issue 141 | july 23, 2015 a closer look · fatca change urged for us expats uae releases fatca...

GLOBAL TAX WEEKLYa closer look

ISSUE 141 | JULY 23, 2015

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

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

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

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

COUNTRIES AND REGIONS

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Global Tax Weekly – A Closer Look

©2015 CCH Incorporated and/or its affi liates. All rights reserved.


ISSUE 141 | JULY 23, 2015

CONTENTS

FEATURED ARTICLES

NEWS ROUND-UP

Cyprus's New Package Of Tax Incentives And Technical AmendmentsElias Neocleous and Philippos Aristotelous, Andreas Neocleous & Co LLC 5 Th e UK Summer Budget StatementStuart Gray, Senior Editor, Global Tax Weekly 8 Canada Changes Source Deduction Rules For Non-Resident Employees And EmployersRon Choudhury, Miller Th omson LLP 15 Topical News Briefi ng: Tax Inspectors Without BordersTh e Global Tax Weekly Editorial Team 20 Mexico's Energy Reform: NAFTA ImplicationsRocío Mejía, Perla Martínez and Alberto López, EY Mexico 22

Brazil – Reporting Of Financial Information And Compliance With FATCA RequirementsHermano A.C. Notaroberto Barbosa and Matheus Bertholo Piconez, Partner and Associate at BMA Consultoria Tributária, Rio de Janeiro, Brazil 28 Topical News Briefi ng: Virtual TaxTh e Global Tax Weekly Editorial Team 31 Qualcomm Inc. v. ADIT (2015) TS-70-ITAT-2015 DelhiPadmini Khare Kaicker and Karthik Natarajan, B.K. Khare & Co., independent member of Morison International 33

International Tax Planning 37 OECD Launches Tax Inspectors Without Borders Initiative

Germany, Netherlands To Exchange Data On Tax Rulings

African Revenue Offi cials Discuss International Tax Issues

WB, IMF To Ramp Up Tax Support For Developing States

VAT, GST, Sales Tax 40 ECJ AG Says Bitcoin Should Be Exempt

Greek Tax Hikes Begin To Take Eff ect

Romania's Tax Code Amendments Derailed


For article guidelines and submissions, contact [email protected]

US Tax Reform 42 House Passes Short-Term Fix For Highway Trust Fund

Legislation Would Increase US Start-Up Tax Break

Hillary Clinton Details Profi t-Sharing Tax Credit

Corporate Taxation 44 South Korea May Raise Eff ective Corporate Tax Rates

Peru Off ers Tax Break For Scientifi c R&D

US Deductibility Of Puerto Rican Excise Tax Questioned

International Trade 46 Canada, Ukraine Conclude FTA Negotiations

WTO States Ready To Expand ITA

FATCA 48 FATCA Change Urged For US Expats

UAE Releases FATCA Guidance, Registration Form

Country Focus: Australia 50 Australian Treasurer Takes Stock Of Tax Reform Feedback

Australians Back GST Reform, Property Council Says

Increase GST To 15 Percent, Australian Accountants Say

TAX TREATY ROUND-UP 53CONFERENCE CALENDAR 56IN THE COURTS 65THE JESTER'S COLUMN 72

© 2015 CCH Incorporated and its affi liates. All rights reserved.

FEATURED ARTICLES ISSUE 141 | JULY 23, 2015

Cyprus's New Package Of Tax Incentives And Technical Amendments by Elias Neocleous and Philippos Aristotelous, Andreas Neocleous & Co LLC

Introduction

Th e Cyprus Government has announced a num-ber of proposed tax incentives aimed at encourag-ing economic activity and attracting inward direct investment. It has also submitted a number of draft laws to the House of Representatives to implement the new provisions of the EU Parent-Subsidiary Directive, to simplify the tax regime and make it more attractive, fair and eff ective.

Th e proposed changes fall under three main headings:

Stimulating economic activity and investment in real estate; Increasing competitiveness and aligning domestic legislation with EU Directives; Attracting high-net-worth individuals and high-earning employees.

Economic Activity And Investment In Real Estate

Reduction Of Transfer Fees On Real Estate Transactions

In order to stimulate the property market, the Government proposes to halve the fee payable on

transfers of immovable property until December 31, 2016.

Th e current rate is 3 percent on the fi rst EUR85,340 (USD95,298) of the consideration, 4 percent on the next EUR85,340 and 8 percent on the balance.

Temporary Exemption From Capital Gains Tax

In addition, any future gain on disposal of immov-able property acquired in the period beginning on the date the law becomes eff ective and ending on December 31, 2016, will be exempt from capital gains tax.

Taxation Of Capital Gains On Indirect Disposals Of Real Estate

Gains on disposal of shares in companies in which the value of real estate directly or indirectly ac-counts for 50 percent or more of the value of the shares will now be subject to capital gains tax.

Abolition Of Local Taxes On Immovable Property

Immovable property taxes charged by local authori-ties will be abolished.

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Extension Of Accelerated Capital Allowances

Th e accelerated tax writing-down allowances on plant and machinery and industrial and hotel build-ings will be extended until December 31, 2016.

Alignment With EU Directives And ECJ Case Law

In order to implement the latest changes to the EU Parent-Subsidiary Directive, after December 31, 2015, the current exemption from Cyprus income tax on dividends received by Cyprus-resident compa-nies will not be available in cases where the dividend was allowed as a tax deduction in the jurisdiction of the paying entity, or where the arrangement is a sham.

In addition, the group loss relief provisions are to be amended with retrospective eff ect from January 1, 2015, so that group relief is available between companies resident in Cyprus and companies resi-dent in other EU member states.

Changes To Th e Arm's Length Principle Cyprus does not have specifi c transfer pricing rules in its domestic legislation, but the arm's length principle is incorporated into the Income Tax Law, allowing the tax authorities to impose additional taxes on profi ts or benefi ts arising from related par-ty transactions. Currently the only adjustments that can be made are to increase profi ts, and there is no provision for the corresponding expenses and losses to be compensated. Th e law will be amended to tax the profi t arising from the transactions between the related parties and to allow a corresponding deduc-tion for the counterparty to the transaction. Th e

Government hopes that the adoption of interna-tional transfer pricing principles will attract more multinational businesses.

Notional Interest Deduction On Equity Capital

With eff ect from January 1, 2015, companies and permanent establishments of foreign companies are to be given a notional interest deduction (NID) on new equity capital (share capital and share premi-um) introduced after that date, calculated by refer-ence to the government ten-year bond. Th e NID will be limited to 80 percent of the taxable profi t before deducting the NID, and no NID will be al-lowed in the event of losses.

Th e introduction of the NID is intended to level the playing fi eld between equity and debt fi nance, as both will be eligible for tax deductions.

Tax Neutrality Of Foreign Exchange Gains And Losses

Profi ts and losses arising from currency exchange rate fl uctuations will be disregarded for tax purpos-es apart from gains or losses arising from trading in foreign currencies or foreign currency derivatives. Entities trading in foreign currencies or foreign cur-rency derivatives may irrevocably elect to be taxed on the basis of realized profi ts or losses.

Limitation Of Losses Carried Forward On IP Activities

Cyprus's IP box regime allows an 80 percent de-duction from the net profi t generated by the use or

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disposal of IP rights. An amendment is proposed in order to make clear that if a loss is made from such activities, only 20 percent of the resulting loss will be allowable.

Anti-Abuse Provisions Corporate reorganizations are currently exempt from all forms of tax. In order to prevent abuse, it is proposed that the exemption may be withheld if the tax authorities consider that a reorganization is not carried out on valid commercial grounds.

Th e tax authorities will also be given discretionary powers to disregard the exemption from the Special Contribution for Defence (SDC) of dividend pay-ments to another resident company if such a com-pany was interposed without valid commercial or economic reason apart from reducing or avoiding the liability for SDC.

Introduction Of Non-Domiciled Regime For SDC

At present, all Cyprus tax-resident individuals are liable to pay SDC on rents, dividends and interest.

It is now intended to introduce the option for in-dividuals who are resident in Cyprus to obtain ex-emption from SDC if their domicile is elsewhere.

Extension Of Income Tax Exemption For New Individual Taxpayers

Individuals taking up residence and employment in Cyprus with income from employment of more than EUR100,000 per annum are currently en-titled to a 50 percent deduction for the fi rst fi ve years of employment. Th e Government intends to extend the period for which the deduction is avail-able from fi ve years to ten.

Conclusion At this stage, the draft laws have still to be con-sidered and voted on by the legislature, and there may be signifi cant amendments during the course of the legislative process. We will monitor devel-opments and issue further details when there is anything to report.

7


The UK Summer Budget Statement by Stuart Gray, Senior Editor, Global Tax Weekly

Th ere were quite a few surprises in the UK Govern-ment's summer Budget, 1 the fi rst budget statement by a purely Conservative Government for 20 years, as Chancellor of the Exchequer George Osborne at-tempted to put his mark on UK tax and economic policy. Some of the most noteworthy measures are summarized here.

Th e Fiscal Situation Th e Government intends to reduce the budget defi cit, currently at 5.9 percent of gross domestic product (GDP), by about 1 percent per year on av-erage. Th is means a budget surplus will be achieved in 2019/20, when public debt, now more than 80 percent of GDP, will begin to fall.

Th e Government says that GBP12bn will be saved from the budget by 2019/20 as a result of proposed welfare reforms. An additional GBP5bn in revenue will be raised from measures to tackle tax avoidance, planning, evasion, compliance, and so-called "im-balances" in the tax system. However, independent analysis suggests that considerably more than GB-P5bn will be raised in revenue as a result of this bud-get, with increases to several minor taxes announced.

Th e Headline Grabber Th e measure that made most of the headlines was not directly tax-related, and, in a way, was distinctly

un-Conservative, but given the impact it is likely to have on businesses operating in the UK, it is worthy of mention – and that was Osborne's proposal to turn the GBP6.50 (USD10) minimum hourly wage (for 2014) into a "living wage" of over GBP9 (USD14) per hour by 2020 for employees aged 25 years or more.

Th ere was, however, an economically liberal reason for doing so: that low wages would no longer need to be supplemented by the taxpayer in the form of working tax credits, saving the Government GB-P12bn overall and shrinking the state by degrees.

Th e UK has a higher incidence of low pay than other advanced economies, with one in fi ve workers clas-sifi ed as low-paid, compared with an average of only one in six among OECD countries. Th erefore, this measure is a key part of Osborne's plan to transform the UK from a "low wage, high welfare economy" into a "high wage, low welfare economy."

"With a strengthening economy, the government believes that now is the right time to take action to

8

tackle low pay and ensure that lower wage workers can take a greater share of the gains from growth."

It remains to be seen how Osborne's theory works in practice.

Corporate Tax Perhaps the most surprising announcement was that corporate tax will be reduced again, from 20 percent to 19 percent in 2017, and to 18 percent in 2020. Perhaps this measure was required as a sweet-ener for businesses facing the prospect of higher labor costs in the years ahead. Nevertheless, after corporation tax was cut from 28 percent to 20 per-cent in the last parliament, this announcement was a strong statement of intent from the Government that the UK intends to compete aggressively for foreign investment.

According to the Government, the corporation tax cuts delivered since 2010 will save businesses GB-P10bn a year from 2016. Th e newly announced cuts are expected to save small and large business-es a further GBP6.6bn by 2021, and will benefi t 1.1m businesses.

In 2013, the Government published analysis mod-eling the economic impact of the corporation tax cuts delivered during the last parliament. Th is analysis has been updated to refl ect the addition-al benefi t of the rate cuts announced in the sum-mer Budget. It suggests that cutting corporation tax from 20 percent to 18 percent could increase GDP in the long run by between 0.1 percent and

0.2 percent (GBP1.8bn to GBP3.6bn in today's prices) and that overall the cuts since 2010 could increase GDP by between 0.6 percent and 1 per-cent (GBP10.9bn to GBP18.1bn) in the long run. Th ese numbers exclude the positive impact the cuts will have on inward investment. Adjusting for in-ward investment would mean that the overall cuts could boost GDP by between 0.7 percent and 1.1 percent (GBP12.7bn to GBP19.9bn).

Th e UK already has the joint-lowest rate of corporate tax in the G20, and this additional reduction will put it in similar territory to low-tax fi nancial centers like Hong Kong and Singapore in tax rate terms. To some extent, this tax cut would appear to contradict the aims of the OECD BEPS project, which the UK sup-ports, with a consensus emerging among the wealthy nations that it's time to restrain tax competition. So it will be interesting to see how this proposal is received in Brussels, Paris, Berlin, and even Washington DC.

Th e corporate tax cut is included in the 2015 Sum-mer Finance Bill. 2

Th e Tory "Tax Lock" Confi rmation by Osborne that the Government would carry out a key Conservative manifesto pledge by legislating for a "tax lock" could also be viewed positively by businesses as they plan their future operations. Th e tax lock will mean that the main rates of personal income tax, National Insur-ance (social security) contributions (NICs) and val-ue-added tax (VAT) will not be raised during the fi ve-year life of the current parliament.

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"Th e government will legislate to set a ceiling for the main rates of income tax, the standard and reduced rates of VAT, and employer and employee (Class 1) NICs rates, ensuring that they cannot rise above their current (2015/16) levels," the Budget document confi rms. "Th e tax lock will also ensure that the NICs Upper Earnings Limit cannot rise above the income tax higher rate threshold; and will prevent the relevant statutory provisions be-ing used to remove any items from the zero rate of VAT and reduced rate of VAT for the duration of this Parliament."

Th is measure is included in the 2015 Summer Fi-nance Bill.

Annual Investment Allowance (AIA) In another move seen as pro-business and invest-ment, the Chancellor announced that the Govern-ment will increase the permanent level of the AIA from GBP25,000 to GBP200,000 for all qualifying investment in plant and machinery made on or af-ter January 1, 2016. However, some businesses were disappointed that the Chancellor didn't fi x the AIA at its previous temporary level of GBP500,000.


Personal Tax Cuts Osborne also delivered modest tax cuts for low- and middle-income earners by raising both the 20 percent basic rate and the 40 percent higher rate thresholds.

Th e Government will increase the income threshold at which individual income tax becomes payable from GBP10,600 in 2015/16 to GBP11,000 in 2016/17. It will increase to GBP11,200 from 2017/18. Th e Gov-ernment will also legislate to ensure that once the per-sonal allowance reaches GBP12,500 it will be uprated in line with the National Minimum Wage (NMW), ensuring that anyone on the NMW working 30 hours per week or less does not pay income tax.

Th e Government will increase the higher rate thresh-old from GBP42,385 in 2015/16 to GBP43,000 in 2016/17, and to GBP43,600 in 2017/18. Th e NICs Upper Earnings Limit will also increase to remain aligned with the higher rate threshold.

All of these changes were included in the 2015 Summer Finance Bill.

Inheritance Tax (IHT) Relief Th e threshold at which IHT becomes payable is fi xed at GBP325,000 until 2021. However, the Chancellor indulged in a little creative mathemat-ics to eff ectively boost the IHT threshold on inheri-tances of a main residence to GBP1m.

To achieve this, the Government is creating a sup-plementary main home IHT allowance, which can be used in addition to the principle GBP325,000 al-lowance. Th e allowance will be up to GBP100,000 in 2017/18, up to GBP125,000 in 2018/19, up to GBP150,000 in 2019/20, and up to GBP175,000 in 2020/21. Th is creates an eff ective GBP500,000 IHT threshold for estates in 2020/21. Note,

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however, that both allowances are transferable to the surviving spouse or civil partner upon death (in the UK no IHT is due on estates passed between spouses and civil partners). Th erefore, as with the current nil-rate band, any unused main residence nil-rate band will be transferred to a surviving spouse or civil partner and means the eff ective IHT threshold will rise to GBP1m in 2020/21.

Th e allowance will also be available when a person downsizes or ceases to own a home on or after July 8, 2015, and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants. Th is element will be the subject of a technical consultation.

However, there will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than GBP2m. Th is will be at a withdrawal rate of GBP1 for every GBP2 over this threshold.

Elements of the IHT measures will be consulted on later this year, with legislation included in both the 2015 Summer Finance Bill and the 2016 Finance Bill.

Tax Hikes Now comes the devil in the detail. As mentioned above, the Government has promised to balance the budget by 2019/20 (which is actually one year later than was pledged in the 2015 Conservative Party election manifesto) and that requires more revenue as well as expenditure cuts. In fact, according to the Institute for Fiscal Studies (IFS), while there were GBP8bn worth of tax cuts in the summer Budget,

these were more than off set by GBP14bn in tax in-creases. 3 Indeed, the IFS calculates that this Budget will produce a net revenue increase of GBP6.5bn per year by 2020.

Non-Domicile Tax Status In something of a surprise move, the Government is removing the ability of wealthy individuals to claim non-domiciled tax status, which has allowed them to escape UK tax on foreign income as long as that income stays off shore. It was a measure al-most lifted straight from the Labour Party election manifesto, and was a policy that was ironically much maligned by the Conservative Party prior to May's general election as further evidence of La-bour's increasingly anti-business and anti-wealth stance. Yet, this move is likely to be popular with many taxpayers in the UK, who might share Os-borne's new-found view that non-dom status is "fundamentally unfair."

Under the changes announced by Osborne, from April 2017, anybody who has been resident in the UK for more than 15 of the past 20 tax years will be deemed UK-domiciled for tax purposes. Further-more, it will no longer be possible for somebody who is born in the UK to parents who are UK do-miciled to claim non-domicile status if they leave but then return and take up residency in the UK. Th ese changes are intended to bring an end to the permanent non-domicile status.

Furthermore, from April 2017, the Government will also introduce new rules so that everybody who

11

owns residential property in the UK and would otherwise pay IHT on that property cannot avoid paying it by holding it in an off shore structure.

Bank Tax Reform In this area, Osborne's proposals attempt to strike a balance between ensuring that banks make an "addi-tional contribution to refl ect their unique risks" while maintaining the competitiveness of the UK banking industry. Th erefore, a new tax on banking sector prof-its of 8 percent will be introduced on January 1, 2016. However, this will be balanced against a phased reduc-tion of the levy on banks' global balance sheet liabili-ties as follows: from 0.21 percent to 0.18 percent from January 2016, 0.17 percent from January 2017, 0.16 percent from January 2018, 0.15 percent from January 2019, 0.14 percent from January 2020, and 0.10 per-cent from January 2021. Additionally, there will be a change in the bank levy's scope from January 1, 2021, meaning that UK headquartered banks are levied on their UK balance sheet liabilities.

Th ese measures are included in the 2015 Summer Finance Bill.

Dividend Tax Osborne's dividend tax changes, while dressed up as a simplifi cation measure, will also raise ad-ditional revenue, especially from investors at the wealthier end of the spectrum. Th e dividend tax changes are also needed, according to the Chan-cellor, because there is a strong incentive for peo-ple to self-incorporate and pay the lower rates of tax due on dividends.

Under the proposals, the Government will abolish the Dividend Tax Credit from April 2016 and intro-duce a new Dividend Tax Allowance of GBP5,000 a year. Th e new rates of tax on dividend income above the allowance will be 7.5 percent for basic rate tax-payers, 32.5 percent for higher rate taxpayers, and 38.1 percent for additional rate taxpayers. Th e changes will be introduced in the 2016 Finance Bill.

Carried Interest In another proposal usually more closely associated with Labour than the Conservatives, the Govern-ment will introduce legislation, eff ective from July 8, 2015, to ensure that sums that accrue to invest-ment fund managers by way of carried interest will be charged to the full rate of capital gains tax, with only limited deductions being permitted. Th is is included in the 2015 Summer Finance Bill.

Th e Government will also launch a consultation to better understand the activities of collective invest-ment schemes, to determine under what circum-stances performance returns should be taxed as a capital gain. It is anticipated that this will not alter the tax treatment of carried interest.

Landlords' Mortgage Interest Deduction Osborne announced that the Government will restrict the relief on finance costs that individ-ual landlords of residential property can get to the 20 percent basic rate of tax. The restriction will be included in the 2015 Summer Finance Bill and phased in over four years, starting from April 2017.

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However, from April 2016, the Government will replace the Wear and Tear Allowance with a new relief that allows all residential landlords to deduct the actual costs of replacing furnishings. Capital allowances will continue to apply for landlords of furnished holiday lets. Th e government intends to publish a technical consultation on this proposal before including it in the 2016 Finance Bill.

Pension Tax Relief A substantial chunk of additional revenue will also come from yet another tightening of the pension tax relief rules for those on high incomes – another proposal that could quite easily have been uttered by a Labour Chancellor.

Under the proposed changes, from April 2016, the Government will introduce a taper to the Annual Allowance for those with adjusted annual incomes, including their own and employer's pension con-tributions, over GBP150,000. For every GBP2 of adjusted income over GBP150,000, an individual's Annual Allowance – the limit on the amount of tax relieved pension saving that can be made by an indi-vidual or their employer each year – will be reduced by GBP1, down to a minimum of GBP10,000.


Insurance Premium Tax (IPT) From November 1, 2015, the standard rate of IPT will be increased by 3.5 percent to 9.5 percent. From this date all premiums received by insurers using the IPT cash accounting scheme will be charged at 9.5

percent. For insurers using the special accounting scheme, there will be a four-month concessionary pe-riod that will begin on November 1, 2015, and end on February 29, 2016, during which premiums re-ceived that relate to policies entered into before No-vember 1, 2015, will continue to be liable to IPT at 6 percent. From March 1, 2016, all premiums received by insurers will be taxed at the new rate of 9.5 per-cent, regardless of when the policy was entered into.

Vehicle Excise Duty (VED) In another revenue-raising measure, the Chancellor announced a reform of the system of VED, which is payable on an annual basis by the registered keeper of a vehicle. Th is is intended to fund improvements to Britain's road network.

Under the changes, a new VED banding system for cars registered on or after April 1, 2017, will be in-troduced. First year rates will vary according to the carbon dioxide emissions of the vehicle. Th ere will be a fl at standard rate of GBP140 for all cars except those emitting 0 grams of carbon dioxide per kilo-meter, for which the standard rate will be GBP0. Cars with a list price above GBP40,000 will attract a supplement of GBP310 per year for the fi rst fi ve years in which the standard rate is paid.

Th is proposal is included in the 2015 Summer Fi-nance Bill.

Summary Considering that this was the second Budget to be announced within the space of a little less than four months, there were some bold and surprising measures

13

here. In a way this was to be expected: it was the fi rst Budget to be announced by a purely Conservative Government in 20 years, and Osborne was obviously keen to make an impact. On the other hand, the Bud-get revealed that Britain continues to feel the eff ect of the fi nancial crisis and that fi scal consolidation remains the priority. Th is Budget also showed that Osborne is a very canny political operator, having outfl anked the Labour Party by recycling some of their more popular policies – and not for the fi rst time.

However, reaction to the Budget has understand-ably been mixed from the business community and fi scal experts.

Th e Confederation of British Industry's (CBI's) re-sponse was that the Budget was a "double-edged sword" for business.

"Firms will welcome measures to balance the books and boost investment, but they will be concerned by legislating for wage increases they may not be able to deliver," said John Cridland, the Director-General of the CBI.

"Th e further reduction in corporation tax is a wel-come surprise but tax reductions for employers don't appear to match the businesses most aff ected by a rise," he warned.

Th e IFS observed that this was a "big Budget" in some respects, but "deeply disappointing" for those taxpay-ers who had hoped that the Chancellor might make

more fundamental changes to the UK's "creaking" tax system. "Th is was not the Budget of a tax-reforming Chancellor," said Paul Johnson, IFS Director.

No, it was more the Budget of an opportunistic Chancellor treading a tightrope between growth and austerity. Some might say it was the budget of a gambler – legislating for the living wage cer-tainly seems a risky strategy that could backfi re on the Government.

Although the business community has reservations about this Budget, Osborne has nevertheless presided over rising business confi dence and a growing econ-omy in the latter half of his tenure at the Treasury, thanks in part to his courageous decision to slash cor-porate tax. Yet the job is only half done. Th e budget defi cit should have been eliminated by now under the Chancellor's original plans, and if it was, the 2015 summer Budget might have looked at lot diff erent. For a start, Osborne probably wouldn't need to try to convince taxpayers that they are getting a tax cut when the tax burden is in fact rising. Unfortunately for him, this is a trick that he might have to pull off a few more times before the books are balanced.

ENDNOTES

1 https://www.gov.uk/government/speeches/chancellor-

george-osbornes-summer-budget-2015-speech

2 https://www.gov.uk/government/publications/summer-

fi nance-bill-2015-legislation-and-explanatory-notes

3 http://www.ifs.org.uk/uploads/publications/budgets/

Budgets%202015/Summer/opening_remarks.pdf

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Canada Changes Source Deduction Rules For Non-Resident Employees And Employers by Ron Choudhury, Miller Th omson LLP

Resident and non-resident employers with employ-ees in Canada have a signifi cant compliance burden in terms of the source deductions required from re-muneration paid to such employees. While most resident employers are well-versed with such com-pliance obligations and reasonably prepared to meet these obligations, non-resident employers are not al-ways aware of these obligations, particularly in the context of employees placed temporarily in Canada.

Th is article discusses a non-resident employer's ob-ligations vis-à-vis Canadian source deductions for employees temporarily located in Canada and cer-tain relieving changes announced in the 2015 Fed-eral Budget in this regard.

Legislative Background Paragraph 153(1)(a) of the Income Tax Act (Canada) (the "Act") requires that every person paying at any time in a taxation year salary, wages or other remu-neration (barring certain exceptions) deduct or with-hold certain amounts determined in accordance with prescribed rules. Th e prescribed rules are contained in the Income Tax Regulations (the "Regulations").

Regulations 100 through 110 of the Regulations contain rules prescribing the manner in which

source deductions are to be made, reported and re-mitted (including deductions for services rendered in Canada). Regulation 100 contains defi nitions of certain terms relevant to the process. Regulation 101 is the operative provision and states that every person who makes a payment described in subsec-tion 153(1) of the Act shall deduct or remit certain amounts as determined in accordance with Part I of the Regulations.

Regulation 102 details the manner of withhold-ing from periodic payments, while regulation 103 contains similar rules for non-periodic payments. Regulation 104(2) is important to non-resident employees. It states that no source deduction is re-quired in respect of an employee who was neither employed nor resident in Canada at the time of a payment of remuneration except in respect of: (a) remuneration described in subparagraph

115(2)(e)(i) of the Act that is paid to a non-resident person who has in the year, or in any previous year, ceased to be resident in Canada; and

15

(b) remuneration reasonably attributable to the duties of any offi ce or employment per-formed or to be performed in Canada by the non-resident person.

Regulation 105 deals with withholdings for services rendered in Canada by non-employees, regulation 106 deals with variations in deductions, regulation 107 deals with reporting, and regulations 108 and 109 deal with remittances. Regulation 109 discuss-es elections to increase deductions, while regulation 110 defi nes prescribed persons for this purpose.

Application To Non-Resident Employees Th e combined eff ect of paragraph 153(1)(a) of the Act and Part I of the Regulations is that every per-son making a payment in respect of employment services rendered in Canada by an individual, irre-spective of whether the payor or payee is a resident or non-resident, must withhold and remit income tax in respect of such payment. In the context of a non-resident employer, such employer must with-hold and remit income tax in respect of employ-ment services rendered in Canada by an employee unless regulation 104 is applicable, i.e. , the em-ployee is neither employed nor resident in Canada.

In other words, remuneration paid to a non-resi-dent employee who is employed in Canada is sub-ject to source deduction in Canada. "Employed" is defi ned in subsection 248(1) of the Act as per-forming the duties of an offi ce or employment. Th erefore, any individual performing the duties of an offi ce or employment in Canada is considered

to be employed in Canada and is ineligible for the exemption off ered by regulation 104. Th is class of individuals includes non-residents temporarily placed in Canada by non-resident employers.

Given that non-resident employees performing employment duties in Canada are subject to source deduction in Canada, their employers (resident or non-resident) have the obligation to deduct and remit taxes pursuant to the rules in Part I of the Regulations. Th is creates an undue burden on non-resident employers, particularly those who may be temporarily locating employees in Canada for a specifi c short-term project or task.

Treaty Issues Non-residents should note that a Canadian tax treaty with their jurisdiction will not relieve any withholding obligations imposed by the Act. A tax treaty will potentially relieve the tax liabili-ty, but will not actually relieve the withholding obligation notwithstanding that the employee may not otherwise be taxable in Canada. For ex-ample, Article XV(2) of the Canada–US Income Tax Convention (the "US Treaty") states that a US resident treaty benefi ciary will not be subject to tax in Canada on remuneration derived in re-spect of employment exercised in Canada if (a) such remuneration does not exceed CAD10,000 (USD8,000), or (b) the recipient is present in Canada for a period or periods not exceeding 183 days in the aggregate in any 12-month pe-riod commencing or ending in the fi scal year concerned, and the remuneration is not paid by,

16

or on behalf of, a resident of Canada and is not borne by a permanent establishment in Canada.

An US-resident treaty benefi ciary who meets one of the conditions above will not be subject to tax in Canada on remuneration derived in respect of employment exercised in Canada, but continues to be subject to source deductions in Canada pursu-ant to paragraph 153(1)(a) of the Act and Part I of the Regulations because there is nothing in the US Treaty or any other Canadian tax treaty that relieves such withholding.

Regulation 102 Waiver Th e Canada Revenue Agency allows a waiver from source deductions if the employee is otherwise not taxable in Canada pursuant to a tax treaty, as noted above. Th e details of the waiver are contained in Information Circular IC 75-6R2, "Required With-holding from Amounts Paid to Non-Residents Pro-viding Services in Canada." A waiver application must be made 30 days before either the employ-ment begins in Canada or the initial payment of re-muneration. Th e application must also explain the application of the relevant treaty and contain ad-equate details of the employment contract to allow the Canadian tax authorities to make a determina-tion of whether the waiver should be made available. Th e process is cumbersome and time-consuming.

2015 Budget Proposal In view of the above, a proposal in the 2015 Federal Budget (released in April 2015) to exempt certain non-residents from the withholding requirement is

very welcome. In order to be eligible for the exemp-tion, an employer must be a qualifying non-resi-dent employer and an employee must be a qualify-ing non-resident employee.

Th e exemption is achieved by amending paragraph 153(1)(a) to exempt payments of salary, wages and other remuneration from the source deduction re-quirement if the payment is made by an employer to an employee where the employer is a qualifying non-resident employer and the employee is a quali-fying non-resident employee.

A qualifying non-resident employer is an employer that: (a) is resident in a country with which Canada

has a tax treaty (a complicated version of the same rule is provided for partnerships);

(b) does not carry on business in Canada through a permanent establishment in its taxation year or fi scal period that includes the time of the payment; and

(c) is certifi ed by the Minister of National Rev-enue at the time of the payment.

In order for an employer to be certifi ed for a speci-fi ed period of time, it must apply in prescribed form and meet the fi rst two conditions above. Th e Minister may impose other conditions hitherto unannounced.

An employee is a qualifying non-resident employee in respect of a payment of salary, wages or other remuneration if the employee is:

17

(a) resident in a country with which Canada has a tax treaty;

(b) exempt from Canadian income tax in respect of the payment because of that tax treaty; and

(c) not in Canada for 90 days or more in any 12-month period that includes the time of the payment.

A qualifying non-resident employer that is exempt from withholding requirements must still comply with the reporting requirements under the Act with respect to amounts paid to its employees.

Technical Issues Th e 2015 Budget proposal, while welcome, falls short of alleviating the concerns associated with source deductions for non-resident employees tem-porarily placed in Canada. Th e fact that the pro-posal is aimed at individuals present in Canada for a short period is evident in the defi nition of quali-fying non-resident employee, since an employee must not be in Canada for more than 89 days in any 12-month period to be a qualifying non-resi-dent employee.

However, the burden on employers to seek certifi -cation may be onerous in view of the fact that the proposal is aimed at employees present in Canada for short periods of time. Given that an employer will need to prove that it does not have a permanent establishment in order to receive certifi cation and continue to comply with reporting requirements, an employer may have limited incentive to apply for certifi cation and may simply choose to deduct

and remit income tax instead (leaving it to the em-ployee to seek a refund if necessary). Th e proposal therefore, while well intentioned, may not be very useful in relieving the compliance burden on non-resident employees present in Canada temporarily and their employers.

A notification requirement in place of a certi-fication requirement may perhaps have been a better proposal. Pursuant to such requirement, the employer would simply be required to pro-vide a notice to the Canada Revenue Agency no-tifying it that it met the first two conditions to be a qualifying non-resident employer, its em-ployee was a qualifying non-resident employee, and accordingly, the employer was self-exempt-ing itself from source deductions on remunera-tion paid to employees.

Th e other benefi t of a notifi cation system, as op-posed to a certifi cation system, is that it would ease the administrative burden of certifying employers. Th e Canada Revenue Agency would still have no-tice of the circumstances where an employer was proposing not to make source deductions and would therefore have the ability to audit any such employer without the need for dedicating resources to certifying every employer that seeks to be exempt from making source deductions.

Notwithstanding the shortcomings to the 2015 Budget Proposal with respect to the exemption from source deductions for qualifying employ-ers and employees, the measure is a positive step

18

towards easing compliance burdens on non-resi-dent employers that temporarily place employees in Canada. It is hoped that the Canada Revenue

Agency will not render this process futile by im-posing onerous administrative burdens through the certifi cation process.

19


Topical News Briefi ng: Tax Inspectors Without Borders by the Global Tax Weekly Editorial Team

Much has been said and written in the past couple of years about the need for developing nations to come up to speed with more advanced countries in terms of tax administration.

As reported in this week's issue of Global Tax Weekly , in the last few days alone there have been three separate developments in this regard, as African tax offi cials met to discuss international tax issues, the World Bank and the International Monetary Fund launched a new initiative to help developing countries strengthen their tax systems, and the OECD announced its "Tax Inspectors Without Borders" scheme, in which the knowl-edge and expertise of experienced tax auditors will be shared with revenue offi cials in low-income states. To this group of supranational institutions can be added the United Nations, which regu-larly reports its concerns about how tax avoidance impacts developing nations, and what should be done to address the problem.

Reasons for this increased focus on tax administra-tion practices in the developing world are essential-ly twofold: fi rst, the wealthy nations believe that more tax revenue means that developing nations can spend more on public services, health care, in-frastructure, etc. , and lift more of their people out

of poverty; second, and more importantly, there will be substantial gaps in the OECD's base ero-sion and profi t shifting (BEPS) work unless the de-veloping nations are fully on board. However, with regard to this latter point, the problem is that low-income countries simply don't have the resources to implement sophisticated new tax mechanisms, especially in the areas of transfer pricing and infor-mation exchange.

As the OECD itself said last November when set-ting out a range of ideas intended to increase the involvement of developing countries in interna-tional tax matters, supporting capacity building in developing countries on BEPS issues "is a priority." Consequently, the OECD is rolling out fi ve re-gional networks, in collaboration with regional tax organizations, to provide broad support during the development of BEPS proposals and to assist the implementation of recommendations.

Th ese include in Africa in close cooperation with the African Tax Administration Forum (ATAF); in Latin America and Caribbean, with the support of the Inter-American Centre of Tax Administra-tion (CIAT); in Asia in cooperation with the Study Group on Asian Tax Administration Research; in Francophone countries with support from CRE-DAF ( Centre de Rencontre des Administrations Fis-cales ); and in Central Europe and the Middle East with support from IOTA, the Intra-European Or-ganisation of Tax Administrations.

20

What will these networks mean from a practical point of view? Th ey will play an important role in the development of so-called "toolkits" needed to help developing nations implement BEPS mea-sures. Th ese toolkits contain reports, guidance, model legislation, train-the-trainers materials, and other items designed to support capacity building. Th ey will also act as a forum for low-income coun-tries to discuss BEPS issues, with the fi rst round of

talks already having taken place in February/March 2015 and the second scheduled for the third quar-ter of this year.

Ultimately, however, it will be the developing nations themselves that will have to put all these words into action. Th e OECD insists that this can be done. But it is surely going to be a lot easier said than done, as the high ratio of talk-to-action seems to suggest.

21


Mexico's Energy Reform: NAFTA Implications by Rocío Mejía, Perla Martínez and Alberto López, EY Mexico

Rocío Mejía is the Global Trade and Indirect Tax lead-er, Perla Martínez is a manager, and Alberto López is the Deputy Tax leader.

In the last couple of years, Mexico approved one of the most anticipated legal reforms of the past 70 years.

Th e Constitution was amended, and over ten new laws and administrative regulations were enacted. Twelve federal laws were modifi ed, and four new governmental agencies were created.

In a nutshell, the energy reform opens the hydrocar-bons resources of the country to private investment, both national and foreign, although the ownership and control of subsoil hydrocarbon assets remains exclusively of the Mexican State. In addition, the paradigm of the electricity sector was transformed to allow the participation of private and public en-tities in rendering services of electrical power gen-eration under the regulation of the State.

Th e reform was and still is a heated and polarized subject in Mexico. Many expectations and open questions revolve around the energy reform: Will it deliver the investment and economic develop-ment promised by its supporters? Is it sustainable

and innocuous to the environment? Does it entail unforeseen consequences?

Th is article focuses on Mexico's reforms in the oil and gas industry and some of its possible impli-cations related to investment protection commit-ments agreed upon by Mexico under Free Trade Agreements (FTAs) and Bilateral Investment Trea-ties (BITs).

Th e background on the reform is that before it took place, the Mexican State had a monopoly over the sector. Th erefore, to protect and retain such mo-nopoly, reservations (exceptions to general obliga-tions under international treaties) were included in the FTAs and BITs that Mexico entered into.

Presently, the energy reform is being progressively implemented. Starting December 2014 and then in February and May 2015, three bidding procedures of the so-called Round one (tender) for contracts for the exploration and production of hydrocarbons – the fi rst two for blocks in shallow waters under a

22

production sharing modality, and the third one for onshore blocks under license contract – were issued and are currently in progress.

What has caught the attention of international in-vestment specialists is that these bidding procedures have provisions on national content minimums, preference to national goods and services, and com-mitments of minimums of investment.

According to the Mexican Hydrocarbons Law (MHL), the national content minimum provisions on biddings are part of the economic policy de-signed by the Government for the industrial pro-motion of, and the development of suppliers and investment attraction to, the new Mexican energy industry.

Th e MHL also provides that contracts for the ex-ploration and extraction "… shall, at least, con-tain provisions on … national content minimum percentage."

Th e national content minimum requirements of the fi rst bidding process that started in December 2014 are as follows: 13 percent at the exploration phase; then 25 percent during the fi rst year of the development phase, which must increase each year until reaching at least 35 percent for year 2025. For the second bidding process that started in February 2015, the minimum national content rate at the extraction phase begins at 17 percent. For the third bidding process, the national content minimums are higher, at 22 percent for the evaluation period

(two years) and 27 percent for the fi rst year of the development until 38 percent in 2025.

Th e sources of the percentages of national content include: purchase of domestic goods, domestic la-bor, services, technology transfer, training, and infrastructure.

Th e national content percentage will be verifi ed an-nually by the Ministry of Economy and if it is not complied with, the contractor shall pay liquidated damages to the Nation.

In addition to the obligations to comply with mini-mum national content, another controversial pro-vision of the bidding requirements is a clause of the production sharing contracts stating: "Th e contrac-tor shall give preference to the procurement of ser-vices of national origin, including the training and hiring of Persons of Mexican nationality at techni-cal and management levels, as well as to purchase of goods of national origin, when such items are of-fered in the market under the same circumstanc-es, including equal price, quality and timeliness of delivery ." 1

Th e issue with these sorts of provisions, known as performance requirements, is that they are normally forbidden by the World Trade Organi-zation (WTO) Agreements and by most of the FTAs and BITs models, since they are considered to be discriminatory practices to trade and in-vestment, unless reservations are made in justi-fi ed 2 circumstances.

23

Essentially, the matter is not that Mexico did not include reservations on these sorts of provisions on the energy sector in its FTAs, but rather that the reservations were made according to the legal framework in eff ect at that time and served for the purpose of maintaining the State's monopoly. But what happens now that that legal framework has been changed?

We will take the case of NAFTA and analyze it in detail (since it is the most signifi cant FTA in Mex-ico), but bear in mind that every FTA that Mexico has executed contains provisions on performance requirements. Also, some of Mexico's BITs have prohibitions to performance requirements, as is the case of Mexico's BIT with Switzerland.

It is important to recall that in the early 1990s, when NAFTA was negotiated, the Mexican leg-islation on hydrocarbons was signifi cantly diff er-ent; the State had full monopoly of the hydrocar-bons sector.

NAFTA did not undergo any amendments as a consequence of the Mexican energy reform. Al-though there is a process within NAFTA that allows for its amendment (when all three parties agree), it is not an easy task to amend NAFTA; each party has to approve such amendment, following its own domestic legal procedures, often requiring going through congress.

Th e reservations that Mexico included on the en-ergy sector within NAFTA were mainly to Chapter

VI: "Energy and Basic Petrochemicals" and Chap-ter XI "Investment."

Chapter VI contains the provisions applicable to measures relating to energy and basic petrochemi-cal goods originating in the territories of Canada, the US and Mexico, and to investment and cross-border trade in services of such goods.

Chapter XI on investment applies to measures re-lating to: (i) investors of another NAFTA party, (ii) investments of investors of a party in the terri-tory of another party; and (iii) Articles 1106 (per-formance requirements) and 1114 (environmental measures) with regard to all investments in the ter-ritory of the party.

It is Chapter XI that lays the investment protec-tion obligations between the NAFTA parties; such protection includes National Treatment, Most-Favored Nation Treatment, minimum standard of treatment for investments (treatment according to international law, fair and equitable principles, and full protection and security), and the prohibition of performance requirements.

It is important to explain what the performance requirements are, since it is there where the con-troversy between NAFTA and the Mexican energy reform lays.

Article 1106 of NAFTA sets forth a prohibition to NAFTA parties of imposing requirements or com-mitments or undertakings, in the establishment,

24

acquisition, expansion, management, conduct or operation of an investment of an investor of a party or of a non-party in its territory to both achieve a given level or percentage of domestic content ; and to purchase, use or accord a preference to goods produced or services provided in its terri-tory , or to purchase goods or services from per-sons in its territory . 3

Th e commitments contained in both Chapter VI and XI are those that Mexico made in general. But, which were the reservations (exceptions) negotiated by Mexico and agreed by its NAFTA partners?

Annex 602.3 of NAFTA Mexico included a reser-vation to Chapter VI which provides that the Mex-ican State reserves to itself the strategic activity, in-cluding investment, and the provision of services in such activities of the "… exploration and exploita-tion of crude oil and natural gas …" 4

Reservations to Chapter XI, protection to investors and investments, are found in Article 1108, Annex I and Annex III.

Article 1108 states that Articles 1102 and 1106 do not apply to any existing non-conforming measure as set out in its Schedule to Annex I or III.

Annex I sets forth a reservation to National Treat-ment of Article 1102 and prohibits risk sharing contracts related to exploitation and perforation of oil and gas wells.

Another reservation is found in Annex III and pro-vides that Mexico reserves the right to perform ex-clusively, and to refuse to permit the establishment of investments in, activities related to petroleum, other hydrocarbons and basic petrochemicals, in-cluding both the exploration and exploitation of crude oil and natural gas.

Th e measures non-conforming with Chapter XI in-cluded in the reservations of Annexes I and III are: 1. Constitución Política de los Estados Unidos

Mexicanos, Artículos 25, 27 y 28 (Mexican Constitution Articles 25, 27 and 28);

2. Ley Reglamentaria del Artículo 27 Constitucio-nal en el Ramo del Petróleo (Regulatory Law of Constitutional Article 27 in the Petroleum Sector); and

3. Ley Orgánica de Petróleos Mexicanos y Organ-ismos Subsidiarios (PEMEX Law).

Th anks to these reservations, the general invest-ment protection principles and treatment were not applicable to the industry of oil and gas.

However, with the energy reform, Articles 25, 27 and 28 of the Mexican Constitution were amended and both the Regulatory Law of Constitutional Ar-ticle 27 in the Petroleum Sector and the PEMEX Law were abrogated.

Since the Constitution and the secondary law were changed or abrogated, a possible interpretation of what happens to the reservations of Annex 602.3 to

25

Chapter VI and of Article 1108, Annexes I and III to Chapter XI is that, given the non-conforming measures of the reservations are no longer in legal eff ect, then the reservations are now null and void and Chapters VI and XI fully apply to the invest-ments on oil and gas, including national treatment (Article 1102) and performance requirements (Ar-ticle 1106).

Moreover, although there are reservations to Chap-ter XI, from the negotiation of NAFTA, none were made, in the hydrocarbons sector, to Article 1106.

A reservation to Article 1106 would allow Mexi-co to have measures that require national content minimum percentages, and that gave preference to national goods and services in the hydrocarbons sector, but there is no such reservation, there was no such reservation when NAFTA was negotiated, and there is none now.

If the current reservations are now null and void and there were no such reservations to Article 1106, it may be concluded that the national content mini-mum percentages requirements and the preference of goods and services of national origin require-ments for participating in the bidding processes for the contracts of exploration and extraction of hy-drocarbons are a potential breach of NAFTA.

Clearly the position of the Mexican Government is that these requirements are a valid and legal eco-nomic public policy designed for the industrial promotion of, and the development of suppliers

and investment attraction to the newborn Mexican energy industry.

Similar policies have been applied before in Mexi-co: for instance, reservations on the development or modernization of the Mexican automotive industry were included in NAFTA to allow the requirements of minimums of national value added, through a res-ervation to performance requirements (Article 1106) that was negotiated and included in NAFTA Annex I for the automotive sector. A calendar with a progres-sive reduction of the minimum national value require-ment that ended in 2004 was part of the reservation.

Th e implication of an alleged breach of NAFTA, particularly to Chapter XI, is that such Chapter in-cludes an investor–state dispute settlement mecha-nism, and investors could sue Mexico for requiring them to meet national content minimums and to give preference to goods produced or services pro-vided in its territory.

Th e controversy of this investor–state dispute mech-anism in international law is not small. A decision made by a panel of three arbitrators may condemn a state to pay high amounts of damages to an inves-tor; also, the arbitral awards issued by this type of arbitration panel cannot be challenged in national courts, and many international law specialists argue that investment arbitrations of this kind tend to agree with the investor more often than with states.

It appears that the safest scenario would have been to amend NAFTA to include a reservation to Article

26

1106 on Annex I, as it is the procedure provided by the Mexican Schedule of NAFTA Annex III on Section B "Deregulation of Activities Reserved to the State" Subsection 2, but thinking that on top of the domestic debate, energy reform needed to wait for Canada, the US and Mexico to agree on amend-ing NAFTA does not sound easy or fast.

Maybe, although a breach of NAFTA indeed exist-ed, it would not be a relevant risk if complying with minimum national content requirements was easy. Perhaps it is too soon to tell, but oil and gas special-ists have forecast that it will be a challenge due to an absence of a real policy for the development of suppliers in the hydrocarbons national industry.

Nonetheless, the National Commission of Hydro-carbons and the Ministry of Economy are entitled to change the national content minimum percent-ages as they see fi t, so if the experience of the fi rst bidding processes shows them that this is diffi cult to meet, they could lower the percentages.

As was mentioned earlier, this analysis focuses on NAFTA, but not only are the big US transnational oil companies participating in the bidding process-es, but also the Europeans, Asians 5 , etc . Since the legal framework of the energy sector was the same as it was during the negotiation of most the rest of Mexico's FTAs and BITs, the implications of the energy reform may be similar.

ENDNOTES

1 http://ronda1.gob.mx/English/pdf/PDF-L-02/PSA-

Extraction-Contract-%28Individual%29.pdf (em-

phasis added); for information on the general bidding

guidelines, see http://ronda1.gob.mx/English/pdf/

PDF-L-01/R01L01_Bidding-Guidelines_20141211.pdf

2 Agreement on Trade-Related Investment Measures

(TRIMS).

3 http://www.sice.oas.org/Trade/NAFTA/chap-111.

asp#A1106

4 http://www.sice.oas.org/Trade/NAFTA/chap-06.

asp#An602.3

5 http://ronda1.gob.mx/English/monitoring.html

27


Brazil – Reporting Of Financial Information And Compliance With FATCA Requirements by Hermano A.C. Notaroberto Barbosa and Matheus Bertholo Piconez, Partner and Associate at BMA Consultoria Tributária, Rio de Janeiro, Brazil

Contact: [email protected] ; [email protected]

On June 25, 2015, the Brazilian Congress approved the Intergovernmental Agreement ("IGA") that was entered into with the United States on September 23, 2014, for implementation of the US Foreign Account Tax Compliance Act ("FATCA").

Th e IGA is based on the Tax Information Exchange Agreement ("TIEA") entered into between Brazil and the United States in 2007, which after long years of discussions became eff ective in Brazil on May 15, 2013, as an eff ort to combat tax evasion and money laundering, and to facilitate the ex-change of information between the two countries.

Th e IGA was based on FATCA/IGA Model 1A, which provides for reciprocal automatic exchange of information between tax authorities, meaning that the Brazilian authorities will gather the infor-mation from their fi nancial institutions and send this information to the US Government.

Based on the IGA, on July 3, 2015, the Brazilian Federal Revenue Service ("RFB") enacted Revenue

Procedure No. 1,571/15 ("IN 1571/15"), establish-ing reporting requirements for Brazilian fi nancial transactions. However, the new regulations were signifi cantly broader than the reporting required by the IGA, as they relate to fi nancial information concerning any companies or individuals in any transactions, and not only to the US persons en-visaged by the IGA. It is clear, therefore, that the RFB's intention was not only to enable compliance with FATCA requirements, but also to gather from Brazilian fi nancial institutions extensive informa-tion in order to enforce the tax legislation.

Pursuant to section 4 of IN 1571/15, the follow-ing legal entities (the "Reporting Legal Entities") are required to fi le the fi nancial transactions report ("e-Financeira"): (i) Legal entities authorized to structure and sell

private pension plans; (ii) Legal entities authorized to establish and man-

age Individual Retirement Funds ("FAPIs"); (iii) Legal entities whose main or auxiliary activity is

the collection, intermediation and investment

28

of own or third-parties' funds (including con-sortiums), in local or foreign currency, and custody of third parties' securities; and

(iv) Insurance companies authorized to structure and sell individual insurance plans.

Banks, custodians, fund managers, brokers and related companies are in charge of fi ling the e-Fi-nanceira. In fact, all entities supervised by the Bra-zilian Central Bank ("BACEN"), the Brazilian Se-curities and Exchange Commission ("CVM"), the Brazilian Association of Insurance Commissioners ("SUSEP") and the National Supplementary Pen-sions Department ("PREVIC") are required to fi le such report.

Under IN 1571/2015, the following information shall to be reported: (i) Balance on the last business day of the year of

any deposit account, including savings, con-sidering any transactions, such as payments made in cash or checks, issuance of credit orders, or similar documents or redemptions;

(ii) Balance on the last business day of each year of fi nancial investments and the monthly balance, considering any transactions, such as those related to investments, redemptions, disposals, sales or liquidations of such invest-ments, month by month, throughout the year;

(iii) Gross income accrued each year, month by month, for fi nancial investments, individual-ized by type of income, including amounts from the sale or redemption of assets under custody and investment fund redemptions;

(iv) Balance on the last business day of the year or on the date of closing of mathematical reserves for benefi ts to be granted in respect of each private pension benefi t plan or each insurance plan for individuals;

(v) Balance on the last business day of the year or on the date of closing of each FAPI, and monthly transactions;

(vi) Benefits or insured capitals accumulated each year, month by month, paid in the form of a lump sum payment or in the form of fixed income;

(vii) Transfers between accounts of the same hold-er, between checking and savings accounts;

(viii) Foreign currency acquisitions and sales; (ix) Other currency transfers and transfers of

funds abroad; (x) Th e total amounts paid by the last day of the

year of consortiums, including the amount of the winning bids, less any credits made available to the consortium quota-holders and related transactions, month by month; and

(xi) Amount of credits made available to the consortium quota-holder, accumulated each year, month by month, by quota.

IN 1571/2015, paragraph 6 of section 5 also determines that all holders and final investors of the transactions must be identified by name, nationality, fiscal residency, address, account number, and tax identification number. Also, the Reporting Legal Entities are required to identify any persons authorized to use the re-ported accounts.

29

As a general rule, the e-Financeira shall be used to report transactions as from January 1, 2015, and it must be fi led every six months. Specifi cally in rela-tion to the year 2015, the e-Financeira must be fi led until the last business day of May 2016. However, the legal entities that are required to report their fi nancial data under the IGA must also report the transactions carried out between July and December 2014. In this case, only the information specifi cally required by the IGA needs to be reported. Penalties are imposed for failure to timely fi le the report or fi ling it with missing or wrong information.

Some reporting issues may arise under the newly enacted rules. For example, in case of stocks listed in the exchange market, the amount to be reported is the publicly traded market value on the last trad-ing day. However, in case of non-publicly traded stocks or shares, the price to be informed is the amount reported by the owner of the stock, which brings uncertainty to the entities required to do the fi ling. Also, IN 1571/15 did not address a specifi c rule with regard to the reporting of amounts arising from derivative transactions.

Although IN 1571/15 provides that it is not al-lowed to provide any information that allows the identifi cation of the source and/or destination of the funds derived from the reported fi nancial trans-actions, apparently a number of reporting require-ments of the new regulation seem to violate this

provision. Th is is expected to give rise to a number of discussions in Brazil.

In Brazil, bank secrecy corresponds to the obliga-tion imposed on fi nancial institutions (and related parties) to "preserve the secrecy of its passive and ac-tive transactions and performed services" (Comple-mentary Law No. 105/01). Section 5 of Comple-mentary Law No. 105/01 provides a list of fi nancial transactions that are subject to reporting. Th is was the legal ground for the enactment of IN 1571/15 by the Brazilian tax authorities.

According to precedents and opinions from repu-table scholars, bank secrecy derives from the consti-tutional protections of intimacy and data. Current-ly there are six lawsuits in the Brazilian Supreme Court challenging the constitutionality of Supple-mentary Law No. 105/01 1 claiming that the rule violates such protections. Th is issue is yet to be resolved by the Brazilian courts, but the results of such lawsuits are expected to aff ect signifi cantly the future of IN 1571/15 and its application.

ENDNOTES

1 Direct Action of Unconstitutionality ("ADI") 2386,

2389, 2390, 2397, 4006 and 4010. In non-binding

decisions, the Supreme Court has upheld Supplemen-

tary Law No. 105/01. See also Extraordinary Appeal

No. 389,808 of December 15, 2010, reporting Justice

Marco Aurélio.

30


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

Th e emergence of virtual or digital currencies like Bitcoin is probably a headache that governments in certain parts of the world can do without as they continue to grapple with regulation of the fi nance industry in the "real" world.

However, with companies accepting payment for goods and services in virtual currencies becoming more numerous, this is a problem that govern-ments, and especially tax authorities, can no longer aff ord to ignore.

Unfortunately for users of virtual currencies, there is much inconsistency in their tax treatment, stem-ming from diff ering interpretations of what a virtu-al currency actually is. Most jurisdictions that have issued guidance or rulings on this subject seem to have concluded that Bitcoin is a currency, and that it should be treated as such in tax terms.

In the US, however, the Internal Revenue Service said in guidance published in March 2014 that cryptocurrencies should be treated as property rath-er than currency. Th e agency observed that while virtual currencies are often seen to operate like fi at currency, they do not have legal tender status in any jurisdiction. It therefore confi rmed that the general tax principles that apply to property trans-actions apply to transactions using virtual currency.

Furthermore, the tax situation in the US with re-gard to virtual currencies remains very uncertain because the vast majority of states have yet to issue any guidance in this area.

While some governments seem to be wary of vir-tual currencies, with a handful going so far as ban-ning their use altogether, others are embracing their growth. Th e UK, for example, has been applauded for issuing clear guidance on the income tax and value-added tax (VAT) treatment of goods and ser-vices exchanged for consideration in virtual curren-cies. Th is was a deliberate policy on the part of the Government as it seeks to take an early lead as a center for virtual currency trading, alongside Lon-don's status as the largest foreign exchange market. Indeed, as the Australian authorities go through convulsions trying to fi gure out how to tax Bitcoin transactions, CoinJar, one of Australia's largest Bit-coin exchanges, slipped its virtual moorings and re-located to London earlier this year.

Finland, Spain and Sweden have taken a similar view to the UK on the VAT treatment of virtual currencies, which is that while no VAT is due when a cryptocurrency is exchanged for a physical cur-rency, VAT is due in the normal way from suppli-ers of any goods or services sold in exchange for a virtual currency. Belgium and the Netherlands have hinted that they may follow suit. On the oth-er hand, many other countries – and EU member states in particular – have issued rules that seek the

31

collection of tax. For instance, a local authority in Poland has said that all transactions related to Bit-coin should be taxable, regardless of the location of the recipient. Estonia has previously said it wishes to subject all trading activity to VAT on the full value of trades, while Germany is seeking VAT only on commissions.

In an attempt to bring consistency to the VAT treatment of virtual currencies under the EU VAT Directive, Sweden has asked the European Court of Justice to rule on the matter. An eventual ruling is seen as crucial to providing the virtual currency industry with certainty on the tax liability of their

activities. However, many EU tax authorities may have to go back to the drawing board if the ECJ follows the recent opinion of Advocate General Juliane Kokott that virtual currencies, when used to purchase goods and services, should be exempt from VAT, in the same way that fi at currency is.

As virtual currency users attempt to absorb all these developments, regulators and tax collectors won't be the only ones suff ering from headaches! How-ever, in the unlikely event that the world's tax au-thorities all reach the same conclusion, fragmenta-tion of tax treatment will continue to be one of the pitfalls of virtual currency trading.

32


Qualcomm Inc. v. ADIT (2015) TS-70-ITAT-2015 Delhi by Padmini Khare Kaicker and Karthik Natarajan, B.K. Khare & Co., independent member of Morison International

Introduction

In a recent judgment, the Delhi Tribunal has ruled that if a patent is used by an end con-sumer and the manufacturer of a product is only a conduit for collection of such a consid-eration, the taxation would be warranted in the end-use jurisdiction. This judgment could have far-reaching ramifications for intellectual prop-erty (IP) holders whose eventual products end up being consumed in India. Of course, this judgment comes on the back of certain specific and highly technical facts which have led to the conclusion that the royalties were deemed to ac-crue or arise in India.

Facts In Brief Th e appellant in this case was M/s Qualcomm Inc. (Qualcomm), a US tax resident, engaged in the business of design, development, manufac-ture, marketing and licensing of digital wireless telecommunication products/services based on code division multiple access (CDMA) technol-ogy (see Figure 1).

Figure 1. Diagrammatic representation of the facts

Qualcomm licensed certain patents (patented technology) for manufacture of CDMA handsets to original equipment manufacturers (OEMs) situated outside India, in countries such as Korea and China;

33

Th e OEMs used the patents to manufacture the products in their manufacturing bases, again outside India; These handsets were sold to wireless carriers worldwide – including to Indian players in the CDMA space, such as TATA Indicomm, Reliance Infocomm – and the title to these handsets passed on to these Indian players outside India; Royalty was paid by OEMs to Qualcomm only upon sale of the handsets; Th ese handsets were sold eventually to end cus-tomers subscribing to the mobile communication network operated by these Indian players.

Assessing Offi cer's Contentions Th e Assessing Offi cer noted the provisions of the domestic tax law and the applicable Tax Treaty viz. Income-tax Act, 1961 (the Act) and India–USA Tax Treaty (Tax Treaty), respectively. Under Section 9(1)(vi)(c) of the Act, income by way of royalty payable by non-residents was deemed to accrue or arise in India so long as it was relatable to a business carried on in India or to any source in India. Per Article 12(7)(b) of the Tax Treaty, where royalties do not arise in one of the contracting states and relate to the use of, or the right to use, the right or property in one of the contracting states, the royalties shall be deemed to arise in that contracting state.

After a perusal of the fact pattern and available doc-umentation, the Assessing Offi cer noted that it was not a case where royalty has been paid a lump sum for the use of CDMA technology, but rather an on-going payment dependent on the volume of sales.

He concluded that royalty arose to Qualcomm only when the OEMs sold the handsets to wireless carriers; and since TATA Indicomm & Reliance In-focomm were based in India, relatable royalty was deemed to accrue or arise in India for Qualcomm and hence taxable in India, both under the provi-sions of the Act as well as the Tax Treaty. He ob-served that there were specifi c features incorporated in the phones to be sold in India, thereby creating a strong Indian nexus for source-based taxation. To further cement his stand, the Assessing Offi cer con-cluded that if the handsets were not made compat-ible with the Indian network specifi cs, then they cannot be used in India.

Qualcomm's Contentions Qualcomm contended that its royalty earnings were not taxable in India, inter alia based on following arguments:

Royalty received from the OEMs is independent of whether the handsets are sold or not; Qualcomm is not involved, in any manner, in the sale of handsets between the OEMs and Indian wireless carriers and also has no role in determin-ing their pricing inter se ; Technically, it was contended that the patented technology was used outside India for manufac-turing the handsets, i.e. , before they are sold to Indian wireless carriers; There was no customization of handset qua the CDMA connectivity, and the handsets manufactured by the OEMs using the patented technology could be sold anywhere in the world and the use of patents was not India-specifi c;

34

hence, activities done by Qualcomm could not be said to be a source of income in India.

Th us, it was contended by Qualcomm that the ulti-mate use of a product manufactured by the OEMs using the patents licensed by Qualcomm, in India, cannot be said to be a source in India. Hence, roy-alties received by Qualcomm abroad were not tax-able in India.

Appeal Before Tax Tribunal Aggrieved by the assessment order and not fi nding support before the fi rst appellate authority, Qual-comm took the matter before the Income-tax Ap-pellate Tribunal. In India, the Tax Tribunal is the fi nal fact-fi nding body whose fi ndings are, by and large, considered to be well reasoned and balanced.

It may be pertinent to note that this judgment re-lates to tax years 2005/06 to 2008/09. Qualcomm sought to invoke the favorable ruling it had ob-tained before the same Tribunal, on same facts, relating to tax years 2001/02 to 2004/05. At that time, the Tribunal had observed that the Indian wireless carriers did not constitute a source of in-come for the OEMs in India and that the OEMs have not used the patented technology for the pur-pose of carrying on business in India or for earning income from a source in India. Th e role of Qual-comm ends when it licenses its patents on IP rights pertaining to CDMA handsets for manufacture and when it collects royalty from OEMs on these handsets, when they are shipped out of the coun-try of manufacture. It was also concluded that the

CDMA handsets were not India-specifi c: mere cus-tomization, such as locking the handset to enable operation only with a specifi c operator, inclusion of Hindi or regional languages, and so on were in no way connected with the patented technology. Accordingly, it had held that the royalties earned by Qualcomm were not taxable in India under the Act and hence, did not go into the question of tax-ability under the Tax Treaty. Th e Tribunal was also infl uenced by the fact that the OEMs did not have any income from business in India.

Earlier Ruling Distinguished Th e matter was examined by a coordinate bench of the same Tribunal. It raised doubts on the con-clusion that the CDMA handsets were not India-specifi c and remanded the matter back to the As-sessing Offi cer for recording categorical fi ndings by obtaining expert technical opinion and by record-ing witnesses of experts.

Drawing an analogy from the US Internal Revenue Code and examining Section 9 of the Act, the Tri-bunal upheld the validity of source-based taxation of royalties in India when the products, in respect of which the royalty is paid, are used in India. Th e emphasis is on the situs of use of the patent rather than the situs of the entity making payment for the royalty. It clarifi ed that if the patent is used in the manufacturing process, then the taxation of royal-ties should be in the tax jurisdiction in which man-ufacturing activity is carried on rather in the tax jurisdiction in which ultimate consumer of prod-uct is located. However, if the patent is used by an

35

end consumer and the manufacturer of a product is only a conduit for collection of such a consid-eration for use by the end consumer, the taxation would be warranted in the end-use jurisdiction.

Editorial Comment Speaking with regard to the decision, Sachin Va-sudeva of S.C. Vasudeva & Co. observed:

"Th is decision seeks to distinguish between the situs of use of a technology in manufac-turing and use of a technology in function-ing of the product so manufactured. Th e fi nding that in the latter case, royalty was taxable where usage of the product ordinar-ily takes place, would create practical diffi cul-ties – especially for non-residents owning IP;

therefore, one could expect protracted litiga-tion on this topic."

"Th is judgment also highlights another im-portant aspect: the role of press briefi ngs. Th e Qualcomm case was infl uenced heavily by the press briefi ngs issued by Qualcomm and press clippings around the visit of one of its senior executives to India, including his meetings with the Indian Government and important customers. Th e Assessing Offi cer had in fact reopened the case on the strength of these clippings. Th is highlights the impor-tance of ensuring the correct and appropriate representation of facts, as any careless quote or unrefl ected soundbite could seriously mar the prospects of unsuspecting assessees."

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ISSUE 141 | JULY 23, 2015NEWS ROUND-UP: INTERNATIONAL TAX PLANNING

OECD Launches Tax Inspectors Without Borders Initiative

Th e OECD has launched the Tax Inspectors With-out Borders (TIWB) initiative to help developing countries bolster domestic revenues by strengthen-ing their ability to undertake tax audits.

Th e initiative was launched in partnership with the United Nations Development Programme (UNDP) at the third UN Conference on Financ-ing for Development, which was held on July 13, 2015, in Addis Ababa.

Under the TIWB initiative, experts will share tax audit knowledge and skills with tax administrations in developing countries through a real time, "learn-ing by doing" approach. Th ese experts will support ongoing audits and provide advice on audit-related issues concerning international tax matters and will share general audit best practices.

Going forward, a dedicated central organizing unit, the TIWB Secretariat, supported by an oversight board of stakeholders, will operate as a clearing house to match the demand for auditing assistance with appropriate expertise. Th e Secretariat, which will be based at the OECD headquarters in Paris, will be staff ed by repre-sentatives from the OECD and the UNDP.

Launching the initiative, OECD Secretary-Gen-eral Angel Gurría said: "Th e challenges faced by

developing countries are being acknowledged in-ternationally and we are delighted to mobilize the best experts worldwide in a practical contribution to domestic resource mobilization. Th e new part-nership between the OECD and UNDP on TIWB will signifi cantly extend the global reach of exist-ing eff orts to build audit capacity while sending a strong message of international support to develop-ing countries."

UNDP Administrator Helen Clark said: "Eff ective domestic resource mobilization is at the core of fi -nancing for sustainable development. But eff orts to raise domestic resources are often constrained by tax … avoidance, and by illicit fi nancial fl ows. Th e TIWB programme is an innovative and practical way of supporting developing countries to mobilize more domestic resources for development. With its country level presence and local knowledge, UNDP is well-placed to partner with the OECD and the best audit experts to scale-up this important work. TIWB can support countries to realize the post-2015 agenda."

Germany, Netherlands To Exchange Data On Tax Rulings Germany and the Netherlands have signed a new agreement that provides for the "spontaneous" ex-change of information on advance pricing agree-ments (APAs) and advance tax rulings.

Th e agreement was signed in Brussels on July 14, 2015. Under the new agreement, both countries

37

have committed to the mutual exchange of infor-mation on unilateral APAs if such agreements have an impact on taxation in the other state.

Similarly, both countries will exchange information on APAs that are concluded with non-EU countries in cases where either Germany or the Netherlands is not a party to the agreement in question but will be aff ected in terms of taxation.

Th e agreement will also cover advance tax rulings issued in the Netherlands concerning preferential tax regimes for intellectual property.

Th e German Ministry of Finance said of the deal: "Th e agreement is an important step towards achieving greater transparency on tax rulings. In the aftermath of the 'Luxembourg Leaks,' which were published in late 2014, Finance Minister Schäuble, together with other EU fi nance minis-ters, called on the European Commission to take action in this area."

"In March 2015, the Commission presented a pro-posal for a directive on the mandatory automatic exchange of information on tax rulings among member states. Deliberations on this proposal are in full swing. Germany is pushing for the delibera-tions to be concluded in autumn of this year. In this way, states whose taxation activities are aff ected by these kinds of tax rulings will be able to obtain information on those rulings in good time, there-by enabling them to ensure proper taxation under their national laws."

Th e agreement applies to information relating to the 2015 calendar year and subsequent years. In addition, the two countries may also agree to ex-change information relating to earlier years.

African Revenue Offi cials Discuss International Tax Issues Th e commissioners and heads of delegations of the revenue authorities of South Africa, Botswana, Leso-tho, Mozambique, Namibia, Swaziland, and Zambia met in Pretoria, South Africa, on July 16, 2015, to discuss international tax issues facing the continent.

Th e event was aimed at preparing a road map and maximizing the respective participating countries' statutory mandates of revenue collection. "Exports out of developing countries are often under-invoiced so that income is accrued abroad, and imports into developing countries are often under-invoiced, so that the excess payment accumulates in foreign ac-counts," SARS Commissioner Tom Moyane said in his opening remarks.

In a joint statement released after the event, the Commissioners noted the global developments in tax matters, especially the negotiations on norms and standards seeking to make international tax more eq-uitable, and affi rmed that as tax authorities, they must adopt the necessary measures to counter base erosion and mitigate the negative eff ects of profi t shifting.

Th e Commissioners said that the threshold for country-by-country reporting may be too high for multinational enterprises headquartered in the

38

sub-region, and agreed to explore the possibility of a lower threshold for these enterprises. Th e Com-missioners underlined the importance of treaty net-working and committed to infl uencing countries to accede to international treaties such as the African Tax Administration Forum Agreement on Mutual Assistance in Tax Matters.

Discussions also centered on issues including the impact of illicit fi nancial fl ows; cross-border tax and customs issues; cooperation on the exchange of information; and proposals for the establishment of a sub-regional forum to enhance cooperation.

WB, IMF To Ramp Up Tax Support For Developing States

Th e International Monetary Fund (IMF) announced on July 10, 2015, that it is launching a new initiative in partnership with the World Bank to help develop-ing countries strengthen their tax systems.

Analysis suggests that many lower-income coun-tries have the potential to increase their tax ratios by at least 2–4 percent of gross domestic product, without compromising the fairness of their tax re-gimes or growth, the IMF said. Raising additional

revenues will allow developing countries to fi ll fi -nancing gaps and to promote development.

"A strong revenue base is imperative if developing countries are to be able to fi nance the spending they need on public services, social support and infra-structure," said IMF Managing Director Christine Lagarde. "Experience shows that, with well-target-ed external technical support and suffi cient politi-cal will, it can be done."

Responding to country demands, the IMF/World Bank initiative will deepen the dialogue with devel-oping countries on international tax issues, aiming to help increase their voice in ongoing international talks on tax rules and cooperation.

In addition, the two agencies will develop diagnos-tic tools to help member countries evaluate and strengthen their tax policies. Th is eff ort will com-plement the launch of the Tax Administration Di-agnostic Assessment Tool (TADAT) in November.

Th e initiative builds on the Bank's tax programs in over 48 developing countries and the IMF's tax-related technical assistance projects in over 120 countries.

39

ISSUE 141 | JULY 23, 2015NEWS ROUND-UP: VAT, GST, SALES TAX

ECJ AG Says Bitcoin Should Be Exempt

Advocate General Juliane Kokott of the European Court of Justice (ECJ) has said that bitcoin should be exempt from value-added tax (VAT), in relation to the ongoing case of the Swedish Tax Agency v. David Hedqvist (Case C-264/14).

She recommended to the ECJ that, although vir-tual currencies are not legal tender, the purchase of goods and services for a consideration of bitcoin should be recognized as a means of payment that should benefi t from the same exemption as for pur-chases made with legal tender as stated under Ar-ticle 135, paragraph 1(e) of the VAT Directive:

"Member states shall exempt the following transactions: … (e) transactions, including negotiation, concerning currency, bank notes and coins used as legal tender, with the excep-tion of collectors' items, that is to say, gold, silver, or other metal coins or bank notes which are not normally used as legal tender or coins of numismatic interest."

However, she acknowledged that the wording of Article 135, paragraph 1(e) does not provide a clear answer to the question, and that member states' interpretation of this provision in their respective domestic laws varies.

Greek Tax Hikes Begin To Take Effect

Greece's Government has started implementing the demands of the EU refi nancing deal, with a steep increase in value-added tax (VAT) rates.

For most goods and services, the rate has increased from 13 percent to 23 percent with eff ect from July 20, 2015. Th is applies to goods including sugar, coff ee, beef, spices, oil for cooking, and salt. All prepared foods, including processed breads, and food and drinks served in restaurants and casual food outlets, are also taxed under the higher rate. Most staple foods, including pork and basic bread, have remained at the old rate.

Hotel accommodation is also aff ected, with a rise from 6.5 percent to 13 percent. In addition, a scheme giving reduced rates on the Aegean Is-lands will be withdrawn with eff ect from October 1, 2015.

Th ere has also been a slight decrease in the rate charged on books, newspapers, and medicines, from 6.5 percent to 6 percent.

Romania's Tax Code Amendments Derailed Romania's President, Klaus Iohannis, has asked Parliament to reconsider the Tax Code amend-ments, which it passed last month.

40

Th e amendments include some radical tax cuts, in-cluding a reduction of the headline VAT rate from 24 percent to 19 percent. Iohannis has stated that he believes the measures need further consideration and has returned the Bill.

Th ese latest proposed cuts follow earlier reduc-tions by the current Government, including a

decrease in social security contributions by 5 per-cent, and a cut in VAT on food from the standard rate of 24 percent to 9 percent. Both the Europe-an Commission and the International Monetary Fund have expressed doubt over whether such cuts would be sustainable.

41

ISSUE 141 | JULY 23, 2015NEWS ROUND-UP: US TAX REFORM

House Passes Short-Term Fix For Highway Trust Fund

Th e US House of Representatives has moved swift-ly to pass the Highway and Transportation Fund-ing Act to extend funding of the Highway Trust Fund (HTF) until December 18, 2015, and Presi-dent Barack Obama confi rmed that he would sign it if it arrived on his desk.

Th e House passed the bill, by a bipartisan vote of 312 to 119, on July 16. Its sponsors, Ways and Means Committee Chairman Paul Ryan (R – Wis-consin) and Transportation and Infrastructure Committee Chairman Bill Shuster (R – Pennsylva-nia), have proposed a stopgap short-term USD8bn fi x, as current HTF funding will run out at the end of this month, and there is no apparent consensus among lawmakers on a longer-term solution.

It is intended therefore that the bill will allow more time for other longer-term solutions to be fi nal-ized during the intervening fi ve months. As noted by Shuster, the "legislation gives time to continue working on the progress made to fund a long-term transportation bill that is fi scally responsible. … Th is legislation is fully paid for and will not add to the nation's debt."

Various tax measures have been passed by the House to fund the stopgap measure, including USD3bn from an extension to the use of Transportation

Security Administration fees for a further two years, until 2024.

Th e remaining funding of around USD5bn will largely come from provisions that would improve tax compliance by those claiming the mortgage in-terest deduction, and prevent taxpayers from un-derstating their tax liabilities when reporting the value of estates subject to tax and gains made when selling properties.

While the USD100bn needed for the originally contemplated six-year funding of the HTF has been impossible to fi nd in Congress outside the po-litically diffi cult option of increasing gas taxes, the Senate still appears to be looking to fi nd appropri-ate tax revenue to off set a two-year solution.

Ryan said the short-term bill "gives us our best op-portunity to produce and pass a long-term bill to rebuild America's roads, bridges, and other infra-structure this year. Th is is the right approach, and the Senate should move quickly to adopt this ex-tension – without any unrelated measures – so that we can provide some certainty and get to work on a multi-year plan."

Legislation Would Increase US Start-Up Tax Break Vern Buchanan (R – Florida), a senior member of the US House of Representatives Ways and Means Committee, has introduced bipartisan legislation

42

that would increase the tax break available to new start-up businesses.

His proposed bill, the Support our Start-Ups Act, would quadruple the amount of start-up costs small business owners can deduct from their federal in-come taxes in the fi rst year of a business, raising it from USD5,000 to USD20,000.

"Government should be doing all it can to encour-age entrepreneurs to create jobs," said Buchanan. "Th is bipartisan, common-sense bill will make it easier and less costly for hard-working Americans to realize their dream of starting a business."

Th e National Federation of Independent Business welcomed the increased tax break in the bill, point-ing out that, in addition to the cost of materials and supplies, "most new small businesses face signifi -cant start-up costs, including advertising, obtain-ing licenses, permits and fees, paying rent, hiring business and fi nancial consultants, and providing employee training."

Hillary Clinton Details Profi t-Sharing Tax Credit Democratic Party presidential candidate Hillary Clinton has now given details of the tax credit she would give to businesses that expand profi t-sharing with their employees.

Th e two-year tax credit, which formed one of the tax reform measures in her speech to the New

School in New York on July 13, would be pro-vided to companies in the amount of 15 percent of the profi ts they share – with a higher credit for small businesses.

Shared profi ts eligible for the credit would be capped at 10 percent on top of employees' current wages, and there would also be an, as yet unspeci-fi ed, cap on the maximum annual credit available to any single business.

A briefi ng on Clinton's campaign website states that the credit "would help companies overcome any initial costs of setting up a profi t-sharing plan. After two years, companies that have established profi t-sharing plans and enjoyed the benefi ts of them would no longer need the credit to sustain the plans."

During her speech, she had indicated that the credit would be "good for workers and good for business. Studies show profi t-sharing that gives everyone a stake in a company's success can boost productivity and put money directly into employees' pockets. It's a win-win."

Th e briefi ng adds that "the overall cost of the tax credit is expected to be roughly USD20bn over the ten-year budget window, and will be fully paid for through the closure of tax loopholes that [Clinton] will identify as part of the comprehensive [tax re-form] agenda that [she] will introduce in the weeks and months ahead."

43

ISSUE 141 | JULY 23, 2015NEWS ROUND-UP: CORPORATE TAXATION

South Korea May Raise Effective Corporate Tax Rates

South Korea's Deputy Prime Minister and Minister of Strategy and Finance, Choi Kyung-hwan, has in-dicated that, within its proposed 2016 tax revisions to be announced shortly, the Government will sug-gest measures to replace the reduced revenue it will collect this year and cut its fi scal defi cit.

Choi was speaking in the National Assembly during discussion on the recently announced supplemen-tary budget that, following the outbreak of Middle East Respiratory Syndrome and a worsening of South Korea's already-weak economic growth pros-pects, has the aim of underpinning the economy by maintaining and stimulating consumer demand during the remainder of this year.

Th e new budget package will total some KRW11.8 trillion (USD10.25bn) and, although KRW5.6 tril-lion of it will be used to replace falling tax revenues, the Government has warned that its fi scal position is bound to worsen further still in 2015.

Th e shortfall in tax revenues has led to sugges-tions that the Government should raise the South Korean corporate tax rate, which is currently at a headline 22 percent for companies with a turn-over of over KRW20bn. Choi has rejected this, particularly as the global trend is for rate reduc-tions, not increases.

However, he did suggest that his Ministry is look-ing at increasing the eff ective tax rates paid by larg-er companies, by closing ineffi cient tax breaks to which they are currently entitled and widening the corporate tax base.

During another interview, he also reiterated previous promises to make additional eff orts to increase tax revenue by compliance improvements that would tackle South Korea's large underground economy.

Peru Offers Tax Break For Scientifi c R&D Th e Peruvian Government has announced a tax break for companies that invest in scientifi c research and development and technological innovation.

As of January 1, 2016, companies will be able to deduct up to 175 percent of their expenses against income tax when they invest in projects approved by the National Council for Science, Technology, and Technological Innovation (CONCYTEC). Authorization of a project by CONCYTEC will remain valid for four years.

Th e tax incentive is part of a Government initiative to diversify the economy. Piero Ghezzi, Minister of Production, said that the measure is intended to help build a culture of innovation in the country.

Th e Minister said the tax break will be available to companies operating in any sector. He said it is

44

hoped that around 200 projects will be approved under the scheme in the fi rst year of its operation.

US Deductibility Of Puerto Rican Excise Tax Questioned Senate Finance Committee Chairman Orrin Hatch has sought an update on the long-running review by the Treasury Department of Puerto Rican man-ufacturers' entitlement to off set excise tax against US federal income tax.

In October 2010, Puerto Rico enacted Law 154 to establish a source income rule to determine the proportion of income derived by multinationals that should be allocated to their operations in Puer-to Rico. A 4 percent excise tax was introduced for manufacturers with more than USD75m in gross receipts.

It was assumed that, to avoid double taxation, US companies would be able to credit the excise tax paid in Puerto Rico against their US federal tax

liability, thereby enabling Puerto Rico to collect ex-tra revenue.

In a July 17 letter to Treasury Secretary Jacob Lew, on a possible intervention by the US in relation to Puerto Rico's debt crisis, Hatch noted that over the last four years, pursuant to a Treasury Notice in 2011 and a further Internal Revenue Service (IRS) information letter in March last year, the IRS has not yet challenged the tax relief.

Th e IRS is undertaking a review however, which it said "requires the resolution of a number of legal and factual issues." It has also been stated that, if the IRS eventually decides that the excise tax is not creditable, a change would not apply retrospectively.

Hatch requested that Lew inform him of when the IRS will fi nish its review; and whether there are other examples of Treasury allowing a tax to be eli-gible for foreign tax credit treatment while that tax is under examination.

45

ISSUE 141 | JULY 23, 2015NEWS ROUND-UP: INTERNATIONAL TRADE

Canada, Ukraine Conclude FTA Negotiations

Canada and Ukraine have announced that they have concluded their negotiations, ongoing since 2010, for a free trade agreement.

Th e Canada–Ukraine Free Trade Agreement (CUFTA) announced by Prime Minister Stephen Harper and Ukrainian Prime Minister Arseniy Yatsenyuk on July 14, 2015, represents an impor-tant milestone in the Canada–Ukraine bilateral relationship. It should generate signifi cant com-mercial benefi ts for Canada while supporting the reform and development eff orts of the Govern-ment of Ukraine.

Ukraine is a promising emerging market for Canadian exporters, with opportunities in agri-culture and processed food (including fi sh and seafood products), and industrial goods such as cosmetics, industrial machinery, iron and steel, and plastics. Th e CUFTA will enable Canadian companies to take greater advantage of these op-portunities by ensuring new market access and more predictable conditions.

Upon entry into force of the CUFTA, Ukraine will immediately eliminate tariff s on 86 percent of Canada's current exports, with the balance to be phased out or subject to tariff reductions over pe-riods of up to seven years. Meanwhile, Canada will

immediately eliminate tariff s on 99.9 percent of current imports from Ukraine.

WTO States Ready To Expand ITA Negotiators from 54 World Trade Organization (WTO) members edged closer to an agreement on July 18 on the expansion of the Information Tech-nology Agreement (ITA) to eliminate tariff s on an-other 200 IT products.

Th e ITA, established in 1996, eliminated tar-iff s on a number of technology products such as semiconductors, computers and telecommunica-tions equipment. However, the agreement's cov-erage has never been updated, even though there have been signifi cant technological advances since 1996, and many IT goods are therefore now not included in the deal.

Th e products covered by the extension would include new generation semiconductors, GPS navigation equipment and medical equipment, including magnetic resonance imaging products and ultra-sonic scanning apparatus. It has been es-timated that USD1 trillion of these products are traded annually.

Th e list of products and the draft declaration, which spells out how the expanded agreement would be implemented, have been sent to capitals for review. Members have been given until July 24 to give fi nal approval.

46

"Th is is a big deal," said WTO Director-General Roberto Azevêdo. "Th e trade covered in this agree-ment is comparable to annual global trade in iron, steel, textiles, and clothing combined. By taking this step, WTO members will help to provide a jump-start to the global economy and underline the WTO's role as the central global forum for trade negotiations."

While not all WTO members participated in the negotiations, all WTO members' exports will ben-efi t from the tariff concessions.

When the product list and draft declaration are ap-proved, WTO negotiators will spend several months hammering out the technical details and the timetable for tariff elimination. Th e objective would be for all elements to be completed in time for ministers of those members who are involved in the initiative to conclude the ITA expansion agreement at the 10th Ministerial Conference in Nairobi in December, the WTO said.

Th e ITA extension would be the fi rst tariff -cutting agreement in the WTO for 18 years, the Organiza-tion said.

47

ISSUE 141 | JULY 23, 2015NEWS ROUND-UP: FATCA

FATCA Change Urged For US Expats

National Taxpayer Advocate Nina Olson has urged the US Treasury Department to amend the Foreign Account Tax Compliance Act (FATCA) regulations to adopt a "same country exception."

Th is regulatory change would exclude from FAT-CA reporting a taxpayer's fi nancial accounts in a foreign home state where they are a bona fi de resi-dent. Only accounts in a country other than one's country of residence should be subject to informa-tion reporting, she has recommended.

FATCA, which was enacted by the US Congress in 2010 and which took eff ect on July 1, 2014, is in-tended to ensure that the Internal Revenue Service (IRS) obtains information on fi nancial accounts held at foreign fi nancial institutions (FFIs) by US persons. Failure by an FFI to disclose informa-tion on its US clients results in a requirement to withhold 30 percent tax on payments to it of US-sourced income.

Olson noted that representatives of organiza-tions representing the American expat commu-nity have pointed out that accounts opened by US citizens resident in a foreign country should not be considered as "offshore" accounts de-signed for tax evasion, as those citizens have a le-gitimate need for local banking services in their country of residence.

She said that a same country exception "would mit-igate concerns about the collateral consequences of FATCA, reduce reporting burdens faced by FFIs, and allow the IRS to focus enforcement eff orts on identifying and addressing willful attempts at tax evasion through foreign accounts."

Olson noted that, to date, the IRS has not been willing to pursue this recommendation.

UAE Releases FATCA Guidance, Registration Form Th e Finance Ministry of the United Arab Emir-ates (UAE) has released US Foreign Account Tax Compliance Act (FATCA) guidance notes and the registration form for entities to access the FATCA reporting portal.

Th e guidance notes provide a detailed explanation of FATCA and the terms and conditions for rel-evant fi nancial institutions identifi ed in the agree-ment and operating in the UAE banking, insur-ance, and fi nancial services sectors. Th e document also includes guidelines for submitting fi nancial reports according to FATCA standards, the UAE's framework and legislation, and an overview of the laws issued by the US Treasury Department.

All relevant fi nancial institutions and entities iden-tifi ed within the agreement are required to register for the portal using the registration form included in the guidance notes.

48

Following registration, fi nancial institutions need to provide the following documentation: a copy of their work permit, data for any subsidiaries, and

audited fi nancial reports for 2014. Th ey must also provide copies of US citizens' passports, visas, and Emirates IDs to their compliance offi cer.

49

ISSUE 141 | JULY 23, 2015NEWS ROUND-UP: COUNTRY FOCUS — AUSTRALIA

Australian Treasurer Takes Stock Of Tax Reform Feedback

Australian Treasurer Joe Hockey has said that a con-sensus is emerging from the more than 800 submis-sions received as part of the Tax White Paper pro-cess, with participants seeking a tax system that is "simpler, more certain, and competitive."

According to Hockey, "there's an understanding of the need for change. No submission has argued for the status quo – that the existing taxation system is fair or future ready."

In a speech to the PwC Tax Reform Forum, Hock-ey stressed that the White Paper "is about how we collect tax, not how much tax we collect … Th e tax system must not be viewed as simply a fund-ing mechanism, especially for ever-increasing pub-lic expenditures. Th e structure and arrangements of our tax system must operate as eff ectively and effi ciently as possible to reduce the overall tax bur-den on the community and to promote stronger economic growth."

Th e Treasurer explained that submissions have been mixed in their views on negative gearing and capi-tal gains tax, while there is a strong feeling that the 30 percent company tax rate is uncompetitive and that high personal income tax rates are prompt-ing workers to move abroad. Hockey voiced his support for lower company tax rates, and said the

recent company tax cut for small businesses, from 30 percent to 28.5 percent, is "a starting point: a point on which to build so that we can continue to drive growth." He noted Australia's reliance on personal income tax revenue and that the threshold for the top income tax bracket is "only a little more than twice the average full time wage." Th e highly progressive nature of the income tax system means that the country is dependent on "a narrow base to support our social infrastructure," he said.

Hockey acknowledged the divide in opinion on su-perannuation tax concessions, but said the Govern-ment has no plans to increase superannuation taxes and will not make "adverse or unexpected changes to superannuation in our fi rst term."

Many submissions called for the broadening of the goods and services tax (GST) base, and/or an in-crease in the rate, in exchange for the abolition of a range of ineffi cient taxes levied by the states and territories. Hockey emphasized that the Govern-ment will consider only those GST reforms that have the unanimous agreement of state and terri-tory governments, and bilateral support in the fed-eral Parliament.

Hockey said that he will be working with colleagues in the coming months "to chart the best course – guided by the Government's principles – to create a better tax system based on the needs of Australia's rapidly changing economy."

50

Australians Back GST Reform, Property Council Says According to a survey commissioned by the Prop-erty Council of Australia, 72 percent of Australians believe that it is inevitable that the goods and ser-vices tax (GST) will rise over the next decade.

Th e results are based on the answers of 1,957 re-spondents surveyed by Newgate Research in May and June 2015. Two-thirds consider the GST to be fair, and 62 percent agreed that the GST is bet-ter than other taxes because it is simple and is less prone to avoidance.

Property Council Chief Executive Ken Morrison said: "Broadening or increasing the rate of GST has long been considered political poison, but that no longer refl ects the attitude of the community. Aus-tralians clearly understand the need for tax reform and as the research makes clear they want a tax sys-tem that is fairer and simpler. Changes to the GST need to be taken out of the too-hard basket."

Participants were also asked about their attitude to-wards stamp duty. Of respondents, 70 percent sup-ported the abolition of stamp duty, with 71 percent agreeing that the level of tax on people's homes is too high.

Almost half of respondents (47 percent) said stamp duty should be abolished in exchange for the re-moval of GST exemptions, while 46 percent sup-ported abolishing stamp duty in conjunction with an increase in the GST from 10 percent to 12.5

percent. However, just 30 percent were prepared to support a deal that scrapped stamp duty but hiked the GST to 15 percent.

Morrison commented: "Our research shows that Australians would support an increase in the rate of GST in return for doing away with other un-fair, punitive taxes like stamp duty. Governments know stamp duty distorts the economy, hurts hous-ing aff ordability, and is a roller coaster source of revenue. National tax reform needs to replace our most distortionary taxes with more effi cient reve-nue sources."

Increase GST To 15 Percent, Australian Accountants Say Th e Australian Government could generate AUD-265bn (USD195.7bn) in revenue over four years if it increased the goods and services tax (GST) from 10 percent to 15 percent across a broadened base, Chartered Accountants Australia and New Zealand (CA ANZ) have said.

According to CA ANZ modeling, a higher rate and broader base would need to be accompanied by corresponding cuts in personal income taxes and increases to benefi ts and pensions, to compensate those on low or fi xed incomes. After deducting this compensation, the federal Government would be left with AUD94bn over four years.

CA ANZ recommended that of this figure, AUD38bn be allocated for the abolition of inef-ficient state taxes. The net takings for states and

51

federal government could be AUD56bn over four years, it said.

Rob Ward, Head of Leadership and Advocacy at CA ANZ, explained: "We developed the formula to show how a rise in GST, and a sensible approach to other tax treatments, can be both fair and aff ord-able. Th e level of GST increase and base broadening is up to government, but our model demonstrates that at 15 percent we can provide appropriate levels of compensation to those who need it and still gen-erate additional revenue."

"We support comments by The Treasurer, Joe Hockey, that we've reached a crucial point and

we're ready to move towards the options paper stage. In Australia, 70 percent of federal Gov-ernment tax revenue is collected from personal and company income taxes. This is a time bomb. With fewer people paying taxes in the future, supporting a higher proportion of retired peo-ple, income tax could fail to generate a sufficient flow of funds for the federal Government to maintain the standard of living that we've come to expect in Australia."

"Tax reform has become a necessity for Australia and will require strong political leadership and co-operation between the federal Government, states, and territories to achieve."

52

TAX TREATY ROUND-UP ISSUE 141 | JULY 23, 2015

CANADA - NEW ZEALAND

Into Force

A new DTA between Canada and New Zealand en-tered into force on June 26, 2015.

CZECH REPUBLIC - ANDORRA

Negotiations

Th e Czech Government has visited Andorra to ex-press interest in signing a DTA, the Andorran Gov-ernment disclosed on July 3.

FRANCE - VARIOUS

Forwarded

France's National Assembly on July 1, 2015, ap-proved two bills (No. 2924 and No. 2925) en-dorsing the DTAs signed with Luxembourg and Switzerland.

HONG KONG - JAPAN

Into Force

Hong Kong and Japan completed the exchange of instruments of ratifi cation on July 6, 2015, bring-ing their DTA into force.

HONG KONG - MACEDONIA

Negotiations

Hong Kong and Macedonia completed a fi rst round of DTA negotiations on June 12, 2015.

ITALY - HONG KONG

Ratifi ed

Italy has ratifi ed the DTA signed with Hong Kong, publishing Law no. 96 in its Offi cial Gazette on July 7, 2015. Th e law became eff ective on July 8, 2015.

JAPAN - GERMANY

Negotiations

Japan's Ministry of Finance on July 16, 2015, an-nounced that it has agreed a DTA in principle with Germany.

53

JERSEY - RWANDA

Signature

Jersey and Rwanda signed a DTA on June 26, 2015.

LUXEMBOURG - BRUNEI

Signature

Luxembourg and Brunei signed a DTA on July 14, 2015.

NETHERLANDS - GERMANY

Signature

Th e Netherlands and Germany on July 14, 2015, signed a TIEA covering tax rulings and advance pricing agreements.

NEW ZEALAND - SAMOA

Signature

New Zealand signed a DTA with Samoa on July 8, 2015.

OMAN - PORTUGAL

Ratifi ed

According to preliminary media reports, Oman on July 2, 2015 ratifi ed the DTA signed with Portugal.

OMAN - SWITZERLAND

Ratifi ed

Oman has ratifi ed the DTA signed with Switzer-land, it was announced on July 14, 2015.

POLAND - ETHIOPIA

Signature

Poland and Ethiopia signed a DTA on July 13, 2015.

SAN MARINO - UNITED STATES

Negotiations

San Marino and the United States are engaged in negotiations towards a DTA, the San Marino Gov-ernment said on June 23, 2015.

SWITZERLAND - LIECHTENSTEIN

Signature

Switzerland and Liechtenstein signed a DTA and an accompanying Protocol on July 10, 2015.

UKRAINE - IRELAND

Forwarded

Ukraine's Parliament on July 15, 2015 approved a law to ratify the DTA signed with Ireland.

54

UNITED KINGDOM - VARIOUS

Legislation

Th e UK has recently released draft legislation to ratify DTAs signed with Algeria, Brazil, Bulgaria, Croatia, Senegal, and Sweden.

UNITED STATES - VIETNAM

Signature

Th e United States and Vietnam signed a DTA on July 7, 2015.

55

CONFERENCE CALENDAR

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

ISSUE 141 | JULY 23, 2015

THE AMERICAS

GLOBAL TAX TRANSPARENCY FOR LATIN AMERICA & THE CARIBBEAN 2015

Hanson Wade

Venue: Conrad Miami, 1395 Brickell Avenue, Mi-ami, Florida, 33131, USA

Key speakers: Alfredo Revilak (Servicio de Admin-istración Tributaria), Neil M. Smith (Ministry of Finance Government of the Virgin Islands), Álvaro Iván Revelo Méndez (Secretaría Distrital de Ha-cienda), Nadja Ruiz (Servicio de Administración Tributaria), Miguel Zamora (Noguera, Larraín & Dulanto), among numerous others

8/4/2015 - 8/5/2015

http://globaltaxtransparency.com/

INTERNATIONAL TAX ISSUES 2015 - CHICAGO, IL

Practicing Law Institute

Venue: University of Chicago Gleacher Center, 450 N. Cityfront Plaza Drive, Chicago, Il 60611, USA

Chair: Lowell D. Yoder (McDermott Will & Em-ery LLP)

9/9/2015 - 9/9/2015

http://www.pli.edu/Content/Seminar/International_Tax_Issues_2015/_/N-4kZ1z12a24?ID=223915

ADVANCED INTERNATIONAL TAX PLANNING - CHICAGO

Bloomberg BNA

Venue: Baker & McKenzie, 300 E Randolph Street, Chicago, IL 60601, USA

Key Speakers: TBC

9/28/2015 - 9/29/2015

http://www.bna.com/advanced_chicago/

BASICS OF INTERNATIONAL TAXATION 2015 – SAN FRANCISCO, CA

PLI

Venue: PLI California Center, 685 Market Street, San Francisco, California 94105, USA

Chairs: Linda E. Carlisle (Miller & Chevalier Char-tered), John L. Harrington (Dentons US LLP)

56

9/28/2015 - 9/29/2015

http://www.pli.edu/Content/Seminar/Basics_of_International_Taxation_2015/_/N-4kZ1z129zs?ID=223955

INTRODUCTION TO US INTERNATIONAL TAX – LAS VEGAS, NV

Bloomberg BNA

Venue: Trump International Hotel, 2000 Fashion Show Drive, Las Vegas, NV 89109, USA

Chairs: Bart Bassett (Morgan Lewis LLP), Doug Stransky (Sullivan & Worcester LLP)

9/28/2015 - 9/29/2015

http://www.bna.com/uploadedFiles/BNA_V2/Professional_Education/Tax/Live_Conferences/IntroIntermediateJuneAugSept2015.pdf

12TH TAXATION OF FINANCIAL PRODUCTS AND DERIVATIVES

Federated Press

Venue: Courtyard by Marriott Downtown Toronto, 475 Yonge Street, Toronto, ON, Canada

Chairs: Ryan L. Morris (WeirFoulds LLP), David P. Stevens (Gowling Lafl eur Henderson LLP)

9/28/2015 - 9/29/2015

http://www.federatedpress.com/12th-Taxation-of-Financial-Products-and-Derivatives.html

INTERMEDIATE US INTERNATIONAL TAX UPDATE – LAS VEGAS, NV

Bloomberg BNA

Venue: Trump International Hotel, 2000 Fashion Show Drive, Las Vegas, NV 89109, USA

Chairs: Bart Bassett (Morgan Lewis LLP), Doug Stransky (Sullivan & Worcester LLP)

9/30/2015 - 10/2/2015

http://www.bna.com/uploadedFiles/BNA_V2/Professional_Education/Tax/Live_Conferences/IntroIntermediateJuneAugSept2015.pdf

INTERNATIONAL TAX CONFERENCE

BNA

Venue: Park Hyatt Toronto Yorkville, 4 Avenue Rd, Toronto, Ontario M5R 2E8, Canada

Key speakers: TBC

10/14/2015 - 10/14/2015

http://www.bna.com/agenda-m17179927392/

57

GLOBAL TRANSFER PRICING CONFERENCE

BNA

Venue: Park Hyatt Toronto Yorkville, 4 Avenue Rd, Toronto, Ontario M5R 2E8, Canada

Key speakers: TBC

10/15/2015 - 10/16/2015

http://www.bna.com/agenda-m17179927386/

CAPTIVE INSURANCE TAX SUMMIT – WASHINGTON, DC

BNA

Venue: McDermott Will & Emery, 500 North Capital Street, NW, Washington, DC 20001, USA

Key Speaker: TBC

10/26/2015 - 10/27/2015

http://www.bna.com/captive_dc2015/

INTERMEDIATE US INTERNATIONAL TAX UPDATE – CHICAGO, IL

BNA

Venue: Baker & McKenzie LLP, 300 East Randolph

Drive, 50th Floor, Chicago, IL 60601, USA

Key Speaker: TBC

10/28/2015 - 10/30/2015

http://www.bna.com/inter_chicago2015/

PRINCIPLES OF INTERNATIONAL TAXATION

Bloomberg BNA

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

Key Speakers: TBC

11/16/2015 - 11/18/2015

http://www.bna.com/principlesintltax_NYC/

INTERNATIONAL TAX PLANNING

IBFD

Venue: Av. das Nacoes Unidas, 12901, Sao Paulo, SP 04578-000, Brazil

Key Speakers: Shee Boon Law (IBFD), Boyke Baldewsing (IBFD)

11/25/2015 - 11/27/2015

58

http://www.ibfd.org/Training/International-Tax-Planning-0

INTRODUCTION TO US INTERNATIONAL TAX – ARLINGTON, VA

Bloomberg BNA

Venue: Bloomberg BNA, 1801 S. Bell Street, Arlington, VA 22202, USA

Chairs: TBC

11/30/2015 - 12/1/2015

http://www.bna.com/intro_va/

THE NEW ERA OF TAXATION

International Bar Association

Venue: TBC, Mexico City, Mexico

Key speakers: TBC

12/3/2015 - 12/4/2015

http://www.ibanet.org/Article/Detail.aspx?ArticleUid=bf91caa6-9df6-454b-a682-8b57c7bf9209

ASIA PACIFIC

3RD GLOBAL CONFERENCE ON FINANCE & ACCOUNTING

Asia Pacifi c International Academy

Venue: Concorde Hotel, 100 Orchard Rd, 238840 Singapore

Chairs: Dr Raymond KH Wong (Th e Chinese University of Hong Kong), Prof. Dan Levin (Wharton Business School, University of Pennsylvania)

7/29/2015 - 7/30/2015

http://academy.edu.sg/gcfa2015/

4TH INTERNATIONAL TAX CONFERENCE

IBFD

Venue: JW Marriott, No. 83 Jian Guo Road, China Central Place, Chaoyang District, Beijing, China

Key speakers: TBC

9/10/2015 - 9/11/2015

http://www.ibfd.org/IBFD-Tax-Portal/Events/4th-International-Tax-Conference#tab_program

59

INTERNATIONAL TAX AT CROSSROADS – PLOTTING THE FUTURE

Taxsutra

Venue: Th e Oberoi hotel at Gurgaon, No. 443, Phase 5, Beside Trident Hotel, Udyog Vihar, Gur-gaon, Haryana 122016, India

Key Speakers: Justice Mohit Shah, Harish Salve, Philip Baker, Akhilesh Ranjan, Grace Perez-Navarro, Marlies de Ruiter, among numerous others.

10/16/2015 - 10/17/2015

http://www.ibfd.org/sites/ibfd.org/files/content/img/event/Taxsutra_Conclave_brochure.pdf

CENTRAL AND EASTERN EUROPE

THE TRANSFORMATION OF TAX SYSTEMS IN THE CEE AND BRICS COUNTRIES

IBFD

Venue: Faculty of Law and Administration, Univer-sity of Lodz, 8/12 Kopcinskiego st., 90-232 Lodz, POLAND

Key Speakers: Mr Porus Kaka (President of the In-ternational Fiscal Association), Prof. Frans Vanis-tendael (Katholieke Universiteit Leuven, Belgium), Prof. Jan de Goede (International Bureau of Fiscal Documentation)

10/9/2015 - 10/10/2015

http://www.cdisp.uni.lodz.pl/images/konferencje/TaxTransformation/Transformation_of_Tax_Systems_CEE_and_BRICS_-_agenda.pdf

WESTERN EUROPE

INTERNATIONAL TAX SUMMER SCHOOL 2015

IIR & IBC Financial Events

Venue: Gonville & Caius College, Trinity St, Cambridge, CB2 1TA, UK

Key Speakers: Timothy Lyons QC (39 Essex Street), Peter Adriaansen (Loyens & Loeff ), Julie Hao (EY), Heather Self (Pinsent Masons), Jonathan Schwarz (Temple Tax Chambers), among numerous others

8/18/2015 - 8/20/2015

http://www.iiribcfi nance.com/event/International-Tax-Summer-School-2015

THE 25TH OXFORD OFFSHORE SYMPOSIUM 2015

Off shore Investment

Venue: Jesus College, Turl Street, Oxford OX1 3DW, UK

Chairs: Nigel Goodeve-Docker (Down End Offi ce),

60

Peter O'Dwyer (Hainault Capital), Richard Cassell (Withers LLP), Nick Jacob (Wragge Lawrence Gra-ham & Co), Andrew De La Rosa (ICT Chambers)

9/6/2015 - 9/12/2015

http://www.off shoreinvestment.com/pages/index.asp?title=Programme_Ox_2015&catID=12148

DUETS ON INTERNATIONAL TAXATION: GLOBAL TAX TREATY ANALYSIS

IBFD

Venue: IBFD Head Offi ce Auditorium, Rietland-park 301,1019 DW Amsterdam, Th e Netherlands

Key Speakers: Richard Vann, Pasquale Pistone, Marjaana Helminen, Peter Harris, Adolfo Martin Jimenez, Scott Wilkie

9/7/2015 - 9/7/2015

http://www.ibfd.org/IBFD-Tax-Portal/Events/Duets-International-Taxation-Global-Tax-Treaty-Analysis-1#tab_program

DUETS ON INTERNATIONAL TAXATION: SUBSTANCE AND FORM IN CIVIL AND COMMON LAW JURISDICTIONS

IBFD

Venue: IBFD Head Offi ce, Auditorium, Rietland-park 301, 1019 DW Amsterdam, Th e Netherlands

Key Speakers: TBC

9/8/2015 - 9/8/2015

http://www.ibfd.org/IBFD-Tax-Portal/Events/Duets-International-Taxation-Substance-and-form-civil-and-common-law

UPDATE FOR THE ACCOUNTANT IN INDUSTRY AND COMMERCE - BRISTOL

CCH

Venue: Aztec Hotel and Spa, Aztec West, Almonds-bury, Bristol, South Gloucestershire BS32 4TS, UK

Key Speakers: Toni Trevett, Dr. Stephen Hill, Kevin Bounds, among others.

9/9/2015 - 9/10/2015

https://www.cch.co.uk/AIC

UPDATE FOR THE ACCOUNTANT IN INDUSTRY AND COMMERCE - MILTON KEYNES

CCH

Venue: Mercure Abbey Hill Hotel, Th e Approach,

61

Milton Keynes MK8 8LY, UK

Key Speakers: Toni Trevett, Dr. Stephen Hill, Kevin Bounds, among others.

9/15/2015 - 9/16/2015


INTERNATIONAL TAXATION OF BANKS AND FINANCIAL INSTITUTIONS

IBFD

Venue: IBFD head offi ce, Rietlandpark 301, 1019 DW Amsterdam, Th e Netherlands

Key Speakers: Ronald Aw-Yong (Beaulieu Capital), Peter Drijkoningen (French BNP Paribas bank), Francesco Mantegazza (Pirola Pennuto Zei & As-sociati), Omar Moerer (Baker & McKenzie), Pedro Paraguay (NautaDutilh), Nico Blom (NautaDutilh)

9/16/2015 - 9/18/2015

http://www.ibfd.org/Training/International-Taxation-Banks-and-Financial-Institutions

UPDATE FOR THE ACCOUNTANT IN INDUSTRY AND COMMERCE - MANCHESTER

CCH

Venue: Radisson Blu Hotel Manchester, Chicago Avenue, Manchester, M90 3RA, UK

Key Speakers: Toni Trevett, Dr. Stephen Hill, Kevin Bounds, among numerous others

9/22/2015 - 9/23/2015


CO-ORDINATED EUROPEAN PLANNING & TAXATION

IIR & IBC

Venue: TBC, London

Key speakers: Filippo Noseda (Withers), Timothy Lyons QC (39 Essex Street), Beatrice Puoti (Burges Salmon), Jonathan Burt (Harcus Sinclair), Line-Alexa Glotin (UGGC Avocats), among numerous others

9/23/2015 - 9/24/2015

http://www.iiribcfi nance.com/event/Co-ordinated-European-Planning-and-Taxation

62

TAXATION OF COLLECTIVE INVESTMENT SCHEMES CONFERENCE

IIR & IBC

Venue: TBC, London

Key speakers: Malcolm Richardson (M&G), John Harpur (Aberdeen Asset Management), James Willson (KPMG), Lorraine White (Bank of New York Mellon), Tim Lewis (Travers Smith), Ali Ka-zimi (Mazars), among numerous others

9/30/2015 - 9/30/2015

http://www.iiribcfi nance.com/event/Taxation-of-Collective-Investment-Schemes

UPDATE FOR THE ACCOUNTANT IN INDUSTRY AND COMMERCE - OXFORD

CCH

Venue: Oxford Th ames Four Pillars Hotel, Henley Road, Sandford-on-Th ames, Sandford on Th ames, Oxfordshire OX4 4GX, UK

Key Speakers: Toni Trevett, Dr. Stephen Hill, Kevin Bounds, among numerous others

10/6/2015 - 10/7/2015


INTERNATIONAL TAX PLANNING ASSOCIATION MONTE-CARLO MEETING

ITPA

Venue: Hôtel Hermitage Monte-Carlo, Square Beaumarchais, 98000 Monaco

Chair: Milton Grundy

10/11/2015 - 10/13/2015

https://www.itpa.org/?page_id=9909

INTERNATIONAL TAX STRUCTURING FOR MULTINATIONAL ENTERPRISES

IBFD

Venue: IBFD head offi ce, Rietlandpark 301, 1019 DW Amsterdam, Th e Netherlands

Key Speakers: Boyke Baldewsing (IBFD), Tamas Kulcsar (IBFD)

10/21/2015 - 10/23/2015

http://www.ibfd.org/Training/International-Tax-Structuring-Multinational-Enterprises#tab_program

63

EU FINANCIAL ACCOUNTING IN INTERNATIONAL COOPERATION AND DEVELOPMENT PROJECTS

European Academy

Venue: Arcotel John F, Wederscher Markt 11, 10117, Berlin, Germany

Key Speakers: TBC

11/26/2015 - 11/27/2015

http://www.euroacad.eu/events/event/eu-fi nancial-accounting-in-international-cooperation-and-development-projects.html

64

IN THE COURTS

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

ISSUE 141 | JULY 23, 2015

THE AMERICAS

United States Th e United States Supreme Court has upheld a key part of President Barack Obama's health care law, allowing premium tax credits granted through both state and federal health insurance exchanges.

Under the Aff ordable Care Act (ACA), premium tax credits were introduced to defray the cost of purchasing health insurance and, in May 2012, the Internal Revenue Service (IRS) issued a fi nal rule (IRS Rule) for their implementation.

Th e ACA requires the creation of an Exchange in each state – basically, a marketplace that allows people to compare and purchase insurance plans. Th e Act gives each state the opportunity to establish its own Ex-change, but provides that the federal Government will establish "such Exchange" if the State does not.

In related language, the ACA provides that tax cred-its "shall be allowed" for any "applicable taxpayer," but only if the taxpayer has enrolled in an insur-ance plan through "an Exchange established by the State," under US Code Title 42 – Public Health Service Act – sub section 18031 . An IRS regulation in 2012 interpreted that language as making tax credits available on "an Exchange … regardless of whether the Exchange is established and operated by a state … or by [the US Department of Health and Human Services – i.e. , a Federal Exchange]."

Th e case was brought by four individuals living in Virginia, which has a Federal Exchange. Th ey did not wish to purchase health insurance. Th ey argued that Virginia's Exchange does not qualify as "an ex-change established by the State" under the afore-mentioned provision, making them ineligible for tax credits. Th at would have made the cost of buy-ing insurance more than 8 percent of their income, thereby exempting them from the requirement un-der the ACA to maintain health insurance coverage or make a payment to the IRS.

Th e individuals challenged the IRS Rule in the Fed-eral District Court. Th e District Court dismissed

65

the suit, holding that the ACA unambiguously made tax credits available to individuals enrolled through a Federal Exchange. Th e Court of Appeals for the Fourth Circuit affi rmed this. Th e Fourth Circuit viewed the ACA as ambiguous, and de-ferred to the IRS's interpretation under Chevron USA Inc. v. Natural Resources Defense Council, Inc. (467 US 837).

Th e Supreme Court noted that the tax credits are one of the ACA's key reforms and highlighted that whether they are available on Federal Exchanges is a question of deep "economic and political signifi -cance." Th erefore, had Congress wished to assign that question to an agency, it surely would have done so expressly, the Supreme Court observed, adding that it is especially unlikely that Congress would have delegated this decision to the IRS, which has no expertise in crafting health insurance policy of this sort.

Th e Supreme Court therefore noted that the case concerned determining the correct reading of Sec-tion 36B of the ACA. It said that, in arriving at its decision, it fi rst considered whether the statutory language was plain. It noted that, if so, the Court must enforce it according to its terms. However, where wording is ambigious, the Court must de-termine the meaning by the context. When decid-ing whether the language is plain, the Court must read the words "in their context and with a view to their place in the overall statutory scheme," it said, noting the ruling in FDA v. Brown & Williamson Tobacco Corp (529 US 120, 133).

Th e Court ruled that, when read in context, the phrase "an Exchange established by the State" is ambiguous. "Th e phrase may be limited in its reach to State Exchanges. But it could also refer to all Ex-changes – both State and Federal – for purposes of the tax credits. If a state chooses not to follow the directive in Section 18031 to establish an Ex-change, the Act tells the Secretary of Health and Human Services to establish 'such Exchange.' And by using the words 'such Exchange,' the Act indi-cates that State and Federal Exchanges should be the same," the Court said.

It concluded: "State and Federal Exchanges would diff er in a fundamental way if tax credits were avail-able only on State Exchanges; one type of Exchange would help make insurance more aff ordable by pro-viding billions of dollars to the States' citizens. Th e other type of Exchange would not."

Th is judgment was released on June 25, 2015.

http://www.supremecourt.gov/opinions/14pdf/14-114_qol1.pdf

US Supreme Court: King v. Burwell (No. 14-114)

WESTERN EUROPE

United Kingdom

The UK Supreme Court has ruled in favor of an appellant concerning his right to double taxation relief on income remitted to the UK from the US.

66

Th e appellant's eligibility for double tax relief de-pended on the interpretation of Article 23(2)(a) of the UK–US Double Taxation Convention 1975 and its successor, Article 24(4)(a) of the UK–US Double Taxation Convention 2001. Th e relevant question under both provisions was whether the UK tax is "computed by reference to the same profi ts or income by reference to which the United States tax is computed."

Th e relevant period was the seven UK tax years run-ning from April 6, 1997, to April 5, 2004, during which the appellant was a member of a Delaware limited liability company (the LLC), classifi ed as a partnership for US tax purposes. As such, the ap-pellant was liable to US federal and state taxes on his share of the profi ts.

Th e appellant remitted the balance to the UK and was liable to UK income tax on the amounts re-mitted, as "income arising from possessions outside the UK." Th e UK tax authority, HM Revenue & Customs (HMRC – the respondent), decided that he was not entitled to any double taxation relief, on the basis that the income that had been taxed in the US was not the appellant's income but that of the LLC.

On the appellant's appeal, the First-tier Tribunal (FTT) found that the combined eff ect of the Dela-ware LLC Act (the LLC Act) and the LLC agree-ment made between the members was that profi ts of the LLC belong to the members as they arise. It concluded that the appellant was taxed on the

same income in both countries, so he was entitled to double taxation relief.

Th e Upper Tribunal allowed HMRC's appeal. Lat-er, the Court of Appeal dismissed the appellant's appeal, but the Supreme Court unanimously al-lowed the appellant's appeal.

Th e FTT had decided that the profi ts belonged to the members, referring to a personal right rather than a proprietary right. Th is was consistent with the appellant's expert evidence and with the com-parison that the FTT made between the LLC and a Scottish partnership. However, the Upper Tribu-nal disagreed. Th e Supreme Court noted that in coming to its decision, the FTT had based its judg-ment on expert evidence as to the combined eff ect under Delaware law of the LLC Act and the LLC agreement.

Th e Court of Appeal focused on whether the ap-pellant had a proprietary right to the profi ts of the LLC as they arose, rather than addressing wheth-er the income taxed in one country is the same as the income taxed in another. Th e Court of Appeal also accepted HMRC's submission that the FTT's fi nding that the profi ts belonged to the members as they arose was a holding on UK domestic tax law, with which the Upper Tribunal was entitled to interfere. However, questions about whether the members had a right to the profi ts and, if so, the nature of that right were questions of non-tax law, governed by Delaware law. Th e FTT's conclusion on them was a fi nding of fact, the Supreme Court

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stated, adding that the Court of Appeal had been diverted by its consideration of the case of Memec plc v. Commissioners of Inland Revenue [1998] STC 754, which was concerned with Article 23(2)(b) of the 1975 Convention, not Article 23(2)(a). Even-tually, the Supreme Court agreed with the ruling of the FTT.

Th e Supreme Court said that, if the words used in Article 23(2)(a) are given their ordinary meaning, it is necessary to identify the profi ts or income by reference to which the taxpayer's UK tax liability is computed, being primarily a question of UK tax law. Next, one must identify the profi ts or income from sources within the US on which US tax was payable under the laws of the US and in accordance with the Convention – primarily a question of US tax law. Th en it is necessary to compare the profi ts or income in each case, and decide whether they are the same.

Th e Supreme Court concluded that the FTT was right in fi nding that the appellant was entitled to the share of the profi ts allocated to him, rather than receiving a transfer of profi ts previously vested (in some sense) in the LLC. Th e Court said it follows that his "income arising" in the US was his share of the profi ts. Th e Supreme Court found that the appellant's liability to UK tax was computed by reference to the same income as was taxed in the US. Accordingly, the Supreme Court ruled that the appellant should qualify for double taxation relief under Article 23(2)(a).

Th is judgment was released on July 1, 2015.

https://www.supremecourt.uk/cases/docs/uksc-2013-0068-press-summary.pdf

UK Supreme Court: Anson v. HM Revenue and Customs [2015] UKSC 44

United Kingdom Th e UK's Supreme Court has rejected an appeal brought by the Rank Group against HM Revenue & Customs' decision to levy value-added tax (VAT) from takings from certain slot machines.

Th e key issue was whether the takings in ques-tion were exempt from VAT because of technology which separated the Random Number Generator (RNG), which is the system for producing num-bers for the machine's software to determine the outcome of a bet, from the machines themselves.

Th e appeal related to "multi-terminal" systems, whereby the RNG might be housed in a separate box or hung on the wall, but would be connected by a wire to the playing terminals. Up to six play-ing terminals might be served by a single remote RNG. Each terminal was designed to be used with the RNG obtained from the manufacturer of the terminal; the terminals and RNGs were sold to-gether; and each RNG was "manufacturer-specif-ic." Although they were linked to a single RNG, each terminal could be operated independently, of-fering the same or diff erent games.

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Th e key issue was whether the takings resulted from the provision of a "gaming machine," as defi ned. Th e disputed element of the defi nition of "gam-ing machine" was whether "the element of chance in the game is provided by means of the machine " (emphasis added). If this was not satisfi ed, then the takings from the disputed machines were exempt from VAT.

It is commonly accepted that a slot machine is a "gaming machine" for VAT purposes when the element of chance is provided by a component that forms part of the body of the machine on which the game is played. Rank had argued be-cause these two elements were separate, that sup-ply should be exempt.

Th e VAT and Duties tribunal concluded, in fa-vor of Rank, that the disputed machines were not "gaming machines" because the RNG was not part of any terminal, and the element of chance was not provided by the machine containing the slot. Th e High Court agreed. However, the Court of Appeal overturned this decision; it considered that each terminal and the single RNG could together con-stitute a machine. Rank appealed to the Supreme Court, which dismissed the appeal.

Th e Supreme Court stated that the question was how the element of chance is provided "in the game." It observed that the defi nition implies an active function in the game as it is played, rather than the mere passive transfer of information to the player. Th ere had been no good policy reason given

for distinguishing between on the one hand, em-bedded software or a single-terminal RNG, and on the other, a multi-terminal RNG.

Th e Court found as follows:

"Th e overall purpose is the creation of a game of chance for the player, in which purpose both the terminal and the RNG play, and are designed to play, essential and connected functions … Th e termi-nal is useless for playing the game without the RNG. Where the RNG is linked to a single terminal, the tribunal saw nothing wrong in principle in viewing them as to-gether being a single machine for playing the game. Similarly, where the RNG serves several terminals, it is appropriate to treat the combined apparatus as a 'machine'."


https://www.supremecourt.uk/cases/docs/uksc-2013-0257-press-summary.pdf

UK Supreme Court: HMRC v. Th e Rank Group Plc ([2015] UKSC 48)

United Kingdom Th e UK's Upper Tribunal has ruled in favor of the appellant in a case that discussed the tests to be applied to determine whether the "no-supply" VAT concession for transfers of a going concern (TOGCs) should apply with respect to the transfer

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of an entity to a member of a VAT group following the European Court of Justice's (ECJ's) ruling in Skandia (Case C-7/13).

Th e case concerned an appeal brought by Intelli-gent Managed Services Limited (IMSL) against the decision of the First-tier Tribunal (FTT). Th e FTT had dismissed its appeal against the decision of HM Revenue & Customs (HMRC) that the transfer of its banking support services business, consisting of business assets and staff , to Virgin Money Manage-ment Services Limited (VMMSL), a member of the Virgin Money Group (VMG), was not a "transfer of a going concern." HMRC decided that the trans-fer gave rise to supplies of goods and services that were subject to VAT.

Under EU law, Article 19 of the EU VAT Directive provides that in the event of a transfer, whether for consideration or not or as a contribution to a com-pany, of a totality of assets or parts thereof, mem-ber states may consider that no supply of goods has taken place, and that the person to whom the goods are transferred is to be treated as the succes-sor to the transferee.

Member states may, in cases where the recipient is not wholly liable to tax, take the measures neces-sary to prevent distortions of competition. Th ey may also adopt any measures needed to prevent tax evasion or avoidance through the use of that Arti-cle. Th e UK has legislated for this rule through Ar-ticle 5 of the Value Added Tax (Special Provisions) Order 1995.

It was accepted before the Upper Tribunal, having regard in particular to the ECJ's judgment in Skan-dia , which was issued after the FTT had released its decision in this case, that for VAT purposes the acquirer of IMSL's business was the single taxable person, namely the VMG VAT group, and not VMMSL itself. Th e relevant tests had to instead be applied in relation to what the group as a whole had done, and not any individual group member.

Th e Upper Tribunal observed: "Th e Skandia case demonstrates the extent of the single taxable person fi ction in a group context. Th ere the question was whether a supply of services from a US company to a branch of the same company in Sweden, which was a member of a Swedish VAT group, was a tax-able transaction. Th e Court held that it was, essen-tially because the eff ect of the grouping provisions was that the supply was to a separate single taxable person, namely the group of which the branch was a member, and not to the branch itself."

"In this appeal, therefore, the issues have narrowed down. It is accepted that, if VMMSL were a stand-alone company, all the conditions for the sale of the business by IMSL being a TOGC, including that VMMSL was carrying on the same kind of business as IMSL, would be satisfi ed. Th e only question is whether, when the transaction is regarded as a sale by IMSL to the single taxable person, the VMG VAT group, that group fails to satisfy the same kind of business test. Th at was not a question addressed by the FTT in its decision." Th e Upper Tribunal therefore set aside the FTT's ruling.

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Th e Upper Tribunal noted that the requirement that the transferee carry on the same kind of busi-ness as that of the transferor is an express require-ment of Article 5 of the SPO (UK law), but not of Article 19 of the Principal VAT Directive (EU law). It considered the case of Zita Modes (Case C-497/01), which looked at the precursor to Ar-ticle 19 of the EU VAT Directive (Article 5(8) of the Sixth VAT Directive).

After discussing the tests used in that case, the Upper Tribunal found that the transfer was for the group to continue to supply such services, rather than to liquidate the assets of the business transferred. Th e Tribunal concluded that "leaving aside the eff ect of the VAT group rules, it is accepted that VMMSL is, as a matter of fact (and ignoring any deeming pro-visions of Section 43 VATA), carrying on the same business as that formerly carried on by IMSL."

Th e Upper Tribunal determined that VMMSL is accepted as "having had the requisite intention to

carry on that business, and not to liquidate the activity or do anything else that could lead to the conclusion that this was no more than a transfer of assets [rather than a transfer of a going concern]."

Th e Upper Tribunal concluded: "For the rea-sons we have given, we allow this appeal and set aside the decision of the FTT. We decide that the transfer by IMSL of the assets of its business to VMMSL satisfi ed the conditions of Article 5(1) of the SPO, and that those supplies are accord-ingly to be treated as neither a supply of goods nor a supply of services."


http://www.tribunals.gov.uk/fi nanceandtax/Documents/decisions/Intelligent-Managed-Services-v-HMRC.pdf

UK Upper Tribunal: Intelligent Managed Services v. HMRC

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THE ESTER'S COLUMN ISSUE 141 | JULY 23, 2015

Dateline July 23, 2015

So what was the point of all that then?

I refer of course to the humiliating conclusion for Greece in its attempt to renegotiate its bailout terms. Almost unbelievably, after six months of deadlock and brinksmanship, Athens has seemingly managed to secure itself worse terms than those it originally protested against, and signifi cantly worse ones than were on the table just a short while ago.

I keep reading and hearing in the media that Greeks will be subjected to harsh new tax rules as part of the agreement. It's certainly true that the screw will be turned ever tighter on tax evaders. However, the statement summarizing Greece's obligations, which was released after the Euro Summit on July 12, barely mentions the word "tax."

In fact, taxation is referred to twice, and both ref-erences are vague in the extreme: streamlining the VAT system (presumably this means removing the VAT breaks bestowed on the Greek islands and re-duced rates) and broadening the tax base to increase revenue. In any other country, the goose would be barely heard to hiss. In Greece, however, the hisses are being drowned out by the howls of anguish at the agreement's other terms.

Th ere's not the room to go into all the gruesome de-tail here, but, to summarize, the stipulations are the very antithesis of what a left-wing party like Syriza

stands for, so it is hard to see how the current coali-tion will hold together. Th ey include: removing labor rights; cutting pensions; and privatizations, to name a few. Indeed, the latter of these three is particularly contentious because it essentially entails the selling of state assets, with the proceeds fl owing into a fund to pay Greece's creditors ( i.e. , mainly Germany).

In fact, the origins of the privatization fund tell a story in itself. Initially it was proposed that the fund would not be located in Greece at all, but some-where else (Germany, perhaps?), as if Greece were some kind of undisciplined trust fund brat who couldn't be relied upon not to blow the money. But that was a humiliation too far for Athens, and in a rare concession by Angela Merkel, the fund will now be established in Greece under the supervision of "relevant European Institutions." Nevertheless, it illustrates just how much control over its own desti-ny Greece appears to have ceded to foreign powers.

If you're wondering why I keep mentioning Ger-many, it's because the country is Greece's largest EU creditor and Europe's largest economy, so it's calling most of the shots here. One economist has actually proposed that the German Government should just increase the solidarity tax – the mecha-nism currently funding development in eastern Germany – by 2.5 percent, transfer those revenues to Greece, and dispense with the tortuous procedure of negotiations and bailout loans. But that would be far too simple, wouldn't it? And it would be far

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too transparent for the German Government's lik-ing – Germany's taxpayers would realize the extent to which they've been propping up Greece.

It might surprise you to know that Greece represents only 2 percent of the total GDP of the EU. To which you might respond: "What's all the fuss about then?" But I'm giving this topic special treatment this week because it's about so much more than just Greece itself; it is about how the EU now operates. Th e Ox-ford Dictionary defi nition of "negotiation" is to "try to reach an agreement or compromise through dis-cussion." So this was really only half a negotiation: there were plenty of discussions, and an agreement of sorts was reached, but there was certainly no hint of a compromise from the EU side. But back to my opening question: what was the point of taking such a hard, unsympathetic line against Greece?

Certainly, to a degree, Greece's current pain is self-infl icted and is partly rooted in fi scal and economic mismanagement by successive governments. But I can't see what continuing to punish Greece for its past profl igacy is going to achieve; this is now the third Greek bailout. Plainly, the fi rst two haven't achieved anything except misery for a large swathe of Greece's population. Would you lend someone with a disastrous credit rating a bunch of money you know you're never likely to see again? Th ought not. Moreover, how is the Greek economy ever going to grow in such a tight straitjacket when it doesn't hold the key to release itself?

Th e answer to all these questions lay in the unsay-able in the EU's corridors of power. As unsayable as it may be, let's imagine how the conversation might unfold. What about debt relief for Greece? "Ah," says Brussels, "but that sets a bad precedent you see. First Greece, then Portugal. Th en perhaps Spain and Italy – France even?" So just cut Greece loose from the eurozone then! "Hmm," ponders Brussels. "Apart from the fact that nobody's quite sure how far the fi nancial and economic ripple eff ect of the Grexit would spread, and of course there could be considerable short-term pain for Greece itself, there is another problem. Th e Grexit would signal that the European Project ( i.e. , ever closer monetary and political union) had failed. We need to keep the patient on life support, rather than let it die and reincarnate as an independent nation with its own currency. But you didn't hear me say this, right?"

Th e EU should be mindful of how such a hard-nosed attitude could cause collateral damage. Na-tionalist and anti-EU sentiment is already on the rise in Europe, and the way Greece has been treated could merely fuel the view that the EU is undemo-cratic and increasingly intolerant of points of view that don't match its own. I wonder what British voters have made of all this as they decide whether to change their relationship with Brussels, or fi le for divorce.

Th e Jester

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