- Article
- March 2, 2015
On February 25, South Africa’s Minister of Finance, Nhlanhla Nene, presented a 2015 Budget that was said to be constrained by a slowing economy and lower-than-expected tax revenues.
Nene indicated that the Government now has to rebalance its fiscal policy to reduce the “structural gap” that exists between spending on investment and economic development and the amount of tax it expects to collect.
South African economic growth for 2015 is projected to total only two percent, down from indications of 2.5 percent growth in October last year. The Government is aiming for three percent growth in 2017, Nene said, and so “it is now clear that we can no longer postpone consideration of additional revenue measures.”
The main tax proposals include a one percent increase to PIT rates for all taxpayers earning more than ZAR181,900 (USD15,900) a year. Under the changes, the rates above this threshold will range from 26 percent rate, for taxable incomes between ZAR181,901 and ZAR284,100, to 41 percent rate, on annual earnings above ZAR701,300.
However, with tax brackets, rebates, and medical scheme contribution credits also being adjusted for inflation, the net effect is that there will be tax relief for those earning below ZAR450,000 a year. Those with higher incomes will pay more tax.
There will also be an increase in the general fuel levy and excise duties on alcoholic beverages and tobacco products from April. The rates and brackets for transfer duties on the sale of property will be adjusted to provide relief to middle-income households. Transfer duty will be eliminated on properties below ZAR750,000, and the rate on properties worth more than ZAR2.2m will increase.
Based on the recommendations of the Davis Tax Committee, a more generous tax regime is proposed for businesses whose annual turnover is below ZAR1m. Qualifying businesses with a turnover below ZAR335,000 a year will pay no tax, and the maximum rate is to be reduced from six percent to three percent.
Nene also added that the Government is to take further steps to combat revenue leakages “through erosion of the tax base, profit shifting, and illicit money flows. … Drawing on advice of the Davis Tax Committee, amendments will be proposed to improve transfer pricing documentation and revise the rules for controlled foreign companies and the digital economy.”
It was stressed that these proposals will be in line with the work of the Organisation for Economic Co-operation and Development on base erosion and profit shifting (BEPS). Tax returns may also be changed to allow the collection of more information to help better identify BEPS risks.
The measures are expected to reduce the consolidated deficit to 3.9 percent of gross domestic product for 2015/16, and to 2.5 percent in 2017/18.
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- Article
- March 2, 2015
On February 25, 2015, China and South Korea initialed the text of their free trade agreement, negotiations towards which began in May 2012 and were completed in November last year during a meeting in Beijing.
A statement at that time from China’s Ministry of Commerce (MOFCOM) revealed that the two countries have agreed to eliminate import tariffs on over 90 percent of all products traded between them and over 85 percent of their annual trade by value. Import duties on non-sensitive products will be cancelled either immediately or within ten years, and those on sensitive products will be abolished within 10-20 years of the FTA becoming effective.
However, the two sides have also decided to exclude certain ultra-sensitive items from the agreement. There had been particular concerns in China regarding opening its manufacturing sector to South Korean imports, and in South Korea on the effect of Chinese exports on its agricultural markets.
South Korea has agreed to a part-opening of its agricultural sector, while continuing to exclude such products as rice, pork, and beef. Meanwhile, it sought access to Chinese industrial sectors with the most opportunities for its small- and medium-sized enterprises. Trade barriers for their automotive industries have been maintained however.
The FTA covers not only trade in goods and services, but also e-commerce, competition policy, and government procurement, while both sides have committed to further talks on financial services and investment in the future.
According to the South Korean Ministry of Trade, Industry, and Energy, the two governments have agreed to work towards an official signing of the FTA within the first half of this year.
China is already South Korea’s primary trading partner, receiving over a quarter of its exports. According to MOFCOM figures, total trade between South Korea and China reached over USD270bn in 2013 and is expected to reach USD300bn in 2015.
The FTA will be the most substantial deal South Korea has ever signed. When it comes into effect, it is to expand the value of the country’s trade outflows covered by trade treaties from the current 60.9 percent to about 73.2 percent.
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- Article
- March 2, 2015
On February 24, Seychelles became the 85th signatory of the Organisation for Economic Co-operation and Development’s (OECD’s) Multilateral Convention on Mutual Administrative Assistance in Tax Matters.
The Convention is described as a comprehensive multilateral instrument to tackle tax evasion and increase transparency. In a statement, the OECD confirmed that its signing therefore represents another important step in Seychelles’ efforts to improve its legal framework and practices in the field of the exchange of information for tax purposes.
The Convention provides for all forms of administrative assistance, in tax matters, including the exchange of information on request and automatically; in tax examinations abroad and in plurilateral investigations; and in tax collection. It will therefore allow the Seychelles’ Revenue Commission to request information from other tax authorities and seek assistance in collecting outstanding tax debts on a reciprocal basis.
The OECD added that it has repeatedly called on all jurisdictions to sign the Convention and has asked the Global Forum on Transparency and Exchange of Information for Tax Purposes to report on progress made by its members in that respect.
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- Article
- March 2, 2015
The Dominican Republic and the United States have begun negotiations on an intergovernmental agreement (IGA) to implement the Foreign Account Tax Compliance Act (FATCA) between the two countries.
It is expected that the Dominican Republic will complete a Model 1A IGA to provide for the automatic exchange of tax information reciprocally between the Dominican Republic’s Directorate General of Internal Revenue (DGII) and the US Internal Revenue Service (IRS).
Meetings were held over two days in Santo Domingo between the Dominican Republic’s Ministry of Finance and the DGII, and the IRS’s International Cooperation Program, led by its senior manager Aziz Benbrahim.
An important part of their talks consisted of reviewing the strength of bilateral procedures and practices for the protection of confidential tax information, both in the US and the Dominican Republic, for when the IGA becomes operational.
FATCA, which took effect on July 1, 2014, is intended to ensure that the US obtains information on accounts held at foreign financial institutions (FFIs) by US persons. Failure by an FFI to disclose information on their US clients will result in a requirement to withhold 30 percent tax on payments of US-sourced income.
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- Article
- February 18, 2015
By introducing a clause limiting benefits in the Indo-Mauritius treaty, treaty shopping is sought to be discouraged.
Mauritius agreed to include a ‘limitation of benefits’ (LoB) clause in its revised tax agreement with India. For the uninitiated, LoB is an anti-abuse provision that restricts eligibility criteria for third country (other than the contracting States) residents to obtain benefits under a Double Taxation Avoidance Agreement (DTAA).
India has been insisting upon an LoB clause with all the concerned nations. The introduction of LoB provisions in recent Indian treaties, as in India’s treaty with Singapore recently, demonstrates a policy to discourage treaty shopping — where a multinational business takes advantage of favourable tax treaties in certain jurisdictions.
In brief
Subjective arrangement: This is entered into to obtain tax benefits in countries such as Malaysia, Ethiopia, Estonia and Finland.
Objective treaty: The benefits of this treaty are extended only if the claimant is a qualified person, generally a government entity, listed company, and so on. It is with countries such as Iceland, Tajikistan, Tanzania and the US.
Beneficial ownership: This ensures that the benefit of lower withholding tax rate is given to genuine tax residents of a contracting state. This is with the US, UK, Singapore and Finland.
Substance treaty: Entered into with Singapore, the benefits are given considering the substance of the entity (not merely a conduit/shell company).
The India-Singapore treaty provides for an expenditure test as proxy for demonstrating commercial substance to restrict benefits only to genuine resident investors who fulfil certain conditions. The LoB clause of this treaty restricts eligibility for capital gains tax exemption either to companies listed on the stock exchange or to those who expend a minimum of $200,000 on operations in Singapore for a tleast two years prior to the date of such gain.
After numerous efforts and failed discussions, Mauritius has finally agreed to include an LoB clause. While the exact modalities are yet to be finalised, it is likely to be similar to the India-Singapore treaty.
Why they matter
Historically, almost 40 per cent of foreign investments in India flows through Mauritius. In view of the friendly local legislation, low cost of doing business, robustness of regulatory framework and quality of supervision, Mauritius enjoys a prominent place in the tax planning of private equity players, MNCs and global fund houses investing in India.
The India-Mauritius DTAA (made way back in 1983) provides for taxability of capital gains from sale of securities in India only in Mauritius. However, the local laws of Mauritius offering minimal tax rate make such transactions practically tax-free. This attracted global investors to Mauritius but with the consequence of treaty shopping.
India has been increasingly concerned about routing third country investment through Mauritius and round-tripping of funds resulting in the loss of huge tax revenues. Its continuing efforts to re-negotiate the DTAA with Mauritius are no secret. In addition, and though it is not only targeted for Mauritius, the Finance Ministry had introduced provisions of general anti-avoidance rules (GAAR) under Indian regulations. GAAR, a powerful and anti-tax evasion provision, seeks to empower the Indian tax authorities with a mechanism to deny tax benefits if the transaction/arrangement is without commercial substance or only with tax benefit motive.
Though it is deferred till April 2015, it would impact investments made post August 2010. The urgency for this rule is perceived to be a fallout of the Vodafone controversy.
Apparently Mauritius too wants to restrict the benefit of tax treaty only to genuine investors. It has tightened the local substance requirements to combat Indian GAAR provisions by proposing amendments to ‘Guide to Global Business’. This move may improve the image of the country as a clean and well regulated international financial centre.
Serious intent
With the introduction of GAAR and insistence on re-negotiation of the treaty with various nations, India is showing its seriousness to deal with treaty shopping, a major tax leakage source.
India is keen to receive its share of the tax revenues available in cross-border transactions and is heading on a policy path to allow only a clearly identified group of persons access to its tax treaties/benefits.
India’s share in the total number of investments made by global companies through Mauritius has almost halved in the past two years. The LoB clause coupled with GAAR are feared to be a dampener to inbound investments flow.
But in the long run, such policy decisions will not affect true long-term investors who will continue to invest in India.
However, it is becoming imperative for investors to embed substance and solid business rationale in the tax-planning of the holding/group structure.
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- Article
- February 18, 2015
The free trade agreement (FTA) between Hong Kong and Chile, which was originally signed on September 7, 2012, enters into force on October 9, 2014.
The agreement will expand Hong’s FTA network to South America, after signing agreements only with territories in the Asia-Pacific region and Europe.
Under the FTA, both sides will enjoy preferential market access. For goods originating from Hong Kong, Chile will abolish import tariffs on about 88 percent of tariff lines and will phase out tariffs on an additional 10 percent of tariff lines over three years. The remaining 2 percent, comprising, for example, cereals, sugars, and articles of iron or steel, will continue to be subject to import tariffs. Hong Kong traders will need to comply with the preferential rules of origin and fulfill the specified requirements to secure preferential access.
Hong Kong, on the other hand, has committed to offer tariff-free access for all products originating from Chile upon the entry into force of the agreement.
Hong Kong service providers will enjoy legal certainty in market access and treatment equal to that of domestic companies for a comprehensive range of services in the Chilean market, including financial services, telecommunications, business and professional services, tourism, environmental services, and services related to innovation and technology.
In addition, Hong Kong investors will have legal certainty on treatment akin to domestic companies’ in respect of their investments in specified non-services sectors in Chile. The two sides have also agreed to negotiate a separate and comprehensive agreement on investment promotion and protection upon entry into force of the FTA.
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- Article
- February 18, 2015
The Board of Directors of The Global Market Abu Dhabi (or “The Global Market”), the international financial centre being developed by Abu Dhabi, announces the signing of a Memorandum of Understanding (“MOU”) with the Central Bank of the United Arab Emirates (“Central Bank”) covering areas of co-operation between the two institutions including regulatory and supervisory matters. The MOU commits both parties to actively strengthening cooperation between key professionals in each entity through staff training and technical assistance, and will form the basis of an active and dynamic working relationship between The Global Market and the Central Bank.
The MOU with the Central Bank of the UAE is an important milestone for The Global Market Abu Dhabi in achieving its current priority to establish the regulator, registrar and legal jurisdiction that together will provide the strong foundation for the future business of its registered companies. This MOU is the first in a series of agreements with local and international regulators to ensure that the Global Market has a financial services regulators that is internationally accredited.
The Global Market will contribute to the development of Abu Dhabi’s financial services sector in line with the Emirate’s Economic Vision 2030.
About The Global Market Abu Dhabi
The Global Market Abu Dhabi is an international financial centre that is being established as a financial free zone to connect the economies of the Middle East, Africa and South Asia with world markets.
The Global Market Abu Dhabi will enable registered companies to transact business within a zero-tax environment. Member companies will operate within a world-class regulatory framework with its own judicial system and legislative infrastructure.
The Global Market Abu Dhabi is establishing three independent entities that together will provide the strong foundation for future business. These include a regulator, a registrar and courts.
The Global Market is located in Abu Dhabi’s Central Business District on Al Maryah Island and it supports the development of Abu Dhabi’s dynamic financial services sector, an important element of the Emirate’s Economic Vision 2030.
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- Article
- February 18, 2015
The Philippines has become the 68th signatory of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, when, in Paris on September 26, it was signed by Bureau of Internal Revenue (Commissioner Kim Jacinto Henares.
The Convention provides an instrument for jurisdictions to implement the automatic exchange of tax information, and to do so with many partners. It is open to all countries, and enables tax authorities to request information from other signatories’ revenue agencies, and to seek assistance in the collection of outstanding tax debts.
Before signing the agreement, Henares stated: “We highly look forward to becoming a party to the Convention. As the Philippines continues to grow, the Government continues to look for ways to increase revenues to support this growth and ensure that critical investments in infrastructure and social services for our people are amply funded.”
Signing the agreement was said, by the Department of Finance, to give the Philippines “an efficient and expeditious way of increasing its tax treaty network from 28 to 59 treaty partners, saving time, financial and human resources spent on negotiating and updating bilateral tax treaties, which usually take five to ten years to complete.”
The Philippines formally expressed interest in becoming a party to the Convention in October 2013. To enter into force, it must now be ratified internally.
The Organization for Economic Co-operation and Development (OECD) also called the signature of the Convention by the Philippines “quite timely as it will facilitate its implementation of the OECD Standard for Automatic Exchange of Financial Account Information in Tax Matters, published last July.”
The Standard calls on governments to obtain detailed account information from their financial institutions and exchange that information automatically with other jurisdictions on an annual basis. The Standard was formally presented to G20 Finance Ministers on September 20-21, 2014, at their meeting in Cairns, Australia.
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- Article
- February 18, 2015
Spain’s 2015 Budget, presented by Budget Minister Cristobal Montoro on September 30, 2014, contains a number of measures aimed at stimulating economic growth, including cuts to the corporate and personal income tax rates.
Montoro said that personal income taxes will be reduced by an average of 12.5 percent, with those on medium and low incomes being the main beneficiaries of the cuts. The main corporate tax, meanwhile, will be cut from the current 30 percent to 28 percent.
The Budget Minister also said that the tax on wealth exceeding EUR700,000 (USD884,080) would be extended for one year.
The Spanish Government’s tax revenue is expected to reach EUR186bn next year, up from the EUR177bn forecast for this year, Montoro said.
The Government is persisting with tax cuts despite the fact that the budget deficit will be 4.2 percent next year (after an estimated 5.5 percent this year), taking the country’s public debt up to 100 percent of GDP
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- Article
- February 18, 2015
Negotiators have completed their work on a free trade agreement between the European Union and Canada (CETA), but the European Parliament has raised concern about certain provisions.
Under the CETA, both sides will eliminate most tariffs but some sensitive agricultural products will remain protected. The agreement, which will be made public shortly, also provides for improved market access for services and investment and affords EU companies significant access to Canada’s public procurement market.
The CETA also sets a new standard for investor-to-state dispute settlement procedures. Members of the European Parliament (MEPs) have called for the removal of a provision, however, that would allow investors to sue Governments over policies perceived as harmful to businesses. Some have argued that this clause should not be necessary in a deal between two countries with mature judicial systems and warned that it could be abused. De Gucht told MEPs that negotiators were aware of these concerns and said that the agreement “directly addresses all the concerns that have emerged so far.”
The CETA is projected to deliver a boost to bilateral trade in goods and services worth an estimated EUR25.7bn (USD33bn).
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