KPMG’S GICT European Roundtable 2013

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International Corporate Tax – Global Team (GICT)

GICT

European Roundtable

Zurich September 13, 2013




.

Notice

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materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax

analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are subject to

change. Applicability of the information to specific situations should be determined through

consultation with your tax adviser.




.

Dated Material

THE MATERIAL CONTAINED IN THIS PRESENTATION IS CURRENT AS OF THE DATE

PRODUCED. THERE CAN BE NO GUARANTEE THAT SUCH INFORMATION IS ACCURATE AS

OF THE DATE IT IS RECEIVED OR THAT IT WILL CONTINUE TO BE ACCURATE IN THE

FUTURE. IN PARTICULAR, THE MATERIALS HAVE NOT BEEN AND WILL NOT BE UPDATED TO

INCORPORATE ANY TECHNICAL CHANGES TO THE CONTENT OR TO REFLECT ANY

MODIFICATIONS TO A TAX SERVICE OFFERED SINCE THE PRODUCTION DATE.




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Agenda

9:00 – 9:45 Introduction, BEPS, EU Action Plan and Swiss Tax Reform III

9:45 - 10:10 Hot Topics

10.10 – 10.30 Structures

10.30 – 11.00 Coffee Break

11.00– 12:30 Structures

12:30 – 13:15 Lunch

13:15 – 14:15 Country workshops

14:15– 16:00 Client meetings




.

Who is Who

Patrick Seroin

Partner, Tax Practice, Fidal in

France

Tel: +33 1 55 68 15 93

[email protected]

Martine Moor

Partner, Tax Practice, KPMG

in the Netherlands

Tel: +31 20 656 10 06

[email protected]

Oliver Dörfler


in Germany

Tel: +49 211 475 6314

[email protected]

Fred Gander

Principal, Tax Practice,

KPMG in the US, based in

the UK

Tel: +44 20 7311 2046

[email protected]

Andreas Müller


in Switzerland

Tel: +41 44 249 33 94

[email protected]




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Who is Who

Alastair Slater

Senior Manager, Tax Practice,

KPMG in the UK

Tel: +44 20 76 94 14 17

[email protected]

Ayhan Ustun


in Turkey

Tel: +902166819000

[email protected]

Abe Zhao Partner, Tax Practice, KPMG

in China

Tel: +86 10 8508 7906

[email protected]

Robert Wallingford


in Russia

Tel: +7 495 937 4477

[email protected]

Louis Thomas

Partner, Tax Practice, KPMG in

Luxembourg

Tel +35 222 5151 5527

[email protected]




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Introduction




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OECD‘s BEPS Action Plan

• Action 1: Address the tax challenges of digital economy

• Action 2: Neutralize the effects of hybrid mismatch arrangements

• Action 3: Strengthen CFC rules

• Action 4: Limit base erosion via interest deductions and other financial payments

• Action 5: Counter harmful tax practices more effectively, taking into account transparency

and substance

• Action 6: Prevent treaty abuse

• Action 7: Prevent the artificial avoidance of PE status

• Action 8-10: Assure that transfer pricing outcomes are in line with value creation

• Action 11: Establish methodologies to collect and analyze data on BEPS and the actions to

address it

• Action 12: Require taxpayers to disclose their aggressive tax planning arrangements

• Action 13: Re-examine transfer pricing documentation

• Action 14: Make dispute resolution mechanisms more effective

• Action 15: Develop a multilateral instrument




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EU Action Plan

European Parliament Resolutions on aggressive tax

planning (19 April 2012)

Advisory to Commission and

Council

European Commission

Communications on aggressive tax

planning and good tax governance

(6 December 2012):

1. Tax havens

2. Anti-hybrid design

3. New impetus for Code of

Conduct group

4. EU Platform on good

governance: EU taxpayer

charter (as part of CSR)

5. Increase tax transparency and

information exchange within EU

Recommendation to EU

Member States

Coordinated blacklisting

Avoid mismatches

Influencing tax payer behavior

Various measures




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EU Action Plan

European Council

(28 Member States)

EU Country-by-country tax reporting EU law

EU Code of Conduct

group

1. Anti-hybrids

2. Spontaneous exchange of

information APAs/rulings

3. Switzerland

4. Guidance notes tax regimes

EU political agreement to

be implemented

domestically

Council working party EU CCCTB Negotiations stalling

Council working party EU FTT tax Enhanced relationship

Council working party EU Mutual assistance directive Proposal for automatic

exchange of information




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Swiss Corporate Tax Reform III – Selected Questions

• Reduction of Cantonal Income Tax Rates

Minimal taxation?

• IP Box Regime

EU acceptance?

Broad definition of qualifying IP

Self-developed versus purchased IP?

UK approach of definition of qualifying tax base?

• R&D Incentives

Bullet proof?

• Notional Interest Deduction Regime

Qualification as hybrid instrument?

Qualification of qualifying equity?




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Swiss Corporate Tax Reform III - Selected Questions

• Changes in the Participation Exemption Regime

Does CH need CFC rules or subject to tax or active business requirements?

• Abolishment of Swiss Stamp Duty

• Informal Capital Contribution Concept/Excess Profit Ruling

How can such set-ups survive within the EU?

• Irish Double Decker or CV/BV Structures

Lifetime of such structures?




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Country Updates




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China




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Value Added Tax Reforms

Expansion of scope

Chongqing

Shenzhen

Shanghai

Jiangsu

Tianjin

Beijing

2013 Jiangsu and Anhui

Beijing Sept. 1, 2012

Oct. 1, 2012

Shanghai Jan. 1, 2012

Nov. 1, 2012

Fujian (including Xiamen)

Guangdong (including

Shenzhen)

Dec. 1, 2012

Aug 1, 2013

Tianjin, Zhejiang and Hubei

The remaining cities and

provinces in China

Beijing

Tib

et

Jian

gxi Fuji

an

Tianjin

Anhui

Shanghai

Zhejiang

Fujian

Guangdong

Hubei

Jiangsu




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China - Switzerland FTA

• Signed 06 July 2013

• Expected to take effect by mid-2014

Ratification required in China

• General framework agreement

Operating procedures expected

• Covers 99.99% of Swiss exports to China and 96.5% of China exports to Switzerland

Different outcome on trade balance based on different statistics

• What to expect on Day 1:

99.7% of Chinese exports to Switzerland immediately exempt from duties

Slow tariff elimination process begins for Switzerland exports to China (zero duty

target on 84.2% of Swiss exports in China within 15 years)

Existing rate is more than 5%

Many agricultural products are excluded from tariff reductions




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2013 Circular 19: Typical Secondment

Fundamental Criteria

• Whether the Home Entity bears all or part of the responsibilities and risks in relation to the work products

of the Secondees

• Whether it is the Home Entity that normally reviews and appraises the job performance of the Secondees

Reference Factors

• Appropriate labeling

• No over-reimbursement

• IIT settlement

• The Home Entity decides number, qualification, remuneration and working locations




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2013 Circular 165: Guidance on “Unfavorable Factor”

• It is OK if the applicant does not make any distributions to a non-HK resident enterprise

• A single-project holding company should not be denied any DTA benefits simply based on the fact

that it has only one investment

• The tax authorities should not equate “assets” with the registered capital of the applicant

• The tax authorities should not solely consider the number of staff and the size of staff costs of the

applicant in assessing whether its staffing level is commensurate with its income

• The mere fact that the applicant’s shares are controlled by a higher-level corporation should not

negate the existence of rights and control or disposal of the applicant

• The fact that the offshore dividend income is exempt in HK should not have a negative implication for

determining the beneficial ownership of the income




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2013 Announcement 40

• Advance tax clearance for certain trade-related outbound payment is abolished

• For each covered remittance that exceeds USD 50,000, the Chinese payor needs to perform a tax

recordal filing with its in-charge state tax bureau (ISTB), unless the remittance falls into an

exemption list

• The ISTB will not review the tax position associated with the remittance during the recordal filing

• In the post-filing examination, if the ISTB discovers that the Chinese taxes have not been properly

paid, it will issue a notice of tax deficiency to the taxpayer or the withholding agent, and may impose

a penalty as well as late payment surcharges




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France




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Recent Changes in the France - Switzerland Relationship:

New DTT on Inheritance Taxes & Swiss Tax Administrative Assistance Act

New Inheritance Tax Treaty

The current DTT on inheritance taxes dates from

1953

Further to recent negotiations, a new DTT has

been concluded by France and Switzerland in July

2013. Such DTT is not yet in force

The revised treaty provides that :

• Any inheritance and gifts granted to French tax

resident are subject to both French and Swiss

inheritance taxes (Swiss taxes are offset

against French taxes)

• Shares in real estate companies are qualified

as real estate

• Improved exchange of information

Swiss Tax Administrative Assistance Act

Improvement of international tax administrative

assistance through the reform of the Tax

Assistance Act (under discussion/consultation until

September 18, 2013) with a view to comply with

international standards for the exchange of

information by :

• Postponing the notification of persons who are

concerned by an administrative assistance

request (subject to conditions, e.g. the

notification would jeopardize the outcome of the

investigations)

• Clarifying the applicable procedure for

collective requests

• Admitting, in certain cases, the treatment of

requests based on stolen data




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Recent and Expected Changes: Anti-abuse Provisions

Anti Debt-push Down Mechanism (“Carrez”

Amendment)

Restriction on the deduction of interest on loans

taken for acquisitions of participation, if

management/control of the target is not performed

in France

Immediate Action Required

• Processes to be documented

• Period of justification:

Acquisitions before 2012/01/01: FY 2013 (if

FYs end on December 31)

Other acquisitions: until the end of the FY

following the acquisition

New Definition of the Notion of “Abuse of Law”

(measure currently discussed in Parliament)

The “abuse of law” procedure currently enables the

tax authorities to disregard structures/operations

that are (i) either exclusively tax driven, or (ii)

fictitious

Proposed Change

• An exclusive tax motivation would no longer be

required – an essential tax motivation would

suffice

• The new definition would apply to tax

reassessment notices sent as from January 1,

2014 – hence a retroactive tax effect!

Subject to appropriateness of retroactive effect

with constitutional principles, an immediate

screening of structures implemented in the past is

recommended

Directly aimed at fighting hybrid mismatches

and other optimizations

“BEPS” spirit




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Recent and Expected Changes: Transfer Pricing

Transfer Pricing Documentation Requirements

In place since FY 2010

Current requirement: hand over TPD at the

beginning of tax audit

Possible Harshening currently Discussed in

Parliament:

• Either obligation to file full documentation each

year together with the annual CIT return

• or file of a lighter TPD yearly (and keep the full

TPD available for the inspector in case of tax

audit)

Stricter Scrutiny of Transfer Pricing, notably on

Cross-border Business Restructuring and Exit

Taxation (measures currently discussed in

Parliament)

Draft bill under discussion aims at reversing

burden of proof on absence of transfer of profit, in

case of transfer of risks and functions to a related

entity outside France

This would lead to an obligation for FrenchCo to:

• Prove that an arm’s length compensation has

been received in consideration of the transfer

and

• Provide the authorities with the new method /

modalities of determination of income to be

received by the transferee, even if located

outside France

Possible application as from FYs ending on

December 31, 2013 – hence a need to

immediately monitor the operational restructurings

performed (“small” retroactivity)

“BEPS” spirit




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Recent Changes: Obligation to Submit Accounting Records in a

Dematerialized Format

Article 14 of the Amended Finance Act for 2012 brought changes regarding the submission of the file of

accounting records when e-audits are carried out

Requirement to Submit Accounting Records in a Dematerialized Format

• Up until now, the submission of accounting records in a dematerialized format was optional

• It is now a mandatory requirement, for all businesses subject to a tax audit and which keep their

accounts using IT systems, to submit their accountings records in a dematerialized format for the

purpose of an accounting audit, regardless of their business or tax regime

• The files should be submitted as soon as the audit work begins (in a format that is to be defined by

decree)

• Penalties in case of failure to submit accounting records in a dematerialized format (up to 0.5% of the

sales turnover)

This measure shall apply to accounting audits for which an audit notice is sent after January 1, 2014 (i.e.,

audits covering fiscal years 2011,2012 and 2013, and possibly previous years if the company is in a tax-

loss position)




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Netherlands




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Netherlands Tax System

Tax Rate per January 1, 2013

• Statutory corporate income tax rate of 25% (20% for the first 200,000 Euro).

Some Key Netherlands Tax Features

• 100% participation exemption on dividends and capital gains (5% shareholding/no low taxed passive

investment subsidiary). Liquidation losses tax deductible

• 15% dividend withholding tax on dividends: often reduced to nil under tax treaty/PS Directive

• 0% withholding tax on interest and royalties

• Wide tax treaty network with over 90 countries reducing withholding taxes on dividends, interests and

royalties (often to 0%)

• Professional advance tax ruling practice

• Fiscal unity regime for Dutch tax residents in case of 95% ownership (consolidated tax returns)

• Innovation box resulting in an effective corporate tax rate of 5% on profits allocable to self-developed IP

• Favourable tax treatment for foreign employees (30% tax ruling)




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Recent Tax Developments

Recent Tax Developments

• Introduction of limiting excessive deduction of interest relating to the financing of participations as per

financial years commencing on or after January 1, 2013; see next slide

• Abolition of the Dutch thin capitalization rules as per financial years commencing on or after January 1,

2013

• 2013: announced: 50% depreciation at will to support capital investments

• 2012 + 2013: 16% employer surtax for wages EUR >150k

• General VAT rate of 21% since October 1, 2012

• 2012: New company law: Flex BV (facilitates for example: tracking stock and non voting shares)

• Horizontal monitoring / enhanced relationship

• Dutch government supports Dutch fiscal climate including support for Dutch holding and financing

companies provided sufficient substance is in place




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Public Debate

• In the Dutch Press and the Dutch Parliament the role of the Netherlands as an international

holding location has been the subject of discussions over the last half year

• Dutch government stresses that the Netherlands is not a tax haven and that the economic

benefits of the Netherlands as an international finance and services hub are not to be

underestimated. Report published on 11 June 2013 indicates 10,000 jobs and € 3 billion taxes

related to this sector

• Generally, the Netherlands do not require a minimum substance for holding activities, only for

finance and licensing entities a certain minimum substance is required, which can be provided by

a trust company

• Dutch APA practice remained largely remained unaffected by the debate, although DTA are

cautious about being a good treaty partner; certain amount of FTE’s and exchange of information

may be part of the package when applying for an APA




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Public Debate

• Dutch government published reaction on 30 August 2013:

Main message is that the Dutch government focuses primarily on global measures through

discussions within the OECD, G20 and EU, not individual measures by the Netherlands

The Netherlands will strive to improve transparency

• Several general measures are suggested:

Substance requirements (real risk and effective management) will apply to more companies

Spontaneous exchange of information to treaty partners if substance requirements are not met

Exchange of information for certain finance companies with an APA, if no activities other than

licensing or financing in the Netherlands

APA requests for holding companies will only be processed if the group has certain economic

nexus with the Netherlands

• More specific measures regarding developing countries:

Renegotiation and inclusion of anti-abuse measures in treaties with 23 developing countries

Technical support to tax authorities of developing countries




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Public Debate: Dutch Government’s Reaction on 30 August 2013

Measures

1.“At present – in contrast to many other countries – the Netherlands makes certain requirements of link companies that receive

interest or royalty payments from other countries and pay out interest or royalties to other countries (these are known as financial

service entities (dienstverleningslichamen)) when they wish to obtain advance certainty from the Dutch Tax Administration’s APA/ATR

team. These requirements, which state that the management and the accounting must be conducted with capital that is consistent with

the functions and risks of the company, will be included amongst the rules that apply to all such companies, even those that do not

request advance certainty. This will be linked to the requirement that, when they rely on the application of a tax treaty with the

Netherlands in their dealings in another country, their tax return must state whether they comply with these requirements. The

Netherlands will spontaneously provide information about companies that do not meet the requirements to the relevant treaty partner.

That state will then have all the relevant information it needs to assess whether the treaty benefits have been relied on with good

reason.

2. Additionally, the Dutch Tax Administration will spontaneously share with foreign tax administrations the contents of APAs (Advance

Pricing Agreements, advance certainty about transfer prices to be used in a group context) agreed with tax-paying entities in cases in

which the group has no activities in the Netherlands other than receiving and paying out interest or royalties through the link company.

3. The government wants to take a third measure in the area of APAs and ATRs. Requests from companies that wish to have advance

certainty about their “holding company activities” – receiving and paying out dividends – will only be considered when the group in

which they operate has sufficient nexus with the Netherlands. Nexus can consist of actual presence or a serious plan to create that

nexus. We may speak of actual presence if companies meet the requirements applicable to financial service entities. We think it is

undesirable for the Dutch Tax Administration to deploy its capacity in cases in which there are no such ties.

4. In relation to developing countries, the Netherlands will suggest to Zambia that the bilateral treaty be updated and will approach the

other developing countries about whether they wish to add anti-abuse provisions to the existing tax treaties. In concluding new treaties,

what anti-abuse provisions they should include will be considered in close cooperation with the developing countries.

Wherever possible, the Netherlands will further expand its support to capacity building in tax administrations in the partner countries

and will release extra funds for this if necessary. In the end, capacity building is one of the most important ways in which developing

countries can combat losses due to tax avoidance and tax evasion.

5. Finally, in the context of restricting integrity risks, the government proposes tightening the Regulations Governing Sound Operational

Practices under the Trust Offices (Supervision) Act in consultation with De Nederlandsche Bank.”




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Turkey




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Corporate Income Tax Rate

• 20% flat rate

• Reduced corporate tax rates may be applicable under Investment Incentive Regime

Capital Taxes and Duties

• Equity capital is not subject to taxes and duties

• Only 0.04% fund contribution payable on registered capital

Corporate Income Tax Consolidation Rules

• Not applicable (each company taxed on stand alone basis)

Tax Losses

• Carry forward 5 years (but no revaluation)

• Carry back not available

• Tax losses not impacted by change of shareholding in the company

Personal Income Tax

• Domestic rates from 15% to 35%

• Certain exemptions may be available

Indirect Tax/VAT

• General rate of 18%; reduced rates 1% and 8%; exemptions are available such as export of goods and

services; transactions of banks and insurance companies are not subject to VAT

Introduction to the Turkish Tax System




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Additional Slides




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France




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Recent Changes: Update of the List of Non-Cooperative Jurisdictions

Purpose of the List

• Transactions involving entities/flows with Non-

Cooperative Jurisdictions (“NCJ”) are subject to

restrictive tax measures, with respect notably to:

Withholding taxes (higher rates up to 75%)

Rebuttal of the participation exemption regime

(dividends / capital gains)

Transfer pricing (reversal of burden of proof)

Etc

List of NCJs for 2012

• Anguilla, Belize, Brunei, Cook Islands, Costa

Rica, Dominica, Grenada, Guatemala, Liberia,

Marshall Islands, Montserrat, Nauru, Niue,

Panama, Philippines, Saint Vincent and the

Grenadines, Oman, Turks and Caicos Islands

Update for 2012

• Territory removed: Philippines

• Territories added: BVI, Jersey, Bermuda




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Recent Changes: E-invoicing

Relaxation of the Rules for Issuing Electronic

Invoices

Previously in France, only two e-invoicing systems

were permitted:

• EDI (i.e. dematerialized invoices)

• Electronic signatures (signed invoices)

As from 2013, a broader definition of e-invoicing is

adopted: an invoice issued and received in any

electronic format whatsoever

• Businesses may use any technical solution so

long as they set up documented and on-going

controls to establish a “reliable audit trail”

between the issued or received invoice and the

delivery of the underlying goods or the

performance of underlying services

• A need to guarantee the authenticity of the

source (guarantee of the supplier’s of the

issuer’s identity of the content (no alteration of

the content) and legibility from when the invoice

is issued up until the end of the retention period

• Recipient’s acceptance required

The authorities’ guidelines are expected to be

published at the end of June 2013

Practical impacts

• Checking if the previous electronic signature put

in place (if applicable) is still compliant

• Configuring invoicing systems (new required

information, issuance period)

• Advantages of using e-invoicing : reduction of

costs related to manual processing (risk of

errors)




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“Trust-based” Relationship

Introduction of an optional “trust-based”

relationship between the tax authorities and

taxpayers (launched in July 2013)

• Yearly review by the tax authorities of the

taxpayer’s obligations (transparency and

cooperation of the taxpayer required / no benefit

of full procedural guarantees!)

• In exchange of a legal security (binding opinion

to receive from the tax authorities)

• However, greater firmness of the tax authorities

outside this “trust-based” relationship…

• Lack of attractivity to date




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Germany




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Treaty/Directive Shopping

• German treaty/directive shopping rules were

amended with effect of 2012

• Significant substance requirements

• Apportionment clause introduced

• Ability to claim WHT refund on dividends and

royalties depends on other income earned by

foreign shareholders

Dividend Dividend

Parent Co

Hol Co

Sub 1 Sub 2 GmbH




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Tax Act on Simplification of Company Taxation

Tightening of Dual Consolidated Loss Rules

• No deduction of tax loss generated within Organschaft regime

if deducted abroad

• Applicable to all open tax years

• Particular relevance for KG holding structures

KG

Loan

Organschaft

US

Sub Cos




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Recent Law hanges

Hybrid Debt Arrangements (Germany as lender)

• Income on equity like hybrid debt is 95% tax exempt (corporate tax, trade tax) in Germany

• Application of domestic participation exemption

• New: Denial of dividend exemption to the extent payments are deductible at debtor level (trade tax

exemption may still be achievable)

• New rules generally applicable as of 1 January 2014

Real Estate Transfer Tax (RETT)

• RETT also triggered in case of direct / indirect transfers in real estate owning entities

• Group internal reorganizations generally not exempted

• New: Repeal of RETT blocker in structures using KGs

• New rules apply as of 7 June 2013




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Luxembourg




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Recent Changes: Luxembourg Corporate Taxation

Increase of Aggregate Corporate Tax Rate in 2013 from 28.80% to 29.22% (Luxembourg-City)

Minimum Corporate Flat Tax

• Holding and/or financing companies (« SoParFi »): from EUR 1,575 to EUR 3,210 per annum (incl. solidarity

surcharge)

• Other activities: EUR 500 to EUR 20,000 per annum depending on balance sheet total of the company

IP Tax Regime

• 80% exemption system still applicable to recurring income and capital gains (patents, trademarks, designs &

models, software, copyrights, domain names…)

• Discussion to widen the IP regime

No Change in Participation Exemption Rules

No Change in Tax Ruling Practice




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Netherlands




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Structures to Finance Acquisitions

• Over the last few years, the discussion regarding the erosion of the Dutch tax base mainly

focused on interest deductions. Several articles limiting interest deductions have been introduced

in this respect:

Article 10a: no interest deduction if intra-group loans are related to tainted transactions

(dividends, capital contributions and intra-group transfers) and if interest income is not subject

to sufficient taxation (10%)

Article 15ad: limited interest deduction if loans are used to buy Dutch target which is included

in a Dutch fiscal unity

Article 13l: limited interest deduction if value of (foreign) participations exceeds the fiscal

equity.

As of 1 January 2013 no fixed debt-equity ratios

• For bona fide business transactions and expansions of operational businesses the above

limitations generally do not have a large impact

• No further restrictions of the participation exemption expected

• No anti-hybrid rules, so participation exemption may apply, even if deduction abroad

• Good relationship with Dutch tax authorities, willing to confirm tax treatment in advance




.

Participation Financing Regime: Section 13l CITA

Amendment Rule Escapes

• Introduction of specific rules

for participation financing in

section 13l CITA per

January 1, 2013

• Additional rule besides anti-base

erosion rules

• Only applies if the sum of the

acquisition price of the participations

exceeds the equity of the Dutch parent.

• Excessive participation debt =

acquisition price of participations -/-

(fiscal) equity of the taxpayer

• Non deductible interest =

• Average participation debt * total

interest costs -/- 750k

Average total debt

• Effect: excessive interest not

deductible.

• In connection with this regime, the thin-

cap rules are abolished as per 1-1-2013

• Also applies for reorganisations

• Interest up to € 750,000

always deductible

• Expansion investments

are not taken into account

when calculating the

excessive participation

debt

• Acquisitions, expansions

and capital contributions

are not to be taken into

account when

determining the

participation debt if and

when they relate to the

operating activities in a

certain period, which

covers the 12 months

preceding the operational

expansion through to the

following 12 months

Target NL

Acquisition

Holding

Bank

Bank debt

Foreign

subsidiary




.

Interest

Foreign Co

Dutch

Hol Co Loan

Bank

Interest Deduction for Participations: Bosal Gap

• Bill on Budget agreement for Dutch Stability

Pact

• Limits excessive deduction of interest relating

to a participation in a subsidiary, i.e. ‘Bosal

interest’ (section 13l Dutch CITA)

• Measures into effect on 1 January 2013

• Thin capitalization rules in the Netherlands are

abolished as of 2013

• “Acquisition debt”: broad scope

- includes 3rd party loans

• Safe harbour # 1: EUR 750K, below this the

interest deductible in full

• What is excessive?

Interest

Loan

Foreign Sub




.

Limitation on Interest Deduction for Participations: Bosal Gap

• The amount of debt that is considered to relate to the financing of participations (participation debt) is

calculated as follows:

Acquisition price of the participations -/- the fiscal equity of the taxpayer

• The non-deductible excessive interest is then calculated as follows:

Average participation debt x Total interest and costs -/- Euro 750K threshhold

Average total debt

Balance sheet (in Euro million):

Profit before interest deduction: 25

Interest paid: 30

Taxable profit before 13l: 25 -/- 30 = -5

Participation loan: 400 -/- 250 = 150

Disallowed interest:

Participation debt / total debt x interest paid

150/450 x 30 = 10 -/- 0.75 threshold = 9.25

Tax deductible interest: 30 -/- 9.25 = 20.75

Taxable profit after art. 13l: 25 -/- 20.75 = +4.25

Participation 400 Equity 250

Other assets 300 Loans 450




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Expansion Investments

• Exception for ‘expansion investments’: acquisitions and contributions if these relate to an expansion of the

operating activities of the group (and transferred to the Dutch company within 12 months period)

• Production-, distribution- and sales activities can be regarded as operating activities. Portfolio investments

are not regarded a part of the operating activities

But no Exception if:

a) the interest in respect of the financing of such an expansion is also deducted elsewhere in the

group (double dip);

b) a double interest deduction is created (hybrid loans, financing through a group company subject to

a low rate of tax); or

c) the participation would not have been held by the Dutch taxpayer, but for the interest deduction

• In respect of situation b) if the taxpayer can prove that ultimately the interest income is subject to a

reasonable level of taxation (>10%), then the expansion investment exception also applies for such a

situation

• If the effective tax rate is less than 10%, then the expansion investment exception may still apply if the

taxpayer can prove that the funding arrangement in connection with the transaction was substantially

driven by business reasons




.


Active financing activities

• Debts are not taken into account in the total debt, nor interest on such debts, if they relate to receivables

which are kept in relation to active finance activities performed by the Dutch company

• Whether finance activities are active depends on the following factors:

Not incidentally arranging and executing financial transactions

Via own bank accounts

For group companies

Qualified personnel

Offices which are equipped with facilities common for financial services

Pre 2006 acquisitions

• Optional: the taxpayer can leave out 90% of the acquisition price of participations acquired or expanded in

a financial year started on or before 1 January 2006.




.

Russia




.

Trends in International Taxation

Tax presence of

foreign companies

in Russia

Relationships with

offshore

jurisdictions

“Beneficial

ownership” concept

Exchange of

information

“Substance over

form” approach

Tax Policy for 2013-2015

Tax policy for 2013-2015 Court practice Clarifications of the Russian Ministry of Finance and tax authorities

Protocols to DTTs

Court practice

Changing

approach of

Russian tax

authorities to

international

taxation




.

Changes in Tax Legislation and Practice

Tax presence of foreign companies in Russia

• Plans to introduce the concept of tax residence of legal entities into tax legislation

“Beneficial Ownership” Concept

• Changed approach of the tax and Ministry of Finance authorities to the definition of beneficial

owner of interest income derived from euro bonds

• Plans to introduce into the Russian Tax Code a definition of beneficial owner




.

Changes in Tax Legislation and Practice

Exchange of Information

• Changes by Protocols to DTTs with Cyprus, Luxembourg, Switzerland

• Prospective conclusion of separate information exchange agreements (with offshore

jurisdictions?)

“Substance over Form” Approach

• Challenging financial structures on the basis of “thin capitalization” rules and application of

“substance over form” approach

Relationships with Offshore Jurisdictions

• Attempts to toughen the tax regime re transactions with foreign companies registered in

jurisdictions with preferential tax regime ("CFC rules"), Tax Policy Plan for 2014-2016

• Attempts to make changes to the civil law regarding the disclosure of information on the

beneficiaries of entities registered in offshore jurisdictions, Tax Policy Plan for 2014-2016




.

Impact on International Structures

• Increased attention to the place of effective management of foreign

companies and substance requirements in foreign jurisdictions to avoid creation

taxable presence in Russia

• Additional requirements to confirmation of the beneficial owner of income for

DTT application

• Challenging of “back-to-back” structures

• Russian tax authorities could receive information on foreign structure of the

Russian groups

• Foreign tax authorities could start to assist the Russian tax authorities to

collect taxes

• Change of the approach of tax authorities to challenge the international

structures and operations

• Necessity of justification of the economic substance of transactions

• Additional control and tax expenses relating to transactions with offshores:

limitation of cost deduction, withholding taxation of other income etc

• Taxation of profits of offshore subsidiaries

1

2

3

4

5




.

Beneficial Ownership Concept

dividends/royalties/interest

dividends/royalties/interest

Offshore jurisdiction

Jurisdiction with DTT

RF

The right to apply tax benefits according to

DTT is provided only if the recipient is

• the beneficial owner of the income; and

• is not an intermediary, agent, that has

limited rights with respect to the

disposal of income

Foreign Co

Foreign Co

Op Co

• The definition is stipulated in Comments to OECD Model Convention

• Article 11 to DTT with Cyprus (point 1) does not directly contain this condition for

application of the benefit

• The right to apply the benefit should be determined by the Russian tax authorities.




.

• Foreign company has the actual right on income if it has legal rights to receive such income (i.e. contract)

Methodological of the tax authorities Recommendations

• The beneficial owner of income should determine the subsequent economic fate of income

Letters of the Russian Ministry of Finance (2010, 2011, 2012)

• Arguments based on OECD comments: the court practice is in favour of taxpayers

Court practice

• It is proposed to insert the definition into the Russian Tax Code

General trends of the tax policy for 2013-2015 years

Possible

interpretations

Beneficial Ownership Concept

The definition is not stipulated in the current Russian legislation




.

Thin Capitalization Rules

Thin Capitalization Rules are Applied to Controlled Debt due

to:

• foreign company that directly or indirectly owns more than 20%

of the charter capital of the borrower

• Russian company that is affiliated with such foreign company

• debt guaranteed by foreign shareholder or its Russian affiliates

Implications of the Use of Thin Capitalization Rules

• The maximum amount of deductible interest expense for profits

tax purposes is calculated

• The difference is treated as dividends:

Does not decrease the profits tax base

Subject to withholding tax

Main Trends of the Tax Practice:

• DTT provisions with respect to non-

discrimination/unlimited deduction of

interest generally do not override the

thin capitalization rules

• Challenges of loans from foreign

“sister” company




.

Germany

Russia

loa

n

inte

res

t

on

loa

n

For Taxpayer:

Conclusions of Commercial

Court of Moscow in the

case № A40-82055/11-91-

354:

• provisions of p. 3 of

Protocol to Russia

Germany DTT provides for

unlimited interest deduction

• Conclusions made by

Presidium of Supreme

Commercial Court of the

Russian Federation in case

dated 15.11.2011 №

8654/11 are not applicable

since in this case Supreme

Commercial Court

analyzed different grounds

for interest deduction

Against Taxpayer:

Conclusions of Commercial

Court of Moscow in the

case № A40-37344/11-107-

60:

• Conclusions made by

Presidium of Supreme

Commercial Court of the

Russian Federation in case

dated 15.11.2011 №

8654/11 are applicable.

Thus, local Russian thin

cap rules stipulated by

item 2 of Art. 269 of RF Tax

Code should be applied

Loan and interest

were fully paid

Thin Capitalization Rules

Different Courts Reach Different Conclusions on Applicability of DTT to Thin Cap Facts

Russian

Co

Foreign Co




.

Turkey




.

Overview of the General Tax Environment

for Foreign Investors




.

Thin Capitalization

• Limitation of interest deduction only applies to group interest

• Debt-equity ratio is 3:1 (not applicable to banks)

• External debt secured by group may fall under thin capitalization rules if secured by “cash guarantee”

• If thin capitalization rules become applicable, interest (on the exceeding portion) is non-deductible for corporate tax plus it is re-characterized as dividend for withholding tax perspective

Interest Withholding Tax

• 10% withholding tax on interest paid to foreign companies (0% on interest paid to banks)

Reverse Charge VAT (18%) on Interest paid to Foreign Companies (exempt for interest paid to banks)

Stamp Tax Charged on Loan Contracts (exempt for bank contracts)

Banking and Insurance Transaction Tax (BITT) 5% on Interest paid to Turkish Banks (not applicable if

the lender is a foreign entity)

Resource Utilization Support Fund on Foreign Loans

• Only applicable on loans from a foreign source)

• RUSF applies as 3% of principle on a foreign currency loan which may be reduced or eliminated totally

depending on the maturity (0% if maturity > 3 year)

• RUSF applies as 3% of interest only on a TL loan irrespective of the maturity

Tax Issues Related to Financing




.

Mergers

• A legal merger between two Turkish companies can qualify as tax free subject to certain provisions. The basic rule is to conduct the merger on the basis of book values (i.e. No step up, no carve out)

De-Mergers

• Real estate properties, participation shares or whole production/service units can be transferred to another company as capital in-kind; which is qualified as a tax free de-merger subject to conditions

• The basic rule is to perform the de-merger on the basis of book values hence the acquiring entity takes over the potential tax liability between fair value and book value (in case of future exit). Certain holding period and procedural requirements apply

Conversion of Forms

• Conversion of legal forms can be done tax free subject to similar provisions that apply for mergers

Share Swaps

• Share Swaps in between two Turkish entities can be done tax free (subject to certain conditions)

Capital Reduction

• Normally not a taxable transaction; but repatriation of other reserves from the company through capital reduction is subject to challenge by the tax authorities

The tax authorities have been increasingly challenging the use of tax free re-organisations both through “legal procedures” and “substance” of such transactions

Tax Free Business Reorganizations




.

Dividend Withholding Tax

• Domestic rate 15%

• Reduction under applicable tax treaties (73 DTTs in force); minimum rate 5%

• EU Directives not applicable

Royalty Withholding Tax


• Usually reduced to 10% by the tax treaties

Interest Withholding Tax

Domestic rate 0% (interest paid to foreign banks) or 10% (interest paid to foreign corporations)

• Usually not reduced by the tax treaties

Professional Service Fees (e.g. management, technical assistance fees etc)


• Usually eliminated by the tax treaties if service not performed in Turkey for period > 183 days

Withholding tax represents the final taxation for a non-resident unless a permanent establishment is

registered in Turkey

Withholding Tax on Payments to Non-Residents




.

Overview of Transfer Pricing Regulations • In effect since 2007, through new Corporate Tax Law • Similar to OECD model in terms of content • Has been a point of attraction in recent tax audits in last years

Acceptable Methodologies • Comparable prices; Cost plus; Resale price; Other methods (if the above are not applicable)

Documentation Requirements • A simple TP form has to be prepared by each company as an attachment to annual Corporate Tax

declaration • Large Corporations (VIP) Tax Office taxpayers are required to prepare an annual TP report for domestic

and international related party transactions; other corporate taxpayers have to prepare TP report only for their international related party transactions

• Annual TP Report has to be prepared by tax return submission date,and it has to be submitted to the tax authorities upon their request

Advance Pricing Arrangements (APAs) • Corporate taxpayers can apply to the Ministry of Finance for an APA • Taxpayers can apply for bilateral or multilateral APAs in order to determine the appropriate method for

controlled cross border transactions • The method negotiated with the Tax Administration becomes definite according to the conditions and

period determined under the APA with no more than three years after the date of signing of the APA

Transfer Pricing Regulations




.

General Incentives

• VAT exemption on purchase of eligible investment equipment (either domestic or import)

• Customs Duty exemption on import of eligible investment equipment

• RUSF exemption on import of eligible investment equipment

Specific Incentives (based on Large Scale Investments, Region or Strategic Investment)

• Reduced corporate tax rate (see next page)

• Provision of free land

• Social Security Premium support

• Interest subsidy on project financing credits

In order to benefit from those Specific Incentives, the Investment should be also in the list of

“Encouraged Sectors” announced by the Council of Ministers Decree

For all incentives, it is required to obtain an Investment Incentive Certificate (IIC) from the Turkish

Treasury before the commencement of investment

Investment Incentive Regulations




.

Investment Incentives are determined based on the improvement index of the city where the investment will be located





.

Corporate Income Tax

• 100% of R&D and innovation expenditures are deductible from taxable profits for corporate tax purposes provided that the companies making these expenditures are located in a R&D Centre and employ at least 50 R&D personnel

Personal Income Tax

• The salaries of R&D and support personnel are exempt from income tax until 2013 at the following portions under certain conditions:

90% exemption for the employees having a PhD,

80% exemption for other employees

Social Security Support

• 50% of the employer’s contribution of social security premiums (limited to the amount computed on monthly social security ceiling) is supported for five years for each R&D and support personnel. The incentive will be financed by the Ministry of Finance

Technological Enterprise Capital Subsidy

• A capital subsidy of up to TL 100 thousand would solely be given once to business ideas of university and college graduates focusing on technology and innovation, without requesting any guarantee

Stamp Tax Exemption

• All documents made out regarding R&D and innovation facilities within the scope of the Law No 5746 (R&D Law) are exempt from Stamp Tax





.

Hot topics




.

Advance Pricing Arrangements (APA)

• Turkey has adopted the following measures already in its Corporate Tax Regime since 2007:

Implementation of a Transfer Pricing regime similar to OECD guidelines, which adopted in strict manner.

Transfer Pricing has become a focus area for tax audits on multinational companies in recent years

Implementation of a 30% withholding tax regime for various types of payments to tax-haven countries.

However, the list of tax haven countries not yet been announced by Turkish authorities

Implementation of a CFC regime whereby foreign companies with more than 50% Turkish ownership,

deriving passive income and subject to a tax burden of < 10% are captured by Turkish tax regime

• Turkey has recently increased its efforts to be able to more effectively fight against international tax

planning structures, as follows:

Turkey has taken an active role to sign “information exchange treaties” with many countries in the recent

years, some of which include well known off-shore investment jurisdictions.

Turkey is also renewing its old DTTs to add “information exchange” and “administrative cooperation”

clauses to those DTTs

Turkey has signed the “administrative cooperation agreement” with EU to enable more effective

information flow and administrative support for auditing cross-border transactions with EU

Turkish tax administration has been restructured to include new sub departments focused on foreign

sourced income and transfer pricing applications of cross border transactions

Fight Against International Tax Planning




.

Asset Peace Act

• Not long after the Asset Peace Act No: 5811, which had been first introduced in Turkey on November

2008 (as a part of the fiscal stimulus response to the global financial crisis; aiming to legalize certain

unrecorded assets and encouraging their injection into Turkish economy) a new Law that can be called as

the 2nd Asset Peace Act entered into force with Law No: 6486 on May 29, 2013

The assets that could be declared under the Asset Peace Law covers (cash/gold/marketable

securities/other capital market instruments/immovables that are verified by a reasonable documentation)

possessed abroad as of April 15, 2013

The application has to be done until 31 October 2013 (an extension is expected until year-end)

There will be 2% tax to be paid on the value of the declared assets

The assets declared as such will be recorded under the equity of the Turkish taxpayer’s balance sheet

and can not be withdrawn from the company in any manner

No tax investigations and assessment can be made due to the declared assets

Furthermore, the amounts to be declared under the Asset Peace Act will be able to offset against any

potential adjustment to the tax base (in terms of Income Tax, Corporate Tax or VAT) with respect to

periods prior to 1 January 2013 irrespective of the reason of that adjustment

The income from foreign participations (e.g. dividend, capital gains) or commercial income derived

through a foreign representative or Permanent Establishment that are transferred to Turkey until 31

December 2013 shall be also exempt from taxation without any further condition

• In view of the above, the Asset Peace Act brings significant tax advantages to taxpayers who may have

assets or investments out of Turkey which can be declared under this regime

Tax Amnesty through “Asset Peace” Act




.

New Fiscal Policy

• Turkish Government has been discussing for a long time to use tax policy more effectively to fight against these challenges and recently a number of tax law changes have been put in place that may impact the M&A and/or financing transactions in the market. The major changes include;

New Financial Expense Restriction

• The Council of Ministers has been entitled to determine that up to 10% of financing expenses incurred on debt that exceeds the shareholders equity may be disallowed from corporate tax base effective from year 2013. The Council of Ministers have not yet used this authority. Turkish tax law already included a “thin capitalization” limit for related party debt but this represents an additional restriction on financial expense deduction that also includes debt from non-related parties hence trying to make it more advantageous for investors who apply equity instead of debt financing

Increase in Funds Payable on Cross-border Loans

• Under the existing regime, the Resource Utilization Support Fund (“RUSF”) has been applied as 3% of foreign currency loans received from abroad that had a maturity of less than 1 year. Through a recent law, the duration to get exemption from RUSF has been increased to 3 years and a gradual decline of RUSF from 3% to 2% and 1% is determined for maturity dates of 1 year and 2 years respectively. This represents an additional cost for Turkish companies on short term debt financing

Increase of VAT Rates on Residential Real-estate Sales

• Turkish real estate market has been enjoying a reduced VAT rate of 1% on sale of residential units that are below 150 square meter. Through a recent law, the VAT rate has been increased to 8% and 18%, respectively, for residential houses that exceed certain value per square meter. There is a grandfathering rule for real estate projects that were licensed before the date of new law

Other Key Fiscal Policy Changes in 2013




.

United Kingdom




.

IP Developments

Patent Box

• Profits arising from qualifying patents to be taxed at 10%

• Legislation introduced in Finance Act 2012, applies from 1 April 2013 by election with a 5 year

transitional period

• Qualifying patents defined widely

• Qualifying income includes royalties, embedded royalties on product sales and patent sale income

• Legal owners (acquisition or self-development) + exclusive licence holders + cost sharing

arrangements within scope

R& D Expenditure Credit

• Legislation included within Finance Act 2013 – applies for expenditure from 1 April 2013

• Credit rate for 2013 is 10%

• If you make a profit, the credit can be offset against your tax bill

• If you make a loss, you may be entitled to a cash payment from HMRC; however there is a

complicated offset process which will delay actual payment of cash to companies with losses

• Companies with tax losses will require sufficient PAYE/NIC relating to R&D to ‘frank’ any cash

repayment

• Existing super-deduction scheme (225% for SMEs, 130% for non-SMEs) continues until April 2016 in

parallel




.

UK CFC Reform and GAAR

Controlled Foreign Companies

• Applies for CFC accounting periods beginning on or after 1 January 2013

• CFC charge restricted to profits passing through “gateway” (largely by reference to UK significant

people functions or “SPFs”) – designed to pick up profits artificially diverted from the UK only

• There are the following entity-level exemptions: temporary period (12 months from coming under UK

control); excluded territories (white list and “whiter than white” list); low profits (£500,000 of which no

more than £50,000 non-trading finance income); low profit margin; and tax (local tax at least 75% of

corresponding UK tax)

• Numerous exclusions (e.g. profits from property businesses) and special rules for banks and

insurance companies

• Proposed partial (75%) finance company exemption for income from qualifying loan relationships – i.e.

effective rate 5% (by 2015)

• Full exemption for finance companies where loans from “qualifying resources” (including relending of

interest receipts and distributions)

GAAR

• Counteracts “tax advantages” arising from “tax arrangements” that are “abusive”

• Counteraction on “just and reasonable” basis (with “consequential relieving adjustments”)

• No clearance procedure

• Is not aimed at a reasonable choice between different courses of action that are taxed in different

ways




.

The UK as a Holding Company Jurisdiction

Although the UK’s corporate tax regime is complex, the UK has developed into a tax-efficient

holding company location

Key features include:

• no dividend withholding tax;

• comprehensive distribution exemption;

• capital gains exemption for substantial shareholdings;

• foreign branch exemption;

• restriction of “controlled foreign companies rules” to artificial diversion of profits from the UK; and

• stable system now designed with clear policy intention of creating an attractive holding location

The reforms that lead to the current tax regime were commenced by the previous government, so

the risk of material change in tax law is low

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KPMG’S GICT European Roundtable 2013

Business

Transcript of KPMG’S GICT European Roundtable 2013