International Tax Alert international...3 // PKF International Tax Alert All Regions Issue 8 November 2011 New Double Taxation Treaty between Germany and Turkey The Federal Republic

International Tax Alert Issue eight

Autumn 2011

Chairman’s NoteWelcome to the November 2011 edition of the PKF InternationalTax Alert (ITA), an online publication that summarises the latestkey tax changes from selected countries around the world. Inthis eighth edition, there are contributions from PKF memberfirms’ tax experts in 26 countries.

The ITA is issued three times per year and can be downloadedfrom the PKF International website at www.pkf.com

News in Brief 3

Austria 4

Dr Thomas Ausserlechner provides a quick summary of the latest changes

Australia 5

Lance Cunningham looks at four topical issues including carbons emissions pricing

Belgium 9

Stefan Creemers explains the changes to non-resident tax liability

Canada 10

Bill Macaulay explains the new treaty developments plus inbound and outbound investment changes

Chile 13

Antonio Melys Alvarez sets out the new simplified procedure and exemption from administrative duties for foreign investors

Cyprus 14

Nicholas Stavrinides updates on new tax treaties

Germany 15

Horst Wörner introduces the new double-taxationtreaty between Germany and Switzerland

Ghana 16

Emmanuel Afoakwah highlights the tax proposals in 2011 fiscal year budget

Hungary 17

Vadkerti Krisztián reports on regulated investment companies, a new corporate entity

India 18

S Santhanakrishnan explains the Indian Transfer Pricing rules

Ireland 20

Sarah Murphy outlines the changes to the Relevant Contracts Tax

Kenya 21

Martin Kisuu summarises the changes to Kenya’s VAT law

Lebanon 23

Elie Chartouni explains the modernization of the law for offshore companies

1 // PKF International Tax Alert Issue 8 November 2011All Regions

Jon Hills, Chairman PKF International Tax Committee

Malaysia 26

Lee Yiing Ting summarises the latest tax changes including the introduction of ‘designated areas’

Netherlands 28

Jan Roeland explains the Government’s 2012 Tax Proposals

Pakistan 31

Malik Haroon Ahmad summarises changes toincome, sales, federal excise duty, customs and capital value taxes

Paraguay 33

Silvia Raquel Aguero promotes the country’s tax benefits

Romania 34

Carmen Mataragiu explains the recent changes to VAT and income tax

Slovak Republic 36

Richard Budd outlines the recent amendments to tax and business legislation

Slovenia 38

Tomaž Lajnšček sets out the 2011 tax changes

South Africa 39

Eugene du Plessis explains the proposed tax amendments to the Taxation Laws Amendment Bill (the TLAB) issued in June 2011

Spain 42

Aischa Laarbi outlines recent changes to corporate tax,wealth tax and VAT

Uganda 44

Albert Beine describes the Ugandan Transfer Pricing Rules

UK 46

Jon Hills reviews the latest UK R & D developments

USA 48

Leo Parmegiani updates on Reporting of Specified Foreign Assets

USA 50

Brent Lipschultz explains the new IRS Voluntary Compliance Program (VCP)

USA 51

Harold Adrion and Jon Hills identify the problems of US LLCs for non-US investors



New Double Taxation Treaty between Germany and TurkeyThe Federal Republic of Germany and the Republic of Turkeysigned a Double Taxation on Income and Prevention ofSmuggling Tax Agreement in Berlin on 19 September 2011.This is intended to make both countries more attractive toinvestors.

It was agreed to implement the provisions of the Agreementfrom 1 January 2011. Turkey has now concluded DoubleTaxation Agreements with 82 countries of which 74 are inforce.

For more information please contact:

Selman Uysal Sun Bagimsiz Dis Denetim Yeminli T: +90 232 466 01 22E: [email protected]

IRS Rules on Creditability of UK Special Remittance TaxThe IRS issued Revenue Ruling 2011-19 ruling that US individuals resident in the United Kingdom who elect to paythe £30,000 levy for non-domiciliaries may claim a foreigntax credit for that amount. The IRS determined that the remittance basis charge (RBC) applied to long-term non-domiciliaries - those resident in the UK for seven of the lastnine years but who continue to claim foreign domicile - fallsunder the code section 901 definition of a creditable foreignincome tax.

Under changes introduced by the UK in 2008, long-termnon-domiciliaries must pay the additional charge to remainwithin the UK remittance-based tax regime. Under the remittance tax regime, a non-dom is not taxed on foreign-source income that remains offshore but will instead betaxed only on income remitted to the UK and on UK -source income.

Uncertainty surrounding the treatment of the tax under USrules raised the specter of double taxation for US nationalswho claimed U.K. non-dom status. Because of the uniquenature of the charge, it was not clear whether it would becreditable under reg. section 901-2(a)(1), which requiresthat "the predominant character of that tax is that of an income tax in the US sense."

In its analysis, the IRS determined that the remittance basischarge and remittance basis taxation are a single tax, whichit terms the long-term non-domiciliary levy, for section 901purposes.

News in Brief

Publication of financial statementsIn accordance with European Union legislation, corporateenterprises have to publish their financial statements withinnine months after balance sheet date. If they miss this date,the entities face a fine of at least EUR 1,400/4,200/8,400(depending on the size of the corporation). Foreign corporations that support an Austrian subsidiary registeredin the commercial register are also required to publish theirforeign financial statements in German language.

Tax treatment of American SCorporations by Austrian fiscalauthorities is unlawfulUnder American civil law, an S corporation is considered a corporate entity but for tax purposes it is deemed a pass-through entity. Therefore, S corporations combine the benefits of transparent taxation with the advantages of limited liability on corporate level. Austrian fiscal authoritiesregard these advantages to be excessive and seek to create a right of taxation via profit allocation leading to double taxation for Austrian investors.

Increase of R&D BonusAustrian fiscal authorities refund 10% (8% by 31 Dec 2010)of research & development costs according to Frascati definition of the OECD.

Interest from Group acquisitionsInterest arising from the acquisition of subsidiaries within thegroup is no longer deductible after 31 December 2010.


Dr Thomas AusserlechnerT: +43 1 512 8780E: [email protected]: www.pkf.at


Austria Update

Australian UpdateLance Cunningham looks at four topical issues:

Carbon Emissions Pricing Scheme

New Mining and Petroleum Taxes

Tax Exemption for Non-residents Managed Funds

New Tax Incentives for Research and Development

1.Carbon Emissions PricingScheme

In response to the threat of climate change caused by thehuman-generated greenhouse gas emissions, the AustralianGovernment has introduced a carbon emissions pricingscheme to commence on 1 July 2012. Australia will be joining a number of other countries that have introducedemissions trading schemes (ETS), including the EuropeanUnion, New Zealand, Switzerland and a number of States inthe United States. Japan and South Korea are also pilotingan ETS. A straight carbon tax has also been introduced ina number of other countries.

The scheme will have two components. Firstly, a price willbe set for the emissions of carbon from large emitting installations such as electricity producers, steel makers andaluminium smelters. This aspect of the scheme will targetAustralia's top 500 polluters, generally being any businessresponsible for direct greenhouse gas emissions of morethan 25,000 tonnes of carbon (or carbon equivalent) annually.

The second component relates to the use of fuels for heavyroad transport, domestic aviation, marine and rail transportand fuels used for off road use. For these fuels, the fuel taxcredits and excise schemes will be amended to give thesame economic effect to these fuels as the imposition of the carbon tax/ETS.

Carbon Tax/ETS for large emitters

For the first two years the scheme will operate like a taxwith the Government dictating the price for greenhouse gasemission permits. From 1 July 2015, it is proposed thescheme will become a cap-and-trade emissions tradingscheme with the Government setting the cap on the amountof greenhouse gas that can be emitted by Australian emittersand the price of permits being set by the market (with aprice floor and ceiling set by the Government).

The initial price of permits will be $23 per tonne of carbon(or equivalent of other green house gases) increasing to$24.15 on 1 July 2013 and $25.40 on 1 July 2014.

Some trade exposed industries will be given free permits to ensure they are not adversely affected by internationalcompetition. After 1 July 2015 some permits will continueto be provided free by the Government to trade exposed industries until a more extensive international ETS is introduced.

Transport fuel taxes

The carbon tax / ETS scheme does not apply to the use oftransport fuels but a broadly equivalent cost will be imposedin the form of selective reductions of fuel tax credits and excise changes to fuels for domestic aviation, marine andrail transport and the use of transport type fuels used foroff-road use (e.g. diesel generators on a mine site). From 1 July 2014, the Government also intends to extend the fuel tax credit reductions to heavy on-road vehicles.

There will be no additional tax on fuel used by householdsor private and light commercial vehicles. Small business,agriculture, forestry and fishing industries will also not haveany carbon price added to the cost of off-road use of fuel.Renewable fuels and non-combustible fuels used for lubrication will not bear a carbon price.

The concessions

Although end consumers will not be directly affected by this scheme it is likely to result in higher prices for certainproducts and services. To offset these higher prices, and tomake it more politically palatable, the scheme also containstax reductions and welfare increases for individuals. Therewill also be various grants and assistance packages formanufacturers, coal and steel producers and the agricultural industry.

2.New Mining and Petroleum Taxes

The Australian Government proposes to introduce a MineralResource Rent Tax (MRRT) on profits made on mining of coaland iron ore in Australia. It will also extend the operation of


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the existing Petroleum Resource Rent Tax (PRRT) to includeall petroleum projects on Australian territory, either at sea oron land. This will be associated with a general reduction inthe income tax rate for companies. These changes are proposed to start from 1 July 2012.

Australia is experiencing a two-speed economy with industriesassociated with resource extraction enjoying boom timeswhile other industries are feeling some of the contractionthat most of the rest of the world is experiencing followingthe global financial crisis. The proposed reduction in thegeneral company tax rate and the imposition of the resourcesrent taxes may help to spread some of the advantages ofthe resources boom to the rest of the Australian Economy.

The report to Government that recommended this approachsuggested a wide ranging resources rent tax with a reductionin the company income tax rate from 30% to 25%. However,due to various political problems and lobbying by vested interests, the resource rent tax has been limited to a fewhigh value commodities such as coal, iron ore, petroleumand natural gas. The reduction in company tax rate has alsobeen limited to a 1% decrease from 30% to 29% (with apromise to consider further reductions in the future).

Mining Resources Rent Tax

This tax will apply from 1 July 2012 to iron ore and coal producers with MRRT profits of at least $50 million perannum. Smaller producers are exempt from MRRT but theywill have compliance and record keeping requirements. The MRRT is a tax on the value of the extracted iron ore orcoal at the taxing point, which is generally when the taxableresource leaves the 'run-of-mine' stockpile, less the costsincurred in getting the commodity to the taxing point (knownas upstream costs). This calculation is designed to identifythe value of the resource as it leaves the ground and beforefurther processing occurs. The MRRT profit is further reducedby an allowance for any State or Territory Government royalties paid on the extracted resource and also an allowance for past year losses on the project. The result is the MRRT profit.

The rate of tax applied to the MRRT profit is 30%. However,this is decreased by a 25% extraction factor, which reducesthe effective tax rate to 22.5%. The extraction factor is anapproximation of the value of the miner's specialist skillsused to extract the resources and bring it to the taxing point.

The liability to tax will commence at profits of $50 million butwith a phase in for profits up to $100 million so the full tax isonly payable once profits exceed $100million.

Pre-May 2010 Projects

The MRRT only applies to new projects that start after 1 May 2010 (the date of the Government's announcementfor a resource rent tax) and to the increase in value of existingprojects as at 1 May 2010. Taxpayers with projects that arein existence at 1 May 2010 have to identify the value of theirproject's starting base. The starting base is the value of theproject as at 1 May 2010 plus certain capital expenditure incurred between 2 July 2010 and 30 June 2012 (the startdate for the MRRT). The starting base can be written offagainst the MRRT profits over time.

Petroleum Resource Rent Tax

The PRRT currently applies only to certain offshore petroleumprojects but from 1 July 2012 it will also apply to all offshoreand onshore oil, gas and coal seam methane projects, including the North West Shelf project but excluding projectsin the Timor Sea joint development area. There is nothreshold before PRRT applies, unlike the MRRT with its$50M threshold.

The PRRT will continue to apply at the rate of 40% of PRRTassessable profits. These will generally be calculated in accordance with the prevailing PRRT rules with some adjustments including:

Projects transitioning into the PRRT may apply the starting base for their project to be written off againstPRRT profits; and

All royalties paid to State and Territory Governments will be credited against PRRT.

3.Tax Exemption for Non-residents Managed Funds

The Australian Government has announced concessionsthat will exempt some non-residents with managed fundsfrom Australian tax.

These concessions are to apply to foreign investment funds

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that fit the definition of an IMR (Investment ManagerRegime) foreign fund, which generally requires the fund to:

not be an Australian resident for income tax purposes

be recognised under a foreign law as a collective investment vehicle

not have its day to day control reside in the members of the fund

not carry on a trading business in Australia i.e. all of itsAustralian sourced income is passive investment income

be widely held and not closely held.

IMR income

These provisions apply where the IMR foreign fund has IMRincome or losses. IMR income comprises returns or gainsdeemed to have an Australian source in accordance with therelevant articles of the double tax agreements (e.g. businessprofits article and agency article) derived from financialarrangements, other then:

debt or equity interests issued by an entity (including derivatives over those interests) where the fund holds more than 10% or more of the entity

derivatives issued in relation to Australian real property(and indirect interests in Australian real property)

arrangements where the fund can vote at a meeting of the issuer, participate in operational decisions of the issuer, or deal with the assets of the issuer.

Fin 48 Amendments

There are two related sets of concessions in these proposedamendments. The first set of rules are designed to alleviateproblems that some IMR foreign funds had in complying withthe United States Fin 48 rules over the last few years becauseof uncertainties in applying Australian tax laws to theirinvestments. These amendments will apply to the 2010/2011and previous years and will provide that the IMR fund incomeand gains made by the IMR foreign funds will not be assessable income of the fund provided that the fund:

has not lodged an Australian income tax return in relation to any income year

has not received an assessment of tax (or had its beneficiaries assessed if the fund was a trust) prior to 18 December 2010

has not been notified by the Commissioner of an

intention for the fund to be audited (prior to 18 December 2010).

Investment Manager Regime - Conduit Income

The second set of concessions applies to the 2010/2011 and subsequent years. They will operate to exclude from Australian income tax all IMR income and losses, as well asIMR capital gains and losses, where the IMR fund does nothave a place of business in Australia but it is treated as havinga permanent establishment in Australia solely as a result ofengaging an Australian-based investment manager who habitually exercises a general authority to negotiate and conclude contracts on behalf of the fund.

4.New Tax Incentives for Research and Development

The Australian Government has changed the taxation incentive regime for companies conducting research anddevelopment (R&D) activities in Australia. Effective for income years commencing from 1 July 2011, the new provisions provide an increased level of financial assistanceto an expanded range of companies. However, the legislation defining what is "research and development" for tax purposes has been changed considerably.

Access for foreign companies

The concession will be expanded to encompass foreign companies operating in Australia through a permanent establishment. This will bring in foreign companies carrying on R&D through a branch in Australia. Foreign ownership ofthe results of the R&D activity is specifically accommodatedunder the new regime.

From tax deductions to tax credits

One of the fundamental changes to the R&D tax incentiveregime involves changing the nature of the tax benefit fromadditional tax deductions to a tax credit. Under the existing incentive, companies are generally allowed a 125% tax deduction on eligible R&D expenditure with up to 175% taxdeduction on increased R&D expenditure.


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Under the new credit regime R&D expenditure will becomenon-tax deductible, although subject to a tax credit at eitherthe 45% or 40% rate (against the current 30% tax rate). Therate of tax credit will depend on whether company groupturnover is less than $20M (45% credit) or more than $20M(40% credit). This equates to 150% and 133% rates of taxdeductions under the current scheme, hence the increasedlevel of headline financial assistance. For companies with lessthan $20M group turnover, the 45% credit is refundable if thecompanies are in a tax loss position.

Changes to the R&D activities’ eligibility criteria

The definition of what constitutes R&D for tax purposes has been completely overhauled with the introduction ofnew terminology. The previous focus for 'core R&D' on 'systematic, investigative and experimental activities involvinginnovation or high levels of technical risk' has been replacedwith 'experimental activities for the purpose of creating newknowledge'. While there would appear to be little substantivedifference in the application of the new terminology, it will bein the administrative interpretation where uncertainty is likelyto be introduced, with the Government flagging the intentfor a tighter interpretation of eligibility.

Areas targeted for specific tightening are those where theGovernment considers the activities were part of 'businessas usual' for certain businesses. Businesses engaged insome form of production such as manufacturers and miningcompanies, along with certain computer software developments will have to review their R&D claims carefully,particularly where the R&D activities themselves produce or are directly related to producing goods or services.


Lance CunninghamDirector of Taxation - PKF Australia Limited T: +61 2 9251 4100 E: [email protected] W: www.pkf.com.au

Non-resident taxation Stefan Creemers explains how the new definition of taxableperiod affects Belgian non-resident tax liability and, in particular, executives benefitting from the special tax status.

Belgium is known for its beneficial special tax status for foreign executives who are temporarily assigned to Belgium.Even if these executives move (with their family) to Belgium,they are deemed to be non-resident taxpayers during thefull length of their assignment. Under this special tax status,they shall only be taxed in Belgium on that part of their income that is related to activities physically performed inBelgium (“travel exclusion”). Moreover, special tax deductions(related to expenses to be borne by the employer) can bemade, even on a favourable, lump sum basis.

The year of arrival or departure in Belgium could turn out to be even more beneficial. However, this has recentlychanged. To the extent possible, we now advise that a Belgian assignment should be set up in such a manner thatit starts on 1 January or at year end. The end date of theBelgian assignment should be set on 31 December or thebeginning of the calendar year. Planning your assignmentstart date and end date will significantly decrease the taximpact of this new measure. Since this new legislation isapplicable as of income derived during 2010, it might beworthwhile to verify whether the necessary tax provisionshave been made.

Old legislation : the taxable period in Belgian non-residentpersonal income tax coincides with the (full) calendar yearprior to the year of assessment. For example, the taxableperiod of income year 2011 is related to assessment year2012. There was one exception to this rule. In the casewhere taxable income was only obtained during a time period that started after 1 January or ceased before 31 December, the taxable period coincided with that part of the year during which taxable income was obtained.

New legislation : By way of a Royal Decree (dated 22 December 2010) Belgian legislation was adapted andnow indicates that if the taxable income is

obtained only after 1 January, the taxable period startsas of that date only if the taxpayer’s tax positionchanged on that date (from resident to non-resident orvice versa)

ceased to be obtained prior to 31 December, the taxableperiod ends on that date only if the taxpayer’s tax posi-tion changes (from resident to non-resident or viceversa).

Impact on Belgian non-resident tax liability

According to Belgian non-resident tax legislation, personalised tax credits (e.g. for dependent children, non-working spouse, etc) are only applicable provided thatthe non-resident tax payer disposes of an abode in Belgiumduring the full taxable period (or acquires more than 75% of his taxable professional income from Belgian sources). An abode is defined as the place where the taxpayer resides (with his family), even without this being his permanent normal tax residence (special tax status of non-resident, see above).

Consequently, if a non-resident (and in particular a foreignexecutive benefitting from this special status) arrives in ordeparts from Belgium in the course of the taxable periodand obtains income taxable in Belgium, he will, under thenew regulation, not be entitled to the personalised tax creditsbecause he did not dispose of an abode during the full taxable period. Under these specific circumstances, theBelgian tax liability will increase (unless the so-called 75%rule or double tax treaty provisions can be applied).


Stefan CreemersPKF BelgiumT: +32 (0)2 242 11 41F: +32 (0)2 242 03 45E: [email protected]

Belgium Update


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New Canadian treaty-basedwithholding rate and benefit formsIn April 2011, the Canada Revenue Agency (CRA) releasedfinal versions of declaration forms that should be used bynon-residents of Canada to provide the CRA and Canadianresident payers with information regarding their residencystatus and eligibility for treaty benefits.

These new forms are important for both Canadian residentpayers and non-resident payees of interest, dividends, rents,royalties, management fees and other similar paymentswhich are subject to Part XIII non-resident withholding tax in Canada and may be eligible for a reduced withholding tax rate under a treaty. The forms can also be used whenrequesting a refund of Part XIII withholding tax, obtaining a Regulation 105 withholding tax waiver, requesting a certificate of compliance or filing a Canadian tax return for a hybrid entity.

The introduction of these forms resulted from the changesin the Fifth Protocol to the Canada-US Tax Treaty. The formsare similar to the US Form W-8BEN, Certificate of ForeignStatus of Beneficial Owner for United States Tax Withholdings.

NR 301 - Declaration of Eligibility for Benefits under aTax Treaty for a Non-Resident Taxpayer (i.e., Individual,Corporation or Trust)

NR 302 - Declaration of Eligibility for Benefits under aTax Treaty for a Partnership with Non-Resident Partners

NR 303 - Declaration of Eligibility for Benefits under aTax Treaty for a Hybrid Entity.

For the purposes of the forms, a hybrid entity is an entitythat is considered "fiscally transparent" under the tax lawsof a country that Canada has a tax treaty with and not "fiscally transparent" for Canadian tax purposes. For example, a US limited liability company is generally treatedas a partnership for US tax purposes, but is treated by theCRA as a corporation for Canadian tax purposes.

Additional information and copies of the forms and instructions can be obtained from the CRA website. Our commentary is available on the Smythe Ratcliffe LLP website at http://www.smytheratcliffe.com/pdf/Cross-Border-Tax-Update-NR301-302-and-303.pdf.

Inbound investment into CanadaUS businesses continue to find it difficult to structure theirnew and ongoing ventures in Canada in the wake of theFifth Protocol to the Canada-US Tax Treaty signed in 2007.An unlimited liability company (ULC) is a certain type ofCanadian corporation that can be incorporated in theprovinces of Nova Scotia, Alberta and British Columbia.

Canada Update


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A ULC is generally treated as a fiscally transparent entity for US tax purposes but is taxed as a corporation underCanadian rules. ULCs have been very popular with US investors seeking a flow-through entity for their tax structure.New Article IV(7)(b), however, will generally eliminate thetreaty benefit to a US resident member of a ULC on across-border payment from the ULC to the member bydeeming the member not to be a US resident for treaty purposes (and thereby eliminating treaty benefits) where thetreatment of the amount under US law is not the same asits treatment would be if the ULC were not treated as fiscallytransparent under US law. On a dividend to the US member,the loss of the treaty benefit could be as much as a 25%versus 5% Canadian withholding tax rate. Solutions may include:

Inserting an intervening foreign entity (such as a DutchCo-op or a Luxembourg SARL between Canada and theUS member).

Using a strategy to increase the paid-up capital forCanadian tax purposes that will result in a deemed dividend for Canadian tax purposes followed by a returnof capital distribution to the US member. This will generallyresult in the availability of the applicable treaty-reducedrate, 5% in the case of qualifying corporations.

We recently came across a situation with a structure proposed by another advisor, which was to have a US LLCbe the member of the Canadian ULC. Article IV(6) is afavourable rule which gives US members of a fiscally transparent entity such as a US LLC or US partnership. Asa result of the strict wording in Article IV(6), there is a problemin obtaining the treaty-reduced rate in a PUC increase strategywhere the ULC member is an LLC. The US does not recognisethe PUC increase amount as a taxable amount. As it is adisregarded amount, the CRA does not consider the USmember to have derived the PUC increase amount throughthe LLC for US tax purposes and Canada will apply a 25%withholding tax rate to the deemed dividend on the PUC increase. In contrast to an LLC needing the help of ArticleIV(6) to get treaty benefits for its members, the CRA willgenerally look through a partnership to give treaty benefits toits members. A member of a US partnership will still be ableto obtain the treaty-based rate on the PUC increase strategy.Where partnerships do not work for commercial reasons, theDutch or Luxembourg planning may be appropriate. TheCRA also considers a Subchapter S Corporation to be ableto get treaty benefits in its own right without the need to useArticle IV(6).

Outbound investment from CanadaOn 19 August 2011, Canada’s Finance Minister introduceda long-awaited package of proposed amendments toCanada’s foreign affiliate rules, Canada’s tax regime for foreign subsidiaries and significant investees of Canadianmultinational corporations, referred to as the foreign affiliaterules. The 200-page package replaces a number of controversial amendments proposed in 2004 but never enacted. The period for comments from interested partieson the current foreign affiliate rules package closes on 19 October 2011. Given the Government’s majority in theHouse of Commons, it is expected that this package maybe passed into law within the next few months. Some ofthe changes will have retroactive effect. The proposed rulesoffer some simplifications over the 2004 proposals but applyback to 2004 or earlier with some modifications to the rulesas they will apply going forward. The coming-into-force rulesare complicated as a result of the transitional rules and theability to make elections to have the rules apply to 2004 andprior years.

The 2011 package includes revisions to the foreign affiliatereorganisation and distribution rules originally proposed on27 February 2004. It also includes new proposals in placeof the proposals that suspended certain gains from the saleof shares and other assets of foreign affiliates for the purposeof the surplus accounting rules.

In its December 2008 report to the Minister of Finance, theAdvisory Panel on Canada’s System of International Taxationrecommended fundamental changes to Canada’s system ofinternational taxation, particularly in respect of its exemptionsystem for foreign source business income earned by foreignaffiliates. In its covering Release, Finance Canada indicatedthat, at this time, the priority is to encourage countries toenter into Tax Information Exchange Agreements with Canadaand to provide exempt surplus treatment as an incentive tothose which choose to do so.

The 19 August 2011 proposals contain the following components:

Hybrid surplus – a new surplus account to capturegains from the sale of foreign affiliate shares

Upstream loans – a rule to protect the integrity of thehybrid and taxable surplus regimes by discouragingtransactions designed to avoid taxation of taxable

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dividends through the use of loans from foreign affiliatesto their Canadian shareholders

Reorganisations – rules to:

Allow more generous foreign accrual property income(FAPI) rollover treatment of asset dispositions by a foreign affiliate in the context of mergers and liquidationsby, for example, allowing all types of property, not justcapital property, to qualify for rollover treatment; and

Prevent the duplication of losses on certain share-for-share transactions

Return of capital – rules to allow more generous andsimplified treatment of distributions from the capital of aforeign affiliate by allowing taxpayers to elect to have thefull amount of their cost of the shares be returned beforeany distributions become taxable

Surplus reclassification – a rule to reclassify certaingains from business asset sales from exempt to taxablesurplus in situations where a taxpayer forces the disposition of such an asset for the primary purpose of creating exempt surplus

Stop-loss rules – amendments to:

Provide relief from loss denial rules that apply on thedisposition of shares of a foreign affiliate by allowing a portion of such a loss to the extent the taxpayer realises a foreign exchange gain on a related financialinstrument

Ensure that certain loss denial rules do not apply in the computation of foreign affiliate surplus balancesand apply properly in the context of foreign accrualproperty losses

FAPI capital losses – new rules to align the FAPI systemwith domestic rules by providing that capital losses canonly be deducted against capital gains

Various other technical changes.

Treaty developmentsNegotiations to update the income tax treaty betweenCanada and the United Kingdom commenced the week of 3 October 2011.

Negotiations for an income tax treaty between the Government of Canada and the Government of the HongKong Special Administrative Region of the People's Republic of China commenced the week of 27 June 2011.

The Agreement between Canada and the Republic of Turkeyfor the avoidance of double taxation and the prevention offiscal evasion with respect to taxes on income and on capitalentered into force on 4 May 2011. The Agreement wassigned on 14 July 2009. In accordance with Article 28 of theAgreement, its provisions have effect in Canada: in respectof withholding taxes, on amounts paid or credited to non-residents on or after 1 January 2012; and in respect of other taxes, for taxation years beginning on or after 1 January 2012.

Tax Information Exchange Agreements with the followingcountries have either been signed or entered into force in2011: St Vincent and the Grenadines; Costa Rica;Bermuda, Cayman Islands; Antigua and Barbuda; Grenada;Montserrat; Uruguay; Guernsey; Isle of Man; Jersey;Netherlands in respect of the Netherlands Antilles.


Bill Macaulay

Tax Partner

Smythe Ratcliffe LLP, Chartered Accountants

Vancouver, BC, Canada

T: +1 604 694 7536

E: [email protected]

Canada Update continued

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New simplified procedure andexemption from administrativeduties for foreign investorsAccording to Resolution No. 36 of 2011 of the IRS, investors without domicile or residence in Chile including,under certain conditions, those taxpayers domiciled, resident or incorporated in countries or territories that areconsidered tax havens or preferential tax regimes, can gettheir tax identity number in a simplified procedure and be released from obligations to give notice of the start up ofactivities, keep accounting records and submit an annual income tax return derived from capital or operations indicated below, when operating through institutions operating in Chile as their "agents responsible for tax purposes in Chile”.

To this end, the Chilean source income should come onlyfrom certain investments or operations pointed out in Resolution No. 36, such as the purchases and sales ofshares of publicly traded corporations, investment in derivative instruments (known as forwards, futures, swaps),investments in fixed income instruments, instruments of financial intermediation, in mutual funds shares, in investment funds shares and others.

Any interested party may request the IRS to consider otheroperations not included in Resolution No.36.

The "officials responsible for tax purposes in Chile" or simply"agents" are, among others, the banking institutions operatingin Chile, stockbrokers, securities dealers, the overall fundmanagement companies, mutual fund administrators andadministrators of public funds who areestablished in thecountry.


Antonio MelysTax Division DirectorPKF Chile Auditores Consultores LtdaT: +56 2 650 43 00E: amelys@pkfchile

Chile Update


Tax treaty updateCyprus has concluded three new agreements – with Denmark, Slovenie and United Arab Emirates.

1.Cyprus - DenmarkThe new tax treaty replacing the old 1981 treaty will enterinto force from the 1st January 2012. In the new treaty,there is no withholding tax on income from interest and royalties, as well as on dividend, assuming a holding of 10% for a minimum shareholder period of 12 months.

2.Cyprus - SloveniaThe new tax treaty replacing the old 1985 Yugoslavia treatywill enter into force from the 1st January 2012. In the newtreaty, there is a 5% withholding tax on dividend, interestand royalties income.

3.Cyprus - United Arab EmiratesA double tax treaty has been signed and will enter into force from the 1st January 2012. In the treaty, there is nowithholding tax on dividend, interest and royalties income.

Changes in Cyprus tax legislation

The income tax law

A new income tax rate of 35% is introduced for individualswith taxable income in excess of EUR60,000, effectivefrom the tax year 2011.

50% exemption will be given to previously non-Cypriottax residents for employment in Cyprus if the incomefrom employment exceeds EUR100,000. The exemptionis given for five years starting from 1st January 2012.The exemption applies irrespective of nationality (i.e. toCypriots and non-Cypriots).

The special contribution for thedefence in republic law

The rate of defence tax on interest has increased from10% to 15%.


Nicholas Stavrinides Director PKF Savvides & Co LtdT: +357 25 868 000E: [email protected]

Cyprus Update


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New double-taxation treaty between Germany and SwitzerlandThe finance ministers of Germany and Switzerland havereached an agreement on a new double-taxation treaty that resolves open questions for the taxation of capital and investment income which have existed for decades. Thegoal was to reach fairness in taxation, especially for Germantax payers.

Both countries are satisfied with the outcome of the negotiations. The privacy protection for Swiss banks remains and the German tax claim is warranted. The regulations of the OECD-model convention for the exchange of information’s are implied.

With this treaty the bordering counties also try to diminishthe distortion of competition. German citizens should nolonger be prevented to open a bank account in Swissbanks, but at the same time tax evasion should no longerbe an element of the investment for Germans.

However the most important parts of the new double-taxation treaty are the taxation for past and future capitaland investment income in Switzerland.

People who had money on deposit in Switzerland on 31 December 2010 have to make a single payment to satisfy their tax responsibilities for the past years.

The tax rate will be 19% - 34%. There are different components which determine the exact tax rate. This will be done with the help of a calculation formula. The bank will collect the money and will transfer the money to theGerman authority. There will be no further prosecution.

There will also be another option for the investor. He canvoluntarily reveal all his deposits. In this case, the Swiss bankwill send the balance of accounts for each 31 Decemberfrom 2002 up to the day that the agreement comes in toforce. These assets will be taxed.

To save the minimum German income for this past taxationand in recognition of their willingness to co-operate withagreement, Swiss credit institutes pledge to contribute

2 billion Swiss francs in guaranteed money. This money willbe absorbed with incoming tax payments of German tax-payers and will be repaid to the credit institutes.

For future capital and investment income there will be a flat-rate withholding tax in amount of 26.375%, whichequals the German flat-rate withholding tax for capital andinvestment income. Again the Swiss bank will retain the taxand transfer the money to Germany.

Another not inconsiderable part of the double-taxation accord is the simplification of requests for further informationon possible investors. The only requirement will be the nameand a plausible reason for the request. For the first twoyears after the treaty comes into force, each country is allowed to make 750 to 999 requests. After the two yearspan, this margin will be adjusted.

There is still no permission to perform ‘fishing expeditions’,which means that Germany cannot select random peopleand request further information about possible deposits.The treaty is still awaiting the approval of both parliamentsbut there few doubts that the new double taxation treaty will be approved.

After the approval by both parliaments, the treaty will comeinto force on 1 January of the following year. It is expectedthat this approval will come in 2012 so that the double taxation treaty will come in to force on 1 January 2013.


Horst WörnerPKF Fasselt SchlageT: +49 69 170000-0F: +49 69 170000-706E:[email protected]

Germany Update


Highlights of the tax proposals in 2011 fiscal year budget.

Domestic Tax (Direct taxes)Withholding Tax

Threshold is now GH¢ 500 instead of GH¢50

Foreign suppliers of service now at 15% instead of 5%.

Gift Tax rate increased from 5% to 15% so as to be in linewith the Capital Gains tax rate.

National Fiscal Stabilisation Levy which was introduced inmid 2009 intended to last for 18 months is now extendedfor an additional year to end 2011.

Institutions with tax-free status due to their non-profitmaking objectives are now to have their incomes fromcommercial activities subjected to tax. The Commissioner-General of the GRA is to initiate an amendment of the taxlaw to enable Government tax all commercial activities undertaken by such institutions.

Taxation of ProfessionalsA special desk in the Domestic Tax Division of GRA isset up from January 2011 to monitor compliance of professionals in their tax payment. These include accountants, surveyors, building contractors, medicaldoctors, lawyers, economists, bankers, insurers andconsultants.

Mining Royalties to be paid monthly instead of quarterly

All NGOs and charitable organisations are to re-apply for tax exempt status on periodic basis with their audited financial statements and a certified record of their activitiesby the appropriate sector ministry.

Domestic Tax (Indirect taxes)VATThe threshold is increased from the current GH¢ 10,000 toGH¢ 90,000 for both goods and services. VAT taxpayerswhose annual business turnover fall between GH¢ 10,000and GH¢90,000 will now operate VAT Flat Rate Scheme,charging a flat rate of 3%.

The following items, which were zero-rated, have been re-classified as VAT exempt items:

a) Locally produced pharmaceuticals

b) Locally produced textbooks and exercise books

c) Locally manufactured agricultural and machinery and other agricultural implements and tools.

Haulage and vehicle hiring are now taxable under the VATLaw.

Communication Service TaxCommunication Service Tax is extended to all companiesand persons across the communication industry and nowincludes the following:

a) Public Corporate Data Operators

b) Providers of Radio(FM) broadcasting services

c) Providers of Free-to-air television services.


Emmanuel AfoakwahTax ManagerPKF GhanaT: +233 21 221 266M: +233 (0)20 8191932E:[email protected]

Ghana Update


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Hungary Update


Introduction of new corporate entity: the regulated investment company.

Regulated investment companiesA new type of corporation has become available in Hungary,the regulated investment company (RIC). This new companyis largely similar to the real estate investment trusts that existin several other countries. RICs may also invest through their‘special purpose entities’ (SPE) into real property projects.

Both RICs and SPEs are exempted from corporate incometax and local business tax but they are subject to a 2% discount rate of transfer duty. The profits are taxed at theshareholders of the RICs.

The RIC is a publicly held company limited by shares andmust be engaged in one of the following activities:

Sale of real property

Renting and operating of real property

Management of real property

Holding activities.

There are certain limitations to the owners of a RIC:

No more than 10% of the shares or voting rights is heldby insurance companies or credit institutions

Must have a 25% ratio of public ownership on a regulated market

At least 25% of the shares must be held by shareholdersowning less than 5% of the RIC.

The other conditions for RICs include:

At least 90% of the profits must be paid to the share-holders as dividend

Its initial capital is not less than 10 billion HUF

Its real property assets must be revaluated at least quarterly

Can only own shares of other RICs or SPEs

There are certain limitations to the asset and liabilitystructure.

Other recent changes

The European Court of Justice ruled that the Hungarian legislation which did not allow the reclaim of VAT on invoices

that have not been paid is not in line with the VAT Directive.The relevant legislation has been changed and taxpayersare now allowed to reclaim such VAT. All related penaltiesfrom the previous periods can be reclaimed as well.

The Government has revealed the main features of the taxchanges effective from 2012:

The standard rate of VAT is expected to be increasedfrom 25% to 27%

The current rate of 20.32% personal income tax will be decreased to 16% up to a monthly tax base of 202,000HUF (approx. 700 EUR), and to 18.16% above this limit. At the same time, a tax credit will no longer be available to ensure the PIT exemption for the minimum wage

Reverse VAT will be introduced in agriculture

The minimum wage will be increased to 92,000 HUF (approx. 320 EUR)

The excise duty on cigarettes, alcohol and diesel will be increased from 1 November 2011

The game tax will be significantly increased from 1 November 2011.


Vadkerti KrisztiánPKF HungaryT: +36 1 391 4220F: +36 1 391 4221E: [email protected]

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India Update


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An introduction to Transfer Pricing Law in IndiaThe law on Transfer Pricing has evolved in India as a logicalconsequence of the exponential increase in internationaltransactions post globalisation. The participation of multi-national groups in the economic activities of India has givenrise to complex issues, particularly so when it involvestransactions between two enterprises belonging to thesame multinational group.

The Finance Act 2001 introduced an entire gamut of provisions dealing with Transfer Pricing (TP) which cameinto force on 1 April 2002 and are applicable to the assessment year 2002–03 and subsequent years.

The law essentially mandates arm's length pricing of international transactions between associated enterprises,specifies the methods for determining the arm's lengthprice (ALP), details the documentation requirements forcompanies entering into international transactions, and stipulates penalties for non-compliance.

Key features of Transfer Pricing Regulations

The Transfer Pricing law in India requires that pricing of international transactions between two Associated Enterprises (AEs), either or both of whom are non-residents,

should be at arm's length, a detailed definition of which hasbeen given in the law. The definition is given based on certain objective parameters to assess the relationship between two entities and include:

Share Capital Criterion: When one AE holds 26% ormore of share capital in the other or when a third partyholds 26% or more share capital in both AEs

Loan-based Criterion: Loan advanced by one AE constitutes 51% or more of total assets of another AE

Management Control Criterion: More than half of the directors or one or more executive directors are actuallyappointed by one AE in the other AE.

If the TP provisions are applicable, the ALP of the interna-tional transaction(s) has to be determined. The pricing atarm's length would need to be established by internationallyaccepted transfer pricing methods including:

1. Comparable Uncontrolled Price Method (CUP)

2. Resale Price Method (RPM)

3. Cost Plus Method (CPM)

4. Profit Split Method (PSM)

5. Transactional Net Margin Method (TNMM)

To date, judicial pronouncements indicate a bias towardsthe CUP method.

India Update continued


Safe harbour provisions

'Safe harbour' refers to circumstances in which the tax authorities will accept the transfer price declared by the assessee. The principle is that, where the application of themost appropriate method results in more than one price, a price which differs from the average of such prices withina permissible range may be taken as the ALP. The allowablevariation will be such percentage as may be notified by theCentral Government. As of now, no percentage has beennotified.

Penalties for non-compliance

Assessees with international transactions of the value exceeding Rs.1 crore are statutorily required to maintainand submit the prescribed documents with regard to the international transactions entered into by them. A reportfrom a Chartered Accountant, as prescribed in Form 3CEB,also needs to be provided before the due date for filing thereturn of income.

Non-compliance with these statutory requirements attractsa levy of penalties under the law.

The penalty can be waived if the assessee can prove thatthe default is due to a reasonable cause.

Advance Pricing Agreement (APA)

An APA is an arrangement between the taxpayer and thetaxing authority whereby the two parties agree on the transferpricing policy for specified transactions of the taxpayer overa given period of time. Such a ruling would be binding onthe taxpayer and the tax authorities. The scheme is intendedto bring certainty in the tax liability of the transacting partiesbut, as the concept is not yet in the current law, the provisions are still at the conceptual stage.

In summary, Transfer Pricing Law in India is in an evolvingstage and, considering the practical issues, there is considerable scope for litigation in this area. Hopefully, in the near future, the law would become streamlined bymeans of amendments to remove the difficulties in application and also by way of judicial pronouncements.


S. SanthanakrishnanPKF Sridhar & SanthanamT: +91 44 2811 2895E: [email protected]: www.pkfindia.in

Nature of Default Penalty Prescribed

Failure to maintain prescribedinformation / documents

Failure to provide information /documents during audit

In case of adjustment to taxpayer’s income by AO consequent to determination of ALP and assessee not beingable to explain the genuineness(leading to inference of concealment)

Failure to provide certificate in Form 3CEB

2% of value of internationaltransaction

2% of value of internationaltransaction

100 – 300% of the tax on adjustment amount

Rs 1,000,000

Domestic Tax Changes Relevant Contracts Tax

Relevant Contracts Tax (RCT) applies to payments made by a principal to a subcontractor under a “relevant contract”.A “relevant contract”is a contract to carry out relevant operations in the construction, forestry or meat processingindustry. RCT applies to both resident and non-residentcontractors operating in the construction, forestry or meatprocessing industry in Ireland.

Tax of 35% is deducted by a principal contractor on payments to a subcontractor unless the principal contractorhas received a relevant payments card for the subcontractor.Where tax is deducted, the principal contractor gives thesubcontractor a certificate, which the subcontractor uses to claim credit for, or repayment of, the tax withheld.

A new electronic system for RCT is being introduced by the Irish Revenue Commissioners on 1st January 2012. Allprincipals in the construction, forestry and meat processingindustry will be obliged to submit information, data and payments to Revenue electronically.

From 1st January 2012, all relevant contracts, includingthose that are ongoing at the end of December 2011, mustbe registered online. Principals must notify all payments onrelevant contracts to the Irish Revenue Commissioners online from 1st January 2012. It will not be possible to notifya payment on-line unless the contract has been registered.

The new system will have three tax deduction rates: 0%, 20%and 35%. Subcontractors who satisfy the current criteria fora C2 card (tax affairs up to date) will qualify for the 0% rate.In certain cases, a subcontractor will be pay the 35% rate.These are likely to be subcontractors who are not registeredwith the Irish Revenue Commissioners or where there areserious compliance issues to be addressed. All other sub-contractors will be eligible for the standard 20% rate.

Each time a payment is to be made by a principal to a subcontractor, the principal must notify the Irish RevenueCommissioners (by electronic means) of their intention tomake a payment and the gross amount of the payment.The Irish Revenue Commissioners will set out the rate of tax and the amount to be deducted from the payment.

This is a significant change from the previous RCT systemwhen a principal paid a subcontractor with the use of theannual Relevant Payments Card.

Levy on Pension Schemes

An annual levy of 0.6% on the market value of assets inpension schemes has been introduced. The levy is chargedat 0.6% on the aggregate of the market value of the assetsof the pension scheme at the 30th June in each year (alternative valuation dates may apply depending on theparticular pension scheme). The levy is payable to the IrishRevenue Commissioners on the 25th September in each year.


Catherine McGovernPKF Tax Consulting LtdE: [email protected]

Ireland Update


Deemed interest provisions The Finance Bill, 2011 which came into effect on 9 June2011 introduced Section 16(5) of the Income Tax Act (ITA)giving powers to the Commissioner of Income Tax to prescribe the form and manner in which deemed interest is to be computed. Deemed interest means an amount ofinterest deemed to be payable by a resident person in respect of any outstanding loan provided or secured by acontrolling non-resident or its non-resident associate, wheresuch loans have been provided free of interest and if thelocal entity is thinly capitalised.

Introduction of the deemed interest principle is a move tocombat tax avoidance schemes by some Multinational Enterprises (MNEs) which previously offered loans to theirsubsidiaries at no charge. With the introduction and enforcement of the deemed interest principle, thinly capitalised companies are now likely to face restriction of a higher proportion of their actual interest expense. Additionally, the deemed interest will be a disallowable expense on such companies and they will have to accountfor withholding tax at the rate of 15% on such expenses.

A company is thinly capitalised where it is in the control of a non-resident person alone or together with four or fewerother persons and if the highest amount of all loans held bythe company at any time during the year of income exceeds

the greater of three times the sum of the revenue reservesand the issued and paid up capital of all classes of sharesof the company. Thin capitalisation is, however, not applicable to banks or financial institutions licensed underthe Banking Act. For purposes of thin capitalisation, controlin relation to a body corporate means the power of a person to secure, by means of the holding of shares or thepossession of voting power in or in relation to that or another body corporate, or by virtue of powers conferred bythe Articles of Association or other document regulating thator another body corporate, that the affairs of the first mentioned body corporate are conducted in accordancewith the wishes of that person, provided that in the case ofa body corporate, unless otherwise expressly provided forby the Articles of Association or other documents regulatingit control means the holding of shares or voting power of 25 % or more. In relation to a partnership, it means the rightto a share of more than one half of the assets or of morethan one half of the income of the partnership.

New VAT law in Kenya As part of law reform in Kenya, the Minister of Finance hasproposed to introduce a new VAT law in Kenya. The DraftVAT Bill, 2011 which was released on 26 July 2011, proposesto impose the standard rate of 16% VAT on most of the itemswhich were previously exempt from VAT or attracted VAT

Kenya Update


at 0%. This is in a bid to address the huge backlog of VAT refund cases that have been a nightmare to the Kenya Revenue Authority (KRA).

The Bill, which is still in its draft stages, has faced resistance from various stakeholders who have made various submissions to the Minister for consideration andimplementation into the Bill. It is expected that the Bill willundergo further amendments before being presented before Parliament for legislation into law.

Other than increasing the threshold of items attracting VAT,other changes being proposed include extinguishing VATremission schemes currently available under the VAT Act,expansion of the definition of the word ‘business’ for VATpurposes to include any profession, vocation or occupationand the requirement to deposit 50% of any tax in disputebefore a taxpayer can secure audience before a VAT Tribunalin case of a VAT dispute with the KRA. In addition to thisand as a way to curb tax evasion through transfer pricing,the Bill provides that the market value of a supply where thesupply is between related parties, shall be the value for taxpurposes as opposed to consideration which is currentlyrecognized as the value for tax. This provision is likely to befaced with difficulty in implementation especially whereshared services centers and cost contribution agreementsare in place. It also means VAT will be due even where thereis no consideration.

Efforts towards prevention of tax avoidance schemes havealso been given a boost by the Bill empowering the KRA to overturn any scheme or arrangement which has beendesigned solely for the purpose creating a tax benefit andwhich is of no economic substance. Thus investors willhave to revise their restructuring strategies so as not to beconstrued as tax avoidance schemes.

In addition to this, the draft law introduces a provision whichmakes it possible for a non-resident supplier who meetsVAT registration requirements to appoint a tax representativein Kenya and at the same time empowers the KRA to appoint such a tax representative in Kenya for an overseassupplier in the event that the supplier fails to appoint one.


Martin KisuuRegional Tax PartnerPKF Eastern AfricaT: +254 020 427 0000F: +254 020 444 7233E: [email protected]

Kenya Update continued


Modernisation of the law number 19 regarding the offshore company in Lebanon The recent modernisation of the law regulating the offshorecompany in Lebanon has transformed it considerably. The offshore company is capable of managing all kinds of activities or “economic projects” abroad, with the exceptionof banking, financial activities, and insurance.

The new offshore company can be used as a holding company to manage its foreign affiliates and grant loans toforeign companies in which it holds 20% of their capital.All of the members of its board of directors may be foreignersand its chairman or company representative is exemptedfrom the requirement of obtaining a work permit if he is aforeigner who does not reside in Lebanon.

From the fiscal standpoint, the new law radically clarifies thescope of taxation and clearly exempts all of the transactionsthat are carried out abroad.

In this way, the revenues of its subsidiaries and the addedvalues realised when they are sold are completely exemptfrom taxes. Payments made to third parties in return forservices that are rendered abroad are exempted from theincome tax, as is the remuneration of salaried employeeswho work abroad.

In addition, the stocks and the shareholders of offshorecompanies are excluded from the scope of succession rights.

With such a modern, transparent and tax-exempt juridicalstructure, Lebanese offshore companies should experiencea considerable expansion.

A) Object of the offshore companyThe offshore companies may not undertake any insuranceoperations whatsoever, nor any operations and activities undertaken by banks, financial institutions and all institutionssubject to the control of the central bank of Lebanon.

Offshore companies are authorised to carry out exclusivelythe following activities:

(a) Negotiating and signing contracts and agreements concerning operations and transactions conducted abroadin relation to assets located abroad or in the free zones(b) Managing from Lebanon companies and institutions withoffshore activities, exporting professional, administrative andregulatory services as well as all kinds of information servicesand IT programs to companies located abroad and uponthe latter’s request

(c) Carrying out tripartite or multipartite foreign trade transactions abroad. For this purpose, offshore companiesmay negotiate and sign contracts, ship goods and issue invoices with regards to activities and transactions performed abroad or via the Lebanese free zones. This includes the use of the facilities available in the Lebanese

Lebanon Update


free zones for the storage of the imported goods intendedfor export

(d) Carrying out maritime transport activities

(e) Acquiring shares, interests, bonds and participations in foreign non-resident institutions and companies, andgranting loans to non-resident foreign institutions of whichthe offshore company holds more than 20% of the capital

(f) Acquiring or benefiting from the rights reverting to agencies for products and goods, and representing foreigncompanies in foreign markets

(g) Opening branches and representation offices abroad

(h) Building, operating, managing and acquiring all kinds of economic projects

(i) Opening credits and taking out loans for financing theabovementioned activities and transactions from banks andfinancial institutions residing abroad or in Lebanon

(j) Renting offices in Lebanon and acquiring the real estateproperties necessary for the activities thereof, subject to theprovisions of the law governing the acquisition by foreignersof real estate rights in Lebanon.

B) Exceptions to the legal regime applicable to Lebanese joint-stock companies

As above mentioned, the offshore company shall be incorporated under the form of joint-stock company andshall abide by the legal provisions governing joint-stockcompanies. However, Legislative Decree # 46/83 specifiedsome exceptions compared to other types of Lebanesejoint-stock companies and which are set forth below.

1. Capital and Accounting

(a) The offshore company’s capital may be set in a foreigncurrency.(b) Its accounts and balance sheets may be kept in thesame currency as of the capital.

(c) The offshore company is exempted from the obligationof appointing a complementary auditor. Furthermore, byvirtue of Legislative Decree # 46/83, offshore companiesare authorised to appoint the principal auditor(s), that remains mandatory, or renew its appointment, for a 3-year period.

2. Offshore management

(a) It is only in 2008 that the legislator exempted the offshore company from the obligation of appointing twoLebanese nationals within its board of directors.

(b) The chairman of the board and since the 2008 reform,the company’s authorised signatory are exempted fromthe requirement of obtaining a work permit if they arenon-resident foreigners.

3. Appointment of a lawyer

The company is not subject to the obligation of appointing a lawyer, unless its capital exceeds 50 million Lebanesepounds (equivalent to USD 33,333) or its total annual balance sheets exceed the equivalent of USD 500,000.

C) Tax Regime and exemptions1. The offshore income

The offshore company is exempted from the income tax on revenues, and is subject to a lump sum tax of 1 millionLebanese pounds (equivalent to USD 667). The company is subject to this tax as of the first financial year, whatever its duration.

2. The exemption of some amounts paid by the offshore

(a) The dividends distributed by offshore companies are exempted from the tax on movable capital income.

(b) The interest paid by the offshore company to legal entities or natural persons residing abroad are also subjectto tax exemption.

(c) Moreover, the offshore company is exempted from thetax on the amounts paid to legal entities or natural personsabroad, in return for services provided abroad.

3. The exemption of some movable capital incomes

Offshore companies are also exempted from the tax onmovable capitals levied on their income and revenues arising from the investment of their assets abroad.

Lebanon Update continued



Elie ChartouniPartnerPKF Emile Chartouni & SonsT: +961 (1) 493 220F : +961 (1) 492 728E : [email protected]


Lebanon Update continued

Capital

Shareholders

Responsibility

Corporate rights

Management bodies

Appointment and dismissal

Powers

Accounting currency

Tax on profit

Tax on distributionof dividends

Capital gains tax on the assignmentof interest held inLebanese companies

Minimum capital of 30,000,000 Lebanesepounds (approximately USD 20,000) or theequivalent amount in foreign currency.

There should be at least three shareholders.Legal entities may be shareholders.

Responsibility limited to the contributionsmade by the shareholders.

Shares: Nominal value set down in the by-laws (minimum LBP 1,000 equivalent toUSD 0.67). Possible payment of one-quarterof the nominal value of the shares paid incash or in foreign currency.

Board of Directors• Three to 12 members.• Members of the board of directors may be legal entities. The members of the board may all be foreign nationals.

• Only shareholders can be appointed as members of the board of directors.

The chairman of the board of directors:must be a natural person; he exercises thefunction of general manager.

No maximum number of terms for the members of the board or the chairman ofthe board of directors

Board of DirectorsMembers of the board are elected by thegeneral meeting for a maximum period ofthree years and may be dismissed by thegeneral meeting. The chairman of the boardof directors is appointed and dismissed bythe board of directors.

Board of DirectorsAll powers are granted to by the articles of association, the law and the generalmeetings of shareholders.

Same currency as the capital

None. Annual lump sum taxation of 1 millionLebanese pounds (equivalent to USD 663)

None

The offshore companies are not entitled tohold interest in Lebanese companies or togenerate revenues from Lebanon.

None

None

• Fixed stamp duty: 1 million Lebanese pounds (equivalent to USD 667)

• Judge's Pension Fund: 500,000 Lebanesepounds (equivalent to USD 333) +1.5 % ofthe capital subscribed.

• Diverse duties: 5% of the capital subscribed.

• Miscellaneous expenses, including stampsaffixed on the inception documents andthe requested copies.

Yes, provided that the capital exceeds 50million Lebanese pounds (equivalent to USD33,333) or if the total balance sheet exceedsUSD 500,000.

Lebanon has a firm Bank secrecy regulation.Furthermore, the repatriation of funds outside Lebanon has a free movement and there is no fiscal or legal constraint regarding this.

Between one to three days

Summary of the relevant information regarding the offshore company in Lebanon:

Capital gain tax onthe assignment ofinterest held in foreign companies

VAT liability

Inception taxes

Obligation to appoint a lawyer

Regulations governing repatriation of fundsoutside Lebanon

Incorporation timeperiod needed foran offshore company

Below is a summary of the recent tax changes or developmentsin Malaysia. The national budget for year 2012 was announcedon 7 October 2011 and a snapshot of the key budget proposalswill be included in the next issue of the Tax Alert.

Income Tax (Exchange of Information) Rules 2011

The Income Tax (Exchange of information) Rules 2011 wasissued on 20 July 2011. The Rules provide that a competentauthority may request for tax information from the DirectorGeneral of a person to whom a double tax agreement entered into by the government of such competent authoritywith the Government of Malaysia relates. The Director General may also make a request from a bank which hasthe information of such person, as requested by the competent authority.

“Information” means any information required to be disclosed pursuant to the article on exchange information of a double taxation arrangement.

A “competent authority” refers to an authorised servant oragent of a government of any territory outside Malaysia withwhich the Government of Malaysia has entered into a double tax agreement.

Double Taxation Relief (The Government of theRepublic of South Africa) (Amendment) Order 2011

The Order amends the Double Taxation Relief (The Government of the Republic of South Africa) Order 2005 asspecified in the Schedule in accordance with the ProtocolAmending The Agreement Between The Government OfMalaysia And The Government Of The Republic Of SouthAfrica For The Avoidance Of Double Taxation And The Prevention Of Fiscal Evasion With Respect To Taxes On Income.

The Order declares that the arrangements specified in theSchedule have been made by the Government of Malaysiawith the Government of the Republic of South Africa with aview to amending the previous arrangements affording relieffrom double taxation in relation to Malaysian tax and SouthAfrican tax (as defined in each case in the arrangements) andthat it is expedient that those arrangements shall have effect.

Income Tax (Exemption) (No. 4) Order 2011

This Order shall have effect from the Year of Assessment2011 and exempts any person from income tax in respectof gains or profits received (in lieu of interest) derived from thesukuk wakala under the concept of Al-Wakala Bil Istismar.Income received under this Order is not subject to withholding

Malaysia Update


tax under Section 109 of the Income Tax Act 1967.

Income Tax (Exemption) (No.5) Order 2011 [PU (A) 325/2011

Under this Order, a person who has obtained his/ her firstGreen Building Index (GBI) certificate issued on or after 24 October 2009 but not later than 31 December 2014 bythe Board of Architects Malaysia will be exempted from thepayment of income tax in respect of the statutory incomefrom his/ her business. The amount so exempted shall beequal to the qualifying expenditure incurred for the purposeof obtaining the GBI certificate.

Petroleum (Income Tax) (Amendment) Bill 2011

Petroleum (Income Tax) (Amendment) Bill 2011 was passedon 11 July 2011. The amendment was to reduce the income tax rate from 38% to 25% for marginal oilfields.

The amendment would also expedite capital allowance from10 to five years for marginal oilfields and allow investmentallowance for projects which require high capital expenditureand technical skills.

Customs (Prohibition of Imports) (Amendment)(No.3) Order 2011

The Order, which will come into operation on 1 November2011, amends the Customs (Prohibition of Imports) Order in Part II of the Fourth Schedule by inserting the particularsrelating to aluminium products.

Draft Goods and Service Tax (GST) Guideline

The implementation of GST has been deferred by the government to a later date which is to be announced. However, The Royal Malaysian Customs has released thefollowing draft GST industry guides and these industryguides are prepared to assist in understanding the GST.

Draft GST specific Guide on Designated Areas

As a developing nation, Malaysia strongly encourages thedevelopment of export-oriented industries. To support thispolicy, various facilities have been introduced by the government, namely the formation of licensed warehouse,free industrial and commercial zones, licensed manufacturingwarehouses and free ports.

Before the implementation of GST, free ports, with minorexceptions, are free from all types of custom duties, exciseduties, service tax and sales tax. Under Customs Act 1967,free ports are regarded as places outside the Principal Customs Area (PCA). To maintain this status quo, specialprovisions and rules are introduced under the GST systemfor the free ports and they are to be known as “designatedarea”.

Draft GST Guide on Relief on Second-HandGoods Released

The Royal Malaysian Customs has released the draft GSTGuide on Relief on Second-hand Goods (Margin Scheme).The Industry Guide is prepared to assist in understandingthe Goods and Services Tax and operation of Margin Scheme.

GST Draft Guide on Auctioneer

This Industry Guide is prepared to provide an understandingof the Goods and Services Tax and its implications on Auctioneer.

GST Draft Industry Guide on Transfer of Businessas a Going Concern released

This Industry Guide is prepared to provide an understandingof the Goods and Services Tax and its implications onTransfer of Business as a Going Concern (TOGC).

Draft GST Industry Guide on Duty Free Shop

This Industry Guide is prepared to assist in understandingthe Goods and Services Tax and its implications on DutyFree Shop.

GST Draft Industry / Specific Guides: Update

The Royal Malaysian Customs has released certain draftGST Industry Guides /draft GST specific guides.


Lee Yiing TingSenior Tax ManagerPKF MalaysiaT : +603 2032 3828F: +603 2032 1868E : [email protected]

Malaysia Update continued


This article summarises a selection of recent tax developments in the Netherlands. The content below is of a general nature and should by no means be regarded asan exhaustive outline and should also not be regarded as a substitute for a detailed legal advice.

2012 Tax proposals On 15 September 2011, the Dutch government publishedthe 2012 Tax Proposals. These contain a number of measures aimed at implementing the ambition of the Dutchgovernment to achieve a simpler, more solid and fraud-resistant tax system. The proposed enactment date is 1 January 2012.

1. Limitation on interest deduction concerningacquisition holdings

A common structure in the Netherlands is that an acquisitionvehicle borrows funds to acquire shares in the Dutch targetcompany and subsequently forms either a fiscal unity orlegally (de)merges with the target company. Through theseactions, the interest expenses of the acquisition vehicle canbe deducted from the operating profits of the Dutch targetcompany and therefore reducing the Dutch tax base. Current rules that do no allow interest deduction, such asthin capitalisation, could be avoided by borrowing fundsthe acquisition’s vehicle equity by contribution of shares in other subsidiaries (in which the Dutch participation exemption applied).

To challenge this undesirable base erosion, the 2012 TaxProposals contains a new provision to disallow the deductionof acquisition interest. This provision applies to interest paidor accrued on intra-group and third party debt used for theacquisition of Dutch target companies that subsequentlybecome part of a fiscal unity or that are merged with the acquiring company. Interest deduction against the profits of the target companies is not allowed except:

If and to the extent the interest does not exceed €1.000.000; or

if and to the extent the debt equity ratio (of the fiscalunity) does not exceed 2:1. For this calculation, theamount of equity will be reduced by the tax book valueof participations that qualify for the participation exemption. Furthermore, the goodwill that arises due tothe acquisition can be added to the fiscal unity’s equity

(taken into account 10% yearly depreciation of thegoodwill) for the calculation of the 2:1 debt equity ratio.

Furthermore, acquisitions that resulted in a fiscal unity or a legal (de)merger with the target company that occurred before January 1, 2012 are grandfathered.

2. Object exemption of profits and losses of foreign permanent establishments (PE)

Currently, foreign PE losses are deductible from the world-wide tax profits of Dutch taxpayers, while foreign PE profitsare generally exempted via the applicable method to avoiddouble taxation. PE losses will have to be recaptured but thiscan be postponed. The 2012 Tax Proposals proposes tochange this method for avoiding double taxation as follows:

the income, either positive or negative from an (active) foreign PE, is no longer included in the tax base (objectexemption) of Dutch taxpayers

a tax credit for foreign low taxed passive PEs (this is applicable if the activities of the foreign PE consist primarily of passive investing or leasing and the profit of the foreign PE is not subject to reasonable taxation,i.e. a tax rate generally of at least 10%)

a measure to deduct liquidation losses from the Dutchtaxable profit.

3. Amendment to substantial interest levyregime for foreign corporate taxpayers

Based on current Dutch tax law, non-Dutch resident corporate taxpayers which hold a substantial interest (generally at least 5%) in a Dutch resident company aresubject to Dutch corporate income tax with respect to income and capital gains, unless the substantial interest can be attributed to an enterprise carried on by the foreignshareholder. This Dutch tax legislation created tension withEU-tax law, as Dutch resident companies that hold a substantial interest in a Dutch subsidiary are favoured, dueto the fact that the income and capital gains are exemptedbased on the Dutch participation exemption.

As a result, the 2012 Tax Proposals amend the substantial interest taxation rule in the following manner: non-Dutch residents are only subject to corporate income tax if (i) thesubstantial interest cannot be attributed to an enterprise carried on by the foreign shareholder AND (ii) the main

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purpose (or one of the main purposes) of the holding of thesubstantial interest in the Dutch company is held to avoid income tax or Dutch withholding tax of another person. Furthermore, in case the substantial interest is only held toavoid Dutch withholding tax, the substantial interest levy islimited to 15% instead of 25%.

4. Anti-abuse measures for dividend distributions by a Cooperative (Coop)

The Dutch Coop is popular for international tax structuring,as under current Dutch tax law income and capital gains received by the Coop from its subsidiaries are generally taxexempted based on the participation exemption (assumingthat the relevant conditions are met). In addition, distributionsmade by the Coop to its (foreign) Members are normally notsubject to Dutch withholding tax. The 2012 Tax Proposalscontain an anti-abuse measure with respect to structurewhich the Dutch government considers abusive in whichthe Dutch Coop holds shares in a company with the mainpurposes (or one of the main purposes) to avoid Dutchwithholding tax or foreign tax of another person.

In such case, distributions to Members will be subject toDutch withholding tax (in principle 15%) if the membershipinterest in the Coop cannot be attributed to an enterprise.Also if the membership interest can be attributed to an enterprise, distributions of the Coop will be subject to with-holding tax but only to the extent necessary to preserve aDutch withholding tax claim on profits of a Dutch companywhose shares are held by the Coop and the claim alreadyexisted at the time the Coop acquired the shares in theDutch company.

5. Miscellaneous measures The 2012 Dutch Tax Proposals set forth a number of miscellaneous measures. These are concisely (not limitative)outlined below:

Foreign associations, foundations or religious society:Currently, non-Dutch resident associations, foundationsand religious societies are subject to Dutch corporate income tax, which is not in line with the tax treatment ofsimilar Dutch residents. The 2012 Tax Proposals providethat non- Dutch resident entities that are similar to Dutchassociations, Dutch foundations and Dutch religious societies are only subject to Dutch income tax to the extent that they carry on a business enterprise.

R&D deduction:The Dutch government considers introducing a R&D deduction that reduces the direct costs relating to R&D,other than labour costs (these already benefit from aR&D wage tax deduction and from the innovation box),in order to ensure the attractiveness of the Netherlandsfor R&D activities. The details of the aforementioned areexpected to be published in Q4 2011.

Extension of Dutch withholding tax refund for foreigncompanies:Based on current Dutch law, Dutch resident entities, EUentities and EEA entities which are exempted from Dutchcorporate income tax (such as pension funds) can request for a refund of the Dutch withholding tax thatwas withheld from them. According to the 2012 Tax Proposals, the scope of this legislation is to be extendedto similar non-EU and non-EEA residents if the belowmentioned conditions are met:

(i) the Netherlands agreed a bi- or multilateral agreement(including an exchange of information provision) with theother country

(ii) the interest relating to the refund is a portfolio investment (i.e. no potential control over the withholdingcompany)

(iii) the concerning entities perform another function asDutch Fiscal Investments Institutions and Exempt Investment Institutions.

It seems that this extension makes it more attractive fornon-EU government exempt entities (such as non-EUexempt pension funds and exempt Sovereign WealthFunds) to invest in the Netherlands from qualifying thirdcountries.

Wage Tax Amendment of the expat arrangement (30% facility)

Currently, expats (employees who come to work in theNetherlands from another country) who have a specific expertise in areas that are rare in the Dutch labour marketbenefit from a special expense allowance in the Netherlands,as their costs of residence in the Netherlands (extraterritorialcosts) are either tax-exempted or can be fixed a lump sumbased on 30% of the wage of the employee (i.e. only 70%of the wage is taxable for the wage tax) for a period for 10 years. The State Secretary of Finance proposed as at

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8 September 2011 the following amendments for the expatregime:

the criterion for “specific expertise” is only considered tobe applicable if the employee obtains a minimum grosssalary (€ 50.619 in 2011 if the employee is aged 30years or older and € 37.121 per year in 2011 if the employee is younger than 30 years)

access to the expat regime for foreign PhD studentswho studied in Dutch universities and thereafter decideto start working in the Netherlands, taken into accountthat a lower minimum gross salary standard is applicablefor them (2011: €26.605)

the current reference period of 10 years is to be extended to 25 years

employees who live within a radius of 150 kilometresfrom the Dutch border are excluded from access to theexpat regime.

International and EU

Dutch exit taxation violates EU law

Dutch tax law contains an exit charge in the event that a taxpayer ceases to be a Dutch tax resident. National GridIndus Company (NGIC) challenged this exit charge. NGICtransferred its place of effective management to the UnitedKingdom. Under Dutch corporate law, NGIC does not lose its legal personality because the Netherlands apply the “incorporation principle” and not the “seat principle”.

The assets of NGIC solely consist of receivables denominated in GB Pound with unrealised currency gains.The transfer of the effective management triggered - according to the Dutch tax authorities - taxation on the unrealised currency gains.

The Appeals Court in Amsterdam presented the case to theEU Court and, on 8 September, the Advocate General ofthe European Court of Justice issued her opinion. Accordingto the Advocate General, the Dutch exit taxation on companies that transfer their place of effective managementto another EU Member State violates EU law. Regardingthis matter, the Advocate General of the European Court ofJustice argued that there is no justification, based on thefreedom of establishment in the EU, to levy exit taxes without the possibility of postponing the payment and totake into account later losses on the hidden reserves of the

transferred assets. The decision of the EU Court is expected in the spring of 2012.

Real Estate Transfer Tax

Dutch Supreme Court upholds exemption fromreal estate transfer tax

The Netherlands levy 6% Dutch real estate transfer tax(DRETT) upon the acquisition of (certain rights to) Dutch realestate. This equally applies when a company acquires atleast one third of the shares in a Dutch real estate company.A company qualifies as a real estate company if the entity’sassets at the time of the acquisition and during the precedingyear consist for 50% or more of real estate of which at least30% is Dutch real estate (asset test) which real estate is heldmainly (70% or more) for acquisition, sale or exploitation(purpose test).

The sale and purchase of Dutch real estate is exempt fromDutch Value Added Tax (VAT), except if (i) it is new real estate or (ii) it qualifies as a building premise. If the acquisitionis subject to VAT, no DRETT is payable except if the (i) newreal estate is used as a business asset and the purchase iswithin two years of taken into use and (ii) the purchaser isentitled to recover the VAT (in whole or in part).

In a recent court case, the question was whether the DRETTexemption was also applicable if shares in a real estatecompany were purchased whose asset was a buildingpremises; i.e the exemption would have been applicable ifthe building premises would have been purchased directlyinstead of the shares. On 10 June 2011, the DutchSupreme Court ruled in favour of the taxpayer and decidedthat the DRETT exemption applies regardless of whetherthe real estate property was acquired directly or by the acquisition of shares in a Dutch real estate company.


Jan Roeland PartnerPKF Wallast, the NetherlandsT: +31 20 653 1812M: +31 6 20 414 629E: [email protected]

The Federal Government of Pakistan has made significantchanges through Finance Act, 2011 relating to Income Tax,Sales Tax, Federal Excise Duty, Customs and Capital ValueTax. The important changes are set out below.

Income Tax1 Tax credit is allowed on investment in new manufacturingunits established between 1 July 2011 and 30 June 2016.Said tax credit will be equal to 100% of the tax liability ofthat unit for the five years from the date of setting up of theindustrial undertaking or commencement of commercialproduction whichever is later.

2 Tax credit is allowed to the companies on their 100% equity in the purchase and installation of plant and machineryfor the purposes of balancing, modernization and replacement or expansion of the already installed manufacturing facility provided such investment is made between the 1 July 2011 and 30 June 2016. Said tax creditwill be allowed equal to the tax payable on the amount of investment and it is adjustable against the tax payable bythe company in the first five years.

3 Basic exemption limit for individuals has been enhancedfrom Rs. 300,000 to Rs. 350,000.

4 Tax credit has been allowed on life insurance premiumsand allows extended relaxations for tax credit on investmentsand premiums, while increasing the minimum holding periodfor shares for the purpose of credit to 36 months as againstthe prevailing period of 12 months.

5 Tax credit has been enhanced on enlistment from existing5% to 15% of tax payable.

6 Carry-forward period of minimum tax under section 113has been enhanced from existing three years to five years.

7 Persons subscribing to a commercial or industrial electricity connection with annual bill of Rs 1 Million and alsothe cases of business individuals having income betweenRs 300,000 and Rs 350,000 are made liable to file return of income.

8 Enhance the threshold for filing of wealth statementsfrom Rs 0.5 Million to Rs 1 Million. The requirement to filealso to cover members of AOPs if their pre-tax share of income is Rs 1 Million or more.

9 Timeframe for payment of advance tax on capital gain is relaxed to non-individual investors from sale of securitiesfrom 7 to 21 days.

10 Tax deducted on profit on debt has been made final in case of corporate taxpayers, at par with other cases.

11 6% tax deduction on payment on account of services is brought under the ambit of minimum tax for companiesalso.

12 The non-taxable limit for withdrawal from pension funds at or after the retirement age has been enhancedfrom existing 25% to 50%.

13 6% tax on services will also be brought under the ambitof minimum tax for companies.

14 Filing of withholding statements has been mademandatory on monthly basis instead of previous quarterlyfrequencies.

15 Limit the scope of advance ruling to those cases ofnon-residents which do not have a permanent establishmentin Pakistan.

16 Tax deducted on certain types of profit on debt received by non-resident persons has been brought underthe ambit of final tax.

17 Increase in tax rate on dividend received by a bankingcompany from its asset management company from existing10% to 20%.

Sales Tax Act 19901 Rate of Sales Tax has been reduced to 16% from existing 17%.

2 Sales tax exemption has been withdrawn in respect itemsof plant , machinery , equipments and apparatus includingcapital goods viz-a-viz agriculture machinery, CNG relatedmachinery, fire fighting vehicles and equipment imported bytown and municipal authorities, imports by Civil Aviation Authority for air traffic services and training, aircraft sparesand allied items

Pakistan Update


Federal Excise Duty Act, 20051 Federal Excise Duty has been enhanced on cigarettes to 20% ad val from existing rate of Rs1 per filter rod.

2 Federal Excise Duty on unmanufactured tobacco hasbeen increased to Rs10/- kg from existing Rs 5/kg.

3 Special Excise Duty has been eliminated.

4 Rate of Federal Excise Duty on aerated beverages has been reduced from existing 12% to 6%.

5 Federal Excise Duty chargeable on services provided byproperty developers and promoters has been withdrawn.

6 Federal Excise Duty of 10% on motor vehicle, air conditioners, deep freezers & other specified goods hasbeen withdrawn.

Customs Act, 19697Withdrawal of Regulatory Duty Regulatory duty applicablein the range of 5% to 35% has been withdrawn in respectof various dairy products, fruits (fresh and dried), sausage,confectionary, food preparations of flour, fruit/vegetablesand allied items, sauces, water and beverages, vinegar/perfumes and toilet papers, cosmetics, soap and allied,paper and paper board, natural stone and allied, glassware,glass beads & allied, padlocks and allied, pumps/ fans/washing machines/ AC / freezers, electric appliances andallied, furniture and allied, scents sprays and allied items.


Malik Haroon Ahmad, FCAPartnerMaqbool Haroon Shahid Safdar & CoT: +92 42 35776682-3F: + 92 42 35776676E: [email protected]

Pakistan Update continued


Paraguay is a founder partner of the Mercosur, South America's leading trading bloc which is known as the Common Market of the South. It has a free and open marketeconomy to the international market and its main economicactivities are agriculture, cattle and services.

Paraguay’s commercial characteristics are:

� A free market based on the economy system

� Free movement of capital

� Free determination of prices

� Free imports and exports

� Liberation of taxes to the investments

� A prudent program of monetary stabilisation based on fiscal adjustments.

Investments Warranty

The Agreement subscribed with the “Agencia Multilateralde Garantía a inversiones” (MIGA) has been ratified.

Agreement on the incentive of investments between theParaguayan Government with the USA Government, theOverseas Private Investment Corporation (OPIC).

Protocol of Cologne for the reciprocation, promotion andprotection of Investments in the Mercosur and the resolution of controversies.

Protocol for the promotion and protection originates fromthe investments of the USA , without knowledge of the Mercosur.

Agreement with the United Nations about the promotionof exports and investments.

Paraguay Tax Benefits

Lowest VAT rate within the region with a VAT at 5% forproducts of the basic market basket, pharmaceuticals,rents and interest. There is a 10% rate for remaining activities.

Low Tax for Managerial Revenue with a rate of 10% and15% for remittances of dividends abroad.

A 10% rate of personal income tax to be in force fromJanuary 2013.

Free market Economy, no price controls.

No duties for exports.

Low costs for social security.

Regime of Maquila that allows a foreign company to be settled in the country or to subcontract to othercompanies to process goods or to give services forbeing re-exported with an added value. These operations are liable to a tax rate of 1% only.

Law 60/90 to stimulate investment which promotes theimport of machinery and high technology equipment forthe local industry and it is benefited by the application of 0% duty and exemption from VAT.

Duty-free zones are private areas closed and isolated inside the national territory that enjoy tax exemptionsand other benefits specified by the law, in order to undertake all kinds of industrial, commercial activitiesand services.


Silvia Raquel Aguero R.PartnerPKF Controller Contadores & AuditoresT: + 595 21 44 28 52 E: [email protected] W: www.pkf-controller.com.py

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Romania Update


There have been some interesting changes to Romanian tax legislation over recent months. The key changes are summarised below.

VAT – reverse charges for cereal and technicalplant deliveries

From June 2011, Romania shall apply reverse charge in regard to VAT on all cereal and technical plant deliveries.This change is meant to complete Art.160 of the RomanianTax Code (RTC) regarding simplification methods relating toVAT, by applying reverse charge to all internal deliveries ofthe following cereals and technical plants: wheat, spelled,rye, barley, corn, soy beans, rape seeds, sunflower seedsand sugar beet.

From June 2011, provided that both partners are registeredfor VAT purposes, reverse charge in regard to VAT shall beapplied to:

Delivery of waste and raw materials resulting from theuse of waste

Wood and wood materials delivery

Cereals and technical plants delivery as per the list mentioned above

The transfer of greenhouse effect gas certificates.

Personal Income tax

In March 2011, the Government adopted Decision 248 regarding the procedure applicable for the indirect methodsof establishing the adjusted taxable base in the case of income obtained by audited individuals. The three mainmethods mentioned by the law were:

The method of the source and expense of the funds

The cash flow method

The patrimony method.

Art.15 of this Decision established that the provisions regarding the application procedure of the abovementionedindirect methods should be completed with the risk analysisprocedure. This last procedure implied the possibility of thetax auditors to identify and evaluate the risk of undeclaredincome, which would later allow for a selection of the individuals, which would be submitted to a preliminary documentary audit.

As per Art.109.1 of the Romanian Tax Procedure Code,should the tax auditor notice a significant difference betweenthe income declared by the taxpayer (or in some cases bythe income payer in his name) and the personal tax situationon the other hand, the auditor should further investigate thepersonal tax situation of the taxpayer. The difference betweenthe declared income and the estimated one is considered a significant one if it is more than 10% but not less than50,000 lei (approximately 12,000 EURo). This method shallallow for a limitation of individual tax audits to those individuals which, upon the preliminary documentary audit,surpass the 10% acceptable difference.

The actions required to undertake these new risk analysisprocedures include:

The establishment of databases for information

The collection of data held by third party entities (accessto databases based on protocols and information exchange collaboration agreements, information receivedfrom judiciary authorities or any other national or international authorities holding information in regard tothe personal tax situation of a taxpayer)

The definition of those individuals who present a taxfraud risk (implies the consideration of issues such asthe level of income declared by the individual and the income payer, the patrimonial increase of that individual,personal expenses incurred, cash flows).

On the basis of the abovementioned procedures, the taxauthorities shall prepare a list of all those individuals whosurpass the minimum risk and shall propose a preliminarydocumentary audit. Should the list identify individuals whoare proved to be related up to a second-degree kinship, the preliminary documentary audit proposal shall include all of the related individuals.

“Trust” operations

From October 2011, a New Civil Code shall be applicable in Romania which, amongst others, contains provisions in regard to “trust” (fiduciary) operations, whereby one or moreconstitutors transfer a set of real rights, receivables, guarantees, other patrimonial rights or a mass of such existing or future rights towards one or more trustees (fiduciaries) who are obliged to administer them with a specific purpose in the interest of one or more beneficiaries(which legally are not part of the contract).

Romanian Update continued


In order to limit the possibility of money laundering operations,the law limits these transactions for those acting as fiduciariesto credit institutions, financial investment institutions, insurance and re-insurance institutions, as well as lawyersand notaries. The law however states no limitations in regard to the constitutor or the beneficiary.

This newly regulated type of operation naturally imposes aset of changes to the applicable tax legislation in regard tothe tax definition of this type of operation as well as to specifictax regulation applicable to income resulting from thetrust/fiduciary operations. In this respect, the Romanian TaxCode (RTC) treats the trust as a transfer of the patrimonialmass from the constitutor to the trustee which, from the taxpoint of view, is not a taxable operation while the income resulting from the transfer of the patrimonial mass from thetrustee to the beneficiary is considered as income obtainedin Romania. The expenses generated by the transfer of thetrust from the constitutor towards the trustee are not considered as deductible expenses within the operation.

The remuneration of the notary public or that of the lawyer(taxable as individuals as they have few other forms of association provided by the law) acting as a trustee shall becumulated with their other professional income for the purpose of the income tax calculation. Any tax obligation resulting for the constitutor from such a trust operation shallbe fulfilled by the fiduciary.

In regard to income obtained from trust operations by anon-resident beneficiary (also acting as a non-resident constitutor) from a resident trustee, as a result of the patrimonial trust within the trust operation, the new

regulation specifies that it shall not be treated as a taxableincome in Romania.

Annual profit tax starting 2013

Recent tax legislation changes brought changes to theprofit tax payment options of Romanian companies. In thisrespect, starting from 1 January 2013, taxpayers may optfor an annual declaration and payment of the profit tax bymeans of prepaid quarterly estimated tax. The change tothis type of tax payment and declaration, however, is re-stricted to companies that registered losses in previousyears, were temporarily suspended in the prior year or havebeen registered as micro-companies in prior years, as wellas to agricultural companies and non-profit organisations(the last two have a particular regime altogether).

Up to 2013 however, companies (except for a few specificexemptions) will continue to declare and pay taxes quarterlybased on a real basis calculation system.


Carmen MataragiuPartnerPKF EconometricaT: +40 256 201 175E: [email protected]: www.econometrica.pkf.ro

Impact on income tax of theamended Investment ActThe Slovak Republic passed the Investment Aid Act (No.561/2007 Coll.) several years ago to encourage investment andcreate jobs in depressed regions of the Slovak Republic.Among other things, it provides for tax relief to recipients ofinvestment aid. A company is in compliance with specifiedinvestment conditions (eligible costs, minimum investmentand creation of jobs, in particular) can claim tax relief up tothe amount of tax on pro rata taxable income.

Pro rata taxable income is calculated so taxable income ismultiplied by either a variable (V) or a flat-rate coefficient (K)that equals 0.8. An investor can choose the more favorablevalue and the selected value is used to calculate pro ratataxable income for subsequent tax periods.

The variable coefficient V is calculated as a fraction, wherethe numerator is eligible costs (acquisition of land, buildings,plant and equipment, intangible assets such as licencesand know-how and labour costs) where investment aid hasbeen provided up to the aggregate costs of items underfixed assets acquisitions (chart of accounts 04X), once written confirmation has been issued that the investmentproject meets conditions for aid and before the end of theapplicable tax period wherein a claim to tax relief is exercised.The denominator is the sum of all eligible costs plus thevalue of the company’s shareholders’ equity recognised inthe balance sheet for the tax period wherein a written confirmation was issued under the Investment Aid Act.

To summarize, the pro rata values taxpayers can choose are:

V = eligible costs / eligible costs + shareholders’ equity; orK = 0.8

Tax relief can now be claimed for up to 10 consecutive taxperiods, where a tax period corresponds to the calendaryear. It had previously been five years.

The amendment came into force on 1 August 2011. Anyclaim for tax relief under a flat-rate coefficient may only beexercised by a taxpayer whose approval of investment aidwas issued after 31 July 2011.

Clarification of tax on emission quotas

In an amendment to the Income Tax Act (No. 595/2003Coll.) passed earlier this year and effective from 1 May 2001,definitions related to emission quotas and the tax on suchquotas were clarified.

Used emission quotas are greenhouse gas quotas andunits of certified emission reductions that a taxpayersubmits for the applicable calendar year, i.e. the tax period.

Transferred emission quotas neither include the hedgedtransfer of registered emission quotas by a debtor tax-payer nor their retransfer by a creditor taxpayer wherethe transfer is carried out by the same entity in identicalquantity and units before the date when the emissionquotas are forwarded to the registry administrator, in theSlovak Republic being Dexia Bank Slovakia.

Unused emission quotas are registered emission quotasless consumed emission quotas plus the savings from

Slovak Update


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used emission quotas, calculated according to a specialregulation that has been issued by the Environment Ministry.

The amendment sets the calculation of estimated tax onemission quotas for 2011 at 80% of the amount calculatedas a multiple of the average market price of emission quotasfor 2010 and registered emission quotas for 2011, lessemission quotas actually used in 2010, plus the savingsfrom used emission quotas calculated according to the Environment Ministry’s regulation.

One-year grace period for mandatory audits

As a response to difficult economic conditions, the SlovakParliament passed an amendment last year to the AccountingAct (No. 431/2002 Coll.), where the threshold for mandatoryaudit of financial statements for limited liability companiesand limited partnerships is to be maintained for two consecutive years before the company’s financial statementsmust be examined by an auditor. That means that if a company’s annual accounts exceed two of the three conditions for mandatory audit (total gross assets of EUR1,000,000; net turnover of EUR 2,000,000 and averagenumber of employees for the year of 20) in 2011, there is no mandatory audit for that fiscal year but, if the above situation continues in 2012, there will be a mandatory auditstarting with the 2012 statements.

Although this is not necessarily a tax issue, it is a considerationfor investors, especially medium-sized enterprises, who areinterested in investing in the Slovak Republic.


Richard Clayton BuddPKF SlovenskoT: +421 2 5828 2711E: [email protected]: www.pkf.sk

Slovak Update continued


Tax changes in 2011 Corporate Income Tax

There are no basic changes to tax incentives which are adeduction from the tax base of 30% of the amount investedin equipment and intangibles but not exceeding the amountof EUR 30,000 and only up to the amount of the taxable base.

No basic changes have been made to corporate income taxgenerally.

Personal Income Tax

The Personal Income Tax Act distinguishes between six categories of income: income fromemployment, businessincome, income from basic agriculture and forestry, incomefrom rents and royalties, income from capital, and other income accruing to persons liable to tax in the Republic ofSlovenia.

Tax schedule for the year 2011 (in EUR)

The tax schedule for the year 2011 is as follows:

Allowances that reduce the aggregated taxable base (deductions) for a resident taxpayer on an annual level include (for the year 2011):

General allowance:EUR 6,205,68 for residents with active income up toEUR 10,342,80;

EUR 4,205,74 for residents with active income betweenEUR 10,342,80 and EUR 11,965,20;

EUR 3,143,57 for residents with active income morethan EUR 11,965,20.

Personal allowances:Disabled person’s allowance: EUR 16,808,00 if the resident is a disabled personSeniority allowance: EUR ,.352,86 for a resident olderthan 65 years of ageStudent allowance: EUR 3,143,57 for income earned bypupils or students for temporary work done on the basis

of a referral issued by a special organisation dealing withjob-matching services for pupils and students.

Family allowances: granted to residents who are supportingtheir family members, as follows:

EUR 2,319,50 for the first dependent child; for eachsubsequent dependent child this amount is increased

EUR 8,404,56 for a dependent child who requires special care

EUR 2,319,50 for any other dependent family member.

Special deduction for voluntary additional pension insurance payments:

premiums paid by a resident to the provider of a pensionplan based in Slovenia or in an EU Member State according to a pension plan that is approved and entered into a special register, but limited to a sum equalto 24% of the compulsory contribution for compulsorypension and disability insurance for the taxpayer, or5.844% of the taxpayer’s pension, and no more thanEUR 2.683,26 annually.

Important VAT deduction change

There is important change in the Slovenian VAT Act on theVAT deduction matter. If the taxpayer identified for the taxpurposes in Slovenia delays payment to its supplier (latepayment according to the Act on preventing of late payment*),VAT cannot be deducted from an invoice. If the taxpayerhas already deducted VAT from the invoice and the delay inpayment appears in the next tax periods, the correctionmust be made in the tax period when delay appears. Thetax liability must be increased for such tax period. This obligation does not concern the tax payer (in this case thedebtor) which offers such invoices into the system of multi-lateral offset.

*This Act shall transpose Directive 2011/7/EU of the European Parliamentand of the Council of 16th February 2011 on combating late payment incommercial transactions (OJ L 48 of 23 February 2011, p.1) into the legislation of the Republic of Slovenia.


Tomaž LajnščekPreizkušeni Davčnik/Verified tax expertRenoma d.o.oT: +386 3 4244210F: +386 3 4244181E: [email protected]

Slovenia Update


Taxable income (EUR)

0 to 7,634,40

7,634,40 to 15,268,77

15,268,77 and over

Tax on lower amount (EUR)

0

1,221,50

3,282,78

Rate on excess

16%

27%

41%

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A draft Taxation Laws Amendment Bill (the TLAB) was issued in June 2011 which contains significant proposed taxamendments. The proposed changes are still in draft formand subject to change following public comment thereon. It is anticipated that the final TLAB will be issued during thecourse of October 2011. Some of the main features of thedraft TLAB dealing with cross-border provisions are as follows:

Dividend withholding tax

The long anticipated replacement of Secondary Tax onCompanies (STC) with a dividend withholding tax will be effective from 1 April 2012. This will bring South Africa’staxation of dividends regime in line with international norms.The withholding tax rate will be 10%, subject to the application of applicable double tax treaty provisions.

Controlled foreign corporation (CFC) provisions- overhaul of CFC rules

The South African CFC regime is in its tenth year anniversary.The regime is being overhauled to close remaining loopholesand to clarify and simplify calculation. In the main, the proposed amendments include:

Attribution of income to a foreign business establishment(FBE) can only be done once arm’s length transfer pricing principles are taken into account. Attribution of income to a FBE must account for the functions performed, assets used and the various risks of the foreign business establishment. Mere connection of income to a FBE via legal agreements and similar artifices will not be sufficient.

The diversionary income rules will be simplified to avoidlegitimate commercial activities falling within its scopewhilst still retaining meaningful protection of the taxbase. The diversionary rules associated with SouthAfrican exports to a CFC will be completely removed.

Under current law, transfer pricing violations involving a CFC trigger tainted treatment for all amounts derivedfrom the suspect transaction, not just the reallocation of misallocated income. This “all-or-nothing” rule is misdirected and will accordingly be deleted.

As a general rule (and consistent with current law), mobile income accruing to a CFC will be automaticallytaxable unless specific exemptions relevant to that income stream are applicable. As under current law, theFBE exemption will per se not apply even though themobile income may be attributable to FBE activities. Unlike current law which mixes mobile income into oneset of rules, the targeted mobile income will be coveredunder four broad but distinct categories - income fromfinancial instruments, tangible rentals, intellectual property and insurance.

Closure of “control” avoidance through trust and otherartifices. The definition of CFC will be extended tospecifically cover certain foreign companies that areunder the de facto control of South African residents.This additional criterion will apply in the alternative to thegeneral CFC requirements. De facto control will existwhere the parent has the power to govern the financialand operating policies of a subsidiary in order to derive

39 // PKF International Tax Alert IIssue 8 November 2011All Regions

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South Africa Update

a benefit from its activities. This is a facts and circumstances case. Factors such as control over thedistribution and reinvestment policies, annual businessplans, corporate strategy, capital expenditure, raising finance, winding up of the entity, voting rights or thepower to appoint or remove the board of directors willbe taken into account on a case-by-case basis. Thisconcept is derived from financial accounting principles.

The ownership thresholds in respect of the dividend andcapital gain participation exemptions in relation to foreignshares will be reduced from 20% to 10%. This lowerthreshold is consistent with the global economic concept of direct foreign investment.

The proposed amendments will apply to the net income of a controlled foreign company relating to the year of assessment beginning on or after 1 April 2012.

CFC restructurings

In terms of existing law, South African resident companiescan restructure their affairs through various transactionsfalling within the so-called reorganisation rollover rules. In terms of these rules, the transactions themselves are from tax but any gain is deferred until a later disposal. The rollover rules apply to asset-for-share transactions,amalgamations, intra-group transfers, unbundlings and liquidations. These relief measures are not currently available to the restructuring of foreign operations (except in very limited circumstances).

In respect of offshore restructurings, only a capital gainsparticipation exemption currently applies. Under the participation exemption, the gain is wholly exempt whenresidents and CFCs dispose of equity shares in a 20% heldforeign company. However, the exemption only applies if theforeign shares are transferred to a totally independent foreignresident or to a CFC under the same South African group ofcompanies. The restructuring of CFC assets can also qualifyfor tax relief if disposed of within the confines of the foreignbusiness establishment exemption or if the disposal occurswithin a high-taxed country.

In light of the global economic crisis, many South Africanmultinationals are seeking to restructure their offshore operations. The current participation exemption applicableto offshore restructurings is too narrow resulting in certainrestructurings being excluded. In view of the above, the domestic corporate restructuring rollover rules will be

extended to fully include the restructuring of offshore companies that remain under the control of the same South African group of companies.

As a result of the extended deferral regime, participation exemption for transfers to CFCs will accordingly be deletedin order to remove the possibility of avoidance.

These proposed amendments will apply in respect of transactions entered into on or after 1 January 2012.

Offshore cell companies

Control of a foreign company generally exists if SouthAfrican residents own more than 50% of the participationand voting rights of the foreign company. Currently, the CFCrules do not apply to foreign statutory cell companies (oftenreferred to as “protected cell companies” or “segregatedaccount companies”). These companies effectively operateas multiple limited liability companies, separated into legallydistinct cells. These cell companies are often found in thejurisdictions of Bermuda, Guernsey, Gibraltar, Isle of Man,Jersey, Vermont, Mauritius and Seychelles.

It is proposed that the CFC rules be adjusted so that eachcell of a foreign statutory cell company will be treated as aseparate stand-alone foreign company for all South AfricanCFC regime purposes. Therefore, if one or more SouthAfrican residents hold more than 50% of the participationrights in an offshore cell, the cell will be deemed to be aCFC without regard to ownership in the other cells. CFCtreatment for the cell will thus trigger indirect tax for the participant cell owners to the extent the cell generatestainted income.

The proposed amendment will apply in respect of foreigntax years of a CFC ending during years of assessment commencing on or after 1 January 2012.

Unification of source rules

South African residents are taxed on the basis of theirworld-wide income with foreign sourced income eligible fortax rebates (credits) in respect of foreign tax proven to bepayable. Non-residents are only subject to tax on the basisof income derived from sources within (or deemed to bewithin) South Africa.

The Income Tax Act does not comprehensively define theterm “source”. The source of income is instead initially

South Africa Update continued


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determined with reference to the common law, in terms ofwhich the determination of source generally involves thedoctrine of originating cause. The statutory regime relatingto source is also scattered throughout the Income Tax Act.

A new uniform system of source is proposed which represents an amalgamation of the common law, pre-existingstatutory law and tax treaty principles. The starting point forthese uniform source rules will largely reflect tax treaty principles (with a few added built-in protections) so that theSouth African system is globally aligned. The common lawwill remain as a residual method for undefined categories of income.

The new uniform set of source rules will eliminate the concept of deemed source. South African sources of income will be fully defined with items of income falling outside these definitions being treated as foreign source income.

Special foreign tax credit for management fees

South African residents are taxed on their worldwide income.However, South African residents are entitled to a tax rebate(i.e. credit) against normal South African tax in respect offoreign taxes proven to be payable. Amongst other requirements, these credits are conditional on the foreigntaxes being applied to foreign sourced income. In otherwords, no foreign tax credits are available in respect ofSouth African sourced income.

A number of African jurisdictions impose withholding taxesin respect of services (especially management services) rendered abroad if funded by payments from their home jurisdictions. These withholding taxes are sometimes evenimposed when tax treaties suggest that the practice shouldbe otherwise. African imposition of these withholding taxesin respect of South African sourced services is no exception.

The net result of these African withholding taxes is doubletaxation with little relief. The South African tax system doesnot provide credits in respect of these foreign withholdingtaxes because of these taxes lack of a proper foreignsource nexus. Only partial relief is afforded through the allowance of a deduction in respect of the foreign taxes suffered. The practical implication of this position is adverse to South Africa’s objective of becoming a regionalfinancial centre.

In view of the above, it is proposed that a new limited foreign tax credit be introduced. The scope of this foreigncredit will be limited solely to foreign withholding taxes imposed in respect of services rendered in South Africa.These tax credits will be limited solely to South African taxesotherwise imposed on the same service income after takingapplicable deductions into account. Foreign withholdingtaxes in excess of the South African tax cannot be carriedover (i.e. the excess is lost). Given the introduction of thisnew foreign tax credit, the current deduction for non-creditable foreign taxes will be withdrawn as ineffective.

The proposed amendment will come into effect in respectof foreign withholding taxes paid in respect of years of assessment commencing on or after 1 January 2012.


Eugene du PlessisDirectorPKF JohannesburgT: +27 11 384 8116E: [email protected]


South Africa Update continued

There have been several important tax reforms in the Spanish legislation in the last few months.

Wealth Tax The Wealth Tax was approved by Law 19/1991 of 6 June2011. The Law 4/2008 (September 23) introduced changesto the Law 19/1991. It eliminated the obligation to contribute TO Wealth Tax without repeal.

Royal Decree Law 13/2011 effectively restores the obligationto satisfy the Wealth Tax for years 2011 and 2012.

Tax remains in the 31 December 2011 and 2012 and theobligation falls on net assets (assets and rights with the deduction of charges and taxes).

Changes introduced by Royal Decree Law 13/2011 are asfollows:

The minimum exemption for residence increases fromEUR 150,253.03 to EUR 300,000.

Taxpayers non-resident in Spanish territory are obligedto appoint a representative in Spain to the Treasury. Theresponsibility is solidarity. Breaching this obligation is apunishable act.

The basis of tax assessment exemption increases fromEUE 108,182.18 to EUR 700,000.

It eliminates 100% bonus share integrated.

It restores the obligation to self-assess tax liability.

Forced to filing (once applied tax deductions and credits)for taxpayers whose assets exceeds EUR 2,000,000.

It also will be mandatory to non-residents (real obligation) inSpanish territory when their net assets are over EUR2,000,000.

The legislation states that the Autonomous Governmentsmay apply to the tax rebates on capital. The Autonomousregions have the capacity to regulate some parameters ofthe Wealth Tax so the limits to declare and the amounts topay can vary depend on the Autonomous region where theassets are located.

Corporate Tax 1. Prepayments taxThe percentage to calculate the prepayments tax to be un-dertaken by large companies to taxable persons whoseturnover has exceeded the amount of EUR 6,010,121.04during the 12 months prior to the start date of the tax years2011, 2012 or 2013 has been raised.

The result of multiplying by five sevenths the tax raterounded down when in the twelve-month net turnover of less than EUR 20 million.

The result of multiplying by eight tenths the tax raterounded down, whereas in those twelve months, the netamount of turnover is at least 20 million but less than EUR 60 million.

The result of multiplying by nine tenths the tax raterounded down, whereas in those 12 months, the netamount of turnover is at least EUR 60 million.

2. Loss tax baseWhere turnover has exceeded EUR 6,010,121.04 in 2010,the offset of brought forward losses against the profits of2011, 2012 and 2013 is limited to 75% of those profits ifturnover is between EUR 20 million and EUR 60 million and 50% if the turnover exceeds EUR 60 million. The maximum period for carrying forward losses is extended from 15 to 18 years.

Deadline extended to compensate for the effects loss taxbases for tax periods beginning on or after 1 January 2012for all types of entities from 15 to 18 years.

3. GoodwillThe losses of the assets with the sole purpose for the tax periods that start in the years 2011, 2012 and 2013 amendingthe annual maximum deductible expense of the financialgoodwill embodied in the acquisition of holdings in equity innon-residents from 5% of the amount to 1%.

Value Added Tax The rate of VAT on the supply of new homes is reducedfrom 8% to 4% until the end of 2011.


Spain Update

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Spain Update continued

Income Tax The main change to income tax is to exempt capital gainsarising on transfer of the shares resulting from private investment in projects driven by entrepreneurs, whose valuedoes not exceed the acquisition of EUR 25,000 whole peryear or EUR 75,000 per entity during the period from theestablishment of the entity to three years.

In order to apply the exemption, both the entity and the purchase must meet certain requirements.

Obligations of non-residents This royal decree is intended primarily to simplify the obligations of non-resident investors in fixed income financial instruments for the actual perception of their performance.

It clarifies the lack of obligation for non-resident investors toobtain a tax identification number for the following operations:

to acquire or transfer securities represented by certificates or book entries located in Spain

to subscribe, purchase, redeem or transfer shares orunits in Spanish collective investment institutions or marketed in Spain.

The non-resident status may be credited to the appropriateentity through a tax residence certificate issued by the taxauthorities of the country concerned or by a declaration oftax residence.


Aischa LaarbiPKF-Audiec, SAT: +34 93 414 59 28F: +34 93 414 02 48E: [email protected]: www.pkf.es

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Uganda Update

Introduction of Transfer Pricing regulations in Uganda

The Minister for Finance, Planning and Economic Developmentin Uganda finally published the Income Tax (Transfer Pricing)Regulations, 2011. These regulations are based on provisionsof Section 90 and Section 164 of the Ugandan Income TaxAct and took effect from 1 July 2011. The Ugandan RevenueAuthority is joining the global trend towards laying emphasison non-traditional revenue sources and moving towardsTransfer Pricing and related party transactions. In this regard,these regulations are meant to ensure that transactions between Ugandan taxpayers and related non-resident entities are at arm’s length.

Who do the regulations apply to?

The Transfer Pricing regulations apply to a controlled transaction where a person who is party to the transactionsis located and subject to tax in Uganda and the other partyin the controlled transaction is located in or outside Uganda.The regulations define ‘a person’ to include a ‘branch person’and a ‘headquarters person’.

Distinction between ‘a branch person’ andheadquarter person’

Under the Transfer Pricing regulations:

(a) ‘a branch’ is deemed to be a separate and distinct person (branch person) from the person in respect of whomit is a branch ie the ‘headquarters person’

(b) a branch person and headquarters person are deemedto be associates(c) a branch person and a headquarter person are locatedwhere their activities are located.

The Arm’s Length Principle

Entities entering into a transaction or series of controlledtransactions in Uganda are now required to determine theincome and expenditure resulting from such transactions, in accordance with the Arm’s Length Principle (ALP). Failureto do so will mandate the Commissioner to effect necessaryadjustments so as to ensure adherence with the ALP whichmay be to the detriment of the taxpayer.

Transfer Pricing methods to be adopted

The Transfer Pricing methods acceptable under the TransferPricing regulations are consistent with the globally acceptednorms under the Organisation for Economic Developmentand Co-operation (OECD) regulations. Entities in Ugandacan adopt either of the following methods for purposes ofarriving at their transfer prices:

(a) the Comparable Uncontrolled Price method

(b) the Resale Price method

(c) the Cost Plus method

(d) the Transaction Net Margin Method

(e) the Transactional Profit Split method; or

(f) any other method that may result to an Arm’s Length Price in a comparable controlled transaction.

Uganda Update continued


In determining whether the results of a transaction are consistent with the ALP, a taxpayer may use the most appropriate method taking into account:

(a) the respective strengths and weaknesses of the transferpricing methods available

(b) the appropriateness of a transfer pricing method and nature of the controlled transaction determined

(c) the availability of reliable information and data; and

(d) the degree of comparability between controlled and uncontrolled transactions, including the reliability of adjustments.

In the event of any inconsistency between the Income Tax Actand the OECD regulations, the Income Tax Act shall prevail.

Transfer Pricing documentation

The affected taxpayers in Uganda are required to record inwriting, sufficient information and analysis to verify that thecontrolled transactions are consistent with the ALP. Suchdocumentation should be put in place by the taxpayer priorto the due date for filing the income tax return for the year inquestion.

Penalties for non-compliance

A person who fails to comply with the transfer pricing regulations is liable on conviction to imprisonment for a termnot exceeding six months or to a fine not exceeding 25 currency points or both. In addition to this, any person whofails to maintain a Transfer Pricing policy is liable on convictionto imprisonment for a term not exceeding six months or toa fine not exceeding 25 currency points or both.

Advance Pricing agreements also allowed

The TP regulations provide a reprieve to taxpayers by allowingthem to enter into Advance Pricing Agreements (APAs) withURA. Such an APA would lay down a set of criteria for determining whether the taxpayer has complied with theALP for certain future controlled transactions undertaken by the taxpayer over a fixed period of time.

This is however at the Commissioner’s discretion. Furthermore, the Commissioner is mandated to make taxadjustments on certain transactions as may be necessary,to avoid double taxation of income that may already havebeen subjected to tax in another jurisdiction. This is subjectto there being a Double Tax Treaty between Uganda andthe country in question and the adjustment being consistentwith the ALP.

Implication on taxpayers

The new regulations having been published, effective 1 July2011, mean that Ugandan taxpayers with transactions withrelated non-resident entities are required to prepare and maintain relevant Transfer Pricing documentation. Similarly,those with resident related entities subject to common control will also be required to maintain transfer pricing documentation. Such documentation for a year of incomemust be in place prior to the due date for filing of the incometax return for that year.


Albert BeinePKF UgandaT: +256 414 341523F: +256 414 251370E: [email protected]

United Kingdom Update


Changes proposed to remove current restrictions on qualifying expenditure

The UK Government has taken significant measures thisyear to encourage innovation and research & developmentactivity in the UK through a series of proposed reforms tothe corporate tax system.

R&D tax relief

The UK has had a special tax relief for R&D expendituresince 2000. Broadly speaking, relief is available to small andmedium-sized companies (SMEs) for 175% (130% for largecompanies) of eligible expenditure (including staff costs,computer software and consumable items) on projects thatseek an advance in science or technology through the resolution of uncertainties. Loss-making SMEs are able toclaim a payable tax credit instead of claiming an enhancedtax deduction.

The rate of relief is increased from 175% to 200% from 1 April 2011 and to 225% from 1 April 2012. These increases are subject to EU state aid approval. Furtherchanges, also proposed to apply from 1 April 2012, are intended to remove some current restrictions on qualifyingexpenditure and to make the rules easier to apply. Thechanges are expected to be of most benefit to SMEs.

The existing requirement for the company to spend at

least £10,000 in the year concerned on qualifying R&Dexpenditure is to be abolished.

The current cap on the amount of payable tax credit isto be removed. At present, the credit cannot exceed theincome tax and National Insurance payments made bythe company in respect of all its employees during theyear concerned.

The Government is considering how it could implementa system whereby the benefit of the tax relief is recognised ‘above the tax line’ in the company’s accounts. This would probably require the extension of the payable tax credit to large companies.

Changes are proposed to the rules for allowing relief forexpenditure on sub-contractors and externally providedworkers.

There is currently uncertainty as to the amount of eligibleexpenditure where R&D is carried out in the course ofproduction activities. Draft guidance has been publishedwhich will hopefully clarify the boundaries in this area.

A new upfront clearance procedure has been proposedfor smaller companies and new start-ups.

If you have any queries regarding the availability of R&D taxrelief in the UK, please contact Denise Roberts, PKF (UK)LLP’s leading expert in this area ([email protected]).

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Patent box

The Government has also proposed that a new patent boxregime, based on the Dutch model, will be introduced from1 April 2013. Although all UK resident companies (and UKbranches of overseas companies) will be able to apply theregime, it is expected to be of most benefit to larger companies with significant patent and similar income.

The regime would apply a reduced rate of tax on incomefrom patents granted by the UK’s Intellectual Property Office and the European Patent Office. It may also apply topatents granted by selected national patent offices of someother European countries.

In addition, the Government proposes to include otherforms of intellectual property (IP) within the regime that havea strong link to R&D and high-tech activity and are subjectto examination by an independent authority. These includeregulatory data protection and certain plant variety rights.

It is proposed that the rate of tax on eligible income willeventually fall to 10% by 2017 but this will be preceded by a gradually reducing rate year-on-year from 2013 onwards.

The reduced rate is intended to apply both to the legalowner of the IP and anyone holding an exclusive licence toexploit it commercially. However, the company concernedmust have performed significant activity in developing thepatented invention or its application. In addition, it mustremain actively involved in the ongoing decision makingconnected with exploitation of the IP.

The regime would cover worldwide income earned by UKbusinesses from inventions covered by a currently validqualifying patent. This would include both royalties and income from the sale of any products incorporating at leastone of such inventions.

Companies will be free to opt in and out of the regime atany time and some companies may choose to remain outside if the prospective tax saving is small and the administration cost in identifying that saving is comparatively high.


Jon HillsPartner - Tax servicesPKF(UK)LLP Accountants and business advisersT: +44 (0) 20 7065 0000 E: [email protected]: www.pkf.co.uk

USA Update


Update on Reporting of Specified Foreign Assets

As a result of 2010 tax legislation, US individuals with interests in “specified foreign financial assets” must attach a disclosure statement to their personal income tax returnfor any year in which the aggregate value of such assets isgreater than $50,000 (or higher value as the IRS may prescribe). In addition, this disclosure requirement appliesto any domestic entity formed or availed of for purposes ofholding, directly or indirectly, those same specified foreign financial assets.

A US individual includes:

A US citizen

A resident alien of the United States for any part of thetax year.

A nonresident alien who makes an election to be treatedas a resident alien for purposes of filing a joint incometax return.

“Specified foreign financial assets” are: (1) depository orcustodial accounts at foreign financial institutions, and (2) tothe extent not held in an account at a financial institution, (a)

stocks or securities issued by foreign persons, (b) any otherfinancial instrument or contract held for investment that isissued by or has a counterparty that is not a US person,and (c) any interest in a foreign entity.

The IRS has developed Form 8938, “Statement of SpecifiedForeign Assets” as a mandatory filing to report these assets.A draft version of this form was released in June 2011 andmost recently draft instructions were released at the end ofSeptember 2011.

The draft instructions provide for various asset value thresholds dependent upon categories such as an individual’sfiling status and whether or not the person is living in theUnited States. Within each category there is a higher reportingthreshold dependent upon asset values at any time duringthe year. The first threshold is more than $50,000 for financial assets held on the last day of the tax year andmore than $100,000 for assets held at any time during theyear by unmarried taxpayers and married taxpayers living in the US and filing separate returns. These thresholds increase to $100,000 and $200,000 respectively for marriedfiling jointly taxpayers if they are living in the US.

Bona-Fide residents of a foreign country or taxpayers who

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are present in a foreign country or countries during at least330 full days during any period of 12 consecutive monthshave an increased threshold. Such individuals meet the reporting threshold if they are not filing a joint return and thevalue of their specified foreign financial assets is more than$200,000 on the last day of the tax year or more than$400,000 at any time during the tax year. These thresholdsincrease to 400,000 and $600,000 respectively for marriedfiling jointly taxpayers living abroad.

Observation

Form 8938 must be filed in addition to the Report of ForeignBank and Financial Accounts (FBARs) – Form TD F 90-22.1even though the same accounts may be reported on bothforms.

Duplicative reporting

However, taxpayers do not have to report a specified foreignfinancial asset on Form 8938 if it has already been reportedon one or more of the following forms that are filed with theIRS for the same year. In such cases, Form 8938 shouldbe used to identify on which of the following forms the taxpayer has met the reporting requirement.

Form 3520, Annual Return to Report Transactions withForeign Trusts and Receipt of Certain Foreign Gifts.

Form 5471, Information Return of US Persons with Respect to Certain Foreign Corporations.

Form 8621, Return by a Shareholder of a Passive ForeignInvestment Company or a Qualified Electing Fund.

Form 8865, Return of US Persons With Respect to certain Foreign Partnerships.

Form 8891, Beneficiaries of Certain Canadian RegisteredRetirement Plans.

Filing Deadline and Transitional Role

The draft instructions to Form 8938 state that for tax yearsbeginning after 18 March 2010, taxpayers must report theirinterest in the specified assets if the value thresholds havebeen exceeded. However, a transitional rule is in place thatprovides an individual with a deferral until 2012 to satisfy a 2011 filing requirement if he or she (1) had a tax year thatbegan after 18 March 2010 (2) was required to file Form8938 and (3) filed an annual return before Form 8938 wasreleased. Thus, if these conditions are met, the prior year filing requirement is satisfied by filing Form 8938 for suchprior year with the current year personal income tax filings.For business entities in which these rules apply, the filingdeadline could be earlier.

Penalties for Failure to File Form 8938

The draft instructions explain that if an individual fails to file acorrect and complete Form 8938, he or she may be subjectto a penalty of $10,000. If this failure continues for more than90 days after the day on which IRS mails a notice of the failure to the individual, he or she will be penalized $10,000for each 30-day period (or fraction of the 30-day period) during which the failure continues after the expiration of the90 day period. The penalty imposed for any failure cannot exceed $50,000. For married taxpayers filing a joint return, thefailure-to-file penalty applies as if the taxpayer and his or herspouse were a single person. However, the taxpayer’s andspouse’s liability for all penalties remains joint and several.

Statute of Limitations

For taxpayers who fail to file Form 8938 or fail to report aspecified foreign financial asset required to be reported, thestatute of limitations for the tax year may remain open for allor a portion of an income tax return until three years afterthe date on which Form 8938 is filed.

Extended statute of limitations for failure to include income

If any gross income related to one or more specified foreignfinancial assets is not included and the amount omitted is morethan $5,000, any tax owed for the tax year can be assessedat any time within six years after the return has been filed.

The IRS also notes in the instructions that if it determinesthat a taxpayer has an interest in one or more specified financial assets and it asks for information about the value

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of any asset, but the taxpayer fails to provide sufficient information for the IRS to determine the value, the taxpayeris presumed to own specified foreign assets with a value ofmore than the applicable reporting threshold.

Draft Form 8938 and instructions can be obtained from thefollowing links

http://www.irs.gov/pub/irs-dft/f8938--dft.pdf

http://www.irs.gov/pub/irs-dft/i8938--dft.pdf


Leo Parmegiani, CPATax Partner in ChargePKF LLPCertified Public AccountantsT: +1 (212) 867-8000 x 426F: +1 (212) 687-4346E: [email protected]: www.pkfnewyork.com

IRS Announces 2011 VoluntaryCompliance Program Focusedon Employee vs. IndependentContractor Exposure On 21 September 2011, the Internal Revenue Service (IRS)unveiled a Voluntary Compliance Program (VCP) that offersrelief for businesses which may have misclassified workersas independent contractors, rather than employees, and soare potentially liable for significant additional taxes, penalties,and interest.

Background

Prior to announcement of the VCP, the IRS and the Department of Labor (DOL)stepped up joint enforcement efforts by signing a new memorandum of understanding tostrengthen information sharing on enforcement actions aimedat misclassified workers. Several states are parties to theagreement including, inter alia, New York and Connecticut.

Observation: This enforcement issue has become more urgentas both federal and state authorities seek additional tax revenues to close large current and projected budget deficits.

VCP Summary

The VCP is available for employers which are currently treating(perhaps incorrectly) workers or a class of workers as independent contractors, but want to prospectively reclassifythe workers as employees for federal employment tax purposes. The IRS retains discretion over whether to acceptan employer into the VCP.

VCP Consequences

Under the VCP, eligible taxpayers will generally be entitled to settle their employment tax liability under a single-yearassessment of employment taxes of 10% of the InternalRevenue Code Section 3509 rates applicable to the mostrecently closed tax year. A 10.68% effective rate appliesunder the VCP in 2011, since the most recently closed taxyear is 2010, and a 10.28% effective rate will apply in 2012.A rate of 3.24% also applies to compensation above theSocial Security wage base in both years. These rates include federal income tax withholding and employer/employee social security and medicare tax.

Observation: Employers in the program will generally payan amount equal to just over 1% of the wages paid to reclassified workers for the most recent tax year and willeliminate the potential exposure for all prior years. It is unclear how states will react to the VCP program.

VCP Qualifications

The VCP is open to businesses, including exempt organisations, which have treated workers as independentcontractors in the past, have filed Forms 1099 for the previous three years, and are not currently under a workerclassification audit by the IRS, the DOL, or a state agency.An employer previously audited by the IRS or DOL concerning worker classification is eligible for this Program if it has complied with the results of such an audit.

Under the Program, an employer does not have to reclassifyall of its workers who are currently treated as non-employees.However, once an employer chooses to reclassify certain ofits workers as employees, all workers in the same class –i.e., workers who perform the same or similar services –must be reclassified as employees.



Employers apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program.This form must be filed at least 60 days before the taxpayerwants to begin treating the workers as employees.

Observation: The IRS has indicated that an employer whichwants to begin treating a class or classes of workers as employees for the fourth quarter of 2011 may do so, butshould file the Form 8952 as soon as possible.

Additional VCP Consequences and Limitations

In addition to filing Form 8952, employers which participatemust sign a closing agreement with the IRS extending thestatute of limitations from three years to six years for thefirst three calendar years beginning after the agreement issigned. The agreement also requires the taxpayer to treatthe same class of workers as employees in the future.

It should be noted that this Program only applies to employment taxes and does not address the impact of thereclassification of workers on the employer’s retirementplans and welfare plans (medical, dental, life, etc.). At thistime, there does not appear to be any special relief for retirement and other benefit plans, so employers need to review the impact of any filing under the Program on thebenefit plans they offer. Specifically for retirement plans, corrective contributions on behalf of misclassified workersand retesting of the plan’s coverage (required by regulation)for the years that workers were misclassified may be required. Insured benefits also should be discussed with an insurance agent.

Observation for foreign investors: For a foreign businesswhich has classified US individuals conducting US activities(perhaps incorrectly) as independent contractors, reclassifyingthem as employees may create a substantial risk of the foreign business being engaged in a US trade or businessor having a permanent establishment in the US for US income tax purposes, resulting in increased US taxation.


Brent LipschultzEisnerAmper LLPT: +1 212 949 8700E: [email protected]: www.eisneramper.com

The problems of US LLCs fornon-US investors United States Limited Liability Companies (LLCs) are treatedas transparent for US tax purposes unless an election ismade to treat them as corporations. They have generallybecome the preferred way for US individuals to operatebusiness or make investments. Almost all countries (otherthan the US) treat LLCs as corporations. While the US hasentered some tax treaties that deal with LLCs, many issuesremain on the foreign tax treatment of LLCs and their members and there have been several recent cases in theUnited Kingdom and Canada when non-residents of the US invested in US LLCs.

As a general rule it is not beneficial for non-US individuals tohold interest in US LLCs because, if the LLC is treated as acorporation in their jurisdiction, they cannot obtain a creditfor US taxes incurred by the non-US members.

In many jurisdictions corporations which own interest in USLLCs do not have a problem with LLCs but in some suchas Canada, US LLCs present problems. However, as a general rule, Section 894 denies tax treaty benefits to certain types of income received by an LLC and distributedto a foreign corporation.

George Anson v HMRC

A recent UK tax case, George Anson v. HMRC, involves thetax treatment of income remitted to the UK from a memberof a Delaware LLC. The issue was whether the UK memberof the LLC should be taxed on partnership profits or dividendsin the UK.

An LLC formed in the US state of Delaware is taxed transparently in the US so that its profits are taxed as the income of its members. In the UK, these LLCs are treatedas companies by HMRC.

The Upper Tribunal’s decision to support the appeal byHMRC of the First-tier Tribunal's decision in this case is avictory for HMRC and restores the traditional understanding(which had arguably been called into question by the First-tierTribunal's decision) that a Delaware LLC should be regardedas opaque for UK tax purposes.

Although UK individual investors would generally prefer an



LLC to be transparent, the opposite is generally true of UKcorporate investors who would be exempt from corporatetax on a distribution of profits by an LLC if it were consideredopaque for UK purposes. However, if the LLC were considered transparent for UK purposes, the corporate investor would be taxed on its share of underlying profitswith credit for any US tax paid. Double taxation relief (DTR)can be problematic so outright exemption would be better.

Background

George Anson, a UK non-domiciled individual, was a participant in a Delaware LLC and was subject to US federal and state tax on the profits of the LLC on the basisthat the LLC had not elected to be treated as a corporationand was thus treated as transparent for US tax purposes. Mr Anson remitted his income from the LLC to the UK andHMRC sought to tax him on the basis that the remitted income was a dividend. No credit was given for tax paid inthe US. Mr Anson successfully appealed to the First-tier Tribunal which found that the LLC was transparent for UKtax purposes and so directed that HMRC should allow acredit (under the US-UK double taxation agreement) for theUS tax paid by Mr Anson on the basis that it was computedby reference to the same profits or income which HMRCsought to tax in the UK.

The Decision

The Upper Tribunal strongly doubted the reasoning of the First-tier Tribunal and found that Mr. Anson had no proprietary interest in the profits of the LLC. It pointed tosection 18-701 of Delaware LLC Act, which states thatmembers of the LLC have no interest in specific LLC property, and said that there was “nothing in the findings, or in the evidence” which could have justified the conclusions of the First-tier Tribunal.

The Upper Tribunal regarded the absence of a proprietaryinterest as “fatal” to Mr Anson’s contention that the LLCwas transparent for UK tax purposes. The Upper Tribunalexplained that there cannot be any ownership of profits inthe absence of a proprietary interest in the underlying assets, since the profits are “not something which one can own as an asset. The profits of an enterprise are an abstract notion arrived at after a calculation”.

Instead, the Upper Tribunal found that Mr Anson merely hada contractual entitlement to receive amounts credited to his

capital account. As such, those amounts when distributedto Mr Anson were clearly not the same amounts which hadbeen subject to US tax and, accordingly, he lost on appeal.

Comment

HMRC has not yet commented on the decision which isconsistent with its long-standing position that a DelawareLLC should generally be treated as being a corporation forUK tax purposes. The approach of the Upper Tribunal isalso useful in confirming the traditional approach of applyingthe criteria laid down by the Court of Appeal in Memec plc vIRC [1998] STC 754 alongside an analysis of the local lawand the drafting of the governing/constitutional documentation of the vehicle in question when consideringthe matter of entity classification.

Bayfine v HMRC

This is another interesting case on the interpretation of theUK/US treaty, which has potential ramifications for the taxtreatment of US LLCs.

Two UK subsidiaries of a US parent (BDE) entered into complex forward contract arrangements with a counterpartystructured to be ‘self-cancelling’ - i.e. one UK subsidiaryproduced a loss and the other UK subsidiary an equal andopposite profit (BUK). The UK subsidiaries were each UK incorporated limited companies while BDE was US incorporated and resident and an ultimate subsidiary ofMorgan Stanley. BUK and its sister company were ‘checkthe box’ entities for US tax purposes, meaning that the UStreated them as transparent entities and taxed the profitproduced by BUK as profits of BDE (as far as HMRC isconcerned ‘checking the box’ has no impact on an entity’sUK tax treatment). On appeal from the Special Commissioners, the High Court had to determine whetherDTR was applicable in the UK to the profits of BUK as a result of the tax paid by BDE in the US.

HMRC had argued that, as BUK was a UK resident, the UKhad primary taxing rights. The Special Commissioners hadagreed and also decided that the profits subject to tax hada UK source on a ‘common sense’ approach. HMRC hadalso argued that, even if there was DTR on the profits, theextent of the relief should be limited as the taxpayers had nottaken all reasonable steps to reduce the foreign tax burden.

If there was no DTR, then the taxpayers argued that they



should be entitled to unilateral relief for the US tax alreadypaid. The issue was whether this relief was available giventhat the tax in question had actually been paid by BDE andnot the UK subsidiaries.

The Decision

In allowing the appeal, the High Court was critical of the‘common sense’ approach followed by the Special Commissioners on the basis that there was no principle allowing them to follow such an approach. The judge didnot see how a ‘common sense’ view could allow the interpretation they had arrived at. The High Court was of the view that, following National Bank of Greece, the source of income was more material than the residency of the company.

In determining this source, it took into account the locationsof the operations giving rise to the profits and the otherparty to the arrangements, the law which they were expressed to be governed by, and the lex situs of the underlying assets. On this basis, the profits of BUK wereheld to be US in origin and this gave the US primary taxing rights.

The High Court felt that, given that either state was entitledto tax the profits, had the UK taxed BUK before the US hadtaxed BDE (the opposite order of events on the facts) thenthe US would have had to give credit rather than the otherway around.

TSD Securities (USA) LLC v The Queen

The Canadian Tax Court in the case of TSD Securities (USA)LLC v The Queen recently decided against the longstandingposition of the Canada Revenue Agency that US LLCs arenot entitled to protection of the Canada-UK tax treaty. Thebasis of this decision appears to have been that, althoughthe LLC was not liable for tax in the US (which was necessary for residence on a strict interpretation of the textof the treaty); its members were subject to tax there. Thiscase has significant ramifications for US LLCs with Canadianincome which has previously been subject to withholdingtaxes and which may now be entitled to a refund.

While the fifth protocol to the treaty includes a provision thatis intended to allow treaty benefits to be claimed on incomeearned by a US resident through an LLC, significant uncertainties remain regarding the interpretation and

operation of this rule. Accordingly, taxpayers with LLCs in their existing Canada-US structures should carefully consider the implications of this case as it applies to thosecurrent arrangements and the manner in which the fifth protocol may apply.

Treatment of LLCs in other Jurisdictions

Some countries have announced that US residents who invest in their countries through US LLCs may derive taxtreaty benefits. For example, on 31 March 2004 the Mexican Tax Administration Service published a rule allowing benefits of the Mexico-US Tax Treaty to US members of US LLCs. The rule does not extend to Mexican residents investing in a US LLC.

On 29 March 2004, the German tax authorities published a letter memorandum on classification of US LLCs. Inessence, the classification approach of German tax authorities is very much like the US entity classification rulesbefore their revision in 2006 (elect-the-box regulations).


Harold AdrionEisnerAmperLLPT: +1 212 891 4082E: [email protected]

Or

Jon HillsPartner - Tax servicesPKF(UK)LLP Accountants and business advisersT: +44 (0) 20 7065 0000 E: [email protected]: www.pkf.co.uk

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November 2011

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International Tax Alert international...3 // PKF International Tax Alert All Regions Issue 8 November 2011 New Double Taxation Treaty between Germany and Turkey The Federal Republic