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Global tax newsletter

Welcome to the seventh edition of theGlobal tax newsletter.

In this edition of the Global tax newsletterwe continue to report on regional taxdevelopments in the EMEA, Asia Pacificand Americas regions, as well as taxdevelopments with respect to transferpricing, treaties and indirect taxes.

In the last few months of 2012, thefinancial world kept its eyes onWashington DC to see how Congress wasgoing to address the fiscal cliff that wasscheduled to occur on 31 December 2012by terminating many of the Bush era taxcuts. This edition provides a brief synopsisof how Congress avoided the fiscal cliffand what may be in store beyond thelast minute 2012 tax legislation.

This newsletter continues coverage ofmany of the other global trends, all ofwhich are expected to continue into 2013.Cross border tax cooperation is expectedamongst the G8, and the tax authorities inthe US, UK, Canada and Australia arealready doing so on a frequent basis.

Global tax newsletter No. 7: February 2013 1

Welcome US featuredarticle

Philippinesfeatured article

EMEA news APAC news Americas news

Transferpricing news

Indirect taxesnews

Treaty news Tax policy Who’s who

Go to page…

2 US featured article

3 Philippines featured article

4 EMEA news

20 APAC news

27 Americas news

34 Transfer pricing news

39 Indirect taxes news

46 Treaty news

50 Tax policy

53 Who’s who

The budgetary pressures felt by mostgovernments have resulted in revenuepressures being placed upon taxadministrators to collect through the auditprocesses and enforcement mechanisms.

Electronic commerce and theservices industry have led to morecomplex types of intangible propertyand income flows, which have led tomore attacks on transfer pricing and thetaxation of permanent establishments.

As the tax gap is seen to widen inmany jurisdictions through sophisticatedtax planning with complex cross borderstructures and transactions, the price ofoperating in a global economy has raisedthe risks in increased tax audits as wellas, in some countries, adverse publicity.The trends noted in this edition areexpected to continue in 2013.

Ian EvansGlobal leader – tax servicesGrant Thornton International Ltd.


US featured article

US Congress approveslast-minute deal to makemost tax cuts permanent

The Grant Thornton US member firmhas prepared a comprehensive analysisfor the year end legislative activity andthe more important provisions havebeen summarised below.

The House and Senate approved alast-minute compromise on 1 January2013 that settles nearly all of theunresolved fiscal cliff tax issues andmakes permanent the 2001 and 2003 taxcuts on income under $400,000 forsingle filers and $450,000 for joint filers.

The president signed the AmericanTaxpayer Relief Act of 2012 (H.R. 8) on2 January 2013, but the bill does notfully resolve the nontax portion of thefiscal cliff standoff. Automatic spendingcuts that would have been triggered by‘sequestration’ are now deferred for justtwo months and are scheduled tobecome effective at the same time as

Treasury is expected to reach itsborrowing limit again. Negotiationsover the growth of the national debtbegan when the new Congress wassworn in on 3 January 2013 and willlikely extend the debate over the role ofadditional revenue.

The major tax provisions in theAmerican Taxpayer Relief Act of 2012will: • make the 2001 and 2003 tax cuts

permanent for income under$400,000 (single) and $450,000 (joint)

• return the top rates to 39.6% forordinary income and 20% for capitalgains and dividends (not includingthe new 3.8% medicare tax)

• reinstate the phase outs for personalexemptions and itemised deductionsat income levels of $250,000 (single)and $300,000 (joint)

• make the $5 million estate and gifttax exemption permanent (indexedfor inflation) but raise the rate from35% to 40%

• permanently index the alternativeminimum tax (AMT) for inflation

• retroactively extend tax provisionslike the research credit

• provide a 50% bonus depreciationfor qualified property placed inservice in 2013.

It is unclear what the deal means forfurther tax legislation in 2013. Manylawmakers had hoped a fiscal cliffagreement would include language toexpedite the tax reform process but thedeal does not include any tax reformlanguage. It may instead relieve some ofthe pressures that could have driven taxreform because it permanently settlesmany of the most pressing tax issues.

Taxes are likely to be part ofnegotiations concerning the nationaldebt over the next two months.Republican leaders indicated during afloor debate that they consider thepermanent tax rules included in thelegislation to be just that – permanent.

On the other hand, President Obamasaid that cutting spending must go hand-in-hand with further reforms to the taxcode and that the deficit must bereduced in a ‘balanced’ way.

The bill generally makes permanentthe estate, gift and generation-skippingtransfer (GST) tax rules for 2011 and2012 but increases the top unified rate to40%. The legislation also retains all thetechnical rule changes made in both the2001 and 2003 tax bills and the 2010 taxagreement. The new rules generallyprovide:• reunification of estate and gift taxes

with a 40% rate and $5 millionexemption adjusted for inflation(reached $5.12 million in 2013)

• identical rates and exemption forGST tax

• portability in estate tax exemptionamounts between spouses.





Indirect taxesnews



Philippines featured article

Transfer pricing in thePhilippines The dramatic increase in

the globalisation of trade has also led toharmful tax practices that have resultedin tremendous losses of tax revenues for governments. The most significantinternational tax issue emerging from globalisation confronting tax administrations worldwide istransfer pricing.

In the Philippines, there is adomestic transfer pricing issue whenincome is shifted in favour of a relatedcompany with special tax privileges. Forexample: Board of Investments (BOI)Incentives and Philippine EconomicZone Authority (PEZA) fiscalincentives; or when expenses of a relatedcompany with special tax privileges areshifted to a related company subject toregular income taxes; or in othercircumstances, when income and/orexpenses are shifted to a related party inorder to minimise tax liabilities.

In accordance with the NationalInternal Revenue Code of 1997, asamended (tax code) these transferpricing regulations were recently putinto law to:• implement the authority of the

Commissioner of Internal Revenue(Commissioner) to review controlledtransactions among associatedenterprises and to allocate ordistribute their income anddeductions in order to determine theappropriate revenues and taxableincome of the associated enterprisesinvolved in controlled transactions

• prescribe guidelines in determiningthe appropriate revenues and taxableincome of the parties in thecontrolled transaction by providingfor the methods of establishing anarm’s length price

• require the maintenance orsafekeeping of the documentsnecessary for the taxpayer to provethat efforts were exerted todetermine the arm’s length price orstandard in measuring transactionsamong associated enterprises.

These regulations apply to: • cross-border transactions between

associated enterprises• domestic transactions between

associated enterprises.

The regulations provide guidelines whenapplying the arm’s length principle forcross-border and domestic transactionsbetween associated enterprises and arelargely based on the arm’s lengthmethodologies as set out under theOrganisation for Economic Co-operation and Development(OECD) transfer pricing guidelines.





Indirect taxesnews



EMEA news

AustriaIn a recent letter ruling,the Austrian Ministry ofFinance (BMF)

commented on the minimum timerequirement for the creation of apermanent establishment (PE).

Example case: Once a year, anAustrian corporation installs wasteprocessing machinery in their Czechpremises of a foreign corporation. Aftera period of four months, the machineryis uninstalled and brought to anotherlocation in a different country. Thisbusiness practice has been carried outover several years. The BMF was todecide whether the Austrian corporationconstituted a Czech PE.

In accordance with the double taxtreaty Austria-Czech Republic, the term‘PE’ means a fixed place of businessthrough which the business of anenterprise is wholly or partly carriedout. There is no minimum time

requirement set out in writing. Thecommentary to the OECD modelconvention states that a PE is normallyassumed to exist if the business has beenmaintained for more than six months.However, if activities have been of arecurrent nature (e.g. have been repeatedover several years), a PE can be deemedto exist even though the individualannual duration has been less than sixmonths. The BMF follows this view. APE may also be deemed to exist in caseof recurring activities at the customer’ssite in the Czech Republic even if thestay in the Czech Republic is below sixmonths. However, the shorter the stayin the foreign jurisdiction, the longer therecurring periods should be in such acase. A one-time repetition would notbe sufficient to create a PE.

BelgiumBelgium is a popularholding companylocation. Recent

developments of interest to theinternational investor include capitalgains taxation (CGT) and the dividendwithholding tax rate.

Since 1991, capital gains realised onthe disposal of qualifying shares havebeen 100% exempt by virtue of theBelgian version of the participationexemption. For the effective taxassessment year of 2014, Belgiancompanies and Belgian branches of non-resident companies will be subject to atax of 0.4% on any capital gainsrecognised or realised on the disposal ofshares that are otherwise tax exemptprovided the taxpayer does not qualifyas a small company.

The basis for the 0.4% CGT is noteligible for reduction by carried-overlosses or any other specific taxdeduction. The CGT regime had alreadybeen amended in 2012 to exclude capitalgains on shares relating to the taxpayer’strading portfolio from the exemption.

The new 0.4% CGT would notaffect most Belgian holding companiesbecause they typically would not exceedthe criteria for a small company,meaning: no more than 50 employees onaverage; annual sales not exceeding €7.3million; and a balance sheet total notexceeding €3.65 million.





Indirect taxesnews



At least two out of the threethresholds must be met to qualify as alarge company unless the companyemploys, on average, 100 or moreemployees, in which case it alwaysqualifies as large. However, theaforementioned criteria must be assessedon a consolidated basis and, in manyinstances, the Belgian holding company– together with its subsidiaries orparticipations (or direct or indirectshareholders, as the case may be) – willexceed the thresholds.

As for dividend withholding taxes, atthe end of 2011, the Belgian withholdingtax system was completely overhauled,creating new rules and exceptions. Withrespect to most types of passive income(except royalties), the 15% rate wasincreased to 21% and the 25% rateremained unchanged. For individualtaxpayers earning more than €20,020 ininterest and dividend income perannum, an additional tax of 4% wascreated.

In December 2011, to simplify thesystem and increase tax revenues, thenew law generally eliminates the 21%rate, replacing it with a 25% rate butkeeping the previously existing 15% ratemore or less in place for royalties and afew specific types of interest anddividends. For example, dividendsdistributed by some real estateinvestment trusts continue to benefitfrom the reduced rate of 15%.Liquidation distributions from Belgiancompanies also will continue to benefitfrom the previously existing 10% rate.

The revised withholding tax ratesapply in the domestic context and areoften modified by Belgium’s doubletaxation network.

BulgariaBulgaria’s Minister ofFinance has suggestedthat the country’s low

flat tax rate will need to be maintainedfor the next ten to fifteen years.Bulgaria’s 10% flat rate tax policy wasintroduced in 2007 and applies to bothpersonal and corporate income.Alongside Cyprus’s 10% rate ofcorporate tax, Bulgaria’s income tax isthe lowest in the EU. The flat tax wasbroadened in October 2012 to includebank deposit income. The new taxrepresents a broadening of the country’s10% flat tax rate, which was introducedin 2007. The move incorporates earningson interest into Bulgaria’s flat tax policy.

CroatiaThe Croatiangovernment is finalisingan Act to improve the

investment climate in Croatia. Thelegislation would provide a number oftax incentives for entities consideringemployment-boosting businessinvestments in specific industries. Someof the key features include:• microenterprises making an

investment of more than €50,000will benefit from an income taxreduction of 50% for a period of upto five years, provided theinvestment creates and sustains threenew jobs

• businesses undertaking investmentsequivalent to €1million will alsobenefit from a halved income tax ratefor a period of up to ten years,provided five new jobs are createdand sustained





Indirect taxesnews



• businesses undertaking investmentworth €1-3million (will benefit froma 75% reduction in their income taxrate, for a period of ten years,provided the investment creates andsustains employment for ten persons

• businesses undertaking investmentsof more than €3million will beentirely exempt from income tax fora period of up to ten years, providedthat fifteen new jobs are created andmaintained.

The law will also provide exemptionsfrom customs duties on capitalequipment and machinery purchases foruse in an eligible investment project; andfinancial support is to be provided tobusinesses creating new jobs in localitieswith unemployment levels above 10%.

Companies availing themselves ofthe incentives will be required to fileannual reports detailing progresstowards investment projects, andreporting employment levels.

CyprusCyprus-Russia taxtreaty Cyprus is a popular

location for Russian commercialenterprises to establish both a localpresence as well as a conduit jurisdictionfor global investments. Additionally,Russian investors invest heavily inCypriot real estate. Two recentdevelopments have proven taxunfavourable to the Russian-Cypriotcommercial connection.

The Russian ministry of finance(MoF) issued guidance which clarifiesthe application of the Cyprus-Russia taxtreaty to remunerations paid by aRussian legal entity to members of itsboard of directors who are Cypriot taxresidents. The MoF held that suchincome qualifies as Russian-sourcedincome regardless of where the directorscarry out their duties or where theremuneration is paid from. It may betaxed in Russia and may also be taxablein Cyprus.

The MoF stated that under article 16 of the Cyprus-Russia tax treaty,directors’ fees and other similarpayments derived by a resident of acontracting state in his capacity as amember of the board of directors of acompany that is a resident of the othercontracting state may be taxed in thatother state. The MoF therefore held thatremunerations paid by a Russianresident legal entity to individuals whoare members of its board of directorsand are Cypriot tax residents for taxtreaty purposes are taxable in Russia.

Immovable property tax regimeCypriot legislators have voted into lawnew austerity measures which include acontroversial updating of the country’simmovable property tax regime.

The immovable property tax hasuntil now been based on property valuesfrom January 1980, but these valuationswill now be multiplied by about 3.5,representing growth in the consumerprice index from 1980 to 2012. Taxationat the new rates will be set at:

Euro amount Tax rate150,001 to 500,000 0.6%500,001 to 1 million 0.8%above 1 million 1%

Further, property owners will betaxed on the total amount of propertyregistered in their names.

The new austerity measures followtalks with the troika of the InternationalMonetary Fund (IMF), the EuropeanCentral Bank (ECB) and the EuropeanCommission. In June, Cyprus becamethe fifth eurozone country to request abailout, when it was forced torecapitalise its banking system.





Indirect taxesnews



Czech RepublicThe taxpayer enteredinto long-term foreigncurrency loans, and

recorded unrealised foreign exchangegains on the conversion of foreigncurrency into Czech crowns. On itsincome tax returns, the taxpayerincluded the amounts of the unrealisedforeign exchange gains in its income taxbase.

Subsequently, the taxpayer filed anappeal against its own tax return, andrequested that the foreign exchangegains be excluded from the tax base. Thetaxpayer asserted that the accountingpolicy (defined by a decree) was not incompliance with the principles under theCzech accounting law and that incomehad not actually been realised, asrequired under the income tax law.

The supreme administrative courtdid not accept the taxpayer’s contentionthat the accounting treatment under thedecree was incorrect. However, thecourt found that actual income does notarise upon a mere exchange-rate changenor with its recognition in the taxpayer’saccounts, but arises when Czechcurrency in relation to a foreigncurrency is accompanied by an actualphysical cash flow requiring fewerCzech crowns. The court did notaddress the method that is to be appliedwith respect to the taxation of foreignexchange gains when they are realised,or with respect to the deductibility ofunrealised foreign exchange losses.

DenmarkNew anti-abuse ruleshave been introduced inorder to respond to the

possibilities of avoiding Danish taxesand/or foreign taxes by using Danishcompanies. The amendments ensurethat: • taxable dividends are not artificially

altered in order to reclassify them astax exempt payments. The ministryof taxation has had the followingexample in mind: a foreign companysells its shares in a Danish subsidiaryto a Danish (holding) company inreturn for a claim on the Danish(holding) company. Hereafter, theDanish subsidiary distributes tax-free dividends to the Danish(holding) company and the Danish(holding) company thenredistributes the dividends to theforeign company as tax-free debtpayments. If a legal person sellsshares, convertible bonds and other

stocks, including warrants to suchstocks in a group company (theacquired company) to another groupcompany (the purchasing company)and the remuneration fully or partlyconsists of other than shares in thepurchasing company, suchremuneration is characterised asdividends for tax purposes

• Danish conduit companies are notused to avoid foreign withholdingtaxes on dividends. Thus, if a Danishcompany directly or indirectlyreceives (tax free) dividends onsubsidiary and group shares andredistributes these (tax free)dividends, withholding taxes arelevied if the Danish company wasnot the beneficial owner of thereceived dividends

• a company is regarded to be residentin Denmark for Danish tax purposesif the company is either registered inDenmark or has its place of effectivemanagement in Denmark.





Indirect taxesnews



FinlandPension plans often havefavourable tax advantagessuch as tax exemption or

reduced rates of taxation. Cross bordertransactions of pension plans concerningeither investment income or benefit pay-out’s can often run into a cross bordertax conflict as there is a lack ofsymmetry in pension legislationbetween jurisdictions.

The European Court of Justice(ECJ) has ruled that a tax on dividendsreceived by non-Finnish pension fundsin Finland is discriminatory. Currently,resident pension funds can avoid payingtax on dividends from investments bytransferring such income into thereserves from which pension pay-outsare made to participants in the fund.This is because the transfer is regarded asan expenditure.

However, non-resident pensionfunds cannot take advantage of thisarrangement, and are subject towithholding tax at source on dividendincome from investments. Finland,supported by Denmark, France, theNetherlands, Sweden and the UK,argued that the differing taxarrangements for resident and non-resident pension plans was justified onthe principle of fiscal territoriality: non-resident funds have only a limited taxliability, since they are taxed only onincome arising in Finland, while residentfunds are assessed for tax on the basis oftheir worldwide income.

The ECJ rejected this argument,noting that Finnish legislation tookaccount of the objective of pensionfunds, which is to accumulate capital tomeet future obligations. Non-residentfunds ‘are in a situation objectivelycomparable to that of resident pensionfunds as regards Finnish sourceddividends’, it argued, going on toobserve that: ‘the national legislation atissue in the main proceedings does notsimply provide for different proceduresfor charging tax depending on the placeof residence of the recipient ofnationally sourced dividends, butprovides, in fact, that only non-residentpension funds are to be taxed on thosedividends’.

The court therefore ruled that thecurrent arrangement is discriminatoryand constitutes a restriction on the freemovement of capital.

FranceDespite recent mediareports of dissatisfactionwith the new tax

measures being implemented, thereremains nonetheless some good taxnews in France. The French governmenthas recently announced details of thekey fiscal measures contained in thenational pact for growth,competitiveness and employment,designed to improve the attractiveness ofFrance as a location for foreigninvestors. The government aims toentice 300 new foreign companies a yearto set up in France.

Intended to reduce the cost oflabour, to boost investment and jobcreation, the government plans tointroduce a new tax credit forcompetitiveness and employment(CICE).





Indirect taxesnews



The CICE amounts to a reduction insocial contributions for corporations,benefiting very small companies, small-and medium-sized companies (SMEs),and intermediate sized companies inFrance. The government wishes tointroduce revenue-neutral plans in orderto widen the corporate tax base andintroduce new lower rates of corporatetax for small companies.

President Hollande outlined plansfor corporate tax reform designed tobenefit in particular innovative small-and medium-sized (SMEs) companies inFrance. Hollande explained that hewould introduce three tax rates, notablya rate of 35% for large companies, 30%for SMEs and 15% for TPEs (very smallcompanies).

The government plans to attract newinvestors and talent to France byretaining tax measures deemed vital forinvestment and for the life of a business.

The government intends to maintaintwo regimes benefiting research andinnovation, namely the research taxcredit (CIR), which has recently beenstrengthened, and exemptions benefitingyoung innovating enterprises in France.

The government is committed to thenew economic contribution (lacontribution économique territoriale –CET), which replaced local business taxin France.

The government has also decided toextend tax credit provisions for filmingand for audio-visual productions and toadapt the tax breaks to increase theattractiveness of France as aninternational film location

GermanyOwnership by a non-resident partner in aGerman partnership

owning shares in a non-Germancorporation proved costly for taxpurposes according to a recent judicialdecision. The case involved two Swisstax residents that held an interest in aGerman partnership, as well as shares ina US corporation. Both entitiesbelonged to a broader group ofcompanies. The German partnershipregularly made supplies to the UScorporation and this corporationpenetrated the US market with theproducts of the partnership. The twoSwiss tax residents sold their shares inthe US corporation and realised capitalgains, which created an issue as towhether the gains should be taxed inGermany or Switzerland.

The tax court concluded that thegains were subject to German tax.According to the court, the shares in theUS corporation functionally belonged tothe special business property of theGerman partnership because of thestrong intercompany relationship.

The court then ruled that Germanyalso has the right to tax the gain underthe Germany-Switzerland tax treaty.The court believed that German taxprinciples should also apply for treatypurposes. As a result, the shares in theUS corporation were qualified as‘business assets’ within the meaning ofthe capital gains article of the treaty andattributed to the German permanentestablishment created by the Germanpartnership for its Swiss partners.





Indirect taxesnews



GreeceGreece’s parliament hasused emergencyparliamentary measures

to approve new income and corporationtax measures; however an amendmentpostpones a new 20% capital gains taxon the Athens stock market until 1 July.The measures form part of a €13.5billion austerity package, and were acondition of further aid from the ‘troika’of the European Commission, theInternational Monetary Fund and theEuropean Central Bank.

The new tax bill simplifies incometax into three brackets: those earning upto €25,000 will be taxed at 22%, thoseearning above this figure up to €42,000will pay 32%, while those earning morethan €42,000 will pay 42%. However,those earning up to €21,000 will beeligible for a tax credit of €2,100 andbenefits will replace current tax-freethresholds for families with children.

Corporation tax will increase from20% to 26%. However, on the otherhand, the tax paid by companies ondistributed dividends will be reducedfrom 25% to 10%.

The government of Greece hassigned a memorandum of understandingwith the shipping industry over a newcargo tax. Under Greek law, shipmanagement companies which run theirshipping fleets from Greece arecurrently exempt from all Greek taxeson profits. There is, however, a tonnagetax on Greek cargo ships that traderegularly between Greek and foreignports, or exclusively between foreignports.

HungaryBesides being afavourable taxjurisdiction, Hungary has

also introduced additional benefits tomake it a favourable research anddevelopment (R&D) location. Inaddition to the general deductibility fortax purposes of the direct costs of certainR&D activities, the current legislationprovides for the deduction of three timesthe costs related to basic research,applied research or experimentaldevelopment (maximum HUF 50million) if these activities are carried outin partnership with an institution ofhigher education, the HungarianAcademy of Sciences or with a researchinstitute, facility founded by theprevious two. The collaboration must bebased on a written contract between thepartners. According to the newregulations, collaboration for research

can be made with a research instituteforming part of the central budget or aresearch institute operating in the formof a corporation whose majority is –directly or indirectly – owned by thegovernment.

Under the new legislation, tax creditcan be given for investments with apresent value of at least HUF 100million, made and conducted in freebusiness zones. Free business zones aretreated jointly for developmentpurposes, designated by thegovernment, coordinated by localorganisations for economic developmentand have their own publicadministration area and topographicalnumber.

A new tax credit is also available forinvestments, certified with a presentvalue of HUF 100 million, made forenhancing energy efficiency.





Indirect taxesnews



IrelandThe Irish ministry offinance has issued anoverview of its

corporation tax strategy and policy forretaining foreign direct investment, apresentation that accompanied Ireland’s2013 budget. Some of the moreimportant points concerninginternational investors include thefollowing:• the government policy in relation to

the 12.5% rate of corporation tax isclear

• the 2013 budget confirms that thegovernment’s policy in relation tothe 12.5% corporation tax rateremains unchanged

• a review of the R&D tax credit willbe carried out in 2013. This is thefirst such review since the schemewas introduced in 2004. Theobjective is to ensure that the R&Dtax credit remains ‘best in class’internationally and that it representsvalue for money for taxpayers

• a Real Estate Investment Trust(REIT) regime is being introduced.REIT is a globally recognisedstandard for investment in rentalproperty, and is already well-established in the US, the UK,Europe and Asia.

IsraelIsraeli law provides newimmigrants and somereturning residents with

an extensive tax exemption covering allnon-Israeli-source income for a periodof ten years. New immigrants are alsoexempt from reporting their foreign-source income for a ten year period.These exemptions have prompted manyforeign residents to argue that theybecame Israeli residents even if they didnot actually transfer their centre of lifeto Israel or in fact become Israeliresidents. Also, many new immigrantshave sought formal residency certificatesfrom the Israeli tax authority in order toprove their Israeli residency to foreigntax authorities.

The Israeli tax authority recentlypublished a ruling that establishes strictrequirements that new immigrants mustmeet before they can be issued residencycertificates. The requirements are meantto ensure that immigrants havetransferred their ‘centre of life’ to Israeland are not granted residency certificateswithout actually becoming Israeliresidents.





Indirect taxesnews



ItalyThe European Court ofJustice (ECJ) agreed withthe Italian government

and held that reserve requirementsimposed on companies transferringassets to another member state did notviolate EU rules. The ECJ was asked todetermine whether conditions placed onintra-community asset transfers byItalian law were consistent with themerger directive.

In this case the taxpayer transferredan Italian branch to a Luxembourgentity in exchange for shares in theLuxembourg entity. Under rules in placeat that time, the taxpayer elected to pay asubstitution tax of 19% gain from thetransaction. Had it not made theelection, the taxpayer would have beenrequired to record the difference in valuebetween the shares received and thevalue of the branch assets for taxpurposes as a non-distributable reservefund or to record the received shares atthe value of the assets before the transfer.

The taxpayer sought a refund of itspayment, arguing that the conditionsplaced on the transaction wereincompatible with EU law and that ithad mistakenly believed that the reservefund requirement was compatible withthe merger directive and that it was thismistake that caused it to elect the 19%substitution tax.

The ECJ noted that the purpose ofthe merger directive is to ensure thefiscal neutrality of transactions involvingthe transfer of assets between memberstates and to prevent disadvantages anddistortions. However, the courtexplained that the directive does notmake the neutral treatmentunconditional.

The court agreed with the EuropeanCommission that the merger directiverequires continuity of the valuations forthe transferred assets and liabilities inorder to prevent a ‘permanentexemption’.

The court rejected the taxpayer’sposition that the merger directiveprohibits member states from imposingconditions on the application of thefiscal neutrality provisions as long as theconditions do not impose currenttaxation on the gains.

The court accepted the argumentraised by the Italian government and theEuropean Commission, that the creationof a non-distributable reserve fund wasnecessary to prevent an undue advantageunder Italian tax rules that gaveshareholders a tax credit fordistributions.

MaltaMalta has introduced afavourable tax scheme forretirees from specific

jurisdictions to seriously consider Maltaas a place to retire. The new tax incentiveencourages citizens of EU memberstates – Iceland, Norway, Liechtensteinor Switzerland – to become resident inMalta and transfer their pensions toMalta.

Foreign-sourced incomes remitted toMalta will be subject to income tax at aflat rate of 15%. Expatriates will berequired to pay a minimum of €7,500 in tax plus €500 for every dependent.Beneficiaries of the scheme may claimdouble tax relief through unilateral reliefor a tax treaty.

Other revenues including Maltese-sourced capital gains derived from thedisposal of a capital asset (other thanimmovable properties), will be taxable atan income tax rate of 35%.





Indirect taxesnews



Capital gains derived from thedisposal of Maltese immovableproperties will be subject to a finalwithholding tax of 12% levied on thetransfer value. The taxpayer may opt fora 35% tax rate levied on the capital gainsvalue. This option applies when thepurchasing date of the disposedproperty is within the last seven yearsbefore the sale date. This applies to‘qualifying property holding’, whichmeans an immovable property located inMalta or Gozo. The property must havebeen purchased after 1 January 2011, fora minimum of €275,000 if it is located inMalta or €250,000 if it is located inGozo. The scheme also applies toexpatriates that rent properties for aminimum of €9,600 annually if theproperty is located in Malta or €8,750 ifthe property is located in Gozo.

The retirement plan beneficiaryshould remit to Malta and pay tax on thewhole pension amount, which shouldconstitute at least 75% of thebeneficiary’s taxable income in Malta.The retirement plan beneficiary is notallowed to earn any employmentincome in Malta. Retirement planbeneficiaries of the scheme should stayin Malta for a period of not less than 90days per calendar year averaged over aperiod of five years and may not spendmore than 183 days in any other foreigncountry. Finally, those eligible for theretirement scheme must not benefitfrom other Maltese schemes providingspecial tax status.

NetherlandsThe Dutch governmentpublished a policystatement that introduced

changes to the thin capitalisation rules.The thin capitalisation rules, which wereadded to the Dutch corporate incometax act with effect from 1 January 2004,will be abolished as of 1 January 2013, orif a taxpayer’s tax year is not the calendaryear, the first day of the first financialyear starting after 1 January 2013. Thusthe recent policy changes will affecttaxable years open under the statute oflimitations.

The thin capitalisation rules limit thedeductibility of interest costs if aborrowing company is consideredexcessively debt financed. Whether ataxpayer qualifies as excessively debtfinanced is determined on the basis ofthe fixed ratio of 3 to 1.

A taxpayer may elect to apply agroup ratio test instead of the fixed ratiotest. Under this alternative test, acompany does not qualify as excessivelydebt financed if the taxpayer is not morehighly leveraged than the overall groupto which it belongs. The group ratio testis to be applied using data derived fromthe taxpayer’s financial statements andthe group’s overall consolidated financialstatements. The Dutch supreme courthas ruled that in some circumstances thethin capitalisation rules also apply if noconsolidated group financial statementsare prepared. The Dutch state secretaryfor finance has determined that in such acase the purpose and scope of the groupratio test justifies the determination ofthe group ratio as if consolidatedfinancial statements had been prepared.





Indirect taxesnews



The state secretary for financeconsiders it important that the electionfor the group ratio test is made solely forthe relevant taxable year. If in asubsequent year the group ratio is lowerthan the fixed ratio, the group ratio doesnot need to be selected again. Also, thereare no potentially adverse taxconsequences from electing for thehigher group ratio. Therefore, taxpayersnow have the option to request areduction in these cases.

PolandAs in other jurisdictions,Poland has addressed theexploitation of its natural

resources. The Polish government hasproposed to introduce a new special taxregime for the oil and gas sector.

Oil and gas firms would be requiredto pay an additional 25% specialhydrocarbons tax on the differencebetween turnover and expenses. Thiswill be paid in addition to the regularcorporate income tax. In addition,Poland intends to introduce anextraction tax based on the value of thehydrocarbons extracted. The rateswould be 5% for gas, and 10% for crudeoil. At the same time, a new governmentbody would be set up to supervise theshale gas sector.

RussiaRecent guidance has beenissued by the ministry offinance concerning a

Russian permanent establishment (PE). The ministry of finance clarified the

application of the provisions of theRussia-Ireland income tax treatyconcerning the conditions when arepresentative office (RO) established byan Irish legal entity in Russia may createa PE in Russia, and the procedure to befollowed in allocating the profits andexpenses to the deemed PE.

The facts of the ruling dealt with anIrish resident company thatincorporated a RO in Russia for thepurposes of performing auxiliary andpreparatory activities. The Irish headoffice used certain assets and personnelof the RO in order to render civilaviation services. The head office

maintained separate accounting recordsof the expenses incurred by the RO inperforming business activities in Russia.The profits of the RO were determinedby adding an average profit margin(based on the profit margin oforganisations conducting similarbusiness activities in the precedingcalendar year) to the total expensesincurred in connection to its businessactivities.

The ministry of finance was askedwhether the engagement of the RO’spersonnel and assets would trigger thecreation of a PE for the Irish head officein Russia and whether the allocation ofprofits and expenses is consistent withthe Russian tax legislation.

The ministry of finance concludedthat a PE existed and agreed with theseparate books and profit allocation.





Indirect taxesnews



South AfricaThe South Africanrevenue service issued abinding private ruling

that deals with the capital gains tax andtransfer duty consequences, for both thetransferor and transferee, in respect of aresidence to be transferred out of acompany to a natural person. The ruling(as detailed below) is important as itdeals with a South African corporationwith a foreign corporate shareholder andthe involved is a passage of SouthAfrican real estate in liquidation.

1. Parties to the proposedtransaction:

• the applicant: a companyincorporated in and a resident ofSouth Africa

• co-applicant 1: a companyincorporated in a foreign countryand not a resident of South Africa,that holds 100% of the share capitalof co-applicant 2

• co-applicant 2: a natural person whois a resident of South Africa, butwho lives abroad, and holds 100% ofthe share capital of co-applicant 1.

2. Description of the proposedtransaction:

Co-applicant 2 purchased the propertyin December 1996 in the name of theapplicant. The purchase price wasfunded by way of shares that had beenissued to co-applicant 1. The only assetheld by the applicant is the property andthe only asset held by co-applicant 1 isthe share capital of the applicant.

Co-applicant 2 has had the right touse the property since acquisition and atall material times he incurred theexpenditure required for the property’smaintenance. At times he let theproperty at arm’s length as holidayaccommodation to generate funds toenable him to defray expenses in relationto the property.

Between 11 February 2009 and 31May 2012, the property was rented outfor a total of 483 days (40% of that timeperiod). Accordingly, co-applicant 2used the property for domestic purposesduring the same period for 60% of thetime.

No holding costs or sellingexpenditure have been incurred by theapplicant in respect of the property after1 October 2001 for purposes of addingsuch costs to the applicant’s base cost ofthe property. A market value as at 1October 2001 of R 900,000 wasdetermined, although a decision wasmade to determine the base cost of theproperty by using the time-apportionment method, as this methodyielded a more favourable result for theparties to the proposed transaction.

The present market value of theproperty is R 2,750,000 and the time-apportioned base cost is R 1,271,463.

It was proposed that the applicantdispose of the property to co-applicant 1by way of a dividend in specie. Theproperty would then be disposed of byco-applicant 1 to co-applicant 2 by wayof a further dividend in specie. In termsof the proposal both distributions wereto take place before 31 December 2012.Once the distribution of the propertyhad taken place, the respectivecompanies making the distributionwould be wound up and deregistered.

3. The ruling The ruling made connections with theproposed transaction as follows: • the proposed distribution of the

property by way of a dividend inspecie from the applicant to co-applicant 1, and from co-applicant 1to co-applicant 2, will be a disposal

• the applicant and co-applicant 1must be treated as if each of themdisposed of the property at its basecost at the time of the disposal, beingR 1,271,463.





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• co-applicant 2, the applicant and co-applicant 1 must be treated as oneand the same person with regard to:the date of acquisition of theproperty owned by the applicant;the amount and date of incurring bythe applicant of any expenditure inrespect of the property allowable;and any valuation of the property.

Neither distribution of the property willattract transfer duty or dividends tax.

SpainTax measures aimed atfurther consolidation ofpublic finance and

stimulation of economic activity havebeen approved by the government. Themost important corporate features of thetax measures are as follows:1. Revaluation of tangible assets,

immovable property investmentsand financial leased assets, as well asother qualifying assets, situatedwithin Spanish territory or abroad,included in the first balanceapproved by the enterprise after theLaw entered into force (i.e. forcompanies whose accounting periodis the natural year, the balance wouldbe the one closed at 31 December2012) will be allowed in 2013 inorder to adapt their value foraccounting purposes to their realvalue. The revaluation is voluntaryand the accounting surplus resultingfrom the revaluation is subject to aone-off non-deductible tax of 5%.

The revaluation should be donebetween the date of the closingbalance and the date of its approval,and the increase in equity due to therevaluation should be booked as arevaluation reserve. The reserve isunusable until the tax authoritieshave verified and approved therevaluation reserve or, if noverification is made, until three yearshave elapsed since the tax had beenfiled. The revaluation reserve canonly be used to offset losses or toincrease the capital of the company.After ten years from the end of thetax year in which the revaluationtook place, the reserve is free fordisposal under certain conditions.

Certain data regarding therevaluated assets should be includedin the annual report. Severe penaltiesmay be imposed for non-compliancewith this information requirement.

2. For the taxable years 2013 and 2014,the tax deduction of the depreciationof tangible, intangible andimmovable property assets is limitedto 70% of the maximum ratespermitted in the CIT regulations.The non-deductible depreciationshould be depreciated during a tenyear period or its useful life startingfrom 2015. This measure onlyapplies to companies whose turnoverin the prior taxable year exceeded€10million and does not affect assetsfor which special depreciation planswere approved by the tax authorities.





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3. The tax lease regime now has anoption to start depreciating thefinance lease payments thatcorrespond to a recovery of the costof the asset when the asset begins tobe built and amongst others, theconstruction of the asset lasts morethan 12 months and follows thetechnical and design specifications ofthe client (e.g. typical assets beingships, planes, trains, etc.).

4. The tax rate applicable to Real EstateInvestment Corporations (REITs) isreduced to 0% if legal conditions aremet (previously, a special tax rate of19% was applied, however, someincome was taxed at the rate of30%).

5. The tax credit available for filmproduction is extended up to taxableyears commencing 1 January 2015.

6. A limitation is introduced on thedeductibility of payments relating tocompensations for loss ofemployment regarding directors andsenior managers.

SwedenThe current restrictionsfrom 2009 refuses a taxdeduction for interest

payments on related parties to anacquisition of shares from an affiliate,unless the creditor is either taxed for theinterest at least at 10% or it is shownthat both the share transfer and the debtare based on commercial reasons.

The restrictions have recently beenexpanded to extend the scope of thecurrent restrictions. For interestdeductibility to apply in respect ofinterest expenses on any loans within anaffiliated group whatever its purpose.

The minimum 10% tax test willcontinue to apply to allow interestdeduction. However, it will beinapplicable if the main reason behindthe debt structuring was forconsiderable tax benefits for the group.

‘Commercial reasons’ for the loanremains as an alternative test forallowing a deduction, but only if thecreditor is resident within the EEA or ina tax treaty jurisdiction with whichSweden has a full tax treaty.

For internal share acquisitions, thecommercial reasons test requires boththe share transfer and the debt to bebased on commercial reasons. Specialqualifications will apply for lifeinsurance business subject to yield taxesand similar regimes, as well for back toback loans.

TurkeyChanges to Turkish taxlaw, include measuresthat affect foreign

investors in relation to investments inTurkey, among these changes are thefollowing provisions:• foreign currency-denominated loans

and gold-based loans granted toTurkish residents from foreignsources may become subject to anadditional surcharge (i.e. the‘resource utilisation support fund’)

• an increase in stamp tax rates, from0.825% to 0.948%, and an increasein the stamp tax ceiling to just underTL 1.5 million (approximately US$830,000)

• increased value added tax (VAT) rateon certain real estate transfers

• increase to withholding tax rates fordeposits and participation accounts(depending on the maturity date andcurrency denomination).





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UkraineThe Ukrainian State TaxService (STS) issuedguidance in which it

clarified the corporate tax treatment ofnon-residents’ PEs in Ukraine.

Under the tax code, the followingnon-resident entities are considered tobe corporate taxpayers in Ukraine: • legal entities established in any

business form that derive incomefrom Ukrainian sources, except forentities possessing diplomaticprivileges or immunities underapplicable treaties to which Ukraineis a party

• non-residents’ PEs that deriveincome from Ukrainian sources orthat exercise agency (representation)and other functions for the non-residents or their founders.

The tax code defines a PE as a fixedplace through which a non-resident fullyor partially does business in Ukraine.However, the following activities do notresult in the creation of a non-resident’sPE in Ukraine: • the maintenance of a fixed place of

business solely for the purpose ofpurchasing goods for the foreignlegal entity

• the maintenance of a fixed place ofbusiness expressly for the purpose ofcollecting, processing, or distributinginformation for the foreign legalentity

• the maintenance of a fixed place ofbusiness solely for the purpose ofcarrying out other preparatory orauxiliary activities.

The STS therefore held that a PEexercising preparatory or auxiliaryactivities in Ukraine for a non-resident isexempt from corporate tax on incomegenerated from those activities because

the activities are not deemed to bebusiness income-generating activities fortax purposes.

Also, it ruled that in determining thetypes of activities that do not result inthe creation of a PE in Ukraine, it is alsonecessary to consult the provisions ofapplicable tax treaties to which Ukraineis a party and that are an integral part of Ukrainian law (based on tax codearticle 3).

Non-residents that are entitled underan applicable tax treaty to exemptionsfrom taxes on specific types of incomegenerated by their PEs in Ukraine mustfill out and file information on theincome that is exempt in Ukraine in theform approved by the tax authorities,the STS said.

Before the commencement of itsbusiness activities in the Ukraine, a non-resident’s PE must register with the taxauthorities operating in the area of thePE’s location. A PE that commencesbusiness activities in the Ukraine before

registration with the tax authorities isdeemed to be evading tax, and theincome generated from those activities isdeemed to be concealed from taxation.

Based on the tax code, a non-resident’s PE must independentlydetermine its corporate tax liabilities, filecorporate tax reporting documents withthe applicable tax authorities, and paythe corporate tax due in line with thegeneral procedure established in the taxcode.

A PE that is deemed to be acorporate taxpayer in Ukraine may beheld liable for failure to file, or forincorrectly executing, its tax reportingdocuments; failure to comply withestablished deadlines for filing thosedocuments; or for declaring falseinformation in its tax reportingdocuments.





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United KingdomHM Revenue &Customs (HMRC) hasissued updated guidelines

on nonstandard treaty tiebreakers thatcould affect the UK’s tax treaties withthe US, Canada, and the Netherlands.

In several double taxationagreements such as those with theNetherlands, the United States andCanada the question of dual residencecan only be answered followingdiscussions between the competentauthorities of the two states.

Often the UK and the other statewill not use the same criteria whenconsidering if a company is resident. Forinstance the UK considers both acompany incorporated in the UK and acompany centrally managed andcontrolled from the UK to be residenthere. In contrast the US uses the solecriterion of the place of incorporation(there are some exceptions but these arevery rare). If a UK incorporatedcompany claims to be resident in the US

then advice should be sought from theCTIAA business international outwardinvestment team.

Due to the different criteria used it isnot possible to say which factors will beused by the competent authorities whendiscussing the question of residence.However the factors that are likely to beconsidered are as follows: • legal connection to the state (where

it is incorporated) • place of central management and

control • place of effective management • where the company’s business

activities are • its economic linkages to each state • does it have a factory, office or shop

in a state• where are employees based• where is business carried out • where would its customers contact it• is there actually any double taxation • what is administratively the simplest

route for the company.

These will all be viewed by the UKcompetent authority when decidingtheir view upon residence. The outcomewill be one of the following: • the company is solely resident in the

UK • the company is solely resident in the

other state • the company is dual resident because

either the two competent authoritiescould not reach agreement or dualresidence is the agreed outcome.

Selected example scenarios:1. A company incorporated in state

“A” has only a ‘brass plate’ in state“A” and all its staff, directors andbusiness is in state “B”. In this casethe UK would normally expect state“A” to cede residence to state “B”.Although the company has a legalconnection to state “A” the place ofcentral management and control andeffective management is in state “B”.

Also the major economic linkagesare in state “B”. So for treatypurposes the company would beresident solely in state “B”.

2. A company incorporated in state“A” and with a real business thereusing state “A” resident employeesand premises has its centralmanagement and control and placeof effective management in state “B”.In this scenario the two majorcriteria are split between state “A”and “B” with the legal connection tostate “A” and the control in state“B”. However, the major economiclinkages are in state “A” as it has areal business there involvingpremises and staff. Therefore itsconnection to state “A” is strongerthan that to state “B”. In suchcircumstances the UK would expectstate “B” to cease residence to state“A”.





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APAC news

AustraliaA recent ruling dealt withthe withholding taxderived by an Australian

resident carrying on business at orthrough a PE outside Australia.

The taxpayer was an Australianresident company that carried onbusiness through a PE in a non-taxtreaty country (the foreign country).The taxpayer maintained a bank accountin the foreign country which was usedfor the sole purpose of paying all theoperational expenses incurred throughthe PE. Business activities conductedthrough the PE in the foreign countryproduced goods which were alsomarketed and sold through the PE.

All proceeds from the sale of thesegoods were deposited directly into thetaxpayer’s Australian bank account. Theonly amounts deposited into theAustralian bank account were from thesales income generated by the activitiesof the PE in the foreign country. Thetaxpayer’s income from these sales was

solely attributable to the activities of itsPE in the foreign country. By way of azero balance physical cash pooling (orcash sweeping) arrangement, operatingon the Australian bank account, the netbalance in this Australian bank accountwas automatically lent to anotherAustralian company AusCo2. The loanarrangement between the taxpayer andAusCo2 is entered into in Australia.Under this loan arrangement, interestpayments were made to the taxpayer byAusCo2.

The issue was the interest incomederived by an Australian resident undera physical cash sweeping arrangementusing funds both obtained from andderived through a foreign branch of theAustralian resident, derived in carryingon business in a country outsideAustralia at or through a PE of theAustralian resident. The ruling held thatthe interest income is derived in carryingon business in a country outsideAustralia at or through the PE of theAustralian resident.

ChinaThe ministry ofcommerce issuedprovisional regulations

on capital contribution with equity byForeign Investment Enterprise (FIE).An FIE may bring its equity in anothercompany as capital contribution for thepurposes of:• establishment of a new company• converting a domestic enterprise into

a FIE• increasing the capital to change the

equity of an existing FIE.

At least 30% of the registered capitalmust be contributed in cash and up to70% can be non-cash (equity).

A recognised appraisal firm mustevaluate the equity. Parties maydetermine the value of the equity byreference to the appraisal, but the valuemay not exceed the appraised value.

The capital contribution with equityis subject to the approval of theMOFCOM branches at the provinciallevel and the applicant must submit thefollowing documents: • the application letter and agreement

on capital contribution with equity• the certificate of the ownership of

the equity• a copy of the business license of the

investing enterprise• the approval for the incorporation of

the FIE and the annual audit reportin the case of an FIE

• the appraisal report of a Chinese(recognised) appraisal firm

• legal opinion of attorney• documents required for the

establishment of a new company orre-register of changes

• documents required for transfer ofequities which are subject to approvalpursuant to laws and regulations orthe state council decisions

• other documents required by theapproval authority.






Indirect taxesnews


Hong KongIn an interesting judicialdecision, the courtaddressed the

consequences in Hong Kong ofconducting manufacturing operations inmainland China. The decision haswidespread implications as the businessrelationships of the Hong Kongtaxpayer is a common structure. HongKong’s court of appeal upheld thedisallowance of a deduction for the costof some fixed assets used by a HongKong taxpayer in its manufacturingoperations in China.

The taxpayer supplied plasticgarment hangers and related packagingmaterials until it ceased businessoperations in 2002. The hangers weremanufactured by two mainlandcompanies unrelated to taxpayer, usingmoulds provided by the taxpayer, underthe guidance of the taxpayer’s staffseconded to mainland China. Theownership of the moulds remained withthe taxpayer.

The moulds were used tomanufacture hangers to be sold to thetaxpayer. The taxpayer’s profits for theassessment years 2000-2001 and 2002-2003 were treated as fully taxable inHong Kong. In calculating its assessableprofits, the taxpayer claimed a full taxdeduction for the cost of the prescribedfixed assets, i.e. the cost of the moulds inthe amounts as shown in the tableabove.

The Inland revenue Department(IRD) challenged the deductions on thegrounds that the assets did not qualify asprescribed fixed assets eligible for writeoff. Although the ownership of theassets was with the taxpayer they wereactually used by unrelated mainlandmanufacturers and thus could beconstrued as a lease asset. Leased assetsare excluded fixed assets.

The statute states that assets knownas ‘excluded fixed assets’ are outside thescope of prescribed fixed assets eligiblefor write off. An excluded fixed asset is‘a fixed asset in which any person holdsrights as a lessee under a lease’. Inrelation to any machinery or plant, theinterpretation of the term ‘lease’ andstatutory definition is: a) any arrangement under which a right

to use the machinery or plant isgranted by the owner of themachinery or plant to another person

b) any arrangement under which a rightto use the machinery or plant, beinga right derived directly or indirectlyfrom a right referred to in paragraph(a), is granted by a person to anotherperson, but does not include a hire-purchase agreement or a conditional

sale agreement unless, in the opinionof the commissioner, the right underthe agreement to purchase or obtainthe property in the goods wouldreasonably be expected not to beexercised.

Because of the wide scope of thestatutory definition, the taxpayer’smanufacturing assets would fall withinthe definition of excluded fixed assetswere the statutory definition to apply.

The Hong Kong board of review (atax tribunal) held that the statutorydefinition should apply. Bypassing thecourt of first instance, the taxpayerappealed to the court of appeal, whichupheld the opinion of the board ofreview and ruled against the taxpayer onthe basis that the historicalcircumstances indicated that thestatutory definition was intended by thelegislature to apply to the assets inquestion.


Assessment year Amount in HKD Approximate USD value2000-2001 11 million 1.42 million2001-2002 3 million 388,0002002-2003 4 million 517,000





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IndiaIn a recent court ruling,the taxpayer (AdidasSourcing Ltd.) was a

Hong Kong resident and functioned as a‘buyer’ for the entities within the Adidasgroup of companies including AdidasIndia. The services provided by thetaxpayer to Adidas India included,amongst others: • sourcing new manufacturers and

maintaining relationships withexisting manufacturers

• procuring samples and relaying ofthe manufacturer’s terms andconditions

• coordination activities, includingnegotiating and placing purchaseorders, between Adidas India andthe manufacturers

• payment of the manufacturers onbehalf of Adidas India. The invoiceswere issued in the taxpayer’s name asthe agent of Adidas India.

However, the taxpayer did not have theauthority to accept or reject prices orterms established between Adidas Indiaand the manufacturers. In return for theabove services, the taxpayer received anarm’s length agency service fee. Thetaxpayer contended in its Indian taxreturn that the fees did not qualify asfees for technical services (FTS) and inthe absence of a PE in India, the incomewas not taxable in India.

The tax authorities disagreed andheld that the fees did qualify as FTS andthus, were taxable in India.

The issue was whether the fees werein the nature of FTS and thus, taxable inIndia.

The Income Tax Appellate Tribunal(ITAT) held that the fees were not formanagerial, technical or consultancyservices and as such did not constitutefees for technical services. Such fees hadto involve some type of applied andindustrial sciences and in this case, thetaxpayer provided no such technicalservices.

Under the Indian income tax act,non-residents are subject to tax onincome sourced in India. The income taxact states the situations where paymentsto non-residents are deemed to beIndian-source, e.g. royalties, interest,technical service fees, etc. Additionally,the income tax act imposes an obligationon the person making payment to thenon-resident to withhold tax onamounts that are taxable in India.Failure to withhold tax could result in adenial of the deduction for the paymentof such amounts when tax has not beenwithheld.






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JapanDespite the upwarddirection of corporate taxrates in some

jurisdictions, Japan has taken a differentstance. The effective corporate incometax rate was reduced to approximately38% for large corporations for threefiscal years beginning with the first fiscalyear starting on or after 1 April 2012.Thereafter, the effective corporateincome tax rate will be further reducedto approximately 36%. However, somesmall and medium-size enterprises willbenefit from a special reducedcorporation tax rate of 16.5% on thefirst ¥8 million (about $97,000) oftaxable income for three fiscal yearsbeginning with the first fiscal yearstarting on 1 April 2012, and 19%thereafter.

On the other hand, the use of netoperating losses carried forward by largecorporations will be capped at 80% oftaxable income for the current fiscalyear, effective for fiscal years beginningon or after 1 April 2012. In other words,at least 20% of large corporations’taxable income for the current fiscal yearwill be subject to corporate tax, even iftheir net operating losses (NOLs)carried forward are greater than thetaxable income for the current fiscalyear. However, some SMEs can beexempted from this NOL restriction.

Also, it should be noted that therehas been an introduction of ruleslimiting the deduction of interestexpense. The rules will disallow adeduction for interest paid or accrued onindebtedness to foreign related personsand interest paid or accrued onindebtedness to unrelated persons that isguaranteed by related persons, if the netinterest expense is more than 50% of theborrower’s adjusted income. These rulesare generally similar to the rules in theUS but do not require the lender’sinterest income to be wholly or partlyexempt from Japanese taxation, and therules do not include a debt-to-equityratio test. Any disallowed interestexpense may be carried forward anddeducted against taxable income arisingduring the following seven fiscal years,subject to the above limitation.

MalaysiaThe Inland RevenueBoard of Malaysia hasrecently ruled on both

employee share scheme benefit andshare scheme benefits for cross borderemployees. This replaces the ruling thatpreviously focused on the tax treatmentof employee share option schemes. Thenew ruling provides new guidance onthe tax treatment that would beapplicable to: • employee share option schemes• employee share purchase plans• share award schemes• share appreciation right schemes• warrant schemes • bonus issues • replacement of rights to acquire

shares.






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The new ruling also provides furtherclarification and guidance on the keycomponents of a share scheme such as:what would constitute share benefits;how the market value of shares aredetermined; when a share is deemed tohave vested; and the common types ofshare schemes seen. The employees’ andemployers’ obligations have also beenfurther detailed.

The ruling provides the taxtreatment in respect of a benefit arisingfrom an employee share scheme receivedby employees from Malaysia who areseconded to work overseas and foreignnational employees who are seconded toMalaysia.

The taxable benefits arising fromemployee share schemes will be taxed asemployment income in Malaysia, andwill be entitled to foreign tax credits(either bilateral or unilateral) wherethere has been double taxation. Theshare benefit will be computed based onnumber of working days (includingleave days) spent in Malaysia. Variousnumerical examples on the possiblescenarios, such as exercise of sharescheme before/during/after theMalaysian employment, provide furtherguidance.

New ZealandProposals in the InlandRevenue officials’released issues paper,

would increase the taxation of highlyleveraged investments made byforeigners, through changes to the thincapitalisation rules. The thincapitalisation rules are intended toprevent non-residents from usingexcessive interest costs to reduce theirtax liabilities, but have not been effectivein all cases.

The proposed changes include:• extension of the thin capitalisation

rules to apply not only toinvestments controlled by singlenon-residents, but also to groups ofnon-residents, provided that thoseinvestors are acting together eitherspecifically by agreement or by co-ordination by a party, e.g. a privateequity manager

• exclusion of related-party debt fromthe debt-to-asset ratio of a

multinational’s worldwide group, for the purposes of the thincapitalisation calculations – debtfrom third parties would not beaffected

• extension of the current rulesapplying to a resident trustee, wheremore than 50% of settlements on thetrust are made by a non-resident, toinclude settlements made by a groupof non-residents acting together, oranother entity which is subject to therules

• exclusion of capitalised interest fromassets when a tax deduction has beentaken in New Zealand for theinterest

• consolidation of individual owners’interests with those of an outboundgroup

• exclusion of increased asset values asa result of internal sales of assets,with the exception of internal salesthat are part of the sale of an entireworldwide group.






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SingaporeThe income tax board ofreview has issued a rulingconcerning the

application of Singapore’s general anti-avoidance rule. General anti-avoidancerules are a form of penalty and/orreporting mandate provision found inmany jurisdictions which are establishedto combat aggressive tax structures andtax planning strategies.

In this particular case, a Malaysianpublic listed company (M) withsubsidiaries in Singapore decided to setup an intermediate holding company(A) in Singapore in order to streamlinethe Singapore operations. As part of therestructuring, the appellant entered intoa financing arrangement involving: • company A issuing fixed rate

convertible notes to a third partybank in Singapore (N)

• company A using the proceeds toacquire four existing Singaporeansubsidiaries. The notes were interestbearing

• N stripped the interest componentfrom the principal component of thenotes

• N sold a portion of the principalnotes at their par value under aconditional payment obligation(CPO) to N in Mauritius, underwhich N in Mauritius agreed to paya specified amount upon N inSingapore receiving payments underthe interest notes from A

• N entered into a forward saleagreement with N in Mauritius forthe remaining portion of theprincipal notes

• N in Mauritius on-sold a portion ofthe principal notes to a Malaysiansubsidiary of M (C), by entering intoanother CPO, under which N inMauritius agreed to pay a specifiedamount upon receiving interestpayments from N in Singapore

• N in Mauritius entered into aforward sale agreement with C forthe remaining principal notes

• C financed the acquisition via itsown funds and inter-companyborrowings arising from theproceeds from the sale of thesubsidiaries to A.

After the restructuring, A receiveddividends that carried franking creditsfrom Singapore. These dividends werereceived in years that fell between thefive year transitional periods beforeSingapore’s full imputation system wasreplaced by the one-tier corporate taxsystem (under which franking credits arenot available).

A also claimed tax deductions on theinterest paid on the notes against thefranked dividend income from itssubsidiaries. This resulted in a taxrefund.

The comptroller invoked the generalanti-avoidance rule on the basis thatthere was no commercial justificationfor the financing arrangement, and thatthe main purpose of the arrangementwas to obtain a tax advantage.

The comptroller also disregarded thedividend income and interest expense.The comptroller’s contention was thatthe interest deduction claimed by Aaltered the incidence of tax payable oravoided the tax payable in addition toobtaining cash refunds of the frankingcredits. This interest was not incurred toproduce income but to create a structurein which a tax refund could be createdon the dividends to be paid out, and thusdid not qualify for deduction.






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A combination of other factors (suchas the fact that all the transactions tookplace on the same day, lack ofdocumentary evidence for thecommercial reasons of the loan, lack ofvaluation for the price of the shares andlack of credit risk by N bank as thelender) also pointed to one of the mainpurposes of the financing arrangementas being one to reduce or avoid tax.

The board of review held that thefinancing arrangement had the purposeor effect to avoid tax, and was contrivedor artificially structured so as to obtain atax refund through the utilisation of taxcredits. There was no evidence that thearrangement was carried out for bonafide commercial reasons. The case iscurrently under appeal in the high court.

TaiwanTaiwan’s Ministry ofFinance (MOF) recentlyissued a ruling to clarify

the withholding tax rules for paymentsof subscription fees to offshore onlinedatabase service providers. In its latestruling, the MOF confirms thatsubscription fees received by a foreigncompany for providing access to onlinedatabases – including periodicaljournals, books and magazines,electronic theses, indices, content,extracts, and statistical data – shall becharacterised as business profits.

Those business profits will not becharacterised as Taiwan-source income ifall the underlying business activities arecarried out and completed outsideTaiwan. This is factually true forprobably all online subscription servicesthat do not rely on any other additionalservices or steps to be taken inside theother country before they can beaccessed by the customer in thatcountry. As a result, the MOFconfirmed that such subscriptionrevenues are free from withholding taxin Taiwan.

ThailandThailand’s Cabinet hasapproved a package oftax measures to provide

assistance to small and medium-sizedenterprises (SMEs) and lessen the effectof the government’s minimum wagepolicy. While the government alreadylowered corporate tax from 30% to23% last year, and even further to 20%in 2013, there have been calls for furtherhelp for SMEs, with annual revenues ofup to THB 50million (USD1.65million), to counteract the increasedwage costs caused by the introduction ofthe country’s THB 300 daily minimumwage on 1 January. In particular, in 2013,the annual income tax exemption forSMEs will be increased from THB150,000 to THB 300,000, and there willbe a 15% tax rate on their profitsbetween THB 300,000 and THB1million. The normal 20% tax ratewould apply to incomes above THB1million.






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Americas news


ArgentinaCorporate and individualtaxpayers haveexperienced some strange

tax consequences in the past 12 monthsas outlined below:1. The Argentine tax authority (AFIP)

announced that it will impose a new15% tax on all overseas transactionsby credit cards issued in the country.In its 31 August announcement, theAFIP said that it would begintracking all credit card transactionsand collecting the tax on foreigntransactions beginning 1 September2012. Individuals subject to theforeign transaction tax will bepermitted to credit any taxes paidagainst other tax liabilities such asincome or wealth taxes.

2. Citing unfavourable treatyprovisions, Argentina denounced itsincome tax treaties with Chile, Spainand Switzerland, effective from 1January 2013. The treaties have beensignificant for tax planning byinternational investors, and theirrevocation has led to a massiverethink of tax structures by high-net-worth individuals, regionalcompanies and global enterpriseswith interests in Argentina.

3. The supreme court held thattransactions entered into by twoArgentine companies, one of whichis the parent company of the other,shall be considered as having beenentered into by two different legalentities and taxed accordingly.

BahamasThe introduction ofvalue-added tax (VAT)has been proposed as a

solution to the Bahamas’ dilemma overhow to meet World Trade Organisation(WTO) membership criteria while at thesame time reducing burgeoninggovernment deficits.

The government stressed that it isworking on a number of initiatives toaddress the fiscal crisis, including:• the introduction of a white paper on

tax reform which would lead to thefirst major public discourse on thetopic and to significant changes inthe tax system

• the introduction of a ‘fiscally-responsible’ mortgage reliefprogramme, which is a part of abroader initiative to restart thehousing sector

• new measures to revitalise foreigninvestment in the Bahamas

• concrete steps to improve revenueadministration and expenditurecontrol.

In the Bahamas there are no taxes onprofits, dividends or income; there is nocapital gains tax, no withholding tax andno sales tax. The taxes impinging oncompanies are business license fees,stamp duty, property taxes and importduty. Most offshore or non-residententities are exempt from business licensefees and many are exempt from stampduty. Corporate entities payincorporation or registration fees to thegovernment.





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BarbadosThe government ofBarbados has signed aneconomic and technical

agreement with China as a sign that therelationship between the countries isstrengthening.

With the protracted downturn that isbeing experienced in Barbados’s maineconomic partners – the United Statesand Europe, Barbados has joined otherinternational financial centres’ efforts tobuild economic relations with the highgrowth economies of emerging markets,and in particular Asian economies, fornew growth potential.

In recent years, China-Barbadosbilateral trade has grown rapidly. Thesigning of the latest agreement buildsupon the legislative framework that isalready in place to encourage trade andinvestment following previouslyconcluded agreements for the avoidanceof double taxation and the reciprocalpromotion and protection ofinvestments.

China has also played a key role inBarbados’s development, providingfinancial and technical assistance in anumber of key construction projects.

BermudaThe Bermudangovernment welcomedthe decision of

reinsurance firm QBE to relocate theoffices of its captive insurance entity,Equator Re, to Bermuda from Dublin.Equator Re, whose parent QBE isranked among the top 20 reinsurersglobally, has had a small presence inBermuda for several decades but hasonly recently decided to relocate thebulk of its operations to the island.

As the wholly-owned captiveinsurance arm of its parent, Equator Reprovides reinsurance against QBE’ssignificant portfolio, which recordedgross written premiums worth USD18.3billion in 2011.

While acknowledging that economicconditions remain tough, thegovernment highlighted that QBE’sdecision and a recent statement fromFitch Ratings backing Bermuda’sregulatory regime attested to theterritory’s strong financial servicescredentials and its ability to attractsignificant entities to the island.

Despite Ireland’s reputation of beinga low tax cost EU location, the insuranceexpertise and infrastructure of Bermudano doubt played a part in the company’srelocation decision.





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BoliviaOn 5 September 2012,the temporary tax onforeign currency

transactions (IVME) was approved bythe chamber of deputies and was sent forapproval to the senate.

Concerns have been raised that thelevy will boost money launderingactivity, and 80-90% of the nation’sforeign exchange businesses are said tobe at risk as the net currency spreadbetween the dollar and the Boliviano isset to diminish due to the presenttrading ceiling that restricts depreciationin the value of the Bolivinio.

Aspects of the IVME include that:• it will apply for a 36 month period• it will apply to financial institutions,

foreign bureau de change and banks

• the a rate of 0.7% will be applicableon the profits from the sale offoreign currencies

• foreign exchange businesses will paythe tax on only 50% of the tax base

• profits derived from the sale offoreign currencies by the CentralBank of Bolivia will be tax exempt

• it will not be deductible from the netprofit subject to corporate incometax

• it will enter into force on the dayfollowing the day on which thedecree is published.

BrazilRecent measures inBrazil have been tointroduce tax breaks to

stimulate long-term financing ofinfrastructure projects of interest toforeign investors.

Before 2012, the tax breaks includeda zero rate withholding tax rate forincome acquired by foreign investorsand individual investors from privatebonds and securities issued bynonfinancial companies in Brazil tofinance approved infrastructure projects.

As of 1 January 2013, the zero ratehas been extended to income acquiredby the same foreign investors andindividuals when generated byinfrastructure receivables investmentfunds (FIDCs), whose settlor or seller isnot a financial institution.

Among the eligibility conditions,FIDCs:• must have a minimum term of six

years• are prohibited from repurchasing the

fund’s shares in the first two years(exceptions may apply)

• cannot have amortisation paymentperiods shorter than 180 days

• must provide evidence that thefund’s shares or securities have beenregistered in systems authorised bythe Central Bank or CVM

• must invest at least 85% of the fund’sequity in receivables of eligibleinfrastructure projects.





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CanadaWe have recentlyreported on general anti-avoidance legislation

adoption around the world. Here is anexample of litigation under suchlegislation adopted many years ago inCanada.

A loss was produced when GlobalEquity Fund Ltd. subscribed forcommon shares of a new subsidiarycorporation (Newco), which then issuedpreferred shares to Global in the form ofa stock dividend. The preferred shareswere redeemable and retractable forCA$5,600,250 and had paid-up capitalof CA$56, which resulted in an incomeinclusion to Global of CA$56. The stockdividend effectively reduced the fairmarket value of the shares of Newcocommon shares to a nominal amountbut did not affect Global’s adjusted costbase. At this point Global sold theNewco common shares to a family trustfor CA$200,000, resulting in aCA$5,600,250 loss.

The minister of national revenuereassessed Global, denying the loss fromthe sale of Newco shares. Globalreported the loss as a business loss ratherthan a capital loss and contended theGAAR didn’t apply because itundertook the transactions with aprimary purpose of securing creditorprotection. Global said ‘the transactionsdo not amount to abusive tax avoidancebecause there is no general policy in theact which prevents the deduction ofartificial business losses’.

The federal court of appeal inCanada vs. Global Equity Fund Ltd.overturned a tax court of Canadajudgement, finding that a ‘highlyartificial’ CA$5.6 million business lossfrom sales of subsidiary shares should bedisallowed under the general antiavoidance rule set out in section 245 ofthe income tax act. The appeal courtdetermined that the government wasable to establish on appeal that thetransactions amounted to abusive taxavoidance.

ColombiaThe Colombiangovernment establishedan income tax

withholding which is creditable againstthe taxpayer’s final tax liability, at therate of 3.5% over the gross amount ofthe payment, applicable on payments toresidents that must file income taxreturns, for the following services: • analysis, design, implementation,

development, maintenance,adjustments, proof, or thedocumentation for the elaboration ofcomputer programme

• design of web pages• consulting related to computer

programme• licensing software• right to use software.

In December 2012, legislation wasissued providing rules for income tax ofcorporations and individuals, occasionalgains, value added tax, excise tax,transfer pricing and procedures fortaxes, to be effective as of 1 January2013, as indicated below:• a new flat rate of 25% for income tax

of corporations, including thoseforeign corporations with a PE inColombia, and 33% for thoseforeign entities not established inColombia

• establishes a new tax named CREE,(income tax for equity) 9% on nettaxable income for years 2013, 2014and 2015 and 8% as from 2016 andonwards

• employers may be exempted fromformer 9% contributions on salariesup to ten minimum monthly wages,complying with certain conditions,as from July 2013, or the date ofestablishing certain withholdings onsuch CREE





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• establishes new upper limits forallowable deduction of interest onproportion to equity of tax payer,allowable deduction of good willfrom acquisition of shares, andsalvage value of assets for decliningbalances method of depreciation

• occasional gains rate is reduced to10%

• a new national excise tax isestablished, on import and sale ofgoods and services, that may beallowable deduction for income tax

• new rules on reorganisation ofenterprises with financial problems,as well as on mergers and spin-offs

• new rules on PEs for foreigncompanies doing business inColombia.

Dominican RepublicThe Dominican Republichas introducedamendments to both the

personal and the corporate income taxregimes. Personal tax rates will beprogressive from 0% to 25%. Thecurrent 29% corporate income tax ratewill remain in place for 2013 but will bereduced to 28% in 2014 and to 27% in2015. Remuneration payments made toresident legal entities are subject to awithholding tax that is regarded as anadvance corporate income tax payment.Accordingly, the amounts withheld maybe set off against those taxpayers’ finalincome tax liability.

Withholding taxes are to be levied atthe following rates: 5% for goods andservices provided to the state and to anyother public bodies and 10% forpayments relating to the lease ofmovable or immovable properties or tofees, commissions, and othercompensation for services generallyprovided by individuals and notexecuted as employees.

A withholding tax of 10% should belevied on interest paid to individuals,whether resident or non-resident. Onthe other hand, Dominican Republic-source dividends will be subject to afinal withholding tax at the rate of 10%,rather than the current rate of 29%,regardless of the residence status of therecipient shareholder.

Some incentives will be abolished asof 1 January 2013, including the ten yeartax exemption for income derived fromthe production of any type of renewableenergy.

EcuadorRecent tax changes inlocal bank taxationdemonstrate the

President’s feud with the banking sectorin terms of his criticism that the bankscaused the hyperinflation leading to theadoption of the US dollar as the localcurrency and resulting loss of savings.

The law of income redistribution forsocial expenditure establishes significantchanges to the financial entities taxregime. The main details are as follows: 1. Private financial entities and credit

card administrators, subject to thecontrol of the superintendence ofbanking and insurance, will nolonger benefit from the 10%reduction in the corporate tax rate.As from 2013 the corporate incometax rate for these entities will be22%. In addition, advance paymentsfor such entities are increased andwill be determined by applying 3%on the total earnings of the previoustax year.





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2. The 10% reduction of the corporateincome tax rate will remainapplicable for other private entities.

3. Certain financial services providedby private financial entities andcredit card administrators will besubject to the general rate of 12%(currently 0%).

MexicoThe most recent budgetaddresses the MexicanPE issue for foreign

investors in the Maquilla programme.Specifically, during 2013, non-residentswould not be considered to have a PE inMexico regarding their Maquilaactivities carried out through enterprisessubject to the general income tax andunder a Maquila programme authorisedby the government provided: • the non-resident and the enterprise

operating under this programme, orany of the enterprise’s related parties,are not directly or indirectly relatedparties

• the non-resident submits before July2014 the information about theMaquila operations requested by thetax administration service.

United StatesThe US treasurydepartment and theInternal Revenue Service

(IRS) have announced their ‘PriorityGuidance Plan for 2012-2013’.According to the accompanying jointtreasury/IRS statement, the plancontains 317 projects that are prioritiesfor allocation of their resources duringthe 12 month period from July 2012 toJune 2013. The plan sets out theadministrative guidance and regulationsthat the US treasury department and theIRS will issue during this period.

The plan is divided into the majorareas of US taxation, includingconsolidated returns, corporations andtheir shareholders, employee benefits,excise taxes, exempt organisations,financial institutions and products,general tax issues, gifts and estates andtrusts, insurance companies andproducts, international issues,partnerships, subchapter S corporations,tax accounting, tax administration andtax-exempt bonds.

In the international area, the planspecifies 50 separate projects within thecategories of subpart F income, inboundtransactions, outbound transactions,foreign tax credits, transfer pricing,sourcing and expense allocation, treatiesand other general topics. The significantinternational projects for the 2012-2013periods include the following:• guidance on subpart F income

(including the treatment oftransactions involving commoditiesand non-functional currency, foreignbase company sales income andservices income, the treatment ofloans to foreign partnerships andrelated issues, and passive foreigninvestment companies)

• guidance on inbound transactions(including dividend equivalentpayments, central withholdingagreements, and reportingrequirements for foreign-owned UScorporations, i.e. IRS Form 5472,and reporting requirements forforeign corporations engaged in a US trade or business)





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• guidance on outbound transactions(including outbound assetreorganisations, transfers ofintangible property to foreigncorporations, the requirement forsubstantial business activities forexpatriating US corporations, andsurrogate foreign corporations)

• guidance on FTC issues (includingnon-compulsory payments, coveredasset acquisitions, overall foreignlosses, separate application of theFTC limitation to income resourcedunder treaties, and FTC splittingevents)

• guidance on transfer pricing(including cost sharingarrangements, global dealingoperations, and the APAprogramme)

• guidance on sourcing and expenseallocation (including the allocationand apportionment of interestexpense and the source of income)

• guidance on US tax treaties(including beneficial ownership andprocedures for requesting competentauthority assistance)

• guidance on other general topics(including the ‘presence test’ forbona fide residency in a US territory,foreign trust reporting, entityclassification, and the circumstancesunder which information returns arerequired with respect to paymentsmade by certain payment settlemententities to offshore accounts).

VenezuelaThe Belgianconstitutional court hasgiven its view on the

constitutionality and compatibility withthe 1993 protocol to the Belgium-Venezuela income tax treaty of thedenial of a carry-forward of the non-deductible part of foreign dividendsreceived from a Venezuelan subsidiary.

The Belgian parent (the taxpayer)owned a qualifying participation in aVenezuelan company on whichdividends were received. Because itsprofits were too low, it could not fullyuse the 95% dividend deduction forforeign dividends. Therefore, thetaxpayer claimed a carry-forward for theunused part of the deduction. TheBelgian tax administration denied thiscarry-forward because the subsidiarywas not established in an EEA countryand the taxpayer appealed against thatdecision.

The Belgian income tax code providesthat the unused part of the 95% foreigndividend deduction can be carriedforward indefinitely with respect todividends received from EEA countriesand received from treaty countries, if thetreaty contains a clause that dividendspaid by the foreign subsidiary are exemptunder the condition that the exemptionwould apply if both companies wereresident in Belgium. The last-mentionedclause is not included in the tax treatywith Venezuela.

The court first held that the denial ofthe carry-forward possibility with respectto the non-deductible part of the 95%foreign dividend deduction for nonEEA-countries is not incompatible withthe equality principle of the Belgianconstitution. The court held decisive thatthe EAA constitutes a special legal orderwhich may justify that cross-bordereconomic activities within the EEA arenot always taxed in the same manner aseconomic activities between an EU/EEAmember state and third countries.





Indirect taxesnews


Transfer pricing news


Dominican RepublicWith effect from 1January 2013, transferpricing provisions apply

to residents in respect of theirtransactions with:• related parties resident in the

Dominican Republic• non-resident related parties• individuals or companies that are

domiciled, incorporated or located interritories with a preferential taxregime or tax havens.

In order to establish the arm’s lengthprice in a controlled transaction, thefollowing methods may be used: • comparable uncontrolled price• resale price• cost-plus• profit split• transactional profit margin.

Taxpayers may request an advancepricing agreement from the taxauthorities (DGII) and such requestsmay be approved, modified or denied bythe tax authorities. The APA is valid forthe taxable period in which it is agreedupon and the next three subsequenttaxable periods. Bilateral or multilateralAPAs can be coordinated between thetaxpayer, the DGII and the taxauthorities of third countries.

Transfer pricing documentationmust be kept and forwarded to theDGII during the term established yearlyby the DGII. Non-compliance may besubject to three times the penaltyestablished in article 257 of the tax code.

Territories with a preferential taxregime or tax havens With effect from 1 January 2012,territories with preferential tax regimesor tax havens are defined as territorieswhere income is untaxed or subject to alesser tax rate than that which wouldcorrespond to the same taxpayer in theDominican Republic, by applying thegeneral regime. Territories that arequalified as non-cooperativejurisdictions by the global transparencyforum are deemed to have a preferentialtax regime.

The DGII will issue a list ofterritories that are not deemed to have apreferential tax regime and the followingterritories will be included in that list(the white list): • countries that have signed the

following treaties with theDominican Republic:

• treaties for the avoidance of doubletaxation containing an informationexchange provision

• exchange of information agreements(TIEAs)

• territories that have been white listedby the DGII.





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BrazilThe transfer pricingcalculation methods forinterest paid or received

by national entities has been amended inBrazil. The law revokes the general ruleproviding that the benchmark for theinterest expenses would correspond tothe LIBOR rate for US deposits of sixmonths plus an annual spread of 3%.

The calculation of the maximumamount of deductible expenses andminimal revenue arising from interestsubject to transfer pricing regulationsshould observe the following: • in case of transactions in USD at

fixed rate, the parameter rate is themarket rate of the sovereign bondsissued by the government on theexternal market, indexed in USD

• in case of transactions in Brazilianreal (BRL) at fixed rate, theparameter rate is the market rate ofthe sovereign bonds issued by thegovernment on the external market,indexed in BRL

• in case of transactions concludedabroad in BRL at floating rate, theMoF will determine the parameterrate

• for all other cases, the parameter rateis the London Interbank OfferedRate (LIBOR).

The subsequent obtained parameter ratecan still be increased by an annualspread to be established by the MoFbased on a market average (the previous3% limitation is now revoked).

The law expressly provides for theapplication of the new rules foragreements as of 1 January 2013. Thenovation, renewal or re-negotiation ofexisting agreements should beconsidered as a new transaction and,therefore, subject to the new regulations.

HungaryThe National Tax andCustoms Administration(NTCA) approach in

transfer pricing matters tends to beconservative; in practice it requires theapplication of statistical methods(specifically, the use of the interquartilerange) to narrow the final range ofcomparable values. In a recent case,however, this approach was successfullychallenged by a taxpayer.

This taxpayer (the company) is aHungarian tax resident manufacturer. Itacquires the required raw material partlyfrom related parties and it also sells thefinal products partly to related parties.In accordance with the Hungariantransfer pricing regulation, it preparedtransfer pricing documentationdetermining the arm’s length price ofthese transactions by applying thetransactional net margin method oncomparable data searched in aninternational financial database.

During a tax audit, the NTCA didnot challenge the application of themethod or the screening steps thecompany already made. However, itstated that such approach is incompletesince the screening process in general isnot capable of producing properly exactresults. Therefore, according to theNTCA, a statistical filter (theinterquartile range, which excludes thelower and upper 25% of the comparablevalues) should be applied to the results.

The company appealed the decisionof the NTCA defending its position bystating that: • it is not obliged by Hungarian laws

to apply the interquartile range • the interquartile range

indiscriminately narrows the rangeof the comparable values. In otherwords, it may exclude companiesregardless of their comparabilitywith the company since it does nottake into account the relevantcharacteristics (functions, assets andrisks) of the compared companies.





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The matter was finally broughtbefore the court where the companyalso pointed out that if furthercorrections are required to increase thecomparability, it could be done byapplying the working capital adjustment(WCA) described by the OECDtransfer pricing guidelines; this methodwould take into account the materialdifferences of the comparable companiesinstead of the indiscriminate exclusionof 50% of the values (as the interquartilerange would do).

At this stage of the court process, theMinistry of National Economy issuedits supervisory injunction as thesupervisory body of tax authorities(requested by the company before thecourt procedure), stating that:

• no legal obligation exists in Hungaryto apply the interquartile range tothe final set of comparables andalbeit there can be cases where it isadvisable, it is unnecessary in thepresent case

• the WCA should be used in the casewhich is a ‘qualitative’ adjustment asopposed to the interquartile range.On this basis, the tax authority mustre-open the case during which thedecision of the Ministry of NationalEconomy must be taken intoaccount.

Such case may affect a number ofHungarian tax resident entities whichhad a transfer pricing dispute with theNTCA on the basis of mandatoryapplication of the interquartile range.

RussiaThe Federal Tax Service(FTS) in Russia,published an official

letter explaining the rules governing thepreparation of transfer pricingdocumentation. Specifically, it explainedhow to classify parties to a transaction,which transactions requiredocumentation and how to select apricing method, as well as the level ofdetail required in the transfer pricingdocumentation, the filing deadline, thearchiving period and other relatedinformation.

The letter stipulates that thedocumentation should be considered asa set of documents or a single documentthat contains the following information:• a description of the main

characteristics of the taxpayer’s(individual) business activity andindustry segment. This sectionshould include information on thegoods (work, services) which are theobject of the controlled transaction(a group of homogeneoustransactions), their classification andcharacteristic features. It is alsonecessary to include data that willfacilitate an understanding of thefactors that may influence the price,such as the current level ofcompetition in the market, the mainconsumers of goods (work orservices), the main suppliers and thelevel of government regulation





Indirect taxesnews



• a description of the maincharacteristics of the Russiantaxpayer’s group of companiessubject to the controlled transaction.The letter recommends disclosing theownership structure of a corporategroup (including ownership stakes,functions and tax jurisdictions of agroup of companies), outlining thoseentities that can influence pricing inthe controlled transaction (group of homogeneous transactions), as well as the group’ s maincompetitive advantages, overallmarket position, etc.

• information on the group structureof the taxpayer. Although this is notrequired under the code, it isrecommended when preparingtransfer pricing documentation inorder to provide data about thecorporate structure, includingmember companies that are notparties to the controlled transaction(a group of homogeneoustransactions)

• information about the controlledtransaction and the functionalanalysis. This section should containthe grounds for considering atransaction as controlled underarticle 105.14 of the code, adescription of the transaction, itsterms and the amount ofincome/expense received/incurred asa result of the transaction and otherfactors which impacted profitability

• a description of the choice of thetransfer pricing method and sourcesof information, with the justificationof the method (including adescription of the relative advantagesand disadvantages of application ofeach method stipulated by the code),as well as the economic analysis thatprovides an estimation of an arm’ slength price or profitability range(depending on the chosen method)

The OECDIn 2010, the OECDannounced thecommencement of a

project on intangibles. A scoping paperwas published on the OECD websitefor public comment after which threepublic consultations were held withinterested parties. In 2012, the OECDissued a draft of the new Chapter VI. Itcontains two principal elements:1. A proposed revision of the

provisions of chapter VI of theOECD guidelines

2. A proposed revision of the annex tochapter VI containing examplesillustrating the application of theprovisions of the revised text ofchapter VI.

• a description determining the arm’slength price or profitability range.This section should include adescription of the comparabilityapproach, functions, assets and risksunder comparable transactions andtheir deviation from the controlledtransaction, as well as adjustmentsapplied when calculating the arm’slength range of prices or profitability.

• information on controllabletransactions in electronic form ifthere is a considerable amount ofsuch information involved, asrecommended by the FTS.





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The new chapter VI aims to provideguidance specially tailored to determinearm’s length conditions for transactionsthat involve the use or transfer ofintangibles. The OECD principlesfound in chapters I through III of theseguidelines apply equally to intangibles.In the analysis of cases involving the useor transfer of intangibles, as prescribedby the OECD, it is important toconsider:• the identification of specific

intangibles• the identification of the party that

should be entitled to retain thereturn derived from the use ofintangibles

• the nature of the controlledtransaction and whether they involvethe use of intangibles and/or thetransfer of intangibles

• the remuneration that would be paidbetween unrelated parties.

NorwayIn a recent case inNorway, the taxpayerowned 65% of the

company IKT which was incorporatedin Norway. Another individual, Mr B,owned the remaining 35%. The sharecapital of IKT was NOK 100,000,spread over 100 shares, each with a parvalue of NOK 1,000.

On 6 August 2004, the taxpayer soldall his shares in IKT to his whollyowned company Skjold Invest. As theshares were sold at par value, no taxablegain (or deductible loss) arose in thehands of the taxpayer from thetransaction.

Shortly thereafter, on 10 September2004, Skjold Invest sold 49 shares inIKT System to Mr G, in connectionwith Mr G becoming a permanentemployee of IKT. The consideration wasNOK 500,000 (NOK 10,204 per share).

board took into account that shares inIKT shortly after the transaction weresold to Mr G for a considerably higherprice than par value. Furthermore, theappeals board emphasised that theaverage annual dividend in the yearsclose to 2004 suggested a considerablyhigher share value. On this basis, theappeals board concluded that taxpayer’sincome was reduced as a result of acommunity of interest with SkjoldInvest.

The appeals board concluded on adiscretionary valuation of each share atNOK 10,000.

The case was admitted to thesupreme court, and the five supremecourt justices accepted the arguments ofthe tax authorities.

Five days later, on 15 September2004, Mr B sold his 35 shares to thetaxpayer. The price was fixed at parvalue pursuant to a shareholderagreement between taxpayer and Mr B.

The taxpayer did not discloseinformation about the transaction in histax return for the income year 2004.Following a notice from the taxauthorities, on 25 January 2006, thetaxpayer submitted a partiallycompleted form which stated that theshares were sold at cost, and thus (in hisopinion) resulted in no gain or loss.

The tax authorities did not acceptthat the transaction did not result in ataxable gain for taxpayer. On 25 April2009, the tax appeals board concludedthat the agreed price for the shares in thetransaction was below market value andtherefore not in accordance with thearm’s length principle. The tax appeals





Indirect taxesnews



Indirect taxes news

Netherlands A recent EuropeanCourt of justice (ECJ)decision although specific

to the Netherlands, may havewidespread application throughoutEurope.

The Dutch taxpayer entered into anagreement for the sale of a plot of landwith the local municipality. At that time,there was a building on the land whichhad been used as a library. Next to thebuilding, there was a public surfaced carpark.

The sales contract stipulated that ‘theproperty sold will be supplied in animproved condition’ in view of thetaxpayer’s intention to have homes builton the land, possibly combined withoffices and parking facilities. It wasagreed that the vendor would beresponsible for the demolition of thebuilding as well as for the removal of thesurface of the car park. In early 2007, thevendor had the building demolished andthe resulting building rubble removed.

The land was supplied to thetaxpayer at the time of the transfer ofownership by notarial act. On that date,the car park was still in use, as thesurface had yet to be removed and thetaxpayer had not yet obtained thenecessary planning permission for itsconstruction plans for the land, whichwas still at the planning and design stage.

The taxpayer considered the land asbuilding land and paid VAT to thevendor, whereas the tax inspectorreasoned that the supply of the land wasexempt because it concerned land whichhad not been built on.

The VAT directive provides thatmember states may regard as a taxableperson anyone who carries out, on anoccasional basis, a transaction relating tothe supply of building land.

Under the directive, ‘building land’means any unimproved or improvedland defined as such by the memberstates and provides that member statesshall exempt the supply of land which

has not been built on other than thesupply of building land.

In the Netherlands, the issuewhether or not real estate is subject toVAT is particularly relevant because realestate subject to VAT is exempt fromproperty transfer tax.

The ECJ began by recalling thatmember states, when defining the term‘building land’, must take the objectiveof the VAT directive into account (onlysupplies of land which has not been builton and which is not intended to supporta building is exempt from VAT).

In addition, the ECJ noticed that thedeclared intention of the partiesconcerning the VAT liability of atransaction must be taken intoconsideration in the course of an overallassessment of the circumstances of atransaction, provided that it is supportedby objective evidence. Such evidenceincludes the extent to which thetransformation work carried out by thevendor had advanced at the time of

supply. In addition, such evidence mayinclude the completion of demolitionwork by the vendor before the time ofsupply for the purposes of a futureconstruction, or the vendor’sunderstanding to carry out suchdemolition work with a view to futureconstruction.

In the case at issue, the demolitionwork of the building was carried out atthe time of supply and the demolition ofthe car park was supposed to be carriedout for the purposes of reconstruction.

Finally, the court decided that it isfor the referring court to carry out anoverall assessment of the factualcircumstances of the transaction at issue,which were prevailing at the time ofsupply, including the intention of theparties, which are supported byobjective evidence to determine whetheror not the transaction at issue concernsbuilding land.





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Consequently, the ECJ held the EUVAT directive, must be interpreted asmeaning that the exemption from VATdoes not cover the supply, such as that atissue in the main proceedings, of landwhich has not been built on followingthe demolition of the building situatedon it. This applies even where, at thetime of that supply, improvement workson the land, apart from that demolition,had not been carried out, but it isapparent from an overall assessment ofthe factual circumstances surroundingthat transaction and prevailing at thetime of supply, including the intentionof the parties when it is supported byobjective evidence, that, at that time, theland at issue was in fact intended to bebuilt on, a matter which is for thereferring court to determine.

FranceIn a recent case in Francethe taxpayer was aholding company that,

on the one hand, charged its subsidiariesfees for taxed administrative, technicaland accounting services provided to thesubsidiaries and, to its customers, feesfor engineering services and, on theother hand, received dividends from itssubsidiaries. The tax authorities took theposition that the ‘mixed holdingcompany’ was only entitled to deductinput VAT for the year 2002 inproportion to its taxed turnover ascompared to its total.

The administrative court of appeal inParis found in favour of the holdingcompany and declared that the expensesincurred by the holding company forthe purchase of capital, and other goodsand services, could not be attributed toits non-economic activity of holding theshares of its subsidiaries. By contrast,the holding of shares was subservient tothe holding company’s taxed activities.

Therefore, the business expenses thatwere not directly related to its taxedactivities were fully deductible asoverhead expenses because the holdingcompany had shown that the costs werefully incorporated into the cost price forits taxed services.

However, the supreme court,reversed the decision. With reference tothe ECJ’s judgement, the supreme courtconcluded that ‘mixed holdingcompanies’ are not entitled to deductVAT incurred in relation to the non-economic activity of holding the sharesof their subsidiaries, in the framework ofwhich they receive dividends from thosesubsidiaries.

PolandThe ECJ ruled on arecent case in Poland,that the provision of

leasing and insurance services to thesame person for the same itemconstitutes, in principle, two distinctservices for VAT purposes.Furthermore, if a lessor insures theleased item itself and then charges thelessee the exact amount that the lessorpaid for the insurance, the transaction isexempt from VAT as an insurancetransaction.

The case involved a Polish company,which requires clients to insure all leaseditems. The taxpayer offers its clients theoption of using insurance that itpurchases itself, as the insured party,since it retains ownership of the leaseditem. If the lessee chooses that option,the taxpayer issues an invoice to thelessee for the exact cost of the insurancepremium, without any mark-up.





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The taxpayer maintained that theinsurance transaction should be exemptfrom VAT under the VAT directive,which exempts insurance andreinsurance services from VAT.However, Polish tax authorities heldthat the insurance service was ancillaryto the leasing service, and that thereforethe two services should be treated as asingle transaction.

The tax authorities’ position wasupheld by the regional administrativecourt in Warsaw, which wrote thatseparating the two services wouldconstitute an ‘artificial split’ in economicterms and would ‘distort the functioningof the VAT system’. The taxpayerappealed that ruling to the Polishsupreme administrative court, whichstayed the proceedings to refer the issueto the ECJ.

The ECJ noted that under the VATdirective, the supply of leasing andinsurance services related to the sameleased item must generally be regardedas distinct supplies for VAT purposes.

SlovakiaThe ECJ has decided thatin certain circumstances,sales of goods which

remain within a customs warehouse aresubject to VAT, unless the member statein which that customs warehouse islocated has opted to exempt suchsupplies

In this recent case, partially finishedsteel products (coils) were shipped fromthe Ukraine to Slovakia on behalf of aSlovakian company. The goods wereinitially placed under a customswarehousing arrangement in Slovakiaand were later placed under inwardprocessing relief (IPR) in order to beprocessed into structural steel. Afterbeing placed under IPR, the goods weresold by the taxpayer to anotherSlovakian company and were once againplaced into a customs warehousingarrangement, without actually leavingthe customs warehouse in Slovakia intowhich they had been originally stored.

While it was accepted that the sale ofgoods in a customs warehouse inSlovakia is disregarded for customs dutypurposes, the Slovakian tax authoritiesrequested payment of VAT by thetaxpayer, considering the transaction tobe a normal supply of goods within thescope of VAT. On appeal, the supremecourt submitted the case to the ECJ for apreliminary ruling.

The ECJ, having considered theadvocate general’s opinion, found thatwhen goods have been placed under acustoms warehousing procedure in amember state and are sold whileremaining under customs’ control, thesale of such goods is subject to VATunless the relevant member state hasmade use of the available option toexempt that sale from VAT.

This case demonstrates the dangersof assuming that supplies of goods heldunder a customs suspensionarrangement can in all cases bedisregarded for VAT purposes. In lightof this judgment, US businesses owninggoods under the control of an EUcustoms authority should alwaysconsider the national legislation in therelevant EU member state to determinewhether the sale (or purchase) of suchgoods within the customs regime maycreate a VAT liability.





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BrazilNew legislation requirescompanies to specify oninvoices and receipts the

taxes charged (percentages), which arepart of the total amount of the productsale price.

Companies must list the amount ofmunicipal, state and federal taxes leviedfor each product described in theinvoices and receipts. Alternatively, suchinformation could also be displayed on apanel in plain view within theirestablishments.

For the purpose of the law, thefollowing taxes should be considered:• state VAT (ICMS)• municipal tax on services (ISS)• federal tax on manufactured

products (IPI)• tax on financial transactions (IOF)• contribution to the employee’s profit

participation programme (PIS)

• contribution for the financing ofsocial security (COFINS)

• contribution for intervention on theeconomic domain (CIDE).

Companies failing to comply shall besubject to penalties such as fines,suspension and revocation of the licenseto operate.

The law results from a popularinitiative that brought togetherapproximately 1.5 million signaturesrequesting more transparency of the taxsystem. The aim of the law is to makeclear to consumers how much of aproduct’s final price comes from taxes.Nevertheless, the new obligation willalso increase the costs of doing businessin Brazil, going against the efforts tosimplify the complex tax regulations.

SwedenThe ECJ has given itsdecision in the joint casesof Daimler and Widex.

The Swedish administrative court ofFalun had requested a preliminary rulingfrom the ECJ and details of thejudgment are summarised below.

Daimler AG, is a company havingthe seat of its economic activity inGermany and carrying out wintertesting of cars in Sweden. Daimler doesnot carry out any activity subject toVAT at the installations in Sweden buthas a wholly-owned subsidiary therewhich provides it with premises, testtracks and related services. Daimlerapplied for a refund of input VAT paidon the purchases it had made and whichhad not been used for any activitysubject to VAT in Sweden (i.e. thetesting of cars).

Widex is a company established inDenmark manufacturing hearing aidsand has a research centre in Swedencarrying out research into audiology,which constitutes a division withinWidex. Widex acquires goods andservices for the research activity which itcarries out in its division in Sweden.Widex also has a subsidiary in Swedenwhich sells and distributes its goods inSweden but the subsidiary operatestotally independently from the researchactivities of the division.

The Swedish tax authorities rejectedthe applications from Daimler andWidex for the refund of VAT paid inSweden on the grounds that theapplicants have a fixed establishment inSweden.





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Under the EU VAT directive taxablepersons who are not established in themember state in which they purchasegoods and services or import goodssubject to VAT but are established inanother member state may obtain arefund of that VAT in so far as the goodsand services are used for the purposes ofcertain specific transactions. A taxableperson that is not established within amember state, qualifies for a refund ofinput VAT if that person has neither theseat of his economic activity, nor a fixedestablishment from which businesstransactions are affected in thatparticular member state.

The issue was whether a taxableperson for VAT established in onemember state and carrying out onlytechnical testing or research work, notincluding taxable transactions, inanother member state can be regarded ashaving a ‘fixed establishment fromwhich business transactions are effected’within the meaning of the directives and,whether the right to refund of VAT inthat state can be denied.

The ECJ pointed out that thecriterion under which a refund of VATcan be denied due to the fact that there isa ‘fixed establishment from whichbusiness transactions are effected’includes two cumulative conditions:firstly, the existence of a ‘fixedestablishment’ and secondly that‘transactions’ are carried out from thatestablishment.

The ECJ emphasised that theexpression ‘fixed establishment fromwhich business transactions areeffected’, must be interpreted asregarding a non-resident taxable personas a person who does not have a fixedestablishment carrying out taxabletransactions in general. The existence ofactive transactions in the member stateconcerned constitutes the determiningfactor for exclusion of the right torefund of VAT. Furthermore, the term‘transactions’ used in the phrase ‘fromwhich business transactions are effected’can affect only output transactions.Consequently, in order to deny the rightto refund, taxable transactions mustactually be carried out by the fixedestablishment in the state where theapplication for refund is made, while themere ability to carry out suchtransactions does not suffice.

In the cases at hand, it is not indispute that the undertakings concerneddo not carry out input taxabletransactions in the member state wherethe refund applications have been madethrough their technical testing andresearch departments. As such, a right torefund of the output VAT paid must begranted. The purpose of the directive isto enable taxable persons to obtain arefund of the output VAT where theycould not deduct output VAT paid frominput VAT due because they have noactive taxable transactions in themember state of refund.





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In respect of whether the taxableperson has applied for the refund in themember state, where a wholly-ownedsubsidiary is based and its main purposeis almost exclusively to supply theperson with services in respect oftechnical testing, activity influences theinterpretation given to the concept of‘fixed establishment from whichbusiness transactions are affected’. TheECJ noted that a subsidiary is a taxableperson on its own account and that thepurchases of goods and services in themain proceedings were not made by it.

AustraliaA recent high courtjudgment concerned theliability of Qantas,

Australia’s largest airline, and itssubsidiary, Jetstar, to remit GST onamounts received for discount non-refundable tickets for domestic flights inthe event the passenger cancelled thereservation or did not show up to takethe flight.

The ECJ gave its decision in analmost identical situation in which hotelguests forfeited their non-refundabledeposits for reservations if theycancelled their reservations. In the lattercase, the hotelier argued successfullythat, under those circumstances, therewas no supply of any service and, thus,there was no basis for imposing VAT.

PortugalIn a recent court case,Portugal Telecom was aholding company that

provided technical, administrative andmanagement services to its subsidiaries.In the course of its business, PortugalTelecom acquired taxed services fromconsultants and charged its subsidiariesfor those services at the same price plusVAT. Portugal Telecom had deducted allthe VAT it had paid on the advisoryservices. However, the tax authoritiestook the view that, since its main activitywas the holding of shares, which is notan economic activity, Portugal Telecomcould, under the pro rata method ofdeduction, only deduct 25% of the inputVAT.

In response to the issue of whether aholding company which, in addition toits main activity of holding shares insubsidiary companies, acquires goodsand services which it then recharges tothose subsidiaries is entitled to deductthe related input tax in full or in part, theECJ stated that a holding companywhose sole purpose is to acquireholdings in other undertakings andwhich does not involve itself directly orindirectly in the management of thoseundertakings, does not have the status oftaxable person and, therefore, has noright to deduct VAT because the mereacquisition, holding and sale of sharesare not economic activities.





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The situation is different where theholding of shares in another company isaccompanied by direct or indirectinvolvement in the management of theother company. The involvement of aholding company in the management ofcompanies in which it has acquired ashareholding constitutes an economicactivity where it entails carrying outtransactions which are subject to VAT,such as the supply of administrative,financial, commercial and technicalservices.

For VAT to be deductible, the inputtransactions must have a direct andimmediate link with the outputtransactions giving rise to a right todeduct. Thus, the right to deduct VATcharged on the acquisition of goods orservices presupposes that theexpenditure incurred in acquiring themwas a component of the cost of outputtransactions that gave rise to the right todeduct. However, a taxable person alsohas a right to deduct input VAT, even ifthere is no direct and immediate linkbetween a particular input transactionand an output transaction ortransactions giving rise to the right todeduct, where the costs of the services inquestion are part of his general costs andare, as such, components of the price ofthe goods or services which he supplies.Such costs have a direct and immediatelink with the taxable person’s economicactivity as a whole.

Input VAT is only partly deductiblewhere the goods and services in questionare used by the taxable person both fortransactions in respect of which VAT isdeductible and for those in respect ofwhich VAT is not deductible, limitingthe right to deduct to that portion of theVAT which is attributable to the formertransactions. It is for the national courtto decide whether the holding companyused the advisory services for mixedpurposes. If the advisory services are tobe regarded as having a direct andimmediate link with the holdingcompany’s economic transactions givingrise to a right to deduct, the input VATin full and the right to deduct cannot belimited simply because the nationallegislation treats taxed transactions asbeing ancillary to the main activity ofholding companies.





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Treaty news

India/Germany

In a recent case, the taxpayer receivedroyalty and fees for technical servicesrendered in India. This income wassubject to a lower withholding tax rateof 10% of the gross amount inaccordance with article 12 of the taxtreaty. However, the tax authoritiescontended that the taxpayer was noteligible to claim benefit of the tax treatysince it is not liable to pay tax inGermany being a limited partnership.The tax authorities supported itsconclusion on the basis of the OECDreport on partnerships (i.e. theapplication of the OECD mode taxconvention to partnership).

Can the limited partnership beeligible to claim the benefits of thetax treaty?The high court held that the taxpayerwas eligible to claim the benefits of thetax treaty. The high court considered thefollowing: • the taxpayer is liable to pay trade tax

in accordance with the laws inGermany. Furthermore, it was issuedwith the tax residency certificate bythe German tax authorities,indicating that the taxpayer was ataxable unit under the taxation lawsof Germany

• article 2(3) of the tax treaty includestrade tax as one of the taxes to whichthe treaty will apply

• article 4 of the tax treaty refers to thedefinition of the term ‘resident’which means ‘any person who,under the laws of Germany is liableto tax therein by reason of hisdomicile, residence, place ofmanagement or any criterion of asimilar nature’.

Netherlands/Finland

The advocate general (AG) gave hisopinion in a case on the refund ofdividend withholding tax to a collectiveinvestment vehicle (CIV) resident inFinland. CIV’s are mutual fundarrangements which often have a formof dividends paid deduction for profitrepatriations to shareholders. Anywithholding tax cost, if not passed on toshareholders, becomes a sunk cost to theCIV.

The AG summarised the DutchDividend Withholding Tax Law(DWTL). The DWTL essentiallyprovides for a refund of dividendwithholding tax to beneficiaries residentin other EU member states if thosebeneficiaries: • are not subject to a profit tax in their

country of residence

• would not be subject to a profit tax ifthey were resident in theNetherlands

• do not undertake activities similar tothose of a tax-exempt investmentinstitution – a type of investmentvehicle which, under conditions, issubject to a corporate income taxrate of 0%.

The case at hand revolved around thesecond condition.

The AG held that the court ofappeal’s reasoning, namely that theresidence country’s concept of non-resident shareholder, is decisive andincorrect. Pointing to the lack ofharmonisation within the EU on thedefinition of what constitutes non-residency, every member state is free,without discriminating, to determine itstaxing jurisdiction and set conditionsand practices to effectuate this right.





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In the Netherlands, the AGindicated it is not obligated toacknowledge (in this case) Finishsubject-to-tax criteria. In the case beforethe court, the treatment of the taxpayerby the Dutch tax authorities is not basedon nationality or residence, but on thelegal and factual circumstances. Theselead to the conclusion that the taxpayerwould, under Dutch law, be subject tocorporate income tax. This places thetaxpayer in a different situation than asimilar entity that is not subject tocorporate income tax and which doeshave a right to a refund of the dividendwithholding tax.

The AG then addressed thetaxpayer’s argument that it wascomparable to a (Dutch) investmentinstitution. Under Dutch law, in orderto qualify for the 0% rate of corporateincome tax, the income derived by thefund must be taxable in the hands of theinvestors, i.e. that taxation takes place asif the investors had invested directlyinstead of through the fund.

The Finish CIV has, however, nolegal obligation to pass the income on toits investors. In this sense, the AGconcludes that the Finish system oftaxation of these types of entities is notcomparable with the Dutch system.

Further, a different treatment ofresident and non-resident investmentinstitutions/funds as regards dividendwithholding tax on the basis of whetheror not they are obligated to pass theirincome straight through to the investoris compatible with EU law.

The AG therefore proposed that, inlight of the fact that the Finish CIV andthe Dutch investment institution are notcomparable (enough), the supreme courtreversed the court of appeal’s decision,and denied the refund of the dividendwithholding tax to the Finish CIV.

Belgium/Korea/Luxembourg/UK

The Korean supreme court ruled thattwo UK investment funds which hadindirectly invested in a Korean companythrough two Luxembourg and twoBelgium companies were liable to tax inKorea on capital gains from a disposal ofshares in the Korean company accordingto Korean substance-over-formprovisions.

The taxpayers were two limitedpartnerships of the UK and founded forthe purpose of investing in real estate inKorea. The two Belgium companies,which were established by twoLuxembourg companies that werewholly owned by the taxpayers, acquiredall the shares of a Korean company whichowned a building in Seoul andsubsequently sold all the shares to a UK

company two years later. The taxpayerstook the view that the gain was exemptfrom tax in Korea under article 13(3) ofthe Belgium – Korea (Rep.) income taxtreaty (1977). The tax authority disagreedand held that the Korean domesticsubstance-over-form doctrine prevailedover the treaty by looking through theBelgium and Luxembourg intermediatecompanies, and thus the two UK limitedpartnerships were taxable in Korea.

The issue before the court waswhether the taxpayers were entitled toenjoy the treaty benefits and thus wereexempt from tax in Korea.

The Korean supreme court observedthat:• instead of substantial business

purposes, the Belgium companieswere established by the taxpayers forthe purpose of enjoying the treatybenefits which prevented the Koreangovernment from taxing capital gainsattributed to the Belgium companiesderived from the transfer of shares inKorea





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• the acquisition of the shares and thereal property in Korea was paid forby the taxpayers in the name of theBelgium companies. It was thetaxpayers who played a leading andsubstantive role in the whole processof acquisition and alienation of theshares and the real estate

• there was no evidence to prove thatthe Belgian companies weresubstantially engaged in economicactivities in Belgium, nor that theyhad independent economic interestsin the real property investment. Theonly role the Belgian companiesplayed was acting as the formaltransaction parties in the acquisitionand alienation of the shares and thereal estate.

Thus, it was held that the treaty was notapplicable to the UK taxpayersaccording to Korean domestic anti-abuse provisions and as such, thetaxpayers were taxable in Korea.

South African/Zambia

The South African revenue serviceissued a binding private ruling regardingthe availability of relief from doubletaxation on interest received or accruedfrom a Zambian source (foreign interest)by a resident of South Africa.

The applicant, a resident of SouthAfrica, was contemplating advancinginterest-bearing loan funding directly toborrowers in Zambia. The applicantwould fund these transactions from itsgeneral funding pool, and wouldaccordingly incur funding and otherrelated expenses. In return, the applicantwill receive foreign interest on the loansadvanced at a market-related rate.

Under the domestic tax laws of bothcountries, the foreign interest would besubject to tax in both South Africa andZambia. However, the South Africa-Zambia treaty provides as follows,‘Where interest is derived by any personfrom a person (the debtor) who isordinarily resident in one of theterritories and the interest would, butfor the provisions of this paragraph, besubject to tax in both territories, thatinterest shall be subject to tax only in theterritory in which the debtor isordinarily resident: Provided that thedebtor is ordinarily resident in bothterritories, the interest shall be subject totax only in the territory in which thatinterest is allowable as a deduction in thedetermination of the debtor’s taxableincome’.

The South African revenue serviceruled as follows:• that the foreign interest will form

part of the applicant’s ‘gross income’• that by virtue of the application of

the South Africa-Zambia treaty, theforeign interest will not be subject totax in South Africa. This will beachieved by reducing ‘gross income’by the amount of the foreign interest

• that any interest expense and relatedexpenses incurred by the applicant toproduce the foreign interest willaccordingly not be allowed as adeduction.





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Netherlands/Belgium

The Dutch supreme court gave itsdecision on the compatibility of theNetherlands Wage Tax Act (WTA) (i.e.taxation of a deemed wage) with the2001 Belgium-Netherlands tax treaty onincome and capital (the 2001 treaty).

In this case the taxpayer was aresident of Belgium in 2003 andoperated an orthodontist practice in theNetherlands. The taxpayer was adirector-employee of that practice. Theonly shareholder of the practice was ‘AHolding BV’, which was in turn 100%owned by a Belgian company, ‘AHolding BVBA’. All the shares of the AHolding BVBA were owned by thetaxpayer and her spouse.

From 2001 to 2003, the practiceemployed nine employees, includingtwo dental assistants and three dentalhygienists. In 2003, the profit of thepractice was EUR 331,074.

Following an audit, the declaredwage for 2003 was increased with adeemed wage. This amount was furtherincreased because: • there are not many orthodontists in

the Netherlands• the taxpayer was the manager of the

practice• the practice’s profits were mainly the

result of the taxpayer’s efforts.

The taxpayer argued that the deemedwage provision is incompatible with thetreaty. The lower court rejected thetaxpayer’s argument that the deemedwage tax provision constituted anunilateral extension of the taxing rightsof the Netherlands. The lower courtheld that the deemed wage tax provisionwas discussed during the treatynegotiations and could be applied.

The lower court observed that thevarious treatments of patients wereincluded in one invoice issued by thetaxpayer. Therefore, the court held thatthe profits of the practice were mainly

the result of the taxpayer’s labour. Thecourt of appeal confirmed the decisionof the lower court and held that thedeemed wage determined by the taxinspector was common for anorthodontist who works five days aweek. In addition, the court also heldthat the profits of the practice weremainly dependent on the taxpayer’semployment. Finally, the court rejectedthe taxpayer’s argument that the deemedwage should be reduced by the ‘releasedreserve’ (as defined) for deferred wage.Consequently, the court held that thedeemed wage provision was compatiblewith the 2001 treaty.

The supreme court first observedthat the term wage is not defined in thetreaty. Therefore, based on the treaty thedomestic definition of the Netherlandsis decisive. The term wage in the Dutchwage tax act includes: • normal wages • deemed wages, under which a

deemed minimum wage is taxedbased on the exercised profession.

Therefore, the court held that the treaty also applies to thedeemed wage. The court also held particularly relevant that inthe common explanatory memorandum both parties agreedthat the treaty also should apply to the deemed wageprovision. Therefore, the court held that: • the context of the treaty does not require another

interpretation • the inclusion of a deemed wage in the definition of the

term wage is not incompatible with the good faithprinciple which the contracting states have to respect wheninterpreting the treaty.

Consequently, the court held that the treaty also applies to theterm wage.

In addition, the court decided that due to the fact that adeemed wage is not actually received, such wage must bedeemed to be received for the application of the tax treaty atthe moment when the wage is deemed to be received underDutch domestic law. Thereafter, the court observed that in thecase at hand it was not in dispute that the deemed wage wastaxable in the Netherlands.

The court, nevertheless, decided to refer the case toanother court of appeal because it held that the original courtof appeal did insufficiently motivate why the calculation of thedeemed wage by the tax inspector was made sufficientlyplausible and substantiated.





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Tax policy

Joint Transfer Pricing ForumThe European Commission has issuedthe final report of the Joint TransferPricing Forum (JTPF) on secondaryadjustments in transfer pricing as part ofits 2011-2015 work programme. Thisreport defines terms and explores caseswhere transfer pricing adjustments canlead to double taxation.

The European Union (EU) JTPF, aspart of its work programme for 2011-2015, considered so-called secondaryadjustments in transfer pricing, as theseadjustments may result in doubletaxation. A questionnaire launched inJune 2011 took stock of the situationprevailing in each EU member state at1 July 2011 and served to prepare anoverview of the legal andadministrative/practical aspects in thedifferent member states.

The responses were as follows:• the application of secondary

adjustments may lead to doubletaxation

• if secondary adjustments are notcompulsory, it is recommended thatmember states refrain from makingsecondary adjustments when theylead to double taxation

• where secondary adjustments arecompulsory under the legislation ofa member state, it is recommendedthat they provide for ways andmeans to avoid double taxation (e.g.by endeavouring to solve it througha Mutual Agreement Procedure(MAP), or by allowing therepatriation of funds at an early stage

• it is recommended that EU memberstates characterise secondaryadjustments as constructivedividends or constructive capitalcontributions rather than asconstructive loans, as long as there isno repatriation

• where competent authorities agreeon a MAP to effectively put theaccounts in line with the economicintent of the primary adjustment,member states consider repatriationby a direct reimbursement orthrough an offset of inter-companyaccounts as an appropriate tool forachieving this result

• tax administrations should be awarethat taxpayers would need up to 90days from the date of the notificationof the agreement to actuallyimplement the repatriation

• when repatriation is agreed in aMAP settlement, it is recommendedthat the MAP agreement states thatno withholding tax will be appliedby the member state out of whichthe repatriation is made and noadditional taxable burden will beimposed in the member state towhich the repatriation is made

• where the MAP is between memberstates it is, on grounds ofsimplification, recommended thatmember states allow, as far aspossible, the repatriation without aninterest component and state this inthe MAP agreement

• if a member state considersrepatriation at an early stage, e.g. atthe stage of an audit, it isrecommended to ensure that theother member state is informedconcurrently based on an exchangeof information procedure, or by thetaxpayer (if the taxpayer agrees)

• a repatriation agreement reached atthe audit stage should not preclude arequest by the taxpayer for a MAP,nor should it indicate agreement ordisagreement with an auditstatement

• when a secondary adjustment isrequired, member states shouldrefrain from imposing a penalty withrespect to the secondary adjustment





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• when the tax consequences of asecondary adjustment are eliminatedor reduced in a MAP, it isrecommended to eliminate orcommensurately reduce the relatedpenalty, respectively

• as taxpayers may not be aware of thefact that in certain situations aseparate request needs to be madefor avoiding double taxationresulting from secondaryadjustments, member states whichdo not consider that secondaryadjustments can be treated under theEU Arbitration Convention areencouraged to highlight in theirpublic guidance the fact that aseparate request under article 25OECD model tax convention maybe needed to remove doubletaxation. For reasons of efficiency, itis recommended that taxpayerssubmit both requests in the sameletter.

Enhanced mutual cooperation in theBRICSAt a meeting on the 17-18 January 2013,the heads of revenue for Brazil, Russia,India, China and South Africa (theBRICS) identified seven areas of taxpolicy and administration that couldbenefit from enhanced mutualcooperation, including transfer pricingand tax avoidance or evasion.

The heads of revenue agree to extendthe cooperation on the following issuesof tax policy and tax administration: • contribute to the development of

international standards on taxationand transfer pricing, taking intoaccount the aspirations of developingcountries in general and the BRICScountries in particular

• strengthening the enforcementprocesses by taking appropriateactions for non-compliance andputting more resources oninternational cooperation

• sharing of best practices and capacitybuilding

• sharing of anti-tax evasion and non-compliance practices, includingabuse of treaty benefits and shiftingof profits by way of complex multi-layered structures

• development of a BRICS mechanismto facilitate countering abusive taxavoidance transactions,arrangements, shelters and schemes

• promotion of effective exchange ofinformation

• any other issues of common interestsand concerns related to taxation.

OECD beneficial ownershipThe OECD released revised proposalsconcerning the meaning of the term‘beneficial owner’ for the purposes ofarticles 10, 11, and 12 of the OECDmodel tax convention. This document isbased on the first discussion draftreleased in April 2011 and subsequentcomments received from the businesscommunity and other interested parties.The revised proposals address thefollowing key points: • the interaction of the definitions

provided in domestic law with theOECD guidelines

• the meaning of the beneficialownership concept

• the interaction of the beneficialownership test with anti– avoidancemeasures.





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OECD progress reportThe OECD has published an updatedprogress report listing (as of 5 December2012) jurisdictions that have signed theOECD-council of Europe conventionon mutual administrative assistance intax matters and substantiallyimplemented the internationally agreedtax standard. The updated progressreport indicates all but one country havefully implemented the internationallyagreed tax standard.

The internationally agreed taxstandard, which was developed by theOECD in co-operation with non-OECD countries and which wasendorsed by G20 finance ministers attheir Berlin meeting in 2004 and by theUN committee of experts oninternational cooperation in tax mattersat its October 2008 meeting, requires theexchange of information on request inall tax matters for the administration andenforcement of domestic tax lawwithout regard to a domestic tax interestrequirement or bank secrecy for taxpurposes. It also provides for extensivesafeguards to protect the confidentialityof the information exchanged.





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Who’s whoGrant Thornton International Ltd

Ian EvansGlobal leader – tax services T +44 (0)20 7391 9544E [email protected]

Claude LedouxExecutive director – tax operationsT +1 312 602 8522E [email protected]

Bill ZinkExecutive director – tax quality and trainingT +1 312 602 9036E [email protected]

Guenter SpielmannExecutive director, EMEA – tax services T +49 (0) 163 895 2434 E [email protected]

Regional tax resourcesWinston Romero Senior tax development manager – AmericasT +1 312 602 8349E [email protected]

Mirka VaicovaTax development manager – APACT +852 3987 1403E [email protected]

Jessica Maguren Tax development manager – EMEAT +44 (0)20 7391 9573E [email protected]

Global coordinatorsGary WoodsSenior manager – IIT developmentT +1 416 360 3065E [email protected]

Agata EysymonttCoordinator – tax specialist servicesT +44 (0)20 7391 9557E [email protected]

Francie KaufmanGlobal project coordinator – training and qualityT +1 262 646 3060 E [email protected]

MarketingRussell BishopSenior marketing executive – taxT +44 (0)20 7391 9549E [email protected]

© 2013 Grant ThorntonInternational Ltd. All rightsreserved.

This information has beenprovided by member firmswithin Grant ThorntonInternational Ltd, and is for informational purposesonly. Neither the respectivemember firm nor GrantThornton International Ltd can guarantee theaccuracy, timeliness orcompleteness of the datacontained herein. As such,you should not act on theinformation without firstseeking professional taxadvice.

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