International Tax News - Edition 63 May 2018 →
International Tax News - Edition 63 May 2018 →
www.pwc.com/its International Tax News Edition 63 May 2018 Welcome Keeping 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’ Lee Global Leader International Tax Services Network T: +1 646 471 5315 E: email@example.com Previous issues In this issue Subscription Glossary Legislation Administrative EU/OECD Treaties Australia New integrity measures for foreign investors in Australia Singapore Singapore enhances the R&D deduction China China extends preferential corporate income tax policy for integrated circuit enterprises EU EC releases State aid opening decision in Inter IKEA
www.pwc.com/its In this issue Legislation Administrative EU/OECD Updates Treaties Previous issues In this issue Subscription Glossary Legislation Administrative EU/OECD Treaties Australia New integrity measures for foreign investors in Australia Australia ATO compliance approach to cross-border related party financing EU EC releases State aid opening decision in Inter IKEA OECD OECD guidance on attribution of profits to PEs leaves unanswered questions Hong Kong Two-tier profits tax system will be effective from the year of assessment 2018/19 Hong Kong Hong Kong extends profits tax exemption to qualified onshore privately offered open- ended fund companies Hong Kong Proposed scope expansion of purchase costs deduction and deemed income taxation for IP rights Luxembourg Luxembourg’s new IP tax regime effective January 1, 2018 Australia ATO guidance on diverted profits tax for significant global entities Cyprus Cyprus ratifies new tax treaties with the United Kingdom and Saudi Arabia France Impact of the new tax treaty between Luxembourg and France Hong Kong Hong Kong signs tax treaty with India Ireland Ireland signs new tax treaty with Ghana United Kingdom UK initiates MLI ratification process Singapore Singapore enhances the R&D deduction Spain Spain’s Basque region approves corporate tax reform legislation Uruguay Uruguay proposes excluding Panama from the Low-or-No-Tax-Jurisdictions list United States Third Section 965 Notice on the ‘toll tax’ calls for immediate action United States First guidance under amended interest expense limitation clarifies high-profile issues Germany German tax authorities release circular on anti-treaty/directive-shopping rules China China extends preferential corporate income tax policy for integrated circuit enterprises United States IRS provides guidance on Section 965 ‘toll tax’ calculation and elections
www.pwc.com/its Peter Collins Sydney T: +61 0 4386 2 4700 E: firstname.lastname@example.org David Earl Melbourne T: +61 3 8603 6856 E: email@example.com Legislation Australia New integrity measures for foreign investors in Australia The Australian government released a tax measures package on March 27, 2018, that seeks to ‘limit the concessions currently available to foreign investors for passive income.’ The majority of the announced measures will apply from July 1, 2019. However, changes may be made to the thin capitalization rules as early as July 1, 2018.
In brief, the proposed changes include new measures that will: • Codify the application of sovereign immunity, which exempts sovereigns where they hold less than 10% of an entity’s ownership interest and do not influence an entity’s key decision making. Additionally, the package will preclude active income, including where it is converted to rent from the exemption. There is no detail on the precise mechanics by which this is achieved. • Limit the foreign pension fund withholding tax exemption for interest and dividends to portfolio investments (i.e., where a foreign pension fund investor holds less than 10% ownership interest and does not have influence over the entity’s key decision making).
• Mean investing in agricultural land for the purpose, or predominantly for the purpose, of deriving rent will no longer qualify as an eligible investment business. • Limit foreign investors from ‘double gearing’ by using multiple layers of flow-through entities, such as trusts and partnerships, that each issue debt against the same underlying asset. PwC observation: The transitional rules for existing arrangements mean that there is no immediate need to revisit existing structures other than to consider the thin capitalization outcomes. However, all proposed new investments will need to factor in these new rules when assessing the financial and commercial impact for investors. Previous issues In this issue Subscription Glossary Administrative EU/OECD Treaties Legislation
www.pwc.com/its Hong Kong Two-tier profits tax system will be effective from the year of assessment 2018/19 Inland Revenue (Amendment) (No. 3) Ordinance 2018 (the Ordinance) was gazetted on March 29, 2018. The Ordinance implemented the two-tier profits tax system in Hong Kong and will be effective from the year of assessment 2018/19. Under the two-tier profits tax system, the first HK$2 million of assessable profits of corporations and unincorporated businesses generally will be taxed at 8.25% and 7.5% respectively, or half of the normal tax rates, regardless of their size and industry. The remaining assessable profits will be subject to the original rates of 16.5% and 15% respectively.
As an anti-avoidance measure, a group of connected entities, as defined, can only nominate one entity within the group to enjoy the reduced tax rate for a given year of assessment. An ‘entity’ in this context includes a natural person. Fergus WT Wong Hong Kong T: +852 2289 5818 E: firstname.lastname@example.org PwC observation: The two-tier profits tax system should be a welcomed measure as it will significantly relieve the tax burden of most small- and medium- sized enterprises. As only one entity within a group of ‘connected entities’ can enjoy the two-tier rates and an ‘entity’ includes natural persons, business groups with numerous related entities and complex direct and indirect shareholdings should review the group’s holding structure to confirm that only one connected entity within the group has elected for the two-tier rates.
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www.pwc.com/its Hong Kong Hong Kong extends profits tax exemption to qualified onshore privately offered open-ended fund companies Inland Revenue (Amendment) (No. 2) Ordinance 2018 (the Ordinance) was gazetted on March 29, 2018. The Ordinance extends the profits tax exemption for offshore investment funds to qualified onshore privately offered open-ended fund companies (OFCs), with their central management and control (CMC) exercised in Hong Kong and subject to certain conditions. Under existing provisions, offshore OFCs and publicly offered OFCs (regardless of the CMC location) already are exempt from profits tax.
Under the Ordinance, sub-funds are regarded as individual OFCs. As such, the exemption conditions set out below are applied to each sub- fund individually. The Ordinance provides a profits tax exemption to an OFC with respect to certain transactions if it fulfils, among others, the following two conditions at all times during the year: 1. The OFC is a Hong Kong resident person with central management and control exercised in Hong Kong and 2. The OFC is ‘non-closely held’, as defined. The profits tax exemption only applies to the OFC’s profits derived from: a. Qualifying transactions. Generally, these are transactions in permissible asset classes specified in the Ordinance. These have to be carried out or arranged in Hong Kong by a qualified person, as defined.
b. Transactions incidental to the qualifying transactions, subject to a 5% threshold. c. Transactions not in the permissible asset classes that are carried out or arranged in Hong Kong by a qualified person. All provisions (except the definition of the Over-The-Counter (OTC) derivatives products under the permissible asset class for the purpose of this Ordinance) will be effective on the day appointed for the commencement of the Securities and Futures (Amendment) Ordinance 2016, such that the profits tax exemption can be implemented at the same time of the entry into force of the new OFC regime regulated by the SFC. However, the definition of the OTC derivatives products under the permissible asset class will come into operation on the day appointed for the commencement of a relevant section of the Securities and Futures (Amendment) Ordinance 2014.
PwC observation: The Ordinance extends the exemption for offshore investment funds to qualified privately offered Hong Kong OFCs. The Ordinance will increase the attractiveness of investing in the Hong Kong fund market. Nevertheless, the conditions that the OFCs have to fulfil to be eligible for the profits tax exemption are rather onerous and complex. Investors should consider these carefully and the potential impact on their restructuring or potential investment fund structuring. Fergus WT Wong Hong Kong T: +852 2289 5818 E: email@example.com Previous issues In this issue Subscription Glossary Administrative EU/OECD Treaties Legislation
www.pwc.com/its Hong Kong Proposed scope expansion of purchase costs deduction and deemed income taxation for IP rights The Inland Revenue (Amendment) (No. 2) Bill 2018 (the Bill) was gazetted on March 23, 2018. The Bill seeks to expand the scope of tax deductions for capital expenditures incurred to cover the purchase of three additional types of intellectual property rights (IPRs). These are namely protected layout-design (topography) rights, protected plant variety rights and performers’ economic rights. The claw-back provision on sale proceeds derived from the IPRs and the anti-avoidance measures applicable to the existing five types of IPRs will apply equally to the three new IPRs. The current IPR tax deduction covers patent, rights to know-how, copyrights, registered designs and registered trademarks.
In addition, the Bill seeks to expand the current deeming provisions on income derived from IPRs such that sums received by or accrued to a person for the use or right to use the three new IPRs in Hong Kong or outside Hong Kong (if the sums are deductible for Hong Kong profits tax purposes) are deemed as taxable even if they are not otherwise caught under the main charging section in the Inland Revenue Ordinance. Furthermore, the Bill proposes to deem sums received by (or accrued to) a performer or an organizer for the assignment of (or an agreement to assign) a performer’s right in relation to a performance in Hong Kong, on or after the effective date of the new provision as taxable if they are not otherwise charged under the normal charging section.
Once the Bill is enacted into law, the tax deduction provisions will take effect retroactively from the year of assessment 2018/19. The deeming provisions will apply to sums received or accrued on or after the enactment date of the ordinance. In addition, the anti- avoidance measures for the tax deduction will only take effect from the enactment date of the ordinance with respect to the three new types of IPRs. PwC observation: We are pleased that the government expanded the scope of the tax deduction for IPRs’ purchase costs.
Unlike those sums received by, or accrued to, a person for the use or right to use IPRs, the Bill does not specify the percentage of a sum received from assignment of a performer’s right as the assessable profits. The Inland Revenue Department has yet to provide guidance on how the assessable profits in such cases should be determined in practice if they are not readily ascertainable, for example where the performer or organizer is a non-resident. Fergus WT Wong Hong Kong T: +852 2289 5818 E: firstname.lastname@example.org Previous issues In this issue Subscription Glossary Administrative EU/OECD Treaties Legislation
www.pwc.com/its Luxembourg Luxembourg’s new IP tax regime effective January 1, 2018 The Luxembourg government on March 22, 2018, approved the legislative measures necessary to bring Luxembourg’s new IP regime into force effective retroactively to January 1, 2018. This is subject to confirmation by the Luxembourg Conseil d’Etat that a second hearing is not required. The measures were introduced in Bill No. 7163, published in August 2017, and since then have not been amended significantly. For qualifying IP rights the new regime provides an 80% tax exemption on eligible net income and a full exemption from the net wealth tax. Please see our PwC Insight for more information. Maarten Verjans New York T: +646 471 1322 E: email@example.com PwC observation: The new IP regime takes effect from the 2018 tax year and will coexist with the former IP regime, in some cases until June 30, 2021. Taxpayers should review their existing IP activities in Luxembourg to confirm whether they can benefit from the former and new IP regimes. Careful analysis of the IP assets and related income and expenses is now required. In some cases, restructuring/refinancing of the Luxembourg IP activities might be necessary. Likewise, taxpayers should consider the substance of the Luxembourg entity performing the IP activities.
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www.pwc.com/its Singapore Singapore enhances the R&D deduction Enhanced R&D tax deduction Businesses currently enjoy 150% tax deduction for qualifying expenditures incurred on qualifying R&D activities from FY 2018 to FY 2024. Although no cap applies to this provision, the additional 50% deduction applies for staff costs and consumables incurred for qualifying R&D activities conducted in Singapore. On February 19, 2018, the Singapore government proposed to increase the additional deduction from 50% to 150% for staff costs and consumables incurred on qualifying R&D activities conducted in Singapore from FY 2018 to FY 2024. This proposal is awaiting approval, and expect it to pass in the third or fourth quarter of 2018.
Ching Ne Tan Singapore T: +65 9622 9826 E: firstname.lastname@example.org PwC observation: MThe enhanced tax deductions on R&D expenditure signals the Government’s continued support for businesses to carry out their R&D projects in Singapore, as R&D activities conducted overseas would not qualify for enhanced deduction with the expiration of the Productivity and Innovation Credit Scheme. With the 250% super deduction enhancement on qualifying R&D expenditure, there appears to be minimal benefit by seeking approval for a 200% deduction, unless the enhanced deduction is sought for expenses other than staff costs and consumables, and the taxpayer is seeking upfront approval of the project.
Tax incentive/relief Incremental or volume based? May the R&D be performed outside the country? May the resulting IP reside outside the country? Refundable option Carry forward Grants / Other 250% super deduction on qualifying R&D expenditures, including staff costs, vendor costs, and consumables 200% super deduction requiring Minister approval on qualifying R&D expenditure, including staff costs, vendor costs, and consumables Deduction on volume No Yes, if the IP can be exploited by the local company. IP ownership can be legal or economic in nature, and while not required, formal registration may reside outside Singapore. No Yes Yes, multiple grants available for various fields, including innovation, product development, and IP management Previous issues In this issue Subscription Glossary Administrative EU/OECD Treaties Legislation
www.pwc.com/its Spain Spain’s Basque region approves corporate tax reform legislation Biscay, Alava, and Guipúzcoa – the three provinces of the Spanish Basque region with the power to issue their own tax rules – have approved major corporate income tax reform legislation. Alava and Biscay published the tax reform law in their Official Gazettes on March 16 and 27, respectively, and Guipúzcoa is expected to publish soon. The amendments generally are effective for tax years beginning on or after January 1, 2018. Please see our PwC Insight for more information. PwC observation: Multinational enterprises (MNEs) with operations in the Basque region should consider how they can take advantage of the tax reform legislation, including the reduced tax rate, the enhanced fixed assets tax credit, and the extended NOL carryforward period. Similarly, MNEs should assess the impact of the interest limitation rules, the anti-hybrid rule, and other restrictive rules.
Ramon Mullerat Madrid T: +34 915 685 534 E: email@example.com Carlos Concha New York T: +213 671 8470 E: firstname.lastname@example.org Eliana Sartori PwC Uruguay T: +598 291 6 0463 ext. 1478 E: email@example.com Uruguay Uruguay proposes excluding Panama from the Low-or-No-Tax-Jurisdictions list With Decree 103/18, issued on April 24th, 2018, Uruguay resolves the exclusion of Panama from its Low-or-No-Tax- Jurisdictions (LNTJs) list, provided that the following conditions are met: • The identification and notification of Uruguay as a partner of the Standard for the Automatic Exchange of Financial Information in Tax Matters, within the framework of the Multilateral Competent Authority Agreement (MCAA) prior to May 15, 2018. The exchanged information must include FY 2017. • The exclusion of Uruguay from the Panamanian list of LNTJs that do not perform an effective exchange of information with Panama (so called ‘lista de retorsión’). The effective date of the exclusion of Panama from the Uruguayan LNTJ list is when the Ministry of Foreign Affairs communicates to its Uruguayan counterpart that it has met the conditions mentioned above. The Uruguayan Tax Office will publish the effective date once determined. PwC observation: Uruguayan taxpayers that carry out commercial activities with Panamanian-related and non- related parties, and Panamanian taxpayers who carry out activities in Uruguay should analyze the opportunities and impact that these provisions will have on their operations. Previous issues In this issue Subscription Glossary Administrative EU/OECD Treaties Legislation
www.pwc.com/its Administrative Australia ATO compliance approach to cross-border related party financing The Australian Taxation Office (ATO) has released the final Practical Compliance Guideline PCG 2017/4 (PCG) which deals with related party debt financing. The draft PCG was first discussed in the July 2017 edition of International Tax News. The final PCG sets out the ATO’s compliance approach to the taxation outcomes associated with a ‘financing arrangement’ entered into with a cross-border related party.
Broadly, the PCG sets out the ATO framework used to assess risk in relation to certain related party financing arrangements with regard to a combination of quantitative and qualitative indicators. The ATO uses this risk assessment to tailor its engagement with taxpayers according to the features of its related party financing arrangements, the profile of the parties to the arrangements, and the taxpayer’s choices and behaviors. The ATO’s risk framework is made up of six color-coded risk zones.
Peter Collins Sydney T: +61 0 438 624 700 E: firstname.lastname@example.org David Earl Melbourne T: +61 3 8603 6856 E: email@example.com PwC observation: Taxpayers should assess all proposed and current related party loans against the PCG’s framework, in order to support their positions against the indicators and evidence types that the ATO would like to see. However, taxpayers should not be alarmed automatically by a risk rating outside the ‘low risk’ green zone. Instead they should review their position, prepare and bolster existing evidence to support their approach to related party financing, and be ready to engage with the ATO. Previous issues In this issue Subscription Glossary Legislation EU/OECD Treaties Administrative
www.pwc.com/its Peter Collins Sydney T: +61 0 438 624 700 E: firstname.lastname@example.org Qiming Lu New York T: + 646 313 3179 E: email@example.com David Earl Melbourne T: +61 3 8603 6856 E: firstname.lastname@example.org Jennifer Zhang New York T: +646 746 4136 E: email@example.com Australia ATO guidance on diverted profits tax for significant global entities As described in the April 2017 International Tax News, Australia’s diverted profits tax (DPT), which applies to multinational groups with more than A$1bn global group wide revenue (also known as significant global entities [SGE]), came into effect on July 1, 2017. The DPT imposes a penalty tax rate of 40%, plus interest, in circumstances where the amount of Australian tax paid is reduced by diverting profits offshore through contrived related party arrangements. The ATO has since released three guidelines on the DPT. LCG 2017/D7 seeks to assist taxpayers in understanding the new DPT law and, when finalized, will constitute a binding public ruling to the extent indicated. The DPT penalty will apply only to arrangements that ‘would be concluded’ to be entered into for a principal purpose of obtaining an Australian tax benefit or both to obtain an Australian tax benefit and reduce foreign tax liabilities. PSLA 2017/2 focuses on the ATO’s administrative processes for making a DPT assessment. Specifically, the ATO has reassured taxpayers that an internal oversight framework is in place to ensure appropriate approvals are obtained before any DPT review is initiated due to the ‘seriousness of making a DPT assessment’.
PCG 2018/D2 acts as a risk assessment tool for taxpayers considering their potential DPT exposure. The PCG provides guidance on what the ATO considers to be high and low risk scenarios in relation to the sufficient economic substance test. China China extends preferential corporate income tax policy for integrated circuit enterprises In 2000, the Chinese government began introducing a series of tax incentives for software and integrated circuit (collectively, IC) enterprises. The goal of these incentives was to promote the growth of these industries, motivate enterprises to enhance their capacity in technological innovation and self-development, optimize the industrial chain, boost technological innovation, and upgrade industrial infrastructure in the IC industry. These tax incentives facilitated the rapid development of these industries in China.
On March 28, 2018, the Ministry of Finance (MoF), State Administration of Taxation (SAT), National Development and Reform Commission (NDRC), and the Ministry of Industry and Information Technology (MIIT) jointly issued Public Notice  No. 27 (Public Notice 27) on the corporate income tax (CIT) policy for IC enterprises. Public Notice 27 provides incentives to qualified IC enterprises or projects established after January 1, 2018, and to qualified IC enterprises established before December 31, 2017, that have not yet made a profit.
Public Notice 27 is effective January 1, 2018. IC enterprises should review whether this encouraging tax policy could apply to a newly established company or project, and whether they can extend previous qualified tax holidays. Please see our PwC Insight for more information. PwC observation: The DPT is extremely broad, and there are still many uncertainties regarding its application. All taxpayers with cross-border related party dealings should first consider if they are an SGE, before stepping through the remaining carve- out exemptions. Based on the ATO’s guidance to date, in many cases the carve-out exemption of the ‘sufficient economic substance test’ likely may prove difficult to satisfy to the standard required by the Commissioner.
PwC observation: According to Circular 49, IC manufacturing enterprises should file with the relevant tax authorities during the annual CIT filing in accordance with the provisions of the Public Notice Issued by the SAT, Releasing the Administrative Measures for CIT Preferential Treatments (Public Notice  No.76). These enterprises should self-assess their eligibility for this CIT preferential treatment before filing. More specifically, these enterprises should evaluate their proprietary IP rights, their percentage of R&D employees, and the revenue percentage related to core technology. New IC projects eligible for preferential CIT treatment should reasonably allocate expenses for these projects and accurately calculate the taxable income.
We expect Public Notice 27 to significantly impact the development and restructuring of IC industries in China. Previous issues In this issue Subscription Glossary Legislation EU/OECD Treaties Administrative
www.pwc.com/its Germany German tax authorities release circular on anti- treaty/directive-shopping rules German tax authorities released a circular (Circular) on April 4, 2018, addressing the EU law-compliant interpretation of the German anti-treaty/directive- shopping rules (Rules). The Circular responds to recent judgments of the Court of Justice of the European Union (CJEU), holding that the previous version of the Rules breached EU law (Deister Holding, C-504/16, and Juhler Holding, C 613/16). As a result of this Circular, more taxpayers should benefit from the WHT reduction under the EU Parent-Subsidiary Directive (the ‘Directive’). Please see our PwC Insight for more information.
Thomas Loose New York T: + 212 671 8395 E: firstname.lastname@example.org Benjamin Engel New York T: +64 471 5627 E: email@example.com PwC observation: Taxpayers should consider whether they can benefit from the German tax authorities’ new interpretation of the Rules and consider filing applications for WHT refunds or exemptions accordingly. Previous issues In this issue Subscription Glossary Legislation EU/OECD Treaties Administrative
www.pwc.com/its United States First guidance under amended interest expense limitation clarifies high-profile issues Treasury and the IRS released Notice 2018-28 (the Notice) on April 2, 2018. The Notice provides interim guidance and describes proposed regulations that they intend to issue on the limitation on business interest expense deduction under amended Section 163(j) for tax years beginning after December 31, 2017. The Notice identifies issues that the proposed regulations will cover, but specifically addresses several of the uncertainties with which taxpayers have been grappling since Section 163(j) was amended. These issues include: • applying the Section 163(j) limitation at the consolidated tax return filing level • allowing the carryforward of a taxpayer’s disallowed disqualified interest that arose under Section 163(j), prior to its amendment • treating a C corporation’s interest income and expense as business interest income or expense unless specifically carved out from Section 163(j), and • allowing a partner to take into account its share of the partnership’s net business interest income. The Notice also provides that until proposed regulations are issued, taxpayers may rely on the rules set forth in the Notice. Please see our PwC Insight for more information. Oren Penn Washington T: +202 414 4393 E: firstname.lastname@example.org Quyen Huynh Washington T: +2 031 2 7929 E: email@example.com Ilene Fine Washington T: +2 02 3465 187 E: firstname.lastname@example.org PwC observation: While Notice 2018-28 addresses several key issues concerning new Section 163(j), many questions remain. In addition, certain categories of taxpayers will be affected significantly by the rules announced in the Notice. For example, taxpayers that have carryforwards of disallowed interest expense must consider whether the carryforward can be utilized in 2018 or future years, given that it is proposed that the carryforward amount will not be grandfathered under the base erosion and anti-avoidance tax (BEAT) provisions and will be subject to both the new Section 163(j) and the BEAT rules. Also, inbound investors should be cognizant of being unable to super-affiliate and must consider whether filing a consolidated return might yield a more favorable result if super-affiliation no longer is permitted. Previous issues In this issue Subscription Glossary Legislation EU/OECD Treaties Administrative
www.pwc.com/its United States Third Section 965 Notice on the ‘toll tax’ calls for immediate action The IRS and Treasury issued Notice 2018-26 (the Notice) on April 2, 2018, providing administrative guidance relating to the ‘toll tax’ due upon the mandatory deemed repatriation of certain deferred foreign earnings. The Notice is the third notice with respect to amended Section 965 under the 2017 tax reform reconciliation legislation (the Act). Importantly, the Notice sets forth several anti-avoidance rules under Section 965(o)(2) (relating to guidance to prevent the avoidance of Section 965) and Section 965(c)(3)(F) (relating to transactions with a principal purpose of reducing the aggregate foreign cash position (AFCP)) that, when applicable, will result in a transaction being disregarded for purposes of computing a US shareholder’s Section 965 tax liability.
In addition, the Notice takes a position on the determination of relevant cash measurement dates with respect to a specified foreign corporation (SFC), and modifies Notice 2018-13 to narrow the scope of accounts receivable and accounts payable that are considered in determining a US shareholder’s AFCP. Further, the Notice contains several favorable provisions related to the application of the constructive ownership rules, the allocation of accrued foreign income taxes in relation to the calculation of post- 1986 E&P of an SFC as of November 2, 2017, and penalty relief for any underpayment of a taxpayer’s net toll tax liability. The Notice also sets forth general guidance related to making elections under Sections 962 and 965, and reporting and paying the toll tax.
Please see our PwC Insight for more information. PwC observation: In order to make timely toll tax liability payments and comply with the filing requirements for making available elections under Section 965, taxpayers should immediately review the Notice and determine the Section 965 impact. For additional background and information related to the reporting requirements and available elections under Section 965, see IRS Publication 5292, How to Calculate Section 965 Amounts and Elections Available to Taxpayers. Taxpayers also should review and assess the impact of the specific rules in the Notice on their business and industry, and consider commenting on the proposals and on other issues arising under amended Section 965 that the IRS and Treasury should address.
MIchael DiFronzo Washington T: +202 312 7613 E: email@example.com Julie Allen Washington T: +202 414 1393 E: firstname.lastname@example.org Annette Smith Washington T: +202 414 1048 E: email@example.com Previous issues In this issue Subscription Glossary Legislation EU/OECD Treaties Administrative
www.pwc.com/its United States IRS provides guidance on Section 965 ‘toll tax’ calculation and elections The IRS has issued Publication 5292, ‘How to Calculate Section 965 Amounts and Elections Available to Taxpayers’. The Publication, dated April 6, 2018, assists taxpayers with calculating their 2017 ‘toll tax’ due upon the mandatory deemed repatriation of certain deferred foreign earnings. The 18-page Publication also addresses certain aspects of the toll tax, such as who is required to report, pay, and make certain elections. The Publication is the latest administrative guidance related to the amended Section 965 under the 2017 tax reform reconciliation act. Please see our PwC Insight for more information. PwC observation: The Publication is the latest IRS guidance intended to assist taxpayers in calculating the toll tax under amended Section 965. Taxpayers subject to amended Section 965 should review the Section 965 Workbook in order to calculate their overall toll tax liability. Taxpayers also should review the Publication in order to better understand certain aspects about who is required to report, pay, and make certain elections under amended Section 965. Michael DiFronzo Washington T: +202 312 7613 E: firstname.lastname@example.org David Sotos San Jose T: +408 808 2966 E: email@example.com Marty Collins Washington T: +202 414 1571 E: firstname.lastname@example.org Previous issues In this issue Subscription Glossary Legislation EU/OECD Treaties Administrative
www.pwc.com/its PwC observation: This is another EC State aid decision in the area of transfer pricing. If the EC’s approach is confirmed in its final decision, we expect further litigation before the European courts. MNEs should be aware of the possible impact of the EU State Aid developments on their current fact patterns and plan accordingly. Pam Olson Washington T: +202 414 1401 E: email@example.com William Morris Washington T: +202 312 7662 E: firstname.lastname@example.org Maarten Maaskant New York T: +646 471 0570 E: email@example.com EC releases State aid opening decision in Inter IKEA The European Commission (EC) on March 27, 2018, made publicly available the non-confidential version of its opening decision of December 18, 2017, in the formal investigation into the Netherlands’ tax treatment of Inter IKEA Systems BV (Systems) with regard to State aid. The EC explains the reasons for initiating the investigation and requests additional information from the Netherlands and potentially Systems or any other company of the Inter IKEA Group, in order to reach a conclusion. This decision therefore represents the beginning, not the end, of the EC’s formal investigation into this transfer pricing matter. The EC’s opening decision focuses on two Advanced Pricing Agreements (APAs) granted by the Netherlands to Systems in 2006 and 2011, respectively.
Please see our PwC Insight for more information. EU/OECD Updates EU Previous issues In this issue Subscription Glossary Legislation Administrative Treaties EU/OECD
www.pwc.com/its Isabel Verlinden Brussels T: +32 27 104 422 E: firstname.lastname@example.org Adam Katz New York T: +646 471 3215 E: email@example.com OECD OECD guidance on attribution of profits to PEs leaves unanswered questions The OECD on March 22 released a final report containing additional guidance on attribution of profits to permanent establishments (the Report). The Report sets forth high- level principles for attributing profits to permanent establishments (PEs), following the two discussion drafts published in July 2016 and June 2017 and public discussions held in November 2016 and November 2017. The Report provides further guidance on the Final Reports on BEPS published in October 2015.
The new additional guidance indicates that the high-level principles should apply regardless of whether the countries involved have adopted the principles of the Authorised OECD Approach (AOA) to attributing profits to PEs. It addresses issues surrounding commissionaire structures and the anti-fragmentation rules covered in the report on BEPS Action 7 issued on October 5, 2015 and under the MLI. The Report contains examples on fragmentation of activities, commissionaire structures, sales of advertising on a website, and procurements of goods. All four examples seek to illustrate the underlying principles of profit attribution, without providing details on the actual calculations of these profits. The starting point of the examples is the AOA, recognizing that its use is not required by many treaties and the method for attributing profit therefore may differ significantly from the AOA.
In general, while offering some helpful and welcome views, the Report is limited to providing high-level guidance. The Report does not contain a decisive tie-breaker on the priority between Article 7 and Article 9 Model Tax Convention (MTC), or conclusive guidance on the significant people functions relevant to the assumption of risk and the risk control functions. The absence of guidance on which countries apply the AOA or which countries rely on another appropriate approach under Article 7 MTC for attributing profits to a PE (or on the co-existence of such approach) can contribute to significant uncertainty and controversy. For reasons of transparency, countries should indicate (for example, through the OECD) whether they would use the AOA or specify which other method they assume appropriate.
The publication of the Report is an indication that issues related to profit allocation to a PE will be under greater scrutiny by tax authorities. During the development of BEPS Action 6 (preventing the artificial avoidance of PE status), there was considerable debate and disagreement over when activities such as warehousing or procurement cross the line from being preparatory or auxiliary in nature to complementary functions that are part of a cohesive business operation. Similarly, the collection of information should not be viewed as per se a value-added function. The Report, however, could be viewed as creating a presumption that these activities add significant value, which in turn will lead to more uncertainty and controversy. The Report recognizes that the net profits attributable to the PE could be positive, nil, or even negative (i.e. a loss). This is a welcome approach and recognition for administrative convenience. Please see our PwC Insight for more information. PwC observation: Multinationals also should be aware of other approaches related to PE issues and allocation of profits that are rapidly evolving. In particular reference can be made to evolutions on the digitalization of the economy. These include the EU Commission directive proposals in its digital tax package presented on March 21, or unilateral measures countries have introduced or might introduce such as diverted profit tax regimes, equalization levies, or withholding taxes.
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www.pwc.com/its Marios Andreou Nicosia T: + 357 22 55 52 66 E: firstname.lastname@example.org Stelios Violaris Nicosia T: + 357 22 55 53 00 E: email@example.com Joanne Theodorides Nicosia T: + 357 22 55 36 94 E: firstname.lastname@example.org Cyprus ratifies new tax treaties with the United Kingdom and Saudi Arabia Cyprus and the United Kingdom signed a new tax treaty and accompanying Protocol on March 22, 2018. Cyprus ratified the treaty on April 2, 2018. This treaty will enter into force upon ratification by the United Kingdom.
In addition, Cyprus ratified the first Cyprus-Saudi Arabia tax treaty on March 5, 2018, This treaty was signed on January 3, 2018. Before this treaty can enter into force, certain legal procedures must occur. Please see our PwC Insight for more information. Treaties Cyprus PwC observation: Cyprus is rapidly updating and expanding its tax treaty network, as indicated by the new treaties with the United Kingdom and Saudi Arabia. These should pave the way for new investment and trade between Cyprus and the two countries.
MNEs should consider how the changes in WHT rates and requirements might impact their operations and legal organization. Previous issues In this issue Subscription Glossary Legislation Administrative EU/OECD Treaties
www.pwc.com/its France Impact of the new tax treaty between Luxembourg and France Luxembourg and France on March 20, 2018, signed a new tax treaty that incorporates the provisions of the latest OECD Model Tax Convention and the MLI adopted in the framework of BEPS measures. In accordance with the latter, the title of the treaty expressly reflects the objective of fighting tax evasion and avoidance. Below is a short summary of the key articles. Tax residence: the treaty now defines a resident as a person ‘subject to tax’. Tax exempt vehicles such as French Organisme de Placement Collectif en Immobilier (OPCIs) will no longer benefit from the treaty. Conversely, French partnerships such as SCIs will be considered as ‘residents’.
PE: the treaty reduces the scope of the ‘preparatory or auxiliary’ activity let-outs from the PE definition and extends the scope of the dependent agent. Principal purpose test: treaty benefits may be challenged if obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit. Dividends: the new treaty grants a full WHT exemption for any holding by a company, resident in the other country, of at least 5%, provided it has been held for at least 365 days. The current treaty provides a 5% WHT on dividends paid to a company holding at least 25% of the capital of the payor. Dividends now include any distribution that domestic law characterizes as a dividend. This notably should include liquidation proceeds from French companies. Holdings in French SIIC (société d’investissement immobilier cotée) or OPCIs (French CIT exempt entities under liquidity conditions): distributions made by these entities to Luxembourg will no longer benefit from a 5% WHT when 25% of the share capital of the French entity is held. If the direct or indirect holding in the share capital is lower than 10%, the WHT will equal 15% of the dividend. If not, the French domestic WHT of 30% will apply.
Some capital gains on the sale of shares realized by a Luxembourg tax resident, which are currently CIT exempt in France and Luxembourg, will be subject to French CIT if the company whose shares are sold has derived, directly or indirectly and at any time over the 365 days preceding the disposal, more than 50% of its asset value from immovable property located in France. Renaud Jouffroy Paris T: +33 0 1 56 57 42 49 E: email@example.com Guillaume Glon Paris T: +33 0 1 56 57 40 72 E: firstname.lastname@example.org PwC observation: The new tax treaty will enter into force once both parties complete the ratification process but not earlier than January 1, 2019. Until this date, the current treaty remains in force.
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www.pwc.com/its Hong Kong Hong Kong signs tax treaty with India Hong Kong and India signed a comprehensive double tax agreement (CDTA) on March 19, 2018. It is the 39th CDTA signed by Hong Kong. The key highlights of the CDTA follow: • Having someone in India who (i) habitually maintains stock from which it delivers goods on behalf of a Hong Kong enterprise or (ii) habitually secures orders in India wholly or almost wholly for a Hong Kong enterprise (or its associated enterprise) may constitute a dependent agent PE of that Hong Kong enterprise in India, even if the person does not conclude any contract in the name of the Hong Kong enterprise in India.
• The WHT rate on interest income derived from India is reduced from 20% to 10%, subject to satisfying the beneficial ownership test. • Fees for technical services in India are still subject to the 10% WHT, even in the absence of a PE in India. • There is no tax exemption in India for gains derived from disposal of shares in an Indian company. If the CDTA is ratified and enters into force in 2018, it will become effective from year of assessment 2019/20 in Hong Kong and from fiscal year beginning on April 1, 2019 in India. The table below provides a general overview of the non-treaty and treaty WHT rates on dividends, interest, royalties and technical services fees derived by a Hong Kong resident company from India: Fergus WT Wong Hong Kong T: +852 2289 5818 E: email@example.com PwC observation: Under the HK-India CDTA, there is no tax exemption for gains derived from the disposal of shares in an Indian company. The tax exemption for the captioned gains under the India-Mauritius and India-Singapore tax treaties will gradually phase out in spite of the grandfathering provision for shares acquired before April 1, 2017 in these two treaties. Eventually, Hong Kong will be on an equal footing with Mauritius and Singapore in terms of taxation of gains from share disposal in India.
Furthermore, the WHT rate on interest income derived by non- financial institutions under the HK-India treaty is more beneficial than that under the Singapore-India treaty. Hong Kong companies should review how they currently invest into India. Dividends Interest Royalties Technical services fees India non- treaty rate 0% 5%/20%1 10% 10% HK/India treaty rate 5% 0%/10%2 10% 10% Notes 1 The 20% rate applies in general whereas the 5% rate applies to certain specified types of interest (such as interest on money borrowed in foreign currency under a loan agreement and interest on certain long-term infrastructure bonds). 2 The 0% rate applies to interest paid to the HKSAR government, certain Hong Kong government authorities and the Exchange Fund. The 10% applies to all other cases.
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www.pwc.com/its Ireland Ireland signs new tax treaty with Ghana Ireland and Ghana recently signed a new tax treaty. This is the first treaty between the two countries, and it will enter into force after the exchange of the ratification instruments. The treaty provides that dividends and interest will be taxed at a maximum of 7%. A maximum rate of 8% will apply in the case of royalties. In Ireland, negotiations have concluded on new treaties with Azerbaijan, Oman, Uruguay and Turkmenistan and for a Protocol to the existing treaty with Mexico. These are expected to be signed shortly.
PwC observation: This recent signing signals Ireland’s commitment to expanding and strengthening its tax treaty network. Ireland has signed comprehensive taxation agreements with 74 countries, 73 of which are now in effect. Dennis Harrington PwC Dublin T: +353 1 792 8629 E: firstname.lastname@example.org Peter Hopkins PwC Dublin T: +353 1 792 5512 E: email@example.com Previous issues In this issue Subscription Glossary Legislation Administrative EU/OECD Treaties
www.pwc.com/its Robin Palmer USA T: +44 0 20 7213 5696 E: firstname.lastname@example.org Phil Greenfield London T: +44 0 20 7212 6047 E: email@example.com Francisco Barrios Panama T: +507 206 9217 E: firstname.lastname@example.org United Kingdom UK initiates MLI ratification process The UK government has begun the legislative process by which the UK will ratify its agreement to the OECD’s MLI. The intention is that the statutory instrument, introduced in draft on March 28 will pass into law by July 24, 2018 and that the MLI will broadly start to take effect with respect to UK tax treaties from January 1, 2019. We understand there are no changes to the substance of the UK’s options and reservations under the MLI, although some minor amendments will be proposed.
PwC observation: The MLI will have a fundamental impact on how taxpayers access tax treaties, so now is the time to prepare for its impact. The UK’s legislative schedule should result in the MLI applying to relief for withholding tax from January 1, 2019 under the UK’s treaties with Poland and Slovenia which have already ratified, and with many others that are expected to ratify before October 1, 2018. The precise dates for other purposes or in relation to other treaties will depend upon the UK’s final ratification date, when other treaty partners submit their instruments of ratification and which options and reservations they have selected.
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www.pwc.com/its Acronym Definition AFCP Aggregate Foreign Cash Position AOA Authorised OECD Approach APAs Advanced Pricing Agreements ATO Australian Tax Office BEAT base erosion and anti-abuse tax BEPS Base Erosion and Profit Shifting CDTA comprehensive double tax agreement CFA controlled foreign affiliate CIT corporate income tax CJEU Court of Justice of the European Union CMC central management and control DPT Diverted Profits Tax E&P earnings & profits EC European Commission ECI effectively connected income EU European Union FAPI foreign accrual property income FY financial year G20 Group of 20 HKSAR Hong Kong Special Administrative Region IC integrated circuit IP intellectual property IPRs intellectual property rights IRS Internal Revenue Service LCG Law Companion Guideline Acronym Definition LNTJ Low-or-No-Tax-Jurisdictions MCAA Multilateral Competent Authority Agreement MIIT Ministry of Industry and Information Technology MLI (1) Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Based Erosion and Profit Shifting MLI (2) Multilateral Instruments MNEs Multinational enterprises MoF Ministry of Finance MTC Model Tax Convention NDRC National Development and Reform Commission NOL net operating loss OECD Organisation for Economic Co-operation and Development OFC open-ended fund companies OPCI Organisme de Placement Collectif en Immobilier (real estate collective investment undertaking) OTC Over-The-Counter PCG Practical Compliance Guideline PE permanent establishment R&D research and development SAT State Administration of Taxation SCIs société civile immobilière (real estate civil company) SFC specified foreign corporation SGE significant global entities SIIC société d’investissement immobilier cotée (listed real estate companies) UK United Kingdom WHT withholding tax Glossary Previous issues In this issue Subscription Glossary Legislation Administrative EU/OECD Treaties
www.pwc.com/its Contact us For your global contact and more information on PwC’s international tax services, please contact: Shi‑Chieh ‘Suchi’ Lee Global Leader International Tax Services Network T: +1 646 471 5315 E: email@example.com Geoff Jacobi International Tax Services T: +1 202 414 1390 E: firstname.lastname@example.org www.pwc.com/its At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with more than 223,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com.
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