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International Tax NewsEdition 28June 2015

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

Administration & case lawTax legislation TreatiesProposed legislative changes



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Tax Legislation

Tax LegislationCzech Republic

Change in the taxation of non-resident executives

From 2014, for income tax purposes, an executive is considered a member of a statutory body and not a statutory organ itself.

As a result, it is necessary to apply final withholding tax (WHT) to the income of tax non-resident executives and no longer a tax advance, as was done until the end of 2013.

Starting from January 2015, it is necessary to pay WHT on the income of executives who are tax non-residents. This was confirmed by talks between the Chamber of Tax Advisers and the tax administration. The tax administration stated that for 2014, it will not dispute the way that was chosen for paying taxes in the taxation of non-resident executives.

PwC observation:Given that in 2014 this approach was not entirely clear from the law, it is necessary to unconditionally apply WHT from 2015. For the correct approach, it is essential to evaluate the tax residency of the executives, including the manners, forms, and legal entitlements to their remuneration

Denmark

New general anti-avoidance rule introduced

Danish parliament has adopted a general anti-avoidance rule (GAAR) that applies to transactions that take place on or after May 1, 2015.

The adopted GAAR has two components:

• GAAR applicable to transactions that are covered by the European Union (EU) directives (specifically Parent-Subsidiary Directive, Interest and Royalties Directive and Merger Directive).

• GAAR applicable to transactions covered by double tax treaties (DTTs).

The GAAR applies to cross-border transactions of Danish-resident entities, i.e. purely local transactions are not covered. Following the adoption of the GAAR, the protection the Danish tax treaties and EU Directives would normally grant to these cross-border transactions would only be available if the transactions are not motivated by tax reasons. If the transactions have been put into place for valid commercial and economic reasons, the GAAR will not apply. The analysis would be based on a case-by-case basis taking the individual facts and circumstances into consideration.

Søren Jesper Hansen Natia AdamiaCopenhagen CopenhagenT: +45 39 45 33 20E: [email protected]

T: +45 39 45 94 92E: [email protected]

Peter ChrenkoPragueT: +420 251 152 600E: [email protected]

PwC observation:The new GAAR provision was subject to substantial criticism by the tax community in the hearing process and significant concerns were raised on legal certainty following the adoption of the provision. The new GAAR provisions are very broadly formulated and do not allow for any grandfathering rules. There has not been a similar rule in the Danish tax law previously, and tax administration and courts have instead relied on specific anti-avoidance provisions.

In the course of the hearing of the bill, the Minister of Taxation noted, that even though the two GAAR provisions had a different wording, their content and applicability would be the same.

The GAAR related to EU-directives largely aligns with the amendment of the Parent-Subsidiary Directive, though it has a wider scope since it not only covers the Parent-Subsidiary Directive but the Interest and Royalties Directive and the Merger Directive as well.

The GAAR related to DTTs aims to address Action 6 of the Organisation for Economic Co-operation and Development’s (OECD) base erosion and profit shifting (BEPS) project, namely Preventing the Granting of Treaty Benefits in Inappropriate Circumstances. Given that the final report on Action 6 is not yet published, the GAAR provision regarding treaty abuse may be amended in the future, in order to align the Danish rules with the OECD’s recommendations. The GAAR applicable to treaty abuse would not only apply to new, but also to existing DTTs that Denmark has entered into.

Multinationals should review any structures and transactions which include Denmark and analyse potential tax implications of the new GAAR provisions.



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Poland

New list of tax haven countries

On May 4, 2015 projects of two decrees of the Minister of Finance were published in the Official Journal which modified the list of countries and territories applying harmful tax competition in the field of personal income tax (PIT) and corporate income tax (CIT).

These decrees are to replace currently binding regulations of April 8, 2013 and will enter into force on May 19, 2015.

Five key factors assist in identifying harmful preferential tax regimes: (i) the regime imposes a low or zero effective tax rate on the relevant income (ii) no equal tax treatment of income derived from sources within the territory of the regime in relation to income ‘transferred’ (iii) the operation of the regime is not transparent (iv) the jurisdiction operating the regime does not effectively exchange information with other countries, and (v) involvement of the minimum amount of investment or a particularly low level of employment compared to the value of transactions.

According to the new regulations, the list of countries applying harmful tax competition includes 31 countries and territories, which is six less than in the previous decrees. The countries which are no longer considered as tax havens are: Bermuda, Belize, Gibraltar, Cayman Islands, Montserrat, Turks, and Caicos Islands.

The above is the result of the peer review conducted by Organisation for Economic Co-operation and Development (OECD) in the last year based on which, it was stated that these countries (or territories) meet, to a large extent, the standards set by OECD for the effective exchange of tax information.

Agata OktawiecWarsawT: +502 18 48 64E: [email protected]

PwC observation:The Polish tax law provides certain unfavourable regulations regarding countries or territories qualified as tax havens.

We will observe closely how this amendment will influence activities/transactions carried out in or with the countries which no longer are qualified as applying harmful tax competition.

Spain

Tax novelties in R&D

A new law on corporate income tax (CIT) has been approved and will come into force on January 1, 2015, being applicable generally to tax periods commencing as of that date.

This new regulation has introduced some important adjustments to the regime regarding research & development & technologic innovation (R&D&ti) deduction.

These main changes are:

• The new regulation introduces a broader definition of advanced software by incorporating the creation, combination, and configuration of this kind of software as R&D expenses, as well as the creation and development of interfaces and applications.

• Inclusion of the animation and videogames initial demonstration projects or pilot projects in the concept of ‘ti’.

• Increasing of the ‘cash back’ procedure: subject to certain requirements, the limitation of 3 million rises to 5 million when R&D expenses for the year exceed 10% of turnover regarding the possibility of applying the R&D deduction without limitations in relation to tax payable or asking for the payment to the tax authorities (recovery of 80%; 20% tax cost in any case).

PwC observation:The main opportunity is the possibility of obtaining the payment of the deduction for R&D and for TI directly from the tax authorities (in cash) at a 20% cost when the deduction is higher than the CIT rate.

Jose Elias Tome Gomez Ernesto Grijalba RuizMadrid MadridT: +915 684 292E: [email protected]

T: +62 63 97 153E: [email protected]

Tax Legislation



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Proposed Legislative Changes

Proposed legislative changesAustralia

Government announces that GST will apply on digital products and imported services

The Australian government has released exposure draft legislation that proposes to amend the Goods and Services tax (GST) law to give effect to the 2015/16 Federal Budget measure to ensure digital products and services provided to Australian consumers receive equivalent GST treatment whether they are provided by Australian or foreign entities.

The new measure will apply to supplies made on or after July 1, 2017. The proposed law changes involve extending the meaning of ‘connected with Australia’ to include supplies made to Australian consumers. It also involves supplies of digital products, such as streaming or downloading of movies, music, applications, games, and e-books as well as other services such as consultancy and professional services receiving similar GST treatment whether they are supplied by a local or foreign supplier. Accordingly, the new measure may require the supplier to register and account for Australian GST. Consultation on the draft legislation is open until July 7, 2015.

PwC observation:The proposed law is consistent with the Australian government’s desire to address the base erosion and profit shifting (BEPS) agenda in the GST space. The delayed start date is welcomed by the industry as a longer time frame is required to properly implement system changes, though, the consultation period is surprisingly short for the industry to comment given the complexity and broad scope of the proposed law (e.g. uncertainty may arise between non-resident suppliers and operators of electronic distribution services as to who has responsibility for the GST administration).

Peter Collins David EarlMelbourne MelbourneT: +61 3 8603 6247E: [email protected]


Australia

Government announces measures to address multinational tax avoidance in 2015/16 Federal Budget

The Australian government announced the 2015/16 Federal Budget on May 13, 2015. The government announced a package of measures designed to address multinational tax avoidance.

These measures send a message that the government is determined to protect the Australian tax base and ensure that the Australian Taxation Office (ATO) is equipped with strong anti-avoidance measures applicable to ‘large’ multinational companies (MNCs).

Broadly, for MNCs with global annual turnover exceeding 1 billion Australian dollars (AUD), the government proposes to:

• amend the general anti-avoidance provisions to tackle particular arrangements designed to avoid a taxable presence in Australia (the ‘permanent establishment [PE] avoidance rule’), with effect from January 1, 2016

• increase the penalties applicable for MNCs engaging in certain tax avoidance schemes and profit shifting (transfer pricing) schemes, for income years commencing on or after July 1, 2015, and

• implement the new transfer pricing documentation standards of the Organisation for Economic Co-operation and Development (OECD), with effect from January 1, 2016.

Though no specific announcement was made, the government also highlighted a number of other actions it will be taking to implement other aspects of the OECD’s work on base erosion and profit shifting (BEPS), including:

• actions to incorporate the treaty abuse rules into Australian treaty practice (noting that most of Australia’s tax treaties already include anti-treaty abuse rules)

• the development of a ‘Public Transparency Code’ by the Board of Taxation to provide support and confidence in the Australian tax system through enhanced transparency

• consultation by the Board of Taxation on the implementation of the OECD anti-hybrid recommendations, and

• commencement of an exchange of information on ‘secret tax’ deals provided to MNCs by other countries that may contribute to tax avoidance in Australia.

Finally, the government has announced that it will allocate an additional AUD 87.6 million of funding to the ATO to continue its International Structuring and Profit Shifting (ISAPS) reviews.

PwC observation:The Federal Budget contained a number of significant tax announcements that will be of interest to MNCs.





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Australia

Release of exposure draft legislation amending the tax consolidation rules, possibly retroactively

Exposure draft legislation has been released that aims to restore integrity to the tax consolidation regime by addressing perceived deficiencies in both the joining tax consolidation calculation and the exit tax consolidation calculations.

The current legislation is expected to apply retrospectively from May 14, 2013.

In broad terms, the draft legislation seeks to prevent taxpayers from obtaining a ‘double benefit’ due to a deductible liability (e.g. employee leave provisions) by including an equivalent amount in assessable income (in effect neutralising the tax benefit otherwise obtained). A similar mechanism would apply to create deductions when a joining entity holds liabilities that will give rise to future assessable income, such as unrealised foreign exchange gains.



PwC observation:If enacted in its current form, the draft legislation may apply retrospectively. Taxpayers should consider the possible impact of the changes on past and future acquisitions where a target has deductible liabilities including provisions for employee leave. In our experience, this proposal has broad application.

Australia

Important legislative and policy developments in the R&D tax incentive

In the field of Australian research and development (R&D), there have recently been a number of important legislative and policy developments in the Australian program.

These have included two major changes to the operation of the country’s main public support program for R&D - the R&D Tax Incentive Program. Namely, there was the rejection of proposed offset rate reductions and the introduction of a 100 million Canadian dollars (CAD) annual spending cap restriction.

The current and future operation of the program will also now be among the issues considered as part of the Federal government’s recently launched Tax White Paper process to be conducted during 2015.

Within a broader section on entrepreneurship and innovation, Part 5.3 of the government’s discussion paper specifically identifies the program as one of the key points of focus of the review.

Sandra BoswellSydneyT: +61 2 8266 0470E: [email protected]

PwC observation:From PwC’s perspective, the establishment of an annual expenditure cap of CAD 100 million represented a considerable improvement on a preceding, alternative proposal to disqualify the access of all companies with turnover of at least CAD 20 billion.

However, in keeping with the recognition across many jurisdictions of the importance of increased innovation to economic growth, we believe that restrictions on eligibility and continued reductions to Australian R&D assistance go against a global trend of investing in R&D and will limit economic growth if restrictions are placed on the program.

PwC will continue to advocate the importance of public support for R&D as part of the White Paper process, and would also encourage clients and other stakeholders in Australia to participate.




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Canada

International tax measures in the federal budget release

The Canadian federal budget was released on April 21, 2015 and includes the following international tax measures:

Captive InsuranceThe Canadian foreign accrual property income (FAPI) regime includes a base erosion rule intended to prevent taxpayers from shifting offshore income from the insurance of Canadian risks.

The accompanying Notice of Ways and Means Motion amends this base erosion rule, for taxation years of taxpayers beginning on or after April 21, 2015, as follows:

• The income of a foreign affiliate (FA) with respect to the ceding of Canadian risks is included in computing the particular FA’s FAPI.

• If a FA cedes Canadian risks and receives as consideration a portfolio of insured foreign risks, the FA is considered to have earned FAPI with respect to the ceding of the Canadian risks in an amount equal to the difference between the fair market value of the Canadian risks ceded and the FA’s costs with respect to having acquired those Canadian risks.

Taxpayers are able to submit comments on this measure until June 30, 2015.

Stub-Year FAPIThe federal government also confirmed its intention to proceed with legislative proposals released on July 12, 2013 providing new rules to ensure an appropriate income inclusion for stub-year FAPI in circumstances where a taxpayer disposes of, or reduces, its interest in a FA. The original proposals will be modified to take into consideration subsequent consultations and deliberations.

PwC observation:The federal budget did not include a recommendation for a specific approach in dealing with abusive treaty shopping. The federal government continues to monitor Organisation for Economic Co-operation and Development (OECD) recommendations on this front and is expecting that these will include a recommendation on a form of multi-lateral instrument which might be entered into by participating countries as a means of overcoming some of the challenges of negotiating changes to tax treaties on a purely bilateral basis.

Kara Ann Selby Maria LopesToronto TorontoT: +1 416 869 2372E: [email protected]





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Italy

New legislative decree includes numerous changes relevant to foreign MNCs

The new legislative decree (the ‘Decree’), which is still a draft legislation and expected to become final soon, is one of the building blocks of a major tax reform that the Italian parliament approved on February 27, 2014.

The most interesting changes are as follows:

• Broadening of the International Ruling’s scope to include the determination of both inbound and outbound migration assets’ tax bases.

• Introduction of a new type of ruling to cover new investments’ tax implications, such as tax avoidance clearance, confirmation of the conditions to elect for specific tax regimes/treatments, disapplication of specific anti-avoidance regulations, etc. The investment must be of the size of at least 30 million euros (EUR) to qualify for this new ruling.

• Possibility for the Italian parent company or corporate shareholder of claiming the underlying foreign income taxes paid by black-listed subsidiaries or entities as foreign tax credit (FTC) in case of full taxation in Italy of either (i) the dividends directly or ultimately coming from those subsidiaries or entities or (ii) the capital gains deriving from the disposal of their shares.

• Amendment to the earnings before interest, taxes, depreciation, and amortisation (EBITDA) definition relevant for the general 30% EBITDA interest limitation to (i) include the dividends received and (ii) remove the 30% EBITDA of the unleveraged non-Italian subsidiaries.

• Softening of the anti tax havens rule, which requires an increased burden of proof to claim the deduction of a cost which derives from a transaction with a tax haven, to provide for a safe harbour solely requiring compliance with the arm’s-length principle and evidence of the transaction execution.

• Broadening the scope of the tax unity regime in order to include also brother-sister companies directly or indirectly controlled by a common European Union (EU) parent company (horizontal tax consolidation). Besides, Italian permanent establishments (PEs) of either EU or European Economic Area (EEA) qualifying entities are now eligible to join a tax unity as controlled entities.

• Repeal of the mandatory nature of the ruling procedure needed to avoid the income inclusion under the Italian CFC rules.

• Introduction of an ‘all in - all out’ election to exempt the foreign branches’ income.

• Extension of the tax deferral regime provided for the migration of legal seat and tax residence within the EU or the EEA to the (i) transfer of Italian permanent establishments to another EU or EEA State and (ii) cross-border reorganisations pursuant to the EU Merger Directive.

• Recognition of an at-fair-value assets’ tax step-up pursuant to the transfer of tax residence/migration from a white-list country to Italy.

• Introduction of a cancellation of debt income (DBI) for the Italian debtor that equals the difference, if any, between the receivable’s nominal value and tax basis.

• Improvement of the FTC general rule.

PwC observation:The Decree is expected to have a significant impact on the entire Italian international taxation system. Both foreign and Italian investors may take advantage from the outlined amendments. Moreover, the approval of the so called ‘Certainty Decree’ shall not be underestimated in order to benefit from the new Italian integrated taxation system as to better grasp the opportunities ahead.

Franco Boga Alessandro Di Stefano Milan MilanT: +39 02 9160 5400E: [email protected]

T+39 02 91605401E: [email protected]




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New Zealand

Proposed changes to the non-resident withholding tax rules

The New Zealand Inland Revenue released an Officials’ Issues Paper in May seeking feedback on proposed changes to New Zealand’s non-resident withholding tax (NRWT) rules for related party debt.

The proposals aim to address Inland Revenue’s concerns about the application of the current NRWT and approved issuer levy (AIL) rules to related party debt. Submissions on the paper are due by June 16, 2015.

The current AIL rules provide that NRWT does not need to be deducted from interest paid on certain borrowings where the New Zealand borrower and overseas lender are not associated and certain other criteria are satisfied (including registration of the relevant security). Where the AIL regime applies, the borrower instead pays a tax deductible levy of 2% of the interest paid.

The Issues Paper identifies three areas where, in Inland Revenue’s view, the application of the current rules to related party borrowing is inconsistent with the policy intent. We comment on each area below.

Subject to public consultation, the rules will likely be introduced into Parliament in the next tax bill, which is scheduled for introduction in late 2015. The proposed changes may apply from as early as mid-2016.

Interaction of the NRWT and financial arrangement rulesInland Revenue is concerned that, under current rules, a New Zealand resident borrower may be entitled to an interest deduction under the financial arrangement rules with no NRWT or AIL payable on the corresponding income to the non-resident.

A three-pronged approach is proposed to address this concern:

• Broadening the definition of ‘money lent’ for the purposes of the NRWT rules so that any amount provided to a New Zealand resident from an associated non-resident under a financial arrangement, where the New Zealand resident borrower is entitled to a deduction under the financial arrangement rules in relation to the funding, will be subject to the NRWT rules.

• Widening the definition of ‘interest’ for the purposes of the NRWT rules so that the amount of interest subject to NRWT is aligned to the deduction available to the New Zealand resident borrower under the financial arrangement rules.

• Imposing NRWT annually, in line with the financial arrangement income that would have arisen to the non-resident if it had been subject to the financial arrangement rules. This proposal addresses a mismatch in the timing of the interest deduction to the New Zealand resident lender (which is generally determined on an accrual basis) and the associated NRWT liability (which is generally determined on a cash basis).

The general impact of these three proposals is to align the interest deduction to the New Zealand borrower with the payment of NRWT on the interest income to the associated non-resident lender.

Eligibility for AILInland Revenue is concerned that the current rules allow for improper substitution of the 2% AIL for NRWT on interest effectively paid to associated parties.

The Issues Paper suggests three changes to address this concern:

• NRWT, rather than AIL, would be relevant for interest paid by the New Zealand borrower to a third party lender where the relevant loan is part of a back-to-back arrangement where the third party lender has received the funds from a non-resident associated with the New Zealand resident borrower.

• NRWT, rather than AIL, would be relevant where interest is paid by the New Zealand borrower to a non-resident lender who is not associated with the borrower, but who is ‘acting together’ as part of a group of persons who would be associated with the borrower if the group was treated as a single entity.

• Limiting the AIL regime and registration criteria to securities where 75% of the funding is expected to come from either (i) a financial intermediary or (ii) raised from a group of ten or more non-associated persons.

Peter Boyce Briar S Williams Nicola J JonesAuckland Auckland AucklandT: +64 9 355 8547E: [email protected]






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NRWT and limits to offshore and onshore branch exemptionsThe Issues Paper expresses concern that the current exemptions from NRWT for offshore and onshore branches are too wide. It suggests the current rules exempt certain interest payments from NRWT, when that is not consistent with the policy intent behind the taxation of New Zealand sourced income of non-residents.

To address this concern, the Issues Paper proposes that interest paid by an offshore branch of a New Zealand resident will be treated as New Zealand sourced interest (and subject to NRWT) unless the interest relates to money borrowed for the purpose of a business outside New Zealand and does not involve lending to New Zealand residents.

Similarly, interest earned by a non-resident with a New Zealand branch will be included as non-resident passive income (and subject to NRWT) unless the money lent is used by the non-resident for the purposes of a business it carries on through its New Zealand branch.

The Issues Paper proposes that members of New Zealand banking groups will be able to access the AIL rules in relation to interest paid to non-resident associates. This is on the basis that banks are ultimately margin lenders and, therefore, do not make large profits on particular dollar lending. Related party lending is ultimately sourced from third parties and is not used as a substitute for equity.

PwC observation:These changes represent a significant change from the existing NRWT rules and will have a wide impact. All funding structures into New Zealand should be reviewed as the proposals progress.

The proposals are complex and will create additional compliance costs for taxpayers. This seems contrary to Inland Revenue’s recent efforts to streamline compliance.

The banking sector will be particularly affected by these proposals. The imposition of AIL on borrowing for New Zealand banks could translate to an increase of costs that is not insignificant.

The proposed changes will also make it difficult for non-bank taxpayers to access the AIL regime in the future. This may impact the ability of New Zealand businesses to borrow from non-resident lenders and, therefore, adversely affect the overall cost of funding as the NRWT cost is usually economically borne by the New Zealand borrower.




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Poland

Draft legislation regarding changes in CIT and PIT - dividends and interest

On April 28, 2015 the draft legislation regarding changes in corporate income tax (CIT) and personal income tax (PIT) Acts and some other acts was published.

The proposed legislation introduces, inter alia, a general anti-abuse clause related to applying the participation exemption for dividends and other profit-sharing payments. Moreover, the aim of the draft legislation is to adjust the Polish tax provisions to the changes in the European Union (EU) law in the scope of taxation of income from savings. The draft legislation also introduces new regulations concerning documentation requirements for transactions between related parties.

Introduction of anti-abuse clauseThe draft legislation intends to implement the anti-abuse clause to the parent-subsidiary directive introduced by the Council Directive no. 2015/21 dated January 27, 2015.

According to the proposed provisions, the participation exemption on dividends and other profit-sharing payments will not apply to the legal transaction or series of legal transactions which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage, are not genuine taking into account all relevant facts and circumstances.

Based on the proposed CIT provisions, a non-genuine legal transaction is a transaction which is undertaken in order to benefit from tax exemption and which does not reflect economic reality, i.e. it is not conducted for valid commercial reasons and its result is, in particular, transfer of shareholders’ ownership of the company paying the dividend or achieving company income (revenue) paid in the form of dividend.

New regulations state that the anti-abuse clause may also refer only to a particular stage of the legal transaction or its part, which, when examined separately, is not genuine, without detriment to other genuine stages or parts.

Taxation of income from savings for individualsThe draft legislation introduces new regulations to the Polish PIT Act. The purpose of the new regulations is to ensure the effective taxation of income from savings in the form of interest paid cross-border. This is to be executed through an exchange of information between member states.

The new rules stem from the Polish implementation of the Council Directive no. 2014/48/EU dated March 24, 2014 which changed the Directive 2003/48/EC relating to the payment of interest made or secured by the entities having seat in one of the member state on behalf of owners of interest being individuals having seat in other member state.

The evaluation of the directive has revealed that it had not taken into account the evolution in the offering of a variety of savings products, which has an impact on different conducts of investors. As a result, the investors were able to bypass the provisions of the directive, e.g. through use of a legal intermediary or a legal agreement.

Hence, the new regulations clarify the definition of ‘the owner of interest’, ‘the interest’s payment’, and ‘the paying entity’ in order to cover innovating savings products and particular products in area of life insurance, payment of interest with the use of intermediate entities, as well as improvement of quality regarding information exchange.

Agata OktawiecWarsawT: +502 18 48 64E: [email protected]

PwC observation:The tax authorities are being equipped with additional tools allowing them to prevent tax planning and to stop tax schemes which allow taxpayers to subject their earnings to taxation in countries other than those where the earnings were generated.

To avoid potential negative consequences arising from the introduction of the discussed regulations, taxpayers should review their structures and instruments used to assess the impact on potential tax risk.




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Administration & Case Law

Administration and case lawOECD

OECD identifies BEPS indicators but more work needed to quantify extent of BEPS

Multinational companies (MNCs) will be interested in the results of the work done by economists and others under Action 11 of the base erosion and profit shifting (BEPS) Action Plan as agreed by the Organisation for Economic Co-operation and Development (OECD) with the G20 countries.

There are some firm conclusions about indicators of BEPS in the discussion draft published on April 16 under Action 11. There is also recognition that assessing the extent of BEPS is ‘severely constrained’ and no attempt is made in the draft to ascertain an overall figure for total BEPS.

Much of the draft deals with broad indicators of BEPS, though two approaches are put forward as alternative ways of seeking to measure BEPS:

• extrapolating from studies assessing the impact of tax rate differentials on the movement of profit from one location to another, and

• adding the amounts identified for each separate BEPS channel (per the Action Plan) with an adjustment for interactions between them.

Existing data sources are considered but questions remain as to whether there are other sources and whether the data will be adequate to perform reliable analyses.

The discussion draft does not discuss new tools to monitor and evaluate the effectiveness and economic impact of the actions taken to address BEPS, or new types of data that might be useful in helping to analyse BEPS in the future. However, it is potentially a concern for MNEs that the draft suggests confidential data could be used or more data might be necessary. No recommendation is made as to whether businesses should be asked to provide that data.

Peter Merrill Stef van Weeghel Richard CollierWashington D.C. Amsterdam LondonT: +1 202 414 1666E: [email protected]



PwC observation:Businesses will want to continue to monitor progress on this action item to ensure that any new data required in the future does not impose a significant additional burden on them.

The confidentiality of information held by tax authorities also remains a concern. While it is not yet proposed that this will be relaxed, the discussion draft describes it as a possibility. In particular, we repeat the message we sent previously to the OECD that the sharing of individual taxpayer information should only be done in accordance with exchange of information provisions of tax treaties and other bilateral or multilateral agreements. The discussion draft notes that even with further data, some of the potential spill over effects will need to be considered in deciding on how to measure BEPS in the future. It recognises that it may only be possible to provide a range of estimates.



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OECD

BEPS proposals address intangibles cost contribution arrangements

Multinational companies (MNCs) involved in the development and use of intangibles under cost contribution arrangements (CCAs) should note the April 29, 2015 discussion draft proposals under Action 8 of the base erosion and profit shifting (BEPS) Action Plan.

The discussion draft proposes fundamental modifications to Chapter VIII of the Economic Co-operation and Development (OECD) Transfer Pricing Guidelines:

• with respect to measuring the value of contributions to CCAs and the tax characterisation of contributions, balancing payments and buy-in/ buy-out payments, and

• to make it consistent with other BEPS amendments including those addressing the fundamental issues on risk, capital, re-characterisation, and intangibles.

Comments on the draft report may be submitted to the OECD by May 29, 2015. The OECD particularly expects comments on whether or not consistency is achieved between the CCA report and the discussion drafts previously published, in particular when it comes to risks, capital, re-characterisation, and intangibles.

A public consultation is planned on July 6, 2015 and July 7, 2015 at the OECD Conference Centre in Paris. The objective of the OECD is to issue final guidance on CCAs by September 2015.

In addition, since the main purpose of the CCA report is to update the guidance on CCAs so as to ensure consistency with the rest of the work on transfer pricing (especially the work on risks and intangibles), the CCA report may be amended as the other work streams are subject to modifications. In particular, a discussion draft on risk, non-recognition and intangibles is expected by the end of May 2015. Depending on the wording of this document, the CCA report may need to be amended accordingly.

PwC observation:The primary goal is to ensure that contributions are commensurate with the benefits received under a CCA. This is a difficult task when the contributions are complex and cannot be valued at cost. The guidance suggested by the OECD, although it acknowledges the need to achieve simplification, may nevertheless increase complexity and disputes.

The proposed requirement in the draft that a participant in a CCA must have the capability and authority to control the risks associated with the ‘risk-bearing opportunity’ under the CCA, while consistent with the overall theme of the BEPS project of focusing on ‘substance’, would be a paradigm change for CCAs. Similarly, the proposal that all of the important R&D and other development activities contributed by the participants to a CCA would need to be accounted for at arm’s length prices, rather than at cost as under the existing Guidelines, would also represent a fundamental change and make ‘cost contribution arrangements’ a misnomer.

The ultimate guidance on CCAs will eventually depend on the final wording of the discussions on risks, capital, re-characterisation, and intangibles.

Jérôme Monsenego Marios Karayannis Ian DykesStockholm San Jose BirminghamT: +46 10 213 3483E: [email protected]






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United States

Detailed guidance on the tax rate disparity test of the ‘branch rule’

In a generic legal advice memorandum, AM 2015-002 (released on February 13, 2015), the Internal Revenue Service (IRS) has provided the most detailed guidance to date regarding the application of the ‘tax rate disparity test’ under the ‘branch rule’ of the foreign base company sales income (FBCSI) provisions.

When tax rate disparity is found to exist, a controlled foreign corporation (CFC) and its branch are treated as separate corporations for purposes of determining whether the branch or the remainder of the CFC has FBCSI.

For purposes of applying the tax rate disparity test, taxpayers must compare the tax rate imposed on the purchase or sales income potentially subject to subpart F treatment under the branch rule (referenced by the AM as the ‘actual effective rate of tax’ or ‘actual ERT’) against the tax rate which would apply to such income had it been earned - hypothetically - in the CFC’s country of organisation (under the sales branch rule) or the country of the relevant manufacturing branch (under the manufacturing branch rule) (referenced in the AM as the ‘hypothetical effective rate of tax’ or ‘hypothetical ERT’).

The AM takes the view that both the actual ERT and the hypothetical ERT are calculated using a single common denominator which represents the amount of taxable income that hypothetically would be subject to tax in the CFC’s country of incorporation or the manufacturing branch, had the tested sales or purchase income been earned there instead.

Use of the common denominator effectively precludes analysing the tax rate disparity test by simply comparing the statutory tax rate of the sales jurisdiction against the statutory tax rate of the CFC’s country of incorporation or the manufacturing branch’s jurisdiction, depending on whether the sales branch rule or the manufacturing branch rule is being applied.

The AM also provides guidance on the calculation of the numerators of these fractions - the amount of tax actually and hypothetically paid to each country. It provides that both amounts of tax are calculated under the respective jurisdiction’s local law, not under US federal income tax principles.

PwC observation:AM 2015-002 provides significant insight into the application of the tax rate disparity tests for sales and manufacturing branches. While the AM is not binding guidance, taxpayers should be familiar with various positions taken (and introduced) in the AM as it provides more detailed guidance on the tax rate disparity test than any other guidance issued to date, and it likely will affect the manner in which IRS examining agents approach the analysis.

Certain aspects of the AM require further clarification. Most importantly, the AM’s statement (in Step 4 of the tax rate disparity test) that the hypothetical tax is computed simply by multiplying the hypothetical tax base by the applicable ‘marginal’ tax rate(s) in the CFC’s country of incorporation or the manufacturing jurisdiction to yield the hypothetical tax should not be construed to mean that the hypothetical tax and hypothetical ERT are determined using the statutory (‘normal’) tax rates of the CFC’s country of incorporation or the manufacturing branch’s country in all cases, since the regulations and prior IRS guidance clearly permit taxpayers to take into account certain tax holiday or tax incentive rates in making this computation.

Tim Anson Charles Markham Matthew ChenWashington D.C. Washington D.C. Washington D.C.T: +1 202 414 1664E: [email protected]






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Steve Chapman Dominick Dell'Imperio Candace B EwellNew York New York Washington D.C.T: +1 646 471 5809E: [email protected]



United States

IRS guidance to modify claims for refund or credit of excess withholding tax

On April 28, 2015, the Department of the Treasury (Treasury) and Internal Revenue Service (IRS) announced in Notice 2015-10 (Notice) their intention to issue regulations impacting claims for refund or credit of amounts withheld under Chapter 3 or 4 of the Internal Revenue Code.

According to the Notice, the regulations will provide that an otherwise allowable claim for refund or credit will be available only to the extent that the withholding agent deposited the amount withheld. The regulations will also provide for a pro rata allocation of the amount available for refund or credit when a withholding agent has partially satisfied its deposit requirements. According to the Notice, the Treasury and IRS are considering exceptions if the amount of the under-deposit is de minimis or if the withholding agent has a demonstrated history of compliance with its deposit requirements. These regulations will apply to claims for refund or credit for amounts withheld with respect to calendar year 2015 and thereafter.

This is a change from the existing rules which authorise the IRS to credit an overpayment against the federal tax liability of the person who made such overpayment and provide that the IRS shall refund any balance. The existing rules provide that, for an overpayment of tax that resulted from withholding under Chapter 3 or 4, the claimant must attach a copy of the Form 1042-S to the income tax return on which the claim for refund or credit is made.

Following a comment period, the Treasury and IRS intend to issue regulations.

PwC observation:The ability to claim refunds or credits of excess withholding tax (WHT) under Chapters 3 and 4 may be significantly impacted if regulations are issued in accordance with the plan announced in the Notice. Claims for refund or credit may be delayed or partially or fully denied based on whether a withholding agent deposited amounts withheld with the IRS on a timely basis.

These rules will apply to withholding that occurs in 2015, so withholding agents should act quickly to ensure they are in compliance with the deposit requirements to limit and avoid any financial or reputational risk due to the failure of a counterparty to receive a refund.




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United States

IRS advises in a CCA that none of a taxpayer’s CFC loans satisfy Notice 88-108 unless all do

The Internal Revenue Service (IRS) Chief Counsel’s Office issued Chief Counsel Advice (CCA) 201516064 on April 17, 2015, addressing the application of Notice 88-108 (the Notice) where a controlled foreign corporation (CFC) made loans back to its US parent over two quarter-ends, both of which were repaid within 30 days, but also made a third loan which caused the CFC to be a creditor of the US Parent for more than 59 days during the year.

The CCA highlights that the test under the Notice is an ‘all-or-nothing’ test. Short-term quarter-end loans that would qualify for the exception on their own can be disqualified if the CFC holds a single dollar of debt from a US affiliate on more than 59 days during the taxable year.

Taxpayers who may wish to rely on Notice 88-108 should consider whether they have controls in place adequate to assure that the CFC lender holds absolutely no debt of US affiliates (which would not otherwise qualify for an exception from the Section 956 definition of US property) for more than 59 days during the year.

A CFC’s Section 956 investments in US property (including loans or other debt obligations owed by US shareholders to the CFC) can result in a Section 951 subpart F inclusion for those US shareholders.

Specifically, the inclusion is the lesser of

i. any excess of (A) the shareholder’s pro rata share of the average of the adjusted basis in US property the CFC held (directly or indirectly) as of the close of each quarter of the tax year, over (B) the earnings and profits (E&P) attributed to such shareholder, or

ii. the shareholder’s pro rata share of the CFC’s applicable earnings and profits E&P. The CCA refers to the Section 956 rationale of treating long-term CFC investments in US property as repatriation equivalents.

PwC observation:Satisfying the requirements of Notice 88-108 can be operationally challenging. Taxpayers will need to monitor their accounts very carefully to ensure that they do not inadvertently disqualify loans intended to meet those requirements.

Chip Harter Alan L. Fischl Carl DubertWashington D.C. Washington D.C. Washington D.C.T: +1 202 414 1308E: [email protected]






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Treaties

TreatiesCyprus

Double tax treaty with Bahrain signed and ratified

Cyprus and Bahrain signed a double tax treaty (DTT) March 9, 2015 with Cyprus subsequently ratifying the treaty on March 20, 2015.

We understand that Bahrain has ratified the treaty as well. Subject to all the remaining necessary legal formalities between the two countries being finalised in 2015, the treaty takes effect as of January 1, 2016.

This is the first DTT between the two countries and it provides for 0% withholding tax (WHT) to be applied on dividends, income from debt claims, and royalty payments.

Under the treaty, Cyprus retains the exclusive taxing right on disposals by Cyprus tax residents of shares in Bahrainian companies including Bahrain located property rich companies.

Denis HarringtonPwC IrelandT: +353 1 792 8629E: [email protected]

PwC observation:Cyprus is ideally located geographically for the establishment of regional headquarters for business in Eastern Europe, North Africa, and the Middle East. This latest treaty further expands the Cyprus tax treaty network in the Middle East.

Ireland

Recently signed and ratified double tax treaties

Ireland has recently signed and ratified, respectively a number of double tax treaties (DTTs).

Ireland-Pakistan treatyA new DTT was signed between Ireland and Pakistan on April 16, 2015.

The treaty provides for withholding tax (WHT) of 5% on dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 25% of the share capital of the company paying the dividends and 10% in all other cases. The treaty provides for WHT of 10% on interest and royalties.

New Ireland-Zambia treatyThe Ireland-Zambia DTT was signed on March 31, 2015. The treaty provides for WHT of 7.5% on dividends and 10% on interest and royalties. However, a maximum WHT of 8% applies to royalties paid for a copyright of scientific work, a patent, trademark, design or model, plan or secret formula, or process for information concerning industrial, commercial, or scientific experience.

The treaty will enter into force once the countries exchange ratification instruments, and its provisions will apply from 1 January of the year following entry into force. Once in force and effective, the treaty will replace the convention signed on March 29, 1971.

Ireland-Thailand treatyThe Ireland-Thailand DTT entered into force on March 11, 2015 and will apply from January 1, 2016. The treaty provides for a WHT of 10% on dividends and 5% on interest (10% if the beneficial owner is a financial institution). WHT on royalties varies from 5% - 15 % depending on source.

Ireland-Bahamas tax information exchange agreement (TIEA)A TIEA has been signed between Ireland and the Bahamas, this agreement has to be ratified by both countries and is not yet in effect.

PwC observation:These recent ratifications signal Ireland’s continuing commitment to expanding and strengthening its DTT network. Ireland has signed comprehensive DTTs with 72 countries, 68 of which are now in effect and negotiations are ongoing with other territories at this time.

Stelios Violaris

Nicosia


Marios Andreou Dinos KapsalisNicosia LimassolT: +357 22 555 266E: [email protected]




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Netherlands

Treaty with Malawi concluded

The Netherlands and Malawi concluded treaty.

On April 19, 2015, the Netherlands and Malawi concluded a new tax treaty which replaces the terminated double tax treaty (DTT) between the Netherlands and Malawi (1969). Besides the avoidance of double-taxation, this tax treaty aims at supporting the fiscal and economic environment of Malawi.

As such, several adjustments to the former treaty have been introduced, including:

• A 5% withholding tax (WHT) on dividends if the receiving company owns at least 10% of the capital of the paying company, and 0% for pension funds. In all other cases, the domestic WHT rates apply (i.e. 10% for Malawi and 15% for the Netherlands).

• 10% WHT on interest, and

• 5% WHT on royalties.

Secondly, the treaty contains an anti-abuse clause which prevents the use of the treaty benefits solely for the purpose of tax avoidance. In such cases, the taxpayer is excluded from treaty benefits. This anti-abuse clause addresses dividends, interests, and royalties. Additionally, the treaty contains clauses on the exchange of information and administrative assistance to reduce tax avoidance.

The treaty enters into force after the ratification has been concluded by both countries.

PwC observation:This treaty is the first treaty in line with the new Dutch international fiscal policy, aiming to support developing countries, bilaterally and through international initiatives, in their efforts to improve their tax systems and the organisation of their tax administrations.

It is expected that the anti-abuse clause as incorporated in the treaty with Malawi will be introduced more widely. There has been agreement on the use of the anti-abuse clause in the treaties with Ethiopia, Kenya, Zambia, and Ghana. Other countries to which such a treaty modification is offered are: Kyrgyzstan, Pakistan, Morocco, Egypt, Bangladesh, the Philippines, Uganda, Moldavia, Nigeria, Sri Lanka, Vietnam, Zimbabwe, Georgia, Uzbekistan, Ukraine, Indonesia, Mongolia, and India.

Jeroen Schmitz Ramon Hogenboom Pieter RuigeAmsterdam Amsterdam AmsterdamT: +31 88 792 7352E: [email protected]



Treaties



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This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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