International Tax Alert - PKF | Assurance, Audit, Tax, … international tax alert... · · 2011-06-12Welcome to the June 2011 edition of the PKF International Tax Alert ... to

International Tax Alert Issue seven

Summer 2011

Chairman’s NoteWelcome to the June 2011 edition of the PKF International TaxAlert (ITA), an online publication that summarises the latest keytax changes from selected countries around the world. In thisseventh edition, there are contributions from PKF member firms’tax experts in 25 countries.

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

Belgium 3

Chris Peeters explains the special tax measures for shipping

Chile 5

Antonio Melys outlines the new audit process for transfer pricing

China 6

Edmund Chan sets out the latest changes to Chinese tax law

Colombia 9

Uribe Cristobal explains the major changesto Colombian tax law

Cyprus 10

Nicholas Stavrinides describes the new definitionof securities exempted from taxation

Czech Republic 11

Regina Brejchov outlines the 2011 tax changes

Germany 13

Kai Schöneberger heralds the arrival of the E-Balance Sheet for electronic transmission of tax Accounting

Hungary 14

Vadkerti Krisztián reports on recent developments in corporate income tax

India 15

S Harihan reports on the latest tax court judgements

Ireland 19

Sarah Murphy outlines the Finance Act 2011 changes for companies investing in Ireland

Isle of Man 20

Phillip Dearden introduces the new Isle of Man Foundation

Japan 20

Eiko Nakamoto reviews Japan’s latest tax treaty reforms

Malaysia 22

Lee Yiing Ting outlines the latest changes to income tax and indirect taxes

Mexico 24

Veronica Barba explains the changes to the maquila system for non-residents

1 // PKF International Tax Alert Issue 7 June 2011All Regions

Jon Hills, Chairman PKF International Tax Committee

Netherlands 26

Jan Roeland discusses the new Dutch Tax Agenda

New Zealand 29

John Dillon picks out the highlights of the 2011 Budget Overview

Paraguay 30

Silvia Raquel Aguero summarises the country’s tax structure

Portugal 31

José Parada Ramos considers the potential impactof the changes to participation exemption provisions

Romania 32

Florentina Susnea sets out the latest changes to corporate tax, income tax and social securitycontributions

Slovak Republic 35

Richard Budd highlights three pointsof the 2011 tax law

South Africa 36

Eugene du Plessis on the forthcoming closureof the Voluntary Disclosure Programme (VDP)

UK 38

Jon Hills reviews the latest tax developments

USA 40

Leo Parmegiani explains the recent developmentsin foreign bank account reporting (FBAR)

USA 42

Doug Mueller outlines the opportunities for US subsidiary and parent companies to reduce their tax liabilities using the IC-DISC

USA 43

Mike Devereux II promotes the benefitsof the Research Tax Credits

News in Brief 45


Belgium UpdateMaritime Tax MeasuresIn this article we highlight the aspects of the Belgian specialtax measures relating to shipping.

Principles of the Tonnage Tax SystemBelgian resident companies or Belgian permanent establishments of foreign companies (taxable in Belgiumtaking into account the double taxation treaty) may opt for the”tonnage tax” system when calculating their taxable profit.

The tonnage tax system applies to the following:

Profit derived from sea-going vessels under the flag ofBelgium or another EU member state derived from thetransport of persons or goods on international maritimeroutes, and on routes from and to installations at seathat are intended for the exploitation or exploration ofraw materials. The requirement to fly a Member State’sflag does not need to be met if the conditions set out inthe Community Guidelines are met.

Under certain conditions, profits from sea-going vessels under the Belgian flag which perform towage or dredging activities.

“Exploitation” is defined as:

Activities by the owner, co-owner or bareboat chartererof a sea-going vessel which is predominantly managedin Belgium and is not given in bareboat charter

Provided these activities are significantly smaller thanthe exploitation as meant in the precedent paragraph:

commercial exploitation of a sea-going vessel ofanother owner etc

exploitation of a sea-going vessel via a time - or a voyage charter.

As indicated above, the tonnage tax system is optional. A formal request has to be submitted to the Belgian RulingCommission. If the request is granted, the “tonnage tax”system will apply for a period of ten years, with an automaticrenewal every ten years.

When a company has different activities, the request can beintroduced for the determination of the taxable profit of thebranch of activity that exploits the sea-going vessels. In that

case, the other results remain subject to the common corporate income tax system.

Consequences of the Tonnage Tax SystemThe qualifying profits of the taxable period are assessed ona daily basis per vessel and per 100 net tons and are not influenced by the real results derived from the exploitation.

The calculation of the daily taxable profit is as follows:

1,00 EUR for up to 1,000 net tons

0.60 EUR for between 1,000 net tons and 10,000 net tons



0.05 EUR for over 40,000 net tons (only applicable if certain conditions are met).

Capital gains or losses at the moment of the alienation ofthe vessels are also deemed to be included in the profit,calculated on the tonnage basis.

Tax losses or other deductible items originating from a period during which the profits were not calculated basedon the tonnage or originating from an activity outside thescope of the tonnage tax system, cannot be offset againstthe profits calculated under the tonnage tax system.�

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Other Belgian tax measuresShipping companies are not likely to opt for the tonnage taxsystem if the company has already been active in Belgiumand has accumulated substantial losses which cannot beoffset against profits calculated under the tonnage tax system. For these companies, other measures have beenintroduced to encourage the Belgian maritime sector. Theseinclude a special amortisation scheme, an exemption fromcapital gains on the realisation of sea-going vessels, and an investment deduction.

ConclusionIf certain conditions are met, the taxable profit derived fromthe exploitation of sea-going vessels can be based on thetonnage of the vessels concerned. This leads to a very loweffective tax rate.

When taking into account the other favourable tax measures,we conclude that Belgium has implemented attractive taxincentives to the maritime shipping sector, even if shippingcompanies do not wish to opt for the tonnage tax system.

For more details please contact:

Chris Peeters or Kathleen Van ElsackerPKF BelgiumT: +32 (0)2 242 11 41

F: +32 (0)2 242 03 45

E: [email protected] or [email protected]


Belgium Update continued

Chile UpdateNew audit process for transfer pricing

Article 38 of the Income Tax Law sets out the regulations on

transfer pricing which have not been changed since 2002.

The regulations are intended to give the Internal Revenue

Service (IRS) the power to justifiably object to transfer pricing

if they have the documentation that, according to reasoning,

analysis and logical consistency, allows them to assign

another value to the transfer or the prices received or paid

between related companies, according to the terms of the

law, if one of the companies is established abroad.

For tax purposes, the IRS has pointed out that the above

prices shall be called “transfer pricing” and includes

concepts such as the purchase and sales of goods, the

provision of services and technology transfer as well as

the authorisation for the temporary use of licences and

trademarks. Broadly speaking, transfer pricing are those

paid or received for the transfer of goods or services

between companies which are part of a multinational group.

Immediately after the last legal regulations on transfer pricing

had been passed, the IRS published instructions clarifying

its approach on the topic and giving examples of several

cases and procedures to determine whether the operation

has been carried out under the principle internationally

known as “arm’s length”.

The Director of the IRS has recently announced that the

Service has begun an audit process on these types of

operations. He has explained that Article 38 of the Income

Tax Law is a facility for the IRS to assess the value of an

operation as if it had been made between non-related

parties. To do this, the methods based on the OECD

model will be applied, considering its advantages and

disadvantages according to the case. Tax auditors are

being trained on the subject and have recently finished

a course on the new Chapter IX of the OECD Transfer

Pricing Guide on entrepreneurial groups’ reorganisations.

The IRS has not given specific instructions on how taxpayers

can demonstrate that prices have been fixed properly from

the tax point of view. However, regardless of which method

has been applied, reliable documentation that provides

supporting evidence under a tax audit shall be crucially

important to prove that its price is not out of the line with

the regular market prices between non-related parties.


Antonio MelysTax Division DirectorPKF Chile Auditores Consultores LtdaT: +56 2 650 43 00

E: amelys@pkfchile


Corporate Income Taxes (CIT)treatment on asset transfer income and certain other incomederived by enterprises (SAT Announcement [2010] No.19)

On 27 October 2010, the State Administration of Taxation

(SAT) issued SAT Announcement [2010] No. 19

(Announcement 19) clarifying CIT treatment on certain

income including asset transfer income derived by

enterprises.

According to Announcement 19, when an enterprise has

income from transfer of property (including various types

of assets, equities and debts, etc), debt restructuring,

donations and irrecoverable debts, regardless of whether

they are monetary or non-monetary, such income should be

treated as one-off income and calculated into the taxable

income of the year when such income is recognised.

Announcement 19 shall become effective on the 30th day

after the issuance day. For the aforesaid income which has

adopted the five-year average amortisation method during

the period from 1 January 2008 to the date of

implementation of Announcement 19, the remaining

balance which has not been included in CIT calculation shall

be recognised as the taxable income of the current year (i.e.

the year of 2010) and complete the CIT payment.

Taxpayers who generated aforesaid income should consider

the impact of Announcement 19 and change the practice

accordingly.

State Admission of Taxation (SAT) clarifies various CIT issues on cross-border transactions

SAT Announcement [2011] No.24 (Announcement 24) was

issued on 28 March 2011 to supplement the content of

Guoshuihan [2009] 698. The purpose of this announcement

is to control treaty shopping and tax avoidance by non-

resident companies. The following five clauses are covered

in the Announcement 24:

Income is recognised as taxable income on the seller

side for a direct transfer of equity settled by instalments

when 1) share transfer agreement becomes effective

and 2) share alteration registration is completed.

Public share exemption defined as share transaction

without pre-agreed transaction parties, volume and price.

An explanation that “effective controlling party” refers

to the party that transfers the PRC equity indirectly;

“effective tax” refers to the effective tax on the specific

transaction; “exempt tax” refers to those cases where

the transaction is not subject to the income tax.

When multiple offshore parties indirectly transfer their

equities, one representative party can complete tax

filing on behalf of all parties.

For a deal involving multiple PRC target companies, the

China Update


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China Update continued

seller can select one representative tax authority among

PRC target companies for combined filing. The selected

tax authority will co-ordinate among other authorities in

determining whether it is a tax case. If the transaction

is deemed to be taxable, filing shall need to be prepared

separately at the different locations of the PRC target

companies.

Announcement 24 also confirms the CIT treatments for

certain PRC-sourced income derived by non-residents:

Timing to withhold tax on passive income including

interest, rent and royalties, etc.

PRC-sourced guarantee income would be treated as

interest in the nature and subject to the CIT.

Transfer of land-use right is calculated as tax basis and

shall be withheld and settled when paid in full.

Finance rental income and rental income of immovable

properties.

Withholding deadline for the equity investment income.

Announcement 24 became effective on 1 April 2011.

Requirements on re-certification of RepresentativeOffices (ROs) of foreign enterprises

SAT issued a new Circular 27 to regularise the requirement

on re-certification of ROs.

Based on the new circular, the local registration authorities

should commence the work of renewal of registration

forms, representative certificates, as well as the submission

of annual reports from 1 March 2011 to 30 June 2011.

The required annual report should include contents such

as the ongoing legal existence of the foreign enterprise,

the business activities of ROs, etc. The deadline for the

submission of annual report is no later than 31 August 2011

if a deferral is needed.

Expanding the scope of companies which canadopt "VAT exempt, offset and refund" method

SAT Announcement [2011] No. 18 (Announcement 18)

was issued on 23 March 2011 to clarify the scope of “VAT

exempt, offset and refund” method. If companies are

engaged in the design of integrated circuits, software and

animation (the Companies) or recognised as non-small

scale High and New Technology Enterprises (the HNTEs)

for more than two years, they can adopt the "VAT exempt,

offset and refund" method under the following conditions:

Export of goods that are manufactured by other

companies for Companies and HNTEs but were

originally designed by Companies and HNTEs

Export of goods labelled as Companies and HNTEs’

brand where the goods were produced by overseas

manufacturers

Export of equipment manufactured by other companies

but embedded with software developed and designed

by the Companies and the HNTEs

Other situations are regulated by the SAT.

Announcement 18 became effective on 1 May 2011.

Issues related to the verification of the calculationbasis on income derived from the alienation ofshares for Individual Income Tax (IIT) purposes(SAT Announcement [2010] No. 27)

On 14 December 2010, the SAT issued SAT Announcement

[2010] No. 27 (Announcement 27) clarifying the calculation

basis on income derived from selling shares of non-listed

companies for IIT purposes.

Announcement 27 specifies that income derived from selling

shares should not only be calculated based on the contract

price but should be based on fair market price for IIT purposes.

When the reported transfer price is obviously lower than fair


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China Update continued

market price without justifiable reason, the tax authority

may determine the deemed transaction price and tax on

such price.

Other IssuesPotential impact of the new PRC social securitylaw on foreign nationals working in China

The Standing Committee of the National People’s Congress

approved the People’s Republic of China (PRC) Social

Security Law (the Law), which comes into effect on 1 July

2011. The Law regulates that participation in social securities

by foreign nationals who are employed in China should

make reference to the provisions of the Law. This means

that foreigners working in China will be able to participate in

the PRC social security system. However, it is uncertain

whether foreign nationals should join the PRC social security

system mandatorily.

Based on the current PRC CIT and IIT, the statutory social

security contributions made by the employer are deductible

for CIT while the statutory social security contributions made

by the employee are exempt from IIT. Therefore, in cases

where foreign nationals make social security contributions,

it is possible that the tax deduction treatment should be

the same.


Edmund ChanPartnerPKF Consulting IncT: +86-21-52929998 ext. 208

E: [email protected]

W: www.pkfchina.com


Major 2011 tax changesOn 29 December 2010 the Government of Colombia signedthe Law 1430 which established a number of changes tothe tax regime. Below is a summary of the main changes.

1 Abolition of the 30% deduction forinvestment in fixed assets

Since the taxable year 2011, taxpayers cannot use the special30% deduction for investment in plant and machinery.

2 Credits no longer considered to be sources of national revenue (income)

Credits obtained outside Colombia by the financial corporations, financial cooperatives, finance companies,BANCOLDEX and the banks in accordance with the Colombian law in force are no longer considered to besources of national revenue.

Neither are credits for foreign trade operations carried outby referred entities.

3 Different treatment for some profits

The profits from trading in derivatives which are securitiesrepresented exclusively in shares listed on a stock exchange in Colombia together with indices or shares infunds or portfolios that reflect the collective behavior ofsuch actions do not constitute income or capital gains.(Article 36-1 Subparagraph E.T.)

4 Tax deduction for financial movements

From tax year 2013, 50% of the tax paid in financial trans-actions, regardless of whether or not it has a causal rela-tionship with the taxpayer's economic activity, will bedeductible provided that is duly certified by the withholdingagent (Art. 115 E.T.)

From 2014, the GMF rate will fall to 2 per thousand and be applied to the years 2014 and 2015.

From 2016 the GMF rate will drop to 1 per thousandand be applied to the years 2016 and 2017.

From 2018 the tax will be eliminated.

5 Deduction of payments to guilds

In 2011 the membership dues paid to guilds will be accepted as income tax deductible. (Art. 116 E.T.)

6 Surcharges for all electricity service userswith 50% deduction for industrial users

The Law created a surcharge equivalent to 20% of the costof providing the service which shall apply to industrial andresidential users in strata 5 and 6 and to commercial users.Industrial users are entitled to deduct an income tax chargefor the taxable year 2011 of 50% of the total value of thesurcharge. (Art. 211 E.T.)

7 Foreign taxes paid

National taxpayers or foreigners with five or more years ofcontinuous or discontinuous residence in the country whoare liable to foreign source income tax in their country of origin are entitled to deduct the amount of the income taxpaid in Colombia from the payment realised abroad on thesame income provided that the discount does not exceedthe tax payable for the same income in Colombia.

8 Withholding Tax

Payments for financial returns made to persons not residentor not domiciled in the country that arise from foreign loansobtained 12 month or more ago together with paymentsfor interest or costs of rental fees originating from leasesheld directly or through leasing companies with foreigncompanies not resident in Colombia are subject to with-holding tax at the rate of 14% on the value of the paymentor crediting an account.

Payments or credits on account arising from leases onships, helicopters and / or aircraft and parts held directly orthrough leasing companies which are foreign companiesnot resident in Colombia will be subject to a fee withholdingtax of 1%. (Art 408 E.T.).

The interest or royalties from leasing or leasing-originatedloans obtained abroad and leasing contracts signed before31 December 2010 are not considered domestic source income and payments for these items are not subject towithholding tax. (Paragraph 408 Temporary Art E.T.).


Cristobal UribeAmezquita & Cia SAT: +57 1 2087500


W: amezquita.com.co

Columbia Update


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Tax Treaty Update: New Agreement with GermanyThe new tax treaty replacing the old 1974 treaty betweenCyprus and Germany was signed by the representatives ofthe countries on 18 February 2011. The treaty is the outcomeof negotiations that began in 2005 and it will enter into forceafter the parties exchange instruments of ratification, widelyexpected to be at the beginning of 2012.

Definition of securities exempted from taxation

Profits on disposal of securities are tax exempted, as per article 8(22).

In its circular, the Commissioner of Inland Revenue issuedthe following list of financial instruments which are to beconsidered and interpreted as securities in the tax legislation:

a) Ordinary shares

b) Founder’s shares

c) Preference shares

d) Options on titles

e) Debentures

f) Bonds

g) Short positions on titles

h) Futures/forwards on titles

i) Swaps on titles

j) Depositary receipts on titles (i.e. ADRs/GDRs)

k) Rights of claim on bonds and debentures (but excluding related interest)

l) Index participations only if they result in titles

m) Repurchase agreements or Repos on titles

n) Participations in companies (i.e. The Russian “OOO”or “ZAO”, the US “LLC” etc) which are subject totaxation on their corporate profits

o) Units in open-end or closed-end collective investmentschemes which have been established, registered and operate in line with specific legislation in the country of registration.

Examples of such investment schemes include:

i) Investment Trusts, Investment Funds, Mutual Funds,Unit Trusts, Real Estate Investment Trusts

ii) International Collective Investment Schemes (ICIS)

iii) Undertakings for Collective Investments in

Transferable Securities or UCITS

iv) Other similar investment entities.


Nicholas StavrinidesDirectorPKF Savvides & Co LtdT: +357 2586 8000


Cyprus Update


Recent changes to the 2011tax legislation Personal income tax

Tax allowance for tax payers is reduced only for year 2011to 23, 640 CSK. Standard tax allowance was 24, 840 CSK.The reason for this reduction of 1,200 CSK is because thegovernment decided to collect 100 CSK/monthly from eachtaxpayer for a “flood tax“.

The threshold of the base for social and health insurancecontribution was increased to 1,781, 280 CSK per annum.No social and health insurance contribution is required frompeople earning above this threshold.

Pensions are tax-free if the amount does not exceed 288,000 CSK. In cases where the pensioner is employed orhas another income and the sum exceeds 840,000 CSKper annum, the pension amount is taxable together with theother income.

The deduction from the tax base of contributions paid to thepension insurance company (up to 12, 000 CSK p.a.) is also allowed when the pension insurance company is a company in EU.

Corporate income tax

Tax rate of corporate income tax is 19% in 2011; tax rate for investments funds is 5%.

There are new regulations for depreciation of photovoltaic solar power plants.

Czech companies in liquidation are not allowed to paydividends tax-free to mother company in EU. The taxneeds to be witheld according to the double tax treaty.

Administration of taxes

A completely new Act for the administration of taxes was introduced on 1 January 2011. Act Nr. 280/2009 Coll. - TaxRegulations replaced the Act of administration of taxes andfees (337/1992 Coll. as amended).

The Act introduces new terminology in the tax administration,new regulations for the execution of tax and changes somedeadlines.

Overview of important changes in the CzechValue Added Tax regime

A number of amendments were made to the VAT regime byAct Nr. 47/2011Coll. which came into effect on 1 April 2011.

Czech Republic Update


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1 The reverse charge to the recipient of the supply

In accordance with Article 199 of the EU VAT Directive, certain supplies are subject to the reverse mechanismwhereby the customer, not the supplier, accounts for VAT.

After the amendment becomes effective, this scheme willbe used for new supplies of gold and also the supply ofscrap and waste, including processing and trading of thegreenhouse gas emissions. The implementation of thisscheme for the provision of construction and assemblywork is postponed until 1 January 2012. The scheme applies to supplies made between the payers in the country.

2 Changes in exercising the right to deduct (VAT reclaim)

There are some changes for claiming a deduction based onsome principles derived from the established jurisprudenceof the Court of Justice and the principles of 2009/162/ EUDirective. These are aimed at simplifying the application ofthe rules in practice and introduce some measures to complywith the principle of tax neutrality for taxable businesses.

When customers reclaim VAT, they are responsible for:

using the correct tax rate on the invoice

payment of VAT by the supplier

checking that the supplier is a registered VAT payer

including all required information (IC,DIC Nr. etc.) on the invoice

ensuring that they only reclaim from invoices received during the VAT period relating to the VAT return. Thiscame into effect on 1 April 2011.

3 Tax claims against debtors in insolvency proceedings

This is a new provision allowing taxpayers under the statutoryconditions of service to make tax claims against debtors ininsolvency proceedings.

4 Exemption from tax on import of goods

There has been a tightening of conditions for tax exemptionon the import of goods to the State if the goods are subsequently delivered to a different Member State from theone in which the original importation of goods was made.

5 Group registration

Due to the changes that occurred in 2010 and 2011 in the provisions relating to registration of the group, thesechanges are commented in the document issued by Ministry of Finance.


Regina BrejchovPKF Czech RepublicT: +420 226 220 010

F: +420 226 220 012


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Czech Republic Update continued

Electronic transmission of TaxAccounting introduced for 2012In the course of the amendment of the German Income TaxAct, a paradigm change in the communication between taxpayer and tax authorities has been introduced. For fiscalyears beginning after 31 December 2011, taxpayers willhave to file the content of their balance sheet and profit andloss statement for tax purposes via an electronic form called“E-Balance Sheet”. This may be a commercial balancesheet combined with a tax reconciliation statement or directly a tax balance sheet.

The electronic mailing is based on the machine languageXBRL (eXtensible Business Reporting Language). This instrument will enable the tax authorities to automaticallydetermine the taxable income but also - due to an exhaustive interpretation on quality and quantity ofinformation requested - to run complex cross-checksin case of a tax audit.

The general regulations for filing annual tax returns are currently being specified by the German Federal Ministry ofFinance (FMF). Due to this regulation the taxpayer will beforced to adjust his (tax) book keeping to the guidelines ofFMF. To illustrate the scope of possible adjustments, onemerely has to take into consideration that the statement(depending on the legal form) covers up to 416 to 550 potential positions just for the balance sheet. Additionally,299 to 305 positions in the profit and loss statement arepostulated. On top of that, master data like domicile of thecompany and name of partners have to be enclosed. Not all of these positions are mandatory but it is to be expectedthat the importance of these parts will grow over time.

The resulting consequences are enormous. Almost everycompany is indirectly committed to extend its standardchart of accounts for fiscal purposes. For inboundinvestors who nearly always draw up accounts under bothlocal GAAP and international reporting standards, thismeans an additional burden. In addition to this, many international investors have specific intra-company bookkeeping policy/guidelines and reporting requirements thatmay have to be adjusted. This will particularly affect corporate groups with German subsidiary companies usingnon-commercial but specific software.

In cases of non-participation and omission of sending the“E-Balance Sheet”, the tax authority is entitled to impose apenalty. The amount of the penalty depends on theindividual case.

Although the adjustment of book keeping systems will tie upresources in the beginning, opportunities will emerge for thetaxpayer. The taxpayer can use the adjustment to implementa self-assessment approach to tax planning. The tax accounting may, for instance, provide an efficient basis tocalculate deferred taxes. Moreover, the implementation inthe book keeping system may be used as an opportunity to modernise an old fashioned chart of accounts. Intra-company information can be sent via XBRL to provide theparent company with very detailed management information.The final guidelines regarding the specific content of the “E-Balance Sheet” are expected in August 2011. Companiesare well advised to deal with the topic well ahead of time to be able to have the new system up and running from 1 January 2012.


Kai SchönebergerPKF Fasselt SchlageT: +49 203 30001 170

F: +49 203 30001 8 170


Germany Update


Recent developments in corporate income taxation

Tax credit for donations to sport clubs and associations

The Parliament adopted new legislation last July which allows companies to claim a tax saving worth 110% or119% of the donations to certain sport clubs and associa-tions. The tax credit is not yet available as the EuropeanUnion also needs to approve it but we believe that the creditcould become effective from 15 June 2011.

The tax credit will be available on donations given to clubsand associations of five sports: football, handball, hockey,basketball and water polo. The credit may be up to 70% expense. A tax saving of at least 110% can therefore beclaimed.

A similar tax saving scheme is already available for film production and performing arts sponsorship.

Corporate income tax rate

According to the already adopted corporate income tax act,the discount rate of 10% applicable to the tax base below500 million HUF (approximately 1,850,000 EUR) will be extended to the whole tax base in 2013. However, the Government has announced that the discount rate will notbe extended until 2015 and, therefore, the standard 19%rate will still apply above 500 million HUF.


Vadkerti KrisztiánPKF HungaryT: +36 1 391 4220

F: +36 1 391 4221


Hungary Update


Finance Act 2011 – amendmentsrelevant to international taxationThe Finance Minister of India presented the Finance Budgetin February 2011. Some of the amendments pertinent to international taxation introduced by Finance Act 2011 aresummarised below:

Transfer Pricing

Under the existing provisions of section 92C, if the variation between the arm’s length price determined by the assessing officer and the price at which the international transaction has actually been undertakenby the assessee does not exceed 5% of the latter, theprice at which the international transaction took placeshall be deemed to be the arm’s length price. As perthe amended provisions, 5% has been substituted by“such percentage as may be notified by the CentralGovernment”. The amended provisions are effectivefrom FY 2011-12.

The filing date for Income Tax Returns for corporate assesses whose accounts are required to be auditedunder the provisions of section 92E (Transfer pricing)has been extended to 30 November from 30 September.

A new subsection (2A) has been introduced in section92CA (Transfer pricing), and, as per the new subsection, “If any international transaction other thanthe international transaction referred by the AssessingOfficer comes to the notice of the transfer pricing officerduring the course of assessment proceedings, thesame will be treated as international transaction referredby the Assessing Officer”. The same will take effect from1 June 2011.

International Transactions

Counter measures in respect of transactions with persons located in a notified jurisdictional areaIn order to discourage a transaction by a resident assessee with a person residing outside India or any jurisdiction which does not effectively exchange information with India, anti-avoidance measures havebeen introduced in new Section 94 A. The provisionsare as follows:

Enabling the Central Government to notify any country

or territory outside India, having regard to the lack of effective exchange of information.

If an assessee transacts with any person of the notifiedarea then all the parties to the transaction shall bedeemed to be the Associated Enterprises and thetransaction shall be deemed to be international transaction and, accordingly, Transfer Pricing Regulations will apply.

No deduction in respect of payment to Financial Institutionwill be allowed unless the assessee furnishes the authorisation, authorising the board or any other IncomeTax Authority in this regard, to seek information from thefinancial institution.

No deduction, in respect of expenses arising from thetransaction with a person located in the notified areashall be allowed unless the assessee maintains prescribed documents and furnishes the prescribed information.

If any sum is received from the notified area, the onus ison the assessee to explain the source of money, failureof which would lead to treating the same as income.

Any payment made to a person of the notified areawould be subject to tax deduction at rate applicable as per the Act or 30%, whichever is higher.

The amendment is effective from 1 June 2011.

Important Legal Judgments

1 Ruling on Bandwidth charges for IT company (INFOSYS TECHNOLOGIES LTD v DDIT, B'LORE )

FACTS AND ISSUES

1 In this case, the assessee was engaged in the businessof software development. It claimed deduction on accountof bandwidth charges paid to service providers such asAT&T and MCI Telecommunications for downlinking signalsin the US for data communication. The assessee had alsomade payment of subscription charges to various international organisations for accessing web-based database of market data and client strategy details, etc.Also, it first claimed double taxation relief and thereaftercomputed surcharge on the amount of tax remaining aftersuch relief.

2 The Income Tax Department rejected the contention ofthe assessee that the payments for bandwidth were not

India Update


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‘royalty’ or ‘fees for technical services’. It contended thatthe assessee was liable to deduct tax at source in respectof the said amount, and since it had not done so, theamount should be disallowed as per Section 40(a).

3 Also, the contention that payment for access of the web-based database was ‘subscription charges’ was rejectedand the Department classified it as 'fee for technical services',and hence asserted that tax should have been deducted at source in order to claim deduction of charges. Themethodology adopted by the assessee for the computationof tax liability was also rejected and it was specified thatfirst, surcharge needed to be computed, and thereafter,double taxation relief was to be allowed. The assessee wentin appeal to the Tribunal.

DECISION

1 Taxability of bandwidth charges as 'royalty' or 'FTS'

When an Indian company exports software to companiesoutside India using satellite communication facilities, thedigital signals are converted into analog signals through earthstations and are transmitted to one of the geo-stationarysatellites using the required bandwidth provided by VSNL.The signals beamed to the satellite are downlinked to theearth station in the US and sent to the client locations usingthe bandwidth and downlinking facility provided by the international service providers (AT& T, MCI Telecom). Thepayments made are for the use of bandwidth provided fordownlinking the signals in the US and not in the nature ofmanagerial, technical or consultancy services, nor is it forthe right to use industrial, commercial or scientific equipment.Companies like AT&T and MCI Telecom only ensure thatsufficient bandwidth is available on an ongoing basis to theultimate users to uplink and downlink the signals. The sumpaid as consideration for the said service are not taxable inIndia and hence tax need not be deducted on such charges.

2 Taxability of subscription charges

The payment was in the nature of an access fee to the Gartnerdatabase maintained outside India. The fee was payableeven if no service was utilised. The question of imparting ofany information did not arise. There was no literary, artistic orscientific work for the payment to be construed as 'royalty'.The server was indisputably located outside India and therendering of services was an event outside the taxable territoryof India. The service provider did not have a PE in India. Bythis reasoning, it was held that since the subscription paid to

the foreign entities is not liable to tax in India, the assesseewas under no obligation to deduct tax u/s 195 and, hence,no disallowance of the amount is warranted u/s 40(a)(i).

3 Whether 'no deduction certificate' mandatory for claiming deduction?

The Tribunal relied on the decision of the Apex Court in GEIndia Technology Centre P. Ltd. v CIT (327 ITR 456) where it was held that the expression 'chargeable' under the provisions of the Act implies that the remittance has to be of a trading nature, whole or part of which is liable to tax inIndia and that if the income is not assessable, question oftax deductibility does not arise. Therefore, it was held thatcertificate u/s 195(2) was not mandatory for avoiding disallowance u/s 40(a)(i).

Surcharge to be computed before DTA relief

ITAT has laid down an important rule in respect of computation of tax liability where double tax relief is available.It was held that first surcharge is to be computed and there-after double taxation relief is to be allowed.

2 Ruling on taxability of payment for purchase of software (M/s CRANE SOFTWARE INTERNATIONALLTD. VS DCIT, B'LORE)

FACTS AND ISSUES

1 In this case, the assessee was in the business of providingsoftware products for statistical analytics and engineeringsimulations to customers in different countries. It had purchased software, mainly from foreign companies, treatedit as addition to the existing Block of Assets, and claimeddepreciation allowance at 60%. It claimed that the softwarewas purchased for its own use, similar to plant and machineryof manufacturing units, which was not meant for re-sale butto develop products and packages for generating income.

2 The Income Tax Department denied such claim. It heldthat the assessee had purchased a comprehensive softwarepackage with the right to sell to multiple customers and notany article or asset as claimed. The payments were thereforein the nature of royalties and the assessee should have deducted tax at source before making payments to non-residents. Having failed to do so, the expenditure was disallowed.

3 Moreover, the assessee had incurred expenditure

India Update continued


towards marketing of its software products in the Europeanmarkets. The activities included market positioning, sourcingof a market database, market survey and research for itsproducts. Although treated as deferred revenue expenditurein the books, it claimed the entire expenditure as deductionwhereas the Department treated the expenditure as havingbeen incurred for technical services and accordingly liableto TDS. Since no TDS had been deducted by the assessee,the Department disallowed the claim.

4 Lastly, the assessee had incurred expenses in connectionwith issue of Foreign Currency Convertible Bonds. As theBonds were convertible, the Department treated the bondproceeds as increase in capital. Accordingly, the expenditurewas disallowed for being capital in nature.

DECISION

1 Purchase of software not royalty

The agreements were titled as 'software distribution andasset purchase agreement'. The agreements thereafter provide for procurement of products on outright purchasebasis even though option is available for licence arrangementas well. There is no doubt that the assessee has exercisedits option for purchases and the products were acquired aspurchase of assets. The assessee was using those productsto develop its own branded proprietary software packages.Therefore, it was concluded that payments made by the assessee against purchase of software cannot be held as'royalty. Since no tax was deductible by the assessee in respect of the transaction, disallowance u/s 40(a)(i) was notwarranted and to be deleted.

2 Taxability of marketing fee in India

Expenditure incurred for marketing of a software product in the competitive foreign market is in the nature of fee fortechnical services since promotion of these products incompetitive markets requires technical expertise. Also, thelaunch of these products call for an elaborate marketingmanagement network and a professional strategy. Therefore,the payment has rightly been treated as fee for technicalservices.

However, in this case, the foreign companies (German andSingapore companies) rendering the services had no PE inIndia; payment is also effected outside India; services wererendered outside India; and the profits were generated inthe hands of those companies outside India. As a result, taxliability in India does not arise and neither does the obligation

to deduct tax. Hence, the disallowance u/s 40(a)(i) was ordered to be deleted.

3 Allowability of expenditure incurred towards issuanceof Foreign Currency Convertible Bonds (FCCB)

The expenditure on FCCB issue was held to be allowablesince the expenditure was held to be not capital in nature.The funds collected through issue of FCCBs were in the nature of a liability and funding was in the nature of loan finance. The assessee company was bound to dischargethe bonds on due dates. The assessee was paying interestto bond-holders. The bond funds would become equity onlyon exercise of the option of conversion by the bond holders.Therefore, the equity nature of funds was contingent on afuture event of conversion. It cannot affect the nature of the funds in the present. If the funds are treated as equitycapital, payment of interest would be ultra vires the law.

3 Applicability of indexation benefit to non-residentsand interpretation of 'Non-discrimination' clause inDTAA (TRANSWORLD GARNET COMPANY LTD. v. DIT)

FACTS AND ISSUES

1 In this case, the assessee, a Canadian company (CanCo)held 74% share in an Indian company (TGI). Shares of TGIwere acquired by CanCo in various lots and at different pointsin time by remitting foreign currency. CanCo transferredshares of TGI to a partnership firm registered in India andmade significant profits. There was no dispute that the shareswere a long-term capital asset in the hands of CanCo andthat income arising on transfer of shares was chargeable totax in India. However, the method of calculation of the capitalgain was in question.

2 CanCo computed capital gain by applying both the provisos of section 48. Firstly, by neutralising exchange fluctuation gain (worked out to Rs 140 million), and secondly,by considering indexation benefit (worked out to Rs 70 million).Since indexation benefit was more beneficial, CanCoclaimed that resident taxpayers under comparable circumstances are provided benefit of indexation for thecost of acquisition, whereas non-residents are denied such benefit. Such treatment results in discrimination of a Canadian National vis-à-vis an Indian National, which iscontrary to the provisions of Article 24(1) of the Treaty between India and Canada.

3 The Tax Department contended that the second proviso to





section 48 of the Act provides that benefit of indexation isnot available in respect of capital gains arising to a non-resident from transfer of shares or debentures of an Indiancompany. The non-residents stand protected from the vagaries of exchange fluctuation under the first proviso tosection 48 of the Act. Hence, in terms of clear language ofthe second proviso to Section 48, no benefit of indexationcan be granted.

DECISION

The Advance Authority Ruling (AAR) held that ‘Discrimination'is understood to be unequal treatment in identical situations.Differential treatment does not constitute discrimination unless it is arbitrary. Article 24(1) of DTAA seeks to preventdifferentiation solely on the ground of nationality. Discriminationon account of nationality alone may be prohibited but a discrimination based on residence is permitted.

4 Ruling on whether payment for data processing support service constitutes royalty (STANDARD CHARTERED BANK v DDIT, MUMBAI)

FACTS AND ISSUES

1 The assessee, a UK bank carrying on business in India,entered into an agreement with Sema Group, Singapore forthe provision of data processing support to the assessee forits business in India. Sema had a Data Centre at Singaporewhich it agreed to make available for “exclusive use” by theassessee for a specified period. Broadly, the service renderedwas that the raw data relating to branch transactions of theassessee was transmitted to Sema’s mainframe computer inSingapore for processing.

2 The raw data was processed by Sema’s staff as per therequirements of the assessee using the application softwareowned by the assessee. The output data was transmittedelectronically to the assessee in India using the software provided by the assessee, which was not designed by Sema.

3 The AO & CIT (A) held the payments made by the assessee to Sema to be “royalty” u/s 9(1)(vi) & Article 12 of theDTAA on the grounds that (i) the provision of the computer facility to process the data was consideration for use of a“process” and (ii) the consideration was for “the use or right to use any industrial, commercial or scientific equipment”.

DECISION

1 Use of process: The activity of transmitting raw data toSema, processing the data by Sema using software belongingto the assessee and the transmission of the processed datato the assessee did not, at any stage, involve the “use ofany process” by the assessee so as to constitute “royalty”under Article 12(3)(a). The consideration received by Semawas for using the computer hardware which does not involve use or right to use a process.

2 Use of equipment: In order to constitute ‘user of equipment’, the customer should actually have domain orcontrol over the equipment or, in other words, the equipmentshould be at its disposal. The customer should be in a position to use the equipment in its business activities. If a customer is given mere access to some infrastructural facilities of the service provider and where the serviceprovider has all the control, disposition and possession ofsuch infrastructure, and also the service provider operatessuch infrastructure on its own, then the customer cannot besaid to have been assigned a right to use the equipment inthe form of the infrastructure. In that case, the transactionpartakes of the character of provision of services or facilitiesby the owner of the infrastructure in favour of the customerand hence cannot constitute 'royalty'.

3 Exclusive use: Although the 'Data Centre' was madeavailable for the assessee’s “exclusive use”, the assesseehad no right to access the computer hardware except fortransmitting raw data for further processing. The assesseehad no control over the computer hardware or physical access to it. The assessee could not come face to face with the equipment, operate it or control its functions in anymanner. The assessee merely took advantage of a facility of use of sophisticated equipment installed and provided by another. Accordingly, the payment was not royalty under Article 12(3)(b) of the DTAA.


S HarihanPartnerPKF Sridhar & SanthanamT: + 91 44 2811 2895

F: +91 44 2811 2899


Finance Act 2011 changes forcompanies investing in Ireland Interest Deductibility

Measures were introduced to restrict interest deductibility forintra-group borrowings (trade interest) and interest as a charge.

A tax deduction is no longer available for interest on fundsborrowed from a group company where such funds areused to acquire assets (other than trading stock and qualifyingintangible assets) from another connected company.

Relief remains available where funds are used to acquire an asset that is leased in the course of a leasing trade, to acquire assets as part of an acquisition of a trade whichwas not previously within the charge to Irish tax and to refinance existing qualifying debt.

Significant changes were introduced to the tax deductibilityof non-trade interest in loans to or acquiring shares in othercompanies. Relief is restricted where the companies which usethe borrowed monies are not within the charge to Irish tax andare in receipt of interest on those monies. Relief is restrictedto the amount of interest earned by the Irish company.

The above restrictions apply to loans made on or after 21 January 2011 other than such loans made in accordancewith a binding written agreement made before that date.

Transfer Pricing

The Transfer Pricing regime applies on or after 1 January 2011.It concerns the pricing of transactions between connectedcompanies. The law applies to arrangements involving thesupply or acquisition of goods, services, money or intangibleassets between associated persons where the profits,gains, or losses arising from the arrangement are within thecharge to tax as trading activities.

Profits and losses shall be computed as if the arm’slength amount were receivable instead of the actualconsideration.

Formal transfer pricing documentation is a requirement.

Full exemption from Transfer Pricing provisions for smalland medium sized entities (<250 staff and annualturnover of < €50million or balance sheet total of<€43million in assets).

Start-Up Companies

Start-up company relief has been extended to companiesthat commence trading in 2011. The relief is also amendedso that the Corporation Tax relief is linked to the amount ofemployers Pay Related Social Insurance (PRSI) paid. Anoverall Corporation Tax limit of €40,000 per annum willapply. For the purpose of calculating the “qualifying employersPRSI” a cap of €5,000 will apply per employee.

Securitisation Regime

Changes have been introduced for qualifying financial services companies under the Section 110 regime. An extension has been made to qualifying assets which can be acquired by a Section 110 company to include (a) commodities and (b) plant and machinery which are subject to lease and (c) an extension of the application ofthe section to additional carbon offsets. Also, where a TotalReturn Swap arrangement is used to extract the profitsfrom a S.110 company, the structure is now restricted sothat a deduction will not now be available for paymentsmade under a return agreement as defined in the legislation.

Other domestic taxation measures include:

Patent Royalty ExemptionPatent royalty and dividend exemption is abolished in re-spect of qualifying patents. Income from a qualifying patentpaid on or after 24 November 2010 is no longer tax exempt.

Foreign CreditCompanies are no longer permitted to allocate relevanttrade charges in computing foreign credit due in respect offoreign tax paid on income.

Mandatory ReportingA new mandatory reporting regime has been introduced inrelation to certain tax transactions where the main benefit isto obtain a tax advantage.


Sarah MurphyPKF Tax Consulting LtdT: + 353 1 496 1444

F: + 353 1 496 1637


Ireland Update


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Manx Foundations set to becomea realityA Bill has been passed through the Isle of Man Parliamentand is due to become law shortly which will create a newproduct, The Isle of Man Foundation.

Amongst other things, this is designed to appeal to clientsand practitioners in civil law jurisdictions.

The Foundations Bill will create a new vehicle which will havesome traits familiar to Trust lawyers in common law jurisdictionswhile also being, in some ways, similar to a civil law Foundationor a company. One specific market which may benefit fromthe use of Isle of Man Foundations is the charitable or philanthropic sector.

An Isle of Man Foundation will be a separate legal entity andwill have the ability to manage and own assets in its ownname and arrange for its own funding.

Purpose of an Isle of Man Foundation

The purpose of the new vehicle is to offer a framework suitable for civil law jurisdictions. Foundations may be usedfor charitable or non-charitable purposes and can offer anattractive asset management structure when combined withthe already existing high levels of corporate services availableon the Island.

Characteristics

The parties involved in an Isle of Man Foundation include:

a ‘Founder’ – similar to a settlor of a Trust

an ‘Object’ – similar to a beneficiary and must be specified in the Foundation Objects and may be charitable or non-charitable

‘Foundation Instruments’ – the rules governing theFoundation. The Instruments are not public documents

a ‘Foundation Council’ – similar to a Board of Directors or Trustees in the case of a Trust. Council membershave explicit responsibilities and exposure to liability ifthey undertake misconduct

a ‘Registered Agent’ – who must be a licence holderin the Isle of Man

an ‘Enforcer’ – the Instruments may require the Foundation to have an Enforcer who can require theCouncil to report to him.

Features of a Foundation

A new Foundation will be a separate legal person in its ownright (as opposed to a Trust which is a legal relationship between Trustee and Settlor/Beneficiaries). This means thatassets held by a Foundation are held in its own name: aFoundation could trade and arrange for finance in its own right.

The Foundation is similar to a company in that it carries limited liability. They can be run in perpetuity.

The creation of a Foundation will be recorded in the publicrecord, whereas a Trust arrangement is a private relationship.

Foundation beneficiaries have no legal automatic right toFoundation income, whereas they can have rights and expectations with Trusts.

Unlike Trusts, an Isle of Man Foundation will be required tohave a licensed Registered Agent on the Isle of Man and tobe able to prepare financial statements along the lines of anIsle of Man company.

Local taxation of Foundations

The general company tax regulations of the Island will applyto a Foundation, so that it will incur 0% income tax on profits, other than those generated by the exploitation ofland situated in the Isle of Man.

EU Savings Directive Notice - New ReportingProcedure

In June 2009, the Isle of Man Government announced its intention to move to automatic exchange of information forbank accounts held in the Isle of Man where the beneficialowner is resident in the EU.

This policy comes into effect from 1 July 2011, and there-after there is no option for account holders to opt for tax retention rather than information exchange.


Phillip DeardenPKF (Isle of Man) LLCT: 0044 1624 652000

F: 0044 1624 652001


Isle of Man Update


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Recent tax treaty reformsAs of end of April 2011, there are 48 concluded tax treatiesbetween 59 countries and Japan. Recent major reforms arenew tax treaties with Netherlands (signed in August 2010)and with Hong Kong (signed in November 2010). Worthnoting are the reduction or exemption of withholding taxrate on investment income and the introduction of arbitration rules.

Reduction or exemption of withholding tax rateon investment income

To encourage mutual investment between the two countries,most of new treaties reduce or eliminate withholding tax oninvestment income - dividends, interest and royalties - andintroduce measures against treaty abuse.

Limitation on Benefit (LOB)

These new treaties tend to include comprehensive limitationon benefit provision that limits the availability of treaty benefitsto qualified residents (individuals, specified government authorities, listed companies and its subsidiaries etc.) Evenif a resident is not a qualified person/entity, the benefits maybe available if the resident meets specific tests (derivativebeneficiary test, active business activity test etc).

Arbitration rules for mutual agreement

The new Japan – Netherlands tax treaty introduces arbitration

rules for mutual agreement procedures for the first time inJapan. Moreover, the Japan – Hong Kong tax treaty introduces second arbitration rules in Japan.

It is prescribed that the competent authority shall endeavourto resolve the case by mutual agreement with the competentauthority of the other Contracting State. However, there isno regulation of the duties to reach an agreement for thecompetent authorities and of the rights to join the discussionfor tax payers.

This arbitration process is intended to serve as a supplementaltool which would be available only if the competent authoritiesare unable to reach an agreement to resolve a particularcase within two years from the date the tax payer presentsthe case for review, in accordance with the mutual agreementprocedures. It should be noted that the two countries mustabide by the decision of the arbitration panel, which consistsof three independent arbitrators with expertise or experiencein international tax matters, except for the cases where thetax payer does not accept the decision.


Eiko NakamotoPKF Japan - Nakamoto and CompanyT: +81 3 3234 0396

F: +81 3 3234 0397


Japan Update


This update includes news on new DTA and changes to income tax and indirect taxes.

Malaysia and Qatar sign pact on Double Taxation Avoidance

Malaysia and Qatar have signed the protocol amending theagreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income.The revised agreement was in line with the internationallyagreed tax standards in relation to the exchange of information.

The amendment was made to Article 27 (Exchange of Information) of the existing Double Taxation Avoidance Agreement (DTAA).

Income Tax (Thin Capitalisation) Rules

Since 1 January 2009, Section 140A of the Income Tax Act 1967 has come into force. It is a provision which empowers the Director General of Inland Revenue to substitute the price and disallow interest on certain transactions which are generally referred to as transfer pricing and thin capitalisation. However, the Ministry of Finance has deferred the implementation of the Income Tax(Thin Capitalisation) Rules to the end of December 2012.

Income Tax (Exemption) (No 2) Order 2010

This Order is deemed to come into effect from the year of

assessment 2011 until the year of assessment 2012. The order exempts a company incorporated under theCompanies Act 1965 and resident in Malaysia in the basisperiod for a year of assessment from the payment of income tax in respect of income received from the sale of certified emission reduction.

The income referred to in subparagraph (1) shall be thegross income from the sale of certified emission reductionunit less an amount equal to the expenditure, not beingcapital expenditure, incurred by the company for the purposes of obtaining certified emission reduction. Any expenditure referred to in subparagraph (2) shall be deemedto be incurred in the basis period for a year of assessmentin which the income from the sale of certified emission reduction is received by the company.

Nothing in subparagraph (1) is absolved or deemed to haveabsolved the company from complying with any requirementto submit any return or statement of accounts or to furnishany other information under the provision of the Act.

Indirect Taxes

Service Tax (Rate of Tax) (Amendment) Order 2010With effect from 1 January 2011, the service tax rate hasbeen changed from 5% to 6% under the Service Tax (Rateof Tax) Amendment Order 2010.

Malaysia Update


Stamp Duty (Remission) (No 2) Order 2010

Under this Order, 50% of the stamp duty chargeable on a loan agreement is exempted on a residential property purchased by a Malaysian citizen subject to certain conditions. This exemption is effective for sales and purchase agreements executed from 1 January 2011 until31 December 2012.


The Order was made on 1 December 2010. The remissionspecifies that 50% is remitted from the stamp duty chargeableon any instrument of transfer for the purchase of only oneunit of residential property costing not more than RM350,000by an individual who is a Malaysian citizen, provided that:

the Sale and Purchase Agreement for the purchase ofthe residential property referred to in subparagraph (1) isexecuted on or after 1 January 2011 but not later than31 December 2012

at the date of execution of that Sale and PurchaseAgreement the individual referred to in subparagraph (1)does not own any other residential property, and

the application for the remission of stamp duty undersubparagraph (1) may only be made once.


The Order came into operation on 1 January 2011. Theamount of stamp duty that is chargeable under subsubitem22(1)(b) of the First Schedule to the Act which is in excessof zero point one per cent (0.1%) of any or sums of moneyrelating to any instrument of service agreement chargeableto duty under that subsubitem executed on or after 1 January 2011 is remitted. For the purpose of subparagraph (1), the instrument of service agreement shallbe an agreement executed by:

a main service provider with a person other than a Rulerof a State or the Government of Malaysia or of anyState or local authority awarding the undertaking, or

a sub-provider of service with the main service providerwhere the main service provider has entered into an undertaking with a Ruler of a State or the Governmentof Malaysia or of any State or local authority awardingthe undertaking.

Notwithstanding subparagraphs (1) and (2), where the mainservice provider under subsubparagraph 2(a) or the sub-provider of service under subsubparagraph (2)(b) further executes an instrument of service agreement with anothersub-provider of service and so on, the amount of stampduty that is chargeable upon that instrument under subsubitem 22(1)(b) of the First Schedule to the Act whichis in excess of RM50.00 is remitted.


Lee Yiing TingTax Senior ManagerPKF Tax Services Sdn BhdT: +603 2032 3828

F: +603 2032 1868


Malaysia Update continued


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Changes to the maquila systemin Mexico for residents abroad Exports account for a large portion of the manufacturingsector in Mexico and the vast majority of export manufacturing is conducted by Mexican companies knownas maquiladoras or maquilas. These operate under temporaryimportation programs known as maquiladora programs, issued under Mexico's maquiladora decree (now alsoknown as the Decree for the Development of the Manufacturing, Maquiladora and Export Services Industry,or IMMEX Decree).

In 2006, the Income Tax Law set out a mechanism for residents abroad enabling them to carry out maquila operations in Mexico through a legal or economic relationshipwith other companies without constituting a permanent establishment provided that they comply with the followingrules:

To have an authorized maquila operation system

To hold a treaty to avoid double taxation between Mexico and the country of residence

To comply with transfer pricing in the determination ofthe taxable utility and income tax through the simplifiedprocedure that allows only taxing the utility generated inMexico and to avoid any double taxation problemswhen they are related parties

Meet the definition of maquila operation in accordancewith the IMMEX Decree, 1 November 2006.

Additionally, maquila companies earn the benefit of a fiscalincentive which consists in the partial exemption of IncomeTax when complying with all the law requirements.

However, due to the wide definition contained in the Decree,many companies applied for the tax benefit which was, inessence, exclusively designed for maquila companies. So,last December the decree was amended to incorporate anew article to define the maquila operation for Income Taxpurposes.

These are the new criteria for a maquila operation:

1 The transformation and repair of raw materials are provided by the resident abroad

2 Raw materials must be owned by the resident abroad or by a third party with which there is a commercial contract in place

3 Raw materials must be temporarily imported

4 Domestic products may be incorporated into the transformation process which will have to be exported andreturned along with the temporary imported raw materials

5 Not applicable for processing of products (100% domesticraw materials) or provision of services

6 Not applicable for sales within national territory

7 At least 30% of the machinery and equipment utilised inthe operation must be owned by the resident abroad. It mayalso be owned by a third party with which there is a commercial agreement derived from the maquila operation,provided that the machinery and equipment have not beenowned by a resident in Mexico as its related party.

Mexico Update


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Companies that had an authorized IMMEX program on 31 December 2009 are not required to comply with the requirements described above.

Value Added Tax (VAT)

A new article is incorporated to the IMMEX Decree toestablish what should be understood by “maquila” or“sub-maquila” for purposes of VAT.

The VAT return will take 20 working days to process forthese companies and five working days for certifiedcompanies (IMMEX companies with bi-annual importsof more than $ 200,000,000.00 pesos).

International Treaty signed by Mexico

In February 2011, the Official Journal published the Decreeon agreement between the Mexican Government and theKingdom of Netherlands in connection with the NetherlandsAntilles regarding the exchange of tax information. This involves assistance between contracting countries to provide relevant information for determination, assessmentand collection of taxes comprising the agreement.

In April, the Official Journal released the Decree of Protocolbetween the Mexican Government, the Government ofUnited Kingdom and Northern Ireland which modifies theAgreement to avoid Double Taxation and prevention of

Fiscal Evasion with respect to Income Taxes and CapitalGains. This includes the following amendments:

a) The Single Rate Business Tax (IETU) is included as oneof the taxes covered by the agreement in the case ofMexico.

b) Dividends - the amendment is related to dividendswhich may also be taxable in the source state.

c) Amendments to allow the exchange of tax informationand assistance for the collection of taxes.

Mexico is currently negotiating 11 more agreements on information exchange.


Veronica BarbaAsesoria FiscalPKF Mexico S.C.T: +52 33 3634 7162|



Mexico Update continued

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Here is a summary of recent developments in the Netherlands.The content below is of a general nature and should not beregarded as an exhaustive outline or as a substitute for detailed legal advice.

Corporate Income Tax

Dutch Tax AgendaOn 14 April 2011 the Under-Minister of Finance publishedthe “Dutch Tax Agenda” (the Agenda). This document consists of ideas to move the Dutch tax system towards asimpler, more solid and fraud-resistant tax system and refersto individual income tax, value added tax and corporate income tax. Below we shall address the following relevantDutch corporate income tax issues:

interest deduction for acquisition companies

permanent establishment losses

reduction of the corporate income tax rate to 24%.

With respect to these items, the intention is to present legislative proposals in the third quarter of this year for possible enactment from 1 January 2012. In addition to theitems mentioned above, the Agenda also indicates that therewill be changes in the rules governing taxation of foreignshareholders with a substantial interest (in general, an interestof 5% of the issued and outstanding capital) in a Dutch company but the Agenda does not contain any further information about what the changes should be.

Interest deductionOver the past years, several alternatives have been discussed to curb the deduction of funding costs with respect to investments in qualifying subsidiaries. There isnow a perceived imbalance between the deduction of interest whereas the benefits are tax-exempt if the subsidiary is a qualifying participation. It appears that no firmconclusion has yet been reached and an ad hoc committeehas been asked to form a view by mid June 2011.

In addition, the alternatives discussed to curb the interestdeduction have been focused on streamlining the variousrules limiting interest deduction. The Agenda focuses onlimiting the interest deduction in Dutch acquisition companystructures. A common practice in the Netherlands is that anacquisition company borrows funds to acquire shares in thetarget company and forms a fiscal unity with the targetcompany. The interest costs of the acquisition are then deducted from the operating profit of the target company.Anti-abuse rules (eg thin capitalisation with respect to theratio of debt and equity) can be avoided by borrowing froma third party instead of a related party and by increasing theequity of the acquisition company by the contribution ofshareholdings in other subsidiaries. The Agenda describesmeasures to limit the interest deduction from (only) the acquisition company (and not from the target company)concerning third party- and related party interest expenses,in case the interest expenses exceed € 500,000 taking intoaccount a certain debt-to-equity ratio.

The Netherlands Update


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Permanent establishment lossesThe Agenda proposes to align the treatment of foreign permanent establishments with that of foreign subsidiaries.Based thereon, the profits of a foreign permanent establishment would be excluded from the taxable basis inthe Netherlands, i.e. object exemption. Losses of the permanent establishment – pursuant to the object exemption regime – could no longer be offset against profitsof Dutch head offices. An exception would be introducedfor losses resulting from the liquidation of a foreign permanent establishment as such a deduction is also available in the event of a liquidation of a (foreign) qualifyingparticipation.

Reduced corporate income tax rateThe Agenda proposes to reduce the corporate income taxrate to 24%.

Foreign currency (FX) results on exempt participationsIn a press release of 8 April 2011, the Under-Minister of Finance announced legislation with respect to the DeutscheShell judgment of the EU Court of Justice. Since that decision,a debate has ensued in the Netherlands whether that casecould also apply to currency translation results under theDutch participation exemption. The Dutch participation exemption provides for a full exemption of all profits andlosses, including currency results, from qualifying subsidiaries.

Applying the Deutsche Shell case to the participation exemption would mean that currency losses would be taxdeductible. The corresponding gain would be tax exemptunder the participation exemption. In recent court cases,taxpayers have taken the position that FX losses concerningexempt participations should be deductible from the Dutchtaxable basis, based on EU-law (decision of the EuropeanCourt of Justice concerning Deutsche Shell GmbH, dd. 28-2-2008, C-293/06).

The Under-Minster of Finance considers this to be undesirablefrom a budgetary view and therefore has announced legislation that aims to redress the imbalance between currency losses and profits. Taxpayers who have successfully claimed a deduction will no longer qualify forthe participation exemption with respect to currency gains.The announced legislation, if enacted, will have retro-activeeffect to 17.00 hrs on Friday, 8 April 2011.

Value Added Tax

The Netherlands currently applies a general VAT tax rate of19% and a reduced rate of 6% for items such as food,books and medication. To finance the suggested taxchanges included in the Agenda, the following proposal islaid down in the Agenda:

increase the reduced VAT rate to 8%

partially abolish the reduced VAT rate whereby food would continue to apply for a reduced rate of 6% or 8%or completely abolish the reduced rate which would bringall goods - for which the reduced rate currently applies– under the general rate of 19%.

International and EU issues

Notice Tax Treaty Policy of the NetherlandsThe Dutch Under-Minister of Finance issued the Notice concerning the Tax Treaty Policy 2011 of the Netherlands(‘the Notice’) on 11 February 2011. The Notice sets out thatit serves the interest of the Netherlands to have an extendedtax treaty network and to ensure capital import neutralityand the exemption method in order to avoid double taxation.The Notice, furthermore, outlines the Dutch policy with respect to future negotiations for new tax treaties and/orchanges in current tax treaties in that the recognition thateach tax treaty requires its tailor-made solutions.

The focus of the policy laid down in the Notice seems to bethe following:

clearer rules for residency for exempt entities and entities subject to a special regime

clear language for hybrid entities

0% withholding tax rate for dividends, interest and royalties

the use of recent OECD Commentary under the dynamicinterpretation method

inclusion of an arbitration clausecurbing tax treaty abuse.

The Netherlands continues discussions with respect to theexisting tax treaties with: Australia, Belgium, China, Germany,France, India and Indonesia. Furthermore, the Netherlandsshall start discussions for tax treaties with Costa Rica,Ethiopia, India and New-Zealand. Besides this, the Netherlands shall contact Angola, Brazil, Chile, Colombia,

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Netherlands Update continued


Poland, Singapore, Slovakia and Spain to start or continuethe discussions for a new tax treaty or protocol to amendan existing tax treaty.

Interest deduction and EU lawCase law has recently been published concerning the question whether Dutch rules limiting interest deduction arein conflict with EU law. The first case deals with the Dutchthin capitalisation rules which were enacted on 1 January2004. These rules aim at denying interest deduction in theevent of excess debt unless certain conditions are satisfied.According to the Dutch Supreme Court, the thin cap rulesdo not create an imbalance between a pure domestic situation and an EU situation because in each situation thesame ratios apply.

The second case involved the tax year 2001 and a paymentof interest by a Dutch company to a Belgian group companywhich enjoyed the “co-ordination tax regime” in Belgium.The interest payment by the Dutch company was governedby a rule limiting interest deduction. Those rules would notapply if the transaction and the debt were predominantlydriven by business reasons or, if that would not be the case,the interest would be subject to tax in Belgium against aneffective rate which, according to Dutch standards, is reasonable.

The Appeals Court Amsterdam ruled that there was not apredominant business reason for the debt and that the interest was not subject to a reasonable tax (taxation in Belgium was 1%). Finally, the Court tested the Dutch rulewith EU law. According to the Appeals Court Amsterdam,the rule limiting interest deduction is in principle in conflictwith the freedom of establishment but the rule is justified by compelling reasons of public interest.

EU Indirect Tax: Infringement proceedings regarding fiscal unity VATCompanies which are entrepreneurs for VAT purposes canform a VAT fiscal unity provided that certain conditions aresatisfied. The question is always whether a holding companyqualifies as an entrepreneur. According to policy applied by the Dutch tax authorities, a holding company can be included in a VAT fiscal unity if the holding company has acentral role with respect to policy making and managementof the group (in Dutch: “beleidsbepalend en sturend”) evenif the holding company conducts those activities without receiving a remuneration. According to the European Commission, the policy applied is in conflict with European

VAT rules. As a result, the European Commission initiatedan infringement procedure at the European Court of Justicein order to investigate whether the Netherlands is acting inviolation of the European VAT Guideline.

A holding company should be considered an entrepreneur –based on EU case law - if it performs services for groupcompanies in exchange for a fee. Continuation of holdingcompanies in a VAT fiscal unity can therefore be achieved –even if the European Court would rule in favour of the EUCommission – if the holding company starts to performmanagement activities in exchange for a fee.


Jan RoelandTax partnerPKF Wallast, AmsterdamT: +31 (0)20 653 18 12

F: +31 (0)20 653 18 47


Netherlands Update continued


2011 New Zealand BudgetOverview The Government had previously announced that this year’sBudget would focus on measures to reduce Governmentborrowing. This will be achieved mainly by a reduction inpublic expenditure and partial privatisation of some Government investments.

The Finance Minister cited the hangover of the global financial crisis as well as the Canterbury earthquake asmajor factors contributing to the record $16.7 billion deficit.The rebuilding of Christchurch alone is estimated to cost$8.8 billion. As a result, it is unsurprising that the Government has chosen in an election year to deliver a fairlybland Budget, with delayed implementation of many of theannounced tax changes.

A new Earthquake Kiwi Bond will be introduced with proceeds going to fund the rebuilding of Canterbury. Newthin capitalisation rules will be introduced for foreign banksand the Government also announced a review of the taxtreatment of livestock and assets such as holiday homesthat have a mixed use.

Kiwisaver

While the $1000 kick start Government contribution will remain, the member’s credit currently worth up to $1042per annum will be halved to $521 for the year commencing1 July 2011.

From 1 April 2012, the tax-free status of employer contributions will be withdrawn and instead employer contributions will be subject to tax at the employee’s marginal tax rate.

The minimum contribution by individual members will increase from 2% to 3% from 1 April 2013 and the employer’s compulsory contribution will also be raised to 3% from the same date.

Thin Capitalisation

The thin capitalisation rules will be amended for foreignowned banks to limit interest deductions against their NewZealand income. The changes will be effected by increasingthe minimum prescribed equity percentage from 4% to 6 %and follows last year’s inbound thin capitalisation changesthat applied to non-banking institutions.

Mixed Use Assets

Inland Revenue has previously issued statements on the deductibility of expenditure claimed by holiday home ownerswhere there is a mixed business and private use of the assets concerned. A review of the tax treatment of assetswith a mixed use such as holiday homes and luxury boatswill be carried out later this year. This could result in a restriction to the deduction of expenditure in the future.


John DillonPartner PKF Ross MelvilleT: +64 9373 0100

F: +64 9373 3247


New Zealand Update


Paraguay's tax structure is based primarily on the consumptiontax and profit tax.

Value added tax

There are two rates of VAT:

a) 5% on sale of properties, agricultural products and farming livestock production, and marketing of pharmaceuticals

b) 10% on the provision of other services and sale of goods in general.

Selective consumption tax (ISC)

ISC is applied to the marketing of fuel, products such assnuff, alcohol and other luxury goods.

Income tax

The general rate of income tax is 10% plus a 5% additionalfee for the distribution of local utilities and an additional feeof 15% on profit remittances sent abroad.

The Congress is currently considering a bill for implementationof Personal Income Tax as of June 2011. This tax wouldhave a rate of 10% over the difference between income received and all expenditures that are properly documented.

Tax incentives

These include the following:

1 A Maquila System that allows a foreign company to settlein the country or outsource to an existing company toprocess goods or services to be re-exported with valueadded. These operations are exempt from all taxes orcharges which affect the process from the import of rawmaterials and supplies, manufacture and export, includingVAT. It has a single rate of 1%.

2 Law 60/90 Investment incentive promotes the import

of machinery and equipment of high technology for local industry. These imports benefited by the application of 0%tariff and VAT exemption on presentation of a project approved by the government.

3 Some designated areas enjoy tax breaks and other benefits specified by law for all kinds of industrial, commercialand service activities.


Silvia Raquel Aguero PartnerPKF Controller Contadores & AuditoresT: +595 21 44 28 52 Int. 195


W: pkf-controller.com.py

Paraguay Update


Changes regarding participationexemption provisions may leadto corporate reorganisations In line with other European countries, Portuguese tax legislation includes a participation exemption rule underwhich a shareholder company is exempt from tax on dividends received from Portuguese and EU resident companies. Until 2010, this benefit applied to dividend distributions where either one of the two following conditions was met:

(i) the parent company holds a stake of 10% or more in the share capital of the subsidiary distributing the dividend or

(ii) the acquisition cost of the shares held in the distributing company was no less than EUR 20 million.

When none of the above conditions were met, the corporateinvestor was still entitled to deduct to its taxable income50% of dividend income received (i.e. from companieswhere the participation represented less than 10% of theshare capital or less than EUR 20 million).

As from 2011, the law has been changed and the participationexemption only applies now when the parent company receiving the dividend holds more than 10% of the sharecapital of the distributing company. In other words, the benefit no longer applies when the stake held in the sharecapital of the distributing company is more than EUR 20million, unless the 10% limit is achieved. Moreover, the 50%relief for non-eligible participations has also been revoked.

The effects of this change are particularly adverse for investors with a significant amount invested in large quoted

companies (banks, energy companies, telecom operators)which were not subject to tax on the return (dividends) obtained from that investments and which will now start to pay tax on such income.

To give an example, let us consider a Portuguese investmentcompany holding 5% in the share capital of a PortugueseBank, which may represent an investment of more thanEUR 1 billion. Until 2010 this investment company was notsubject to taxation from dividends distributed by the Bankbut, under the new rules, such dividend income will be included in the taxable income of the investor and subjectto tax at the general corporate income tax rate (29% for taxable income in excess of EUR 2 million).

As a consequence, there are a number of holding and investment companies which are in the process of restructuring their investments and looking for more suitablejurisdictions (taking into consideration the Double TaxTreaties available) in which to concentrate their portfolio investments (benefiting, afterwards, from the parent subsidiary Directive in respect of future dividends receivedfrom such jurisdiction). Ultimately, a rule that was intendedto increase the tax revenue for the Portuguese Governmentmay result in a massive emigration of investment in sharesof Portuguese quoted companies to foreign jurisdictions.


José Parada RamosPartnerPKF & Associados, SROC, LdaT: +351 213 182 720

F: +351 213 182 720


W: www.pkf.pt

Portugal Update


Below is a summary of recent tax developments in Romania.

Corporate income tax

1 Corporate tax on micro-companies has been reintroduced

Companies can opt for the micro-company regime if theymeet the following criteria:

annual turnover up to EUR 100,000

have between one and and nine employees

derive their turnover from activities other than consultancy and management, insurance and reinsurance, banking and gambling

the share capital is owned by persons others than thestate and the local authorities.

In 2011, micro-companies are subject to tax on revenues of 3% applied to the micro-company’s annual turnover, excluding certain types of income.

If a micro-company fails to meet any of the above criteriaduring a financial year, it will revert to becoming a profit taxpayer from the next year. However, by way of exception, if during a year, the micro-company’s annual turnover exceeds EUR 100,000, the micro-company will become aprofit tax payer starting from the quarter when the said limitwas exceeded.

2 Taxpayers given the option to reschedule their taxpayment obligations

In certain conditions, taxpayers administered by the National Agency for Tax Administration may have, upon request and specific conditions being met, their paymenttax obligations rescheduled for a maximum of five years.The beneficiary of such postponement of tax obligationsmay be individuals or legal entities of private or public law,irrespective of their form of organization.

The rescheduling is granted for all the certified tax obligationsadministered by the said tax authority if the following conditions are met:

All their tax returns have been submitted

Have the financial capacity from a payment point of view during the rescheduling period in the event thatthey find themselves in economic distress generated bytemporary lack of liquidities. The competent tax authority

will evaluate if such conditions are met on the basis ofthe reorganization/recovery plan or other information/documents presented by the taxpayer.

Have pledged guarantees

Do not find themselves in an insolvency procedure

Do not go into in liquidation

Cannot be held responsible under the Insolvency Law and Fiscal Procedure Code.

The postponement for the tax payment obligation is notgranted for amounts lower than RON 500 in the case of individuals and RON 1,500 for legal entities.

The postponement period is decided by the tax authoritiesdepending on the amount of the tax obligations and the financial capacity of the taxpayer.

As a general rule, the guarantees pledged must cover thepayment tax obligations rescheduled, as well as the latepayment interest owed during the rescheduling period (i.e. 0.04% per day of delay) plus up to 40% from the taxobligations postponed, depending on the rescheduling period granted. However, for tax obligations below RON 5,000 postponed for individual and below RON20,000 postponed for legal entities, guarantees do not need to be pledged.

3 Withholding tax on dividendsThe local withholding tax on dividend paid by a Romanianlegal entity to a non-resident legal entity or to a permanentresident of a non-resident legal entity who are fiscally resident in the European Union or in one of the EuropeanAssociation of Free Exchange countries has been increasedfrom 10% to 16%.

4 Interest & Royalties DirectiveFrom 1 January 2011, Romania is no longer in the transitionperiod in terms of application of the Interest & Royalty Directivefrom a withholding tax perspective. In other words, interestand royalties derived from Romania by a non-resident legalentity, tax resident in the European Union or in one of theEuropean Association of Free Exchange countries, is with-holding tax-exempt in Romania, provided that the effectivebeneficiary of the interest and royalties type of income holdsat least 25% in the shares of the Romanian legal entity for auninterrupted period of two years, ending at the date of thepayment of income.

Romania Update


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5 VATA taxable person may deduct the VAT related to the acquisitions performed within the forced execution procedure from an inactive taxpayer or from a taxable person who is temporarily inactive.

The deadline for the application of the special limitationsof the deduction right on the VAT relating to the acquisition of motor vehicles and fuel was extendeduntil 31 December 2011.

The taxable person registered for VAT purposes whodoes not exceed the VAT exemption threshold (i.e. EUR 35,000) during a calendar year may request by 20 January of the following year to deregister for VATpurposes in order to apply the special exemptionregime as of 1 February of the following year.

Taxpayers who are on the list of inactive taxpayers,temporarily inactive at the Registry of Commerce orwhose VAT code has been cancelled must request tothe fiscal authorities to register them for VAT purposes,if the situation that led to the cancellation of their VATcode has been resolved.

Main and ancillary services related to cultural, artistic,sporting, scientific, educational, entertainment and othersimilar events which are rendered to taxable personswill be taxable where the customer is established (thegeneral taxation rule for services rendered to taxablepersons). For services supplied to non-taxable persons,the place of supply will remain the place where the services are actually rendered.

Services that consist of granting access to cultural,artistic, sporting, scientific, educational, entertainmentand other similar events, as well as ancillary services related to granting access to such events, will be taxable at the place where the events are performed.

Services performed to a taxable person, related to thetransport of goods carried outside the Community, willbe taxable outside the Community if the service is usedand enjoyed outside the Community.

In the case of events that determine the adjustment of taxable base (i.e. discounts, returns of goods, etc), theexchange rate used will be the same as the one used in the main operation that generated these events.

For services regarding the transfer of certificates forgreenhouse gas emission allowances, simplification

measures apply under certain conditions and the personliable to pay the VAT is the beneficiary under the reversecharge mechanism.

The specific rules regarding the supply of gas throughthe natural gas distribution system are also applicable in case of the supply of gas through any network connected to such system.

The dispatch or transport of heat energy or coolingagent through the heating or cooling networks with thepurpose of being supplied is deemed as a non transfer.

The place of supply of heat energy or cooling agentthrough the heating or cooling networks to a taxabledealer is where the taxable dealer is established.

The European Committee has granted Romania theright to apply simplification measures (i.e. the reversecharge mechanism) for some products with a high riskof fraud such as: corn, wheat, rye, sunflower, barley,rape, sugar beet and soya. However, the measure canonly be applied after the communication of the final decision of the European Authorisation Council regarding such derogation from the VAT directive.

Income tax and social security contributions

1 Income from independent activitiesTaxpayers who derive income from independent activities,for which 10% income tax is withheld at source, canchoose final taxation at 16%.

A minimum annual income quota has been established forevery independent activity which generates commercial income and can be lower than 12 minimum gross salaries.

For intellectual property rights, the deductible expenses ratewas reduced to 20% from 25% when determining the netincome.

The “Statement regarding the realised income” has beenreintroduced:

The statement will be submitted by the 15th of May (insteadof 25th of May) of the following year. The income tax is calculated by the tax authorities based on the “Statementregarding the realised income” (and not by the taxpayers), a tax decision being again issued.

Due date for annual income tax payment: the income tax

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Romainia Update continued


differences are to be paid within 60 days from the tax decision communication date.

The new procedure for reporting and payment applies fromincome obtained in 2010.

2 Reporting and payment procedureIntroduction of the Single Statement 112 – “Statement regarding the payment obligations of the social charges, income tax and the nominal evidence of the insured individuals” - to be submitted monthly, beginning with theobligations of January 2011, up to the 25th of the followingmonth. Until 1 July 2011, employers have the option to submit the Single Return either online by accessing thewww.e-guvernare.ro website or at ANAF’s offices (in paperformat, stamped and signed, together with the electronicsupport file on CD. After this date, the Single Return mustbe submitted exclusively online.

3 Social security contributionsSocial security charges are provided also in TITLE IX of theFiscal Code starting January 2011.

The monthly calculation basis for mandatory social contributions (for payments by employees and employers) is the gross monthly income earned by the insured individual,taking into account the general and specific exceptionsspecified by the law.

The contribution for sick leave and health insurance is applied to the basis as described above but cannot behigher than the number of insured persons multiplied by the value of 12 minimum gross salaries.

In the public pension system, the monthly calculation basisfor the individual contribution for employees cannot exceedfive average gross salaries (5 x RON 2,022 for 2011). Foremployers, the monthly calculation basis for social contributions is the monthly gross income earned by insuredpersons and cannot be higher than the number of insuredpersons in the month of calculation (differentiated dependingon the work conditions) multiplied by five average grosssalaries (5 x RON 2,022).

4 Individual work contractsIndividual work contracts no longer need to be registered inpaper format with local work inspectorates, with effect from1 January 2011.

5 Introduction of special provisionsThe term “personal fiscal situation” is defined as meaningthe entire assets and liabilities of the taxpayer, includingcash flows and other elements that could determine the realfiscal situation of the taxpayer during the reviewed period.

The review may involve the tax authorities making a comparison between the taxpayer’s declared income andhis or her assets and liabilities and may be undertaken at anoffice of the tax authorities, at the taxpayer’s residence or atthe residence of the taxpayer’s representative.

The procedure to be followed if differences are discoveredhas also been set out. In this case, the tax authorities mustissue a review opinion and they may also request additionalinformation, applying certain indirect methods to establishthe adjusted taxable base, as follows:

Sources and funds expenditure method

Cash flow method

Assets and liabilities method.

The application procedure for these methods will be set outin a forthcoming Government Decision.


Florentina SusneaPKF Finconta SRLT: +40 21 317 31 90


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Cancellation of 40% credit for business expenses could discourage new entrepreneursFor self-employed persons and small businesses who donot pay value-added tax or who paid value-added tax forpart of the year, the 40% credit they can deduct from annual income for expenses has been cancelled for the2010 tax year. With this change, all businesses will be required to account for expenses in detail and to be able to prove deductions to taxable income to cover expenses.

This cancellation should not affect most international companies because their turnover is too large to be exemptfrom value-added tax but it will have an impact on small entrepreneurs both inside and outside Slovakia, particularlylow-cost, high value-added enterprises. This cancellation,combined with proposals from the Slovak government towiden what would be considered taxable income, is likely to encourage skilled employees to remain employees ratherthan setting up their own small business, particularly in lightof current proposals to decrease required contributions byemployees and payroll deduction rates.

Expanded definition of employees and employers

Amendments to income tax, social insurance and health insurance laws in 2011 have expanded the definition of employee and employer, and thus who would be required to pay social insurance and health insurance premiums.

Now considered to be employees are:

directors of limited liability companies

members of executive boards, supervisory boards,audit committees and other governing bodies in corporations and cooperatives

shareholders in limited liability companies and limitedpartners in limited partnerships, if they are paid for workconsidered to be earned income under legislation.

Individuals whose income is taxed as earned income will be considered employees, while an employer, for health insurance purposes, will now include persons paying whatwould be considered earned income to employees.

This expanded definition subjects more individuals to requirements to pay health and social insurance premiumsalthough persons not covered by Slovak health insurancedo not have to pay premiums to Slovak companies.

Social and Health Insurance Premiums

The definition of a self-employed person has been expanded for health insurance purposes to include personsreceiving income from leases. Health insurance contributionswill have to be paid on rental income earned in 2011. Propertylandlords were also considered self-employed persons as of1 January 2011 and required to register for health insurancebut this definition was repealed effective 1 May 2011, withprovisions. Self-employed persons have always been required to pay health insurance and social premiums butthe government has proposed that these premiums shouldnot be deductible expenses.

The amendment to social insurance legislation also requiresan employer to distinguish between employees who have a regular monthly income from employees with an irregularincome. Mandatory hospitalisation and retirement insuranceas well as unemployment insurance will be attributed to employees receiving a regular monthly earned income. Directors of limited liability companies are included if theyreceive regular remuneration each month for the positionthey hold.

Only mandatory retirement insurance will be attributed toemployees with an irregular income, including directors oflimited liability companies who receive irregular remunerationfor the position they hold. The assessment is calculated forthe calendar month from previous income paid.


Richard BuddPKF SlovenskoT: +421 46 518 3829 - direct

F: +421 46 518 3838


W: www.pkf.sk

Slovak Republic Update


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Voluntary Disclosure Relief A Voluntary Disclosure Programme (VDP) has been in placesince 1 November 2010 and will close on 31 October 2011.The VDP covers all tax defaults committed prior to 17 February 2010 and all exchange control defaults committed before 28 February 2010.

Tax VDP

The Tax VDP is available to companies, individuals and trusts.

Under the Tax VDP, the taxes due would remain payable.However, relief is granted from interest and certain penaltiesand no criminal prosecution will be pursued. This relief doesnot extend to any fixed rate administrative non-compliancepenalty imposed or a penalty imposed under the terms of a tax Act for the late submission of a return or for the latepayment of tax.

If a taxpayer is aware of a pending audit or investigation bySouth Africa Revenue Service (SARS) into its affairs or iscurrently under audit or investigation, approval from SARS is required to access the VDP. If approval is granted, the relief offered is amended in that 50% of the interest will remain payable.

An anonymous application may be lodged to gauge how a particular default would be dealt with under the Tax VDP. The relief granted will be evidenced by a written agreementbetween the Commissioner for SARS and the applicant.Any assessment issued or determination made by SARS to give effect to the agreement reached is not subject to objection or appeal.

The Commissioner for SARS is bound to keep any application confidential as the secrecy provisions containedin section 4 of the Income Tax Act also apply to the Tax VDP.

Exchange control VDP

Any individual, sole proprietor, partnership, deceasedestate(s), insolvent estate(s), South African trust(s), formerSouth African residents, companies and close corporationsthat have contravened the Exchange Control Regulationsprior to 28 February 2010 can apply for relief under theExcon VDP.

As with the Tax VDP, any person who has been notified or

is the subject of an investigation or enforcement action is precluded from applying for relief under the Excon VDP. However, such a person may lodge an application to qualifyfor administrative relief under the VDP by completing the relevant section provided on the application form and lodgingit with the Financial Surveillance Department of the SouthAfrican Reserve Bank (FinSurv) which will consider such request on merit.

Unlike the Tax VDP, anonymous applications will not be considered under the Excon VDP. However, anonymous enquiries may be made.

The following categories of assets do not qualify for administrative relief:

Bearer instruments

Assets derived from unlawful activities

Foreign assets (of whatever nature, excluding bearer instruments) that form part of, or where the applicantbenefited from, any criminal actions and/or omissions(eg drug trafficking, money laundering).

Exchange control contraventions committed after 28 February 2010 will not qualify for administrative reliefunder the Excon VDP.

Where a full disclosure is made in the prescribed mannerand administrative relief is granted by FinSurv, no further action against the South African resident involved in suchcontraventions will be taken or initiated by the FinSurv.

Applicants who are granted administrative relief in respect of unauthorised foreign assets and/or structures (of whatevernature, excluding bearer instruments) may have to pay a

South Africa Update


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levy on the market value thereof at 28 February 2010.Where the levy is paid from foreign-sourced funds, the levywill be 10%. The levy will increase to 12% where the levy ispaid from local funds.

The levy must be paid within three months of the date of approval of the application through an authorised dealer whomust submit documentary proof of such payment to FinSurv.

All applicants will receive a written notification from FinSurv informing them of the outcome of their application.

DividendsDividend definition

With effect from 1 January 2011, the definition of dividendwas changed in anticipation of the introduction of the newdividends withholding tax regime which will be introducedwith effect 1 April 2012. In terms of this new definition, “dividend” means any amount transferred or applied by a company for the benefit of any shareholder, including consideration received as a result of a share buy-back.Specifically excluded from the definition of dividend is anamount so transferred or applied which:

results in a reduction of contributed tax capital

constitutes shares in that company i.e. a capitalisationissue

a share buy-back by a JSE Securities Exchange listedcompany subject to certain requirements.

Contributed Tax Capital definition

The new dividend definition excludes amounts distributed toshareholders which results in a reduction of CTC. CTC is anew concept which has similarly been brought into the Actwith effect from 1 January 2011. CTC represents the sum of:

the stated capital or share capital and share premium (“equity”) of that company immediately before 1 January 2011

Less: so much of the equity as would have constituteda dividend i.e. tainted capitalised reserves

Plus: the consideration received by or accrued to that company for the issue of shares on or after 1 January 2011

Less: any reduction in equity distributed to shareholdersafter 1 January 2011.

It is important to note that the amount transferred to ashareholder of any class of shares is deemed to be anamount that bears the same ratio to the total of the amountof CTC attributable to that class of shares immediately before the distribution as the number of shares of that classheld by that shareholder bears to the total number of sharesof that class.

Therefore, if a company has issued several classes ofshares, CTC must be maintained separately on a per classbasis. Therefore, CTC created by virtue of an ordinary shareissue cannot be allocated or reallocated to preference shares.Similarly, distributions in respect of preference shares cannotbe used to reduce the CTC associated with ordinaryshares. If a company makes a distribution out of CTC in respect of a given class of shares, the CTC distributed willbe allocated pro rata to all of the shareholders of that class.


Eugene du PlessisDirector / TaxPKF South AfricaT: +27 113848116

F: +27 86 6452651

M: +27 827842760


South Africa Update continued


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Corporation tax rateFrom 1 April 2011, the main rate of corporation tax hasfallen from 28% to 26%. Further 1% reductions are scheduledfor each of the following three financial years so that the ratewould be reduced to 23% by 1 April 2014. The small companies’ rate has also been reduced from 21% to 20%from 1 April 2011.

Controlled foreign companies

A number of changes have been made to the controlled foreign companies (CFC) rules for accounting periods beginning on or after 1 January 2011. These interim measures are being made in advance of a more fundamentalreform of the CFC rules in 2012. Highlights are as follows:

■ A new exemption for intra-group trading activitiesand intellectual property exploitation where there is minimal connection with the UK and it is unlikely that profits have been artificially diverted from the UK.

■ A choice of two de minimis limits under which a CFC’s profits are ignored. Under the existing exemption, aCFC’s chargeable profits (calculated under UK tax principles) can be ignored if they do not exceed£50,000. In the future, companies will have the choiceof using this test or an alternative de minimis profit levelof £200,000 based on the company's accounting profitsas calculated under GAAP but adjusted to exclude distributions treated as exempt under part 9A CTA 2009and capital gains or losses and to include trust andpartnership income. The result is also to be adjusted byapplying the transfer pricing rules in relation to relatedparty transactions, unless the amount of this adjustmentto profit would be less than £50,000.

Reforms that are more fundamental are expected to be introduced in the Finance Bill 2012. It is proposed that thenew regime will be mainly entity based but will only targetthe proportion of overseas profits that have been artificiallydiverted from the UK. The profits of finance companiescaught under these rules will be taxed at a maximum of aquarter of the main corporation tax rate (i.e. an effective rateof 5.75% by 2014).

Foreign branches

For accounting periods commencing on or after Royal Assent to Finance Bill 2011, UK companies will be able to

make an irrevocable election to permanently exempt theiroverseas branch profits (including capital gains attributableto the branch) from UK taxation. Once a company hasmade the irrevocable election, losses of a foreign branch willnot be available to offset against the UK company’s profits.

Under these rules, a company’s branch profits will becomeexempt as soon as the tax losses of those branches in theimmediately preceding six years have been matched byprofits. Special rules will apply to very large losses (thoseover around £50m). Branch profits will be determined byreference to the latest OECD model treaty unless a specifictreaty applies. New anti-avoidance measures will also prevent the diversion of profits for tax avoidance purposes.

Patent income

The Government has confirmed that a reduced 10% rate ofcorporation tax will be introduced from 1 April 2013 on profitsarising from certain patents first commercialised after 29 November 2010.

VAT thresholds

The new UK registration limit is £73,000. However, from 1 August 2012, any business which is not established in theUK but is making taxable supplies of goods or services inthe UK must register for VAT – i.e. there will be no thresholdin such cases.

R&D tax relief for SMEs

The UK offers companies enhanced tax relief against qualifying costs of projects that seek to achieve an advancein science or technology by resolving scientific or technologicaluncertainty. Subject to EU state aid approval, the rate ofR&D tax relief available to small and medium-sized enterpriseson qualifying expenditure has increased to 200% (previously175%) for expenditure incurred from 1 April 2011. From 1 April 2012, again subject to EU state aid approval, thetotal rate of relief will increase to 225%. Larger companiescan still claim a 130% deduction for the same type of expenditure.

Personal non-residence

Individuals who leave the UK to take up full-time employmentoverseas need to fulfil certain conditions if they are to bedeemed non-UK resident. These include having a contractof employment overseas for at least a full tax year and makingvisits to the UK that total fewer than 183 days in any tax

UK Update


year and average fewer than 91 days a year (over any fouryear period).

HMRC has now laid down guidelines relating to such workers.These would typically be employees initially posted overseasfor two or three years. In HMRC’s view, unless there are extenuating circumstances, if someone spends ten or moredays working in the UK in any tax year, ignoring days whenhe or she is only carrying out incidental duties, he or she willremain UK resident. This could affect people coming backto the UK for business meetings. It will affect not only theemployees but also employers who will have a duty todeduct income tax and, possibly, employee and employersocial security payments throughout the employee’s periodof absence. This issue is likely to be of less significance forthose in countries with whom the UK has a double taxagreement although, in many such cases, it still would leadto undesirable consequences.

The current non-statutory rules for establishing whether individuals are UK resident for tax purposes are complex.The Government has announced that it will commence consultation in June 2011 with a view to introducing a statutory definition of residence from April 2012. The aboveguidelines are expected to be subsumed into the new residence test.

Personal domicile

Under current rules, non-UK domiciled individuals who havebeen UK resident in seven out of the last nine tax years canelect to be taxed on foreign income and gains only to theextent that these are remitted to the UK on payment of a£30,000 per annum remittance basis charge. From 6 April2012, the charge will be increased to £50,000 for thosewho have been resident in the UK for 12 or more years andwish to continue to be taxed on the remittance basis. Subject to consultation, from April 2012, certain remittancesof income and gains will not be taxable if the funds are usedto invest in UK businesses.

Entrepreneurs’ relief

Entrepreneurs’ relief reduces the tax rate on individuals andtrustees from 18% or 28% to 10%. The lifetime limit oncapital gains qualifying for entrepreneurs’ relief has beenincreased from £5m to £10m for qualifying business disposals on or after 6 April 2011.

Tax amnesty on offshore accounts

The UK authorities have offered a number of tax amnestiesin recent years ranging from specific offers for plumbers (albeit other individuals could use this particular facility too)and medical professionals to general offers for UK residentindividuals with offshore assets. The most useful of these forUK based individuals with assets held offshore is likely to bethe Liechtenstein disclosure facility (LDF). Although this facility was negotiated with the Liechtenstein authorities, no-one should discount the LDF as it is theoretically availableto anyone, even those who currently have no connectionwhatsoever with Liechtenstein.

The LDF allows individuals to create a financial presence in Liechtenstein and then to make a voluntary disclosure ofworldwide income which should previously have been taxedin the UK. The terms of the LDF can save users a massiveamount of tax and interest on bringing their UK tax affairsup to date.

There are also press reports of a potential deal between theUK and the Swiss on a facility for settling undeclared tax onassets held in Switzerland. Negotiations have been goingon with Switzerland for some months now but no formal announcement of terms has yet been made. Whether theterms of any Swiss facility will be more advantageous thanthe current LDF (which is available to UK resident individualswith Swiss accounts in many cases) remains to be seen.


Jon HillsPKF (UK) LLP, LondonT: +44 (0) 1483 564646


W: www.pkf.co.uk


United Kindom Update continued

Recent developments in foreignbank account reporting and disclosing unreported offshoreincome In 2011, the United States Treasury has continued its trend in seeking out information from US taxpayers withundisclosed foreign financial accounts. In February 2011,the Internal Revenue Service (IRS) unveiled a second specialvoluntary disclosure initiative to combat international taxevasion. The program gives taxpayers another opportunityto become current on all previously unreported income andrelated tax liabilities from offshore accounts for the years2003 to 2010.

IRS says that the 2009 settlement offer resulted in about15,000 taxpayers coming forward, covering banks in 60countries. This new voluntary disclosure initiative called the"2011 Offshore Voluntary Disclosure Initiative" (OVDI) will beavailable from 31 August 2011 and includes severalchanges from the 2009 program. The overall penalty structure for 2011 is higher and includes an eight year lookback rather than six years in the 2009 program. (Seediscussion of reporting requirements below.)

In connection with the rollout of OVDI, IRS CommissionerDoug Shulman said: "As we continue to amass more information and pursue more people internationally, the riskto individuals hiding assets offshore is increasing. This neweffort gives those hiding money in foreign accounts a tough,fair way to resolve their tax problems once and for all. Andit gives people a chance to come in before we find them."

If a taxpayer meets the terms of the OVDI, back taxes forthe years 2003 – 2010 and accuracy-related penalties mustbe paid. In addition, he or she will have to pay a 25%penalty on the amount in foreign accounts in the year withthe highest aggregate account balance or asset value. This25% penalty will apply in most cases but the penalty can bereduced to 12.5% for smaller offshore accounts ($75,000 orless) and, in certain very limited circumstances, to 5% (forexample, in the case of foreign residents who are unawarethat they are US citizens).

Benefits of the OVDI

In the IRS Frequently Asked Questions and Answers on the

program, Q&A number 4, the IRS states the following reasonswhy a taxpayer should make a voluntary disclosure:

to become compliant, avoid substantial civil penaltiesand generally eliminate the risk of criminal prosecution.

to calculate, with a reasonable degree of certainty, thetotal cost of resolving all offshore tax issues.

to avoid risk of detection by the IRS; the imposition ofsubstantial penalties such as the fraud penalty and foreign information return penalties; and reduce the riskof criminal prosecution.

Further, the IRS warns that much of the information is becoming increasingly available as a result of the ForeignAccount Tax Compliance Act (FACTA) legislation and bywhistleblowers.

One-Size-Fits-All

One significant downside to this program is the lack of flexibility in administering these cases. IRS agents are informed not to make any factual determinations as towhether there has been "wilful neglect" in not filing theforms or whether reasonable cause exists. Thus, taxpayerswho believe lesser penalties should be imposed are requiredto opt out of OVDI and ask for an examination. As a result,many US tax practitioners complain that the one-size-fits-allprogram is ill-suited for their clients who have not wilfullyevaded their taxes.

Final Rules on FBAR Reporting Requirements

Also in February 2011, the Financial Crimes EnforcementNetwork (FinCEN) issued final rules that amend the BankSecrecy Act (BSA) Regulations concerning foreign bank account reporting. The rules cover the scope of persons required to file reports, types of reportable accounts andrules preventing circumvention of the reporting requirements.

Background

US resident taxpayers are required to annually file FBAR –Form TD F 90-22.1 to report a financial interest in, or signature authority over, one or more financial accounts inforeign countries if the aggregate value of such accountsexceeds $10,000. FinCEN delegated its authority to enforcethe FBAR rules to the IRS in 2003 but it retained its authorityto revise the applicable regulations. In February 2010, FinCENpublished proposed rules to define the scope of individualsrequired to file FBARs, delineated the types of reportable

United States Update


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accounts and provided exemptions for certain persons andaccounts from reporting.

The final rules address these issues and take into consideration42 comments received from the tax community.

The following clarifications were made:

Reportable accounts – FinCEN clarified that an accountmaintained with a US financial institution is generally notconsidered a foreign account for FBAR purposes, evenif the account contains holdings or assets of foreign entities. In general, the FBAR rules also do not apply tocustodial arrangements in which a US bank, acting as a “global custodian,” combines the assets of multiple investors and creates pooled cash and securities accounts in non-US markets. FinCEN reasoned thatUS customers with these types of accounts typicallyhave no rights in the foreign accounts and can accesstheir holdings only through the US financial institution.FinCEN warned, however, that a US customer is considered to have a foreign financial account if thecustodial arrangement allows him or her to directly access his or her foreign holdings maintained at the foreign institution.

Signature or other authority – FinCEN issued a reviseddefinition of “signature or other authority”. The reviseddefinition clarifies that an individual has such authorityover an account if the foreign financial institution will actupon a direct communication from the individual regardingthe disposition of assets.

Recordkeeping requirements – FinCEN clarified that individuals who have signature authority over their employer's foreign financial accounts are not personallyrequired to maintain the records of that employer for five years.

Definition of “US resident” - in determining whether an individual is a US resident, certain elections to betreated as a resident for tax purposes are disregarded.

“Other financial accounts” - the treatment of life insurance policies and annuities as accounts for FBARpurposes will not cause them to be treated as financialaccounts. Also, for life insurance policies, FinCENstated that the obligation to file an FBAR rests with thepolicy holder and not the beneficiary. In order to avoidconfusion for discretionary beneficiaries or remaindermen,only beneficiaries who have a present beneficial interestin excess of 50 % are subject to the FBAR rules.

Effective Date

FinCEN said that the final rules would apply to FBARs required to be filed by 30 June 2011 and do not applyretroactively to tax years beginning before 2011. Taxpayersthat properly relied upon prior IRS guidance to defer their filing obligations may elect to apply the final rules to determinetheir FBAR filing requirements for foreign accounts maintained in calendar years beginning before 2010.


Leo Parmegiani, CPATax Partner in ChargePKF LLPT: +1 (212) 867-8000 x 426

F: +1 (212) 687-4346



United States Update continued

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Reduce US subsidiary and parent company tax liabilitiesusing the IC-DISC Historically, the Interest Charge - Domestic InternationalSales Corporation (IC-DISC) has been a tool for deferring income for US tax purposes. In recent years, the IC-DISChas become a viable planning opportunity to reduce US income tax liabilities utilising the rate differential availablethrough treaties and US capital gains rates on dividends for pass through entities and individuals.

This treatment may be available for those who:

export goods manufactured in the United States

provide engineering services for construction projectsoutside of the United States or offshore

provide architectural services for construction projectsoutside the United States

lease or rent property used by the lessee outside of theUnited States.

IC-DISC example based upon the US InternalRevenue Code

A separate US corporation is formed that elects to betreated as an IC-DISC in accordance with the InternalRevenue Code.

The US operating company pays a commission to theIC-DISC.

The operating company expenses the commission paidto the IC-DISC, reducing its taxable income calculatedat ordinary tax rates.

By statute, the IC-DISC is tax-exempt and pays no Federal income tax on its distributed commission income.

The IC-DISC pays a dividend to the owner(s) of the IC-DISC (the non-US parent company, pass throughentity or individual), subject to withholding at treaty rates or US capital gains rates.

Requirement of an IC-DISC

The IC-DISC must be a US corporation with one classof stock of at least $2,500 of par or stated value.

The Corporation must elect to be treated as an IC-DISCwithin 90 days of incorporation.

95% or more of the gross receipts of the IC-DISC mustbe qualified export receipts.

95% or more of the assets of the IC-DISC must bequalified export assets, which include: export property,accounts receivable, temporary investments and loansto producers.

The export goods must be manufactured, produced,grown or extracted within the US, with no more than50% of the fair market value of the export property canbe attributed to goods imported into the US.

The export property must be sold or leased for directuse, consumption or disposition outside of the US.

There are numerous ways to structure the ownership andcommission payments and companies will want to considerwhich structure will fit their specific goals, whether it be reduction of US income tax liabilities, expatriation of profitsto the parent company, estate planning, asset protectionand/or incentivizing key employees.

The owner of the IC-DISC does not have to be the non-USparent. This opens a variety of opportunities for planning.With regards to the commissions, there are a number ofmethods that can be used to calculate this amount. The IC-DISC can be a buy/sell or commission based entity.Commissions can be based on the qualified export grossreceipts or profit margin. Subject to certain limitations, thereare a number of options to maximize the tax benefit.

Conclusion

By implementing this strategy, a US subsidiary which ismanufacturing or distributing US manufactured products for sale outside the US (including Canada and Mexico), thecompany can reduce its taxes in the US and reduce itswithholding tax on dividends paid to its non-US parentcompany. However, proper planning is required to ensurethe IC-DISC has been established correctly and to ensurethe tax benefits are maximized each year.


Douglas M Mueller, CPAMueller Prost PCT: +1 314.862.2070




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US subsidiaries may qualify forthe Research Tax Credit The Credit for Increasing Research Activities, also known as the Research & Development (R&D) tax credit or the Research and Experimentation (R&E) tax credit, is a rewardingprogram of which US subsidiaries may be able to take advantage to reduce their Federal and State income tax liabilities.

About the United States Research Tax Credit

Historically, the R&E tax credit has been claimed by largemanufacturing companies, research facilities, software development companies, biotechnology companies, andcompanies in the pharmaceutical industry. However,changes to the governing Treasury Regulations have allowed additional industries such as custom manufacturers,engineering firms and design-build contractors to take advantage of this growing US tax incentive.

While many countries reward research and development inmany different ways, the US has adopted a broad definitionof the type of activities that may qualify for the credit.

The US R&E tax credit is a wage-based tax credit that rewards companies for investing in qualified research activities. In addition to qualified wages, companies maycapture supply costs for prototypes or models, as well as65% of contracted labour performing research during the

development process. Companies may benefit by both deducting the research expenditures and claiming the tax credit.

While the research expenditures are a reduction of taxableincome, the credit is a dollar-for-dollar reduction of incometax. Companies claiming the credit must first use the creditto offset tax for the year in which the credit is generated.However, if additional credit remains, the company maycarry the research tax credit back one previous tax year and forward the next 20 tax years. However, the recently enacted Small Business Jobs Act of 2010 allows researchcredits earned in 2010 by eligible small businesses to becarried back up to five previous tax years and forward thenext 20 tax years.

The Requirements

There are four basic requirements for an activity to qualifyfor a research tax credit:

1 Qualified research activities are defined as the development or improvement to a business component,which is defined as a product, process, technique, formula,invention or software.

2 The research must be technological in nature. That is, the process of experimentation used to discover the infor-mation fundamentally relies upon the physical or biologicalsciences, engineering or computer science. Furthermore,companies may use existing technologies and may relyupon existing principles to satisfy this requirement.

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3 The research must be intended to eliminate uncertainty concerning the development or improvement of a businesscomponent. Uncertainty exists if the capability or methodfor developing the business component is unknown or if theappropriate design of the business component is unknown.

4 Elimination of the technical uncertainty must be accomplished through a process of experimentation, including systematic trial and error, modelling or simulation.

Examples of qualifying activities may include:

Designing new products

Developing new, improved or more reliable products, processes or formulas

Developing prototypes

Designing tools, jigs, moulds or dies

Developing patentable products or processes

Performing certification testing

Conducting testing of new concepts and technology

Developing or improving production or manufacturing processes

Improving manufacturing facilities

Expending resources on outside consultants or contractors to do any of the above-stated activities.

Eligible industries and sectors

The US research tax credit is not limited to any specific industry or sector. Thus, numerous industries may qualifyfor a credit. Companies in the following industries have successfully claimed the research tax credit.

Aerospace and Defense

Agriculture and Farming

Architectural and Engineering

Boat Manufacturing

Chemical Manufacturing

Computer Product Manufacturing

Construction

Custom Manufacturing

Dental Laboratories

Design-build Contracting

Electrical Equipment Manufacturing

Energy and Utilities

Food Processing

High Tech

Medical Device Manufacturing

Metal Casting and Fabrication

Oil and Gas

Pharmaceutical and Biotech

Plastics and Rubber Manufacturing

Software Development

Tool and Die

Transportation Equipment Manufacturing

Conclusion

As you can readily determine, the R&D tax credit is an excellent instrument to reduce US Federal and State incometax liabilities and, thereby, retain cash in an otherwise tighteconomy. As companies budget for expenditures allocatedto research, taxpayers and their advisors should take intoaccount the ability to subsidise research efforts with the USR&D tax credit.


Mike Devereux IIMueller Prost PCT: +1 314 8622070


Guyana tax rate changesThe following three changes to the Guyana tax regime cameinto effect on 1 January 2011:

Corporation tax for commercial companies - rate reduced from 45% to 40%.

Corporation tax for non-commercial companies - rate reduced from 35% to 30%.

Personal Tax - statutory allowance increased fromG$420,000 to G$ 480,000 per annum.

Switzerland prepares to negotiate with US over taxesSwitzerland has made the first move to establish the “normalisation” of tax arrangements with the US. While thecountry’s finance minister has said that negotiations havenot yet begun, she indicated that Switzerland would pursuea deal largely similar to that brokered with Germany and theUK. Under those agreements, Switzerland agreed to tax theincome of non-residents and forward the proceeds to theirrespective governments – effectively trading taxes for secrecy.

The country is also holding a series of referenda to debatevarious tax breaks which have historically attracted high networth individuals. The canton of Zurich’s abolition of the taxbreaks two years ago resulted in the departure of almosthalf of all “tax exiles”. Switzerland has been a particularlypopular tax alternative to the UK which has lost two of itslargest hedge funds, Brevan Howard and Bluecrest, to thealpine nation.

Mauritius and India set up group to re-negotiate DTTMauritius and India have agreed to create a joint workinggroup to re-evaluate the two countries’ double taxationtreaty (DTT). India’s politicians are under pressure to renegotiate the DTT, signed in 1983, after a recent series ofscandals. Some of the “black money” generated by India’s

corruption debacles is said to have been laundered in Mauritius before coming back into India. Mauritius has longbeen India’s largest offshore centre, handling about 44% ofthe latter’s total foreign direct investment. Concern had alsobeen mounting that India might unilaterally renege on manyof its DTTs, including the one with Mauritius.

New zero rating for income from the sale of shares in Russian companiesFrom 2011, income from the sale or other disposal ofshares in the authorised capital of Russian entities andshares of Russian joint-stock companies are zero rated.

The exemption is applied if, at the date of the sale ofshares, a taxpayer has owned them for more than five years and:

during the entire period of ownership, the shares are securities that are not traded in the securities market, or

the shares are securities traded in the securities marketbut, during the entire period of ownership, they areshares in the high-tech (innovation) economy sector, or

at the acquisition date, the shares are securities that arenot traded in the securities market but, at the date ofsale, they are related to shares traded in the securitiesmarket, and they are shares in companies in the high-tech (innovation) economy sector.

The exemption applies in respect of shares acquired by thetaxpayer after 1 January 2011.


Nadejda OrlovaTax and Law PartnerFBKT: + 7 495 737 53 53

F: +7 495 737 53 47


News in Brief


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IMPORTANT DISCLAIMER: This publication has been distributed on the express terms and understanding that the authors are not responsible for the results of any actions which are undertaken on the basis of the informationwhich is contained within this publication, nor for any error in, or omission from,this publication.

The publishers and the authors expressly disclaim all and any liability and responsibility to any person, entity or corporation who acts or fails to act as aconsequence of any reliance upon the whole or any part of the contents of thispublication.

Accordingly no person, entity or corporation should act or rely upon any matteror information as contained or implied within this publication without first obtainingadvice from an appropriately qualified professional person or firm of advisors, andensuring that such advice specifically relates to their particular circumstances.

PKF International is a network of legally independent member firms administeredby PKF International Limited (PKFI). Neither PKFI nor the member firms of thenetwork generally accept any responsibility or liability for the actions or inactionson the part of any individual member firm or firms

PKF International Ltd

Farringdon Place

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London EC1M 3AP

Tel: 020 7065 0104

Fax: 020 7065 0194

www.pkf.com

June 2011

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International Tax Alert - PKF | Assurance, Audit, Tax, … international tax alert... · · 2011-06-12Welcome to the June 2011 edition of the PKF International Tax Alert ... to