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International Tax NewsEdition 14March 2014

WelcomeKeeping up with the constant flow of international tax developments worldwide can be a real challenge for multinational companies. International Tax News is a monthly publication that offers updates and analysis on developments taking place around the world, authored by specialists in PwC’s global international tax network.

We hope that you will find this publication helpful, and look forward to your comments.

Tony Clemens Global Leader International Tax Services Network T: +61 2 8266 2953 E: [email protected]

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In this issue

Administration & case lawProposed legislative changesTax legislation Treaties



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Tax Legislation

Zuleika S. Lasten Terrence MelendezCuraçao CuraçaoT: +5999 430 0024E: [email protected]

T: +5999 430 00456E: [email protected]

Tax LegislationCuraçao

New export regime in Curaçao

As of January 1, 2014, a new ‘export regime’ has been introduced in Curaçao for companies that replace 90% or more of their profits by selling goods and rendering services internationally.

The export regime in Curaçao has an effective profit tax rate of approximately 4%, which could be reduced to 3% going forward. The export regime is suitable for international holding, trading, and finance companies based in Curaçao. The export regime can also be used by international and local companies based in Curaçao that export products, perform maintenance services abroad, or that provide international warehousing activities. Curaçao is an independent country within the Dutch Kingdom and is an Organisation for Economic Co-operation and Development (OECD), Financial Action Task Force (FATF), and European Union (EU) compliant jurisdiction. As a result, the new export regime makes Curaçao even more appealing to international investors when structuring their investment in upcoming markets, such as the Latin American market.

PwC observation:A new export regime has been introduced in Curaçao leading to tax rates of approximately 4%. Thus Curaçao might be a favourable jurisdiction for multinational enterprises doing business in the Latin American region.

Franco BogaMilanT: +39 02 91605400E: [email protected]

Alessandro Marzorati Pasquale SalvatoreMilan MilanT: +39 02 91605408E: [email protected]


Italy

Notional interest deduction

The Italian parliament has put into law the proposed Financial Bill for 2014, which has increased the notional interest deduction (NID) rate from the current 3% to 4% for financial year (FY) 2014, 4.5% for FY 2015, and 4.75% for FY 2016.

In later years the NID rate will be annually determined by the Minister of Finance. The computation is based on the average return of Italian public debt securities, plus a risk factor of up to 3%. NID is calculated applying the mentioned rate to the net increase of the equity occurred since January 1, 2011. Such a date represents the starting point for the calculation of the equity net increase also for each of the following FYs. The NID tax base takes into consideration only the cash contribution and/or the retained earnings resolved by the shareholders; such a base shall be decreased by the equity reductions implying cash distribution/disposal. The NID may be deducted up to the taxable income of each period; exceeding NID may be carried forward indefinitely.

PwC observation:The approved Financial Bill for 2014 enhances the tax incentives for investors in Italian companies in order to sustain the overall Italian economic recovery by promoting injections of capital.

Uruguay

Changes in taxation of capital gains arising from transfer of bearer titles

In July 2013, the Uruguayan Executive Power remitted to Congress for consideration a bill including a provision proposing the elimination of the tax exemption for capital gains derived from the disposal of bearer shares.

The law was finally passed, approving the provision on the terms proposed.

The elimination of the tax exemption is effective as of January 1, 2014. Based on this new provision bearer title transfer capital gains are subject to a 12% tax rate, applicable to a notional 20% of the transfer price (or 20% of market value of the titles transferred if there is no price). The same tax treatment applies to capital gains derived from the transfer of nominative titles.

PwC observation:Multinational enterprises operating in Uruguay should consider how this elimination of the tax exemption on capital gains derived from the transfer of bearer titles could affect their existing or contemplated structures. Several double tax treaties (DTTs) have been signed by Uruguay granting exclusive taxation powers to the transferor’ country of residence that (if applicable) would not determine a tax burden in Uruguay in this regard.

Daniel García

Montevideo

T: +598 25182828E: [email protected]

Eliana Sartori Diego TognazzoloMontevideo MontevideoT: +598 25182828E: [email protected]




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Proposed Legislative Changes

Proposed legislative changesAustralia

Australian government’s position on unlegislated tax measures

On December 14, 2013, the Assistant Treasurer released the final outcome of the new Australian government’s review of 92 previously announced but not enacted tax measures.

Of particular relevance, and as expected, the government confirmed that it will not proceed with the modernisation of the Australian controlled foreign company (CFC) rules. The government also announced that it will not legislate a specific tax exemption for foreign governments (sovereign immunity) nor will it proceed with announced changes to the multiple-entry consolidation (MEC) group rules regarding the calculation and collection of income tax liabilities (although the government has referred issues relating to MECs for consideration by the ongoing MEC group review being conducted).

A legislative measure is being developed by the government to protect taxpayers who have self-assessed on the basis of an announced measure that will no longer proceed.

The government will proceed with previously announced changes to tighten the thin capitalisation regime which limits tax deductions for interest (and other defined ‘debt deductions’) for certain inbound and outbound investors.

Specifically, the government will:

• reduce the ‘safe harbour’ debt limit for general entities from 75% to 60% of adjusted Australian assets (from 3:1 to 1.5:1 on debt to equity basis)

• reduce the ‘safe harbour’ debt limit for non-bank financial entities from 20:1 to 15:1 on a debt to equity basis

• increase the ‘safe harbour’ minimum capital for banks from 4% to 6% of the risk weighted assets of their Australian operations

• reduce the worldwide gearing ratio from 120% to 100% and make it available to inbound investors, and

• increase the de minimis threshold from 250,000 Australian dollars (AUD) to AUD 2 million of debt deductions.

These changes will have effect from income years commencing on or after July 1, 2014. The alternative ‘arms-length debt test’ will remain available. However, it is currently the subject of review by the Board of Taxation. A discussion paper on the arms-length debt test was released in December 2013 and a final report is due to be delivered to the government in December 2014.

The non-resident capital gains tax (CGT) provisions will be amended to ensure that intercompany dealings between members of a consolidated group are ignored when trying to determine whether at least 50% by value of the underlying assets of an entity are Australian real property. These amendments will have retroactive effect to CGT events occurring after May 14, 2013.

Peter Collins David EarlMelbourne MelbourneT: +61 3 8603 6247E: [email protected]

T: +61 3 8603 6856E: [email protected]

PwC observation:The government’s announcement clears the legislative backlog providing welcome certainty and clarity for taxpayers. However, a long work program to implement these measures is expected to continue through 2014.



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Canada

Offshore tax evasion

On January 9, 2014, draft legislative proposals relating to the reporting by certain financial intermediaries of international electronic funds transfers of 10,000 Canadian dollars (CAD) or more were released for public comment.

Reporting will be required beginning in 2015.

Also, on January 15, 2014, federal tax authorities launched the Offshore Tax Informant Program, following which tax authorities may pay individuals with information about major international tax non-compliance a percentage of the federal tax collected as a result of the information provided.

PwC observation:These measures were announced as part of the 2013 federal budget and are aimed at containing international tax evasion and aggressive tax avoidance.

Ken Buttenham Maria LopesToronto TorontoT: +1 416 869 2600E: [email protected]


Canada

2014 Canadian federal budget

The Canadian federal budget was released on February 11, 2014 and contained the following international tax measures:

• A new anti-avoidance rule in respect of withholding tax (WHT) on interest payments, and an amendment of an existing avoidance measure in the thin capitalisation rules, to address certain back-to-back loan arrangements where third party intermediaries are inserted between a Canadian borrower and a foreign related party lender. These measures will apply to tax years that begin after 2014 in respect of the thin capitalisation rules and to amounts paid or credited after 2014 in respect of WHT.

• The government’s offer of additional information on a proposed domestic rule to combat treaty shopping. The main elements of this proposed rule are set out in the budget documents and the government has initiated a consultation period ending on April 13, 2014.

• Amendment of the base erosion rule relating to the offshore insurance of Canadian risks.

• Narrowing of the exception in the ‘investment business’ definition for regulated foreign financial institutions to eliminate the use of this exception by Canadian taxpayers that are not financial institutions to avoid foreign accrual property income treatment for certain passive income.

An invitation by the government for input on the impact of international tax planning by multinational enterprises on other participants in the Canadian economy as well as other corporate income tax (CIT) or sales tax issues related to improving international tax integrity that should be of concern to the government. The consultation period for comments ends on June 12, 2014.

PwC observation:In certain situations, the back-to-back loan anti-avoidance proposals may have broader application than expected. Canadian taxpayers should undertake a review of amounts owing to third parties (such as financial institutions) to determine whether a related non-resident has secured the debt with its own property or made a loan to the third party on condition that a loan be made to the Canadian taxpayer.

As set out above, the government is pursuing a domestic anti-treaty shopping rule - despite substantially all submissions received during the initial consultation period indicating a preference for a treaty-based approach. Canadian taxpayers and foreign residents earning income from Canada will want to follow developments in this area closely and consider how the proposed rule set out in the budget documents may affect them, if enacted.






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Kingsley Owusu-Ewli Darcy White George KwatiaAccra Accra AccraT: +233 302 761 500E: [email protected]

T: +233 302 761 576 E: [email protected]


Ghana

2014 budget proposals - tax matters

The 2014 Budget Statement of the Republic of Ghana was read in the Parliament on November 9, 2013, and there were certain proposals made to the corporate income tax (CIT) regime.

Among others, these proposals included:

• increasing the withholding tax (WHT) rate on commercial rent from 8% to 15%

• increasing the WHT rate on management and technical service fees from 15% to 20%

• undertaking transfer pricing audits to reduce transfer pricing abuse

• expanding the scope of capital gains tax (CGT) to cover upstream petroleum operations, and

• a possible reintroduction of the windfall tax bill to the Parliament.

Details of the various proposals are as follows:

Tax on property and property use The 2014 Budget proposed to increase the rate of WHT on the rental payments of commercial buildings from 8% to 15%.

Management and technical service feesThe government has also proposed to increase the WHT rate on management and technical service fees to non-residents from 15% to 20%. The change in rate is quite unexpected - especially since the rate was originally 20% but was revised downwards a few years ago to 15% to be at par with the general WHT rate for payments made to non-residents. However, in a recent Income Tax Amendment Bill presented to Parliament, the WHT rates for management and technical service fees as well as the general non-resident withholding rate has been increased to 20%.

Transfer pricing auditsFollowing the passage of the Transfer Pricing Regulations in 2012, the Ghana Revenue Service (GRA) aims to train its staff on effective auditing on businesses to reduce perceived abuses and under-declaration of profits. This is aimed at enhancing compliance with the new regulations.

Expansion of capital gains tax to cover petroleum operations The 2014 Budget made provision for expansion of the CGT regime under the Internal Revenue Act, 2000 (Act 592), as amended, to apply to upstream petroleum operations. It is expected that the proposed amendment will include details of the definition of petroleum operations, the types of transactions, and their basis of calculations for CGT purposes.

PwC observation:The above proposals have been enacted into law and are now effective.




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Portugal

Corporate income tax reform approved by Portuguese government introduces patent box regime

Under the new regime, only 50% of the income arising from the temporary use of patents and industrial drawings or models subject to registration are now included in the calculation the taxable income as long as the assets in question are registered on or after 2014.

Costs incurred in the development of the qualifying immovable property (IP) rights remain fully tax deductible. The patent box regime applies to income received from related parties (subject to restrictions) and unrelated parties.

PwC observation:Companies based in Portugal temporarily exploiting patented inventions and other innovations may now benefit from a 50% exemption on the gross income computed for corporate income tax (CIT). As costs incurred in the development of the qualifying IP rights remain fully deductible (and benefiting from a research & development [R&D] tax credit scheme), Portugal increases its level of tax competitiveness, in an attempt to attract foreign businesses with R&D activities.

Pedro DeusPortoT: +351 225433131E: [email protected]




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Armin Marti Stefan SchmidZurich ZurichT: +41 58 792 43 43 E: [email protected]

T: +41 58 792 44 82E: [email protected]

Switzerland

Second report published regarding Corporate Tax Reform III

BackgroundIt is a matter of common knowledge that Switzerland has been under pressure for some time from the European Union (EU). The EU commission has criticised certain cantonal tax regimes (regarding holding, administrative, and mixed companies) and has demanded that Switzerland bring them into conformity with EU standards, even though Switzerland is not a member state of the EU.

Against the background of the tax controversy with the EU and the corresponding need for action for Switzerland, the work for Corporate Tax Reform III (CTR III) has been launched with the establishment of a joint project organisation by the federal government and the cantons in September 2012.

Recent developments This project organisation issued a first interim report in May 2013 discussing the direction of how the competitiveness of Switzerland and its attractiveness as a business location should be maintained and strengthened going forward.

Specifically, the project organisation proposed:

(i) the introduction of new special regimes being compatible with EU and Organisation for Economic Co-operation and Development (OECD) requirements, and

(ii) the reduction of cantonal corporate income tax (CIT) rates and the removal of certain tax obstacles to generally strengthen Switzerland’s attractiveness as a business location.

A second report was issued on December 19, 2013, which in essence confirmed the fiscal and financial policy strategic direction of CTR III outlined in May 2013 but further developed the solutions and evaluated the different measures.

According to the December report, Switzerland emphasised at a meeting of the State Secretariat for International Financial Matters (SIF) with the EU-Commission administration on November 15, 2013, its willingness to abolish certain tax regimes and to design future measures in such a way that they satisfy internationally recognised standards. The future regimes in Swiss fiscal law for the taxation of mobile income should satisfy the OECD’s recognised international standards (i.e. in particular to contain no elements of ‘ring-fencing’ and no international non-taxation) and are justifiable tax systems or follow regimes which demonstrably are applied in OECD member states.

From the fiscal policy aspect, the strategic direction of CTR III consists of the following three elements, whereby it is still to be decided to what extent new regimes are to be declared binding on the cantons:

• New regimes for mobile income - The project organisation proposes the introduction of a licence box and is further investigating the introduction of a notional interest deduction.

• Abolition of certain tax charges to generally improve the attraction of Switzerland as a business location - The cantons’ option to make adjustments to the capital tax should together with the further abolition of the issuance stamp duty and amendments to the tax laws (e.g. by improving the participation exemption rules, the foreign tax credit system etc.) further enhance the attractiveness of the location.

• Cantonal cCIT reductions at the discretion of the cantons.

The next step is a consultation procedure among the cantons, expected to be concluded by March 2014. Because of the various legal steps involved in the political legislation process, it is expected that the new regimes will not become effective before the beginning of 2018.

PwC observation:With the second report on CTR III, the Swiss government further developed the strategic direction of CTR III and emphasised its determination to maintain and further strengthen Switzerland’s position as an attractive business location by the planned tax reform. Multinational companies with business operations in Switzerland should monitor current developments on CTR III, start scenario planning and impact analysis, and get actively involved in public debate on CTR III to support a business friendly implementation of the reform.




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Administration & Case Law

Administration and case lawAustralia

Payments for software were royalties under the Australia-Canada double tax treaty

Task Technology, an Australian resident entity, entered into an agreement with a Canadian resident entity, CWI, to market and distribute software under end-user licences, and to make copies of the software for distribution.

It was also licensed to develop and supply templates for use with the software under application template licences. Task Technology paid an annual fee to CWI under its licensing agreement. The fees paid included a percentage of the software and template licence fees that Task Technology charged its customers.

Task Technology argued that the payments did not constitute a royalty as defined under Article 12 para. 7 of the Australia - Canada double tax treaty (DTT). However, the Federal Court held that payments made under the licensing agreement were not excluded from the royalty definition under the DTT because the nature of the rights acquired under the agreement were not limited to rights necessary for the effective operation of the software by Task Technology (there were rights to copy the software for sale to end users and rights to use the copyright for the purposes of developing its own templates to sell in conjunction with the software).

Consequently, interest withholding tax (WHT) of 10% was required to be withheld on each payment made by Task Technology to CWI. Task Technology Pty. Ltd. v. FCT (2014) FCA 38.

Peter Collins David EarlMelbourne MelbourneT: +61 3 8603 6247E: [email protected]


PwC observation:The Federal Court’s decision reinforces the opportunity to particularise rights and associated consideration in licensing arrangements.



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Adenike Akindolie Kenneth Erikume Taiwo OyedeleLagos Lagos LagosT: +234 2711 700E: [email protected]



Nigeria

Nigeria as a holding company location

Nigeria is generally not considered a preferable holding company location as the tax laws do not support Nigerian holding company structures.

Corporation tax in the form of ‘excess dividend tax’ at 30% can be triggered when dividends are distributed in excess of the computed taxable profits. However, with the Central Bank of Nigeria’s requirement for Nigerian banks to migrate to a Nigerian holding company structure to accommodate non-banking subsidiaries, some banks have adopted a Nigerian holding structure. This resulted from the federal tax authority issuing a publication dated April 2012 to banks, exempting Nigerian holding company structures from the ‘excess dividend tax’. Some organisations outside the banking industry, therefore, reassessed the risk of the excess dividend tax to be low if they adopted a Nigerian holding company structure on the basis of the publication.

PwC observation:The validity of the ruling provided by the tax authority for bank holding companies can be questioned on the basis that a change in law is actually required rather than a mere ruling. In recent times, some local tax offices have refused to apply the principles in the publication outside the banking industry. It is, therefore, our recommendation that companies that propose to have Nigerian holding company structures (or which have existing structures) should obtain a specific ruling as a short term measure and consider a restructuring to avoid the exposure going forward.




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Singapore

Landmark case deals with tax treatment of investment gains of insurance companies

In a recent decision, the Court of Appeal had to consider whether gains derived by a general insurer from the disposal of shares held within its insurance funds are taxable income or (tax free) capital gains.

In dismissing the appeal of the Singapore tax authorities (Inland Revenue Authority of Singapore or IRAS), it upheld decisions of the High Court and the Income Tax Board of Review, and ruled that an insurance company can hold assets (including shares) on capital account. Further, the fact that the assets are held within the insurance funds does not mean the gains on their disposal must necessarily be taxable income. Based on the given facts, the gains were held to be on capital account.

David Sandison Paul LauSingapore SingaporeT: +65 6236 3388E: [email protected]


PwC observation:This is a landmark case, being the first in Singapore to deal with the tax treatment of investment gains of insurance companies. The decision is a great win for the insurance industry. It also clarifies and settles many principles which have been the subject of disputes between the IRAS and the insurance industry.



Singapore

Singapore tax authorities clarify tax treatment of virtual currencies

On January 27, 2014, the Singapore tax authorities (IRAS) clarified the tax treatment of virtual currencies such as Bitcoins on its website.

Businesses that accept virtual currencies will be subject to normal income tax rules, and are expected to record their transactions at open market value in Singapore dollars. Profits derived by businesses which issue or trade virtual currencies in the ordinary course of their business will be taxed on profits from those activities. Businesses that buy virtual currencies for long term investment purposes will not be taxed on gains from such transactions, to the extent that those gains are true capital gains.

PwC observation:The clarification by the IRAS reflects the position under current law. As only few businesses in Singapore currently accept or deal in virtual currencies, this is unlikely to affect many taxpayers. Nonetheless, certainty of tax treatment provided here is welcome.

United Kingdom

The end of UK GAAP in 2015 - tax consequences

As reported previously, UK Generally Accepted Accounting Principles (GAAP) in its current form is shortly going to be abolished.

For periods beginning on or after January 1, 2015, all UK companies must use either the new UK GAAP standard (FRS 102), or a variant of International Financial Reporting Standards (IFRS) (either full IFRS or IFRS with reduced disclosures). Early adoption is permitted.

These changes will have tax consequences, both for cash tax costs and for tax accounting such as deferred tax.

Graham T RobinsonLondonT: +44 (0)20 7804 3266E: [email protected]

PwC observation:In UK tax law there are several types of taxable profits which are based on the accounting result (e.g. trading profits and property income). If a company changes GAAP then this could impact its cash tax liabilities in two ways - via transitional adjustments, and from the different method of calculating a profit going forward. Some of the key areas affected are loans, derivatives and financial instruments, foreign currency, goodwill, and intangible assets.

Companies should start to consider the effects of GAAP change as soon as possible. As described above, there could be significant tax consequences arising from the choice of GAAP selected and the timing of adoption. There will also be other issues which management will need to consider, such as the impact on financial statements including distributable reserves, bank and loan covenants, and data and systems requirements.




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Tim Anson Michael A DiFronzo Carl DubertWashington, DC Washington, DC Washington, DCT: +1 202 414 1664E: [email protected]



United States

IRS rules Section 367 requires gain on US sub’s outbound liquidation only for intangibles

The IRS issued Private Letter Ruling (PLR) 201348011, which ruled that under Section 367(e)(2) a US subsidiary would not recognise gain or loss when liquidating into its foreign parent, except with respect to gain attributable to intangibles under Section 936(h)(3)(B).

PLR 201348011 restates the general rule that under Section 337(a) a corporation generally does not recognise gain or loss on its distribution of property to an 80% distributee (as defined in Section 337(c)) in a complete Section 332 liquidation. However, Section 367(e)(2) specifically addresses the liquidation of a US corporation and provides that Section 337(a) does not apply where the 80% distributee is a foreign corporation, except as regulations permit. In that regard, Reg. Sec. 1.367(e)-2(b)(2)(i) provides that if certain requirements are satisfied, then Section 337(a) can apply to a US corporation’s distribution of property that is used in a US trade or business, but not including intangibles described in Section 936(h)(3)(B).

PwC observation:PLR 201348011 does not seem controversial. Note that a transfer of intangibles under Section 936(h)(3)(B) is immediately taxable in the context of an outbound liquidation, in contrast to an inclusion of amounts over time under the deemed royalty regime of Section 367(d). Multinational enterprises with US subsidairies should consider the exceptions in the Treasury Regulations that provide nonrecognition treatment in light of the general anti-abuse rule, and with the understanding that gain is required to be recognized on the transfer of intangibles described in Section 936(h)(3)(B).




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Collin F Imhof Kathryn Horton O'Brien David ErnickWashington, DC Washington, DC Washington, DCT: +1 202 414 1475E: [email protected]



OECD

OECD releases discussion draft on transfer pricing documentation and country-by-country reporting

Multinational enterprises (MNEs) will face materially increased compliance burdens as a result of the hotly debated proposals to report to tax administrations, on a country-by-country basis, extensive details of their income, taxes, and business activities.

Further, extensive changes to the current requirements for transfer pricing documentation reporting will also add to this burden. These are the broad consequences of the proposals made by the Organisation for Economic Co-operation and Development (OECD) in a discussion draft released on January 30, 2014.

Two-tiered approach to transfer pricing documentation The discussion draft adopts a two-tiered approach to transfer pricing documentation: a ‘master file’ containing standardised information for all MNE group members, which the OECD suggests should be completed in English, and a ‘local file’ that provides specific information related to the transactions of a local taxpayer, which the OECD suggests should probably be provided in the prevailing local language.

The master file is intended to provide a complete picture of the MNE’s global business. The information in the master file would be organised into five categories: the global organisational structure; descriptions of the MNE’s business; descriptions of the MNE’s intangibles, intangible development activities, and transfers of intangibles; descriptions of any intercompany financial activities; and details regarding the MNE’s financial and tax positions, including allocations of income and taxes.

Timing The OECD emphasises that transfer pricing documentation should be based on information reasonably available at the time the transfer price was determined. The OECD also acknowledges that mismatches in the due dates of transfer pricing documentation in various jurisdictions can make it difficult for tax payers to prioritize global documentation obligations and to provide relevant information to tax administrations on a timely basis. As a result, the draft indicates that it is a best practice to prepare transfer pricing documentation contemporaneously with filing of the tax return for the fiscal year at issue.

The draft also notes that final statutory financial statements relevant to the country-by-country data requirements may not be available until after the due date for tax returns in some countries. Accordingly, the draft would extend the date for completion of the country-by- country reporting template until one year following the last day of the fiscal year of the ultimate parent entity of the MNE group.

Materiality The OECD recognises a balance between the tax administrations’ desire for information and the compliance burdens placed on taxpayers. As a result, the discussion draft recommends that local jurisdictions adopt specific materiality thresholds that take into account, among others, the size of the transaction and nature of the local economy. The draft does not, however, provide any guidance on what would constitute an immaterial transaction, but it does seek public comment on whether more specific guidance could be provided.

The draft recommends simplification measures that would limit the transfer pricing documentation requirements for small and medium-sized enterprises (SMEs) on the basis that smaller enterprises should not be required to produce the same amount of documentation that might be expected from larger enterprises. Nevertheless, the draft takes the position that SMEs should be required to provide information and documents about their material cross-border transactions.

Comparables consideration Although the discussion draft recommends that transfer pricing documentation be updated annually, it does acknowledge that business descriptions, functional analyses, and comparables may not change materially from year to year. As a result, in those situations, the OECD suggests that searches for new comparables in the local file could be updated every three years. Financial data for the comparables, however, must still be updated annually to determine an arm’s-length amount.

PwC observation:The OECD’s strategic objectives of making transfer pricing documentation more efficient and better targeted should be supported. The approach, as originally developed, sought to streamline and rationalise information requirements to benefit both tax administrations (i.e. with better information) and taxpayers (i.e. by delivering a more efficient process). However, based on the proposals in the current discussion draft, it is not clear that these goals have been achieved as, overall, the package seems somewhat one-sided with limited clear benefit to business.

Overall, the discussion draft proposes a large number of significant changes which could result in a very short period for business to adjust to life with increased reporting obligations, including country-by-country information. The OECD will need to carefully consider whether the reporting of tangible property, number of employees and payroll expense in practice might lead to adjustments more in line with a formulary apportionment type of transfer pricing system, along with all the potential for increased disputes and double taxation that entails. The OECD has also posed a number of difficult questions, to be answered in a very short timeframe. Consequently, we recommend full and active participation by all interested stakeholders in the brief consultation period.




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Stuart Finkel Scott Dillman Dominick Dell'ImperioNew York New York New YorkT: +1 646 471 0616E: [email protected]



United States

US and global information reporting and withholding: Looking ahead to 2014 and beyond

Although the US tax regime is based on self-assessed tax, the Internal Revenue Service (IRS) continues to expand third-party information reporting requirements in order to ensure that taxpayers file complete and accurate income tax returns by matching independent information with what they report on their returns.

Globally, information reporting and withholding requirements are expected to become more numerous and complex, particularly with the many Foreign Account Tax Compliance Act (FATCA) provisions becoming effective July 1, 2014.

Facing potentially steep penalties for non-compliance, companies should evaluate their current processes to ensure compliance for 2014, as well as prepare for additional information reporting and withholding requirements likely arising in the future. Early planning is critical and technology-enabled strategies can help generate efficiencies going forward.

Upcoming important compliance dates include July 1 - the effective date of FATCA withholding and the date when withholding agents must identify a payee’s status and collect other information. At the time this article was written, the revised Forms W-8 were still in draft. Another important date is April 25 - the date by which foreign financial institutions (FFIs) must register using the IRS on-line registration system to obtain a global intermediary identification number (GIIN) and be included on the first IRS list of registered FFIs.

In addition, other potential information reporting and withholding requirements are on the horizon beyond 2014. The promulgation of many other US FATCA intergovernmental agreements (IGAs) promises to generate additional complexity. Another upcoming critical development is the Organisation for Economic Co operation and Development’s (OECD) release of the Common Reporting Standard (CRS). This standardised model may prompt the proliferation of bilateral automatic exchange of tax information agreements.

PwC observation:FFIs should prepare to register with the IRS by the April 25 deadline so that they can be included in the first IRS list of registered FFIs. Identifying FFIs (e.g. analysing pensions, treasury centers, and holding companies) may be time-consuming and should be done as early as possible. July 1 is also a critical date by which to ensure that Form W-8 and GIIN verification processes, as well as FATCA withholding procedures, are in place so that payment flows are not impeded. Proper due diligence procedures for FFIs should also be in place by this date.

Keeping abreast and planning for imminent reporting and withholding compliance is an important and challenging task. Furthermore, the global environment of tax information exchange and transparency is becoming even more fast-paced and dynamic with the evolution of FATCA, CRS, and other developments. Thus multinational companies must become even more agile and more keenly focused on early planning to keep pace with global requirements as their business operations expand.

Project plans should reflect both 2014 and later years’ potential requirements and include specific steps that focus on decreasing administrative burden. Notably, plans may reflect the increasing shift towards more electronic processes to achieve greater autonomy and less manual intervention.




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Treaties

TreatiesCanada

Canada - Liechtenstein TIEA

The agreement between Canada and Liechtenstein for the exchange of information on tax matters was signed on January 13, 2013, and entered into force on January 26, 2014.

Ken Buttenham Maria Lopes

Toronto Toronto



PwC observation:With the entry into force of the tax information exchange agreement (TIEA) between Canada and Liechtenstein, Canada’s exemption system can apply to the net earnings from an active business carried on in Liechtenstein by a CFC resident in that jurisdiction.



Canada

Canada - US Agreement on FATCA

On February 5, 2014, Canada and the US signed an intergovernmental agreement to improve cross-border tax compliance through enhanced information exchange under the Canada - US double tax treaty (DTT), including information exchange in support of the provisions enacted by the US commonly known as the Foreign Account Tax Compliance Act (FATCA).

Draft legislation to implement the agreement will be released shortly for comment.

PwC observation:FATCA was enacted by the US in 2010 and requires Canadian financial institutions to report information about accounts held by US taxpayers and by entities in which US taxpayers hold a substantial ownership interest. In an effort to minimise conflicts with privacy and other laws, Canada and the US have agreed to place reliance on government-to-government mechanisms for the exchange of information, similar to the procedures already in existence under the Canada - US treaty.



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Hong Kong

Hong Kong and Vietnam sign second protocol to the Hong Kong - Vietnam double tax treaty

The second protocol to the double tax treaty (DTT) between Hong Kong and Vietnam was signed on January 13, 2014.

The Hong Kong - Vietnam DTT and its first protocol were signed in December 2008. The second protocol updates the Exchange of Information (EOI) article in the DTT to the more liberal 2004 version of the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention, removing the ‘domestic tax interest’ requirement for exchanging information. If the ratification of the second protocol on both sides can be completed within this year, the protocol will take effect in Hong Kong from April 1, 2015.

PwC observation:On entry into force of the second protocol, Hong Kong and Vietnam can exchange information under the DTT even when there is no domestic tax interest involved. However, the scope of information that can be exchanged will still be restricted to information relating to the types of tax covered by the DTT. Currently, there are two other Hong Kong DTTs that still impose a domestic tax interest requirement for exchanging information under the EOI article (the DTTs with Belgium and Thailand). It is understood that Hong Kong is currently seeking to update the EOI articles in these two DTTs.

China

China and France signed new double taxation agreement

On November 26, 2013, China and France signed a new double tax treaty (DTT) and an accompanying protocol. The new DTT will replace the existing treaty signed in 1984.

The new China - France DTT has a number of new key features that would:

• clarify treaty application to partnerships and other similar entities

• extend the construction permanent establishment (PE) threshold from six to twelve months and adjust of other PE policies

• reduce of the withholding tax (WHT) rate on dividends paid to qualified corporate beneficial owners from 10% to 5%

• allocate taxing rights over dividends, interest, and capital gains (other than those in relation to immovable properties) derived by qualified sovereign wealth funds to the resident country exclusively

• update of the capital gains article by clarifying the circumstances where a source country could impose tax and reallocating the taxing rights in relation to property not specified in paragraphs one to five of the capital gains article from the source country to the resident country exclusively

• add new articles and limitation of benefit paragraphs aiming at combatting treaty shopping, and

• remove the tax sparing benefit in the existing treaty.If the new DTT is ratified by both governments within 2014, it would apply to income derived on or after January 1, 2015.

If the new DTT is ratified by both governments within 2014, it would apply to income derived on or after January 1, 2015.

PwC observation:The new DTT revises some tax allocation principles which could affect taxpayers who have cross-border business between the two countries. It is also important to note that the new DTT incorporates many anti-treaty shopping provisions as well as specific limitations for treaty benefits. Relevant parties are advised to assess their current structures and arrangements and remain vigilant with regard to meeting the eligibility requirements for treaty benefits. Meanwhile, taxpayers should put in place sufficient documentation to cope with possible challenges in the future when the new DTT comes into force.

Matthew MuiChinaT: +86 10 6533 3028E: [email protected]

Fergus WT WongHong KongT: +852 2289 5818E: [email protected]

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Ireland

Double tax treaties with Kuwait, Qatar, Uzbekistan, and Egypt now in effect

The new Kuwait - Ireland double tax treaty (DTT) came into force on August 12, 2013 and is effective as of January 1, 2013.

This treaty provides for a 0% withholding tax (WHT) on dividends and interest, and 5% WHT on royalties.

The Qatar - Ireland DTT will take effect from January 1, 2014. The treaty was signed on June 21, 2012, and came into force on December 13, 2013. This treaty provides for a 0% WHT on dividends and interest , and 5% WHT on royalties.

New DTTs with Uzbekistan signed on July 11, 2012, and Egypt signed April 9, 2012, came into force on April 1, 2013 and April 24, 2013, respectively, and are effective from January 1, 2014.

The Uzbekistan - Ireland DTT provides for a 5% WHT on dividends if the beneficial owner holds directly at least 10% of the capital of the company paying the dividends. A 10% WHT will apply in all other cases. The treaty provides for a 5% WHT on interest and royalties.

The Egypt - Ireland DTT provides for a 5% WHT on dividends if the beneficial owner holds directly at least 25% of the capital of the company paying the dividends. A 10% WHT will apply in all other cases. The treaty provides for a 10% WHT on interest and royalties.

New agreements have been signed with Ukraine on April 19, 2013, and Thailand on November 4, 2013. The legal procedures to bring these agreements into force are now being followed.

PwC observation:These recent ratifications signal Ireland’s commitment to expanding and strengthening its DTT network. Ireland has signed comprehensive double taxation treaties with 70 countries, 68 of which are now in effect and negotiations are ongoing with other territories at this time. DTTs seek to eliminate and minimise double taxation that might arise for companies operating cross border and are an essential instrument for achieving international tax efficiencies.

Denis HarringtonPwC DublinT: +353 1 792 8629E: [email protected]

Qatar

Qatar double tax treaties updated; tax manual published

Qatar double tax treaties (DTT) with Hong Kong and Ireland came into force as of December 5 and December 13, 2013, respectively.

The following DTTs were signed (and will come into force when ratified):

• Spain (November 2013)

• Fiji (December 2013)

• San Marino (December 2013)

• Morocco (December 2013)

• Kazakhstan (January 2014), and

• Ecuador (December 2013).

Bangladesh is currently negotiating a draft treaty with Qatar.

Furthermore, in January 2014 the Qatar Financial Centre (QFC) published a tax manual setting out its interpretation of the QFC tax regulations (in English, and in a format similar to the one used by the UK tax authority). The manual provides comprehensive guidance on all areas of the QFC tax regulations.

PwC observation:Qatar now has 109 DTTs of which 64 are in force. Its growing treaty network from which all Qatar entities can benefit implies that Qatar is becoming a key jurisdiction for tax efficient holding platforms, IP companies, and treasury companies. The Qatar tax authority may be one of the first tax authorities in the Middle East & North Africa region to publish detailed technical guidance on its tax regulations.

Sajid KhanDohaT: +974 4419 2777E: [email protected]

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United Kingdom

Protocol to UK - India DTT enters into force

The new protocol to the UK–India 1993 double tax treaty (DTT), signed on October 30, 2012, entered into force on December 27, 2013, and will have effect:

• In both states in the case of taxes withheld at source, in respect of amounts paid on or after December 27, 2013.

• In India, in respect of taxes levied for fiscal years beginning on or after December 27, 2013;

• In the UK for any financial year beginning on or after April 1, 2014, for corporation tax and for any year of assessment beginning on or after April 6, 2014, for income tax and capital gains tax, and in respect of petroleum revenue tax, for any chargeable period beginning on or after January 1, 2014.

The new protocol includes the following reduced withholding tax (WHT) rates:

• 15% on dividends paid out of income and gains derived directly or indirectly from immovable property by an investment vehicle (subject to certain conditions), and

• 10% on dividends in all other cases.

PwC observation:The new protocol to the UK - India DTT, which recently entered into force, includes reduced WHT on dividends. In addition, the protocol streamlines the DTT’s provisions relating to partnerships, incorporates new articles on assistance in the collection of taxes and on limitation of benefits, and provides for the effective exchange of information between the tax authorities of both jurisdictions.

United Kingdom

The Hong Kong - Guernsey double tax treaty entered into force

The new protocol to the UK - Netherlands 2008 double tax treaty (DTT), signed on June 12, 2013, entered into force on January 31, 2014, and will have effect:

• In the UK for any financial year beginning on or after April 1, 2014, for corporation tax and for any year of assessment beginning on or after April 6, 2014, for income tax and capital gains tax, and

• In the Netherlands, for tax years and periods beginning on or after January 1, 2015.

The new protocol implements two changes to the 2008 DTT:

• A new Article 7 on business profits, which is in line with the latest approach of the Organisation for Economic Co-operation and Development (OECD) as set out in its Model Tax Convention on Income and Capital, and

• A revised Article 18 to ensure the effective taxation of income from government service.

PwC observation:The new protocol to the UK - Netherlands DTT entered into force on January 31, 2014. The protocol implements a new Artcle 7, which is in line with the latest OECD approach, and a revised Article 18 to ensure the effective taxation of income from government service.

David J Burn Chloe PatersonManchester LondonT: +44 161 247 4046E: [email protected]


Mukesh RajaniLondonT: +44 20 7804 2709E: [email protected]



Singapore

Tax treaty update

The double tax treaty (DTT) between Singapore and Morocco was ratified and entered into force on January 15, 2014.

The treaty provides for tax exemption in the country of source for shipping and air transport income and lower withholding tax (WHT) rates for dividends and interest.

In addition, a revised DTT between Singapore and Poland was ratified and entered into force on February 6, 2014. The revised treaty provides for lower WHT rates on interest, dividends, and royalties, exemption for shipping and air transport income, as well as higher permanent establishment (PE) thresholds compared to the existing treaty. It also incorporates the internationally agreed Standard for Exchange of Information (EOI) for tax purposes.

An Exchange of Notes amending the EOI Article in the treaty between Singapore and Austria will enter into force on May 1, 2014, and will have retroactive effect from January 1, 2011.

PwC observation:Singapore s new treaties with Morocco and Poland will facilitate trade and investment between these countries and Singapore by providing greater clarity on taxing rights and minimising the scope of double taxation.

Treaties



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Daniel García

Montevideo


Eliana Sartori Diego TognazzoloMontevideo MontevideoT: +598 25182828E: [email protected]


Uruguay

Uruguay ratifies tax information exchange agreement with Norway

On December 13, 2013, Uruguay ratified a pending tax information exchange agreement (TIEA) with Norway.

The law approving the TIEA was officially published on December 24, 2013. The TIEA was signed on December 14, 2011, in Paris. It meets the Organisation for Economic Co-operation and Development (OECD) standard for exchange of information and transparency. The TIEA will enter into force once each country notifies the other of the completion of its necessary internal procedures.

PwC observation:Uruguay continues widening its international treaty network that together with its local tax regime based on territorial principles makes Uruguay an attractive location for tax structuring investments in the region.

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This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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