Border Crossingding you d Border Crossing - 2nd Quarter 2012 3 • Where an entity is in a loss making position by virtue of non-arm’s length pricing, multiple transferpricing benefits

Border Crossing

Welcome to issue 21 of Border Crossing - RSM International’s newsletter covering technical developments in taxation around the globe.

In this issue:

Australia: Cross-border transfer pricing reforms

USA: Proposed FATCA regulations

China: Overseas Listed Companies: ‘Share-based Incentive plans’

UK: Worldwide Debt Cap

Netherlands: New German-Netherlands tax treaty

2nd Quarter 2012

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Border Crossing - 2nd Quarter 2012

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On 24 May, the Government introduced into Parliament the first piece of draft legislation in its reform of Australia’s transfer pricing provisions.

This legislation is the culmination of the Government’s consultation to date on this subject, including the release of an exposure draft and the receipt of submissions. The draft legislation deals unequivocally with the “clarification” that Australia’s tax treaties provide an independent and stand-alone ability to impose transfer pricing adjustments.

The Treaties are not merely a mechanism to relieve double taxation. The Bill also introduces into Law the ATO’s interpretation of the interaction between the transfer pricing and thin capitalisation provisions and the interpretive use of OECD material. We expect this will be the first of several rounds of new legislation in the government’s reform of the transfer pricing regime.

Critical Points

The draft legislation retains many of the key features of the exposure draft, while incorporating additional aspects in response to the consultation process.

While the justification for the introduction of the retrospective legislation is still highly questionable, the legislation will at least provide some certainty to taxpayers of the shape and operation of the new regime. The key aspects of the Bill are as follows:

• Legislative clarification that tax treaties provide an independent power to make transfer pricing adjustments. This clarification is

Australia: Cross-border transfer pricing reforms

effective from 1 July 2004. The provisions will only be applicable to transactions involving a country with a Double Tax Agreement with Australia which incorporates a relevant business profits article, or an associated enterprises article

• The amount of the adjustment will be determined by reference to a “transfer pricing benefit”. This refers to the difference between the amount of profit that would have been made using the arm’s length principle, and the amount actually made

• The Commissioner must make a determination to adjust the tax position to negate this benefit. Where no profit has been made, the Commissioner can make a determination to impose an arm’s length profit

• The profit of permanent establishments will be based on if the permanent establishment is a “distinct and separate” enterprise

• The interaction between the thin capitalisation regime and the transfer pricing rules as set out in TR2010/7 has been legislated

• The use of OECD guidance (including the 2010 Transfer Pricing Guidelines) for years commencing after 1 July 2012 for the interpretation of the provisions will be mandated. For prior years a taxpayer must use the relevant OECD material in force at the time

• The restated interpretation of the arm’s length principle remains focused on taxing “economic contribution” and “profits”, rather than applying the arm’s length principle to individual transactions. The clear implication of this approach is that transactions can no longer be viewed in isolation, but must be viewed in terms of the contribution to the group as a whole

• Provisions are included which allow for consequential adjustments that may be the result of transfer pricing adjustments e.g. WHT.

In addition to the features discussed in the exposure draft, the draft legislation incorporates the following new aspects:

• Existing settlements and agreements made to date with the Commissioner will be protected from adverse adjustment

• The imposition of additional penalties beyond that which would have existed under the current interpretation of Division 13 and the DTA’s will not occur. That is, the penalty under Division 815 will be limited to that which could have been assessed had Division 815 not been enacted

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• Where an entity is in a loss making position by virtue of non-arm’s length pricing, multiple transferpricing benefits may be seen to have accrued to the entity - the first to negate the loss and the second to attribute taxable income to the taxpayer.

The table opposite illustrates the key differences between the current regime and the new regime, in so far as it is addressed by the draft legislation.

Conclusions

The changes occurring in the transfer pricing arena are complex and ongoing. In particular, taxpayers may be subject to multiple regimes operating concurrently. In light of the impending introduction of the draft legislation, it is absolutely critical that taxpayers review their transfer pricing policies. Conducting a transfer pricing risk assessment will determine if additional work is required to mitigate any latent transfer pricing risks. Specifically, taxpayers should ensure transactions are not only viewed in isolation, but as part of the overall contribution to the group to ensure the requirements now expected by the Government are met. Consequently, existing supportive contemporaneous documentation may need to be modified or reworked.

This documentation and risk assessment process will require a review, not only of the historical and current position, but also of the adequacy of policy operation in the the future.

Current position New position

Adjustments can be made under Division 13 ITAA 1936, or transfer pricing provisions of a treaty (in the Government’s opinion).

Adjustments can be made under Division 13, tax treaty or Division 815. Provides legislative authority for adjustments to be made under treaties.

Use of OECD guidance generally accepted, but not in legislation

Use of OECD guidance will be required post 1 July 2012, and where relevant for pre 1 July 2012 transactions.

Interaction between transfer pricing and thin capitalisation provisions dealt with in ATO ruling, which specified transfer pricing provisions to apply before thin capitalisation.

Provides legislative authority to ATO’s interpretation

Administrative penalties to be determined in accordance with Subdivision 284-C of Schedule 1, TAA 1953

Administrative penalties to be determined in accordance with Subdivision 284-C of Schedule 1, TAA 1953 for all transaction pre 1 July 2012 as if Division 815 didn’t exist. After this date, penalties may be imposed reflecting the changes made.

For further information please contact Anthony Hayley, Associate Director

Global Transfer PricingRSM Bird Cameron

[email protected]+61 3 9286 1993

orRob Mander

Director, Tax ServicesRSM Bird Cameron


www.rsmi.com.au

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Proposed FATCA regulations

On 8 February 2012, the IRS issued proposed regulations providing rules on information reporting by Foreign Financial Institutions (FFIs) and withholding on certain payments to FFIs and other foreign entities (REG-121647-10), pursuant to the Foreign Account Tax Compliance Act. Previous FATCA guidance was issued in Notice 2010-60, Notice 2011-34 and Notice 2011-53.

On the same date, the US Treasury Department also issued a joint statement on FATCA with five European Union countries: France, Germany, Italy, Spain and the United Kingdom. They announced they are exploring a cooperative approach to combating international tax evasion.

Purpose of proposed regulations

The proposed regulations are designed to implement a step-by-step process for US account identification, information reporting and withholding requirements for FFIs, other foreign entities and US withholding agents. The proposed regulations take into account input from stakeholders, including financial institutions. IRS Commissioner, Doug Shulman, stated that the proposed regulations reflect the IRS’ “…commitment to take into account

the implementation challenges of affected financial institutions while allowing for a smooth and timely roll-out of the law.”

Background

FATCA, part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010, (P.L. 111-47), was enacted to collect information with respect to US taxpayers investing through FFIs and non-financial foreign entities (NFFEs). FATCA requires FFIs to provide the IRS information regarding their accounts held by US taxpayers or by foreign entities in which US taxpayers hold a substantial ownership interest. FFIs include banks, insurance and real estate companies, hedge funds, mutual funds and private equity firms. FFIs must enter into agreements with the IRS to report US accounts. If an FFI fails to enter into such agreement, the FFI will be subject to a 30 percent withholding.

Under section 1471(a), a withholding agent must withhold 30 percent of certain payments to an FFI which does not meet the requirements of section 1471(b). Withholdable payments, subject to exceptions, include; payments of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments and other fixed or determinable annual

or periodical gains, profits and FDAP income (if such payment is from sources within the U. S.) and any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the US An FFI satisfies section 1471(b), if it either enters into an FFI agreement with the IRS to perform certain obligations or otherwise qualifies for an exemption.

The withholding agent must also withhold 30 percent of certain payments (listed above) to a NFFE if the payment is beneficially owned by the NFFE or if the NFFE is an agent acting on behalf of another NFFE that is the beneficial owner of the payment unless (1) the beneficial owner or agent provides the withholding agent with either a certification that such beneficial owner does not have any substantial US owners, or provides the name, address and TIN of each substantial US owner, and (2) the withholding agent reports the information provided to the IRS.

In order to avoid withholding under FATCA, a participating FFI must enter into an agreement with the IRS to (1) identify US accounts, (2) report certain information to the IRS regarding US accounts, (3) verify its compliance with obligations pursuant to the agreement, and

On 8 February 2012, the IRS issued proposed regulations providing rules pursuant to the Foreign Account Tax Compliance Act (FATCA). The proposed regulations are generally consistent with the guidance set out in prior Notices. However, there are significant modifications and refinements. With the proposed regulations, the IRS has attempted to address many industry concerns, however, FATCA continues to pose a significant burden on the affected industries. This article discusses the background of FATCA and highlights the important modifications and repercusions of the proposed regulations.

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(4) ensure that a 30 percent tax on certain payments of US source income is withheld when paid to non-participating FFIs and account holders who are unwilling to provide the required information. (See IR-2012-15, Feb 8, 2012)

Summary of proposed regulations

The proposed regulations provide significant modifications to the previously issued guidance, as highlighted:

1. Grandfathered obligations: The HIRE Act provided that no withholding was required from any payment under any obligation outstanding on or before 18 March 2012, or from the gross proceeds from disposing of the obligation. The proposed rules will extend the grandfathered obligations, and their gross proceeds, to 1 January 2013

2. Eased initial reporting requirements on members of affiliated FFIs: Each FFI in an expanded affiliated group must either be deemed compliant or be a participating FFI. If the preceeding requirements are not met the group will be disqualified. The proposed regulations grant a two-year transition period to fully implement this requirement. Therefore, certain branches and FFI affiliates that are subject to local law restrictions that prohibit FATCA compliance will not cause disqualification of the group until 1 January 2016. Instead, such branches and affiliates will be treated separately for purposes of

US withholding tax. During this period, an FFI affiliate, in a jurisdiction that prohibits withholding or reporting as these rules require, will not prevent other FFIs in the same group from entering into FFI agreements, as long as the other FFIs agree to perform due diligence to identify US accounts and meet other requirements.

3. Withholding on “pass-thru” payments is postponed: Withholding on “pass-thru” payments is postponed until 1 January 2017. However, for calendar years 2015 and 2016, FFIs are required to report annually the aggregate number of payments made to nonparticipating FFIs. The IRS and Treasury will work with the governments of the jurisdictions that enter into agreements to facilitate FATCA implementation, to develop practical alternatives to “pass-thru” payment withholdings.

4. Some information reporting is postponed: Under Notice 2011-53, only identifying information and account balances are required to be reported in 2014 for the 2013 calendar year. The proposed regulations add the requirement that income be reported beginning in 2016 for the 2015 calendar year, followed by gross proceeds in 2017 for the 2016 calendar year. The information may be reported in the account’s currency or in US dollars.

5. Modified procedures for identifying US accounts: The proposed rules permit participating FFIs to use electronic reviews to identify US accounts for pre-existing accounts with less than 1 million USD. Manual or enhanced review is required for certain categories of paper records for existing accounts over 1 million USD. If an “enhanced review” is required, an inquiry as to a relationship manager’s actual knowledge of the indicia of US ownership will be required. Reviews are not required for pre-existing individual accounts with a value of US$50,000 or less (US$250,000 for certain insurance contracts) and pre-existing entity accounts with a balance or value of US$250,000 or less.

6. Procedures to verify compliance: Officers of a participating FFI will be expected to certify that the FFI has complied with the agreement, but no audit is required. If the FFI complies with the agreement, it will not be held strictly liable for failing to identify a US account.

7. Definition of financial accounts: The proposed regulations refine the definition of financial accounts to focus on traditional bank, brokerage and money market accounts, and interests in investment vehicles, but exclude most debt and equity securities issued by banks and brokerage firms.


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8. Deemed-compliant FFIs are expanded: Deemed-compliant FFIs are expanded to include additional categories, thereby reducing burdens on truly local entities and other entities. The IRS says this will allow the focus of FATCA compliance activities to be on higher risk institutions that provide global investment services.

Joint statement on FATCA

The Treasury Department reported that France, Germany, Italy, Spain and the United Kingdom have agreed to jointly develop a framework to collect and send to the IRS information about offshore accounts held by Americans from their respective banks. Once the framework is finalised, banks in the five European countries will be exempt from entering into separate agreements with the IRS. The US has agreed to reciprocate by collecting and sharing information with the five aforementioned countries about accounts held by their citizens in US financial institutions.

Industry response

The IRS has requested comments on the implementation of FATCA and industry leaders have responded with concerns over the high cost of complying with FATCA.

Private Equity - The European Private Equity and Venture Capital Association (EVCA), believes that investment by the European private equity/venture capital industry in the US may be negatively impacted if FATCA as proposed is implemented. In a letter to the IRS, EVCA noted that the nature of investment activities in the private equity/venture capital (PE/VC) industry is unique compared with other financial institutions, (i.e. banks and hedge funds), making FATCA compliance burdensome. In its letter to the IRS, EVCA addressed the following concerns:1

1. If an investor in a European PE/VC fund is a recalcitrant account holder, the fund would not have a mechanism to force the investor to withdraw from the partnership for FATCA non-compliance purposes. This could lead to commercial problems for the PE/VC fund as there would be reduced available funding for investment.

2. A typical fund could have ten to forty portfolio investments with each investment involving a number of holding companies, viewed as FFIs, which could increase European PE/VC compliance costs.

3. The regulations pertaining to “pass-thru” payments require valuations more frequently than the fund would normally be

required to make, and therefore will increase the burden on European funds.

Insurance - A financial institution includes an insurance company or a holding company that issues, or is obligated to make, payment to financial accounts. A financial account includes cash value life insurance contracts and annuity contracts. Insurance industry leaders note that the guidance to date is directed towards the banking industry and that the application of FATCA to the insurance industry needs further clarification.2

Pension – The proposed regulations expand the definition of a retirement business, which is exempt from the scope of FATCA. Old Mutual, in its submission to the IRS, states that this expansion is welcome as most pension and retirement programmes are not favourable for use in avoiding taxes and exemptions. However, the linear application of a US$50,000 limit means that, in a number of jurisdictions, retirement plans will still be in scope. Given the relative inflexibility of personal pension products, the industry believes that the US$50,000 limit should be increased.3

Bank – Barclays Bank PLC contends that there still remains a number of significant issues that must be addressed for FFIs to be able to fulfill the requirements of FACTA in a manner that limits the need to create duplicative and costly

1 Comment letter submitted on January 6, 2012 by European Private Equity and Venture Capital Association, (untitled).

2 Comment letter submitted on April 23, 2012 by Walter C. Welsh, Mandana Parsazad, and Lisa G. Strikowsky at the American Council of Life Insurers, “Proposed Regulations REG-121647-10, Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities”.

3 Comment letter submitted on March 16. 2012 by Stephen Lock at Old Mutual, (untitled).


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Disclaimer: The information contained herein is general in nature and based on authorities that are subject to change. McGladrey LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. McGladrey LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations.

Circular 230 Disclosure: This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

systems and procedures, address the potential conflict of law issues, and accommodate industry practices and legal requirements, while still meeting the intent of Congress to address potential tax evasion and avoidance by Americans utilizing offshore accounts.4

Credit Card Company – The proposed regulations indicate that financial accounts are (i) any depository account maintained by a FFI; (ii) any custodial account maintained by a FFI; (iii) a non-publicly traded debt or equity interest in an FFI, and (iv) any cash value insurance contract. In its submission to the IRS, Visa Inc. asserts that neither credit cards nor prepaid cards represent any interest in any financial institution and are not insurance contracts.5

Furthermore, these card products will not be a financial account unless they constitute depository accounts or custodial accounts. Non-income credit cards and prepaid card products should neither be depository accounts nor be custodial accounts under the proposed regulations.

Action items

While the regulations have not been finalised to date, they are of particular importance to banks, insurance and real estate companies, hedge funds, mutual funds and private equity firms. These types of entities should begin to consider making modifications to their internal systems, processes and procedures to be in compliance with the regulations which will be effective 1 January 2013. At a high level, compliance includes the identification of US account holders, annual FATCA reporting requirements and long-term (ten years) data retention, storage and security.

For further information please contact Larry LeBlanc

Partner - International Tax McGladrey LLP


orAyana Martinez

Manager, International Tax McGladrey LLP


www.mcgladrey.com

4 Comment letter submitted on April 20, 2012 by Philip Jacobs at Barclays Bank PLC, “Comments on Proposed Regulations under FATCA”.

5 Comment letter submitted on April 13, 2012 by Linda Selker at VISA Inc, “Comments Pursuant to Notice of Proposed Rulemaking dated February 15, 2012 Regarding Definition of “Financial Account” Under FATCA”.


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On 20 February 2012, the PRC State Administration of Foreign Exchange (“SAFE”) issued Circular Huifa [2012] No.7 – ‘Notice regarding certain issues related to foreign exchange administration for individuals employed by domestic companies participating in share-based incentive plans of overseas listed companies’ (“Circular [2012] 7”). This notice clarified the procedural requirements on SAFE registration of share-based incentive plans previously stipulated by Circular Huizongfa (2007) No.78 (“Circular [2007] 78”). This article sets out the key points of Circular [2012] 7, as well as certain accounting and tax issues still faced by companies in China offering share-based incentive plans to Chinese employees.

China:Overseas Listed Companies ‘Share-based Incentive plans’

Background

Exchange control is one of the major barriers of international trade and investment; it hinders free flow of capital and increases the cost of doing business. In China, exchange control measures are complicated and ineffective because banks are required to monitor and report clients’ transactions involving foreign currencies, and the exchange control system is linked to the tax reporting system.

Circular [2007] 78 is one of the first guidelines issued by SAFE to monitor the administrative matters related to local employees of the People’s Republic of China (“PRC”) who participate in share-based incentive plans granted by overseas listed companies. To facilitate proper inbound and outbound foreign exchange funds flows, registration requirements as stipulated below must be followed throughout the implementation and execution of the overseas incentive schemes.

On 20 February 2012, SAFE took further steps to tighten the share-based incentive plans registration requirements by issuing Circular [2012] 7. Circular [2012] 7 took effect upon its promulgation and supersedes Circular [2007] 78 and Circular Huizongfa [2008] No.2 (regarding the delegation of approval

authority for the quota of initial foreign exchange purchase and opening foreign exchange accounts).

Major Differences between Circular [2007] 78 and Circular [2012] 7

The key differences between Circular [2007] 78 (now superseded) and Circular [2012] 7 are summarised in the table opposite.

Registration Requirements Under Circular [2012] 7

First Time Registration

Local agents are required to submit the following information/documents to the local branch of SAFE for the registration of the share-based incentive plan(s) granted by an overseas listed company:

• Application letter

• Application form

• Authorisation letter appointing the main applicant/local agent in the PRC for the registration procedures

• Public notice issued by the overseas listed company that proves the authenticity of the share-based incentive plan(s)

• Commitment letter stipulating the employment relationship between the participating entities in the PRC and the

individuals (the letter should cover the personal details of the individuals and the type of share-based incentive awards given)

• Other documents as required by the authorities

A quota for foreign currency to be remitted out of China and/or to be remitted into China shall also be applied for when performing the above application.

Status Report Filing

Quarterly status on-record filing of the incentive plan (e.g. changes to the main applicant or their designated agent, as well as changes to the operation of the plan) should be performed by the local agents within three working days after each quarter ends.

Amended Registration

Local agents should perform amended SAFE registration within three months of the major changes being made to the original share incentive plans, e.g. change of key terms, merger and acquisition, etc..

De-registration

Local agents are required to perform de-registration of the incentive plans within 20 days after the expiration or termination of incentive plans, e.g. the plan expires, termination of the


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For local participants who use their own foreign currency reserves to participate in the share-based incentive plans, registration with the relevant SAFE branch office is required.

Points to Note

Circular [2012] 7 provides flexibility in allowing local participants using their own foreign currency reserves to participate in share-based incentive plans and simplifies the application procedures for the quota of foreign exchange purchases.

Nevertheless, the SAFE is tightening up the foreign exchange administration related to overseas share incentive plans under Circular [2012] :

• by expanding the types of plans e.g. phantom share incentive plans

• expanding the persons covered e.g. foreigners and residents of Hong Kong, Macau and Taiwan who have employment or working relationship with PRC entities

• making/amending provisions on the subsequent reporting requirements.

plan due to de-listing of the foreign listed company, or restructuring/merger of the PRC entities.

Others

Local agents are required to open a special foreign exchange bank account in the PRC for the execution of share-based incentive plans.

The designated bank should report each month’s foreign exchange transactions, as well as track and report the opening and closure of these foreign currency accounts, within three working days following the end of each month.

Circular [2007] 78 Circular [2012]7

Types of Share-based Incentive plan covered

Limited to the following two types of incentive plan:

• Employee Share Purchase Plan (“ESPP”)

• Employee Stock Option (“ESOP”)

Covers all types of incentive plan, including:

• ESPP• ESOP• Employee Ownership Plan• Share Appreciation Rights Plan• Restricted Share (Units) Plan• Performance Share (Units) Plan• Phantom Shares Plan • Others

Types of participant covered

• Employees only • Employees• Individual contractors• Directors, supervisors, senior management of the Chinese

entities• Other individuals who have employment or contractual

relationships with the Chinese entities

Nationality of the participant

• PRC nationals • PRC nationals• Residents of Hong Kong, Macau and Taiwan • Non-PRC nationals working in the PRC or who have resided

in the PRC for at least one year

Local Agent The following entities can act as a local agent for handling SAFE registration and other related matters:

• Branch offices (including representative offices) of the overseas listed company

• PRC parent companies, their subsidiaries or partnerships which have ownership, or controlling relationship with the overseas listed company

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China:Overseas Listed Companies ‘Share-based Incentive plans’

In addition, the circular remains unclear as to whether the registration requirements apply to international assignees of the PRC in the same way that it applies to locally-hired foreigners. Multi-national companies should review the current SAFE registration status of their share-based incentive plans to make sure they are properly registered according to Circular [2012] 7.

Accounting and Tax Issues

Registration requirements of employee share option plans with the PRC tax authorities have been set out in Circular [2005] No.35, issued by the Ministry of Finance. In general, the plans and the implementation procedures will be provided to the local tax authorities in charge of the PRC individual income tax (“IIT”) filings of the PRC employees concerned. PRC employers will also be required to act as the IIT withholding agents.

Upon issuance of Circular [2012] 7, we anticipate the State of Administrative of Taxation (“SAT”) will issue another tax circular to cover the other types of share-based incentive plans and the persons involved so that it is consistent with the provisions of Circular [2012] 7.

The PRC IIT treatments in respect of gains from deriving benefits from share-based incentive plans, and capital gains from the disposal of the underlying shares, are in line with international practice.

The PRC Enterprise Accounting Standards No.11 is generally in line with the International Financial Reporting Standards No. 2, in respect of share-based payment. Fair value of the share-based payment shall be recognised by enterprises as its cost of services received from its employees or other personnel.

The SAT has recently issued Circular [2012] 18 on 23 May 2012, granting corporate tax deduction on share-based payment costs. However, it is still uncertain if costs charged by a foreign listed company to its affiliates in China regarding share-based payments granted to employees of the PRC affiliates, can be tax deductible in China.

Conclusion

Share-based incentive plans would be more popular in China. Various PRC authorities including the Ministry of Finance SAT, SAFE and the Securities Regulatory Commission shall work together to produce an updated set of regulations and measures.

For further information please contact Dicky To, Partner

RSM Nelson [email protected]

+ 852 2508 2863

www.rsmnelsonwheeler.com


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UK:Worldwide Debt Cap

Worldwide debt cap rules were introduced as an extension to the UK thin capitalisation rules to ensure that UK companies bear their fair share of group debt. It applies to accounting periods beginning on or after 1 January 2010. In overview, the rules seek to ensure that the UK does not obtain a tax deduction for interest expenses that is greater than the worldwide group’s 3rd party interest expense.

UK companies that fall within the rules will suffer a significant compliance burden, which ultimately may or may not result in an actual restriction on the tax deductibility of interest. However, groups can establish whether they need to consider the rules in more detail by following two simple steps:

1. Is there a qualifying Worldwide Group?

• A qualifying Worldwide group is one that contains a large company i.e. broadly 250+ employees plus €50m+ turnover and/or €43m+ balance sheet total, and one or more relevant group companies

• A relevant group company is one that has a UK corporation tax residence i.e. generally either a UK company or a UK permanent establishment of a non-UK company. The relevant group company should also be either the parent company of the group or a 75% subsidiary of another group company.

• If the worldwide group definition is met then the group must go on and apply the gateway test.

2. Is the gateway test met?

• In order to determine whether the group passes the gateway test, an initial calculation is required to compare the level

of UK net debt to the worldwide gross debt of the group. The test must be applied to each accounting period.

• Worldwide gross debt is the average of the closing debt at the end of the current and preceding accounting periods and is taken from the consolidated accounts, i.e. generally equal to the amount of group external debt.

• UK net debt is the average of the net debt at the beginning and end of the period for each company that was a relevant group company at any time during the period. Net debts of less than £3m and of dormant companies are treated as nil for this purpose.

• Company net debt is the company debt liabilities’ less liquid assets, as per the company balance sheet drawn up under IAS.

• Where UK net debt exceeds 75% of the worldwide gross debt of the group, the gateway test is failed and the detailed worldwide debt cap rules need to be applied. Further complex calculations are then required to determine the amount of interest and finance expenses that are disallowed for UK tax purposes.

Practical Next Steps

Because the gateway test requires the use of average balances, final calculations cannot be prepared until after the year end. Therefore, for the purposes of quarterly instalment payment calculations, forecasts should be used to determine whether a disallowance is likely to need to be calculated and updated for each instalment date.

There is a compliance burden and potential disallowance that comes with the application of the detailed worldwide debt cap rules, it is therefore advisable to fully understand whether the gateway test will be met or not. Generally, where the gateway test is failed, interest expenses in relevant group companies that are below £500,000 can be ignored for the purposes of calculating any UK tax disallowance.

Groups who meet the qualifying group definition should therefore review their debt structures to maximise the use of the £3m de-minimus and, where possible, make use of the £500,000 allowance.

For further information please contact Alison Sapsford

Tax Director. RSM [email protected]

+44 118 953 0350

www.rsmtenon.co.uk

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Netherlands:New German-Netherlands tax treaty

On 12 April 2012, Germany and the Netherlands signed a new tax treaty and protocol. The new tax treaty avoids double taxation and prevents fiscal evasion with respect to taxes on the income of residents. Furthermore, it regulates and improves the position of frontier workers. The new tax treaty has not yet been ratified. It is anticipated that the new tax treaty will enter into effect on 1 January 2014. Following are highlights of the key features of the new tax treaty.

Dividends

Dividend withholding tax is reduced to 5% if the beneficial owner is an body that holds at least 10% of all the shares in the entity that distributes the dividends. The dividend withholding tax is reduced to 10% if the beneficial owner of the dividends is a pension fund. In all other cases, the dividend withholding tax is reduced to 15%. However, the Parent/Subsidiary Directive provides for a 0% dividend withholding tax rate for qualifying European shareholders and pension funds. This provision in the new tax treaty may be beneficial for German and Dutch shareholders that do not qualify as European shareholders and pension funds under the Parent/Subsidiary Directive.

Interest

In principle, no interest withholding tax may be levied by the source state. Should the relationship between the beneficial owner and debtor result in a higher interest income in comparison to the interest income calculated between unrelated parties, the lower interest income should be taken into account.

Royalty

In principle, no royalty withholding tax may be levied by the source

state. Should the relationship between the beneficial owner and debtor result in a higher royalty income in comparison to royalty income calculated between unrelated parties, the lower royalty income should be taken into account.

Capital gains

Based on the new tax treaty, capital gains on the sale of shares are taxed in the source country. However, capital gains on real estate companies should, in principle, be taxed in the country where the real estate is located.

Dutch workers

The new tax treaty provides for a compensation scheme for Dutch frontier workers who are employed in Germany. The new compensation scheme takes into account the Dutch tax allowance provisions, for example, Dutch frontier workers employed in Germany can deduct their mortgage interest. For residents of the Netherlands, it is therefore more beneficial to work in Germany. The new compensation scheme is therefore beneficial for the Dutch border regions.

Other income

In principle, other income is only taxable in the resident state of the beneficial owner of the income.

Anti-abuse provisions

Various anti-abuse provisions to prevent inappropriate use of the new tax treaty are being introduced. Below we have summarised key changes in the anti-abuse provisions: (Note: the below mentioned list is not a complete overview.)

• Beneficial ownership is introduced as an explicit requirement to benefit from a reduced dividend, interest and royalty withholding tax rate

• Profit dependable loan receivables or profit dependable rights which reduce the taxable income of a German (debtor) entity should not benefit from a reduced dividend and/or interest withholding tax rate

• German or Dutch domestic law that prevents the avoidance or evasion of tax should not be hindered by the new tax treaty

• Specific rules with respect to the treatment of income from entities that are transparent for one jurisdiction and non-transparent for the other are being introduced

• Provisions for the exchange of information and assistance in taxes have been included.

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Entry into force

The new tax treaty needs to be ratified in order to be enforced. It is anticipated that the new tax treaty will be effective on 1 January 2014. However, note that this depends on the ratification procedures in Germany and the Netherlands.

Conclusion

The new tax treaty is more in line with the OECD model treaty. The new tax treaty provides certainty and clarity with respect to investments between Germany and the Netherlands and prevents double taxation. Further clarity on certain terms and provisions should be provided in the Memorandum of Explanation of the German and Dutch governments, which should be issued in connection with the ratification of the new tax treaty.

We expect a minimal impact on existing legal structures, however, it is recommended that existing and proposed legal structures are reviewed to determine the potential impact of the new tax treaty.

For further information please contact Mario van den Broek

RSM Netherlands+31 23 5300 433

[email protected]

Bertrand BoomRSM Netherlands+31 23 5300 449

[email protected]

www.rsmnederland.nl

The publication is not intended to provide specific business or investment advice. No responsibility for any errors or omissions nor loss occasioned to any person or organisation acting or refraining from acting as a result of any material in this publication can be accepted by the authors or RSM International. All opinions expressed are those of the authors and not necessarily that of RSM International. You should take specific independent advice before making any business or investment decision.

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© RSM International Association, 2012

AfricaDieter Schulze +27 21 686 7890 [email protected]

Americas Larry LeBlanc+1 240 426 [email protected]

Mark Kral (Transfer Pricing)+1 704 442 [email protected]

Editor Gillian HawkesPR & CommunicationsRSM International+44 (0)20 7601 1080 [email protected]

Global International Tax Contacts

Asia PacificRob Mander+61 2 9233 [email protected]

Dicky To+852 2508 [email protected]

EuropeMario van den Broek+31 23 5300 [email protected]

Caroline Walenkamp +31 23 530 04 [email protected]

www.rsmi.com

Documents

Border Crossingding you d Border Crossing - 2nd Quarter 2012 3 • Where an entity is in a loss making position by virtue of non-arm’s length pricing, multiple transferpricing benefits