GLOBAL TAX WEEKLYa closer look

ISSUE 285 | APRIL 26, 2018

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 WEEKLYa closer look

ISSUE 285 | APRIL 26, 2018

CONTENTS

FEATURED ARTICLES

NEWS ROUND-UP

GLOBAL TAX WEEKLYa closer look

New Zealand Inland Revenue Stretches Its Tentacles Overseas Tori Sullivan, EY Law and David Snell, EY 5Brexit And The UK VAT Regime Stuart Gray, Senior Editor, Global Tax Weekly 18UK Tightens The Tax Net On UK Immovable Property Kieran Smith, Kingston Smith, independent member of Morison KSi 26Nigeria Extends Voluntary Assets And Income Declaration Scheme Taiwo Oyedele, Kenneth Erikume, Folajimi Olamide Akinla, and Priscilla Manah, PwC Nigeria 29

Topical News Briefing: Crunch Time For EU Digital Tax? The Global Tax Weekly Editorial Team 31Subpart F Income Earned By Canadian Corporations After US Tax Reform Max Reed, SKL Tax, Canada 33Topical News Briefing: Transitioning To Complexity? The Global Tax Weekly Editorial Team 41

Country Focus: Australia 43

Australia Urged To Resist Tax 'Race To Bottom'

Australian Firms Not Convinced Of Need For Tax Reform

Australia Confident Of EU Trade Talks

European Union 46EU 'Busy' Negotiating Free Trade Deals

EU Warns UK: No Border Deal, No Brexit Deal

EU To Strengthen Protections For Whistleblowers

EU Asks States To Calculate Common Corporate Tax Base Cost

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

© 2018 CCH Incorporated and its affiliates. All rights reserved.

Digital Taxation 50German Industry Cautions Against EU Digital Tax

Moscovici Defends EU Digital Tax Agenda In Washington, DC

New Zealand Confirms Virtual Currencies Are Property For Tax Purposes

VAT, GST, Sales Tax 54Irish Revenue Updates And Issues New VAT Guidance

Italy Receives EU Green Light For Real-Time VAT Reporting

Luxembourg To Amend VAT Group Regime After ECJ Ruling

Think Tank Calls For Scottish VAT Devolution

Country Focus: United States 58IRS Adds To Transition Tax FAQs

IRS Issues Guide On New Depreciation And Expensing Rules

AICPA Urges Changes To Transition Tax Rules

Other Taxes 63New Zealand To Offer New Research Tax Breaks Next Year

EU Pushing For Exemption From US Metals Tariffs

India Seizes Another Dividend Due To Cairn In Tax Dispute

TAX TREATY ROUND-UP 65CONFERENCE CALENDAR 67IN THE COURTS 78THE JESTER'S COLUMN: 86 The unacceptable face of tax journalism

FEATURED ARTICLES ISSUE 285 | APRIL 26, 2018

New Zealand Inland Revenue Stretches Its Tentacles Overseasby Tori Sullivan, EY Law and David Snell, EY

In December 2017, the New Zealand Inland Revenue released draft legislation proposing a range of reforms to the tax treatment of large multinational groups. The reforms implement into domestic law the Base Ero-sion and Profit Shifting ("BEPS") initiatives being adopted by the OECD, of which the New Zealand Inland Revenue has been an enthusiastic participant.

The new Bill would involve significant changes to the tax treatment of many aspects of the struc-ture, financing and operation of multinational groups. It expands the definition of "Permanent Establishment" ("PE"), gives new teeth to the Transfer Pricing ("TP") rules, and imposes tighter limits on the deductibility of interest on related party debt. It will also significantly extend Inland Revenue's information gathering powers and debt collection ability beyond its jurisdiction in New Zealand to reach into overseas members of a multinational group.

BEPS Reforms

Inland Revenue signaled its intention to implement wide-ranging BEPS reforms in a series of Discussion Documents issued in March 2017. Those proposed reforms were incorpo-rated into the Taxation (Neutralising Base Erosion and Profit Shifting) Bill that was intro-duced into Parliament in December 2017.1 The changes are anticipated to have a significant impact upon both the future structure and ongoing operations of multinational groups operating in New Zealand.

Given the targeted nature of the proposed reforms, the Official Commentary to the Bill2 states that it expects taxpayers to change their structure to prevent the worst features of the proposed reforms from applying. In most instances (but not all) the reforms are expected to come into force on income years commencing after June 30, 2018 – so multinational taxpayers with a

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June 30 balance date have been given less than six months to address the impact the reforms will have and take whatever steps are necessary to comply with the new laws. Taxpayers with a December 31 balance date have had 12 months' notice.

The major features of the reform are discussed below.

New Permanent Establishment Rules

The Bill proposes to unilaterally expand the scope and definition of the PE rules so as to catch sales of goods and services by non-residents into New Zealand that rely upon local entities pro-viding sales and marketing support. Predictably, that new definition is drawn largely (almost word-for-word) from the expanded definition of PE in Part IV of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS.

As with the expanded definition of PE in the Multilateral Convention, the Bill establishes the new concept of a local "facilitator" who is responsible for "bringing about" the sales on behalf of the non-resident – and deems the operations of the facilitator to constitute a PE for the non-resi-dent. The role of the facilitator must be distinguished from simply providing "ancillary services". Neither the Multilateral Convention nor the proposed definition in the Bill provides any detailed guidance on that difficult boundary.

However, the Official Commentary to the Bill does provide some (non-binding) insight. It confirms that the new definition of PE applies only when the local facilitator acting on behalf of the non-resident supplier is responsible for an identifiable sale to a customer in New Zea-land. It explains:3

"The facilitator must carry on an activity for the purpose of bringing the supply about. It is intended that only activities designed to bring about a particular sale to an identifi-able person should potentially result in a deemed PE. Therefore activities that do not relate to a particular sale, such as advertising and marketing, would not be sufficient to trigger a possible PE under this requirement. After-sales activities, such as technical support, would not be sufficient to meet this requirement, as they occur after the supply has been made.

The kinds of activities that are within the intended scope of this provision primarily include activities designed to convince a particular customer to acquire the supply."

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It continues:

"… any activities that are preparatory or auxiliary to the non-resident's supply of goods or services will not be sufficient to trigger the potential application of the rule. An ex-ample of preparatory or auxiliary activities is general marketing or advertising of a non-resident's products. Warehousing and delivery of the supplied goods would also usually be preparatory or auxiliary."

Accordingly, care must be taken to differentiate the various activities of the alleged facilita-tor – and the new PE rules will apply only to the sales-related activities. Other marketing, distribution, customer support and after-sales care should not bring about a PE under the new rules.

Likewise, the Bill provides the new PE rules apply only to income from the facilitated sales activ-ity – other activities will therefore not be attributed to the deemed PE of the non-resident. It is only the income arising from the sale-related activities of the facilitator that will be taxed to the non-resident under the new PE rules. So the precise scope and tax consequences of the PE will be very fact-specific, and the activities of the facilitator with respect to each sale may determine the tax treatment. Obviously the devil will be in the details, and audits and tax disputes may become very fact dependent.

To implement the new PE rules, the Bill amends the fundamental rule incorporating double tax agreements (DTAs) into New Zealand law.4 That rule was amended only last year to provide that DTA rights could be overridden by the domestic general anti-avoidance provision;5 and has now been further amended to characterize the new PE rules as a type of anti-avoidance rule (thereby ensuring they also override any taxpayer DTA rights).

One aspect of the new PE rules that had not previously been signaled by Inland Revenue during its earlier round of consultation is that it now extends to situations where the local "facilitator" for the non-resident is a third party (i.e., is not owned/associated with the non-resident supplier). The Bill provides that if the unrelated facilitator is "economically dependent" upon the non-resident (i.e., it generates more than 80 percent of its income from the non-resident) then it is treated as if it were related, and therefore can also create a PE for the multinational group. So the identity of the facilitator is not relevant; only the role they play in completing sales on behalf of the non-resident supplier.

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Finally, the new PE rule effectively applies whether or not the non-resident is based in a jurisdic-tion with which New Zealand has a DTA. The Official Commentary explains:6

"If a New Zealand DTA applies to the non-resident, the definition of a PE in that DTA will apply for this purpose. If no New Zealand DTA applies to the non-resident, then a new domestic law definition of a PE will apply."

So the new PE rule (either under the domestic legislation or the DTA) applies regardless of the jurisdiction of the non-resident supplier. Given possible delays in ratification of the Multilateral Convention that will implement the expanded definition of PE across the network of DTAs, it seems these changes to New Zealand's domestic law may pre-empt those changes. Accordingly, the new PE rules will apply for all purposes in New Zealand even before the Multilateral Conven-tion comes fully into effect.

Corporate restructure required?

As explained by the Official Commentary to the Bill, Inland Revenue does not actually expect it will have to apply the new PE rules to most multinational groups. Rather, it is ex-pected that compliant taxpayers will voluntarily restructure their New Zealand operations to conform to the purpose of the new rules (and thereby prevent the draconian consequences). The Official Commentary recommends taxpayers proactively restructure before the new PE rules come into effect:7

"The Government anticipates that some multinationals may wish to restructure their New Zealand operations in response to the proposed PE anti-avoidance rule. One of the policy goals of the proposed rule is to encourage taxpayers to move away from PE avoidance structures. Therefore, the Government is happy for taxpayers to restructure their New Zealand operations in response to the rules by either adopting a formal PE, or by moving to a standard local distributor model (where the goods or services are sold by the non-resident to an associated party, who then on-sells the goods to unrelated customers)."

In some instances, this has resulted in multinational groups being obliged to take steps to restruc-ture their operations, to ensure a greater share of the final sale price to New Zealand customers becomes taxable locally. In other instances, it has required the group to make adjustments to in-ternal prices to ensure an increased level of profit is returned by the New Zealand member of the

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group. But all multinational groups must give detailed consideration to how best to comply with the new rules before their adverse effects are felt after July 1, 2018.

New Interest Limitation Rules

New Zealand has long had a Thin Capitalization ("Thin Cap") regime restricting the quantum of debt that could be carried by the New Zealand-resident members of a multinational group. However, the Bill sets out two further new limitations on the ability of New Zealand entities to deduct interest payments.

Recalculation of Thin Cap ratio

First, the Bill reclassifies what liabilities may be taken into account when calculating the appli-cable Thin Cap ratio. In particular, it now excludes a number of non-debt liabilities that were formally permitted under the current calculation. The Official Commentary explains:8

"The Bill proposes that in calculating its New Zealand debt percentage, an entity will be required to measure its assets net of its non-debt liabilities …

For a borrower's New Zealand group, non-debt liabilities are defined as all liabilities as shown in the company's financial accounts that are not counted as debt."

The new Interest Limitation Rules will impact most companies' debt percentages for Thin Cap pur-poses, moving some companies from having a conservative debt profile to an "at risk" debt profile (i.e., greater than 40 percent debt ratio). Other companies may find themselves moving from inside the safe harbor threshold, to breaching the 60 percent safe harbor, with a proportion of interest expenditure becoming non-deductible. Multinational groups will need to assess the impact of these changes on their Thin Cap ratio and consider whether they need to reduce the amount of debt in New Zealand.

In order to give taxpayers time to adjust to the new calculation requirements, under the Bill cur-rent compliance with the existing rules will be grandfathered for five years. However, a taxpayer that takes on any new debt that results in it breaching the former thresholds will immediately become subject to the new safe-harbor limits.

Interest rate limits on related party debt

Second, a new and more substantive reform is the introduction of interest-rate limits on related party borrowing by New Zealand entities. As well as restricting the extent of borrowing permitted

9

under the revised Thin Cap rules, the Bill proposes limitations on the interest rate that can be charged on related party debt. To achieve this limitation, the Bill permits Inland Revenue to ig-nore/recharacterize a range of allegedly non-market features that it believes may artificially inflate the interest rate charged on equivalent debt by a third party.

Factors that can now be ignored are the following:

Loan periods of more than five yearsSubordination of repaymentLack of securityAny other "exotic features" (including convertibility, acceleration, and contingencies).

The new rules will permit Inland Revenue to determine the proper interest rate based on what it considers should be the arm's length terms for the loan, and not upon the actual terms of the loan itself.

In practice, with few exceptions, the rate of interest payable by the New Zealand borrower will be significantly restricted to one of the following:

First, the safe harbor of the rating of the Group parent, minus one "notch";Second, the borrower's own rating (providing the lending does not have a "high BEPS risk" profile); orLastly, a recalculated version of the borrower's own rating (if it had no greater than 40 percent debt, which must give rise to a rating no lower than BBB–).

Inland Revenue clearly anticipates most taxpayers will simply adopt the safe harbor of the group parent's rating, which will obviously lower compliance costs. However, that safe harbor is avail-able only where the group parent is both easily identifiable and has a recognized rating (i.e., from a recognized ratings agency). If the New Zealand borrower has no identifiable parent, then it must choose one of the following ratings options:

The borrower's own rating (again, if it has a recognized rating and the lending does not have a "high BEPS risk" profile), or finallyA recalculation of the borrower's own rating, but as if that borrower had no more than a 40 percent debt ratio under the Thin Cap calculation.

10

Accordingly, unless the parent's safe-harbor rating is used, the interest rate for the borrower de-pends upon its "BEPS risk". That new term applies if the lending has any of the following features:

The borrower's Thin Cap ratio is great than 40 percent; orThe lender is located in a low-tax jurisdiction (i.e., it faces an interest rate of 15 percent or lower on that interest income); orThe borrower has a low income-interest ratio when their earnings before interest, tax, depreciation and amortization (EBITDA) is at least 3.3 times their interest expense.

The complexity of these rules seems deliberately intended to compel taxpayers to simply adopt their group parent's interest rate, regardless of the form of the lending or the true economics or credit-risk of the parties. Given the complexity of these new rules and the additional calculations required, care must be taken for any multinational group intending to apply any interest rate on intragroup lending other than the parent's own interest rate (minus one notch).

The combined effect of those reforms is to further restrict the quantum of debt that can be carried by New Zealand members of a multinational group – and therefore the amount of interest that can be deducted. Furthermore, there will be no grandfathering of these new rules, and all existing loans will become subject to the proposed limitations when they come into force from July 2018.

More Teeth For Transfer Pricing

New Zealand's TP rules have been in force for over two decades without any substantive change.9 The BEPS Bill introduces significant revisions. The proposed changes are intended to better align New Zealand's rules with the OECD TP Guidelines generally, and with the equivalent Austra-lian TP rules in particular. The Bill achieves this by incorporating measures recommended by the OECD BEPS Actions 8–10.

A significant requirement of the proposed new TP rules is to ensure the OECD enhanced docu-mentation standards must now be met. While not (yet) compulsory, the new rules clearly envis-age a greater burden on taxpayers to generate and maintain timely TP documents regarding all intragroup transactions. In practice, documentation will require far more emphasis to explain:

The value-adding functions of the various parties to a transaction;The actual conduct of the parties; andHow the various risks are managed and controlled by the parties.

11

As a result, we expect that, for many taxpayers, existing documentation will need to be enhanced to meet the new standards.

In practice we also anticipate TP investigations in New Zealand will increasingly focus not only upon the agreements and supporting documentation, but also involve a "deep dive" into the actual terms of individual transactions to ensure the taxpayer is actually "living the model" con-tained in the underlying documents.

Focus on economic substance of transactions

The key aspect of the new TP rules is to require transactions between group members are aligned with the value created by each member through its respective economic activities. But taxpayers will now be expected to demonstrate that the "conditions" of the transaction (not just the price adopted) are arm's length.

The new TP rules therefore provide that the legal form of transactions can be altered or disre-garded by Inland Revenue where that legal form is inconsistent with the economic substance. In extreme instances, Inland Revenue will have the ability to completely disregard or replace a trans-action where it concludes there would be no "commercial rationale" for independent parties to enter into that transaction. This will permit Inland Revenue to recharacterize both the transaction itself as well as the price adopted.

In practice, we expect Inland Revenue to focus scrutiny upon limited risk entities operating in New Zealand, paying particular attention to the presence of intangibles and the question of which party economically owns the intangible. Obviously multinational groups operating this structure and reliant upon intangibles face an increased prospect of audit.

Onus of proof and time bar

While the onus of proof in general tax matters rests on the taxpayer, the current TP rules place that onus onto the Commissioner to establish that the price adopted by the parties was not at arm's length. This onus has proved unexpectedly difficult for Inland Revenue, which obviously knows less than the taxpayer about its business operations and pricing methodology. A lack of comparables within this small jurisdiction has also hampered audits. Those practical difficulties partly explain why there have been few disputes and no TP cases decided in New Zealand under the current rules.

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To relieve itself of these difficulties, the Bill proposes to reverse the onus of proof and place it upon the taxpayer to positively establish that its pricing was at arm's length. Much of the increased documentation requirement is aimed at ensuring taxpayers create and retain the necessary information to satisfy this new onus. This change will bring New Zealand's TP rules into line with both other types of tax disputes, and with the TP rules operating in other comparable jurisdictions – but it will open up the possibility of future disputes at the boundary that may be decided not according to the merits but upon the weight of evidence the taxpayer is able to produce.

The time bar within which Inland Revenue can reassess all taxpayers in New Zealand is a standard four years. Inland Revenue has resisted all previous attempts to permit a reduced time bar for certain low-risk taxpayers or for certain simple categories of disputes. So at present, even complex disputes involving tax avoidance or TP normally apply the standard four-year time bar. However, to provide sufficient time for Inland Revenue to review and as-similate all this increased TP documentation expected in future, the Bill proposes to extend the time bar to seven years for TP disputes only (three years longer than permitted for any other type of reassessment).

Interestingly, it is this extended time bar that has drawn the sharpest response from taxpayers and their advisers, who have made repeated submissions against the proposal. But recommendations to simply provide Inland Revenue with greater resources to conduct TP disputes or to impose stricter time-frames for such audits have (so far) been ignored.

Tax Administration Issues

To give the reforms teeth, the Bill contains some extensions to Inland Revenue's power to con-duct audits and recover tax allegedly owing by non-residents. These changes come into effect from June 30, 2018. As the Official Commentary to the Bill explains:10

"This means that these new powers can be used by Inland Revenue after the date of en-actment when pursuing current or new investigations, even if those investigations cover income years prior to the date of enactment."

Accordingly, these changes are likely to have the most significant immediate impact upon the conduct of any current investigation or dispute involving prior periods.

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Extended information gathering powers

For some time, Inland Revenue has struggled with its inability to obtain information held off-shore by non-residents. To apparently solve that problem, the Bill extends the reach of the Com-missioner's current information gathering powers in two ways.

First, it expands the general information gathering power in section 17 of the Tax Administration Act 1994. That section now applies to all information held by any member of the world-wide group. New subsection 17(1CB) provides that:11

"… information or a document is treated as being in the knowledge, possession, or con-trol of a member of a large multinational group in an income year, disregarding any law of a foreign country relating to the secrecy of information, if the information or docu-ment is in the knowledge, possession, or control of the member or another member of the large multinational group."

The effect of this extended power is that Inland Revenue may now seek from the New Zealand resident member of the group any information held by any member of that group overseas. The Official Commentary to the Bill explains how this will operate:12

"In practice, it is anticipated that the Commissioner would request the information from the group member who is resident or potentially subject to tax in New Zealand. This group member would then source the required information from non-resident members of their group. The information would be passed on to the relevant New Zea-land taxpayer who would then supply this information to the Commissioner.

For example, the Commissioner could ask a New Zealand subsidiary of a multinational corporation to provide transfer pricing documentation that was held by their offshore parent. The New Zealand subsidiary would ask their parent to provide this documenta-tion to them, and they would then supply it to the Commissioner."

The Bill gives teeth to these expanded information gathering powers against multinational groups in a number of ways:

It provides for a civil penalty of up to NZD100,000 (USD71,749) to be imposed on any New Zealand member of the multinational group that fails to provide the requested information,13 and

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It provides for a strict and knowledge criminal liability to be imposed on any New Zealand member of the multinational group that fails to provide the requested information.14

Second, the Bill provides for the potential exclusion of any evidence that was requested by Inland Revenue but not originally provided by the New Zealand member of the multinational group from being considered in any subsequent dispute or court challenge.15 So, if the information was not pro-vided in response to the original request, it may not later be provided or relied upon by the group to support its position – the new statutory window for producing that information will have closed.

Given the onus of proof imposed on the taxpayer in all tax disputes, the failure to provide the requested information when required may adversely impact its arguments in support of its tax position. And the new provision ensures that the Commissioner is entitled to make an assessment based upon only the information that is available – and prevents the taxpayer from later attempt-ing to introduce new records to support its case that had not previously been provided.

The new power effectively obliges the New Zealand member of the multinational group to act as the Commissioner's agent and collect all the requested information from other members of the group, while exposing it to the range of new draconian sanctions if it fails to do so. We therefore anticipate Inland Revenue will make ready use of this new power, especially as it will permit re-quests for information regarding prior income years covered by a present audit or dispute involv-ing prior periods.

Recovery of tax from New Zealand group member

Another practical concern for the Commissioner was the ability to recover unpaid tax from non-resident members of the multinational group. Again, the Bill has proposed to permit the Com-missioner to treat the New Zealand member of the group as if it was the "agent" of the non-res-ident member and therefore recover any tax owed by it from the New Zealand member directly.

Importantly, that power extends only to taxpayers within the same "wholly owned group" but otherwise has the effect that the New Zealand member becomes fully liable for all tax payable by the non-resident member. Presumably that power is primarily intended to allow the Commis-sioner to recover tax owing with respect to the income attributed to the non-resident's alleged new PE under the Bill – but is drafted widely so could potentially apply to all tax obligations owed by the non-resident. This power therefore creates a significant new risk for non-resident groups operating in New Zealand.

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Conclusion

New Zealand is taking strong steps to implement a number of the BEPS proposals. And those reforms will have wide-ranging implications for multinational groups. It will introduce a num-ber of new rules limiting the way groups are structured, fund themselves or operate in New Zealand. Compliance with the PE, TP and interest limitation rules may require groups to re-structure their operations.

Many tax advisers are questioning whether rules intended largely to force taxpayers to adopt ap-proved structures or pricing methods or interest rates with the sole intention of increasing the amount of tax payable in New Zealand represents sound tax policy. All tax authorities are fight-ing over the same pie, but it seems Inland Revenue has taken steps to ensure it becomes entitled (rightly or not) to a larger share.

The proposed administrative reforms also give sharper teeth to a range of existing powers to gath-er information and collect tax debt. These rules impose greater compliance costs on taxpayers and effectively make them unpaid (and presumably unwilling) agents for Inland Revenue. Again, the proposed reforms are being pushed through in the face of significant taxpayer opposition. Inland Revenue's sole justification appears to be that protecting New Zealand's (increased) share of the international tax pie requires it to reach beyond its borders into members of the group in other jurisdictions. Presumably the tax authorities in some of those other jurisdictions may not be so welcoming of New Zealand's proposed intervention.

As a result, we anticipate implementation of the reforms by Inland Revenue will increase the number and complexity of cross-border disputes. While New Zealand is committed to the Mu-tual Agreement Procedure under its network of DTAs to resolve these, Inland Revenue has in-dicated it will not permit this often lengthy process to impede tax audits or disputes under the domestic law. Taxpayers may therefore be obliged to fight against a proposed reassessment of its New Zealand tax liability on many fronts simultaneously. Audits are already lengthy and time consuming, and the proposed measures are expected to extend these time-frames.

Finally, global multinationals may see their New Zealand tax expense as immaterial to the group as a whole, and any reassessment of its New Zealand member to be so small as to not be worth disputing. It is common for large taxpayers to conclude on a cost-benefit analysis that lengthy tax disputes are simply not worthwhile. However, as previously stated, New Zealand's Inland Revenue is beginning to flex its muscles in demanding a larger share of the global pie. Simply

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conceding that larger share of tax to New Zealand may have unintended flow-on consequences when more significant revenue authorities ask why a similar share is not being returned in their jurisdiction. It would therefore be unwise for multinationals to agree to any increased tax demand in New Zealand without ensuring it does not create an unwelcome precedent that could be fol-lowed in more important jurisdictions.

ENDNOTES

1 http://taxpolicy.ird.govt.nz/bills/52-32 http://taxpolicy.ird.govt.nz/publications/2017-commentary-nbeps-bill/overview3 Id., pp. 41–42.4 Section BH 1 of the Income Tax Act 2007.5 Found in section BG 1 Income Tax Act 2007.6 Supra, note 2, p. 37.7 Id., p. 46.8 Id., p. 26.9 See Part GC Income Tax Act 2007.10 Supra, note 2, p. 107.11 Supra, note 1, clause 50.12 Supra, note 2, p. 109.13 Under new section 139AB Tax Administration Act 1994.14 Under new sections 143 and 143A Tax Administration Act 1994.15 Under section 21 Tax Administration Act 1994.

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FEATURED ARTICLES ISSUE 285 | APRIL 26, 2018

Brexit And The UK VAT Regimeby Stuart Gray, Senior Editor, Global Tax Weekly

Almost two years after the United King-dom voted to leave the European Union on June 26, 2016, businesses continue to face huge uncertainties regarding their fu-ture value-added tax (VAT) obligations after Brexit. This article looks at the possible consequences for the UK VAT regime as a result of its impending withdrawal from the EU.

Current Rules

EU VAT directives are binding upon each member state, although the form and methods of implementation are left to the national authorities who transpose them into national legislation. Member states must also recognize general principles of EU law in relation to VAT. The VAT di-rectives set the framework for VAT rates in the EU, and rules on charging, invoicing, VAT returns and filing, refunds and deductions, reverse charges, and many other aspects of VAT in the EU.

The main piece of legislation is the VAT Directive (2006/112/EC).1 Other legislation includes:

Directive 2008/9/EC (VAT Refund – EU business)Directive 86/560/EEC (VAT Refund – non-EU business)Directive 2009/132/EC (VAT-free importation)Directive 2006/79/EC (private consignments)Directive 2007/74/EC (travelers' allowances).

In addition, VAT Implementing Regulation (Council Regulation (EU) No. 282/2011) contains measures to ensure the uniform application of the VAT Directive among states, and is binding in its entirety and directly applicable in all member states.

Each member state is responsible for the correct application of these laws within their territory. The UK has implemented the VAT Directive through the Value Added Tax Act (VATA) 1994 (as

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amended).2 The main body of the Act sets out the general principles governing the tax, such as when the tax becomes chargeable, the rate of VAT, who has to pay it, and what VAT businesses can recover. More detailed rules, such as lists of supplies of goods or services that are exempt or zero-rated, are contained within its schedules.

Under the current "transitional VAT system", goods sold cross-border between businesses estab-lished in different member states are exempt from VAT in the member state of departure of the goods (an exempt intra-EU supply) and the customer must self-assess and pay the VAT due in the member state of arrival on his intra-EU acquisition.

However, the EU is transitioning to a "definitive" destination-based VAT regime, and, as noted below, this could have major implications for the future of the UK VAT regime. Already, all busi-ness-to-consumer supplies of telecommunications, broadcasting and electronic (TBE) services are taxable in the consumer's EU member state. To simplify compliance matters, a "Mini One Stop Shop" (MOSS) scheme is offered in every member state, enabling digital suppliers to register in a single member state, from which they are able to account for VAT on supplies to all EU consumers.

What Brexit Means For VAT

Until the UK leaves the EU, it will continue to be a member of the EU Customs Union and will continue to apply EU law on Customs, VAT and excise. However, the UK Government has ex-pressed a preference for a "hard Brexit." While there is an enormous amount of detail still to be fleshed out regarding the UK's future relationship with the EU, this is likely to mean that the UK will at some point cease to be a member of the Single Market, the Customs Union, and the EU VAT and excise areas. This is, though, subject to legislative approval by the UK Parliament, a fact that further increases uncertainty.

In a "Notice to Stakeholders" dated January 30, 2018,3 the EU's Directorate-General for Tax and Customs Union spelled out the "legal repercussions" for businesses and taxpayers in VAT terms in the absence of any other agreed special arrangements. The introductory text states:

"The United Kingdom submitted on 29 March 2017 the notification of its intention to with-draw from the Union pursuant to Article 50 of the Treaty on European Union. This means that, unless a ratified withdrawal agreement establishes another date, all Union primary and secondary law will cease to apply to the United Kingdom from 30 March 2019, 00:00h (CET) ('the withdrawal date'). The United Kingdom will then become a 'third country'.

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Preparing for the withdrawal is not just a matter for EU and national authorities but also for private parties.

In view of the considerable uncertainties, in particular concerning the content of a pos-sible withdrawal agreement, economic operators are reminded of legal repercussions, which need to be considered when the United Kingdom becomes a third country.

Subject to any transitional arrangement that may be contained in a possible withdrawal agreement, as of the withdrawal date, the EU rules in the field of customs and indirect taxation (VAT and excise duties) no longer apply to the United Kingdom."

According to the notice, this has the following VAT consequences as of the withdrawal date:

Goods entering the VAT territory of the EU from the UK or dispatched or transported from that territory to the UK will respectively be treated as import or export of goods in line with the EU VAT Directive. This means that VAT must be charged at importation and exports will not be subject to VAT.Taxable persons who wish to use the MOSS scheme (i.e., those who supply TBE services to non-taxable persons in the EU) will have to be registered for the MOSS in an EU member state.UK-established taxable persons that purchase goods and services or import goods subject to VAT in an EU member state, and who wish to claim a refund of that VAT, may no longer file electronically in accordance with Directive 2008/9/EC (refunds for EU businesses). Instead, they will have to claim in accordance with Directive 86/560/EEC (refunds for non-EU businesses). Member states may make refunds under the latter Directive subject to reciprocity.A UK-established company carrying out taxable transactions in an EU member state may be required by that member state to designate a tax representative as the person liable for VAT payments in accordance with the VAT Directive.

Transition Period

As mentioned in the previous section, per the terms of Article 50 of the Lisbon Treaty, the UK is due to officially withdraw from the EU on March 29, 2019. However, it is expected that there will be a post-agreement transition period, during which the UK will effectively remain a mem-ber of the EU (but likely without Council voting rights) to enable the UK's orderly exit from the bloc. The EU has proposed that the transition period should run until the end of 2020, although the UK would prefer a full two-year transition period until March 29, 2021.

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The draft withdrawal agreement published by the European Commission on February 28, 2018,4 states that Council Directive 2006/112 shall apply in respect of goods dispatched or transported from the UK territory to that of a member state, or vice versa, until the end of the agreed transi-tion period. The draft agreement also states that the jurisprudence of the EU Court of Justice (ECJ) should continue to apply to the UK until the end of a transition period.

The Cross-Border Trade Bill

Immediately upon exiting the EU (with or without a prior transition period), the UK European Communities Act would be repealed by the European Union (Withdrawal) Bill (EUWB),5 for-merly known as the Great Repeal Bill, and the bulk of EU laws implemented in the UK would be converted to UK law, to prevent a Brexit legal cliff edge. The idea is that after the UK's official exit from the EU, the UK Parliament would be free to amend or repeal these former EU laws over time, giving businesses more time to prepare for any changes in the legal framework.

However, the EUWB provides that a large proportion of this converted law will not apply in relation to VAT, excise or customs. Instead, domestic provisions are being made in the Taxation (Cross-border Trade) Bill,6 previously known as the Customs Bill, which alter the existing domes-tic legislation or, in the case of customs, introduce alternative regimes to fill the gap which is left once converted EU law no longer applies.

The Cross-border Trade Bill includes several changes to UK VAT that would be legislated for at the time of the UK's exit from the EU. According to the Government, these amendments are intended ensure that the UK VAT regime will function properly after the UK leaves the EU. The changes would be conditional upon the outcome of exit negotiations, and in the event of a negotiated outcome being reached, the Government may choose not commence them. Salient measures include that:

The concept of "acquisition" as a taxable event for goods entering the UK from EU member states would be abolished. Should the UK leave the EU without a negotiated settlement, these goods will fall to be treated as imports and will be subject to import VAT.Measures facilitating the MOSS will be withdrawn, meaning that the UK will no longer be able to collect and pass on VAT due in EU member states on their behalf.Direct references in the VATA 1994 and related domestic legislation to EU law and to requirements of EU member states will be removed.The legal obligation on HMRC to make arrangements for dealing with applications by UK-registered taxpayers for VAT refunds on supplies or importations made in another member state will be withdrawn.

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The VATA 1994 will be amended to provide for a "consistent" approach to the application of ECJ decisions for VAT.The VATA 1994 will be amended to ensure the VAT zero-rate continues to apply to supplies made in the UK and not the wider member states.

Import VAT

One of the obvious observations to make from the above is that upon the UK's official withdrawal from the EU, and in the absence of any special arrangement, imports into the UK from the EU VAT territory will be subject to VAT, and this in particular is a cause for concern for businesses in the UK, especially small firms and traders.

As matters stand, after Brexit, imports to the UK from the EU would become liable for import VAT, which would have to be paid before goods could to be released into free circulation in the UK. According to the UK Parliamentary Treasury Committee, these changes would potentially affect over 200,000 businesses, and for over half of them, these would be "novel" because they trade only with other EU member states.7 Such a change could have significant implications for companies' cash flows.

Under current rules, tax-registered persons importing goods from outside the EU have to pay VAT upon the goods' entry into the EU, and later recover that VAT via their tax return. These rules do not apply to imports of goods from within the EU (so-called acquisitions) upon which acquisition VAT applies. Instead, this VAT liability is reported on subsequent tax returns at which time the business can seek to offset that tax liability with any available input tax credits – i.e., postpone accounting for VAT, and benefit from mitigating any short-term drag on the company's cash flow.

The UK Government has partly assuaged the cash flow concerns of the business community by committing, as part of the 2017 Budget announced last November, to examine how any adverse impacts from the removal of postponed accounting for VAT on imports from the EU can be reduced.

"The government recognizes the importance of such arrangements to business due to the cash flow advantage they provide," stated the Budget Red Book.8 "The government will take this into account when considering potential changes following EU exit and will look at options to miti-gate any cash flow impacts."

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However, there is no guarantee that measures will be introduced to delay VAT liability on imports from the EU, or, if they are, how effective they will be.

UK's VAT Options Limited?

In theory, Brexit should allow the UK Government more freedom over taxation, particularly in the field of VAT. It could even abolish VAT, although that outcome is extremely unlikely given the levels of revenue VAT raises for the Government. Nevertheless, freed from the shackles of EU VAT law, future UK governments would have an opportunity to considerably simplify VAT, particularly for small traders. As the Federation of Small Business has observed:9 "Brexit should be seen as an opportunity to reduce, not increase, the huge administrative burden that the VAT regime places on small firms."

But, by steering UK VAT away from the EU VAT regime, a degree of "friction" would be ap-plied to post-Brexit trade in goods and services from the UK to the EU and vice versa, and this is likely to impose considerable compliance burdens on businesses. Indeed, in announcing the Cross-border Trade Bill last November, the Government said it would seek to mitigate the risk of increased compliance problems.

Such an approach comes with complications. As mentioned above, proposed EU VAT reforms involve major changes to the VAT treatment of cross-border business-to-business sales of goods and services within the EU. The main aim is the introduction of a "definitive" VAT system for such transactions, centered on the destination principle – that goods and services should be taxed in the location of the consumer, or where they effectively are consumed, under that member state's rules. The reform package also includes changes to the VAT rules on reduced rates, new measures to ease the compliance burden on small companies, and proposals for administrative cooperation between agencies responsible for tackling VAT fraud.

Despite opposing some of these proposals, the nature of these reforms might give the UK no option but to adopt them, because, as a recent paper by the UK Treasury European Scrutiny Committee observed,10 EU law has created a symmetrical and reciprocal system to ensure proper taxation of cross-border supplies. Therefore:

"… a refusal by the UK during the transition to implement changes adopted by the remaining member states could undermine the feasibility of the UK's continued par-ticipation in the system altogether. To take the 'definitive VAT' proposal, it is not clear

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how the UK could – by way of example – unilaterally reject the eventual abolition of the reverse charge mechanism and use of the One Stop Shop for cross-border sales while it remains part of the single EU VAT area if it was abolished by the EU-27. That would render it unclear who was accountable for VAT on sales of goods from the EU to the UK: HM Revenue & Customs would require the vendor to account for the tax, while the EU-based supplier would simultaneously expect to have to account for the VAT through the One Stop Shop.

While this is an extreme example, any decision by the UK to diverge from the harmo-nized standards that underpin the common VAT system could have unforeseen con-sequences, potentially rendering the whole cross-border system that allows for border controls to be waived technically unworkable.

As such, it could be that the Government's long-term objective is continued alignment with EU VAT legislation beyond the transition, to maintain the 'freest and most fric-tionless trade possible'. This is our interpretation of the various Explanatory Memo-randa we have received from the Treasury, which appear to assume the VAT Directive could still restrain the Government's domestic room for maneuver in 2022 and beyond. However, any arrangement that sees the UK having to keep in lock-step with EU VAT law indefinitely raises serious issues about the extent to which the UK would have free-dom post-Brexit to modify the fundamentals of a major part of its tax system."

Yet, the timetable for the introduction of the EU VAT reforms is itself unclear, as there are ob-jections to many aspects of the proposals from some member states. And given that the UK is expected to lose its seat at the European Council table during a transition period and beyond, it would have no say in the shaping of these reforms, raising the possibility that it would be forced to accept VAT rules it would have voted against as an EU member state. Moreover, if the UK is forced down the route of aligning with EU VAT law, it may also have to accept that the ECJ would continue to have jurisdiction over its VAT regime, an outcome that is directly contradic-tory to one of the UK Government's main Brexit objectives. As the Committee further observed:

"It cannot yet be ruled out that the VAT reform package – including the proposal on the 'definitive' system for cross-border supplies – will have to be implemented in the UK. [T]his raises a potentially serious problem: when the UK ceases to be a member state, it will lose its Treaty-based veto over new EU tax legislation. The Government

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could then find itself in the position of having to implement VAT legislation which it would have blocked had it still been a member of the [European] Council."

An Uncertain Outlook

Slowly, key elements of the Brexit arrangements are emerging from the fog of uncertainty. It seems likely that there will be a post-agreement transition period, although its exact duration has yet to be determined. It also appears that, despite its preference for a hard Brexit, the UK Government is seeking to mitigate the impact of Brexit on the VAT system by continuing to follow EU rules.

However, there remain huge uncertainties about how this will work in practice, and this poses considerable difficulties for businesses attempting to plan their tax affairs. So it is to be hoped that these important questions are resolved in the coming months.

ENDNOTES

1 http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:32006L01122 https://www.legislation.gov.uk/ukpga/1994/23/contents3 https://ec.europa.eu/taxation_customs/sites/taxation/files/notice_to_stakeholders_brexit_customs_

and_vat_en.pdf4 https://ec.europa.eu/commission/sites/beta-political/files/draft_withdrawal_agreement.pdf5 https://publications.parliament.uk/pa/bills/lbill/2017-2019/0079/lbill_2017-20190079_en_1.htm6 https://publications.parliament.uk/pa/bills/cbill/2017-2019/0128/en/18128en.pdf7 https://www.parliament.uk/documents/commons-committees/treasury/Correspondence/Chair-Jon-

Thompson.pdf8 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/

file/661480/autumn_budget_2017_web.pdf9 http://www.fsb.org.uk/media-centre/press-releases/brexit-must-be-seen-as-opportunity-to-reduce-

vat-burden-say-small-firms10 https://publications.parliament.uk/pa/cm201719/cmselect/cmeuleg/301-xxii/30105.htm

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FEATURED ARTICLES ISSUE 285 | APRIL 26, 2018

UK Tightens The Tax Net On UK Immovable Propertyby Kieran Smith, Kingston Smith, independent member of Morison KSi

Contact: kieransmith@kingstonsmith.co.uk

Introduction

Historically, non-resident individuals and corporate entities have been able to realize gains from UK land and property ("immovable prop-erty") without being subject to UK tax. In contrast, UK residents have been subject to capital gains tax (CGT) for individuals, or corporation tax (CT) for corporate entities.

The disparity in treatment between UK residents and those based offshore is quite unusual com-pared with tax regimes in other countries, and in response to significant political and press pres-sure regarding offshore ownership of UK immovable property, the UK government has taken a number of recent measures such as the introduction of occupation taxes on high-value residen-tial property owned by overseas companies and the introduction of CGT for non-residents on the disposal of residential property (NRCGT) in April 2015. Furthermore, from July 5, 2016, offshore-based developers of land and immovable property situated in the UK were brought into the charge to UK tax on their profits.

Continuing the theme above, in the Autumn Budget 2017, the UK Government published a consul-tation document; effectively a statement of intent, articulating that from April 6, 2019 (individuals) and April 1, 2019 (corporates) non-residents will be subject to UK tax on gains arising from the di-rect and indirect disposal of all UK real estate. This now also brings the disposal of commercial prop-erty by non-residents within the UK tax regime. Although the term "consultation" has been used, it is more a consultation of how exactly the new rules will apply rather than whether they should or not!

The new provisions also detail proposed changes regarding the harmonization of the annual tax on enveloped dwellings (ATED), NRCGT, and non-resident gains on immovable property. How-ever, these changes are not within the scope of this article.

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It is expected that gains arising from April 2019 onwards will be taxed on individuals at the rel-evant CGT rate, being 18 percent or 28 percent for residential properties, and 10 percent or 20 percent for commercial properties; and for corporate entitles at the prevailing CT rate – currently 19 percent, reducing to 17 percent in 2020 for all properties.

Given the extent of foreign ownership of commercial real estate in the UK (particularly in Lon-don), these new measures are expected to have a significant impact on the market. This article provides a brief summary of how the intended provisions will operate from a tax perspective.

Direct Disposals By Non-residents

Direct disposals are whereby a non-resident disposes of their interest in UK immovable property, irrespective of the nature of the property or the residence of the disposing entity. Any gain from a direct disposal will be subject to tax at the rates discussed above.

Indirect Disposals By Non-residents

Indirect disposals are where a non-resident disposes of an interest in an entity that holds UK im-movable property. The UK tax authorities argue that the "economic effect of disposing of such a company may be the same as a direct disposal of the property"; therefore, not including indirect disposals within the scope to tax may create an inconsistency in the tax treatment of two eco-nomically very similar transactions.

As a result, the entire gain on the disposal of shares will fall within the charge to tax if the follow-ing conditions are met:

The entity is considered "property rich"; andBroadly speaking, the non-resident owner holds or has held at least a 25 percent interest in that entity at some point within the five years prior to its sale.

A "property-rich" entity is one which, at the time of disposal, derives 75 percent or more of its gross asset value (hence excluding liabilities) directly or indirectly from UK immovable property.

In instances where there are groups of companies, shares disposed of in a holding company that, viewed in isolation, is not property rich may be caught under these proposals where the group on the whole is property rich.

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Rebasing

The UK Government is seeking to tax only the gains arising on or after April 2019; therefore, the base cost of properties for the purposes of direct disposals will be rebased for April 2019 values. However, the taxpayer will be able to elect to use the original cost of the property instead in cases where the April 2019 valuation is less than the original cost of the property.

For indirect disposals such election is not available, so the property will be rebased to April 2019 – meaning that the change in value from that date onwards will be subject to UK taxation.

Interaction With Tax Treaties

With particular reference to indirect disposals, there are treaties between the UK and some over-seas jurisdictions where disposals of shares in "property rich" companies will not be subject to UK tax and will in fact be taxable in the state of residence of the person disposing of the shares. This will be of benefit to investors located in certain jurisdictions, particularly those with low rates of tax on gains.

This might lead to arrangements known as "treaty shopping" whereby an entity structures or restructures their investments to exploit treaties to ensure that their gains cannot be taxed in the UK. In an attempt to counter "treaty shopping," anti forestalling provisions have been effective from November 22, 2017, and seek to deny relief where the arrangement's main purpose is to avoid the imposition of the indirect charge.

Conclusion

It has been argued that the proposed new rules could make the UK less desirable in terms of property investment from non-resident investors. This may be true; but in an environment with measures such as BEPS and the global drive to crack down on perceived tax avoidance using off-shore structures, there is unlikely to be any relaxation of these plans.

This approach represents a significant departure from previous and long-standing law and prac-tice. Non-residents holding UK commercial real estate need to consider their existing structures as a matter of urgency.

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FEATURED ARTICLES ISSUE 285 | APRIL 26, 2018

Nigeria Extends Voluntary Assets And Income Declaration Schemeby Taiwo Oyedele, Kenneth Erikume, Folajimi Olamide Akinla, and Priscilla Manah, PwC Nigeria

The federal government of Nigeria on April 11 announced the extension of the deadline for filing returns under the Voluntary Assets and Income Declaration Scheme ("the Scheme") by three months. This means the tax amnesty scheme will now end on June 30, 2018.

Background

On June 29, 2017, the Acting President, Professor Yemi Osinbajo, formally launched the Volun-tary Assets and Income Declaration Scheme.The Scheme commenced on July 1, 2017, initially for a period of nine months.

The Scheme is an initiative designed to encourage voluntary disclosure of previously undisclosed assets and income for the purpose of payment of all outstanding tax liabilities.

The Scheme was implemented by the Federal Inland Revenue Service (FIRS) in collaboration with all 36 State Internal Revenue Services and the FCT IRS.

Objectives

The main objective of the Scheme is to increase the number of taxpayers in the tax net and raise revenue, specifically with a view to:

Increase Nigeria's tax to GDP ratio;Broaden the national tax base;Curb non-compliance with existing tax laws; andDiscourage illicit financial flows and tax evasion.

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Overview Of The Scheme

Framework

The legal basis for the Scheme was an Executive Order signed into law by the Acting Presi-dent and a Memorandum of Understanding signed between the FIRS and the State Internal Revenue Services.

Incentives

Taxpayers who make full and honest declarations enjoy waivers of interest and penalty, immunity from prosecution, confidentiality, exemption from tax audits for the periods covered, and flexible payment of tax due.

Scope and applicable taxes

The Scheme is applicable to all persons (individuals, companies, executors, trustees, partnerships etc.) liable to tax in Nigeria. Taxes covered include Companies Income Tax, Personal Income Tax, Petroleum Profits Tax, Capital Gains Tax, Value-Added Tax, Stamp Duties, Tertiary Education Tax, and the NITDA IT development levy.

Non-declaration

Taxpayers who fail to participate in the Scheme will be investigated and, if found culpable, will be subject to criminal prosecution. A "name and shame" list of tax evaders will be published.

As a fall-back option, the Government will rely on various international conventions and multi-lateral agreements to obtain information required for prosecution of defaulting taxpayers or those who make false declarations.

An international forensic and asset tracing company has been engaged to support this process.

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FEATURED ARTICLES ISSUE 285 | APRIL 26, 2018

Topical News Briefing: Crunch Time For EU Digital Tax?by the Global Tax Weekly Editorial Team

As reported in this week's issue of Global Tax Weekly, EU Tax Commissioner Pierre Moscovici was recently given the unenviable task of defending the Commission's proposals for an interim tax on digital companies in an address to the American Enterprise Institution (AEI) in Washington, DC. But perhaps he should be concentrating his energy on winning over certain skeptical mem-ber states in the EU.

We already know that the US Government is deeply hostile to the idea of special taxes on digi-tal companies. This is courtesy of Treasury Secretary Steven Mnuchin's critical response to the OECD's examination of the tax challenges of the digital economy in a report to the G20 in March 2018, when he said that the US "firmly opposes proposals by any country to single out digital companies."

But there appears to be as much hostility to interim measures closer to home, both from business and industry, and certain European governments.

As also reported in this week's issue, the German federal industry association, BDI, has warned that an EU tax on digital companies would not only be "detrimental" to the economy, but also risks provoking retaliatory action from the US if the Government and Congress conclude that such a tax discriminates against US tech companies.

Moscovici claimed in his remarks to the AEI that 20 EU member states were supportive of the proposals to one degree or another. But 20 is simply not enough votes in the Council if unanim-ity is required to bring any new digital tax into being. And those member states most hostile to the idea, notably Ireland and Luxembourg, show no signs of backing down any time soon.

However, he also indicated that unless significant progress was made towards implementing the interim tax this year, momentum would very likely dissipate, and would be difficult to restart.

This leaves precious little time for the dissenting member states to be won over. And history sug-gests that, with many national interests represented at the Council table, the EU will struggle

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to meet such a tight deadline considering the contentious nature of the proposal at hand. The tortuous discussions between just a handful of member states on the design of the proposed EU financial transactions tax is one example of how protracted EU legislative negotiations can be.

So, it seems 2018 may prove to be a make or break year for the EU's digital tax plans.

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FEATURED ARTICLES ISSUE 285 | APRIL 26, 2018

Subpart F Income Earned By Canadian Corporations After US Tax Reformby Max Reed, SKL Tax, Canada

Contact: max@skltax.com

Max Reed is a US and Canadian tax lawyer at SKL Tax, a boutique US and Canadian tax advisory firm in Vancouver, Canada (http://www.skltax.com/). Prior to joining SKL he was a US tax lawyer at White & Case in New York and clerked for Justice Karen Sharlow of the Canadian Fed-eral Court of Appeal where he focused on Canadian tax law. He holds a BA and two law degrees from McGill University. The author would like to thank Josh Harnett and Tim Barrett for their comments on this article. All errors remain the author's.

This Article was previously published in Tax Topics, Issue 2406, April 1, 2018.

Introduction

On December 22, 2017, the US enacted the most sweeping tax changes in 30 years. While the changes are numerous, one of the results is that US citizens who own stock in Canadian Con-trolled Private Corporations ("CCPCs") should no longer have any Subpart F tax exposure on passive income earned through a CCPC, because of the high tax exclusion for Subpart F income.

Briefly, US citizens who are the owners of foreign corporations, which include CCPCs, are re-quired to include in their annual US taxable income the Subpart F income of a controlled foreign corporation ("CFC") in which they have 10 percent or more ownership by vote or value. In turn, passive income (interest, dividends, and capital gains from the sale of assets which earn passive income) is normally considered Subpart F income. This results in both a potential loss of deferral and a double tax risk. However, there is a key exception from Subpart F income for income that is subject to a minimum amount of Canadian tax. Income that would normally be classified as Subpart F income is exempted from this classification if the corporation pays tax on its income to the country where the CFC operates at a rate of at least 90 percent of the US federal corporate

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tax rate. The technical term for this is the high tax exclusion, and it is found in section 954(b)(4) of the Internal Revenue Code.1

With the reduction of the US federal corporate tax rate to 21 percent, the 90 percent threshold is now reduced to an 18.9 percent rate. That means that passive income earned by a CCPC, which is subject to tax at a higher rate than this, will not be considered Subpart F income. The effect of this is that US citizens that own CCPCs that earn passive income should no longer have any Subpart F risk. Below, I argue that the 18.9 percent rate is determined prior to the calculation of any Refundable Dividend Tax on Hand (RDTOH) or Canadian refundable tax. Thus, all invest-ment income earned by a CCPC should be excludible under the high tax exclusion since it is all subject to Canadian tax at a rate higher than 18.9 percent. Such an approach would minimize the consequences of operating through a CFC and may help achieve a measure of tax deferral for US citizens in Canada.

To start out, I survey the CFC regime as it was updated by the Tax Cuts and Jobs Act. Then I briefly explain how investment income earned by a CCPC is taxed and how the RDTOH func-tions. RDTOH, I argue, does not need to be taken into account in determining the effective Ca-nadian corporate tax rate paid by a CCPC for the purposes of the high tax exclusion. The result of this is that most US citizens in Canada should not have any Subpart F income exposure on passive income earned by CCPCs.

1. Overview Of The CFC Regime As Updated By The Tax Cuts And Jobs Act

A CCPC will be classified as a CFC for US tax purposes if more than 50 percent of the voting power or value of stock is owned by "US shareholders".2 A "US shareholder" is defined as a US person who owns 10 percent or more (directly or indirectly) of the combined voting power of all classes of voting stock in the corporation or the total value of the corporation.3 The definition of a US person includes US citizens and residents, US corporations, US trusts, and US partnerships.

Generally, the adverse US federal income tax consequences of owning stock in a CFC are as fol-lows. First, if the corporation has been a CFC at any time during a taxable year, the 10-percent-or-more US shareholders of the CFC would recognize deemed income in an amount equal to such shareholder's pro rata share of the CFC's "Subpart F Income" and to the extent of any invest-ments of the CFC in US property, limited to the current earnings and profits of the CFC.4 The definition of Subpart F Income is complicated and includes various items;5 the one of primary

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relevance here is foreign base company income, which in turn includes foreign personal holding company income.6 This means that as a starting point, Subpart F income includes income from dividends, interest, rents, royalties,7 capital gains, commodities transactions, net foreign currency gains, and income from notional principal contracts and certain personal service contracts.8 More generally, foreign base company income also includes income from:

(a) The sale of certain property purchased from a related person;(b) The sale of personal property to, or on behalf of, a related person; or(c) The purchase of personal property on behalf of a related person, where the property is

(i) manufactured, produced, grown, or extracted outside the country in which the CFC is organized, and (ii) sold or purchased, as the case may be, for use, consumption, or disposition outside such non-US country.9

Finally, foreign base company income also includes income derived in connection with the per-formance of technical, managerial, engineering, architectural, scientific, skilled, industrial, com-mercial, or like services which are performed (A) for or on behalf of a related person, and (B) outside the country in which the CFC is organized.10

2. How Investment Income Earned By CCPCs Is Taxed In Canada

CCPCs pay Canadian corporate tax ranging from 50 percent to 55 percent on passive income from property, including interest and dividend income from non-Canadian sources, rental income, and royalty income without reference to the refundable tax generated. On income from taxable capital gains, the effective tax rate is in the 23–26 percent range without reference to the refundable tax generated. Dividends from Canadian sources are taxed at the corporate level at a rate of 38.33 percent. The rate will differ according to the province in which the CCPC operates. Overly simpli-fied, this rate is reduced by a refundable tax when a taxable dividend is paid out to the individual shareholder. A full discussion of the mechanics of the refundable tax is available elsewhere, and the 2018 federal budget changed basic elements of that refundable tax. But the basic point remains that, without considering the refundable tax, the Canadian corporate tax rate on passive income earned by a CCPC is greater than 18.9 percent. This is why it will benefit from the high tax exclu-sion and not be considered Subpart F income. This is discussed in the next section below.

3. The High Tax Exclusion

The high tax exclusion is significant because if a CFC earns income which would normally con-stitute Subpart F income, as defined above, but pays foreign corporate tax at a rate equal to or

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greater than 90 percent of the highest US corporate tax rate (currently 21 percent) on that item of income, then that item of income is excluded from Subpart F income.11

Put differently, with the reduced US corporate tax rate, when the effective foreign tax rate is 18.9 percent or higher for a particular item of income it can be excluded from Subpart F income. Since CCPCs pay Canadian corporate tax ranging from 50 percent to 55 percent on most passive in-come, and on capital gain income the effective tax rate is in the 23–26 percent range without refer-ence to the refundable tax generated, it seems intuitive that it would be excludable from Subpart F income using the high tax exclusion. However, Code section 954(b)(4) requires that the "effective rate of income tax" be used to determine whether an item of income earned by a CFC is exclud-able from Subpart F using the high tax exclusion. The question then becomes: must the dividend refund that is generated when a CCPC pays tax on investment income be taken into account when determining the effective tax rate paid by the CFC for the purposes of the high tax exclusion?

My answer is no: the dividend refund likely does not have to be taken into account to determine the applicability of the high tax exclusion to investment income earned by a CCPC. There are a number of steps required to arrive at this conclusion. At the outset, it is worth pointing out that if a CCPC uses a dividend refund (or another type of credit) to push its Canadian corporate tax rate below 18.9 percent then this strategy does not work. It only works if the dividend refund is banked for future years and the effective Canadian corporate tax rate remains at least 18.9 percent on an item of income.

To start out, examine what constitutes an item of income for the purposes of the high tax exclu-sion. The term "item of income" is defined quite specifically.12 The definition depends on what type of income it is. If the income in question is foreign personal holding company income (dis-cussed in section 1 of this article), then the definition of what constitutes an "item of income" for the purposes of the high tax exclusion has two elements:

(1) The income has to fall into a single grouping under the rules set out in Reg. § 1.904-4(c)(3), (4) and (5).

(2) The income must also fall into one single category of those set out in paragraphs (i) through (v) of Reg. §1.954-1(c)(1)(iii) (A)(1).13

Take each aspect of the definition in turn. The rules under Reg. § 1.904-4(c)(3) group items of income according to the amount and type of Canadian tax that will be imposed on them. No

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investment income earned by a CCPC will be subject to Canadian withholding tax, but it will be subject to Canadian corporate tax.14 As such, all investment income earned by a CFC in Canada will be under the same category for the purposes of Reg. § 1.904-4(c). Thus, it is the categories set out in paragraphs (i) through (v) of Reg. § 1.954-1(c)(1)(iii) (A)(1) that will determine how an item of income is defined. Dividend, interest, rent, royalty, and annuity income from passive sources is lumped together for the purposes of calculating the high tax exclusion. Similarly, gains from the sale of property that produces passive income is a separate category. In sum, to figure the "effective rate of income tax" for the purposes of a CCPC, all passive income save for capital gains is grouped into one category and capital gains generated by the sale of assets that generate passive income is grouped into another. Note that capital gain income generated by the sale of assets which do not produce passive income is not classified as Subpart F income to begin with and as such is not germane to this discussion.

Next, consider the time period in which the determination of the effective tax rate takes place. For the purposes of figuring the high tax exclusion, the effective tax rate is analyzed with respect to the "taxable year of the controlled foreign corporation".15 Arguably, when an analysis is per-formed with respect to the CFC's tax year, the consequences in a future tax year are irrelevant.

Last, the Treasury Regulations provide guidance that a future tax refund is to be ignored in de-termining the effective rate of tax for the purposes of examining the applicability of the high tax exclusion. According to Reg. § 1.954-1(d)(2), the effective tax rate for a particular item of income is determined under Reg. § 1.954-1(d)(3). In turn, Reg. § 1.954-1(d)(3)(i) defines how the effective tax rate for Subpart F income that is not passive foreign personal holding company income should be determined. Reg. § 1.954-1(d)(3)(i) states that future reductions in tax due to a distribution to shareholders should not be taken into account for the purposes of calculating the effective tax rate for the high tax exclusion.

While the universe of Subpart F income that does not include passive foreign personal holding company income may not be large (or at all interesting for the purposes of this analysis), this pro-vision explicitly states that a future reduction in foreign taxes due to a distribution to shareholders will not impact the assessment of a CFC's effective tax rate for the purposes of the high tax exclu-sion. A dividend refund is a future reduction in Canadian (foreign) taxes that is only attributable to a distribution of income to shareholders. When combined with the general proposition under Reg. § 1.954-1(d)(1)(ii) that the analysis is conducted with respect to the current tax year of the corporation, there is a good argument to be made that future dividend refunds should not be

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taken into account for the determination of the effective tax rate paid by a CFC on income other than foreign personal holding company income. Still, it remains important for establishing the context of how the Treasury Regulations deal with calculating the effective tax rate when the tax rate will be reduced by future distributions to shareholders.

Dividend refunds also do not need to be used in establishing the effective tax rate for an item of income that is foreign personal holding company income. The route to arrive at this conclusion is longer than it is for items of income which are not foreign personal holding company income. Recall that foreign personal holding company income includes income from dividends, interest, rents, royalties, capital gains (from the sale of assets that produce passive income), commodities transactions, net foreign currency gains, and income from notional principal contracts and cer-tain personal service contracts.16 The definition of effective tax rate for the purposes of the high tax exclusion for foreign personal holding company income is set out in Reg. § 1.954-1(d)(3)(ii). In turn, Reg. § 1.954-1(d)(3)(ii) simply outsources the task of establishing the effective tax rate to the regulations under Reg. § 1.904-4(c) (foreign tax credits for passive income).

An analysis of the rules under Reg. § 1.904-4(c) reveals that the dividend refund generated for future use should not be included in the calculation of the effective tax rate for the purposes of the high tax exclusion. Reg 1.904-4(c)(6)(i) states that the determination of whether income is high-taxed or not is made "in the taxable year the income is included in the gross income of the US shareholder". This is parallel to Reg. § 1.954-1(d)(1) (the general rule which is applicable to the entire high tax exclusion section), and suggests that reductions of tax in future tax years should not be incorporated into the analysis of the effective tax rate for the purposes of section 954(b)(4).

Similarly, Reg. §1.904-4(c)(7)(i) mirrors the text of Reg. § 1.954-1(d)(3)(i), which is used to establish the effective tax rate for Subpart F income which is not foreign personal holding company income. Reg. §1.904-4(c)(7)(i) states that a future reduction of tax due to a distribu-tion of dividends is not taken into account to determine the effective tax rate for the purposes of the high tax exclusion.

Finally, Reg. § 1.904-4(c)(7)(iii) clarifies the relationship between Reg. § 1.904-4(c) and the deter-mination of the effective tax rate for the purposes of the high tax exclusion under section 954(b)(4). It holds that the rules under 954(b)(4) shall be applied without regard to the subsequent re-duction of foreign tax. In other words, for the purposes of determining the applicability of the high tax exclusion, the rules under Reg. § 1.904-4(c) ignore a future reduction in foreign tax. This is a

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divergence from the way that the rules under Reg. § 1.904-4(c) are applied to the determination of foreign tax credits. Examples 6 and 7 under the Reg. § 1.904-4 illustrate this point.

In Example 6, the taxpayer has to re-determine its foreign tax credits because of a subsequent reduction in tax due to a dividend that was paid out. Tax that is refundable is generally not available as a foreign tax credit.17 Example 6 does not, however, deal with an election to use the high tax exclusion. Further, Reg. § 1.904-4(c)(7)(iii) differentiates the analysis under the Reg. § 1.904-4 rules between their application for foreign tax credit purposes and their application for the purposes of the high tax exclusion. This distinction is confirmed in Example 7, in which the taxpayer is able to apply the high tax exclusion to exclude the passive income from categorization as Subpart F income even though that passive income was ineligible for use for foreign tax credit purposes.

In sum, as long as the tax rate, excluding a future reduction in tax generated by dividend refunds, for passive income earned by a CCPC exceeds 18.9 percent in the current tax year, this income can escape classification as Subpart F income.

4. Conclusion

Subpart F income can be an expensive proposition. It robs the dual citizen of tax deferral that they would otherwise enjoy on investment income. The high tax exclusion can be used to exclude dividend, interest, and royalty income generated by a CCPC from Subpart F classification as long as that income is subject to Canadian corporate tax above 18.9 percent without reference to the refundable credit generated. But with these caveats, some of the worst effects of the Subpart F regime can be mitigated.

ENDNOTES

1 United States Internal Revenue Code of 1986, as amended (the "Code").2 Id.3 Code section 951(b).4 Code section 951.5 Other items of Subpart F income include: certain insurance income, income from boycott operations,

illegal payments to foreign government, and other income earned in specific countries.6 Code section 954(a).7 Dividends, interest, rents, and royalty payments received by a CFC from a related CFC (one that owns

50 per cent or more of stock by vote or value) are excluded from foreign personal holding company

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income (and, therefore, foreign base company income), provided that the payments are attributable

and allocable to neither Subpart F Income nor income that is effectively connected to a US trade or

business. Code section 954(c)(6); Treas. Reg. 1.954-1(f).8 Code section 954(c).9 Code section 954(d).10 Code section 954(e).11 Code Section 954(b)(4).12 Treas. Reg. § 1.954-1(c)(1)(iii).13 Treas. Reg. § 1.954-1(c)(1)(iii)(B).14 Treas. Reg. § 1.904-4(c)(3)(iv).15 Treas. Reg. § 1.954-1(d)(116 Code Section § 954(c).17 Treas. Reg. 1.901- 2(e)(2)(i).

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FEATURED ARTICLES ISSUE 285 | APRIL 26, 2018

Topical News Briefing: Transitioning To Complexity?by the Global Tax Weekly Editorial Team

The US tax reform law, the Tax Cuts and Jobs Act (TCJA), was never going to be completely flawless given the bill's length and complexity, and the relatively short time that Congress spent vetting the text. And the new transition tax is a good illustration of how issues are emerging with the detail of the TCJA after the fact.

Several companies have reported in their financial results that they have taken short-term hits as a result of the TCJA, principally because of the revaluation of US deferred tax assets at a lower rate of corporate tax, and the transition tax. For example, in February 2018, Cisco Systems reported a charge in excess of USD11bn in its quarterly results, most of which was attributed to the transi-tion tax on its deferred foreign income.

In the long term though, many large corporations which have reported results for 2017 say they expect to benefit from tax reform, largely as a result of the much lower corporate tax rate, and the shift to a territorial corporate tax regime, of which the transition tax is a key element.

However, the detailed guidance on transition tax compliance that has been issued by the Treasury Department and the Internal Revenue Service (IRS) in several tranches in the wake of the TCJA's enactment is indicative of just how complex this new tax is. Indeed, in April alone, the IRS has published the two batches of guidance, including comprehensive rules on calculating transition tax liability, as well as extending its last of transition tax questions and answers on its website (as reported in this week's issue of Global Tax Weekly).

While large firms with dedicated tax teams are mostly able to cope with such detailed new tax rules, some have pointed out that for small firms and certain individuals with company owner-ship interests, the transition tax is turning out to be something of a compliance nightmare, in-cluding groups representing the interests of Americans living abroad.

As a March 2018 letter to the Treasury Department by American Citizens Abroad and its sis-ter organization American Citizens Abroad Global Foundation observed, any American abroad who owns a business through a controlled foreign company (CFC) may need to report and pay

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transition tax, but for these types of taxpayer the rules are going to be far from simple. As the let-ter went on to explain, any American abroad who owns a CFC "will need to figure out whether that CFC has accumulated earnings and profits as of November 2, 2017; if so, what the size and character of these earnings are; likely bring current the calculation of accumulated earnings and profits; and make the calculation of earnings subject to tax under new Section 965. The last cal-culation must be in conformance with new, very detailed rules."

More recently (and also reported in this week's issue), the American Institute of Certified Public Accountants (AICPA) warned the IRS that newly-added answers to its transition tax FAQs will have a "detrimental impact on all affected taxpayers" by restricting their ability to claim refunds for tax overpayments, not only for small taxpayers, but also for large corporations. Indeed, the AICPA's letter points out that for large companies with potentially substantial additional tax li-abilities, "a significant penalty amount could result."

On balance, the tax reforms have been welcomed by corporate taxpayers. However, as expected, plenty of devil has emerged in the detail of the TCJA since it was signed into law by President Trump in December 2017, as highlighted by the issues which have emerged with the transition tax. For taxpayers with relatively small business interests, this new compliance burden could be a serious problem, and it is to be hoped that Treasury and the IRS will take steps to mitigate this. But, as the AICPA's recent response to the IRS's transition tax FAQs shows, this measure could be problematic even for large firms.

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ISSUE 285 | APRIL 26, 2018NEWS ROUND-UP: COUNTRY FOCUS — AUSTRALIA

Australia Urged To Resist Tax 'Race To Bottom'An open letter organized by The Australia Insti-tute has urged the Australian Government not to join a race to the bottom on tax and to instead fo-cus on tackling tax avoidance and tax loopholes.

Signed by more than 30 economists and pub-lic figures, the letter argues that "in order to fund the services and infrastructure that Aus-tralia needs, we need more tax – not less."

It called upon political leaders "to reject a tax cuts race to the bottom, and instead focus on tackling tax avoidance, closing tax loopholes, and unfair tax concessions in order to build a stronger revenue base for the nation."

Alongside the letter, The Australia Institute has published research which it says shows that Australia "is a low-taxing country." The Institute analyzed OECD data and report-ed that the Australian tax system fares well compared with the competitiveness of other developed countries.

The Institute said that Australia's total tax-to-GDP ratio makes it the eighth-lowest taxing member among the OECD's 35 member ju-risdictions. At 28.2 percent of GDP, the Aus-tralian tax burden is below the OECD average of 34.3 percent.

According to the Institute, "to reach the OECD average, Australia would need to raise an extra 6.1 percent of GDP as tax revenue." It said that "6.1 percent of Australia's AUD1.8 trillion GDP in 2017 is approximately AUD-110bn" in extra revenue.

Australian Firms Not Convinced Of Need For Tax ReformFifty-two percent of Australian businesses think that a tax cut would help their firm's prospects, according to a new survey by the National Australia Bank (NAB).

NAB asked 914 businesses how they might re-spond to corporate tax cuts.

Of those that supported a tax cut – 52 percent of respondents – the average suggested corpo-rate tax reduction was 6.7 percentage points. 20 percent of respondents said that the corpo-rate tax burden needn't be cut. The remainder either were not Australian corporate taxpayers or expressed no opinion.

Thirty-two percent of businesses stated they would use any tax reduction for investment growth and 14 percent said they would grow their workforce. 17 percent said that they would pay down debt and 8 percent said they would focus on wage growth.

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NAB revealed that, typically, the smaller the busi-ness, the larger the tax cut sought. Among compa-nies with fewer than 100 employees, the average reduction suggested was 7.4 percentage points, falling to 6.7 points among companies with 100–200 employees, and to 6.1 points among companies with more than 200 employees.

Last year the Government succeeded in secur-ing a reduction to the small business company tax rate and an increase in the turnover thresh-old for accessing the rate. However, it was un-able to pass its full Enterprise Tax Plan, which proposed to increase the turnover threshold for access to the lower, small business rate each year to 2023/24 and to reduce the headline rate to 25 percent for all businesses by 2026/27.

The Government has recently made a second attempt at passing the Enterprise Tax Plan. The legislation passed the House of Represen-tatives but again stalled in the Senate, where the Government failed to secure the support of enough crossbench and opposition senators.

Publishing the results of its latest Director Sen-timent Index, the Australian Institute of Com-pany Directors (AICD) said that 42 percent of respondents would prefer infrastructure invest-ment to be prioritized at the Budget, ahead of controlling government debt and tax reform.

However, the AICD also found that 65 percent of directors regard corporate tax as being too

high. 73 percent said that personal tax rates are too high. 31 percent rated the tax system as among the top three economic challenges cur-rently facing Australian businesses, above low productivity growth and high energy prices.

Forty-nine percent of respondents nominated comprehensive tax reform as their top priority for the federal Government in the short term. Com-pany tax reform was rated as the highest priority for any future comprehensive review of the tax system, followed by personal income tax reform.

Australia Confident Of EU Trade TalksAustralia would like to conclude a free trade agreement with the EU as soon as possible, Prime Minister Malcolm Turnbull has said.

Turnbull has been in Germany to promote his Government's free trade agenda. He told a press conference that "we need to have a free trade agreement with the European Union which provides the opportunity for more American exports to Europe and more investment, both in Australia and in Europe."

Turnbull told reporters that he recognizes that the EU has a process that it must complete in order to begin free trade negotiations with a new country. The European Commission must be given a mandate by member states to conduct talks.

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Turnbull stated that: "We'd like to get the agree-ment concluded as soon as possible, plainly. But of course the EU is a complex organiza-tion of many nations that have to develop a consensus and agreement around agreements of this kind."

However, he stressed that while "negotiating free trade agreements is a laborious business … if you don't start and you're not tenacious you won't get there."

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ISSUE 285 | APRIL 26, 2018NEWS ROUND-UP: EUROPEAN UNION

EU 'Busy' Negotiating Free Trade DealsEU Trade Commissioner Cecilia Malmström has provided an update on the bloc's efforts to expand its free trade network.

In a speech to the Uppsala Association of For-eign Affairs in Sweden, Malmström explained that the EU looks "beyond its borders for prosperity, cooperation, and wealth," and be-lieves in "free trade and social liberalism." She stressed that "the EU and its partners are com-ing together to shape globalization, stand up for open trade, and to agree on a rule book that's fair and works for everyone."

A major focus of Malmström's speech was the EU's trade agenda, and in particular the nego-tiations it is currently conducting.

The EU is updating its agreement with Mexico and is seeking "a deal for the 21st century" that will include provisions on intellectual property and services and a chapter on anti-corruption. Turning to the talks with Mercosur, the South American trade bloc, Malmström observed that this is a "a large and highly protected mar-ket" to which EU businesses "will be the first to get liberal access."

Negotiations are also underway with Singa-pore and Vietnam, and the EU is hoping to open talks with Australia and New Zealand.

Malmström added that the EU is also keen to ensure its agreements "address the envi-ronment, labor rights, human rights, and corruption." The proposed agreement with Chile, for example, will include a chapter on trade and gender.

As regards the EU's recently agreed trade deals, Malmström said that the advantages of the provisional application of an agree-ment with Canada are clear. She explained that lower tariffs will mean lower prices and emphasized the number of jobs supported by EU exports to Canada.

Last, Malmström described the conclusion of negotiations with Japan as a "particular tri-umph." Talks towards this deal were finalized in December 2017.

EU Warns UK: No Border Deal, No Brexit DealThe EU has warned the UK that without a so-lution to the issue of the Irish border, there will be no Brexit withdrawal agreement and no transition period.

In a new report to the European Parliament, European Council President Donald Tusk ob-served that the UK's decision to leave the EU had caused the border problem and that the UK "will have to help solve it."

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Tusk said that, a withdrawal agreement hav-ing been reached, the Council wants to use the "positive momentum" in the negotiations to "finally settle outstanding issues such as the so-lution to avoid a hard border between Ireland and Northern Ireland."

However, he emphasized that "without a solu-tion, there will be no withdrawal agreement and no transition."

Leaders from the EU's remaining 27 member states will assess the state of the Brexit nego-tiations in June. In parallel, the first talks will begin on the future EU–UK relationship.

Last month, the Council revealed that it is ready to initiate work toward a free trade agreement with the UK. It did nonetheless warn that the UK's intention of leaving both the customs union and the single market will "inevitably lead to frictions in trade."

The Council also made clear that any future trade agreement "cannot offer the same benefits as membership and cannot amount to partici-pation in the single market or parts thereof."

EU To Strengthen Protections For WhistleblowersThe European Commission has proposed new rules to strengthen whistleblower protection rules across the EU.

The Commission explained that: "Recent scan-dals such as Dieselgate, Luxleaks, the Panama Papers, or the ongoing Cambridge Analytica revelations show that whistleblowers can play an important role in uncovering unlawful ac-tivities that damage the public interest and the welfare of our citizens and society."

"Today's proposal will guarantee a high level of protection for whistleblowers who report breaches of EU law by setting new, EU-wide standards. The new law will establish safe chan-nels for reporting both within an organization and to public authorities. It will also protect whistleblowers against dismissal, demotion, and other forms of retaliation and require na-tional authorities to inform citizens and pro-vide training for public authorities on how to deal with whistleblowers."

The EU's First Vice-President, Frans Timmer-mans, said: "Many recent scandals may never have come to light if insiders hadn't had the courage to speak out. But those who did took enormous risks. So if we better protect whis-tleblowers, we can better detect and prevent harm to the public interest such as fraud, cor-ruption, corporate tax avoidance or damage to people's health and the environment. There should be no punishment for doing the right thing. In addition, today's proposals also pro-tect those who act as sources for investigative journalists, helping to ensure that freedom of

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expression and freedom of the media are de-fended in Europe."

Vera Jourová, Commissioner for Justice, Con-sumers, and Gender Equality, added: "The new whistleblowers' protection rules will be a game changer. In the globalized world where the temptation to maximize profit sometimes at the expense of the law is real we need to sup-port people who are ready to take the risk to uncover serious violations of EU law. We owe it to the honest people of Europe."

Under the proposal, all companies with more than 50 employees or with an annual turnover of over EUR10m (USD12.21m) will have to set up an internal procedure to handle whistle-blowers' reports. All state, regional administra-tions, and municipalities with over 10,000 in-habitants will also be covered by the new law.

According to the Commission, the protection mechanisms will have to set up must include:

Clear reporting channels, within and outside of the organization, ensuring confidentiality;A three tier reporting system of:

Internal reporting channels;Reporting to competent authorities – if internal channels do not work or could not reasonably be expected to work (for exam-ple where the use of internal channels could jeopardize the effectiveness of investigative actions by the authorities responsible);

Public/media reporting – if no appropri-ate action is taken after reporting through other channels, or in case of imminent or clear danger to the public interest or irreversible damage;

Feedback obligations for authorities and companies, who will have to respond and fol-low-up to the whistleblowers' reports within three months for internal reporting channels;Prevention of retaliation and effective protec-tion: all forms of retaliation are forbidden and should be sanctioned, the Commission has said. It is proposed that if a whistleblower suffers retaliation, he or she should have access to free advice and adequate remedies (for example mea-sures to stop workplace harassment or prevent dismissal). The burden of proof will be reversed in such cases, so that the person or organization must prove that they are not acting in retaliation against the whistleblower. Whistleblowers will also be protected in judicial proceedings, in particular through an exemption from liability for disclosing the information.

EU Asks States To Calculate Common Corporate Tax Base CostThe EU has begun evaluating the potential revenue cost to states of the introduction of common rules for the calculation of corpo-ration tax under its Common Corporate Tax Base proposals.

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The initiative is reportedly intended to enable the EU to ensure that the reform is revenue-neutral for those member states that otherwise stand to lose out, and therefore block the pro-posals, such as Ireland and the Netherlands.

On April 20, 2018, the Council released a doc-ument titled Proposal for a Council Directive on a Common Corporate Tax Base – Specific provisions for evaluating the impact on nation-al tax revenue. Its release follows a meeting of the High Level Working Party on Tax on Feb-ruary 28, 2018, where delegations agreed to the idea of evaluating the impact of the CCTB proposal on national tax revenues using a com-mon methodology (using the so-called COR-TAX model) and common hypotheses (based on the frozen Presidency compromise text) for the sake of comparability of results.

The Council explained that the evaluation will be done in the course of 2018 by mem-ber states, with the technical assistance of the Commission services. A technical work-shop organized by the Commission servic-es was scheduled for this purpose on April 23–24, 2018.

Under the larger CCCTB initiative, the Com-mission intends first to introduce harmonized rules on the calculation of a company's tax base in all EU member states. After that, tax revenues would be collected and distributed among member states under a formulary ap-portionment approach, whereby revenues would be allocated based on factors such as turnover, sales, and employment – that is, based on economic substance.

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ISSUE 285 | APRIL 26, 2018NEWS ROUND-UP: DIGITAL TAXATION

German Industry Cautions Against EU Digital TaxThe Federal Association of German Industry (BDI) has said that proposals for a tax on digi-tal companies will be detrimental to the Euro-pean economy and will exacerbate trade ten-sions between Europe and the US.

In comments published on the Association's website, BDI Chief Executive Joachim Lang called for an "internationally coordinated ap-proach" to the taxation of the digital econo-my, rather than short-term unilateral solutions that will increase the tax burden on companies investing in digitization.

"Our companies are increasingly pursuing digital business models and are therefore also affected by the EU digital tax. As they digitize their products and processes, they face addi-tional tax burdens. An EU digital tax is detri-mental to the industry," Lang argued.

"The proposal for an EU digital tax comes at an inopportune time because it exacerbates transatlantic tensions. The European Com-mission is risking to intensify the trade con-flict with the US. The expense and income of the planned tax are disproportionate. Instead of short-term interim solutions at EU level, we believe that an internationally coordinated ap-proach is necessary," he added.

Last month, the EU proposed two measures: an interim tax on the turnover of companies engaged in digital activities that would other-wise go untaxed, at a rate of 3 percent; and a longer-term solution, which the EU will seek to achieve international consensus on under the leadership of the OECD, which would estab-lish new digital permanent establishment rules.

The interim measure would be levied on rev-enues created from selling online advertising space; created from digital intermediary activi-ties; and those created from the sale of data gen-erated from user-provided information. Such would apply only to companies with total an-nual worldwide revenues of at least EUR750m (USD928m) and EU revenues of EUR50m.

Moscovici Defends EU Digital Tax Agenda In Washington, DCPierre Moscovici, the EU Tax Commissioner, visited the US to discuss the EU's plans for a new tax on the turnover of digital firms, tell-ing a recent conference that 20 member states so far support proposals for a digital turnover tax and stating it is not intended to target US firms in particular.

Ahead of the visit, which included addressing the American Enterprise Institution (AEI), Moscovici tweeted: "I will be reassuring my US interlocutors here that this is not an

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anti-American initiative! I strongly believe the approach to digital taxation must be global. We must continue to work with our partners, starting with the US, to push for ambitious in-ternational taxation reforms."

The European Commission on March 21 re-leased two proposed amendments to internation-al tax rules to ensure digital business activities are taxed "fairly" and in a growth-friendly way in the European Union. The proposals are in response to calls from member states for a permanent and lasting solution, to ensure a "fair share" of tax revenues from online activities where digital firms derive revenue from users in their territory, which might otherwise go untaxed.

The EU has proposed two measures: an interim tax on the turnover of companies engaged in digital activities that would otherwise go un-taxed, at a rate of 3 percent; and a longer-term solution, which the EU will seek to achieve in-ternational consensus on under the leadership of the OECD, which would establish new dig-ital permanent establishment rules. It is pro-posed that a digital platform will be deemed to have a taxable "digital presence" or a virtual permanent establishment in a member state if it fulfills one of the following criteria:

It exceeds a threshold of EUR7m (USD8.58m) in annual revenues in a member state;It has more than 100,000 users in a member state in a taxable year

Over 3,000 business contracts for digital services are created between the company and business users in a taxable year.

Meanwhile, the interim measure would be lev-ied on revenues created from selling online ad-vertising space; created from digital intermedi-ary activities; and those created from the sale of data generated from user-provided informa-tion. Such would apply only to companies with total annual worldwide revenues of at least EUR750m and EU revenues of EUR50m.

In his comments to the AEI event, on "The future of corporate taxation in a digital world," which was streamed online, he discussed the EU's efforts and fielded questions. A video of the discussions has been made available on the AEI website.

In his comments, he agreed that the emerg-ing patchwork of taxes on multinationals fol-lowing the release of the OECD's base erosion and profit shifting project is not ideal, and in particular that the interim measure proposes taxing turnover, rather than profits. He said it was requested by the member states and that the EU will seek to ensure that it does not re-sult in double taxation.

He said: "To tax profits first you need to be capable of identifying where they are created. This is why we need this the significant digital presence concept to be defined. It's much bet-ter if we can to do that at global level – and again we are willing to do that and I think we

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are good contributors to the OECD and G-20 work – but we also have to show … or to lead by example, and that's what we have the ambi-tion to do now."

On the sentiment among member states for the reforms, he admitted Ireland and Lux-embourg are "very vocal" in their opposition to the reforms. He admitted there is not yet unanimity for the changes, stating: "For those who fear this tax, they have to be reassured. … For those that hope for [the reforms], there is still a bit of work to be done," he said.

He explained that there is "a very strong basis of support from around 20 states that are ei-ther very favorable or favorable to the tax or accepting the principle." The G-5 in particular are supporting the approach from the "fore-front," he said.

We have little time, he added. "If this is not concluded by the end of the year, it will be dif-ficult to conclude before I don't know when. So for those who support the proposal, and not only supporting but driving it, we need to put a lot of political capital and dedicate energy to that." He was optimistic in his con-cluding remarks, stating: "there is a capacity to convince, there is a way to find consensus, I'm quite sure, and also there can be some amend-ments … because our proposals are never take it or leave it."

New Zealand Confirms Virtual Currencies Are Property For Tax PurposesNew Zealand has joined a number of territo-ries in confirming this month that virtual cur-rency transactions are taxable as property, in new guidance that was issued at the beginning of the month.

Tony Morris, the Inland Revenue Department representative responsible for virtual currency compliance, explained that "trading in cryp-tocurrencies may happen in a digital realm but tax obligations still apply in New Zealand. Inland Revenue has responded to requests for guidance by issuing some common questions and answers on our website so that everyone knows their responsibilities. Just like with property – when you acquire cryptocurrency for the purpose of selling or exchanging it, the proceeds you make from selling it are taxable."

He explained that virtual currencies are sub-ject to existing tax rules, going on to state that: "generally the only time they produce an in-come is when they change hands. Tax is also applied when one cryptocurrency is swapped for another. You don't need to cash out to dol-lars to create a tax obligation. Likewise, if you receive a cryptocurrency as payment for goods or services, this is considered business income and is taxable."

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He added that tax rules for foreign exchange do not apply when it comes to cryptocurrencies.

Concluding, he urged taxpayers to keep records of transactions and let Inland Revenue know if

previous tax returns are incorrect. "Operating in the digital world doesn't absolve you from your tax obligations. It also doesn't mean your activity is untraceable," he said.

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ISSUE 285 | APRIL 26, 2018NEWS ROUND-UP: VAT, GST, SALES TAX

Irish Revenue Updates And Issues New VAT GuidanceOn April 23, 2018, the Irish tax agency, the Revenue Commissioners, announced it had updated three guides on the value-added tax treatment of certain services in its Tax and Duty Manual and issued a new guide on VAT on staff secondments.

Revenue said Part 3 of the VAT Tax and Duty Manual has been amended as follows:

VAT Treatment of Education and Vocational Training – to reflect the amendments made to legislation in Finance Act 2017. These were to ensure exemption for such services.VAT and Solicitors – to remove obsolete and duplicate material.VAT Treatment of Medical Services – to remove duplicate material, which is already contained on the Revenue website.

Meanwhile, the tax authority announced that the new guidance on the VAT treat-ment of staff secondments has been created to incorporate guidance on the VAT treat-ment of certain staff secondments to compa-nies established in Ireland from related for-eign companies that was separately set out in Revenue eBrief No. 14/2007.

Italy Receives EU Green Light For Real-Time VAT ReportingOn April 19, 2018, the EU published in its Official Gazette a Council Implementing De-cision (2018/593) to authorize Italy to intro-duce mandatory electronic reporting obliga-tions on all taxable persons except those small businesses benefiting from an exemption.

The regime would enable the tax agency to better tackle tax fraud, by enabling it to com-pel traders to submit real-time information through its SdI portal (Sistema di Interscambio).

The derogation will apply from July 1, 2018, until at least December 31, 2021.

Luxembourg To Amend VAT Group Regime After ECJ RulingOn April 13, 2018, the Luxembourg Govern-ment tabled draft law 7278 to replace its VAT grouping provisions, which the European Court of Justice (ECJ) earlier said contravened EU VAT law.

In European Commission v. Luxembourg (C-274/15), delivered on May 4, 2017, the ECJ ruled that Luxembourg's existing VAT group-ing regime – the Independent Groups of Per-sons (IGP) regime – contravened EU VAT law in three respects. It was widely used by finan-cial and insurance entities.

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Subject to the necessary approvals, the new re-gime, which is intended to be in line with EU VAT law, would apply from July 31, 2018.

Outline of case C-274/15

The ruling in case C-274/15 Commission v. Luxembourg supported both a decision by the European Commission and an opinion of an Advocate General of the ECJ that Luxembourg had transposed in too wide a manner rules in the VAT Directive on services provided by in-dependent groups to their members.

Under the VAT Directive, certain services sup-plied by a group to its members are exempt from VAT. This is to avoid making operations downstream more expensive for these mem-bers, given that the VAT cannot be deducted. Strict conditions must be complied with to benefit from the exemption.

Under the regime that will be replaced in Lux-embourg, the services provided by an indepen-dent group to its members were free of VAT provided that the members' taxed activities did not exceed 30 percent (or 45 percent under certain conditions) of their annual turnover. Group members were also allowed to deduct the VAT charged to the group on its purchases of goods and services from third parties. Last-ly, operations by a member in his or her own name but on behalf of the group are regarded as outside the scope of VAT.

Under European law, in order to be exempt from VAT, the services provided by an inde-pendent group to its members must be directly required for their non-taxable or exempt activ-ities. Moreover, group members should not be allowed to deduct VAT charged to the group.

In 2014, the European Commission decided that arrangements in place in Luxembourg were not compatible with EU VAT law. In ad-dition, it was argued that they were likely to distort competition.

The Commission's decision was largely sup-ported by ECJ Advocate General Kokott in October 2016, whose decision was endorsed by the full court in a ruling released on May 4, 2017.

First, the ECJ said only the services rendered by an IGP and directly necessary for the exer-cise of the exempt activities of its members may fall outside the scope of VAT. It added that by providing that the services rendered by an IGP to its members are exempt from VAT where the share of the members' taxed activities does not exceed 30 percent (or even 45 percent) of their annual turnover, Luxembourg did not correctly transpose the VAT Directive.

Second, the ECJ highlighted that the IGP is an independent taxable person, which provides services independently to its members, from which it is separate. It said: "In the light of the

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IGP's independence from its members, the lat-ter may not, contrary to what the Luxembourg permits, deduct from the amount of VAT which they are liable to pay the VAT payable or paid in respect of goods or services provided to the IGP (and not to those members directly)."

Third, the ECJ observed that, because of the IGP's independence from its members, any transaction between the IGP and one of its members must be regarded as a transaction between two taxable persons and therefore fall within the scope of VAT. It concluded: "It follows that Luxembourg has, in this respect, again failed properly to transpose the VAT Di-rective by providing that the transactions car-ried out by a member in his name but on be-half of the group may fall outside the scope of VAT for the group."

Think Tank Calls For Scottish VAT DevolutionReform Scotland, a non-partisan think tank, has called for value-added tax powers to be de-volved from the UK Government to the Scot-tish Government, once legal restrictions im-posed by EU law are lifted following the UK's departure from the European Union.

The think tank explained that: "Devolving VAT to the Scottish Parliament would mean that the Scottish Parliament would be respon-sible for raising 60 percent of what it spends,

passing the 50 percent threshold for the first time. This would also significantly reduce Holyrood's reliance on income tax revenue."

The link between VAT and the performance of the economy has been a talking point for suc-cessive Commissions into Scottish devolution, the think tank pointed out, stating that: "The Calman Commission said that the devolution of VAT had the 'potential to deliver accountability given its significant yield and the transparency to the population,' but [added] 'devolution of VAT to Scotland is precluded by EU law.'"

The Scotland Act 2016, which provides for the devolution of tax powers to Scotland, in-cluding limited income tax powers, assigns 50 percent of VAT revenues to the Scottish Parlia-ment. Reform Scotland suggested there may be political support for such a move, noting statements from government officials, both in Scotland and the UK, that VAT devolution may have been earlier discussed were it not precluded by EU law.

Commenting, Reform Scotland's Chairman, Alan McFarlane, explained that: "Whilst we supported the principle of devolving income tax to the Scottish Parliament, we have consis-tently expressed concern that the Scottish Gov-ernment's powers are so heavily dependent on one tax. The devolution of VAT, adding a con-sumption tax to an income tax, would help ad-dress this problem. Politicians have previously

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acknowledged the benefits of devolving the tax, but it was never previously possible due to EU law. Brexit removes this impediment.

"We hope that the Scottish Conservatives still recognize the benefits of devolving VAT and will argue its case, along with politicians from other parties in Scotland. Although the

politics of this issue are critical, so are the economics. Devolving VAT would rapidly focus minds at Holyrood on promoting eco-nomic growth because of its direct link to tax revenue, and it would also give the Finance Secretary an important extra tool to change outcomes through tax policy."

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ISSUE 285 | APRIL 26, 2018NEWS ROUND-UP: COUNTRY FOCUS — UNITED STATES

IRS Adds To Transition Tax FAQsOn April 13, 2018, the Internal Revenue Ser-vice (IRS) updated and added new answers to frequently asked questions in relation to 2017 filings and the "transition tax," provided for in Section 965 of the Internal Revenue Code, as in-troduced in the Tax Cuts and Jobs Act (TCJA).

The transition tax applies to the untaxed foreign earnings of foreign subsidiaries of US compa-nies. Prior to the enactment of the TCJA, US tax on the income of a foreign corporation could be deferred until the income was distrib-uted as a dividend or otherwise repatriated by the foreign corporation to its US shareholders.

The transition tax seeks to regularize these holdings as part of the switch from a tax system with a worldwide corporate tax basis towards a territorial tax basis system, with a concession-ary tax rate for newly repatriated income. The transition tax generally may be paid in install-ments over an eight-year period. The tax func-tions by deeming to have been repatriated any untaxed foreign earnings of US companies' foreign subsidiaries. Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and the remaining earn-ings are taxed at an 8 percent rate.

The two new answers in relation to compli-ance with the levy from the IRS concern how

the IRS will apply 2017 estimated tax pay-ments (including credit elects from 2016) to a taxpayer's net tax liability under Section 965, and what happens in future periods if a tax-payer's 2017 payments, including estimated payments, exceed its liability.

On the first, it announced: "The IRS will ap-ply 2017 estimated tax payments first to a tax-payer's 2017 net income tax liability described under Section 965(h)(6)(A)(ii) (its net income tax determined without regard to Section 965), and then to its tax liability under Section 965, including those amounts that are subject to payment in installments pursuant to an elec-tion under Section 965(h)."

Second, it addressed the following question: "If a taxpayer's 2017 payments, including estimated tax payments, exceed its 2017 net income tax liability described under Section 965(h)(6)(A)(ii) (its net income tax deter-mined without regard to section 965) and the first annual installment (due in 2018) pursu-ant to an election under Section 965(h), may the taxpayer receive a refund of such excess amounts or credit such excess amounts to its 2018 estimated income tax?"

The IRS stated in response: "No. A taxpayer may not receive a refund or credit of any por-tion of properly applied 2017 tax payments

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unless and until the amount of payments ex-ceeds the entire unpaid 2017 income tax li-ability, including all amounts to be paid in in-stallments under Section 965(h) in subsequent years. If a taxpayer's 2017 tax payments exceed the 2017 net income tax liability described un-der Section 965(h)(6)(A)(ii) (net income tax determined without regard to Section 965) and the first annual installment (due in 2018) pursuant to an election under Section 965(h), the excess will be applied to the next successive annual installment (due in 2019) (and to the extent such excess exceeds the amount of such next successive annual installment due, then to the next such successive annual installment (due in 2020), etc.) pursuant to an election under Section 965(h)."

The updates to the FAQs concern, first, the obligation to file a IRC 965 Transition Tax Statement alongside the 2017 tax return and its content. It tells taxpayers to refer the newly released guidance in Publication 5292 on the calculation of transition tax liability and nu-merous other things.

Other changes include a amendment to guid-ance on who can make an election with respect to Section 965 of the Code on a 2017 tax re-turn. Another change concerns the require-ment to file Form 5471. On this, the guidance notes that, earlier, Notice 2018-13, Section 5.02, released in January 2018, provided an

exception to filing Form 5471 for certain Unit-ed States shareholders considered to own stock by "downward attribution" from a foreign person. The update confirms the IRS intends to modify the instructions to the Form 5471 to provide for the exception, as announced re-cently in Notice 2018-26 on April 2, 2018.

Other updates cover whether domestic part-nerships, S corporations, or other passthrough entities are required to report any additional information to their partners, shareholders, or beneficiaries in connection with Section 965 of the Code; and how a taxpayer should pay the tax resulting from Section 965 of the Code for a 2017 tax return.

IRS Issues Guide On New Depreciation And Expensing RulesThe US Internal Revenue Service (IRS) has is-sued a fact sheet explaining the new deprecia-tion and expensing rules included in the Tax Cuts and Jobs Act (TCJA).

Fact sheet FS-2018-9, last updated on April 20, 2018, includes information on Section 179 expensing, temporary 100 percent bonus depreciation, changes to depreciation limita-tions on luxury automobiles and personal use property, alterations to the treatment of farm equipment and property, and the recovery pe-riod for real property.

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With regards to the Section 179 deduction, the fact sheet explains that a taxpayer may elect to expense the cost of any Section 179 property and deduct it in the year the prop-erty is placed in service. The new law increased the maximum deduction from USD500,000 to USD1m. It also increased the phase-out threshold from USD2m to USD2.5m.

The new law also expands the definition of Sec-tion 179 property to allow the taxpayer to elect to include the following improvements made to nonresidential real property after the date when the property was first placed in service:

Qualified improvement property, which means any improvement to a building's in-terior. Improvements do not qualify if they are attributable to:

the enlargement of the building,any elevator or escalator orthe internal structural framework of the building.

Roofs, heating ventilation and air condition-ing (HVAC), fire protection systems, alarm systems and security systems.

These changes apply to property placed in ser-vice in taxable years beginning after December 31, 2017.

The fact sheet explains that the TCJA increases to the bonus depreciation percentage from 50 percent to 100 percent for qualified property

acquired and placed in service after Septem-ber 27, 2017, and before January 1, 2023. The bonus depreciation percentage for qualified property that a taxpayer acquired before Sep-tember 28, 2017, and placed in service before January 1, 2018, remains at 50 percent. Spe-cial rules apply for longer production period property and certain aircraft.

The definition of property eligible for 100 per-cent bonus depreciation was expanded to include used qualified property acquired and placed in service after September 27, 2017, although the cost of the used qualified property eligible for bonus depreciation doesn't include any carry-over basis of the property, for example in a like-kind exchange or involuntary conversion.

However, the TCJA added qualified film, tele-vision, and live theatrical productions as types of qualified property that are eligible for 100 percent bonus depreciation. This provision also applies to property acquired and placed in service after September 27, 2017.

The new law also changed depreciation lim-its for passenger vehicles placed in service after December 31, 2017. If the taxpayer doesn't claim bonus depreciation, the greatest allow-able depreciation deduction is:

USD10,000 for the first year,USD16,000 for the second year,

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USD9,600 for the third year, andUSD5,760 for each later taxable year in the recovery period.

If a taxpayer claims 100 percent bonus depre-ciation, the greatest allowable depreciation de-duction is:

USD18,000 for the first year,USD16,000 for the second year,USD9,600 for the third year, andUSD5,760 for each later taxable year in the recovery period.

However, the new law removes computer or peripheral equipment from the definition of listed property. This change applies to proper-ty placed in service after December 31, 2017.

The fact sheet also reiterates that the TCJA shortens the recovery period for machinery and equipment used in a farming business from seven to five years. However, farm busi-nesses electing out of the new interest deduc-tion limit (which applies to farms with gross receipts of more than USD25m), must use the alternative depreciation system to depreciate any property with a recovery period of 10 years or more, such as single purpose agricultural or horticultural structures, trees or vines bearing fruit or nuts, farm buildings, and certain land improvements. This provision applies to tax-able years beginning after December 31, 2017.

Last, it explains that the new law keeps the gener-al recovery periods of 39 years for nonresidential real property and 27.5 years for residential rental property. But, effective January 31, 2017, the law changes the alternative depreciation system recov-ery period for residential rental property from 40 years to 30 years. Qualified leasehold improve-ment property, qualified restaurant property, and qualified retail improvement property are no longer separately defined and given a special 15-year recovery period under the new law.

AICPA Urges Changes To Transition Tax RulesThe American Institute of Certified Public Accountants (AICPA) has said the US tax agency should amend its guidance on the transition tax, published recently in question-and-answer format.

Two answers to frequently asked questions re-leased recently would have a "detrimental im-pact on all affected taxpayers," from individu-als to large corporations, the AICPA argued.

On April 13, the IRS posted two new FAQs (numbered 13 and 14) to its website concern-ing how the IRS will apply 2017 estimated tax payments (including credit elects from 2016) to a taxpayer's net tax liability under Section 965, and what happens in future periods if a taxpayer's 2017 payments, including estimat-ed payments, exceed its liability.

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The AICPA has taken issue with the answer to FAQ 14 because it appears to suggest that only after the entire Section 965 liability is satisfied would the IRS apply any remaining overpay-ment against a taxpayer's estimated tax liability for 2018 or issue a refund.

"It is common practice for taxpayers to take a conservative approach when estimating their tax liability for purposes of estimated tax pay-ments or a payment submitted with an exten-sion request. Taxpayers take this action to ensure timely payment of their ultimate tax liability with the intention of either applying the result-ing overpayments towards the subsequent year's estimated tax payments or requesting a refund," Annette Nellen, Chair of the AICPA Tax Execu-tive Committee, wrote in a letter to the IRS.

"In addition, taxpayers may have included payment for the additional estimated amount of their initial section 965(h) installment with their fourth quarter estimated tax payment in January 2018. The initial release of FAQs by the IRS on March 13, 2018, which included Q&A 10, specifically required a separate pay-ment for the initial section 965(h) installment liability. Compliant taxpayers who abided by this guidance submitted a second payment for that amount as instructed. They had reason-ably expected to have the ability to request a refund or direct the application of that addi-tional and unexpected overpayment from their January estimated payment," the letter added.

According to Nellen, the two FAQs in ques-tion will have a "detrimental impact on all af-fected taxpayers, including individuals, small businesses, and large corporations."

"Taxpayers who had anticipated applying an overpayment of their regular tax liability to their first quarter estimated tax payment were re-quired to immediately submit an additional pay-ment to the IRS to cover an unexpected short-fall," Nellen continued. "For many individual and small business taxpayers, obtaining available cash resources to cover this sudden, unanticipat-ed liability is likely to have created a hardship. For those taxpayers unaware of this last-minute change, a late payment of the additional amount will likely result in imposition of an underpay-ment penalty. For large corporations, with po-tentially a substantial additional liability, a sig-nificant penalty amount could result."

The AICPA is therefore urging the IRS to amend Q&A 13 and Q&A 14 to provide tax-payers the ability to direct the application of any overpayment to satisfy the initial section 965(h) installment.

"We believe that allowing taxpayers a choice in how their tax payments are applied is consistent with the eight-year installment payment period enacted as part of code Sec-tion 965(h) and necessary for the fair and sound administration of the tax system," Nellen concluded.

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ISSUE 285 | APRIL 26, 2018NEWS ROUND-UP: OTHER TAXES

New Zealand To Offer New Research Tax Breaks Next YearThe New Zealand Government on April 19, 2018, announced its intention to introduce a research and development tax incentive in 2019.

The Ministry of Business, Innovation, and Em-ployment has released a consultation on the proposal. Input is being invited on its design.

EU Pushing For Exemption From US Metals TariffsThe EU will have "no choice but to react" if it is not permanently exempted from the US's new metals tariffs, European Council Presi-dent Donald Tusk has said.

In his report to the European Parliament on March's Council meetings, Tusk said that the Council has called for "a permanent exemption from the US tariffs on steel and aluminum."

The US has announced tariffs of 25 percent on steel imports and 10 percent on aluminum imports. According to the US Department of Commerce, steel and aluminum imports pose a threat to US national security.

Exemptions were granted by the US to Canada and Mexico. President Trump has said that any country with which the US has a security re-lationship can "discuss with the US alternative

ways to address the threatened impairment of the national security caused by imports from that country." Should Trump decide that such imports no longer pose a threat, he may re-move or modify the restrictions imposed.

Tusk's report stressed that if the EU is not granted a permanent exemption, "we will have no choice but to react." He said that the Coun-cil wishes to "avoid this route," and that he has called for "a dialogue that will bring more trade between the US and the EU, not less."

"Free and fair trade is one of the most power-ful engines for growth and jobs, and we should make full use of it. It is simply in everyone's interest," he concluded.

India Seizes Another Dividend Due To Cairn In Tax DisputeIn another development likely to damage its rep-utation with international investors, India has de-cided to seize a INR4.4bn (USD66m) dividend due to Cairn from its subsidiary under a tax law amended retrospectively, Indian media reported.

The amount is intended to be held against a tax assessment that Cairn disputes.

In 2012, India retrospectively amended Indian tax law. The amendment was given retroactive effect from 1961, the year in which India's current income tax legislation was introduced.

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It was introduced after a ruling from the Su-preme Court in the Vodafone International Holdings BV case, in which the court said that transfers of non-resident companies made by non-residents should not attract Indian capital gains tax. Indian lawmakers defied the ruling by amending Section 9 of the Income-tax Act, 1961, with retroactive effect.

Although the circumstances for Cairn's af-fected transactions are different to Vodafone's, India likewise used the retrospective amend-ment to assess tax worth about INR102bn (USD1.5bn), plus interest dating back to 2007 totaling INR188bn (USD2.8bn), on transac-tions linked to its earlier restructuring. India says that Cairn failed to pay capital gains tax on transactions undertaken to effect the group reorganization, which were required to enable the Cairn India Ltd (CIL) IPO in 2007.

Subsequently CIL merged with an entity from the Vedanta Resources group, creating

a combined entity Vedanta Ltd (VIL). The Cairn group has a shareholding of approxi-mately 5 percent in this new entity, after its shares in CIL were converted into new units in the merged entity. It is seeking to sell these shares but has been blocked from doing so.

Indian authorities are seeking the assessed tax from the Cairn group's shareholding in this entity and have so far prevented its sale, pend-ing the completion of an ongoing battle for the tax in the courts. It had proposed that it would sell Cairn's shares to gain access to the unpaid tax. Having seized an earlier dividend payment due to Cairn from this shareholding, it has again reportedly seized a dividend pay-ment worth INR4.4bn.

The tax dispute is being heard in international arbitration in The Hague under the UK–India Bilateral Investment Treaty. Cairn expects a fi-nal ruling from the Tribunal in August 2018.

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TAX TREATY ROUND-UP ISSUE 285 | APRIL 26, 2018

AUSTRALIA - FRANCE

Into Force

The Assistance in Recovery clause in the DTA between Australia and France entered into force on April 1, 2018.

AUSTRIA - JAPAN

Forwarded

Austria's Federal Council on April 5, 2018, approved the DTA with Japan.

CAMBODIA - VIETNAM

Signature

Cambodia and Vietnam on April 5, 2018, signed a DTA.

CZECH REPUBLIC - KOSOVO

Forwarded

The Czech Senate on April 4, 2018, approved a law to ratify the DTA being negotiated with Kosovo.

FINLAND - HONG KONG

Forwarded

Finland's President on April 6, 2018, autho-rized the signature of a DTA with Hong Kong.

FINLAND - PORTUGAL

Terminated

Finland is proposing to terminate its existing DTA with Portugal at the start of 2019, should Portugal fail to ratify a replacement DTA ne-gotiated between the two states.

INDIA - KAZAKHSTAN

Ratified

A protocol updating the DTA between India and Kazakhstan entered into force on March 12, 2018, and was published in India's Official Gazette on April 12, 2018.

INDIA - ZAMBIA

Signature

A DTA between India and Zambia was signed on April 12, 2018.

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KAZAKHSTAN - BELARUS

Ratified

Kazakhstan's President on April 9, 2018, signed legislation ratifying a protocol to the DTA with Belarus.

KOSOVO - SAUDI ARABIA

Negotiations

Kosovo on April 4, 2018, approved negotia-tions towards a DTA with Saudi Arabia.

LATVIA - CHILE

Negotiations

Latvia and Chile discussed launching DTA ne-gotiations during a two-day meeting that con-cluded on April 10, 2018.

MACAU - VIETNAM

Forwarded

Macau's Office of the Chief Executive on April 3, 2018, issued Order No. 63/2018 authoriz-ing the conclusion of a DTA with Vietnam.

SAUDI ARABIA - HONG KONG

Forwarded

The Saudi Cabinet on April 3, 2018, approved a DTA with Hong Kong.

SINGAPORE - BANGLADESH

Negotiations

Singapore on March 13, 2018, announced plans to update the DTA with Bangladesh signed in 1979.

SPAIN - FINLAND

Forwarded

The Spanish Senate on April 11, 2018, ap-proved a DTA with Finland.

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CONFERENCE CALENDAR

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

ISSUE 285 | APRIL 26, 2018

THE AMERICAS

STEP International Tax & Estate Planning Forum: Around the Globe in 2018

5/3/2018 - 5/4/2018

STEP

Venue: The Surf & Sand Resort, 1555 S Coast Hwy, Laguna Beach, CA 92651, USA

Chairs: Katharine Davidson (Henderson, Caverly & Pum), Lawrence H. Heller (Greenberg Traurig)

https://www.step.org/events/step-international-tax-estate-planning-forum-around-globe-2018-3-4-may-2018-0

STEP CC18 Caribbean Conference

5/7/2018 - 5/9/2018

STEP

Venue: Hilton Barbados, Needham's Point St. Michael, Bridgetown, BB 11000, Barbados

Key speakers: Theo Burrows (Higgs & Johnson), Peter Cotorceanu (G&TCA and Anaford), Eric Dorsch (Kozusko Harris Duncan), Tara Frater (Lex Caribbean), among numerous others

http://www.stepcaribbeanconference.com/

IBFD Network Events USA 2018 – New York

5/15/2018 - 5/15/2018

IBFD

Venue: Millennium Broadway, 145 W 44th St, New York, NY 10036, USA

Key speakers: Agnieszka Samoc (Danaher Corporation), Michael Lebovitz (PwC), Premkumar Baldewsing (IBFD), Thomas Fezza (Moodys), Vladimir Samoylenko (NCR Corporation)

https://www.ibfd.org/IBFD-Tax-Portal/Events/IBFD-Network-Events-USA-2018-New-York

IBFD Network Events USA 2018 – Houston

5/17/2018 - 5/17/2018

IBFD

Venue: Hyatt Regency Houston/Galleria, 2626 Sage Rd, Houston, TX 77056, USA

Key speakers: Agnieszka Samoc (Danaher Corporation), Michael Lebovitz (PwC),

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Premkumar Baldewsing (IBFD), Thomas Fezza (Moodys)

https://www.ibfd.org/IBFD-Tax-Portal/Events/IBFD-Network-Events-USA-2018-Houston

48th Annual Spring Symposium

5/17/2018 - 5/18/2018

National Tax Association

Venue: National Press Club, 529 14th St NW, Washington, DC 20045, USA

Chair: Rosanne Altshuler (National Tax Association)

https://www.ntanet.org/event/2017/12/48th-annual-spring-symposium-2018/

The Private Investment Fund Tax Master Class

5/22/2018 - 5/23/2018

Wilmington FRA

Venue: The Princeton Club, 15 West 43rd Street, New York, New York 10036, USA

Key speakers: Kenneth DeGraw (Withum), Phil Gross (Kleinberg Kaplan Wolff & Cohen), Lee Sheppard (Tax Analysts), Mark Leeds (Mayer Brown), among numerous others

http://events.frallc.com/events/the-private-investment-fund-tax-master-class-b1075-/event-summary-d799e93eb1744a94ba553c800ee40d70.aspx?dvce=1

IFA Costa Rica 2018

5/23/2018 - 5/25/2018

International Fiscal Association

Venue: Hotel Real Intercontinental, In Front Of Multiplaza, San José, 1001, Costa Rica

Key speakers: Adrián Torrealba (Facio & Cañas), Juan Guillermo Ruiz (Posse Herrera Ruiz)

https://ifacostarica2018.cr/

In-Depth HST/GST Course

5/27/2018 - 6/1/2018

CPA

Venue: 48 John Street, Niagara-on-the-Lake, ON LOS 1J0, Canada

Key speakers: David Robertson (CPA), Janice Roper (Deloitte)

https://www.cpacanada.ca/en/career-and-professional-development/courses/core-areas/taxation/indirect-tax/in-depth-hst-gst-course

STEP Canada 20th National Conference

5/28/2018 - 5/29/2018

STEP

Venue: Metro Toronto Convention Centre, 222 Bremner Boulevard, South Building, Toronto, ON, Canada

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Speakers: Philip Marcovici, TEP, Hong Kong: Offices of Philip Marcovici, Ed Northwood, JD, TEP, Buffalo: Ed Northwood and Associates, Pamela Cross, LLB, TEP: Ottowa: Borden Ladner Gervais LLP; Deputy Chair, STEP Canada, among numerous others

http://www.cvent.com/events/step-canada-20th-national-conference/event-summary-3ae3bbc412384eed96b4e18e7df3b266.aspx

Transcontinental Trusts: International Forum 2018

6/3/2018 - 6/5/2018

Informa

Venue: The Hamilton Princess, 76 Pitts Bay Rd, HM08, Bermuda

Key speakers: The Hon. Premier David Burt (Premier, The Goverment of Bermuda), The Hon. Justice Indra Charles (Justice, Supreme Court of The Bahamas), Anthony Poulton (Baker & McKenzie), Jonathan Conder (Macfarlanes), among numerous others

https://finance.knect365.com/transcontinental-trusts-international-forum/

1031 Exchanges

6/6/2018 - 6/6/2018

National Business Institute

Venue: Hotel RL by Red Lion Salt Lake City, 161 West 600 South, Salt Lake City, UT 84101, USA

Key speakers: Michael Anderson (Exchange Services), Adam Dayton (Fabian VanCott), J. Craig Smith (Smith Hartvigsen), Michael Walch (Kirton Mcconkie), among numerous others

https://www.nbi-sems.com/ProductDetails/1031-Exchanges/Seminar/79433ER?N=64013%2B4294966381

Global Transfer Pricing Conference: Washington, DC

6/6/2018 - 6/7/2018

Bloomberg

Venue: The National Press Club, 529 14th St NW, Washington, DC 20045, USA

Key speakers: TBC

https://learning.bloombergnext.com/catalog/product.xhtml?eid=6161

Trusts From A to Z

6/7/2018 - 6/7/2018

National Business Institute

Venue: Comfort Inn, 716 New Haven Rd, Naugatuck, CT 06770, USA

Key speakers: Beth Ann Brunalli (Davidson, Dawson & Clark), Michael Clear (Wiggin and Dana), Stephen Keogh (Keogh, Burkhart & Vetter), Katherine Mcallister (Cummings & Lockwood), among numerous others

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https://www.nbi-sems.com/ProductDetails/Trusts-From-A-to-Z/Seminar/79049ER?N=64013%2B4294966381

2018 Bermuda Captive Conference

6/11/2018 - 6/13/2018

BCC

Venue: Fairmont Southampton, 101 South Shore Road, Southampton SN02, Bermuda

Key speakers: Jonathan Reiss (Hamilton Insurance Group), Derreck Kayongo (Global Soap Project)

http://bermudacaptiveconference.com/

11th Annual US – Latin America Tax Planning Strategies

6/13/2018 - 6/15/2018

American Bar Association

Venue: Mandarin Oriental Miami, 500 Brickell Key Dr, Miami, FL 33131-2605, USA

Chairs: Monica Reyes (Reyes Abogados Asociados), Lionel Nobre (Dell Computadores do Brasil), Erika Litvak (Greenberg Traurig), Sonia Velasco (Cuatrecasas), among numerous others

https://shop.americanbar.org/ebus/ABAEventsCalendar/EventDetails.aspx?productId=294841319

Family Office & Private Wealth Management Forum

7/16/2018 - 7/18/2018

Opal Group

Venue: Gurney's Newport Resort & Marina, 1 Goat Island, Newport, RI 02840, USA

Key speakers: Chuck Baker (O'Melveny & Myers), Richard Bloom (MAZARS USA), M.K. Palmore (FBI), Catherine Lee Clarke (Sentinel Trust Company ), among numerous others

http://opalgroup.net/conference/family-office-private-wealth-management-forum-2018/

STEP Global Congress

9/13/2018 - 9/14/2018

STEP

Venue: The Westin Bayshore, 1601 Bayshore Drive, Vancouver, British Columbia, V6G 2VA, Canada

Key speakers: Ivan Sacks (Withersworldwide), Jason Sharman (University of Cambridge), Desmond Teo (EY), Leanne Kaufman (RBC Estate and Trust Services), among numerous others

http://www.stepglobalcongress.com/About-Congress

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Family Office & Private Wealth Management Forum West

10/24/2018 - 10/26/2018

Opal Group

Venue: Napa Valley Marriott, 3425 Solano Ave, Napa, CA 94558, USA

Key speakers: TBC

http://opalgroup.net/conference/family-office-private-wealth-management-forum-west-2018/

111th Annual Conference on Taxation

11/15/2018 - 11/17/2018

National Tax Association

Venue: Sheraton New Orleans Hotel, 500 Canal St, New Orleans, LA 70130, USA

Chair: Rosanne Altshuler (National Tax Association)

https://www.ntanet.org/event/2017/12/111th-annual-conference-on-taxation/

ASIA PACIFIC

China Offshore Shenzhen Summit 2018

5/22/2018 - 5/24/2018

China Offshore

Venue: Grand Hyatt Shenzhen, 1881 Baoan Nan Road, Luohu District, Shenzhen, 518001, China

Key speakers: Simon Guo (Five Lakes World Trade Center), Uny Chan (Fidinam Hong Kong), Timothy Zammit (RSM Malta), Till Neumann (Citizen Lane), among numerous others

http://shenzhen.chinaoffshoresummit.com.hk/en/

NSW 11th Annual Tax Forum

5/24/2018 - 5/25/2018

The Tax Institute

Venue: Sofitel Sydney Wentworth, 61-101 Phillip Street, Sydney NSW 2000, Australia

Key speakers: Andrew Noolan (Brown Wright Stein Lawyers), Jonathan Woodger (PwC), Daniel Butler (DBA Lawyers), Gareth Aird(Commonwealth Bank), among numerous others

https://www.taxinstitute.com.au/professional-development/key-events/nsw-tax-forum

The 4th Annual Asia Offshore Forum

5/29/2018 - 5/30/2018

Asia Offshore Association

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Venue: Renaissance Hong Kong Harbour View Hotel, Hong Kong Convention And Exhibition Centre, 1 Harbour Rd, Wan Chai, Hong Kong

Key speakers: Michael Olesnicky (KPMG), Zarrian Liu (Zhong Zhi Wealth Preservation Holdings), Wilson Cheng (Ernst & Young), Gabriel Hai (Lang Di Fintech), among numerous others

http://asiaoffshoreforum.com/

2018 Private Business Tax Retreat

5/31/2018 - 6/1/2018

The Tax Institute

Venue: Palazzo Versace Hotel, 94 Seaworld Drive, Main Beach QLD 4217, Australia

Key speakers: Raynuha Sinnathamby (Springfield City Group), Greg Pratt (Deloitte), Mark Molesworth (BDO), Martin Jacobs (ATO), among numerous others

https://www.taxinstitute.com.au/professional-development/key-events/private-business-tax-retreat

2018 Death… and Taxes Symposium

6/19/2018 - 6/20/2018

The Tax Institute

Venue: Sofitel Gold Coast Broadbeach, 81 Surf Parade, Broadbeach QLD 4218, Australia

Chair: Peter Godber (Grant Thornton)

https://www.taxinstitute.com.au/professional-development/key-events/death-and-taxes-symposium

Principles of Transfer Pricing

6/27/2018 - 6/29/2018

IBFD

Venue: Address: Kuala Lumpur, Malaysia (address available after registration)

Instructors: Anuschka Bakker (IBFD)

https://www.ibfd.org/Training/Principles-Transfer-Pricing-10

Transfer Pricing Masterclass

7/2/2018 - 7/4/2018

IBFD

Venue: Address: Singapore (address available after registration)

Instructors: Anuschka Bakker (IBFD)

https://www.ibfd.org/Training/Transfer-Pricing-Masterclass-1

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CENTRAL AND EASTERN EUROPE

International Wealth Forum – Tbilisi 2018

6/6/2018 - 6/6/2018

CIS Wealth

Venue: Courtyard by Marriott Tbilisi, 4 Freedom Square, Tbilisi 0105 Georgia

Key speakers: Anna Pushkaryova (Eurofast Global), Kaha Kiknavelidze (Bank of Georgia), Ekaterine Liluashvili (Bank of Georgia), Otar Sharikadze (Galt & Taggart), among numerous others

http://cis-wealth.com/en/konferencii/20-tbilisi2018.html

Ukrainian Business Forum Kiev 2018

11/12/2018 - 11/12/2018

CIS Wealth

Venue: Fairmont Grand Hotel Kyiv, 1 Naberezhno-Khreshchatytska Street, Kyiv 04070, Ukraine

Key speakers: TBC

http://cis-wealth.com/en/konferencii/21-ubf2018.html

MIDDLE EAST AND AFRICA

4th IBFD Africa Tax Symposium

5/9/2018 - 5/11/2018

IBFD

Venue: Sarova Whitesands Beach Resort & Spa, Off Malindi Road, Mombasa County, Mombasa, Kenya

Key speakers: Belema Obuoforibo (IBFD), Emily Muyaa (IBFD), Jan Maarten Slagter (IBFD), Kennedy Munyandi (IBFD), Michael Lennard (FDO, United Nations), and numerous others

https://www.ibfd.org/IBFD-Tax-Portal/Events/4th-IBFD-Africa-Tax-Symposium

WESTERN EUROPE

3rd International Conference on Taxpayer Rights

5/3/2018 - 5/4/2018

IBFD

Venue: IBFD head office, Rietlandpark 301, 1019 DW Amsterdam, The Netherlands

Key speakers: Philip Baker, QC (Field Court Tax Chambers), Kevin M. Brown (PwC), Juliane Kokott (Advocate General, ECJ), Andrew Roberson (McDermitt Will & Emery), among numerous others

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https://www.ibfd.org/IBFD-Tax-Portal/Events/3rd-International-Conference-Taxpayer-Rights

Tax and Technology

5/3/2018 - 5/4/2018

IBFD

Venue: IBFD head office, Rietlandpark 301, 1019 DW Amsterdam, The Netherlands

Instructors: Bart Janssen (Deloitte), Aleksandra Bal (IBFD), Monica Erasmus-Koen (Tytho), Eliza Alberts-Muller (Tytho)

https://www.ibfd.org/Training/Tax-and-Technology

International Tax, Legal and Commercial Aspects of Mergers & Acquisitions

5/7/2018 - 5/9/2018

IBFD

Venue: IBFD head office, Rietlandpark 301, 1019 DW Amsterdam, The Netherlands

Instructors: Frank de Beijer (Liberty Global), Femke van der Zeijden (PwC), Rens Bondrager (Allen & Overy), Rinze van Minnen (DLA Piper)

https://www.ibfd.org/Training/International-Tax-Legal-and-Commercial-Aspects-Mergers-Acquisitions

Taxation of UK Land and Buildings

5/9/2018 - 5/9/2018

Key Haven Publications

Venue: The Law Society's Hall, London, WC2A, UK

Chair: Robert Venables (Old Square Tax Chambers)

https://www.khpplc.co.uk/products/98/Taxation-of-UK-Land-and-Buildings

Guernsey Funds Forum

5/17/2018 - 5/17/2018

Guernsey Finance

Venue: Etc.Venues, Broadgate City of London, 155 Bishopsgate, London, EC2M 3YD, UK

Key speakers: Jonathan Ford (Financial Times), Simon Osborn (IFI Global Ltd), Leith Moghli (Reed Smith), Fiona Carpenter (PwC), among numerous others

https://www.weareguernsey.com/events/2018/guernsey-funds-forum-2018/

Transfer Pricing and Intra-Group Financing

5/24/2018 - 5/25/2018

IBFD

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Venue: IBFD head office, Rietlandpark 301, 1019 DW Amsterdam, The Netherlands

Instructors: Antonio Russo (Baker & McKenzie), Andre Dekker (Baker & McKenzie), Francesco Iaquinto (Meijburg & Co.), Krzysztof Lukosz (Ernst & Young)

https://www.ibfd.org/Training/Transfer-Pricing-and-Intra-Group-Financing

Tax Treaty Case Law around the Globe 2018

5/24/2018 - 5/26/2018

Fiscal Institute Tilburg

Venue: Dante Building, Tilburg University, Warandelaan 2, 5037 AB Tilburg, Netherlands

Key speakers: Eric Kemmeren (Tilburg University), Daniel Smit (Tilburg University), Peter Essers (Tilburg University), Cihat Öner (Tilburg University), among numerous others

http://www.tilburguniversity.edu/research/institutes-and-research-groups/fit/conferences/tax-treaty-case-law/

Introduction to European Value Added Tax

6/5/2018 - 6/8/2018

IBFD

Venue: IBFD head office, Rietlandpark 301, 1019 DW Amsterdam, The Netherlands

Instructors: Fabiola Annacondia (IBFD), Jordi Sol (IBFD), Wilbert Nieuwenhuizen (VAT adviser), Marie Lamensch (Institute for European Studies), Christian Deglas (Deloitte), Zsolt Szatmári (IBFD)

https://www.ibfd.org/Training/Introduction-European-Value-Added-Tax-0

International Tax Planning Association Meeting

6/13/2018 - 6/15/2018

ITPA

Venue: The Ritz Carlton, Schubertring 5, 1010 Wien, Austria

Chairs: Milton Grundy (Grays Inn Tax Chambers), Paolo Panico (Private Trustees)

https://www.itpa.org/meeting/vienna-october-2017/

Tax and Technology

6/26/2018 - 6/27/2018

IBFD

Venue: IBFD head office, Rietlandpark 301, 1019 DW Amsterdam, The Netherlands

Instructors: Bart Janssen (Deloitte), Aleksandra Bal (IBFD), Monica Erasmus-Koen (Tytho), Oscar Good (World Bank Group), among numerous others

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https://www.ibfd.org/Training/Tax-and-Technology

IFRS Foundation Conference: Frankfurt 2018

6/28/2018 - 6/29/2018

Informa

Venue: InterContinental Frankfurt, Wilhelm-Leuschner Strasse 43, Frankfurt, 60329, Germany

Chair: Hans Hoogervorst (IASB)

http://www.ifrs-conference.org/

Tax Planning and Substance

6/28/2018 - 6/29/2018

IBFD

Venue: IBFD head office, Rietlandpark 301, 1019 DW Amsterdam, The Netherlands

Instructors: Annemiek Kale (Arla Foods), Clive Jie-A-Joen (DLA Piper), Jan de Goede (IBFD), Bart le Blanc (Norton Rose Fulbright), among numerous others

https://www.ibfd.org/Training/Tax-Planning-and-Substance

Taxing The Digital Economy: The Way Ahead

6/28/2018 - 6/29/2018

IBFD

Venue: De Industrieele Groote Club, Dam Square 27, 1012 JS Amsterdam, The Netherlands

Chairs: Mariken van Hilten (Netherlands Supreme Court), Pasquale Pistone (IBFD), Dennis Weber (Loyens & Loeff), Stef van Weeghel (PricewaterhouseCoopers), among numerous others

https://www.ibfd.org/sites/ibfd.org/files/content/pdf/Taxing-the-digital-economy-conference.pdf

Summer Course on European Tax Law

7/2/2018 - 7/6/2018

Academy of European Law

Venue: ERA Conference Center Trier, Metzer Allee 4, Trier, 54295, Germany

Key speakers: Tomas Balco (OECD), Daniel Smit (Tilburg University), Fatima Chaouche (University of Luxembourg), Philippe Malherbe (University of Louvain), among numerous others

https://www.era.int/cgi-bin/cms?_SID=NEW&_sprache=en&_bereich=artikel&_aktion=detail&idartikel=127448

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Private Investor Middle East International Conference

9/26/2018 - 9/27/2018

Adam Smith Conferences

Venue: The Montcalm London Marble Arch, 2 Wallenberg Place, London, W1H 7TN, UK

Key speakers: Jeffrey Sacks (Citi Private Bank), Michael Addison (UBS), Paul Stibbard (Rothschild Trust), Ian Barnard (Capital Generation Partners), among numerous others

http://www.privateinvestormiddleeast.com/

Wealth Insight Forum 2018

9/27/2018 - 9/27/2018

Spear's

Venue: One Great George Street, 1 Great George St, Westminster, London, SW1P 3AA, UK

Key speakers: Trevor Abrahmsohn (Glentree International), Robert Amsterdam (Amsterdam & Partners), Stephen Bush (New Statesman), Mark Davies (Mark Davies & Associates), among numerous others

http://wif.spearswms.com/

International Tax Planning Association Meeting

10/17/2018 - 10/19/2018

ITPA

Venue: Mandarin Oriental Hyde Park, 66 Knightsbridge, London, SW1X 7LA, UK

Chairs: Milton Grundy (Grays Inn Tax Chambers), Paolo Panico (Private Trustees)

https://www.itpa.org/meeting/london/

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IN THE COURTS

A listing of recent key international tax cases.

ISSUE 285 | APRIL 26, 2018

THE AMERICAS

United States

The US Supreme Court began to hear arguments on whether states should be allowed to tax online retailers not based within a state's borders, in South Dakota v. Wayfair, on April 17, 2018.

The Supreme Court earlier this year accepted a challenge from authorities in South Dakota to the court's earlier ruling in Quill Corp. v. North Da-kota, concerning the ability of states to tax retailers not present within their physical borders.

Quill, a Supreme Court ruling delivered before the internet sales boom, established the "physical presence" test, whereby retailers are required to collect sales tax only in states in which they also have brick-and-mortar stores. It was also de-cided that only Congress has the authority to regulate interstate commerce under the Commerce Clause of the US Constitution.

Previously, the Court had not taken up an opportunity to review Quill, even though, in the Ap-peals Court, Justice Anthony Kennedy had noted that "there is a powerful case to be made that a retailer doing extensive business within a state has a sufficiently 'substantial nexus' to justify imposing some minor tax-collection duty, even if that business is done through mail or the in-ternet," and recommended "it is unwise to delay any longer a reconsideration of the [Supreme] Court's holding in Quill."

Colorado and Ohio earlier sought to have the Supreme Court review the ruling, but such requests were rejected.

On January 12, 2018, after an earlier delay, the Supreme Court granted South Dakota's petition for a writ of certiorari.

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The Retail Industry Leaders Association (RILA) had earlier said the case would give the Court an opportunity to "end the unfair economic advantage that Quill gives to online-only retailers." RILA General Counsel and Retail Litigation Center President, Deborah White, said: "Retailers have supported this case since the beginning, and still believe it is the right case to correct the constitutional course set more than 50 years ago – well before the advent of e-commerce – that today gives online-only retailers an unfair commercial advantage at the expense of local retailers."

The case concerns the legality of South Dakota's Senate Bill 106 (SB 106), which was signed into law on March 22, 2016, by Governor Dennis Daugaard.

SB 106 requires remote sellers with no physical location in South Dakota to remit sales tax and follow all procedures of the law, as if they have a presence in the state, if they meet one of two criteria in the previous calendar year or the current calendar year:

The remote seller's gross revenue of sale of tangible property, any products transferred electronically, or services delivered into South Dakota exceeds USD100,000; orThe remote seller has 200 or more separate transactions of tangible property, any products transferred electronically, or services delivered into South Dakota.

South Dakota's Attorney General, Marty Jackley, welcomed the decision to revisit the issue, stat-ing that: "South Dakota is leading the nation to fight for main street America. As Attorney Gen-eral, I will give main street businesses a strong and long awaited voice in our highest court." He added: "I want to extend my appreciation for the support we have received from the 35 Attorneys General, the National Governors Association, educational leaders, and the business community to bring tax fairness for our local retailers and to help support main street businesses."

Jackley further explained that the state will ask the US Supreme Court to overrule the physical-presence requirement, which currently prevents the state from requiring out-of-state retailers to remit taxes for sales made within South Dakota.

https://www.supremecourt.gov/oral_arguments/argument_transcripts/2017/17-494_7lho.pdf

US Supreme Court: South Dakota v. Wayfair, Inc. (17-494)

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WESTERN EUROPE

Belgium

Belgium's Constitutional Court has annulled legislation which extended value-added tax (VAT) to the supply of online gaming and gambling services to customers in Belgium.

The landmark decision was issued on March 22 in response to a legal challenge to the legislative change brought by Swedish-listed online gambling group Kindred (formerly Unibet).

Legislation to remove the broad-based VAT exemption on the gambling sector in Belgium en-tered into force on August 1, 2016. As a result of the change, all gambling and games of chance that take place online are subject to VAT at the standard rate of 21 percent. However, lotteries and land-based gambling remained VAT-exempt.

Kindred put forward arguments that the decision was incompatible with both Belgium's gaming laws and VAT law, as it discriminated against online operators and in favor of lotteries and land-based casinos.

"The ruling points out the inherent incompatibility between consumer protection and tax rev-enue objectives, especially when products (lotteries v. other products) and channels (retail v. on-line) are treated differently," the company said after the ruling.

http://www.kindredgroup.com/kindred-wins-vat-case-in-belgium

Belgian Constitutional Court: Belgian Government v. Kindred PLC

Denmark

A Danish court has ruled in favor of Microsoft in a transfer pricing case involving an arrangement between units of the company in Ireland and Denmark.

The case concerned whether Microsoft Danmark ApS had received appropriate consideration for activities performed for Microsoft Ireland Operation Limited, which sells Microsoft programs on the Danish market.

Under an agreement between the two companies, Microsoft Danmark would market Microsoft software in Denmark. However, the Tax Ministry argued that the Danish unit also had a right to

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receive commission fees for the sale of devices with software with a pre-installed Microsoft oper-ating system.

The Tax Ministry therefore concluded that Microsoft Danmark had understated its Danish in-come and assessed it for an additional DKK308m (USD51m) in tax for the years 2004 to 2007.

However, in a judgment issued on March 28, the high court for the eastern district said that the tax authority had failed to prove its case.

"The District Court did not find that Microsoft Danmark ApS had carried out marketing activi-ties that had not been settled after the agreement," a court statement said.

This ruling was delivered on March 28, 2018.

http://www.domstol.dk/oestrelandsret/nyheder/domsresumeer/Pages/DomMicrosoft.aspx

Østre Landsret: Case No. B-2008-16

Germany

Germany's Constitutional Court has ruled that the existing value-based system of assessing prop-erty taxation is unconstitutional and must be replaced by parliament.

Property tax in the states located in the former West Germany is based on real estate values from 1964. However, the ratable values of properties for tax purposes in the former East German states have not been updated since 1936. In a statement issued on April 10, the Constitutional Court said this situation results in "serious and extensive unequal treatment, which is not sufficiently justified."

Properties are supposed to be revalued every six years for the purpose of assessing property tax. This regular revaluation ceased because the exercise was too burdensome on government resources.

The ruling, which affects around 35m properties, requires that parliament draw up legislation for a replacement property tax regime by the end of 2019, and that the existing system cease to apply by December 31, 2024.

Property tax is an important source of revenue for local governments in Germany, generating about EUR14bn (USD17.3bn) per year in receipts.

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http://www.bundesverfassungsgericht.de/SharedDocs/Pressemitteilungen/EN/2018/bvg18-021.html;jsessionid=0217A95B4DFCA4AA3FABD1966AA56AEA.2_cid361

German Constitutional Court: Judgment of April 10, 2018 (1 BvL 11/14)

Slovakia

The European Court of Justice (ECJ) has ruled in favor of Volkswagen in a case concerning the company's right to claim a refund for VAT not initially charged on the supplies it re-ceived, with VAT retrospectively being charged to the company as much as seven years after it received the supplies.

The case concerned national legislation in Slovakia that time-limited the grant of a refund in such circumstances, despite no error by Volkswagen.

The ECJ ruled that EU law must be interpreted as precluding legislation of a member state under which, in circumstances such as those at issue in the main proceedings, the benefit of the right to claim a refund of VAT is denied on the grounds that the limitation period provided for by that legislation for the exercise of that right began to run from the date of supply and expired before the application for a refund was submitted.

The case concerned supplies between 2004 and 2010 by Hella Leuchten-Systeme GmbH, a com-pany established in Germany, and two Hella companies based in Slovakia (together, the Hella Companies), to Volkswagen AG, the auto giant established in Germany, of moulds for the manu-facture of lights for motor vehicles.

During this time, the Hella Companies did not include VAT on the invoices they issued, as they considered the transactions not as supplies of goods but of "financial compensation," which is exempt from VAT.

In 2010, the Hella Companies realized that the transactions were not being carried out in ac-cordance with Slovak law. They issued invoices charging the VAT due by Volkswagen for supply of the goods in question, and in accordance with Law No. 222/2004, filed supplementary tax returns for all years from 2004 to 2010, and paid the relevant VAT to the Treasury.

On July 1, 2011, Volkswagen submitted to the Bratislava I Tax Office (Slovak Republic) an ap-plication for a refund of the VAT charged on the supplied goods.

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On April 3, 2012, the tax office only partially upheld the application, ordering a refund only for the tax periods from 2007 to 2010 and not for the three subsequent years 2004 to 2006. This was due to the expiry of the limitation period of five years provided for by Slovak law.

In this regard, it held that the entitlement to a refund of VAT arose on the date of delivery of the goods, namely the date the VAT had become due, with the result that the right to claim a refund for the period from 2004 to 2006 had expired by the time the application for a refund was submitted.

Volkswagen brought an action seeking the annulment of the latter decision before the Regional Court in Bratislava, which dismissed the action. It then appealed that decision before the Slovak Supreme Court, which referred questions on the legality of the decision to the ECJ.

In ruling against the local tax authority's decision to deny the VAT refund request partially, the ECJ said:

"In the present case, it is apparent from the order for reference that, even though the supply of goods at issue was carried out during 2004 to 2010, the Hella Companies did not make an adjustment of the VAT until 2010 when they drew up invoices including the VAT, sent supplementary tax returns to the competent national authority and paid the amount of VAT that was due to the State treasury. It is equally apparent that the risk of tax evasion or non-payment of VAT has been excluded. In these circumstances, it was objectively impossible for Volkswagen to exercise its right to a refund before this adjustment, as, prior to that, it had neither been in possession of the invoices nor aware that the VAT was due.

Indeed, it was only following that adjustment that the substantive and formal condi-tions giving rise to a right to deduct VAT were met and that Volkswagen could therefore request to be relieved of the VAT burden due or paid, in accordance with [the EU VAT Directive] and the principle of fiscal neutrality. Accordingly, since Volkswagen did not demonstrate a lack of diligence, and in the absence of an abuse or fraudulent collusion with the Hella Companies, a limitation period which began from the date of supply of the goods and which, for certain periods, expired before this adjustment, cannot validly deny Volkswagen the right to a refund of VAT."

This ruling was released on March 21, 2018.

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http://curia.europa.eu/juris/document/document.jsf?text=&docid=200484&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=743081s

European Court of Justice (Second Chamber): Volkswagen AG v. Finance Directorate of the Slovak Republic (C-533/16)

United Kingdom

The UK's Court of Appeal (Civil Division) has recommended that the First-Tier Tribunal (FTT) rule in favor of HM Revenue & Customs in the case of HMRC v. Paul Newey, following guidance received from the European Court of Justice (ECJ).

The basic issue in the appeal is whether the EU law doctrine of abuse of law applies in circum-stances where the respondent taxpayer, Newey, who had previously carried on a successful loan-broking business in partnership in the UK under the trading name of "Ocean Finance," took steps to incorporate and restructure the business in Jersey, outside the EU and, abusively, outside the normal territorial scope of value-added tax (VAT).

According to HMRC, in order to avoid irrecoverable VAT, Newey set up a company, Alabaster (CI) Ltd, in Jersey, and granted it the right to use the business name Ocean Finance. Broking contracts were concluded between the lenders and Alabaster, and the broking commissions were paid not to Newey, but to Alabaster. Alabaster then entered into a contract for the supply of ad-vertising services.

HMRC took the view that, notwithstanding the contractual terms, the advertising services con-cerned were supplied to Newey in the UK and were therefore taxable in the UK. The FTT al-lowed Newey's appeal against that decision and HMRC appealed to the Upper Tribunal, which referred questions to the ECJ. The ECJ decided that although contractual terms should be taken into consideration, they are not decisive. It argued that they may be disregarded where they do not reflect economic and commercial reality and are a wholly artificial arrangement set up with the sole aim of obtaining a tax advantage.

Lord Justice Henderson said in the Court of Appeal judgment:

"The decisions of both Tribunals [the FTT and the Upper Tribunal] are (as I have held) vitiated by material errors of law, with the consequence that the evaluation of the facts required by the [ECJ] has not yet been performed by a fact-finding body which has

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directed itself correctly in law. In those circumstances, I see no escape from the conclu-sion that the case must be remitted so that this task can for the first time be properly performed in all respects."

He observed that EU case law has been added to substantially, which will support HMRC's case, since the hearing in February 2010 in this case.

In its April 17, 2018 decision, the Court of Appeal decided to refer the matter back to the FTT, recommending that it accept the ECJ's advice on the matter and deny the arrangement.

Earlier, welcoming the preliminary ruling from the ECJ, HMRC stated:

"The guidance from the ECJ confirms HMRC's view that economic reality must be considered and that contractual relationships do not necessarily determine VAT issues. HMRC will continue to mount in-depth investigations where we believe that a tax ad-vantage may have been claimed artificially."

http://www.bailii.org/cgi-bin/format.cgi?doc=/ew/cases/EWCA/Civ/2018/791.html&query=([2018])+AND+(EWCA)+AND+(Civ)+AND+(791)

UK Court of Appeal (Civil Division): HMRC v. Paul Newey

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THE ESTER'S COLUMN ISSUE 285 | APRIL 26, 2018

Dateline April 26th, 2018

The Australia Institute recently urged the Government to resist partaking in the "race to the

bottom" on corporate tax rates. Instead, it recommended that Australia tackle tax loopholes and avoidance schemes, arguing that the priority is to ensure enough revenue is raised to fund public services and infrastructure. But if you look around the world, you'll find that parliaments are vot-ing through tax reforms that do both – cut corporate tax while shoring up the corporate tax base.

It's no coincidence that in recent times successive governments have announced, are legislating for, or have completed, tax reforms which reduce the corporate tax rate while restricting interest deductions and strengthening controlled foreign company regimes, among other anti-avoidance

measures. These moves are largely a response to base erosion and profit shifting (BEPS), but they also show that tax competition is far from dead.

Nevertheless, it is wrong to assert that most governments are doing nothing, or very little, to tackle tax avoidance. On balance, anti-avoidance and other revenue-raising measures have considerably outnumbered tax cuts over the course of time. And the gap has likely widened since the BEPS project came about. Perhaps it is the case that on the relatively rare occasions that corporate tax cuts are made, they can be quite spectacular in magnitude, as in the United Kingdom (30 to 19 percent and falling), and the United States (35 to 21 percent), so perceptions are being skewed.

Where Australia is concerned, it is arguable that the Government is doing more than most in attempting to reduce tax avoidance, particularly by multinational companies. The Government expects the Multinational Anti-Avoidance Law (MAAL), in place since January 2016, to raise an additional AUD7bn (USD5.4bn) in tax each year, and in March, it introduced legislation to in-

crease the MAAL's scope. Indeed, the Turnbull administration seems to me to be quite tough on tax avoidance, having established a tax avoidance taskforce with four-year funding of AUD679m and 1,300 ATO staff.

For Australian businesses though, it is the other side of the bargain that the Government isn't fulfilling –the corporate tax rate cut bit. To be fair, this isn't a bargain that it is unwilling to fulfill. Because tax cuts on the scale seen all over the developed world recently are simply not possible

in Australia for largely fiscal and political reasons, at least for the foreseeable future. The problem is, this legislative stasis is making Australia look more and more like a corporate tax outlier.

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It can be argued that a favorable corporate tax rate isn't the be all and end all for international investors. Even Ireland acknowledges that non-tax factors have contributed to its phenomenal success at attracting FDI from the United States. Investors look at a host of factors when deciding where to put their money, such as workforce quality, the state of the country's infrastructure, and its wider regulatory environment, to name but a few. But it's true that "the Lucky Country" could do with a dose of fiscal good fortune to give it a break in a highly competitive tax environment.

From one side of planet to the other now, and I wrote recently on how the process of devolving

fiscal powers in the United Kingdom was leading to complexity in, and fragmentation of, the UK's once unitary tax system. So, I won't dwell on this point too long again this week. But I had to mention the fact that the devolution of value-added tax powers to the Scottish Government has now been made, at a time when yet another report, this time by the Chartered Institute for Taxation, has concluded that Scottish taxpayers now face more complexity than ever before. As if the implications of Brexit on UK VAT weren't mind-boggling enough for UK businesses! Oh, for a VAT MOSS scheme. The way Brexit is shaping up though, the only moss to be found in substantial quantities will be on Hadrian's Wall.

And here we go again. This is another point I don't wish to belabor, but it is one that bears repeat-ing, albeit briefly – India's propensity to shoot itself in the foot.

It was reported last week that the Government has established a new board for the granting of tax breaks to small and start-up businesses. This sounds like a good idea, although we await the inevitable devil in the detail. Then it came to light that the tax authorities have seized Cairn Energy's INR4.4bn (USD66m) dividend, based on the notorious retrospective amendment to the Income-tax Act passed under the former administration. Which sounds like a very bad idea!

Again, this would appear very much at odds with one of the Government's key policies, which is to boost the stability and predictability of the tax regime, while also improving the tax and regula-tory environment. Nevertheless, in India, it doesn't seem to matter too much what the Govern-ment does, as the tax authorities seem to be a law unto themselves.

The Jester

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