In this Article, we have given brief information about the recent global developments in the sphere of international taxation which could be of relevance and use in day-to-day practice and which would keep the readers abreast with various happenings across the globe in the arena of international taxation. We intend to keep the readers informed about such developments from time to time in future.
(1) United Kingdom
(i) Finance (No. 1) Act, 2010 — New measures regarding DOTAS
On 19 October 2010, Her Majesty’s Revenue & Customs (HMRC) announced that it was anticipated that the package of five measures revising and extending disclosure of tax avoidance schemes (DOTAS), which were issued for consultation following the Pre-Budget Report 2010-11 and in respect of which legislation was included in Finance (No. 1) Act, 2010 will be implemented on 1st January 2011. Some of the descriptions of schemes (‘hallmarks’) requiring disclosure that were the subject of the consultation will, however, be implemented in 2011-12.
(ii) Tax avoidance clampdown — New measures announced
On 6th December 2010, the Exchequer Secretary to the Treasury announced a number of anti-avoidance measures.
The following measures take immediate effect:
— legislation to prevent groups of companies using intra-group loans or derivatives to reduce the group’s tax bill (group mismatch schemes); and
— legislation aimed at schemes involving accounting derecognition, i.e., where a company does not fully recognise in its accounts certain amounts involving loans and derivatives.
Further details will be published in respect of the following measures:
— legislation to address the practice of disguised remuneration (basically arrangements involving trusts or other vehicles);
— legislation aimed at avoidance involving changes in the functional currency of an investment company. The legislation is expected to take effect for accounting periods beginning on or after 1st April 2011; and
— legislation targetting VAT avoidance involving ‘supply splitting’. The legislation is expected to come into force with effect from the date of Royal Assent to the Finance Bill, 2011.
(iii) Disclosure of Tax Avoidance Schemes — Extension to certain inheritance tax transfers
On 6th December 2010, HMRC published a document in response to the consultation on bringing within the disclosure regime inheritance tax (IHT) on transfers of property into trust.
The Disclosure of Tax Avoidance Schemes (DOTAS) regime came into force on 1st August 2004. It introduced an obligation to report to HMRC certain tax avoidance arrangements. Broadly, where an arrangement is notifiable, the promoter must, within a specified time, provide HMRC with details of the arrangement. In certain cases, the obligation to report is shifted from the promoter to the user of the scheme.
The scheme currently covers income tax, capital gains tax, corporation tax, national insurance contributions, VAT, and stamp duty land tax.
(iv) Statement of Practice on Advance Pricing Agreements updated
On 17th December 2010, HMRC issued an updated version of Statement of Practice on Advance Pricing Agreements (APAs) SP3/99 so as to provide greater transparency regarding the processes in respect of APAs for businesses and advisors and also to cover the relevant legislative changes that have been enacted since 1999.
The updated version of SP3/99 is available on the HMRC website.
(v) GAAR — Study group established
On 14th January 2011, HM Treasury announced that it had been notified of the experts who will work on the study into a General Anti-Avoidance Rules (GAAR) and the areas that the experts will cover. This follows the announcement on 6th December 2010 that a study group would be established to explore the case for GAAR in the United Kingdom.
The topics that the study group will consider include:
— consideration of the existing experience with GAARs and other anti-avoidance principles in other jurisdictions;
— what a UK GAAR could usefully achieve; and
— what the basic approach of a GAAR should be.
The study will also consider whether or not a GAAR could deter and counter tax avoidance, whilst providing certainty, retaining a tax regime that is attractive to business, and minimising costs for businesses and HMRC.
The study group will complete its work by the 31st October 2011 and will report its conclusions to the UK Treasury.
(2) Italy
(i) Tax Authorities issue Ministerial Circular No. 51/E: new CFC regime clarified
On 6th October 2010, the Italian Tax Authorities (ITA) issued Ministerial Circular No. 51/E (the Circular) aimed at providing further clarifications in respect to the new CFC regime introduced on 1st July 2009 by Article 13 of the Anti-crisis Law Decree No. 78 converted into Law No. 102/2009.
(3) South Africa
(i) Transfer pricing and thin capitalisation rules revised
The Taxation Laws Amendment Act of 2010 has introduced new transfer pricing (TP) rules. Section 31 of the Income-tax Act of 1962 has been repealed and replaced. The main reason for introducing new TP rules is to further align the Income-tax Act with Article 9 of the OECD and UN Model Tax Conventions. This is in view of the fact that: — the current wording focusses on separate transactions, as opposed to overall arrangements driven by an overarching profit objective;
— the current wording seems to emphasise the comparable uncontrolled price method over other TP methodologies;
— the emphasis, in the current legislation on ‘price’ as opposed to ‘profits’ does not neatly align with tax treaty wording, potentially creating difficulties in the mutual agreement procedures available under tax treaties; and
— the need to directly merge thin capitalisation rules into the TP rules, as opposed to having parallel rules as is currently the case.
The revised legislation comes into effect on 1st October 2011.
(ii) Regional headquarter company regime introduced
In order to make South Africa an ideal location for multinational enterprises wishing to invest in Africa, a regional headquarter (HQ) company regime has been introduced vide the Taxation Laws Amendment Act of 2010. The regime is intended to address some tax barriers to the setting up of regional holding companies in South Africa.
(4) Thailand
Additional tax incentives package for Regional Operating Headquarters
On 27th October 2010, Royal Decree No. 508 (RD 508) was issued that added another package of tax incentives for Regional Operating Headquarters (ROH). With the advent of RD 508, a company may opt to apply for the old or new package of tax incentives. A company that wishes to apply for the new package is required to notify the Thai Revenue Department within five years from the date specified by the Director-General (to be announced later). RD 508 is effective from 28th October 2010.
(5) Mauritius
Budget for 2011 — Details
The Budget for 2011 was presented to the Parliament by the Minister of Finance on 19th November 2010. Details of the Budget, which unless otherwise indicated will apply from 1st January 2011, are summarised below.
Direct taxation
(a) Corporate taxation
— corporate entities operating in the real estate business will be taxed as a separate taxable person at the rate of 15% instead of being taxed at the level of their individual partners;
— corporate entities holding Category 1 Global Business Licence, previously limited to carry on business offshore, will be allowed to conduct business both inside and outside Mauritius. Accordingly, foreign source income derived by such entities will continue to benefit from foreign tax credits while their domestic income will be subject to tax at the standard rate; and
— the current preferential corporate tax regime applicable to companies established in Free Trade Zones has been extended for two additional years.
(b) Personal taxation
— interest income will be exempt from in come tax;
— individuals with total income (inclusive of exempt income) exceeding MUR 2 million will be subject to a 10% solidarity tax on their exempt income; this will apply in addition to their personal tax liability;
— new statutory deductions for individuals are introduced and include:
- deduction for interest expense on loans for the first acquisition/construction of a residence; and
- deduction for educational expenses in respect of children undertaking undergraduate studies at the university; and
— a reintroduction of tax exemption on income generated from the first 60 tonnes of sugar for small sugar-cane farmers with less than 15 hectares of land and who rely solely on income from sugar farming.
(c) Capital gains tax
— gains from the sale of immovable property will be taxed at the rate of 15% for corpo rate entities. A reduced rate of 10% will apply for individuals after an exemption of MUR 2 million.
(d) Other direct tax measures
— costs undertaken in the context of sugar-related business reform, such as factory closure costs, will be tax deductible;
— the threshold for the exemption from land conversion tax for small and medium planters is raised from 1 to 2 hectares;
— the 5% surcharge on land transfer tax introduced in 2008 is removed; and
— a fixed fee of MUR 350,000 per hectare is levied on the transfer of land conversion rights between unrelated parties.
Other measures
(a) Tax management
— the deadline for e-filing of tax returns is extended for 15 days; and
— small sugarcane farmers are not required to file an income tax return.
(b) Company laww
The Trust Act is amended to allow unlimited duration for non-charitable purpose trusts.
(6) Japan
Transfer pricing
In accordance with the amendments to the OECD Transfer Pricing Guidelines, the proposed amendment in the transfer pricing regime include:
— priority of methods adopted in calculating arm’s-length price;
— arm’s-length price range; and
— secret comparables.
Tax haven rules (CFC)
Under the proposal, there are amendments to:
— the effective income tax rates;
— the exemption conditions (Regional Headquarters Company);
— the calculation of aggregated income; and
— the passive income aggregation rule.
Foreign tax credits
Under the proposal, there are amendments to:
— the scope of foreign taxes;
— creditable foreign taxes;
— the scope of foreign source income; and
— the creditable limit of foreign taxes.
New special incentives for Comprehensive Investment Zones/Asian Base in Japan
(a) Special incentives for Comprehensive Investment Zones
— A 50% initial depreciation or a tax credit of 15% of the acquisition costs of assets will be available for company conducting business as stipulated in International Strategy Special District Plan. This rule will be applied to assets acquired from the day the new regime become effective until 31st March 2014; or
— reduction of 20% taxable income for each fiscal year ending prior to the day five years from the day on which the designation was obtained.
A company will not eligible for both incentives at the same time.
(b) Special incentives for Asian base in Japan
Under the proposal, to encourage foreign companies to set up a R&D centre or regional headquarters in Japan, Japanese subsidiary of a foreign company designated by competent ministers will enjoy the following incentives:
— reduction of 20% taxable income which relate to such designated business for each fiscal year ending prior to the day five years from the day on which designation is obtained; and
— defer tax for income from excising stock option of a foreign parent company granted to the directors and employees.
(7) Singapore
Budget for 2011 — Details
The Budget for 2011 was presented to the Parliament by the Finance Minister on 18th February 2011. Main details of the Budget, which unless otherwise indicated will apply from the year of assessment (YA) 2012, are summarised below:
Direct taxation
(a) Corporate taxation
— for the YA 2011, companies with a 20% corporate tax rebate capped at SGD 10,000. Small and medium-sized enterprises (SMEs) will receive the higher of the 20% rebate or a cash grant amounting to 5% of the company’s revenue, but capped at SGD 5,000. The cash grant is available only to SMEs that made Central Provident Fund (CPF) contributions in YA 2011;
— a foreign tax credit (FTC) pooling system will be introduced, under which FTC is computed on a pooled basis for each particular stream of foreign income (FI) remitted into Singapore. The amount of FTC to be granted will be based on the lower of the pooled foreign taxes paid on the FI and the pooled Singapore tax payable on such FI, subject to the resident taxpayer meeting certain conditions;
— businesses can claim pre-commencement revenue expenses incurred in the accounting year immediately preceding the accounting year in which they earn the first dollar of trade receipts;
— the tax deduction of 250% on contributions to Institutions of Public Charter (IPCs) will be extended for another five years for donations made during 1st January 2011 to 31st December 2015;
— eligible companies that make voluntary contributions to the Medisave accounts of their self-employed person (SEP) partners from 1st January 2011 can deduct up to SGD 1,500 per SEP per year. The SEPs would be exempt from tax on these contributions;
— with effect from 1st April 2011, banks and other approved or licensed financial institutions will be exempt from withholding tax on interest and other qualifying payments made to all non-resident persons (excluding permanent establishments in Singapore), if the payments are made for the purpose of their trade or business; and
— companies that set up special purpose vehicles (SPVs) to acquire shares for their equity-based remuneration schemes can deduct the cost of the shares, subject to conditions.
(b) Personal taxation
— a one-off personal income tax rebate of 20% that is capped at SGD 2,000 will be granted to all residents for YA 2011;
— taxpayers will be exempted from tax on alimony and maintenance payments they receive under a court deed or deed of separation;
— spouse relief and handicapped spouse relief will no longer be granted to taxpayers for maintaining their former spouses; and
(c) Tax incentives
— various enhancements were made to existing incentives, such as:
- Productivity and Innovation Credit (PIC);
- Global Trader Program (GTP);
- Finance Treasury Centre (FTC);
(8) OECD
(i) OECD — Report on disclosure initiatives for tackling aggressive tax planning released
On 1st February 2011, the OECD published a report on tackling aggressive tax planning through improved transparency and disclosure, which was prepared by the Aggressive Tax Planning Steering Group of Working Party 10 of the Committee of Fiscal Affairs (CFA).
The report was adopted by the CFA on 3rd January 2011 and outlines the importance of timely, targeted information to counter aggressive tax planning and provides an overview of disclosure initiatives introduced in some OECD countries.
(ii) OECD — Transfer pricing aspects of intangibles — Scoping document released
On 25th January 2011, the Committee on Fiscal Affairs released the scoping document regarding its new project on the transfer pricing aspects of intangibles.
The work will focus on the following aspects:
— The development of a framework for analysis of intangible-related transfer pricing issues.
— Definitional aspects.
— Specific categories of transactions involving intangibles, such as research and development activities, differentiation between intangible transfers and services, marketing intangibles, other intangibles and business attributes.
— How to identify and characterise an intangible transfer.
— Situations where an enterprise would at arm’s length have a right to share in the return from an intangible that it does not own.
— Valuation issues.
The work is expected to lead to an update of the existing guidance on intangibles which is found in Chapter VI of the OECD Transfer Pricing Guidelines (TPG). In addition, a review will be carried out of the existing guidance in Chapter VIII of the TPG on Cost Contribution Arrangements, although the extent of any further work that might be needed on that chapter remains to be decided.
(9) Miscellaneous
(i) Austria — Ministry of Finance publishes Transfer Pricing Guidelines
On 28th October 2010, the Austrian Ministry of Finance published the Transfer Pricing Guidelines 2010; the first domestic transfer pricing guidelines ever published by the Ministry of Finance. The Guidelines deal with selected transfer pricing issues such as the methodology to be used, group internal financing, business restructuring and documentation requirements, but also with issues that are usually not directly linked to transfer pricing, such as permanent establishments, the Authorised OECD Approach and abuse of law by interposing companies.
(ii) Treaty between Denmark and Luxembourg — Danish Tax Tribunal rules Luxembourg intermediary beneficial owner of Danish interest; Parent-Subsidiary Directive applies
On 17th November 2010, the Danish Tax Tribunal (Landskatteretten) published a decision (SKM 2010.729 LSR) and held that a holding company resident in Luxembourg was the beneficial owner of interest distributed by a holding company resident in Denmark. Details of the decision are summarised below.
Facts
A number of private equity funds and other investors acquired a Danish holding company (DK HoldCo) through a holding company resident in Luxembourg (Lux HoldCo). DK HoldCo distributed dividends to its parent company, Lux HoldCo. On the day of distribution of the dividends, Lux HoldCo granted two loans (one convertible loan and the other an ordinary loan) to DK HoldCo equal in amount to the distributed dividends. At the end of the income year in which the loans were granted, the convertible loan including the accrued interest, was converted into shares of DK HoldCo. In the following income year the ordinary loan, including the accrued interest, was also converted into shares of DK HoldCo. The Danish tax authorities concluded that the interest payments on the loans were subject to withholding tax, and required that the DK HoldCo should pay a withholding tax on the interests distributed to the Lux HoldCo, for two reasons:
— Lux HoldCo was not the beneficial owner of the interest since (i) it did not carry out an active business but the holding of shares in
DK HoldCo, and (ii) had no real power to act regarding the disposition of the interest.
— the Interest and Royalty Directive (the Directive) does not prevent Denmark from levying withholding tax on the interests as the Directive only applies if the beneficial owner of the interests is a company or a permanent establishment resident in a Member State.
Legal background
Under the Danish law, interest paid to a foreign-related entity (i.e., an entity owning or controlling, directly or indirectly, more than 50% of the share capital or voting power in the company paying the interest) is subject to a withholding tax. No withholding tax is, however, levied if the withholding tax is reduced or abolished by a tax treaty or by the Directive. Under the Denmark-Luxembourg treaty (the Treaty), interests paid to a resident in the other contracting state can only be taxed in that other state if that resident is the effective beneficial owner of the interest [Art. 11(1)].
Issue
The issue was whether the Luxembourg holding company was the beneficial owner of the interest received from a Danish company, and subsequently qualified for the Treaty protection and/or protection under the Directive.
Decision
The Tax Tribunal emphasised, by referring to their earlier case law (see TNS:2010-04-23:DK-1), that a conduit company could only be disregarded as the beneficial owner of interest if the interest was redistributed. As the interest was not redistributed but converted into shares of the DK HoldCo, Lux HoldCo could not be regarded as a conduit company in respect of the interest. Thus, Lux HoldCo was held to be the beneficial owner of the interest under the Treaty and the Directive. The Tax Tribunal ruled in favour of the taxpayer and thereby overruled the decision made by the tax authorities.
Acknowledgment
We have compiled the above information from the Tax News Service of the IBFD for the months of October, 2010 to March, 2011.
