ness to both the taxpayer and the tax authority, something that is not always possible to achieve through the courts as they rely upon the SAT for guidance in transfer pricing matters. Transfer Pricing Audit Targets – China currently focuses on MNEs that fi t any of the following fact patterns: (i) frequent related party transac-tions, (ii) abnormal losses or gains, (iii) regular losses that are not corrected by the business, (iv) failure to report suffi cient documentation, or (v) adoption of "unreasonable" pricing policies.

It is evident from Mr. Tizhong's comments that the SAT will continue to focus on transfer pric-ing matters and is busily filling in the gaps in terms of its approach to common issues such as comparables, adjustments, and audit practices. MNEs located or operating in China should be vigilant in setting up and documenting their op-erations in a way that minimizes exposure. In addition, whether operating in China or other developing countries, MNEs should evaluate the existence of potential LSAs that could im-pact intercompany pricing.

30

OECD Section E – Redraft On Safe Harbors

Revised Section E On Safe Harbors In Chapter IV Of Th e Transfer Pricing Guidelines For Multinational Enterprises And Tax Administrations

by Matthew Vold (Chicago)

Revised Section E on Safe Harbors in Chapter IV of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, approved by the OECD Council on May 16, 2013, encourages, under the right circumstances, the use of bilateral or multilateral safe harbors. Th e discussion con-siders the benefi ts of, and concerns regarding, safe harbor provisions and provides guidance regarding the circumstances in which safe harbors may be ap-plied in a transfer pricing system based on the arm's length principle.

Key areas of discussion include: Benefi ts of safe harbors – Safe harbors provide benefi ts to taxpayers through simplifi ed compli-ance and reduced compliance costs and certainty that the price charged or paid on the covered controlled transaction will be accepted by the tax administrations. Th ey also permit tax adminis-trations to focus administrative resources from smaller taxpayers and less complex transactions to more complex, higher-risk cases. Concerns over safe harbors – Adverse conse-quences of safe harbors may include reporting of taxable income that is not in accordance with the arm's length principle, the risk of double taxation

or double non-taxation when adopted unilater-ally, the potential for inappropriate tax planning, and issues of equity and uniformity. Recommendations on the use of safe harbors – Th e OECD developed guidance encourages, under the right circumstances, the use of bilat-eral or multilateral safe harbors, but notes that whether adopted on a unilateral or bilateral basis, safe harbors do not bind or limit in any way any tax administration other than the tax administra-tion that has expressly adopted the safe harbor. Th e OECD's recommendations on the use of safe harbors include the following:

Unilateral safe harbors may lead to the potential for double taxation or double non-taxation, among other issues. For example, when a taxpayer reports income above the arm's length level due to the safe harbor, more income will be reported by the domes-tic affi liate and less taxable income will be reported in the foreign tax jurisdiction of the counterparty to the transaction. In the event the other tax administration challenges the price of the transaction, the taxpayer may face double taxation. On the other hand, double non-taxation could occur when the taxpayer elects application of a unilateral safe harbor below the arm's length level in the country adopting the safe harbor. In such a case, there would be no assurance that the taxpayer would report income above the arm's length level in other countries on a consistent basis, and it is unlikely other administrations could require the income to be reported above arm's length

31

levels. To avoid situations leading to double taxation or double non-taxation, the OECD feels that tax administrations should avoid unilateral safe harbors. Disadvantages to taxpayers may exist when safe harbors diverge from arm's length pricing. Tax administrations may mitigate such disad-vantages by providing the option to (a) elect the safe harbor or (b) price the transactions in accordance with the arm's length principle. Th is approach may reduce the administrative benefi ts of the safe harbor and reduce tax rev-enue to the tax administration since taxpayers would opt to pay the lesser of the safe harbor or arm's length amount. By controlling the eligibility criteria for the safe harbor ( e.g. , by requiring multi-year commitments to the safe harbor or requiring notifi cation regarding the use of the safe harbor in advance) the admin-istration may gain more comfort with the risks of providing elective safe harbors. Bilateral or multilateral adoption of safe har-bors through competent authority agreements between countries could lessen the problems of non-arm's length results and double taxa-tion and double non-taxation stemming from the use of safe harbors. In such arrangements, two or more countries could establish pric-ing parameters that would be acceptable to each country's administration. Th is approach should limit some of the perceived arbitrari-ness that characterizes unilateral safe harbors and eliminate the risk of double taxation or double non-taxation. Bilateral or multilateral

safe harbors by competent authority agreement may provide a practical approach to simplify-ing transfer pricing, particularly for smaller taxpayers and/or less complex transactions, but it is unlikely safe harbors will provide a rea-sonable alternative to a rigorous, case specifi c application of the arm's length principle for complex and higher risk transactions. Th e OECD recommends bilateral and multi-lateral arrangements target reasonably narrow ranges of acceptable results, and require the taxpayer to consistently report income in each country that is party to the safe harbor. Such steps may alleviate tax administrations' concerns regarding potential tax planning opportunities created by safe harbors (for example, a cost-ef-fi cient taxpayer earning a return in excess of the safe harbor may adopt the safe harbor and shift the additional profi t to a lower tax jurisdiction). Countries can also use exchange of information provisions under a bilateral safe harbor, to con-fi rm the use of consistent reporting.

Revised Section E does not materially diff er from the draft proposed revision on safe harbors circulat-ed by the OECD in June 2012; however, it refl ects a more favored view of the OECD to safe harbors under certain circumstances.

To facilitate negotiations between tax administra-tions, the OECD also provides sample memoranda of understanding ("MOUs") for competent au-thorities to establish bilateral safe harbors for cer-tain classes of transfer pricing cases. Th e OECD

32

suggests that the following items may be relevant in the negotiation of MOUs:

Description of an criteria to be fulfi lled by the qualifying enterprises; Description of the qualifying transactions covered; Determination of the arm's length range of tested party compensation; Th e years to which the MOU applies; Statement that the MOU is binding on both tax administrations involved; Reporting and monitoring procedures for the MOU; Documentation and information to be main-tained by the participating enterprises; and A mechanism for resolving disputes.

Th e OECD developed guidance does not provide or specify target returns or metrics for quantitative

ratios, which, along with the MOUs, would need to be agreed upon between the countries' compe-tent authorities for low risk manufacturing services, low risk distribution services, and low risk contract research and development services.

ENDNOTES

1 See Paragraph 3 of the Handbook.

2 The OECD Forum on Tax Administration published

a report entitled "Dealing Effectively with the Chal-

lenges of Transfer Pricing" in January 2012.

3 See Paragraph 56.

4 See Paragraph 73.

5 See paragraph 88.

6 The OECD provides an example defi nition for quali-

fying enterprises and qualifying transactions in the

sample MOUs found in Annex I to Chapter IV.

33

ISSUE 30 | JUNE 6, 2013FEATURED ARTICLES

Topical News Briefi ng: Italy Between A Rock And A Hard Place by the Global Tax Weekly Editorial Team

Although the tax-raising steps taken last year by "technocrat" Mario Monti's government has suc-ceeded in reducing the fi scal defi cit from 5 percent to below 3 percent, it has been at the cost of plung-ing the country into a downward spiral of anemic consumption, which in turn aff ects forward levels of tax collection.

Or does it? Th e fi gures say that consumption fell by 7 percent in 2012, and that may be true, but it may also be the case that people's reaction to higher taxes is to cheat more eff ectively on their income declarations. Italy has one of the largest "black" economies in Europe, and one of the lowest lev-els of respect for government. Th e authorities have tried to limit the use of cash by putting ceilings on cash withdrawals and requiring banks to provide a mass of data about account movements, but the eff ect of those measures may just be to turn people away from using banks at all.

Th e news that the European Commission is end-ing its "excessive defi cit procedure" against Italy

was welcomed by the Government, but it actually means nothing in real terms this year; next year it will mean the unblocking of somewhere between EUR5bn and 10bn in EU support funds, but much of that money has prescribed uses, and it won't all count against the defi cit.

Meanwhile, the Government is in a hole. Th e coali-tion has two halves, essentially, left wing and right wing, and the condition set by Silvio Berlusconi for his right-wing party's participation was the aban-donment of IMU, a property tax imposed by Mario Monti and which reaped about EUR8bn last year. Th e fi rst installment, of two, was due in June and has been postponed pending a grand settlement of the nation's fi scal aff airs which is supposed to take place before September; in the meantime there will be a 1 percent VAT increase in July unless the Gov-ernment, by magic, can fi nd a way of avoiding it.

In fact the coalition is at war with itself, and the fear must be that Berlusconi is simply waiting for the moment to bring it down, hoping for a better outcome for his party is renewed elections. Another change of government at this moment in history would be a disaster. Poor Italy.

34

ISSUE 30 | JUNE 6, 2013FEATURED ARTICLES

Payments To Related Foreign Persons: Beware Of State Addback Provisions by Michael S. Schadewald

©2013 M.S. Schadewald

Michael S. Schadewald, Ph.D., CPA, is a Professor in the Lubar School of Business at the University of Wisconsin Milwaukee.

Subject to U.S. constitutional constraints and fed-eral statutory restrictions, each U.S. state has the authority to adopt its own unique defi nition of corporate taxable income. Over the years, Con-gress has enacted numerous restrictions on a do-mestic corporation's deductions for interest and royalty payments made to a related foreign per-son, including Code Secs. 163(j) , 267 and 482 . In addition to these federal restrictions, many states have enacted the requirement that a domestic cor-poration must add back any federal deductions for interest expenses and royalty expenses paid to a related person in computing its state taxable in-come. Th ese state restrictions are important be-cause state income taxes represent a signifi cant component of a domestic corporation s overall tax burden. 1 Th us, tax practitioners must consid-er the implications of these state addback provi-sions when evaluating the tax consequences of in-tercompany fi nancing or licensing arrangements between a domestic corporation and its foreign

parent company or other related foreign person. 2 Th is article provides a comprehensive analysis of the impact of state-related party expense addback provisions on the deductibility of payments made to related foreign persons.

Federal Restrictions On Payments To Related Foreign Persons

Most states that impose a corporate income tax use either federal taxable income before the net operat-ing loss and special deductions (federal Form 1120, Line 28) or federal taxable income (federal Form 1120, Line 30) as the starting place for comput-ing a domestic corporation's state taxable income. 3 Consequently, states generally conform to the fed-eral restrictions on deductions for interest and roy-alty payments made to a related foreign person. In computing federal taxable income, a domestic corporation generally may deduct all interest paid or accrued, 4 as well as all rentals or other payments made for the use of property. 5 However, federal law imposes numerous restrictions on deductions for interest and royalty expenses paid to a related foreign person.

35

Code Sec. 482 gives the IRS the authority to re-allocate income and expense among related par-ties if necessary to clearly refl ect the income of a taxpayer. For example, if a loan made by a foreign parent company to a domestic corporation pro-vides for an unreasonably high rate of interest, the IRS may adjust the U.S. subsidiary's inter-est expense deductions to refl ect an arm's-length rate of interest for a comparable loan made under comparable circumstances. 6 Likewise, the IRS may adjust the royalty charged on a cross-border licensing agreement if it does not provide an arm s-length result, and the regulations under Code Sec. 482 provide various methods for determin-ing an arm's-length royalty rate. 7 Income tax treaties also generally contain an associated en-terprises provision, which permits the IRS to ad-just the income derived by related parties if their commercial or fi nancial relations (e.g., interest or royalty rates) diff er from those that would exist between unrelated persons. 8

Code Sec. 267(a)(2) generally prohibits an accrual basis taxpayer from deducting interest expenses or royalty expenses accrued but not yet paid to a relat-ed person that is a cash basis taxpayer. Instead, the expense is deductible in the tax year that the corre-sponding income is recognized by the related payee. Th is provision is based on the principle that the in-come and expense arising from related party transac-tions should be recognized in the same tax year. In the case of interest and royalties owed to related foreign persons, no deduction is allowed until the expense is paid, regardless of the related foreign payee s method

of accounting. 9 For this purpose, a related foreign person includes, but is not limited to, a foreign per-son that is a more than 50-percent shareholder of the domestic corporation making the interest payment, as well as other members of a controlled group that includes the more than 50-percent shareholder. 10

Congress enacted Code Sec. 163(j) to limit the tax benefi ts that a foreign parent corporation ob-tains from using debt as opposed to equity to fi -nance its U.S. subsidiaries. Code Sec. 163(j) dis-allows a deduction for interest expenses that are paid to a related person and the corresponding interest income is exempt from U.S. tax, as well as interest expenses paid to an unrelated person if the debt is guaranteed by a related foreign per-son and no U.S. withholding tax is imposed on the unrelated payee's interest income. 11 For this purpose, a related person includes a more than 50-percent shareholder, as well as other members of a controlled group that includes the more than 50-percent shareholder. 12 A domestic corpora-tion's interest expense deductions are disallowed only if the corporation has excess interest expense and its debt-to-equity ratio exceeds 1.5 to one. 13 Th e amount of disallowed interest expense de-ductions may not exceed the corporation s excess interest expense for the tax year. 14 Excess interest expense equals the excess, if any, of the corpora-tion's net interest expense over 50 percent of its adjusted taxable income. 15 Any disallowed inter-est expense deductions may be carried forward indefi nitely and treated as interest expenses paid in a carryforward year. 16

36

State Interest And Intangible Expenses Addback Provisions

Although most states use federal taxable income as the starting point in computing a domestic cor-poration s state taxable income, each state requires various addition and subtraction modifi cations. 17 Th ese adjustments refl ect diff erences in federal and state policy objectives, as well as fi scal constraints. For example, due to budgetary constraints, many states do not conform to federal bonus depreciation or the Code Sec. 199 deduction.

As indicated in Table 1, 20 states and the Dis-trict of Columbia require domestic corporations to add back otherwise deductible related party in-terest expenses and intangible expenses (royalties, licensing fees, etc.) in computing state taxable in-come. States have enacted these provisions to lim-it the ability of taxpayers to erode the corporate income tax base through the use of intercompany fi nancing and licensing arrangements which give rise to deductions for interest expenses and intan-gible expenses. Th e diff erent state addback provi-sions share many common themes. Nonetheless, there are signifi cant diff erences among the states with respect to the specifi c types of expenses and related entities targeted by the addback provi-sions, as well as the circumstances under which an exception applies and the related-party expense is deductible for state tax purposes. Th erefore, it is essential to thoroughly analyze each state's spe-cifi c provisions to ensure compliance.

Expenses Targeted

State-related party expense addback provisions are generally targeted at two types of expenses – inter-est expenses and intangible expenses (see Table 1). States generally defi ne "interest expense" by refer-ence to Code Sec. 163 . For example, for purposes of the Maryland addback provision, interest expense means "an amount directly or indirectly allowed as a deduction under Section 163 " for purposes of determining federal taxable income. 18 Some states disallow interest expense deductions only if the interest expense is related to intangible property. Such provisions are aimed at tax planning struc-tures where an operating company pays a royalty for the use of an intangible asset to a related party, and the related party then lends the funds back to the operating company. For example, the Indiana addback provision applies to "directly related in-tangible interest expenses," 19 which means interest paid on loans where "the funds loaned were origi-nally received by the recipient from the payment of intangible expenses" by the taxpayer or a member of the same affi liated group as the taxpayer. 20 In a similar fashion, the New York addback requirement applies only to "royalty payments," which includes payments for the use of intangible property, as well as "amounts allowable as interest deductions under [ Code Sec. 163 ] to the extent such amounts are di-rectly or indirectly for, related to or in connection with the acquisition, use, maintenance or manage-ment, ownership, sale, exchange or disposition of such intangible assets." 21

37

Table 1: States That Require Addback of Related Party Expenses

State

Otherwise deductible expenses added back

Interest expenses Intangible expenses Applicable statute

Alabama X X Ala. Code § 40-18-35

Arkansas X X Ark. Code Ann. § 26-51-423

Connecticut X XConn. Gen. Stat. §§ 12-218c and 12-218d

Georgia X X Ga. Code Ann. § 48-7-28.3

Illinois X X 35 Ill. Comp. Stat. § 5/203

Indiana Interest expenses related to intangible property

X Ind. Code § 6-3-1-3.5

Kentucky Interest expenses related to intangible property

X (and management fees)

Ky. Rev. Stat. Ann. § 141.205

Maryland X X Md. Code. Ann., Tax-Gen. § 10-306.1

Massachusetts X XMass. Gen. Laws ch. 63, §§ 31I and 31J

Michigan X X Mich. Comp. Laws § 206.623

Mississippi Interest expenses related to intangible property

X Miss. Code Ann. § 27-7-17

New Jersey X XN.J. Stat. Ann. § 54:10A-4.4

New York Interest expenses related to intangible property

X N.Y. Tax Law § 208.9

North Carolina XN.C. Gen. Stat. § 105-130.7A

Oregon Interest expenses related to intangible property

X Or. Rev. Stat. § 314.296

Rhode Island Interest expenses related to intangible property

X R.I. Gen. Laws § 44-11-11

Tennessee Interest expenses related to intangible property

XTenn. Code Ann. §§ 67-4-2004 and 67 -4-2006

Virginia X X Va. Code Ann. § 58.1-402

West Virginia X X W. Va. Code § 11-24-4b

Wisconsin XX

(and management fees and rental expenses)

Wis. Stat. § 71.26

Dist. of Columbia X X D.C. Code § 47-1803.03

Source: CCH IntelliConnect, Multistate Quick Answer Charts, Related Party Expense Addback Requirements; and J. Healy and M. Schadewald, 2013 MULTISTATE CORPORATE TAX GUIDE (Chicago: CCH, a Wolters Kluwer business, 2012), at 3217–51.

38

States generally defi ne "intangible expenses" to in-clude a wide range of items. For example, the Vir-ginia statutory defi nition of "intangible expenses and costs" reads as follows: (1) Expenses, losses and costs for, related to, or in

connection directly or indirectly with the di-rect or indirect acquisition, use, maintenance or management, ownership, sale, exchange, lease, transfer, or any other disposition of in-tangible property to the extent such amounts are allowed as deductions or costs in deter-mining taxable income;

(2) Losses related to or incurred in connection directly or indirectly with factoring transac-tions or discounting transactions;

(3) Royalty, patent, technical and copyright fees; (4) Licensing fees; and (5) Other similar expenses and costs. 22

States generally defi ne "intangible property" to in-clude patents, patent applications, trade names, trademarks, service marks, copyrights, trade secrets and similar types of intangible assets.

North Carolina takes a more limited approach. Its addback provision applies only to "royalty pay-ments" for the use of intangible property in North Carolina. For this purpose, royalties include tech-nical fees, licensing fees and other similar charges, and intangible property includes only trademarks, patents and copyrights. 23 On the other hand, the Kentucky addback provision applies not only to in-tangible expenses and interest expenses related to intangible property, but also to management fees. 24

Th e Wisconsin addback provision applies to "inter-est expenses, rental expenses, intangible expenses, [and] management fees." 25

Defi nition Of "Related Party" State addback provisions apply to interest expenses and intangible expenses paid or accrued to a related party (typically, referred to as a "related member"). Th e defi nition of a related member varies from state to state, but generally means a component member of a controlled group under Code Sec. 1563 (which is generally limited to domestic corporations), 26 a shareholder that directly or indirectly owns 50 per-cent or more of the taxpayer or a corporation that is 50 percent or more owned, directly or indirectly, by the taxpayer (see Table 2). For purposes of de-termining stock ownership, the attribution rules found in Code Sec. 318 generally apply. Th e Or-egon statutory defi nition of a related member is in-dicative of the approach taken by many states, and reads as follows:

"Related member" means a person that, with re-spect to the taxpayer during all or any portion of the taxable year, is:

(A) A related entity;

(B) A component member as defi ned in section 1563(b) of the Internal Revenue Code;

(C) A person to or from whom there is attribu-tion of stock ownership in accordance with sec-tion 1563(e) of the Internal Revenue Code; or

39

(D) A person that, notwithstanding the per-son s form of organization, bears the same rela-tionship to the taxpayer as a person described in this paragraph.

"Related entity" means:

(A) A stockholder who is an individual, or a member of the stockholder s family as defi ned in section 318 of the Internal Revenue Code, if the stockholder and the members of the stockhold-er's family own, directly, indirectly, benefi cially or constructively, in the aggregate, at least 50 percent of the value of the taxpayer's outstanding stock;

(B) A stockholder, partnership, limited liabil-ity company, estate, trust or corporation, if the stockholder and the stockholder's partnerships,

limited liability companies, estates, trusts or cor-porations own, directly, indirectly, benefi cially or constructively, in the aggregate, at least 50 percent of the value of the taxpayer's outstand-ing stock; or

(C) A corporation, or a party related to the corporation in a manner that would require an attribution of stock from the corporation to the party or from the party to the corpora-tion under the attribution rules of the Internal Revenue Code if the taxpayer owns, directly, indirectly, benefi cially or constructively, at least 50 percent of the value of the corporation's outstanding stock. Th e attribution rules of the code shall apply for purposes of determining whether the ownership requirements of this defi nition have been met. 27

Table 2. Related Corporations (Payees) Targeted by Expense Addback Provisions

Statutory defi nition of related corporationCommon control

thresholdApplicable

statute

Code Sec. 1563(controlled

group)

50% or more

shareholder

50% or more

corporation Other

AlabamaIncludes (but not limited to) corpora-tions included in taxpayer’s federal consolidated tax return

80%Ala. Admin Code r. 810-3-35-.02

Arkansas Related parties under Code Sec. 267 > 50% Ark. Code Ann. § 26-51-423

Connecticut X X X 50%

Conn. Gen. Stat. §§ 12-218c and d

Georgia X X X 50% Ga. Code Ann. § 48-7-28.3

Illinois

Excluded from taxpayer’s unitary group because (1) foreign corpora-tion with 80% of activity outside U.S., or (2) required to use special-ized apportionment formula

> 50%35 Ill. Comp. Stat. §§ 5/203 and 5/1501

40

Statutory defi nition of related corporationCommon control

thresholdApplicable

statute

Code Sec. 1563(controlled

group)

50% or more

shareholder

50% or more

corporation Other

Indiana X XMember of federal affi liated group, except foreign corporations includ-ible and 50% ownership requirement

50% Ind. Code § 6-3-2-20

Kentucky X X 50% Ky. Rev. Stat. Ann. § 141.205

Maryland X X X 50%Md. Code. Ann., Tax-Gen. § 10-306.1

Massachusetts X X X 50%Mass. Gen. Laws ch. 63, § 31I

Michigan “related to the taxpayer by owner-ship or control”

Mich. Comp. Laws § 206.623

Mississippi X X X 50% Miss. Code Ann. § 27-7-17

New Jersey X X X 50% N.J. Stat. Ann. § 54:10A-4.4

New York “controlling interest” defi ned as 30% or more ownership 30% N.Y. Tax Law

§ 208.9

North Carolina X X Includes 80% or more owned corpo-rations 50% N.C. Gen. Stat.

§ 105-130.7A

Oregon X X X 50% Or. Rev. Stat. § 314.296

Rhode Island X X X 50% R.I. Gen. Laws § 44-11-11

Tennessee “more than 50% ownership interest” > 50% Tenn. Code Ann. § 67-4-2004

Virginia X X X 50% Va. Code Ann. § 58.1-302

West Virginia X X X 50% W. Va. Code § 11-24-3a

Wisconsin X Related parties under Code Sec. 267 > 50% Wis. Stat. § 71.22

Dist. of Columbia X X X 50% D.C. Code

§ 47-1803.03

Source: CCH IntelliConnect, Multistate Quick Answer Charts, Related Party Expense Addback Requirements; and J. Healy and M. Schadewald, 2013 Multistate Corporate Tax Guide (Chicago: CCH, a Wolters Kluwer business, 2012), at 3217–51.

Th erefore, for purposes of the state addback provi-sions, a foreign corporation generally qualifi es as a related member if it either owns 50 percent or more of the stock of a domestic corporation, or it is 50 percent or more owned by a domestic corporation. Note that a foreign corporation that owns 50 percent of a domestic joint venture meets this requirement.

Not all states employ the conventional approach to defi ning a related member. For example, New York defi nes a related member by reference to a "control-ling interest," which means a 30-percent or more ownership interest. 28 Arkansas defi nes a related member by reference to Code Sec. 267 . 29 Wisconsin also defi nes a related member by reference to Code

41

Sec. 267 , as well as Code Sec. 1563 . 30 Under Code Sec. 267(b) , two corporations are related if there is more than 50 percent common ownership. 31 A more than 50-percent ownership test also applies for pur-poses of the Tennessee addback provision. 32 For pur-poses of the Alabama addback provision, a related member includes but is not limited to any member of a federal affi liated group (which requires 80 per-cent or more common ownership and is generally limited to domestic corporations) that has elected to fi le a federal consolidated tax return. 33 Th e Michigan addback statute does not provide an explicit com-mon ownership threshold, but instead defi nes a re-lated member as a "person related to the taxpayer by ownership or control." 34 Finally, the Illinois ad-dback provision applies to payments made to (1) a foreign person that is excluded from the Illinois uni-tary business group because it qualifi es as an 80/20 company, and (2) a person that is excluded from the unitary business group because it is required to

use a specialized industry apportionment formula, such as a fi nancial organization or a transportation company. An 80/20 company is a related corpo-ration (more than 50-percent control test) whose business activity outside the United States is 80 percent or more of its total business activity. 35

Exceptions To Addback Requirement State addback provisions are designed to prevent cor-porations from using intercompany fi nancing and licensing arrangements to avoid state income taxes. Th ese provisions generally apply automatically to all related party interest expenses and intangible expenses, including those related party payments that are moti-vated by legitimate business purposes rather than tax avoidance. As a consequence, each state provides some relief in the form of exceptions from the automatic ad-dback requirement. Th ese exceptions are complex and vary from state to state. Nevertheless, they do share some common themes (see Table 3 for a summary).

Table 3. Exceptions to Addback Requirement

Recipient’s incomeis taxed by a foreign country

Recipient’s incomeis taxed by a U.S. state Conduit payment Other

Alabama Income is taxed by a foreign country with U.S. tax treaty and recipient is a resident of that foreign country

Income is taxed by a state Expenses pass through to unrelat-ed third party, and other require-ments are met

• Adjustment is unreasonable• Taxpayer agrees to alternate

adjustment• Principal purpose of transaction

is not tax avoidance, and recipi-ent is not primarily engaged in activities involving intangibles or fi nancing of related entities

Arkansas Income is taxed by a foreign country with U.S. tax treaty

Income is taxed by a state • Taxpayer agrees to alternate adjustment

• Recipient is in nontax location, 50 full-time employees, and property and revenue both ex-ceed $1 million

•Transactions is not intended to avoid tax and is conducted at arm’s length

42

Recipient’s incomeis taxed by a foreign country

Recipient’s incomeis taxed by a U.S. state Conduit payment Other

Connecticut • Interest expense—Transaction has business purpose other than tax avoidance, is con-ducted at arm’s length, and income is taxed by a foreign country at rate within 3 per-centage points of CT rate

• Interest expense—Recipient is located in foreign country with U.S. tax treaty

Interest expense—Transac-tion has business purpose other than tax avoidance, is conducted at arm’s length, and income is taxed by a state at rate within 3 percentage points of CT rate

• Adjustment is unreasonable• Taxpayer agrees to alternate

adjustment• Taxpayer elects to compute CT

tax on unitary basis

Georgia Transaction has business pur-pose, amount is arm’s length, and recipient is domiciled in foreign country with U.S. tax treaty

Transaction is arm’s length, and income is taxed by a state

Transaction has business purpose, and recipient pays expenses to unrelated third party in same year

Taxpayer agrees to alternate adjustment

Illinois Income is taxed by a foreign country

Income is taxed by a state that does not mandate unitary reporting

Principal purpose of transaction is not tax avoidance, and recipient pays expenses to unrelated third party in same year

• Adjustment is unreasonable• Taxpayer agrees to alternate

adjustment• Principal purpose of transaction is

not tax avoidance, and amount is arm’s length

• Taxpayer receives dividend from payee

Indiana Principal purpose of transac-tion is not tax avoidance, amount is arm’s length, and income is taxed by a U.S. possession or foreign country that is recipient’s commercial domicile

Principal purpose of transaction is not tax avoidance, amount is arm’s length, and income is taxed by a state that is recipient’s commercial domicile

• Principal purpose of transaction is not tax avoidance, and recipi-ent pays expenses to unrelated third party in same year

• Principal purpose of transaction is not tax avoidance, taxpayer receives amount from unre-lated third party, and taxpayer pays expenses in arm’s-length transaction

• Adjustment is unreasonable• Taxpayer agrees to alternate

adjustment• Taxpayer and recipient fi le IN

combined or consolidated return• Principal purpose of transaction is

not tax avoidance, and recipient regularly engages in transactions involving intangibles with unre-lated members on similar terms

• Principal purpose of transaction is not tax avoidance, amount is arm’s length, and recipient is engaged in substantial business activities involving intangibles or other sub-stantial business activities

Kentucky Income is taxed by a foreign country, amount is arm’s length, and recipient is en-gaged in substantial business activities (unrelated to intan-gibles or fi nancing of related members) that require offi ces and full-time employees

Income is taxed by a state, amount is arm’s length, and recipient is engaged in substantial business activities (unrelated to intangibles or fi nancing of related members) that re-quire offi ces and full-time employees

• Taxpayer agrees to alternate adjustment

• Taxpayer and recipient included in KY consolidated return

• Recipient engages in transactions with unrelated members on identi-cal terms

• Management fees—Amount is arm’s length

Maryland Principal purpose of transaction is not tax avoidance, amount is arm’s length, and income is taxed by a U.S. possession or foreign country with U.S. tax treaty at aggregate effective tax rate of 4% or more

Principal purpose of trans-action is not tax avoid-ance, amount is arm’s length, and income is taxed by a state at aggre-gate effective tax rate of 4% or more

Principal purpose of transaction is not tax avoidance, amount is arm’s length, and recipient pays expense to unrelated third party in same year

Interest expense—Tax avoidance is not principal purpose of transac-tion, amount is arm’s length, and taxpayer and recipient are banks

43

Recipient’s incomeis taxed by a foreign country

Recipient’s incomeis taxed by a U.S. state Conduit payment Other

Massachusetts • Interest expense—Principal purpose of transaction is not tax avoidance, amount is arm’s length, and income is taxed by a foreign country at rate within 3 percentage points of MA rate

• Interest and intangible expens-es—Principal purpose of trans-action is not tax avoidance, and recipient is a resident of a foreign country with U.S. tax treaty but is not a controlled foreign corporation

Interest expense—Prin-cipal purpose of transac-tion is not tax avoidance, amount is arm’s length, and income is taxed by a state at rate within 3 per-centage points of MA rate

Principal purpose of transaction is not tax avoidance, and recipient pays expenses to unrelated third party in same year

• Adjustment is unreasonable• Taxpayer agrees to alternate

adjustment

Michigan Transaction has business pur-pose other than tax avoidance, is conducted at arm’s length, and recipient is organized in foreign country with U.S. tax treaty

Transaction has business pur-pose other than tax avoidance, is conducted at arm’s length, and is a pass through of comparable transaction between recipient and unrelated third party

• Transaction has business purpose other than tax avoidance, is conducted at arm’s length, and adjustment is unreasonable

• Transaction has business purpose other than tax avoidance, is con-ducted at arm’s length, and ad-dback results in double taxation

• Taxpayer and recipient included in MI combined return

Mississippi Recipient pays expenses to unre-lated third party in same year

Transaction has business purpose other than tax avoidance, and recipient is not primarily engaged in activities involving intangibles

New Jersey • Interest expense—Principal purpose of transaction is not tax avoidance, amount is arm’s length, and income is taxed by a U.S. possession or foreign country at rate within 3 percentage points of NJ rate

• Interest expense—Recipient is located in foreign country with U.S. tax treaty

Interest expense—Prin-cipal purpose of transac-tion is not tax avoidance, amount is arm’s length, and income is taxed by a state at rate within 3 per-centage points of NJ rate

Principal purpose of transaction is not tax avoidance, and recipient pays expenses to unrelated third party in same year

• Adjustment is unreasonable• Taxpayer agrees to alternate

adjustment• Interest paid to an independent

lender and taxpayer guarantees debt

New York Recipient is organized in foreign country with U.S. tax treaty and is taxed by foreign country at rate equal to or greater than NY rate

Transaction has business purpose, amount is arm’s length, and recip-ient pays expenses to unrelated third party in same year

Taxpayer and recipient included in NY combined return

North Carolina Recipient is organized in foreign country with U.S. tax treaty, and is taxed by foreign country at rate equal to or greater than NC rate

Recipient pays expenses to unre-lated third party in same year

In same year, recipient includes the amount as income in NC tax return and does not deduct the amount

Oregon • Owner and user of intangible are included in same OR consoli-dated tax return

• Separation of ownership and use of intangible does not result in evasi on of tax or distortion of inco me

44

Recipient’s incomeis taxed by a foreign country

Recipient’s incomeis taxed by a U.S. state Conduit payment Other

Rhode Island Interest expense—Principal purpose of transaction is not tax avoidance, amount is arm’s length, and income is taxed by a U.S. possession or foreign country at rate within 3 per-centage points of RI rate

Interest expense—Prin-cipal purpose of transac-tion is not tax avoidance, amount is arm’s length, and income is taxed by a state at rate within 3 per-centage points of RI rate

Transaction does not have tax avoidance as its signifi cant purpose, and recipient pays expenses to unrelated third party in same year

• Adjustment is unreasonable• Taxpayer agrees to alternate

adjustment

Tennessee Recipient is located in a foreign country with U.S. tax treaty

Income is taxed by a state, other than a state in which members fi le a combined report and recipient’s income offsets taxpayer’s expense

Recipient pays expenses to unre-lated third party in same year

Upon application by taxpayer, IRS determines that principal purpose of expenses is not tax avoidance

Virginia Intangible expenses—Income is taxed by a foreign country with U.S. tax treaty

Intangible expenses—In-come is taxed by a state

Intangible expenses— Principal purpose of transaction is not tax avoidance, and recipient pays expenses to unrelated third party in same year

• Intangible expenses—Recipi-ent derives at least one-third of revenues from licensing intan-gibles to unrelated third parties in comparable transactions

• Interest expense—Recipient has substantial business operations related to interest-generating activity, 5 full-time employees, interest is not related to intan-gible property, business pur-pose other than tax avoidance, arm’s-length amount, and other requirements are met

West Virginia Transaction has business pur-pose, amount is arm’s length, recipient is organized in a foreign country with U.S. tax treaty, and is taxed by foreign country at rate equal to or greater than WV rate

Income is taxed by a state at rate equal to or greater than WV rate

Intangible expenses— Transaction has business purpose, and recipi-ent pays expenses to unrelated third party in same year

• Taxpayer agrees to alternate adjustment

• Interest expense—Transac-tion has business purpose and amount is arm’s length

• Income is taxed by a U.S. posses-sion at rate equal to or greater than WV rate

Wisconsin Income is taxed by a U.S. pos-session or foreign country at aggregate effective tax rate equal to or greater than 80% of taxpayer’s aggregate effec-tive tax rate

Income is taxed by a state at aggregate effective tax rate equal to or greater than 80% of taxpayer’s aggregate effective tax rate, other than a state in which members fi le a combined report and recipient’s income offsets taxpayer’s expense

Recipient pays expenses to unre-lated third party in same year

• Recipient is a bank holding com-pany or subsidiary thereof, with certain exceptions

• Primary motivation for transac-tion is a business purpose other than tax avoidance, transaction changes economic position of taxpayer in a meaningful way apart from tax effects, and amount is arm’s length

District of Columbia

Principal purpose of transac-tion is not tax avoidance, amount is arm’s length, and income is taxed by a U.S. pos-session or foreign country with U.S. tax treaty at aggregate ef-fective tax rate of 4% or more

Principal purpose of trans-action is not tax avoid-ance, amount is arm’s length, and income is taxed by a state at aggre-gate effective tax rate of 4% or more

Principal purpose of transaction is not tax avoidance, amount is arm’s length, and recipient pays expenses to unrelated third party in same year

Recipient is allowed deduction on DC tax return to extent related payer is denied a deduction

Source: CCH IntelliConnect, Multistate Quick Answer Charts, Corporate Income Tax, Related Party Expense Addback Requirements; J. Healy and M. Schadewald, 2013 Multistate Corporate Tax Guide (Chicago: CCH, a Wolters Kluwer business, 2012), at 3217–51; and applicable state statutes (see Table 1 for listing).

45

Exceptions Aimed At Foreign Payees Most states permit a deduction for interest expens-es or intangible expenses paid to a related foreign person, but generally only if one or more of the following requirements are met: (1) the recipient's income is subject to tax in a foreign country, (2) the recipient resides in a foreign country that has an income tax treaty with the United States, (3) the transaction is at arm's length, or (4) the transaction has a business purpose other than tax avoidance. Th e specifi c requirements for the foreign payee ex-ception vary from state to state, as illustrated by the following examples:

Georgia. Th e recipient is domiciled in a foreign country that has a comprehensive income tax treaty with the United States, the expenses are arm's-length amounts, and the transaction has a valid business purpose. 36 Illinois. Th e recipient's income is subject to in-come tax in a foreign country. 37 Indiana. Th e recipient's income is subject to income tax in a foreign country that is the re-cipient's commercial domicile, the terms are comparable to an arm's-length transaction, and the principal purpose of the transaction is not tax avoidance. 38 Massachusetts. In the case of interest expenses, the recipient's interest income is subject to income tax in a foreign country at a rate that is with within three percentage points of the state's statutory tax rate, the transaction refl ects an arm's-length rate

of interest and terms, and the principal purpose of the transaction is not tax avoidance. 39 New York. Th e recipient's income is subject to income tax in a foreign country that has a com-prehensive income tax treaty with the United States, and is taxed at a rate at least equal to the tax rate imposed by the state. 40 Virginia. In the case of intangible expenses, the recipient s income is subject to income tax in a foreign country that has a comprehensive income tax treaty with the United States. 41

Many states that provide an exception for foreign payees often require that the payee reside in a for-eign country that has entered into a "comprehen-sive income tax treaty" with the United States. Table 4 provides a listing of such countries, as defi ned by Code Sec. 1(h) . Many states also require that the related party transaction giving rise to the inter-est expenses or intangible expenses have a business purpose other than tax avoidance or that the princi-pal purpose of the transaction is not tax avoidance. Some states provide statutory defi nitions of a valid business purpose. For example, New York defi nes a "valid business purpose" as "one or more business purposes, other than the avoidance or reduction of taxation, which alone or in combination con-stitute the primary motivation for some business activity or transaction, which activity or transac-tion changes in a meaningful way, apart from tax eff ects, the economic position of the taxpayer." 42

46

Other Exceptions Another common exception to the automatic add-back requirement applies if the related payee s corre-sponding income is subject to tax in a U.S. state. As with the exception for payments to related foreign persons, the specifi c requirements vary from state to state, but generally include one or more of the fol-lowing factors: (1) the recipient's income is subject to state tax at some minimum tax rate, (2) the trans-action is at arm's length, and/or (3) the transaction has a business purpose other than tax avoidance.

A third common exception to the automatic add-back requirement is the conduit payment exception, under which a state permits a deduction for related party interest expenses or intangible expenses if in

the same tax year the related payee pays the amount to an unrelated person and tax avoidance was not a principal purpose of the related party payment. In such situations, the related payee serves as a conduit for the taxpayer s payment of interest or intangible expenses to an unrelated third party. An example of a conduit payment arrangement is centralized cash management, where the excess cash generated by some operating affi liates is used to pay the expenses of other operating affi liates.

Many states also provide a catch-all relief provision, under which the addback of related party expenses is not required if the taxpayer can establish that the adjustment produces an "unreasonable result." 43 Finally, as summarized in Table 3, states provide

Table 4. Comprehensive Income Tax Treaties with the United States That Include Exchange of Information Provision

Australia Germany Luxembourg South AfricaAustria Greece Malta SpainBangladesh Hungary Mexico Sri LankaBulgaria Iceland Morocco SwedenBarbados India Netherlands SwitzerlandBelgium Indonesia New Zealand ThailandCanada Ireland Norway Trinidad and TobagoChina Israel Pakistan TunisiaCyprus Italy Philippines TurkeyCzech Republic Jamaica Poland UkraineDenmark Japan Portugal United KingdomEgypt Kazakhstan Romania VenezuelaEstonia Korea Russian FederationFinland Latvia Slovak RepublicFrance Lithuania Slovenia

Source: IRS Notice 2011-64 (Aug. 18, 2011), which provides a listing of comprehensive income tax trea-ties that meet the requirements for a preferential tax rate on qualifi ed dividends under Code Sec. 1(h) .

47

various other types of exceptions, many of which are unique to a particular state. 44

Summary And Conclusions At present, 20 states and the District of Columbia have enacted provisions that may deny a domes-tic corporation a deduction for interest expenses and intangible expenses paid to a related foreign person. Although the diff erent state statutes share many common themes, there are signifi cant diff er-ences among the states, particularly with respect to the circumstances under which an exception ap-plies and a deduction is permitted. It is important to consider the implications of these deduction disallowance provisions when analyzing the tax consequences of interest expenses or intangible ex-penses paid by a domestic corporation to a foreign parent corporation or other related foreign person.

ENDNOTES

1 Forty-fi ve states and the District of Columbia impose

corporate income taxes, with tax rates ranging from

about fi ve to 10 percent (CCH IntelliConnect, Multi-

state Quick Answer Charts, Table of 2013 Corporate

Income Tax Rates ). Nevada, Ohio, South Dakota,

Washington and Wyoming do not impose corporate

income taxes. However, Ohio and Washington impose

gross receipts taxes.

2 IRS statistics indicate that the magnitude of these

transactions is signifi cant. A domestic corporation that

is 25-percent-or-more owned by a single foreign person

must report the dollar amounts of these transactions

on Form 5472 ( Code Sec. 6038A ). For tax year 2008,

large domestic corporations (total gross receipts of

$500 million or more) reported that they made $68.1

billion of interest payments and $6.9 billion of royalty

payments to related foreign persons. Isaac J. Goodwin,

Transactions Between Large Foreign-Owned Domestic

Corporations and Related Foreign Persons, 2008 , STA-

TISTICS OF INCOME BULLETIN (Fall 2012).

3 J. Healy and M. Schadewald, 2013 MULTISTATE COR-

PORATE TAX GUIDE (Chicago: CCH Incorporated,

2012), at 3001 – 11.

4 Code Sec. 163(a) .

5 Code Sec. 162(a) , and Reg. §1.162-11 .

6 Reg. §1.482-2(a) .

7 Reg. §1.482-5 .

8 See , for example, Article 9 of the U.S. Model Income

Tax Treaty of 2006.

9 Code Sec. 267(a)(3) and Reg. §1.267(a)-3(b) . Special

rules apply to payments that represent income effec-

tively connected with the conduct of a U.S. trade or busi-

ness, income which is exempt under a treaty, or income

derived by a controlled foreign corporation or a passive

foreign investment company. Reg. §1.267(a)-3(c) .

10 Reg. §1.267(a)-3(b)(1) .

11 Code Sec. 163(j)(3) .

12 Code Secs. 163(j)(4) and 267(b).

13 Code Sec. 163(j)(2)(A) .

14 Code Sec. 163(j)(1)(A) .

15 Code Sec. 163(j)(2)(B) . Adjusted taxable income is a

rough approximation of the corporation's cash fl ow

from operations, before taking into account any inter-

est expense deductions. Code Sec. 163(j)(6)(A) .

16 Code Sec. 163(j)(1)(B) .

17 Common addition modifi cations include state income

taxes, net operating losses, dividends-received deduc-

tions, Code Sec. 199 deduction, federal bonus deprecia-

tion and interest expenses and intangible expenses paid

to related parties. Common subtraction modifi cations

48

include federal interest income, state net operating

loss deductions, state dividends-received deductions,

Subpart F income, and Code Sec. 78 gross-up income.

18 Md. Code. Ann., Tax-Gen. § 10-306.1.

19 Ind. Code § 6 -3-1-3.5.

20 Ind. Code § 6 -3-2-20.

21 N.Y. Tax Law § 208.9.

22 Va. Code Ann. § 58.1-302 .

23 N.C. Gen. Stat. § 105-130.7A. The addback require-

ment also applies to any "time price differential

charged for the late payment" of a royalty.

24 Ky. Rev. Stat. Ann. § 141.205 . Management fees

includes expenses paid for "services pertaining to

accounts receivable and payable, employee ben-

efi t plans, insurance, legal, payroll, data processing,

purchasing, tax, fi nancial and securities, accounting,

reporting and compliance services or similar services."

25 Wis. Stat. § 71.26 . See Wis. Stat. § 71.11 for a defi ni-

tion of "management fees" and "rental expenses."

26 Generally, a foreign corporation must be engaged in

a U.S. trade or business to qualify as a component

member of a controlled group of corporations under

Code Sec. 1563 . Reg. §1.1563-1(b)(2) .

27 Or. Rev. Stat. § 314.296 .

28 N.Y. Tax Law § 208.9 .

29 Ark. Code Ann. § 26-51-423.

30 Wis. Stat. § 71.22 . Special rules apply to a real estate

investment trust.

31 See Reg. §1.267(a)-3(b)(1) for the defi nition of a "re-

lated foreign person."

32 Tenn. Code Ann. § 67-4-2004.

33 Ala. Admin Code r. 810-3-35-.02, and Code Sec. 1504 .

34 Mich. Comp. Laws § 206.623 .

35 35 Ill. Comp. Stat. §§ 5/203 and 5/1501. Illinois enacted

this provision to close the perceived loophole which ex-

isted when Illinois taxpayers could deduct royalties and

interest paid to an 80/20 company ( see Zebra Technolo-

gies Corp. v. Dept. of Revenue , 344 Ill.App.3d 474 [2003]).

36 Ga. Code Ann. § 48-7-28.3.

37 35 Ill. Comp. Stat. § 5/203.

38 Ind. Code § 6 -3-2-20.

39 Mass. Gen. Laws ch. 63, § 31J .

40 N.Y. Tax Law § 208.9 .

41 Va. Code Ann. § 58.1-402 .

42 N.Y. Tax Law § 208.9 .

43 For example, in Benefi cial New Jersey, Inc. v. Director,

Division of Taxation [No. 009886-2007 (N.J. Tax Ct.,

Aug. 31, 2010)], the New Jersey Tax Court ruled that

a fi nance company could deduct interest it paid on a

loan from its parent corporation because the addback

adjustment was unreasonable. See Technical Advisory

Memorandum TAM-13 (N.J. Div. of Taxn., Feb. 24, 2011)

for guidance regarding the types of situations in which

the New Jersey Division of Taxation will recognize the

disallowance of a deduction to be unreasonable. On

the other hand, in Kimberly-Clark Corporation v. Com-

missioner of Revenue [981 N.E.2d 208 (2013)], the Mas-

sachusetts Appeals Court ruled that the unreasonable

adjustment exception was not satisfi ed. Likewise, in

Surtees v. VFJ Ventures, Inc . [8 So.3d 983 (2008); cert.

denied , U.S. No. 08-916, Apr. 27, 2009], the Alabama

Supreme Court affi rmed a lower court's decision that

the addback adjustment was reasonable because the

resulting tax was not "out of proportion" to the corpo-

ration's activities in Alabama.

44 In addition to the exceptions summarized in Table 3,

a few states ( e.g. , West Virginia) permit the related

payer to claim a credit for the taxes paid by the re-

lated payee on the corresponding income ( e.g. , W.

Va. Code § 11-24-4b).

49

ISSUE 30 | JUNE 6, 2013FEATURED ARTICLES

Recurring Issues In African M & A by Nick Aziz and Tara Walsh, McDermott Will & Emery

Economic growth in sub-Saharan Africa continues at a pace that is impressive in comparison with glob-al averages. While the more mature markets in the United States and Europe continue to struggle with the consequences of the fi nancial crisis of 2008, the outlook for business in Africa is very diff erent.

Some of the outstanding performers – Angola, Ni-geria and Chad – owe their progress to oil, but what has helped fuel sustained growth across this region is the eff ect of a marked transition away from sub-sistence farming to employment in the wider com-mercial sector. Analysis from the McKinsey Global Institute suggests that just 32 per cent of Africa's GDP growth from 2000 through 2008 was gener-ated from natural resources and related government spending. Th e remainder came from the wholesale and retail, transportation, telecommunications and manufacturing sectors. Th is highlights a fundamen-tal demographic change that is characterized by Afri-ca's increasing urbanization and its rising consumer-led middle class, leading to new potential investment opportunities in the region in food production, fast moving consumer goods, fi nancial services/consum-er fi nance, manufacturing and technology.

Background Trends Merger & acquisition activity in the region ranges from auction sales of long-held family businesses

that are now run by professional managers be-cause the younger generation is either too dispa-rate to present a manageable shareholder base or simply not interested in carrying on the business, to auction sales of African subsidiaries of family-owned international groups where the African components are now valued at higher multiples than the group as a whole. Exits also are being precipitated by the comparatively prohibitive cost of local bank fi nance in Africa, which is forc-ing business owners to sell or to seek alternative sources of fi nance such as from strategic foreign equity investors.

First time international investors are most likely to make strategic alliances with local, well-established groups, for example Danone SA's USD686 mil-lion (or 37.8 per cent) stake in the Moroccan dairy business, Centrale Laitiere. Other investors are making strategic acquisitions as part of a "buy and build" strategy to embed themselves into the region within a sector. Examples include Singapore-based Olam International's acquisitions of Crown Flour Mills, OK Foods and Ranona, which together ben-efi t from integrated scale and synergies.

50

Recurring Issues

Restructuring of the Target Business

Target businesses, particularly the ones established over generations, are rarely single purpose vehicles and can include a wide range of unrelated and un-documented activities and trading relationships both within the group and with counterparties. As a condition to closing, the target group should be required to undergo a restructuring to formal-ize third-party trading relationships, formalize or discharge related-party agreements and intra-group debt, discharge local debt (as the buyer will often want to refi nance using international bank debt without prior security granted to local banks), di-vest non-core assets and put any arrangement with any member of the selling shareholder group that is to remain in place post-closing on fully docu-mented, arm's length terms. More often than not, the pre-sale restructuring is as complex as the trans-action itself, but if carried out eff ectively, it can reduce signifi cantly the transaction risk associated with the acquisition.

Selling Shareholders Companies in Africa very often include minority shareholders unrelated to the controlling family group. Th ese should be bought out by the princi-pal controlling shareholder prior to sale at a fair and transparent price on arm's length terms, or eff ectively bound into the sale process. Ideally, a buyer should seek a cohesive seller group with aligned interests as a counterparty to the pur-chase agreement.

Sale Structures Sellers often create an off shore holding company structure pre-sale. It is essential to ensure the struc-ture does not infringe local laws that restrict foreign ownership (normally restricted to minerals, de-fence, media and the banking industries) or foreign investment controls, for example, requiring central bank approval. Th is applies to both share owner-ship and shareholder debt.

Restrictions Local exchange controls and other regulations may limit the ability of the buyer to repatriate profi ts or otherwise leverage the investment. A buyer should therefore seek advice as to its intended method of revenue repatriation before acquisition. Some ju-risdictions also require technology, licensing and royalty remittance arrangements to be approved by local regulatory authorities, and impose fi nancial and practical constraints on inbound investors to ensure local technology is not exploited to the det-riment of the local economy.

Management and Employees Most jurisdictions impose quotas on expatriate em-ployees and many require social infrastructure as a condition of investment, in addition to national in-surance and social fund contributions.

Eff ective Due Diligence and Disclosure Th is area is critical. Even though buyers typically encounter undocumented business arrangements, signifi cantly lower standards of corporate gover-nance and vague and inaccurate data disclosure

51

and explanation through the due diligence pro-cess, it is still vital to conduct as great a degree of due diligence as the transaction timetable provides. Interpreting and clarifying disclosure against the warranties in the purchase agreement, and the con-sequences of that disclosure, are important given that local lawyers, local accounting fi rms and lo-cal management typically will be involved in the initial diligence exercise, and they may not fully understand the absolute requirement for certainty of expression. Unless the timetable is critical to the transaction (in which case any curtailment of due diligence must be balanced by enhanced contrac-tual protections), the benefi ts to a buyer of a thor-ough, drawn out due diligence and disclosure pro-cess to mitigate diminution of value post-closing cannot be over-emphasised.

Corrupt Practices Th e existence of the US Foreign Corrupt Practic-es Act and the UK Bribery Act imposes a height-ened risk on investors. As part of the due diligence process, buyers should determine the risk level of potential corruption involved in the transaction and target group and allocate resources according-ly, identify any "red fl ag" activities that may sig-nal corrupt practices, record all incidents, consider voluntary self-disclosure (early disclosure can miti-gate or eliminate successor liability for violations uncovered pre-acquisition), seek warranty and in-demnity protection in the purchase agreement, and audit and strengthen internal controls immediately after closing. Concentrated due diligence, self-re-porting, contractual protection and post-closing

implementation of robust controls are key to elimi-nating or mitigating liability for pre-closing corrupt practices within the target group.

Political Risk/Expropriation A buyer should check to see whether the country concerned is a party to any bilateral investment treaty protecting foreign investment. If there is a real risk of expropriation, methods to mitigate the risk include securing co-investment from an inter-national development corporation and/or obtain-ing political risk insurance.

Transaction Governing Law Owing to uncertainty about enforcement of con-tracts and the reliability of the local courts, transac-tions in Africa are typically governed by English or French law, depending on the jurisdiction. Occasion-ally minority shareholders will seek to challenge these provisions, but generally the courts in most African jurisdictions recognise off shore governing law and dispute resolution in relation to contracts involving local assets. One form of additional protection is to have an English law irrevocable power of attorney from the minority shareholders in favour of one con-trolling shareholder, pursuant to which they expressly waive their rights to challenge subsequently the pur-chase agreement's governing law and jurisdiction.

Th e Authors:

Nick Azis is a partner based in the Firm's London offi ce. He has advised on a broad range of UK do-mestic and cross-border public and private company

52

M&A. Nick has extensive experience acting for the Firm's international clients, who both operate and invest in Africa, most particularly in the food & bev-erage and energy sectors. He can be contacted on +44 20 7577 6947 or at njazis@mwe.com .

Tara Walsh is an associate based in the Firm's Lon-don offi ce. She has advised on the full range of

cross-border and domestic corporate and corpo-rate fi nance work, including private M&A, joint ventures, public takeovers, equity and debt capital markets, reorganisations and restructurings. She has acted for a number of the Firm's clients, who invest in the region both through direct and in-direct fund investments. She can be contacted on +44 20 7577 3448 or at twalsh@mwe.com .

53

ISSUE 30 | JUNE 6, 2013NEWS ROUND-UP: INTERNATIONAL TRADE

China, Germany Vow To Negotiate Away Trade Disputes According to joint statements following a meeting between Chinese Premier Li Keqiang and German Chancellor Angela Merkel in Berlin on May 26, both countries intend to avoid the imposition of European Union (EU) duties in trade disputes over solar and wireless communications equipment, and to resolve all trade confl icts by negotiation.

Earlier this month, it was disclosed that the Euro-pean Commission (EC) is considering opening, on its own initiative, anti-dumping duty (AD) and anti-subsidy countervailing duty (CVD) in-vestigations into imports into the EU from China of mobile telecommunications equipment, which totals around EUR1bn (USD1.29bn) per year.

Th e EC had not received complaints from the in-dustry concerned before opening its "ex offi cio" investigations, but believed it has prima facie evi-dence of subsidization by China and of mobile tele-communications equipment being sold in the EU at prices lower than market value.

Earlier this year, the EC had also confi rmed that it is readying substantial ADs and, subsequently, CVDs against Chinese exporters of solar panels and solar cells into the EU. In 2011, China exported solar panels and their key components worth around EUR21bn to the EU.

Warnings of the serious consequences of both ac-tions have already been given by China's Ministry of Commerce (MOFCOM), which, with regard to the EC's unilateral action against Chinese mo-bile telecommunications exporters, said that "the trade restriction measures unilaterally taken by the EU will undoubtedly do harm to industrial interests on both sides," especially as China be-lieves that most EU member countries disagree with launching an investigation.

MOFCOM has stressed recently that trade dis-putes should always be settled through dialogue and consultation, and that countries should exer-cise caution and restraint before using trade rem-edy measures. Th e Ministry sees itself as fi ghting a tendency, led by the US, and now the EU, towards global trade protectionism following the fi nancial and economic crisis, where countries are abusing the use of trade remedy tariff s.

Following the meeting with Chancellor Merkel, Pre-mier Li reiterated China's concerns and its opposi-tion to the EC's "abuse of trade remedy measures" as giving "the wrong signal of trade protectionism."

He continued that China hopes to resolve problems through dialogue and consultation to solve prob-lems, rather than fi ght a trade war that "would not only hurt Chinese business and jobs, but also dam-age the interests of European industries, business

54

and consumers." As Germany and China have a mutual position in opposing trade protectionism, Li looked forward to Germany playing an active role in promoting the resolution of the on-going trade friction, and maintaining the overall situation of China-EU economic and trade cooperation.

In reply, Merkel confirmed that Germany did indeed advocate cooperation to resolve prob-lems, so as to maintain an expansion of trade and mutual commercial benefits. She promised to do everything she could to avoid the imposi-tion of stringent duties, with both sides seek-ing common ground to resolve the disputes as quickly as possible.

EU, China Hold Meeting On Trade Disputes Following the meeting in Berlin between Chinese Premier Li Keqiang and German Chancellor An-gela Merkel, during which both countries professed their intention to resolve all trade confl icts by ne-gotiation, rather than the imposition of substantial duties, European Trade Commissioner Karel De Gucht met Chinese Vice-Minister of Commerce Zhong Shan in Brussels.

It was disclosed, earlier in May, that the European Commission (EC) is considering launching its own anti-dumping duty (AD) and anti-subsidy counter-vailing duty (CVD) investigations of imports into the European Union (EU) of mobile telecommu-nications equipment from China, totaling around EUR1bn (USD1.29bn) per year.

In addition, in what has become a more pressing problem due to provisional determinations be-ing expected early next month, the EC is ready-ing substantial ADs and, subsequently, CVDs against Chinese exporters of solar panels and solar cells into the EU. In 2011, China exported solar panels and their key components worth around EUR21bn to the EU.

At the meeting in Brussels on May 27, which had already been organized for a China-EU Trade and Investment Policy Dialogue, Zhong reiterated that the EU's impending actions could seriously hurt the Chinese companies and workers involved and seriously sour trade and economic cooperation be-tween the two sides.

He stressed that "such practices of trade protection-ism are not acceptable to China." Given the large value of bilateral trade between China and the EU, he added that "it is only natural to see some trade friction. Th e right focus should be on resolving those frictions appropriately. Taking abrupt and unilateral action does not help problem-solving, but will rather set the parties further apart and ag-gravate the tensions."

If the EU were to impose provisional ADs on Chi-nese solar panels and to initiate an ex offi cio case on Chinese wireless communications network, Zhong confi rmed that "the Chinese government would not sit on the sidelines, but would rather take necessary steps to defend its national interest." Nevertheless, Zhong believed that the meeting in

55

Brussels with De Gucht was "constructive and the exchanges were useful."

However, the EC was less than eff usive, and it seems to have become more likely, rather than less, that provisional ADs will be imposed on Chinese solar exports to the EU.

A statement by the EU Trade Spokesman John Clan-cy after the meeting emphasized that "De Gucht ex-pressed clearly that he was ready to negotiate a solu-tion on the solar panels case," but that it was also indicated that De Gucht intends to "examine the possibility of a negotiated settlement in partnership with the United States should this become necessary."

De Gucht has "made it very clear to the Vice-Min-ister that he was aware of the pressure being exerted by China on a number of EU member states, [but that it] is the EC which has the role of deciding on provisional tariff s." At a hearing with the Europe-an Parliament's trade committee, he is reported to have added that China "can try to put pressure on member states, but they will waste their time trying to do so with me."

Clancy's statement concluded that the EC "will look at any proposal to be made after the imposi-tion of provisional measures, if any. In this respect, the ball is very much in China's court. Th e fi nal decision on possible provisional measures in this case must be taken by June 5, according to the legal process. Th e full investigation continues and will conclude in early December 2013."

Chinese Trade Disputes The Focus Of WTO Meeting Among decisions taken during the meeting of the World Trade Organization's Dispute Settlement Body (DSB) on May 24, 2013, a panel was approved to examine Japanese claims of illegitimate Chinese anti-dumping duties being levied on High Perfor-mance Stainless Steel Seamless Tubes from Japan.

Th e panel will investigate Japanese claims set out in a request for consultations by Japan on December 20, 2013. Th e dumping duties were introduced by way of Notices No 21 and 72, issued by the Chi-nese Ministry of Commerce (MOFCOM) during 2012. Th e European Union, India, Korea, Russia and the United States reserved their third-party rights to participate in the panel's proceedings.

Other matters progressed during the DSB's meet-ing included a confi rmation from China that it will implement the DSB's recommendations and rulings in the dispute "China - Defi nitive Anti-Dumping Duties on X-Ray Security Inspection Equipment from the European Union" in a man-ner that respects its WTO obligations.

In February 2013, a World Trade Organization panel ruled against China in respect of anti-dump-ing duties, of 71.8 percent, on imports of certain security inspection equipment (x-ray scanners) from the European Union. Th e panel in particular found that China's investigation into "dumping," where a product is sold to a foreign market at be-low the market price, was not objective, and fl awed

56

on many levels. Th e panel found that MOFCOM failed to consider all relevant economic factors, in particular, the "magnitude of the margin of dump-ing," when calculating its anti-dumping duties.

Th e Panel requested that China revoke the anti-dumping duties, and permitted the European Union to claim benefi ts under the Anti-Dumping Agreement of equal value to the illegitimate duties levied by Chinese authorities.

Also at the May 24, 2013, meeting, the DSB also deferred the establishment of a panel to examine In-donesia's complaint in the dispute "European Union - Anti-Dumping Measures on Imports of Certain Fatty Alcohols from Indonesia;" deferred the estab-lishment of a panel to examine Panama's complaint in the dispute "Argentina - Measures Relating to Trade in Goods and Services;" and heard an addi-tional statement from Dominica, speaking on behalf of Antigua and Barbuda, in relation to the ongoing dispute between the United States and the Caribbe-an territory on the cross-border supply of gambling and betting services.

Hong Kong To Join International Services Trade Agreement Talks It has been disclosed that Hong Kong will formally participate in negotiations between some World Trade Organization (WTO) members this year on the trade in services agreement, also known as the Plurilateral Services Agreement (PSA).

In July 2012, a group of WTO members agreed to in-tensify discussions on a "high ambition" international

agreement on a wide range of services, to reinforce and strengthen the multilateral services trading system.

Participants have stated that a new PSA should be comprehensive in sectoral scope, including infor-mation and communication technology services, lo-gistics and transport, fi nancial services and services for businesses; contain new and enhanced rules that countries have developed since the WTO General Agreement on Trade in Services entered into force in 1995; increase market access commitments to be as close as possible to countries' current practices; and produce new market liberalization improvements.

Th e agreement will be open to all WTO members who wish to join, but, as of April 2013, the partici-pating economies of the PSA comprise 22 WTO members, namely Australia, Canada, Chile, Chi-nese Taipei, Colombia, Costa Rica, the European Union, Hong Kong, Iceland, Israel, Japan, South Korea, Mexico, New Zealand, Norway, Pakistan, Panama, Paraguay, Peru, Switzerland, Turkey and the United States.

Hong Kong is a service-oriented economy, with the service industry constituting over 93 percent of its gross domestic product. It is therefore expected that eventual participation in the PSA will allow Hong Kong to strengthen trade and economic ties with other economies and provide more business oppor-tunities with many of its major trading partners, as well as some relatively new markets.

Th e other participating economies of the PSA, as a whole, account for around 70 percent of total world

57

trade in services and around 50 percent of Hong Kong's services trade. In 2011, Hong Kong's services exports to the PSA economies reached HKD370bn (USD47.7bn), registering an average annual growth rate of 4.9 percent for the period from 2007 to 2011.

In particular, Hong Kong's exports of fi nancial ser-vices to the PSA participants are very signifi cant, ac-counting for around 80 percent of its total exports in the sector. Th is is followed by business services (including professional, computer, research and de-velopment, real estate and rental/leasing services) and transport services.

To assist the Government in formulating Hong Kong's overall position in the PSA negotiations, a consultation document has been issued by the Trade and Industry Department (TID), and replies are requested by June 18, 2013.

Views are invited on which service sectors and ser-vice measures of the participating economies Hong Kong should particularly focus on in the negotia-tions under the PSA – for example, for relatively new markets whether the provision of a service in a particular sector or a particular mode is being contemplated, or whether there are any existing or foreseeable hurdles to the provision of any services in any of the markets involved.

In addition, the TID would like to know whether there are any service sectors, areas or measures in which Hong Kong should be more cautious in un-dertaking commitments.

Finally, as new or enhanced disciplines will also be negotiated on the basis of proposals by PSA partici-pants for inclusion in the agreement, the TID is in-viting further views on the areas of disciplines that should be focused on, and whether there are exist-ing hurdles faced by Hong Kong service suppliers in the export of services that could be addressed by new and enhanced disciplines for trade in services.

Th ese disciplines, similar to agreed and binding best practices, seek to address regulatory practices that may impair the benefi ts accruing to the par-ticipants in the PSA. In preliminary discussions, participants have, so far, signaled interests in nego-tiating disciplines in a number of areas, including domestic regulation, movement of natural persons, information and communications technology, mar-itime transport, government procurement, profes-sional and education services, export subsidies, and postal and courier.

Caribbean Prepares For WTO Trade Policy Review Territories of the Organization of East Caribbean States (OECS) that have acceded to membership of the World Trade Organization (WTO) are to re-ceive technical support ahead of a six-yearly review by the global trade body assessing their trade and tax policies.

In anticipation of the WTO review in a year's time, the OECS Secretariat's Geneva Techni-cal Mission and the Trade Policy Unit will assist the territories, in recognition of the extensive

58

requirements placed on the states, including ex-tensive data collection on trade policies, trade performance, adherence to standards, health and food safety, competition policy, price control, in-vestment, sectoral policies, as well as tariff and non-tariff measures.

Th e Trade Policy review for OECS Member States is one of the requirements of WTO membership. Th e reviews are intended to assess the compliance of countries with WTO rules and their integra-tion in the multilateral trading system. In partic-ular, the fi nalized report will provide comprehen-sive details of changes to the territories' trading and tax regimes on international trade since the last review in 2007.

Program Offi cer at the OECS Secretariat, Alicia Stephen, explained: "We assist the member states by helping them to gather all this information as well as mobilizing resources and accessing technical assistance so they can provide the information and participate in the drafting of the fi nal report which is the review of their trade policy."

"Th e good thing about the review is that it is not the basis for any sort of action to be taken against member states if they do not comply. What the review does for our member states is that it gives them an assessment of where they are in terms of their ability to implement the commitments that are set out when they signed on the WTO and it also gives them a global view of their Trade Performance not just in terms of fi gures but in

terms of the reforms they have undertaken since their last review. Th e review also looks at emerg-ing issues such as competition policy and trade facilitation which are not yet within the ambit of the WTO but is there to signal to the member states in a certain way what their state of pre-paredness is to engage in those other issues," Ste-phen concluded.

China Studying Possibility Of Joining TPP Ministry of Commerce spokesman Shen Danyang, at a foreign trade press briefi ng, has indicated that China would carefully analyze the pros and cons and the possibility of joining the Trans-Pacifi c Part-nership (TPP) in the future.

Shen was replying to recent remarks made by the United States Under Secretary of Commerce for International Trade, Francisco Sánchez, who, while discussing Japan's impending entry into the on-going TPP negotiations, said that his country would welcome China's participation in the talks if it could give an undertaking to implement, for example, the same trade liberalization measures un-der consideration by its other members.

Th e US has always professed that the TPP agree-ment should serve as a platform for regional trade integration in the Asia-Pacifi c. Earlier this year, Acting US Trade Representative Demetrios Maran-tis had lauded the TPP's eff orts to eliminate tariff s and other non-tariff barriers, as well as rules on in-tellectual property, labor and the environment, but

59

had stressed that it is not directly aimed against the interests of China, despite the signifi cant trade dis-putes between the two countries.

Th e 17th round of TPP negotiations was held in Lima, Peru, and ended on May 24, and it was re-ported that its negotiators from the participating countries – Australia, Brunei Darussalam, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Sin-gapore, Vietnam and the US – had made progress across the agreement, including comprehensive tar-iff -reduction packages.

In his reply, Shen disclosed that China had always attached importance to the role of the TPP, and had tracked the progress of its negotiation. Th e

Ministry of Commerce was also constantly listen-ing to the views of the various Chinese industries that could be aff ected by it.

He stressed that China believes that the trade treaty discussions should be "open, inclusive and transpar-ent," especially in their treatment of the diversity of Asian countries at diff erent levels of development.

He confi rmed that China would, subject to "the principles of equality and mutual benefi t," analyze the advantages and disadvantages and the possi-bility of joining the new trade treaty. In the mean-while, he hoped that the TPP's present members would continue to share information and data with China on the progress of their talks.

60

ISSUE 30 | JUNE 6, 2013NEWS ROUND-UP: COUNTRY FOCUS – ITALY

Italian Small Businesses Fearful Of VAT Rate Hike CGIA of Mestre, the Italian association of sole trad-ers and small businesses, has warned again of the ef-fect of the further value-added tax (VAT) rate hike, expected next month, on family fi nances, domestic consumption and small businesses in Italy.

An increase in the country's current 21 percent VAT rate to 22 percent on July 1 this year still remains from the program, agreed by former Italian Premier Mario Monti with the European Union, of balanc-ing Italy's fi scal defi cit by the end of 2013. While the present Government has expressed the inten-tion of avoiding the rate rise, it is not yet certain that it will fi nd the additional revenue or reduced spending to be able to do so.

A VAT rate rise is expected to have the eff ect of further reducing domestic consumption in an Ital-ian economy that is already in recession. CGIA had already calculated that the eff ective reduction in Italian family incomes will be substantial – equiva-lent to EUR2.1bn (USD2.7bn) for the remainder of 2013 and EUR4.2bn in 2014.

CIGA has now pointed out that when the most re-cent 1 percent VAT rate increase was made in 2011, VAT revenue, between mid-September 2011 and December 2012, actually decreased by EUR3.5bn. While, it stated, the depressed Italian economy had obviously infl uenced the revenue outcome, the

increase in the rate had certainly contributed to a fall in consumption, and therefore also tax collected.

Giuseppe Bortolussi, CIGA's Secretary said that "that result should serve as a warning. From the be-ginning of the economic crisis to the end of 2012, Italy's gross domestic product has decreased by 7 percent and household spending by 5 percent – in absolute terms, an average decrease in spending of around EUR3,700 per family. If we do not forego the VAT increase expected in a month, we run the risk of penalizing further the fi nancial position of families, and that of small businesses and the self-employed who exist almost exclusively because of domestic consumption."

Italian VAT is 40 years old this year, and Bortolussi added that, if the rate rise is allowed to happen, its anniversary will be marked by Italian consumers suff ering the highest rate, at 22 percent, within the principal countries of the euro area.

Italy Exits From EU Excessive Defi cit Procedure

While Italian Premier Enrico Letta has expressed satisfaction at the closure of the European Union's (EU) excessive-defi cit procedure against Italy, the European Commission (EC) has warned that fi s-cal consolidation should continue and has made recommendations on future tax measures that run contrary to the Government's current proposals.

61

Th e EC noted that the Italian Government had been requested to reduce the country's fi scal defi cit from the 5.5 percent of gross domestic product (GDP) seen in 2009 to the 3 percent required under EU regulations by last year. In fact, the fi scal defi cit was exactly on target in 2012, and is forecast by the EC to reduce again marginally to 2.9 percent this year and to 2.5 percent in 2014.

Th e EC has also looked at the measures announced by the new Government on May 17 and, in partic-ular, at the Government's suspension of the interim payment of IMU, the local property tax, on fi rst residences that was due on June 16.

It has decided, given that the present Government has confi rmed that it will maintain the previous Government's budgetary constraints, that the IMU payment will be due on September 16 if overall property tax reform is not agreed by the Govern-ment by end-August, and that the eff ect of that re-form is expected to be revenue-neutral, Italy's im-proved fi scal position is likely to last.

However, while Italian Premier Enrico Letta paid tribute to the policies adopted by previous Govern-ments, particularly that led by Mario Monti, for the EC's decision and said that all of Italy should be proud of its achievement, he will have also heard the

comments of EC President José Manuel Barroso, who pointed to the country's very high public debt level as a reason to continue fi scal consolidation, and the Monetary and Financial Aff airs Commis-sioner Olli Rehn, who remarked that the current plan to repay tax refunds and credits to businesses would take away much of the Government's room for maneuver.

While the Government is aware that the closure of the EU procedure for excessive defi cit will only have an eff ect on Italy's budget in 2014, it wants to avoid a 1 percent increase in the normal rate value added tax due in July this year, and is also being pressurized by Silvio Berlusconi's center-right Peo-ple of Freedom party, which is a member of Letta's broad governing coalition, to scrap the IMU prop-erty tax on fi rst residences entirely, and even return the tax levied in 2012.

On the other hand, the EC's country specifi c rec-ommendations, made at the same time as the exces-sive defi cit review, are contrary to both of the current Government concerns. Th e EC strongly suggests that a shifting of the tax burden towards, and not away from, consumption and property will be essen-tial, in order to reduce the very high fi scal burden on employers and employees in a revenue-neutral way and to foster economic growth and competitiveness.

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ISSUE 30 | JUNE 6, 2013NEWS ROUND-UP: REAL ESTATE AND PROPERTY TAXES

Ireland's Revenue Chair Offers Property Tax Update "Th e outcome of the voluntary phase of Local Property Tax (LPT) has been extremely success-ful," the Chairman of Ireland's Revenue Commis-sioners has said.

Announcing the initial administrative details of Ireland's controversial new tax, Josephine Feehily calculated that over EUR100m in revenue has been generated so far.

Th e LPT will enter into force from July 1. It will be charged at 0.18 percent of the market value of prop-erties worth up to EUR1m (USD1.3m), and at 0.25 percent on any excess value over EUR1m. Property values are organized into a number of bands – from EUR0 to EUR100,000 and then in EUR50,000 bands. Th e tax liability is calculated by applying 0.18 percent to the mid-point of the relevant band.

Th e initial valuation of the property on May 1, 2013 will be the value of the property for LPT pur-poses up to and including 2016. Th e 0.18 percent rate is fi xed for the lifetime of the current Govern-ment, but a "local decision factor," allowing local authorities to vary the rate by up to 15 percent, will apply from 2015.

Th e levy will be administered by the Revenue Com-missioners, but is self-assessed. Householders are required to decide on the value of their property,

fi le a return, choose a payment option and send the payment to the Revenue.

Th e Commissioners' LPT Register was compiled from several databases, while LPT Returns, person-alized letters and LPT Guides were sent to just over 1.69m residential properties. According to Feeh-ily, LPT Returns have now been fi led in respect of 1,517,902 properties. Including properties where local authorities or social housing groups are liable, and where special payment provisions are to be en-forced, there have been nearly 1.68m cases of volun-tary compliance.

Approximately 22 percent fi led a paper return, while 73 percent did so online, and a further 5 percent by telephone or through the local tax offi ce network.

Feehily explained that: "Th e next steps in this proj-ect include activating the various payment options chosen, including by sending fi les to employers and the relevant Government Departments to be-gin LPT deductions at source. We are now moving quickly into compliance mode and have already be-gun to identify the non-engagers for follow up ac-tion. We owe no less to all the compliant taxpayers who have voluntarily fi led their returns."

French Property Tax Rules Under Fire

Allegedly "discriminatory" tax rules on new resi-dential property have resulted in France's referral

63

by the European Commission to the European Court of Justice.

According to the Commission, French provisions are incompatible with the free movement of capi-tal, which it says is a fundamental principle of the European Union's (EU) Single Market.

Under French tax law, accelerated depreciation can be applied to new residential property in the coun-try that is intended to be let for a minimum of nine years. By contrast, there is no comparable provision for a French taxpayer investing in a residential to-let property in another EU member state.

Th e Commission claims that, in practice, this means that taxpayers investing the same amount in immov-able goods abroad would face a higher tax liability.

Th e Commission formally requested in February, 2011 that action be taken to ensure France's com-pliance with EU law. No legislative amendments have been made to date, and the referral to the Court of Justice represents the last step in the Com-mission's infringement procedure.

Italy To Renew Home Tax Credits Before their expiry at the end of this month, the Italian Government has confi rmed its plans to re-new and expand temporarily the tax credits for individuals who improve the energy-effi ciency of their homes, as well as for those who make prop-erty refurbishments.

Under a law decree that is still to be issued, the ex-isting income tax credit for documented expenses on improvements to homes to reduce their energy use – the so-called "ecobonus" – will increase from 55 percent to 65 percent for the period from July 1 to December 31, 2013 (or until June 30, 2014, for works covering an entire building). Th e tax de-duction will be available to be taken in ten equal annual installments.

In addition, the 50 percent tax credit available for expenses of up to EUR96,000 (USD125,000) re-lating to a building's structural improvement has also been extended from end-June until Decem-ber 31, 2013, while an additional EUR10,000 limit is to be made available for the purchase of furniture (such as kitchen equipment) linked to such refurbishment. The deduction will also cover the restructuring costs relating to the adoption of anti-seismic measures in those areas subject to earthquakes.

Th e Government has, however, warned that this could be the last renewal for selective tax measures aimed at facilitating the structural improvement of existing buildings, as well as for an increase to their energy performance, and that this renewal is de-signed to encourage those who have not yet taken advantage of the credits to do so as soon as possible.

It is expected that, when the decree is published, the EUR200m annual fi nancing for the renewal and increase to the tax deductions will be found from a "rationalization" of value added tax (VAT)

64

rates – such that, in 2014, the 4 percent rate on the sale of certain editorial products (but not books) will be abolished and they will be taxed at the nor-mal 21 percent rate, while the 4 percent VAT rate on food and drinks sold in automated machines will increase to 10 percent.

Scots Ponder Amendments To Property Sales Tax

Scotland's Finance Minister John Swinney has ex-pressed opposition to proposed amendments to the planned Land and Buildings Transaction Tax (LBTT) which would link the rate at which the tax is set to energy effi ciency.

Th e proposals were put forward by Malcolm Ch-isholm MSP during a meeting of the Scottish Parliament's Finance Committee. Chisholm ar-gued that a property's Energy Effi ciency Certifi -cate (EEC), which is required when a property is sold, would make variations in the tax rate easy to calculate, with perhaps an extra 0.5 percent added to properties below the median EEC rat-ing, and a discount of 0.5 percent for properties above it. In this way, he explained, there would be "winners and losers," and tax neutrality would be maintained. Chisholm also suggested a rebate for purchasers who improve the EEC rating of their new home within 12 months.

He described the proposed amendments as "a use-ful contribution" to meeting emissions targets, al-though they were not a "panacea," and could be

combined with other approaches, such as incen-tives relating to council tax.

In response, Swinney argued that the amend-ments would create complexity and add uncer-tainty. He pointed out that EEC ratings change over time, and that the tax would have no ef-fect on properties rated at zero for LBTT, which make up 70 percent of the housing market and the majority of the sales that take place each year. He added that owners of apartments would lose out, as it can be diffi cult to get all the owners of a building to agree to improvements, and that the tax did not create an incentive, as the seller would make the improvements but the buyer would get the advantage.

Another member of the committee, John Ma-son, described the tax as "regressive," arguing that while properties zero-rated for LBTT would receive no help, larger properties would gain a subsidy. Further, the amount of the discount in proportion to the whole transaction would not be an incentive, and the measure would do noth-ing for properties that do not change hands. As LBTT is to be the fi rst tax brought in by the Scottish Parliament, it would be better to keep it simple, he suggested.

Chisholm rejected the claim that the tax was re-gressive – he suggested that the discount for larger homes could be subject to a cap, but it was larg-er homes where energy effi ciency improvements were most urgent. Further, if larger homes paid

65

more, zero-rated properties could be brought into the system. He also said that he did not believe that there would be no incentive for sellers, as im-proved energy effi ciency and the discount would give the property a "market premium." He added

that tenements tended to have better energy ef-fi ciency ratings.

Th e committee failed to agree on the amendments, with most voting against them.

66

ISSUE 30 | JUNE 6, 2013NEWS ROUND-UP: FTT

Center For Policy Studies Raises Concerns Over FTT European fi nancial transaction tax (FTT) proposals were "introduced in a remarkably un-transparent way," while their extraterritoriality "may well be illegal," a new report from the Center for Policy Studies is to claim.

In "Th e Tobin Tax rears its ugly head, again," to be published tomorrow, author and tax expert John Chown criticizes the European Commission's plans for a 0.01 percent tax on derivatives and a 0.1 per-cent rate on other fi nancial instruments.

Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia are progressing with an FTT along the lines of "en-hanced cooperation." Th is procedure, which en-ables those states wishing to work more closely to-gether to do so, was authorized by the European Council of Economic and Financial Aff airs (Eco-fi n) at the start of the year.

According to Chown, the manner in which the propos-als were introduced was "surely an abuse of process." He points to the Treaty of Lisbon, which he believes is clear that tax legislation can only be introduced with the unanimous consent of all Member States.

Summarizing Chown's points in a foreword to the re-port, ex-UK Chancellor Nigel Lawson raises his own concerns about the potential impact the FTT will

have on the UK's fi nancial services sector. Lawson writes that as the Commission has intimated that all fi nancial institutions will be subject to the levy where transactions are carried out with a counterparty with headquarters in the EU11, "much of the tax collect-ed by the UK tax authorities from economic activity here might well not accrue to the UK."

Th e UK will therefore suff er from a loss of tax rev-enue as a result of the direct and indirect costs of FTT on profi ts and earnings. Lawson believes that "this extraterritoriality may well be illegal: it is clear-ly unenforceable."

Lawson welcomes the UK Government's decision to challenge the FTT in the European Court of Jus-tice, but warns that this is "not nearly enough." It is possible that the FTT may be introduced before the case is even heard. Th is would lead to major un-certainty and signifi cant costs for fi nancial services companies based in the UK.

Th e FTT is, Lawson claims, "designed both to pun-ish the bankers and to raise money for the EU bud-get," and will "drive fi nancial business away from the EU (including the UK) to more hospitable ju-risdictions elsewhere."

FTT Scale-Back On The Cards? Offi cial sources have suggested that the so-called EU11 group of European nations is considering a

67

climb-down over controversial proposals for a fi -nancial transactions tax (FTT).

Th e European Commission's plans for a 0.01 per-cent tax on derivatives and a 0.1 percent rate on other fi nancial instruments are intended to enter into force from January, 2014. At the start of this year, the European Council of Economic and Fi-nancial Aff airs (Ecofi n) authorized Belgium, Ger-many, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia, and Slovakia to progress with an FTT along the lines of the "enhanced cooperation" procedure, which enables those states wishing to work more closely together to do so.

According to Reuters, which claims to have spoken to Brussels offi cials linked with the project, the levy on trading bonds and shares could fall from the originally outlined 0.1 percent to just 0.01 percent. Th e result would be a drop in the revenue gener-ated from EUR35bn to just EUR3.5bn.

Th e timetable for implementation also looks set to change. It is apparently likely that only shares will be hit by the tax from next year, while bonds will come under the regime from 2015, and derivatives at an unspecifi ed later date.

As one offi cial put it, "Th e whole thing will have to be changed quite a lot … It is not going to survive in its current form."

Sandy Bhogal, Head of Tax at law fi rm Mayer Brown International, believes it should come as no surprise that the EU has had to "scale back" its

proposals. Th ey have come under fi re from sources as far and wide as the outgoing head of the Bank of England, Mervyn King, the International Capi-tal Markets Association, and the Global Financial Markets Association. Common themes of appre-hension include the likely extraterritorial impact, the increased costs for businesses and governments, and the potential adverse eff ects for the global economy. Earlier this week, European Central bank executive board member Benoît Cœuré told the Fi-nancial Times of his desire to "ensure that the tax has no negative impact on fi nancial stability."

As Bhogal explains, "Th e original proposals raised lots of questions and concerns about the impact of the FTT on the cost of sovereign and corporate debt, liquidity in the EU and beyond and the potential re-location and displacement eff ect in the fi nancial mar-kets. In its proposed form, the FTT could also be viewed as being inconsistent with regulatory changes like EMIR and the general direction of travel of the EU, particularly at a time when there is a need to en-courage EU economic growth and competitiveness."

A number of issues related to enforcement and the practical problems associated with collecting FTT revenue, also remain unsolved, Bhogal added. With this in mind, "the scaled back plans and step-by-step approach may be more sensible."

A spokeswoman for EU Tax Commissioner Algir-das Šemeta commented: "Depending on the speed of progress from here, it is still feasible that the common FTT could be implemented in 2014, al-though January 2014 is looking less likely."

68

ISSUE 30 | JUNE 6, 2013NEWS ROUND-UP: ENVIRONMENTAL TAXES

European Commission Recommends Car Tax For Estonia Estonia has again dismissed a recommendation from the European Commission that the country introduce a car tax and/or higher excise duties on motor fuels, as an environment incentive to im-prove energy effi ciency.

Instead, according the Finance Ministry, the gov-ernment intends to remain focused on existing measures, such as an electric car program. When the EC recommended a vehicle tax last year, Fi-nance Minister Jürgen Ligi told the media that the government did not want to put extra burdens on car owners, and that to do so would be "re-gionally painful."

Th e EC's recommendation was published in a document responding to Estonia's 2013 stability program for the period 2012-17 and the country's 2013 national reform program. It forms one of fi ve country specifi c recommendations (CSRs) in rela-tion to the EC's Europe 2020 strategy for growth and jobs.

Th e EC notes that Estonia has made some progress in meeting CSRs for 2012, in particular by limiting the budget defi cit to 0.3 percent of GDP, but that some reforms eff orts "appear insuffi cient." As well as introducing the tax, the EC recommends imple-menting the structural budget balance rule in the Treaty on Stability, Coordination and Governance,

complemented by more binding expenditure tar-gets; better-targeted labor market policies; making education and training more relevant to the labor market; and local government reform to ensure that the whole population has access to services such as child care, family support services, healthcare, edu-cation, and transport.

Brussels Challenges British Yacht Fuel Tax Breaks

Th e European Commission has formally request-ed that the United Kingdom amend its legislation to ensure that owners of private pleasure boats, such as luxury yachts, can no longer buy lower taxed fuel intended for fi shing boats, known in the UK as "red diesel."

Under European Union rules on fi scal marking for fuels, fuel benefi ting from a reduced tax rate has to be marked by colored dye. In the United King-dom, red diesel – so-called as it is marked with red dye – attracts a duty rate up to 40 percent lower and may be used only in the farming, fi shing and forestry industries.

EU rules stipulate however that while fi shing vessels may benefi t from fuel subject to a lower tax rate, private boats must use fuel subject to the standard rate. Th e UK was allowed to off er the concession to pleasure boating until 2006 when a transitional period ended.

69

In an eff ort to retain the concession, the UK de-veloped a regime whereby pleasure boat owners could continue to use "red diesel" provided they acknowledge that its use is only permitted within UK waters, i.e. not in the rest of the EU.

However, the European Commission has pointed out that UK law does not require fuel distributors to have two separate fuel tanks, i.e. one marked for red diesel and one for fuel subject to the standard tax rate. As a consequence, private leisure boat own-ers often do not have access to fuel subject to full duty, placing these vessels at risk of heavy penalties if they travel to another member state's waters.

Th e Commission has now formally requested that the United Kingdom should change the regime to ensure that the use of red diesel is restricted to fi sh-ing vessels only. Th e UK has been given two months to comply with the request or the matter may be forwarded to the European Court of Justice.

Swiss Federal Council Rejects Energy Tax Initiative

Th e Swiss Federal Council has rejected the popular initiative calling for value-added tax (VAT) in the Confederation to be replaced by an energy tax.

Submitted by the Green Liberal Party (GLP), the initiative advocates that a tax be imposed on non-renewable energy in the Confederation, including petrol, gas, and oil, and recommends at the same time that VAT be abolished. Although the Federal

Council supports the main thrust of the initiative, namely to introduce fi scal incentives to achieve the country's climate and energy policy objectives, it nevertheless fundamentally rejects certain key as-pects of the text.

Th e GLP makes clear in its initiative that the amount of the proposed energy tax should be set in such a way as to yield the same revenue level as currently fl ows from VAT. Th e Federal Council argues, how-ever, that such a high rate of tax could simply not be justifi ed by the pursuit of these environmental goals.

Th e Federal Council emphasizes that it would not be effi cient to abolish VAT, given that this tax con-stitutes the main source of fi scal income for the Confederation, and in view of the fact that it plays a key role in the fi nancing of the country's social security system. At international level, VAT is con-sidered to be a highly effi cient levy, whose impact on the economy is considerably less than from di-rect taxes, such as income or profi t tax and social insurance contributions, the Federal Council adds.

Furthermore, the Federal Council warns that re-placing VAT with an energy tax would be disadvan-tageous for businesses in Switzerland. Th e Federal Council points out that companies are barely af-fected by VAT, as they are generally able to pass the tax on to consumers and as exports are exempt from VAT, to guarantee international competitiveness. In contrast, an energy tax would aff ect exports, and would also adversely aff ect low-income households in Switzerland, the Federal Council stresses.

70

Finally, the Federal Council vehemently rejects the idea that the initiative could be implemented swift-ly, within a few years, underscoring the importance of allowing businesses and individuals suffi cient time to adapt to the measures.

On May 25, 2011, the Federal Council decided to progressively phase-out the use of nuclear power. As part of its Energy 2050 Strategy, the Federal Coun-cil plans as a fi rst step to introduce a number of fi scal incentives to encourage individuals to use re-newable energy sources. From 2021, as part of the

second phase, the Federal Council plans to replace this incentive system with a steering mechanism, in the form of a tax on energy.

Th e Swiss Federal Department of Finance, the Fed-eral Department of the Environment, Transport, Energy and Communications, and other depart-ments, have been tasked with drawing up proposals to facilitate the transition between the two systems and to put forward proposals for the incentive sys-tem. Th ese proposals are to be presented to the Fed-eral Council by autumn 2013.

71

ISSUE 30 | JUNE 6, 2013NEWS ROUND-UP: SMEs

Spain's Fiscal Package Fosters 'Entrepreneurial Culture' Th e Spanish Government has unveiled details of its Entrepreneur Support Act, providing for a raft of fi scal measures designed to facilitate the creation of new companies in Spain, and to support the coun-try's self-employed and small- and medium-sized enterprises (SMEs).

In the area of fi scal support, the new legislation pro-vides that the self-employed and SMEs that are not subject to the modular tax system and with turnover of less than EUR2m (USD2.6m) will not have to pay value-added tax (VAT) on invoices until they are actually settled. Th e measure is to apply from January 1, 2014, and is expected to benefi t almost 1.3 million self-employed individuals and over 1 million SMEs in Spain.

Th e draft law provides for the introduction of a fi scal incentive for corporations electing to rein-vest part of their corporate profi ts in the business. Consequently, companies with a turnover of below EUR10m will be able to deduct from tax up to 10 percent of profi ts obtained in the tax year in which they are reinvested in economic activity. Th is initia-tive is predicted to benefi t 200,000 self-employed taxpayers and 185,00 SMEs.

Th e Government also aims to promote the con-cept of "business angels," namely individuals

that invest in a company or in a business project of a third party. Th e decision to contribute capi-tal and/or business knowledge to a new company will enable individuals to deduct 20 percent of their State Personal Income Tax quota. In ad-dition, all profi ts obtained from the activity are tax-exempt if reinvested in other newly incorpo-rated companies.

To support funding for entrepreneurs, interna-tionalization covered bonds have been created. Th ese are assets secured by loans earmarked for the internationalization of companies or for exports.

Other key non-fi scal measures contained in the leg-islation include plans to create the statute of "lim-ited liability entrepreneur," intended to ensure that the self-employed no longer have unlimited liabil-ity for their business debts. Furthermore, their pri-mary residence will be exempt from liability, pro-vided that the value of the property is not in excess of EUR300,000.

Finally, the legislation creates the concept of the limited liability capital growth company, which allows companies to be set up with share capital of less than EUR3,000. Under the provisions, the company is required to contribute 20 percent of its corporate profi ts until such time as the capital required by law is fully paid.

72

Singapore Plugs Benefi ts For SMEs Of e-Filed Simplifi ed Tax Form Th e Inland Revenue Authority of Singapore (IRAS) has encouraged small and medium-sized companies (SMEs) to use the simplifi ed tax return, Form C-S, to e-fi le their income with eff ect from the 2013 as-sessment year, and enjoy further benefi ts.

All companies normally have to fi le an estimate of their chargeable income within three months af-ter the end of their accounting period on Form C. However, with the simplifi ed and shortened 3-page Form C-S, which was fi rst available for the 2012 as-sessment year, there is no requirement to submit fi -nancial accounts, tax computation and supporting schedules with the tax return. Th e documents must be prepared, but only sent to IRAS if requested.

Form C-S is available for a company if a business is incorporated in Singapore, has an annual turnover of less than SGD1m (USD795,000), has only in-come taxed at 17 percent and does not claim any carryback of capital allowances/losses, group relief, investment allowance, research and development tax allowance, or foreign tax credit.

Th e initiative was expected to benefi t about 67,000, or 42 percent, of all companies in Sin-gapore in 2012. Th ey are now also being encour-aged to e-fi le their simplifi ed forms this year and obtain further advantages.

If SMEs e-fi le a Form C-S they will receive an exten-sion of their fi ling due date to December 15, 2013,

instead of November 15. Th ey will also be able to use the iHelp facility to fi ll in the form, minimize completion and computation errors with in-built formulae that auto-fi ll relevant fi elds, and have an estimate of tax payable auto-computed.

IRS Facilitates Extension Of US Empowerment Zones

Th e United States Internal Revenue Service (IRS) has issued a simplifi ed procedure for a state or local government to amend its nomination of an empow-erment zone (EZ), and thereby facilitate its extension to a new termination date of December 31, 2013.

Since 1993, the US tax code has allowed a state or local government to nominate an area or areas in its jurisdiction for designation as an EZ. Th e govern-ments have generally provided in their nomination that the designation would remain in eff ect until December 31, 2009.

Th e enactment of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, and then the American Taxpayer Relief Act of 2012, has extended those EZ designations, fi rstly to December 31, 2011, and then to Decem-ber 31, 2013.

Th e IRS's new procedure provides simply that any nomination for an EZ that was in eff ect on Decem-ber 31, 2009, is deemed to be amended to provide for a new termination date of December 31, 2013, unless the state or local government sends written

73

notifi cation to the IRS by July 29, 2013. Th e writ-ten notifi cation must affi rmatively decline exten-sion of the EZ nomination.

EZs are highly distressed urban and rural commu-nities who may be eligible for a combination of tax credits for businesses, grants, low-cost loans and other benefi ts. Above all, an employment tax credit provides businesses with an incentive to hire indi-viduals who both live and work in an EZ. For tax

years that include December 31, 2012, the credit is 20 percent of the employer's qualifi ed wages (up to USD15,000 per employee).

In addition, the EZ benefi ts available to busi-nesses can include increased Section 179 tax de-ductions (of up to USD35,000 of the cost of eli-gible equipment purchases), and the 60 percent exclusion of tax on capital gains upon the sale of certain assets.

74

ISSUE 30 | JUNE 6, 2013TAX TREATY ROUND-UP

ARMENIA - ARGENTINA

Forwarded Th e Government of Armenia on May 29, 2013, ap-proved the signing of a TIEA with Argentina.

CANADA - VARIOUS

Forwarded

A bill to implement DTAs and DTA Protocols signed between Canada and Namibia, Serbia, Poland, Hong Kong, Luxembourg and Switzerland was tabled be-fore Canada's Parliament on May 23, 2013.

CZECH REPUBLIC - KOREA, SOUTH

Negotiations

According to preliminary media reports, the Czech Republic and South Korea are to hold four-day nego-tiations towards a DTA, concluding on June 13, 2013.

ETHIOPIA - PORTUGAL

Signature

Ethiopia and Portugal signed a DTA on May 25, 2013, the Ethiopian Government has confi rmed.

KAZAKHSTAN - LUXEMBOURG

Ratifi ed

Th e Kazakhstan authorities on May 21, 2013 rat-ifi ed the DTA signed with Luxembourg on June 26, 2008.

KOREA, SOUTH - VARIOUS

Forwarded

Th e Government of South Korea has forwarded two Tax Information Exchange Agreements signed with Vanuatu, and the Bahamas, to the country's National Assembly for its approval.

LUXEMBOURG - VARIOUS

Forwarded

Luxembourg's Chamber of Deputies has approved a law to ratify the DTAs signed with Kazakhstan and Sri Lanka, and to approve the ratifi cation of its DTA with Laos.

NETHERLANDS - CHINA

Signature

Th e Netherlands and China signed a new DTA on May 31, 2013.

75

PERU - UNITED ARAB EMIRATES

Negotiations

Peru and the United Arab Emirates have com-menced negotiations towards a DTA, it was an-nounced on May 27, 2013.

POLAND - ANDORRA

Forwarded

Poland's Senate on May 24, 2013 approved a law ratifying the TIEA signed with Andorra on June 15, 2012.

QATAR - VARIOUS

Signature

According to preliminary media reports, Qatar signed four Tax Information Exchange Agreements with Denmark, Greenland, Sweden and the Faroe Islands on May 29, 2013.

SINGAPORE - VARIOUS

Ratifi ed

Two protocols to amend Singapore's DTAs with Malta and South Korea were ratifi ed on May 29, 2013, and will enter into force on June 28, 2013.

TAJIKISTAN - FINLAND

Forwarded

Tajikistan's lower house of Parliament on May 22, 2013, approved a Protocol to amend the nation's DTA with Finland.

TAJIKISTAN - SAUDI ARABIA

Negotiations

According to preliminary media reports on May 22, 2013, representatives from Tajikistan and Saudi Arabia have endorsed a draft DTA, and agreed to formally sign the agreement in the near future.

UNITED STATES - BRAZIL

Into Force

According to preliminary media reports, the TIEA between the United States and Brazil entered into force on May 16, 2013.

76

ISSUE 30 | JUNE 6, 2013CONFERENCE CALENDAR

A guide to the next few weeks of international tax gab-fests (we're just jealous - stuck in the offi ce).

THE AMERICAS

FINANCIAL ACCOUNTING & REPORTING UPDATE

Accounting Conferences and Seminars LLC

Venue: Boston Hyatt Cambridge, 575 Memo-rial Drive, Overlooking Boston, Cambridge, MA 02139-4896

Key speakers: Tom Adams (KPMG), Chad Arcinue (Ernst & Young), John Benedetti (PwC), Renee Bomchill (Partner, Deloitte & Touche) Luke Cadi-gan (Assistant Director of Enforcement, US Secu-rities and Exchange Commission's Boston offi ce), among numerous others

6/12/2013 - 6/13/2013

http://www.allconferences.com/c/financial-ac-counting-reporting-update-conference-cambridge-2013-june-12

6TH ANNUAL US LATAM TAX PLANNING STRATEGIES

American Bar Association

Venue: Mandarin Oriental Hotel, 500 Brickell Key Drive, Miami, FL 33131 (Downtown), USA

Co-chairs: Manuel Benites, (Perez Alati, Grondo-na, Benites, Arnsten & Martinez de Hoz), William Dixon (Citigroup Global Markets)

6/13/2013 - 6/14/2013

http : / /meet ings .abanet .org/meet ing/ tax/MIAMI13/

2013 FINANCE AND ACCOUNTING FOR FINANCIAL INSTITUTIONS

Grant Th ornton

Venue: Seaport Hotel & World Trade Center, 1 Seaport Lane, Boston, MA 02210, USA

Chairpersons: Richard L. Rowe (CPA FMS Chair-man), William Kline (CPA FMS Vice Chairman)

6/16/2013 - 6/18/2013

http://www.grantthornton.com/portal/site/gtcom/menuitem.0442c01c1536cc779eb1f810633841ca/?vgnextoid=08f446479771d310VgnVCM1000003a8314acRCRD&vgnextchannel=6d2ecbbdad9c4010VgnVCM100000368314acRCRD

77

US INTERNATIONAL TAXATION

Bloomberg BNA

Venue: London, UK, TBA

Chair: Jim Hemelt (Adjunct professor, Georgetown University School of Business)

6/17/2013 - 6/17/2013

http://www.bna.com/us-international-taxation-e17179869445/

INDEPENDENCE IN A CAPTIVE MARKET

Darla Moore School of Business

Venue: Darla Moore School of Business, Charles-ton, 151 Market Street, Charleston SC 29401, USA

Key speakers: Michael D. Tarling (Assistant Trea-surer, Risk Management and Insurance Th e Boeing Company), Ian Wrigglesworth (Managing Director, Guy Carpenter & co), Nicolas Depardey (Director of Insurance and Risk Management, Michelin), Dave Adams (Maiden Re), Anthony Valente (Maiden Re), Raymond G. Farmer (Director of Insurance, State of South Carolina), Bill Hodson (Executive Vice Presi-dent, USA Risk Group Intermediaries) Gary Bowers (Partner, Johnson Lambert LLP)

6/20/2013 - 6/20/2013

http://mooreschool.sc.edu/executiveeducation/workshopsconferences/independenceinacaptive-marketreinsuranceseminar.aspx

REVENUE RECOGNITION ACCOUNTING UPDATE

AAC

Venue: Chicago Marriott Oak Brook, 1401 W. 22nd St., Oak Brook, IL 60523, USA

Key speakers: Tom Adams (KPMG), Chad Arcinue (Ernst & Young), John Benedetti (PwC), Renee Bomchill (Deloitte & Touche), Luke Cadigan (US Securities and Exchange Commission), Andreas Chrysostomou (Duff & Phelps), Wissam Dandan (Deloitte & Touche), Steve DiPietro (Deloitte & Touche), Jonathan Feig (Ernst & Young), Hank Galligan (BDO), among various others

6/20/2013 - 6/21/2013

http://www.allconferences.com/c/revenue-recogni-tion-accounting-update-oak-brook-2013-june-20

CAPTIVE INSURANCE LANDSCAPE

DealFlow

Venue: Th e Westin Jersey City Newport, 479 Wash-ington Blvd, Jersey City, NJ 07310, USA

6/24/2013 - 6/24/2013

78

Key speakers: John Capasso (Alvarez & Marsal In-surance Advisory Services), Gregg Sgambati (Th e New Jersey Captive Association), Harry Baumgart-ner (Bressler, Amery & Ross), Donald McCully (Roundstone Management)

http://www.dealflowevents.com/conferences/Captive_2013/

INTERNATIONAL TAX ASPECTS OF FOREIGN CURRENCY TRANSACTIONS

TolleyConferences

Venue: Bloomberg BNA, 1801 S. Bell St., Arling-ton, VA 22202

Key speakers: John Bates (Ivins Phillips & Barker), Ramon Camacho (McGladrey), Michael Corrnett (KPMG), Kevin Cunningham (KPMG) Adam S. Halpern (Fenwick & West), Lucy Murphy (PwC), Susan Ryba (Baker & McKenzie), William R. Skinner (Fenwick & West), Adam Tritabough (McGladrey)

6/24/2013 - 6/25/2013

http://www.bna.com/uploadedFiles/Content/Events_and_Training/Live_Conferences/Tax_and_Accounting/Conferences_-_Seminars/JuneDC.pdf

TAXATION OF INTELLECTUAL PROPERTY

BNA Bloomberg

Venue: Bloomberg LP, 731 Lexington Ave, New York, NY 10022, USA

Key speakers: TBA

6/24/2013 - 6/25/2013

http://www.bna.com/taxation-intellectual-property-newyork/

BASICS OF INTERNATIONAL TAXATION 2013

Practising Law Institute

Venue: PLI New York Center, 810 Seventh Avenue at 53rd Street (21st fl oor), New York, New York 10019

Chair: Linda Carlisle (White & Case LLP)

7/23/2013 - 7/24/2013

http://www.pl i .edu/Content/Seminar/Ba-sics_of_International_Taxation_2013/_/N-4kZ1z12p29?ID=158672

79

THE HEDGE FUND ACCOUNTING AND COMPLIANCE FORUM

Financial Research Associates

Venue: Th e Princeton Club, NYC, 15 West 43rd Street, New York, NY 10036, USA

Chair: Karl Jordan (Principal, Joseph Decosimo and Co)

7/25/2013 - 7/26/2013

http://www.frallc.com/conference.aspx?ccode=B876

VCIA'S 28TH ANNUAL CONFERENCE

Vermont Captive Insurance Association

Venue: Th e UVM Davis Center, Main Street, Bur-lington, Vermont, USA

Key speakers: Frank Nutter (President, Reinsurance Association of America), among others

8/13/2013 - 8/15/2013

http://www.vcia.com/annualconference/

ASIA PACIFIC

POTENTIAL USES OF OFFSHORE TRUSTS

STEP Malaysia

Venue: Sasana Kijang, 2 Jalan Dato' Onn, Kuala Lumpur, Malaysia

Chairpersons: Saiful Bahari Baharom (Chief Ex-ecutive Offi cer, Labuan IBFC), Raymond Wong (Chairman, Society of Trust and Estate Practitio-ners Malaysia)

6/19/2013 - 6/19/2013

http://www.step.org/events.aspx?eventId=a0XC000000AzGNKMA3

NATIONAL TAX CONFERENCE 2013 MALAYSIA

Chartered Tax Institute of Malaysia

Venue: Kuala Lumpur Convention Centre, Kuala Lumpur, Selangor, Malaysia

Chair: SM Th anneermalai (President, Chartered Tax Institute of Malaysia)

6/24/2013 - 6/25/2013

http://www.ibfd.org/IBFD-Tax-Portal/Events/National-Tax-Conference-2013-Malaysia

FINANCIAL REPORTING AND COMPLIANCE

Achromic Point

Venue: Th e Oberoi, 37-39, Mahatma Gandhi Road, Bangalore 560001, India

80

Key speakers: TBA

6/27/2013 - 6/27/2013

http://www.achromicpoint.com/upcomingevent.php?id=118

INDONESIA: INVESTMENT AND TAXATION

IBFD

Venue: Novotel Singapore Clarke Quay, 177A Riv-er Valley Road, Singapore 179031

Key Speakers: Andreas Adoe (IBFD), Pieter de Rid-der (Loyens & Loeff )

7/3/2013 - 7/4/2013

http://www.ibfd.org/Courses/Indonesia-Investment-and-Taxation

9TH INTERNATIONAL SPECIAL ECONOMIC ZONES

ASSOCHAM

Venue: Hotel Le Meridien, Windsor Place, New Delhi 110001, India

Key speakers: TBA

7/26/2013 - 7/26/2013

http://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=2&ved=0CDgQFjAB&url=http%3A%2F%2Fwww.asso-cham.org%2Fdownloads%2F%3Ffilename%3DSEZ-2013-Brochure.pdf&ei=bZWQUay0MsnZPKyfgBA&usg=AFQjCNH5Y6ZCrGW4VmIcATZ0LNQ0BJmxyw&sig2=T9cczo_kqKIJ_Bs0zb7DFw&bvm=bv.46340616,d.ZWU

GETTING WITHHOLDING TAX & TREATIES ESSENTIALS RIGHT

CCH

Venue: Concorde Hotel, Kuala Lumpur, Wilayah Persekutuan, Malaysia

Chair: Kularaj K. Kulathungam (former Assistant Director of Inland Revenue Board, Philippines)

8/5/2013 - 8/5/2013

http://www.cch.com.my/my/ExecutiveEvents/Ex-ecutiveEventDetails.aspx?PageTitle=FasTax-Series-Getting-Withholding-Tax---Treaties-Essentials-Right&ID=1673&EETopicID=3&Source=EETopic

MIDDLE EAST AND AFRICA

USING DUBAI AS AN OFFSHORE FINANCIAL CENTRE

STEP Johannesburg

Venue: Discovery's Head Offi ce, Th e Forum Room, 16 Fredman Drive, Sandton, South Africa

81

Key speaker: Warren Luyt (Trident Trust Company (UAE) Limited)

6/12/2013 - 6/12/2013

http://www.step.org/events.aspx?eventId=a0XC000000B2AHtMAN

WESTERN EUROPE

IBFD'S 75TH ANNIVERSARY CONGRESS

IBFD

Venue: Beurs van Berlage (former Amsterdam Stock Exchange), Damrak 243, 1012 ZJ Amster-dam, Netherlands

Key speakers: Jan Kees de Jager (Former Nether-lands Minister of Finance), Belema Obuoforibo (Director of the IBFD Knowledge Centre), Profes-sor Sweder van Wijnbergen (Former chief econo-mist for the World Bank)

6/12/2013 - 6/12/2013

http://www.ibfd.org/IBFD-Tax-Portal/Events/IBFD-s-75th-Anniversary-Congress-Tax-avoid-ance-international-arena-legitimate

WHAT THE REVENUE KNOW

STEP London Central

Venue: BDO LLP London, 55 Baker Street, Lon-don, W1U 7EU, UK

Key speaker: Senior Offi cial at Off shore Coordina-tion Unit HMRC, TBA

6/13/2013 - 6/13/2013

http://www.step.org/docs/events/STEP%20Lon-don%20Central_6.pdf

ICAEW TAX FACULTY CONFERENCE 2013

TolleyConferences

Venue: ICAEW, Moorgate Place, London EC2R 6EA, UK

Chair: Rebecca Benneyworth (Chairman Elect, ICAEW Tax Faculty)

6/14/2013 - 6/14/2013

http://www.conferencesandtraining.com/en/Browse-Events/tax-conferences/Icaew-Tax-Facul-ty-Conference-2013-London/?displayControl=overview

PRIVATE CLIENT TAX: RUSSIA

TolleyConferences

Venue: Th e Montague on Th e Gardens, 15 Mon-tague Street, Bloomsbury, London WC1B 5BJ, England

Chair: Elizabeth Henson (Partner, PwC)

82

6/14/2013 - 6/14/2013

ht tp: / /www.conferencesandtra ining.com/private-client-russia

INVESTHK

Invest Hong Kong and the China-Britain Business Council

Venue: La Mare Wine Estate, La Route de Hogue Mauger, St Mary JE3 3BA

Key speakers: Simon Galpin (Director General, InvestHK), Lise Bertelsen (Executive Director, CBBC) and Alan Maclean (Jersey Minister for Economic Development)

6/17/2013 - 6/17/2013

http://www.jerseyfi nance.je/events/investh

TAX RISK MANAGEMENT

IBFD

Venue: IBFD head offi ce, H.J.E. Wenckebachweg 210, 1096 AS Amsterdam, Th e Netherlands

Key speakers: Stijn Euverman (PwC), Koen De Grave (PwC), Sandra Hogeveen (Tax Director Eu-rope, Ahold), Robbert Hoyng (Partner, Deloitte), Sander Kloosterhof(Deloitte), Bas de Mik (PwC), John Piepers (PwC)

6/17/2013 - 6/18/2013

ht tp : / /www. ib fd .o rg /Cour s e s /Tax -R i sk -Management

FATCA FOR INVESTMENT MANAGERS

Infoline

Venue: London, UK, TBA

Key speakers: Steven A Musher (Associate Chief Counsel International, Internal Revenue Service), Malcolm White (Policy and Technical Adviser, Fi-nancial Services, HMRC)

6/18/2013 - 6/18/2013

h t t p : / / w w w . i n f o l i n e . o r g . u k / e v e n t /FATCA-for-Funds-Conference

TAXATION OF HOLDING COMPANIES IN EUROPE

IBFD

Venue: IBFD head offi ce, H.J.E. Wenckebachweg 210, 1096 AS Amsterdam, Th e Netherlands

Key Speakers: Regina van der Kuip (Partner, PwC Amsterdam), Kannan Raman (Ernst and Young, London), Valéry Civilio (Head, Tax Consulting, PwC Amsterdam)

6/19/2013 - 6/21/2013

83

http://www.ibfd.org/Courses/Taxation-Holding-Companies-Europe

OFFSHORE TAX AND TRUST FORUM ISLE OF MAN

TolleyConferences

Venue: Isle of Man, TBA

Key speakers: Giles Clarke (Author, Off shore Tax Planning), John Barnett (Partner, Burges Salmon), Gregory Jones (Tax Director, KPMG), George Sharpe (Tax Director, PwC), John Rimmer (Partner, Appleby), Guy Wiltcher (Partner, Greystone LLC)

6/20/2013 - 6/20/2013

ht tp: / /www.conferencesandtra ining.com/en /Browse -Even t s / t a x - con f e rence s /Of f -s h o r e - Ta x - A n d - Tr u s t - Fo r u m - I s l e - O f -Man/?displayControl=overview

PRACTICAL APPLICATION OF TAX TREATIES

IBFD

Venue: IBFD head offi ce, H.J.E. Wenckebachweg 210, 1096 AS Amsterdam, Th e Netherlands

Key speakers: Roberto Bernales (IBFD), Bruno da Silva (Loyens & Loeff ), Jan de Goede (Senior Prin-cipal, Tax Knowledge Management, IBFD), Ridha Hamzaoui (IBFD), Bart Kosters (IBFD)

6/24/2013 - 6/27/2013

ht tp : / /www. ib fd .o rg /Cour s e s /Pr a c t i c a l -Application-Tax-Treaties

TAX PLANNING FOR CORPORATE RESTRUCTURING

TolleyConferences

Venue: London, UK, TBA

Chairperson: Martin Moore QC (Barrister, Erskine Chambers)

6/26/2013 - 6/26/2013

http://www.conferencesandtraining.com/en/Browse-Events/tax-conferences/Tax-Planning-Cor-porate-Restructuring--Insolvency/

FUNDS TAXATION IRELAND 2013

Infoline

Venue: Dublin IFSC, Dublin, Ireland, TBA

Key speakers: Kate Levey (Financial Policy Divi-sion, Irish Department of Finance), Jim Byrne (Corporate Business and International Division, Revenue Commissioners)

6/26/2013 - 6/26/2013

http://www.infoline.org.uk/event/Fund-Tax-Ireland-Conference

84

THE CYPRUS BAIL-OUT AND FOREIGN CLIENTS

Academy Finance

Venue: Hotel Beau Rivage, Quai du Mont-Blanc 13, 1201 Geneva, Switzerland

Key speaker: Charilaos Stavrakis (former Vice-Pres-ident of the Eurogroup)

6/26/2013 - 6/26/2013

http://www.academyfinance.ch/v2/next_events/AF466.pdf

ICAEW TAX FACULTY CONFERENCE 2013

ICAEW

Venue: Renaissance City Centre Hotel, Manches-ter, M2 2EQ, UK

Key speakers: Anita Monteith (ICAEW), Paula Tallon (Managing Partner, Gabelle LLP), Rebecca Benneyworth (Expert Tax Writer), Peter Rayney (Independent Tax Consultant), Martin Wilson (Director, Th e Capital Allowances Partnership)

6/27/2013 - 6/27/2013

http://www.conferencesandtraining.com/en/Browse-Events/tax-conferences/Icaew-Tax-Faculi-ty-Conference-2013-Manchester/?displayControl=overview

IFRS FOUNDATION CONFERENCE: AMSTERDAM

IFRS

Venue: NH Grand Hotel Krasnapolsky, Dam 9, Amsterdam 1012 JS, Th e Netherlands

Chair: Hans Hoogervorst (Chairman, IASB)

6/27/2013 - 6/28/2013

http://www.iiribcfi nance.com/download/send-fi le/iddownload/9029

INNOVATIVE FINANCIAL PRODUCTS

IBFD

Venue: IBFD head offi ce, H.J.E. Wenckebachweg 210, 1096 AS Amsterdam, Th e Netherlands

Key Speakers: Severine Baranger (Loyens & Loeff ), Floris Andriessen (KPMG), Peter Drijkoningen (BNP Paribas), Shee Boon Law (Manager, Tax Research Services, IBFD), Roger Smith (independent trader), Eelco van der Stok (Freshfi elds Bruckhaus Deringer), Bob van Kasteren (Freshfi elds Bruckhaus Deringer)

7/1/2013 - 7/1/2013

http://www.ibfd.org/Courses/Innovat ive-Financial-Products

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ISSUES FOR IMPLEMENTING UCITS IV, V AND VI IN LUXEMBOURG

IBC

Venue: Sofi tel Luxembourg Europe, 4 rue du Fort Niedergruenewald, Quartier européen Nord, Plateau de Kirchberg, Luxembourg City 2015, Luxembourg

Chair: Christopher Stuart Sinclair (Director, Deloitte)

7/2/2013 - 7/3/2013

http://www.iiribcfi nance.com/download/send-fi le/iddownload/9523

FINANCIAL SERVICES AND FATCA

TolleyConferences

Venue: London, UK, TBA

Chairperson: Malcolm Powell (Head of Tax, In-vestec Asset Management)

7/3/2013 - 7/3/2013

http://www.conferencesandtraining.com/en/Browse-Events/tax-conferences/FStax2013/

TAXATION OF HIGH NET WORTH INDIVIDUALS

IBFD

Venue: IBFD head offi ce, H.J.E. Wenckebachweg 210, 1096 AS Amsterdam, Th e Netherlands

Chairperson: Bart Kosters (Senior Principal Re-search Associate, IBFD Tax Services Department)

7/8/2013 - 7/9/2013

http://www.ibfd.org/Courses/Taxation-High-Net-Worth-Individuals

CREATING A BEST IN CLASS TAX FUNCTION

IBC

Venue: Th e Hatton, 51-53 Hatton Garden London EC1N 8HN

Key speakers: Ruth Felsing (Global Head of VAT/GST-Taxation, American Express Services), Yian-nis Poulopoulos (General Manager, Global Indi-rect Taxes, Rio Tinto), Darren Mellor-Clark (Part-ner Head of Indirect Tax Advisory, Pinsent Masons LLP), Michael Dong (Director of Tax, Sega of America), Philip Geddes (Head of Tax, Europe, Sun Life Financial of Canada), among others

7/9/2013 - 7/9/2013

http://www.iiribcfi nance.com/event/Operational-Tax-Conference

HMRC AND HIGH NET WORTH INDIVIDUALS

IBC

Venue: Th e Hatton, 51-53 Hatton Garden, Clerkenwell, London EC1N 8HN

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Chair: Jonathan Levy (Partner, Reynolds Porter Chamberlain)

7/9/2013 - 7/9/2013

http://www.iiribcfinance.com/appdata/down-loads/HMRC-and-HNWIs/Final_HMRC_FKW52582_Brochure.pdf

TAXATION ISSUES IN THE BOARDROOM

TolleyConferences

Venue: London, UK, TBA

Key speakers: Vanessa Houlder (Financial Times Journalist), Neil Sharmen (Head of Group Tax at Brit Insurance), among others

7/9/2013 - 7/9/2013

http://www.conferencesandtraining.com/en/Browse-Events/tax-conferences/Taxation-Issues-In-Th e-Boardroom-Jul-13/

OFFSHORE TAX PLANNING BUDGET AND FINANCE BILL SPECIAL

IBC

Venue: Central London, UK, TBA

Key speakers: Patrick C Soares (Gray's Inn Tax Cham-bers), Giles Clarke (Author, Off shore Tax Planning), Michael Flesch (Gray's Inn Tax Chambers), Emma Chamberlain (Pump Court Tax Chambers)

7/11/2013 - 7/11/2013

http://www.iiribcfi nance.com/download/send-fi le/iddownload/9058

TRANSFER PRICING AND INTRA-GROUP FINANCE

IBFD

Venue: IBFD head offi ce, H.J.E. Wenckebachweg 210, 1096 AS Amsterdam, Th e Netherlands

Key speakers: Michel van der Breggen (PwC), Dan-ny Oosterhoff (Ernst and Young), Antonio Russo (Baker & McKenzie)

7/11/2013 - 7/12/2013

h t t p : / / w w w . i b f d . o r g / C o u r s e s /Transfer-Pricing-and-Intra-Group-Finance

TRANSFER PRICING AND INTANGIBLES

IBFD

Venue: IBFD head offi ce, H.J.E. Wenckebachweg 210, 1096 AS Amsterdam, Th e Netherlands

Key speakers: Anuschka Bakker (IBFD), Giammar-co Cottani (European Tax College, Leuven), Mon-ica Erasmus-Koen (PwC), Danny Houben (Global Transfer Pricing Manager with Shell International BV), among numerous others

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9/2/2013 - 9/2/2013

http://www.ibfd.org/Courses/Transfer-Pricing-and-Intangibles#tab_program

CORPORATE TAX REFORM

TolleyConferences

Venue: Halsbury House. 35 Chancery Lane, Lon-don WC2A 1EL, UK

Key speakers: TBA

9/12/2013 - 9/12/2013

http://www.conferencesandtraining.com/en/Browse-Events/tax-conferences/Corporate-Tax-Reform/

PRACTICAL APPLICATION OF THE STATUTORY RESIDENCE TEST

IBC

Venue: Millennium Gloucester Hotel, 4-18 Har-rington Gardens, Harrington Gardens, London

Key speakers: Emma Chamberlain (Pump Court Tax Chambers), Patrick Way (Gray's Inn Tax Cham-bers), Peter Vaines (Squire Sanders), Keith Gordon (Atlas Chambers), among numerous others

9/12/2013 - 9/12/2013

http://www.iiribcfi nance.com/download/send-fi le/iddownload/9871

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ISSUE 30 | JUNE 6, 2013IN THE COURTS

A listing of key international tax cases in the last 30 days

THE AMERICAS

Canada

Th e Supreme Court of Canada heard an appeal from a company, DMI, that had sold two forest tenures, with both sales agreements imparting upon the purchaser the obligation to reforest the areas harvested. Th e Revenue however assessed the company for the tax on the costs of reforestation under national law. Th e company brought the issue to the Tax Court, which stated that the reforestation obligation had been a part of the transaction and was included in the price paid by the purchaser. However, the Court ruled that the company was obliged to include in its proceeds the estimated cost of reforestation after 12 months follow-ing the sale, plus 20 percent of the remaining amount.

Th e Federal Court of Appeal disagreed with this point and decided that the company should have been responsible for the entire estimated cost of re-forestation, given that the amount was the value included in the sales agreement. Likewise, because a value was not agreed upon in the second sale, the Court of Appeal recommended that the matter be considered again by the Tax Court.

Th e Supreme Court was to consider whether the reforestation obligation was included in the price paid for the forest tenure, and if any meaning was to be given to the specifi c value included in the fi rst sales agreement. It pointed out that the com-pany had to obtain permission from the provincial

government to sell its forest tenures, and that to be granted permission the purchaser had to assume the reforestation liability. Th erefore the obligation was tied to the sale of the tenures as a future ex-pense rather than being separately included in the agreement, and the Supreme Court rejected the argument "that the purchasers' assumption of the reforestation obligations had to be added to DMI's proceeds of disposition for income tax purposes."

Th e judgment was delivered on May 23, 2013.

http://scc.lexum.org/decisia-scc-csc/scc-csc/scc-csc/en/item/13071/index.do

Supreme Court: Daishowa-Marubeni International Ltd. v. Th e Queen (SCC 29)

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United States

Th e United States Tax Court heard a motion for summary judgment from a taxpayer who was a resi-dent of the US Virgin Islands and held an interest in a domestic partnership. Th e taxpayer fi led his tax returns with the Virgin Islands Revenue; however the IRS argued years later that the partnership was not valid, that the taxpayer had failed to properly identify all sources of income, and that the returns should have been fi led with the IRS.

Th e IRS made adjustments to negate the tax bene-fi ts the taxpayer received from the Virgin Islands on account of the partnership; the taxpayer objected and brought the motion before the Tax Court.

Th e Court acknowledged that the success of the taxpayer's motion depended on whether he prop-erly fi led the required returns with the Virgin Is-lands Revenue, and that it was required under law to assume that income from the partnership was not suitably recorded in the submitted returns.

Th e IRS attempted to rely on case law and its own notices to argue that the taxpayer was considered a US resident living abroad and was required to fi le a tax return with them, but the Court disagreed en-tirely with their interpretation of the law. It stated that the taxpayer had no reason to consider himself living abroad, that the necessary returns fi led with the Virgin Islands Revenue mirrored the returns re-quired by the IRS, and that their notices were pub-lished after the taxpayer fi led his returns and did not have retroactive eff ect.

Because the taxpayer correctly fi led his tax returns with the Virgin Islands Revenue, despite the mat-ter of income from the partnership being left unre-solved, the Court granted his motion for a summa-ry judgment against the tax adjustments, by reason that the notice was issued by the IRS more than three years after the properly fi led tax returns and was therefore invalid.

Th e judgment was delivered on May 22, 2013.

http://www.ustaxcourt.gov/InOpHistoric/Apple-tonDivJacobs.TC.WPD.pdf

Tax Court: Arthur I. Appleton Jr. et al. v. Commis-sioner (140 T.C. No. 14)

ASIA PACIFIC

India

Th e Delhi High Court heard an appeal by the Rev-enue against the tax treatment of services provided by an India-based subsidiary of Digital Microwave (Mauritius) Ltd, which is itself a wholly-owned subsidiary of a US-based manufacturing company, Digital Microwave Corporation USA.

Th e subsidiary was paid to supply warranty coverage on equipment sold by the US company to Indian customers, but it also independently provided in-stallation and maintenance services for said equip-ment. Th e subsidiary calculated the arm's length price of its international transactions with the US company, but the Transfer Pricing Offi cer insisted

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on including the profi t from the domestic installa-tion and maintenance services in the computation to "determine the profi t level indicator."

Th e Revenue argued that the domestic services were "intricately connected" with the international transactions; however the Tribunal drew the conclu-sion that there was no connection, given that only three of the company's 40 customers had taken ad-vantage of the subsidiary's installation services, and that the Revenue had not recognised the domestic services as part of the arm's length price.

Th e High Court agreed with the Tribunal and con-fi rmed that the subsidiary's domestic services were not international transactions due to the lack of in-volvement of the US company. As a result, there was no discernable connection between these ser-vices and the services the subsidiary provided as in-ternational transactions with the US company, and so the Revenue's appeal was dismissed.

Th e judgment was delivered on May 6, 2013.

h t t p : / / l o b i s . n i c . i n / d h c / B D A / j u d g e -ment/09-05-2013/BDA06052013ITA3532011.pdf

High Court: CIT v. Stratex Networks (India) Pvt Ltd (ITA 353/2011)

India Th e Special Bench of the Mumbai Income Tax Appellate Tribunal was consulted during proceed-ings concerning a UK law fi rm, Cliff ord Chance,

partners of which had occasionally provided servic-es relating to projects in India.

Th e fi rm had no branches in India, but when Clif-ford Chance representatives were in the country for longer than 90 days, the Assessing Offi cer consid-ered that this constituted a permanent establish-ment (PE) there.

Th e assessee claimed that Cliff ord Chance employ-ees should be subject to benefi cial provisions con-tained in the UK-India DTA, and that therefore only services actually rendered in India should be subject to Indian tax; the Revenue claimed that (due to the PE), all receipts relating to the Indian projects should be subject to income tax, and that further-more, the DTA provisions (which related to the tax treatment of fees paid to individuals) did not apply.

Th e company appealed against the assessment, and the Commissioner of Income Tax (Appeals) (CIT(A)) agreed that there was no creation of a per-manent establishment, and that the company was not liable for tax in the years when their employees spent less than 90 days in India. It based its deci-sions on an earlier Tribunal judgment.

Th e Revenue then appealed to the Tribunal on the basis that the previous Tribunal decision which ben-efi ted the company involved a law that had since been amended with retroactive eff ect, which the Revenue insisted made all services received in In-dia taxable regardless of where they were rendered. Th e company argued that the amendment did not

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aff ect the specifi c law that exempted their services from tax liability. Th e Tribunal asked the Special Bench whether the amendment to the law aff ected the company's tax liability in India, and for an in-terpretation of the tax treaty regarding the taxabil-ity of services rendered outside of India.

Th e Special Bench considered whether the compa-ny's income in India took the form of fees for tech-nical services and whether it was therefore aff ected by the change in the law, as claimed by the Reve-nue. It concluded that the matter of the income be-ing fees for technical services was not addressed by either the earlier Tribunal decision or the CIT(A), and did not factor into the tax offi cer's assessment, and therefore there was no reason to consider the company's income as such.

Th e Special Bench then undertook an interpreta-tion of the UK-India tax treaty with regard to the UN Model Convention brought up during the Tri-bunal proceedings. It found that the language of the treaty was suffi ciently diff erent from the UN model so as to distance it from the concept of all business activities being taxed in the receiving country despite not being tied to the permanent establishment there. Th e conclusion was that only income attributable to the business carried out by the permanent establishment can be taxed in the source country.

Th e answers provided by the Special Bench pro-duced a strong case for the company's assertion that only income resulting from employees providing

services in India was taxable. However, the Special Bench was not asked to consider whether the em-ployees stayed for longer than 90 days or whether a permanent establishment was created; these ques-tions were left for the Tribunal to consider, with regard to the Special Bench's deliberations.

Th e judgment was delivered on May 13, 2013.

http://www.itatonline.in:8080/itat/upload/785077208211983070913$5%5E1REFNOMicrosoft_Word_-_Cliff ord_Chance_-_Spl._bench__1.5_Space_.pdf

Income Tax Appellate Tribunal (Special Bench): Cliff ord Chance v. Asst. DIT (ITA 3021/MUM-2005)

WESTERN EUROPE

Belgium

Th e European Court of Justice was asked for a pre-liminary ruling during proceedings at the Mons Court of Appeal where a group of companies who had submitted incomplete tax invoices to the Bel-gium tax authority were appealing a decision that prevented the suppliers from receiving a VAT re-fund and the receivers from deducting VAT. Th e companies had subsequently provided additional information which the tax authority had refused for being too late and deemed to be lacking value.

Th e Court of Appeal approached the ECJ for an in-terpretation of EU law regarding whether a Mem-ber State can legally refuse to allow a taxpayer to

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deduct VAT as a result of incomplete tax invoices, despite the fact that they later provided relevant in-formation, and subsequently whether the Member State must refund the VAT to the suppliers.

Th e ECJ stated that the Belgian national law goes beyond what the EU law provides for the requirements of a tax invoice in order to ben-efi t from the right to deduct VAT, but that it is for the national courts to decide whether the law makes obtaining the benefi t too diffi cult. It then concluded that although the taxpayer is permit-ted to correct any invoice errors before the tax authority makes its decision regarding such er-rors, in the present case the information was pro-vided only after the authority had decided to re-fuse to allow the deduction of VAT, and EU law does not prevent national law from denying the deduction in such an event.

Th e ECJ then considered the matter of whether the VAT should be refunded with regard to the prin-ciple of fi scal neutrality, and found that:

"Th e principle of fi scal neutrality does not preclude the tax authority from refusing to refund the value added tax paid by a company providing services, in the case where the exercise of the right to deduct the value added tax levied on those services has been denied to the companies receiving those services by reason of the irregularities confi rmed in the invoic-es issued by that service-providing company."

Th e judgment was delivered on May 8, 2013.

http://curia.europa.eu/juris/document/document.jsf?text=&docid=137304&pageIndex=0&doclang=EN&mode=lst&dir=&occ=fi rst&part=1&cid=1867295

European Court of Justice: Petroma Transports SA v. Belgium (C-271/12)

Bulgaria Th e European Court of Justice was asked for a pre-liminary ruling regarding a taxpayer who had been removed from the VAT register while in possession of a number of motor vehicles. Th e tax authorities assessed the amount of VAT due on the vehicles based on their 'open market value'; the taxpayer ar-gued in court that the assessment should take into consideration the depreciation in value of the vehi-cles between when they were purchased and when the company was removed from the VAT register.

Under national law the open market value, which is interpreted as the purchase price of the assets, is required to assess the taxable amount; however the court asked the ECJ whether EU law is applicable to cases where an economic activity ends because of removal from the VAT register, whether national law concerning the open market value of assets is compatible with EU law, and whether it should take depreciation into consideration.

Th e ECJ fi rst stated that the EU VAT Directive does apply when a taxable activity ceases due to the taxpayer being removed from the VAT register, as the law applies to the end of an activity without specifying a necessary reason.

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Th e ECJ then concluded that, with regard to both the EU law and relevant case law, the appropriate value of goods for tax purposes is at the time of ces-sation rather than at the time of purchase. It was also decided that it is for the national court to de-cide whether the national law's use of the phrase 'open market value' incorporates the change in val-ue of assets between their acquisition and the end of the taxable activity under EU law.

Th e judgment was delivered on May 8, 2013.

http://curia.europa.eu/juris/document/document.jsf?text=&docid=137305&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=1890512

European Court of Justice: Marinov v Bulgaria (C-142/12)

Hungary Th e European Court of Justice was asked for a pre-liminary ruling regarding the repayment of VAT to a company which had been denied the right to deduct VAT under legislation that was found to be incompatible with EU law. Th e company had requested state aid for a subsidized project, which was calculated based on the ''eligible expenditure' of the project including VAT, despite the law not allowing for the deduction of VAT pertaining to the amount of the aid.

After a European Court case whereby a nation-al law that only allowed the deduction of VAT

proportionate to the costs not provided for by State aid was found to be incompatible with EU law, the company surmised that it could deduct the entire amount of VAT arising from the proj-ect and sought to re-negotiate the State aid based on the VAT that had been non-deductible until the result of the case.

Th e institution providing the aid refused to re-negotiate, and so the company approached the tax authority with a claim for the repayment of VAT that it had not been allowed to deduct prior to the case. Th e fi rst judgment allowed the repayment of VAT proportionate to the amount of aid received rather than to the full cost of the project; the sec-ond judgment adhered to the case decided in the European Court and insisted that the full amount of VAT relative to the cost of the project be re-paid. Th e tax authority appealed on the basis that a part of the VAT the company sought to recover had been included in the amount of aid it had received, while the company took it upon itself to argue that not being paid the total amount of deductible VAT was against EU law; therefore the court consulted the ECJ.

Th e ECJ considered whether a Member State is al-lowed under EU law to limit the amount of repay-able tax when the taxpayer had received aid pro-vided by the State. It established that a taxpayer has the right to be refunded any tax that had been incorrectly paid in breach of EU law, but that the repayment of tax must not constitute unjust en-richment of the taxpayer due to circumstances

94

where the taxpayer had somehow off set or recov-ered the tax paid, and that national law has the power to limit the repayment claim of a taxpayer in such a situation.

Th e ECJ concluded by pointing out that the tax-payer had received a greater amount of aid due to the inclusion of the non-deductible VAT in the cal-culation than it would have if the VAT had been deductible from the beginning; therefore in order for the taxpayer to be adequately compensated but not unjustly enriched, the repayment amount should be the diff erence between the VAT that the company should have been allowed to deduct and the extra amount of aid it received due to the VAT being non-deductible.

Th e Court stated in conclusion that:

"Th e principle of repayment of taxes levied in a Member State in infringement of the rules of EU law must be interpreted as meaning that it does not preclude that State from refusing to repay part of the value added tax, the deduction of which had been precluded by a national measure contrary to European Union law, on the ground that that part of the tax had been subsided by aid granted to the taxable person and fi nanced by the Euro-pean Union and by that State, provided that the economic burden relating to the refusal to deduct value added tax has been completely neutralised, which is for the national court to determine."

Th e judgment was delivered on May 16, 2013.

http://curia.europa.eu/juris/document/document.jsf?text=&docid=137423&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=2973965

European Court of Justice: Alakor Gabonatermelo és Forgalmazó Kft. v. Hungary (C-191/12)

Netherlands Th e European Court of Justice was asked for a preliminary ruling during proceedings at the Su-preme Court of the Netherlands where the tax au-thority was appealing a Court of Appeal decision that a taxpayer acting as a trader could deduct the VAT imposed on a transfer of shares. Th e Su-preme Court instead considered that the transfer was an economic activity that was exempt from VAT, but was aware that in a past case the ECJ had stated that VAT may be chargeable "where that disposal may be regarded as equivalent to the transfer of a totality of assets or part thereof". Th e Supreme Court therefore addressed the ECJ con-cerning this matter, with regard to the facts of the present case.

Th e ECJ fi rst stated that according to case law a transfer of shares cannot be regarded as a "transfer of a totality of assets" when it is not suffi cient enough to establish an independent economic activity that can be carried out by the transferee. It then con-sidered whether the fact that the total shares of a company were being transferred to a single entity by companies including the taxpayer had any im-pact on the Court's deliberations. Th e decision was

95

that each transaction must be assessed separately, and that the transfer of a full company by a number of shareholders does not qualify as a "transfer of a totality of assets".

Th e ECJ ruled in conclusion that:

"Articles 5(8) and/or 6(5) of Sixth Council Direc-tive 77/388/EEC of 17 May 1977 on the harmo-nization of the laws of the Member States relat-ing to turnover taxes - Common system of value added tax: uniform basis of assessment must be interpreted as meaning that the disposal of 30% of the shares in a company to which the transfer-ror supplies services that are subject to VAT does not amount to the transfer of a totality of assets or services or part thereof within the meaning of those provisions, irrespective of the fact that the other shareholders transfer all the other shares in that company to the same person at practically the same time and that that disposal is closely linked to management activities carried out for that company."

Th e judgment was delivered on May 30, 2013.

http://curia.europa.eu/juris/document/document.jsf?text=&docid=137829&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=65291

European Court of Justice: Netherlands v. X BV (C-651/11)

Romania

Th e European Court of Justice was asked for a pre-liminary ruling during proceedings at the Oradea Court of Appeal where a company which had been denied reimbursement of excise duties that it had paid in Romania argued that the law required the request for reimbursement to be made after the products it had exported had arrived at their desti-nation, due to the information that was necessary for the request to be made. Th e tax authority insist-ed that it could not accept the request according to EU law precisely because the products had already entered another Member State. Th e Court of Ap-peal therefore petitioned the ECJ for an interpreta-tion of the law.

Th e reimbursement of excise duties is allowed un-der EU law for the sake of harmonisation and to prevent double taxation by ensuring that excise du-ties are only levied in one Member State.

Th e ECJ identifi ed two diff erent methods of reimbursement under EU law, and found that Romanian law appears to only incorporate one of them; namely the method that requires the request for reimbursement to be made before the goods are dispatched as part of a suspension agreement, and before excise duties are paid in the destination State.

Th e second method however, does not impose a time for the request to be made; the requirement for reimbursement is that the excise duties have

96

been paid in the destination State. Th e ECJ stated that the national court was responsible for decid-ing in which way EU law had been implemented in national law, and which provisions applied to the present case.

Th e conclusion from the ECJ was that when ex-cise duty has been paid in the destination State, the request for reimbursement from the source State cannot be refused simply because the request was made after the products were dispatched, accord-ing to the second method of reimbursement under EU law. When the duty has not been paid in the

destination State, the request may be refused due to a failure to follow the procedure required by the fi rst method.

Th e judgment was delivered on May 30, 2013.

http://curia.europa.eu/juris/document/document.jsf?text=&docid=137825&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=107934

European Court of Justice: Scandic Distilleries v. Romania (C-663/11)

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ISSUE 30 | JUNE 6, 2013THE ESTER'S COLUMN

Dateline June 6, 2013

For a long time it has seemed that CARICOM, the grouping of Caribbean states including such rela-tively large territories such as Th e Bahamas, Haiti and Jamaica as well as minnows like Montserrat, is nothing but a talking shop without the will or even the technical skills to achieve its stated goal of economic and political integration. But there have been some signs recently that it may be get-ting more serious. Th is week it signed a TIFA with the US , which will presumably act as a stimulus to some sort of local harmonization of standards, laws and taxes. Th en, seven WTO members of sub-grouping the OECS (the Organization of East-ern Caribbean States) which could be said to have made better progress towards at least economic unifi cation, with a shared currency and central bank, are to undergo a trade policy review by the WTO, which will doubtless be thoroughgoing and productive. Th ese are good signs; but more gener-ally, progress towards the CSME (Caribbean Single Market and Economy), which is the name given to CARICOM's intended shared economic space, has been fairly glacial. We will see, but I'm not holding my breath.

A cheer for UK Chancellor George Osborne who says that he will square the country's budgetary circle in 2015 with savings from government de-partments rather than by increasing taxes. I don't know what the Treasury gave visiting IMF offi cials to drink two weeks ago, but it must have been

something quite strong with pixie dust mixed in because just for once the IMF didn't suggest raising taxes, and broadly supported the coalition's stance. I say "the coalition," but minority partner the LibDems are facing electoral wipe-out, damaged perhaps beyond repair by the very fact of joining the coalition, in which they have had to support an economic program that is the exact converse of everything they have ever preached. It's wonder-ful what power does to people's sense of judgment. Th e Tories probably have little to fear from the Lib-Dems in the next election, and Labour is sinking under the weight of another feckless leader. You would have thought they had learned the lessons of Michael Foot and Neil Kinnock, but no – and they have a serious funding crisis to deal with as well. Th e Tories' problem is the burgeoning UKIP (UK Independence Party) which is supported by a plu-rality of the UK population in wanting to leave the EU. If UKIP can manage to shed its unpleasantly racist fringe, a Tory/UKIP government becomes a real possibility, and then there would be a refer-endum on EU membership by 2018, with a fairly predictable result.

I may have to admit that I was wrong in saying that the Spanish Government was all talk and no walk. Its latest package of support for small busi-ness is practical and signifi cant, giving substantial encouragement to people to start and/or invest in businesses. Presumably it has been cleared with Brussels, but if not, it wouldn't be the fi rst time

98

that Spain has gone its own way fi rst and looked for approval afterwards. It's also not quite clear whether the new measures are consistent with the Government's stability program announced at the end of April, which sees a defi cit of 6.3 percent of gross domestic product this year (revised upwards recently from 4.5 percent), 5.5 percent in 2014, 4.1 percent in 2015, and of 2.7 percent in 2016. Th ose numbers are in line with the Commission's defi cit targets for Spain, although only because the EU, bowing to the inevitable, announced this week that Spain (and France) would be given an extra two years to reach their fi scal targets. It's diffi cult to see how even these latest targets can be reached without signifi cant savings; let's hope that Prime Minister Rajoy takes a leaf out of Britain's book. Challenging as it is, the only way of saving Europe is to cut bloated state sectors, and cut them hard.

We can't give the EU Commission any brownie points for abandoning the fi nancial transactions tax in its current form – given the barrage of opposi-tion from politicians, the fi nancial sector in general, several unincluded member states, and even from some of the prospective members of the "variable geometry" eleven, it had no choice. In fact we'll give it a black mark for leaking the information via Reuters rather than announcing it. Too shameful, presumably, after it had staked so much on the tax. Heads would roll, if the EU was a properly trans-parent political space, but it isn't, and there will be a long process of face-saving before the tired old animal is fi nally led to the knacker's yard. In this column we have been strongly against the tax from

the very beginning. Offi cially, the Commission is still pretending that the tax is merely "under discus-sion," but I prefer to believe the leaks!

Australia had a very successful week in its campaign to drive multinational businesses out of the coun-try. Assistant Treasurer David Bradbury said that reforms to increase fi scal transparency form "part of the Government's broader agenda to crack down on multinationals." No, OK, he didn't say that, al-though he just as well might have said it. What he actually said was " . . . . to crack down on multina-tional profi t shifting and tax avoidance." Yawn. Ear-lier in the week he had delivered a stinging diatribe against the habits of multinationals , calling them "massive money shuffl es." He screeches that com-panies obtain "a competitive advantage" – how aw-ful! Isn't that exactly what they're supposed to do? And naturally he complains that "families" are left to foot the bill. Well, Mr. Bradbury, what about the jobs those families live from, and the income taxes and GST etc etc your Government receives cour-tesy of those jobs? He's only 37, by the way, and was a tax lawyer with a major commercial law fi rm for some years before being elected to parliament in 2007. He was twice mayor of Penrith. Impressive.

I may be wrong (often am!) but I am suspicious of the Dutch Government's plan to replace corporate apprenticeship tax breaks with "targeted subsidies," because it seems to take decisions out of the hands of companies and puts power to dish out money in the hands of offi cials. It's not that I would sus-pect Dutch offi cials of venality – I am sure that

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they are impeccably honest and public-spirited; the problem is that the process inevitably becomes less transparent. Th e Government complains that the current scheme has become too expensive, i.e. that it is successful, and wants to allocate money "on

the basis of need." But who is better equipped to decide on the need for apprentices? Th e fi rms that employ them, or the Government?

Th e Jester

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