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Dbriefs Bytes brings you a weekly summary of the significant international tax developments impacting Asia Pacific. This video is broadcast every Friday afternoon. Stay tuned!
Latest Dbriefs Bytes
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24 May 2013
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?
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%
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)
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17 May 2013
Australia: Budget
Delivered on 14 May
Key changes
Thin cap: "safe harbor" rules tightened
Nexus test for interest deductions
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
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)
China: Circular 165 and Bulletin 19
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)
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
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
In brief
Hong Kong / Qatar treaty signed
New Zealand: Budget
10 May 2013
Treaties
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
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
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)
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
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
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
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
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
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?
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
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
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
Treaties
India / Malta
Signed: 8 April 2013
Interest: 10%
Royalties: 10%
"Short form" LOB rule
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
BEPS
OECD working groups
Source countries' jurisdiction to tax (incorporating CFC rules)
chaired by France
Transfer pricing
chaired by Italy
Countering base erosion (incorporating intragroup financial transactions, hybrids and anti-avoidance measures)
chaired by Denmark
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
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
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
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
Foreign principal performs most of the significant functions involved in the R&D cycle
Foreign principal provides the funds or capital and significant assets
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
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
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
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
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