Dbriefs Bytes

24 May 2013

1. Case: Clifford Chance (India)
   • Special Bench of the Income Tax Appellate Tribunal
   • Article 7 (1) of the India / UK treaty: if the enterprise has a PE in the source country, then the source country is permitted to tax the profits which are "directly or indirectly attributable" to the PE
   • This approach differs from both the OECD model and the UN model
   • Article 7 (3) of India / UK treaty states how to calculate profits "indirectly attributable" to the PE: a proportion of the global profits, based on the PE's relative contribution
   • Facts in case
     • UK firm provided legal services in regard to several projects in India
     • Work performed in India and outside India
     • Accepted that UK law firm had a PE in India (due to regular visits by partners and employees)
   • Issue: in calculating the profits "directly or indirectly attributable" to the PE, do you include profits which relate to work done outside India?
   • Special Bench: "no"
   • Unclear aspect from case: do you aggregate "profits directly attributable to PE" and "profits indirectly attributable to PE"? If so, is there not then double counting?
   • For more information, email K.R. Sekar (Bangalore), C.A. Gupta (Mumbai), and Rohinton Sidhwa (Delhi)

2. Taiwan
   • Expected changes to be announced by Taiwan government (retrospective from 2011)
     • To obtain exemption from withholding tax on patent royalties, you will not need to register the patents in Taiwan
     • Exemption from withholding tax on knowhow royalties will be abolished
     • Exemption from withholding tax on technical service fees (during construction period) will be abolished - possibility of achieving an effective Taiwan tax rate of 3%
   • For more information, email Cheli Liaw (Taipei)

3. India
   • Guidance released on APA program
   • Criticisms
     • No rollback
     • If no Article 9 (2) in treaty, then no bilateral APA
     • Use of Indian TP rules vs. OECD principles
     • Safeguarding confidential information
     • Circular 165 will likely be applied by SAT to the dividends articles in other double tax treaties (and possibly also the interest and royalties articles)
   • For more information, email Anis Chakravarty (Mumbai) and Shanto Ghosh (Boston)

4. In brief
   • Thailand / Tajikistan treaty
   • China: record TP adjustment
   • India: increased TP adjustments
   • OECD: finalizes TP "safe harbor" guidance
   • BEPS: Google and Apple

17 May 2013 

1. Australia: Budget
   • Delivered on 14 May
   • Key changes
     1. Thin cap: "safe harbor" rules tightened
     2. Nexus test for interest deductions
     3. Taxation of gains made by non-residents on sales of shares in Australian land-rich companies
        • "Land" to be widened to include mining information and certain intangible assets
        • 10% non-final withholding tax

2. Exchange of information
   • Australia, UK, and U.S. tax authorities are working together to find assets hidden in Cayman Islands, BVI, Cook Islands, and Singapore
   • Singapore government will significantly strengthen its framework to allow information exchange
   • Australia / Switzerland initial new double tax treaty (which will allow ATO to identify Australians with Swiss bank accounts)

3. China: Circular 165 and Bulletin 19
   1. Circular 165
      • Relates to the "beneficial owner" condition in the dividends article in the China / Hong Kong double tax arrangement
      • Provides guidance on Circular 601 "negative factors" and the Bulletin 30 "listed company safe harbor"
      • Circular 165 will likely be applied by SAT to the dividends articles in other double tax treaties (and possibly also the interest and royalties articles)
   2. Bulletin 19
      • Relates to the issue of whether in-bound seconded employees cause an "establishment" (domestic law) or PE (treaty) for the foreign employer
      • "Real or substantive employer" principle is followed
      • First test: Does the overseas company take responsibility for the work performed by the employee and does it assess the employee's performance?
      • Second test: List of 5 factors
      • If the answer to the first test is "yes" and if at least one of the 5 factors in the second test is satisfied, then
        • Overseas company has an "establishment" in China (domestic law)
        • That establishment is a PE (for treaties), if maintained for a sufficiently long time period

4. Cases
   • India: Convergys case
     • Delhi Income Tax Appellate Tribunal
     • Indian subsidiary provides substantial support services to U.S. company
     • U.S. company held to have a PE in India (at the Indian subsidiary's premises), under Art. 5(1) of the India / U.S. treaty
     • Tribunal applied a 4 step methodology to calculate the profits attributable to the PE

5. In brief
   • Hong Kong / Qatar treaty signed
   • New Zealand: Budget

10 May 2013

1. Treaties
   1. Japan / UAE
      • Treaty signed on 2 May 2013
      • Dividends: (i) 5% (if shareholder is a company which has owned at least 10% of the voting shares for the 6 months prior to dividend); (ii) 10% otherwise
      • Interest: (i) 0% (if paid to a Government institution, including a sovereign wealth fund); (ii) 10% otherwise
      • Royalties: 10%
      • Japan's domestic tax law applies to a silent partner in a TK
      • "Main purpose" test, but no general LOB article
      • Treaty does not apply to exploration and exploitation of hydrocarbons
      • For more information: Jun Takahara (Tokyo)
   2. Treaties entering into force
      • Singapore / lsle of Man and Singapore / Jersey treaties recently entered into force
      • Their provisions will generally apply from 1 January 2014

2. BEPS: Australia's Issues Paper
   • Issues Paper published by Australian Treasury on 3 May 2013
   • Balanced and open-minded
   • Public comments requested by 31 May on 3 topics
     1. Should Australia care if tax is avoided in another country?
     2. Does "base erosion and profit shifting" exist in Australia?
     3. Should the key pressure areas identified by the OECD be the main priorities for action in the short term?
   • Treasury plans to publish its BEPS Scoping Paper in late June. The Scoping Paper will analyze a range of possible solutions to the BEPS issue
   • Australia will chair the G20 in 2014
   • For more information: Peter Madden (Sydney) and David Watkins (New York)

3. Cases
   1. India: KLM Royal Dutch Airlines
      • Delhi Income Tax Appellate Tribunal
      • Netherlands-resident company which operates aircraft in international traffic
      • Provides ground handling and technical services to other airlines at airports in India
      • Such services are covered by the by-laws of the International Airlines Technical Pool (IATP), of which KLM is a member
      • Tribunal held that the service fees are "profits from the participation in a pool", and are therefore "profits from the operation of aircraft in international traffic" for the purposes of Article 8 of the India / Netherlands treaty
      • Thus, Article 8 provides exemption from Indian tax, despite the existence of a PE in India
      • For more information: K.R. Sekar (Bangalore)
   2. India: Vodafone
      • In January 2012 decision in Vodafone case, India's Supreme Court articulated a new anti-avoidance doctrine: the "look at" approach
      • India's Solicitor-General on 9 May: the Government will likely seek to have the Vodafone case reviewed by a larger bench of the Supreme Court
      • For more information: K.R. Sekar (Bangalore)

4. In brief
   1. China: Circular 165 and Announcement 19
      • SAT has recently issued
        • Circular 165 (beneficial ownership for the purpose of obtaining lower dividend withholding tax rate under China's double tax arrangement with Hong Kong)
        • Announcement 19 (circumstances in which inbound secondment of employees could cause the foreign employer to have a PE in China)
        • For more information: Vicky Wang (Shanghai) and Ye Hong (Shanghai)
   2. India: Nokia
      • Nokia's $368 million withholding tax dispute (regarding payments for software used in mobile phones) looks set to be dealt with under the MAP procedures of the India / Finland treaty

3 May 2013

1. Australian Case: Resource Capital Fund
   • Decision of a single judge of the Federal Court
   • Two issues
     • Application of a double tax treaty to a partnership which is a hybrid entity
     • Application of the "land-rich company" rules in the Australian tax law
   • Taxpayer is a Cayman Islands limited partnership. More than 97% of the contributed capital is owned by U.S. resident partners
   • Partnership sold shares in an Australian gold-mining company and derived large capital gain
   • Under Australian tax law: the partnership is treated as a non-resident company
   • Under U.S. tax law: the partnership is fiscally transparent
   • Australian tax authorities issued tax assessment to partnership
   • Federal Court concluded that tax assessments should be issued to the partners, not the partnership
   • Federal Court's reasoning
     • OECD Commentary of Art. 1 (application of double tax treaties to partnerships) should apply in interpreting Australia / U.S. Treaty
     • Thus, the Australia / U.S. Treaty applies to the partners, not the partnership
     • That conclusion is different from the Australian domestic tax law (which views the taxpayer as the partnership)
     • Due to the paramount force of the Australia / U.S. Treaty, the relevant taxpayer is changed from the partnership to the partners
   • Australia's "land-rich company" rules do not apply, because the Australian gold-mining company was not sufficiently "land-rich" to be caught by the rules
   • The gold-mining company owned significant "non-land" assets, including
     • Cash
     • Working capital
     • Derivatives
     • Plant and equipment
     • Importantly: valuable mining information
     • Goodwill
     • Tax losses
   • For more information, email Peter Madden (Sydney) and David Watkins (New York)

2. Treaties
   1. Hong Kong / Guernsey
      • Signing completed on 22 April 2013
   2. Korea / Bahrain
      • Entered into force on 26 April 2013

3. India
   1. Narrowing of "tolerance band" for calculating arm's length range
      • Many countries use the interquartile range in applying the arm's length principle
      • In contrast, India uses the arithmetical mean, and then allows a "tolerance band" of 5%
      • India's approach generally causes a greater impact from the existence or omission of outliers
      • Indian Government announced on 15 April 2013 that the "tolerance band" will be narrowed to
        • 1% for "wholesale traders" (not defined)
        • 3% for all others
      • Effective for the 2012 - 2013 financial year
      • For more information, email Samir Gandhi (Mumbai) and Shanto Ghosh (Boston)
   2. Transfer pricing (TP) adjustment: subsidiary issues shares to parent at an undervalue
      • On 26 April, India's Finance Minister told Parliament that 27 Indian subsidiaries of foreign parents have received TP adjustments for issuing shares to their parents at an undervalue
      • Shell and Vodafone have recently commenced court challenges
      • For more information, email Samir Gandhi (Mumbai) and Shanto Ghosh (Boston)
   3. Finance Bill, 2013
      • Introduced into Parliament and passed by the lower house on 30 April 2013
      • Some changes made to the version published at the time of the Budget: for our Tax Alert on the changes, go to Amendments to the Finance Bill, 2013
      • Most significant change concerns the concessional interest withholding tax rate of 5%

4. OECD: Draft Handbook on Transfer Pricing Risk Assessment
   • On 30 April 2013, OECD released, for public comment, a draft handbook on transfer pricing risk assessment
   • Comments requested by Friday, 13 September 2013

5. In brief
   1. China
      • Circular 5: Interest on local government bonds exempt from income tax
      • For more information, email Vicky Wang (Shanghai)
   2. Indonesia
      • Tax incentives for oil, gas, and geothermal exploration
      • For more information, email Cindy Sukiman (Jakarta)

19 April 2013

1. India: Vanenburg Facilities case
   • Hyderabad Income Tax Appellate Tribunal
   • Dutch company sells 100% of the shares in an Indian company to a Singaporean company
   • Indian company owns and operates an industrial park in India
   • Issue: how to apply Article 13 of India / Netherlands treaty?
   • Article 13(4) (land-rich provision) does not apply, because of exclusion for immovable property in which the business of the company is carried on
   • Article 13(1) (immovable property situated in India)
     • "Immovable property" takes its meaning under Indian law
     • Tribunal: under the general meaning of "immovable property" under Indian law, shares in a company which owns immovable property are not included
     • Thus, Article 13(1) does not apply
   • Article 13(5) (residual provision): applies
   • Thus, Dutch company is exempt from Indian tax

2. India: Right Florists case
   • Kolkata Income Tax Appellate Tribunal
   • Were payments made to Google Ireland and Yahoo U.S., for online advertising, subject to Indian withholding tax?
   • Key facts
     • Online advertising operated by way of complex software and algorithms
     • No computer servers in India
   • Decision based on Indian domestic tax law
   • No "deemed source" in India, because the payments were not "fees for technical services" (which requires significant human involvement - not present here)
   • Was there an "actual source" in India?
   • Based on case law, there would be an "actual source" in India only if Google Ireland and Yahoo U.S. have a "permanent establishment" (PE) in India (in accordance with the double tax treaty meaning of "PE"
   • Applying OECD Commentary on Article 5
     • A website is not a PE
     • A server (located in the source country) can be a PE
   • Tribunal: OECD Commentary is generally relevant in interpreting a double tax treaty
   • But Indian Government has made a relevant reservation on the OECD Commentary: "a website may consitute a PE in certain circumstances"
   • Tribunal
     • A reservation, if relevant at all, is only relevant to treaties signed after the reservation was made
     • This reservation is "vague and ambiguous" and thus "cannot have any practical impact on a website being treated as a PE"
   • Thus, no "actual source" in India
   • Thus, payments were not subject to withholding tax

3. Australia: ATS Pacific case
   • Federal Court
   • Concerns an issue which is common to most VAT / GST systems in Asia Pacific
     • Service provider in country A provides a service directly to contractual party (X) in country B
     • Through one or more other contractual links, a benefit is obtained by another party in country A
     • Should the invoice issued to X be zero-rated or standard-rated?

4. China
   • China State Administration of Taxation (SAT) has published Circular 82, which describes a significant "Circular 698 / indirect share transfer" case
   • The case concerns Walmart's indirect share acquisition of a 65% interest in Trust-mart of China

5. Tax audits
   • Korea
     • Korea's National Tax Service (NTS) announced last week that large businesses should expect tougher tax audits
     • "Large business" = Sales of more than 50 billion won (US$44 million)
     • Duration of tax audits expected to increase to 6 - 8 months (from the current 3 - 4 months)
   • India: Excise duty for motor vehicle manufacturers
     • Tax authorities are investigating motor vehicle manufacturers to determine whether they are under-paying excise duty
     • Follows last year's Supreme Court case concerning Fiat

6. Indonesia
   • New regulation permits certain mining companies to use the current withholding tax rate for services payments, instead of the higher rate which is stated in their Production Sharing Contract or Contract of Work

12 April 2013

1. Treaties
   1. India / Malta
      • Signed: 8 April 2013
      • Interest: 10%
      • Royalties: 10%
      • "Short form" LOB rule
   2. Hong Kong / Mexico
      • In force: 7 March 2013
      • Effective: 1 January 2014 (Mexico) / 1 April 2014 (Hong Kong)
      • Very interesting provisions in protocol
        • OECD and UN Commentaries required to be used for interpretation
        • Art. 5(3) PE: aggregation of similar activities of associated companies
        • Double non-taxation due to differing classification of income: no treaty benefits

2. BEPS
   1. OECD working groups
      1. Source countries' jurisdiction to tax (incorporating CFC rules)
         • chaired by France
      2. Transfer pricing
         • chaired by Italy
      3. Countering base erosion (incorporating intragroup financial transactions, hybrids and anti-avoidance measures)
         • chaired by Denmark
   2. CFC rules vs. transfer pricing
      • Looming tussle between residence country taxation (CFC rules) vs. source country taxation (transfer pricing)
      • U.S. government officials argue in favor of stronger CFC rules

3. China: VAT pilot scheme
   • VAT pilot scheme will be expanded nationwide on 1 August 2013 and will be extended to more services
   • Government intends that the VAT reform will be completed by 2015
   • For information: contact Vicky Wang (Shanghai)

4. MAP/APA statistics
   1. OECD 2011 MAP report
      • Open MAP cases at the end of 2011
        • Germany: 702
        • US: 686
        • France: 539
      • On average, 25 months to complete an MAP case
   2. U.S. 2012 APA report
      • 103 bilateral APAs completed by U.S. in 2012
      • Over 50% with Japan

5. Japan
   1. Customs duty
      • Effective 1 April 2013, transaction value method cannot be used to set the customs value for goods imported by a non-resident importer
   2. Takeda Pharmaceutical Company
      • Takeda issues press release announcing its victory in a transfer pricing dispute with the Japanese tax authorities
      • Expects a refund of USD163 million of taxes and interest

6. Australia
   1. Draft legislation: investment manager regime
      • Draft legislation released on 4 April for public comments
      • Third and final element of investment manager regime
      • For Deloitte Tax Alert, click here
      • For information: contact Peter Madden (Sydney) or David Watkins (New York)
   2. Dividend withholding tax: ruling
      • Australia / UK treaty, Art. 10(2)(a): "holds directly" at least 10% of the voting power
      • Not satisfied by 100% parent, where the shares are registered in the name of a nominee

5 April 2013

1. India
   • Circular No.3 / 2013
     • In what circumstances would a contract R&D unit be accepted as bearing insignificant risk?
     • All of 5 conditions must be satisfied
       1. Foreign principal performs most of the significant functions involved in the R&D cycle
       2. Foreign principal provides the funds or capital and significant assets
       3. Indian contract R&D unit works under the direct supervision of foreign principal – which has the capability to, and actually does, control or supervise the R&D activities
       4. Indian contract R&D unit does not bear or control significant risks. Rebuttable presumption: Foreign principal located in a low or no tax jurisdiction does not control risks
       5. Indian contract R&D unit has no legal or economic ownership right in the outcome of the R&D effort
   • Circular No.2 / 2013
     • Relevant if you conclude that Indian contract R&D unit does bear economically significant risks
     • Should the profit split method be applied?
     • Depends on the availability, coverage and reliability of data
     • To apply the profit split method, you need information about the Indian entity and the foreign principal
     • Indian entity is expected to have the information or to have a “good and sufficient reason” for not having it
     • If you can’t apply the profit split method (due to unavailability of information), then you should seek to apply TNMM or CUP methods by:
       • Selecting comparables
       • Making "upward adjustments" for location savings and location specific advantages
   • Nokia
     • Tax demand to pay USD368 million by end of March
     • “Stay” order issued by Delhi High Court on 22 March

2. Australia
   • Discussion Paper on improving tax transparency
     • Rules would apply to corporate tax entities (companies, corporate limited partnerships, corporate unit trusts, and public trading trusts) with gross revenue of AUD100 million or more
     • Government will publish
       • Corporate tax entity’s name and Australian business number
       • Its gross revenue
       • Its taxable income
       • Its Australian income tax payable
     • No specific indication how a tax consolidated group will be treated
     • Effective income year commencing on 1 July 2013
     • Public comments requested by 24 April
     • For more information, email Peter Madden (Sydney), and David Watkins (New York)

3. Treaties
   • Mongolia / Italy
     • Recently entered into force
     • Will apply from 1 January 2013
     • Dividends: 5% (if at least 10% shareholding held for 12 months); 15% (otherwise)
     • Interest: 10%
     • Royalties: 5%
   • Japan / UK
     • Protocol agreed "in principle"
     • Lower interest and dividend witholding tax rates
     • Arbitration

4. Taiwan
   • Taiwanese Government considering two new rules
     • CFC Regime
     • “Place of effective management” test of corporate residence

22 March 2013

1. Japan: Earnings stripping rule
   • Earnings stripping rule will apply to income year commencing on or after 1 April 2013
   • Formula: "Net interest expense" > 50% of "adjusted income"
   • Excess "net interest expense" is non-deductible in current year, but is carried forward to next year (and the formula repeated in the next year)
   • Maximum carry forward: 7 years
   • "Net interest expense" means gross interest expense minus gross interest income
     • Only counting interest paid to or received from related parties
     • Treatment of guarantees
     • Interest subject to full Japanese income tax (and not just witholding tax) is excluded
     • Interest under repo transactions in excluded
   • "Adjusted income" = Taxable income + "Net interest expense" ± Other adjustments
   • Interaction with existing thin cap rule: whichever rule results in the greater amount of non-deductible interest will apply
   • Speculation: possible limitation on earnings stripping rule from Article 24(4) (non-discrimination) of relevant double tax treaties
   • For more information, email Jun Takahara (Tokyo), and Linda Ng (New York)

2. China
   • Guangdong case
     • Company A: profitable
     • Company B: tax losses
     • No transfer of tax losses or tax consolidation
     • B transfers business to A, generating capital gain or goodwill (sheltered by tax losses)
     • A claims deductions for goodwill amortization
     • Attacked by tax authorities
   • Shanxi case
     • French company sells shares in Chinese company to unrelated, non-resident buyer
     • Consideration is in the form of shares in buyer's parent company
     • Tax authorities assert that the assigned price was "too low", based on benchmarking of similar transactions
     • Tax authorities therefore deem a higher price, which causes a higher capital gain for French company
   • For more information, email Vicky Wang (Shanghai)

3. Treaties
   • Indonesia / Belarus treaty signed on 19 March
   • Singapore / Belarus treaty signed on 21 March
   • Mongolia / Luxembourg
     • Luxembourg Government confirms unilateral termination of the treaty by Mongolia

4. Base erosion and profit shifting (BEPS)
   • OECD is trying to manage expectation in regards to its BEPS action plan (due in June)
   • Pascal Saint-Amans
     • No "concrete guidance"
     • Merely "valuable sense of direction"