AITC Tax Flash Editorial: The Future of Tax Sovereignty in the EU
With the newest press release (discussed in the EU segment of November Edition) the Commission has opened up the old-new front (the idea has been present since 2003) regarding the unification of taxation of companies´ profits inside the EU in the form of the Common Consolidated Corporate Tax Base (CCCTB). It could be said that the proposal is the consequence of the OECD´s BEPS project and the infamous tax schemes of large multinationals culminating in the latest case of EU v Ireland for the state aid given to the Apple Inc. The decision that has legal basis in the EU´s state aid rules, which in affect determine the free competition in the EU for the benefits of the common market, set the limit to the tax sovereignty of particular state. The ruling in Apple Inc state aid case has implications on sovereignty of EU states regarding the advanced pricing agreements (APA), while the BEPS movement with the intensified version of it in the form of CCCTB affects the sovereignty of setting down rules of taxation (effecting residence provisions and division of profits).
Where does all this development leave the EU member states and their power to set down tax rules? The answer is easy – the tax sovereignty could be severely narrowed and the process is already under way. If we take a look at the case of Ireland for instance, we will observe that Ireland came under increasing pressure of other EU countries and had to change its laws regarding the determination of residence in the Finance Act 2014. The revision of company residence in Ireland had its origin in the treatment of residence for companies in the Apple Inc scheme, where the company managed to establish double non taxation through double non-residence. Furthermore, with the decision regarding the transfer pricing APA deals in the EU v Ireland state aid case, the time of the APAs could be coming to a close, ending an important tool for dealing with and simplifying specific transfer pricing issues upfront and on a horizontal level with the taxpayer. All these actions indirectly affect the legislative initiatives of the countries, repressing the tools that countries have used for enhancing their market competitiveness. A centralized CCCTB would cement the direction of tax policy that is already indicated by the court decisions and the proposed directives regarding the base erosion and profit shifting initiative.
These are all important steps in the development of the EU that will inadvertently have significant effects on the competitiveness of the EU market in the global economy and the sovereignty of EU member states. Current promotion of CCCTB emphasizes the simplification and transparency of the EU system for the EU states. Regardless of some positive implications, the promotion does not consider a broader aspect, which would analyse long-term EU competitiveness on the global market that could be harder to achieve with a rigid unified corporate tax base. Competitiveness of the EU common market is that more important in the face of the looming Brexit, in the aftermath of which Britain will no longer be constrained by the unification direction of the EU. Where will the multinational companies decide to take their business in the future? In the end it will be the companies that will decide where it is in fact easier and cheaper to do business.
Contributed by: Dominik Kuzma, editor of Tax-Flash in association with AITC, E: email@example.com
AITC Welcomes the New Pakistan Member
The President and the Board of AITC welcome of Mr. Rafqat Hussain of Rafqat Hussain & Co, the new AITC representative in Lahore, Pakistan and wish a rewarding mutual cooperation.
For more information please see the online information or contact Mr. Rafqat Hussain directly.
Company: Rafqat Hussain & Co
Contact person: Mr. Rafqat Hussain
Address: 81 Abu Bakar Block, Garden Town, Lahore, Pakistan
Tel: + 92 42-35864181
Contributed by: AITC – Association of International Tax Consultants, E: info@aitc- pro.com, W: www.aitc-pro.com
Denmark: EC Court Judgement Regarding Dividends
According to Act no. 652 of 8 June 2016 the definition of a foreign subsidiary for Danish tax purposes was amended due to the EU Court judgment of 11 September 2014 in case C-47/12 (Kronos International Inc.).
The definition of a foreign subsidiary (minimum 10 % shareholding) transpires from the Act on Capital Gains on Shares, article 4 A. Before the amendment, the definition was based on the residence of the foreign subsidiary as it was a requirement that dividends from the foreign subsidiary were eliminated or reduced according to EU Directive 2011/96 or a tax treaty with the state of residence of the company, i.e. a subsidiary resident in another state was not included.
In the Kronos case the question concerned whether dividends received by a company resident in a member state that was distributed by a subsidiary (minimum 10 % shareholding) resident in another member state or a third state were subject to the rules of freedom of establishment (articles 49 and 54 TFEU) or the rules of free movement of capital (articles 63 and 65 TFEU), the latter rules also applying to third states as opposed to the first mentioned rules. It transpires from the operative part of the judgment that the rules of free movement of capital applied.
The Act has amended the definition of a foreign subsidiary to be based on tax liability without exemption in the state of residence including according to a tax treaty and exchange of information between the competent authority in the state of residence and the Danish tax authorities according to a tax treaty, another international agreement or convention or an agreement administratively entered into about assistance in tax cases. However, it is still a requirement that the foreign company is resident in a country that has an agreement with Denmark as defined. It transpires from the relevant bill that the tax liability requirement (further explained in the bill) and the requirement regarding agreements are considered to be overriding reasons in the public interest and therefore in compliance with EU law.
The amended definition of a foreign subsidiary is relevant to Danish companies holding foreign subsidiaries. It is noted, that the requirement regarding EU Directive 2011/96 and the tax treaty requirement, see above, are still relevant to outbound dividends.
The transition rules are complex, previous income years may be taken up again upon request due to the amended definition.
Contributed by: David A. Munch, Advokat David Munch, E: firstname.lastname@example.org, W: www.davidmunch.dk
Australia: A Case Report Concerning Royalties under Australia-India DTA
In a recent case before the Full Federal Court, Tech Mahindra Limited v Commissioner of Taxation  FCAFC 130 (22 Sept 2016), an Indian resident company sought to argue that it should not pay any tax in Australia on payments for services performed in India for clients in Australia (Indian Services), which were deemed to be royalties under the Australia-India DTA, and which the Australian Commissioner subjected to withholding tax under the Royalties Article of the DTA.
The issue arose as the Indian company had a PE in Australia whose Australian resident employees provided services to the same Australian customers who paid the deemed royalties (Australian Services). The parties agreed the Australian Services were taxable in Australia under the Business Profits Article of the DTA: Art 7.
The parties agreed that the Indian Services were not taxable in Australian under the Business Profits Article, in its terms, as the profits from those services were not “attributable” to the PE, as the services were not performed in Australia i.e. the Business Profits Article did not work on the basis of the “force of attraction” principle.
Under the Royalties Article, royalties “effectively connected” with a PE of the provider, are said to be dealt with under the Business Profits Article (Art 12(4)). The Indian company sought to argue that the royalties were “effectively connected”, taking them out of the Royalties Article, but that having done so, the Business Profits Article did not, in its terms, subject the net royalties to tax (by assessment).
The Indian company’s argument was that the Indian Services (deemed royalties) were “effectively connected” on the basis that they were provided under the same contracts as the Australian Services.
The Court concluded that:
- The Indian Services were not “effectively connected” with the PE as the Indian Services needed to have a “real or actual connection” with the PE, which it found they did not; and
- Even if they were “effectively connected”, Art 12(4) would only apply to take them out of withholding treatment, if they would be taxed under Art 7 i.e. the scheme of the provisions was to tax under either Art 7 or 12, not to result in no Australian tax.
The Court was able to reach these conclusions without finding that the word “attributed” in Art 7 had the same meaning as the words “effectively connected” in Art 12.
Contributed by: Robert Gordon of Pointon Partners, E: email@example.com, W: www.pointonpartners.com.au
US: President-Elect Donald Trump Is Less Than Ideal for US Tax Advisers?
On July 19, 2016 we posted Time to Compare Candidate’s Tax Plans! where we discussed both the Clinton Tax Plan and the Trump Tax Plan. Now with that the Donald is President-Elect, what does that mean for Tax Advisers?
Donald Trump has proposed tax reforms that would significantly reduce marginal tax rates for both individuals and businesses, increase standard deduction amounts to nearly four times current levels, limit or repeal some tax expenditures, repeal the individual and corporate alternative minimum taxes and the estate and gift taxes, and tax the profits of foreign subsidiaries of US companies in the year they are earned. The main elements of the Trump proposal can be found here or in our previous article linked above.
Where Does Trump´s tax plan Leave Tax Advisers?
From my roughly 35 years of experience, Taxpayers generally value tax advice when the tax rate is above 50%.
When rates are between 25% – 50% the value of Tax Advice diminishes and the tax adviser has to produce more significant benefits in order to show value.
When the rates are between 15% – 25% you really have to question whether you need a tax adviser at all and certainly whether the cost of their tax advice significantly exceeds the value of the tax savings.
- For Businesses a tax rate of 15%, or roughly 20% where you factor in state income taxes, it will be very difficult for tax advisers to provide sufficient tax benefits to justify their fees; especially for small companies and small enterprises… Not a plus for tax advisers here!
- For Estate Planners, with the elimination of gift and estate taxes, who needs an estate planner, other than someone who needs testamentary documents and taxpayers can get them from LegalZoom… Definitely not a plus for tax advisers here!
- For Individuals with the top tax rate decreasing from 43.4% (39.6 & 3.8 Obama care) to a maximum of 25% (Trump proposes to eliminate Obama care), this decrease essentially cuts the value of individual tax advice by roughly 45%. With an increase in the standard deduction to $25,000 for single filers and $50,000 for joint filers, most individual taxpayers we’ll see their taxes decrease by roughly 50%, without the need to consult a tax advisor… Again not a plus for tax advisers here!
When you add to that a Trump proposed 10% repatriation tax on offshore deferred profits; not only who needs a tax advisor, but who needs to keep the profits offshore anymore? No tax advice needed here!
Now it’s not all doom and gloom for Tax Advisers, as I have found them to be some of the smartest, most technical, most adaptable and opportunistic group of professionals and no matter how the tax law changes, they consistently somehow find a way to find an exception for their clients and thereby demonstrate their value to their clients.
Contributed by: Ronald A. Marini, Attorney at Law – Marini & Associates, P.A., E: Rmarini@TaxLaw.ms, W: http://taxlaw.ms
Canada: Canadian “Trump” Effect
Like the rest of the world Canada was shocked by the election of Donald J. Trump as President of the United States.
President elect Trump was short on policies, and long on rhetoric, so we don’t know what impact this will have on Canada. Prime Minister Trudeau has stated a willingness to work with President elect Trump but the ideologies of our two countries are very different and some disagreement is inevitable.
President elect Trump said he wants to replace the North American Free Tree Agreement with a new Canada/US trade deal. As a conciliatory move Prime Minister Trudeau has stated a willingness to renegotiate NAFTA. A new trade deal could have significant implications for both countries since Canada is one the largest customers and suppliers to the United States. On the table could be import/export duties and taxes.
There is no indication of any planned significant income tax changes. If an American first policy takes hold we could see duty and tariff changes, as well as income tax measures aimed at non-residents, as the US moves to protect and grow important US industries.
We are cautiously optimistic our long standing relationship with the United States will continue but have to wait for clearly stated policies to know if this optimism is justified.
Contributed by: Keith Doxsee of Doxsee & Co. Chartered Accountants, E: firstname.lastname@example.org, W: http://www.dsaccountants.com/index.php
Cyprus: Amendment of Cyprus – India DTT
The Double Taxation Avoidance Treaty (DTT) between Cyprus and India has been signed on 18th of November 2016. According to official statements, with the signing of the DTT Agreement, the Republic of Cyprus shall be removed from the Indian tax authorities list of “Notified Jurisdictional Area”, with retrospective effect from the 1st of November 2013.
The DTT Agreement text agreed between the two countries settles all commitments between the two countries that have been pending for a number of years, providing stability and certainty to investors, whilst contributing to further development of trade and economic activities between Cyprus and India, as well as other neighbouring countries.
The DTT Agreement provides for the taxation of capital gains from the disposal of shares at source. It is noted that a certain grace period is also applicable for investments that have been undertaken or will be undertaken by the 1st of April 2017, so that any taxation of future disposal of said investments will remain in the contracting State of the residence of the seller.
The continuous updating, preservation and extension of the existing DTT Network, which are of utmost economic and political importance to the government of Cyprus, aims to draw additional foreign investments and further promote Cyprus as an established international business centre.
Contributed by: Stavros Pavlou-Senior & Managing Partner, Patrikios Pavlou & Associates LLC, E: email@example.com, W: www.pavlaw.com
UK: Recent UK Personal Tax Developments and News
HMRC created a Panama Papers taskforce in April, 2016 and they have now published a progress report on their criminal and serious civil offences investigation activity. More information can be found via this link https://www.gov.uk/government/news/taskforce-launches-criminal-and-civil-investigations-into-panama-papers
The Tax Justice Network
The Tax Justice Network is a 13 year old independent international network crusading for systematic change on a wide range of issues including tax, financial globalisation and tax havens.
Their regular blog http://www.taxjustice.net/ and their monthly half hour podcasts http://www.taxjustice.net/taxcast/ frequently provide informative interesting insights into the international world of taxation and political obfuscation and you do not need to be a tax professional to benefit from them. Do not read or listen too many of them at once though as they can be a little disheartening.
Making Tax Digital
HMRC’s Making Tax Digital consulting period has now been completed and we await HMRC’s briefing documents summarising their conclusions and proposed actions to progress this project.
Due to past experience with HMRC and the size of this project there has been a fair amount of lobbying of HMRC to postpone some of the initial dates for activating this project beyond those companies and individuals who volunteered to be part of the pilot phase.
In particular there are a number of operational concerns regarding software, record keeping, access and the burden on small and large businesses of the proposed quarterly reporting.
Here is a link to one of HMRC’s earlier alerts on this topic https://www.gov.uk/government/collections/making-tax-digital-consultations together with another more recent example of lobbying with concerns from the Treasury Select Committee http://economia.icaew.com/news/september-2016/treasury-committee-chair-urges-caution-on-making-tax-digital-plans
The new UK Chancellor of the Exchequer, Philip Hammond, is due to make his first Autumn statement in Parliament on Wednesday 23rd November.
For those of you who are unfamiliar with the Autumn statement here is Wikipedia’s description https://en.wikipedia.org/wiki/Autumn_Statement .
This 2016 Autumn statement along with HMRC’s tax documents which are released shortly afterwards should provide an early insight into Budget 2017 UK tax changes for the following Spring to be followed by next year’s Finance Bill and Act.
So here is a link to where those HMRC tax documents can usually be found shortly after the Autumn statement. https://www.gov.uk/government/topical-events/autumn-statement-2016
Contributed by: David Watts, Watts Woollett LLP, E: firstname.lastname@example.org, W: www.wwtax.co.uk, Twitter: twitter.com/dwattswoollett
Hong Kong: Implementation of Automatic Exchange with the UK and Japan in 2018
According to the Hong Kong Government, Hong Kong has signed agreements with the UK and Japan on 26th October, 2016 with a view to implementing automatic exchange of financial account information in tax matters (AEOI) with these two tax jurisdictions in 2018.
In September 2014, Hong Kong indicated its support for the standard promulgated by the OECD on AEOI, with a view to commencing the first exchanges with appropriate partners on a reciprocal basis by the end of 2018. An ordinance amending the Inland Revenue Ordinance (IRO) was passed by the Legislative Council in June 2016 to provide the necessary legal framework for Hong Kong to implement AEOI, and came into effect on June 30, 2016.
The Inland Revenue Department (IRD) has recently signed bilateral competent authority agreements (CAAs), based on the model CAA promulgated by the OECD, with the United Kingdom and Japan. Under the AEOI standard, a financial institution (FI) is required to identify financial accounts held by tax residents of reportable jurisdictions in accordance with the OECD’s due diligence procedures. FIs are required to collect the reportable information of these accounts and furnish such information to the IRD beginning from the reporting year. The IRD will exchange the information with the tax authorities of the AEOI partner jurisdictions on an annual basis.
Looking ahead, the Hong Kong Government has stressed that it will expand Hong Kong’s network of AEOI with partners with which Hong Kong have signed a comprehensive avoidance of double taxation agreement (CDTA) or a tax information exchange agreement (TIEA). The Government will commence AEOI discussions with all other CDTA/TIEA partners committed to adopting AEOI, and seek to conclude as many CAAs as practicable within 2017.
Contributed by: Catherine le Bourgeois & Wilson Yeung of Masson de Morfontaine Limited, E: email@example.com, W: www.masson-de-morfontaine.com
Netherlands: Possible Options for Tightening Substance Requirements
In the Netherlands recently there is some debate about substance requirements of foreign companies. Latest on this topic is that Wiebe’s, Secretary of Finance, presented three options to tighten the demands for substance requirements, which can prevent conduit companies without harming companies with real economic activities. The House has invited hereto in a motion (V-N 2016 / 53.4).
The Minister sees three possible actions:
1. exchanging information in more cases;
2. Impose more stringent substance requirements prior to a ruling (e.g. cost level, number of staff, minimum level of equity);
3. Sharpening of art. 8c of the Dutch Corporate Income tax (Wet VPB 1969). Minimum requirements for the company to meet in order to exempt interest and royalties in the taxable amount.
The Secretary sees nothing in adding substance requirements to art. 2 paragraph 4 of the Wet VPB 1969 (residence fiction). The policy should be aiming to improve the capacity of the source countries to assess whether there is abuse. The effort also internationally is to achieve that. It is, according to the Secretary of Finance, important to have a fast and widespread implementation, so that source countries efficiently can combat abuse of tax treaties.
Contributed by: Michel Kuik, Enik Accountancy, E: firstname.lastname@example.org, W: http://www.enik.com/ & Aart Spaans, Spaans & Partners, E: email@example.com, W: http://www.spaans.biz/
Ghana: Income Tax Act 2015 ACT 896
Dear Members, in last month article on tax updates in Ghana, West Africa, I indicated to bring you up to speed with recent amendment to the Income Tax Act 2015 (ACT 896).
As at 9th September 2016, the Parliament of the Republic of Ghana passed Act 924 which is made up of amendments on 17 sections of the Income Tax Act and this actually affected the tax status of both residents and non residents on various tax bases:
Some of the significant areas are under listed below:
- Interest on bonds
Section 7 which encapsulate all the exemption of income earn by individuals was amended to include interest paid to a non-resident person on bonds issued by the Government of Ghana (GoG) and gains from the realisation of bonds issued by GoG by non resident persons. This tax exemption was initially reserved for residents by the promulgation of Act 907.
This actually gives incentives for non-residents to actively participate in bonds floated by the GoG.
- Granting of Capital Allowance under operating lease
This has been a grey area and the amendment of section 30 of the Income Tax Act has added more clarity. Now a lessor who has leased out an asset under operating lease can now enjoy capital allowance in accordance with the Third Schedule. This also applies to finance lease arrangements.
- Tax Rate after Concessionary Period
The First Schedule has also been expanded to include subparagraph 6A which stipulates that the income tax rate applicable to the chargeable income of a business referred to in subparagraph (1), (2) and (3) of the Sixth Schedule for the next five years period after the temporary concession period is:
|Location||Rate of Income Tax|
|Accra and Tema||20%|
|Other Regional Capitals outside the Northern Savannah EcologicalZone||15%|
|Outside other Regional Capitals||10%|
|The Northern Savannah Ecological Zone||5%|
Northern Savannah Ecological Zone has the meaning provided in the Savannah Accelerated Development Authority Act, 2010 (Act 805). Businesses that benefit from these concessions do not qualify for any other location incentives available to manufacturing businesses.
I will share more light on other amendments in the next month’s update. However, you can certainly get in touch should you need more details on the above or any other clarifications on tax issues in Ghana.
Contributed by: Richard Dwumor of RDK Consulting Services, E: firstname.lastname@example.org, W: www.rdkconsulting.net
EU: CCCTB – the New Commission Proposal
The Commission has today announced plans to overhaul the way in which companies are taxed in the Single Market, delivering a growth-friendly and fair corporate tax system.
Re‑calibrated as part of a broader package of corporate tax reforms, the Common Consolidated Corporate Tax Base (CCCTB) will make it easier and cheaper to do business in the Single Market and will act as a powerful tool against tax avoidance.
It is suggested that with the CCCTB, companies will for the first time have a single rulebook for calculating their taxable profits throughout the EU. Compared to the previous proposal in 2011, the new corporate taxation system will:
– Be mandatory for large multinational groups which have the greatest capacity for aggressive tax planning, making certain that companies with global revenues exceeding EUR 750 million a year will be taxed where they really make their profits.
– Tackle loopholes currently associated with profit-shifting for tax purposes.
– Encourage companies to finance their activities through equity and by tapping into markets rather than turning to debt.
– Support innovation through tax incentives for Research and Development (R&D) activities which are linked to real economic activity.
Also, this proposal will be implemented through two steps. The first step will introduce the Commmon Corporate Tax base in connection with which the Commission is expecting to reach an easier consensus. The second step will provide the full system of the CCCTB with the rules of consolidation together with the common tax base.
Contributed by: Dominik Kuzma, editor of Tax-Flash in association with AITC, E: email@example.com