Worldwide Tax News
The Australian Taxation Office has issued GSTR 2018/2 - Goods and services tax: supplies of goods connected with the indirect tax zone (Australia). For a supplier to be liable for goods and services tax (GST) on a taxable supply, one of the requirements is that the supply must be connected with Australia. For this purpose, GSTR 2018/2 explains, with examples, the different cases where a supply of goods is considered connected, including where the supply is wholly within Australia, from Australia, and to Australia. It also explains cases where a supply is disconnected.
GSTR 2018/2 generally applies from 19 September 2018 and replaces the previous ruling on the matter, GSTR 2000/31.
Canada's Ministry of Finance published on 17 September 2018 the draft Regulatory and Legislative Proposals Relating to the Taxation of Cannabis and Explanatory Notes. The legal sale of cannabis for non-medical purposes was approved in June 2018 with effect from 17 October 2018, although individual provinces/territories may dictate from when sales are allowed. The draft regulations and legislative proposals set out the related provision for taxation, including products and exclusions, the dutiable amounts, the rates, and penalties.
The European Commission has issued a notice to stakeholders dated 11 September 2018 on Withdrawal of the United Kingdom and EU rules in the Field of Value Added Tax. The notice covers issues of VAT payment and liability and VAT refunds, including specific advice to taxable persons for preparing for a withdrawal of the UK without a withdrawal agreement.
Peru Publishes Legislative Decrees on Implementation of GAAR, New Interest Restriction Rules, Definition of PE, and Other Changes
Peru has published Legislative Decree No. 1422 and Legislative Decree No. 1424, which include measures for the implementation of the General Anti-Avoidance Rule (GAAR), new thin capitalization and interest restriction rules, the definition of a permanent establishment, and other changes.
Decree No. 1422 includes measures for the implementation of Peru's GAAR, which was first introduced in 2012, but was generally suspended pending further regulations. The Decree provides that:
- The GAAR applies in relation to tax audits reviewing issues beginning from 19 July 2012;
- Where the tax authority (SUNAT) intends to apply the GAAR, the case must be submitted to a Review Committee that will notify the taxpayer of a hearing and must issue its opinion within 30 days of the hearing, which is binding for both SUNAT and the taxpayer;
- Legal representatives involved in with the design or implementation of the acts challenged with the GAAR are jointly liable for resulting tax debts; and
- Where a company has a board of directors, the board is responsible for approving an entity’s tax planning, with any tax planning implemented up to 14 September 2018 to be approved (or modified) by 29 March 2019.
The Decree is effective from 14 September 2018.
Decree No. 1424 expands the provisions regarding the taxation of gains from the indirect transfer of shares in a Peruvian entity to provide that a taxable indirect transfer will be deemed to occur if the amount of consideration paid for the shares of the non-resident entity corresponding to the Peruvian shares is equal to or higher than 40,000 tax units (Unidad Impositiva Tributaria - UIT). For this purpose, the fair market value of the shares is considered, which should be determined using the discount cash flow method or the net worth value based on audited balances.
For 2018, one tax unit is equal to PEN 4,150 (~USD 1,250).
With respect to thin capitalization, Decree No. 1424 provides that from 1 January 2019 to 31 December 2020, the thin capitalization rules (3:1 debt-equity) will apply in relation to both related and unrelated party debt (currently, just related).
From 1 January 2021, the thin capitalization rules will be replaced with a general restriction on the deduction of net interest expense exceeding 30% of EBITDA, with excess interest expense carried forward up to four years. An exception from the restriction is provided for financial and insurance institutions, taxpayers whose income in the fiscal years is less than or equal to 2,500 UIT, companies operating under public-private partnership projects, and interest on debt for public projects.
Decree No. 1424 provides for the introduction of a new definition of a permanent establishment, which includes:
- Any fixed place of business through which activities are totally or partially carried out, including places of management, branches, agencies, offices, factories, workshops, warehouses, stores, mines, oil and gas wells, quarries, or any other place, installation, or fixed or mobile structure used in the exploration, exploitation, or extraction of natural resources;
- A construction, installation, or assembly project, as well as related supervisory activities, if the duration is greater than 183 calendar days within any 12-month period, unless a shorter period has been established in an applicable tax treaty;
- The provision of services when performed in Peru for the same or a related project for a period or periods exceeding 183 calendar days within any 12-month period, unless a shorter period has been established in an applicable tax treaty; and
- When a person acts in Peru on behalf of a non-resident entity and routinely concludes contracts or plays the main role in the conclusion of contracts on behalf of the non-resident entity without substantial modification on the part of the non-resident entity.
In any case, it will not be considered a permanent establishment when the activity carried out is of a preparatory or auxiliary nature. An activity is considered preparatory or auxiliary when it is not an essential or significant part of the activities, unless the activities taken together with other activities carried out in Peru by a non-resident entity or related parties constitute complementary functions that form part of the operation of a cohesive business.
Further, it is provided that identical, substantially similar, or related activities carried out in Peru by related parties will be considered in determining if the 183-day period limit for a construction or service permanent establishment has been exceeded.
Lastly, it is provided that permanent establishment will not be deemed to exist when a person acting on behalf of a non-resident entity acts as an independent agent in the ordinary course of business, subject to certain conditions.
Decree No. 1424 introduces the possibility of an indirect foreign tax credit for dividend and other profit distribution income received by Peruvian entities in addition to the current direct credit. An indirect credit is available in respect of the income tax paid by a first-tier non-resident entity, provided that the Peruvian entity has held at least 10% of the shares of the non-resident entity for a period of at least 12 months before the date the dividends are paid. An indirect credit is also available in respect of the income tax paid by a second-tier non-resident entity provided that the 10%/12-month ownership conditions are met in respect of the second-tier entity and the second-tier entity is either resident of a jurisdiction that has an exchange of information agreement with Peru or is a resident of the same jurisdiction as the first-tier entity.
On 18 September 2018, Pakistan's new government submitted the Finance Supplementary (Amendment) Bill 2018 in parliament. One of the main measures of the bill is the amendment of the individual income tax brackets introduced as part of the Finance Act 2018, which would include replacing the top 15% rate with additional progressive rates of up to 25% or 29%, depending on the portion of taxable income that is salary income. The proposed brackets/rates are as follows, unless salary income exceeds 50% of taxable income:
- up to PKR 400,000 – 0%
- over PKR 400,000 up to 800,000 – PKR 1,000 minimum tax
- over PKR 800,000 up to 1.2 million – PKR 2,000 minimum tax
- over PKR 1.2 million up to 2.4 million – 5%
- over PKR 2.4 million up to 3.0 million – 15%
- over PKR 3.0 million to 4.0 million – 20%
- over PKR 4.0 million to 5.0 million – 25%
- over PKR 5.0 million – 29%
If a taxpayer's salary income exceeds 50% of taxable income, the following brackets/rates would apply:
- up to PKR 400,000 – 0%
- over PKR 400,000 up to 800,000 – PKR 1,000 minimum tax
- over PKR 800,000 up to 1.2 million – PKR 2,000 minimum tax
- over PKR 1.2 million up to 2.5 million – 5%
- over PKR 2.5 million up to 4.0 million – 15%
- over PKR 4.0 million to 8.0 million – 20%
- over PKR 8.0 million – 29%
Subject to approval, the changes are to apply with immediate effect.
The Online Sales Simplicity and Small Business Relief Act of 2018 (Bill H.R.6824) was introduced in the U.S. Congress on 13 September 2018 by Representatives Jim Sensenbrenner (R- WI), Anna Eshoo (D-CA), Jeff Duncan (R-SC), and Zoe Lofgren (D-CA). The relatively simple bill is meant to provide for the orderly implementation of state sales tax on online sales as a result of the 21 June 2018 decision of the Supreme Court in the case of South Dakota v. Wayfair Inc., which found that physical presence is not required for collection of sales taxes by states on online sales. The bill includes three main provisions:
- A State may not impose a sales tax collection duty on a remote seller for any sale that occurred prior to 21 June 2018;
- A State may impose a sales tax collection duty on a remote seller only for a sale that occurs after 1 January 2019; and
- In the case of a sale made by a small business remote seller, no State may impose a sales tax collection duty on any person other than the purchaser if the sale is made on or after 21 June 2018, and before the date that is 30 days after the date on which the States develop and Congress approves an interstate compact, applicable to the State and sale, governing the imposition of tax collection duties on remote sellers.
For the purpose of the third provision, the term "small business remote seller" means a remote seller with gross annual receipts in the United States during the preceding calendar year in an amount that is not more than USD 10 million.
The Luxembourg Ministry of Finance has announced that an income and capital tax treaty with Botswana was signed on 19 September 2018. The treaty is the first of its kind between the two countries and will enter into force after the ratification instruments are exchanged. Details of the treaty will be published once available.
The income tax treaty between China and the Republic of Congo was signed on 5 September 2018. The treaty is the first of its kind between the two countries.
The treaty covers Chinese individual income tax and enterprise income tax and covers Congolese individual income tax and company income tax.
- Dividends - 5% if the beneficial owner is a company directly holding at least 25% of the paying company's capital; otherwise 10%
- Interest - 10%
- Royalties – 5%
The following capital gains derived by a resident of one Contracting State may be taxed by the other State:
- Gains from the alienation of immovable property situated in the other State;
- Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State; and
- Gains from the alienation of shares deriving more than 50% of their value directly or indirectly from immovable property situated in the other State.
Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.
Both countries apply the credit method for the elimination of double taxation. In respect of dividends received by a Chinese company that owns at least 20% of the shares of the paying company, the credit will take into account the tax paid to Congo by the company paying the dividends in respect of its income.
Article 26 (Entitlement to Benefits) provides that a benefit under the treaty will not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the treaty.
The treaty will enter into force 30 days after the ratification instruments are exchanged and will apply from 1 January of the year following its entry into force.
The protocol to the 2002 income and capital tax treaty between Latvia and Switzerland entered into force on 3 September 2018. The protocol, signed 2 November 2016, is the first to amend the treaty and includes several BEPS-related provisions, as well as new withholding tax exemptions for dividends, interest, and royalties, and new exchange of information provisions. The main amendments made by the protocol include:
- The title and preamble of the treaty are replaced to introduce language developed under BEPS Action 6, including that the Contracting States have a common intention to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through evasion or avoidance;
- Article 10 (Dividends) is replaced to include:
- A withholding tax exemption if the beneficial owner is a company that has directly held at least 10% of the paying company's capital for at least one year before the payment; otherwise 15% (original 5% if holding at least 20%; otherwise 15%); and
- A withholding tax exemption if the beneficial owner is a pension fund or the central bank of the other State;
- Article 11 (Interest) is amended to include:
- A 0% withholding tax rate on interest paid by a company to another company that is the beneficial owner; otherwise 10% (original just 10%); and
- A withholding tax exemption if the beneficial owner is a pension fund or the interest is paid on a loan of any kind granted by a bank;
- Article 12 (Royalties) is amended to include a 0% withholding tax rate on royalties paid by a company to another company that is the beneficial owner; otherwise 5% (original 5% for the use of industrial, commercial or scientific equipment; otherwise 10%);
- Article 22A (Entitlement to Benefits) is added, which includes that a benefit of the treaty will not be granted if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be consistent with the object and purpose of the relevant provisions of the treaty;
- Article 23 (Elimination of Double Taxation) is amended in respect of Switzerland to clarify that Switzerland will only provide an exemption for gains from the sale of shares deriving value from immovable property (Article 13 (4)) if their actual taxation in Latvia is demonstrated;
- Article 25 (Mutual Agreement Procedure) is amended to include provisions for arbitration in cases where mutual agreement has not been reached within three years of a case being submitted;
- Article 26 (Exchange of Information) is replaced to bring it in line with the OECD standard for information exchange; and
- The final protocol to the treaty is amended to include the provision that if the holding period for the dividend withholding tax exemption is met after the dividend is paid, the beneficial owner may then request a refund of the tax withheld.
The protocol generally applies from 1 January 2019. However, the provisions added to Article 25 (Mutual Agreement Procedure) on arbitration apply from the date of the protocol's entry into force, with the three-year period for arbitration beginning from that date for pending cases.