We are pleased to share CTA’s December 2014 newsletter, below.
THE NETHERLANDS | BEPS Discussion draft: Preventing artificial avoidance of PE status UNITED KINGDOM | Recent UK tax announcements CYPRUS | Russian de-offshorisation laws
THE NETHERLANDS | BEPS DISCUSSION DRAFT: PREVENTING THE ARTIFICIAL AVOIDANCE OF PE STATUS by Guido van Asperen (Fisconti Tax Consulting) In the OECD BEPS Action 7 draft report, fundamental changes are introduced to the permanent establishment (PE) rules. I will discuss the following structures that the OECD proposes to challenge:
- Structures that has been set up as a commissionaire arrangements
- Structures that make use of the auxiliary PE exemption status
- Structures to split up contracts to avoid the construction PE status
Commissionaire arrangements Many MNC’s have set up commissionaire structures in the past in order to shift profit from local sales and distribution companies to a principal company in a more favorable tax jurisdiction. These local operations were often initially set up as ‘buy-sell’ company. Many multinationals changed the risk profile of these buys-sell operations by introducing a commissionaire structure, consequently reducing the remuneration of the local operations in favor of the principal. The “additional profit” of the principal party is in most situations not subject to tax in the country of the sales operation as a result of the wording of the PE article in the relevant bilateral tax treaty. This may be different in cases where the local sales and distribution company was changed into a regular agent. Nevertheless, implementing a commissionaire structure was a risky tax planning strategy since many tax authorities have challenged this and the outcome of the several court cases in different countries shows different outcomes (inter alia Zimmer – France, Roche – Spain) The OECD is now proposing to introduce new language that will try to abolish the distinction between the agent and commissionaire model in the OECD tax treaty model regarding the tax treatment of the principal. The OECD has provided 4 alternative formulations, which in essence creates a local PE of the principal if the local sales company is not performing its activities in the course of an independent business (and is an affiliated entity). The proposed formulations will introduce more subjectivity into the determination of whether a PE exist and seems to impact a wide range of arrangements (inter alia the Limited Risk Distributor). If a PE is recognized, the next question will be what profit needs to be allocated to this PE. This is a matter of applying the transfer pricing rules which is in many countries are derived from previous work of the OECD on this matter. Auxiliary PE exemption The current wording of the OECD bilateral tax model treaty leaves room for interpretation whether business activities can benefit from the PE exemption of article 5 paragraph 4. The OECD provides various options to counter abuse of the PE exemptions, including:
- All options mentioned in article 5 paragraph 4 should be subject to a preparatory or auxiliary condition
- Removing the term ‘delivery’ from subparagraphs a) and b), which prevents that for instance warehouses of Amazon cannot benefit from the PE exemption provided in these paragraphs
- Deleting the exception for ‘purchasing’ in paragraph d) which will restrict the possibility of (large) purchase and procurement companies of multinational companies to apply the PE exemption
- Counter the fragmentation of business activities by setting up separate legal entities in order to benefit from the PE exemption of subparagraph f. Splitting up the ‘value chain’ (inter alia purchase, storage, delivery etc.) and allocating these ‘auxiliary activities’ to separate affiliated legal entities will according to the proposed formulation no longer work.
Split up contracts In many tax treaties, construction and installation projects that last more than twelve months will result in a local PE. In order to avoid this PE status, taxpayers divided contracts up into several parts, each covering a period less than 12 months and attributed this work to several legal entities of the same international group. The OECD proposes two alternatives to counter these structures:
- Introducing an rule that also takes into account activities of affiliated companies at the same building site or construction project for the measurement of the twelve months’ period
Relying on the General Anti Abuse Provision as has been proposed in action 6 of the OECD BEPS project.
UNITED KINGDOM | RECENT UK TAX ANNOUNCEMENTS by Robert Newey The UK Chancellor of the Exchequer made a variety of tax announcements on 3 December 2014. Detailed draft legislation on some topics followed on 10 December 2014. Details of an earlier proposal (to tax non-residents on disposals of UK residential property) were also announced on 27 November 2014. The following announcements relating to international taxation may be of interest to members of the Corporate Tax Alliance. Corporate tax Diverted profits tax A new tax, to be known as the diverted profits tax, will be introduced from 1 April 2015. This will apply a 25% tax charge on “diverted profits” relating to UK activity. It will apply to companies that:
- define their activities to avoid creating a taxable presence (a permanent establishment) in the UK; or
- create a tax advantage by using transactions or entities that lack economic substance.
The first rule will come into effect if goods and services are supplied by a non-UK resident company to customers in the UK, provided that certain detailed conditions are met. However, this rule will not apply if the permanent establishment/foreign company are small or medium-sized enterprises or the sales revenues from all supplies of goods and services to customers in the UK are no more than £10 million in a 12-month accounting period. There will be a variety of detailed conditions. Country by country reporting Multinationals operating in the UK will be required to provide information regarding their economic activity, tax payments and profits in each jurisdiction to the UK tax authorities. This will implement an OECD initiative. Hybrid mismatches The UK government has launched a consultation on rules to prevent multinational companies avoiding tax through the use of certain international structures. The consultation will end on 11 February 2015. Personal tax Capital gains tax charge on disposals of UK residential property by non-residents In March 2014 the UK government confirmed its plans to introduce capital gains tax on future gains by non-residents disposing of UK residential property from April 2015. The government set out the framework for this extended tax charge on 27 November 2014. The charge will apply to disposals of UK residential property used or suitable for use as a dwelling, including property that is in the process of being constructed or adapted for such use. Communal accommodation will generally be excluded from charge, as will care homes and nursing homes. The charge will apply mainly to:
- non-resident individuals;
- non-resident trustees;
- personal representatives of a non-resident deceased person; and
- some non-resident companies disposing of UK residential property.
Disposals of UK residential property made by diversely held institutional investors will not be subject to the charge. Non-domiciliaries The remittance basis charge is payable by individuals who are resident but not domiciled in the UK and who wish to be taxed on overseas income and gains when they are remitted to the UK, rather than when they arise. There is no charge for using the remittance basis until the taxpayer has been resident in the UK for at least seven out of the last nine tax years. The charge for an individual who has been resident in the UK for at least seven out of the last nine tax years will remain unchanged at £30,000 per year. If an individual has been resident in the UK for 12 out of the last 14 years, the charge will increase from £50,000 per tax year to £60,000 per tax year. A third level of charge will be introduced for individuals who have been resident in the UK for 17 out of the last 20 tax years, set at £90,000 per tax year. It is not clear from the announcement whether these new charges will have effect from 6 April 2015 or from 6 April 2016.
CYPRUS | RUSSIAN DE-OFFSHORISATION LAWS by Aspen Trust Group Introduction The lower chamber of the Russian Parliament passed a new de-offshorisation law on the 18th of November 2014. For several months this law has been one of the main topics of discussion between the business community and the Ministry of Finance in Russia. The law’s main purpose is to prevent tax avoidance through the use of tax havens and low-tax jurisdictions by Russian tax residents. However, it also includes measures that affect foreign investors owning equities in, or receiving income from, Russian entities. The key developments in the de-offshorisation law include:
- Introduction of the concept of beneficial ownership for the purposes of applying double tax treaty (DTT) benefits
- A tax on indirect sales of immovable property in Russia
- Introduction of the concept for legal entities, based on place of management
- A regime for controlled foreign companies (CFC)
On the 25th of November Russia’s President, Mr. Vladimir Putin, signed the new law approved by the upper chamber of the Parliament intended to return Russian capital and assets from foreign tax shelters. The law is expected to be effective from the 1st of January 2015. Beneficial Ownership Foreign persons will no longer be able to access treaty benefits if:
- They have limited powers to dispose of the income or fulfil intermediary functions and do not perform any other duties or undertake any risks, OR
- The income is subsequently transferred, partially or in full, directly or indirectly, to another person who would not be entitled to treaty benefits if that person directly received the income from a source in Russia.
Beneficial ownership will be tested by tax agents and the tax authorities when granting treaty benefits. If the direct recipient of the income is not the beneficial owner, but a Russian tax agent is aware of the party acting as the real beneficial owner of the income, then:
- If the beneficial owner is a Russian resident, the tax agent should not withhold tax but should inform the tax authorities about the payment
- If the beneficial owner is a non-Russian resident, the agent must apply the DTT with a country where the beneficial owner is located subject to certain conditions. The method for identifying a beneficial owner in this case and which documents to provide to the Russian tax authorities to confirm this fact is unclear.
Changes Impacting Russian Real Estate Owners Foreign corporations, trusts, partnerships and funds which hold property subject to Russian corporate property tax are required to notify the Russian tax authorities of their shareholders (for corporations) and founders, beneficiaries and managers (for trusts, partnerships and funds). A penalty equal to 100% of the property tax may apply upon failure to provide the information. The indirect sale of Russian real estate through the sale of shares in a foreign entity directly or indirectly owning such property will now be taxable in Russia if assets of the entity consist of more than 50% of Russian real estate (owned directly or indirectly). Previously, only the sale of shares in a Russian company owning real estate was taxable. The Law includes a provision that would exempt income in the form of property transferred to a Russian company without consideration by a shareholder (participant) individual or a legal entity that has an equity interest exceeding 50%. Property received from a foreign company must pass an additional test to qualify for exemption under the Law. This means that the foreign company cannot be permanently resident in a jurisdiction blacklisted by the Ministry of Finance. The mechanism for collecting withholding tax on sales between two non-Russian entities not registered in Russia is currently unclear. For the full article, please visit www.corptax.org/publications