Global Tax Update, Issue 2
MULTINATIONAL
OECD Releases First BEPS Recommendations to G20 in Accordance with Action Plan
As a part of the OECD/G20 project to combat base erosion and profit shifting ("BEPS"), the OECD released the first set of reports and recommendations on September 16, 2014. These reports address seven of the actions described in the 15-point action plan to address BEPS published in July 2013.
UNITED STATES
Treasury Department and IRS Issue Long-Awaited Inversion Guidance
On September 22, 2014, the U.S. Treasury Department and the IRS issued long-awaited inversion guidance in the form of Notice 2014-52. The Notice sets forth rules that are generally effective for transactions completed on or after September 22, 2014, and will be included in regulations that will be issued in the future. The new rules address two aspects of inversion transactions. First, they increase the likelihood that the inversion ownership tests under section 7874 of the Internal Revenue Code will be met (the 60 percent and 80 percent tests). Second, they limit the tax benefits of certain types of post-inversion planning.
IRS Issues Guidance Regarding the Deductibility of Litigation Fees Incurred by Branded Pharmaceutical Companies When Defending Their Patents Against Challenges to Market Exclusivity by Generic Companies
There is welcome clarity for branded pharmaceutical companies seeking to deduct legal fees incurred in defending their patents against challenges to market exclusivity by generic companies. This clarity comes after a year of uncertainty arising from a negative opinion expressed by the IRS in a chief counsel memorandum in January 2013, which the IRS seems to have now reversed in a second CCM issued 20 months later.
UNITED KINGDOM
Follower Notices and Accelerated Payments
The UK Finance Act 2014, enacted in July 2014, contains new legislation to deal with cases of purported tax avoidance, which marks a radical departure from previous policy in this area.
SDLT and Property Investment Funds
The UK government has announced that it will be looking at whether any changes are needed to current stamp duty land tax rules to cater for two specific forms of collective investment scheme designed for investors in the UK market.
Further Reference to CJEU on Card Handling Charges
The First Tier Tax Tribunal has referred certain questions regarding the liability for VAT of card handling charges to the Court of Justice of the European Union ("CJEU") in the case of Bookit Ltd v The Commissioners For Her Majesty's Revenue & Customs.
THE NETHERLANDS
The Netherlands to Expand its Fiscal Unity Regime to Second-Tier Subsidiaries and Sister Companies Following EU Court of Justice Ruling
On June 12, 2014, the EU Court of Justice ruled in two joint cases that the Dutch fiscal unity regime infringes on the EU freedom of establishment, because it does not allow a fiscal unity between (i) a Dutch resident parent company and its second-tier Dutch resident subsidiary held through an EU resident intermediate company, or (ii) two Dutch resident sister companies held by the same EU shareholder.
Dutch Innovation Box Regime for Intangibles is Clarified in Decree
The Innovation Box was introduced in 2007 to encourage companies to innovate and increase their research and development activities. Under this optional regime, subject to certain conditions, Dutch corporate taxpayers are taxed at an effective rate of 5 percent. In the newly published Decree, the Underminister of Finance clarifies the scope of the Innovation Box, in particular addressing the types of qualifying intangibles and the level of involvement of the taxpayer required for the application of the regime.
SPAIN
ECJ Rules that Spanish Law on Inheritance and Gift Tax is Contrary to Community Law
The Court of Justice of the European Union handed down a ruling on September 3, 2014
(C-127/12, Commission/Spain), in which Spanish law on inheritance and gift tax (Impuesto sobre Sucesiones y Donaciones) is considered to restrict the free movement of capital since it involves differences in tax treatment between tax residents in Spain and nonresidents.
Parent–Subsidiary Directive
The Explanatory Memorandum to the Draft Law amending nonresident income tax points out that the main reason for the tax reform is to adapt it, to a greater extent, to the European Union regulatory framework. The draft law includes an anti-abuse clause, similar to the one currently in force, which prevents the application of the tax exemption in Spain on dividends paid when most of the voting rights of the European Union resident shareholder are held, directly or indirectly, by individuals or legal entities that do not reside in a European Union member state.
MEXICO
Tax Rules Included in the Mexican Energy Reform
On August 6, 2014, the Mexican Congress approved some of the secondary legislation related to the so-called Mexican Energy Reform. The approved laws were published in the Mexican Official Gazette on August 11, 2014. Among the approved secondary legislation is the Hydrocarbons Revenues Law, which includes: (i) special tax provisions for governmental and nongovernmental entities entering into agreements for the extraction and exploration of hydrocarbons; and (ii) a new hydrocarbons tax applicable to these entities.
Three New Tax Treaties Signed by Mexico Will Be Applicable from January 1, 2015
During 2014, three new tax treaties signed by Mexico with Peru, the United Arab Emirates, and Malta have been published in the Mexican Official Gazette. According to the tax treaties, their benefits will be applicable from January 1, 2015, bringing Mexico's tax treaty network to 59. Treaties with Costa Rica, Malaysia, and Nicaragua are currently being negotiated by the Mexican government, and the modifications to the 1994 Mexico–Belgium treaty are currently pending.
JAPAN
Tokyo District Court Allows Tax Saving from Share Repurchase
On May 9, 2014, the Tokyo District Court reversed a large tax that had been imposed on a large U.S. multinational's Japanese holding company.
Judgment of Tokyo District Court: Application of a General Anti-Avoidance Rule Concerning Reorganization Transactions
On March 18, 2014, the Tokyo District Court affirmed corporate tax assessments against two tax payers: Yahoo Japan Corporation, a Tokyo Stock Exchange listed company, and IDC Frontier Inc., a wholly owned subsidiary of Yahoo Japan. The main issue of the Yahoo Japan case was whether, upon a tax-qualified merger, the surviving company (Yahoo Japan) was entitled to utilize net operating losses of the acquired company pursuant to Article 57 of the Corporation Tax Act of Japan.
ITALY
Repeal of the Interest-Withholding Tax on Certain Cross-Border Loans
As a rule, if a nonresident lender grants a loan to an Italian resident borrower, the interest paid on the loan is subject to a 26 percent withholding tax in Italy unless the lender is eligible for the exemption under the Italian laws that implemented the EU Interest and Royalties Directive. The withholding tax may be reduced (usually to 10 percent) or, in very few cases, zeroed under the double tax treaties entered into by Italy, where applicable.
Withholding Tax Exemption on Bond Interest Broadened
Law Decree No. 91 of June 24, 2014, converted into law by the Italian Parliament on August 7, 2014, has broadened the scope of the withholding tax exemption applicable to eligible nonresident investors (i.e., investors resident in a white-listed country and with no permanent establishment in Italy) on certain debt-like securities.
GERMANY
New Developments for Real Property Transactions
On July 9, 2014, the German Supreme Fiscal Court decided a real estate transfer tax case that shines a new light on RETT structures. Contrary to the long-standing interpretation of the law, the court took the position that aspects of economic ownership are also relevant for RETT purposes.
FRANCE
Luxembourg–France Tax Treaty: Amendment Signed
On September 5, 2014, French Minister of Finance Michel Sapin and Luxembourgian Minister of Finance Pierre Gramegna signed an amendment to the France–Luxembourg Tax Treaty. The amendment, in line with the current OECD Model Tax Convention on Income and Capital, reverts to the tax treatment of capital gains arising on the direct and indirect disposal of real estate assets and puts an end to the potential double-tax exemption regularly applied until now regarding sale of real estate companies' shares.
CHINA
Draft Guidance for the General Anti-Avoidance Rule
On July 3, 2014, the State Administration of Taxation (the "SAT") released a discussion draft on the Administrative Measures on the General Anti-Avoidance Rule (the "Draft Measures). The General Anti-Avoidance Rule ("GAAR") was introduced in China Corporate Income Tax Law effective on January 1, 2008. However, the provision of law and subsequent interpretation tax circulars provide only some basic principles. The Draft Measures provide comprehensive guidance on the implementation of GAAR.
BELGIUM
Recharged Costs and Expenses of Stock Option Plans Not Tax Deductible for the Belgian Employer
On June 25, 2014, the Brussels Court of Appeal confirmed an earlier ruling (dating from 2010) from the Tribunal of First Instance. The tribunal had found that costs and expenses in connection with an international stock option plan recharged by a South African parent company to its Belgian subsidiary are not tax deductible by the latter to the extent a capital loss has been suffered on the shares that had to be acquired in order to be delivered to Belgian optionees following the exercise of their stock options.
No Corporate Income Tax on an Undervaluation of Shares Acquired by Belgian Holding Company
Following a very long and winding road in several courts, it has finally been confirmed that Belgium cannot impose corporate tax on any undervaluation of or underpayment for shares acquired by a Belgian corporate taxpayer. Thus, when a Belgian corporation buys shares at a price below fair market and subsequently sells those same shares at the higher market value, the capital gain so booked qualifies, in principle, for the participation exemption.
"Protectionist" French Excise Tax on Certain Types of Beer Complies with EU Law
On September 13, 2014, it was reported by the trade press that the European Commission had found that the increase by 160 percent of French excise tax on certain types of high-alcohol-content and luxury beers that was introduced on January 1, 2013 did not fall afoul of the free-market principles of the EU.
