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Worldwide Tax News

Approved Changes (4)

Australia

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Australia Publishes Local and Master File Guidance for 2018

The Australian Taxation Office has published Local file instructions 2018 and Local file/master file 2018 to provide guidance for taxpayers to comply with their reporting obligations.

Local File Instruction 2018

The Local file instructions 2018 set out the basic requirements for the submission of the Local file, which is comprised of three parts; short form, part A, and part B. The local file must be electronically lodged in the approved form (an XML file generated in accordance with an ATO developed XML schema). The local file is part of a combined form, which also contains the Master file. The local file may be lodged separately or together with the Master file.

Local File/Master File 2018

The Local file/master file 2018 guidance covers the general criteria for the submission of the short form Local file and the full Local file, as well as the required information to be included in the Local file and Master file, the exceptions and exclusions, and the detailed design.

Barbados

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Barbados Delays Introduction of New Upper Income Tax Band to August 2018

The Barbados Revenue Authority has announced that the Ministry of Finance, Economic Affairs and Investment has changed the effective date of the new upper income tax band (40%) from 1 July 2018 to 1 August 2018. With the new band, the individual income tax bands/rates are as follows:

  • up to BBD 25,000 – 0%
  • over BBD 25,000 up to 60,000 – 16%
  • over BBD 60,000 up to 75,000 – 33.5%
  • over BBD 75,000 – 40%

The new tax band was included as part of the Budgetary Proposal and Financial Statement 2018, delivered 11 June 2018 (previous coverage).

Singapore

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Singapore Publishes Updated Guidance Reflecting Increase in Additional Buyer's Stamp Duty and Additional Conveyance Duty

The Inland Revenue Authority of Singapore has published updated guidance on Additional Buyer's Stamp Duty (ABSD) and Additional Conveyance Duty (ACD) to reflect an adjustment of the rates effective 6 July 2018.

Additional Buyer's Stamp Duty (ABSD)

The ABSD rates are generally increased overall, including an increase in the rate for entities buying any residential property from 15% to 25%. In addition, housing developers are subject to an additional non-remittable ABSD rate of 5% upon stamping, i.e. aggregate ABSD rate of 30%.

A transitional remission may apply for residential properties acquired on or after 6 Jul 2018 such that the former ABSD rates, instead of the new ABSD rates will apply. For buyers to be eligible for the remission, all the following conditions must strictly be met:

  • The option to purchase (OTP) is granted on or before 5 Jul 2018;
  • The OTP is exercised on or before 26 Jul 2018 or the date of expiry of the OTP validity period, whichever is the earlier; and
  • The OTP is not varied (including any extension of the validity period) on or after 6 Jul 2018.

The OTP is considered exercised when the acceptance to OTP or sale and purchase agreement (whichever applicable) is executed, i.e., signed by the buyer.

Click the following link for the ABSD guidance page and an ABSD fact sheet on the changes.

Additional Conveyance Duty (ACD)

The ABSD rate component of the ACD rate for buyers of residential property-holding entities is increased from 15% to 30% effective 6 July 2018, resulting in a top ACD rate of 34%. The ACD was introduced effective 11 March 2017, including Buyer's Stamp Duty at a rate of 1% to 3% (depending on the value of underlying property) plus ABSD at a rate of 15%. From 20 February 2018, the Buyer's Stamp Duty component applies at a rate of 1% to 4%. The ACD rate for sellers remains unchanged at 12%.

Click the following link for the updated e-Tax guide reflecting the change – Stamp Duty: Additional Conveyance Duties on Property-Holding Entities (Third Edition).

United States

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U.S. Issues Final Anti-Inversion Regulations

On 12 July 2018, TD 9834 was published in the U.S. Federal Register, which contains the final anti-inversion regulations addressing transactions that are structured to avoid the purposes of sections 7874 and 367 of the Internal Revenue Code and certain post-inversion tax avoidance transactions. The regulations finalize the regulations first issued in April 2016. The final regulations are largely in line with the initial regulations, although some clarifications/modifications have been made.

Section 7874

Under section 7874, a new foreign parent of a domestic U.S. target will be considered as a surrogate foreign corporation if three tests are met:

  • The foreign acquiring corporation completes, after March 4, 2003, the direct or indirect acquisition of substantially all of the properties held directly or indirectly by a domestic corporation (domestic entity acquisition);
  • After the domestic entity acquisition, at least 60% of the stock (by vote or value) of the foreign acquiring corporation is held by former shareholders of the domestic corporation (former domestic entity shareholders) by reason of holding stock in the domestic corporation; and
  • After the domestic entity acquisition, the expanded affiliated group that includes the foreign acquiring corporation (EAG) does not have substantial business activities in the foreign country in which, or under the law of which, the foreign acquiring corporation is created or organized when compared to the total business activities of the EAG.

The final regulations published mainly concern the ownership test. Under this test, if there is a continuity of ownership by U.S. shareholders of 80% or more following an inversion, the surrogate foreign corporation is treated as a U.S. domestic corporation for tax purposes. If there is a continuity of ownership over 60% and less than 80%, the surrogate foreign corporation will be treated as foreign, but certain tax disadvantages apply.

Main Rules of the Final Regulations

The main rules of the final regulations are summarized as follows:

Passive Assets Rule

The passive assets rule excludes from the denominator of the ownership fraction, stock of the foreign acquiring corporation attributable to certain passive assets. In general, the rule applies with respect to a domestic entity acquisition if, on the completion date, more than 50% of the gross value of all foreign group property constitutes foreign group nonqualified property. In the final regulations, this rule only applies for purposes of determining the ownership percentage by value, given the potential administrative complexities of determining the ownership percentage by vote.

Serial Acquisition Rule

The serial acquisition rule excludes from the denominator of the ownership fraction, stock of the foreign acquiring corporation attributable to certain domestic entity acquisitions completed by the foreign acquiring corporation (or a predecessor) in the previous 36 months. This essentially results in a higher continuity of ownership percentage for a single acquisition and prevents a foreign corporation engaging in serial acquisitions from avoiding surrogate foreign corporation status.

Third-Country Rule

The third-country rule excludes stock of the foreign acquiring corporation from the denominator of the ownership fraction when a domestic entity acquisition is a third-country transaction, which occurs when three requirements are satisfied:

  • The foreign acquiring corporation must complete a covered foreign acquisition in a transaction related to the domestic entity acquisition, which is generally an acquisition by the foreign acquiring corporation of another foreign corporation, provided that an ownership continuity requirement is satisfied;
  • After all related transactions are complete, the foreign acquiring corporation must be a tax resident in a third country, which is, a foreign country other than the foreign country in which, before the foreign acquisition and any related transaction, the acquired foreign corporation was a tax resident; and
  • The ownership percentage, determined without regard to the third country rule, must be at least 60%.

Certain exceptions to the rule apply in the final regulations, including where the EAG has substantial business activities in the third country compared to the total business activities of the EAG. An exception also applies where (i) both the foreign acquiring corporation and the acquired foreign corporation are created or organized in a foreign country that does not impose corporate income tax, and (ii) neither the foreign acquiring corporation nor the acquired foreign corporation is a tax resident of any other foreign country. This exception is provided because the migration from one no-income-tax jurisdiction to another such jurisdiction is unlikely to be driven by tax planning, as the countries would generally be equally favorable from a tax perspective.

NOCD Rule

This rule provides that, for the purpose of determining the ownership percentage by value, former domestic entity shareholders or former domestic entity partners are deemed to receive, by reason of holding stock or an interest in the domestic entity, an amount of stock of the foreign acquiring corporation with a fair market value equal to the aggregate value of non-ordinary course distributions (NOCDs) made by the domestic entity. The final regulation includes a number of clarifications and modifications for the application of NOCD rule.

De Minimis Exception

Rules are provided for de minimis exceptions preventing the application of one or more of the disqualified stock rule (under section 7874), the passive assets rule, and the NOCD rule from causing section 7874 to apply to a domestic entity acquisition that, given minimal actual ownership continuity, largely resembles a cash purchase by the foreign acquiring corporation of the stock of (or interests in) the domestic entity. The exceptions are generally satisfied when each former domestic entity shareholder or former domestic entity partner owns less than 5% of the stock of each member of the EAG.

Applicability Dates

In general, the final regulations apply from the same date as the rules provided in the initial regulations issued in April 2016, although certain provisions predate the 2016 regulations and apply accordingly. However, differences between the final regulations and the 2016 regulations generally apply on a prospective basis from 12 July 2018, with an option for taxpayers to apply the differences retroactively.

Treaty Changes (6)

Algeria-Kenya-Oman-Swaziland-Thailand-OECD

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Algeria, Kenya, Oman, Swaziland, and Thailand Intend to Sign BEPS MLI

According to the latest update of the list of signatories, Algeria, Kenya, Oman, Swaziland, and Thailand have expressed their intent to sign the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI). Each country must sign the MLI and deposits their respective ratification instruments in order for the MLI to enter into force. The MLI will then generally apply for the respective notified covered agreements (tax treaties) of each country, provided that a particular agreement has also been notified as covered by the respective counterparty, and such counterparty has also deposited its MLI ratification instrument.

Canada

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Canada Announces Successful First Round of CbC Report Exchanges

On 10 July 2018, the Canada Revenue Agency published a release announcing Canada's first successful round of CbC report exchanges.

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The Honourable Diane Lebouthillier, Minister of National Revenue, today issued the following statement on Canada's successful first round of exchanges of Country-by-Country reports:

"I am pleased to announce today that Canada has successfully initiated its first round of exchanges of Country-by-Country reports.

With this important step, Canada joins our international partners, as one of 69 nations, in the first exchange of information on the revenue, profit, tax and accumulated earnings information of large multinational enterprises. Our participation in this global initiative will allow the Canada Revenue Agency to better understand these companies' worldwide operations, and help ensure compliance with Canada's tax laws.

Thanks to Country-by-Country reporting, Canada now has automatic access to more information and data that will allow the Canada Revenue Agency to better risk assess large multinational enterprises, those with an annual consolidated revenue of over 750 million euros, and to better target its efforts and resources.

Canada is committed to combatting tax evasion and aggressive tax avoidance, and to addressing Base Erosion and Profit Shifting that uses offshore structures and other types of aggressive tax avoidance. This is why we are playing a leadership role internationally, and have made historic investments in Budget 2016, 2017, and 2018 to prioritize obtaining better data and improving our use of it to target our actions.

Ensuring that Canada's tax system is fair to all Canadians is my top priority. To that end, the Canada Revenue Agency continues to build strong relationships with its international partners to enhance information sharing tools, such as the Country-by-Country reporting initiative and the recent creation of the Joint Chiefs of Global Tax Enforcement (J5). Aggressive tax avoidance is a global problem, which requires a collaborative global response, and that is exactly what we are working towards."

Georgia-OECD

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Georgia Government Approves BEPS MLI

On 5 July 2018, the Government of Georgia approved the bill for the ratification of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), which Georgia signed on 7 June 2017. Once approved by parliament, Georgia must deposit its ratification instrument to bring the MLI into force for its covered agreements (tax treaties).

The MLI will generally enter into force for a particular covered agreement on the first day of the month following a three-month period after both parties to the covered agreement have deposited their ratification instrument. Once in force, the provisions of the MLI will generally apply for a covered agreement from 1 January of the year following its entry into force in respect of withholding taxes, and for all other taxes with respect to taxable periods beginning on or after the expiration of a 6-month period following the date of entry into force.

Click the following link for Georgia's provisional list of reservations and notifications at the time of signature. A definitive list will be provided when the ratification instrument is deposited.

Kenya-Portugal

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Tax Treaty between Kenya and Portugal Signed

On 10 July 2018, officials from Kenya and Portugal signed an income tax treaty. 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.

Macao-Vietnam

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Update – Tax Treaty between Macau and Vietnam

The income tax treaty between Macau and Vietnam was signed on 16 April 2018. The treaty is the first of its kind between the two jurisdictions.

Taxes Covered

The treaty covers Macao complementary tax, professional tax, and property tax, and covers Vietnam personal income tax and business income tax.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services within a Contracting Party through employees or other engaged personnel for the same or connected project for a period or periods aggregating more than 183 days within any 12-month period.

Limited Force of Attraction Provision

Article 7 (Business Profits) includes a limited force of attraction provision whereby taxing rights are granted to a Contracting State on profits attributable to the sale of goods or merchandise or other business activities carried on in that Contracting State by a resident of the other State if the same or similar goods or merchandise or business activities are also sold or carried out by a PE maintained by that resident in the first-mentioned Contracting State. Relief from taxation is provided where an enterprise is able to demonstrate that the sales or business activities were carried out for reasons other than obtaining treaty benefits.

Withholding Tax Rates

  • Dividends - 10%
  • Interest - 10%
  • Royalties – 10%

Capital Gains

The following capital gains derived by a resident of one Contracting Party may be taxed by the other Party:

  • Gains from the alienation of immovable property situated in the other Party;
  • Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other Party;
  • Gains from the alienation of shares of the capital stock of a company, or of an interest in a partnership, trust or estate, the property of which consists directly or indirectly principally (greater than 50%) of immovable property situated in the other Party; and
  • Gains from the alienation of shares, other than the above, of not less than 15% of the entire shareholding of a company that is a resident of the other Party.

Gains from the alienation of other property by a resident of a Contracting Party may only be taxed by that Party.

Double Taxation Relief

Macao generally applies the exemption method for the elimination of double taxation, while Vietnam applies the credit method. However, Macao applies the credit method in respect of income that may be taxed in Vietnam in accordance with Articles 10 (Dividends), 11 (Interest), and 12 (Royalties).

A provision is also included for a tax sparing credit for tax that would have been payable in a Contracting Party for any year but for an exemption or reduction of tax granted by the application of the provisions of the law of that Contracting Party designed to extend tax incentives to promote foreign investment for development purpose. The provision will apply for a period of ten years beginning the date the treaty becomes effective.

A provision is also included that a credit for dividends will include the tax on the profits out of which the dividends are paid if the company receiving the dividends directly or indirectly controls at least 10% of the shares of the paying company.

Entry into Force and Effect

The treaty will enter into force once the ratification instruments are exchanged and will apply from 1 January of the year following its entry into force.

Ukraine-United States

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Ukraine Clarifies Acceptable Residence Certification for Reduced Withholding Tax Rates Under Tax Treaty with the U.S.

The Ukraine State Fiscal Service has published an individual tax consultation dated 25 June 2018 that clarifies the acceptable certification of residence for U.S residents to reduced withholding tax under the 1994 Ukraine-U.S. tax treaty. The letter notes that a Ukraine tax agent may directly apply reduced treaty rates on income paid to a non-resident, provided that the non-resident is the beneficial owner and has provided the agent certification of its residence in the country with which Ukraine has concluded the relevant treaty. Such certification must be issued by the competent authority specified in the relevant treaty and in accordance with that country's legislation and must be translated into Ukrainian.

To apply reduced withholding tax rates under the Ukraine-U.S. tax treaty, the only acceptable U.S. certification is a certificate of residency (Form 6166) issued by the Philadelphia Accounts Management Center, which must include the name of the taxpayer, the U.S. tax identification number, and the year for which the certification is issued. The original certificate is accepted by the Ukraine tax authorities without consular legalization or an apostille but must be accompanied by an official translation into Ukrainian.

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