Tax Legislation

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International Tax News Edition 4 April 2013

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Welcome Keeping up with the constant flow of international tax developments worldwide can be a real challenge for multinational companies. As a result, PwC’s International Tax Network is excited to bring you a new publication that will offer updates and analysis on international tax changes around the world. We hope that you will find this publication helpful, and look forward to your comments.

Ireland

Brazil

Irish Finance Bill 2013

Brazilian tax court favourable decision with respect to taxation of profits generated by indirectly controlled entities

Organisation for Economic Co-operation and Development (OECD)

Singapore Tax administrative issues

OECD base erosion and profit sharing report looks to action plan

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

Tax Legislation

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Tax legislation

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Denmark Denmark proposes tax reform plan

Australia Proposed amendments to Australia’s general antiavoidance rules (GAAR) (Part IVA)

Belgium Recent case law on change of control impacting carried-forward tax losses

Hong Kong The Hong Kong-Mexico double tax treaty (DTT) entered into force on March 7, 2013

Germany German legislation impacts portfolio investments and real estate transfer tax structures

Hong Kong The 2013/14 Hong Kong Budget

Brazil Brazilian tax court favourable decision with respect to taxation of profits generated by indirectly controlled entities

Singapore Update on tax treaties

Ireland Irish Finance Bill 2013

United Kingdom Budget and Finance Bill 2013

Netherlands Qualification of Australian Redeemable Preference Shares

United Kingdom New protocol to pending UK/China treaty

Netherlands Introduction Article 13l - Limitation on the deduction of excessive participation interest

United States Senators introduce international tax bills with new and significant provisions

New Zealand Tax avoidance - New Zealand Court of Appeal finds for the Commissioner in the Alesco decision

United States New US-Poland treaty incorporates modern limitation on benefits article

Singapore Tax Legislation

OECD OECD base erosion and profit sharing report looks to action plan

Singapore Tax administrative issues

Singapore Recent Case Law

United Kingdom Tax and government procurement rules

Tax Legislation

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Tax Legislation Denmark

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Germany

Denmark proposes tax reform plan On February 26, 2013 the Danish Government presented a new plan for tax reform under the heading Growth Plan Denmark. The proposed initiatives aim at encouraging growth in the private sector by making it more attractive to invest in Denmark. On the corporate tax side, the presented tax reform plan includes the following initiatives: Reduction of corporate income tax rate The corporate income tax rate is proposed to be gradually reduced from the current 25% to 22% in 2016. The rate would be reduced by one percentage point per year starting in 2014. The tax rate reduction would not apply to business activities in the Danish part of the North Sea. Increase in the amount of potential tax credit From income year 2012, companies with tax losses arising from research and development (R&D) activities can request a tax credit (refund) for the tax value of up to 5 million Danish kroner (DKK) (i.e. maximum amount paid out is DKK 1.25 million under applicable corporate income tax rate of 25%). This amount is proposed to be increased to DKK 25 million with effect from 2014 (i.e. with the reduced corporate income tax rate of 22%, a tax credit of up to DKK 5.5 million can be claimed).

PwC observation: The initiatives presented as part of the Growth Plan are certainly positive and a step in the right direction. However, at this point the proposals are only a part of the tax reform plan and no specific legislation proposals have been presented. The plan has to undergo political debate and specific proposals may be amended or removed.

Søren Jesper Hansen Copenhagen T: +45 39 45 33 20 E: [email protected]

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Natia Adamia Copenhagen T: +45 39 45 94 92 E: [email protected]

German legislation impacts portfolio investments and real estate transfer tax structures Enactment expected for Tax Bill on Portfolio Investments The German Federal Council (the Bundesrator upper house of the German Legislature) on March 1 approved the Tax Bill on Portfolio Investments, following approval by the Federal Parliament (the Bundestagor lower house) on February 26, 2013. The bill is expected to be enacted in the next two weeks. The bill will abolish the participation exemption for dividends received by portfolio investments (participation of less than 10%). Capital gains realised upon disposal of portfolio investments will generally still qualify for the 95% participation exemption, if certain conditions are met. The bill will apply to all dividends received after February 28, 2013. Revival of a ‘light’ Tax Bill 2013 The Federal Council has proposed a revised ‘light’ Tax Bill 2013. The new Tax Bill 2013, like the previous version, contains in particular provisions addressing the use of specific real estate transfer tax (RETT) blocker structures but also again, the use of hybrid instruments in German outbound structures, and loss utilisation limitations following reorganisations. The further legislative process should be monitored. PwC observation: We expect enactment of the Tax Bill on Portfolio Investments, so taxpayers should review existing shareholding structures for German investments, particularly minority shareholdings or shareholdings held via German or non-German partnerships. Taxpayers should monitor legislative actions regarding Tax Bill 2013, in particular provisions addressing RETT blocker structures. If this bill is enacted as currently drafted, current reorganisations based on RETT blocker structures risk triggering the RETT.

Stefan Brunsbach Frankfurt T: +49 69 9585 6319 E: [email protected]

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Ireland Irish Finance Bill 2013 The Irish Finance Bill 2013, which was published on February 13, 2013, is expected to be ratified into law by early April. The Bill contains a number of provisions that should benefit multinational companies (MNC’s) operating in Ireland or looking to invest in Ireland, as detailed below. Taxation of foreign dividends The Bill provides for an additional credit for tax on certain foreign dividends received by Irish companies. This change is a direct result of the recent European Court of Justice (ECJ) decision in the Franked Investment Income Group Litigation Order case. Irish tax law currently exempts from corporation tax dividends received from Irish resident companies, while dividends received from foreign resident companies are taxable in Ireland at 25% or 12.5% with credit for foreign tax. This means that whilst domestic dividends are exempted from tax by reference to the ‘nominal’ rate of tax on those profits, foreign sourced dividends are only granted a credit at their ‘effective’ rate. The ECJ ruling means that where this effective rate is lower than the Irish nominal rate this is contrary to European Union (EU) law. The proposed changes would allow an increased credit where the existing ‘effective’ credit for foreign tax on the relevant dividend is less than the amount that would be computed by reference to the nominal rate of tax in the country from which the dividend is paid. The additional credit will apply to certain dividends received from companies resident in EU or European Economic Area (EEA) treatypartner countries.

Denis Harrington Dublin T: +353 1 792 8629 E: [email protected]

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Ireland continued Group relief for losses The Bill includes an amendment to the rules surrounding group relief for losses and the companies deemed eligible to avail of such relief. Prior to 2012, Irish companies could only be considered grouped for Irish tax loss relief purposes where ownership could be traced through EU/EEA treaty partner countries. These rules were enhanced in Finance Act 2012 to allow groups to be formed by tracing through companies resident in treaty countries or, where not so resident, where the shares in the ultimate parent company are quoted on a recognised stock exchange. The 2012 changes created some unintended consequences and the current amendment is intended to clarify the position. As a result of the proposed changes, in order to qualify for group relief for losses, all relevant intermediary companies must be resident in the EU or in a country with which Ireland has a DTA, or the shares of the parent must be quoted on a recognised stock exchange. Once again, however, it seems that the proposed changes may have some unexpected consequences, particularly for listed companies where an intermediary company is neither EU nor treaty partner resident. Real Estate Investment Trusts (REITSs) Finance Bill 2013 creates a new REIT regime in Ireland which closely follows the UK REIT regime. There is no entry charge into the regime (for existing real estate companies), the company can be listed on a recognised stock exchange in any EU Member State (although it must be resident and incorporated in Ireland), and there is a threeyear grace period before a new REIT must comply with the technical conditions contained within the proposed legislation.

While the normal stamp duty rate (2%) applies to Irish real estate transfers into a REIT, the REIT itself is exempt from tax on rental income and on any capital gains arising from real estate disposals. Distributions out of the REIT to shareholders are subject to dividend withholding tax (WHT) at 20% (with some exceptions). Capital gains generated by the REIT do not have to be distributed. If these gains are retained and reinvested by the REIT, the gains must be reflected in the share price. Non-resident investors can then dispose of the REIT shares free of Irish capital gains tax CGT; however it would appear that the disposal will be subject to stamp duty at 1%. Other measures of interest Capital gain tax (CGT) rate The CGT rate increased from 30% to 33% for disposals made on or after December 6, 2012. Intellectual property regime The Bill introduces an improvement to the intangible assets amortisation regime which will preclude the recapture of tax amortisation claimed on intangible assets which are disposed of/cease to be used more than five years after the asset was first acquired or created. The recapture period currently is ten years, so the decrease to five years is positive for taxpayers.

R&D tax credit The Bill increases the amount of qualifying R&D expenditure excluded from the incremental basis for calculating the R&D tax credit. Now the first 200,000 euros of qualifying expenditure on R&D is eligible for a tax credit without reference to the base-year expenditure (if any) in 2003. In addition, there will be a decrease in the threshold that a company must reach to use the R&D tax credit to reward ‘key employees’. Under current law, an individual must devote at least 75% of his or her time to R&D activities to qualify as a ‘key employee’. The Bill will decrease this threshold to 50%, which would provide more flexibility in utilising the R&D tax credit to attract and retain key R&D talent.

PwC observation: A number of the proposed changes will have a positive impact on Ireland’s offering to MNC’s. The proposed changes in relation to the taxation of foreign dividends should reduce the risk that dividends received in Ireland from lower-tax jurisdictions in EU/EEA countries with a DTT would be subject to incremental tax. The enhancements to the attractiveness of Ireland’s intellectual property and R&D tax credit regimes will also be warmly welcomed by business. The introduction of REITs is to be welcomed, however further tax changes will be required if the Irish REIT is to become an attractive structure for holding international property, and we expect further enhancements in this regard. However, given the potential unintended consequences of the proposed changes in relation to group relief for losses, structures involving listed companies where an intermediary company is neither EU nor treaty partner resident should be reviewed as soon as possible.

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On January 1, 2013 a new measure entered into effect on the basis of which the deductibility of interest on loans that have been used to finance participations to which the Dutch participation exemption applies may be limited. The measure has been laid down in Article 13l of the Dutch corporate income tax act and limits the deduction of so-called excessive participation interest. Recently, the Dutch State Secretary of Finance published a decree that may, for now, be considered a final piece in the process of the implementation of Article 13l. The purpose of this decree is to set specific rules for determining the acquisition price of participations in connection with, inter alia, internal reorganisations and the Dutch fiscal unity regime. Article 13l relies on a mathematical approach. The formula which can be used to calculate the excessive participation interest is as follows: Excessive participation

=

Average participation debt Average total debt

x

Total interest expenses

The exclusion of expansion investments is meant to avoid interest deduction restrictions for operational expansion investments by Dutch taxpayers. Thus, interest expenses on debt financed expansions of the group’s operational activities (e.g. manufacturing, R&D, distribution and sales activities) through acquisitions of or capital investments in subsidiaries remain deductible. The expansion investment exception, however, does not apply if the expansion related interest expense is deducted elsewhere within the group (‘double dip’) or if the participation financing is predominantly tax driven. This might occur when, for example, the taxpayer cannot demonstrate a management link between the Dutch taxpayer and the participation. The introduction of Article 13l was accompanied by the abolishment of the Dutch thin capitalisation rules. PwC observation: Article 13l may have a material impact on the tax position of Dutch companies which own participations that have been financed with debt, in particular for companies with little substance in the Netherlands. It is therefore highly recommended to review existing Dutch holding structures in order to assess the impact of this new interest limitation deduction measure.

In this formula, participation debt can be defined as the amount by which the cost price of the non-qualifying participations exceeds the equity for Dutch corporate income tax purposes. A participation is considered as non-qualifying if the Dutch participation exemption applies and the participation investment is not a so-called expansion investment.

Jeroen Schmitz Amsterdam T: +31 8879 273 52 E: [email protected]

Ramon Hogenboom Amsterdam T: +31 8879 267 17 E: [email protected]

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Netherlands Introduction Article 13l - Limitation on the deduction of excessive participation interest

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Pieter Ruige Amsterdam T: +31 8879 234 08 E: [email protected]

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Singapore Tax Legislation The Income Tax (Amendment) Act 2012 was gazetted on December 18, 2012. Amendments to the Income Tax Act relate mainly to the changes announced in the 2012 Budget Speech. Non-Budget related changes include the extension of the tax treatment of Scottish Limited Partnership members of Lloyd’s syndicate and of certain tax incentives for insurance companies to the limited liability partnership members of Lloyd’s syndicate, the extension and enhancement of the International Arbitration Tax Incentive, and the introduction of a sunset clause for the further tax deduction for approved R&D projects. The Economic Expansion Incentives (Relief from Income Tax) (Amendment) Act 2013 was gazetted on February 20, 2013. The amendments relate mainly to the extension of the maximum tax relief period under the Development and Expansion Incentive (DEI) from 20 years to 40 years for headquarter DEI companies and legislation of the Integrated Investment Allowance (IIA) scheme proposed in the 2012 Budget. An Order amending the list of information that the competent authority of a treaty country is required to provide the Singapore tax authorities (Inland Revenue Authority of Singapore or IRAS) in a request made under provisions for the exchange of information under tax treaties and arrangements for the exchange of information was gazetted on December 3, 2012. The requirements on the said competent authority have been slightly relaxed.

David Sandison Singapore T: +65 6236 3388 E: [email protected]

Regulations prescribing how certain tax incentives should be modified to apply to partnerships were gazetted on December 28, 2012. They are deemed to have come into operation on April 1, 2008. The tax incentives relate mainly to venture companies, shipping investment enterprises, R&D, the acquisition of IP rights, cost-sharing agreements for R&D activities, leasing of aircraft and aircraft engines and container investment enterprises.

PwC observation: With the amendments to the Income Tax Act, most of the tax changes announced in the 2012 Budget have been legislated and may be treated as enacted for US Generally Accepted Accounting Principles and International Financial Reporting Standards purposes from December 18, 2012. The amendments to the Economic Expansion Incentives (Relief from Income Tax) Act may likewise be treated as enacted from February 20, 2013. The extension of the maximum tax relief period for the DEI is a significant enhancement to the incentive, but is expected to be granted only in exceptional cases.

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Hong Kong

Proposed amendments to Australia’s GAAR (Part IVA)

The 2013/14 Hong Kong Budget

On February 13, 2013 the Australian Government introduced the Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013 into Parliament.

The Financial Secretary of Hong Kong delivered the 2013/14 budget on February 27, 2013.

These changes are proposed to apply to any scheme entered into, or commenced to be carried out, on or after November 16, 2012. PwC observation: Part IVA will in practice continue to largely turn on available evidence of the facts relevant to the alternative transactions identified (so-called postulates) and an objective enquiry of the dominant purpose of parties to the scheme. It would be an over-reaction to describe the changes as alarming but care will be required to fully appreciate the nuances of the changes going forward.

Peter Collins Melbourne T: +61 3 8603 6247 E: [email protected]

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

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Proposed legislative changes Australia

The Bill contains important amendments to Part IVA. The amendments, originally announced on March 1, 2012, were triggered by a number of high profile losses by the Australian Taxation Office in the courts and are the culmination of significant debate concerning the ongoing effectiveness of Part IVA in combatting tax avoidance.

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The budget did not propose any change to the Hong Kong profits tax rates, which remain at 16.5% (for corporations) and 15% (for incorporated businesses). However, a waiver of 75% of Hong Kong profits tax for year of assessment 2012/13, subject to a ceiling of 10,000 Hong Kong dollars, was proposed in the budget to help ease the burden of small and medium sized enterprises. In addition, the following two tax incentives for the financial industry were proposed: •

Extending the profits tax exemption for offshore funds to include transactions in private companies which are incorporated or registered outside Hong Kong and do not hold any Hong Kong properties nor carry out any business in Hong Kong as ‘specified transactions’.

•

Extending the concessionary profits tax rate (i.e. 50% of the normal profits tax rate) applicable to offshore reinsurance business to the offshore insurance business of captive insurance companies.

The implementation of the above budgetary proposals is subject to the enactment of the relevant legislative amendments.

Fergus WT Wong Hong Kong T: +852 2289 5818 E: [email protected]

PwC observation: The proposed expansion of the scope of ‘specified transactions’ will allow some private equity funds to enjoy the profits tax exemption under the offshore funds exemption regime, making it more attractive for private equity funds to do business via Hong Kong. This measure represents a further step taken by the Hong Kong Special Administration Region Government in strengthening Hong Kong’s role as a regional asset management centre.

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United States

Budget and Finance Bill 2013

Senators introduce international tax bills with new and significant provisions

The Chancellor presented his Budget Speech on March 20, 2013 and the Finance Bill was published on March 28, 2013. Many measures were pre-announced in the Autumn Statement, and draft legislation was published in December 2012 for consultation, including: •

a further reduction in the UK corporation tax rate to 21% from April 1, 2014

•

introduction of a new general anti-abuse rule;

•

amendments to the new controlled foreign companies (CFC) rules

•

introduction of new rules to allow deferral of tax payable in respect of corporate exit charges when a UK company migrates its tax residence within the EEA

•

relaxation of the restriction on the surrender of losses of UK branches of EEA companies as group relief

•

mandatory new rules for chargeable gains calculations for UK companies which do not operate in a sterling environment, and

•

a new above-the-line R&D credit.

PwC observation: We made a number of representations on the draft Finance Bill 2013 published in December and we hope that some, at least, of those will be acted upon.

David J Burn Manchester T: +44 161 247 4046 E: [email protected]

Chloe Paterson London T: +44 207 213 8359 E: [email protected]

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Background President Obama and Congressional leaders continue to call for tax reform, including reform of the US international tax regime. In addition, fiscal policy is expected to dominate legislative discussion in 2013. Senators Carl Levin and Bernard Sanders have added to the tax reform and budget debates with separate bills addressing perceived international tax ‘loopholes.’

PwC observation: Although the Levin and Sanders bills are unlikely to be enacted as introduced, the specific provisions are now on the table as possible revenue raisers for the 2013 legislative session, whether for tax reform, deficit reduction, or other budgetary needs. In addition these bills are now part of the corporate tax reform debate. Companies headquartered in the United States or abroad should assess the potential impact of these bills on their current structures and consider whether to participate in the legislative process.

In detail Senator Levin on February 11 reintroduced the Cutting Unjustified Tax (CUT) Loopholes Act, an extensive and wide-ranging antiabuse bill. In the international area, this bill (S. 268) includes new provisions eliminating CFC look-through treatment and entity status electivity for certain foreign entities. In addition, it treats CFC loans to US shareholders as dividends to the extent of aggregate CFC earnings. The 2013 Levin bill also includes provisions apparently drawn from previous bills on deferral of foreign expenses, pooling of foreign tax credits (FTC’s), limits on outbound transfers of intangible property (both under subpart F and Sections 367(d) and 482), and limits on earnings-stripping by inverted companies. Senator Sanders on February 7 introduced a separate bill (S. 250, the Corporate Tax Fairness Act) that would eliminate deferral for active income of CFCs, reinstate per-country FTC rules, limit FTCs for oil companies that are dual-capacity taxpayers, and treat foreign companies managed and controlled in the United States as US companies.

Carl Dubert Washington, DC T: +1 202 414 1873 E: [email protected]

Oren Penn Washington, DC T: +1 202 414 4393 E: [email protected]

Kevin M Levingston Atlanta, GA T: +1 678 419 1235 E: [email protected]

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Administration & case law Belgium Recent case law on change of control impacting carried-forward tax losses Based on a specific provision of the Belgian income tax code, certain tax attributes (such as carried forward tax losses) are forfeited in the case of a change in the control of a company. However, in cases where the taxpayer is able to substantiate the change of control with sound financial or economic drivers, these tax attributes would not be forfeited as a result of the change of control. In a recent court decision, the Court of Appeal of Ghent gave a very strict interpretation to the notion of financial and economic needs and concluded that the change of control was not supported by legitimate financial or economic needs. It remains to be seen if other courts may follow the interpretation of the Court of Appeal of Ghent. PwC observation: In the case of a change of control of a Belgian company, it is necessary to assess whether the change of control provision impacts the available tax attributes. We recommend obtaining up-front certainty on the application of the change of control provision by requesting a ruling from the Belgian Ruling Office.

Pascal Janssens Antwerp T: +32 3 2593119 E: [email protected]

Axel Smits Brussels T: +32 3 2593120 E: [email protected]

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Brazil Brazilian tax court favourable decision with respect to taxation of profits generated by indirectly controlled entities A large Brazilian company has won an appeal in the Administrative Court of Federal Tax Appeals (CARF) against the Federal Revenue (SRF) involving the taxation of profits earned by indirectly controlled entities. The company underwent a major corporate restructuring in which it contributed shares in a range of its offshore investments to its Spanish holding company, which was subject to the special Entidad de Tenencia de Valores Extranjeros (ETVE) regime, under which revenues derived from CFCs are not taxed in Spain. The Brazil-Spain DTT ensured that profits from the Spanish entity were not taxed in Brazil. In its assessment, the Revenue contended that the new corporate structure served only as a means to channel profits to Brazil avoiding tax and therefore lacked economic substance, and attempted to tax the profits accrued by the indirectly controlled entities (i.e. held by the Spanish Holding Company). In the decision which has yet to be published, the majority of the Counsellors held in favour of the taxpayer, stating that no legal basis exists that would allow the disregard of treaty provisions, which must take precedence over national law. The Spanish Holding Company was held to possess economic substance, evidenced by the fact that it carried out its activities as a holding company and could not be said to have been constituted solely for the purposes of tax avoidance. Additionally, Brazilian CFC rules should only reach the profits of the directly controlled entities (since the profits accrued by the indirectly controlled ones should be consolidated by the former).

Durval Portela São Paulo T: +55 11 3674 2582 E: [email protected]

Carolina Ibarra São Paulo T: +55 11 3674 3496 E: [email protected]

PwC observation: This decision in favour of the taxpayer has come after a relatively recent unfavourable one with regards to controlled foreign entities in which the authorities had looked through the holding company and directly taxed the profits generated by its investees. Additionally, the decision approached the economic substance of a holding company by considering its usual investment position as sufficient for such an end. Although not binding in future cases and still subject to review by the Superior Administrative Court of Federal Tax Appeals (CSRF), this decision in favour of the taxpayer gives a useful insight into the administrative tax court’s approach on this matter.

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Further to the decisions of the Dutch Lower Court and the Dutch Higher Court, Advocate General Wattel (AG) delivered his opinion in case no. 12/03540 with respect to the questions: •

•

whether Redeemable Preference Shares (RPS) issued by an Australian subsidiary of a Dutch company should qualify as either debt or equity for Dutch corporate income tax purposes, and if the RPS should qualify as equity, whether benefits realised on those RPS should be exempt from Dutch corporate income tax under the Dutch participation exemption regime.

The AG now concludes that in order to qualify as equity for Dutch tax purposes it is decisive whether the RPS lead to participation in the losses of the subsidiary. Albeit that the circumstances should be qualified in accordance with Dutch law, guidance should, in the view of the AG, be obtained from the legal characteristics of the instrument under Australian law. The AG stated that since the Higher Court did not pay attention to the characteristics of the RPS under Australian law, the case should be re-assigned to another higher-court for further examination of the facts.

PwC observation: The opinion of the AG is in line with PwC advice and opinions issued. Current and future planning possibilities with respect to redeemable preference shares therefore remain intact.

In Australia, the RPS qualified as debt and resulted in an interest deduction. To recap, the Dutch Lower Court (January 25, 2011, case no. 09/3391) qualified the RPS as debt for Dutch corporate income tax purposes, and the compensation received by the Dutch company as interest. The Dutch Higher Court ( June 7 2012 (case no. 11/00174) disagreed with the Court and qualified the RPS as equity and ruled that the benefits relating to the RPS should be exempt from Dutch corporate income tax under the Dutch participation exemption regime.

Jeroen Schmitz Amsterdam T: +31 8879 273 52 E: [email protected]

Ramon Hogenboom Amsterdam T: +31 8879 267 17 E: [email protected]

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Netherlands Qualification of Australian Redeemable Preference Shares

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Pieter Ruige Amsterdam T: +31 8879 234 08 E: [email protected]

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The Court of Appeal has unanimously upheld the High Court’s decision which found the optional convertible note (OCN) financing structure used by Alesco to be a tax avoidance arrangement. In 2002 Alesco Corporation Limited (Alesco Corp), an Australian company, decided to acquire two industrial businesses in New Zealand through its wholly owned New Zealand subsidiary Alesco New Zealand Limited (Alesco NZ). Alesco Corp raised approximately 85 million New Zealand dollars (NZD) to finance the purchases. Alesco Corp decided to implement an OCN financing structure to complete the purchases. Under this structure, Alesco Corp advanced NZD 78 million to Alesco NZ in consideration for the issue by Alesco NZ of zero coupon OCN’s. An OCN is a hybrid debt/equity instrument that starts out as a debt but has an option to convert into shares. For New Zealand income tax purposes, the OCN is split into an equity and a debt component with Alesco NZ being entitled to a tax deduction for notional interest on the debt component under the financial arrangement rules. The OCN is treated as equity for Australian tax purposes.

Stewart McCulloch Auckland T: +64 935 587 51 E: [email protected]

The Court of Appeal dismissed Alesco NZ’s appeal. Whilst specifically acknowledging that there was a commercial reason for the advancing of funding to Alesco NZ (i.e. to fund the acquisition of the business), the Court found this “will not necessarily protect a transaction from scrutiny where tax avoidance is viewed as a “significant or actuating purpose which had been pursued as a goal in itself’”. Further, the Court noted that it is not Parliament’s intention to allow a taxpayer to use the financial arrangement rules as a basis for claiming deductions for interest that the taxpayer was not liable or did not pay.

PwC observation: The decision will have a direct impact on a number of other corporate taxpayers with similar OCN financing structures that are subject to disputes with the Commissioner of Inland Revenue. Unfortunately, the line between avoidance and legitimate tax planning remains blurred following the Alesco decision. We believe better guidance in the legislation or reform of the general anti-avoidance rule (or both) is required to improve the current situation.

Nicola J Jones Auckland T: +64 935 584 59 E: [email protected]

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New Zealand Tax avoidance - New Zealand Court of Appeal finds for the Commissioner in the Alesco decision

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Sandy M Lau Wellington T: +64 946 275 23 E: [email protected]

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OECD OECD base erosion and profit sharing report looks to action plan Background Recently, tax authorities in various countries have expressed concern about losing tax revenue as a result of corporate planning that they believe erodes tax bases and shifts profits to lower-tax jurisdictions. At the same time, authorities and companies alike share a fundamental concern that the common principles by which taxing rights are shared between countries have not kept pace with the changing global business environment. This shortcoming is highlighted by the global nature of business (including the proliferation of internet-based transactions) and the increased importance of IP as a value driver. The report The OECD report on base erosion and profit shifting (BEPS), released February 12, 2013, analyses the key tax principles and opportunities for BEPS. It notes that the ‘jurisdiction to tax’ principle, including permanent establishment rules, has come under pressure due to the development of the digital economy. Also, the report points out that transfer pricing concepts already consider economically significant activities and responsibilities undertaken, assets used, and risks assumed. In addition, the report highlights the different treatment of debt and equity in many countries and categorises antiavoidance techniques.

Furthermore, the report considers how to address BEPS concerns. The report identifies the following as ‘key pressure areas’: •

International mismatches in entity and instrument characterisation.

•

Application of treaty concepts to profits from delivery of digital goods and services.

The report states that the action plan will include proposals to develop: •

instruments to end or neutralise the effects of hybrid mismatch arrangements and arbitrage

•

improvements or clarifications to transfer pricing rules

•

updated solutions to ‘jurisdiction to tax’ issues

•

more effective anti-avoidance measures that complement the previous items

•

The tax treatment of intra-group financial transactions.

•

Transfer pricing.

•

rules on the treatment of intra-group financial transaction, and

•

The effectiveness of anti-avoidance measures.

•

•

The availability of harmful preferential regimes.

solutions to counter harmful regimes more effectively, taking into account factors such as transparency and substance.

The OECD action plan As for proposed next steps, the report identifies no ‘magic recipe’ that could address BEPS. However it emphasises that the OECD is ideally positioned to advance a collaborative solution (and that this is preferable to any unilateral action which could potentially exacerbate the problem). Although the paper does not set forth specific steps, it mentions the development of a comprehensive action plan by June 2013. The plan will (i) identify actions required to address BEPS; (ii) set deadlines for those actions; and (iii) identify the resources and methodology required to implement the proposed solutions.

PwC observation: Generally, today’s OECD report summarises the key issues raised by BEPS and aligns with previous OECD statements about the concerns of the organisation and its member tax authorities. Although the BEPS report questions the efficiency of current international principles, it does not support unilateral actions, which would “undermine the consensus-based framework for establishing jurisdiction to tax and addressing double taxation.” This should comfort taxpayers that the OECD is committed to “protecting multinationals from uncertainty or double taxation.” Regardless of the action plan’s timeline, taxpayers should consider the report’s key pressure areas and the proposals to address those areas.

Richard Stuart Collier London T: +44 207 212 3395 E: [email protected]

David Swenson Washington T: +1 202 414 4650 E: [email protected]

Michael J Gaffneys New York, NY T: +1 646 471 7135 E: [email protected]

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Singapore Tax administrative issues 2013 Budget proposals The 2013 Budget Statement was delivered on February 25, 2013. It included the following tax proposals: •

A 30% corporate tax rebate for the Years of Assessment 2013 to 2015 (income years 2012 to 2014), capped at 30,000 Singapore dollars for each year of assessment.

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Enhancements to the Productivity and Innovation Credit scheme. This scheme allows taxpayers to claim benefits in the form of cash payouts and/or enhanced tax deductions for qualifying expenditure on certain qualifying activities (acquisition and leasing of automation equipment, employee training, registration and acquisition of IP rights, R&D, and approved design projects). The list of qualifying automation equipment has been expanded, and the definition of acquisition of IP rights has been expanded to include in-licensing of such rights.

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The maximum incentive period for which tax exemption may be granted under the Maritime Sector Incentive-Approved International Shipping (MSI-AIS) award has been increased from 30 to 40 years. The MSI-AIS award provides for tax exemption of qualifying income from operating foreign-flagged ships in international waters.

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Certain tax incentives for the financial sector which were due to expire in 2013 have been extended and rationalised. Enhancements have also been made to some of these incentives.

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A few tax incentives, including those for Islamic finance and insurance have been allowed to lapse as they are no longer relevant or have been unpopular.

David Sandison Singapore T: +65 6236 3388 E: [email protected]

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Singapore continued Withholding tax (WHT) The Singapore tax authority (IRAS) considers payments for software and payments for the use of or right to use information and digitised goods to be in the nature of royalties. Similarly, payments for the use of satellite capacity and the use of or the right to use international submarine cable capacity, including payments for an indefeasible right of use (IRU), are considered to be in the nature of payments for the use of movable property. These payments should be subject to WHT in Singapore. However, there is a WHT exemption for them which was due to expire on February 27, 2013. On February 8, 2013, the IRAS issued a circular announcing that it would adopt a ‘rights-based approach’ to characterise payments for software and for the use of or right to use information and digitised goods for tax purposes. This approach distinguishes payments for the right to exploit a copyright, from payments made to acquire a copyrighted article (without acquiring the right to the underlying copyright). The latter is not considered a royalty and is not subject to Singapore WHT. The IRAS also announced on February 21, 2013 that payments for the use of satellite and international submarine cable capacity would be characterised as payments for services. WHT is not applicable on such payments if they are made in relation to services performed outside Singapore. These changes took effect from February 28, 2013. This re-characterisation however, does not extend to payments for the use of international submarine cable capacity made under IRU agreements, which are still considered to be payments for the use of movable property. For these payments, the WHT exemption has been extended for five years to February 27, 2018.

Voluntary disclosure The IRAS liberalised its Voluntary Disclosure Programme with effect from January 1, 2013. The reduced penalties for voluntary disclosure under the programme will be extended to repeated instances of voluntary disclosure instead of being limited to the first instance by a taxpayer for each tax type. The IRAS has also announced that taxpayers who voluntarily disclose past acts involving wilful intent to evade tax will not be prosecuted even though penalties for tax evasion will still be higher than when there tax is underpaid as a result of negligence. Dispute resolution process The IRAS issued a circular on February 28, 2013 which sets out administrative changes to the objection and appeal process for corporate taxpayers which will be introduced on January 1, 2014. Property developers The IRAS published a circular on March 6, 2013 detailing the tax treatment of property developers. It details the tax treatment on the accounting for property sales and other revenues of a property developer and the deductibility of development and related expenses. It also provides updates on the administrative concession for companies that are set up to undertake a single development project.

PwC observation: 2013 Budget proposals Most of the 2013 Budget changes are intended to benefit local small and medium-sized enterprises. Larger corporations are not precluded from enjoying the same benefits, but the measures introduced may not have as significant an impact on them. The enhancement to the MSI-AIS incentive however, is an exception and is notable as it is the only tax incentive providing for full exemption that has been extended beyond 30 years. This indicates the importance of the maritime sector to Singapore Withholding tax This change should not have any WHT implications for most taxpayers as payments that do not attract WHT under the new categorisation should have qualified for tax exemption prior to its introduction. However, this approach provides greater certainty as, unlike the exemption, it does not have a sunset clause. Such certainty is not similarly available for payments under IRUs, but taxpayers will only have to worry about that in five years’ time. Voluntary disclosure The programme has been made more attractive for taxpayers to voluntarily come forward to disclose errors in past returns and instances of failure to correctly withhold tax in the past on a timely basis. Dispute resolution process The new process formalises somewhat the timeframe for communications with the IRAS and is intended to expedite the finalisation of taxpayers’ tax affairs. Property developers The circular provides greater clarity on the tax treatment of such taxpayers.

Tax Legislation

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Singapore Recent case law In a Court of Appeal case, the Court dealt with the deductibility of a provision for doubtful debts arising as a result of misappropriation of funds by the taxpayer company’s ex-director. The Court agreed with the High Court that the ‘overriding power or control’ test was appropriate, but held that the taxpayer had not had the opportunity to present evidence relevant to the application of this test. The case was therefore remitted to the Board of Review in order for the necessary evidence to be adduced and for the Board to render a decision based on the application of the said test. In a High Court case which dealt with the issue of whether a financing arrangement was a tax avoidance scheme, the Court found that there was tax avoidance, but allowed the taxpayer’s appeal nonetheless as it disagreed with the approach taken by the Comptroller of Income Tax in which the dividend income was disregarded. The Court was of the view that the interest expenses incurred to finance the investments should have been disregarded instead. It is understood that both parties are appealing the judgment. In an Income Tax Board of Review case, the Board ruled that a payment for radio frequency spectrum for 3G mobile telecommunication services and 3G Facilities Based Operator licence made by a mobile telecommunications operator was capital in nature and therefore not deductible. In a separate case, the Board held that discounts and redemption premiums on bonds, where the amounts raised from the bond issues were used for financing renovation works carried out at the appellant’s hotel, re-financing existing borrowings, and working capital were not tax deductible.

David Sandison Singapore T: +65 6236 3388 E: [email protected]

PwC observation: The Court of Appeal case lays down the appropriate test for determining when losses arising from the misappropriation of funds should be deductible. The High Court case is of particular interest as it raises important issues pertaining to the proper interpretation and application of anti-avoidance provisions in the Singapore Income Tax Act, which have not previously been considered in Court. The two Board of Review cases would mainly be of interest to taxpayers with a similar fact pattern.

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On February 14, 2013 the government published, for comment by February 28, draft guidance (note that this is not legislation) on its new procurement policy with a view to its application to all contracts concluded after April 1 2013. The proposals will apply to all organisations in the UK and overseas likely to bid for contracts of value greater than the European Commission procurement threshold from central government (all central government departments, their executive agencies, and nondepartmental public bodies) and potentially any other public bodies including local government. Very broadly, the policy will require potential suppliers to central government to self-certify that, in their recent tax compliance history (it’s suggested this should cover the previous ten years), there has been no ‘occasion of ‘non-compliance’. Potential suppliers may therefore not be awarded government contracts if they are unable to self-certify.

2. any tax return is found to be incorrect because a scheme which the supplier was involved in, and which was, or should have been, notified under the Disclosure of Tax Avoidance Scheme (DOTAS) rules, has proved to have failed, or 3. the supplier’s tax affairs have given rise to a conviction for tax related offences or to a penalty for civil fraud or evasion. Where a return is amended, whether following the outcome of litigation or simply by agreement between HMRC and the taxpayer (by reason of GAAR, TAAR, etc.), that is also an ‘occasion of noncompliance’. Contractual documentation will: •

contain a standard clause enabling termination of the contract, at the Contracting Authority’s discretion, if a supplier has had an ‘occasion of non-compliance’, and

•

place an obligation on the supplier to keep the Contracting Authority notified of changes in relation to tax compliance. Failure to do this will also trigger remedies including, potentially, termination of the contract.

An ‘occasion of non-compliance’ is defined as an occasion where: 1. any tax return is found to be incorrect as a consequence of HM Revenue & Customs (HMRC) successfully taking action: • under the General Anti-Abuse Rule (GAAR) to be enacted in Finance Bill 2013 • under any targeted anti-avoidance rule (TAAR), or • under the ‘Halifax abuse’ principle.

David J Burn Manchester T: +44 161 247 4046 E: [email protected]

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United Kingdom Tax and government procurement rules

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PwC observation: PwC and many other organisations have made representations, and we hope that several changes will be made to the initial proposals before they come into force. We expect to see more clarity about the circumstances which will fall within the new policy, and we hope that the element of retrospection will be removed or significantly shortened.

Chloe Paterson London T: +44 207 213 8359 E: [email protected]

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Treaties Hong Kong The Hong Kong-Mexico DTT entered into force on March 7, 2013 The table below sets out the effective dates of the treaty in Hong Kong and Mexico respectively. Treaty Hong Kong-Mexico treaty Date of signing June 18, 2012 Date of entry into force March 7, 2013 Date of effect From April 1, 2014 in Hong Kong From January 1, 2014 in Mexico

PwC observation: While the Hong Kong-Mexico DTT may help in promoting a closer economic tie between Hong Kong and Mexico, one of the challenges ahead for taxpayers wishing to enjoy the benefits under the Hong Kong-Mexico DTT will be the interpretation and application of some of the less clearly defined provisions in the treaty. An example is how the anti-abuse provision in respect of the dividends, interest and royalties articles that targets at ‘back-to-back arrangement’ involving a conduit company should be applied in practice.

Fergus WT Wong Hong Kong T: +852 2289 5818 E: [email protected]

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Singapore Update on tax treaties In October 2012, Austria and Singapore exchanged notes amending the information that must be provided by the relevant competent authorities in an exchange of information request under Article 25 (Exchange of Information) of the treaty, and clarifying that the interpretation of that article 25 is in accordance with the internationally agreed Standard for the Exchange of Information (EOI). This Exchange of Notes has not been ratified and does not have the force of law. A second protocol to the treaty between Singapore and the United Kingdom (UK) was ratified and entered into force on December 27, 2012. It updates Article 5 (PE) of the treaty and lowers the WHT rates for dividends, interest, and royalties with effect from January 1, 2013. An agreement for information exchange between Singapore and Bermuda was also ratified and entered into force on December 6, 2012. It took effect from January 1, 2013 and is Singapore’s first stand-alone agreement for information exchange with any country. A second protocol to Singapore’s existing treaty with Vietnam was ratified and entered into force on January 11, 2013.

David Sandison Singapore T: +65 6236 3388 E: [email protected]

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United Kingdom Among other changes, it updates Article 5 (PE) of the treaty to include the establishment of a period test for the furnishing of services, inserts a most favoured nation clause for interest WHT, and lowers the royalty WHT rate from 15% to 10% for certain types of royalties. The limitation of relief article is removed and the exchange of information article is updated in line with the EOI. On February 6, 2013, Singapore signed a comprehensive treaty with Guernsey which incorporates the EOI. This treaty has not been ratified and does not have the force of law.

PwC observation: The protocols generally enhance the existing treaties and should facilitate economic exchange, trade and investment flows between Singapore and her respective treaty partners. The agreement for information exchange with Bermuda is a notable indication of both countries’ commitment to tax transparency and there is hope that this may pave the way for a similar agreement with the United States, with whom Singapore does not have a tax treaty. The removal of the limitation of relief article in the treaty with Vietnam is also an interesting development as that article is present in most of Singapore’s tax treaties.

New protocol to pending UK/China treaty A protocol to the pending 2011 China/UK DTA was signed on February 27, 2013. The protocol removes the words ‘and indirectly’ from subparagraph 2a) of Article 10 (dividends). The pending DTA was signed on June 27, 2011 but has not yet entered into force. The DTA and protocol will enter into force once ratification procedures have been completed in both countries and will have effect: •

•

in China, in respect of profit, income, and capital gains arising in any tax year beginning on or after January 1 in the calendar year next following that in which the DTA enters into force, and in the United Kingdom, • in respect of income tax and capital gains tax, for any year of assessment beginning on or after April 6 next following the date on which the DTA enters into force • in respect of corporation tax, for any financial year beginning on or after April 1 next following the date on which the DTA enters into force.

PwC observation: A key change in the new DTA from the existing DTA was a reduction in dividend WHT from 10% to 5% where the beneficial owner is a company which holds (directly or indirectly) at least 25% of the capital of the company paying the dividend. The change to be introduced by the protocol means that the beneficial owner of the dividends must now directly hold the capital of the company paying the dividend in order to benefit from the reduced WHT rate under the pending DTA.

David J Burn Manchester T: +44 161 247 4046 E: [email protected]

Chloe Paterson London T: +44 207 213 8359 E: [email protected]

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Treaties

Background The United States and Poland have signed a new income tax treaty replacing the 1974 income tax treaty. The 1974 treaty was one of the few remaining US income tax treaties that did not contain a limitation on benefits article (LOB) and accommodated international investment.

PwC observation: Taxpayers currently relying on the 1974 treaty should revisit their structures in order to determine whether they can meet the new LOB article and be prepared to revise impacted structures before the new treaty enters into effect. Taxpayers who are eligible for the benefits of the new treaty should be aware of the new WHT for interest and royalties.

In detail As expected, the new treaty, signed on February 13, 2013, includes a modern LOB article. Unlike other recent treaties, the new US-Poland treaty does not eliminate source state taxation on intercompany dividends, certain types of interest, or royalties. For withholding provisions, the treaty will be effective the first day of the second month following the date on which the treaty enters into force. For all other taxes, the treaty will be effective for taxable periods beginning on or after the first day of January of the next taxable year following the date on which the treaty enters into force. The treaty will enter into force on the date that Poland and the United States both have notified each other that they have complied with their applicable internal procedures. The treaty does not include a transition rule. Therefore, taxpayers presently entitled to treaty benefits may lose those benefits once the treaty’s provisions take effect.

Bernard E. Moens Washington, DC T: +1 202 414 4302 E: [email protected]

Steve Nauheim Washington, DC T: +1 202 414 1524 E: [email protected]

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United States New US-Poland treaty incorporates modern limitation on benefits article

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Susan J Conklin Washington, DC T: +1 202 312 7787 E: [email protected]

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Contact us For your global contact and more information on PwC’s international tax services, please contact: Anja Ellmer International tax services T: +49 69 9585 5378 E: [email protected]

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www.pwc.com/its PwC helps organisations and individuals create the value they’re looking for. We’re a network of firms in 158 countries with more than 180,000 people who are committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com. 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 do 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. © 2013 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. Design Services 28112 (03/13).