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International Tax NewsEdition 55September 2017
WelcomeKeeping up with the constant flow of international tax developments worldwide can be a real challenge for multinational companies. International Tax News is a monthly publication that offers updates and analysis on developments taking place around the world, authored by specialists in PwC’s global international tax network.
We hope that you will find this publication helpful, and look forward to your comments.
Shi‑Chieh ‘Suchi’ LeeGlobal Leader International Tax Services NetworkT: +1 646 471 5315E: [email protected]
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In this issue
Legislation OECD and EU UpdatesAdministrativeJudicial Treaties
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LegislationArgentina
Argentina’s non-resident capital gains tax: developments expected on payment mechanism
The Argentine Tax Authorities on July 17, 2017 issued General Resolution No. 4094-E. This set forth a mechanism to pay capital gains tax on the transfer of shares in Argentine companies when both the buyer and the seller are non-Argentine residents.
The General Resolution came into effect on July 18, 2017 and applies to taxable transactions that occurred on or after September 23, 2013. This is the date the capital gains tax on non-residents was introduced. However, on July 20, 2017, three days after issuance of the General Resolution, the Argentine Tax Authorities issued General Resolution No. 4095-E establishing a 180-day suspension of the application of General Resolution No. 4094-E.
See our PwC Insight for more detail.
PwC observation:Multinational enterprises (MNEs) that sold shares in Argentine companies on or after September 23, 2013 or are planning to do so should consider their options for determining the capital gain.
Non-resident sellers residing in jurisdictions with foreign tax credit systems should consider whether they can claim foreign tax credits for withholding taxes paid three or four years after the sale. This assumes that the withholding tax agent has been able to recover the tax paid from the seller.
Ignacio RodriguezArgentinaT: +54 11 4850 6714 E: [email protected]
John A SalernoNew York, NYT: +1 203 539 5733E: [email protected]
Ramón Mullerat SpainT: +34 91 568 5534 E: [email protected]
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Belgium
Belgian government announces corporate tax reform
The Belgian Federal government on July 26, 2017, reached a ‘summer agreement’ on a tax, economic, and social reform package. The tax reform centers around budget neutrality, simplification, and fair taxation.
Currently no details on the measures are available. The announced measures still must be formalised in draft legislation after the summer break. Draft legislation would only be available in September or October.
In particular, the government announced the following corporate income tax measures:
• The general corporate tax rate of 33.99% would fall to 29% in 2018 and 25% in 2020. Small and medium enterprises (SMEs) would see a decrease in the rate to 20% in 2018 for the first tranche of EUR 100,000. These rates would increase with the crisis tax, which also would decrease for 2018 and would be abolished in 2020.
• Companies also would be encouraged to make more tax prepayments.
• The measures would introduce tax consolidation beginning in 2020. Then, only the consolidated tax base would be subject to corporate income tax.
• To compensate these new measures, a minimum taxation would be imposed on companies having a taxable profit over EUR 1 million (by limiting certain deductions). Certain deductions could be claimed only on 70% of the profits exceeding the EUR 1 million threshold. The remaining 30% would be fully taxable at the above-mentioned new rate.
• By 2020 all measures included in the EU Anti-Tax Avoidance Directive would be implemented, introducing all of the rules on controlled foreign corporations (CFCs); earnings before interest, tax, depreciation, and amortization (EBITDA) interest limitation; exit taxation and hybrid mismatches.
• The measures would abolish the separate 0.4% capital gains tax on shares, while also aligning the conditions to benefit from the capital gains exemption with those applicable to the dividends received deduction.
• The notional interest deduction, although maintained, would be modified to stimulate the increase of equity and would no longer apply on the total amount of the company’s qualifying equity (some transitional rules would be available).
• At this stage, the fate of the Fairness Tax remains unclear as the tax reform package does not include this topic.
• The measures would extend the research and development (R&D) wage withholding tax exemption for scientific research personnel to include bachelor degree holders.
Furthermore, SMEs would be able to benefit from a temporarily increase of the investment deduction from 8% to 20%.
PwC observation:Clients should closely monitor the developments regarding the announced tax reform and assess the impact this may have on their Belgian activities.
For more information, refer to PwC Belgium’s tax reform website.
Pascal JanssensAntwerpT: +32 3 259 3119E: [email protected]
Maarten TemmermanAntwerpT: +32 3 259 3021E: [email protected]
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Korea
Korea announces tax reform proposals
The Korean government announced new tax reform proposals on August 2, 2017. Korean inbound investors should be aware of the following corporate tax proposals:
• Increase in corporate income tax rate for taxable income exceeding KRW 200 billion: Under the proposals, the corporate income tax rate for taxable income exceeding KRW 200 billion would increase to 25% from 22%. The tax rates applicable to taxable income of KRW 200 billion or less would not change.
• Limitation on utilization of tax losses: Currently, the amount of tax losses that a Korean entity can carry over from prior years generally is limited to 80% of current year taxable income. For entities other than SMEs, the limitation would be reduced to 60% for fiscal years starting on January 1, 2018 and 50% for fiscal years starting on January 1, 2019.
• Introduction of hybrid mismatch rules: Consistent with the Organisation for Economic Co-operation and Development’s (OCED) recommendations in base erosion and profit shifting (BEPS) Action 2, Korea proposes to introduce new rules that limit interest expense deductions related to hybrid mismatch arrangements.
• Introduction of a new interest capitalisation rule: In line with the OECD’s recommendations on the limitation of interest expense deductions (BEPS Action 4), Korea proposes new rules that would limit the net interest deductions for loans from overseas related parties to 30% of adjusted taxable income (with some exceptions for banking and insurance companies). With the interaction of the existing thin capitalisation rules, that the proposal would allow companies to apply the rule that results in the greatest interest disallowance. These new rules would apply for fiscal years beginning on or after January 1, 2019.
• New rules to replace the existing tax on excess corporate earnings: The existing rules that apply a 10% additional tax if the use of corporate earnings for qualifying expenditure falls short of certain thresholds are scheduled to expire on December 31, 2017. A proposal to replace the existing rules would apply a 20% additional tax on excess corporate earnings if the use of those earnings falls short of certain threshold amounts computed using one of two methods:
Method A: [(adjusted taxable income for a year limited to KRW 200 billion multiplied by a prescribed rate between 60-80%) minus (the total amount of qualifying expenditure including facility investments, wage increases and certain other expenditure)] multiplied by 20%, or
Method B: [(adjusted taxable income for a year limited to KRW 200 billion multiplied by a prescribed rate between 10-20%) minus (the total amount of wage increases and certain other expenditure)] multiplied by 20%.
Unlike the existing excess corporate earnings tax rules, dividend payments are excluded from the scope of qualifying expenditure. Also, a weighting would be given to certain items of qualifying expenditure, e.g., a weighting of 150% would be given for the amount of wage increases. Under the proposal, the rules would apply for three years from January 1, 2018 to December 31, 2020.
PwC observation:The proposed tax law changes are the first under Korean president Moon Jae-In, elected as the South Korean president earlier in 2017. The changes align with his election pledges of encouraging job creation, youth employment, and corporate investment. The proposals demonstrate the government’s commitment to implement the OECD’s BEPS project recommendations.
Foreign companies invested in Korea should assess how the proposed changes may impact them. The proposals may be subject to some modifications before being finalized for submission to the National Assembly in September. If approved by the National Assembly, most of the proposed changes are expected to be effective on January 1, 2018.
Alex Joong‑Hyun LeeSeoulT: +82 2 709 0598E: [email protected]
Sang‑do LeeSeoulT: +82 2 709 0288E: [email protected]
Robert BrowellSeoulT: +82 2 709 8896E: [email protected]
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Luxembourg
Luxembourg proposes IP tax regime
Luxembourg’s Finance Minister, Pierre Gramegna, on August 4, 2017, introduced a bill for a new Intellectual Property (IP) regime. The proposed regime, which is in line with the Minister’s previous announcements, would be a beneficial tax regime based on the ‘modified nexus’ approach.
Two main groups of IP assets could benefit from this regime: (i) inventions under patent protection, utility models, and other IP rights that are functionally equivalent to patents; and (ii) software protected by copyright under national or international norms. Eligible net income from qualifying IP rights, which mainly include royalties, capital gains, embedded IP income from the sale of products and services, and judicial indemnities related to an eligible IP, would benefit from an 80% tax exemption. Qualifying IP rights, those directly connected to eligible IP rights, also would benefit from a full net wealth tax exemption. Under the nexus approach, a ratio applies to ensure that the proportion of income that may benefit from the exemption regime equals the one between qualifying expenditures and overall expenditures.
The proposal aims to attract investment while complying with new EU and international tax standards. In particular, the IP regime would comply with the conclusions reached in the OECD’s BEPS report on Action 5, related to the substantial activity requirement.
If enacted, the provisions would become effective beginning in tax year 2018. In addition, they would apply noncumulatively in parallel with the former Luxembourg IP regime until the expiration of the latter’s grandfathering period on June 30, 2021.
See our PwC Insight for more detail.
PwC observation:The current Luxembourg IP regime may be limited because only companies with existing valid rulings can benefit from the grandfathering rules. For many MNEs, IP planning in Europe within the context of BEPS has been challenging given the increased uncertainty. The introduction of a new IP regime within the OECD standards, even if more restrictive than the previous one, provides new business opportunities for utilizing IP.
Maarten VerjansNew York City, NYT: +1 646 471 1322E: [email protected]
Alina MacoveiLuxembourgT: +352 49 48 48 3124E: [email protected]
Gerad CopsLuxembourgT: +352 49 48 48 2032E: [email protected]
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Netherlands
Netherlands proposes amendments to the Dutch Dividend Withholding Tax Act
Draft legislative amendments to the Dutch Dividend Withholding Tax Act on the withholding tax position of Dutch cooperatives (the Consultation Document) were open for consultation through June 13, 2017. The Consultation Document is not yet a formal legislative proposal but rather a draft proposal. The Consultation Document seeks to align the dividend withholding tax treatment of holding cooperatives with that of Dutch tax-resident entities whose capital is divided into shares (BVs/NVs). The Consultation Document also proposes introducing a more extensive unilateral dividend withholding tax exemption in conjunction with anti-abuse rules along the lines of Action 6 of the OECD BEPS project. The Dutch Ministry of Finance believes the draft proposal, if enacted, will address European Commission observations on differential treatment of cooperatives, maintain a strong fiscal investment climate, and counter international tax avoidance through the use of Dutch cooperatives in specific situations.
PwC observation:We anticipate that a formal legislative proposal will be published on Dutch Budget Day (September 19, 2017) and is intended to become effective January 1, 2018.
Clark NoordhuisNew York City, NYT: +646 471 7435E: [email protected]
Arjan FundterNew York City, NYT: +646 471 6089E: [email protected]
Michiel MoisonNew York City, NYT: +646 471 3091E: [email protected]
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Netherlands
Netherlands updates on measures from ATAD1
The Netherlands, on July 10, 2017, launched a consultation, which is the first step to implementing the first EU Anti-Tax Avoidance Directive (ATAD1) which the EU agreed upon in 2016. The consultation contains a draft proposal (the consultation document) for implementing the minimum measures from ATAD1. Given the Netherlands’ current political status, the consultation has left the more fundamental choices that the ATAD1 provides to the next government. The consultation document proposes an earnings stripping rule, CFC measures, and additional measures for exit taxation. The consultation document does not contain any proposed measures with respect to the effect of hybrid mismatches; these measures will take effect beginning January 1, 2020, according to the second EU ATAD (ATAD2).
See our PwC Insight for more detail.
PwC observation:The deadline for submitting comments has passed. However, companies should continue to follow the ATADs to determine if any future documents could impact their transactions.
Clark NoordhuisNew York City, NYT: +646 471 7435E: [email protected]
Arjan FundterNew York City, NYT: +646 471 6089E: [email protected]
Michiel MoisonNew York City, NYT: +646 471 3091E: [email protected]
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Nigeria
Nigeria introduces Voluntary Assets and Income Declaration Scheme
The Nigerian Acting President, on June 29, 2017, launched the Voluntary Assets and Income Declaration Scheme (VAIDS). The VAIDS, which commenced on July 1, 2017, will continue through March 31, 2018. VAIDS is designed to encourage voluntary disclosure of previously undisclosed assets and income for the purpose of paying outstanding tax liabilities. The Federal Inland Revenue Service (FIRS), in collaboration with the Internal Revenue Services of the 36 Nigerian states and the Federal Capital Territory, is implementing the VAIDS.
The VAIDS’s main objective is to increase the number of taxpayers and raise tax revenue. It also has other key objectives, such as:
• increasing Nigeria’s tax-to-GDP ratio to 10-15% from the current 6%
• broadening the national tax base • reducing non-compliance with existing tax laws, and • discouraging illicit financial flows and tax evasion.
Taxpayers that make full and honest declarations will receive: waivers of interest and penalties, immunity from prosecution, exemption from tax audits for the periods covered, confidentiality, and flexible payment terms for any tax due.
Taxes covered include the companies’ income tax, personal income tax, petroleum profits tax, capital gains tax, value added tax, stamp duties, tertiary education tax, and the National Information Technology Development (NITDA) levy. The VAIDS applies to all persons (individuals, companies, executors, trustees, partnerships, etc.) liable for tax in Nigeria Taxpayers that do not participate in the VAIDS will be investigated. If found culpable those taxpayers will be subject to criminal prosecution. The government will publish a ‘name and shame’ list of tax evaders.
See our PwC Insight for more detail.
PwC observation:Given the state of the Nigerian economy with the significant fall in oil production, continued decline in commodity prices, ballooning budget deficit, and rising debt-servicing costs, the government has continued to try and diversify the economy, with immediate focus on increasing tax collections. MNEs with businesses in Nigeria are encouraged to correct any areas of noncompliance with their tax obligations. We anticipate that the government’s aggressive tax revenue focus will continue at least until the economy fully recovers. In addition, we expect the government to apply more stringent measures to collect tax and enforce compliance after it introduces the VAIDS’s ‘window of leniency’.
Omoike W ObawaekiHouston, TXT: +1 713 356 6046E: [email protected]
Gilles J de VignemontNew York City, NYCT: +1 646 471 1301E: [email protected]
Taiwo OyedeleNigeriaT: +234 1 271 1700E: [email protected]
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Switzerland
Switzerland recommends new corporate tax proposal
Since the Swiss corporate tax reform III (CTR III) package was rejected by popular vote in February 2017, a Swiss governmental working group, comprised of federal and cantonal members (steering body), has been working on a revised package (tax proposal 17). The steering body published its recommendation for tax proposal 17 on June 1, 2017. The Federal Council has been considering the draft proposal and was expected to publish a final proposal for parliamentary discussion by the end of June 2017. Tax proposal 17 is comparable to the CTR III package. The tax reform is expected to take effect on January 1, 2020.
PwC observation:Overall, Switzerland would remain competitive with a standard tax rate of 12% to 14% total effective tax rate in most cantons. It also will remain an attractive business location with business advantages such as qualified talents and labor, geographic location, flexible labor law, service orientation of tax and general administration, and quality of life. Considering non-Swiss developments, such as the EU ATADs and hybrid mismatch legislation, interest and royalty limitations, and EU black list discussions, the use of special low-rate regimes could become even more restricted in the future.
Matrina WaltNew York, NYT: +1 646 471 6139E: [email protected]
Rolf J RoellinNew York, NYT: +1 646 471 7311E: [email protected]
United Kingdom
UK Finance (No.2) Bill 2017 updates
The UK government confirmed on July 20, 2017 that UK Finance (No.2) Bill 2017 will be introduced to Parliament on September 6, 2017.
This bill will include a number of measures (including, but not limited to, clauses introducing corporate loss reform, corporate interest restriction, and the substantial shareholdings exemption) that were originally included in the last bill but subsequently dropped as the General Election reduced the time available to debate that bill. These were originally announced to start beginning on April 1, 2017, and that effective date has been retained in the amended clauses that have now been published.
HM Revenue & Customs (HMRC) has now issued an initial tranche of draft guidance on aspects of the corporate tax loss reform measures as well as a second tranche of draft guidance in relation to the corporate interest restriction rules. Comments are invited on these by September 25 and October 31, respectively. Further, draft and amended guidance HMRC will issue in due course.
PwC observation:We expect that full Parliamentary scrutiny of Finance (No.2) Bill 2017 will be delayed until October because Parliament adjourns on September 14 (shortly after the bill’s publication on September 6). It then returns on October 9. Our current view is that Royal Assent may take place in late November or early December, but officially this has not been confirmed.
The government’s announcements regarding the contents of the Finance (No.2) Bill are welcomed, as is the draft guidance on the proposed operation of corporate loss reform and corporate interest restriction. However, given the government’s slender working majority in the House of Commons, there is still some doubt that the Bill will progress through Parliament as smoothly as one usually might expect.
Robin G PalmerLondon, More LondonT: +44 20 7213 5696E: [email protected]
Sara‑Jane ToveyLondon, Embankment PlaceT: +44 20 7212 2507E: [email protected]
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Uruguay
Uruguay announces Accountability Bill with local and International tax impact
The Uruguayan Executive Power (the country’s executive branch), on June 20, 2017, submitted the 2016 Accountability Bill to Congress for consideration. This bill includes tax provisions that may significantly impact certain activities related to internet services and the software industry. The bill also would amend the Free Zones (FZ) law. If the bill passes, its provisions are expected to take effect on January 1, 2018 and may affect companies operating in or with Uruguay.
Taxation of internet-related services: The bill proposes new rules on the taxation of the following cross-border activities that take place, at least partially in Uruguay:
• production, distribution or intermediation of cinematographic films and tapes, as well as income derived from direct TV broadcasting,
• services provided by nonresident entities directly through the internet, technology platforms, computer applications (apps), or similar means, and
• mediation and intermediation in the supply or demand of services provided through the internet, technology platforms, apps, or similar means.
Limitation on benefits for software: Under the proposed rules, software amortisation would continue to be deductible for corporate income tax (CIT) purposes to the extent certain conditions are met. In addition, the bill would repeal the current CIT benefit. Income from software production and related services still would be exempt from CIT, but exclusively in the proportion of direct software development expenses to total direct expenses.
FZ regime improvements and amendments: The bill proposes that FZ users may render services from a FZ to Uruguayan CIT taxpayers, provided that such services do not exceed 5% of the other services rendered by the FZ user during the tax year (i.e., compared to services provided either within the FZ to other FZ users or to third parties in other countries). These newly permitted activities would be covered by the large tax exemption that FZ users enjoy. For FZ users to benefit from the FZ user status and tax exemptions, the FZ user contracts require government approval and extensions. The bill includes new provisions establishing that income from IP rights and other intangible goods would be tax exempt, to the extent that the income results from R&D activities performed within the FZ, among other conditions.
See our PwC Insight for more details on the taxation for each of these services, software limitation benefits, and FZ law amendments.
PwC observation:Domestic enterprises and MNEs with a Uruguayan presence, and non-residents who have transactions with Uruguayan entities or individuals should consider these tax proposals. In particular, companies operating in the film, TV broadcasting, internet, and software sectors should carefully analyze these provisions’ potential effect on their transactions and monitor expected legislative developments in the upcoming months.
Daniel GarciaUruguayT: +598 2916 0463E: [email protected]
Eduardo RodriguezUruguayT: +598 2916 0463E: [email protected]
John A SalernoNew YorkT: +1 203 539 5733E: [email protected]
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Uruguay
Identification of the ultimate beneficiaries and nominative titles holders
The Central Bank of Uruguay (CBU) on July 21, 2017, released guidelines and forms for Uruguayan resident and non-resident entities to identify and report to the CBU their ultimate beneficiaries and their respective percentages of participation, as well as the chain of ownership.
In addition, entities whose capital is expressed in nominative shares or social quotas must communicate the corresponding information of their holders through an affidavit, including the percentage of their participation in the capital.
Personal or agrarian societies whose social quotas belong to individuals and civil or de-facto societies are required to identify their final beneficiary.
Exceptions include entities whose securities are listed on national stock exchanges, on prestigious international stock exchanges, or those under other procedures of public offering who are not obliged to inform ultimate beneficiaries.
Failure to comply with these disclosure requirements will prohibit the entity from paying profits, dividends, capital redemptions, or liquidation proceeds to beneficiaries whose identification requirements were not met. Entities will be subject to a fine up to the improperly distributed amount for distributions violating this rule.
Finally, the regulations established that entities whose share capital is represented through bearer certificates have 60 calendar days from August 1, 2017 (i.e., up to September 29, 2017), and entities whose share capital is represented through nominative certificates, partnerships, and other entities have 60 calendar days from May 1, 2018 (i.e., up to June 29, 2018).
See our PwC Insight for more detail.
PwC observation:These regulations are connected to the adoption of international standards to enhance transparency. Corporate and individual taxpayers, as well as non-residents should consider the impact of the enacted amendments on their respective structures.
Daniel GarciaUruguayT: +598 2916 0463E: [email protected]
Eliana SartoriUruguayT: +598 2916 0463E: [email protected]
Carolina TecheraUruguayT: +598 2916 0463E: [email protected]
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JudicialFrance
French court rules Google had no permanent establishment in France during 2005-2010
The Paris Administrative Court on July 12, 2017, ruled that Google Ireland Limited (GIL), the Irish subsidiary of the Google group, had no permanent establishment (PE) in France from 2005 through 2010. Therefore, GIL was not liable for French corporate income tax, value added tax (VAT), and local business taxes.
GIL has been selling in France an online advertising service named ‘AdWords’ that is linked to its search engine.
GF, a French subsidiary of the Google group, entered into an agreement with GIL under which GF provides sales assistance and advice to GIL’s French customers, i.e., AdWords users.
Based on this agreement and on the advertisement service provided to GIL’s French customers, the French tax authorities found that GIL had a PE in France, and therefore was liable for French corporate income tax, withholding taxes, VAT, former business tax, and the companies’ value-added contribution for the period 2005 - 2010.
GIL challenged this assessment, arguing that GF did not have sufficient autonomy and power to make commitments on behalf of GIL and, as a result, GF could not be regarded as a PE of GIL in France.
Following the advice of one of its counsellors – released a month ago – the Paris Administrative Court confirmed GIL’s position and rejected the USD 1.3 billion tax adjustment proposed by the French tax authorities.
Guillame GlonFranceT: +33 156 574 072E: [email protected]
Guillaume BarbierNew YorkT: +1 646 471 5278E: [email protected]
PwC observation:Although this decision can be viewed as an interesting first step when it comes to defining a PE for e-business purposes, it should not be considered definitive. The French tax authorities already have announced that they will appeal the Paris court’s decision.
In addition, the Google case is based on a fact pattern specific to Google that might be different as it relates to other technology companies.
MNEs operating in the e-business sector in France should carefully consider the potential impact of this decision and follow the case in the coming years.
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Israel
Israeli Court ruling provides insight on Israeli transfer pricing rules
In recent years purchasers of Israeli companies have commonly transferred the IP of the purchased company to a related company group following the acquisition. The question of how to define the IP transfer and its valuation has been a contentious issue in tax assessments with the Israeli Tax Authority.
The Israeli Court for the first time ruled on this issue in June 2017, and its adoption of the Israel Tax Authority viewpoint may have implications for other acquisitions of Israeli companies when employees and assets (including IP) are subsequently transferred to an affiliate. The Court ruled that when an Israeli company owning IP is acquired and shortly thereafter substantial assets, including employees and IP, are transferred to a related party, the transfer should be viewed as a sale of the entire business activity and the value of the IP should be defined broadly. Therefore, the Court held that the value of the transaction should be closer to the share acquisition price and not as reported in the company tax filings.
The Court also expressed its view that the purchase price allocation (PPA) prepared for the Company was performed for accounting purposes under US generally accepted accounting principles. This does not mean that one might derive an analogy from the PPA for transfer pricing purposes regarding the value of functions, assets and risks being transferred in the IP transfer between the related parties. As a side comment, the Court referred to control premium as having an independent value which should not be attributed to the company’s assets or its activities, but is attributable to the shareholders.
Notwithstanding the above, the Court did not address when to attribute a value to control premium as this was not an issue in the case. Taxpayers should consider value that may be attributed to other items such as net operating losses and other tax attributes and value of routine returns post-transfer, among other items that were not directly addressed by the Court.
PwC observation:Acquirers of Israeli companies having IP should consider the impact of this important Court ruling on recent and future transactions. Note that the transaction in this case involved the transfer just nine months after the acquisition of substantially all of the operating assets of the company (principally), employees and IP. The Court did not address a situation when only IP is transferred and/or more time passes between the acquisition and subsequent transfer.
Doron SadanTel AvivT: +972 3 7954460E: [email protected]
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United States
US Tax Court rules that non-US partner’s gain from the redemption of its partnership interest is not effectively connected income
The US Tax Court on July, 13, 2017, issued its opinion in Grecian Magnesite Mining, Industrial & Shipping Co., SA, v. Commissioner, 149 T.C. No. 3, holding that a non-US partner’s gain from the redemption of an interest in a partnership that was engaged in a US trade or business was not effectively connected income (ECI).
The decision is notable because the Tax Court declined to follow Rev. Rul. 91-32 (the ruling), in which the Internal Revenue Service (IRS) ruled that a non-US partner disposing of an interest in a partnership that is engaged in a US trade or business will always have ECI to the extent the gain is attributable to partnership assets that are used in the conduct of the partnership’s US trade or business. The ruling has often been criticized as incorrectly applying aggregate principles to the disposition of a partnership interest and as incorrectly applying the principles of Section 864 for determining when gain is considered effectively connected with a US trade or business. This is the first time since the IRS issued the ruling that a court has faced the issue presented in the ruling. The Tax Court ruled in favor of the taxpayer.
The opinion in Grecian Magnesite also raises fundamental questions as to the treatment of partnerships under entity or aggregate principles under subchapter K. A pure aggregate approach would treat each partner as a co-owner of an undivided interest in a partnership’s assets, whereas a pure entity approach would treat a partnership as a separate and distinct taxpayer from its partners. The Tax Court held that Section 731(a) explicitly requires applying the entity theory.
See our PwC Insight for more detail.
PwC observation:While the IRS may appeal the Tax Court’s decision, its impact represents a significant development that should enable non-US partners disposing of interests in partnerships engaged in a US trade or business to consider whether the gain is not subject to US federal income tax.
Because Rev. Rul. 91-32 has not been revoked to date, taxpayers may continue to rely upon it during the government appeals process. If the government decides not to appeal the Tax Court decision, further analysis would be required to determine the viability of Rev. Rul. 91-32. On the other hand, taxpayers that have followed the ruling and treated gain from the disposition of a partnership interest as ECI should consider the case’s impact and the possibility of seeking refunds for open years.
Oren PennWashington, DCT: +202 414 4393E: [email protected]
Steve NauheimWashington, DCT: +202 414 1427E: [email protected]
Nils CousinWashington, DCT: +202 674 6993E: [email protected]
www.pwc.com/its
AdministrativeFrance
Eligible taxpayers should file refund claims for the French 3% tax on dividends before October 7, 2017
In a decision dated March 29, 2017, the French Administrative Supreme Court held that the exemption from the 3% tax on distributions (the 3% tax) paid to entity members of a tax unity was incompatible with the European Convention on Human Rights. The court found that the French legislation discriminates against parent companies that own 95% or more of their subsidiaries when compared to parent companies that are part of a French fiscal unity.
The European Court of Justice (ECJ) decided on May 17, 2017, that a French company’s liability for the 3% tax on distributions received from its subsidiaries established in another EU Member State is incompatible with the Parent-Subsidiary Directive. According to the ECJ, the tax liability creates double taxation on profits realized within the EU.
These decisions provide an additional opportunity to claim refunds of the 3% tax paid before December 31, 2016. Those eligible to claim the refund include French companies at least 95%-owned by MNEs that are subject to CIT and French companies on redistribution of dividends received from their EU subsidiaries subject to CIT.
The ECJ’s decision (an anticipated development) is important for disputes relating to the 3% contribution, but is only one step. The litigation likely will continue on the basis of constitutional law issues.
At this stage, the ECJ’s decision prohibits taxing the redistribution of profits by EU subsidiaries. However, it does not prohibit taxing redistributions of profits by subsidiaries resident in France or non-EU countries. The issue of potential discrimination (i.e., when a domestic situation or a situation involving a non-EU country is treated less favorably than an EU situation), likely will be at the heart of the debates before the administrative Supreme Court and the Constitutional Council.
Guillame GlonFranceT: +33 156 574 072E: [email protected]
Guillaume BarbierNew YorkT: +1 646 471 5278E: [email protected]
PwC observation:Companies that have not filed refund claims of the 3% tax may do so before October 7, 2017. Companies that already have filed claims should consider going before courts before this date.
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Poland
Agata OktawiecWarsaw, PolandT: +48 502 18 48 64E: [email protected]
Weronika MissalaWarsaw, PolandT: +48 502 18 48 63E: [email protected]
Poland warns CIF taxpayers about specific structures
The Polish Ministry of Finance (MoF) on May 8, 2017, published a warning that included a list of tax planning solutions that may be challenged under the General Anti-Avoidance rules. This list focuses on corporate income tax for related entities that purchase bonds with participation in closed-end investment funds (CIF). The MoF included transactions that appear to involve aggressive tax planning with the potential to avoid taxes.
PwC observation:If appropriate, companies should evaluate their involvement in any of the listed transactions. As part of the warning, the MoF indicated that companies that correct the tax settlements before being subject to an official evaluation can avoid the negative consequences.
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United States
IRS announces a one-year delay in Section 385 documentation requirements and PwC submits a comments letter
Treasury and the IRS issued Notice 2017-36, announcing a one-year delay for applying the documentation requirements in final regulations under Section 385. Section 385 authorizes Treasury to prescribe rules to determine whether certain instruments between related parties are treated as debt or equity (or as in part debt and in part equity). Treasury and IRS intend to amend the documentation regulations to apply only to interests issued or deemed issued on or after January 1, 2019.
This one-year delay is in response to taxpayer concerns and the recently announced review of the Final and Temporary Section 385 regulations per Notice 2017-38 (See our PwC Insight). This notice was in response to Executive Order 13789, which required additional review of significant tax regulations.
In response to Notice 2017-38, PwC submitted a comment letter on August 7, 2017, focusing on three of the eight regulations: the Final Section 367 Regulations, the Final and Temporary Section 385 Regulations, and the Final and Temporary Section 987 Regulations. See our PwC Insight for more detail.
PwC observation:While many items remain in question, companies should stay abreast of current regulatory and legislative developments and evaluate the potential implications that these developments may have on their business, including financial reporting, to ensure they are prepared to account properly for these changes.
Oren PennWashington, DCT: +202 414 4393E: [email protected]
William W SuttonWashington, DCT: +202 346 5188E: [email protected]
Krishnan ChandrasekharChicago, ILT: +312 298 2567E: [email protected]
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United States
Trump Administration, Republican Congressional leaders release statement on tax reform goals
The Trump Administration and Congressional Republican leaders today released a joint statement outlining key principles and goals for comprehensive tax reform. The brief statement is the product of tax reform discussions by a working group, known as the ‘Big 6,’ that includes six key figures of the Administration and Congress. Members of the Big 6 and their staffs have been meeting regularly since early May and also have been seeking input on tax reform from Members of Congress, business groups, and other interested parties.
The statement calls for tax reform that makes taxes “simpler, fairer, and lower” for American families, and provides “lower rates for all American businesses.” The statement sets a goal for the House Ways and Means Committee and the Senate Finance Committee to produce tax reform legislation that “reduces rates as much as possible, allows unprecedented capital expensing, places a priority on permanence, and creates a system that encourages American companies to bring back jobs and profits trapped overseas.”
The most significant element of today’s joint statement is the announcement that the House Republican Blueprint proposal from June 2016 for a border adjusted tax has been dropped from further consideration. The statement cites debate both over the “pro-growth benefits” of border adjustability and the “many unknowns” associated with the proposal. As a result, a decision was made to “set this policy aside in order to advance tax reform.”
See our PwC Insight for more detail.
PwC observation:The ‘Big 6’ statement reaffirms that pro-growth tax reform remains a top priority for President Trump and Congressional Republicans. Despite this commitment to tax reform, there are many difficult policy issues to resolve if Congress is to enact a sustainable reform of the US tax laws that provide a more competitive tax system for business taxpayers.
Pam OlsonWashington, DCT: +202 414 1401E: [email protected]
Rohit KumarWashington, DCT: +202 414 1421E: [email protected]
Scott McCandlessWashington, DCT: +202 312 7686E: [email protected]
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Arne SchnitgerGermanyT: +49 30 2636 5466E: [email protected]
Ronald GebhardtGermanyT: +49 40 6378 1113E: [email protected]
Referral of German Anti-Treaty Shopping regulation to CJEU
The Fiscal Court of Cologne, on May 17, 2017, referred a case to the Court of Justice of the EU (CJEU) dealing with the German anti-treaty shopping rule in Sec. 50d para. 3 German Income Tax Act (ITA).
Background In this particular case, a German GmbH distributed dividends in 2013 to its non-resident shareholder, a Dutch BV. The BV’s immediate shareholder was a German GmbH. In the Federal Central Tax Office’s view the BV did not maintain sufficient ‘substance’ in terms of the requirements of Sec. 50d para 3 ITA. Furthermore, under the rule’s ’look through approach’, the German resident shareholder of the Dutch BV could not claim benefits under a double tax treaty/the Parent-Subsidiary Directive, if it had received the dividends directly. Therefore, the Federal Tax Office denied the reduction of withholding taxes.
The CJEU referral The Fiscal Court of Cologne has doubts as to whether Sec. 50d para. 3 ITA is in line with the EU fundamental freedoms, since as a GmbH receiving domestic sourced dividends would be in a position (i) to apply a 95%-exemption for the dividends received and (ii) to receive a credit/refund of the withholding tax suffered. Furthermore, the court questions whether the substance test of Sec. 50d para. 3 ITA meets the requirements of a previous judgment, Cadbury Schweppes (C-196/04) of the CJEU.
On the grounds of Sec. 50d para. 3 ITA, the Federal Central Tax Office refused to grant a refund of withholding tax. The Fiscal Court of Cologne questions whether this refusal is in line with EU law and whether the interposition of the BV can be considered abusive. Additionally, the strict substance requirements of the provision seem to be out of line with the Cadbury Schweppes case. In particular it is unclear whether the requirement that both economic reasons and sufficient business operations need to be present.
OECD and EU UpdatesGermany
PwC observation:If the CJEU confirms that Sec. 50d para. 3 ITA is not in line with EU law, the German legislator needs to change various aspects of this provision. Until the final decision of the CJEU is handed down, taxpayers should consider an appeal based on the grounds of EU law if the Federal Central Tax Office refuses to grant an exemption or a refund for withholding taxes based on Sec. 50d para. 3 ITA.
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Netherlands
Dutch government proposes bill for new law on State aid recovery
The Dutch government recently sent a completely revised legislative proposal for a State Aid Recovery Act to the Dutch Parliament. The former proposal (from 2008) was unsuccessful and will be withdrawn. The new bill establishes a clear and separate legal basis for the recovery of unlawful State aid. This basis, which is currently not present within the Dutch legal system, ensures that such aid can be effectively recovered in all cases when ordered by the EC. The bill introduces a new general system but contains special rules for the recovery of State aid resulting from (non) taxation. The effect is that the aid is recovered as tax payable.
In general, the new bill establishes a uniform recovery procedure for all cases regardless of whether the unlawful State aid results from the application of private law or administrative law. The new general system applies to interest and the statute of limitations.
The proposed administrative law procedure will apply when the European Commission orders the recovery of the aid. The government body that is responsible for the aid granted has to determine the amount, including accrued interest that will refund the beneficiary. Under the proposed bill, neither the Dutch tax statutory interest provisions nor the tax statute of limitations apply. Instead, the general procedure will apply, with interest payable from the day the aid was available until the day that the aid was recovered.
There is one important exception in the newly proposed general procedure: it does not apply if the unlawful State aid results from the application of tax law. In that case, the recovery will have to take place within the present tax law system insofar as possible. Accordingly, the unlawful State aid is recovered as tax payable.
PwC observation:The bill will be subject to parliamentary discussion. When enacted, it will not have retroactive effect. Companies should consider the tax impacts that could result from the State Aid Recovery Act.
Hein VermeulenNetherlandsT: +31 6 20 94 10 31E: [email protected]
Pieter JansenNetherlandsT: +31 6 53 84 45 50E: [email protected]
Bob van der MadeNetherlandsT: +31 6 13 09 62 96E: [email protected]
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OECD
Philip GreenfieldLondon, UKT: +44 20 7212 6047E: [email protected]
Michael UrseCleveland, OHT: +1 216 875 3358E: [email protected]
Calum M DewarNew York, NYT: +1 646 471 5254E: [email protected]
OECD report on ‘Neutralising the effects of branch mismatch arrangements’
The OECD published the final report on ‘Neutralising the effects of branch mismatch arrangements’ and related press release on July 27, 2017. This 2017 report sets out recommendations for branch mismatch rules that would bring the treatment of these structures into line with the treatment of hybrid mismatch arrangements as set out in the 2015 Report on Neutralising the Effects of Hybrids Mismatch Arrangements (Action 2 Report). Branch mismatches arise when the ordinary rules for allocating income and expenditure between the branch and head office result in a portion of the taxpayer’s net income escaping the tax charge in both the branch and residence jurisdiction. Unlike hybrid mismatches, which result from conflicts in the legal treatment of entities or instruments, branch mismatches are the result of differences in the way the branch and head office account for a payment made by or to the branch. The 2017 report identifies five basic types of branch mismatch arrangements that give rise to one of three types of mismatches: deduction / no inclusion (D/NI) outcomes, double deduction (DD) outcomes, and indirect deduction / no inclusion (indirect D/NI) outcomes. This report includes specific recommendations for improvements to domestic law intended to reduce the frequency of branch mismatches as well as targeted branch mismatch rules that adjust the tax consequences in either
the residence or branch jurisdiction in order to neutralise the hybrid mismatch without disturbing any of the other tax, commercial or regulatory outcomes. The annexes of the report summarise the recommendations and set out a number of examples illustrating the intended operation of the recommended rules.
PwC observation:Now that the OECD has published its final report on ‘Neutralising the effects of branch mismatch arrangement’, companies can plan accordingly and determine if they have branch mismatches.
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Fernando GiacobboSão PauloT: +55 11 3674 2582E: [email protected]
Ruben GottbergSão PauloT: +55 11 3674 6518E: [email protected]
Brazilian Tax Treaty with Russia is now in force
Brazil’s executive branch on August 1, 2017, promulgated Decree No. 9.115/2017, which converts the Convention to avoid a tax treaty between Brazil and Russia into internal legislation. The countries signed the treaty on November 22, 2004 and the Brazilian Senate ratified it on Mya 25, 2017.
As with other Brazil treaties, the treaty between Brazil and Russia treats technical services and technical assistance as royalties. Also, it does not restrict the application of thin capitalisation and CFC rules.
In contrast to other treaties signed by Brazil, remittances of interest on net equity (Juros sobre capital próprio - JCP) are regarded expressly as interest. This leaves no room for potential discussions about their characterisation for treaty purposes.
Finally, the treaty between Brazil and Russia includes a Limitation of Benefits (LOB) provision, aimed at preventing treaty abuse. Moving forward, the treaties expected to apply to tax years starting January 1, 2018 because its entry into force was completed on June 16, 2017.
TreatiesBrazil
PwC observation:Russian multinationals with operations in Brazil should analyse how the newly enacted the treaty may impact their business.
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Brazil
New Amendment Protocol changes Argentina/Brazil tax treaty
Argentina and Brazil signed on July 21, 2017, a new Amendment Protocol to their tax treaty. The subsequent exchange of instruments of ratification, which is expected to occur soon, will make it effective beginning January 1 of the year following the ratification process.
The new Protocol introduces relief for withholding on payments of (i) interest, (ii) royalties and technical assistance services, and (iii) dividends (although this last category may not be available to both sides under current regulations). It also includes other provisions aligned with the OECD Model Tax Convention and the BEPS project such as a new PE clause, an LOB clause, a required holding period for benefiting from dividends relief, and a minimum taxation threshold to benefit from tax treaty benefits if income is assigned to a third country PE and Taxation of Capital.
One of the most relevant changes replaces the full exemption method to avoid double taxation with the foreign tax credit method. This has been a long-standing demand from exporters of services, even though it means taxing Argentine dividends in Brazil side and Brazilian-source income in Argentina.
Interest Domestic Argentinean tax law generally subjects interest payments on related-party loans to a foreign beneficial owner to a 35% withholding tax rate. However, under the amended tax treaty, interest payments on such loans paid to Brazilian beneficiaries would now be subject to a maximum withholding tax rate of 15%.
Although the treaty already contains non-discrimination provisions, they do not override domestic thin capitalisation rules that establish a 2:1 debt-to-equity ratio. Therefore, taxpayers should still consider these rules when debt funding an Argentinean company from Brazil.
From a Brazilian perspective, the amendment does not bring additional advantages as the domestic withholding tax rate applicable to interest payments to Argentina is 15%.
Royalties Per the amended Protocol, royalties and technical assistance payments made to a Brazilian beneficial owner now have relief from domestic taxation, since they are subject to maximum income tax withholding at 10% or 15% rates, depending on the case. Note that under domestic Argentine tax law, royalties may be subject to withholding tax rates as high as 31.5%, whereas under Brazilian domestic tax law, royalty payments from Brazil to Argentina are subject to 15% withholding tax.
The treaty generally follows the OECD model. However, there are some deviations from that model, such as listing technical assistance services in Article 12 (royalties).
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Fernando GiacobboSão PauloT: +55 11 3674 2582E: [email protected]
Ruben GottbergSão PauloT: +55 11 3674 6518E: [email protected]
Dividends Under Argentine domestic law, dividend payments are subject to 35% withholding tax to the extent the payment exceeds the amount of accumulated tax earnings. The Protocol establishes a 10% maximum withholding rate for dividend payments made to shareholder residents in the other contracting state and holding a minimum of 25% stake for at least a one-year period that includes the dividend payment date. In all other cases, there is a 15% maximum withholding rate. This may not currently apply in practices since Brazil does not tax dividend distributions and the Argentine equalization tax would not be overridden due to the amendment introduced to Paragraph 4 of the Protocol to the treaty through the present Amendment Protocol.
Other features The treaty provides other features as follows:
• The new title and preamble to the treaty clearly state that it seeks to prevent tax avoidance.
• A new PE clause addressing commissionaire arrangements and similar strategies, and subjects all subparagraphs of Article 5.3 (PE exemptions) to a ‘preparatory or auxiliary’ condition.
• A new clause addresses the Taxation of Capital. • As Argentina recently agreed with Chile for the very first time, and
with Mexico, the amendment includes an LOB clause. Although these LOBs may be relaxed and some relief may be provided by the relevant contracting state under certain specific facts and circumstances, they are clearly aligned with current global trends (such as BEPS) that are mainly aimed at avoiding treaty-abuse and double non-taxation.
• Treaty benefits are also recognised when income is assigned by a resident of a contracting state to a PE located in a third country, but only to the extent the taxation level in that third state is at least 60% of what should have applied in the residency-state.
• It updates exchange of information procedures between both states.
• Non-discrimination rules would not override domestic legislation regarding limitations for deductibility of royalty payments made to a controlling company located in the other contracting state.
PwC observation:MNEs with operations in Argentina or Brazil may wish to consider the changes introduced in this Amendment Protocol. This protocol would reduce withholding taxes at the source and may allow the exporter of services to compute a foreign tax credit. This has been an issue negatively affecting competitiveness in cross-border transactions.
This development also is an encouraging indication that the Argentine and Brazilian authorities are continuing to expand and improve their respective tax treaty networks.
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Mexico
New protocol on Mexico-Spain tax treaty to enter into force in September 2017
On July 7, 2017, Spain published the new protocol to the tax treaty between Mexico and Spain (Protocol). The Protocol will enter into force on September 27, 2017. This new agreement modifies the current tax treaty in force between Spain and Mexico, which has been in effect since 1995. The treaty introduces BEPS inspired-provisions such as a broader anti-abuse provision.
The Protocol also provides other benefits to certain taxpayers in the form of an additional reduction to withholding tax on dividends, interest, and capital gains.
PwC observation:MNEs with investments or operations in Mexico or Spain should consider how the Protocol could impact their investments or structures in those countries, particularly those with cross-border payments, or investments related to pension funds or hydrocarbon-related activity.
John A SalernoNew York MetroT: +1 203 539 5733E: [email protected]
Lissett Tautfest MexicoT: +52 555 263 5756E: [email protected]
Jose Leiman T: +1 305 381 7616E: [email protected]
Ramón Mullerat SpainT: +34 91 568-5534 E: [email protected]
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Nigeria
Nigeria moves closer to joining OECD BEPS treaty-related pact
Nigeria’s Federal Executive Council (FEC), on June 14, 2017, approved Nigeria’s inclusion as a signatory to the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). The FEC’s approval moves Nigeria closer to joining 70 other signatories to the MLI.
The MLI aims to automatically amend existing bilateral treaties to include measures that address BEPS through tax treaties. Many believe that the changes resulting from the MLI will protect governments against tax avoidance strategies that inappropriately use tax treaties to artificially shift profits to low or no-tax jurisdictions.
See our PwC Insight for more detail.
PwC observation:The National Assembly’s ratification is required for the MLI to enter into force in Nigeria. The changes to specific tax treaties then would take effect when the treaty partner also has ratified the MLI. According to the OECD, the first modifications to tax treaties through the MLI likely will take effect beginning in 2018.
The FEC’s approval is one demonstration of Nigeria’s commitment to implementing the BEPS recommendations.
Some taxpayers that currently enjoy certain treaty benefits could lose some of these benefits; therefore, it is important to proactively assess the potential impact of the MLI-driven treaty changes.
Gilles J de VignemontNew York City, NYT: +1 646 4711301E: [email protected]
Taiwo OyedeleNigeriaT: +234 1 271 1700E: [email protected]
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Acronymn Definition
ATAD1 EU Anti-Tax Avoidance Directive
BEPS base erosion and profit shifting
CBU Central Bank of Uruguay
CFC controlled foreign company
CIF closed-end investment funds
CIT corporate income tax
CJEU Court of Justice of the European Union
CTR III Swiss corporate tax reform III
EBITDA earnings before interest, tax, depreciation and amortization
ECI effectively connected income
ECJ European Court of Justice
EU European Union
FEC Federal Executive Council
FIRS Federal Inland Revenue Service
GIL Google Ireland Limited
HMRC Her Majesty's Revenue and Customs
Acronymn Definition
IP intellectual property
IRS Internal Revenue Service
ITA Income Tax Act
LOB limitation of benefits
MLIMultilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting
MNEs multinational enterprises
MoF Ministry of Finance
NITDA National Information Technology Development
OECD Organisation for Economic Co-operation and Development
PE permanent establishment
PPA purchase price allocation
R&D research and development
SMEs small and medium enterprises
VAIDS Voluntary Assets and Income Declaration Scheme
VAT value added tax
Glossary
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Contact us
For your global contact and more information on PwC’s international tax services, please contact:
Shi-Chieh ‘Suchi’ Lee Global Leader International Tax Services Network
T: +1 646 471 5315 E: [email protected]
Geoff JacobiInternational Tax Services
T: +1 202 414 1390E: [email protected]
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Design Services 30852 (09/17).