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) Australia
(i) Federal Court holds non-resident manager of portfolio of Australian shares for non-resident companies liable to tax in Australia
The Federal Court on 8th September 2010 handed down a decision in Leighton v. FCT, (2010) FCA 1086 that dealt with taxation in Australia of a non-resident manager who was managing a portfolio of Australian shares for two non-resident companies.
Briefly, Mr. Leighton was, during the relevant period, a resident of Monaco and was not a resident of Australia. He was engaged by two companies, who were not tax resident in Australia and were incorporated in the British Virgin Islands and the Bahamas, to manage a portfolio of Australian shares for them and to provide other services incidental to the management services. Mr. Leighton opened a bank account in Australia and engaged a number of Australian brokers and an Australian custodian. The trading instructions were given by Mr. Leighton, on behalf of the two companies, from Monaco. The trading activities generated taxable income during the relevant period.
Non-residents are subject to tax in Australia only on income sourced in Australia. The judgment does not discuss whether the relevant income has a source in Australia and, presumably, assumes that it does.
After considering the facts, the judgment concludes that Mr. Leighton, in acting as a manager, was, during the relevant period, a trustee of a trust for the non-resident companies as beneficiaries. As such, he is liable for tax for the taxable profits under former section 98(3) of the Income Tax Assessment Act, 1936.
(ii) Treaty between Australia and US: US LLC disregarded under treaty
The Australian Taxation Office released Interpretative Decision ATO ID 2010/188 that confirms that:
— A limited liability company (LLC) incorporated in the United States that has a single owner and is disregarded as an entity separate from the owner for the US tax purposes, is not a resident of the US under the tax treaty between Australia and the US.
However, — where the single owner is a treaty resident of the US, it may be entitled to benefits under the treaty in respect of income derived by the LLC.
(iii) ATO rules on private equity investments into Australia: revenue/capital distinction; treaty shopping; source rules; treaty protection
On 11th November 2010, the Australian Taxation Office (ATO) released two final determinations and two draft determinations that deal with taxation of private equity investments into Australia.
Two final determinations were released in draft in 2009 after an unsuccessful attempt by the ATO to collect AUD 678 million in tax and penalties from the TPG Group in respect of the listing of the Myer group in Australia. By the time the ATO issued the assessments, the funds had left Australia. It has been reported that the ATO has yet to collect the outstanding debt.
(iv) Foreign Managed Fund Exemption announced
The Assistant Treasurer announced that taxation law will be amended to implement a new foreign managed fund exemption. The exemption, called the Investment Manager Regime, is intended to apply to investment income of foreign managed funds that is attributable to a permanent establishment in Australia arising from the activities in Australia of a dependent agent of the fund.
It appears that the exemption will apply to tax treaty investors only. Fund management fees will continue to be subject to tax in Australia.
(v) Taxation of trusts clarified by Federal Court
The Federal Court handed down a decision in Colonial First State Investments Limited v. FCT, (2011) FCA 16 that deals with taxation of net income of unit trusts. Specifically, the judgment deals with the effect of a change in a trust deed on the income of beneficiaries of the trust in case of redemption of units. The changes of the deed were affecting both redeeming and remaining unit holders.
(vi) Non-resident may be required to withhold income tax, FBT
The Australian Taxation Office released Taxation Determination TD 2011/1 that expresses a view that where a non-resident entity pays an Australian resident for work performed overseas, the nonresident entity may be required to withhold income tax under the Pay-As-You-Go (PAYG) provisions and become subject to Fringe Benefits Tax (FBT) if the non-resident entity has a sufficient connection with Australia, such as, for example, a physical presence in Australia.
The Taxation Determination also states that if the foreign entity does not have PAYG obligations, it will not be subject to FBT.
(vii) Final ruling on business restructures and transfer pricing released
The Australian Taxation Office (ATO) has released Taxation Ruling TR 2011/1, which deals with the application of domestic transfer pricing provisions and Australian tax treaties to business restructuring. The ruling was previously released as Draft Taxation Ruling TR 2010/D2 and expresses a view that in applying to business restructuring arrangements, both domestic transfer pricing provisions and associated enterprises articles of Australia’s tax treaties require following the arm’s-length principle and therefore the 3-step process adopted by the ATO to transfer pricing analysis should equally be applied to business restructuring.
(viii) NDF execution is not trading in currency
The Australian Taxation Office (ATO) released an Interpretative Decision (ID) ATO ID 2011/27 stating that execution of non-deliverable forwards (NDF) is not trading in currency or rights in respect of currency.
In reaching this decision, the ATO noted that NDSs are very similar to wagering contracts and relied on an 19th century judgement for a definition. Further, the connection with the reference currency is too remote for an NDF to confer a right in respect of a currency.
The implication of this ID would be that income from executing NDFs with residents would not qualify for a reduced income tax rate of 10% under the Offshore Banking Unit (OBU) rules.
(ix) Final ruling on interaction of thin capitalisation and transfer pricing rules issued
The Australian Taxation Office (ATO) released final ruling TR 2010/7 on the interaction between the transfer pricing and thin capitalisation provisions. The ruling was previously released in draft as TR 2009/D6 (see TNS: 2009-12-21: AU-2), and was not substantially changed from the earlier draft ruling.
Briefly, the ATO expresses a view that the transfer pricing provisions may apply to a loan that satisfies the safe harbour test under the thin capitalisation provisions. As such, loans should be priced based on commercially realistic outcome. This may include consideration of parental affiliation, as well as other circumstances of the parties (including, for example, the ability of the borrower to borrow from unrelated third parties or prevailing market and economic conditions).
The ruling has retrospective application.
(2) United States
(i) Small Business Jobs Act of 2010 signed
— The Act extends the carryback period for eligible small business credits from one year to five 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 five years for built-in gains of Sub-chapter S corporations that convert from prior Subchapter C status.
— The Act increases the maximum amount a taxpayer may elect to deduct in connection with the cost of qualifying section 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 section 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 maximum 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 of the 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 heightened sub-stantiation requirements and special depreciation rules do not apply.
— The Act imposes the same information reporting requirements (i.e., IRS Form 990-MISC) on tax-payers 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.
(ii) IRS confirms withdrawal of proposed trans-fer 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 4th August 2009.
The withdrawal was previously announced on 7th September 2010 in the US Federal Register. For a report, see TNS: 2010-09-09: US-1.
(iii) IRS announces non-acquiescence in VERITAS transfer pricing case
The US Internal Revenue Service (IRS) has issued an Action on Decision (AOD) announcing that it does not acquiesce in the result or the reasoning of the US Tax Court’s decision in VERITAS Software Corporation and Subsidiaries v. Commissioner of Internal Revenue, 133 T.C. No. 14 (Docket No. 12075-06, 10 December 2009), reported in TNS: 2009-12-21: US-1.
(iv) Guidance issued on FTC splitting transactions
The US Treasury Department and Internal Revenue Service (IRS) have issued Notice 2010-92 (the Notice) with guidance on foreign tax credit (FTC) splitting transactions. These are transactions in which the FTC is separated (i.e., split) from the associated foreign income and claimed by a US taxpayer prior to the tax year in which such income is subject to tax in the United States.
(v) Proposed regulations extend reporting re-quirements for US bank interest paid to all non-residents
The US Treasury Department and the Internal Revenue Service (IRS) have issued proposed regulations u/s. 6049 of the US Internal Revenue Code (returns regarding payments of interest). The proposed regulations provide guidance on the information reporting requirements for interest paid to non-resident individuals on deposits maintained at US offices of specified financial institutions.
The regulations are proposed to be effective for payments made after 31st December of the year in which the regulations are adopted as final.
The US Treasury Department and the IRS have requested comments on the regulations and a public hearing is scheduled for 28th April 2011.
(vi) US Treasury Department reissues list of boycott countries that result in restriction of US tax benefits
The US Treasury Department has reissued 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 was not included in the list but that its future status remained under review. The list is dated 19th January 2011 and was published in the Federal Register on 28th January 2011. The new list is unchanged from the list issued on 23rd November 2010.
(vii) IRS issues updated Publication 514 — Foreign Tax Credit for Individuals
The US Internal Revenue Service (IRS) has released the 2011 revision of Publication 514 (Foreign Tax Credit for Individuals). The Publication is dated 27th January 2011 and is intended for use in preparing 2010 tax returns.
(viii) IRS announces 2011 offshore voluntary disclosure initiative
The US Internal Revenue Service (IRS) has announced a second special voluntary disclosure initiative designed to bring offshore money back into the US tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes (News Release IR-2011-14). The new initiative, called the 2011 Offshore Voluntary Disclosure Initiative (OVDI), is available through 31st August 2011.
Taxpayers participating in the 2011 OVDI must file all original and amended tax returns and pay back-taxes and interest for up to eight years as well as accuracy-related and/or delinquency penalties by the deadline.
The overall penalty structure for the 2011 OVDI is higher than the 2009 Offshore Voluntary Disclosure Program. As a result, taxpayers who did not come forward through the 2009 OVDP, which ended on 15th October 2009, will not be rewarded for procrastinating.
The 2011 OVDI imposes a 25% penalty on the amount in the foreign bank accounts in the year with the highest aggregate account balance between 2003 and 2010. Taxpayers in limited situations may be eligible for lower penalties of 5% or 12.5%.
A taxpayer can qualify for a 5% penalty if the taxpayer meets all the following cumulative conditions:
— the taxpayer did not open the account;
— the taxpayer has exercised minimal and infrequent contact with the account;
— the taxpayer has not withdrawn more than USD 1,000 from the account in any year covered by the 2011 OVDI; and
— the taxpayer can establish that all applicable US taxes have been paid on funds deposited to the account.
The 5% penalty also applies to taxpayers who are foreign residents and who were unaware they were US citizens.
Taxpayers whose offshore accounts or assets did not exceed USD 75,000 in any calendar year covered by the 2011 OVDI can qualify for a 12.5% penalty.
According the IRS News Release, taxpayers hiding assets offshore who do not come forward will risk far higher penalties as well as the possibility of criminal prosecution.
The IRS has also launched a new section on its website (www.IRS.gov) that contains the full terms and conditions of the 2011 OVDI, including:
— an extensive set of Q&A’s for frequently asked questions and answers;
— the procedures for a voluntary disclosure, including contact points and mailing addresses; and
— a list of documents, worksheets, and forms needed to participate in the 2011 OVDI.
The IRS website also includes information on the 2009 OVDP.
(ix) IRS issues updated Publication 513 — Tax information for visitors to US
The US Internal Revenue Service (IRS) has released the 2011 revision of Publication 513 (Tax Information for Visitors to the United States). The publication is dated 23rd February 2011 and is intended for use in preparing 2010 tax returns.
(x) IRS issues updated Publication 515 — Withholding of Tax on Non-resident Aliens and Foreign Entities
The US Internal Revenue Service (IRS) has released the 2011 revision of Publication 515 (Withholding of Tax on Non-resident Aliens and Foreign Entities). The publication is dated 11th March 2011 and is intended for use in 2011.
Publication 515 provides guidance for withholding agents who pay income to foreign persons, including non-resident aliens, foreign corporations, foreign partnerships, foreign trusts, foreign estates, foreign governments and international organisations.
(xi) IRS announces availability of IRS Free File for US taxpayers abroad
The US Internal Revenue Service (IRS) has announced that US taxpayers abroad can now use IRS Free File to prepare their US tax returns and then e-file them free of charge (News Release IR-2011-30). Free File will be available until 17th October 2011 in order to accommodate overseas taxpayers who file on or before the regular deadline of 15th June 2011 as well as taxpayers who claim the six-month extension.
(xii) IRS releases frequently asked questions on reporting uncertain tax positions
The US Internal Revenue Service (IRS) has issued seven frequently asked questions (FAQs) regarding the requirement to report uncertain tax positions (UTPs) on IRS Schedule UTP. The FAQs are intended to supplement the information contained in the 2010 instructions and in the other guidance issued on Schedule UTP.
The IRS noted that additional FAQs on Schedule UTP may be forthcoming.
(xiii) US Treasury issues final regulations on reporting foreign financial accounts
The Financial Crimes Enforcement Network (FinCEN) of the US Department of the Treasury has issued final regulations amending the Bank Secrecy Act (BSA) regulations regarding reports of foreign financial accounts. Under the BSA regulations, a US person having a financial interest in or signature or other authority over financial accounts in a foreign country is required to report such accounts by filing Form TD-F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), and to maintain the records of the accounts for five years. No report is required if the aggregate value of the accounts does not exceed USD 10,000.
(xiv) US individuals sentenced for hiding assets offshore
The US Department of Justice (DOJ) and the US Internal Revenue Service (IRS) announced that US Federal District Court judges sentenced US individuals to three years probation for hiding assets in offshore bank accounts (DOJ Press Releases dated 4th March 2011 and 14th March 2011).
(3) Indonesia
(i) 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 6th September 2010. The Regulations are based significantly on the OECD’s TP Guidelines, and its main contents are summarised below.
Scope
The Regulations apply 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.
The Regulations also endorse the five OECD TP methods, and specifically state 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).
(ii) Guidelines for implementing CFC rule
The Tax Office issued Regulation PER-59/PJ/2010 on 30th December 2010, which provides further guidance on the implementation of the controlled foreign corporation (CFC) rule. The CFC rule applies to all Indonesian investment in all foreign countries, except where the foreign company’s shares are listed on a recognised stock exchange.
The salient points of the Regulation are summarised below:
— qualifying shareholders are deemed to receive dividends from the CFC;
— in the fourth month after the annual corporate income tax return deadline, or
— seven months from the end of the financial year, where (i) the company is not obliged to file a tax return or (ii) where the tax filing deadline is not stipulated;
— the deemed dividends are calculated based on the shareholding percentage and the CFC’s after-tax profits;
— the dividends must be reported by the shareholders in the annual corporate income tax returns together with the CFC’s financial statements;
— the CFC rule does not apply if the CFC has distributed dividends to the qualifying shareholders consistently with the prescribed formula and before the above-mentioned deadline;
— dividends received in excess of the deemed dividends must be reported in the shareholders’ corporate income tax returns in the year the dividends are distributed; and
— a foreign tax credit is available on foreign tax paid or withheld on the dividend.
Acknowledgement
We have compiled the above information from the Tax News Service of the IBFD for the months of October, 2010 to March, 2011.
