- Article
- March 9, 2016
Canada and the European Union (EU) have agreed to the inclusion in their proposed free trade agreement of a new approach to investment protection and dispute resolution.
Negotiations toward an EU-Canada Comprehensive Economic and Trade Agreement (CETA) were concluded in 2014. The text of the agreement included clearly defined standards of protection, and provided for full transparency of proceedings, a ban on forum shopping, governmental control of interpretation of the agreement, a strict code of conduct, early dismissal of unfounded claims, and a “loser pays” principle.
Following the required legal review of the text, which has yet to enter into force, the main elements of the EU’s new approach on investment have been incorporated into CETA. This approach was previously outlined in the investment protection package presented by the EU to the US in September as part of their ongoing Transatlantic Trade and Investment Partnership (TTIP) negotiations. In that case, the EU proposed the creation of an international Investment Court System, with an appeal mechanism based on clearly defined rules, qualified judges, and transparent proceedings.
According to the European Commission, the revisions to CETA represent a clear break from the old Investor to State Dispute Settlement (ISDS) approach. Trade Commissioner Cecilia Malmström said: “CETA takes on board our new approach on investment and its dispute settlement. By making the system work like an international court, these changes will ensure that citizens can trust it to deliver fair and objective judgements.”
The revised CETA establishes a permanent Tribunal of 15 members that will be competent to hear claims for violation of the investment protection standards established in the agreement. It also provides for the creation, upon the agreement’s entry into force, of an Appellate Tribunal.
Canada and the EU have committed to join efforts with other trading partners to set up a permanent multilateral investment court with a standing appellate mechanism. The revised text recognizes that a court of this nature will come to replace the bilateral mechanism established in CETA.
In a joint statement with Canada’s International Trade Minister, Chrystia Freeland, Malmström said: “With these modifications, Canada and the EU will strengthen the provisions on governments’ right to regulate; move to a permanent, transparent, and institutionalized dispute settlement tribunal; revise the process for the selection of tribunal members, who will adjudicate investor claims; set out more detailed commitments on ethics for all tribunal members; and agree to an appeal system.”
Canada and the European Commission will now complete the translation and review of the text. Malmström and Freeland said that they will then “focus on the swift ratification of CETA so that individuals and businesses, both large and small, are able to benefit from the opportunities offered by this gold standard agreement.”
“We are confident that CETA will be signed in 2016 and enter into force in 2017,” they said.
Once the deal is fully implemented, 99 percent of the EU’s tariff lines will be duty-free, including 100 percent of non-agricultural tariff lines and 95 percent of agricultural tariff lines. Nearly 92 percent of EU agricultural and food products will be exported to Canada duty-free.
- Newsletter
- February 26, 2016
31 countries have now signed a MCAA enabling the automatic exchange of CbC reports from each reporting entity between the competent authorities.
The agreement handles the exchange of CbC reports as stated in BEPS action plan 13. This action plan has amended Chapter V of the transfer pricing guidelines of the OECD. The guidelines are soft law and as such, OECD member countries are encouraged to follow these guidelines in their domestic transfer pricing practices.
CbC reporting is also part of the EU anti-tax avoidance package, which was proposed by the European Commission on 27 January 2016 and is tabled for political agreement by ECOFIN on 25 May 2016.
CbC reporting only applies for MNE Groups with a total consolidated income greater than €750,000,000. A CbC report is only required to be exchanged if both competent authorities have the MCAA in effect and their respective jurisdictions have legislation in effect that requires the filing of CbC reports with respect to the fiscal year to which the CbC report relates.
Countries that have currently implemented CbC reporting are Switzerland, Australia, China, Ireland, Mexico, South Africa, Denmark, Spain, Poland, USA (the IRS), United Kingdom, Norway, the Netherlands and Luxembourg. More countries are expected to follow this year. Some domestic law imposes the reporting obligation for book years as of 1 January 2016 and others from 1 January 2017.
In addition to current transfer pricing documentation, the ultimate parent entity or a surrogate parent entity of an MNE group must annually report the information as in Annex III to Chapter V for the CbC reports to their tax administration. Filing needs to be done in relation to fiscal years beginning 1 January 2016, 12 months after the closing of the fiscal year. The exchange between the competent authorities needs to take place within 15 months of the closing of the fiscal year.
- Newsletter
- February 26, 2016
The tax information exchange agreements (TIEAs) signed with four Nordic jurisdictions (i.e. Denmark, the Faroes, Iceland, and Norway) in August 2014 entered into force on December 4, 2015.
These TIEAs will become effective from year of assessment 2016/2017 in Hong Kong. For the other contracting jurisdictions, the TIEAs will take effect for exchange of information (EoI) in respect of
- (i) the taxable periods beginning on or after December 4, 2015 or
- (ii) where there is no taxable period, for all charges to tax arising on or after December 4, 2015.
- Newsletter
- February 26, 2016
The first Cyprus-Switzerland double tax treaty (DTT), signed in 2014, entered into force in October 2015 with its provisions taking effect as from January 1, 2016.
Under the treaty there is no withholding tax (WHT) on interest and royalties. There is also no WHT on dividends in those cases where the beneficial owner of the dividends is:
- a company (other than a partnership), the capital of which is wholly or partly divided into shares, holding directly at least 10% of the capital of the company paying the dividends for an uninterrupted period of at least one year (the time period criterion may be satisfied post the date of the dividend payment), or
- a pension fund or similar institution recognised as such for tax purposes, or
- the government, a political subdivision, local authority, or the central bank of one of the two Contracting States.
As Per the treaty, a 15% WHT on dividends applies in all other cases. Irrespective of this, per the provisions of Cyprus’ domestic tax legislation, Cyprus does not apply WHT on dividend payments out of Cyprus at all times.
Under the treaty, Cyprus retains the exclusive taxing rights on disposal of shares in Swiss companies except in certain cases when the disposed-of shares derive more than 50% of their value directly or indirectly from immovable property situated in Switzerland.
- Newsletter
- February 26, 2016
On December 1, 2015, China signed a DTT with Zimbabwe, bringing the number of DTTs signed by China to 104. The DTT will enter into force upon completion of the ratification procedures by both sides. The important features of ChinaZimbabwe DTT include:
- Withholding tax (WHT) rates on dividends, interest, and royalties paid to qualified beneficial owners (BO) are 2.5% / 7.5% (2.5% for corporate BO which holds directly or indirectly at least 25% shares of the company paying the dividends and 7.5% for all other cases), 7.5% and 7.5% respectively.
- There is a ‘principle purpose test (PPT)’ provision in each article of dividends, interest, and royalties stipulating that if the main purpose or one of the purposes to put in place the arrangement is to take advantage of the treaty benefit, the treaty benefit shall not be granted.
- Capital gains arising from the transfer of property-rich shares and shares that represent a participation of at least 50% in a company in the source state may be taxed in the source state. In other cases of share transfers, the taxing right lies with the residence state.
- The profit derived by an enterprise from the operation or rental of ships, boats, aircraft, rail, or road transport vehicles in international traffic and the rental of containers and related equipment which is incidental to the operation of international traffic shall all be taxable only in the contracting state where the place of effective management of the enterprise is located.
- Newsletter
- February 26, 2016
Intellectual Property (IP) Box alignment with the OECD’s BEPS Action 5 conclusions announced, with maximum transitional arrangements
The Cyprus Ministry of Finance (MoF) announced on December 30, 2015 that it will propose amendments to the current Cyprus intellectual property (IP) Box in order to introduce a new IP Box as from July 1, 2016 which will be fully aligned with the conclusions of the Organisation for Economic Co-operation and Development’s (OECD’s) Base Erosion and Profit Shifting (BEPS) Action 5 conclusions.
As Per the MoF announcement, Cyprus intends to provide from the maximum possible transitional arrangements. It is therefore expected that IP already benefitting from the current Cyprus IP Box by June 30, 2016 will continue to receive the current benefits for a further 5 years, i.e. until June 30, 2021. A much shorter transitional period to December 31, 2016, however, is expected in the case of IP which is acquired, directly or indirectly, from related parties at any time in the first six months of 2016, unless at the time of acquisition such IP was already benefitting from an IP Box.
The current Cyprus IP Box leads to a competitive effective corporate tax rate of 2.5% (or lower) for qualifying incomes earned on qualifying IP assets. Qualifying income currently includes royalties, gains on disposal of IP and IP infringement compensation. Qualifying assets are currently broadly defined and include, for example, copyrights (which may take any of the following forms: literary works, dramatic works, musical works, scientific works, artistic works, sound recordings, films, broadcasts, published editions, databases, publications, software programmes), patented inventions, trademarks (and service marks), as well as designs, and models that are used or applied on products. A narrower range of IP assets will qualify under the new IP Box as compared to the current IP Box, expected to include patents and computer software.
Although not referred to in the MoF announcement, it is expected that the planned new Cyprus IP Box will retain the benefit of the competitive effective corporate tax rate of 2.5% (or lower) but only a portion of income may qualify. The qualifying portion of the income is expected to reflect the research and development (R&D) expenditure undertaken by the IP owner itself (or outsourced to unrelated parties) as compared to the total R&D expenditure required to develop the asset.
In line with BEPS Action 5 recommendations it is expected that Cyprus will spontaneously exchange information (under existing international agreements) on taxpayers who benefit from the transitional arrangements of the current IP Box if the IP entered the current IP Box in the period February 7, 2015 to June 30, 2016.
- Newsletter
- February 26, 2016
The Korean National Assembly has approved amendments to tax laws for 2016 which include some changes to the proposals announced in August 2015. Supporting details related to the tax law changes have also been released in amendments to relevant Enforcement Decrees. The main corporate tax law changes that may have impact on Korean inbound investors include:
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- The introduction of a limit on the amount of carried forward net operating losses that can be offset against taxable profits. Companies will only be able to utilise carried forward net operating losses of up to 80% of their taxable profits each year. Prior to this amendment, net operating losses could be carried forward for 10 years and be used to offset against a company’s taxable profits without any limitation. Small and medium sized enterprises (SMEs) are exempt from the restriction.
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- The introduction of new transfer pricing reporting requirements applicable to Korean corporations and foreign corporations with Korean permanent establishments (PEs) that have annual gross sales exceeding 100 billion South Korean won (KRW) and international related party transactions exceeding KRW 50 billion per year. Where these thresholds are exceeded, additional information relating to international related party transactions must be submitted to the authorities including a transfer pricing master file and local file by the corporate tax return filing deadline.
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- New tax credits worth KRW 5 million (KRW 2 million for large corporations) for the increase in employment of young regular workers aged between 15 to 29 years old, subject to certain restrictions. The new tax credit is available for fiscal years that include December 31, 2015.
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- Korean capital gains tax may be applicable when a foreign company disposes of shares held in a domestic company if the domestic company is regarded as being ‘property rich’, subject to the provisions of any applicable double tax treaty (DTT). For the purposes of testing whether a domestic company is property rich, the value of shares in property rich subsidiaries owned by the domestic company will now also be taken into account as real property when calculating whether greater than 50% of the company’s assets consist of real property
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- Newsletter
- February 26, 2016
Marking a significant development in the Advance Pricing Agreement (APA) space, India recently signed its first two bilateral APAs with the U.K. on transactions of management charges and brand royalty, avoiding seven years of potential litigation for two companies of a U.K. based group engaged in manufacturing of automotive and industrial components.
The Indian APA programme was introduced in 2012 to bring about certainty and uniformity in transfer pricing matters of multinational companies and reduce litigation. The programme allows unilateral as well as bilateral APAs to be entered into by the taxpayers. Unilateral APAs are agreed between Indian taxpayers and the Central Board of Direct Taxes (CBDT), without the involvement of the tax authorities of the country where the associated enterprise is based. Bilateral APAs include agreements between the tax authorities of the two countries.
In the last three years, an overwhelming number (over 500)¹ of APA applications have been filed demonstrating good faith and positive expectations of the taxpayer companies from the programme. Resolution of these APAs has steadily caught pace over the last several months with 39 APAs² signed by the CBDT until 22 January 2016. With the conclusion of two bilateral APAs with the U.K., the total tally of signed APAs has increased to 41 (38 unilateral and three bilateral).
These are first such bilateral resolutions involving the controversial issues of management charges and brand royalty. The two taxpayer companies recently also concluded their Mutual Agreement Procedure (MAP) proceedings with the U.K. on the same set of transactions. With the APA outcome now in place, 12 years of existing/potential litigation for each of the two companies has been resolved.
Management charges or group cost allocations and royalty payments for intangibles such as brand are one of the most litigious issues in the area of transfer pricing, which involves greater subjectivity since the considerable emphasis is placed on the benefits derived from the services or intangibles in addition to the pricing. The Indian and the U.K. Competent Authorities as well as the APA Office provided a very pragmatic and rational resolution of the controversial issues, notwithstanding the fact that not much guidance was available internationally on the resolution of similar issues through the APA route.
1. 386 applications were filed till 24 December 2014 as per the CBDT Annual Report and further over 150 applications have been filed till 31 March 2015
2. Press release by Government of India dated 22 January 2016.
- Article
- February 22, 2016
On 12 February 2016, Belize and the Czech Republic signed a Tax Information Exchange Agreement.
- Article
- February 22, 2016
On 10 February 2016, Luxembourg and Senegal signed an Income Tax Treaty.
The Treaty will come into force after the two countries exchange ratification instruments. The provisions of the treaty will have effect from 1 January of the calendar year next following that in which the agreement enters into force.
In accordance with the Treaty, the following withholding taxes will apply:
Dividends:
- 5% if the beneficial owner is a company (other than a partnership) which owns
- directly at least 20% of the capital of the company paying the dividends.
- 15% in all other cases.
Interest: 10%.
Royalties:
- 6% on royalties paid for the use or the right to use industrial, commercial or scientific equipment.
- 10% in all other cases.
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