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International Tax NewsEdition 35January 2016
WelcomeKeeping up with the constant flow of international tax developments worldwide can be a real challenge for multinational companies. International Tax News is a monthly publication that offers updates and analysis on developments taking place around the world, authored by specialists in PwC’s global international tax network.
We hope that you will find this publication helpful, and look forward to your comments.
Shi‑Chieh ‘Suchi’ LeeGlobal Leader International Tax Services NetworkT: +1 646 471 5315E: [email protected]
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In this issue
Tax Administration and Case LawTax legislation TreatiesProposed Tax Legislative Changes
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Tax LegislationBelgium
List of tax havens revised
On November 27, 2015, the Council of Ministers revised the lists of tax havens that apply for the purposes of the so-called dividends received deduction (DRD) and the reporting obligation for payments (to tax havens). Two draft Royal Decrees have been approved that add or delete certain countries to or from the lists following changes to domestic tax legislation.
Under the DRD regime, Belgian companies or branches can exempt 95% of dividends received relating to qualifying shareholdings for Belgian corporate income tax (CIT) purposes. Nevertheless, if dividends are received from a company that is established in a country of which the statutory nominal tax rate or effective tax rate is lower than 15%, Belgian tax law considers it as a substantially more advantageous common tax regime. Therefore, one of the recently approved draft Royal Decrees adapted this so-called black list.
With respect to the reporting obligation for payments to tax havens in excess of 100,000 euros (EUR), the approved Royal Decree has adjusted the Belgian list as well.
PwC observation:We invite our clients to assess the impact of the above described legislation on their businesses and to anticipate on whether this could affect their business going forward.
Axel SmitsBrusselsT: +32 3 259 3120E: [email protected]
Pascal JanssensAntwerpT: +32 3 259 3119E: [email protected]
Hong Kong
Ordinance to enhance the tax appeal mechanism and abolish the case stated procedure
The Inland Revenue (Amendment) Ordinance (No.3) Ordinance 2015 was gazetted on November 13, 2015.
The Ordinance seeks to enhance the tax appeal mechanism beyond the Board of Review (Board) and to improve the efficiency and effectiveness of the Board by giving effect to the following:
• Allowing an appeal against the decision of the Board on a question of law to go direct to the Court of First Instance or Court of Appeal, replacing the current case stated procedure.
• Empowering the person presiding at the hearing of an appeal before the Board to (i) give directions on the provision of documents and information for the hearing and (ii) impose sanction on non-compliance with the given directions by means of refusing to admit any documents and information as evidence in an appeal hearing if they are not produced in compliance with the given directions.
• Providing privileges and immunities to the Chairman, Deputy Chairmen and other members of the Board, as well as the parties to a hearing and other persons appearing before the Board.
• Raising the cost ceiling to be paid by the appellant as may be ordered by the Board from 5,000 Hong Kong dollars (HKD) to HKD 25,000.
The Ordinance will not become effective until a day to be appointed by the Secretary for Financial Services and the Treasury by notice published in the Gazette.
PwC observation:The Ordinance revamps the long standing, inefficient, and costly case stated procedure in Hong Kong and introduces measures to enhance the efficiency and effectiveness of the Board. It is expected the enhanced appeal procedures will provide a more equitable and efficient mechanism in handling tax technical disputes between taxpayers and the Hong Kong tax authority.
Fergus WT WongHong KongT: +852 2289 5818E: [email protected]
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Ireland
Irish Finance Bill 2015 concluded on December 11, 2015
With tax high on the agendas of all multinational companies (MNCs) following the publication of the final Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) papers and the recent State Aid decisions, the Irish parliament passed new legislation containing measures to maintain Ireland’s position as an attractive location for MNCs with substance in Ireland. Significant measures include the introduction of an OECD compliant ‘knowledge development box’ (KDB) and the intention to introduce legislation to adopt country by country reporting (CbCR).
The OECD’s publication of the final BEPS papers and recent pronouncements from the European Union (EU) have brought into focus a move towards better alignment of taxing rights with substance. For multinationals looking to align their intangible property (IP) with substance in a jurisdiction with a good tax regime and a successful track record, Ireland remains a very attractive option. Ireland’s established tax relief regime for expenditure on intangible assets and research and development (R&D) activities, coupled with the new KDB, should provide long-term certainty on tax treatment to groups that seek an appropriate location for their IP-related activities.
Conversely, as well documented both domestically and abroad, the CbCR is likely to present challenges. There are concerns about the significant administrative burden that the CbCR regime will place on multinationals and the confidentiality of sensitive information. Tax authorities now will have the information to analyse a wide variety of data across groups.
The KDB will apply an effective 6.25% rate of corporation tax (which is half of the 12.5% standard rate) to the profits arising to certain IP including patents and copyrighted software which are the result of qualifying R&D carried out by the company availing of the relief. Ireland’s KDB will be the first ‘box’ in the world to meet the standards of the OECD’s ‘modified nexus approach. Finance Minister Michael Noonan stated that the government’s commitment to the OECD standard should provide long-term certainty for the regime.
A company that owns patented (or other specifically defined) IP may qualify for the reduced tax rate on qualifying income from the IP. However, for qualifying income to come within the regime’s scope, a significant proportion of the R&D work must be undertaken in Ireland. The definition of R&D activities is very similar to the definition included in the R&D tax credit regime.
A requirement for multinationals with Irish parent companies to file CbCR of their income, activities and taxes with the Revenue Commissioners will apply from January 1, 2016. It is intended that the reports will ultimately be shared with other tax authorities on a confidential basis.
CbCR is viewed by tax authorities globally as a positive move towards improved transparency, providing them with the ‘risk assessment’ tool necessary to identify BEPS activity. However, the business sector has repeatedly raised concerns regarding confidentiality of information and the increasing compliance burden. The legislation will require Irish-parented groups to populate and submit an annual CbCR template to Irish Revenue. CbCR will fundamentally change how Irish MNCs must document intercompany transactions. This may create a significant administrative burden. Taxpayers should address how this information and data will be reported, whether finance systems have the necessary capabilities to gather the required data and what ongoing additional resources are needed to implement and manage CbCR.
PwC observation:This new legislation mirrors the ‘Update on Ireland’s International Tax Strategy’ document that was also published which reiterates Ireland’s commitment to the BEPS process, the 12.5% corporation tax rate and also discusses Ireland’s approach to the ongoing EU tax agenda.
Denis HarringtonDublinT: +353 1 792 8629E: [email protected]
Also within the legislation is the implementation of Council Directive No. 90/435/EEC as recast by Council Directive 2011/96/EU (the amended EU Parent-Subsidiary directive). The general anti-avoidance rule (GAAR) will prohibit the granting of the benefits of the EU Parent-Subsidiary directive to arrangements that have been put in place to obtain a tax advantage without reflecting economic reality, and defeat the object or purpose of the Directive.
The legislation also emphasises the focus of Ireland’s tax treaty negotiation policy to engage with African countries that wish to extend their tax treaty networks. In this context, the final stage of the ratification process for a new double tax treaty (DTT) with Ethiopia and for replacement of DTTs with Zambia and Pakistan is now complete. These two treaties have been renegotiated to reflect developments in international tax policy since they were signed in the 1970s.
The legislation providing for a scheme of accelerated capital allowances for the construction of buildings for use in the maintenance, repair, overhaul, or dismantling of aircraft has been amended to comply with State Aid rules.
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Kenya
Kenya narrows scope of reintroduced capital gains tax on transfers of Kenyan property
The Kenyan tax on capital gains was reintroduced by the Finance Act 2014 after being suspended for 30 years. The reintroduced tax, to be imposed at 5% on gains on the transfer of property situated in Kenya, became effective January 1, 2015.
For purposes of the tax, transfers of property include:
• Property sold, exchanged, conveyed, or otherwise disposed of in any manner whatever (including by way of gift), whether or not for consideration.
• Compensation received for the loss, destruction, or extinction of property, unless that sum is used to reinstate the property in essentially the same form and in the same place within one year of the loss, destruction or extinction, of the property, or within a longer period of time approved by the Commissioner.
• Abandonment, surrender, cancellation or forfeiture of, or the expiration of substantially all rights to, property, including the surrender of shares or debentures on the dissolution of a company.
The Finance Act 2015, however, exempts from capital gains tax gains on the sale or transfer of listed securities, effective January 1, 2016.
Listed securities refer to securities that are listed and traded on any securities exchange approved under the Capital Markets Act Cap 458A (i.e. the Nairobi Securities Exchange).
While the Finance Act 2015 became law on September 11, 2015, the exemption of gains on sales of listed securities will take effect on
Omoike W ObawaekiHoustonT: +1 713 356 6046E: [email protected]
Gilles de VignemontHoustonT: +1 646 471 1301E: [email protected]
Steve OkelloNairobiT: +254 20 285 5116E: [email protected]
PwC observation:Net gains on the transfer of land and buildings and private or unlisted securities appear to remain subject to the 5% capital gains tax. This is final tax on such gains, and is to be accounted for by the transferor.
We commend the ongoing reforms in Kenya, particularly tax reforms and efforts of the government to increase internally generated revenue and attract foreign direct investments. However, it is apparent that clear guidelines are needed to implement laws and simplify regulations.
It remains unclear how the reintroduced 5% final tax on capital gains from the transfer of property situated in Kenya should apply to indirect transfers of shares of companies in Kenya or companies that own property in Kenya.
Multinational companies (MNCs) with Kenyan affiliates should consider the impact of these changes on their existing operations and investment structures.
MNCs also should consider these changes when carrying out group restructurings or planning initial investments into Kenya.
January 1, 2016. The Finance Act 2015 clarifies the due date for capital gains tax on property other than shares listed and traded on the Nairobi Securities Exchange.
Effective January 1, 2016, tax is payable on or before the date the application for transfer of the property is made at the relevant Lands Office.
Besides, gains from transfers, recapitalisations, acquisitions, amalgamations, and separations within groups are taxable unless the arrangement was done in the public interest to the satisfaction of the Cabinet Secretary in charge of the National Treasury.
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Proposed Tax Legislative ChangesUnited Kingdom
The UK Autumn Statement 2015
On November 25, 2015, the UK Chancellor of the Exchequer, George Osborne, delivered a joint Autumn Statement and Spending Review setting out the government’s plans for the economy and how the government will spend public money over the course of the Parliament.
There were few major business tax announcements, and even fewer announcements relating specifically to international taxation.
The government confirmed the introduction of anti-hybrid rules with effect from January 1, 2017, but there were no other announcements relating to UK implementation of the Organisation for Economic Co-operation and Development’s (OECD’s) Base Erosion and Profit Shifting (BEPS) Action Plan.
Some of the broader business measures which may impact multinationals operating in the UK include:
• The government aims to transform Her Majesty’s Revenue and Customs (HMRC) into one of the most digitally advanced tax administrations in the world. From 2020, most businesses will be required to keep track of their tax affairs digitally and update HMRC at least quarterly via their digital tax account.
• A new apprenticeship levy will be introduced in April 2017. It will be set at a rate of 0.5% of an employer’s pay bill and will be collected through the Pay As You Earn (PAYE) system. Each employer will receive an allowance of 15,000 pounds (GBP) to offset against their levy payment.
• The recent emphasis on tackling tax evasion and avoidance continued with the introduction of several new anti-avoidance measures (for instance, amendments to the taxation of intangible assets rules to ensure that they apply to intangible assets that are acquired or disposed by a partnership on or after November 25, 2015).
The government is pressing ahead with its ‘devolution revolution’. The Northern Ireland parties have now indicated that they wish to pursue the implementation of a new Northern Ireland rate of 12.5% in April 2018. The devolution of taxing powers to Wales is to be accelerated by removing the requirement for the Welsh Assembly to hold a referendum as a pre-condition to implementing the Welsh Rates of Income Tax.
PwC observation:As this was the third budgetary speech from the Chancellor this year (there was an additional Budget in July following the general election), it is perhaps not surprising that it included few major tax changes. This could open the door to a busy Budget next year, possibly with more on UK implementation of recommendations from the OECD’s BEPS Action Plan.
For most of the new measures that were announced, there is little technical detail at this stage. Draft legislation for inclusion in Finance Bill 2016 was published on December 9, 2015 (not available at time of writing). The Chancellor announced on December 1, 2015 that the government will publish its next Budget on March 16, 2016.
Stella C AmissLondonT: +44 207 212 3005E: [email protected]
Jonathan HareLondonT: +44 20 7804 6772E: [email protected]
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Tax Administration and Case LawOECD
OECD releases final recommendations on BEPS proposals: What does it mean for global mobility?
On October 5, 2015, the Organisation for Economic Co-operation and Development (OECD) published the final Base Erosion and Profit Shifting (BEPS) package after two years of work on the 15-point action plan. In general, the BEPS project seeks to tax profits where actual business activity is performed and where value is created. The actions have been categorised by the OECD into three key themes: Addressing substance, coherence of the international tax system, and transparency. The recommendations included in the various reports released by the OECD have been designed to be implemented via changes in domestic legislation and practices, as well as via treaty provisions.
Although most of the initiatives will not take effect immediately, some countries have begun to take action by introducing changes to their domestic laws. An increased focus can be expected from tax authorities globally on the recommendations arising from the BEPS Action Plan.
BEPS is not just a corporate tax issue, a number of these actions will affect how organisations manage, track, and report on their globally mobile workforce. In light of the behavioural changes expected from tax authorities globally, businesses should take appropriate action now. Companies should assess their risk in the context of BEPS and seek to mitigate any adverse impacts.
PwC observation:BEPS will cause fundamental changes in international tax law and the behaviour of tax authorities globally. Greater scrutiny from the authorities, the media, and the general public will put multinational enterprises in the spotlight more than ever.
David Ernick Calum M DewarWashington D.C. New YorkT: +1 202 414 1491E: [email protected]
T: +1 646 471 5254E: [email protected]
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OECD
OECD issues final report with recommendations on a best practice approach to interest limitation rules (BEPS Action 4)
The Organisation for Economic Co-operation and Development (OECD) has published its final report on the Base Erosion and Profit Shifting (BEPS) Action Plan item 4 dealing with interest deductibility. The aim of Action 4 is to produce recommendations for best practice rules to prevent BEPS through the use of interest expense, although they do not represent a minimum standard.
The report concludes on a recommended approach based on a fixed ratio rule which limits an entity’s net deductions for interest and payments economically equivalent to interest to a percentage of its earnings before interest, taxes, depreciation and amortisation (EBITDA). The report suggests a range of acceptable fixed ratios between 10%-30%, with factors identified for countries to determine their appropriate fixed ratio.
Along with the fixed ratio rule, the paper identifies optional rules that territories could adopt. Principally, this includes a group ratio rule that would allow an interest expense deduction in a territory up to the group net interest/EBITDA ratio, thereby potentially exceeding a territory’s fixed ratio for highly leveraged groups. The paper also considers alternative group ratio rules, such as those already adopted by Germany.
Other optional elements for territories to consider include the introduction of a de-minimis threshold, the carry-forward of unused capacity or disallowed interest expense, and targeted rules.
Given the flexibility afforded by the recommendations, there likely will remain a variety of different approaches to target interest deductibility. Furthermore, a number of territories (e.g. Australia and Germany) may feel little or no need to amend their current rules in this area.
The report identifies areas for further work, including more detailed work on the group ratio rule, transfer pricing aspects of financial transactions and specific rules for banking and insurance groups. It also indicates that the OECD intends to review the impact that fixed ratios have had on interest deductibility and BEPS by 2020.
United Kingdom
The UK tax authority issues updated guidance on Diverted Profits Tax
On December 1, 2015, the UK tax authority, HM Revenue & Customs (HMRC), published updated guidance on the Diverted Profits Tax that was introduced in Finance Act 2015. It replaces all previously published guidance and contains some significant amendments.
The guidance has been expanded in several places to provide further clarification on HMRC’s interpretation of the provisions and their approach, as well as including additional examples, and a new section with flowcharts on the application of the Diverted Profits Tax. There have been some specific updates to various sectors (including asset management, banks, insurance, and property), but for many business models, the messaging is broadly consistent with what HMRC have previously expressed. Although the updated guidance provides further clarity in some areas, there are still many areas that remain uncertain and careful interpretation of specific fact patterns will continue to be required.
PwC observation:There likely will be a wide variety of responses with regard to restrictions in the relief for interest and other financial payments. Therefore, groups should monitor proposals and legislative changes in their relevant territories, especially to reduce the risk of double taxation. Surplus cash in territories, in particular, could cause double taxation, as it will not reduce the disallowance of interest.
Groups likely will need to restructure their intra-group financing arrangements in order to deduct, for taxes, any third party finance expenses. In a majority of cases there will be a number of local tax, commercial, legal, and treasury considerations when trying to introduce debt into territories. Groups should therefore assess and model the potential impact of these rules on their structures now.
Groups should also consider the impact of these rules when modelling tax projections, in particular for mergers and acquisitions (M&A) transactions, given the risk that historic assumptions regarding deductibility of third party debt may no longer be valid.
Bernard E. MoensNew YorkT: +1 646 471 6787E: [email protected]
Krishnan ChandrasekharChicagoT: +1 312 298 2567E: [email protected]
Michael UrseClevelandT: +1 216 875 3358E: [email protected]
PwC observation:The timing of the publication of this updated Diverted Profits Tax guidance is helpful because many corporate groups will be turning their attention now to year end reporting and will need to consider whether they need to provide for a Diverted Profits Tax exposure (or disclose a potential Diverted Profits Tax liability). The guidance will help groups to assess their position.
For those groups that have already undertaken a Diverted Profits Tax analysis, that analysis should be reviewed in light of the updated guidance.
Jonathan HareLondonT: +44 20 7804 6772E: [email protected]
Nick WoodfordLondonT: +44 20 7212 2251E: [email protected]
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TreatiesHong Kong
Hong Kong-Romania double tax treaty signed
Hong Kong signed a double tax treaty (DTT) with Romania on November 18, 2015, bringing the number of DTTs signed by Hong Kong to 33. The Hong Kong-Romania DTT will be entered into force after completion of the ratification procedures by both sides.
PwC observation:Hong Kong residents investing into Romania may benefit from the Hong Kong-Romania DTT by means of the significantly reduced withholding tax (WHT) rates on their incomes derived from Romania (e.g. dividends 5%, interest 0%, royalties 3%). In addition, WHT on commissions or service fees (which are business profits) for provision of services in Romania will be eliminated as far as the Hong Kong resident does not have a permanent establishment (PE) in Romania.
Fergus WT WongHong KongT: +852 2289 5818E: [email protected]
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Ramón MulleratMadrid & BarcelonaT: +34 915 685 534E: [email protected]
Luis Antonio GonzálezMadridT: +34 915 685 528E: [email protected]
Spain
2014 Protocol amending the Convention between Canada and Spain for the Avoidance of Double Taxation enters into force
The Protocol amending the Convention between Canada and Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital (and Protocol) of 1976, signed on November 18, 2014, has entered into force on December 12, 2015.
The main highlights are:
• Withholding tax (WHT) on dividends is reduced from 15% to 5% in case the beneficial owner is a company (other than a partnership) which directly holds at least 10% of the capital of the paying company (the rate of 15% will apply in all other cases). The branch remittance tax is also decreased from 15% to 5%. Under certain conditions, an exemption is introduced for dividends paid to pension or retirement plans.
• WHT on interest is decreased from 15% to 10% when the payment is made to the beneficial owner, regardless taxation in the State of residence, and the following exemptions are introduced: i) interest paid to the beneficial owner dealing at arm’s length with the payer, ii) interest arising in Spain and paid to a resident of Canada in respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by Export Development Canada, and iii) interest arising in Canada and paid to a resident of Spain if it is paid in respect of a loan, debt-claim or credit that is owed to, or made, provided, guaranteed, or insured by Spain, provided the loan, debt claim or credit is in respect of exports.
• Source-taxation of royalties is maintained at a 10% rate, provided such royalties are subject to tax in the State of residence and paragraphs 5 and 6 are aligned to the Organisation for Economic Co-operation and Development (OECD) standards.
• The capital gains provision is not amended, although paragraph 2 is updated according to OECD standards.
• Other highlights introduced by the new agreement are as follows: i) the ‘independent personal services’ provision is abolished, ii) taxes covered are updated, iii) treaty provisions are aligned to the OECD model of convention (e.g. the ‘Assistance in the collection of taxes’ provision is introduced, new paragraphs are included in article 26, etc.), and iv) a limitation-on-benefits clause is established to avoid abusive structures.
PwC observation:The Protocol to the Spain-Canada double tax treaty (DTT) introduces a number of amendments to update and align the 1976 treaty with the OECD standards, as well as includes anti-abuse provision.
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