Expert Guide - Tax

Expert Guide w w w. c o r p o r a te l i v e w i r e . c o m

Tax

Slaughter and May

PwC

Deloitte

September 2012

Ernst & Young

KPMG

Europe

Chief Executive Officer Osmaan Mahmood Managing Director Andrew Walsh Editor in Chief James Drakeford Publishing Division Jake Powers John Hart Art Director Adeel Lone Designer Ben Rogers Staff Writers Haider Ali Mark Johnson Ehan Kateb Rohini Makwana Contributing Organizations Bredin Prat ¦ Slaughter and May ¦ De Brauw Blackstone Westbroek ¦ Gray’s Inn Tax Chambers ¦ Apex Trust Company Ltd ¦ Malone & Co ¦ Maples and Calder ¦ McCann FitzGerald ¦ Vieira de Almeida ¦ PwC ¦ Schellenberg Wittmer ¦ H&P Trust Group ¦ Lenz & Staehelin ¦ Latham & Watkins ¦ Bilanz Data Wirtschaftstreuhand GmbH ¦ Eurofast Taxand ¦ ALRUD ¦ Cravath, Swaine & Moore ¦ Marjorie Rawls Roberts, P.C. ¦ Baker & Mckenzie ¦ Deloitte ¦ Amarchand & Mangaldas ¦ ALMT Legal ¦ MS&Co - KPMG ¦ Ernst & Young ¦ Cramer Salamian ¦ Mkono & Co ¦ Marketing Manager Sylvia Estrada Production Manager Sunil Kumar Account Managers Ibrahim Zulfqar Norman Lee Sarah Kent Steve Bevan Omar Sadik Competitions Manager Arun Salik Administration Manager Nafisa Safdar Accounts Assistant Jenny Hunter Editorial Enquiries Editor@corporatelivewire.com Advertising Enquiries advertising@corporatelivewire.com General Enquiries info@corporatelivewire.com Corporate LiveWire The Custard Factory Gibb Street Birmingham - B9 4AA United Kingdom Tel: +44 (0) 121 270 9468 Fax: +44 (0) 121 345 0834 www.corporatelivewire.com

6 - 9 Restrictions On Tax Deductions For Acquisition Financing 10 - 13

The Settlement Of Tax Disputes

14 - 15

Offshore: Tax, Morality & The

Future 16 - 19

Tax Planning & Investment

Opportunities In Ireland 20 - 23

Important New Irish Revenue

Guidance On Structured Finance Legislation 24 - 29

Ireland - The Domicile of Choice

For Structuring Distressed Asset Deals 30 - 33

Is Portugal Still An Interesting

Country For Investors To Look At? 34 - 37

The Portuguese Connection

38 - 41

Swiss Tax Authorities Issue New

Circular On Income Tax Treatment Of Swiss Resident Individuals Trading In Securities 42 - 43

Substance Over Form, How Does A

Corporate Services Provider Deal With This?

44 - 47

Asia

Exchange Of Tax Information 78 - 79

Vietnam Tax Developments

amend its business taxation system: new tax

80 - 83

India Budget 2012-

burdens for corporate minority holdings

Retrospective Amendments – Impact

48 - 51

Germany plans to further

Analysis 52 - 55

International

Tax

Planning 84 - 87

With An Austrian Company

Indian Tax Regime: Two

Recent Rulings 56 - 59

Cyprus Is Becoming The

Jurisdiction Of Choice For Intellectual

88 - 89

Property Rights 60 - 63

Middle East & Africa

Debt Financing Of Russian

Operations: Time To Re-Think

64 - 65

Dividend Tax Planning

Global

Snapshot - Tax Havens facts

90 - 93

Managing Tax Risk & Tax

Controversy In The Middle East 94 - 95

Swiss-UAE Treaty On Double

Taxation: A Game Changer

and figures

The Americas 66 - 69

96 - 97

The Transfer Pricing Regime In

Tanzania

Directories

The Model Intergovernmental

Agreement Under FATCA 70 - 73

Europe Directory

102

The Americas Directory

103

Asia Directory

104

Middle East & Africa

US Virgin Islands Business

Incentives 74 - 77

98 - 101

Mexican Anti-Abuse

Domestic Tax Provisions Within The Context Of Treaty Law

Corporate LiveWire The Custard Factory Gibb Street Birmingham B9 4AA United Kingdom Tel: +44 (0) 121 270 9468 Fax: +44 (0) 121 345 0834 www.corporatelivewire.com

Introduction

T

By James Drakeford

ax is rarely a laughing matter but that hasn’t stopped one of Britain’s most recognisable comedians finding him self at the centre of the tax landscape in 2012.

Ever since it was revealed back in June that Jimmy Carr has been using a tax avoidance scheme allowing him to pay as little as one per cent income tax – a whole furore has unravelled. Since then, HMRC have vowed a full-scale clampdown on the controversial Jersey system said to shelter £168 million from the exchequer.

There is a relationship between budget deficits and the health of the economy, but it is certainly not a perfect one. Over the last 20 years, corporate tax has increasingly been used as a weapon in the global battle to attract investment from footloose multinationals. Rates have come down from highs in the early 1980s to record lows. Yet again we expect to see continued jostling to use corporate tax as a tool to encourage investment along with offering a whole host of other incentives to bring in further much needed income.

The Treasury also sent a huge wake up call to the banks this year when they stunned the City by taking action to stop Barclays from using two schemes to avoid paying more than £500 million in tax.

When banks started to buy back their debt – such as bonds they had issued – after the financial crisis they were able to do so at prices lower than the debt had been issued at. This generated a profit.

While tax avoidance is not necessarily illegal, the Treasury introduced rules to make sure that banks paid corporation tax on these profits which could have further repercussions for other organisations within the industry.

This has been the case in the United Kingdom with the delivery of Chancellor George Osborne’s third Budget back in March. Corporation tax was already scheduled to drop in April from 26% to 25% but it was announced that there will now be further cuts to 24%, with plans to lower it even further in the next two years to 22%.

When it comes to world tax, one of the hottest topics for 2012 has been the ever growing budget deficits. As things stand, Portugal look unlikely to achieve its goal in order to meet its bailout conditions; Turkey is highly likely to miss its target of 1.5 per cent of national output this year as growth slows and tax revenues fall; and Poland will overshoot its annual target as the European Union’s biggest eastern economy slows to its weakest pace in three years amid the euro region’s debt crisis.

That goes without even mentioning the crippling financial affairs in Spain, Ireland and Greece.

4 - Expert Guide : Tax

While most countries have been chopping their corporate tax time and time again it has been a completely different story over in the United States. After decades of maintaining corporate tax rates, American businesses have a powerful incentive to hold foreign-earned profits abroad. The US has one of the world’s highest top marginal rates: federal and state levies add up to over 39 per cent and with the budget deficit likely to top $1 trillion dollars again this year, the Presidential election has given a significant amount of airtime to the debate on how to bring this figure down.

Both candidates say they want to cut the top rate, but differ in their treatment of foreign earnings.

Broadly speaking, Barrack Obama’s plans would levy a minimum tax on US overseas profits while Mitt Romney would cut taxes on those profits being brought into the country. Either way, change appears to be on the horizon.

Expert Guide : Tax - 5

Restrictions On Tax Deductions For Acquisition Financing By Sara Luder, Sébastien de Monès & Paul S

T

he UK has made great strides in reforming its corporate tax rules to make it competitive for UK based multinationals. Corporates are exempt from tax on dividend income and on gains arising on the sale of subsidiaries, but they are still, broadly speaking, entitled to claim an interest deduction in respect of acquisition debt.

The UK Government has considered whether it should restrict the right to an interest deduction on a number of occasions, but each time has decided against any such restriction. There are a number of specific anti-avoidance rules restricting interest deductibility, as well as the more general transfer pricing/thin cap rules and the “debt cap” regime (which looks at the leverage of the UK as compared to the worldwide group). The general principle, however, is that acquisition debt is deductible for tax purposes, even if it is funding the acquisition of assets that are unlikely ever to generate any UK taxable profits.

These rules have proved useful for highly-leveraged acquisitions, with the interest deduction on the acquisition debt being offset (by way of group relief) against the target company’s profits.

In some jurisdictions a general interest restriction has been introduced, with “excessive” interest being denied if the total interest deduction exceeds a certain percentage of taxable profits.

This type of rule could have an impact on acquisitions where the target companies are not generating profits taxable in the borrower’s jurisdiction.

Other jurisdictions have started to take a different approach. France has recently implemented a new rule to restrict the interest deduction on debt to fund the purchase of shares unless the French borrower can demonstrate that it or another Frenchbased group company is making the decisions in relation to such shares and the control of the relevant target companies.

6 - Expert Guide : Tax

Although primarily designed as an anti-abuse provision aimed at the artificial injection of debtfinancing into French subsidiaries of worldwide groups, its effect is much wider. Indeed, any French company that has acquired a shareholding since 2004 must now prove that the decision-making process relating to this shareholding is effectively carried out in France.

The concepts here are vague in nature, and it is yet to be seen what needs to be done in practice to prove that such decisions and control are being exercised in France. Is it enough to ensure that there is adequate local management and/or that group senior management based outside of France attend meetings in France at which crucial decisions are made? And how is all this going to be dealt with in practice by those who have been used to making strategic group wide decisions at board meetings or in investment committees? Draft guidelines look at organisational charts showing the decision-making process and evidence of active attendance at shareholders’ meetings or within management boards in France but international groups with centralised governance may struggle to show that a French acquirer has sufficient autonomy.

Where the restriction applies, for eight years following the acquisition the French borrower will have to add back to its taxable income a portion of its interest expenses calculated by applying the average debt financing cost of the acquiring entity to the acquisition price of the relevant shareholding. This can mean that interest is disallowed even if the acquisition had significant equity financing, and can result in the interest deduction being deferred to periods after the financing has been repaid.

Sleurink In January 2012, the Netherlands introduced a new rule that restricts the offset of acquisition funding costs against a Dutch target’s profits. The effect of this rule will, for example, mean that where such debt is incurred by a single-purpose Dutch holding company which will be part of the same fiscal unity as the Dutch target, the interest deduction will be restricted if and to the extent that (i) the acquisition-debt-to-purchase-price ratio exceeds an “acceptable” ratio, which is 60% in the first year, reduced by 5% annually over the course of seven years, down to a fixed percentage of 25% by year eight, and (ii) the annual amount of interest due on the acquisition debt exceeds €1 million.

The rule will affect private equity funds and also foreign corporate groups without existing Dutch operations that acquire Dutch operating companies. Another new rule (which comes into effect from 1 January 2013) was also adopted earlier this year that will restrict the deduction of interest due on loans that are attributed to foreign or domestic participations. The restriction applies to both related party and third party debt. Participations are deemed to be funded to the extent possible out of the parent’s equity; any excess is considered to be funded out of the company’s debt and the corresponding interest will be non-deductible. Participations are only taken into account in so far as the book value does not represent investments in business expansion of the subsidiary.

This is not an issue that is going to go away. Each country is clearly concerned about excessive debt being “dumped” in its jurisdiction simply to create tax shelters. The French and Dutch changes are interesting examples of how different jurisdictions are seeking to deal with this, but there is currently no common approach. EU member states will also be concerned that some of these proposals could end up being challenged successfully before the ECJ.

There is a significant EU issue here. One of the axiomatic freedoms of the EU is that of freedom of establishment. In other words, a company should be free to decide where in the EU it is to be based, and should not be penalised for that decision. Is a rule that restricts interest deductions by reference to “local” profits (so encouraging the group to build up its activities in that jurisdiction) or requires significant local presence contrary to that freedom?

Expert Guide : Tax - 7

Bredin Prat (France), De Brauw Blackstone Westbroek (the Netherlands) and Slaughter and May (UK) are three of the members of the Best Friends Network of independent law firms. The Best Friend firms regularly work together on an integrated basis to deliver innovative multinational tax advice.

Sara Luder is Head of the Slaughter and May tax practice and advises on most aspects of UK corporate taxation. She has extensive experience of the full range of corporate and financing transactions. She has also been involved in advising on disputes with HMRC. Sara is named as a leading individual in The Legal 500, Chambers UK, Chambers Global and Chambers Europe. She was awarded ‘Best in tax’ at IFLR’s ‘Euromoney LMG Europe Women in Business Law Awards 2012’.

Sara Luder can be contacted via email at sara.luder@slaughterandmay.com Sébastien de Monès is a partner at Bredin Prat specialising in French and international tax. He has developed a particular expertise on tax issues relating to French and crossborder mergers and acquisitions, real estate transactions (incl. SIIC regime) and private equity transactions. He also advises private clients on their personal tax situation. He is listed as a leading individual in The Legal 500 (201102012), World Trade Review (2012), Décideure Statégie Finance Droit (2011-2012).

Sébastien de Monès can be contacted via email at sdm@bredinprat.com

8 - Expert Guide : Tax

Paul Sleurink is a noted specialist in Dutch and international tax law, particularly in relation to corporate finance, capital markets and investment funds. His practice is strongly transaction driven, with a mixture of M&A, corporate restructuring and structured finance transactions. Chambers singles him out for his combination of “technical excellence with sound commercial understanding of the business, which helps when it comes to giving pragmatic and informed advice.”

Paul Sleurink can be contacted via email at paul. sleurink@debrauw.com

Expert Guide : Tax - 9

The Settlement Of Tax Disputes

T

ax disputes happen. This is an inevitable consequence of complex tax systems and complex fact matrices. The important thing is that they are either avoided – if possible – when tax advice is given, or, if they cannot be avoided, that they are resolved satisfactorily.

Tax barristers belong to that part of the UK legal profession who are specifically trained in dispute resolution. We have rights of audience in all courts and tribunals in England and Wales. To a greater or lesser extent we are all involved in litigation and other forms of dispute resolution. Even if we are primarily engaged in tax advisory work, the potential for a dispute to arise always informs our advice.

Tax disputes come in different shapes and sizes.

Recently, a member of Gray’s Inn Tax Chambers was instructed on behalf of HM Revenue & Customs in a case where a taxpayer had claimed a benefit under a tax treaty. The issue that arose was one that was relevant to many of the 3,000 or more tax treaties in operation around the world (the issue concerned the difference in a tax treaty between the phrase “liable to tax” and the phrase “subject to tax”). The member of chambers won the case, establishing a precedent which is likely to be studied in many countries around the world (see Weiser v HMRC [2012] UKFTT 501 (TC)).

The much-publicised Vodafone India case was heard in the Supreme Court in Delhi through much of the summer and autumn last year. One of the members of Gray’s Inn Tax Chambers was an expert for the successful taxpayer in that case, and attended most of the hearing to give his input to Counsel for the taxpayer.

10 - Expert Guide : Tax

By Philip Baker QC, Hui

Members of Gray’s Inn Tax Chambers are not only involved in disputes between taxpayers and tax authorities; it is not uncommon for tax-related disputes to arise between private bodies as well. Members of Gray’s Inn Tax Chambers may be called to assist in preparation for, and conduct of, any ensuing litigation. For instance, a tax deed may be entered into where one group of companies sells one or more companies to another group of companies, and this document may give rise to litigation which falls to be resolved in the civil courts. A member of Chambers won such a case in the High Court earlier this year.

Expertise in UK tax law (including international tax matters) and in the settlement of tax disputes are key roles of members of Gray’s Inn Tax Chambers.

In recent years, the types and nature of dispute resolution procedures has grown and changed. In terms of regular tax litigation, the old structure of General Commissioners, Special Commissioners and VAT Tribunals (with appeals from those tribunals being heard by the High Court) has been replaced by the Tax Chamber of the First-tier Tribunal (with appeals being heard by the Tax and Chancery Chamber of the Upper Tribunal).

Further appeals lead into the normal structure of the Court of Appeal and the Supreme Court (which has itself replaced the House of Lords as an appellate body). These tribunals and courts may make references to the Court of Justice of the European Union, and occasionally cases proceed beyond the Supreme Court to the European Court of Human Rights. Members of Gray’s Inn Tax Chambers have experience of appearing in cases before all of these courts, with a large number of appearances before the Supreme Court, Court of Justice, and Human Rights Court.

i Ling Mccarthy & Laurent Sykes A small number of commonwealth jurisdictions have retained appeals to the Judicial Committee of the Privy Council in London (which sits in the same building and with the same judges as the Supreme Court). Members of Gray’s Inn Tax Chambers have appeared frequently before the Judicial Committee.

Disputes that arise under a double taxation convention are subject to their own, rather peculiar and unique form of dispute resolution. This is referred to as “competent authority procedure”, “mutual agreement procedure” or “MAP”. It is unusual because the procedure is one of seeking agreement between the competent authorities of the two countries concerned: technically, the taxpayer is an outsider, merely supplying information and encouraging the two authorities to reach an acceptable agreement. In practice, some competent authorities allow much more involvement by the taxpayer than others. This is an area where there is a growing amount of experience acquired by members of Gray’s Inn Tax Chambers.

MAP will not always resolve a case where the two competent authorities are unable to reach agreement. In order to avoid that scenario, a development of the last two decades has been the introduction of arbitration, particularly with regard to transfer pricing disputes. This started in Europe with the Arbitration Convention, and was taken up by the OECD by including provision for arbitration in the Model Convention. So far, there have been few actual arbitrations. However, tax barristers have training for these types of disputes, and one member of Gray’s Inn Tax Chambers is a member of an arbitration panel to resolve disputes under tax treaties.

More generally, attention has been shifting in recent years towards the use of “alternative dispute resolution” or “ADR” in resolving disputes between taxpayers and the tax authorities.

Some large, international tax disputes (where many billions of pounds or dollars may be at stake) may not be particularly suited to be heard by local tax tribunals. Arbitration of these disputes has begun to appear as one form of ADR. These arbitrations have arisen under various international agreements, including bilateral investment conventions and the Energy Charter. Members of Gray’s Inn Tax Chambers have already had some involvement with these arbitration cases.

Another form of ADR which has been developing in the UK in the last two years is mediation. In essence, a third party who has not previously been involved with the dispute is brought in to facilitate negotiations between the parties with a view to reaching agreement without the need to go to the tribunal. Mediation differs from arbitration in that the mediator does not make binding decisions. In 2010, HM Revenue & Customs launched an initiative piloting the use of this form of ADR. The pilot has been run in two streams: one for large and complex disputes, the other for tax disputes involving small and medium enterprises. Both streams have resulted in a high proportion of cases selected for ADR being settled without recourse to litigation and in a cost efficient manner. Two members of Gray’s Inn Tax Chambers have been accredited as mediators by the Centre for Effective Dispute Resolution (CEDR).

Tax disputes are inevitable, and skilled advice is needed to resolve these disputes successfully. This is where the profession of tax barristers particularly come into their own and provides a need for the skills held by members of Gray’s Inn Tax Chambers.

Expert Guide : Tax - 11

Philip Baker is a barrister and QC practising from Grays Inn Tax Chambers. He was called to the bar in 1979, began practising in 1987 and took silk in 2002. He specialises in international tax issues, with a particular emphasis on double tax conventions, and on European Union law and taxation. He has a particular interest in the European Convention on Human Rights and taxation.

Before moving into practice, he taught law for seven years at the School of Oriental and African Studies, London University. He was subsequently a visiting professorial fellow at Queen Mary University of London, and is now a senior associate fellow of the Institute of Advanced Legal Studies, London University. He is the author of Double Taxation Conventions and International Tax Law and the editor of the International Tax Law Reports.

Laurent Sykes advises on business taxation at both the company and shareholder level. He has a special interest in the interplay between tax and accounting (and is a qualified chartered accountant as well as a barrister), and in the taxation of partnerships. He also advises extensively on employment tax matters. His private client practice is broad but has a particular focus on the tax treatment of non-UK domiciled individuals. Litigation is an important part of his work and has taken him to the Tax Tribunal, the High Court and the Court of Appeal.

12 - Expert Guide : Tax

Hui Ling McCarthy is a barrister and CEDR accredited mediator.

She specialises in VAT, CGT, business and corporate taxation and has a particular interest in cases raising avoidance / abuse of rights, human rights or accounting issues. She has an increasing presence in multimillion pound cases, most recently representing the pension trustees in Equity Trust Singapore Ltd before the Court of Appeal and acting for HMRC in one of the first SDLT avoidance schemes to proceed to litigation, Vardy Properties. Hui Ling was shortlisted as “Taxation’s Rising Star” in 2009 and was included in Tax Journal’s “Top 40 under 40” in 2011.

They can be reached at clerks@taxbar.com

Expert Guide : Tax - 13

Offshore: Tax, Morality & The Future By David Petit

T

he media had a field day over Jimmy Carr’s use of a tax scheme using an offshore jurisdiction and once again politicians have been quick to tap into the concern of the general public, this time linking tax avoidance, or should I should say tax mitigation, to issues regarding morality. This is dangerous ground of course; some may question the morality of using tax revenue in pursuing conflicts in the Middle East and Afghanistan, although those opposed to such policies are unlikely to be staunch supporters of offshore jurisdictions. However, the example illustrates that tax is not a question of morality.

The general public has little idea of the benefits that are provided to the UK economy by Jersey, Guernsey, Isle of Man and elsewhere and indeed such jurisdictions are actively encouraged to promote investment in the UK. It is unfortunate that the “K2” scheme used by Jimmy Carr has produced such potentially damaging publicity. Some independent financial advisors appear to have been discouraged from any planning which has an offshore element by recent developments working to clients’ disadvantage. So let us look impartially at the reality of the position.

It is often overlooked that offshore jurisdictions are neutral in the development of tax avoidance or mitigation planning. They are almost always the inventions of UK tax advisors and other UK based professionals. The offshore role is to hold assets either in trusts or companies or other structures. It is the UK based advisors who are seeking to mitigate the effect of or to defeat UK tax legislation.

In turn it is for HM Government to introduce legislation to restrict the effectiveness of such schemes, or to approve them as it sees fit. This is and has always been the position and the constantly developing and highly complex UK tax legislation demonstrates this to be the case. Take a look at the provisions of Part 7A of the Income Tax (Earnings and Pensions) Act 2003 introduced on 6 April 2011 aimed principally at employee benefits trusts.

14 - Expert Guide : Tax

On the other hand some legislation introduces tax incentives. For example the Finance Bill 2012 introduces provisions enabling non-doms to remit income to the UK tax free, under certain conditions. Offshore centres will facilitate that remittance.

The next step HM Government proposes is to introduce the general anti-avoidance rule (GAAR) which will no doubt impact upon future planning.

I am not aware of any offshore practitioner who considers HM Government’s approach to be in any way unfair.

So we should view tax legislation for what it is, simply a tool of government to raise revenue or to achieve a government policy. Tax is nothing to do with morality. Does the hostile approach of the media and politicians (publicly at least) and the introduction of GAAR mean that the days of offshore centres are coming to an end?

Certainly not. Here are some reasons.

1.

The so called “K2” scheme, operated out of Jersey, was described by the Prime Minister no less, as “legal”. It is not a scheme that I particularly like, for reasons which space does not allow me to elaborate, but HM Government’s position is that the scheme cannot be challenged on the grounds of illegality.

2.

GAAR will not render all planning ineffective. In particular, it has already been noted that some legislation provides tax incentives and these particular provisions are often best utilised using an offshore structure.

3.

Offshore centres continue to be used by major companies. Out of an infinite number of examples I would refer to the recent sale of 10% of the shares in Manchester United on the New York Stock Exchange. The shares have been issued by a Cayman Islands company.

It is not possible to challenge the international aspect of business. Offshore centres will always play a significant role in international planning.

4. The NewBuy home loan scheme introduced earlier this year not only has HM Government approval but relies upon a HM Government guarantee. Insurance to the lending institutions is provided by a Guernsey protected cell company which is managed by a Guernsey insurance management company. HM Government therefore approves of the use of Guernsey!

David Petit, a Jersey advocate and a member of STEP, is the Chairman of Apex Trust Company Ltd. In private practice he specialised in commercial law with particular focus on trust and company law.

David can be contacted by phone on +44 (0)1534 883605 or alternatively via email at david.petit@apextrustco.com

5.

A tax neutral base for an investment vehicle is necessary if it is to invest in the UK (or elsewhere). Western economies function only with investment and much of that comes f r o m offshore structures.

Some schemes – K2 perhaps - may not have a long term future but this does not mean that all aspects of offshore work should be avoided; after all it is acceptable for HM Government to be connected to a Guernsey based scheme.

If you are concerned about a piece of planning which involves an offshore jurisdiction then I would suggest that you look closely at the proposal to see if it is the planning itself which gives rise to the problem, it is rarely the fact that an offshore centre is being used which gives rise to an issue.

A carte blanche rejection of any work with an offshore involvement is really missing the point.

Expert Guide : Tax - 15

Tax Planning & Investment Opportunities In

T

he number of businesses locating in Ireland over the past decade has increased enormously with major multinationals basing their international operations here and foreign individuals starting their business – some helped by state aided international start-up funds to target investor ready overseas entrepreneurs – in Ireland.

Recent Tax Initiatives In our most recent Budget, a range of measures were maintained and introduced to help International Business such as: - The three year corporate tax exemption for new start up companies has been extended for the next three years which can help new companies setting up in Ireland earn profits of up to almost €1 million free of corporation tax - Our R&D tax credit regime has been improved, particularly for SME’s.

- A “Special Assignee Relief Programme” was introduced to attract key people to Ireland, encouraging the expansion of businesses and the creation of jobs.

- A Foreign Earnings Deduction was also announced for individuals who travel abroad developing markets for Ireland.

Recent Property Based Tax Initiatives To try and boost the crashed Irish property market, a number of measures were taken such as a relief from Capital Gains Tax for properties purchased after 6 December 2011 until the end of 2013. Where held for a period of at least seven years, the gain attributable to that seven year period will be exempt from Capital Gains Tax for both individuals and corporates in respect of both residential and commercial purchases.

16 - Expert Guide : Tax

Indeed since its announcement, we have worked with and advised a number of overseas investors who are of the opinion that this relief, along with current market prices and further reductions in stamp duty, now is the time to invest in Irish property.

There are a number of features of the Irish tax regime that have been, and remain, critically important for Ireland in attracting and retaining international investment. These include the following: Standard 12.5% tax rate for trading business profits.

There has been much discussion regarding Ireland’s 12.5% Corporation Tax rate in recent times, with endless articles and news discussions over whether Ireland will be able to keep the low rate now it has the EU / IMF bailout. Over the last number of weeks there has been renewed discussion as Ireland looks for more favourable interest rates on the EU / IMF loan. However in our most recent budget our Minister for finance reaffirmed the Irish Government’s commitment to this 12.5% rate.

A tax efficient Holding Company regime When properly structured, such companies may pay little or no Irish tax on income and gains derived from their investments. Some of the main features under this favourable tax regime are discussed:

Ireland By Damien Malone 1. Capital Gains Tax Exemption Subsidiaries – Irish Holding Companies benefit from a full participation exemption from Irish capital gains tax in respect of gains arising on the disposal of shares in certain subsidiary companies.

Shareholders (profit repatriation) – Non-Irish resident investors (individuals and corporates) are generally exempt from Irish tax on any gains derived on the sale shares in Irish companies.

Therefore in practice, it is possible for foreign investors to establish an Irish Holding Company to invest in domestic and global companies and subsequently dispose of both these investments and the Holding Company itself all free from Irish capital gains tax.

2. Dividend Income Irish subsidiaries – in general, dividends received by one Irish resident company from another Irish resident company are exempt from Irish tax. Such dividends are also received gross, exempt from any withholding tax.

Foreign subsidiaries – Ireland operates a credit system for providing relief for foreign tax suffered on dividend income. This unilateral credit relief is available for both foreign underlying and withholding tax suffered. The foreign tax credit is offset against any Irish tax payable on the income.

Where the foreign tax exceeds the Irish tax payable on the dividend income, these excess credits can be set-off against Irish tax payable on other dividend income streams or carried forward indefinitely. In practice, this credit system often significantly reduces or eliminates entirely any Irish tax payable by a Holding Company on dividend income received from foreign subsidiaries. This is particularly the case for foreign ‘trading’ dividends which are taxable at the standard 12.5% corporation tax rate.

Foreign ‘trading’ dividends – dividends received by an Irish Holding Company from a foreign company which were paid out of “trading profits” may be taxable at the standard 12.5% corporation tax rate. Where the dividend paying company is resident in a country with a higher tax rate than Ireland’s low 12.5% rate (which is generally the case), the availability of foreign tax credit relief for the Holding Company often means no Irish tax should be payable on the dividend income.

3. Dividend Payments (Profit Repatriation) Dividend Withholding Tax (DWT) – The general rule is that dividends paid by an Irish resident company are subject to DWT at the rate of 20%.

However, there are a number of exceptions to this general rule which provide exemptions from the imposition of DWT and therefore, in practice Irish Holding Companies are often exempt from Irish DWT in respect of dividends paid to their nonIrish resident shareholders.

4. Debt Financing In general, interest paid by an Irish Holding Company is not deductible for Irish tax purposes when arriving at taxable profits. However, where an Irish Holding Company borrows funds to acquire shares in, or lend money to, a third party company or certain related companies, interest paid on such loans may qualify for relief. The availability of this relief is very much dependant the exact facts of each case but once qualified for this relief can provide a very tax efficient funding option.

5. Interest Free Loans The limited Irish Transfer Pricing rules do not apply to most Irish Holding Companies, therefore such companies may be able to lend money (borrowed or otherwise) interest free without adverse Irish tax implications.

Expert Guide : Tax - 17

Attractive R&D regime and Intellectual Property structures It has always been recognised that encouraging innovation is an important strategic objective for improving Ireland’s competitiveness by developing a knowledge economy. Our government often markets the advantages that Ireland has to offer in this area. These advantages include a highly skilled and educated workforce, a strong technical infrastructure, significant grant incentives from domestic and EU funds and an R&D tax credit regime. Also, the introduction of generous tax allowances for intellectual property transferred to Ireland has further bolstered Ireland’s status as a favourable location for tax planning.

Finally, other factors such as no thin capitalisation or controlled foreign corporation provisions, an extensive tax treaty network and generally no outbound withholding taxes provisions further add to the attractiveness of Ireland as a holding company location.

In Summary When considering an international tax planning initiative, the use of Ireland is a key component.

Ireland has consistently and continually let it be known on the international stage that it will steadfastly maintain low tax rates for international investors. Also, the OECD has also publicly backed the current Irish tax regime on many occasions and this highlights the stability of the Irish tax system which should give comfort to those looking to invest in Ireland.

18 - Expert Guide : Tax

About Us Our firm have assisted many overseas businesses and individuals set up their operations in Ireland by providing advice on all business, taxation and financial matters as well as providing Accountancy/Audit & full support services. We promote ourselves by offering a cost effective solution to setting up in Ireland and by offering a more personalised and complete option to all Irish compliance needs and requirements.

For further information or assistance on any aspect of doing business or investing in Ireland, please contact Damien Malone.

Damien Malone can be contacted by phone on +353 87 685 9474 or alternatively via email at info@maloneaccountants.ie

Expert Guide : Tax - 19

Important New Irish Revenue Guidance On Structured Finance Legislation By Andrew Quinn & Willia

B

ackground

Recent legislation, in particular the Irish Finance Act 2011, has introduced significant amendments to the Irish section 110 or structured finance regime. In April 2012, following consultation with industry practitioners, Irish Revenue published guidance on the application and interpretation of these provisions. This note summarises the current position and outlines how the Irish structured finance regime continues to be attractive for international debt capital markets, structured finance and investment funds transactions.

Although initially aimed at securitisations, since its inception over 20 years ago the regime has been used in a range of financial transactions including CLOs, re-packaging and investment platforms. In the latter case, a section 110 company would typically be held by an Irish or Cayman investment fund and used to hold international investments in an efficient manner.

The guidance confirms Irish Revenue’s view on a number of important points, including: (i) the range of commodities which will be eligible for use in an Irish section 110 company; (ii) the ability to continue to utilise a section 110 company in structures with Irish regulated funds (such as Qualifying Investor Funds (“QIFs”)) and non-Irish funds (e.g. Cayman funds); (iii) the circumstances in which profit dependent payments will be deductible under the “subject to tax” test, thus securing the tax neutrality of the section 110 company; and (iv) the practical approach taken towards identifying specified persons, in respect of whom profit dependent payments may be non-deductible.

Irish Structured Finance Vehicles The Irish structured finance regime, commonly known as the section 110 regime by reference to the relevant provisions of the Irish Taxes Consolidation Act 1997, effectively provides for tax neutral Irish special purpose companies.

20 - Expert Guide : Tax

To benefit from the section 110 regime, the company must satisfy a number of conditions. It must be resident in Ireland for tax purposes and must acquire, hold or manage qualifying assets or have entered into arrangements, such as loans or derivative transactions, which themselves constitute qualifying assets. The market value of the qualifying assets must be at least €10 million on the day they are first held, acquired or entered into.

The taxable profits of a section 110 company are subject to tax at 25%, but are calculated as if it was an Irish trading company. Importantly, provided it is appropriately structured, the section 110 company can claim a deduction for interest and distributions on securities which it issues, including profit-participating interest and distributions.

Consequently, there should be no significant taxable profits remaining in the company.

am Fogarty Finance Act 2011 introduced a number of changes to the regime including: (i) an extension of the range of assets which a section 110 company can invest in, to include commodities, plant and machinery (such as aircraft) and carbon offsets; and (ii) a potential restriction on the deductibility of profit dependent payments under securities and certain forms of swap arrangements (known as return agreements).

Non-Deductible Payments The restrictions on the deductibility of profit dependent payments under securities and return agreements attracted significant comment at the time the legislation was introduced. Such profit dependent payments are non-deductible unless they fall within one of the following excepted cases: (i) a payment to an Irish resident person or, a person who is otherwise within the charge to Irish corporation tax in respect of that payment; (ii) a payment which satisfies a “subject to tax” test in another EU member state or a jurisdiction with which Ireland has signed a double taxation agreement (a “Relevant Territory”); (iii) a payment to a tax exempt entity (such as a pension fund) resident in a Relevant Territory.

This tax exempt entity must not be a “specified person”. This term includes a company which controls the section 110 company, and a person, or persons connected with each other, from whom the section 110 company has acquired more than 75% of its assets by value; or (iv) a payment in respect of securities which qualify as quoted Eurobonds or wholesale debt instruments provided the recipient of the interest is not a “specified person”.

Irish Qualifying Investor Fund and Cayman Fund Structures Section 110 companies are increasingly used in conjunction with Irish QIFs for a variety of structuring purposes, such as to facilitate access to tax treaties or bond offerings. A QIF may be constituted as an Irish limited partnership, a unit trust or a corporate entity. The guidance has confirmed that Revenue will regard all such forms of QIF as a “person” resident in Ireland which means that payments to such entities will continue to be tax deductible for the section 110 company.

Subject to Tax Test The Revenue guidance on the “subject to tax” test illustrates the limited scope of the new restrictions.

It should be possible to satisfy the test, where necessary, in many cases.

Revenue has confirmed that the tax status of the payment needs to be investigated only on the date the company enters into the transaction under which the payment is made. Subsequent changes to the tax rules of a Relevant Territory should not be taken into account in considering whether the test is satisfied.

The subject to tax test is judged by reference to the taxation of the payment, not the recipient. Payments to tax transparent vehicles, such as partnerships, or to disregarded entities (e.g. US “check the box” entities or CFCs, which have taxable investors, may still satisfy the subject to tax test and therefore remain deductible.

Even where a non-transparent recipient of the payment is not taxable, for example a Cayman resident company, the subject to tax test will also be satisfied where the structure provides for the immediate transmission (as defined) of the funds to taxable investors.

Expert Guide : Tax - 21

A payment will also satisfy the subject to tax test in such circumstances where the ultimate investor is a qualifying tax exempt entity in a Relevant Territory.

Quoted Eurobond and Specified Persons Tests Eurobonds are the subject of a specific exemption from the new provisions affecting deductibility.

Under the terms of the legislation, deductions in respect of payments on quoted Eurobonds will only be restricted in the following circumstances: (i) the section 110 company is aware, at the time the notes were issued, that such payments would not satisfy the “subject to tax” test; and (ii) the payment is made to a person who is a specified person.

In a significant capital markets transaction, where quoted Eurobonds may be sold and transferred without reference to the issuer, the first limb above (i) will typically not be satisfied, so full deductibility is available.

Where the Eurobond issuer has material information regarding the tax status of the payments at the time of issuance, the concept of a specified person becomes relevant. Revenue have helpfully confirmed that they do not require a section 110 company, in investigating whether a specified person holds the Eurobonds, to pursue information which, in good faith, is neither: already within its possession or awareness, nor relevant to the more straightforward methods of construing control by reference to shareholder or director control.

Andrew Quinn is Head of Tax at Maples and Calder.

He is an acknowledged leader in Irish and international tax and advises companies, investment funds, banks and family offices on Ireland’s international tax offerings.

Prior to joining Maples and Calder, Andrew was a senior partner with a large Irish law firm and before that a tax consultant with Ernst & Young. He is recommended by a number of directories including Chambers, Legal 500, PLC Which Lawyer?, Who’s Who Legal, World Tax and the Tax Directors Handbook. Andrew has also been endorsed in Practical Law Company’s Tax on Transactions multi-jurisdictional guide.

Andrew is a law graduate of University College Dublin and an associate of the Irish Taxation Institute.

Andrew Quinn can be contacted by phone on +353 1 619 2038 or alternatively via email at andrew.quinn@maplesandcalder.com William Fogarty is a Senior Tax Associate with Maples and Calder with extensive cross-border experience in corporate and finance transactions. He has particular experience in private equity, investment funds and banking transactions.

William joined Maples and Calder in 2011. Previously, he was a senior tax associate with Linklaters LLP in their London office.

He has also worked in Macfarlanes LLP and a large Irish corporate law firm.

William is a graduate of Trinity College Dublin and University of Cambridge. He is an associate of the Irish Taxation Institute.

William Fogarty can be contacted by phone on +353 1 619 2730 or alternatively via email at william.fogarty@maplesandcalder.com

22- -Expert ExpertGuide Guide: :Energy Tax & Natural Resources 24

Expert Guide : Tax- -2523 Expert Guide : Energy & Natural Resources

Ireland - The Domicile of Choice For Structur Distressed Asset Deals By Eleanor MacDonagh, Fergus Gillen &

S

ince 2008, US private equity funds, among other investors, have been seeking to invest in distressed debt portfolios in Ireland and elsewhere. In the past 10 months in Ireland, however, there has been a marked increase in the number of deals completing. Interesting trends are emerging in connection with the structures explored and employed for the purposes of housing the target assets in such transactions, demonstrating Ireland’s continued position as a domicile of choice for special purpose vehicles in structured finance transactions, whether target assets are located in Ireland or abroad. The most popular structure to date in these transactions has been the establishment of a qualifying company within the meaning of section 110 of the Taxes Consolidation Act 1997 of Ireland, as amended (a ‘Qualifying Company’) in order to acquire the target assets. Another Irish domiciled vehicle that is sometimes considered for this purpose (and often in addition to a Qualifying Company) is a Qualifying Investor Fund (‘QIF’).

A summary of the key features relating to each vehicle, from an Irish tax perspective, is provided below.

Taxation of Qualifying Companies Qualifying Companies are companies that are designated as such solely because they meet certain conditions outlined in Ireland’s tax laws (see below), so as to be capable of enjoying tax-neutrality in Ireland. Qualifying Companies can access Ireland’s extensive network of double taxation agreements and are not subject to regulation by the Central Bank of Ireland.

Section 110 provides for a special tax regime for a ‘Qualifying Company’. A ‘Qualifying Company’ is a company that meets the following conditions whereby: (a) it is resident in Ireland;

24 - Expert Guide : Tax

(b) it acquires qualifying assets from a person, holds or manages qualifying assets as a result of an arrangement with another person or has entered into a legally enforceable arrangement with another person which itself constitutes a qualifying asset; (c) it carries on in Ireland a business of holding qualifying assets or managing qualifying assets, or both; (d) apart from activities ancillary to that business, it carries on no other activities; (e) in relation to which the market value of qualifying assets held or managed by the company or the market value of qualifying assets in respect of which the company has entered into legally enforceable arrangements is not less than €10,000,000 on the day on which the qualifying assets are first acquired, first held, or a legally enforceable arrangement in respect of the qualifying assets is entered into (which is itself a qualifying asset); and (f) it has notified the Revenue Commissioners in the prescribed format that it is, or intends to be, a Qualifying Company. Also, a company is not a Qualifying Company if any transaction is carried out by it otherwise than by way of a bargain made at arms’ length, apart from where that transaction is the payment of consideration for the use of principal that meets certain conditions. A ‘qualifying asset’, in relation to a Qualifying Company, means an asset which consists of, or of an interest in, (1) any financial asset (e.g. loans and other debt obligations), (2) plant and machinery or (3) commodities.

ring Mark White Tax on Profits Where a company meets the conditions to be a Qualifying Company, expenses that are wholly and exclusively incurred in the course of the company’s business are generally deductible in calculating the company’s taxable profits. Also, provided that interest payments meet certain conditions, such interest payments will be tax-deductible even if the interest is profit-participating, in excess of an arms’ length rate or both (i.e. profit-strip interest). Accordingly, transactions can be structured to be tax-neutral for a Qualifying Company, and transactions involving the investment by investors in distressed debt portfolios can be facilitated on a tax-efficient basis by using a Qualifying Company. In such transactions the Qualifying Company issues debt securities to investors and uses the subscription proceeds raised by the issue of those securities to acquire the target assets. The Qualifying Company can then make payments of interest on those debt securities to investors (or accrue for liabilities to make such payments in the future) out of net income so that negligible profits arise and therefore negligible corporation tax is payable.

Withholding Tax Payments by borrowers to a Qualifying Company may be made without any obligation to deduct an amount on account of Irish tax, while, in relation to foreign taxes, if applicable, the Qualifying Company can access Ireland’s extensive and expanding network of double tax treaties to reduce or eliminate such taxes. In relation to the payment of interest by a Qualifying Company on securities issued, a number of exemptions from Irish withholding tax are available.

These include a ‘quoted eurobond’ exemption for securities which are listed on a recognised stock exchange and a separate exemption in respect of payments to persons resident in European Union Member States (other than Ireland) or countries with which Ireland has signed a double tax treaty, provided that the securities are not held through or in connection with a branch or agency in Ireland. In addition, in many circumstances, interest on securities that mature within two years is not subject to Irish withholding tax. Also, Irish withholding tax does not arise on ‘short interest’ (i.e. interest on an obligation that matures within one year) or discount.

VAT There is an exemption from Irish Value Added Tax (‘VAT’) for companies that are Qualifying Companies with respect to fees paid in respect of investment management, investment administration, corporate administration and marketing services.

In particular, this would generally include fees paid by the Qualifying Company for the servicing of loans meaning that the Qualifying Company should not suffer significant irrecoverable VAT on costs and expenses.

Stamp Duty Irish Stamp duty will not apply on the issue or transfer of securities issued by a Qualifying Company. There are also various exemptions from Irish stamp duty that apply to the acquisition of debt and loan portfolios so that significant Irish stamp duty charges should not arise.

For the above reasons, Irish Qualifying Companies provide a neat solution when structuring distressed debt transactions. In some cases, due to investor demand or for tax reasons, another Irish vehicle is often considered in the context of these types of transactions; the Qualifying Investor Fund (‘QIF’).

Expert Guide : Tax - 25

Qualifying Investor Funds (‘QIFs’)

Taxation of QIFs However, if this process had taken longer or begun A QIF is authorised by the Central Bank of Ire-three QIFs fullythe exempt from tax on theirhave income, weeksarelater transaction wouldn’t land and is subject to on-going regulation andbeen profits enjoying a tax-free roll-up able toand get gains, underway, because of thegross subsesupervision. A regulated investment vehicle canquentofchanges income,inprofits and gains.

Instead, an exit tax European market conditions. often be an important feature for certain classes regime applies, whereby Irish tax arises upon the of institutional investors who wish, in a post-The unpredictability making of payments to investors, unlesseconotherwise inherent in the global Madoff world, to invest in a well-regulated fundomy, exempt.

However, by virtue of thing an exemption, as it stands, isn’t always a bad for the no authorised in an EU Member State with an inde-M&AIrish taxeither. arisesFor in those connection investments market with thewith will and the pendent custodian which has responsibility formoney held by any person that isofnot Irish available resident (irreto buy, there is a wealth options the vehicle’s assets. The benefit of a QIF is thatand the spective where that person is resident) provided key is of targeting the right ones.

This means although it is subject to regulation and oversightthat the thatneed certain simpleisn’t procedures for speed pertinentare tofollowed. the M&A by the Central Bank of Ireland, the investmentsell-side only, increasingly VDR projects are being and borrowing restrictions which apply to retailestablished Also, no stamp, capital other duties

by Irish buy-side teams whoorare willing toapply funds are automatically disapplied. In return forpay for to the issue, or redemption cost oftransfer the VDR setup withinofainvestments target the disapplication of such retail-type restrictions,organisation, in a QIF.just to ensure they have the time and a QIF can only be sold to ‘Qualifying Investors’opportunity to perform thorough due diligence. (as defined below) who are prepared to invest a In addition, there is an exemption from VAT for minimum subscription amount of €100,000 (orNow QIFs respect to fees paid in respect investthat itwith is so difficult to forecast what is of goits equivalent in another currency). management, investment administration, ing toment unfold across the world’s economies from A ‘Qualifying Investor’ for these purposes is: one month corporate administration marketing services. to the next, even for and the most seasoned In particular, this VAT exemption would generof experts, all that dealmakers, investors, advisors (a) a ‘professional client’ within the meaning ofand companies ally includecan feesdopaid by the QIF for the servicing is prepare to weather the Annex II of Directive 2004/39/EC (MiFID Di-storm.of There loans. are Custodial services are be alsoexposure generally exrisks and there will rective); or on allempt sidesfrom whenVAT. it comes to putting M&A trans(b) an investor who receives an appraisal from anactions together, raising funds, selling an asset or EU credit institution, a MiFID firm or a UCITSeven just Because of the in taxsuch exempt nature of QIFs, however, operating an interconnected but management company that it has the appropri-unpredictable access to global some of Ireland’s double treaties market.

But, wheretax there are may ate expertise, experience and knowledge to ad-risks, not be are available.

Each jurisdiction typically there also opportunities and the secretneeds equately understand the investment; or to be reviewed on a to case by case to determine is to be prepared, ready seize that basis opportunity (c) an investor who certifies that it is an ‘in-whenwhether access is possible that again, time. it does arise, before it ebbsataway formed investor’. potentially forever.

Comparing the Tax Benefits of a Qualifying In addition, certain conditions apply in relation Company & a QIF to certain service providers to a QIF and, in certain circumstances, the services that they proIn favour of a QIF, we note that no Irish tax arises vide. Consequently, albeit a regulated vehicle, on payments made by QIFs to non-Irish resident the QIF provides great flexibility in terms of ininvestors irrespective of where those investors are vestment structure. resident. However, unless the debt securities issued by a Qualifying Company are listed on a recognised stock exchange, investors in a Qualifying Company generally must be resident in a European Union Member State or a country that has signed a double tax treaty with Ireland in order to be entitled to receive interest payments gross.

26 - Expert Guide : Tax

However, if access to Ireland’s network of double tax treaties is required to mitigate foreign taxes, a Qualifying Company may be a better solution as the QIF may not be eligible to enjoy the benefits of the relevant treaty.

Whilst there are no differentiating tax factors, we note that the costs of establishing and running a QIF are generally higher than the costs of establishing and running a Qualifying Company, which are generally quite low. As noted above, a Qualifying Company is not subject to supervision or regulation by the Irish Central Bank, whereas a QIF is so regulated (which may be seen as a benefit or a burden, depending on investors’ preferences).

Combining the Qualifying Company & the QIF There are, of course, cases where the QIF may be preferred (for example, where certain classes of investors have a requirement that the investment vehicle be regulated). In that scenario, the tax exemption that applies to the QIF regime may be enjoyed by the investment vehicle and no Irish tax will arise on payments to investors irrespective of where that investor is resident. However, in order to mitigate foreign taxes on income arising to the investment vehicle, access to Ireland’s network of double tax treaties is required. In such scenarios a combination of: (1) investors investing in a QIF; and (2) the QIF investing in a Qualifying Company that in turn invests in the target assets, may be the solution. Such structures have been established to achieve multi-jurisdictional tax efficient structures for investors in various asset classes over the past number of years, and could equally provide an excellent solution for investors investing in portfolios of distressed debt in Ireland and abroad.

Accordingly, Ireland is currently one of the main domiciles of choice for a number of private equity and distressed debt managers and investors, both for the acquisition of assets as they become available for sale, and the structuring of onshore investment platforms to facilitate such acquisition in Ireland and abroad.

“

Accordingly, Ireland is currently one of the main domiciles of choice for a number of private equity and distressed debt managers and investors, both for the acquisition of assets as they become available for sale, and the structuring of onshore investment platforms to facilitate such acquisition in Ireland and abroad.

“

Also, because a QIF is tax exempt, no tax arises for the QIF irrespective of how the investment is structured. Whereas, in connection with the business of a Qualifying Company, it must be ensured that expenses in each accounting period are taxdeductible and sufficient in amount so as to shelter all of the Qualifying Company’s income from tax.

Eleanor MacDonagh specialises in taxation law and practice and, since joining McCann FitzGerald in 2001, has led the expansion of the firm’s tax advisory services to both domestic and international banking and financial services clients. She has developed particular expertise in relation to international tax structuring through Ireland, the taxation of capital markets products including derivatives, securitisation and structured finance and establishing investment funds and other tax-based investment products.

Eleanor is a member of the Tax Committees of each of the Irish Securitisation Forum and the Irish Funds Industry Association.

Eleanor MacDonagh can be contacted by phone on +353 1 611 9174 or alternatively via email at Eleanor.MacDonagh@mccannfitzgerald.ie

Expert Guide : Tax - 27

Fergus Gillen focuses on a wide range of debt finance work, with a particular emphasis on debt capital markets (public and private), restructuring, securitisation, structured finance and secured lending transactions.

Fergus advises many financial institutions (Irish and international), non-financial corporates and state-owned entities.

However, if this process had taken longer or begun three weeks later the transaction wouldn’t have been able to get underway, because of the subsequent changes in European market conditions.

The unpredictability inherent in the global economy, as it stands, isn’t always a bad thing for the M&A market either. For those with the will and the money to buy, there is a wealth of options available and the key is targeting the right ones.

This means that the need for speed isn’t pertinent to the M&A sell-side only, increasingly VDR projFergus Gillen can be contacted by phone on ects are being established by buy-side teams who +353 1 611 9146 or alternatively via email at are willing to pay for the cost of the VDR setup Fergus.Gillen@mccannfitzgerald.ie within a target organisation, just to ensure they have the time and opportunity to perform thorAs Head of the McCann FitzGerald Investmentough due diligence.

Management Group, Mark White advises a wide variety of clients who are engaged in the promotionNow that it is so difficult to forecast what is going and management of investment funds (includingto unfold across the world’s economies from one Qualifying Investor Funds). Mark has particularmonth to the next, even for the most seasoned of expertise on structuring alexperts, all that dealmakers, investors, advisors ternative funds such as priand companies can do is prepare to weather the vate equity funds, distressed storm. There are risks and there will be expodebt funds and hedge funds. sure on all sides when it comes to putting M&A Clients include some of the transactions together, raising funds, selling an largest fund managers in asset or even just operating in such an interconthe Irish and international nected but unpredictable global market. But, funds market, institutional where there are risks, there are also opportuniseed investors and some of ties and the secret is to be prepared, ready to the large prime brokerage seize that opportunity when it does arise, before houses. Mark also advises on investment business regulation and financial services law.

Mark has been a member of the Legal and Regulatory Committee of the Irish Funds Industry Association for the past five years and is a member of the IFIA Council.

Mark White can be contacted by phone on +353 1 607 1328 or alternatively via email at Mark.White@mccannfitzgerald.ie

28 - Expert Guide : Tax

Expert Guide : Tax - 29

Is Portugal Still An Interesting Country For Investors To Look At? By Tiago Marreiros Moreira & Francisco Cab

S

aying that “Portugal is an interesting country for investors to look at” may seem a bold statement. We take the risk of putting forward such statement, but we also take the opportunity to give substance to it and have a glance on some of the existing opportunities and a few others coming up soon.

Portugal has suffered significantly from the financial crisis and as a result is was forced to request the financial assistance from the European Financial Stabilisation Mechanism. For that purpose, the Portuguese government has negotiated and signed the “Memorandum of Understanding on Specific Economic Policy Conditionality” (MoU) and has undertaken the commitment of carrying out significant changes to the way public funds are spent.

Differently from what happened in other Mediterranean Member States, and in spite of the natural protests against the most social-sensitive cuts in public spending and the increase of the unemployment rates, the social environment in Portugal has been calm and stable and is far from the turmoil seen, for example, in Greece and in Spain.The fact that Portugal is under constant analysis by international organisations (e.g. the International Monetary Fund) and still being able to ensure economic and social stability became an asset in convincing investors to maintain their interest in Portuguese economy.

In fact, both private and institutional investors have kept their confidence in the economic recovery of Portuguese economy. According to the Portuguese Central Bank and to private banks such as Barclays, deposits in the Portuguese banking system have increased circa 2% between June 2011 and March 2012 whereas in the same period were falling 1% in Ireland, 2% in Italy, and 3% in Spain.

30 - Expert Guide : Tax

On the other hand, Portuguese companies have been successfully issuing retail bonds, finding in private investors an efficient alternative way of funding their business and show publicly the investors’ confidence in their medium to long term performance.

Portugal became also the gateway for Chinese investment in Europe, as Three Gorges bought to the Portuguese government a stake of more than 20% in the Portuguese power company (“EDP”) back on December 2011. More recently, Three Gorges took part in enhancing the international business of EDP by granting a €1 billion loan – notably the first loan by China Development Bank ever made to a non-Chinese company outside of Chinese territory. Furthermore, Portuguese government has been fostering economic diplomacy between Portugal and China and it is expected that new investments are made in the future in Portuguese companies.

It should be said that the investment of Three Gorges in EDP was also a milestone in the privatisation process in course, pursuant to the MoU. In the queue is still the privatisation of the State’s stake in major Portuguese companies such as TAP Portugal (the main Portuguese airline), Aeroportos de Portugal (the airport management company), CP Carga (the cargo train company), CTT (the postal service), Caixa Seguros (the insurance business of the public-owned bank, Caixa Geral de Depósitos), Águas de Portugal (the national-wide water supply company) and RTP (the public television).

bral Matos In light of the above, we take the view that the crisis raised the opportunity to fine tuning Portuguese economic policy and setting more specific goal for attracting foreign investment.

Although for some it may come as a surprise the significant interest of foreign investors in a small economy such as the Portuguese, one should look further than the Portuguese borders to realise the potential of taking Portuguese companies as an investment vehicle for entering in markets such as Brazil, Angola, Mozambique and even in China.

As a matter of fact, the historical, cultural, social and political ties between Portugal and the Portuguese speaking community (and in Asia the close links to Macau and Timor) has facilitated the development of mutual cross-border investments in various areas, from natural resources, infrastructure, banking and finance, to telecoms and media.

In addition to the above, we note the fact that the Portuguese tax system fosters the use of Portuguese corporate vehicles for investing in the above economies.

On the one hand, there is a domestic participation exemption rule applicable specifically to dividend distributions arising out of Portuguese speaking African countries.

At the tax treaty level, Portugal also offers quite efficient opportunities, such as a 95% dividend exemption under the Portugal-Brazil double tax treaty and a tax sparing credit under the PortugalMozambique double tax treaty. Naturally, since Portugal is a Member State of the European Union, Portuguese companies (namely the holding companies – “SGPS”) may also benefit from the tax regimes applicable under European Tax Law (such as the Parent Subsidiary Directive and the Interest and Royalties Directive).

On the other hand, Portugal has been following a path into economic development. To that end, some very interesting scientific clusters have been created, namely in the area of biotechnologies, and in recent years Portuguese universities have been working together with entrepreneurs in Research and Development (“R&D”) projects.

Also from a tax perspective, companies are welcome to invest in R&D, benefiting from a specific tax regime (“SIFIDE”) similar to other European “IP Box” systems. Significant investments in Portugal may also be granted contractual tax benefits as specifically set forth in the Investment Tax Code.

Portugal is also aware that companies may not succeed without the human capital. Therefore, in order to attract individuals of “high added value”, the Government enacted the first Portuguese expatriates tax regime – the non-habitual residents regime.

Based on an exemption for foreign-sourced income and a 20% flat tax for Portuguese-sourced income, this regime is very competitive as to other European regimes, bearing in mind that it does not require any minimum annual tax amount and foreign income is exempt even if it is remitted to Portugal.

All summed up, Portugal is making a significant effort to overcome the crisis and it is doing so not only by ways of cutting public spending but also by focusing its economic and tax policy in boosting the confidence of Portuguese and foreign investors.

Expert Guide : Tax - 31

Tiago Marreiros Moreira, Partner at Vieira de Almeida, is in charge of VdA’s Tax practice group and member of the Board in charge of VdA’s International Platform, VdAtlas. Law Degree, Catholic University of Lisbon. Post-Degree in Taxation, Instituto Superior de Gestão, in Lisbon. PIL, Harvard Law School. Lecturer at the Postgraduate Course in Management of Social Organizations of Economics at the Catholic University of Porto. Admitted to the Portuguese Bar Association as specialist lawyer in Tax Law, tax arbitrator certified by the Minister of Justice. President of the International Association of Lawyers’ Tax Commission, member of the International Fiscal Association and of the Portuguese Tax Association.

Tiago can be contacted by phone on +351 21 311 3485.

Francisco Cabral Matos is an Associate lawyer at VdA’s Tax practice group. Law degree, University of Lisbon.

Post-Degree in Tax Management, Higher Institute of Economics and Management Technical University of Lisbon. Master in Advanced Studies (Adv LLM) in International Tax Law, International Tax Center University of Leiden.Teaching Assistant at the International Tax Center, Leiden University. Lecturer at the Institute for Economic, Fiscal and Tax Law of the Faculty of Law of the University of Lisbon (IDEFF) on the Advanced Postgraduate Course in Tax Law. Member of the International Fiscal Association and of the Portuguese Fiscal Association.

Francisco can be contacted by phone on +351 21 311 3400.

32 - Expert Guide : Tax

Expert Guide : Tax - 33

The Portuguese Connection By Jaime Carvalho Esteves

I

n spite of being under financial assistance, Portugal is currently one of the places where to invest and where wealthy individuals and their families should consider taking up residence. This article aims to explain why we observe this trend by setting out a number of (tax) reasons for doing so.

Participation Exemption: European Union & Portuguese Speaking Countries Portugal offers (under conditions) full exemption on dividends received from subsidiaries located in the European Union, as well as in Portuguese speaking countries located in Africa (Angola, Cape Verde, Guinea-Bissau, Mozambique, S. TomĂŠ and Principe) and East Timor. Furthermore, also under conditions, only 5% of dividends received from Brazilian subsidiaries are subject to tax.

Generally, capital gains on shares (either issued by residents or nonresidents) sold by pure holding companies (named SGPS) may also be tax exempt.

Treaty Networks

The Portuguese Double Tax Treaty network is expanding and counts now with more than 60 DTTs, with a special focus on emerging countries. Furthermore the Government intends to quickly expand such number to more than 100 DTT and, consequently, a very significant number of treaties are being negotiated and are about to be concluded.

Portugal also understands that a foreign investor is not only concerned with taxes. As such, the country concluded several international agreements on investment protection and social security conventions. Also here there is a strong will to rapidly expand the number of such agreements and a relevant number are being negotiated with both developed and emerging countries.

34 - Expert Guide : Tax

In addition to the DTTs signed with China and also with the Special Administrative Region of Macao (in Guangdong province), it should also be noted that China Mainland and Macao entered a Closer Economical Partnership Agreement (CEPA), which offers Portuguese entities strong opportunities to access the China Mainland promising markets. In reinforcing the historical links with Portuguese speaking territories and creating enhanced business relationships the Community Of Portuguese Speaking Countries (CPLP) counting eight member countries (including Portugal) and three observers should also be noted (http://www.elo-online.org/).

Madeira International Business Center (MIBC) The Madeira IBC is fully integrated within both the European Union and the Portuguese legal systems, being also fully accessible to Portuguese residents. It offers a relevant number of tax advantages, including a 5% Corporate Income Tax rate up to 2020 for companies licensed up to 31 December 2013 (http://www.ibc-madeira.com/Default.aspx?ID=29). Despite the reduced CIT rate, licensed companies have full access to the EU Treaty, Regulations and Directives and to almost all DTTs signed by Portugal.

As a result, the combination of the favourable Madeira IBC regime with the EU Law, the Portuguese DTT network and the participation exemption regime for investments in Portuguese speaking countries offers a relevant number of tax optimisation opportunities for the business community including: holding, lease, trading, services, intellectual property, etc.

Advanced Pricing Agreements & Tax Arbitration Furthermore, and with the clear goal to boost certainty, the Portuguese Government and the Tax Authorities are actively willing to expand the number of APAs already concluded on transfer pricing. As a result, actual or potential transactions with related parties may be discussed with the tax authorities, leading to unilateral, bilateral or even multilateral APAs. It is also worth nothing that with the same goal and also in the benefit of speed, Portugal introduced an innovative tax arbitration regime. Consequently, and for almost all types of tax disputes, tax payers may now opt for arbitration instead of following the usually more lengthy tax courts route.

Non Habitual Residents Regime (High Value Activities & Wealthy Families) Under conditions, non tax resident individuals that become tax residents in Portugal may opt to be taxed under the so called “Non Habitual Resident tax regime�. Under this regime, employees and self-employed individuals engaged in listed activities of high value may be taxed in relation to such income at a flat rate of 20% and almost all their non Portuguese source income may be tax exempt. At the same time, as a resident, NHRs are entitled to benefit from the Portuguese DTTs, Bilateral Investment Protection Agreements and Social Security Conventions.

Furthermore, the Portuguese tax regime does not foresee a wealth tax, and inheritance and gift tax is of small relevance. In fact, inheritances or gifts to spouses, descendants or ascendants or inheritances and gifts of non Portuguese assets are not taxed at all. In the remaining cases, a small flat tax rate of 10% will be applicable.

This advantageous tax regime can also be combined with a liberal visa and residence permit policy that may be followed by naturalisation, thus allowing full access to the EU, Euro and Schengen areas.

The Portuguese close links to Africa, Asia and South America also helps explaining why the regime is so attractive to a considerable number of MNCs and wealthy individuals and their families.

Real Estate Opportunities & Real Estate Investment Funds (REIF) Some assets are currently extremely under valuated, namely real estate, thus creating extremely favorable investment opportunities either for development, rental income and/or capital gains.

Even so and for material investments, real estate investors may benefit from a very favourable tax regime, by setting up a Real Estate Investment Fund. These vehicles may include a combination of exemption or reduced rates, e.g. real estate acquisition tax (IMT), annual real estate tax (IMI), income tax (IRC) and taxation on profits distribution (IRS/IRC). Furthermore the acquisition of real estate may speed up the visa processes mentioned above.

The Goal Of Becoming A Very Tax Friendly Regime Portugal current critical goals are to quickly restore financial credibility and to boost competitiveness in order to attract relevant FDI. As a result, restoring the fiscal balance will not jeopardise the above tax incentives, which are deemed to be pivotal for FDI. Additionally, after such balance is restored, tax incentives to promote exports and employment will be maximised. In the meantime, contractual tax and non tax incentives for major FDI are available under a red carpet process.

Expert Guide : Tax - 35

Finally, the large potential opened by the privatisation of a number of public companies and assets should also not be forgotten.

The Hub Concept The reasons listed above, together with an extensive list of non tax incentives and comparative advantages, explain why Portugal is becoming very popular for MNCs. It also explains why Portugal should be considered as a more than reliable base for coordination centers and routine and non routine services, as well as a hub for investments between Europe and the emerging markets and from these into Europe.

Finally, it also explains why the wealthy families of Europe and emerging economies are also choosing Portugal for their residence.

Jaime Esteves is Partner of PwC Portugal and leads its Tax Department, with responsibility also for Angola and Cape Verde. He’s a specialist in Corporate Restructuring, International Tax Planning, Transfer Pricing and Wealthy Individuals.

He is also a Tax Arbitror at CAAD and was the lawyer responsible for the tax cases: Epson (ECJ) and Norvalor (STA). He is responsible for several tax courses and lectures at a number of Universities. He published several studies on taxation and collaborates regularly with leading media in tax matters.

Jaime Esteves has a degree in Law from the Catholic University of Oporto and Post Graduate studies in European Studies and Commercial Law from the Catholic University in Lisbon.

Jamie Carvalho Esteves can be contacted by phone on +351 225 433 212 or alternatively via email at Jaime.esteves@pt.pwc.com.

36 - Expert Guide : Tax

Expert Guide : Tax - 37

Swiss Tax Authorities Issue New Circular On Of Swiss Resident Individuals Trading In Sec

I

ntroduction

One fundamental principle of the Swiss tax law is the exemption of Swiss resident individuals from the income taxation of capital gains resulting from the disposal of movable property like securities.

This exemption applies on a federal as well as to the cantonal and municipal income tax level (Article 16 Paragraph 1 and 3 of the Swiss Federal Income Tax Act and the respective cantonal income tax provision).

In cases, however, where the individual investor is deemed to be a so called “professional securities dealer� (i.e. acts as self-employed) the gains incurred upon sale of such securities are subject to federal, cantonal and communal income taxation as the securities are considered to be part of a business activity of the taxpayer (see Article 18 Paragraph 1 of the Swiss Income Tax Act and the respective cantonal income tax provision).

1. The holding period for the sold securities was at least one year.

2. The overall transaction volume (all purchases and sales) per calendar year was not more than five times the market value of the securities at the beginning of the tax year.

3. Capital gains are not required to replace other income required to cover the living expenses. This is the case if realised capital gains are all less than 50% of the overall taxable income in the tax period.

4. The investments are generally accessible to all investors and are not closely related to the professional activity or do relate to special knowledge resulting from any special professional status of the investor.

5. The investments were not leveraged or the taxable investment income from the securities (interest, dividends, etc.) is higher than the proportionate interest payments of the investor.

6. The buying and selling of derivatives (especially options) is limited to the hedging of other investments.

The key question in assessing whether an individual is taxed as professional trader is whether such person conducts a business activity while managing his private wealth.

The Swiss Federal Tax Authorities have issued a renewed safe haven test under which a person is not considered to be a securities dealer and can in principle realise an income tax free capital gain (see Circular No 8 issued by the Swiss Federal Tax Authorities on 21 June 2012).

Safe Haven Test The tax authorities consider capital gains resulting from the disposal of securities as income tax-free, provided the following safe haven test are cumulatively met:

38 - Expert Guide : Tax

These safe haven rules are certainly welcome. They however raise the question whether a taxpayer must be considered a securities dealer if one of the criteria is not met (i.e. if for instance the taxpayer leverages its investments).

In this respect the circular states that if not all criteria are met cumulatively, it cannot be excluded that the taxpayer is considered a securities dealer.

Income Tax Treatment curities By Harun Can & Michael Nordin Treatment If Safe Haven Test Cannot Be Met If the safe haven test cannot be met, the assessment is made based on the below five questions. As each case is assessed individually it cannot be said that one of the questions decides the tax treatment of capital gains. Rather one has to go through all the questions and if most are against the taxpayer it is likely that the taxpayer cannot realise income tax free capital gains as he or she is considered a self-employed securities dealer which selling its investment assets generates taxable income from self-employment.

The five questions to answer are as follows:

3. Is there a close relationship to the activities of the taxpayer and does he or she use special knowledge?

A close relationship to the other business activities of the taxpayer may also be an indication that the taxpayer does not act as a private investor but rather acts just like a full-time or part-time selfemployed person trying to generate profits. It is irrelevant whether the taxpayer himself concludes the trades or authorises a third party (bank, custodian, etc.) The behavior of these authorised persons is attributed to the taxpayer as it impacts his or her income directly.

1. Is there a systematic or planned investment approach?

4. Is there a use of substantial debt to finance the investments?

This is the case if the taxpayer is actively engaged and is striving to use market developments for his or her own profit. Based on case law it is not required that the taxpayer performs such activity in a proper, organised business nor is the taxpayer himself visible on the market.

The use of significant external funding in order to make investments in securities is considered atypical by the authorities. Normally, the revenues from investments exceed the cost. In case of a debt financed investment behavior, the taxpayer accepts an increased risk which is considered a sign of acting as a self-employed securities dealer. Unless the expenses including the interest in connection with the investments cannot be covered by periodic income but must be funded by capital gains the authorities may no longer accept that capital gains from sales of securities are income tax-free.

2. Are securities transactions frequent and is the holding period brief?

A brief period of ownership in the securities implies that the taxpayer does not follow a holding strategy but rather wants to make profits from dealings in securities. Based on the frequency of such transactions and the shortness of the holding period it is assumed by the tax authorities that the taxpayer intends to make immediate capital gains and also accepts that significant losses may arise.

In that case they might consider the taxpayer to be a securities dealer.

5. Are profits reinvestment in similar investments?

The fact that profits are reinvested in similar assets is an indication that the taxpayer acts as a selfemployed securities dealer.

Expert Guide : Tax - 39

Conclusion The new safe haven test is certainly welcome. The test however raises the question whether a taxpayer must be considered a securities dealer if he or she fails the test. This for instance is of interest for a hedge fund manager who co-invests in the fund he or she manages and has special knowledge (i.e. fails the safe haven test).

This is not the case. The taxpayer might still be able to realise a tax free capital gain. For this, one however has to assess whether he falls under one of the five questions (systematic investment approach, frequent dealings, dealings related to other business activities, use of leverage, profits reinvested).

Furthermore one has to consider whether any other provision in the income tax act prevents such tax free capital gain (for instance under the so called indirect partial liquidation provision, the so called transposition provision, the fact that the securities actually belong to an existing business activity, the fact that the majority of a factually liquidated company is sold or the fact that the majority of a Swiss real estate company is disposed of).

The above shows that in case of substantial disposals of investments the Swiss taxpayer is well advised to consult his tax advisor. It might also be possible to obtain a favorable income tax ruling confirming that the disposal of the securities is considered an income tax-free capital gain based on the Swiss tax laws.

Harun Can is a partner in the tax team in Zurich.

He specialises in Swiss and international tax planning for multi-national corporations and private equity funds and its managers. In addition, Harun Can has broad experience in real estate transactions and special expertise in valueadded tax law and is the founder and manager of the “mwst netzwerk zh”.

40 - Expert Guide : Tax

Harun Can studied at the University of St. Gallen, graduating in 1994 (lic. iur. HSG). He was admitted to the bar in 1997 and qualified as Swiss Certified Tax Expert in 2000. He obtained a Master of Laws at the London School of Economics (LL.M. Tax 2001), and in 2005, became a Swiss VAT-Expert. Before joining Schellenberg Wittmer in 2009, he worked several years for another major law firm.

Harun can be contacted by phone on +41 44 215 5252 or alternatively via email at harun.can@swlegal.ch Michael Nordin is a partner in Schellenberg Wittmer’s Zurich office, where he heads the Taxation Group. Apart from providing general tax advice, he focuses on transactions such as mergers and acquisitions, reorganisations and restructurings, and those related to financing and capital markets. In addition, he advises private clients on strategic tax planning and other tax aspects.

Michael Nordin studied law at the University of St. Gallen, where he completed a first degree in 1991 and, after admission to the Swiss bar in 1993, a doctorate in 1996. He also attended New York University, where he graduated with an LL.M. in International Taxation in 1997. In 2000 he qualified as a Swiss Certified Tax Expert. Before joining Schellenberg Wittmer he worked in the group tax department of a major Swiss bank, in the tax departments of two international “Big Four” audit firms, and for a large business law firm in Zurich.

Michael can be contacted by phone on +41 44 215 5252 or alternatively via email at michael.nordin@swlegal.ch

Substance Over Form, How Does A Corporate Services Provider Deal With This? By Fréderique van Geld

E

Every once a while it happens that, when starting upon the ‘information gathering process’ with a new client, I get the question “So why not just incorporate an offshore company, because then I pay no tax”. Of course at that point I am talking with an entrepreneur who is not just chatting about investment portfolios, but has a commercial background, trading in goods or delivery of services. “I want to work from my home country and will just invoice my clients from an offshore company” seems to be the sentence that always follows. And each time I’m astonished how much additional time and patience is needed before the client understands that this is “not what works nowadays”.

We have been familiar for several years with the substance over form discussion. However, with the increasing pressure of the over-discussed current downturn that has definitely left its impact upon the global economy (the topic is getting very old, I realise, but is still trending I’m afraid) with the result that many governments are focusing on getting their hands on as much revenue from their taxpayers as possible and therefore using all tools within their power.

In some countries this causes various, in the eyes of many, unfair effects with the chances of double taxation increasing dramatically. The well-known and feared Limitation on Benefits clauses present in almost all double tax treaties the US concluded and, more recently, the measurements taken by the Indian government following the Vodafone case, as well as the new financial transaction tax included in the revised budget by the new French President Francois Hollande are “good” examples of the increasing interest of (tax) authorities to make sure they get their piece of the cake and even a bit more.

The basic premise that a company is established and effectively resident where it performs its business and that it receives its profit and pays tax in that jurisdiction where it should pay taxes; is without doubt a defendable thought, if not simply logical and just.

42 - Expert Guide : Tax

On the other hand, freedom in organising ones assets, in choosing optimal routes or forms, resulting in paying an acceptable tax rate (from the perspective of the taxpayer this being anything between 5 and 15%, even though the cash strapped jurisdictions are, without doubt, attempting to collect a tax percentage substantially higher) should remain possible.

One of the primary reasons we are in business – ours is the task of finding the jurisdictions most beneficial to our clients! Or as the often quoted Judge Hand wrote: “There is nothing sinister in arranging one’s affairs so as to keep taxes as low as possible. Everybody does so, rich or poor; all do right. Nobody owes any public duty to pay more than the law demands. Taxes are enforced exactions, not voluntary contributions.” The increasing trend of limiting the autonomy of the individual entrepreneur (and therefore indirectly limiting free competition) is a drastic measurement. In the end, it is all about the right balance and even about personal freedom.

These developments have had their effect on tax planning and structuring and thus on us corporate service providers who, in the end, are responsible for servicing structures which resulted from the genius - and the less genius - fiscal brains of our times. The mere keeping books and records, holding a yearly AGM and taking some resolutions is not enough anymore in an increasing number of cases.

deren More and more corporate service providers form the jumping board to a corporate (re-)structure in order to set up the most beneficial advantages available for a business’ actual operations. This means that we are not only expected to create substance and run a real “shop” but it can even be said that a large part of the burden to initiate a “real” set up of a new business rests on our shoulders. We are moving from being a follower to being an initiator, picking up quite some responsibilities, if not liabilities, on the way. The so called “dummy-directors” have exited or are on their way out.

To give it a romantic touch, we could start thinking of ourselves as parents, nurturing a baby, educating it and growing it into a healthy responsible adult who will take off to stand on his/her own feet.

This means a drastic change in our ways of working. We need to understand more of the business our clients are running or want to run; we have to be involved, becoming an actual yet independent part of the new structures we help develop until, at least, the client has reached the point where the proverbial bird is ready to leave the nest.

This brings some new challenges, if not complications. We need to move between being generalist and specialist on various areas. It is essential for us to attend meetings about products which may be new to us, arrange to get the advisors on board in specialist areas outside our scope of knowledge, and assist, where possible in finding financing for the expansion happening under our noses. From passive paperwork provider, we are moving - or have already moved - to being a company kick-off facilitator. We must re-invent ourselves, welcoming challenges and a certain adventure, saying goodbye to certainty of recurring fees on a single client for at least 10 years. Getting actively involved will be rewarding but has its challenges: how do we deal with that potential minefield of sometimes conflicting interests and sentiments?

In the practice our role as corporate services provider gets more supportive, providing accounting, managing payroll, acting as tax and legal counsel, be a local co-board member next to ‘real’ directors abroad and form a gateway to the local

market when it comes to banking, financing and local trade organisations. I would say that the art of being a service provider also means the ability to keep reinventing yourself and be ahead of trends. What is crucial, though, is that you are passionate about the job. As simple as that may sound, this is often the difference which makes a successful professional. Especially when working with private clients one has to think as if you are ‘part’ of the client, not just the outside professional. We’ve got to be involved in familiarising ourselves with background, family situation and line of business of the client. Only then can we develop the steps toward becoming an integral part of the new (re-)structuring. Remember though, that we cannot rest upon the laurels of being successful in substance requirements fulfilled. Sooner or later, the governments we work with will develop new problems and will come up with new laws, rules and regulations that inefficient government in financial need tend to develop…..and then we’ve got to look, again, at what we can do to rectify the problem!

Fréderique van Gelderen is an International Tax Structuring Advisor and Partner with the H&P Trust Group, located at the firm’s Swiss Office since 2008. She started her career in the financial services industry with the TMF Group in the Netherlands.

Subsequently she studied Tax Law at the Erasmus University of Rotterdam during which she joined PriceWaterhouseCoopers at the international tax services department. Fréderique leads the Indian desk of the H&P Trust Group and assists high net worth families and active entrepreneurs with the creation and implementation of international tax efficient corporate structures. Furthermore she is part of the Structured Solutions group.

Fréderique van Gelderen can be contacted by phone on +41 41 729 63 63 or alternatively via email at frederique.vangelderen@henleyglobal.com

Expert Guide : Tax - 43

Exchange Of Tax Information By Jean-Blaise Eckert

T

his article takes a look at the changing Swiss policy on the exchange of tax information at international level, drawing on examples of agreements between Switzerland and the US.

Trigger Events In September 2007 the US authorities initiated an investigation into Swiss bank UBS, which they suspected of helping US account holders to conceal their assets from the US Internal Revenue Service (IRS). The investigation targeted the existence of a tax fraud by individuals holding accounts with UBS, committed methodically and with some support of the bank, or bank’s employees.

In June 2008, following tough negotiations between the US and Switzerland, the latter persuaded the US tax authorities to put an end to the investigation and retrieve the desired information through international administrative assistance. In July the Swiss Federal Tax Administration (SFTA ) received such a request. The SFTA agreed to provide administrative assistance and ordered UBS to remit the relevant information and records. Thereafter, some of the US citizens involved, who were beneficial owners of UBS accounts of offshore companies incorporated in the British Virgin Islands, appealed to the Federal Administrative Court of Switzerland (FAC) against the decision of e SFTA. On March 5 2009 the FAC issued a ruling concluding, in the specific case, the existence of a tax fraud in application of Article 26 of the 1996 Swiss-US double taxation treaty, known as ‘DTT 96’. Consequently, the relevant information was to be exchanged with the US tax authorities. Furthermore, the FAC stressed that the request by the IRS was valid even though the US tax authorities did not issue the names of US beneficial owners of accounts and that the description by the IRS of the behavioral pattern of the offending conduct sufficed to require administrative assistance. This was the real starting point for changes in Swiss policy on the exchange of tax information.

44 - Expert Guide : Tax

The appeal had, in any case, lost its interest since the information on this specific case had already been exchanged. Indeed, before the FAC rendered its decision and following US threats to institute criminal proceedings against UBS, the Swiss banking supervisory authority (FINMA) had ordered - on 18 February 2009 - the immediate exchange of information related to 285 US clients of UBS to the IRS.

Finally, to resolve the dispute, a separate bilateral treaty between the US and Switzerland (‘the Agreement’) was signed on 19 August 2009. The Agreement stipulated inter alia that requests by the IRS for administrative assistance with the SFTA would be accepted in cases that met certain requirements listed in the Agreement and detailed in its attachment. The number of UBS clients targeted by the request was approximately 4,450 and it involved around $18 billion in assets.

In parallel with the UBS case the US authorities started, in 2009, to investigate other Swiss banks’ US clients.

On 26 September 2011 the 1RS asked the SFTA for administrative assistance to obtain information regarding the accounts of certain US persons held through domiciliary companies maintained with certain banks in Switzerland, among which Credit Suisse AG between 1 January 2002 and 31 December 2010.

All these events led Switzerland to review its standards and reshape its legal system on administrative assistance in tax matters between Swiss and foreign authorities.

Following the UBS case and under threat of seeing Switzerland ‘greylisted’, the Federal Council decided on 13 March 2009 to line up its standards of exchange of tax information with Article 26 of the OECD Model Tax Convention. Therefore, it was decided that existing and future DTTs should be revised or adopted accordingly.

Following the decision of the Federal Council, the US immediately requested a redesign of DTT 96, with the intention of creating a convention that would reflect the full scope of Article 26 of the OECD model. On 18 June 2009 both contracting states installed a protocol amending DTT96 and, on 23 September representatives of the US and Swiss governments signed said protocol to DTT 96 (hereinafter ‘DTT 09’).

Whereas the DTT 96 allowed for legal assistance in cases of suspected “tax fraud and the like”, the new protocol amends the exchange of information provisions of DTT 96 provided that the exchange of information between the two states is not only applicable in cases of suspected “tax fraud and the like”, but also in cases of suspected “tax evasion”.

This means that, as per OECD standards, Switzerland can no longer invoke banking secrecy to avoid sharing information in cases of tax evasion.

Regarding the formal requirements regarding a request for assistance, DTT 09 provides that this should specify the name of the owner of the information, but can also identify the person by information other than their name - for example, their bank account number. Automatic exchange of information remains excluded to protect client privacy.

On 6 April 2011, following the OECD led review by peers, the Federal Council explained that said peers felt the conditions required for an exchange of information were still too restrictive.

In August 2011, the Federal Council therefore proposed to Parliament the adoption of a Federal Decree concerning a supplement to DTT 09.

This specified that a request for administrative assistance (i) must demonstrate that the requesting state does not intend to make ‘fishing expeditions’, (ii) may identify the taxpayer by means other than name and address and (iii) indicate the name and address of the holder of the information (mainly banks and financial institutions) to the extent that the requesting state is in possession of that information.

“

However, one can see a number of signs suggesting that the US and Switzerland will soon reach an agreement and therefore the US Congress will not delay in ratifying DTT 09.

“

Redesign of DTT 96

Finally, on 8 August 2011 the Swiss government published yet another message clarifying interpretation of the decree. This essentially states that the case law of the FAC ruling of 5 March 2009 relating to the UBS case will remain valid under DTT 09. Thus, the possibility of exchanging tax information based on the description of a behavioral pattern will remain, although no longer limited to cases of tax fraud or the like.

On 16 March this year, the Federal Decree was adopted by Parliament. It provides that taxpayer identification can be achieved by describing a pattern of behavior. It is further stipulated that taxpayers can be identified in this manner only if the information holder (or its employees) have contributed significantly to such behavior.

Expert Guide : Tax - 45

For the time being, DTT 96 is still in force. Indeed, even if the Swiss Parliament approved the protocol the US Senate still needs to ratify the instrument for DTT 09 to enter into force.

However, one can see a number of signs suggesting that the US and Switzerland will soon reach an agreement and therefore the US Congress will not delay in ratifying DTT 09. Many proceedings initiated by the US authorities against Swiss banks (11 in total) have been frozen by the US Department of Justice. Moreover, on 16 May 2012 the media revealed that the request regarding 620 customers of Credit Suisse has been withdrawn by the IRS. This indicates that US tax authorities will soon re-lodge a request for information, probably using exactly those criteria issued by the Swiss government on 8 August 2011, in relation with the DTT 09.

Implementation In parallel with the realignment of double tax treaties, Switzerland needed to fix in an ordinance regarding the implementation of the new provisions governing administrative assistance. Therefore, the ordinance on administrative assistance according to conventions against double taxation (OACDI) became effective as of 1 October 2010.

In a second step, and in order to replace the OACDI, Switzerland initiated the process of adopting a new law allowing the implementation of double taxation treaties with regard to administrative assistance.

On 6 July 2011 the Federal Council issued a statement regarding the adoption of the newly drafted Federal Law on Administrative Assistance in Tax Matters (LAAF). The latter, with some amendments, was approved by the National Council on 29 February this year. On 24 April the Committee for Economic Affairs and Taxation of the Council of States also approved it.

46 - Expert Guide : Tax

Unlike OACDI - with its scope limited to existing §double taxation treaties or ones revised after 1 October 2010 - the LAAF will not only apply to all double taxation treaties but also to international conventions having provisions regarding administrative assistance (including, in particular, the EU-Swiss Agreement on the Taxation of Savings Income).

The LAAF should enter into force later this year.

Conclusion There has been a rapid and sustained ramping up of pressure on the Swiss financial sector. The efforts of the Swiss government have pulled Switzerland into a state of full OECD compliance. The Swiss government now needs to agree with the US government on a global solution that covers the entire industry. This will probably require massive information still to be provided. The political, rather than the fiscal, battle will nevertheless not stop, and the Swiss government will need to ensure that its OECD compliant status is thoroughly reinforced in the minds of the international community and that – to a greater extent than that which would be required by some of its peers – such status continues to be well publicised and remembered.

Jean-Blaise Eckert studied law at the University of Neuchâtel and was admitted to the Bar of Neuchâtel in 1989 and to the Bar of Geneva in 1991. He studied business administration in the US (Berkeley, Haas Business School) where he acquired an MBA in 1991.

He acquired a diploma as a Certified Tax Expert in 1994. He is considered as a leading lawyer in tax and private client matters in Switzerland. He’s the co-head of the tax group of Lenz & Staehelin. Mr Eckert advises a number of multinational groups of companies as well as HNWIs. He has been nominated by Chambers in 2011 as a leading individual in tax. Mr Eckert is a frequent speaker at professional conferences on tax matters. He also teaches in the Master programs of the University of Geneva. Mr Eckert is a VicePresident and member of the Executive Committee of IFA. Jean-Blaise Eckert can be contacted by phone on +41 58 450 7000 or alternatively via email at jean-blaise.eckert@lenzstaehelin.com

Expert Guide : Tax - 47

Germany plans to further amend its business t new tax burdens for corporate minority holding

G

erman legislators plan to further amend the German domestic holding privilege.

Proposed plans include making capital gains and dividends from certain corporate minority stakes fully taxable. The changes will have a large impact on the German tax landscape, and they bring Germany closer to the ambitious and often-copied taxation system introduced in the early 2000s. This article provides an overview of these changes and their impact on inbound and outbound holding structures.

I. Introduction In its current draft, Tax Bill 2013, German legislators propose to exclude certain minority stakes held by German and non-German corporate entities from the benefits of the German domestic holding privilege. Unlike other changes made to the German domestic holding privilege, the motivation for this new draft legislation is not primarily to increase tax revenue. In this case, German legislators are striving to resolve the conflict between current German domestic tax law and the rules set by the European Parent Subsidiary Directive, as interpreted by the European courts. Currently, corporate shareholders of German corporate entities that are not German residents are taxed on dividends if their stake does not reach the 10% threshold required by the European Parent Subsidiary Directive. Residents, on the other hand, are able to avoid such a tax burden.

The proposed legislation is designed to eliminate the obvious foreign shareholder discrimination by excluding German resident corporate investors from the domestic holding privilege with respect to dividends from minority shares, and make them subject to German taxation, as well. In other words, the law will eliminate the discrimination not by releasing foreign shareholders from their current tax burden, but by increasing the tax burden on German corporate shareholders.

48 - Expert Guide : Tax

II. The new provisions in more detail Consequence of the new law: full taxation of minority shares Capital gains and dividends from minority shares become fully taxable, and subject to German corporate income and trade tax at a combined rate of around 30% (in the case of German resident corporate investors) or corporate income tax at a rate of 15.8% (in the case of non-resident corporate investors, not protected by a double taxation treaty).

Expenses and write-offs relating to minority shares are subject to specific provisions.

Minority shares According to the proposed new law, minority shares are shares in corporate entities (German resident or not), representing less than 10% of their stated capital, or, in the absence of stated capital, in the net assets of the respective entities, starting the beginning of the fiscal year, not the dividend date or the date of the disposition, in the case of a capital gain. To the extent shares are acquired after the beginning of the fiscal year, only acquisitions of 10% or more provide the domestic participation exemption. Strengthening existing shares by acquisitions of less than 10% provides the domestic participation exemption in the following year.

Only direct shares count With respect to the 10% threshold, only direct shares count. Indirect shares held through other corporate entities, even if connected through fiscal consolidation, are not taken into account. Indirect shares held through partnerships, however, are allocated pro rata on the basis of the general profitsharing provisions of the partnership.

taxation system: gs By Stefan S端ss & Dr. Thomas Fox Limited-expense deduction

Step-up structures

Expenses and write-offs relating to minority shares can only be offset with positive income from these shares, but are barred from being netted with positive income from any other source. To the extent they are not offset with positive income from these shares, they will be carried forward.

Step-up structures increasing the acquisition cost of minority shares should be carefully discussed, as the date of application of the new law is still unclear and step-up structures require proper legal and tax documentation.

Specific rules and date of application The draft law contains quite a number of specific rules with respect to minority shares, overall leading to a remarkably complex framework of provisions which conflicts with the existing tax system.

It is proposed that the new law would come into effect already for the tax year 2012, and therefore, would retroactively cover dividends and capital gains received in 2012. It is expected, however, that due to constraints under German constitutional law, the legislative process will change the date of application, probably with a cut-off date later in 2012. Grandfathering rules are not expected.

III. Impact on tax planning and current structures Holding structures Current holding structures for minority shares need to be revisited. For stakes focused on capital gains, the use (i.e. the interposition) of treaty protected non-German holding entities should be considered. For dividend-focused investments, a pooling of the shares with other shareholders through a partnership structure may optimize the tax burden.

The new draft law leads to a clear discrimination of German resident holding structures: whereas nonGerman holdings would be subject to corporate income tax only, and would therefore have effective taxation of 15.8%, German resident holdings would also be subject to trade tax, which increases the effective tax burden to around 30%.

Sudden death of equity participation rights?

According to the wording of the new law, instruments such as equity participation rights (Genussrechte) may be treated as minority holdings, as they do not grant a participation in the stated capital of the corporation. Although it is doubtful that the legislators aimed to achieve this effect, the draft law may mean the end of such structures, as they may become extremely inefficient tax vehicles.

Tranching of equity When structuring corporate shares, creating tranches of equity through share classes using preferential rights should be considered. Although each represent more than 10% of the corporate capital, different share classes may provide for different voting and profit rights, and therefore allow also for tax-optimized investments by minority shareholders.

IV. Outlook The new draft legislation on minority shares adds another layer of complexity when dealing with German tax structures. As it conflicts with the existing German tax system, it is expected that the changes only mark the beginning of many revisions of the German domestic shareholder participation privilege.

Expert Guide : Tax - 49

Stefan Süss is a partner in Latham & Watkins’ Munich office. He is the Vice Chair of the firm’s Global Tax Department. He specializes in German and international tax law, focusing on tax-optimization of private equity and M&A transactions, as well as on structuring funds and financial instruments.

Stefan Süss is qualified as a certified tax advisor and specialist tax lawyer and is a member of the International Fiscal Association.

Stefan can be contacted on +49 89 2080 3 8167 or by email at stefan.suess@lw.com Dr. Thomas Fox is the Office Managing Partner of Latham & Watkins’ Munich office, practicing in the firm’s Tax Department.

His practice focuses on tax regulations and all tax aspects of mergers and acquisitions and private equity transactions. Mr. Fox also has extensive experience with advising large multinational corporations and mid-sized German businesses on tax audits and tax controversy matters, as well as on a wide range of tax-related restructurings. He is a member of the International Fiscal Association, the International Bar Association and the German-Italian Lawyers’ Association.

Dr. Fox can be contacted on +49 89 2080 3 8166 or by email at thomas.fox@lw.com

50 - Expert Guide : Tax

Expert Guide : Tax - 51

International Tax Planning With An Austrian Co

A

ustria - at the gateway between East and West - is a perfect hub for making investments into foreign countries tax efficiently. For being able to obtain the benefits of the Austrian Holding Tax Regime there is no need for a special purpose company but any Austrian corporate entity like a GmbH (company with limited liability) or AG (stock corporation) as well as Austrian permanent establishments of European corporate entities can benefit from the Austrian Holding Privilege.

What Are The Key Features Of That Austrian Holding Regime?

Domestic Holding:

No Debt-Equity Ratios Or Thin Cap Rules Austria does not apply thin capitalisation rules or debt-equity-ratios which would limit the deductibility of interest payments. Austrian corporations can therefore leverage the acquisition of foreign shareholdings or any other investments. Interest is fully tax deductible and can compensate any other income which is achieved by the Austrian corporation.

There is no withholding tax on interest paid to foreign lenders, regardless of where they are located.

So even interest payments to off-shore companies are not exposed to any withholding tax at source in Austria.

Intercompany dividends paid between two Austrian companies are tax exempt in the hands of the receiving Austrian company. Capital gains arising from the sale of shares in an Austrian corporation held by another Austrian corporation are taxable and are due to the standard flat corporate tax of 25%. Financing costs effectively connected with the acquisition of the shares held are fully tax deductible.

Foreign Holdings: Provided that the Austrian company holds at least 10% of the shares of a foreign corporate entity, comparable to an Austrian GmbH, for at least one year, any dividends received by the Austrian company and any capital gains resulting from the sale of the shares of the foreign corporation are tax exempt in Austria. Regardless of whether Austria has a treaty with that foreign country or not. This tax exemption is also valid if the foreign subsidiary of the Austrian company is located in a non-tax treaty country or in an off-shore jurisdiction.

52 - Expert Guide : Tax

The Austrian “Check-The-Box”-System An Austrian corporation can make capital gains taxable if it wishes to do so. The Austrian company just has to “check-the-box” in its tax return and can select for which participation any capital gains resulting from a sale should be taxable. Nevertheless dividends received stay tax-exempt.

The Foreign Subsidiary Austrian law does not know CFC-legislation or similar regulations. Nevertheless it is important to know how income achieved by a foreign subsidiary has impact on the tax situation of the Austrian parent company.

ompany By Erich Baier Provided that the Austrian corporation holds shares in a foreign entity which achieves passive income the sale of such a participation and the dividends when, paid to the Austrian company, will be taxable. The mere holding of such corporations does not trigger any taxes.

Although losses from the foreign subsidiary can be set off from the tax base of the Austrian parent dividends paid by such a foreign entity are tax exempt. Such dividends from foreign entities are tax exempt even if the foreign entity is not due to taxes.

What Is Seen As Passive Income?

Indirect Holdings

The Austrian tax authorities categorise income as passive if the following income is achieved by the foreign subsidiary and, at the same time, the overall tax burden of this subsidiary is not more than 15 %.

According to Austrian law also indirect participations via partnerships lead to tax exempt income for the Austrian holding company:

•Interest income •Royalty income •Capital gains achieved by selling shareholdings of less than 10 % in other corporations •Dividends are tax exempt if resulting from rental income (considered to be active income) •Dividends are tax exempt even if the foreign subsidiary is not due to taxes

Taking into consideration that Austria has a far reaching treaty network (currently 89 treaties) including countries like Barbados, Belize, Estonia, Hong Kong (2011), Liechtenstein, Luxembourg, Malta, San Marino, Switzerland, Singapore, UAE and Cyprus just to name a few of those, which also have very interesting tax regimes, it is of course a fact, that these very interesting tax treaties open a bundle of tax planning opportunities.

It is important to know, that if the foreign subsidiary achieves profits from buying and selling securities, treasury bonds or stocks this is considered to be active income and therefore any dividends paid to the Austrian company and any capital gains achieved by the Austrian company are tax exempt.

The Foreign Subsidiary Is Making Losses Due to the new group taxation system, losses, suffered by foreign subsidiaries, can be set off from the domestic tax base of the Austrian company holding shares in such a subsidiary, provided that the Austrian company holds more than 50% of the shares of the foreign subsidiary. These foreign losses have to be exposed to taxes in the hands of the Austrian corporation when the foreign entity is using these losses as a carry forward to compensate its own tax burden.

Tax Treaty Network

Dual Resident Companies Any corporate entity, regardless where domiciled, has access to the Austrian holding system, provided that the management of the foreign parent company is located in Austria. This would be the case when a BVI company is holding shares in a Russian or Ukrainian company but the managing director of the BVI company is resident in Austria.

Obtaining Royalty Income Via Austrian Companies Austrian companies are quite often used to obtain royalty income from foreign sources.

Austria has a large number of tax treaties with other countries and a large number of these treaties provide for a zero withholding tax rate levied upon royalty payments to or from Austrian companies.

Expert Guide : Tax - 53

These are the treaties with: Belgium Belize Bulgaria Canada Croatia Cyprus Czech Republic Denmark Egypt Faroer Islands France Georgia Germany Greece Hungary Ireland

Italy Luxembourg Malta Netherlands Norway Russia San Marino Slovak Republic Slovenia South Africa Sweden Switzerland Tadjikistan Turkmenistan Ukraine United Arab Emirates

In case of other treaty countries the withholding tax rate is significantly reduced ranging between 3% and 10%, only in some cases 15%.

Using regulations laid down in Austrian tax law such royalty income routed via an Austrian company can lead to a profit exposed to a tax bracket of only 4% to 8%.

Austrian Trading Company An Austrian Company can serve perfectly as an agent for an off-shore principal and profits resulting from the trade of goods are then exposed to an effective tax bracket of only 2% to 5%.

Summary The large treaty network in combination with a perfect holding regime together with the possibility to obtain binding rulings from the Austrian tax administration make Austria a perfect place for holding companies and further tax planning activities.

Erich Baier, MBA, LL.M. (Int’l Tax Law) TEP is a certified tax advisor. He can be contacted by phone on +43 1 516 12 x 0 or alternatively via email at baier@austrian-taxes.com

54 - Expert Guide : Tax

Expert Guide : Tax - 55

Cyprus Is Becoming The Jurisdiction Of Choice For Intellectual Property Rights By Boris Lazi

I

t is a recognised principle that wealth creating assets may well rest on Intellectual Property (IP) Rights, as all companies have them, but few exploit them to their fullest extent. IP rights derive from the Legal System, such as registered rights, trade marks, etc.

IP rights give more value to businesses. In forming an IP Company, proper due diligence should take place, since there is a need to identify all the possible IP rights that may exist. The next step is the very important consideration of finding the most suitable jurisdiction for the IP Company. The jurisdiction in question must offer a wide range of agreements for the avoidance of double taxation (DTT) so that IP rights can be exploited in a number of countries. In addition, due to the DTT a favourable withholding tax (WHT) (if any) will be imposed on the royalty income that the IP Company is entitled to receive. Above all however, the country of tax residence of the IP Company must offer a beneficial tax regime itself.

There is no perfect jurisdiction for an IP Company. Each case should be assessed in accordance with its own merits as all jurisdictions offer advantages and disadvantages. What a skilled tax advisor should do is to ensure that the benefits his/her client receives exceed the costs to a great extent.

Cyprus, as a jurisdiction, offers many more advantages rather than disadvantages to IP Companies.

Royalty Rights Taxation Taxation of royalty income is regulated by the Income Tax Law 118(I)/2002 (as amended). In accordance with the Income Tax Law 118(I)/2002 (as amended) the Cyprus IP Company will be subject to withholding tax (WHT) on the royalty income it receives from the use of intellectual property within the territory of the Republic of Cyprus.

56 - Expert Guide : Tax

In most cases however, when a Cyprus IP Company is used for the purposes of international tax structures, the IP rights are used outside the territory of the Republic of Cyprus. If the IP rights are not used in Cyprus, there will be no WHT imposed in Cyprus when the Cyprus IP Company in its capacity as sub-licensee proceeds with making a payment from the sublicensing of the IP rights to the licensee located abroad.

The House of Representatives of the Republic of Cyprus has voted for new amendments to the aforementioned Income Tax Law in May of 2012.

These new amendments amongst all, intend to establish Cyprus as a favourable jurisdiction for IP Rights, by creating an appealing tax regime for an IP company.

The amendments to the law provide that 80% of any income generated from IP rights will be exempt from Corporate Income Tax (CIT); therefore only 20% of the profits generated from IP rights (royalties) will be subject to CIT at the rate of 10%.

The aforementioned tax treatment is also applicable to any profit made from the future sale of the IP rights.

Furthermore, the law permits the deduction of all expenses that result out of the production of the royalty income. Therefore, the amount to be paid may be reduced even further.

ic

Subsequently, having the aforementioned in mind with regard to the amendments of Income Tax Law 118(I)/2002 (as amended), a Cyprus IP Company will effectively be liable to a maximum tax of 2%, as it is only taxed on 20% of its profits in case of royalty income.

The amendments to the law have come into force on 6th July 2012 and have a retroactive effect as of 1st January 2012.

Below we have illustrated an example of the benefits gained when using a Cyprus IP Company. We have used Russia as an example and all the figures indicated therein are used solely as an example for the purposes of this article.

Please note that the example illustrates an initial royalty income of €10,000 before any taxes are imposed. We have indicated that the Cyprus IP Company has gained a profit of €2,000 from sublicensing the IP rights. The remaining €8,000 are what the group headquarters are entitled to received as a result of licensing the IP Rights. Applying the favourable tax regime, the Cyprus IP Company will solely liable to an amount of € 40 in tax.

At the beginning of this article it was mentioned that when choosing the right jurisdiction for an IP Company, such jurisdiction needs to offer a range of treaty network as well as the lowest possible tax. Cyprus has an extensive DTT network with the world’s leading countries as well as with the emerging economies.

To be more precise Cyprus has signed treaties with the G20 countries (USA, France, UK etc), with the former Eastern Bloc countries (Ukraine, Azerbaijan, Armenia etc), with the EU countries (Austria, Malta, Poland, Belgium etc), the BRIC countries (Brazil, Russia, India, China) as well as with the countries of the Arab World (UAE, Egypt etc). As such Cyprus has over 46 treaties that are currently in force. With reference to the favourable tax regime, I find that finding another non offshore jurisdiction that offers a flat tax rate of 10% only on 20% of the royalty income will be a difficult task for anyone. Subsequently, Cyprus satisfies all the requirements of a very beneficial IP Company jurisdiction.

“

The amendments to the law provide that 80% of any income generated from IP rights will be exempt from Corporate Income Tax (CIT); therefore only 20% of the profits generated from IP rights (royalties) will be subject to CIT at the rate of 10%.

Eurofast’s Take

“

In regard to capital expenditure it ought to be noted that the Cyprus IP Company will be able to write off any capital expenditure for the purpose of the acquisition or development of the IP Rights.

Such a write off will be permitted for the initial five years of use. Straight line capital allowances at the rate of 20% will be applicable for the first years of use as well as the following four years.

Tax complexity does indeed arise when a company is involved in international operations, due to their multi-jurisdictional nature. With the correct structuring however, international operations will offer greater flexibility.

When it comes to IP rights the lowest possible tax, as the amended Income Tax Law 118(I)/2002 has come into force, makes a Cyprus IP company in the hands of a tax advisor one of the best tax planning tools in the area of IP rights

Expert Guide : Tax - 57

Boris Lazic is a Tax & Legal advisor with Eurofast Taxand. He has received his Bachelor of Laws at the University of Wolverhampton. Prior to coming to Eurofast, Boris was employed by a large law firm in London and a leading law firm in Cyprus.

He is currently undertaking a Masters of Laws (LLM) at the University of London (University College London and Queen Mary) via distance learning.

Boris’s specialises in Corporate Law, Property Law, Conveyance, Tax Law and Immigration Law. Boris is known for breaking cultural boundaries and as such is instructed regularly to represent and advise international clientele. He speaks English, Russian, Greek and Serbian fluently.

Boris Lazic can be contacted by phone on +357 22 699 222 or alternatively via email at boris.lazic@eurofast.eu

58 - Expert Guide : Tax

Expert Guide : Tax - 59

Debt Financing Of Russian Operations: Time To Re-Think By Maxim Alekseyev & Zaurbek Timaev

G

Generally there are two ways to finance a subsidiary: via equity or debt. If the aim of financing is to push back profits of a subsidiary to a shareholder, the more preferably is the second one, as debt financing allows a firm to transfer revenues from the subsidiary to shareholders irrespective of whether the subsidiary realised profits and if such profits will be distributed to the shareholders.

Not surprisingly debt financing has been extensively used by foreign investors to finance their Russian operations. However taking into account recent developments in Russian case law it may be time for investors to re-assess the long established approach.

They argued that treaties are forbidding any discrimination and explicitly stipulate that a Russian company owned by a foreign company will not be the subject to more burdensome taxation than the Russian company owned by another Russian company. Interest paid to Russian parent lenders is not subject to limited deduction, whereas interest paid to a foreign parent company is. Hence the thin capitalisation rules are discriminatory as their application depends on the nationality of lender.

The Russian Thin Capitalisation Rules In order to fight tax base erosion by means of excessive interest deduction Russia introduced in 2001 thin capitalisation rules. They apply to debt obligations of a Russian company to a foreign organisation which directly or indirectly owns over 20 % of the charter capital of the Russian company.

According to the rules if the amount of debt exceeds three-to-one debt-to-equity ratio, the interest payable by the Russian company to the foreign investor will be subject to limited deduction for the purposes of calculation of the borrower’s profits tax. Moreover the excessive interest is re-qualified into dividends and taxed accordingly.

However the devil turned out to be not so black as he was painted by the legislator.

The Russian companies paying interest to foreign companies – residents of countries which has double tax treaty agreements with Russia are invoked the treaty protection.

60 - Expert Guide : Tax

It should be noted that most of the Russian tax treaties were adopted well before the thin capitalisation rules. Therefore you’ll hardly find any comments from state authorities on how to resolve this contradiction in the favour of taxpayers.

At the same time most of the treaties exempted interest from withholding tax in Russia. As a result of all these factors the foreign investors received tax free interest which decreased the Russian subsidiary’s profits tax.

The courts consistently ruled in favour of the taxpayers holding that non-discrimination clause of a double tax treaty controls the thin capitalisation rules.

Finally one of the cases decided by lower courts was reconsidered by the Supreme Commercial Court. The Court ruled that treaty protection cannot be invoked if there is a conflict between the treaty and the thin capitalisation rules.

Loans From Foreign “Sister” Companies The wording of the rules explicitly exclude from its scope interest incurred on loans from a foreign affiliated company that holds no stock in a Russian borrower. However, in a recent case the tax authorities were able to prove that the thin capitalization rules may be applied, if the funds were actually provided by a foreign parent company but channelled through a foreign sister company.

According to the facts of the case ConocoPhillips (US) indirectly owned around 30% of the Russian company which received loans from its US sister company and deducted the interest in full.

The tax authorities identified that ConocoPhillips was party to the Shareholders Agreement in which it undertook the obligation that the Russian company shall be financed via loans from the shareholders’ affiliated entities. Templates of these loan agreements (including terms and conditions) were attached as Addendums to the Shareholders Agreement.

Further, the actual loan agreements between the Russian entity and its US sister company were titled “shareholder loan agreements”. Occasionally, the Russian entity would request advance financing directly from ConocoPhillips, although the actual cash was wired from the US sister company.

Finally, ConocoPhillips treated the interest payable by Russian entity under the related “shareholder loan agreements” as its own interest income for accounting purposes.

Based on the ‘substance over form’ approach courts found that the loans should be construed as provided by ConocoPhillips, since it was ConocoPhillips which organized and controlled the financing of the Russian entity. Therefore the thin capitalisation rules are applicable to the interest accrued on the loans.

“

Not surprisingly debt financing has been extensively used by foreign investors to finance their Russian operations.

“

Even though Russia is not a common law country the lower courts follow the precedents set by the Supreme Commercial Court. Therefore the taxpayers immediately felt the negative impact of this ruling. Still there was another means available for a foreign investor to avoid application of the thin capitalisation rules.

We cannot say all loans provided by foreign sister companies will be the subject to thin capitalisation rules, as this case is quite unique in terms of evidences that the tax authority was able to collect.

At the same time we see tax authorities starting to attack sister financing structures using the same approach even though not having the same evidence.

They’re organized information exchange between competent authorities of double tax treaty countries as the tax authorities tend to get more information on a Russian company’s shareholders and its affiliated foreign legal entities. This information allows the tax authorities to claim that the ultimate lender is a foreign parent company, even though the loans were extended by a sister foreign company.

The lack of any changes in law the tax environment for debt financing of Russian operations was significantly altered by the courts. Hence the debt financing may no more be a feasible option for many investors. We would recommend carefully reviewing the existing tax legislation and your future investments taking into account the risks described above.

Expert Guide : Tax - 61

Maxim Alekseyev is a senior partner at ALRUD and is head of the AsiaPacific Desk. He deals with both Russian and foreign partners within the territory of Russia and abroad.

Maxim has extensive experience in managing investment projects for the largest oil and gas, machine building, real estate construction, food companies, wholesale, retail traders, mass media and other companies.

Mr. Alekseyev is a member of the International Bar Association (IBA), the American Bar Association (ABA), the Inter-Pacific Bar Association (IPBA) and the Society of Trust and Estate Practitioners (STEP) – a professional body joining the world’s most prominent experts specialised in the management of personal finance.

Maxim Alekseyev can be contacted by phone on +7 495 234 96 92 or alternatively via email at malekseyev@alrud.com Zaurbek Timaev is a tax consultant at ALRUD and has a strong expertise in corporate and international taxation, client representation both in tax authorities and courts.

He provides ALRUD clients with advice on a diverse range of complicated tax issues, supports them during tax audits, represents clients’ interests in negotiations with state authorities, participates in performing tax due diligences and tax audits Zaurbek Timaevcan be contacted via email at ztimaev@alrud.com

62 - Expert Guide : Tax

Expert Guide : Tax - 63

Snapshot: Tax Havens facts and figures •Andorra – Corporate Tax – N/A; Income Tax – 0% •The Bahamas – Corporate Tax – 0%; Income Tax – 0%; Payroll Tax – 0% •Bahrain – Corporate Tax – 0%; Income Tax •Bermuda (United Kingdom) – Corporate Tax – 0%; Income Tax – 0% •British Virgin Islands (United Kingdom) – Corporate Tax – N/A; Income Tax – 0% •The Cayman Islands (United Kingdom) – Corporate Tax 0%; Income Tax – 0% •The Channel Islands of Jersey and Guernsey (United Kingdom) – Corporate Tax 0%; Income Tax – 20% •Cyprus – Corporate Tax - 10%; Income Tax - 35% •The Isle of Man (United Kingdom) – Corporate Tax – 0%; Income Tax – 20% •Liechtenstein – Corporate Tax 12.5% to 15%; Income Tax – 1.2–34.32% •Mauritius – Corporate Tax 15%; Income Tax - 15%; •Monaco – Corporate Tax 0%-33% on profits, Income Tax – 28-40% •Panama – Corporate Tax - 25%; Income Tax 25% •Switzerland – Corporate Tax – 21.17%; Income Tax 40% •Turks and Caicos Islands (United Kingdom) – Corporate Tax – 0%; Income Tax – 0%;

64 - Expert Guide : Tax

Average Rates By Region Africa: Corporate Tax - 28.89%; Income Tax – 26.82% North America: Corporate Tax - 33%; Income Tax – 28.29% Asia: Corporate Tax - 23.12%; Income Tax – 34.93% Europe: Corporate Tax - 20.6%; Income Tax – 34.93% Latin America: Corporate Tax - 28.3%; Income Tax – 31.84% Oceania: Corporate Tax - 28.6%; Income Tax – 37.75% EU: Corporate Tax - 22.75%; Income Tax – 37.35% OECD: Corporate Tax - 25.37%; Income Tax – 40.59% Global: Corporate Tax - 24.43%; Income Tax – 31.82% 1) An international money-laundering watchdog has found that a total of 17 countries are presented as high-risk and non-cooperative jurisdictions. The Financial Action Task Force (FATF) Blacklist in February 2012 has gone as far as applying counter-measures against Iran and Democratic People’s Republic of Korea.

2) The 16th annual World Wealth Report (2012) from Merrill Lynch/Capgemini finds the number of High Net Worth Individuals (HNWI) has declined across all regions in 2011, with the exception of the Middle East. The 1.7% decline is the first since the 2008 world economic crisis, a year in which HMWI global wealth declined by 19.5% 3) An advocacy group known as the Tax Justice Network claims that there may be as much as $32 trillion of hidden financial assets held offshore by high-net-worth individuals in their report The Price of Offshore Revisited (July 2012). The estimates are based on financial assets and exclude non-financial assets such as real estate and yachts held by offshore structures.

4) The Tax Justice Network also claims that tax evasion costs the world $3.1 trillion a year – more than 5% of world GDP. 5) 9% of Brazil’s GDP is lost in tax dodging, while only 5% is invested in Education.

6) Microsoft explained to the US Securities and Exchange Commission (SEC) last year that its declining effective tax rate (what it pays as a ratio of profits) resulted from using Ireland, Puerto Rico and Singapore as regional sales centres for routing profits, because of their low-tax regimes.

7) Apple have also followed Microsoft by taking advantage of the Republic of Ireland’s ultra-low tax rate after it was announced that the technology giants paid a paltry £10million in UK corporation tax in the last financial year, despite earning an estimated £6billion in the country over that period.

8) In December the Public Accounts Committee claimed that Britain’s biggest firms owe the taxman up to £25.5 billion, but are regularly let off the hook – while the report also claims that Dave Hartnett, the outgoing HMRC chief executive, was wined and dined 107 times by big firms’ tax lawyers and advisors between 2007 and 2009.

Expert Guide : Tax - 65

The Model Intergovernmental Agreement Under FATCA By Michael L. Schler & Christopher K. Fargo ntroduction The Foreign Account Tax Compliance Act (“FATCA”)1 imposes a 30% U.S. withholding tax on certain payments to a foreign financial institution (“FFI”), including interest paid by a U.S. borrower, if the FFI does not agree to disclose information about its U.S. accountholders to the U.S. government. Under proposed regulations (the “Proposed Regulations”), withholding does not apply to payments on obligations outstanding on January 1, 2013, and FATCA withholding generally begins on January 1, 2014. Final FATCA regulations are expected this fall.

On February 8, 2012, the U.S. Treasury released a joint statement with the governments of France, Germany, Italy, Spain and the United Kingdom (the “participating countries”). The statement recognised that implementing FATCA could be complicated by several issues, including the existence of local legal restrictions on information reporting (such as privacy considerations), as well as compliance costs for FFIs. The statement announced that the participating countries would develop a framework for “domestic reporting and reciprocal automatic exchange based on existing bilateral treaties” that would address the local legal restrictions and reduce compliance costs for FFIs. Model Intergovernmental Agreement On July 26, 2012, the U.S. Treasury released a model intergovernmental agreement (the “Model Agreement”) to implement FATCA that was developed in consultation with the participating countries. On the same day, the U.S. and the participating countries issued a Joint Communiqué stating that the parties look forward to a speedy conclusion of bilateral agreements based on the Model Agreement, including by other jurisdictions. The parties also state that they will, in cooperation with other countries, work towards common standards to support a more global system of combating tax evasion while minimising compliance burdens.

66 - Expert Guide : Tax

The Model Agreement likewise commits the parties to working with the OECD to adapt the Model Agreement to a common model for automatic information exchange.

The Model Agreement creates an alternative to the usual rule that an FFI is exempt from FATCA withholding tax only if it enters into a direct agreement with the U.S. Internal Revenue Service (“IRS”) to provide information about U.S. accountholders.

Rather, an FFI located in a jurisdiction that has entered into the Model Agreement (such jurisdiction, the “FATCA Partner”) would provide the relevant information to the FATCA Partner, and the FATCA Partner would itself provide the information to the IRS. An FFI branch located within the FATCA Partner would be subject to the Model Agreement even if the FFI’s place of incorporation or headquarters was located elsewhere.

The participating countries published two versions of the Model Agreement. Under the nonreciprocal agreement, information would only flow from the FATCA Partner to the IRS. Under the reciprocal agreement, the U.S. would also provide the FATCA Partner with information about the FATCA Partner’s taxpayers that are accountholders of U.S. financial institutions. The U.S. will only enter into the reciprocal agreement if it is confident that the information will remain confidential and will only be used for tax purposes.

The Model Agreement (in both versions) requires the U.S. and the FATCA Partner to automatically share information pursuant to a bilateral tax treaty or tax information exchange agreement between the two nations.

Consequently, the Model Agreement would only be available for jurisdictions that have such a treaty or agreement with the U.S. In addition, the FATCA Partner would, if necessary, be required to adopt local legislation allowing the relevant information to be provided by the FFI to the FATCA Partner and then to the U.S. The Model Agreement requires the FATCA Partner to obtain from all of its nonexempt FFIs, and provide to the U.S., the name and identifying number of the FFI, and, for each financial account in the FFI held by a U.S. person (or by a non-U.S. person that has a controlling U.S. person), (i) the name, address and U.S. taxpayer identification number (“TIN”) of the U.S. person, (ii) the account number, (iii) the account balance or value and (iv) the amount of interest, dividends and other income credited to the account. The Model Agreement imposes extremely detailed “due diligence” requirements on an FFI in determining whether its accountholders are U.S. persons. The reciprocal agreement requires the U.S. to provide similar information to the FATCA Partner, and this requirement could increase the burden on U.S. financial institutions (such as to obtain a foreign TIN from non-U.S. depositors).

Under FATCA and the Proposed Regulations, if an FFI cannot obtain information about an account holder or cannot provide such information to the IRS because of local laws, the account holder is treated as “recalcitrant” and is subject to withholding by the FFI or termination of the account.

These rules would not apply under the Model Agreement as long as the U.S. receives the required information (for example, if the FATCA Partner is able to obtain the information from the FFI or the holder).

Similarly, under FATCA and the Proposed Regulations, an FFI entering into a private agreement with the IRS is in compliance only if its “expanded affiliated group” enters into similar agreements.

The FFI must terminate its business in any jurisdiction in which its branch or affiliate cannot enter into such an agreement.

By contrast, under the Model Agreement, an FFI will be treated as compliant notwithstanding the status of its expanded affiliated group, if the FFI and the branch or affiliate satisfy certain conditions, including anti-abuse rules.

The Model Agreement does not exempt FATCA Partner FFIs from FATCA. Rather, a FATCA Partner FFI that complies with its obligations under the Model Agreement will be deemed to have complied with FATCA and accordingly will not be subject to FATCA withholding. If a FATCA Partner FFI is in significant noncompliance with its obligations, the FATCA Partner is obligated to apply its local laws (including penalties) to obtain compliance, and if this is not successful within 18 months, the FFI will be added to an IRS list of noncompliant FFIs that are subject to FATCA withholding tax.

The Model Agreement clarifies and simplifies the obligations of FFIs and has received a generally favorable response in the U.S. The Future The U.S. Treasury has stated that it hopes that agreements will be signed with the participating countries by early September. It will then begin negotiations with other countries. In addition, in June 2012, the Treasury issued separate Joint Statements with Switzerland and Japan that contemplated a different framework (the so-called Model II approach). Under that approach, FFIs in the relevant jurisdiction would provide certain information directly to the U.S., and such information would be supplemented by exchange of information between the U.S. and the other government pursuant to a group request under the treaty or other agreement. The Treasury is expected to release a model agreement containing this alternative in the near future.

Expert Guide : Tax - 67

One complexity created by the Model Agreement is that some branches of an FFI could be subject to the Model Agreement, while other branches could be subject to different rules in individual agreements with the IRS. Hopefully, the final FATCA regulations will provide rules similar to those in the Model Agreement. This would greatly simplify compliance with FATCA by all FFIs, especially those located in multiple jurisdictions.

Cravath has long been known as one of the premier U.S. law firms. Each of its practice areas is highly regarded, and its lawyers are recognised internationally for their expertise and commitment to client interests. Cravath is by design not the largest law firm measured by number of offices or lawyers.

Its goal is to be the firm of choice for clients for their most challenging legal issues, most significant business transactions, and most critical disputes.

Michael L. Schler is a tax partner, and Christopher K. Fargo is a tax associate, at Cravath, Swaine & Moore LLP in New York City. Michael practices in the areas of mergers & acquisitions, corporate tax, consolidated returns, and financial products. He is a past Chair of the New York State Bar Association Tax Section, the author of numerous published articles, a past winner of the Chambers USA Award for Excellence in Corporate Tax, and a top rated tax lawyer by Chambers Global and other publications.

The Firm’s Tax Department is primarily engaged in complex U.S. and international corporate transactions, including public and private mergers and acquisitions, spin-offs, joint ventures, private equity transactions, financial transactions, real estate transactions, and debt and equity offerings.

Michael can be contacted via phone on +1 212 474 1588 or alternatively by email at mschler@cravath.com Christopher can be contacted via phone on +1 212 474 1236 or alternatively by email at cfargo@cravath.com

68 - Expert Guide : Tax

1 - Internal Revenue Code sections 1471-1474.

Expert Guide : Tax - 69

US Virgin Islands Business Incentives By Marjorie Raw ntroduction The US Virgin Islands (USVI) is an unincorporated US territory acquired from Denmark in 1917. As a US territory, the USVI occupies a unique status; although part of the US, it has been granted the authority by the US Congress to enact special tax laws to encourage investment in business operations and to develop a financial services industry.

The USVI has enacted targeted tax incentives to certain types of businesses that enhance the economic well-being of the territory and its people.

These benefits, administered by the Economic Development Commission (EDC), are available for financial services companies, including investment managers and advisors, business and management consultants, international trading and distribution, and other businesses serving clients outside the USVI. Benefits are also available for hotels, recreation facilities, manufacturers, businesses in the marine industry, and agriculture.

Businesses can also qualify for tax benefits under the University of the Virgin Islands Research and Technology Park (RTPark), which is an autonomous instrumentality of the USVI government and was created to foster the development and expansion of a technology sector in the USVI. Tax Benefits Benefits under the EDC and RTPark Programs include a credit equal to 90% of the otherwise applicable income tax, which applies both to the income from the benefited business and to the bona fide USVI resident owners on their allocations or dividends. Hence a USVI corporation pays an effective tax rate of 3.85% on its eligible income.

(Salaries and other forms of compensation such as guaranteed payments are fully taxable.)

70 - Expert Guide : Tax

Beneficiaries are also exempt from the territory’s 5% tax on gross receipts, and from USVI property tax for the property occupied by the beneficiary.

No withholding tax is imposed on payments to US corporations.

Beneficiaries with foreign corporate owners are exempt from withholding tax on interest payments and are subject to a reduced withholding tax rate of 4.4% on dividend payments.

Similarly, no income tax is payable on interest paid to nonresident alien individuals, and the tax rate on dividends paid to nonresident individuals is 4%. Businesses in the RTPark also pay a reduced withholding tax on royalties of 4.4% and 4% respectfully. Finally, a beneficiary’s customs duties are reduced from 6% to 1% on raw materials and component parts imported from outside the US. No local customs duties are imposed on US made products.

EDC Requirements To qualify under the EDC Program, an applicant must make a minimum capital investment of US$100,000, and must meet certain minimum employment requirements. Typically a business must employ 10 full-time employees but pending legislation would reduce the employment requirement to five persons. Beneficiaries must purchase goods and services locally when available, make certain contributions to scholarships and public education, and provide a plan for civic participation.

Beneficiaries must also provide employee benefits and enact a management training program.

wls Roberts The application process requires submission of a detailed application including details of the beneficiary’s ownership, followed by the application’s presentation at a public hearing before the EDC commissioners. EDC applications are then reviewed by the commissioners and, upon receipt of a favorable recommendation, are forwarded to the USVI Governor for final review. With the Governor’s approval, benefits are available for initial periods ranging from 10 to 30 years, depending on where in the USVI the business is located. Benefits can be extended in five-year increments and are reduced by 10% on extension.

RTPark Requirements RTPark applicants must qualify as “KnowledgeBased Businesses,” which includes “e-Commerce Businesses.” A “Knowledge-Based Business” is statutorily defined to include any business that uses highly skilled or highly educated personnel and a high level of research and development to create intellectual assets and property. An “e-Commerce Business” is defined to mean any business involving electronically based data transactions for digitally based commerce.

The RTPark beneficiary, or “Protected Cell,” must provide the RTPark with an equity interest in the Protected Cell entity, and negotiate an initial fee to the RTPark and an ongoing payment that can be a set amount or a percentage of gross income.

Protected Cells work closely with the University of the Virgin Islands to develop opportunities for students and faculty.

Applications (including extensive due diligence) are reviewed by the RTPark Board and, upon a receipt of a favorable recommendation, by the USVI Governor. Benefits are available for a 15-year period regardless of where the Protected Cell operates within the USVI and may be renewed for periods of 10, then five, years.

Federal Requirements for Tax Incentives The Internal Revenue Code of 1986, as amended (Code), applies in the USVI under a “mirror” system whereby “USVI” is substituted for “United States” wherever the latter appears. Also, the Code contains several sections – notably sections 932, 934, and 937 – that deal specifically with the USVI and govern the extent to which the USVI can grant tax incentives and how USVI residents file their tax returns.

The USVI can grant tax benefits on any USVI source income and on certain income that is effectively connected with a USVI trade or business. Income is USVI source if it is fee income for services performed in the USVI. Capital gains derived by a USVI business may also be eligible if certain requirements are met (although gains from the sale of assets contributed by a US resident who then moves to the USVI must typically be allocated). Certain dividend and interest income from a USVI payor is USVI source income.

Income may be effectively connected with a USVI trade or business if it consists of non-US source dividends or interest derived in the active conduct of a banking, financing, or similar business. The USVI cannot reduce or rebate tax on income from US sources, except for sales of inventory manufactured in the USVI where title passes in the US. Of course, income must be earned in the conduct of the business activities approved by the EDC and the RTPark.

Owners of eligible businesses can also get the benefits on their dividends or distributions if they are bona fide USVI residents. To be a bona fide USVI resident, the individual must meet certain physical presence, closer connection, and tax home tests set out in the Code.

Expert Guide : Tax - 71

Exempt Companies An overseas investor can obtain US flag protection for non-US investments by using a USVI exempt company (EC). An EC offers many of the benefits of tax-free corporations established in traditional tax-free jurisdictions with special advantages only available to a corporation established in a US flag jurisdiction. ECs are exempt from all taxes on income from business activities outside the USVI and the US, and on USVI source income such as interest and dividends. An EC is covered by the US’s extensive network of treaties of friendship, commerce and navigation and bilateral investment treaties. ECs also give foreign investors access to the US court system for dispute resolution.

Further, an EC can be used to own an aircraft for which an “N” registration number is desired from the FAA. An “N” registration number indicates that the aircraft is maintained to high US standards. US or USVI persons must own less than 10% of the stock of an EC, but it can be owned by individuals or companies from any other country.

A company must elect to be an EC at the time of incorporation by affirmatively electing EC status in its Articles of Incorporation.

Marjorie Rawls Roberts is a tax and corporate attorney based in St. Thomas, USVI. She heads a firm of four attorneys specialising in USVI tax, investment, and business law. She received her J.D. from Harvard Law School and her LL.B. from Cambridge University. Previously she served as an Attorney Advisor in the US Treasury Department’s Office of Tax Policy, as Chief Counsel to the USVI Bureau of Internal Revenue, and as General Counsel/Vice President to a St. Thomas-based hedge fund manager. Ms. Roberts is admitted to practice law in California, the District of Columbia (inactive), the USVI, before the Third Circuit Court of Appeals and the U.S. Tax Court, and is licensed as a Solicitor in England and Wales and the British Virgin Islands.

Marjorie Rawls Roberts can be contacted by phone on +1 340 776 7235 or alternatively via email at jorie@marjorierobertspc.com

72 - Expert Guide : Tax

Expert Guide : Tax - 73

Mexican Anti-Abuse Domestic Tax Provisions Within The Context Of Treaty Law By Jorge Narváez-Hasfu

T

he issue of reference relates to the application of Mexican domestic anti-abuse provisions in connection with payments supposedly protected by a double tax convention when effective taxation in the country of residence of the beneficial owner of the payment is lower than 22.5%.

Mexico has in effect a number of rules that consider that payments (royalties, interest, etc.) are deemed to be made to a preferential tax regime (“PTR”) if they are subject to tax in that jurisdiction at a rate equal or lower that 22.5%. If that is the case, the withholding is increased from the regular domestic tax rate to 40% tax rate as a way to penalise these types of payments.

Let’s say for the sake of example, royalty payments are made to Singapore, a treaty country where the withholding rate is 10% but where local taxation on those royalties is below the 22.5% effective rate mentioned below. The question here is whether the taxpayer is entitled to the 10% treaty withholding or if the domestic anti-avoidance provisions would apply instead, in which case the withholding would be the one set forth in terms of domestic legislation (either 40% or 25%), not treaty legislation.

Up to now, it would appear that treaty provisions protect against domestic provisions; that treaty provisions have higher hierarchy than domestic provisions and thus, that from a constitutional perspective treaty provisions apply over domestic provisions. Notwithstanding the foregoing, it appears that based upon what the OECD Commentaries have mentioned on this regard, the domestic anti-abuse provisions should prevail over treaty provisions since there is no conflict between these two sets of provisions. The OECD Commentaries go on to say that States have adopted CFC or anti-abuse domestic law provisions to maintain the equity and neutrality of these laws in an international environment characterised by very different tax burdens, but such measures should be used only for this purpose.

74 - Expert Guide : Tax

While these anti-abuse rules do not conflict with tax conventions, there is an understanding that member countries should carefully observe the specific obligations enshrined in tax treaties to relieve double taxation as long as there is no clear evidence that the treaties are being abused. Bear in mind that the OECD Commentaries are considered as source of treaty interpretation for the signing states, as confirmed by Mexican domestic guidelines.

Mexican legal framework: In terms of Article 205 of the Mexican Income Tax Law and Rule l.3.17.15. of the Administrative Guidelines currently in effect, payments made to a PTR (regardless of whether there is a double tax convention executed with such PTR) would be subject to withholding at the rate of 40%, unless the payments are made to a related party resident in a country with which Mexico has in effect an ample tax exchange information agreement duly listed in the Administrative Guidelines, in which case, the applicable w/h rate would be one set forth in domestic legislation for regular cases (i.e., here it is 25%).

The question lingers without a clear answer as to the application of these anti-abuse rules within the context of the application of a double tax convention. I would appear that if a tax convention is used only to take advantage of the preferential treatment set forth therein, meaning that no actual substance exists in the country recipient of the payments coming from Mexico - no treaty protection would be awarded to such payments.

ura The Required Platform To Create & Enact An Exhaustive Tax Reform In Mexico

There is clearly much to be done to achieve the rule of law in taxation, ensuring proportional, fair taxation for taxpayers and enough revenue to defray public expenditure without depending on the important amount of taxes paid by Petroleos Mexicanos (the Mexican oil company). Mexico needs an internationally competitive tax platform that fosters domestic and foreign investment, drives job creation and tax compliance, and gives rise to public well-being. To achieve an exhaustive tax reform to the benefit of Mexico and its residents, and to fulfil the aforesaid objectives, a platform is needed whereby a framework of justice and fairness enables the development of an effective tax education program where all Mexicans (taxpayers and authorities alike) consider (i) tax payment to be a social duty more than an empty obligation, and (ii) tax collection to be a public faculty based on the need to cover public spending for the common good within the context of co-responsibility, accountability and absolute transparency.

It appears that an exhaustive tax reform requires a rethinking of ideas that will necessarily imply the rearrangement of public policy priorities. The successful implementation of an exhaustive tax reform requires the commitment of all social and political actors to prioritize and place the general interest over individual or group interests.

While the topic warrants a long and arduous review to come anywhere close to being a final product, as tax lawyers and other tax professionals have insisted, an exhaustive tax reform in Mexico must be geared toward the following objectives, among many others, including general policy goals and more specific short-term goals: (i) Ensuring the legal certainty of taxpayers through clearly understandable, easily applied and sufficiently consistent provisions, in line with the constitutional requirements;

(ii) Designing a fairer income tax (non-preferential tax regimes lacking true social basis shall exist); (iii) Designing and implementing true tax incentives that foster domestic and foreign investment in the long term, as well as job creation and savings; (iv) Greater revenues from indirect taxes and less from income taxes, through a generalisation of the VAT with a higher rate, yet with re-designed exemptions for basic food products; (v) Allowing the states and municipalities to conduct efficient collections and inspections under an improved Tax Coordination Law, to collect federal and local taxes within the scope of their jurisdictions; (vi) Development of better and more streamlined provisions to prevent and penalise the abuse of the law, tax fraud and sham transactions; (vii) Creating cooperation arrangements between the tax authorities and taxpayers, through concepts similar to “Tax Intermediaries” to improve taxpayer relations and reward taxpayer’s timely and voluntary compliance with the respective rules; (viii) Tax simplification through the elimination of the corporate flat tax, which could be replaced with an easily computed minimum tax similar to the U.S. Alternative Minimum Tax, as well as a return to the deduction of purchases rather than the deduction of the cost of sales, which has proven to be much more complicated than the prior regime; (ix) Simplifying tax computations by reducing estimated payments to only four per tax year– there is no valid reason for requiring monthly filings when the economy is not subject to the inflationary changes previously seen; (x) Establishing tax provisions for stricter inspections of unions and similar arrangements to avoid tax evasion through such entities; (xi) Returning to a comprehensive approach to tax consolidation, with clear, specific rules on various scenarios regarding tax deferral and the tax arising in the case of disincorporation or deconsolidation;

Expert Guide : Tax - 75

(xii) Creating a new platform for workers to compute and pay the tax, to more fairly and proportionally pay it in terms of more progressive rates set forth in accordance with the country’s economic reality; (xiii) Broadening the range of personal deductions, to the benefit of the economy overall; (xiv) Better aligning the transfer pricing provisions with international directives such as pro rata expenses, among others, etc.

Of course, the creation of a better tax legal framework does not only depend on the skills, knowhow and expertise of specialists; the creation and implementation of a better tax system depends primarily on the will of political actors and the citizens they represent. A true tax reform requires the commitment, of everyone involved in its development, to ensure public well-being over individual or group interests. A true tax reform must foster a better relationship between taxpayers and the authority, where taxes are levied and paid with a clear sense of social responsibility and with the understanding and conviction that the tax will quantifiably benefit society as a whole. A much improved culture in tax education and on the legal framework should set the foundations for a new and more efficient approach to taxation, finding a way to ensure that all Mexicans are part of the formal economy and contribute to public spending on a voluntary basis by paying a fair and proportional tax.

Jorge Narváez-Hasfura can be contacted by phone on + 52 55 5279 2924 or alternatively via email at jorge.narvaez-hasfura@bakermckenzie.com

76 - Expert Guide : Tax

Expert Guide : Tax - 77

Vietnam Tax Developments By Tom McClelland

I

f there is one thing that is certain concerning Vietnam’s tax system it is change. This has been no different in 2012 with new regulations for all the major taxes. There have been some positive changes including a new withholding tax Circular in which the interest withholding tax rate (a deemed Corporate Income Tax (“CIT”)) has been reduced from 10% to 5% with effect from 1 March.

Under new VAT regulations applicable since 1 March 2012 however VAT is now imposed on interest paid to enterprises that are not financial institutions. This appears to be a policy measure introduced to discourage lending by domestic non-credit institutions. It is unclear to what extent the impact on loans from offshore lenders was considered when this rule was formulated. It has nevertheless been confirmed; at least at local tax authority level that interest on foreign loans is also subject to VAT in addition to the 5% CIT. There are currently discussions at Prime Ministerial level regarding potentially removing the application of VAT to interest. Until there is a formal response from the Prime Minister the local tax authorities take the view that VAT applies.

In terms of other future reforms there is an intention to reduce the CIT rate which will likely be included in the new Law on CIT. Indications from policy makers currently are that the CIT rate will be reduced from the current 25% rate to 20%. It is also intended that the top Personal Income Tax rate will be reduced from 35% to 30% from 2014.

Areas where change is desired but uncertain is with respect to the long standing issue of the restriction on deductibility of advertising and promotional expenditure which, for some major FMCG companies means their effective tax rate is up to 50%. But will the proposed reduction in tax rates be enough to attract new foreign investment into Vietnam where there is intense competition from other countries in the region?

Also in relation to interest the 5:1 debt-to-equity thin capitalisation rule which was included in draft CIT regulations that would have been effective from early 2012 was not finally implemented.

It appears that further time was required to consider the full implications.

Vietnam’s tax incentives have become much more focused since 2009 to specific higher value added industries such as Hi-tech and in locations that are seen as disadvantaged. Export related incentives were finally fully phased out in 2012 in accordance with Vietnam’s WTO commitments.

On the basis of recent discussions with Ministry of Finance policy makers there remains an intention to introduce a thin-capitalisation rule, possibly in the new Law on CIT to be introduced to the National Assembly in 2013. It is appears that the rule it will be considered again from the beginning including by having reference to the rules of other countries, therefore the likely ratio is uncertain at this time.

The removal of incentives for business expansion since 2009 in particular is a major issue for many manufacturing companies that have incentives for their original businesses but cannot obtain them for their expansion.

78 - Expert Guide : Tax

The reduction in incentives was formulated at a time when Vietnam was receiving massive foreign investment in late 2007 early 2008 which led to overheating of the economy.

It is hoped that as the new Law on CIT is being developed that there will be a review of the tax incentive regime in the current environment and at a minimum reconsideration of the re-introduction of incentives for business expansion.

Tax Approach Of The Tax Authorities The past year has been one where many domestic companies have experienced reduced profits or have incurred losses. Government revenue from corporate tax has been reduced. At the same time fiscal stimulus measures, including tax payment deferrals and tax reductions for SMEs and labour intensive industries were introduced.

The result of this lowered tax revenue has meant that the tax environment has become more difficult, in particular for foreign investors. The regularity of tax audits has increased. The tax regulations are being applied very strictly together with the imposition of penalties.

Transfer pricing continues to have the priority focus for the Tax Authorities who continue to enhance their audit capacity through the establishment in 2012 of specialist transfer pricing teams at the central and local tax authority levels. Training of tax officers is ongoing, including by the Australian and Japanese Tax authorities and under a programme sponsored by the European Union.

The Tax authorities are continuing to build their own database of comparable from Vietnamese companies. At present cross-border related party services charges are a particular focus of the tax authorities which are routinely being denied a deduction on tax audit.

An Advance Pricing Agreement (APA) Regime is intended to be introduced in 2014. At present there is a pilot programme being undertaken by the Tax policy Department of the General Department of Taxation.

Tom McClelland is one of Vietnam’s most experienced tax specialists, having advised a wide range of businesses, both international and domestic on all areas of Vietnam taxation since 1998. Tom has over 20 years of international tax experience, originally commencing his career in New Zealand.

Tom has led the corporate income tax advisory and structuring for many offshore investors in a diverse range of industries in Vietnam from oil and gas, consumer goods and financial services to media, information technology and real estate. He was the principal tax advisor to foreign investors seeking to acquire stakes in two of the three largest SOE equitisations in Vietnam and to the purchaser in Vietnam’s largest private equity transaction.

Tom is heavily involved in tax policy in Vietnam and contributing to the development of Vietnam’s tax regime. He is also the Chairman of the Taxation Committee of the European Chambers of Commerce in Vietnam, and the Co-Chair of the Tax Working Group of the World Bank sponsored Vietnam Business Forum, the main platform for structured dialogue between the Government and business.

Tom is the co-author of the first published guide to Vietnam Taxation: CCH Taxes in Vietnam – An Overview.

Tom McClelland can be contacted by phone on +84 8 3911 0727 or alternatively via email at tmcclelland@deloitte.com

Expert Guide : Tax - 79

India Budget 2012- Retrospective Amendmen – Impact Analysis By Krishan Malhotra & Vinayak Srivastava

T

he growth of any emerging country like India depends upon flow of inwards foreign funds by the Non- Resident Investors. The countries tax regime is often a decisive factor, for a foreign investor to invest its funds in any jurisdictions.

The Indian Budget 2012 however, has brought certain significant provisions in the Income Tax Act, 1961 (Act) which could have an adverse impact on conduct of Non Resident Tax Payer business in India. Some of the amendments brought out by the legislature are retrospective in nature, essentially introduced to nullify the effect of valid judicial opinions pronounced by courts in India in favour of the taxpayer. Some of these key retrospective amendments impacting Non-Resident Taxpayer are mentioned belowTaxing Indirect Transfer The retrospective amendment w.e.f. April 1, 1962 of section 9(1) (i) has been made to tax any transfer of share outside India, having substantial underlying assets located in India. This comes in the sharp contrast to the recent judgment by the Supreme Court (SC) in the case of Vodafone International Holding vs. Union of India, 2012 341 ITR 1 wherein the SC concluded that offshore sale transaction between two non-resident for sale of shares of an Cayman Island company having underlying asset in India was outside the tax jurisdiction of the Indian Tax Authorities and hence not subject to any withholding tax in India. It was observed by the SC that section 9 (1) (i) of the Act is not wide enough to cover indirect transfer of Indian shares.

However vide above stated retrospective amendment, the effect of the SC judgment has been nullified and the legislature has clarified that section 9 codifies source rule where state where the actual economic nexus of income is situated (i.e. indirect transfer of substantial Indian assets) has the right to tax the income irrespective of place of residency.

80 - Expert Guide : Tax

Therefore any transfer of shares outside India which results in indirect transfer of “substantial” asset located in India will be taxable in India.

The law in its present form is unclear and does not address some of the contentious issues which tax payer could face. For instance the meaning and scope of word ‘substantial’ has been left for judicial interpretation which could further lead to unnecessary litigation. In the absence of any definition for “substantial” the provision may have arbitrary application to transfer of shares of any offshore company where the company derives some value from its Indian assets.

Furthermore the amended Section 9 of the Act, as currently drafted, could also potentially covers transactions such as secondary transfers of securities listed on foreign stock exchanges and transactions in the nature of intra-group restructuring amongst entities under common control which could adversely impact the Non-Resident Tax Payer.

Satellite Transmission Services Another major amendment was made to the definition of “royalty” to add clarificatory amendment to tax income earned by satellite companies by satellite transmission (including upliking, amplification, conversion for down-linking of any signal).

This nullifies the latest judgment in the case of Asia Satellite by the Delhi High Court wherein it was held that the payments for use of transponder capacity to satellite operators by TV channels cannot be taxed as “royalty”.

nts

Computer Software Yet another instance of overturning the judicial decision is amendment of the definition of ‘royalty’ to include the consideration for use or right to use of computer software irrespective of the medium through which such rights is transferred.

Computer software (mostly shrink wrapped) is usually sold under a licensing agreement whereby the buyer is granted non exclusive limited right to use the program for business or personal purposes. The copyright of the material remains with the seller/manufacturer. The buyer is precluded from transferring or altering the program.

If all rights with respect to the copyright are not transferred to the buyer, the issue is whether the transaction is taxable as royalty income for the use of the copyright or involves the purchase of copyrighted material taxable as business income. Several judgments1 has been pronounced in favour of the taxpayer wherein it has been recognised that transaction involving sale of computer software programs but without any transfer of “copyright” are merely purchase of copyrighted article, not liable to be taxed as royalty income. In this regard it is also pertinent to note that there has been instances2 wherein the judiciary has taken a divergent view and refused accept distinction between copyright and copyrighted article.

However the aforesaid retrospective amendment has put to rest this controversy by bringing in its sweep all consideration for use or right to use of computer software irrespective of the medium through which such rights is transferred. This consequently could have very wide ramification over the Indian computer software industry. The amendment could potentially include even “software for consumer use” which could pose major challenge to the IT industry operating in India and could also bring financial adversities to IT industries operating in India.

“

The law in its present form is unclear and does not address some of the contentious issues which tax payer could face. For instance the meaning and scope of word ‘substantial’ has been left for judicial interpretation which could further lead to unnecessary litigation.

Applicability Of The Retro Amendments

“

It was observed by the Delhi High Court that AsiaSat cannot be on account of providing its customers right to use a process or equipment as the control & possession of the transponder/satellite vests all the time with AsiaSat and not with Customer. However the Finance Act 2012, amended section 9 retrospectively and clarified that the definition of royalty includes consideration received for data transmission by satellite and nullified the decision of Delhi High Court in the case of Asia Satellite. The amendment could potentially affect various satellite companies and undersea cables companies operating in India and currently under litigation before the various tax authorities.

In view of increasing criticism of these amendments, the erstwhile Finance Minister, Mr. Pranab Mukherjee in his statement has clarified that retrospective amendment will not override tax treaties entered by India with respective countries. However it is pertinent to note that no such clarification has been codified by the Government under Act or by any rules or notification.

The Indian Judiciary on the other hand has also provided some respite. The Mumbai ITAT in the case of B4U International Holdings Ltd.ITS-362ITAT-2012(Mum) has held that the said amendment could not be applied unless there was a corresponding amendment made in the relevant DTAA. Therefore these retrospective amendments may not apply to the taxpayer claiming treaty protection unless the treaty is amended in line with the retrospective amendment.

Expert Guide : Tax - 81

Conclusion The above retro amendments may be considered as a challenge to investor friendly environment which every investor requires. These amendments have already received negative feedback from the Industry experts and have already effected foreign direct investments in India. In view of the same, Indian Government has recently appointed committee headed by Dr. Parthasarthy Shome to review the retrospective amendments made under the Act. The recommendation of the committee on retrospective amendment is keenly awaited by the corporates in India. Hopefully wisdoms will prevail and these harsh, unreasonable amendments would be revoked by the Government.

This article has been authored by Krishan Malhotra, Partner and Vinayak Srivastava, Associate, associated with Amarchand & Mangaldas New Delhi.

Mr. Krishan Malhotra has extensive experience spanning over 25 years in the areas of Direct Tax (Domestic and International), Cross Border Taxation including Alternate Dispute Resolutions and Business Advisory Services. His experience straddles areas like Tax Strategy, Transfer pricing, Regulatory Practice, mergers, acquisitions, and re-organizations. He has wide exposure across industries and its practices and has worked in the fields of corporate and business tax compliance services, analyzing cross border tax risks and planning across multiple jurisdictions.

He holds dual degrees in Law and Chartered Accountancy.

Krishan Malhotra can be contacted via email at krishan.malhotra@amarchand.com

82 - Expert Guide : Tax

Mr Vinayak Srivastava is an law graduate and is currently working as an Associate, at Amarchand & Mangaldas & Suresh A. Shroff & Co. He has extensive experience in the areas of Direct Tax advisory (Domestic and International), Litigation before various forums for direct tax matters and advising clients merger & acquisition issues.

Vinayak Srivastava can be contacted via email at vinayak.srivastava@amarchand.com 1 - Millennium IT Software , 2011-(338)-ITR0391-AAR, Ericson AB, ITA No.504/2007 2 - Samsung Electronics 2011-(203)-TAXMAN0477-KAR

Expert Guide : Tax - 83

Indian Tax Regime: Two Recent Rulings By Aliff Faze

T

wo recent rulings, one by the Supreme Court and another by the Income Tax Appellate Tribunal in Mumbai, have lent some clarity to two important aspects in the Indian tax regime.

The above stated uncertainty has been brought to a rest with the recent decision of Supreme Court in the case of Columbia Sportswear Company Vs. Director of Income Tax, Bangalore (“the Case”), wherein the apex court has held that–

Columbia Sportswear Company Vs Director of Income Tax, Bangalore1

1. An AAR is a tribunal within the meaning of the expression in Articles 136 and 227 of the Indian Constitution; 2. Section 245S of the Act does not bar the jurisdiction of the Supreme Court under Article 136 or the jurisdiction of the High Court under Articles 226 and 227 of the Indian Constitution to entertain a challenge to the advance ruling of the AAR;

The Supreme Court of India has delivered an important judgment which interalia deals with the issue of challenging the decisions of the Authority of Advance Rulings (“AAR”) by way of writ petitions/Special Leave Petitions (“SLP”).

The AAR was introduced by way of inclusion of section 245S of the Income Tax Act (“the Act”) by the Finance Act, 1993 for the purposes of providing certainty of decision to specified categories of tax payers and to help them ascertain their tax liability with respect to certain types of transactions.

Section 245S of the Act provides that a ruling of the AAR is binding on the applicant as well as the income tax authorities for a particular transaction in respect of which the AAR ruling is sought. On a strict interpretation of this section, no appeal should lie to any higher appellate authority and the ruling should be treated final.

However, it cannot be denied that a school of thought believed that at least one level of appeal is necessary against an AAR ruling so that any patent infirmities in the decisions can be addressed. This thought further gained momentum when many rulings of the AAR were being challenged with taxpayers filing writ petitions and SLPs before the High Courts and Supreme Court respectively on grounds of irreparable loss and injury resulting from an infringement of their rights under the provisions of the Indian Constitution2. This resulted in further uncertainty with respect to whether a ruling of the AAR can be challenged and if yes, the appropriate forum to challenge a ruling of the AAR.

84 - Expert Guide : Tax

3. To hold that an advance ruling of an AAR should not be permitted to be challenged before the High Court under Articles 226 and 227 of the Indian Constitution would be to negate the basic structure of the Constitution; 4. The power of the Supreme Court to entertain a SLP under Article 136 of the Indian Constitution is discretionary in nature and hence, even if good grounds are made out in the SLP for challenge to an advance ruling given by an AAR, the apex court may still refuse to grant special leave on the ground that the challenge to the advance ruling of the AAR can also be made to the High Court under Article 226 and/or Article 227 of the Indian Constitution.

5. It does not encourage an aggrieved party to appeal directly to the Supreme Court against the order of the tribunal exercising judicial functions unless it appears to the court that a question of great importance arises.

elbhoy & Statira H. Ranina Thus, the apex court through its decision in the Case has clarified the uncertainty in the procedural laws by clearly stating that the ruling of an AAR can be challenged before a High Court by filing a writ petition under Articles 226/227 of the Constitution. Further, that an SLP challenging a ruling of an AAR will be considered for admission in the Supreme Court only if it involves a question of principle of great importance or a similar question is already pending before the Supreme Court.

While this decision seems to have settled a controversial issue, some experts feel that it appears to have defeated one of the primary reasons for the establishment of the AAR in the very first place (i.e. the certainty of its decision) by reducing the AAR to the level of the Income Tax Appellate Tribunals. This may therefore lead to more protracted litigation. On balance, the authors feel that this decision is a positive decision as it cannot be the rule of any law that just a single decision is binding in all circumstances without any right of even a single appeal whatsoever.

TUV Bayren (India) Ltd Vs Deputy Commissioner of Income Tax Circle-2(1), Mumbai3 The Mumbai Income Tax Appellate Tribunal (“ITAT”) in its recent decision in the case of TUV Bayren (India) Ltd Vs Deputy Commissioner Of Income Tax Circle-2(1), Mumbai (“TUV Bayren Case”) has held that the audit services and activities carried out by the assessee comes within the realm of ‘professional services’ and not within the meaning of ‘Fees for Technical Services’ (“FTS”) as provided in Article 12(4) of the India –Germany Double Tax Avoidance Agreement (“IndiaGermany Tax Treaty”) and Section 9(1)(vii) of the Act. FTS under the provisions of the Act has been defined to mean any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include

consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”.

In the present case, the issue was whether the services of audit in relation to issuance of ISO 9000 certification will fall within the scope of FTS. The ITAT explaining the meaning of the three components of FTS namely, technical, managerial and consultancy services has defined the scope of the services as follows– •Technical services require expertise in technology and providing the client such technical expertise.

•A managerial service is used in the context of running and management of the business of the client.

•Consultancy is to be understood as advisory services wherein necessary advice and consultation is given to its clients for the purpose of client’s business.

Based on the above, the Hon’ble Tribunal has held that the entire nature of services and activities carried out by the assessee comes within the realm of ‘professional services’ and that the assessee’s income is to be computed in view of the Article 7(1) of the India-Germany Tax Treaty and resultantly as per sections 28 to 43 of the Act. Thus the ITAT has narrowed down the scope of services to be covered under FTS. It has been clarified by the ITAT that professional services cannot be treated as consultancy services and hence do not fall under the purview of FTS. Accordingly, this decision of the ITAT has provided tax relief to a large group of professionals. However, it may be noted that the aforesaid decision is only a Mumbai ITAT judgment and therefore only binding on authorities below the ITAT in Mumbai.

Expert Guide : Tax - 85

Conclusions Both decisions are a welcome step and one hopes that the judiciary continues on a path that will lead to a more sensible interpretation of ambiguous provisions and more certainty among tax payers.

About ALMT ALMT Legal is a dynamic and progressive full service Indian law firm providing high quality Indian expertise with an international capability. With over 100 lawyers and 20 partners across offices in strategic commercial centres like Mumbai, Bangalore, New Delhi and London, ALMT has an established reputation as one of India’s top bracket firms.

ALMT’s practice areas encompass all aspects of Indian law ranging from corporate, commercial to tax, employment, dispute resolution, shipping, aviation and even immigration laws.

Aliff Fazelbhoy, who was a founding partner in another law firm in Mumbai, merged his practice with ALMT Legal in 2003 to enhance the Firm’s tax and M&A practice. Today Aliff is recognised as one of the leading lawyers in his chosen fields of practice and has also been selected as one of India’s leading lawyers for M&A practice by Asia Law and Practice for four consecutive years in their publications “Asialaw Leading Lawyers” from 2006 to 2010.

Aliff ’s tax experience includes advising on cross border tax structuring and issues such as creation of permanent establishment, obligations in relation to withholding tax, transfer pricing, characterisation of software payments etc. as well as some indirect tax issues particularly service tax and VAT for various international and domestic clients.

Aliff is also involved in advising on tax related litigation and dispute resolution proceedings before various tax authorities, tribunals and courts.

Besides his tax and M&A practice, Aliff has helped develop a thriving employment law practice for the Frim and assists several clients on a range of employment law issues including structuring contracts, implementing terminations, establishing and advising on social security schemes, enforceability of post termination obligations, etc. Aliff has authored articles for international publications and been a panellist at various international tax and M&A conferences and seminars.

Aliff Fazelbhoy can be contacted by phone on +91 22 4001 0000 or alternatively via email at afazelbhoy@almtlegal.com Statira began working whilst she was perusing her law degree since 1996. During her initial years in practice she gained experience in a variety of fields including corporate commercial law, intellectual property and information technology law.

Statira has been associated with ALMT since December 2003 and now specialises in M&A, private equity transactions and tax.

Statira Ranina can be contacted by phone on +91 22 4001 0000 or alternatively via email at sranina@almtlegal.com 1

-

Special

Leave

Petition

No.

31543

of

2011

2 - Societe Generale Vs. CIT [251 ITR 657 SC]; DIT International Taxation Mumbai Vs M/S Morgan Stanley & Co Inc. [2007-TII-01-SCTP]; UAE Exchange Centre Ltd. v. UOI, 2009-TIOL-84-HC-DEL-IT 3 - 2012-TII-105-ITAT-Mum-Intl

86 - Expert Guide : Tax

(C)

Expert Guide : Tax - 87

Dividend Tax Planning

T

he Philippine’s favourable economic climate has resulted in more domestic companies declaring dividends to their stockholders. Naturally, minimisation strategies on taxes that are due on these dividends are once again at the fore of investors’ minds.

This is true of non-resident foreign investors who are generally subject to higher rates of tax on dividends (anywhere from 20 to 30 percent depending on the taxpayer type). Contrast this with Filipino and resident alien individuals who are subject to a rate of 10 percent, and domestic corporations which are exempt on dividends received from another domestic corporation. This article examines two ways by which a non-resident foreign investor can lover the dividend tax rate.

As a rule, the tax is collected at the source when the issuer of dividends withholds the proper amount and remits this to the Bureau of Internal Revenue (BIR), the Philippines’ tax collection bureau. In anticipation of dividend issuances, securities custodians usually advise their international clients to avail of lower tax rates under tax treaties. For this reason, I will take this up first. A tax treaty generally ensures that only one state party taxes the income earned by a citizen of another state within the former state’s jurisdiction; hence, their formal name Conventions for the Avoidance of Double Taxation (Double Taxations Agreements or DTAs).

DTAs also provide favorable tax rates on certain income types, such as dividends. For example, the DTA between the Philippines and the US says that the maximum rate of tax that either state can impose on dividends is 25 percent; if the recipient is a corporation holding at least 10 percent of the outstanding shares of the voting stock during a stated holding period, then the rate should not exceed 20 percent.

88 - Expert Guide : Tax

By Emmanuel P. Bonoan

One question in the area of treaty relief is whether a non-resident collective investment vehicle (CIV), such as a trust, can apply for treaty benefits on its own right and not merely as an agent of the CIV’s investors. This has practical implications since its numerous investors or beneficiaries may encounter prohibitive transaction costs if they are required to claim treaty benefits individually. Additional transaction costs also arise if the CIV has to prove that each and every investor or beneficiary is entitled to treaty benefits. In either situation, this can result in the denial of treaty benefits to someone who is entitled to it and, ultimately, fail in the prevention of double taxation. Having the CIV claim treaty benefits on its own right, thus, seems a more efficient way of respecting treaty benefits.

The current state of tax treaties provides little clarity on the issue. Instead of relying on a uniform policy across the various tax treaties, one has to rely on the textual peculiarities of each treaty. For example, under some Philippine treaties, in order to avail of the treaty rates the dividend recipient must be a resident of one of the contracting states and the beneficial owner of the shares of stock giving rise to the dividend. The BIR might decline to entertain a tax treaty relief application to a CIV even if such CIV is a resident of Japan unless it proves that it is also the beneficial owner of the dividends.

As CIVs are, by their nature, investment pools, it would be challenging to explain to the BIR how a CIV’s structure or its legal relationship with its investors makes it the beneficial owner of the dividends. Contrast this with other Philippine treaties where it appears sufficient that, in order to claim the treaty benefit, the applicant need only be a resident of either of the contracting states. Considering the absence of the beneficial owner requirement, there seems no need to prove to the BIR that a CIV under such a treaty is also the beneficial owner of the dividend-bearing stock.

The second method of lowering the dividend tax is found in the Tax Code of the Philippines and can only be enjoyed by non-resident foreign corporations. Under Tax Code Section 28 (B) (5) (b), the dividend tax is 15 percent if the corporation’s country of domicile allows a credit against the tax due of at least 15 percent of the taxes “deemed paid” in the Philippines on the dividend. The Philippine Supreme Court has clarified that for the taxpayer to actually enjoy the 15 percent rate it is sufficient that the foreign law allows the tax credit without the taxpayer actually having to pay the foreign government the amount of dividend tax waived by the Philippine government.

When planning a tax-efficient receipt of dividends then, the main consideration is whether one gets more favourable treatment from applying the treaty of the Tax Code. But there are other practical considerations too. BIR rules require application with the BIR prior to the taxpayer’s availment of treaty benefits. These regulations have been cited approvingly by the Court of Tax Appeals in the case of Mirant vs. Commissioner (Case No. 6382, 7 June 2005). This interpretation has been upheld by the Supreme Court.

With the Philippines’s capital market steadily growing and foreign investors taking more active positions in it, the BIR will certainly be monitoring the take from taxes in this area and dividends are on the list. From the investor’s point of view it certainly pays to plan the tax prior to receiving the dividend pay-off.

Emmanuel P. Bonoan is the Chief Operating Officer and Vice Chair for Tax of Manabat Sanagustin & Co., CPAs (the Firm), the Philippine member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

Aside from his senior management role as COO, Mr. Bonoan also heads the Tax group of the firm providing clients with tax strategies and represents clients before the BIR especially on high-level issues.

Before joining the Firm, he has been president of a private company specialising in financial investigation and other advisory services.

He was also a former Undersecretary of the Department of Finance (DOF) of the Philippines and has led various programs promoting efficient tax collection and good governance. He had operational oversight of revenue collection agencies such as the BIR and the Bureau of Customs.

In 2004, he was awarded the 10 Outstanding Young Men (TOYM) Award for Public Service.

Emmanuel P. Bonoan can be contacted by phone on +63 288 50602 or alternatively via email at ebonoan@kpmg.com

Expert Guide : Tax - 89

Managing Tax Risk & Tax Controversy In The Middle East By Morris Rozario

A

ll companies are concerned with the same bottom-line question about their taxes: “How much are we going to pay this year?” For global companies, that question is harder to answer than it has been for many years.

From a business perspective, tax costs like all other expenses, need to be managed to ensure certainty of outcomes from business investment. And it is not just how much is payable based on the tax declarations filed, but also “will we have to have a disagreement with the tax authority in order to agree on that final figure?”

Ernst & Young asked more than 500 senior tax and finance executives, audit committee members, tax authorities and policy makers in 18 countries a wide range of questions about their recent experiences and predictions for the future.

According to a report based on this tax survey, “tax risk” and “tax controversy” are both rising rapidly.

Tax risk is what companies face when they are unsure of filing correct tax returns. And tax controversy is a polite term for the disputes that arise – alas, with greater frequency – with tax authorities over calculations of tax liability.

Tax risks and tax controversies are as relevant to companies doing business in Middle East countries as they are in other parts of the world. In this article we will review the determinations from the Ernst & Young tax survey and consider their relevance vis-á-vis the tax landscape in the Middle East North Africa (MENA) region.

Ernst & Young Tax Survey Findings More stringent tax enforcement. : The predominant consensus from the tax survey is that the enforcement landscape is now more challenging than it has ever been.

90 - Expert Guide : Tax

Most respondents agreed that governments will continue to lean heavily on companies in the coming years as tax authorities everywhere strive to increase tax collections. The survey also determined that increasingly stringent enforcement practices are causing considerable stress and uncertainty.

The traditional tax audit: Tax audits are now more frequent and aggressive and the resulting assessments and penalties significantly increase tax costs. In a relatively new development, some companies find themselves being audited by more than one tax jurisdiction at the same time, in what are called joint audits. As one executive put it, “Dealing with increasingly hostile and aggressive tax authorities is our number one tax risk right now.”

These enforcement trends are apparently here to stay: 97% of tax authorities say they will increase their focus on international structures and crossborder transactions in the next three years.

Large increases in the volume of taxpayer information being shared: Governments rarely shared taxpayer data until recently, but the number of formal agreements to share taxpayer related data has increased significantly over the last few years. That makes it much more likely that a dispute in one country will become a regional or global dispute.

New disclosure and transparency requirements: 78 percent of tax directors and CFOs report that new transparency rules have forced them to disclose more financial data in the last two years. At the same time, tax authorities are focusing on crossborder transactions and insisting that companies disclose when and where they have entered into related party transactions.

Additional attention to indirect taxes: The tax community now also reports rising levels of risk and controversy over indirect taxes, especially valueadded taxes, reflecting the increasing use of this type of tax by governments.

Hot spots for stricter tax scrutiny: The increasingly global nature of business has directed the attention of tax authorities to issues relating to the movement of intellectual property, the transfer or disposal of assets between group companies located in different countries and the movement of expatriate employees between countries. The complexity of transfer pricing has long been a bone of contention between taxpayers and tax authorities and this is likely to continue.

New tax laws and regulations: Tax policy-makers have been issuing new tax laws and regulations at an increasing pace, adding greatly to the uncertainty of tax outcomes.

The Tax Landscape In MENA Countries The Arab Spring and the impact of shifts in the global economy have brought about paradigm changes to the political and social landscapes in MENA countries from Bahrain to Tunisia. Not unexpectedly, the fiscal landscape has also not been spared with bells ringing fiscal change continuing to toll in many countries.

The fiscal landscape in MENA is defined by; •Low corporate tax rates introduced in most countries (Qatar 10%, Oman 12%, Iraq / Kuwait 15%, Egypt / Saudi 20%) to encourage local and foreign investment •fiscal pressures to increase tax collections to boost public finances depleted by economic disruption and the need to provide social subsidies (Egypt, Iraq, Oman) •tax authorities working with relatively simple (limited) tax legislation and tax expertise (Kuwait, Saudi, Iraq)

•the absence of broad based indirect taxes like VAT (almost all countries) The current fiscal and tax environment is driving tax authorities in many MENA countries to consider changes in tax policy, compliance and enforcement that are likely to have a significant effect on tax costs in the MENA countries.

Tax Risks & Tax Controversies Of Particular Relevance In MENA The tax assessment and enforcement process is becoming more stringent with increasing scrutiny of cross border transactions and related party transactions in Egypt, Saudi, Kuwait, Oman and Qatar. Tax authorities in these countries are also at various stages of implementing more definitive transfer pricing regulations and compliance requirements.

The authorities also appear to be taking a much broader and at times subjective interpretation of tax law provisions. In a number of countries like Kuwait, Oman and Saudi, the tax authorities are also less inclined to follow OECD guidelines.

Another growing trend – that we believe could have considerable tax cost impact in the coming years - is the increasingly rigorous tax assessments and less favourable tax cost outcomes related to deemed profit tax declarations. Throughout the region we see tax authorities either issuing deemed profit assessments with arbitrary taxable profit determinations (Oman, Kuwait) or introducing laws to discontinue this tax filing option (Egypt, Qatar).

Ernst & Young is working with clients to prepare for tax filings on the basis of actual profits, supported by audited local financial statements, by undertaking analytical reviews of operating structures and arrangements, substantiation of related party transactions and tax health checks.

Expert Guide : Tax - 91

More recently, tax authorities in many MENA countries, including Oman and Qatar, are employing greater emphasis on enforcement of withholding tax laws, scrutiny of WHT compliance and use of pay and claim regulations, clearly to increase tax collections.

In summary, the tax environment and regime in MENA is becoming more challenging with complex tax law concepts being introduced with broad interpretations coupled with increasing tax compliance scrutiny and enforcement. It is clear that in MENA countries as is the case in other jurisdictions, that to reduce tax risks and tax controversies it is increasingly important for companies to get it right before businesses start up and before filing tax declarations.

Morris Rozario is an Executive Director responsible for tax technical communications with Ernst & Young, MENA. Morris is a corporate tax specialist with over 30 years of experience advising and working with multinational companies in Asia, East Africa and the Middle East. Ernst & Young is the leading professional services firm in the Middle East with professional tax advisors and subject matter specialists in over 15 countries across the Middle East and North Africa.

Morris Rozario can be contacted via email at Morris.Rozario@om.ey.com

92 - Expert Guide : Tax

Expert Guide : Tax - 93

Swiss-UAE Treaty On Double Taxation: A Game Changer By Yann Mrazek

T

he recently ratified Swiss-UAE treaty for the avoidance of double taxation on income (DTT) has established the Emirates as the go-to jurisdiction for investments from the Persian Gulf into Switzerland and from Switzerland into the Persian Gulf. The agreement has wide implications and offers great opportunities for both nations – and their residents.

The DTT is patterned on the OECD Model Convention on Income and Capital, although it only covers income taxes. The treaty has provisions allowing for the two countries to exchange information in accordance with OECD standards. There are deviations from the OECD Model which are mainly motivated by the need to avoid persons abusively obtaining benefits from the DTT, while taking advantage of the UAE’s nil-tax regime.

For instance, individuals are not considered as residents of the UAE if they only have their domicile in the jurisdiction; they must also have a “substantial presence” in the country. The “substantial-presence-test” is met when the considered person spends most of its time in the UAE and has close ties (family, social and professional) with the UAE. Pensions and other retirement benefits also remain taxable in the state where they arise – generally, in the state of residence of the payer. This differs from the OECD Model under which “pensions and other similar remuneration” are taxable only in the State of residence of the beneficiary.

Insofar as the other provisions of the DTT are concerned, the DTT noticeably provides key benefits to those investing in Switzerland from or through the UAE. Under the treaty, there is a reduction of Swiss withholding tax from 35 percent for nontreaty countries to 5 percent for corporate shareholders with a participation of at least 10 percent.

All other shareholders have a reduction in tax to 15 percent. The DTT also eliminates Swiss withholding tax on interest from items such as Swiss bonds or certain loans as well as any withholding tax on income from Swiss collective investment schemes.

94 - Expert Guide : Tax

The agreement therefore allows the UAE to be used in a very tax efficient way for the purpose of holding shares in Swiss companies. Indeed, beside reduced rates of Swiss withholding tax, any dividends that a UAE stakeholder receives from the Swiss company is not subject to corporate income tax in the UAE. In addition, no withholding tax applies in the UAE on dividends paid by UAE companies, regardless of the country of residence of the recipient.

It must, however, be kept in mind that benefits of the DTT are not granted automatically. On the one hand, there are safeguards aimed at tackling abuses in place in the DTT. On the other hand, Switzerland has a battery of anti-abuse rules and practices. All those rules may actually deprive a person meeting the formal requirements of the DTT from the benefits of the same.

Anti-abuse rules in the treaty may broadly be divided into two categories: classical anti-abuse provisions that are also found in the OECD Model and anti-abuse rules that are specific to the DTT. Classical anti-abuse provisions mainly aim at making sure that the links of the UAE recipient with the UAE, respectively with the Swiss source income (e.g. dividends), are strong enough in order for it to be considered a resident of the UAE, respectively the beneficial owner of the Swiss source income. Anti-abuse rules that are specific to the DTT aim at reducing the risks that persons who would otherwise not be entitled to treaty benefits establish an artificial presence in the UAE in order to abusively benefit from the treaty. One may for instance mention the requirement that it is not sufficient that an individual be domiciled in the UAE to be considered a resident of the UAE, but that he also has to have a “substantial presence” in the country.

Swiss anti-avoidance rules may also deprive a person meeting the requirements of the DTT from the benefits of the tax treaty.

For instance, under Swiss tax law, affiliated companies may transact business and incur tax deductible expenses with each other. As a general rule, any commercially justified expense incurred by a Swiss company is tax deductible, regardless of the relationship between the service provider and the Swiss recipient of the service.

Therefore, if a UAE company provides any type of services to a Swiss affiliated company, the latter may pay a fee for those services. Such fee would be deductible from the Swiss company’s taxable profit and would not be taxed in the hands of the UAE beneficiary. Such a setting up may generate important tax savings, at least as long as the remuneration paid to the UAE entity does not differ from what would have been agreed among unrelated parties. Where the remuneration is higher than it would be if the service was provided by a third party, the excess is not allowed as a deduction, but re-characterised as a dividend (“transfer pricing rules”).

Another Swiss domestic anti–abuse provision may apply when the Swiss taxpayer sets up a wholly-artificial, unusual structure or transaction the main objective and reason of which is to avoid or mitigate Swiss taxes. In such cases, Swiss tax authorities may apply the abuse-of-law doctrine with the result that the artificial and unusual measures taken by the taxpayer are disregarded and taxes assessed based on a “substance-over-form-approach”.

A socialist deputy of the Swiss National counsel said that the DTT is “mainly a tax avoidance tool.”

She certainly has a point. There is indeed little doubt that the new DTT establishes the UAE as the go-to jurisdiction for investments to, from or through Switzerland.

In spite of the absence of precedents and of some remaining ambiguities, the DTT offers very interesting tax planning opportunities not only to existing UAE and Swiss businesses and residents but also – or even mainly in our view – to those ready to establish a bona fide business presence in the UAE or to relocate to the UAE. When trying to optimise Swiss taxes, one needs, however, to be extremely cautious due to the numerous Swiss anti-abuse rules and practices. In particular, wholly artificial arrangements mainly aimed at getting the benefits of the DTT should be avoided as they are likely to be challenged by the Swiss authorities.

Yann Mrazek is the Managing Partner of the Dubai office of Cramer-Salamian (operated in association with Ali Ibrahim Advocates). He chiefly focuses on tax & structuring and private clients’ & global entrepreneurs’ practice.

Yann routinely advises HNWIs on securing and substantiating their resident status in the UAE and is regularly solicited as a speaker on these themes.

Cramer-Salamian has been voted UAE tax law firm of the year by three publications and is the only boutique firm on the World Tax list for the GCC. Yann Mrazek can be contacted by phone on +971 (0)4 227 7427 or alternatively via email at mrazek@cramer-salamian.com

Expert Guide : Tax - 95

The Transfer Pricing Regime In Tanzania By Ofotsu

W

ith the entry into the East African Community Common Market Protocol and the anticipated reduction in customs duty collection, the Tanzania Revenue Authorities (TRA) is poised to intensify transfer pricing reviews as a way of augmenting revenue collection.

Nonetheless, Tanzania’s transfer pricing regime remains vague and largely untested. In fact, the TRA is yet to issue detailed guidelines on how the rules will be applied. Of particular consequence is the standard by which the “arm’s length principle” enshrined in section 33 of the Income Tax Act 2004 (the “Act”) will be applied to controlled transactions. The OECD and the United Nations Tax Committee have both endorsed the “arm’s length” principle and it is widely used as the basis for bilateral treaties between governments.

Simply stated, the arm’s length principle prescribes that compensation for any inter-company transaction conform to the level that would have applied had the transaction occurred between unrelated parties, all other factors remaining constant.

Accordingly, section 33(1) of the Act provides: “[i]n any arrangement between persons who are associates, the persons shall quantify, apportion and allocate amounts to be included or deducted in calculating income between the persons as is necessary to reflect the total income or tax payable that would have arisen for them if the arrangement had been conducted at arm’s length.”

Further, section 33(2) provides: “[w]here in the opinion of the Commissioner, a person has failed to comply with the provisions of subsection (1), the Commissioner may make adjustments consistent with subsection (1) and in doing so the Commissioner may (a) re-characterise the source and type of any income, loss, amount or payment; or (b) apportion and allocate expenditure […] incurred by one person in conducting a business that benefits an associate in conducting a business to the person and the associate based on the comparative turnover of the businesses.”

96 - Expert Guide : Tax

Regulation 6 of the Income Tax Regulations, 2004, provides: “[s]ection 33(1) of the Act shall be construed in such a manner as best secures consistency with the transfer pricing guidelines in the Practice Notes issued by the Commissioner.”

While the arm’s length principle can be simply stated, the practical determination of what constitutes arm’s length compensation is notoriously complicated. Key factors affecting the determination include the type of transaction under consideration and the economic circumstances surrounding the transaction. Quite apart from influencing the amount of the compensation, these factors may in fact impinge on the form of the compensation.

Evidently, Regulation 6 contemplates the issuance of transfer pricing guidelines by the TRA. Yet, none exist. The TRA has, in fact, issued no practice notes to clarify what approach it will follow to effectuate the transfer pricing provisions.

As in other areas of the law, it is vital to publish in advance, clear guidelines regarding any legal requirements that will be applied with respect to transfer pricing. This is not only important for the TRA, which needs such guidelines to apply the law properly and equitably, but also for taxpayers, who must comply with the law. Clear guidelines could help prevent unexpected and inconsistent results, which could otherwise pose significant problems for both the TRA and taxpayers. They could also minimise controversy and reassure potential investors. Nonetheless, guidelines can serve these purposes only if they are clear and sufficiently detailed to be understood by both the tax administration and taxpayers. Insofar as no detailed transfer pricing guidelines exist in Tanzania, the TRA has indicated that it will follow the OECD transfer pricing guidelines with regard to the standard by which the arm’s length principle will be applied.

u A. Tetteh-Kujorjie Tanzania tends to follow Kenya’s lead in situations involving new approaches to tax enforcement.

Hence, the TRA has indicated that it will follow the approach taken by the Kenyan High court in the landmark case of Unilever Kenya Limited v.The Commissioner for Income Tax (Income Tax Appeal No. 753 of 2003).

In the Unilever case, the Kenyan High Court acknowledged that the OECD guidelines represented internationally accepted principles, which could not be disregarded in applying transfer pricing legislation and which are to be applied in the absence of specific guidelines in the legislation.

The detailed methodology to be applied under the transfer pricing rules therefore is that provided in the OECD guidelines1.

Should Tanzania, in fact, follow Kenya’s lead, Tanzania’s transfer pricing regime might allow persons to choose from a list of specified methodologies to determining the arm’s length price. These approaches might include the Comparable Uncontrolled Price Method (CUPM), the Resale Price Method (RPM), the Cost Plus Method (CPM), the Profit Split Method (PSM) and the Transactional Net Margin Method (TNM).

Other features that might be reasonably anticipated in Tanzania could be a well defined set of the types of transactions that might come within the ambit of the transfer pricing rules, sweeping powers granted to the Commissioner to request information from taxpayers, including books of accounts and other documents relating to relevant transactions.

Furthermore, the transfer pricing rules might place the burden of proving that prices are at arm’s length on the taxpayer, so that a taxpayer who fails to provide transfer pricing documentation to support the arm’s length nature of its prices would be at risk that the TRA will conduct a transfer pricing audit and examine its transfer pricing policies in detail. In the event the TRA, as a result of the examination, adjusts the transfer price adopted by

the taxpayer, the lack of adequate documentation would make it difficult for the taxpayer to rebut the adjustment.

Pronouncements by the TRA to the effect that they will follow the OECD guidelines, while somewhat comforting, remain merely pronouncements.

Without proper, clear and detailed guidelines, issues of fairness to the taxpayer may arise, when the application of general principles to related party pricing is ambiguous and unpredictable. If the result is not perceived as being fair and predictable, this may create significant controversy, placing further strain on an already challenged administrative regime and leaving potential investors to view the lack of transfer pricing guidance as an unfavorable factor. Any arbitrary departures from the arm’s length principle would yield an increased risk of double or unanticipated taxation, with no sound prospect of cross-border relief. Needless to say, this would unduly increase the cost of doing business in Tanzania and not only discourage cross-border trade and investment, but also impair sustainable development in the long run.

Ofotsu A. Tetteh-Kujorjie is Cross-Border Counsel at Mkono & Co. He is an Ivy League educated lawyer, with significant corporate finance and private equity transactional experience.

Ofotsu holds Bachelors (BS) and Masters (MEng.) degrees from Cornell University, a Juris Doctor (JD) from the University of Pennsylvania Law School, a certificate in Business and Public Policy from the Wharton School of the University of Pennsylvania and an LLM in Taxation from the Georgetown University Law Center. Ofotsu’s career interests span the universe of cross-border transactions. In his current position at Mkono, he focuses on special projects as well as a broad range of energy, mining, banking, taxation and corporate advisory matters.

Expert Guide : Tax - 97

Expert Directory - Euro UK Slaughter and May Sara Luder sara.luder@slaughterandmay.com www.slaughterandmay.com

UK Gray’s Inn Tax Chambers Laurent Sykes & Hui Ling McCarthy clerks@taxbar.com www.taxbar.com

Ireland Malone & Co Damien Malone +353 87 685 9474 info@maloneaccountants.ie www.maloneaccountants.ie/Home.aspx

Ireland Maples and Calder Andrew Quinn +353 1 619 2038 andrew.quinn@maplesandcalder.com William Fogarty +353 1 619 2730 william.fogarty@maplesandcalder.com www.maplesandcalder.com

Ireland McCann FitzGerald Eleanor MacDonagh +353 1 611 9174 Eleanor.MacDonagh@mccannfitzgerald.ie Fergus Gillen +353 1 611 9146 Fergus.Gillen@mccannfitzgerald.ie www.mccannfitzgerald.ie

ope France Bredin Prat SÊbastien de Monès sdm@bredinprat.com www.bredinprat.fr

Netherlands De Brauw Blackstone Westbroek Paul Sleurink paul.sleurink@debrauw.com www.debrauw.com/Pages/default.aspx

Jersey Apex Trust Company Ltd David Petit +44 (0)1534 883605 david.petit@apextrustco.com www.apextrustco.com

Portugal Vieira de Almeida Tiago Marreiros Moreira +351 21 311 3485 Francisco Cabral Matos +351 21 311 3400 www.vda.pt/en

Portugal PwC Jaime Carvalho Esteves +351 225 433 212 Jaime.esteves@pt.pwc.com www.pwc.pt

Europe continued

Germany Latham & Watkins Stefan S端ss +49.89.2080.3.8167 stefan.suess@lw.com Dr. Thomas Fox +49.89.2080.3.8166 thomas.fox@lw.com www.lw.com

Austria Bilanz Data Wirtschaftstreuhand GmbH Erich Baier +43 1 516 12 x 0 baier@austrian-taxes.com

Cyprus Eurofast Taxand Boris Lazic +357 22 699 222 boris.lazic@eurofast.eu www.eurofast.eu/dev1/

Russia ALRUD Maxim Alekseyev +7 495 234 96 92 malekseyev@alrud.com Zaurbek Timaev ztimaev@alrud.com

Switzerland H&P Trust Group FrĂŠderique van Gelderen +41 41 729 63 63 frederique.vangelderen@henleyglobal.com www.henleyglobal.com Switzerland Lenz & Staehelin Jean-Blaise Eckert +41 58 450 7000 jean-blaise.eckert@lenzstaehelin.com www.lenzstaehelin.com/en.html

Switzerland Schellenberg Wittmer Michael Nordin +41 44 215 5252 michael.nordin@swlegal.ch www.swlegal.ch

The Americas USA Cravath, Swaine & Moore Michael L. Schler +1 212 474 1588 mschler@cravath.com Christopher K. Fargo +1 212 474 1236 cfargo@cravath.com www.cravath.com

USA Marjorie Rawls Roberts Marjorie Rawls Roberts +1 340 776 7235 jorie@marjorierobertspc.com

Mexico Baker & Mckenzie Jorge Narvรกez-Hasfura +52 55 5279 2924 jorge.narvaez-hasfura@bakermckenzie.com www.bakermckenzie.com

Asia India Amarchand & Mangaldas Krishan Malhotra krishan.malhotra@amarchand.com Vinayak Srivastava vinayak.srivastava@amarchand.com www.amarchand.com

Vietnam Deloitte Tom McClelland +84 8 3911 0727 tmcclelland@deloitte.com www.deloitte.com

India ALMT Legal Aliff Fazelbhoy +91 22 4001 0000 afazelbhoy@almtlegal.com Statira Ranina +91 22 4001 0000 sranina@almtlegal.com www.almtlegal.com

Philippines MS&Co - KPMG Emmanuel P. Bonoan +63 288 50602 ebonoan@kpmg.com www.kpmg.com

Middle East & Africa UAE Cramer Salamian Yann Mrazek +971 (0)4 227 7427 mrazek@cramer-salamian.com www.cramer-salamian.com

Oman Ernst & Young Morris Rozario Morris.Rozario@om.ey.com www.ey.com

Tanzania Mkono & Co Ofotsu A. Tetteh-Kujorjie +255 22 211 8789 ofotsu.tetteh-kujorjie@MKONO.COM

Get Wired today and connect directly with the corporate world.

Discuss the latest corporate news and developments across the globe and share your knowledge and experience with others.

Keep in touch with key individuals and organisations in the business community and build your own profile now.

And it’s completely free!

www.corporatelivewire.com/wired.html