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India and Maldives signed two new tax agreements on April 11, 2015, for the exchange of information in tax matters and for the avoidance of double taxation of income from international air transport.

The tax information exchange agreement is based on international standards on transparency and exchange of information. The Indian Government said it covers taxes of every kind and description imposed by both territories, and enables the exchange of information, including banking information.

The second Agreement provides for relief from double taxation for the airlines of India and Maldives by way of an exemption for income from the operation of aircraft in international traffic. Under the deal, profits from the operation of aircraft in international traffic will be taxed in one country alone; the taxing right will be conferred upon the country to which the enterprise belongs. The agreement includes Mutual Agreement Procedure provisions, to help resolve any disputes surrounding the agreement’s application.

Chile and Uruguay concluded a second round of negotiations towards a free trade agreement (FTA) on April 12, 2016, according to a statement from Chile’s Directorate General of International Relations (DIRECON).

Experts from both countries discussed various issues related to the proposed agreement, including access to goods, rules of origin, trade in services, technical barriers to trade, and trade facilitation.

The two countries are already part of the Economic Complementation Agreement between Chile and Mercosur (ACE 35), which entered into force on October 1, 1996. The agreement also includes Argentina, Brazil, and Paraguay.

Trade between Chile and Uruguay during 2015 totaled USD349m, according to DIRECON. Chilean exports to Uruguay in that period reached USD149m, while imports totaled USD200m.

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Dubai Customs announced the introduction of the Authorised Economic Operator (AEO) programme in September 2015 in line with Dubai Customs’ vision to be the leading customs administration in the world supporting legitimate trade. The AEO is one of the pillars of the WCO SAFE Framework of Standards to Secure and Facilitate Global Trade (SAFE Framework), aimed at enhancing the security in the international supply chain while facilitating global trade.

An effective AEO programme requires a true partnership between the customs administration and all agents in the international supply chain. The rationale of the AEO programme lies in the voluntary compliance with the applicable customs rules and regulations, and WCO supply chain security standards, in return for being granted a number of advantages and incentives.

Given the lack of room for manoeuvre amid the global economic slowdown, Chancellor of the Exchequer George Osborne’s latest UK budget contained a surprising number of tax measures.

Business tax roadmap

    • Corporate income tax and losses

 

Alongside the budget, the UK government has published a business tax roadmap. This sets out cuts in business rates (an annual commercial property tax), cuts in the rate of corporate income tax from 20% to 17% by 2020, and cuts in the petroleum revenue tax paid by oil and gas companies.

The roadmap also reforms the relief for corporate income losses. Companies will, in future, be able to carry forward such losses against all types of income, and surrender them for use by other companies in the same group. However, if profits exceed £5 million (presumably group not company profits), only 50% of profits can be offset by losses. These two measures should take effect from 1 April 2017, but a restriction on banks only being able to offset 25% of profits against pre-April 2015 losses will be introduced one year earlier.

    • Stamp duty land tax

 

Also included in the business tax roadmap are changes to the system of stamp duty land tax (SDLT), which businesses pay when they acquire commercial properties.  The changes follow the principles adopted by the Chancellor last year for residential property, and will take effect for transactions entered into after 17 March 2016.

Prior to the budget, purchasers paid nothing if the property cost under £150,000, 1% of the total value if it cost between £150,000 and £250,000, 3% if it cost between £250,000 and £500,000 and 4% if it cost more than that. Now purchasers will pay 0% on the first £150,000, 2% on the next £100,000 and 5% on the balance. So, for a business premises costing £200,000, the SDLT will now be £1,000 ((£200,000-£150,000) x 2%) rather than £2,000 (1% of £200,000).

    • Interest deductions on taxable profits

 

The business tax roadmap also includes restrictions on the amount of interest that can be deducted from taxable profits. From 1 January 2017 this will be set at 30% of EBITDA (earnings before interest, tax, depreciation and amortisation) for groups of companies with interest deductions over £2m. There will be a group ratio rule based on net interest to EBITDA for worldwide groups, and the existing worldwide debt cap will be abolished.

There are other anti-avoidance measures in the business tax roadmap, including increasing the chances of a withholding tax applying to royalty payments, and measures to tax offshore property developers on their UK developments. Businesses have been asking for another roadmap and therefore should welcome this document; however the general theme is one of relief for small businesses that is to be paid for by larger enterprises.

Personal tax

From a personal tax perspective, the Chancellor announced the abolition of Class 2 national insurance contributions (currently £2.80 per week for the self-employed) with effect from 6 April 2018. He also announced that individuals will be able to earn £1,000 from trading and £1,000 from renting property without paying income tax. Those with incomes in excess of these sums can either return income less expenses or income less the £1,000 allowance. These allowances take effect from 6 April 2017 and are welcome simplification measures.

Mr Osborne also announced a personal allowance increase for the year ending 5 April 2018. The amount of income that can be earned before any tax is paid will rise to £11,500, and the amount of income on which basic rate tax (broadly 20%) is paid, will increase to £33,500.

    • Individual savings accounts

 

The annual amount that can be saved into an Individual Savings Account (ISA), in which income and gains are tax-free, will increase to £20,000 from 6 April 2017. Few working basic-rate taxpayers can afford to save £20,000 a year, so this is of benefit to higher earners, and to those with pre-existing savings who can move funds from their taxed accounts into ISAs. The Chancellor is also planning to introduce a Lifetime ISA. This will allow persons between 18 and 40 years of age to save up to £4,000 per annum, and the government will top up the fund by £1 for every £4 saved. This measure will be subject to consultation.

Capital gains tax

The Chancellor also announced reductions in the rates of capital gains tax (CGT) from 28% to 18% for higher rate taxpayers and trusts and from 18% to 10% for basic rate taxpayers, although in practice extremely few basic rate taxpayers pay CGT. These changes take effect from 6 April 2016 and may reduce share trading volumes between now and then. The old rates continue to apply to gains on let residential property and second homes, and to “carried interest” for private equity managers. With the previously announced increases in dividend tax rates (to over 38% for the wealthiest taxpayers) taking effect at the same time, investors are likely to be looking for capital returns in future rather than yield, whilst holding their high-yielding investments in the increasingly generous ISAs.

From a stand-alone tax perspective, this was a good budget for savers, and investment managers will now focus on rebalancing their clients’ portfolios.

Background

The fiscal budget was announced in India on 29 February 2016. Like every year the government released several measures to accelerate growth and development in the country. One of the most important developments from a Transfer Pricing (TP) regulations perspective was introduction of Country-by-Country (CbyC) reporting norms for TP documentation with effect from Assessment Year (AY) 2017-18. These norms are based on recommendations issued by the Organisation of Economic and Commercial Development (OECD) and G20’s – Base Erosion and Profit Shifting (BEPS) action plan 13.

Many countries that are members of OECD and the G20 member countries have already introduced these TP documentation norms in their local regulations. These norms are based on one of the most important objective of transparency impressed upon by the OECD for prevention of BEPS.

OECD had recommended three-tier TP documentation including:

  • Master file – requirement to provide an overview of the Multinational Enterprises (MNEs) business and explain the MNE’s TP policies in the context of its global economic, legal, financial and tax profile.
  •  Local file – to demonstrate that the taxpayer has complied with the arm’s length principle in its material intragroup transactions. Entities need to

– Demonstrate arm’s length nature of transactions;

– Contains the comparable analysis.

  • Country by Country (CbyC) report –to provide information to a tax authority to enable it to undertake a TP risk assessment, data may also be used to assess wider BEPS related risks. It is required to:

                – provide jurisdiction-wise information on global allocation of income, taxes paid/accrued, the stated capital, accumulated earnings, number of employees and tangible assets

                – provide entity-wise details of main business activities which will portray the value chain of inter-company transactions.

Based on the above OECD recommendations India has proposed to introduce CbyC reporting norms in their local tax and TP regulations.

Master file and local file

The Memorandum to the Finance Bill states that a master file will have to be maintained and the detailed rules regarding the same will be notified at a later date. However, no threshold for preparation of master file has been prescribed.

Local file related regulations that already exist in the law may continue or may be aligned to the recommendations of the OECD, however the same can be clear only once the detailed Rules in this regards are issued.

CbyC reporting

A new section or provision (proposed Section 286 of the Income-tax Act, 1961) on CbyC reporting has been introduced. The CbyC provisions in the budget require the Indian Parent entity of an international multinational group or any other designated group entity in India (referred to as alternate reporting entity) to file a CbyC report for financial year 2016-17 before the due date of filing of Return of Income i.e. 30 November 2017.The threshold for filing the CbyC report has been maintained at EUR750 million and the format shall be notified in the Rules at a later date. However, it is proposed in the memorandum that the OECD prescribed template will be adopted.

1. The CbyC report will be required to furnish the following:

  • the aggregate information in respect of the amount of revenue, profit or loss before income-tax, amount of income-tax paid, amount of income-tax accrued, stated capital, accumulated earnings, number of employees and tangible assets not being cash or cash equivalents, with regard to each country or territory in which the group operates;
  • the details of each constituent entity of the group including the country or territory in which such constituent entity is incorporated or organised or established and the country or territory where it is resident;
  • the nature and details of the main business activity or activities of each constituent entity.
  • any other information as may be prescribed

2. Responsibility of the local constituent entity: The CbyC report will have to be furnished by the local constituent Indian entity if the parent entity is resident of a country:

  • with which India does not have an agreement providing for exchange of information under the CbyC report; or
  • there has been a systemic failure of that country and the said failure has been intimated by the prescribed authority to such constituent entity.

‘Systemic failure’ with respect to a country means that the country has an agreement with India providing for exchange of CbyC report, but:

  • in violation of the said agreement, it has suspended automatic exchange; or
  • has persistently failed to automatically provide to India the report in its possession in respect of any international group having a constituent entity resident in India.

3. A ’constituent entity’ means:

  • any separate entity of an international group that is included in the consolidated financial statement of the said group for financial reporting purposes, or is included for the said purpose, if the equity share of any entity of the international group were to be listed on a stock exchange;
  • any such entity that is excluded from the consolidated financial statement of the international group solely on the basis of size or materiality; or
  • any permanent establishment of any separate business entity of the international group included in (a) or (b) above, if such business unit prepares a separate financial statement

4. An ‘international group’ means any group that includes:

  • two or more enterprises which are resident of different countries; or
  • an enterprise, being a resident of one country, which carries on any business through a permanent establishment in other countries.

5.Where there are more than one constituent entities of the international group, resident in India, the CbyC report shall be furnished by any one constituent entity, if:

  • the international group has designated such entity to furnish the CbyC report on behalf of all the constituent entities resident in India; and
  • the information has been conveyed in writing on behalf of the international group to the prescribed Indian tax authorities.

6. If any other alternate reporting entity of the international group has furnished the CbyC report with the tax authority of their country, there will be no need for the local constituent entity to furnish the same again locally if the following conditions are satisfied:

  • the CbyC report is required to be furnished under the local law of that country;
  • that country has entered into an agreement with India providing for exchange of the CbyC report in respect of the international group;
  • that country’s prescribed authority has not conveyed any systemic failure in respect of the said country to any constituent entity resident in India;
  • the said country or territory has been informed in writing by the constituent entity that it is the alternate reporting entity on behalf of the international group.

7. The Indian revenue authorities may, for the purpose of determining accuracy of the information furnished under the CbyC report, ask the reporting entity to furnish such information or documents as may be deemed necessary, after giving a 30-60 days’ notice.

8. Annual accounting period, for which data has to be furnished will be an accounting period with respect to which the parent entity of the international group prepares its financial statements under their local laws and local accounting standards.

9. Penalty provisions relating to TP documentation

  • Failure to furnish information and documentation under the proposed three-tier documentation structure by the due date will be INR500,000 (approximately USD7,500).
  • Pursuant to a transfer pricing adjustment, following specific penalty provisions have been proposed in situations wherein the tax payer has failed to maintain appropriate documentation or failed to disclose international transaction:

-Penalty at 50 percent of the tax payable on under-reported transaction

-Penalty at 200 percent of the tax payable on misreporting of transaction

  • Failure on account of CbyC reporting:

-Failure to furnish CbyC report by the due date of filing of return of income

1. Delay upto one month – INR 5,000 (USD75) per day

2. Delay beyond one month – INR 15,000 (USD230) per day

3. Delay payment of penalty after receipt instructions to pay – INR 50,000 (USD750) per day

  • Failure to furnish additional information and documents sought by the Revenue authorities

1. Delay upto one month – INR 5,000 (USD75) per day from the day on which the period for furnishing the information and document expires

2. Delay beyond one month – INR 5,000 (USD75) per day from the day on which the period for furnishing the information and document expires

3. Delay payment of penalty after receipt instructions to pay – INR 50,000 (USD750) per day

  • Inaccurate information filed under the CbyC report*

1.  Delay upto one month – INR 500,000 (USD7500)

2. Delay beyond one month – INR 500,000 (USD7500)

3. Delay payment of penalty after receipt instructions to pay – INR 500,000 (USD7500)

*Where the information filed under the CbyC report is inaccurate, a penalty of INR500,000 (approximately USD7,500) will be levied if:

–  the entity has knowledge of the inaccuracy at the time of furnishing the CbyC report but fails to inform the prescribed authority; or

– the entity discovers the inaccuracy after the CbyC report is furnished and fails to inform the prescribed authority and furnish a correct report within a period of fifteen days of such discovery; or

– the entity furnishes inaccurate information or document in response to request for additional information and documents.

Administrative TP proposals

There are a few administrative amendments proposed by the budget from a TP perspective:

– Since time limit for completion of regular income tax audits proposed to be reduced to three months, the time limit for completion of TP audits will also consequentially be reduced by three months

– The Revenue authorities will have no right to appeal against the instructions issued by the Dispute Resolution Panel.

– In the circumstances wherein the time limit for completion of assessment proceedings is stayed (i) by an order or injunction of any court or (ii) for a period to obtain information under the agreement referred in Section 90 or 90 A of the Act, the period for completion of assessment proceedings by the Transfer Pricing officer, subsequent to such stay shall be minimum 60 days.

The UAE Minister of State for Financial Affairs, His Excellency Obaid Humaid Al Tayer, has stated that the UAE will implement VAT at the rate of 5% on 1 January 2018.

The minister was speaking in Dubai on 24 February after a joint press conference with Christine Lagarde, Managing Director of the International Monetary Fund (IMF).

VAT is expected to be introduced at a rate of 5% with some limited exceptions including basic food items, healthcare and education. The UAE are planning to implement on 1 January 2018 – other GCC countries may do so at the same time or by 1 January 2019 at the latest.

Background

The GCC Member States are in the process of approving the long anticipated common framework for the introduction of a Value Added Tax (VAT) system in the GCC. The common VAT framework will form the basis for the introduction of a national VAT system by each Member State.

While there are a number of challenges that still need to be addressed before it is introduced, VAT will help governments to deliver on long-standing plans for economic diversification away from oil, while still being able to deliver social and economic programmes. The exact details of the VAT regime which will need to be set out in the common framework and national legislation are yet to be made available.

Takeaway

From our experience in other markets, the establishment of clear regulations and efficient administrative processes is vital for VAT introduction to be a success. Businesses in the UAE (and GCC) should start planning now how the changes could impact their business, to ensure a smooth transition.

Businesses will have to adapt to the changes by identifying the impact of VAT on their business, and key immediate considerations are to:

  • Assess capability of existing systems
  • Identify VAT implementation strategy
  • Identify contracts that need a VAT action
  • Identify intercompany transactions
  • Undertake training / awareness

A potential VAT implementation will also have immediate effects on consumer behaviour which gives opportunities for companies to assess their business direction and to plan strategically.

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.

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.

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