International Tax Alert - PKF

International Tax Alert

Issue nine Spring 2012

Chairman’s Note Welcome to the April 2012 edition of the PKF International Tax Alert (ITA), an online publication that summarises the latest key tax changes from selected countries around the world. In this seventh edition, there are contributions from PKF member firms’ tax experts in 28 countries. The ITA is issued three times per year and can be downloaded from the PKF International website at www.pkf.com

Jon Hills, Chairman PKF International Tax Committee

News in Brief

3

Ireland

Angola

5

Catherine McGovern describes the changes to R & D, Corporation Tax Relief and Capital Gains Tax

Italy

Jose Ramos on Angola’s new Private Investment Law

Australia

7

Lance Cunningham and the tax team set out changes to Transfer Pricing Rules and GAAR and shipping industry reforms

Austria

11

12

13

S. Santhanakrishnam reports on three court cases with significant international taxation implications 1 // PKF International Tax Alert

Ali Al-Qudah summarises eight changes to the Jordanian tax law

25

Martin Kisuu discusses the latest situation on employee contracts and the overhaul of VAT

27

Chin Chin Lau and Manharlal Gathani summarise recent developments and 2012 Budget highlights

Malta 14

Vadkerti Krisztián summarises the 2012 final tax legislation

India

23

Malaysia

Edmund Chan and Qinghua Liu report on the Shanghai Pilot Arrangement to change to VAT

Hungary

Walter Bonzi reviews the changes to the treatment of tax losses

Kenya

Chris Peeters sets out the changes to withholding tax

China

22

Jordon

Michaela Moosbrugger explains the key elements of the 2012 Austerity Budget

Belgium

20

George Mangion explains the new rules for High Net Worth Individuals and Highly Qualified Persons

Mexico 15

30

33

Mario Camposllera and Veronica Barba set out the tax changes to the Maquiladora industry. Octavio Lara explains the tax consequences of dual nationality

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Issue 9 Spring 2012

Namibia

26

Uwe Wolff and Beatrice Johr report on relevant tax amendments for investors in Namibia

Romania

37

39

40

UK

50

USA

54

Leo Parmigiani explains the latest US efforts to ensure tax compliance involving offshore financial assets and accounts

41

USA

GOH Bun Hiong highlights the significant tax-related proposals in the 2012 Budget

Slovak Republic

49

Jon Hills discusses the draft legislation for a new controlled foreign companies (CFC) regime

Martin Kisuu heralds Rwanda’s rise in the global rankings for ease of doing business

Singapore

Uganda Martin Kisuu explains the changes to the VAT law and its implications for taxpayers

Nadejda Orlova summarises the new transfer pricing regulations and income tax changes

Rwanda

47

Santiago Gonzalez summarises the Spanish wealth tax for non-residents

Andreea Tudose describes the most significant changes to 2012 local legislation

Russia

Spain

55

John Forry looks at foreign deferred compensation and IRS guidance for US citizens living abroad

42

Richard Budd previews the anticipated changes to the tax regime when the new Government is formed

South Africa

43

Eugene Du Plessis describes the amendments to the Company Dividend Tax (DT) 2 // PKF International Tax Alert

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Issue 9 Spring 2012

News in Brief New Turkish Commercial Code (TCC)

Argentina revokes tax treaty with Switzerland

The new TCC will take effect from 1 July 2012. Traditionally, bookkeeping and commercial accounting are heavily affected by tax regulations in Turkey but commercial accounts will be kept according to the Turkish Accounting Standards in compliance with the International Accounting Standards from 1 January 2013. The financial statements have to be prepared in conformity with the Turkish Financial Reporting Standards in line with International Financial Reporting Standards (IFRS).

Argentina has given Switzerland a notice of termination of the Tax Treaty that had been in effect since 2001. The notice was sent through diplomatic channels on 16 January 2012.

Foreign companies operating in Turkey no longer have to keep accounts according to tax legislation and convert into IFRS. Single IFRS reporting will be acceptable for your international consolidated financial reports and local needs.

The Official Authority said that, even though the notice of termination was sent, they will keep negotiating with Switzerland for a new Treaty. It is considered that the advantage given in royalties (specially on trademarks, patents and technical assistance) triggered the decision. The convention ceased to have effect in respect for taxation years beginning 1 January 2013. For further information please contact:

Incentives in Turkey With effect from 28 February 2009, a reduction of up to 80% in the corporate income tax rate is available for earnings derived from production of plants in specific sectors located in cities specified by the Council Ministers (usually in regions prioritised for development).

Gustavo Director Tax Partner PKF Villagarcía & Asociados E: [email protected]

Investment projects started in 2012 in certain regions also have support for employer insurance premiums for between three and five years. Reduced corporate tax to be applied to investments in 2012 is as follows on the table. Regional Implementation

Large-scale Investment

Region

Investment Contribution rate (%)

The corporate tax or income tax reduction rates (%)

Investment Contribution rate (%)

The corporate tax or income tax reduction rates (%)

I

10

25

25

25

II

15

40

30

40

III

20

60

40

60

IV

25

80

45

80

For more information please contact: Selman Uysal Sun Denetim YMM E: [email protected]

3 // PKF International Tax Alert

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Issue 9 Spring 2012

News in Brief New regime to formalise trading between Paraguay’s second city and Brazil Paraguay is a founder partner of the MERCOSUR with a free and open market economy. Its second largest city, Ciudad del Este, is the third major free-trade zone of the world - after Miami and Hong Kong – and conveniently located at the convergence of the borders of three countries, Brazil, Argentina and Paraguay. A new regime has been introduced to formalise commercial activities between Ciudad del Este and Brazil. This will increase the transparency of the operations and stimulate greater competiveness between companies. This regulation has the following characteristics: ■

A 25% rate of the tax will be applied

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The amount of purchases will be limited to 110.000 reales per year divided into four quarters

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The trading companies must be registered with the Treasury Department and fully compliant with all tax and labour legislation

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The eligible products categories are: IT components, electronics and telecommunications products.

For further information, please contact: Silvia Raquel Aguero Partner PKF Controller Contadores & Auditores T: + 595 21 44 28 52 Int. 195 E: [email protected] W: www.pkf-controller.com.py


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Issue 9 Spring 2012

Angola Update The new Private Investment Law and more tax reform Against a background of international financial turmoil, the Angolan economy, rich in natural resources such as diamonds and oil, constitutes an exceptional case of consistent growth, with an average annual increase of the GDP over the last five years of more than 10%. Its capital, Luanda, considered to be the most expensive city in the world, hosts a wide range of expatriate individuals, potential investors and traders seeking an opportunity in this emerging market.

The Private Investment Law The Private Investment Law (PIL), published on May of last year, sets out the rules and a tax benefits regime for investment projects exceeding USD 1 million, aimed at attracting new investments to the country, especially those considered highly relevant for the strategic development of the national economy. The benefits available include: ■

■

■

Reduction of the corporate income tax rate (up to 50% of the standard rate) or exemption from corporate income tax up to a maximum period of 10 years. The maximum duration of the benefit is defined according to the location of the investment (up to 5, 8 or 10 years, for projects located in well developed, medium developed or less developed regions, respectively). Exemption or reduction of taxes on dividend distributions up to a maximum period of 9 years. The maximum duration of the benefit is defined according to the location of the investment (up to 3, 6 or 9 years for projects located in well developed, medium developed or less developed regions, respectively). Exemption from real estate transfer tax.


The graduation of the benefits is based on the predictable social and economic impact of the investment, taking into consideration the following factors: (i) net exchange balance (ii) number of objectives effectively achieved (iii) number of jobs created and training to be provided to Angolan workers (iv) amount of the investment (v) volume of goods to be produced or of services to be rendered (vi) type of technology used (vii) profits to be reinvested (viii) creation of production lines. For projects declared of high relevance for the strategic development of the national economy, the following factors are taken into consideration: (a) the importance of the activity concerned (b) the localisation and amount of the investment and (c) its contribution to the reduction of regional imbalances.

Further incentives and tax benefits may be negotiated if one of the following conditions is met: ■

the investment is capable of generating (or maintaining) a minimum of 500 jobs for national citizens

■

the investment is capable of contributing, in a quantifiable and certifiable manner, to a positive boost in terms of scientific research and technologic innovation in the country

■

the investment generates annual exports of no less than USD 50 million.

In order to have access to the regime of tax benefits and incentives introduced by the Private Investment Law, taxpayers are required to maintain their accounting records duly organised and certified by an external auditor.

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Issue 9 Spring 2012

Angola Update continued

Tax reform is on the way In parallel, as part of the Tax Reform announced by the Angolan Government, the publication of new legislation introducing significant changes to the tax laws in force is expected to occur at any moment. According to the press releases about the tax reform, the new legislation will introduce changes in respect of (i) tax rates, (ii) computation of taxable income, (iii) special rules for large size corporate taxpayers (including tax consolidation and transfer price rules), (iv) invoicing requirements, (v) stamp duty, (vi) taxation of investment income and (vii) personal income tax.

Technical Assistance Agreements In the context of said tax reform, a new ruling on Foreign Management and Technical Assistance Services was published last October (Presidential Decree 273/11, of 27 October 2011). This new ruling imposes new obligations regarding the agreements supporting such type of services, which must be prepared in Portuguese language and communicated to the Economy Ministry. Contracts with an amount exceeding USD 300,000 or with a duration of more than 12 months are subject to approval. Moreover, companies incorporated under the new Private Investment Law are not allowed to sign this type of contract with their foreign associated entities, except in special cases duly authorised by the National Private Investment Agency (ANIP). For more information please contact: José Ramos Tax Partner PKF Portugal T: + 351 213 182 720 E: [email protected]


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Issue 9 Spring 2012

Australia Update A clearer legislative pathway for the use of the Guidelines is expected to be included in the new rules. A second area of uncertainty is whether the Associated Enterprises article in the tax treaties provides a power to make transfer pricing adjustments independently of domestic legislation. The new legislation will confirm that the tax treaties do operate as an alternative to the domestic rules. Finally, the amendments will also clarify that the application of the tax treaty articles should be done in a manner that is consistent with the OECD Guidelines. This aspect of the reforms will operate retroactively from 1 July 2004.

Proposed reforms of the Australian Transfer Pricing Rules In November 2011, the Australian Government announced a proposal to reform the current transfer pricing rules. These reforms are expected to address issues that arose in recent Court decisions which highlighted the difficulties faced by multinational organisations when pricing intra-group transactions. The proposed amendments are designed to address inconsistencies between the current Australian legislation and the approach to transfer pricing based on the revised OECD Guidelines. Australia’s current transfer pricing rules use the internationally accepted arm's length principle and focus on pricing individual transactions. Consequently, the overall profits may not reflect the economic contributions of the various parties. As part of the revision of the transfer pricing rules, the pricing of transactions will be broadened to incorporate the arm's length outcome for the full dealings between parties to appropriately reflect the contributions of each party. This reflects the 2010 revision to the OECD Guidelines which explicitly acknowledges that the profit based methods should be used wherever they are the most appropriate method. The new rules are also expected to resolve a number of uncertainties. Firstly, in relation to the role of the OECD Guidelines in applying the transfer pricing rules, the Courts in Australia have not yet formally endorsed a direct resort to the Guidelines. However, evidence based on the approach taken in the Guidelines has been accepted by the Courts. 7 // PKF International Tax Alert

The Government is currently undertaking consultation with stakeholders in relation to these reforms and the actual legislation may yet be a few years away. However, the application date for these changes may be retroactive to the date these proposals were announced. From a practical perspective, the alignment of Australia's transfer pricing rules with international transfer pricing standards should be a positive step as it is expected to reduce uncertainty, minimise compliance and administrative costs, and reduce the risk of double taxation for multinational enterprises. For more information on this issue see the PKF Corporate Tax Essentials on the PKF Australia website: http://www.pkf.com.au/Pages/default.aspx Or further information from: David Blake or Kaajri Vaughan PKF Melbourne E: [email protected] or [email protected]

General Anti-Tax Avoidance Rewrite (GAAR) The Australian Government has recently announced its intention to introduce changes to protect the integrity of Australia's tax system by introducing amendments to the general anti- tax avoidance provisions of Part IVA of the income tax law. The genesis for this announcement appears to be the recent success enjoyed by various taxpayers in successfully defending their commercial transactions from Part IVA.

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Issue 9 Spring 2012

Australia Update continued

Broadly, Part IVA will apply to a scheme or arrangement where the taxpayer obtained a tax benefit that would not have been available if the scheme had not been entered into and it could be objectively concluded that a person/s entered into that scheme for the sole or dominant purpose of obtaining that tax benefit. The Part IVA rules have been slated to be rewritten for sometime. In November 2010 the Government announced a review of GAAR to pave the way for a rewrite to “improve the integrity, certainty and simplicity of the income tax laws”. However, since that announcement, the Commissioner has lost a number of Part IVA cases, notably where there has been a huge tax saving (or benefit) in the area of internal corporate group reconstructions or re-organisations. The most recent case was decided by the Full Federal Court in RCI v FCT [2011] FCAFC 104 decided in August 2011. RCI involved a restructure of the US assets of the James Hardie Group. The Group wanted to move its US assets within the group but the transfer of the assets could result in a substantial taxable capital gain. As an alternative, a dividend of US$318 million (equal to the increase in value of the assets reflected in the asset revaluation reserve) was paid to the taxpayer. This dividend was not taxable income in Australia. This resulted in a significant reduction in the value of the assets, thereby reducing the capital gain realised on the transaction. The Tax Office argued Part IVA applied because an assessable gain was converted to a non-assessable amount. The Tax office alleged this comprised the Part IVA tax benefit.

transaction would not have proceeded at all. Soon after the final appeal in the RCI case, the Government announced the intention to amend Part IVA to counter the argument that a taxpayer did not obtain a " 'tax benefit' because, without the scheme, they would not have entered into an arrangement that attracted tax". Although the announcement contains very little detail of the proposed amendments or any specifics of what form they will take, they will apply to schemes entered into or carried out after the date of the announcement (being 1 March 2012). Taxpayers are on alert to be extremely careful if contemplating any business group restructures or reorganisations pending the release of further details on this Part IVA rewrite. Further information from: Lance Cunningham and Marinda Waller PKF Australia E: [email protected] or [email protected]

For Part IVA to be successful, the Tax office has to identify a counterfactual arrangement that the taxpayer would have undertaken but for the tax benefit. The Court found that, while the Tax Office had succeeded in presenting an alternative form of the transaction that would have resulted in a higher tax liability, the Court rejected that alternative as non-commercial.

Proposed reforms of Living Away from Home Allowances and Benefits

The Court considered the contemporaneous evidence produced by the company during the course of the restructure and concluded that, had the company not entered the transaction in the form it had, it would not have proceeded with the transaction i.e. it would not have not sold the shares. The Court noted the alternative advanced by the Tax Office was completely impractical, as the transactions costs involved in that restructure meant the

In November 2011, the Government announced a proposal to reform the current Fringe Benefits Tax (FBT) concessions for "living away from home" (LAFH) allowances and benefits (FBT is paid by employers on benefits provided to employees). As well as a broader desire to raise revenue, the Australian Government has commented that the LAFH concessions are being exploited in a manner that is outside the original intent of the legislation.


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Issue 9 Spring 2012

Australia Update continued

Currently, housing costs and food allowances (generally up to a limit) are FBT free if the employee in question is LAFH from their usual place of residence and intends to return to that residence on conclusion of their temporary duties at another location. There are currently few restrictions on which employees may qualify as being LAFH as long as they meet the criteria mentioned above. The proposed reforms will deny tax free housing and food allowance to nearly all "temporary resident" employees. Broadly, temporary residents are foreign nationals that hold (and their spouse holds) a temporary migration visa. However, the tax free status will continue for temporary resident employees that maintain a home for their own use in Australia, from which they are living away for work purposes (which is not many), and Australian citizen and permanent resident employees that are genuinely living away from home for work purposes in Australia or abroad. Those employees that continue to qualify for tax free housing and food allowances will be required to substantiate their actual expenditure on accommodation and food (beyond a statutory amount). In addition, benefits provided by way of a cash allowance as opposed to a specific reimbursement, will no longer be considered to be a fringe benefit (on which an employer could pay FBT), but instead will form part of an employee’s assessable income (on which an employee could pay income tax). However, a corresponding deduction is allowed for substantiated expenses of eligible employees only. The proposed changes will take effect from 1 July 2012 and no transitional arrangements have been proposed. The Government has received many responses to its proposal - most requesting a softening of the proposal and transition arrangements to allow employers and employees time to consider how to deal with an expected increased tax burden of AUD770m. To date the Government has not indicated whether it will change its proposals.

Reform of shipping industry The Federal Government has announced plans to reform the Australian shipping industry, including plans to exempt qualifying operators from Australian income tax on their shipping profits from 1 July 2012. The reforms are aimed at making Australian shipping more internationally competitive and to facilitate Australian competition on international routes. Access to the concessions will be restricted to operators who are certified as qualifying operators. The following are being considered as criteria for qualifying operators: ■ ■ ■

In the context of the taxation of shipping income, the following rules currently apply: ■

Shipping companies pay income tax at the rate of 30%

■

Ships are depreciated with an effective life for tax purposes of 20 years

■

When a ship is sold, the gain or loss realised on the sale of that depreciated ship is included in the operator's taxable income in the year in which the sale occurs

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If a shipping company has net exempt income in any year, it must reduce its tax losses by all of the company’s net exempt income from all sources

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All salaries and wages paid to “seafarers” are deductible in the year in which the salary and wages is paid.

For more information please contact: Kumar Krishnasamy and Ernie Thai PKF Melbourne E: [email protected] or [email protected] 9 // PKF International Tax Alert

Location of the company Management and training Shipping activities undertaken by the vessel.

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Issue 9 Spring 2012

Australia Update continued Under the proposed reforms, the general rules that will apply to certified operators will include: ■

Income tax exemption - an income tax exemption will be introduced for qualifying shipping income derived by certified operators. The activities that will be exempt from income tax include: ■ ■ ■

■ ■

Carrying cargo or passengers Crewing ships Carrying goods on board for the operation of the ship (provisions for crew and passengers) Providing containers for use to carry cargo on the ship Loading and unloading cargo.

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Accelerated depreciation - qualifying ships will have an effective life of 10 years

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Roll-over relief - where a depreciable ship is sold for a gain, the operator has two years after the sale to purchase a replacement ship. Where a replacement ship is not purchased, the gain on the original ship will then become taxable

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Losses - the loss provisions will be amended such that only 10% of the exempt income derived from qualifying shipping operations will be applied to reduce tax losses claimed or carried forward

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Seafarer tax offset - a refundable tax offset (tax credit) of 27% will be provided to qualifying operators for salary and wages paid to seafarers employed on overseas voyages where their employment exceeds 91 days. For example, assume the operator pays $100,000 in qualifying salaries and is entitled to an offset. They will receive a tax offset of $27,000 (27% of $100,000). This offset reduces the operator’s tax payable and any excess is payable in cash to operator

■

Royalty withholding tax exemption - payments made by Australian resident companies for bareboat leases of qualifying ships will not be subject to Australian royalty withholding tax.

For more information please contact: Lance Cunningham Director of Taxation PKF Australia Limited T: +61 2 9251 4100 E: [email protected] W: www.pkf.com.au


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Issue 9 Spring 2012

Austria Update Key elements of 2012 Austerity Budget To consolidate its budget, the Austrian government has drawn up an austerity budget which is currently in draft stage (the parliamentary decision is scheduled for 28 March 2012). Key changes to the draft are not expected.

In the commercial sector, sales profits from property were already taxable. Here, the tax rate will be reduced from the previous level of up to 50% down to 25% to equalise property sales tax in the private and commercial sectors. Following the introduction in 2011 of the general taxation of sales profits from capital assets, this almost completely removes any options for keeping the profits from the sale of private assets free from taxation.

1. Solidarity contribution for higher earners Employees earning more than EUR 185,000 gross per year will lose the preferential tax rate of 6% on 1/6th of their annual income. The tax on these earnings will be raised on a sliding scale up to 50%. The equivalent in the self-employed sector (13% tax-free allowance) will, accordingly, be reduced on a sliding scale down to zero for profits of EUR 175,000 or above.

3. Group taxation For foreign group members the options for utilisation of losses will be limited. Foreign loss must already be converted to Austrian conditions. As of 2012, the loss is to be limited with the foreign sum, i.e. even if the loss as converted to an Austrian scale is higher than the foreign loss, only the foreign loss can be utilised.

4. VAT These measures are planned for a limited period from 2013 to 2016.

2. Property sales tax To date, taxes on property sales profits in the private sector were untaxed after expiry of a speculation period of ten years. From 1 April 2012 these profits will be taxed at 25%. In terms of constitutional law, the new regulation appears to be problematic regarding its retroactive applicability, as even those properties that were already outside this speculation period – and therefore tax-exempt – would, under this ruling, be liable for taxation if sold after 1 April 2012. A lower tax rate would, however, apply in these cases.

In letting business premises it was, to date, possible to opt for VAT liability on the rent income to take advantage of an input tax deduction from the purchase or erection of the property. After the expiry of the ten-year observation period, a switch to tax-free letting was possible without losing the input tax deduction applicable at the time. As of 1 April 2012, the option of tax liability is to be possible only if the tenant qualifies for full tax deduction). Furthermore, the period in which the input tax must be paid back aliquot (observation period) will be extended from currently 10 years to 20 years.

5. Research premium

Under the new ruling, it will be possible to balance losses from the profits of property sales only with gains from property sales and not with profits from other income. Furthermore, expenses will not be offsettable.

Stricter reviews of the eligibility for receipt of the premium are planned; in this context contract research (research carried out not in-house but subcontracted to another organisation) is to be raised from currently EUR 100,000 p.a. to EUR 1 million p.a. (as of 2012).

As before, tax exemptions are to apply for speculation with principal residences and self-erected buildings.

For more information please contact:

This property sales profits tax is to apply to tax payers both with full and with limited tax liability (i.e. tax payers who own property but do not have a residence or habitual abode in Austria).

Michaela Moosbrugger PKF Corti & Partner GmbH T: +43 316 826082-22 E: [email protected] W: www.pkf.at


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Issue 9 Spring 2012

Belgium Update

Changes in Belgian withholding tax

2. Withholding tax on interest

As of 1 January 2012, certain Belgian withholding tax rates have been increased.

Existing exemptions or reductions, both based on internal law (including the advantages of the EU Interest-royalty Directive) and Double Tax Treaties remain completely intact.

The standard rate of 15% tax withholding tax on interest has been increased to 21%.

1. Withholding tax on dividends The standard rate of 25% tax withholding tax on dividends has been maintained. Dividends benefitting in the past from a favourable rate of 15% will now be liable to 21% withholding tax.

Private persons having a combined dividend and interest income exceeding EUR 20,000 per annum will be subject to a total of 25% income tax on the part of the income exceeding EUR 20,000. . For further information, please contact:

Dividends distributed via an acquisition of own shares will also be subject to 21% instead of 10% withholding tax. Existing exemptions or reductions, both based on internal law (including the advantages of the EU Parent-subsidiary Directive) and Double Tax Treaties remain completely intact.

Chris Peeters PKF accountants en belastingconsulenten CVBA T: +32 (0)3 235 88 88 F: +32 (0)3 235 22 22 E: [email protected] W: www.pkf.be

Private persons having a combined dividend and interest income exceeding EUR 20,000 per annum will be subject to a total of 25% income tax on the part of the income exceeding EUR 20,000.


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Issue 9 Spring 2012

China Update The Shanghai Pilot Arrangement for the transition from Business Tax to Value Added Tax The long-simmering reform of Change from Business Tax to Value-Added Tax has started. On 16 November 2011, The Ministry of Finance and State Administration of Taxation announced the “Pilot Proposals for the Change from Business Tax to Value-Added Tax” and issued a number of circulars setting out the Shanghai VAT pilot arrangement. It was confirmed that the pilot arrangement for Business Tax to Value Added Tax would start in transportation industry and some modern service industries such as R & D, IT and technology services, cultural and creative services and movable property leasing in Shanghai from 1 January 2012. After the change from Business Tax to Value-Added Tax, in addition to the existing VAT rates of 17%(standard tax rate) and 13% (low rate), there will be new rates of 11% and 16% (both are low rate). The rate of 17% is applicable for movable property leasing. For transportation services, the rate of 11% is applicable. For other modern service industries, the rate of 6% is applicable. Since executing the transition of VAT in 2009, this is another big reform of the goods and service tax system, and it is also an important measure for structured tax reduction. The reform has contributed to eliminating the problem of double taxation by levying VAT and business tax on goods and services separately. Optimizing the tax structure and reducing the tax incidence has created a more favourable system for promoting industrial (diversification) and modern service


development, which will contribute to accelerating economic development and adjusting the economic structure. The Shanghai pilot arrangement provides an example for the whole nation. The scope of the pilot will be expanded and the reform will be promoted to the whole nation step by step. Beijing has been approved for the pilot and Tianjing, Chongqing, Jiangsu and Shenzhen are also applying to be included in the pilot. Many large and medium sized state owned enterprises are concerned that the reform will influence enterprise’s tax burden dramatically and affect their profits. Some of these enterprises are inviting us to calculate the tax burden after tax system reform so that they develop long-term strategies for business development and adjust their business models.

For more information please contact: Edmund Chan Partner PKF China T: +86-21 52929998 ext. 208 E: [email protected] www.pkfchina.com or Qinghua Liu PKF Daxin T：+8610 82330590 E: [email protected] www.daxintax.com

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Issue 9 Spring 2012

Hungary Update The expected tax changes for 2012 listed in the last Tax Alert have now been modified. Summarised below are the main features of the final tax legislation for 2012.

Other changes ■

The rate of value added tax has been increased from 25% to 27%

Corporate income tax

■

The VAT on car rental fees is now deductible if the car is used for activities subject to VAT

The tax rate remains 10% up to 500m HUF tax base and 19% above. Deferred losses can only be offset against the profits up to 50% of the tax base from 2012. Deferred losses in the case of company transformations and acquisitions are now subject to certain limitations.

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The sale of real property between related companies is now exempted from transfer duty

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A new “car accident tax” has been introduced. This is 30% of the mandatory insurance premium for the car.

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The rates of excise duty and game tax have been significantly increased

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Any company may choose a fiscal year different from the calendar year if it is reasonable due to the business cycles or the information needs of the parent company.

From 2012, the profit from the sale of a “registered intangible” will be exempted from corporate income taxation if the intangible is held for at least one year. The legislation applies to intangibles on which royalty can be charged. In order to take advantage of this exemption, the intangible needs to be registered at the Tax Office within 60 days from the acquisition. If a company sells or otherwise disposes of an intangible that is not registered (on which royalty can be charged), the tax base can be decreased by the profit if a pledged reserve is created. This reserve has to be spent on another intangible within three years.

Personal income tax (PIT)

For more information please contact: Vadkerti Krisztián PKF Hungary T: 36 1 391 4220 F: 36 1 391 4221 E: [email protected] W: www.pkf.hu

The PIT rate is decreased to 16% on the tax base below 202,000 HUF monthly. However, the tax credit that ensured the exemption of the minimum wage is no longer available. The range of fringe benefits has changed significantly and the benefits are now subject to 11.9% healthcare contribution. The rate of personal income tax of such benefits remains 19.04%. Representation and business gifts are taxed at 51.17%. There is no limit on the value of business gifts.


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Issue 9 Spring 2012

India Update Recent court cases with important implications for international taxation

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In 2007, the assessee – Vodafone International Holdings BV (VIH) - a Dutch company, acquired the shares in CGP from HTIL for a total consideration of US$ 11.08 billion (approx Rs. 55,000 crore).

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The AO issued a show-cause notice u/s 201, taking the view that, as the ultimate assets acquired by the assessee were shares in an Indian company, the assessee ought to have deducted tax at source under section 195 on the capital gains, while making payment to the vendor. The tax liability was assessed at approx Rs.11,000 crore.

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The main contention of the Revenue was that CGP was inserted at a late stage in the transaction in order to bring in a tax-free entity and, thereby, avoid capital gains tax.

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This notice was challenged by a Writ Petition but was dismissed by the Bombay High Court in 2008. On appeal, the Supreme Court remitted the matter to the Revenue to first determine whether the transaction came under the jurisdiction of Indian tax authorities.

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The Revenue opined that, since CGP was a mere holding company and could not conduct business in Cayman Islands, the situs of the CGP share existed where the underlying assets were situated, that is, in India. Hence, the Revenue determined that the transaction was under the jurisdiction of the Indian tax authorities.

■

This order was challenged by the assessee by a Writ Petition which was dismissed by the High Court (329 ITR 126 (Bom) in 2010. The assessee then appealed to the Supreme Court.

India’s tax authorities recently made three important decisions in cases relevant for international taxation.

1. Taxability of Capital Gains on transfer of shares of a foreign company by a non-resident to another non-resident In the case of Vodafone International Holdings, Netherlands vs Govt of India, [2012] 17 taxmann.com 202 (SC), the Supreme Court has ruled that transfer of shares of a foreign company by a non-resident to another non-resident does not attract Capital Gains tax in India, even if the transfer results in the acquisition of Indian assets held by the foreign company. The decision has put to rest a raging controversy relating to taxability of offshore transfers using the medium of special purpose vehicles. While the verdict in this case was based on the facts and circumstances of the transaction, the judgment has laid down clear and predictable guidelines distinguishing what is permissible and what is not. By placing the burden of proof on the Revenue, the Supreme Court has coupled discretion with accountability. The Court has also ruled on interpretation of Section 195. In the Eli Lily case, it was decided that, even if the payment is made outside India in respect of services rendered in India, the liability to deduct tax would arise on the Indian employer in respect of the payment made outside India by virtue of provisions of Section 192. It should be noted that, even though the payment was not made by a resident, it was liable to tax. This could lead to confusion in the interpretation of provisions of Chapter XVIIB considering that both the decisions are coming from the highest court of the land.

Key questions before the Apex Court: ■

Could the Revenue Authorities ignore the series of downstream subsidiaries and look through the transaction in order to ascertain the 'substance' thereof?

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Was the off-shore transaction under the jurisdiction of the Indian tax authorities thereby attracting the provisions of Section 195 relating to withholding taxes?

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Was such a structure created to attract the benefits of Treaties and curtailing the tax liability an acceptable mode of tax planning or it can be ignored considering the same as a 'sham' or a 'colourable device'?

The excerpts from the Judgment are as follows:

Case Facts ■

A Cayman Island company called CGP Investments (CGP) held 52% of the share capital of Hutchison Essar Ltd (HEL), an Indian company engaged in mobile telecom business in India. The shares of CGP were, in turn, held by another Cayman Island company called Hutchison Telecommunications (HTIL).


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India Update continued

was paid for the “entire package” and it was not permissible to split the payment and consider a part of it attributable to individual items.

Observations of the Supreme Court ■

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A strategic foreign direct investment is to be viewed in a holistic manner. Certain factors such as business purpose and period of business operations in India are to be considered in determining whether the transaction is a device to avoid taxes. The Hutchison Group structure had been in place since 1994 and could not be said to be created as a sham or tax avoidant. In fact, from 2002-03 to 2010-11 the Hutchison Group had contributed an amount of Rs. 20,242 crore towards direct and indirect taxes to the Indian exchequer. Hence, the holding companies were not a “fly by night” operator or short term investor. CGP was incorporated in 1998 in Cayman Islands. It was in the Hutchison structure from 1998. The transaction in the present case was of divestment and, therefore, the transaction of sale was structured at an appropriate tier so that the buyer really acquired the same degree of control as was hitherto exercised by HTIL. VIH agreed to acquire companies and the companies it acquired controlled 67% interest in HEL. CGP was thus an investment vehicle. The Revenue’s argument that u/s 9(1)(i) it could “look through” the transfer of shares of a foreign company holding shares in an Indian company and treat the transfer of shares of the foreign company as equivalent to the transfer of the shares of the Indian company on the premise that sec. 9(1)(i) covered direct and indirect transfers of capital assets was not acceptable. Sec. 9(1)(i) (unlike the corresponding provision in the Direct Taxes Code Bill, 2010) did not use the word “indirect transfer”.

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The sale of CGP’s shares to VIH was for a commercial or business purpose and not with the ulterior motive of evading tax. The sale of the CGP shares was a genuine business transaction not a fraudulent or dubious method to avoid capital gains tax. The situs of the shares was in the Cayman Islands.

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Section 195 applied only if payments were made from a resident to another non-resident and not between two non-residents. This transaction was between two nonresident entities through a contract executed outside India, consideration for which passed outside India. The transaction had no nexus with the underlying assets in India. In order to establish a nexus, the legal nature of the transaction had to be examined and not the indirect transfer of rights and entitlements in India.

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The object of Section 195 was to ensure that tax due from non-resident persons was secured at the earliest point of time so that there was no difficulty in collecting tax subsequently at the time of regular assessment. The present case concerned an outright sale between two non-residents of a capital asset (shares) outside India. Further, the said transaction was entered into on a principal to principal basis. Therefore, no liability to deduct tax at source arose.

Conclusion

The argument that CGP had no business or commercial purpose and that its situs was not in the Cayman Islands but in India (where the assets were) was also not acceptable. The situs of the shares transferred was the place where the registered office of the company was situated.

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The Offshore Transaction between HTIL (a Cayman Islands company) and VIH (a Dutch company) for the transfer of CGP (a company incorporated in Cayman Islands) shares is a bonafide, structured FDI investment into India. As It falls outside the ambit of India's territorial jurisdiction, it is not liable to tax in India

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This transaction was one of sale of shares and not of underlying assets. It had to be viewed from a commercial and realistic perspective. As it was not a sale of assets on an itemised basis, the entire structure, as it existed, ought to be looked at holistically. A transfer of shares could not be broken up into separate individual components, assets or rights, such as right to vote, management rights, controlling rights etc as shares constituted a bundle of rights. The sum of US$ 11.08 bn

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The 2010 judgment of the Bombay High Court is set aside.


2. Taxability of sale of software In recent times, the taxability of software payments is one of the most debated topics in the field of international taxation. The debate is whether payment for the use of computer software can be termed as royalty as per provisions of section 9(1)(vi) of the Income Tax Act, or under the provisions

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of relevant double tax avoidance agreement (DTAA). There have been a number of cases on this issue, some of which analyse the taxability of software payments under Income Tax Act and some under DTAAs. In December 2011, the High Court gave its ruling in the case of Samsung Electronics (ITA No. 2808-2005) on this contentious issue.

Issue involved ■

Whether payment made to foreign software suppliers was royalty or not.

Observations of the Bangalore High Court ■

As per the Copyright Act, 1957, computer software is a ‘literary work’ and is therefore covered by copyright provisions. In this case, the copyright for the computer software is held by the original developer.

Case Facts ■

The assessee (Samsung Electronics, India) was engaged in the development of computer software. It imported software from non-resident companies in USA, France and Sweden and exported such software to its head office located in South Korea.

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Unless the owner of the copyright gives specific permission (licence) under an agreement to another person to use the software for some specific purpose, or to make copies out of it, any such action by the other person would be considered as infringement of copyright.

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The assessee had made payments for importing software to non-resident companies in USA, France and Sweden. However, it did not apply any Tax Deduction at Source (TDS) on such payments.

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According to the assessee, since it had imported shrinkwrap software and had not customised it, the payment was not in the nature of royalty under sec 9(1)(vi) of the IT Act and so no tax was payable.

In this case, the licence granted to the assessee was used by it for making a copy of the shrink-wrapped / off-the-shelf software into a hard-disk of the designated computer and to take a copy for backup purposes. There was no other right granted to the assessee.

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If there had been no such licence granted to the assessee, making a copy would have been considered an infringement of the copyright. Thus, by granting the licence, the copyright owner had passed on a part of its exclusive right to the assessee.

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Any payment made by the assessee to obtain this part of the copyright is to be treated as royalty.

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Also, the payment made by it was business income in the hands of the non-resident companies but, because they did not have a Permanent Establishment in India, this income was not taxable in India under the DTAAs with US, Sweden and France respectively. The AO held that the payments were in the nature of royalty, so TDS should have been deducted under sec 195(1) of the Act. CIT(Appeals) also confirmed the AO’s order. Upon appeal to ITAT Bangalore, the Tribunal ruled in favour of the assessee by holding that the payments were not royalty and hence not taxable. The Revenue then appealed to the High Court (HC). The Division Bench of the HC set aside the ruling of the Tribunal and ordered that TDS needs to be deducted unless a certificate is taken by making an application under sec 195(2) that there is no liability to deduct tax.

Decision ■

Payment made by the assessee to non-resident companies is royalty and, therefore, TDS needs to be deducted from such payments.

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Although there are other contradictory judgments, the Bangalore High Court has taken the same view for the Samsung Electronics case as that taken by other authorities in the cases of Microsoft, Gracemac and Millennium IT Software Ltd. This indicates that the opinion is hardening that payments for software import from non-resident companies are in the nature of ‘royalty’ and thus TDS needs to be deducted on them. It is to be seen if the highest authority decides to come out with a judgment that can decide the matter once and for all.

Aggrieved by this order, the assessee (and others) approached the Supreme Court. The SC set aside the order of the Division Bench, and referred the matter to the HC.


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had received for services rendered outside India would neither qualify as fee for technical services as defined under Explanation 2 to sec. 9(1)(vii) nor under Article 13 of the Indo-UK treaty. It explained that it acted as a broker not engaged in managerial or technical consultancy.

3. Taxability of Reinsurance Services The case of Guy Carpenter & Co Ltd vs Adit, New Delhi (2011-TII-190-ITAT-DEL-INTL), discusses the taxability of the payment received by a foreign reinsurance company from an Indian insurance company and determines that such a payment does not constitute fees for technical service.

Issue involved ■

Whether the consideration received by the assessee acting as an intermediary in the reinsurance process can be qualified as a consideration received for rendering any financial analysis related consultancy services, rating agency advisory services and risk based capital analysis.

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Whether, when an assessee engaged in reinsurance business renders only intermediary services while acting as an intermediary/facilitator in getting the reinsurance cover for an Indian insurance company, it can be said that the assessee was rendering any kind of technical/ consultancy service within the meaning of Article 13 of the DTAA.

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Whether to fit into terminology “make available”, the technical knowledge, skills, know-how or processes must remain with the person receiving the services even after the particular contract comes to an end.

The excerpts from the judgment is given below:

Case Facts ■

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The assessee company incorporated in United Kingdom and tax resident of UK was a recognised insurance broker in London and licensed as an International Reinsurance Intermediary (broker) by the Financial Services Authority (FSA) of the United Kingdom. The assessee had earned brokerage income from Indian insurance companies for rendering reinsurance intermediation services outside India. The assessee had various agreements with Indian insurance companies, entered in conjunction with J B Boda Reinsurance Brokers P. Ltd. of Mumbai, which was duly licensed by Insurance Regulatory & Development Authority (IRDA), India to transact reinsurance business in India. It was stated that the assessee, through M/s J B Boda, helped the originating insurer in India receive competitive proposals from international reinsurers including other primary brokers and various syndicates. Based on the decisions made by the originating insurer in India, the policy terms were agreed and the risk was placed with the International Reinsurers. As per normal industry practice, the reinsurance premium net of brokerage at a mutually agreed rate of 10 % as per the policy contract was then remitted to the assessee, as reinsurance broker for onward transmission to the chosen international reinsurers.

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The assessee had thus received commission from its Indian clients for rendering services of reinsurance intermediation outside India. It was stated that the assessee did not maintain any office in India and some of its employees had made occasional business visits to India to maintain general business awareness and reinforce business contracts/relationships.

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The assessee had filed its return of income showing nil taxable income, as it considered that the commission it


Observations ■

The AO held that the assessee had provided advisory and consultancy services to Indian insurance companies by helping them to understand the complexities of reinsurance, as well as the selection of the appropriate reinsurance company in the international market. This came within the definition of fees for technical services under the Act as well as under the DTAA and it was taxable at a reduced rate of 15 of the gross amount of fee as provided under Article 13 of the tax treaty.

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In appeal, the CIT(A) confirmed the AO’s order. In appeal before the Tribunal, the assessee submitted that the receipts were in the nature of ‘transaction fee’ not involving technical and managerial services. Moreover, without prejudice to this contention, the assessee also contended that, if the amount was treated as fee for technical services under the Act, it was not liable for tax in India under Article 13 of the tax treaty as it did not make available any technical knowledge, experience, skill, knowhow or processes or consist of development and transfer of a technical plan or technical design.

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Decision The Tribunal held that: ■

It is an admitted position that the assessee is a tax resident of the UK and, therefore, eligible to claim shelter under DTAA between India and UK to the extent more beneficial than the corresponding provisions of the Income Tax Act.

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From the role played by the assessee in the reinsurance process, it is evident that the assessee was rendering only intermediary services while acting as an intermediary/ facilitator in getting the reinsurance cover for New India Insurance Co. There is no basis to conclude that the assessee was rendering any kind of technical/consultancy service within the meaning of Article 13 of Indo-UK treaty. The consideration received by the assessee acting as an intermediary in the reinsurance process cannot be qualified as a consideration received for rendering any financial analysis related consultancy services, rating agency advisory services, risk based capital analysis etc. as alleged by the A.O.

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To fit into terminology “make available”, the technical knowledge, skills, know-how or processes must remain with the person receiving the services even after the particular contract comes to an end. In other words, payment of consideration would be regarded as fees for technical services only if the twin test of rendering services and making technical knowledge available at the same time is satisfied; Thus, it was held that the payment received by the assessee from the Insurance Company in India, cannot be brought to tax in India as fees for technical services.

For further information please contact: S. Santhanakrishnan PKF Sridhar & Santhanam T: +91 44 2811 2895 E: [email protected] W: www.pkfindia.in


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Ireland Update

Research and development

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Outsourcing limits: At present, sub-contracted R&D costs are eligible where they do not exceed 10% of total costs or 5% in the case of sub-contracting to third level institutions. This limit can disproportionately affect smaller companies who may have greater need to outsource R&D work than larger multinationals with greater internal resources. The outsourcing limits for sub-contracted R&D costs are being increased to the greater of 5% or 10% as appropriate or €100,000.

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Use of the credit to reward R&D employees: Companies in receipt of the R&D credit will have the option to use a portion of the credit to reward key employees who have been involved in the development of R&D. The credit will be a tax-free payment in the hands of the employee (although they will be taxed as normal on their other income).

A credit of 25% applies to qualifying R&D expenditure where the expenditure is incurred in an accounting period commencing on or after 1 January 2009. R&D for the purposes of the relief includes basic research, applied research or experimental development. These activities must seek to achieve scientific or technological advancement and involve the resolution of scientific or technological uncertainty. A company which carries on a trade in Ireland, undertakes R&D activities in Ireland or within the EEA and incurs the expenditure shall be entitled to the R&D tax credit. If the company does not have a Corporation Tax liability, then it is possible to receive a refund of the Research and Development tax credit, up to certain limits, over a 33 month timeframe. Finance Act 2012 introduced a number of changes to the R&D tax credit scheme as follows: ■

Volume basis: The R&D credit applies to incremental expenditure with reference to a fixed base period of 2003. This has been revised so that the first €100,000 of qualifying R&D expenditure will benefit from the 25% R&D tax credit on a volume basis. The tax credit will continue to apply to incremental R&D expenditure in excess of €100,000.


Corporation Tax relief for start-up companies New companies incorporated in Ireland or an EEA State after 14 October 2008 and commencing a new trade will be exempt from corporation tax on income and certain chargeable gains for the first three years. The relief is now limited to the amount of employer’s PRSI paid by a company in an accounting period subject to a maximum of €5,000 per employee and an overall limit of €40,000.

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Ireland Update continued

Marginal relief will apply where corporation tax payable by a new company for a period is between €40,000 and €60,000. This relief will not apply where an existing trade is acquired. It will also cease to apply where part of a newly established trade is passed to a connected party. Companies carrying on excepted trades and close service companies will not qualify for this exemption.

VAT

Relief is being extended to include start-up companies which commence a new trade in 2012, 2013 or 2014.

Multiple Stamp Duty rates for non-residential property were abolished. A new lower rate of 2% has been introduced. The single rate will apply to the entire amount of the consideration. The new rate applies to instruments executed on or after 7th December 2011.

Capital Gains Tax (CGT) The rate of Capital Gains Tax has increased from 25% to 30%. This increase applies in respect of disposals made after 6 December 2011. A new incentive relief from CGT has been introduced for the first seven years of ownership for properties bought between 7th December 2011 and the end of 2013, where the property is held for more than seven years. The relief will be granted by relieving any gain on the disposal of the land or buildings by the same proportion that the period of seven years bears to the period of ownership.


With effect from 1 January 2012, the standard rate of VAT increased from 21% to 23%.

Stamp Duty

For further information please contact: Catherine McGovern PKF Tax Consulting Ltd E: [email protected]

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Italy Update 1. Use of tax losses generated by Italian resident companies (Article 84 of the Italian Income Tax Code (TUIR) Article 1 of the Law Decree 98/2011 (converted by Law 111/2011) has introduced significant rule changes for carry forward tax losses. According to the previous rules, it was possible to: ■

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carry forward tax losses generated in a particular tax year for the five following tax years offset the entire amount of tax losses against the amount of taxable income of each subsequent fiscal year.

An increase of 10.5% will be applied to corporate tax effective as of FY 2012, thus leading to an overall corporate tax rate of 38.0 %. This tax rate increase applies to: 23 December 1994) b) Companies whose revenues exceed the minimum

threshold foreseen by non-operating companies, which declare a loss for corporate tax purposes for three consecutive financial years

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carry forward the losses without any time limit

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offset said losses up to only 80% of the taxable income amount of each successive fiscal year carry forward losses exceeding 80% of the annual taxable income, thus reducing the taxable income of subsequent tax periods.

It is to be noted that the Law has not modified the treatment of any tax losses undergone in the first three tax periods from the date of the company’s incorporation. That is, they can still be carried forward without any time limit and the entire taxable income of any subsequent years can be offset, provided they have resulted from the start-up phase of a new business. Needless to say, these changes are likely to result in a different approach to assessing priority for the use of the losses. Whereas previously it was more convenient for a company to use the “ordinary” losses first (that otherwise would have expired after five years), now it would be more appropriate to utilise those made at the beginning of its activity (ie in the three first years). For the sake of clarity, we would point out that our legislation does not contemplate tax losses being carried back. Enforcement of the new rules The new regime applies to tax losses produced during the tax year in progress at 6 July 2011. Companies whose tax period matches the calendar year (1 January – 31 December) must calculate their tax burden for 2011 in accordance with the new rules. In other words, only the tax losses generated in fiscal years 2006, 2007, 2008, 2009 and 2010 can be offset against the abovementioned threshold of 80% of the 22 // PKF International Tax Alert

2. Non-operating and loss-making companies (Law Decree 138/2011 paragraph 2)

a) Non-operating companies (Art. 30 of Law of

The new rules now allow companies to:

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taxable income for 2011. Losses generated in 2005 are not allowed to be carried forward.

c) Companies that, in a three year time-frame, made tax

losses in two years and in the other year declared profits lower than the minimum established by the rules governing non-operating companies. Companies falling under a), b) and c) above can file for a ruling by the Tax Authorities to claim for the non-applicability of the rule, either fully or partially, on the basis of particular facts and circumstances.

3. Exit tax news (Article 166 of the Income Tax Law, paragraph 2 – quarter ) As a general rule, Italian companies that decide to transfer their tax residence abroad are assumed to having realised their assets at “fair value” unless they maintain a permanent establishment in Italy. In accordance with the new rules, if the tax residence is transferred to European Union countries or to States included in a specific “white list”, without leaving a permanent establishment in Italy, companies are allowed to request suspension of such taxation up to when the taxable income relating to the business transferred abroad has been produced. For further information, please contact: Walter Bonzi MGP Studio Tributario e Societario T: +39 02 43981751 E: [email protected] W: www.mgpstudio.it

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Jordan Update

i. 14% for all legal persons except those mentioned in subparagraphs (ii, iii) below

1. Return Amendment is acceptable A taxpayer may amend the Income Tax Return if he finds that there is a mistake in it. In this case, the taxpayer is required to pay the tax and the due late fines resulting from that amendment and the taxpayer is not considered to have committed a violation or a crime unless the Tax Department discovered the mistake before him or the auditor has issued a notice of audit about this Return.

2. Interim Income Tax Return is required a. The first Return covers the first half of the financial

period. The Return has to be declared and the tax paid in full during the period of 30 days from the first half of the tax period.

ii. 24% on financial companies (including exchange companies), financial intermediary companies, insurance companies, legal persons carrying out financial lease businesses and main communication companies iii. 30% on banks.

4. Physical Person exemptions To calculate the taxable income, the following exemptions shall be deducted from the gross income of a physical resident person: a. 12,000 JOD for the taxpayer b. 12,000 JOD for the dependents regardless of their

b. The second Return covers the second half of the

financial period. The Return has to be declared and the tax paid in full during the period of 30 days from the second half of the tax period.

3. Tax Rates are reduced a. Tax shall be imposed on a physical person’s taxable income according to the following rates:

i. 7% for each Jordanian Dinar (JOD) of the first 12,000 JOD ii. 14% on each 1 JOD over 12,000 JOD. b. Tax shall be imposed on a legal person’s taxable

number.

5. Incentives for foreign companies to register within Kingdom of Jordan The Council of Ministers issued a decision number (742) dated 3 February 2010 containing the exemption of salaries and wages paid by the company’s headquarters and representative offices to non-Jordanian workers within the kingdom of Jordan. The business is carried outside the Kingdom of Jordan in order to encourage foreign companies to register the headquarters or the representative offices within the Kingdom of Jordan.

income according to the following rates: 23 // PKF International Tax Alert

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Jordon Update continued

6. Withholdings on Non-Resident Income 7. Previous expenses A. Income from investment, royalties and any other nonexempted income paid by a resident directly or indirectly to a non-resident person is subject to the rate of 7% instead of previous figure of 10% and the withheld amount shall be considered a final tax.

A taxpayer may deduct the previous tax periods’ expenses unless they were defined and final. Expenses of the previous four years are cancelled from the amended law.

B. All the services provided by a local service provider are subject to 5% instead of the previous figure of 2% withholding tax on the due date of payment or payment within 30 days, whichever comes first.

If it has been proven that there is missing information in the submitted tax declaration by the taxpayer, a penalty shall be imposed at the following rates:

The following services are exempt from the 5% deduction: ■ Air services ■ Bank services ■ Cargo services ■ Cleaning services ■ Clearance services ■ Energy services provided by the Electricity Corporation ■ Financial lease services provided by licensed companies ■ Health services provided by hospitals ■ Hospitality services ■ Information Technology services provided by companies ■ Insurance services ■ Maintenance services ■ Media services ■ Programming service provided by companies ■ Security services ■ Telecommunication services ■ Tourism services provided by professionals ■ Training courses delivered by companies ■ The umbrella of services provided by Registered Companies within the Income and Sales Tax Department.


8. New penalties raised

a. 15% if the difference is more than 20% and does not

exceed 50% of the due tax b. 80% of the tax difference if it exceeds 50% of the

due tax. If the taxpayer accepts the auditing decision, the administrative assessment decision or the committee’s decision issued by the Tax Department, then the taxpayer shall only pay 25% off the penalty. For further information, please contact: Ali Al-Qudah Partner PKF Planning Tax Advisory T: +962 6 5627129 Ext.125 F: +962 6 5606344 E: [email protected] W: www.pkf.jo

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Issue 9 Spring 2012

Kenya Update

Employee vs Consultant – ‘Substance over form’ principle re-emphasised Both local and foreign Investors in Kenya are still battling with matters relating to their human capital and, specifically, whether to have in place ‘contracts of services’ or ‘contracts for services’ with individuals for provision of services. The difference lies in the manner in which tax is computed on the two modes of contracting. Employees are taxed under the Pay As You Earn (PAYE) scheme which provides specific tax bands for taxing purposes with the highest band being taxed at 30%. On the other hand, consultants are taxed via the withholding tax mechanism at either 10% (residents) or 20% (non-residents of countries with whom Kenya does not have a Double Tax Agreement (DTA)). In a case decided late last year, the Kenyan courts re-emphasised the need for employers to look at the principle of ‘substance over form’ in determining whether persons in their ‘employment’ are actually employees or consultants. The particular case in point involved a Kenyan taxpayer who filed a case in court disputing an assessment raised by the Kenya Revenue Authority due to the payments made and PAYE not accounted for by the taxpayer. The Kenya Revenue Authority demanded tax from a 25 // PKF International Tax Alert

taxpayer on the basis that it underpaid its taxes as a result of accounting for tax in the form of withholding tax as opposed to PAYE on an individual it deemed a consultant. In its ruling in favour of the revenue authority, the courts stated that “there was a lack of independence in the performance of his (the consultant) duties and he (the consultant) was totally answerable to the applicant (the taxpayer)”. This is despite the individual being contracted as a consultant by the taxpayer. This ruling demonstrated that the tax authority in Kenya and the courts have fully embraced the “substance over form” approach in assessing disputes involving the treatment of individuals deemed consultants. In light of this ruling companies investing in Kenya should consider carefully how they contract and deal with their consultants and contractual workers.

Proposed VAT law The Government is looking at overhauling the existing VAT law and introduce a new and simpler piece of legislation in its place aimed at removing inconsistencies in treatment of various VATable items and reducing the VAT burden placed on the revenue authority. The first draft released for public view in July 2011 contained various positive proposals but, at the same time, was widely criticized for not taking into account the existing environment in Kenya. The second

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Kenya Update continued

draft issued early this year (2012), on the other hand, was a major improvement to the first draft but still contains the following provisions that may significantly affect investment in Kenya: a) Scrapping of VAT Remissions

The second draft of the proposed VAT law is still undergoing amendments and is expected to be released one more time to members of the public before being presented before Parliament for legislation into law. For further information, please contact:

The second draft of the new VAT law has confirmed the scrapping of VAT remission schemes which remains a major incentive to investors in Kenya. Consequently, all capital expenditure will now be subject to 16% VAT (where applicable) payable upfront either upon importation or local purchase of the same. Previously, VAT remission was available on the purchase of capital goods worth KShs 1,000,000 and above for investment or expansion of investments. This provision is likely to increase the cost of financing projects and would deter investments.

Martin Kisuu Regional Tax Partner PKF Eastern Africa T: +254 020 427 0000 M: +254 717 077 824 F: +254 020 444 7233 E: [email protected]

b) Deferring of Input VAT

Under Section 23 of the current VAT Act, input tax at the end of the tax period can be deducted by a registered person from the tax payable by him on supplies by him in that period. This allows companies to claim input VAT, freeing up funds in terms of VAT and thereby encouraging investment in long term projects. The proposed VAT law now seeks to defer the recover of input VAT incurred until the time when the machinery/plant is first put to use or until production begins. In the absence of the VAT remission scheme, investors in long term capital-intensive projects will suffer significant cash flow problems as they may be forced to finance huge VAT costs which will only be recoverable once production commences. This would increase the costs of production and further deter long term investment. c) Lodging and payment of refund claims The draft VAT law also proposes to have all taxpayers file their VAT refund claims within three months and goes further to provide for payment of the refund claims within three months of the submitted VAT claims. This is a major improvement to the existing VAT Act which left payment of refund claims to the discretion of the revenue authority. In addition to this, the law also provides for a 2% per month compounded interest on refunds falling due for payment. The proposal will now compel the Government to pay refund claims and will address companies’ cash flow challenges brought on by the need for them to finance the VAT costs at the outset of any purchase. It will also increase goodwill between the investors/taxpayers and the Government. 26 // PKF International Tax Alert

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Malaysia Update

Here is a summary of recent developments in Malaysia and the 2012 Budget highlights. Tax exemption on income derived from qualifying professional services rendered in Labuan Income Tax (Exemption) (No. 6) Order 201)

non-Malaysian citizen who is exercising an employment in a managerial capacity with a Labuan entity in Labuan, co-located office or marketing office. Service Tax exemption for Free Zones, Duty Free Islands and Joint Development Area

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Effective from Year of Assessment (YA) 2011 – YA 2020

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A new tax incentive which provides 65% income tax exemption of statutory income (SI) for person providing qualifying professional services such as legal, accounting, financial or secretarial services rendered in Labuan by that person to a Labuan entity.

The Ministry of Finance has announced that effective 1 January 2012, exemption of service tax will be granted on all taxable services: i. provided by any person in free zones and supplied to any person in free zones ii. provided by any person in free zones and supplied to any person in the principal customs area

Tax exemption on directors’ fees received from a Labuan Entity - Income Tax (Exemption) (No.7) Order 2011 ■

Effective from YA 2011 – YA 2020

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Income tax exemption on directors’ fees received by non-Malaysian citizen in Labuan.

Tax exemption for income from employment in a managerial capacity with a Labuan entity, co-located office or marketing office - Income Tax (Exemption) (No. 8) Order 2011) ■

Effective from YA 2011 – YA 2020

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Income tax exemption on 50% of gross income for a


iii. provided by any person in the principal customs area and supplied to any person in free zones iv. provided by any person in the principal customs area or free zones in connection with any matters in Langkawi, Tioman, Labuan and the Joint Development Area. The exemptions listed shall be granted until the Goods and Services Tax comes into force.

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Malaysia Update continued

2012 Budget Highlights

3. Tax incentive for providers of industrial design services in Malaysia

The 2012 Budget was presented by the Malaysian Prime Minister cum Minister of Finance on 7 October 2011. The Budget highlighted the direction of Government policies in enhancing Malaysia’s business environment, strengthening competitiveness of industries, fostering economic diversifications as well as ensuring the well-being of the Rakyat and Nation.

Generally, industrial design service is the professional service of creating and developing concepts and specifications that optimise the function, value and appearance of products and systems. It was proposed in the 2012 Budget that providers of industrial design services be given pioneer status with an income tax exemption of 70% of statutory income for five years subject to terms and conditions being met.

In line with the theme of the 2012 Budget – National Transformation Policy: Welfare For the Rakyat, Well-Being Of The Nation, it focuses on five key areas:

4. Tax incentive for profit-oriented private schools and international schools

1. Accelerating investment 2. Generating human capital excellence, creativity and innovation 3. Rural transformation programme

A new tax incentive has been given to the following categories of private schools and international schools registered and fulfilling the requirements stipulated by Ministry of Education. Profit oriented private schools:

4. Strengthening the Civil Service

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5. Easing inflation and enhancing the well-being of the Rakyat. ■

The key budget changes announced and introduced are outlined below: 1. Tax incentive for Treasury Management Centre (TMC) A new tax incentive has been introduced to encourage multinational corporations to set up a regional treasury management hub or TMC in Malaysia.

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Income tax exemption equivalent to Investment Tax Allowance of 100% of the qualifying capital expenditure incurred within a period of five years to be set off against 70% of statutory income Effective for applications received by MIDA from 8 October 2011 until 31 December 2015.

Profit oriented international schools: ■

Key features of the incentive are as follows: a) 70% income tax exemption on the SI arising from the

qualifying treasury services rendered for a period of five years ■

b) Withholding tax exemption on interest payments

for borrowings made in relation to qualifying activities c) Stamp duty exemption on all loan agreements and

service agreements in relation to qualifying activities d) Expatriates working in a TMC are taxed only on the portion of their chargeable income attributable to the number of days in Malaysia.

2. New tax incentive for new 4 and 5 star hotels in Peninsular Malaysia The Government has proposed that investors undertaking new investments in 4-star and 5-star hotels in Peninsular Malaysia be given Pioneer Status or Investment Tax Allowance incentive subject to certain conditions being met. 28 // PKF International Tax Alert

Income tax exemption of 70% for a period of five years or

Income tax exemption of 70% for a period of five years as an additional option to the current tax incentive available (i.e ITA of 100% on the qualifying capital expenditure to be set off against 70% of statutory income) Effective for applications received by MIDA from 8 October 2011 until 31 December 2015.

Profit oriented private schools and international schools: ■

Exemption from import duty and sales tax on educational equipment – effective for applications received by MIDA from 8 October 2011

■

Double tax deduction for overseas promotional expenses – effective YA 2012.

5. Tax incentives for Kuala Lumpur International Financial District (KLIFD) KLIFD has been identified by the Government as an Early Entry Point in its Economic Transformation Programme.

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Malaysia Update continued

This crucial component of the Greater Kuala Lumpur initiative under the National Key Economic Area (NKEA) is aimed at transforming Kuala Lumpur into an international hub for banking and finance as well as related professional services. A proposal has been made in the 2012 Budget that the following tax incentives are given to accelerate development of KLIFD:

8. Duty to furnish particulars of payment made to agents, dealers and distributors ■

■

a) 100% income tax exemption for a period of 10 years

and exemption from stamp duty on loan and service agreements for KLIFD status companies

With effect from 1 January 2012, the prescribed form (CP 58) containing relevant particulars of payment needs to be prepared and sent to agents, dealers or distributors not later than 31st March of the following year. “Agent”, “dealer” or “distributor” is defined as any person authorised by a company to act in such capacity and receives payment from the company arising from sales, transactions or schemes carried out by him as an agent, dealer or distributor.

b) Industrial building allowance and accelerated capital

allowance for KLIFD Marquee Status Companies

9. Compensation for Late Refund of Income Tax

c) 70% income tax exemption for a period of five years

■

for property developers in KLIFD. ■

6. Real property gains tax (RPGT) With effect from 1 January 2010, the RPGT has been re-introduced where the effective RPGT rate of 5% is levied on gains arising from disposal of real property or shares in Real Property Companies within five years of acquisition. However, with effect from 1 January 2012, the RPGT rates have been further revised as per the table below for the revised RPGT rate: Holding Period

RPGT Rates

Within two years

10%

Exceeding two years but not exceeding five years

5%

Exceeding five years

0%

■

Effective from YA 2013. Compensation of 2% per annum (daily rest) on the amount of tax refunded late by the IRB will be given to taxpayers who have filed their tax returns within the stipulated timeframe. Compensation is payable to taxpayers where the amount refunded is made after: i) 90 days from the due date for e-Filing or ii) 120 days from the due date for manual tax filing.

10. Enhancement of Employee Retirement Scheme (EPF) With effect from 1 January 2012, the employer’s contribution of EPF for an employee who receives monthly wages /salary of RM5,000 and below is increased by 1% from 12% to 13%. The employee’s contribution rate remains at 11%.

7. Revision of Reinvestment Allowance (RA) incentive

For further information, please contact:

RA is a capital-based incentive granted to manufacturing companies which undertake qualifying projects and incur qualifying capital expenditure for their manufacturing business. In the past few years, the conditions set for a company to qualify and enjoy this RA incentive has been further tightened. The following changes have been introduced:

M. B. Gathani Executive Director of Tax Division PKF Malaysia T: +603-2032 3828 E: [email protected]

1) The definition of “manufacturing” activities and “factory” are provided in the relevant provisions of law 2) Exclusion of “processing” activities for RA claims 3) Income Tax (Prescription of Activity Excluded from the

Definition of “manufacturing”) Rules 2012 further clarifies the IRB’s stand on the types of activities which do not qualify for RA claims. 29 // PKF International Tax Alert

Ms Chin Chin Lau Principal of Tax Division PKF Malaysia T: +603-2032 3828 E: [email protected] W: www.pkfmalaysia.com

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Issue 9 Spring 2012

Malta Update

High Net-Worth Individuals Rules and Highly Qualified Persons Scheme Below are the key points of the new rules for High Net Worth Individuals and Highly Qualified Persons. 1. High Net Worth Individuals Rules (HNWI) The High Net worth Individual (HNWI) regulations introduced in terms of Legal Notice 400 and 403 in 2011 have replaced the Residence Scheme Regulations. The process for an individual to become resident in Malta depends on whether the said individual is a national of an EU country (including EEA and Swiss Nationals) or of a third country. i. Individuals residing in EU/EEA/Swiss nationals: Property ■ Applicants are required to own property in Malta at the time of application with a value of not less than €400,000, serving as the applicant’s habitual residence ■

Financial Resources and Insurance ■ The applicant must also be in receipt of stable and regular resources which are sufficient to support himself/ herself as well as any accompanying dependents. Applicants must therefore be economically self-sufficient and both the applicant and any dependents must hold adequate health insurance covering the EU territory. A new requirement is that the individual must satisfy a “fit and proper test” in order to be granted a permit under this scheme. Tax Treatment ■ The permit holder is given special tax status carrying the right to pay tax at a beneficial rate of 15% on foreign source income received in Malta together with the possibility of claiming double taxation relief ■

■

Alternatively, the applicant may opt to rent property in Malta for not less than €20,000 per annum.


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This is subject to a minimum yearly tax of €20,000 and €2,500 per accompanying dependent after claiming any applicable double tax relief Other chargeable income of the beneficiary (and that of his or her spouse) that is not taxed at the special rate of Issue 9 Spring 2012

Malta Update continued

15% will be taxed at 35%. A beneficiary of this scheme and his or her spouse cannot opt for a separate tax computation.

Recent Changes to HNWI Rules The HNWI rules and guidelines have recently been amended by means of Legal Notices 41 and 42 of 2012. The main changes are the following:

ii. Individuals residing in Non-EU/EEA / Swiss Nationals

1. Minimum residence rules removed: The condition which required an applicant to reside in Malta for a minimum period of 90 days in a calendar year has been removed. However, individuals must ensure that they do not reside in another jurisdiction for more than 183 days in a calendar year.

Property ■ Applicants who are non-EU/EEA/Swiss nationals are required to own property in Malta at the time of application. Such “qualifying property holding” must have a value of not less than €400,000 and must serve as the applicant’s habitual residence and that of any accompanying family members ■

2. With respect to Non-EU/EEA/Swiss nationals: an applicant must state at the outset whether he/she will be applying as a long-term resident or not. In the event that the applicant’s intention is not to be a long-term resident, then such person cannot stay in Malta for more than nine months in a calendar year. If they stay longer, they will be considered a long-term resident and will be required to enter into a ‘Qualifying Contract’ with the Government of Malta.

Alternatively, the applicant may opt to rent property in Malta for not less than €20,000 per annum.

Financial Resources and Insurance ■ The applicant must not already benefit from the Residence Scheme Regulations or from the Highly Qualified Individual Rules. As in the case of EU/EEA/ Swiss nationals, the applicant must also be in receipt of stable and regular resources which are sufficient to support himself/herself as well as any accompanying dependents and be in possession of adequate health insurance cover for himself/herself and any accompanying dependents covering the EU Territory. A new requirement is that the individual must satisfy a “fit and proper test” in order to be granted a permit under this scheme.

In the case of long-term residents, the requirement to contribute an amount to the Government of Malta of €500,000 and €150,000 for each dependent has been removed from guidelines. However, reference to this concept is still made in a generic manner. Details such as the amount thereof and the circumstances in which it would be imposed have not yet been published. 3. One of the most important requirements to be satisfied for eligibility for the residence status is the ownership of qualifying owned property or the lease of qualifying rented property. Pursuant to the amendments, property is also deemed to be qualifying owned property if it was purchased after 1 January 2011, thus widening the bracket and including property purchased between January and 14 September 2011.

Tax Treatment ■ A 15% rate of tax is charged in respect of foreign income remitted to Malta with the possibility of claiming double tax relief ■

■

The minimum annual tax stands at €25,000 with an added €5,000 per dependent, after claiming any double tax relief Other chargeable income of the beneficiary (and that of his or her spouse) that is not taxed at the special rate of 15% will be taxed at 35%. A beneficiary of this scheme and his or her spouse cannot opt for a separate tax computation.

A onetime registration fee of €6,000 is levied by the Government. Such fee is, however, waived in the case of applications for special tax status under the HNWI rules. This concession will continue to apply in respect of applications submitted until 15 September 2012.


2. Highly Qualified Persons Scheme In 2011, the Government implemented a scheme for highly qualified persons to attract them to occupy “eligible office” with companies licensed and/or recognised by the Malta Financial Services Authority and Lotteries and Gaming Authority. “Eligible office” comprises employment in one of the following positions: Actuarial Professional, Chief Executive Officer, Chief Financial Officer, Chief Insurance Technical Officer,

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Issue 9 Spring 2012

Malta Update continued

Chief Investment Officer, Chief Operations Officer, Chief Risk Officer, Chief Technology Officer, Chief Underwriting Officer, Head of Investor Relations, Head of Marketing, Portfolio Manager, Senior Analyst (including Structuring Professional), and Senior Trader/Trader.

6. Proves to the satisfaction of the Malta Financial Services Authority (in the case of Financial Services) or the Lotteries and Gaming Authority (in the case of Gaming Services) that he performs activities of an eligible office 7. Proves that:

Qualifying Contract of Employment An individual may benefit from the 15% tax rate if he satisfies all of the following employment conditions:

i. he is in receipt of stable and regular resources which are sufficient to maintain himself and the members of his family without recourse to the social assistance system in Malta

1. Derives employment income subject to income tax in Malta

ii. he resides in accommodation regarded as normal for a comparable family in Malta and which meets the general health and safety standards in force in Malta

2. Employment contract is subject to the laws of Malta

and proves to the satisfaction of the Malta Financial Services Authority (in the case of Financial Services) and the Lotteries and Gaming Authority (in the case of Gaming Services) that the contract is drawn up for exercising genuine and effective work in Malta 3. Proves to the satisfaction of the Malta Financial Services Authority (in the case of Financial Services) or the Lotteries and Gaming Authority (in the case of Gaming Services) that he is in possession of professional qualifications and has at least five years’ professional experience

4. Has not benefitted from deductions available to investment services expatriates with respect to relocation costs and other deductions (under article 6 of the Income Tax Act) 5. Fully discloses for tax purposes and declares

emoluments received in respect of income from a qualifying contract of employment and all income received from a person related to his employer paying out income from a qualifying contract as chargeable to tax in Malta


iii. he is in possession of a valid travel document iv. he is in possession of sickness insurance in respect of all risks normally covered for Maltese nationals for himself and the members of his family. Tax Treatment under the Highly Qualified Persons Scheme ■ Employment Income - subject to tax at a flat rate of 15% provided that the income amounts to at least €75,000 . ■

Over €5,000,000 is exempt from tax

■

The 15% tax rate applies for a period of five years.

For further information, please contact: George Mangion PKF Malta T: +356 21 484 373 F: +356 21 484 375 E: [email protected] W: www.pkf.malta.com

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Issue 9 Spring 2012

Mexico Update Presidential decree of tax benefits to companies of the Maquiladora industry On 12 October 2011, a Decree originally published on 5 November 2007 was amended. These amendments relate to various tax benefits which will now be effective from 31 December 2013. The Federal Government has issued a series of measures for the Maquiladora industry which was originally in force until 31 December 2011 as follows: ■

There will be a tax incentive to companies that carry out assembly operations (Maquila activity) and determine their income based on Article 216-Bis of the Income Tax Law (ITL)

■

The benefit consists in determining the credit of the Single Business Tax Rate (flat tax), considering as the basis for the calculation of the flat tax, the same tax profit determined for income tax (ISR)

■

According to the Decree, the result of multiplying the tax profit determined for the income tax at flat tax rate (17.5%).

Highlights:

■

The name or tax address of the supplier, producer, consignee or purchaser abroad, stated in the pedimento or invoice, is not false or non-existent.

The Decree is good news for the maquiladora industry but there are still outstanding issues that need to be addressed by the tax authorities.

Resolution of the federal court of fiscal and administrative justice The court found and published in December 2011 that, when the tax authorities publish in the Official Journal of the Federation comments on the interpretation of the OECD Model Agreement to avoid Double Taxation and Prevention of Fiscal Evasion, individuals may rely on those comments in interpreting and applying Treaties signed by Mexico provided the Treaty in question is consistent with the Model Treaty.

2012 FISCAL IMPROVEMENT In December 2011, the legislative bodies approved some changes to tax provisions applicable in 2012. These include:

I. The application of tax incentives relating to Tax Rate (IETU) for companies carrying out assembly (Maquila) operations is extended to 31 December 2013.

■

Companies file the federal tax statements they are required to file

Income Tax Law ■ The tax incentive for the final consumption of diesel remains. This consists of crediting the tax paid for the acquisition of fuel against Income Tax for the year. It applies to taxpayers engaged in farming, forestry and public and private transport activities

■

Companies have not been charged with a tax credit

■

■

Companies must submit their audited financial statements

■

Companies file a Statement (Information) reporting any transactions with third parties (DIOT) under the terms and conditions provided by the tax provisions

II. Effective 1 January 2012 and up until 31 December 2013, tax incentives may be applied provided that:

■

Companies file a Statement on Manufacturing, Maquiladora and Export Services (DIEMSE) in the terms and conditions provided by the tax provisions

■

Company’s Federal Taxpayer Registry is current and active

■

Data provided to the Federal Registry of Taxpayers are not false or non-existent

■

All the supporting documentation of foreign trade operations is available

■

Companies address the requirements of the authorities to submit documentation and information demonstrating compliance with their tax or customs obligations in relation to assembly (Maquila) operations


The tax incentive for the payment of fees for the use of national roads also remains. This consists of crediting 50% of such payments against Income Tax.

Tax Code Several dispositions which govern the legal environment have been updated including: ■

It is established that when the accounting information is expressed in a language other than Spanish, or values are entered in foreign currency, the Tax Authorities may request a Spanish translation or the provision of the exchange rate used

■

Requirements for the issuance of digital invoices are simplified.

■

Setting up proof requirements for tourists to obtain a refund of VAT paid in Mexico.

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Issue 9 Spring 2012

Mexico Update continued

Tax Offence ■ Establishing new statute of limitations for criminal proceedings in the case of tax offences ■

in which individuals are subject to tax in Mexico and in the United States. Legislation of different countries bases its tax jurisdiction on several items, mainly residence, citizenship and nationality. Thus, while some countries tax income of their nationals, others feel that they must comply with the requirement of being citizens and, for some others, it is enough to be a resident which, in most cases, depend on where the person has a permanent residence or carries out activities which generate most of its revenue.

The failure to submit final statements for more than 12 consecutive months would be equal to tax fraud.

For further information, please contact: Mario Camposllera Partner PKF Mexico T: +33 3634 7159 E: [email protected]

In the case of Mexico, the right of taxation (on income) is governed by the concept of residence. An individual shall be a resident of Mexico if his home is in this country, while if he has a home also in another country, it will depend on where he has his centre of vital interests, which depends on where he gets most of his income, or where he carries on his professional activities. If this determines he is resident of Mexico, this individual will be required to pay income tax on all income, regardless of its source.

Veronica Barba Asesoria Fiscal PKF Mexico T: +33 3634 7162| E: [email protected] W: www.pkfmexico.com

Tax Consequences of Dual Nationality Dual nationality is the legal status enjoyed by certain individuals who are recognised as nationals simultaneously by two States. Dual nationality means that an individual is a national (or citizen) of two countries at the same time. However, each country has its own laws in this regard. While some countries allow it, others do not and, in some cases, there are even countries that have no specific laws on this concept. Although dual nationality automatically occurs in some cases – for instance by birth - it might also occur in other circumstances such as social, cultural, family and work, without taking into account that this status can sometimes lead to inadvertent or unwanted tax consequences. Referring in particular to the case of the United States and Mexico, it is important to note that dual nationality was expressly prohibited in both countries until 1868 in the United States and 1998 in Mexico but dual nationality is now legal in both countries. However, having such status may cause several problems, as individuals with dual national owe allegiance to both states and are obliged to obey the laws of both countries. Tax implications In order to understand the issues that may arise as a result of having dual nationality, it is necessary to refer to the way 34 // PKF International Tax Alert

In the United States, tax law is governed by the concept of citizenship. This does not mean that the concept of residence is irrelevant, since resident aliens in the United States are taxed in the same way as citizens, while nonresident aliens are taxed according to special rules. Thus, in principle, an American citizen is obliged to pay income tax on all income regardless of its source. For these purposes, in general, an individual is a US citizen by birth or naturalisation. In addition, for tax purposes, if an individual is not a citizen of the United States, it must be determined whether he is a resident alien or a non-resident alien. If an individual is an alien, he shall be considered non-resident unless he meets one of the two burdens of proofs of residence provided by law for that purpose or if he chooses to be considered a resident alien for tax purposes. Therefore, non-residents pay tax only on income from a source in the United States, besides being subject to special tax rates and able to apply the exemptions and benefits of international treaties to avoid double taxation. On the other hand, a resident for tax purposes in the United States will be under the same rules as an American citizen, which means he will pay taxes on all income regardless of where it is derived from.

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Issue 9 Spring 2012

Mexico Update continued

In this sense, we can conclude that both countries set their tax base on a global basis (worldwide income), which means that, once a person becomes a resident of one of the two countries, he must report the total income regardless of its source. On the other hand, while not being a resident, he would only be required to pay taxes on income obtained from a source located in said country (source income). A person born in the United States of Mexican parents would have US citizenship by being born on US soil (Amendment XIV, Section 1 of the US Constitution) and the Mexican citizenship derived from being born abroad as son /daughter of Mexican parents (Section II of Article 30 of the Mexican Constitution). Immigration laws provide that when the person reaches legal age, he will have to decide to have both nationalities. Under this scenario, dual nationality may be a result of the choice made by the individual (under certain conditions), for example, a Mexican by birth who has always resided in Mexico and is the son of US parents. Under these conditions and complying with certain requirements contained in the Immigration and Nationality Act, a person may obtain US citizenship and get "by choice" dual nationality, Mexican by birth and American by blood right. This choice, in many cases (if not all), relates to social, cultural, family, work issues, among others. Thus, individuals with dual citizenship could be acquiring tax obligations in both countries without knowing it and paying taxes on all income.


Similarly, many Mexicans do not foresee that, when acquiring the "green card", they become US residents for tax purposes, which means that annual tax returns must be filed in the United States as well as in Mexico, his country of residence. Some of these issues are dealt by Articles 4 and 24 of the Convention for the avoidance of double taxation concluded between Mexico and the United States. An individual should carefully review the facts when facing dual nationality/ citizenship and whether the income obtained is taxed by the two States. In conclusion, while the domestic laws of Mexico and the United States allow dual nationality/citizenship status, when electing such status the individual should take into consideration not only the social, cultural, labour, immigration, issues, etc but also the tax implications, since having dual citizenship implies being subject to all their laws, tax included. For further information, please contact: Octavio Lara Partner Armando Aguirre Associates E: [email protected]

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Issue 9 Spring 2012

Namibian Update Relevant tax amendments for future Namibia investors

Withholding tax on services

The Namibian Government via its Government Gazette has issued a number of income tax and other related amendments which became effective on 30 December 2011. Listed below are the changes which are considered to be of particular importance to future investors to Namibia.

Income tax amendments

■

■ ■ ■ ■

Management fees paid Consultation fees Directors’ fees Entertainment fees.

The withholding tax is payable by the resident within 20 days from the end of the month during which the amount has been withheld.

The following income tax amendments were introduced effective 30 December 2011 for: ■

Withholding tax at 25% is now also payable by a resident person to a non-resident person (who has no permanent establishment in Namibia) in the following instances:

Corporate taxpayer: Years of assessment commencing on or after 1 January 2012 Individuals and trusts: Years of assessment commencing on or after 1 March 2012.

The amendments relate to:

A practice note set the effective date as 1 January 2012 with the first payment to be effected by 20 March 2012. This includes all invoices dated on or after 30 December 2011 to 28 February 2012. Thereafter payments are to be effected by the 20th of the following month for the preceding month ended.

a) Key-man policy proceeds

The possibility exists that DTAs in place might override section 35A with regards to withholding tax. DTAs should be reviewed in order to assess the possibility. Uncertainty in this respect currently exists and it is advised that clients obtain specific tax directives from the Inland Revenue. Permanent establishment refers to office, branch, fixed place available to non-resident from where the trade can be exercised.

b) Deductibility of premiums for key man policies c) Proceeds on the disposal of mining and exploration

licences d) Deemed source amounts with regards to the sale of

a mineral licence or the right to mine. Amounts are deemed to be from a Namibia source e) Recoupment of allowances and deductions. Assets

are to be valued at market value in order to calculate the relevant recoupment f) Educational policies g) Building allowances – the initial 20% and 4% (non-

manufacturer) or 8% (manufacturer) are claimable in the same year

Prospective clients wishing to commence business in Namibia are advised to obtain professional advice in order to ensure that all tax implications are clearly pointed out and researched before further steps are taken. For further information, please contact:

h) Special exporters’ allowances – all goods which are

manufactured in Namibia qualify for an 80% allowance.

Ring-fencing The new amendment now ring-fences a loss from a trade to that specific trade. The loss of a particular trade is now limited to the income for that trade. Losses cannot be offset against income from another trade. This change is only applicable to natural person taxpayers.

Uwe Wolff Partner M:+264 81 127 6323 E: [email protected] Beatrice Johr Tax Manager E: [email protected] PKF Namibia T: +264 61 220 662


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Issue 9 Spring 2012

Romania Update

Recent tax changes Romanian Tax Authorities have recently made significant changes to the relevant local legislation which come into effect in 2012. Some of the most important changes are set out below. Amendments regarding the deductibility of the fuel expenses

Amendments regarding certain forms

From 1 January 2012, taxpayers will be entitled to deduct 50% of the expense incurred for fuel for public transport motor vehicles weighing up to 3,500 kg and up to nine passenger seats including the driver’s which are owned or used by the taxable person. Also, 50% of the VAT incurred for the acquisition of vehicles and of fuel for such vehicles may also be deducted. From an individual income tax perspective, 50% of the expense incurred for the fuel can be deducted when determining the annual net income from freelancing activities. As before, the vehicles used for emergency services, repairs, security, delivery, sale or transportation of persons are not subject to the abovementioned limitation of the deductibility right. Cancellation of the registration for VAT purposes New options under which a taxpayer’s registration for VAT purposes can be cancelled have been also introduced. Among others, tax authorities may cancel a taxpayer's registration for VAT purposes if no VAT returns were submitted during a calendar semester or if no acquisitions 37 // PKF International Tax Alert

or deliveries of goods / provision of services have been reported in the VAT returns submitted during a calendar semester. Taxpayers whose VAT number are cancelled do not have the right to reclaim VAT. They are, however, subject to payment obligations in respect of VAT for the taxable operations performed.

The statement regarding the deliveries and acquisitions performed in the national territory by entities registered for VAT purposes (Form 394) has been modified. Consequently, taxable transactions for which the reverse charge mechanism applies must be included in the form. In particular, separate lists have been prepared in order to highlight transactions with cereals and technical plants. For all operations performed from January 2012, the reporting period shall be the fiscal period declared for the submission of the VAT return (Form 300), which may be monthly, quarterly, etc. The VAT return (Form 300) has been also amended. Consequently, new rows have been introduced for the taxable transactions with Romanian legal persons to which the reverse charge mechanism applies. Additionally, the new form contains two new rows where the taxpayer must disclose taxable transactions (supply of goods and provision of services/ acquisitions of goods and services) performed inside the country for which invoices have been issued/received from entities registered for VAT purposes in Romania.

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Issue 9 Spring 2012

Romania Update continued Amendments regarding the deadline for submitting the profit tax return The deadline for submitting the annual profit tax return will be 25 March of the following year. As before, non-profit organisations and taxpayers obtaining income from cereal crops and technical plants must submit their profit tax return by 25 February of the following year. Amendments regarding the personal income tax due by individuals receiving income other than salaries Individuals for which taxable income is determined based on income norms and who have registered an annual gross income of more than the equivalent in lei of EUR 100,000, must determine the taxable income on an actual basis starting with the next fiscal year. For income derived from renting agricultural property, a 16% tax will be withheld at the moment of payment, the tax being final (if the taxpayer cannot choose to calculate the taxable income on an actual basis). However, if the taxpayer chooses to determine the taxable income on an actual basis, the payment of the tax due will be made annually based on a tax decision issued by the tax authorities. Amendments regarding the social security contributions From 1 July 2012, the administration of the mandatory social contributions due from individuals receiving income from freelance’ activities, agricultural activities and unincorporated associations will be transferred to the National Agency of Fiscal Administration.


Pension contributions will be due for the indemnity received by companies’ administrators and for the amounts received by the representatives within the board of directors. Income received by employees participating in a company’s profit will also be subject to social security contributions. There has been a clarification regarding the treatment of the expenditure which is not deductible from the profit tax perspective. Consequently, this type of revenue shall not be subject to social security contributions. The list of benefits in kind not subject to social security contributions has been restricted. For more details, please contact: Andreea Tudose Partner PKF Consultor T: +40 21 252 38 80 E: [email protected] Andreea Arcereanu Tax Consultant PKF Audit SRL T: +40 21 252 38 80 E: [email protected]

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Issue 9 Spring 2012

Russia Update This update covers new transfer pricing regulations, changes to income tax and the latest tax treaties.

New transfer pricing regulations New rules for the taxation of transactions between related persons came into force in 2012. The following five methods for determination of income (profit, revenue) from transactions between related persons have been introduced: 1) method of comparable market prices

Income Tax changes From June 2011 all income received by a foreign company from the sale of shares in Russian companies where more than 50 % of the assets consist of immovable property located in the territory of the Russian Federation and from financial instruments derived from such shares shall not be treated as income of a foreign company, received by it from sources in the Russian Federation and shall not be subject to taxation, provided such shares are recognised as shares traded on an organised stock market. Securities are recognised as traded on an organised stock market only if all the following conditions are observed:

2) method of the subsequent sale price 3) cost method 4) method of compared profitability

1) they are admitted into circulation by any one of the

5) method of profit distribution.

trade organisations which have the right to do so in accordance with national legislation 2) information on their prices (quotations) is published in the mass media (including electronic) or if it may be supplied by the trade organisation or by another authorised person to any interested person in the period of three years after the date of the performance of transactions in the securities 3) the market quotation is calculated by them within the three months before the date of the transaction, when this is required by the corresponding national legislation.

Two or more of these methods may be used at the same time. Transactions shall be treated as controlled when they are effected between related persons. Cross-border transactions involving goods traded on commodity markets and transactions where one of the parties is registered, lives or is a tax resident of the state or the territory included into the List of States and Territories adopted by the Ministry of Finance of the Russian Federation shall be treated as transactions between related persons.

International tax treaties This list includes Cyprus, Hong Kong, Liechtenstein, and the Channel Islands (Guernsey, Jersey, Sark, Alderney). A taxpayer shall notify local tax authorities about an effected controlled transaction. The notification shall be submitted to the tax authorities not later than 20 May of the year following the year in which the controlled transaction occurred. The notification shall contain the following information: 1) the calendar year when the transaction occurred 2) the subject of the transaction 3) information on the participants (company’s name or

a name of a natural person, tax number, citizenship) 4) information on the amount of income received and/or expenses incurred (or losses sustained) under the controlled transaction so that all incomes and expenses under transactions where the prices are being regulated by the state shall be revealed.


The Convention between the Government of the Republic of Chile and the Government of the Russian Federation for the avoidance of double taxation and the prevention of fiscal evasion dated 19 November 2004, was ratified on 28 February 2012. The Protocol dated 7 October 2010 amending the Agreement between the Government of the Russian Federation and the Government of the Republic of Cyprus for the avoidance of double taxation with respect to taxes on income and on capital dated 5 December 1988 was signed on 28 February 2012. For more details, please contact: Nadejda Orlova Tax and Law Partner FBK T: + 7 495 737 53 53 F: +7 495 737 53 47 E: [email protected]

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Issue 9 Spring 2012

Rwanda Update Rwanda rises in the global rankings for ease of doing business

PKF expands tax services offered in Rwanda

Rwanda has been rated by the World Bank as one of the most improved countries for the ease of doing business. Rwanda moved up from rank 70 in the global rankings in Doing Business 2010 to rank 58 in Doing Business 2011. The country has had a steady improvement from 2008 when it was ranked 150th. In Africa, Rwanda is ranked by the World Bank as the fourth easiest place to do business after Mauritius, South Africa and Botswana. It is ranked as the easiest place to do business in the East African region. In the more recently published Doing Business report 2012, Rwanda has also improved its rating in a number of areas. Some of the areas in which that Rwanda is ranked highly are: Area

2012 ranking

2011 ranking

8

9

Getting credit

8

37

Paying taxes

19

33

Enforcing contracts

39

39

Starting a business

PKF has expanded its tax services’ offering in Rwanda to serve the growing number of clients in the market. PKF now has a resident Tax Manager stationed at Kigali. Tax services offered by PKF Rwanda include: a) Tax compliance services b) Tax advisory services which includes tax litigation,

employee compensation structuring, tax optimization reviews, tax training, tax lobbying, mergers, acquisitions and re-organisations; and c) Cross-border tax advisory services which includes

investor tax advisory and due diligence review, transfer pricing policy reviews and cross-border tax planning. For further information, please contact: Martin Kisuu Regional Tax Partner PKF Eastern Africa T: +254 020 427 0000 M: +254 717 077 824 F: +254 020 444 7233 E: [email protected]

The ranking for paying taxes has improved due to administrative reforms introduced to ease the payments of taxes, including: ■

Online tax registration and declarations

■

Quarterly paying of VAT and PAYE for Small and Medium Enterprises

■

Installation of software to calculate taxes and fines.

Rwanda also improved in the “trading across borders” ranking mainly due to the following reforms: ■

Harmonization of customs administration procedures with the East African Community

■

Introduction of 24 hour border operations

■

Reduction of documentation necessary for clearance of goods

■

Establishment of an integrated border management system.


All Regions

Issue 9 Spring 2012

Singapore Update Singapore Budget 2012 Highlights The Finance Minister delivered the 2012-13 Budget on 17 February 2012. However, unlike previous years, the Budget this year focused on social equality as opposed to fiscal competitiveness. Significant tax-related proposals are as follows: Disposal of equity investments : Safe harbour rules Gains from the disposal of equity investments are not taxable if the buyer holds a minimum of 20% shares for at least 24 months prior to the disposal. This applies to gains realised from 1 June 2012. Gold Trading Hub The supply of investment grade gold and other precious metals will be exempt from Goods & Services Tax (GST) from 1 October 2012. Cash grant for Small and Medium Enterprises (SME) Automatic one-off cash grant, pegged at 5% of the company’s revenue for the Year of Assessment 2012 (fiscal year 2011), capped at S$5,000. The company must have made Central Provident Fund (CPF) contributions for at least one employee during the year. Enhanced Productivity and Innovation Credit (PIC) Scheme A 400% tax deduction on S$400,000 expenditure on one any of the qualifying activities: ■ ■ ■ ■ ■

purchase/lease of automation equipment training investment in research and development approved design acquisition or registration of intellectual property.

This is available from the Year of Assessment 2011 to 2015. Companies can also opt for a 60% cash pay out for up to S$100,000 of the qualifying expenditure. Mergers and Acquisitions Allowance In addition to the current allowance, a 200% tax allowance on up to S$100,000 of the transaction costs for each year of assessment is proposed. This allowance may be written down in a single year and is applicable to transactions between 17 February 2012 and 31 March 2015.


Extension of the GST Temporary Import period Goods imported for approved purposes such as exhibitions, fairs, auctions, repairs, stage performances, testing, experiments and demonstrations may be imported without GST if they are re-exported within six months. This does not apply to imports of alcoholic beverages and tobacco. Renovation and Refurbishment Deduction Scheme With effect from the year of assessment 2013, the ceiling is raised to S$300,000 for costs incurred every three years. Double tax deductions: Helping companies internationalise Automatic deductions without prior approval for up to S$100,000 on the following expenditure: ■ ■ ■

overseas business development trips overseas investment study trips overseas trade fairs and approved local trade fairs.

Revisions to Vehicle Tax Regime The Green Vehicle Rebate Scheme (GVR) for commercial vehicles and motorcycles will be extended to 2014. Additional Transfer Fees (ATF) on used vehicle transactions will also be removed. Low carbon emission vehicles will enjoy rebates of up to S$20,000 while high carbon emission vehicles are subject to a surcharge of up to S$20,000. Euro-V compliant diesel vehicles will also enjoy reduced taxes. Enhanced Special Employment Credit (SEC) and revised Central Provident Fund (CPF) contributions In the effort to encourage employers to engage older Singaporean employees above the age of 50, an SEC of up to 8% of wages will be given. Older workers will also enjoy an increase in CPF contribution rates. For further information, please contact: GOH Bun Hiong (吴文雄) Director of Taxes PKF-CAP Advisory Partners Pte T: +65 6500 9359 F : +65 6225 8840 E: [email protected] W: www.pkfsingapore.com

All Regions

Issue 9 Spring 2012

Slovak Update Major tax regime changes expected after Parliamentary election

Finance leasing of PPE

A combination of the overwhelming victory by the left-wing SMER party in elections held on 10 March, guaranteeing them an absolute majority in the Slovak National Council, and the continuing effort by the Slovak Republic to lower its national budget deficit to below 3% spells certain changes in Slovak tax law. Although the new Government has not yet been put in place, it is expected that there will be a higher income tax bracket of 25% for personal and corporate income tax for earnings over a certain level, probably EUR 33,000, and a tax on dividends. Currently, dividends are taxed as regular income, and dividends to non-residents are not taxed in Slovakia.

For further information please contact:

The general value-added tax rate of 20%, which was to have been a temporary measure, will probably be permanent, with a higher rate for luxury items. These changes are expected to be in place by the end of 2012. Please note that the information presented above is based on news reports in the business press, the party program and conversations with experts. The laws have not yet been passed by the National Council.


In an amendment to the Income Tax Act, effective from 1 March 2012, finance-leased property, plant and equipment will be depreciated by the lessee over the term of the lease up to 100% of the value of principal plus acquisition-related costs incurred by the lessee until the asset is put into use. If the lease is assigned to another person, consideration paid in excess of total stipulated payments will be straight-line depreciated as part of the initial price over the remaining period of the lease. If the term of the finance lease is extended or shortened, depreciation already recognised will not be retroactively adjusted and remaining write-offs will be on a straight-line basis over the newly-contracted period until the finance lease expires. The intention here is to clarify questions regarding finance leasing.

Richard Clayton Budd PKF Slovensko T: +421 2 5828 2711 E: [email protected] W: www.pkf.sk

All Regions

Issue 9 Spring 2012

South Africa Update

Amendments to Company Dividends Tax On 20 December 2011 the Minister of Finance Gazetted that, with effect from 1 April 2012, Secondary Tax on Companies (STC) will be replaced with a dividends tax to be levied at shareholder level, except in respect of dividends in specie which would remain the liability of the company. Thus with the imminent introduction of this new dividends tax (DT), taxpayers are left with only a short time in which to adequately prepare for the DT. The main reason given by SARS for the change from STC to DT is that STC (as a tax on companies) created the impression that South Africa's corporate tax rate was higher than that of other emerging markets, thereby disincentivising inbound foreign investment. Furthermore, the introduction of DT aligns South Africa with international standards and best practice where the recipient of the dividend is liable to the tax relating to the dividend and not the company paying it. Broadly, DT is a tax imposed on shareholders or rather beneficial owners (being the person entitled to the benefit of the dividend and not necessarily the registered shareholder) at a rate of 10%on dividends paid by the company. STC, on 43 // PKF International Tax Alert

the other hand, is a tax imposed on companies (at a rate of 10%) on the declaration of dividends. DT is categorised as a withholding tax, as, with exception for dividends in specie, collection of the tax is withheld and paid to SARS by the company paying the dividend or by a regulated intermediary (RI) (a RI is defined, in the Income Tax Act, No. 58 of 1962 ("The Act”), and includes for example brokers and banks) on behalf of the beneficial owners.

The basic principles of dividends tax Dividends, other than dividends in specie In respect of dividends, other than dividends in specie, DT is borne by the beneficial owner at a rate of 10%. DT will only apply in respect of dividends or foreign dividends paid by SA resident companies or non-resident JSE listed companies in respect of JSE listed shares. In this regard, foreign withholding taxes paid on the dividends paid by these non-resident listed companies, may be deducted from any DT due. However, it is important to note that the beneficial owner, the company and the RI are all jointly and severally liable for the payment of DT until the liability is discharged. Further, the company or RI will be the first point of call for DT as a result of their withholding obligations.

All Regions

Issue 9 Spring 2012

South Africa Update continued For the purposes of DT a dividend is deemed to be paid on the earlier of the date on which the dividend is paid or becomes payable by the company declaring the dividend ("payment basis”).

■

A closure rehabilitation trust, as contemplated in s 37A of the Act

■

Pension, provident and similar funds

■

A parastatal exempt in terms of s 10(1)(t) of the Act

In the previous legislation which introduced DT, the dividend was deemed to be paid when it accrued to the beneficial owner ("accrual basis”), and, generally, it accrued to the beneficial owner when it was declared by the company.

■

A shareholder in a registered micro business, to the extent that he aggregate amount of the dividends paid by that registered micro business to its shareholders during the year of assessment in which that dividend is paid does not exceed the amount of R200,000

The reason for the change from an accrual basis to a payment basis is that SARS recognises that there may be a delay between the date of declaration and the date of payment of the dividend, for example, a closely held company may declare a dividend far in advance of cash available to distribute the profits, before the introduction of new shareholders. Furthermore, a RI cannot practically be expected to withhold cash on dividends without receipt of such cash. Hence the change from an accrual basis to a payment basis in respect of the timing of the DT liability.

■

A natural person upon receipt of an interest in a primary residence as envisaged in paragraph 51A of the Eighth Schedule to the Act; and

■

A non-resident receiving a dividend from a non-resident company which is listed on the JSE.

The DT liability must be paid by the last day of the month following the month in which the dividend was deemed to be paid. Dividends in specie The taxing of dividends in specie is different. In this case, the DT liability remains the liability of the resident company and does not shift to the beneficial owner. The timing as to when the DT liability arises is the same as any ordinary dividend, dealt with above. The amount of the in specie dividend represents the market value of the asset on the date that the dividend is deemed to be paid.

Exemptions from dividends tax The following beneficial owner's are exempt from DT: ■

A South African resident company. It should be noted, for dividends paid between SA resident companies, there is no requirement for these companies to be within the same group of companies

■

The Government

■

Public benefit organisations

■

An institution, board or body that conducts research, provides services to the State or general public or that promotes commerce, industry or agriculture as contemplated in s 10(1)(cA)of the Act


The same exemptions apply to dividends in specie.

Obligations in respect of DT The DT, in essence, requires the company declaring the dividend to withhold DT, either on behalf of the beneficial owner or in the case of dividends in specie, for its own account, on payment of the dividend. However, liability for DT shifts if the dividend is paid to a RI, and the dividend is not a dividend in specie, so that the primary withholding obligation falls with the RI. RI's include central securities depository participants (CSDP), brokers, collective investment schemes in securities and listed investment service providers. Obligation of companies declaring and paying dividends. The obligation to either withhold DT at a rate of 10%, on behalf ofthe beneficial owner, or to pay DT at a rate of 10%, in the case of dividends in specie, may be avoided/reduced if the company: ■

Has a written declaration from the beneficial owner that the beneficial owner either: • Qualifies as an exempt person as listed above; or • Qualifies for tax treaty relief (or would have qualified for tax treaty relief had the dividend not been a dividend in specie); and

■

Has a written undertaking from the beneficial owner to inform the company, in writing, should the beneficial owner dispose of the share.

All Regions

Issue 9 Spring 2012

South Africa Update continued Refunds of DT withheld due to late declarations

The company is automatically exempt from withholding DT where the company: ■

Pays the dividend (other than a dividend in specie) to a RI (the RI then becomes liable for withholding DT) in the case of dividends paid in respect of listed shares; or

■

Forms part of the same group of companies (as defined in s 41of the Act) as the company receiving the dividend, i.e. a dividend within a resident group of companies.

These are exemptions and no written declarations are required. The written declarations referred to above will have to be in a form as prescribed by SARS. The written declaration and undertaking in the case of dividends other than dividends in specie, must be submitted at the earlier of the date set by the company or the date of payment of the dividend. Late declarations and undertakings can still be used in order to claim refunds. In the case of dividends in specie, the written declaration and undertaking must be submitted by the date of payment of the dividend. If the declarations and undertakings are not timeously submitted there is no mechanism whereby the company can obtain a refund. It should be noted that if an unlisted company does not withhold and pay DT as required, every shareholder or director of the company, who controls or is regularly involved in the overall management of the financial affairs of the company, becomes personally liable for the tax as well as any additional tax, interest or penalties levied. Obligations of RIs Where a company pays a dividend to a RI, the RI is liable to withhold DT at a rate of 10% unless: ■

The dividend constitutes a dividend in specie

■

Another person has paid the tax

■

The beneficial owner is exempt, or qualifies for a reduction in terms of a double tax treaty (any person who qualifies for an exemption or reduction must submit a written declaration and undertaking, as referred to above, to the RI); or

■

Refunds of DT withheld by companies Where DT is withheld in respect of a dividend (other than a dividend in specie) a beneficial owner who qualifies for an exemption but did not submit a declaration to the company in time, has 3 years after payment of the dividend to submit the declaration. The company must refund and pay over the DT that is refundable to the beneficial owner out of: ■

DT withheld on any subsequent dividend paid within one year from the submission of the declaration; or

■

Where the refundable DT exceeds the DT withheld or no subsequent dividend is paid, the refundable DT or the balance thereof must be recovered from SARS.

No refund may be claimed after four years from the date when the DT was withheld.

Revised dividend definition With effect from 1 January 2011, the definition of dividend was changed in anticipation of the introduction of the new DT regime. In the Taxation Laws Amendment Act 24 of 2011 (TLAA) there are two categories of amendments, the first which is applicable retrospectively to 1 January 2011 and the second which is effective from 1 April 2012. The only noteworthy amendment falling within the first category is that a foreign dividend is excluded from the definition of dividend. Taking into account the TLAA amendments, from 1 April 2012 "dividend” means, any amount transferred or applied by a company that is a resident, for the benefit or on behalf of any person in respect of any share in that company, whether that amount is transferred or applied by way of a distribution made or as consideration for the acquisition of any share (share buy-back). Specifically excluded from the definition of dividend is an amount transferred or applied which: ■

Results in a reduction of contributed tax capital (CTC)

■

Constitutes shares in that company, i.e. a capitalisation issue; or

■

A general share buy-back by a JSE listed company subject to certain specific JSE requirements.

The dividend is payable to another RI.

The same timing rules applicable to companies in respect of the written declarations and undertakings apply to RIs. 45 // PKF International Tax Alert

The amount transferred may consist of money as well as

All Regions

Issue 9 Spring 2012

South Africa Update continued the market value of any asset distributed. The distribution of a company's own shares, i.e. a capitalisation issue, is not within the dividend definition on the basis that these distributions do not result in an outflow of overall value from the company as all the underlying assets remain within the company. It should be noted that where a company transfers an amount to a shareholder, it will not constitute a dividend to the extent that it represents a general repurchase by a listed company of its own securities, in terms of certain specific JSE requirements. Therefore, the shareholder will pay capital gains tax (CGT) and there will be no DT on such a distribution. This exemption does not apply in respect of an unlisted company and any dividend arising from such an acquisition could be subject to DT in the hands of the shareholder (subject to exemption if applicable) and not CGT. The reason for this is that, practically, the shareholder in a listed company cannot distinguish this purchase from any other JSE market purchase.

Conclusion It is apparent that the introduction of DT will result in yet another set of complex administrative rules and regulations increasing the already heavy compliance burden of the taxpayer. It would appear that the supporting data that will be required to be included in the DT return is substantial and whether SARS, never mind the taxpayer, will be able to cope will have to be seen. For further information please contact: Eugene du Plessis Director PKF Johannesburg T: +27 11 384 8116 E: [email protected] W: www.pkf.co.za


All Regions

Issue 9 Spring 2012

Spain Update

taxpayers with zero quota whose assets exceeds EUR 2,000,000. It also will be mandatory to non-residents in Spanish territory with zero quota if their net assets exceed EUR 2,000,000.

Spanish Wealth Tax for non-residents The Wealth Tax was approved by the Law 19/1991 of 6 June 2011. The Law 4/2008 (23 September) eliminated the obligation to contribute to Wealth Tax without repeal. Nevertheless, Spanish Parliament has restored it for years 2011 and 2012 by Royal Decree Law 13/2011 of 16 September. The Tax is charged on 31 December 2011 and 2012 and the obligation falls on net assets (assets and rights with the deduction of charges and taxes). The minimum exemption for residences increases from EUR 150,253.03 to EUR 300,000 and the tax exemption base increases from EUR 108,182.18 to EUR 700,000.

Non-residents with patrimony (real estate, usually on the coast) in Spain are required to: ■

File the Tax if the property value exceeds EUR 700,000 (if individual) or EUR 1,400,000 (jointly owned by spouses).

■

Appoint a Tax Representative in Spain to act as treasurer. The responsibility is joint and several. Breaching this obligation is a punishable act.

■

Compulsory filing (after tax deductions and credits) for


■

The legislation states that this tax is managed by the Autonomous Governments. Amounts payable depend of the volume of assets and the Region where the property located.

■

There are some Autonomous Governments with specific reductions (eg Madrid).

■

The filing deadline is 30 June 2012 (for 2011 Tax) and 30 June 2013 (for 2012 Tax).

We are available to provide advice and management services to anyone in this situation. Other tax changes Royal Decree Law 20/2011 on urgent tax matters was issued in December 2011 and contains significant amendments.

Other tax changes 1. Corporate tax rates There is a special low rate for companies with an annual turnover not exceeding EUR 5 million. These micro companies will pay 20% on the first EUR 300,000 of taxable income for

All Regions

Issue 9 Spring 2012

Spain Update continued

years 2011 and 2012. Those with fewer than 25 employees will need to maintain or create jobs. Tax is charged at 25% on profits in excess of the above mentioned limits. 2. Prepayments These are payments based on the forecast taxable income of the period. During 2011, 2012 and 2013, there is a general rate rise to 24% for companies whose annual turnover is between EUR 20,000,000 and EUR 60,000,000 and 27% for those with more than EUR 60,000,000. 3. Rise in withholding tax rates Withholding rates rise from 19% to 21% in the general case and from 35% to 42% for remuneration of managers and board members. 4. Value added tax The super reduced 4% tax for first time buyers has been extended to December 2012.

There is a new tax scale for General Base for 2012 and 2013. Income in excess of (EUR)

Tax quota assessment (EUR)

Alternative tax basis (EUR)

Tax Rate %

Additional rate (1) %

0.00

0.00

17,707.20

24

0.75

17,707.20

4,249.73

15,300.00

28

2

33,007.20

8,533.73

20,400.00

37

3

53,407.20

16,081.73

66,593.00

43

4

44,716.73

55,000.00

44

5

175,000.20

69,466.73

125,000.00

45

6

300,000.20

115,716.73

more

45

7

6. Residence Relief by acquisition of residence has been restored since January 2012. 7. Wealth Tax The Spanish Wealth Tax has been reactivated only for 2011 and 2012 (see article above). The date of filing the Tax ends on 30 June 2012 (for 2011 Tax) and 30 June 2013 (for 2012 Tax). 8. Land Tax Tax rates have been increased between 4% and 10% for 2011 and 2012, depending on the date in which cadastral valuation was made. 9. Non-residents income tax Tax rates applicable to income obtained by non-residents have risen from 24% to 24.75%.

5. Income tax General Base

120,000.20

Withholding rates rise from 19% to 21% for other payments.

The tax rate applicable to the transfer abroad of the income of permanent establishments and to dividends, interests and capital gains obtained by non-residents rises from 19% to 21%. For more information, please contact: Santiago González E: [email protected] Álvaro Beñarán E: [email protected] PKF ATTEST

(1) Temporary rise only during 2012 and 2013.

Savings Base There is a new tax scale for Savings Base for 2012 and 2013, as follows: Income in excess of (EUR)

Tax quota assessment (EUR)

Alternative tax basis (EUR)

Tax Rate %

Additional rate (1) %

0.00

0.00

6,000.00

19

2

6,000.00

1,140.00

18,000.00

21

4

24,000.00

4,920.00

more

21

6

(2)Temporary rise only during 2012 and 2013.

Withholding rates are amended for labour income (payroll) according to the above tables. 48 // PKF International Tax Alert (1) Temporary rise only during 2012 and 2013.

All Regions

Issue 9 Spring 2012

Uganda Update Accounting for VAT on imported services in Uganda Background The Value Added Tax (VAT) Act, CAP 349 of the Laws of Uganda provides under Section 4(c) that VAT is applicable on the supply of any imported services by any person. This is called VAT on imported services or “Reverse VAT” in some jurisdictions. In view of the above, any person who imports services in Uganda is obliged to declare such services, compute and pay VAT thereon, within the calendar month of importation.

The changes to the VAT law The Commissioner General of URA has now notified the general public in a public notice issued on 20 January 2012 of the following changes in law on VAT on imported services in Uganda with effect 1 July 2011. 1. Any person who receives imported services other than

an exempt service shall account for the tax due on the supply, and the person shall account for that service when performance of the service is completed, or when payment for the service is made, or when the invoice is received from the foreign supplier, whichever is the earliest. 2. That NO credit will be allowable to any person for VAT

paid on imported services.

Until 1 July 2011, The VAT Regulations under Paragraph 13 provided as follows: 13 (1) A registered taxpayer who receives a supply of services from a foreign supplier shall account for the tax due on the supply, and the taxpayer shall account for that tax when performance of the service is completed, or when payment for the service is made, or when the invoice is received from the foreign supplier, whichever is the earliest. Paragraph 14 of the same regulations provided as follows: (3) Tax accounted for on imported services may be claimed as a credit under the provision of Section 28 of the Act, provided the recipient of the service prepares a self-billed tax invoice to account for tax due on the supply; the claim for credit is subject to the conditions specified in Section 28 of the Act. The above provisions meant that, upon importation of VATable services in Uganda, the importer would load VAT on the invoice value, file a return with the Uganda Revenue Authority (URA) and pay VAT thereon. This VAT would then be claimed as input VAT in the taxpayer’s subsequent VAT return.


3. That persons not registered for VAT who import services other than exempt services will also be required to file a VAT return and pay VAT for the period the supply was made. The implications The above amendment means that, from 1 July 2011, taxpayers will no longer claim VAT on importation of services into Uganda as has been the case in the past. This move certainly makes importation of services more expensive on the side of the importer as the VAT component becomes part of the cost of the goods. It will, however, encourage and boost consumption of services provided by local service providers. Any VAT paid before 1 July 2011 on imported services can still be claimed as input VAT by the taxpayer. For further information, please contact: Martin Kisuu Regional Tax Partner PKF Eastern Africa T: +254 020 427 0000 M: +254 717 077 824 F: +254 020 444 7233

All Regions

Issue 9 Spring 2012

United Kingdom Update

operating expenditure (including the cost of goods to be delivered to the CFC’s territory of residence but excluding intra-group expenditure).

Controlled foreign companies changes Draft legislation has been published setting out a redesigned controlled foreign companies (CFC) regime that will take effect for accounting periods beginning on or after 1 January 2013. As with other CFC regimes around the world, the aim is to tax income which has been hived offshore into overseas companies which are controlled by UK companies and which pay tax at a lower rate than in the UK. The mechanism employed is to deem UK companies with an interest in the CFC to have received a proportionate share of the CFC’s profits, thereby bringing them within the charge to UK tax. The new regime has been designed as a response to criticisms of the existing rules in recent years.

Entity level exemptions There are a number of exemptions from the current regime: overseas companies can be exempted based on the size of their profits, the tax rate in their territories of residence and the activities carried out. Some of these exemptions are retained with changes and a company can be exempt from the new regime where: ■

the foreign tax suffered by the CFC is at least 75% of the equivalent UK tax on the taxable profits of the CFC

■

the CFC has less than £500,000 of trading profits and £50,000 of investment income per annum

■

the CFC is resident in a territory on the ‘excluded territories’ list. These are broadly territories with a headline rate of more than 75% of the UK main corporation tax rate (subject to conditions relating to the CFC’s amount and type of income and a motive test)

■

the CFC has profits of no more than 10% of relevant


There will also be a temporary exemption period of up to two years from the date a company becomes a CFC as a result of certain corporate acquisitions and reorganisations.

Trading profits - gateway test With regards to non-financial trading profits, a key component of the new regime is the gateway test which is designed to test whether profits have been artificially diverted from the UK. This test is passed (and therefore the CFC is inside the regime) if it does not meet any of conditions A - D. A. The CFC’s management and control of its risks and assets is not carried out to any significant extent through UK activities undertaken by connected companies, or by itself in the UK, otherwise than through a permanent establishment. B. The CFC has the capability to replace any such activities as are carried out by connected companies in the UK, either itself or by obtaining support from unconnected companies. The condition is met provided these replacement activities would allow the CFC to be a commercially effective stand-alone company. C. The arrangement does not have as its main purpose, or one of its main purposes the reduction or elimination of a UK tax liability; or it is reasonable to suppose that the arrangement would have been made in the absence of all tax advantages that result from it. D. The company’s profits consist only of non-trading finance profits or property business profits.

All Regions

Issue 9 Spring 2012

United Kingdom Update continued Previously, the CFC regime worked on an all or nothing basis whereas under the new regime, profits will only be subject to the charge to the extent that they relate to UK ‘significant people functions’ (SPFs). The process is as follows: 1. Identify the assets held and risks borne by the CFC 2. Determine which are managed in the UK by the CFC (other than through a UK permanent establishment) or a company connected with the CFC 3. Determine the extent to which profits have been generated by those UK SPFs on the assumption that those UK SPFs were carried out by a UK permanent establishment of the CFC (in other words, attributing profits to those assets and risks using OECD guidelines). Only those profits will be subject to the CFC charge. There will also be a number of safe harbours which will completely exempt the attributed profit from a CFC charge if: ■

■

the CFC has premises in its territory of residence which are, or are intended to be, occupied and used with a reasonable degree of permanence and from which its activities are wholly or mainly carried on not more than 20% of the CFC’s relevant trading income derives from UK residents or UK permanent establishments of UK companies

■

not more than 20% of the CFC’s total related management expenditure (i.e. the cost of employing staff to carry out management duties) is UK based.

■

the CFC’s profits do not include any amounts arising from significant transfers of intellectual property to the CFC in the last six years from UK persons or UK permanent establishments of non-UK resident companies.

■

not more than 20% of the CFC’s trading income arises from goods exported from the UK (other than goods exported from the UK to the CFC’s territory of residence).

There will be an anti-avoidance provision which deems any of these tests not to have been met if the CFC’s group has organised any part of its business in a particular way with the main purpose, or one of the main purposes, to ensure that one of the tests is met.

Non-trading finance profits The tests described above relate specifically to trading profits, but there will be a separate test for non-trading finance 51 // PKF International Tax Alert

income, which seeks to tax only those profits that are: ■

financing income which would meet each of the tests referred to above regarding business profits

■

derived from funds invested directly or indirectly from the UK

■

from loans made by a CFC to a connected UK resident company where it is reasonable to assume that there are tax reasons for making the loan rather than a distribution.

If the profits pass through this ‘finance income gateway’, then a claim can be made to tax only 25% of those profits (making the effective tax rate on them only 5.75% for 2014). It is proposed that the taxable amount will also be limited to the aggregate net borrowing costs of the UK members of the group. For example, if chargeable financing profits are £400m and UK group members have net borrowing costs of £60m this would reduce the CFC charge to apply to profits of only £60m. There will also be a full exemption for finance profits arising from a loan funded from qualifying resources. These include: ■

profits the CFC generates from making loans to members of the CFC’s group which are used solely for the purposes of the debtor in its territory of residence

■

sums derived from the issue of shares issued by a ‘top company’ to unconnected shareholders

■

dividends and other share-related distributions received from group members

■

certain proceeds from the issue of shares to group companies as well as from shares held in group companies.

A group will be free to focus on either the entity level exemptions or the gateway test to determine whether, or to what extent, its overseas subsidiaries’ profits are subject to a CFC charge.

UK VAT from ‘dollar one’ for inbound businesses Historically, non-UK businesses have been able to sell in the UK without registering for VAT unless and until their turnover exceeds the UK’s VAT registration threshold (currently £73,000). However, the rules will change on 1 December 2012, meaning that businesses not established in the UK that are supplying taxable goods and services within the UK must register for VAT here – no matter how small their turnover may be.

All Regions

Issue 9 Spring 2012

United Kingdom Update continued The new measure will affect businesses that sell goods and services in the UK from a temporary presence here, e.g. at a trade fair or other event. For example, a US-based business whose employees bring its products into the UK to sell to customers from an exhibition stand would be required to charge VAT on its sales right from the start. Equally, non-UK traders taking part in a Christmas or specialty market would need to consider the rules carefully.

for VAT in other EU member states where they operated.

Broadly speaking, the changes will not apply to businesses that ship goods or sell services directly to UK customers from abroad, although some of these organisations may already be required to register for VAT in the UK under different rules. Also unaffected are vendors of electronic media sold to private customers in the UK, provided they are already VAT registered - either in the UK only or under the EU wide ‘special scheme for electronic services’. However, those that have opted out of the special scheme and are not UK VAT registered could well be required to account for VAT on their sales of electronic media and should seek advice on their position.

There are exceptions though: B2C supplies of this nature and B2B admission charges for events continue to be subject to VAT in the country where the event takes place. So far, the biggest challenge the new system presents is to identify which income constitutes an admission charge.

Overseas businesses that sell to their customers from a permanent UK presence will not be affected by the new rules and will not need to register unless their turnover exceeds the normal UK VAT registration threshold. However, they would need to consider their UK income or corporation tax obligations.

Place of supply of services for VAT In 2011 there were two VAT developments of interest to UK companies which organise or attend exhibitions, conferences and training events.

January 2011 changes For many years, activities of a ‘cultural, artistic, sporting, scientific, educational or entertainment’ nature have formed a specific category when determining the VAT position of cross border services. Apart from the commercial events listed above, the term also includes concerts, music festivals, theatrical and sporting events, repair, valuation and other work on goods, some scientific and technical work and many other services that involve a ‘physical performance’. Until 2011, these services were treated for VAT purposes as taking place in the country where the work was physically carried out. This required companies in these sectors to register 52 // PKF International Tax Alert

The EU VAT rules changed on 1 January 2011 and where this type of service is provided on a B2B basis, it is now deemed for VAT purposes to take place in the country where the customer belongs. Instead of the service provider registering for VAT overseas, the recipient now accounts for VAT on its own VAT return under the reverse charge mechanism.

October 2011 European Court ruling A judgment in the European Court of Justice (ECJ) has created more uncertainty for the events sector, this time over the VAT position of the hire of stands or space at exhibitions. For many years, HMRC has treated exhibition stand hire as a temporary rental of land, provided the exhibitor is given the right to a defined area of the exhibition hall. As a result, some exhibition organisers have treated these lets as VAT exempt while others have opted to tax their interest in the exhibition hall and charged VAT on the hire. The ‘rental of land’ approach also means that the hire of a stand at a UK venue is a UK supply for VAT purposes so, where VAT is charged, it applies whether the client is a UK or overseas based exhibitor. Other cross border exhibition related services, such as general event organisation, are subject to the post - 2011 place of supply rules – i.e. VAT is accounted for by the customer as a reverse charge. Put together, these factors have resulted in an inconsistent application of VAT across the industry. In the Inter-Mark Group decision, the ECJ says that the VAT treatment of exhibition stands depends on the precise details of the hire and could constitute advertising services, a hire of equipment or ‘exhibition services’. The key area of uncertainty arising from the judgment lies in its statement that the hire of a stand is NOT a supply related to land, meaning the UK’s approach of allowing VAT exemption for defined stand locations could be wrong. However, Inter-Mark was in the business of designing, providing and setting up stands rather than letting the

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United Kingdom Update continued space they occupy. It is unclear whether this statement will also apply to businesses that simply hire out defined areas of an exhibition hall. Businesses in the sector should seek advice on their UK VAT position to ensure they are dealing with VAT correctly and efficiently under the current rules.

Capital allowances

heat generated, or gas or fuel produced by the plant and machinery concerned. However, where this consists of a combined heat and power system, the restriction will only apply to expenditure incurred from April 2014. Special zones Businesses based in the following zones will qualify for 100% capital allowances on investment in plant and machinery from April 2012 to March 2017:

Fixtures From April 2012, where a business purchases a second hand building which includes fixtures, it must make a claim for capital allowances in respect of those fixtures before they are sold on, disposed of or transferred to another person (so that a company or business cannot make a claim for assets it no longer owns).

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the Black Country

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Humber

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Liverpool

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the North East

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Sheffield

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Tees Valley.

Within two years of the acquisition of a building, both the purchaser and the seller must agree a purchase price attributable to the fixtures which they must then notify to HMRC by way of a joint election (which is currently optional). If the parties cannot agree the attribution figures, the matter must be referred (by either party) to the Tribunal if this appears material to the tax liability of either (currently it must be material to both).

Statutory residence test The legislation to introduce a statutory residence test for individuals (covered in the July 2011 issue of International Tax Alert) has been delayed and will not take effect until 6 April 2013. It is understood that the Government is working to clarify a number of the key definitions used in the proposed rules and draft legislation is expected to be published with Budget 2012.

In addition, a new measure is proposed on the interaction between the fixtures rules and the business premises renovation allowances (BPRA) scheme. From April 2012, if a taxpayer sells a building on which BPRAs have been claimed within seven years and, as a result, allowances claimed on expenditure on fixtures are clawed back, the purchaser will be entitled to claim capital allowances on those fixtures instead. It has also been confirmed that the current BPRA relief at 100% will continue until April 2017.

For further information please contact: Jon Hills Partner - Tax services PKF (UK) LLP Accountants and business advisers T: +44 (0) 20 7065 0000 E: [email protected] W: www.pkf.co.uk

Solar subsidy From April 2012, expenditure on solar panels will be treated as special rate expenditure for capital allowances purposes. Where such expenditure is not covered by the annual investment allowance, it will only attract capital allowances at 8%. In addition, where there is expenditure on plant and machinery which is used to generate electricity and the business receives a feed-in tariff payment in respect of that expenditure (in the same year or in later years); no enhanced capital allowances (100% relief upfront) may be claimed. The same rule applies in respect of incentives received under the renewable heat incentives scheme as a result of 53 // PKF International Tax Alert

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USA Update US efforts to ensure tax compliance involving offshore financial assets and accounts Over the last several weeks the US Treasury has released additional guidance with respect to the reporting by US taxpayers of non-US domiciled financial assets. The most recent guidance has come in the form of newly issued proposed regulations governing the implementation of the FATCA rules, which were added to the Internal Revenue Code by the HIRE Act of 2010.

Together, these four regimes represent a formidable attempt on the part of the US Treasury to maintain awareness of all non-US financial assets of any person subject to US taxation, regardless of the domicile of either the asset or the taxpayer.

These voluminous proposed regulations cover many topics, including expanding the categories of foreign financial institutions that are “deemed compliant”, the phase-in of requirements over a newly extended time frame, and the reduction of certain of the burdens placed on foreign institutions associated with identifying US accounts. Also released were the final Form 8938 and related instructions, which are to be used by individuals to report specified foreign assets for the 2011 tax year and beyond. What this means is that the US Treasury framework to ensure full disclosure of all non-US financial assets held by those subject to US taxation is now comprised of four independent and sometimes overlapping regimes. These four regimes are: 1) Report of Foreign Bank and Financial Accounts (FBAR)

is required to be filed annually to disclose all foreign accounts over which a US taxpayer has a financial interest or retains signature authority (Form TD F 90-22.1). 2) Various Entity Disclosure Forms are required to be filed

annually to disclose ownership of certain offshore entities, including offshore corporations (Forms 5471, 8621, 926, etc.), partnerships (Form 8865) and trusts (Forms 3520 and 3520A). 3) Statement of Specified Foreign Financial Assets (Form

8938) is required to be filed annually by US individual taxpayers disclosing offshore ownership of certain financial assets in excess of applicable thresholds. The requirements are expected to be extended to US entities in the near future. 4) Foreign Account Tax Compliance Act (FATCA) institutes

a new disclosure and withholding regime whereby foreign financial institutions will be required to provide financial 54 // PKF International Tax Alert

information to the US Treasury with respect to their US accounts and both US and foreign institutions will be forced to withhold on payments between noncompliant or non participating institutions.

The annual FBAR and entity disclosures (Numbers 1 and 2 above) have been in existence for many years and their provisions are familiar to most practitioners. The annual Form 8938 filing requirement (Number 3 above) became effective for the 2011 US tax year as described in our previous article in the PKF International Tax Alert. As an update to our recent article, the US Treasury released the final version of the 2011 Form 8938, along with full instructions on 21 December 2011. The digital links to both the Form 8938 and its related instructions are as follows: http://www.irs.gov/pub/irs-pdf/f8938.pdf http://www.irs.gov/pub/irs-pdf/i8938.pdf The new FATCA legislation (Number 4 above) essentially ‘deputizes’ all foreign financial institutions (FFIs) in the worldwide search for unreported income taxable in the US. On 8 February 2012 the US Treasury issued almost 400 pages of Proposed Regulations (REG-121647-10) in connection with these new requirements and their provisions begin to phase in for the 2013 tax year. The digital link to these newly proposed regulations is as follows: http://www.irs.gov/pub/newsroom/reg-121647-10.pdf Briefly, the new FATCA framework contains two distinct components; a disclosure component and a withholding component. With respect to disclosure, foreign financial institutions meeting certain parameters will be required to report annually to the US Treasury on their holdings of assets owned by persons subject to US taxation. With respect to withholding, the payment of US source income by US payors and made to a ‘non-compliant’ FFI will be subjected to 30% withholding at source. In addition, a 30% withholding will be levied on ‘pass-through’ payments’ between and among FFIs. A non-compliant FFI is generally any institution which does not adhere to the disclosure requirements under FATCA. A ‘pass- through’ payment’ is

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USA Update continued

generally any withholdable payment made between FFIs. A participating FFI would be required to enter into an ‘FFI Agreement’ with the US Treasury, whereby it agrees to annually provide the subject information, as well as undertake due diligence and other internal procedures to ensure compliance, both on the disclosure and the withholding side.

Key components of the newly proposed Regulations The Proposed Regulations offer relief to FFIs since they provide additional time to phase-in implementation of FATCA procedures and contain many provisions to ease compliance efforts and costs associated with FATCA.

Revisions to Compliance and Due Diligence Procedures

As noted, these regulations are proposed and more guidance is expected.

The newly proposed regulations: ■

would distinguish between pre-existing and new accounts and provide exemptions for accounts that do not exceed specified balances

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would allow for increased reliance on the FFI's current due diligence procedures for identifying account owners

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provide an expanded list of Deemed Compliant FFIs to include certain banks which conduct business only with local clients; identified low-risk entities or other participating FFIs, and

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describe when electronically searchable records are sufficient and when "enhanced reviews" are required including manual reviews of files and inquiries with the FFI relationship manager.

Leo Parmegiani PKF LLP T: +1 212 867 8000 E: [email protected] W: pkfnewyork.com

Foreign Deferred Compensation

2013 tax year: FFIs need only provide the name, address, TIN, account number and account balance of each US account; withholding on the payment of US source income to noncompliant FFIs begins. 2015 tax year: Income reporting will be added to the required disclosure. 2016 tax year: Gross proceeds from asset sales reporting will be required.


For further information, please contact:

Other US international tax matters

The implementation time schedule for selected FATCA provisions includes the following:

2017 tax year: Withholding on foreign ‘pass-through’ payments begins.

As one might expect, the framework is extremely complex and it will place a substantial burden on financial institutions both within and outside of the US. In partial recognition of this fact, the US Treasury announced in February of 2012 that it had entered into agreements with the governments of five Eurozone countries - the UK, France, Germany, Italy and Spain - whereby each of these governments will collect the sought after information from its own financial institutions and forward it directly to the US Treasury. This means that FFIs in those countries would escape some of the more onerous provisions of FATCA, such as entering into FFI Agreements, withholding on ‘pass-through’ payments (payments between FFIs), and closing recalcitrant accounts. The US hopes that this can become a model approach going forward, in effect delegating FATCA enforcement to the country where a particular FFI is located.

As the global economy becomes increasingly integrated, many US middle-market companies find themselves expanding into foreign markets including manufacturing, sales and distribution facilities abroad. In addition to hiring local nationals, they often must assign US executives/ employees, or third country nationals, to work in these new markets. Among the host of issues confronting such companies, deferred compensation – whether for retirement or as part of executive agreements – is one of the most important but, at the same time, complex and frustrating. In an article on “IRC Section 409A and Foreign Deferred Compensation” in the Journal of Compensation and

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USA Update continued

Benefits, we provide an important summary of the impact of US regulations on deferred compensation plans for international operations.

2011 Voluntary Compliance Program for Employee vs. Independent Contractor Exposure The US Internal Revenue Service (IRS) has unveiled a Voluntary Compliance Program (VCP) that offers relief for businesses which may have misclassified workers as independent contractors rather than employees. Such employers are potentially liable for significant additional taxes, penalties and interest. For a foreign business which has classified US individuals conducting US activities (perhaps incorrectly) as independent contractors, reclassifying them as employees may create a substantial risk of the foreign business being engaged in a US trade or business or having a permanent establishment in the US for US income tax purposes, resulting in increased US taxation.

IRS Guidance for US citizens and dual citizens living abroad The IRS understands that some US citizens – including some who are also citizens of another country – who are residing outside the US have failed to file federal US income tax returns as well as Foreign Bank Account Reports (FBARs) to report their foreign financial holdings. While these individuals may be complying with tax filings and


payments in their foreign countries of residence, they are not filing returns in the US. On 13 December 2011, the IRS issued updated guidance in the form of Fact Sheet FS 2011-13 with two principal aims: ■

To clarify the issues facing US citizens described above who wish to commence complying with US law regarding their income tax returns and FBARs; and

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To offer a no-penalty opportunity for such compliance by those individuals.

In essence, this guidance provides that US citizens or dual citizens residing abroad will not be assessed late filing or late payment penalties if they are either: 1. with “no balance due” income tax returns – due for

example to foreign tax credits or the US foreign earned income exclusion 2. with “balance due” income tax returns but where the

failure to file was due to reasonable cause. In addition, there will be no penalties assessed on those same individuals with respect to late FBAR filings, if the failure to comply was due to reasonable cause. For further information, please contact: John Forry EisnerAmper T:+1 212 949 8700 E: [email protected] W: www.eisneramper.com

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IMPORTANT DISCLAIMER: This publication has been distributed on the express terms and understanding that the authors are not responsible for the results of any actions which are undertaken on the basis of the information which is contained within this publication, nor for any error in, or omission from, this publication. The publishers and the authors expressly disclaim all and any liability and responsibility to any person, entity or corporation who acts or fails to act as a consequence of any reliance upon the whole or any part of the contents of this publication. Accordingly no person, entity or corporation should act or rely upon any matter or information as contained or implied within this publication without first obtaining advice from an appropriately qualified professional person or firm of advisors, and ensuring that such advice specifically relates to their particular circumstances. PKF International is a network of legally independent member firms administered by PKF International Limited (PKFI). Neither PKFI nor the member firms of the network generally accept any responsibility or liability for the actions or inactions on the part of any individual member firm or firms

PKF International Ltd Farringdon Place 20 Farringdon Road London EC1M 3AP Tel: 020 7065 0104 Fax: 020 7065 0194

www.pkf.com

Spring 2012