sábado, 18 de noviembre de 2017

IRS APMA Program releases draft APA template

The IRS’s Advance Pricing and Mutual Agreement Program (APMA) on September 15, 2017, announced the release for public discussion of a draft template for use in drafting an advance pricing agreement (APA).  Revenue Procedure 2015-41, released on August 12, 2015, requires taxpayers to submit a proposed APA as part of a complete APA request. 

APMA’s draft APA template is “designed to systematize how taxpayers propose terms for their APAs and standardize language used in executed APAs.”  Further, APMA hopes its new draft APA template will “improve efficiency in the APA process and enhance consistency in the administration of the APA program.”

The draft APA template would make substantial changes to and replace APMA’s current model APA template.

Source & more info: PwC

Dbriefs Bytes - 17 November 2017

viernes, 17 de noviembre de 2017

Ireland’s Finance Bill 2017 includes new measures

On 19 October 2017, the Irish Minister for Finance, Public Expenditure and Reform presented Finance Bill 2017 to parliament, which starts the process for implementing the measures announced on 10 October 2017 in Budget 2018. The Finance Bill largely reflects the measures announced in the budget, but also includes other provisions, some of which would affect companies.

Measures in the Finance Bill that were announced in the budget include the following:

  • The reintroduction of the 80% cap on the relevant income against which capital allowances for intangible assets may be deducted in a tax year (as a result, 20% of the profits would remain within the charge to Irish corporation tax, and any unused capital allowances could be carried forward);
  • The introduction of a “Key Employee Engagement Programme” (KEEP), a new share option scheme to help small and medium-sized enterprises (SMEs) attract and retain top talent though tax efficient share-based remuneration. Under the KEEP, tax on the exercise of employer share options would be deferred until the shares are sold, at which point the lower capital gains tax rates would apply to the income;
  • An increase in the standard rate band for income tax to EUR 34,550 for single earners, along with a decrease in the 2.5% universal social charge rate from 2.5% to 2%;
  • An increase in the stamp duty rate on transfers of commercial property from 2% to 6% with effect from midnight, 10 October 2017, subject to transitional measures provided in the Finance Bill; and
  • A reduction in the qualifying holding period of land or buildings from seven years to four years for qualifying disposals to be exempt from capital gains tax.

The Finance Bill has added several measures that would affect corporations:

Deductibility of interest: The deductibility of interest on financing has been the subject of considerable discussion over the last 12 months. The updates included in the Finance Bill formally recognize the complex structures of corporate groups, which can involve multi-tiered holding company structures due to legal requirements or practices in a particular country or security requirements of lenders, etc. The updates in the Finance Bill would be effective for loans made on or after 19 October 2017.

The Finance Bill would extend the existing anti-avoidance measures relating to the recovery and “deemed” recovery of capital (which disallow the deduction of interest expense where a company is deemed to have recovered capital in relation to the underlying borrowings) to such multi-tiered holding company structures. The bill also would require taxpayers to maintain appropriate records to support positions where a recovery of capital could occur, but the taxpayer is claiming non-applicability of these rules. Broadly, the deduction of such interest expense should not be disallowed where the debt is incurred for bona fide commercial reasons and not for purposes of avoiding Irish tax.

Ireland has made a formal request that the EU accept its current rules on interest expense deductibility as being equally effective to the rules proposed in the EU anti-tax avoidance directive for a period that extends until the earlier of (i) the transition period that lasts until 31 December 2023; or (ii) when BEPS action 4 becomes a minimum standard, thereby allowing these rules to remain in effect for the foreseeable future.

Multilateral instrument: The Finance Bill commences the legislative procedure required to ratify the OECD multilateral instrument (MLI), which Ireland signed on 7 June 2017. The MLI will have the effect of updating Ireland’s tax treaties; each of Ireland’s treaties will be modified where Ireland and the relevant treaty partner country have signed and ratified the MLI. No specific timeline has been provided for ratification.

Other measures:

  • The Finance Bill includes measures that would clarify the provisions for adopting a new accounting standard within an existing accounting framework, such that affected income and expenses would be adjusted, taxed or allowed, respectively, over a five-year period. The measures would apply to accounting periods beginning on or after the date the Finance Act is passed (mid to late December 2017, with earlier election possible).
  • The Finance Bill would implement changes to deal with provisions in the Companies Act 2014 with respect to transfers of assets and liabilities of a “transferor company” to a “successor company” pursuant to a merger or division. The amendment would ensure that the tax payment, filing and reporting obligations and liabilities of a transferor company would transfer to a successor company or companies following the transaction.
  • An anti-avoidance measure would be introduced that would apply to the capital gains tax exemption on the disposal of certain shareholdings made on or after 19 October 2017, to ensure that money or other assets transferred to a company prior to a disposal of shares in that company would not be taken into account in determining the assets from which the value of the shares is derived.

Transfer pricing/Coffey report: The Finance Bill does not contain any specific transfer pricing measures, although in an update on Ireland’s international tax strategy published as part of the budget, the minister announced a consultation that runs until 31 January 2018 to review how the recommendations in the “Coffey report” will be implemented into Irish tax law. The Coffey report, published on 12 September 2017, is the output of a review of the Corporation Tax Code undertaken by an independent academic expert that was appointed to perform the review in 2016.

The report, for instance, recommends that Ireland provide for the application of the OECD 2017 Transfer Pricing Guidelines incorporating BEPS actions 8-10 into Irish legislation. This recommendation is now subject to public consultation. Other transfer pricing recommendations outlined in the report and under consultation include whether to:

  • Extend the transfer pricing rules to non-trading and capital transactions;
  • Remove the current exemption for certain SMEs; and
  • Repeal pre-1 July 2010 grandfathered arrangements and bring them within the scope of the transfer pricing rules.

Source: Deloitte

Argentine Executive proposes comprehensive tax reform

On October 31, 2017, the Argentine Executive presented its proposal for comprehensive tax reform. The proposed measures include a reduction in the corporate income tax rate from 35% to 30% during the first two years and to 25% going forward. Prior to presenting its tax plan in September 2017, the Argentine Executive submitted to the Argentine Congress a one-time tax on an asset revaluation for tax purposes.

Source & more info: PwC

jueves, 16 de noviembre de 2017

Mexico: Electronic platform and forms ready for new transfer pricing informative returns

On November 1, 2017, the Mexican Tax Service Administration (Servicio de Administración Tributaria or SAT) issued the online platform and digital formats for the new informative returns for taxpayers that are obligated to present the new Transfer Pricing Informative Returns pursuant to Article 76-A of the Mexican Income Tax Law (MITL).

Source & more info: PwC

Netherlands proposes to amend the Dutch Dividend Withholding Tax Act

The Dutch Ministry of Finance published its 2018 tax budget proposals on Dutch Budget Day (September 19, 2017). The most relevant aspect for multinational enterprises (MNEs) is the formal legislative proposal to amend the Dutch Dividend Withholding Tax Act (DWTA) effective January 1, 2018.

This final legislative proposal is in line with earlier announcements and the consultation document published earlier this year. For MNEs,  the proposal broadens the Dutch dividend withholding tax exemption from European Union (EU) / European Economic Area (EEA) residents to all jurisdictions with which the Netherlands has entered into a tax treaty. In addition, ‘holding’ cooperatives owned by residents of non-treaty jurisdictions would become subject to Dutch dividend withholding tax.

Source & more info: PwC

miércoles, 15 de noviembre de 2017

Japan announces new consultation services and guidance for preparing transfer pricing documentation

In June 2017, the National Tax Agency (NTA) published a new guidebook (in Japanese only), “NTA Transfer Pricing Guidebook for Taxpayers” (the Guidebook), and announced new consultation services and visits to taxpayers to support taxpayers required to prepare Local File transfer pricing documentation contemporaneously.

Source & more info: PwC

martes, 14 de noviembre de 2017


The transfer pricing environment continues to change, and provide opportunities for taxpayers to assess their transfer pricing policies and evaluate audit defense strategies. Transfer pricing is also increasingly important in resolving other business disputes. In a recent case not involving the tax authorities or a dispute over taxes, the use of a transfer pricing methodology, and interpretation of intercompany agreements, was the key to the final resolution. This summary of the most recent case law, with interesting settlements, highlights the impact transfer pricing is having both on taxes paid by international businesses and on resolutions for non-tax disputes.

Cameco – contrasting approaches by the CRA and IRS
Cameco is one of the world’s largest uranium producers, with mines in Canada and the U.S. In 1999, the company restructured and established a Swiss Company (Swiss Co) to purchase uranium from the Canadian mine and other third parties. At the time, the uranium was being sold back to the U.S. for resale. Presumably at a later date, the U.S.-produced uranium was also sold to the Swiss Co.

Both the Canada Revenue Agency (CRA) and the Internal Revenue Service (IRS) have been actively auditing the purchase of uranium by the Swiss Co, with contrasting results.

In Canada, the Crown is seeking $2.2 billion of tax, for the 2003-2015 tax years. In the Tax Court, the Crown has three clear alternative arguments. The Crown’s first argument uses the sham doctrine, on the basis that there was no real business undertaken by the Swiss Co. The second argument uses the transfer pricing recharacterization provisions, on the basis that there was no bona fide non-tax reason for the Swiss Co’s inclusion in the transaction. Lastly, the Crown is relying on adjusting the price for which the product was sold to the Swiss Co.

From a technical perspective, this is the first transfer pricing case to include three clear alternative arguments, and it is hoped that this case will help clarify further which argument is to be used depending on the circumstances.

To date, Cameco has paid the CRA $264 million in cash and provided $421 million in letters of credit. The company expects to spend $57 million to defend this case. Final arguments are expected in September 2017, with the decision being issued six to 18 months later. If the decision is appealed, further costs will be incurred.

Note, the CRA had requested that an additional 25 employees be made available for oral interviews (outside of the Tax Court process), to verify information included in the transfer pricing reports. The Tax Court rejected the CRA’s demand for these oral interviews since Cameco had met all other audit requests with written responses. There was also a concern that oral interviews would violate Tax Court rules and could jeopardize the resolution of tax cases.

In the U.S., the IRS had proposed an adjustment of US$122 million, for the 2009-2012 tax years. This adjustment was for the sale of uranium to the Swiss Co (the same transactions that the CRA examined) and to increase the compensation to a U.S. sales entity. In addition, penalties of US$8 million were also proposed.

In July, Cameco received confirmation of the settlement agreement, which includes a cash payment of US$122,000, with no penalties being applied.

While the two tax authorities have a common transaction, albeit with significantly different proposed adjustments, the IRS has settled for 10 percent of the original proposed adjustment, and waived the penalty. While we do not have the full facts in each case, this is a timely reminder that each tax authority will evaluate similar transactions independently, and settlement can be an extremely efficient method of resolving transfer pricing audits. We await with interest the Canadian Tax Court’s judgment on the use of the Crown’s three alternative arguments, and the value of the adjustment.

Eaton memorandum opinion (Eaton Corp. v Commissioner, T.C. Memo. 2017-147, T.C., No.5576-12, 7/26/17) - reassurance on the IRS’ ability to cancel APAs
A recent U.S. Tax Court memorandum reviewed an important question: If the IRS no longer agrees with the position taken in an Advance Pricing Agreement (APA), can its administrative privileges be used to cancel the APA?

Ordinarily, an APA provides the taxpayer with certainty in the transfer pricing treatment of the specified cross-border transaction for a set period of time. An APA is attractive in certain circumstances, as it provides shelter from rigorous audit activity and reduces compliance costs. However, the taxpayer does have to provide extensive business information, which can then be used to provide the basis of the material assumptions. The material assumptions are key to the APA, and can include parameters in respect of the type of business, related and third party transactions, industry or general economic conditions. When a material assumption has been breached, the APA can then be cancelled by the tax authority.

Eaton, a large multinational company, had entered into two APAs with the IRS: for the 2001-2005 tax years and the 2006-2010 tax years. At the time of negotiating each APA, a profit split method was accepted. The IRS had discussed using a different profit split method; however, this was not included in the APAs. Later, the IRS cancelled the APAs based on the preference for a different profit split method, and increased the company’s taxable income by US$368 million.

In Eaton’s case, the company argued that it had not omitted or misrepresented material facts during the negotiation process, and the material assumptions were not breached. However, the IRS used its administrative privileges to cancel the APAs in 2011. In this unusual memorandum opinion, the Court reaffirmed the established precedent that once an APA is in place, the IRS can cancel based on the revenue procedures or a breach of the material assumptions. A change of opinion on a technical matter is not sufficient to cause a cancellation.

This is good news for taxpayers looking to enter into the IRS’ APA program, and achieve certainty on their transfer pricing positions going forward. This Tax Court memorandum reaffirms the position that it is difficult to for the IRS to cancel an APA, unless the company breaches a material assumption in the APA.

The Apotex Case (Apotex, Inc v Servier Canada, Inc,. Can Fed. C.A., 2/2/17, 2/2/17) – using transfer pricing tools to settle drug infringement cases
Apotex manufactured a patent-protected drug in Canada, then sold it in Canada, Australia and the UK. It has been established that in 2008 Apotex infringed Servier’s patent, and damages are to be paid.

This case looks at how to calculate the settlement based on Apotex’s sale of the patent-infringing drug to the off-shore affiliates. Fundamentally, the Federal Court of Appeal answered two key questions.

To calculate the value of the loss suffered, Servier elected to claim the accounting profits earned from the sale of the infringing drug. The questions on appeal were, what are Apotex’s profits from the export sales to affiliates and can the hypothetical purchase of a non-infringing drug be used to reduce the settlement?

Justice Dawson rejected the approach that Servier is entitled to all of the profits derived from the export sales. Instead, the “differential profit approach” is to be used where Servier is entitled to the profits which are “casually attributable” to the invention, potentially being the difference between the profits earned on the sale of the infringing and the non-infringing drug. This gives rise to the possibility that Apotex could point to a “hypothetical purchase” to reduce the settlement from the starting position, being the total profits earned.

The Federal Court had heard evidence from three third-party manufacturers based in India and Mexico, which established that Apotex may have been able to purchase a non-infringing version of the drug to resell to its affiliates, at the time the infringement took place. This hypothetical purchase can then be used to ascertain the profits casually attributable to the infringement of the patent.

The Federal Court of Appeal outlined the hypothetical purchase test, which is twofold: firstly, if the third-party manufacturer could have provided the non-infringing drug in the required quantity; secondly, if the first test failed, to then assess if at a later time, the manufacturer could have provided the non-infringing drug. From a transfer pricing perspective, the analysis is similar to using the Comparable Uncontrolled Price (CUP) method.

Once the Federal Court is satisfied that the third-party manufacturers could have supplied the non-infringing drug in the required quantities, the analysis would presumably then turn to quantifying the difference in the CUP analysis and actual profits earned. This case demonstrates that transfer pricing methodologies are not limited to tax cases, and the principles are easily utilized for other purposes.

The second question that has been put to the Federal Court of Appeal is, if the infringing drug price included both the cost of the drug and a legal indemnity (in case of patent infringement), can this indemnity also be used to reduce the profits payable to Servier?

Apotex had intercompany agreements with the offshore affiliates, which included the price payable for the supply of both the infringing and non-infringing drug. However, lacking was a price difference between the infringing and non-infringing drug. This was a fatal flaw in the agreement, which led Justice Dawson to conclude that there was no value demonstrated for the indemnity on the infringing drug. Therefore, there was no reduction in the profits earned by Apotex for the indemnity, which was provided to the affiliates.

Of note is the interpretation of the intercompany agreements. Agreements will be interpreted based on the “factual matrix,” which includes reviewing the contract and surrounding circumstances at the time of formation, on an objective basis. For example, if there is a difference in the price of two goods, the difference in value either needs to be specified in the contract, or clearly demonstrated in another way at the time the contract is put in place.

Justice Dawson noted that at the time the intercompany agreement was put in place, an important factor that could have been taken into account was the inability by the affiliates to bear the financial risk of patent infringement, which may have been a valid reason to support a price difference. This is a common scenario when companies first expand into a new jurisdiction. In this light, retrospective analysis or evidence to “support” a position taken, such as a price difference, is unlikely to be accepted by the courts.

This is an important reminder that intercompany agreements need to fairly reflect the intention of the parties, and should be regularly reviewed and amended to reflect the facts and circumstances at the time of entering into the contract. A lack of definition as to the underlying value of the goods or services included in a price, can result in specific components of the price being deemed valueless at a later date. The courts will continue to look to these intercompany agreements and surrounding facts to ascertain the nature of intercompany relationships, for both transfer pricing and other purposes.

Source: BDO

lunes, 13 de noviembre de 2017

Australia proposes legislation to avoid doble taxation in GST for e-currencies

A bill that would change the goods and services tax (GST) treatment of digital currencies was introduced into parliament on 14 September 2017. The bill would amend the GST law to ensure that supplies of digital currency receive equivalent GST treatment to supplies of money, in particular, foreign currency. The bill is in response to concerns that the current GST rules effectively create a “double taxation” effect for some digital currency users. In broad terms, the amendments would have the effect of taking digital currency outside the GST system when it is used in exchange for other goods and services, but treat the provision of it as an “input taxed” supply for GST purposes when it is exchanged for Australian or foreign currency or another digital currency.

On 11 September 2017, the government released for public consultation exposure draft legislation and a draft explanatory memorandum on the tax consolidation rules. The measures included in the draft legislation address changes with respect to the treatment of deductible liabilities and deferred tax liabilities; certain transfers by foreign residents of membership interests in a joining entity; the interaction of the tax consolidation rules with the rules for taxing intragroup financial arrangements; the treatment of intragroup liabilities in the context of the exit tax cost setting rules; and the treatment of entities holding securitized assets upon joining or leaving a consolidated group. Comments may be submitted until 6 October 2017.

Source: Deloitte

sábado, 11 de noviembre de 2017

Technical Committee on Customs Valuation approves case study on transfer pricing

The Technical Committee on Customs Valuation (TCCV) has approved a new case study discussing the evaluation of a transfer pricing study by a customs authority. Following approval by the World Customs Organization Council, it is expected to be released as TCCV Case Study 14.2.

The TCCV is a committee of customs authorities created by the World Trade Organization (WTO) Valuation Agreement and tasked with providing interpretation and guidance on the Valuation Agreement. It is administered by the World Customs Organization (WCO), an intergovernmental organization of 180 customs authorities. While its guidance is not binding on any jurisdiction, its pronouncements are regularly cited by customs authorities worldwide.

While the objective of both income tax transfer pricing rules and customs related party valuation rules is the same – arriving at arm’s-length prices – the rules are different. As a result, customs authorities worldwide have struggled with whether and how documentation prepared to support income tax transfer pricing may be considered to support customs valuation.

The vast majority of importers declare import values based on the transaction value methodology, the price paid or payable for merchandise. Ease of documentation and recordkeeping are often primary reasons that a business prefers using transaction value.

However, when importers purchase from related parties, special rules apply in order to use transaction value. Transaction value is an acceptable customs valuation methodology between related parties if either: (1) an examination of the circumstances of the sale indicates that the relationship between the parties did not influence the price actually paid or payable (in income tax terms, the totality of circumstances demonstrate that the parties transacted as though unrelated); or (2) if the transaction value of the imported merchandise approximates certain test values. Test values are not commonly used, and importers usually attempt to demonstrate the acceptability of transaction value under the circumstances of sale test.

The circumstances of sale test examines the relevant aspects of a transaction to determine that the relationship between the buyer and seller did not influence the price. In 2010 the TCCV issued Commentary 23.1 stating that a customs administration may examine a transfer pricing study in connection with its evaluation of the circumstances of sale. Last year, the TCCV approved Case Study 14.1 which explains how a transfer pricing study utilizing the Transactional Net Margin Method (a method analogous to the US Comparable Profits Method) testing the profit margin of the importer/distributor can demonstrate that the relationship between the parties did not influence the price, and consequently transactions priced using this approach qualify for transaction value.

The new Case Study, 14.2, explains a situation in which a customs administration may conclude from a transfer pricing study that the relationship between the parties was influenced, and consequently the importer may not use transaction value.

Case study 14.2
Case Study 14.2 deals with an importer of luxury handbags purchased from a related party. Both the importer and exporter are subsidiaries of a multinational brand owner. The related party pricing was determined in accordance with the Organisation for Economic Co-operation and Development (OECD) Resale Minus Method, in which the profit margin of the importer is compared to the profit margin of a group of benchmarked companies which have similar functions and risks to the importer, but who transact with unrelated parties. In this case, the gross margin of the importer for the year at issue was 64%. The benchmarked range of margins of the comparable companies was 35% to 46%.

Normally, when an OECD profits-based transfer pricing methodology, such as Resale Minus, is employed, a compensating adjustment is required if the actual profits of the taxpayer are outside of the benchmarked range. The compensating adjustment, an additional payment from the importer if the profit margin of the importer is higher than the benchmarked range, or alternatively a credit from the exporter to the importer when the importer’s profits are below the benchmarked range, will return the profit margin to a point within the range. In the situation described in Case Study 14.2, where the importer’s profit margin exceeds the benchmarked range, the importer would be expected to make a supplemental payment to the exporter, thus increasing the importer’s cost of goods and reducing the importer’s profit margin. This supplemental payment would in turn be reported to customs, and any attendant duties would be paid. However, the facts of Case Study 14.2 specify that upon a post-import customs audit, it was discovered that no compensating adjustment is made. Consequently, the final profit margin exceeds the benchmarked range.

Not surprisingly, Case Study 14.2 concludes that absent the compensating adjustment, the transfer pricing study demonstrates that an arm’s-length price did not result. Thus, the importer is precluded from using transaction value.

Cautions for importers
As the norm is that a company utilizing an OECD profits-based transfer pricing method will make a compensating adjustment, in most situations this case study will not be directly applicable. There are situations, however, in which the importer may choose not to make a compensating adjustment.

One situation that arises in practice occurs when the importer’s profits are slightly in excess of the range, and, when considering the situation only from an income tax perspective, the tax department makes a practical assessment that in the country of importation, a higher than benchmarked profit means that income taxes are overpaid, and consequently an income tax authority will not criticize a decision to leave the situation alone. A customs authority, however, will have a different perspective, as a compensating adjustment would increase dutiable value and custom duties. Case Study 14.2 gives clear guidance that the compensating adjustment must be made for the transfer pricing to be used for customs purposes, and in fact not making the adjustment is strong evidence that prices are not arm’s length.

A second situation occurs when the country of importation has currency (or other income tax) controls in place which makes supplemental payments out of the country for compensating adjustments difficult, if not impossible. In some cases, taxpayers prepare transfer pricing documentation with the understanding that no compensating adjustment will be made, but the transfer pricing study will demonstrate that income taxes were overpaid in comparison to similar situations. For importers in these countries this “strategy” is perilous when also considering customs; the income tax will remain overpaid, but transaction value will be rejected and customs value will be increased, resulting in more duties. Interestingly, this case study was brought to the TCCV by China, which has currency controls in place.

Finally, it is important for taxpayers to remember that for any compensating adjustment to be considered for customs purposes, it must be an actual payment for the goods. Customs authorities often look at the journal entries associated with the compensating adjustment to see that the adjustment impacted the importer’s cost of goods. A “tax only,” or “Schedule M” adjustment is not sufficient for customs purposes.

Source: EY

jueves, 9 de noviembre de 2017

Spain: New form approved for reporting related party and tax haven transactions

The Spanish tax authorities published on 30 August 2017 the final regulation that formally approves a new form (Form 232) to be used by corporate taxpayers to report certain related party transactions and all transactions with persons resident in tax haven countries for tax years beginning on or after 1 January 2016. The information required to be reported for these types of transactions, which previously was reported on the corporate income tax return (Form 200), now must be reported (with certain modifications) on Form 232.

Under both the previous reporting rules and the new regulation, all transactions carried out with the same related party must be reported where the total consideration involved exceeds EUR 250,000. Moreover, all related party transactions made where the taxpayer has elected to apply the Spanish “patent box” and all transactions conducted with residents of countries on Spain’s list of tax havens are reportable, regardless of the amount of consideration.

The final regulation introduces two new disclosure rules that apply beginning with the 2016 reporting year:

  • As an anti-fragmentation measure, all transactions with the same related party that are of the same nature and that are quantified using the same valuation method must be disclosed where the combined amount of the transactions is greater than 50% of the entity’s turnover.
  • “Special” transactions must be disclosed where the total amount of each transaction type exceeds EUR 100,000. Such transactions include transfers of a business unit, real estate, intangibles and shares in entities that are not traded on regulated exchange markets or that are traded on exchange markets located in tax havens.

The final regulation provides that Form 232 generally must be filed with the Spanish tax authorities during the first calendar month after the 10-month period that immediately follows the taxpayer’s fiscal year-end (e.g. for calendar year taxpayers, the period for filing Form 232 is from 1 November through 30 November of the following year).

Source: Deloitte

miércoles, 8 de noviembre de 2017

Netherlands: Legislative proposal released to revise scope of domestic dividend withholding tax

The Netherlands Ministry of Finance published a legislative proposal on 19 September 2017 that details proposed changes to the dividend withholding tax act, following a public consultation launched in May 2017. The document proposes to align the domestic dividend withholding tax treatment of Dutch holding cooperatives with that of private limited liability companies (BVs)/public limited companies (NVs) and to expand the scope of the exemption from dividend withholding tax to apply to parent companies resident in countries that have concluded a tax treaty with the Netherlands. The legislative proposal also includes specific rules regarding interests held in a Dutch BV/NV or a holding cooperative through hybrid entities.

The legislative proposal also includes changes to the tax regime applicable to nonresident taxpayers in the Dutch corporate income tax act. Nonresident taxpayers that hold a substantial interest in a Dutch BV/NV or cooperative generally would be subject to Dutch corporate income tax on their Dutch-source dividend income and on their capital gains only if the interest is held with the main purpose (or one of the main purposes) of avoiding Dutch personal income tax at the level of the (indirect) shareholder. To some extent, this narrowing of the tax base would be counter-balanced by the introduction of an anti-abuse provision in the dividend withholding tax act.

If adopted, the measures would apply as from 1 January 2018.

Holding cooperatives

Dividends distributed by a Dutch cooperative currently are not subject to Dutch dividend withholding tax, except in certain situations where abuse is present. By contrast, Dutch BVs/NVs, in principle, are required to withhold a 15% tax on dividends paid to shareholders.

Under the legislative proposal, a Dutch holding cooperative would be required to withhold dividend withholding tax where a member of the cooperative holds a “qualifying interest,” i.e. an interest that entitles the holder to at least 5% of the cooperative’s profits and/or liquidation proceeds. In determining whether this quantitative test is met, the interests of related parties, including those of related individuals, would be taken into account.

A holding cooperative for these purposes would be defined as a cooperative at least 70% of whose activities comprise the holding of participations or the direct or indirect financing of affiliated entities. The determination of whether a cooperative falls within the definition of a holding cooperative, in principle, would be based on the cooperative’s balance sheet for the year before the year of the distribution. However, other factors also would be considered, such as the nature of the cooperative’s assets and liabilities, its turnover and profit-generating activities and how the cooperative’s personnel spend their time. A Dutch cooperative that actively manages its investments and has sufficient related substance (e.g. personnel, offices) in the Netherlands potentially would not qualify as a holding cooperative and, therefore, would not fall within the scope of the dividend withholding tax act. In certain circumstances, some cooperatives in private equity-owned structures could qualify as non-holding cooperatives.

The above activity and quantitative ownership criteria for cooperatives would not apply to BVs/NVs, which would continue to be subject to the dividend withholding tax act. It should be noted that a Dutch BV/NV, similar to a Dutch holding cooperative, may benefit from a full domestic dividend withholding tax exemption (see below).

Broadening of dividend withholding tax exemption

Under current law, if a foreign parent company holds an interest in a BV/NV or a holding cooperative (a “Dutch entity”) through a Dutch permanent establishment to which the interest can be allocated, a domestic dividend withholding tax exemption applies, provided the interest qualifies for the Dutch participation exemption or participation credit. In conjunction with the new withholding tax obligation that would be applicable to Dutch holding cooperatives, the legislative proposal includes a provision that would broaden the scope of the domestic dividend withholding tax exemption applicable to EU/European Economic Area (EEA) parent companies. The exemption would apply to distributions made by BVs/NVs and holding cooperatives to parent companies that are tax resident in the EU/EEA or in a third country that has concluded a tax treaty with the Netherlands that contains “qualifying provisions” relating to dividend withholding tax. In both instances, the interest in the Dutch entity would have to be an interest that would qualify for the Dutch participation exemption or participation credit if the recipient were resident in the Netherlands.

It should be noted that the full Dutch withholding tax exemption would be applicable even where dividends are distributed to persons resident in treaty countries where the relevant treaty provides for a reduced rate of withholding tax rather than a full exemption (e.g. where a treaty with a non-EU/EEA member state provides for a 5% dividend withholding tax rate).

The legislative proposal includes a concession in relation to an interest held in a Dutch entity through a hybrid entity that is considered non-transparent for Dutch tax purposes, but transparent in its country of residence. Even though, from a Dutch tax perspective, the dividend recipient otherwise would not qualify for the exemption because it is not a tax resident of the EU/EEA or a tax treaty jurisdiction, the exemption would be available if all participants in the hybrid entity treat the hybrid entity as transparent and would qualify for the exemption if they had held the Dutch entity directly. (For example, the exemption could be available where a US corporation holds an interest in a Dutch entity through a disregarded limited liability company.) On the other hand, if the hybrid entity is considered transparent for Dutch tax purposes, but as nontransparent from the perspective of the participants, the participants would not qualify as the dividend recipients from a Dutch tax perspective. Therefore, for the exemption to apply, the hybrid entity itself would have to qualify as a tax resident in the EU/EEA or a tax treaty jurisdiction.

Anti-abuse rule

The legislative proposal also would introduce a new anti-abuse rule in the context of the dividend withholding tax exemption. For the exemption to apply to recipients resident in the EU/EEA and/or in a treaty jurisdiction, it would be necessary to determine whether the (direct) interest in the Dutch entity is held with the main purpose (or one of the main purposes) of avoiding Dutch dividend withholding tax (the “subjective test”); and if so, whether the structure or transaction is considered artificial (the “objective test”). A structure or transaction would not be deemed artificial if it is based on valid business reasons that reflect economic reality. This could be the case, for example, if the direct member or shareholder of the Dutch entity itself carries on an active trade or business to which the interest can be allocated. When the interest in the Dutch entity is considered a passive investment, the exemption would be applicable only if the subjective test is failed (i.e. if the interest is not held with a main purpose of tax avoidance).

Since the determination of the valid business reasons that reflect economic reality would be made by reference to the existing rules, a private equity investment fund could qualify as an active business and thus satisfy the valid business reason criterion. In addition, if the member or shareholder of a Dutch entity is a top-tier holding company that carries out governance, management and/or financial activities for the group, this could satisfy the valid business reason criterion. The criteria also could be satisfied by a foreign intermediary holding company with the requisite substance that performs a “linking function” between the business or head office activities of the (ultimate) shareholder and the lower-tier companies (whether Dutch or non-Dutch).

The factors that would be taken into account in determining whether the foreign intermediary holding company has the requisite substance would be adjusted under the proposed rules. In addition to the substance needed to obtain an advance tax ruling (i.e. at least 50% of the board of directors must be Dutch resident, bookkeeping must be maintained in the Netherlands, etc.), the foreign intermediary holding company would have to have wages of approximately EUR 100,000 relating to either its own or hired group personnel and an office and premises of its own available, both of which (i.e. the personnel and the premises) are being used for its intermediary holding function. The legislative proposal would provide a transition period of three months from the date the new rules become effective (i.e. until 1 April 2018) where the two additional substance requirements would not have to be met.

It should be noted that if the dividend withholding tax exemption does not apply, tax treaty relief would still be available (in whole or in part).

Source: Deloitte

martes, 7 de noviembre de 2017

Japan-Estonia Double Tax Treaty contains BEPS-related provisions

he governments of Japan and Estonia signed the first tax treaty between the two countries on 30 August 2017. The treaty generally follows the OECD model treaty and reflects certain recommendations included in the BEPS project.

The treaty includes provisions that will clarify the scope of taxable income for purposes of eliminating double taxation; provide for arbitration where taxation not in accordance with the treaty is not able to be resolved under the mutual agreement procedure after two years; and introduce the exchange of information on tax matters and mutual assistance in the collection of tax claims.

The treaty provides for reduced withholding tax rates on dividends, interest and royalties:

  • Dividends: A 0% rate will apply on dividends paid to a company that holds, directly or indirectly, at least 10% of the voting power of the payer company for the six-month period ending on the date on which entitlement to the dividends is determined (provided the payer company is not entitled to a deduction for dividends paid in computing its taxable income); otherwise, the rate will be 10%.
  • Interest: The general rate will be 10%, with an exemption for interest and debt claims beneficially owned by certain government institutions.
  • Royalties: The rate will be 5%.

The treaty includes a limitation on benefits article that sets out the criteria that will have to be fulfilled for persons to qualify for beneficial treatment. Benefits will not be granted if it is reasonable to conclude that obtaining a treaty benefit was one of the principal purposes of a transaction.

The treaty will enter into force 30 days after the two jurisdictions exchange diplomatic notes indicating that their domestic approval procedures for the treaty are complete, and generally will apply as from 1 January of the following calendar year.

Source: Deloitte

lunes, 6 de noviembre de 2017

US tax reform proposal

House Ways and Means Committee Chairman Kevin Brady (R-TX) on November 2, 2017 released a 429-page “Tax Cuts and Jobs Act of 2017” (HR 1). The bill proposes to lower business and individual tax rates, modernize US international tax rules, and simplify the tax law, with significant impacts on numerous sectors of the economy.

The Ways and Means Committee on November 6 is scheduled to begin consideration of the bill. Chairman Brady has announced that he may propose modifications to his bill in advance of the committee ‘markup’ sessions, at which additional amendments offered by committee members could be considered.

Source & more info: pwc , more

UK's HMRC publishes guidance on penalties to tax fraud enablers

The UK tax authorities (HMRC) issued draft guidance on 20 October 2017 on penalties to be imposed on any person that enables the use of abusive tax arrangements that are later defeated. The draft supports new legislation in the Finance Bill 2017, which will give HMRC the power to challenge all aspects of marketed avoidance supply chains. Comments are requested on the draft guidance by 30 November 2017.

On 9 October 2017, the UK government published two white papers on trade and customs that set forth policies to enable the development of legislation that will apply after the UK’s exit from the EU, with an aim of preventing disruption to the UK’s trading arrangements. The white paper on trade sets forth principles for establishing an independent international trade policy and practical steps to support those principles, which would include incorporating existing trade agreements with EU and non-EU countries into UK law. The white paper on customs sets forth plans to legislate for independent customs, VAT and excise regimes post-Brexit, and confirms the government’s intent to have the new customs legislation replicate the effects of existing EU law to the extent possible.

Source: Deloitte

Greece: Guidance issued on application of MAP under EU arbitration convention

Greece’s Director of the Independent Public Revenue Authority (IPRA) issued a decision on 23 August 2017 that contains new guidance on the application of the mutual agreement procedure (MAP) in the EU arbitration convention. The decision, published in the official gazette on 30 August, is applicable for MAP requests filed as from that date.

The tax treaties of EU member states contain an article that is comparable to article 25 of the OECD model treaty, which provides for a MAP, under which the competent authorities of the treaty partner countries attempt to resolve disputes arising under the treaty. The arbitration convention, which has been in effect in the EU since 1995, contains a procedure to resolve transfer pricing disputes and disputes involving the attribution of profits of permanent establishments between member states. However, unlike the MAP in most treaties, the convention requires the competent authorities to eliminate the double taxation by mandating that if the authorities are unable to reach agreement, an advisory commission must be set up to issue an opinion.

The MAP provides an opportunity to resolve disputes arising under a tax treaty and the convention, following the submission of a written request by a taxpayer. The IPRA issued guidance on the application of the MAP under Greece’s tax treaties on 7 April 2017.

The new guidance complements the April guidance, specifically with respect to the scope of application of the MAP, the evaluation and consultation procedure, the content of a MAP request and the results of the MAP. However, the new guidance also provides as follows:

  • The competent authority of a contracting state will not be required to initiate a MAP or to set up an advisory body in cases where legal or administrative proceedings have resulted in a final ruling under which one of the enterprises concerned has committed a “serious infringement” (as defined).
  • Where the competent authorities fail to reach an agreement that eliminates the double taxation within two years of the date the case was first submitted, the competent authorities must set up an advisory body charged with issuing an opinion that eliminates the double taxation in question.

The issuance of this supplementary guidance by the IPRA should create a more complete framework for resolving instances of double taxation.

Source: Deloitte

Overview of Ways and Means Chairman Brady’s tax reform bill

House Ways and Means Committee Chairman Kevin Brady (R-TX) on November 2, 2017 introduced a 429-page “Tax Cuts and Jobs Act” (HR 1) that would make dramatic changes to the taxation of
businesses and individuals.
Chairman Brady released a substitute amendment to the bill on November 3, and announced that he
intends to offer additional amendments for Ways and Means Committee ‘markup’ sessions scheduled to begin on November 6. Chairman Brady’s November 3 changes include accelerating the use of a ‘chained’ consumer price index (CPI) to adjust for inflation certain tax provisions (such as individual tax brackets) and striking a proposal in the bill that would have limited tax treaty benefits for certain
deductible payments.
Below is a general summary of select business and individual tax proposals in Chairman Brady’s bill as modified (the ‘bill’), along with links to explanations and updated revenue estimates released by the Ways and Means Committee and Joint Committee on Taxation staffs.

Source & more info: PwC

jueves, 2 de noviembre de 2017

Finland: Changes proposed to withholding tax treatment of dividends paid on nominee-registered shares

The Finnish government released a proposal on 28 June 2017 that would modify the tax treatment and procedure relating to dividends paid for nominee-registered shares. The main proposed changes include the following:

  • Abolition of the simplified procedure for relief from withholding tax at source;
  • Increase in the withholding tax rate applicable to unidentified foreign beneficial owners; and
  • Imposition of tax liability on registered custodians where tax was incorrectly withheld because the registered entity failed to provide information identifying the beneficial owner.

Current legislation

A Finnish payer or account operator currently must withhold tax at a rate of 20%/30% at the time dividends are paid, unless the distribution qualifies for relief at source under an applicable tax treaty or the income is exempt from tax. To benefit from a reduced withholding tax rate, the dividend payer must have information to identify the beneficial owner of the dividend.

An exception from the identification requirement applies to nominee-registered shares. In these cases, the payer of dividends can apply a 15% or higher withholding tax rate in accordance with an applicable treaty if the payer knows the beneficial owner’s country of residence. It is not necessary to provide any other information identifying the beneficial owner.

Proposed changes

The proposed rules would abolish the simplified withholding tax relief at source procedure. The payer would be required to withhold tax at a new increased rate of 35% on dividends paid to unidentified foreign beneficial owners. To benefit from a lower treaty rate, full disclosure of the beneficial owner would be mandatory.

A new custodian register would be created to replace the existing foreign custodian register. All current registrations would expire, and custodians would be required to re-register. New registrations could be made during the six-month period before the new legislation becomes effective.

The rights and obligations of the registered custodian would change under the new system. The registered custodian closest to the beneficial owner would be required to provide the dividend-paying entity with reliable information on the identity of the beneficial owner. This would include the beneficial owner’s name, address and date of birth or tax identification number or other official identification number. The registered custodian would have to ensure that the beneficial owner qualifies for treaty benefits and provide a certificate of tax residence upon request. Further, the registered custodian would become liable for the withholding tax if tax was incorrectly withheld because inaccurate or incomplete identification information was provided.

Source: Deloitte