Part 2. Recent Global Developments in International Taxation

The MAP lists the specific types of plans in Belgium and the United States that will qualify. It also states, however, that the listing is not intended to be exclusive and that any US or Belgian pension plan of a type not mentioned, including any type of plan established pursuant to legislation enacted after the date of signature of the MAP, or any participant in a type of plan not mentioned, may ask the competent authority of the other Contracting State for a determination that the plan generally corresponds to a pension plan recognised for tax purposes in that other State.

A-12 Mexico-India:
Treaty between Mexico and India enters into force:

The income tax treaty and protocol between Mexico and India, signed on 10 September 2007, entered into force on 1 February 2010. The treaty generally applies from 1 January 2011 for Mexico and from 1 April 2011 for India.

    Domestic tax developments in foreign jurisdictions:

B-1 United States:
B-1.1 Small Business Jobs Act of 2010 signed:
President Obama signed the Small Business Jobs Act of 2010 (H.R. 5297) into law on 27 September 2010. Significant business tax measures in the Act are summarised below?:

— The Act temporarily excludes 100% of the gain from the sale of qualified small business stock held at least 5 years.

— The Act extends the carry-back period for eligible small business credits from 1 year to 5 years.

— The Act allows eligible small business credits to offset both regular and alternative minimum tax liability.

—  The Act temporarily reduces the recognition period to 5 years for built-in gains of Subchap-ter S corporations that convert from prior

Subchapter C status.

— The Act increases the maximum amount a tax-payer may elect to deduct in connection with the cost of qualifying S. 179 property placed in service in 2010 and 2011 to USD 500,000. The maximum amount is phased out by the amount by which the cost of qualifying property exceeds USD 2 million. The Act temporarily expands the definition of qualifying S. 179 property to include certain real property, i.e., qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. The maximum amount of deduction for such real property is USD 250,000.

—  The Act extends the additional first-year depreciation deduction which is allowed equal to

50% of the adjusted basis of qualified property placed in service through 2010.

— The Act increases the maximum amount that a taxpayer may deduct in connection with trade or business start-up expenditures from USD 5,000 to USD 10,000. The maxi-mum amount is phased out by the amount by which the cost of start-up expenditures exceeds USD 60,000, increased from USD 50,000.

— The Act revises the penalties that may be imposed for failure to disclose a reportable transaction to the IRS.
— The Act allows self-employed individuals to deduct the cost of health insurance for themselves and their spouses, dependents, and any children under age 27 for purposes social security and Medicare taxes imposed by the Self-Employment Contribution Act (SECA).

— The Act removes cell phones and similar telecommunications equipment from the definition of listed property so that the height-ened substantiation requirements and special depreciation rules do not apply.

— The Act imposes the same information reporting requirements (i.e., IRS Form 990-MISC) on taxpayers who are recipients of rental income from real estate as are imposed on taxpayers engaged in a trade or business, with a few exceptions.

— The Act treats as US-source income amounts received, whether directly or indirectly, from a non-corporate US resident or a US domestic corporation for the provision of a guarantee of indebtedness of such person.

— The Act increases the amount of the required estimated tax payments otherwise due by large corporations in July, August, or September, 2015, by 36 percentage points.

A complete description of the provisions of the Act is included in the Technical Explanation prepared by the US Joint Committee on Taxation (JCX-47-10). The White House also issued a press release with a summary of the principal business provisions that are included in the Act.

B-1.2 Proposed regulations issued on treatment of series LLCs:
The US Treasury Department and Internal Revenue Service (IRS) have issued proposed regulations on the treatment of a series limited liability company (LLC), a cell of a domestic cell company, or a foreign series or cell that conducts an insurance business.

The proposed regulations were issued to address the tax classification of segregated groups of assets and liabilities (referred to as ‘series’ or ‘cells’) for US federal income tax purposes. The regulations generally provide that such series or cells will be treated as separate entities.

The proposed regulations were issued in response to the enactment of statutes by a number of US states that permit the creation of entities that may establish separate series, including limited liability companies (series LLCs). These statutes may provide conditions under which the debts, liabilities, obligations and expenses of a particular series are enforceable only against the assets of that series.

The preamble to the proposed regulations states that the classification of a series or cell that is treated as a separate entity for federal tax purposes is determined under the same rules that govern the classification of other types of sepa-rate entities.

The preamble further states that the proposed regulations will affect domestic series LLCs, domestic cell companies, foreign series or cells that conduct insurance businesses, and their owners.

The proposed regulations will be effective on and after the date the regulations are published as final. A transition rule is provided for existing se-ries that satisfy specified conditions, including that they were established and conducted business or investment activity prior to 14 September 2010.

B-1.3 IRS announces further exemptions from FTC disallowance rules in cross-border back-to-back transactions?:
The US Internal Revenue Service (IRS) has announced further exceptions for claiming foreign tax credits on back-to-back cross-border transactions. The excep-tions were announced in Notice 2010-65.

The new notice addresses the scope of S. 901(l)

    of the US Internal Revenue Code (IRC), which disallows an FTC for gross basis withholding taxes where the taxpayer fails to meet a holding period requirement for the property with respect to the foreign taxes that are imposed [S. 901(l)(1)(A)], or is under an obligation to make a related payment with respect to positions in substantially similar or related property [S. 901(l)(1)(B)].

Notice 2010-65 is a follow-up to earlier Notice 2005-90, in which the US Treasury Department and IRS stated that they intended to issue regulations setting forth an exception to IRC S. 901(l)

(1)(B) for foreign gross-basis withholding taxes imposed on payments in back-to-back computer program licensing arrangements in the ordinary course of the licensor’s and licensee’s respective trades or businesses. New Notice 2010-65 states that the US Treasury Department and IRS will provide exemptions from FTC disallowance in the regulations as follows?:

— S. 901(l)(1)(B) will not apply to disallow an FTC for foreign gross-basis withholding taxes with respect to back-to-back licensing arrangements involving certain intellectual property or copyrighted articles entered into in the ordinary course of business; and

— S. 901(l)(1)(A) will not apply to disallow an FTC for foreign gross-basis withholding taxes with respect to retail distribution arrangements for certain copyrighted articles entered into in the ordinary course of business.

Notice 2010 -65 sets out the conditions necessary for meeting the above exceptions. The exceptions will apply to amounts paid or accrued after 23 September 2010. Taxpayers are permitted to rely on the guidance given in Notice 2010-65 until the regulations are issued.

B-1.4 Final regulations issued on US exemption for international operation of ships and aircraft:
The US Treasury Department and the Internal Revenue Service (IRS) have issued final regulations on the US exemption for income derived from the international operations of ships and aircraft.

The final regulations are issued u/s.883 of the US Internal Revenue Code, which provides a US tax exemption for foreign corporations organised in countries that grant an equivalent tax exemption to US corporations for shipping and air income.

The final regulations adopt the proposed and temporary regulations issued on this topic on 25 June 2007.

The final regulations include several modifications to the proposed regulations. A particular modification relates to the types of activities that will be considered as incidental to shipping and air-craft activities, and thus also covered by the US exemption. An additional modification specifies the conditions under which bearer shares can be taken into account for purposes of satisfying the stock-ownership test that applies to foreign corporations.

The final regulations also include guidance on the treatment of shipping and aircraft corporations that are controlled foreign corporations (CFCs) under the US Internal Revenue Code.

The final regulations apply generally to taxable years of foreign corporations beginning after 25 June 2007, with additional application to open taxable years beginning on or after 31 December 2004. The modification with respect to the treatment of bearer shares applies to taxable years beginning on or after 17 September 2010.

B-1.5 Treasury Department and IRS issue relief guidance for erroneous check-the-box elections:

The US Treasury Department and Internal Revenue Service (IRS) have issued Revenue Procedure 2010-32 with relief guidance for foreign business entities that make erroneous elections under the US check-the-box regulations (Treas. Reg. §§ 301.7701-1 through 3).

The guidance applies to foreign entities that file IRS Form 8832 (Entity Classification Election) and make an invalid election as to the status of the entity as a partnership or disregarded entity under the US check-the-box regulations due to an incorrect assumption as to the number of owners of the entity.

The Revenue Procedure states that the Treasury Department and IRS are aware that foreign entities have made invalid elections on this basis and that relief guidance is being issued in order to alleviate concerns and simplify tax administration in this area.

Revenue Procedure 2010 -32 notes that an invalid election can occur if the entity elects partnership status, on the assumption that there are two or more owners of the entity, or if the entity elects to be treated as a disregarded entity (i.e., as a sole proprietorship, branch, or division) on the assump-tion that there is a single owner, and in either case the elected status is not available due to an incorrect assumption as to the number of owners.

Revenue Procedure 2010-32 provides that if the conditions set out in the procedure are followed, taxpayers may make a corrective election and the IRS will treat the entity in the desired manner, i.e., as a partnership or disregarded entity, as the case may be, and not as an association taxable as a corporation. The procedure is effective for qualified entities that meet the necessary requirements as of 7 September 2010.

B-1.6 US Treasury Department re- issues list of boycott countries that result in restriction of US tax benefits:

The US Treasury Department has re-issued its list of the countries that require cooperation with or participation in an international boycott as a condition of doing business. The countries listed are Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, the United Arab Emirates, and the Republic of Yemen. The Treasury Department stated that Iraq is not included on the list, but that its future status remained under review. The new list is dated 23 April 2010 and was published in the Federal Register on 29 April 2010.

The listed countries are identified pursuant to S. 999 of the US Internal Revenue Code (IRC), which requires US taxpayers to file reports with the Treasury Department concerning operations in the boycotting countries. Such taxpayers incur adverse consequences under the IRC, including denial of US foreign tax credits for taxes paid to those countries and income inclusion under Sub-part F of the IRC in the case of US shareholders of controlled foreign corporations that conduct operations in those countries.

B-1.7 IRS updates Publication 519?: US Tax Guide for Aliens:
The US Internal Revenue Service (IRS) has updated its Publication 519 (US Tax Guide for Aliens). The publication is intended for use in preparing tax returns for 2009.

Publication 519 provides detailed guidance and information for residents and non-residents to determine their liability for US federal income tax. This includes the rules for determining US residence status, i.e., the US green card test and the US substantial presence test, and the general rules that apply to determine and compute US tax liability. The requirements to file US income tax returns are also discussed, and information is further provided regarding benefits under US income tax treaties and social security agreements.

B-1.8 IRS updates Publication 901 on US income tax treaties:
The US Internal Revenue Service (IRS) has updated its Publication 901 on US income tax treaties. The publication includes a list of all current US income tax treaties together with the general effective date of each and a table with the tax rates for interest, dividends, capital gains, royalties, copyrights, rents, pensions, and social security payments.

Also included are summaries of the relevant provisions of each US treaty regarding taxation of personal services income, taxation of income received by professors, teachers and researchers, taxation of income received by students and ap-prentices, and taxation of wages and pensions paid by foreign governments.

The publication carries a revision date of April 2010, and was updated to include information for the new US income tax treaty with Italy, the new US protocol with France, both of which entered into force at the end of 2009. The publication includes a Reminder section that notes that:

— US taxpayers must disclose treaty-based return positions to the IRS, i.e., positions that US tax is reduced or eliminated by a US tax treaty;

— the US-USSR income tax treaty remains ef-fective for certain members of the Common-wealth of Independent States (i.e., Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, and Uz-bekistan);

— the US-China treaty does not apply to Hong Kong; and

— the US-Iceland treaty signed 23 October 2007 was generally effective on 1 January 2009, subject to an election to apply the prior treaty for a 12-month period.

B-1.9 Updated IRS Publication 593 issued — Tax

Highlights for US Citizens and Residents Going Abroad:
The US Internal Revenue Service (IRS) has released the 2010 revision of Publication 593 (Tax Highlights for US Citizens and Residents Going Abroad). The publication is dated 22 January 2010.

Publication 593 explains the provisions of US federal income tax law that apply to US citizens and resident aliens who live or work abroad and who expect to receive income from foreign sources.

The publication discusses the applicable US tax return filing requirements, the treatment of income earned abroad, including the S. 911 earned income exclusion and housing exclusion or deduction, tax withholding and estimated taxes, claiming a credit or deduction for foreign income taxes, claiming tax treaty benefits, and information on how to obtain tax help from the IRS.

Publication 593 also refers to the other IRS publications that are relevant in this context, including IRS Publication 54 (Tax Guide for US Citizens and Resident Aliens Abroad), IRS Publication 514 (Foreign Tax Credit for Individuals), and IRS Publication 901 (US Tax Treaties). The latter publication discusses in detail the treatment of foreign income, the foreign tax credit, and tax treaty benefits.

B-2 Netherlands Antilles:

Corporate income tax rate reduction for Curaçao and St. Maarten planned:

In a Dutch Parliamentary Document (32.276, No. of 6 September 2010 and a recent letter (No. 2010Z07793) of the Minister of Finance of the Netherlands Antilles, it was announced that after the dismantling of the Netherlands Antilles, which will take effect on 10 October 2010, Curaçao and St. Maarten are planning to reduce the corporate income tax to 15%. Currently, the rate is 34.5% (inclusive island surcharge).

The new rate may become effective on 1 Janu-ary 2012.

B-3 United Kingdom:

B-3.1 New scheme for DTR on inter-company loan interest and inter-company royalties:

HMRC has announced that with regard to double taxation relief on inter-company loan interest and inter-company royalties, from 1 September 2010, HMRC’s Provisional Treaty Relief Scheme (PTRS) has been replaced in its entirety by the Syndicated Loan Scheme (SLS).

B-3.2 Reform of CFC regime?: summary of main proposals:
The main proposals in HM Treasury’s discussion document http://online2.ibfd.org/linkresolver/static/ tns_2010-01-27_uk_1 on the reform of the CFC regime are summarised below.

Scope?:

—  The rules will operate on an ‘entity basis’.

—  There will be objective tests to exclude subsidiaries where there is low risk of artificial diversion.

— The rules will be drafted on an ‘exemption’ basis. Thus, a CFC meeting certain prescribed criteria is exempted from the regime.

—  Chargeable gains of a CFC remain excluded.

— A new test will replace the ‘lower level of tax’ test. The effect of the new test should be to exclude companies in territories with tax rates and tax bases similar to the UK. If implemented as expected, the HM Treasury hopes that this would obviate the necessity for a white list.

Exemptions:

— There will be objective tests that will exclude from the regime CFCs undertaking genuine trading activities. Here, special attention will be given to intra-group activities. The legislation will need to be drafted carefully to ensure that such activities are not caught if they do not pose a risk to the UK tax base.

— Extension of the ‘trading company exemption’ to bring within its ambit genuine offshore treasury operations and the active manage-ment of intellectual property.

— Extension of the ‘trading company exemption’ to non-trading income of a trading company where such income is incidental or ancillary to the trade.

—  Specific exemption for particular activities where there is no artificial diversion of profits from the UK, e.g., certain reinsurance subsid-iaries and property subsidiaries.

— Increase in the de minimis limit from GBP 50,000.

— Two further routes to exemption, to apply where other exemptions are not available. One will apply where exemptions are narrowly missed, or where a one-off transaction results in a test being failed. The intention is to leg-islate for some flexibility in these areas. The second avenue is a reformed motive test.

— Proposals to extend the current ‘period of grace’ motive clearance arrangements.

B-3.1 HMRC issue revised International Tax Manual

— Interaction between self-assessment re-gime and treaty non-residence (company) rules?:

HMRC have revised their International Tax Manual (INTM), in particular, the section dealing with treaty non-residence.

A new paragraph (INTM120075) has been added. INTM120075 deals with the interaction between the self-assessment regime and the treaty non-residence rules. A dual-resident company, or a potential dual-resident company, should comply with the normal self-assessment rules where applicable. Where a determination is currently underway of its tax residence status, the company should, nevertheless, continue submitting its tax returns while awaiting the outcome of the determination.

A company must self-assess its place of effective management where there is a relevant standard tie-breaker clause. Where the outcome of the tie-breaker depends on agreement between the competent authorities, the company must self-assess, while awaiting the outcome of the deliberations. The self-assessment should be based on relevant information, including any relevant treaty provisions.

In addition, INTM120070 has been revised. That paragraph addresses the following:

—    residence under a tax treaty;
— a list of the UK’s tax treaties in force at 1 December 2009 showing separately those which contain a tie-breaker for companies and those which do not;

—  tax treaties with standard tie-breakers;

—  tax treaties with non-standard tie-breakers;

— how to deal with cases where a company is treated as not resident in the United Kingdom, as a result of the tie-breaker rules (‘S. 249 cases’);

—  compliance considerations;

—  place of effective management;

—  UK holding companies;

—  other effects of S. 249; and

— Companies which were already treaty non-resident on 30 November 1993.

B-4 Australia:
B-8.1 Framework Rules for Sovereign Investments:

Consultation Paper released:

On 23 June 2010, the Government released Consultation Paper that deals with the Framework Rules for Sovereign Investments. It seeks to clarify and provide certainty as to the Australian tax consequences for certain investments made by foreign governments, and the withholding tax obligations for Australian residents.

The Paper states that the policy objective behind the proposed law is to enhance Australia’s attractiveness as a destination for foreign government investment, but also to make sure that the concessional tax treatment afforded under sovereign immunity does not shelter the commercial operations of foreign governments.

Briefly, the framework seeks to exclude from the exemption from Australian taxation (including with-holding tax) of activities of ineligible entities, gains from carrying on a business or from profit-making undertakings. The Paper discusses the definition of eligible entities, including sovereign funds and eligible activities, and provides a number of examples.

B-8.2 Tax treaties — ATO automatic exchange audit report released:

The Australian National Office released on 18 May 2010 a 110-page report that deals with the management and use of information collected under the automatic exchange of information (AEOI) mechanism with the tax treaty partners.

The report notes that while the ATO is increasingly reliant on its data-matching capabilities, the ATO faces a number of challenges and limitations in establishing and using the information exchange as part of its compliance programme activity, including differences in language, legal systems, time zones, financial year- ends and the organisational priority afforded to automatic information ex-changes in different jurisdictions. Notwithstanding the difficulties, the report finds that the manage-ment of the programme has been sound.

The report notes that the ATO has a generally non-discriminatory approach to sending the AEOI date to treaty partners, even where the partner does not reciprocate with sending data to the ATO — the report states that approximately 40% of treaty partners regularly sent AEOI to the ATO over the last five years.

The report says that the ATO receives largest amount of information (by dollar value) from New Zealand (37%), Canada (19%), Denmark (16%), Norway (8%), France (5%), Japan (4%) and the UK (3%). The number of annual data records received by the ATO fluctuates between 200,000 and 500,000.

The outgoing AEOI (by dollar value) were provided to the US (36%), the UK (24%), New Zealand (7%), Japan (6%), Singapore (5%) and the Netherlands (4%). The annual number of data records fluctuates between 1.1 and 1.9 million.

B-8.3 Draft anti-roll-up provisions
— Further clarification?:

Following an earlier release of the Draft Legislation that will implement the anti-roll-up rules, the Treasury on 7 May 2010 released the Draft Explanatory Memorandum to the Draft Legislation that provides important explanations of the operation of the proposed anti-roll-up rules.

By way of background, as part of a review of the Australia’s anti-deferral regimes, the Foreign Investment Fund (FIF) provisions will be repealed and replaced by the anti-roll-up (ARU) provisions. The FIF provisions are designed to supplement the CFC rules and apply to investments of residents to foreign entities that are primarily engaged in finance-like and passive investment activities, providing that the Australians do not control the foreign entity. (If the foreign entity is controlled by Australian residents, the CFC provisions apply instead.)

In contrast, the proposed ARU provisions will target investments by residents in foreign accumulation funds that reinvest interest-like returns. The ARU provisions will apply to “foreign accumulation funds” which are entities that are foreign resident,

not a CFC, do not distribute substantially all profits and gains and have investment returns that are subject to a low level of risk.

The Draft Explanatory Memorandum explains when the returns are considered to be subject to a low level of risk.

The returns will be subject to a low level of risk where?the?return on investments held by the foreign entity is sufficiently certain, such as interest paid on government bonds or bank call deposits. Specifically, a return will be considered to be sufficiently certain if it is reasonably expected that the foreign entity will receive returns on the assumption that it will hold the instrument till maturity and at least some amount of the return is fixed or determinable with reasonable accuracy at the time of the investment. This is tested on an annual basis.

B-8.4 MITs — New tax system:

The Assistant Treasurer announced on 7 May 2010 the new taxation regime for Managed Investment Trusts (MIT) that aims to provide certainty and simplification and to end the confusion between trust and tax law. The proposed changes will commence from 1 July 2011.

At present, taxation of beneficiaries in any trust, including managed investment schemes, is determined on the basis of their present entitlement which may result in double taxation in some cases. Further, there has been significant divergence between the rules dealing with the taxation of the trusts and their practical enforcement and application by the industry.

The proposed regime aims to correct these out-comes by implementing the following measures:

— Unitholders in MITs will be taxed on the taxable income that the trustee allocates to them (rather than on their present entitlement under the trust deed);

— Unders and overs, that is minor corrections to the calculation of the net income of an MIT will be allowed to be carried to the following year and taken into account in the calculation of the net income in the following year (rather than effectively allowing this treatment under the ‘industry practice’);

— Cost base of units in MITs will be increased by amounts that have been taxed to the unitholder, but not yet received (this will eliminate the current potential for double taxation on the disposal of the units before the distribution is received);

— Corporate trust rules in Division 6B of the Income Tax Assessment Act, 1936 will be repealed (at present, these rules may require certain trusts to be taxed as companies, but the reason for the existence of these rules have long been abolished).

B-8.5 Taxation laws to be reviewed to facilitate

Islamic finance:

The Assistant Treasurer announced on 26 April 2010 that the Board of Taxation would undertake a comprehensive review of Australia’s tax laws to ensure that they do not inhibit the development of Islamic finance, banking and insurance products. He mentioned that the review is not about grant-ing a special treatment of concessions for Islamic finance or its providers, but about ensuring that the tax system does not unfairly disadvantage or preclude such instruments.

B-8.6 ATO comments on classification of US

LLC:

The ATO released an interpretative decision dealing with the classification of US Limited Liability Companies (LLC). In its Interpretative Decision ATO ID 2010/77, the ATO confirmed that a single- member US LLC may qualify as a foreign hybrid company for the purposes of Australia’s foreign hybrid provisions in Division 830 of the Income Tax Assessment Act, 1997. In particular, it notes that while a single-member LLC cannot be treated as a partnership for the US tax purposes, it is nevertheless treated as an entity disregarded as an entity separate from the owner and therefore the condition in Ss.830-15(2) will be satisfied.

B-8.7 Treaty between Australia and US — ATO comments on classification of US LP?:

The ATO has released an interpretative decision dealing with the classification of US Limited Partnerships (LP).

Interpretative Decision ATO ID 2010/81 states that a US LP established under the State law of Delaware is not treated as a ‘company’ for the purposes of Art. 10 of the tax treaty between Australia and United States, but is treated as a partnership.

In particular, the ATO ID 2010/81:

— confirms that a US LP may qualify for treaty benefits, as it is a ‘person’ and a ‘resident’ under the treaty;

— however, it states that dividend distributions to the US LP will not qualify for a reduction of the Australian withholding tax rate under Art. 10 of the treaty, as the distributions are not received by a ‘company’;

— in reaching this conclusion, the ID considers the definition of a ‘company’ under the treaty and notes that a US LP is neither a ‘body corporate’ or ‘an entity treated as a company for tax purposes’;

— the ID notes that a US LP is, prima facie, a ‘body corporate’ under the ordinary meaning of the term in Australia, even though a US LP does not enjoy a continued existence;

—  however, the ID states that the definition should be interpreted in light of the context of the treaty and refers to the Commentaries to Article 3 of the OECD Model Convention that requires the examination of the rules of the State in which the entity is organised and not those of the source State. In the US, a LP is not a ‘body corporate’ and therefore it should not qualify as such under the treaty;

— further, the ID notes that a US LP is not treated as a company for tax purposes under the tax laws of the US, as an LP cannot qualify for the check-the-box election.

B-8.8 Subordinated notes are debt for tax purposes — Regulations issued:
The Income Tax Assessment Amendment Regulations, 2010 (No. 3) were registered on 14 April 2010 that apply to the relevant payments after 1 July 2001 (i.e., from the introduction of the debt/ equity rules).

Briefly, the debt/equity rules in Division 974 of the Income Tax Assessment Act, 1997 operate to classify financial arrangements as either debt or equity for income tax purposes. A financial arrangement may be classified as debt if there is

    non-contingent obligation to provide financial benefits under the arrangement.

However, term cumulative subordinated notes could not formally qualify as debt as the obligations under the notes were subject to insolvency or capital adequacy conditions, i.e., the payments under the note were contingent on the payer remaining solvent or satisfying the capital adequacy requirements. Such conditions are common for banks and other regulated entities (e.g., bond traders).

While the note could not qualify as debt, it would also not qualify as equity and returns on the notes could be non-deductible under the principle set up by the St. George case [St. George Bank v. FCT, (2009) FCAFC 62].

The Regulations allow disregarding the subordination and treating the note as a debt interest, subject to the note satisfying other relevant conditions.

B-5 Sweden:

Amendments to CFC rules proposed:

On 14 April 2010, the Swedish Tax Agency published its report on the controlled foreign company (CFC) rules (the Report). The Report proposes amendments to the current CFC rules. The main proposals are summarised below.

White list — IP income:
Under the general rule, income of a CFC is deemed to be subject to low taxation and subsequently taxable in the hands of the owner of the CFC, if it is not taxed, or is subject to a tax rate lower than 14.5%. The income is, however, not considered to be subject to low taxation if the foreign legal entity is a tax resident and liable to income tax in one of the countries listed in a ‘white list’, provided that the income in question has not been expressly excluded.

Currently, financial income has been excluded for some of the countries in the ‘white list’. The Report proposes that income from patents, trademarks, licences and other similar IP rights would also be excluded in respect of the following countries in the ‘white list’:

CFC resident in EEA:

Furthermore, the Report proposes to abolish the exemption applicable to income from a CFC resident in an EEA state. This exemption currently applies if the shareholder can prove that the foreign entity (i) is established in the other country for business reasons, and (ii) is engaged in real economic activities there.

B-6 Saudi Arabia:

New procedure of withholding tax refund:

The Department of Zakat and Income Tax (DZIT) issued on 23 May 2010, Circular No. 3228/19 to clarify the procedure of claiming withholding tax refund where a tax treaty applies.

Under the procedure, which applies to resident companies and to permanent establishments in Saudi Arabia of non-resident companies, where payment is made to a non-resident with no PE in Saudi Arabia, the payer must withhold tax at the rates provided for in the Income Tax Regulations.

Such rates apply even if an effective tax treaty provides for lower rates (or for an exemption). In such a case, the payer is required, under the procedure, to submit a letter to the DZIT requesting the refund of the overpaid tax. The letter must be accompanied with the following:

— a letter from the non-resident recipient requesting the refund of the overpaid tax;

— a certificate of residence issued by the competent authorities of the country of residence of the recipient proving that the latter is a resident of that country under the treaty and that the amount paid is subject to tax in that country; and

— a copy of the withholding tax form submit-ted to DZIT by the payer, together with the receipt of payment of tax.

The Circular does not specify an effective date, but it may reasonably be expected that it applies to payments made after its date of issuance (i.e., 23 May 2010). The Circular also does leave a number of other questions unanswered particularly with respect to the consequences of non-application of the procedure (i.e., direct application of treaty rates by the payer), the time frame of refund, etc.

Further details will be published as soon as they become available.

B-7 France:

New limited liability entity for sole proprietorship — law adopted and published?:
On 16 June 2010 the Law No. 2010-658, providing for a new limited liability entity for sole proprietorship [enterprise individuelle à responsabilité limitée (EIRL)], was published in the official journal. This publication follows the adoption of the law by the Parliament on 12 May 2010, and its approval by the Constitutional Council on 10 June 2010. However, this law will not become effective until the government enacts further regulations. Key elements of this new legal structure are summarised below:

    Introduction of a separate capital allocated to the enterprise. A sole proprietorship will be entitled, by filing an official declaration stating the creation of an EIRL, to benefit from a capital allocated to its enterprise distinct from its private capital. The assets allocated to that separated capital (patrimoine d’affectation) will be listed on a distinct balance sheet and, consequently, deemed solely dedicated to the business and liabilities of the enterprise. As a result, the individual entrepreneur will no longer be personally liable for all debts of the enterprise, especially in case of liquidation.

    Introduction of an election to corporate income tax. For tax purposes, the EIRL will be allowed to elect for assessment under the corporate income tax rules. By doing so, the disparity between the tax treatment of sole proprietorship and companies will be removed. In particular?:

— the profits realised by the EIRL will be subject to a reduced rate of 15% up to EUR 38,120, and to a flat rate of 33.33% for the excess;

— the salary payments paid by the EIRL to the individual entrepreneur, in consideration of his work, will be deductible;

— the social contributions will only be levied on such remuneration, and not on the whole profits realised by the EIRL; and

— any capital gains (or loss) that may arise from the disposal of the assets included in the EIRL’s capital (i.e., shown on its balance sheet), will be subject to the corporate income tax rules.

B-8 China (People’s Rep.):
B-8.1 Taxation on interest derived by foreign branches of Chinese financial institutions
— Treaty treatment clarified:

The State Administration of Taxation (SAT) issued a ruling on 2 June 2010 [Guo Shui Han (2010) No. 266] clarifying the taxation on interest derived by foreign branches of Chinese financial institutions. The content of the ruling is summarised below.

A branch established in a third country by a foreign financial institution, which is exempt from income tax under the tax treaty concluded between China and the country of the foreign financial institution, may receive the same treaty benefit (exemption) unless the treaty expressly states that only the head office is entitled to the exemption. The exemption is subject to the administrative rules on the approval procedure in respect of granting treaty benefits [Guo Shui Fa (2009) No. 124].

A foreign branch (non-legal entity) established by a Chinese resident bank is treated as a Chinese resident. The tax treaty between China and the country where the branch is located does not apply to the interest derived from Chinese source by such a branch. The interest must be taxed under the Chinese domestic laws and regulations, by reference to the ruling on the taxation of interest derived by non-residents [Guo Shui Han (2008) No. 955], regardless of whether the interest is paid by a Chinese resident or a Chinese branch of a non-resident.

B-8.2 Technology transfer — Treaty treatment clarified:
The State Administration of Taxation (SAT) issued a ruling on implementation of treaty articles on 26 January 2010 [Gui Shui Han (2010) No. 46]. The ruling supplements a previous ruling regarding the article on royalties [Guo Shui Han (2009) No. 507]. The content of the new ruling is sum-marised below.

As a general rule, technical services related to the transfer of the right to use proprietary technology constitutes part of the technology transfer; hence, the income arising from these services is to be classified as royalties for the purposes of the treaty. However, if the beneficial owner of the royalties carries on business through a permanent establishment (PE) in the state in which the royalties arise and the royalties received are effectively connected with that PE, and if the transferor of the technology seconds personnel to the user of the technology to provide technical services which due to the duration of the services constitute a PE according to the tax treaty, Article 7 (business profits) of the relevant treaty shall apply to that income and Article 15 (employment income) shall apply to the personnel providing the services. Where there is no PE and the income arising from such services cannot be attributed to a PE, such income remains subject to Article 12 (royalties).

In cases where the fees for technical services are paid by the user immediately after the conclusion of the contract on the technology transfer, and it cannot be established in advance whether the provision of services will continue long enough to constitute a PE, Article 12 shall apply. However, if it is subsequently established that there is a PE and the royalty income is effectively connected with that PE, the tax treatment has to be ad-justed according to the Article 7 and Article 15, as described above.

For contracts entered into before 1 October 2009 which are still being executed, this Ruling and the Ruling [Guo Shui Han (2009) No. 507] will apply as long as the tax treatment of income from the contract has not been determined. If the tax treatment of the contract was determined before 1 October 2009 according to Article 15, there will be no adjustments.

B-9 Finland:

Tax administration publishes handbooks on inter-national and individual taxation?:
On 12 May 2010, the tax administration published the following 2 handbooks which provide up-to-date information on the tax legislation currently in force with references to recent case law?:

— Handbook on international taxation 2010 (Kan-sainvälisen verotuksen käsikirja 2010); and

— Handbook on individual taxation 2010 (Hen-kilöverotuksen käsikirja 2010).

The handbooks are published in Finnish. The Hand-book on international taxation, however, includes a Finnish-English tax glossary.

B-10 Germany:

Ministry of Finance publishes guidance on application of tax treaties regarding partnerships?: Recently, the Ministry of Finance published guidance in the form of an official letter dated 16 April 2010, regarding the application of tax treaties to partnerships.

The guidance comments on various forms of partnerships, and the qualification of the partners profit shares. The guidance covers both the treatments of:

— non-resident partners of domestic partnerships, and

— resident partners of foreign partnerships.

The guidance in particular deals with:

— the partnership’s entitlement to treaty benefits;

— the qualification of partnership income as profits under Article 7 of the OECD Model Convention;

— the application of the permanent establishment proviso [Article 10(4), Article 11(4), Article 12(3)];

— the treatment of conflicts of qualifications.

The guidance also:

— contains a separate chapter on the treatment of special payments, i.e., remuneration derived by a partner (i) for activities performed for the partnership, (ii) for the granting of loans, or (iii) for the use of the partner’s assets by the partner-ship. The guidance stipulates that such payments qualify as business profits within the scope of

Article 7 of the OECD Model Convention;

— provides for an overview of specific provisions of certain treaties concluded by Germany re-garding a partnership’s entitlement to treaty benefits and comments on specific forms of foreign partnerships.

The guidance can be downloaded on the website of the Ministry of Finance (www.bundesfinanzministerium.de).

B-11 Belgium:

Circular on tax amnesty and voluntary additional declaration for individuals published:

Recently, the tax administration published Circular CIRH 81/562.220 ET 118.235 (AOIF no. 28/2010) of 1 April 2010 to clarify:

— the tax amnesty regime with respect to income from foreign savings accounts introduced by the Program Law 2005;

— the submission of a voluntary additional declaration; and
— related matters.

Note?: The matters below apply only to individuals.

Tax amnesty:

— It is possible to request for an amnesty period of 3, 5 or more years;

— Tax amnesty cannot be requested in case of money laundering.

— The tax amnesty does not preclude a tax audit with respect to the income concerned, which may result in a re-classification of the income concerned and the imposition of additional tax (but not result in penalties or tax increases).

Voluntary additional declaration:

— Generally, interest will be charged and a pen-alty will be imposed. A penalty will, however, be waived if (i) the non-declaration was the result of a mistake, minor negligence or lack of knowledge, and (ii) the penalty would have been at least 10%.

— A voluntary additional declaration can also be made with respect to foreign savings income in cases where a withholding tax was withheld under the Savings Directive (2003/48). If so, the foreign withholding tax can be credited with the additional tax and penalties imposed.

Statute of limitations:

— In cases where the term of limitation to issue an additional assessment has expired, a criminal procedure could nevertheless still be initiated.

B-12 Russia:

Central?Region?Federal?Arbitrary?Court?—?individual’s day of arrival disregarded for residence test?: An individual is deemed to be a resident of Russia for income tax purposes if he is physically present in Russia for at least 183 days during any 12-month period. On 11 March 2010, the Central Region Federal Arbitrary Court confirmed that an individual’s day of arrival in Russia is disregarded for these purposes.

B-13 Chile:

Amendments improve protection of taxpayer’s rights:

Law 20.420, published in the Official Gazette of 19 February 2010, introduced amendments to the Tax Code, which include a list of the taxpayer’s rights, e.g.:

— the right to be informed, at the start of a tax control or audit, of its nature and subject, and to know at any moment the situation of his tax affairs and of relevant proceedings;

— the right to know the name and position of the tax officials responsible for the proceedings in which the taxpayer is involved;

— the right to refuse the filing of documents which are already in the hands of the tax administration, and to get them back once the proceeding is finalised; and

— the right that the intervention of the tax administration is carried out without unnecessary delays, requests or waiting, once the official in charge has received all the necessary documentation.

The acts or omissions of the tax administration that violate any of the rights listed in the Tax Code may be the object of a complaint with the new independent tax tribunals (see TNS?: 2009-01-07?:?CL-1). In those regions where the new judges are not yet operative, the complaint may be filed with the ordinary civil court.

The taxpayer may opt for the serving of notices from the tax administration by electronic mail.

When a tax audit or control begins with the request of documents, the tax administration will have 9 months, from the filing of all the docu-ments, to either ask for a clarification under Article 63 of the Tax Code, assess the tax that may be due, or charge that tax (where assessment is not necessary). The term is 12 months (instead of 9) in the following cases?:

— a tax audit on transfer pricing;

— an assessment of taxable income of taxpayers with sales or receipts above 5,000 monthly tax units;

— a control of tax consequences of a company reorganisation; and
— a control of transactions with related enter-prises.

The terms referred to are not applicable when information from a foreign authority is necessary or in cases of tax crimes.

The tax administration must audit and decide refund requests originating on loss-offset within 12 months.

B-14 New Zealand:
Taxation of non-residents investors in PIEs — Is-sues Paper released:
On 14 April 2010, an officials’ Issues Paper, entitled ‘Allowing a zero percent tax rate for non-residents investing in a PIE’, was released jointly by the In-land Revenue and the Treasury. The Paper invites comments from interested parties on proposals to exempt from New Zealand income tax foreign-sourced income derived by a non-resident through a portfolio investment entity (PIE).

New Zealand operates a typical income tax system under which a New Zealand resident is taxed on both domestic and foreign-sourced income, and a non-resident is taxed only on income derived from New Zealand. However, non-residents investing in foreign assets through a PIE, are subject to New Zealand tax on all income from the PIE.

The Issues Paper puts forward two proposals, which exempt from tax foreign-sourced income derived by a non-resident through a PIE?:

— For a PIE with resident and non-resident investors that derives only foreign-sourced income, the non-residents would have a zero portfolio investor rate of tax (PIR) for all income of the PIE, whereas standard PIRs would apply to residents.

— For a PIE with both resident and non-resident investors earning New Zealand and foreign-sourced income in which the PIE tracks each type of income and apportions expenses to that income, the non-resident investors would be subject to tax according to the type of income derived by the PIE, as follows:

The Issues Paper sets out a number of advantages and disadvantages associated with each option, and also invites public submissions on them. Sub-missions should be made by 4 June 2010.

B-15 Singapore:
Abolishment of withholding tax on management fees:

It has been reported that withholding tax will no longer apply on management services rendered by non-residents entirely outside of Singapore on or after 29 December 2009, even if the service fees contain a mark- up element. Previously, the withholding tax did not apply only where the service fees represented a reimbursement of costs incurred by non-residents without any profit mark-up.

It should be noted that management services rendered before 29 December 2009 and paid at a later date continue to be subject to with-holding tax where they contain a profit mark-up element.

This development follows the passing of the Income Tax (Amendment) Act, 2009 which was gazetted on 29 December 2009.

C. Developments in respect of transfer pricing:
C-1 Indonesia:

Introduction of transfer pricing regulations?: The Director General of Taxation (DGT) has introduced transfer pricing (TP) regulations for Indonesian taxpayers, via Regulation No. PER-43/ PJ/2010 which took effect on 6 September 2010. The Regulation is based significantly on the OECD’s TP Guidelines, and its main contents are summarised below.

Scope?:

The Regulation applies to transactions between related parties which have an impact on the reporting of income or expenses for corporate tax purposes, including?:

— the sale, transfer, purchase or acquisition of tangible goods and/or intangible goods;

— payments of rental fees, royalties, or other payments for the provision of or use of both tangible and intangible property;

— income received or costs incurred for the provi-sion of or utilisation of services;

— cost allocations; and

— the transfer or acquisition of property in the form of a financial instrument, as well as income or costs from the transfer or acquisition of the financial instrument.

Arm’s-length principle?:

Taxpayers who earn income or incur expenses of IDR 10 million and above must implement the ALP according to the following steps?:

— perform a comparability analysis;

— determine the most appropriate TP method;

— apply the ALP to the tested transaction based on the result of the comparability analysis and the selected TP method; and

— document each step of the process in determin-ing the ALP or profit in consideration of the prevailing tax regulations.

The comparability analysis to be undertaken is consistent with that outlined in the OECD’s guidelines and internal comparables are preferred over external comparables.

The Regulation also endorses the five OECD TP methods, and specifically states that the hierarchy is as follows?:

— comparable uncontrolled price (CUP) method;

— resale price method (RPM);
— cost plus method (CPM);

— profit split method (PSM); and

— transactional net margin method (TNMM).

Special transactions:

  a)  Services: In order for services transactions to be in compliance with the ALP, it is necessary to confirm that the service is actually rendered, that it provides the recipient with a commer-cial or economic benefit, and that the value of the service fee is in line with comparable arm’s-length service fees or with the costs that would have been incurred by the recipient had it performed the activities itself. No service fee should arise where a parent company performs an activity in its capacity as shareholder of the group.

  b)  Royalties: In case of royalties, it is necessary to confirm that the transaction actually takes place, that the intellectual property provides a commercial/economic benefit to the licensee, and that the royalty paid is consistent with comparable arm’s-length royalties. A compa-rability analysis for royalty transactions should consider:

— the geographical coverage;

— exclusive or non-exclusive character of any rights granted; and

— whether the licensee has the right to participate in further developments of the property by the licensor.

Documentation:

A taxpayer’s TP documentation must at least include:

— an overview of the company, such as group structure, organisation chart, shareholding structure, business operations, list of competitors and a description of its business environment;

— price policy and/or cost allocation policy;

— comparability analysis;

— list of selected comparables; and

— application of the selected TP method.

Other:

The Regulation states that the DGT is empowered to make primary and secondary TP adjustments, and that mutual agreement procedures and advance pricing arrangements are available to taxpayers.

C-2 United States:

IRS confirms withdrawal of proposed transfer pricing regulations on controlled services transactions and intangibles:

The US Internal Revenue Service (IRS) has issued Announcement 2010-60 confirming its withdrawal of proposed regulations issued on 10 September 2003 regarding the treatment of controlled services transactions and the allocation of income from intangibles u/s.482 of the US Internal Revenue Code.

The proposed regulations were withdrawn due to the subsequent issuance of final regulations on these topics on 4 August 2009.

The withdrawal was previously announced on 7 September 2010 in the US Federal Register.

C-3 Brazil:

New transfer pricing rules (resale price method) revoked — PM 478/2009 terminated: Provisional Measure 478/2009 was not converted into law by the Congress. PM 478/2009 was officially terminated through the enactment of the National Congress Declaratory Act 18/2010, published in the Official Gazette of 15 June 2010.

Note?: PMs are issued by the President of Republic without the intervention of the legislature power. It is valid for a 60 calendar-day period, which may be extended for 60 days. After this period, the PM loses its effect, unless it is approved and converted into law by the Congress. Accordingly, the measures reported at TNS?: 2010-02-26?:?BR-1 have lost their effect.

C-4 Australia:

Draft ruling on business restructures and transfer pricing released:

The Australian Taxation Office released on 2 June 2010 for discussion Draft Taxation Ruling TR 2010/ D2 that deals with the application of transfer pricing provisions to business restructures. The Draft Ruling:

— defines ‘business restructuring’ as an arrange-ment where assets and/or risks of a business are transferred between jurisdictions, such as a conversion of a distributor into a sales agent or transfer of ownership and management of intangibles. However, the Draft Ruling does not deal with permanent establishment issues that a restructuring may give rise to or the application of general anti-avoidance rules.

— requires that the arm’s-length approach is used for business restructuring, which may require that all of the circumstances relevant to the arrangement are taken into account to compare the arrangement to dealings between indepen-dent parties and arm’s length. Specifically, the Draft Ruling states that the ATO does not accept the view that the transfer pricing provisions can only have regard to a specific transaction when deciding whether the parties were dealing at arm’s length.

— Notes that restructures are often conducted to obtain a tax benefit and existence of such benefit would not, by itself, show that the re-structure was not done at arm’s length.

— Does not prescribe a specific arm’s-length pricing method that should be applied to business restructures, and states that the most appropriate method should be applied.

C-5 Vietnam:
Transfer pricing regulations amended:

The Ministry of Finance has issued Circular 66/2010/ TT-BTC, which amends the current transfer pricing regulation Circular 117/2005/TT-BTC. Circular 66 will take effect on 6 June 2010.

Scope:

Circular 66 limits the application to transactions between enterprises and their affiliated parties and, unlike Circular 117, does not cover individuals.

Related parties:

Under Circular 66, the definition of ‘related parties’ includes limited liability companies.

Under Circular 117, there was a test of affiliation whereby a 20% ownership of ‘total assets’ in another company will render the parties as being related. Circular 66 has replaced this test with these criteria in determining related party relationships, i.e., two companies are related if:

— one provides the other with a guarantee or grants a loan which constitutes at least 20% of the owner’s equity of the guaranteed party/ borrower, and that loan accounts for more than 50% of the total value of long and medium term loans of the guaranteed party/borrower; or

— they both hold, either directly or indirectly, at least 20% of the owner’s equity of a third party.

Material difference:

Under Circular 66, any factor that triggers at least a 1% increase/decrease in the unit price of transacted products, or 0.5% increase/decrease in the gross profit ratio or profitability ratio, is considered as a ‘material difference’, for which appropriate adjustments in the financial information of the comparable transactions should be made.

Comparative analysis:

Circular 66 emphasises that, for aggregated transactions:

— the sale price is the highest price; and

— the purchase price is the lowest price.

Arm’s-length price:

Circular 66 provides guidance on how to determine arm’s-length prices in unique sale and purchase transactions. An adjustment of the transfer price shall be made as follows:

— Sales transaction?: if the price, gross profit ratio or profitability ratio is lower than the median of the inter-quartile range, the arm’s-length value is a value equal to or higher than the median of the range. This aims to ensure that the Viet-namese seller charges the highest possible price within the arm’s-length range with respect to cross-border controlled transactions.

— Purchase transactions: if the price is higher than the median of the inter-quartile range, the arm’s-length value is a value equal to or lower than the median of the range. This limits the purchase price that the Vietnamese purchaser can purchase goods or services to a value equal to or lower than the median of the arm’s-length range with respect to cross-border controlled transactions.

C-6 Indonesia:

C-6.1 Transfer pricing — Increased focus (Documentation):
It has been reported that the Tax Office has stepped up its scrutiny of transfer pricing cases in Indonesia.

In July 2009, the Tax Office imposed a requirement that taxpayers submit 3 related party forms along with the corporate income tax return beginning fiscal year 2009. This requirement is introduced under DGT Regulation No. PER-39/PJ/2009 dated 2 July 2009, as follows?:

— Form 3A requires full details of all related-party transactions;

— Form 3A-1 requires a list of 15 yes and no questions regarding documentation prepared to support related-party transactions and to demonstrate arm’s-length compliance; and

— Form 3A-2 requires details on related-party trans-actions with companies in tax haven countries.

C-6.2 Transfer pricing — Increased focus (Bench-marking ratios):
It has been reported that the Tax Office has stepped up its scrutiny of transfer pricing cases in Indonesia.

On 5 October 2009, the Tax Office issued Circular Letter SE-96/PJ/2009 which provides guidance on benchmarking ratios that they would expect to see within certain industries, such as palm oil, pharmaceuticals, construction, real estate, cigarettes, food and beverages and others.

The benchmarking ratios include gross profit margins, operating profit margins, pre-tax profits, dividend pay-out ratios etc., which may be used by the Tax Office in selecting taxpayers for transfer pricing audits and queries.

Acknowledgment:

We have compiled the above information from the Tax News Service of the IBFD for the months of January to June, 2010 and for the month of September, 2010.