years 1964 - 2014...3. Strengthen Controlled Foreign Corporation rules 4. Limit base erosion via...

Border CrossingAugust 2014

Welcome to issue 27 of Border Crossing - RSM International’s newsletter covering technical developments in taxation around the globe.

In this issue:

Hong Kong: Effects of the international tax framework

Europe: The Mini One Stop Shop for e-services, broadcasting and telecom services

China: Corporate Income Tax Incentives

Hungary: Advertisement Tax

USA: New global tax and information reporting regimes create risks and burdens for businesses

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Border Crossing - August 2014

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The globalisation and development of the digital economy has fostered continuous growth of cross-border transactions. As different countries adopt different tax regimes, taxpayers may avoid taxation in their home countries by pushing activities abroad to low or no tax jurisdictions. The Organisation for Economic Co-operation and Development (OECD) and various tax authorities have tried to introduce new rules to address base erosion and profit shifting.

Hong Kong, being a low-rate and source-based tax jurisdiction, is facing challenges and pressure to improve its tax information exchange, transfer pricing, tax transparency arrangements and requirements. The following article contains a summary of the OECD’s actions against base erosion, profit shifting and recent developments of Hong Kong’s international tax framework.

A) OECD’s Action Plan on Base Erosion and Profit Shifting

At the request of G20 Finance Ministers, the OECD launched an Action Plan on Base Erosion and Profit Shifting (BEPS Project). This action plan identifies 15 specific actions needed in order to equip governments with the domestic and international instruments to address the arrangements that lead to double non-taxation or less than single taxation (which is being referred to as “harmful tax practices”) in July 2013. These 15 actions include:

1. Address the tax challenges of the digital economy

2. Neutralise the effects of hybrid mismatch arrangements

3. Strengthen Controlled Foreign Corporation rules

4. Limit base erosion via interest deductions and other financial payments

5. Counter harmful tax practices more effectively, taking into account transparency and substance

6. Prevent treaty abuse

7. Prevent the artificial avoidance of permanent establishment status

Hong Kong: Effects of the international tax framework

8. Develop rules to prevent BEPS by moving intangibles among group members

9. Develop rules to prevent BEPS by transferring risks among, or allocating excessive capital to, group members

10. Develop rules to prevent BEPS by engaging in transactions which would not, or would only very rarely, occur between third parties

11. Establish methodologies to collect and analyse data on BEPS and the actions to address it

12. Require taxpayers to disclose aggressive tax planning arrangements

13. Re-examine transfer pricing documentation

14. Make dispute resolution mechanisms more effective

15. Analyse the tax and public international law issues related to the development of a multilateral instrument.

The BEPS Project is scheduled to be finalised in three phases and completed by December 2015.

The following deliverables are expected:

September 2014

• An in-depth report identifying tax challenges raised by the digital economy and the necessary actions to address them (Action 1)

• Recommendations regarding the design of domestic and tax treaty measures to neutralise the effects of hybrid mismatch arrangements, both from a domestic and treaty law perspective (Action 2)

• Finalise the review of member country regimes in order to counter harmful tax practices more effectively (Action 5)

• Recommendations regarding the design of domestic and tax treaty measures to prevent abuse of tax treaties (Action 6)

• Changes to the transfer pricing rules in relation to intangibles (Action 8)

• Changes to the transfer pricing rules in relation to documentation requirements (Action 13)

• A report on the development of a multilateral instrument to implement the measures developed in the course of the work on BEPS (Action 15).


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September 2015

• Recommendations regarding the design of domestic rules to strengthen Controlled Foreign Companies Rules (Action 3)

• Recommendations regarding the design of domestic rules to limit base erosion via interest deductions and other financial payments (Action 4)

• Strategy to expand participation to non-OECD members to counter harmful tax practices more effectively (Action 5)

• Tax treaty measures to prevent the artificial avoidance of permanent establishment status (Action 7)

• Changes to the transfer pricing rules in relation to risks and capital, and other high-risk transactions (Actions 9 and 10)

• Recommendations regarding data on BEPS to be collected and methodologies to analyse them (Action 11)

• Recommendations regarding the design of domestic rules to require taxpayers to disclose their aggressive tax planning arrangements (Action 12)

• Tax treaty measures to make dispute resolution mechanisms more effective (Action 14).

December 2015

• Changes to the transfer pricing rules to limit base erosion via interest deductions and other financial payments (Action 4)

• Revision of existing criteria to counter harmful tax practices more effectively (Action 5)

• The development of a multilateral instrument (Action 15).

In response to a question raised in the Legislative Council in November 2013, the Secretary for Financial Services and the Treasury, Professor Ceajer Ka-keung Chan (Professor K C Chan) said Hong Kong has been closely monitoring the latest development in respect of the BEPS Project with a view to assessing the need for introducing corresponding measures. Professor K C Chan also advised that the Hong Kong Inland Revenue Department (IRD) has set out in its Departmental Interpretation and Practice Notes No. 46 the methodologies and practices adopted for dealing with transfer pricing issues. The IRD has no plan at this juncture to change the current practices.

B) Tax Information Exchange Agreement and Intergovernmental Agreement

Tax Information Exchange Agreement (TIEA)

The Global Forum on Transparency and Exchange of Information for Tax Purposes of the OECD conducted Phase 1 and Phase 2 Peer Reviews on Hong Kong in 2011 and 2013 respectively. These reviews examined Hong Kong’s legal framework for exchange of tax information. The OECD used a four-tier rating system (from non-compliant, partially compliant, largely compliant, to compliant) when reviewing and assessing the framework. The overall rating for Hong Kong is largely compliant.

According to the Phase 1 review report published in October 2011, the Global Forum commented that Hong Kong has generally implemented the necessary legal framework for exchange of information. However, Hong Kong was advised to put in place a legal framework for entering into TIEAs.

In 2013, Hong Kong amended its Inland Revenue Ordinance and Inland Revenue Rules (Disclosure of Information) extending the IRD’s information gathering power and allowing the IRD to exchange information under TIEAs. On 25 March 2014, Hong Kong and the United States (US) signed a TIEA which became effective on 20 June 2014. This is the first TIEA signed by Hong Kong. Currently, there is no double tax agreement between Hong Kong and the US. The TIEA with the US allows the exchange of tax information on request between Hong Kong and the US, which will help Hong Kong to meet the US Foreign Account Tax Compliance Act (FATCA) requirements.

FATCA Requirements

The purpose of FATCA is to combat tax evasion by US taxpayers using offshore financial accounts.

In brief, under FATCA, foreign financial institutions (FFIs) are required to sign agreements with the US Internal Revenue Service (IRS) to identify and disclose detail regarding their US account holders. These FFIs will be required to withhold tax for relevant US account-holders who do not give consent to such disclosures, or to close such accounts. An FFI which does not sign or is not otherwise exempt, will face a punitive 30% withholding tax on all “withholdable payments” derived from US sources, including dividends, interest and certain derivative payments.

The TIEA with the US provides the necessary basis for Hong Kong to provide an exchange of information upon request, made in relation to the information reported by financial institutions in Hong Kong to the US, under the FATCA.

Continued >>>>


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Intergovernmental Agreement (IGA)

The US Treasury announced in June 2012 its intention to sign IGAs under FATCA with other jurisdictions, in order to simplify due diligence and disclosure requirements, reduce or eliminate conflicts with local legislation, and eliminate certain withholding requirements. The US has developed two Model IGAs to simplify the implementation of FATCA:

• Model I establishes a framework of reporting account information on US persons by FFIs to the relevant domestic authority, which in turn provides the information to the IRS. Thirty-four jurisdictions, including Australia, Canada, France, Germany and the United Kingdom, have signed Model I IGAs with the US

• Model II establishes a framework of enabling relevant FFIs to seek consent for disclosure from US clients, and to report relevant tax information of such clients to the IRS directly. Model II will be supplemented by the operation of a TIEA. Austria, Bermuda, Chile, Japan and Switzerland have signed Model II IGAs with the US.

Hong Kong and the US have reached consensus on the substance of a Model II IGA. Hong Kong will sign the IGA with the US when both sides complete the necessary legislative procedures. This IGA will provide additional exemptions, simplified reporting and due diligence procedures to minimise the compliance burden of financial institutions in Hong Kong.

According to the proposed IGA with the US, financial institutions in Hong Kong, with the consent of their US clients, have to report to the IRS their US clients’ identification details (e.g. name, address, the US federal taxpayer identifying numbers etc.), the relevant account balances, gross amounts of relevant interest income, dividend income and withdrawals.

If their US clients refuse to give any consent to report their account information, the financial institution concerned should report “aggregate information” of account balances, payment amounts and number of non-consenting US accounts to the IRS. Based on such aggregate information, the IRS may request the IRD, where necessary, for exchange of information on a group basis pursuant to the Hong Kong’s TIEA with the US.

C) Our Comments

The BEPS Project may have a substantial effect on multinational companies using offshore structures where little or no business activities take place. More stringent transfer pricing rules in relation to intangibles, interest deductions, financial payments and documentation requirements are expected.

According to the IRD’s Departmental Interpretation and Practice Notes No. 45 - Relief from Double Taxation due to Transfer Pricing or Profit Reallocation Adjustments, where the tax administration of another state makes a transfer pricing or profit reallocation adjustment and no relevant double tax agreement exists, the question of any relief from the resultant double taxation does not arise.

If the tax authorities of our non-treaty partners adopt a more stringent transfer pricing rule following the changes to the international tax framework that are recommended by the BEPS Project and make transfer pricing adjustments on overseas companies and charge additional overseas tax on their cross-border transactions with Hong Kong group companies, the existing Hong Kong tax laws do not allow the IRD to make a downward adjustment of tax for the Hong Kong group companies. As such, adjustments shall be made to the prevailing Hong Kong tax system to avoid the potential double taxation issues arising from this.

The change in international tax standards and the request for exchange of information between different jurisdictions are inevitable. These changes may have a significant impact on taxpayers’ cross-border transactions. Taxpayers should be alert to the development of the international tax framework and review their operating models periodically so as to be in compliance on one hand and to effectively reduce any risk of double taxation on the other.

For further information, please contact: Ka Ho CHAN,

RSM Nelson [email protected]

+852 2583 1249


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Europe: The Mini One Stop Shop for e-services, broadcasting and telecom services In January 2015 the VAT legislation providing for the place of taxation for e-services, broadcasting and telecom services will change. Although the actual change in legislation will be minimal, it will have a substantial impact on the providers of these services from a VAT compliance perspective. This article discusses the beneficial scenario for counterbalancing the increased challenges on VAT compliance by using the Mini One Stop Shop scheme.

I. Overview of VAT changes in e-services, broadcasting and telecom services as per January 2015

From 1 January 2015, the country of taxation of e-services, broadcasting and telecom services provided to private consumers will shift from the country of the service provider to the country of the consumer.1 By taxing these supplies in the country of consumption a more level playing field is created. For instance, electronic services provided by a supplier now established in Luxembourg are taxed at a VAT rate of 15% (e-books 3%), whereas as of 2015 the VAT rate applicable in the country of residence of the customer will become decisive. Non-EU established suppliers of these services were already obliged to ensure taxation took place in the country of consumption since 1 July 2003 to avoid distortions on the internal market.2

Although a seemingly small change in legislation, the budgetary effects for EU member states will be considerable. With an average VAT rate of 21% within the EU, countries with a VAT rate substantially lower

than that — especially Luxembourg — will be hit hard. Furthermore the VAT compliance burden for service providers will increase substantially since they need to register in the EU countries where the customers are located and thus need to periodically file VAT returns.

II. Effects on VAT compliance

The effects on compliance demands for service providers are illustrated in the table below.

The first hurdle the service provider will have to overcome is to identify the location of the customer. As evidence of the residence of the customer the following information can be used:

• the billing address of the customer

• the customer’s IP address of the device that is used

• bank details provided by the customer

• mobile country code of the customer’s SIM card

• the location of the fixed landline

• other commercially

relevant information

Under the current legislation, identifying the location of the customer is not a requirement if the service provider is established in an EU member state. Not only identifying the customer’s residence, but also determining and applying the correct VAT rate will be required, giving rise to increased demands on IT systems.

Once the residence of the customer is identified the service provider is confronted with the fact that they may be required to register for VAT purposes in all 28 EU member states, for the supply of e-services is a cross-border activity in optima forma. As this is a very undesirable consequence, a way to avoid registration has been introduced by means of the Mini One Stop Shop scheme. Not only will this avoid having to register in all EU member states, it will also avoid having to file VAT returns in the various EU countries and make separate VAT payments to all the various tax authorities.

Current Situation Situation as per 1 January 2015

Country supplier Country customer

VAT rate

Country supplier Country customer

VAT rate

Luxembourg Spain 15% Luxembourg Spain 21%

Denmark 15% Denmark 25%

Germany 15% Germany 19%

Luxembourg 15% Luxembourg 15%


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III. Details of the Mini One Stop Shop

A practical guide to the VAT Mini One Stop Shop was published by the European Commission at the end of 2013.3 Although not binding, these guidelines provide functional and technical specifications for adopting the Mini One Stop Shop scheme. Modifications of the guidelines and the current information as described in this article may therefore become effective.

Under the Mini One Stop Shop scheme companies providing e-services, broadcasting and telecom services will be able to account for the VAT that is due in the member states of consumption by filing just one single return in the country of identification and making one single payment. This member state will then distribute the VAT due in the member states of consumption.

The Mini One Stop Shop is similar to the system already available for non-EU entities to account for VAT on the present services.

Under the Mini One Stop Shop there are two schemes available:

• the Union scheme for EU established companies

• the non-Union scheme for non-EU established or registered companies, and companies not required to register.

A. Established taxable persons

Taxable persons can be considered established by having either a business establishment or a fixed establishment. In order for a company to be considered as having a fixed establishment it is required to have a sufficient degree of permanence and a suitable structure in terms of human and technical resources to be able to make the supplies of services. A mere VAT registration does not mean a company has a fixed establishment in the country of registration.

If a taxable person chooses (it is not

imperative) to adopt the Mini One Stop Shop they will have to register in the member state of identification. Under the Union scheme this is the member state of establishment, either business or fixed. Should a taxable person only have a fixed establishment in the EU, they can choose between these member states for a member state of identification.

Taxable persons wishing to apply the non-Union scheme can choose any member state to be the member state of identification. This member state will attribute the taxable person with an individual VAT identification number (which will start with EU).

IV. Which turnover is included in the Mini One Stop Shop return?

A. Domestic sales

All sales that are consumed in the country of establishment are not included in the Mini One Stop Shop return. These sales will need to be accounted for in the domestic VAT return. Companies using the non-Union scheme must also include the sales in the country of identification and will therefore not be required to file a domestic return.

B. Sales from fixed establishment

Where a taxable person has a fixed establishment in a member state, all supplies of the present services made by that taxable person to consumers in that member state are also declared via the domestic VAT return of that establishment and not on the Mini One Stop Shop return.

C. Sales by VAT Groups

Some EU member states provide the option of forming a VAT Group for VAT purposes. VAT groups can also make filings under the Mini One Stop Shop scheme. A VAT group is required to register under the same VAT identification number with which domestic sales are reported. Should separate numbers have been given on a domestic level then a new or existing single number must be allocated to the VAT Group under the Mini One Stop Shop scheme.

Sales from any fixed establishments by members of a VAT group are not included in the Mini One Stop Shop VAT return of the VAT Group. These will have to be reported in the VAT return by that fixed establishment. The ties with that fixed establishment are therefore broken for Mini One Stop Shop purposes.

D. Exemptions

Any supplies that are exempted in the EU member state of consumption (e.g. e-gambling or e-education) must not be included in the Mini One Stop Shop return. As countries may have different legislation with regard to the application of exemption, the supplier must keep a good record of which sales are to be included in the return, for example, services related to e-gambling in certain member states.

V. Consequences of opting for the Mini One Stop Shop

Filing a return under one of the Mini One Stop Shop schemes will decrease the impact on VAT compliance and avoid having to file several returns. Taxable persons will, however, need to bear in mind that VAT regulations on any sales that are accounted for under the Mini One Stop Shop scheme will still apply.

This means that, for instance, when invoicing the invoicing rules of the member state of consumption are applicable. As of 1 January 2013 the rules for electronic invoicing should have been more or less harmonised, however, there can still be a discussion between member states, for instance, on what constitutes an electronic invoice of which the authenticity of the origin and the integrity of the content is guaranteed.4

Not only with respect to invoicing rules, but also in the situation of bad debt relief will the rules of the member state of consumption have to be applied. A return filed under the scheme should be made out in Euros, although member states of identification with a currency other than the Euro may be required to file the return in their national currency.


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It is then up to the member state of identification to make conversions back into Euros and transfer the return information and the VAT due to the other member states. Upon choosing a member state of identification — for non-EU established entities — filing a return in a member state that has adopted the Euro may therefore be preferable.

Furthermore, returns are to be filed on a quarterly basis and submitted within 20 days of the end of the period covered by the return, including payment within that period. All EU member states, however, retain the right to impose penalties should a taxable person not meet these filing and/or payment deadlines under the Mini One Stop Shop scheme.

VI. Other considerations

A. Incurred input VAT

It may be likely that a taxable person will incur VAT on business expenses in the member state of consumption of its services, for instance, VAT on hotel accommodation and transport. The returns filed under the Mini One Stop Shop scheme can, however, only include VAT due on consumption of the supplied services. To reclaim the VAT incurred on expenses a separate refund claim will still need to be filed under the Electronic VAT Refund Mechanism or the 13th VAT Directive.5

B. Retention period

Under the Union scheme the member states of identification will have the right to retain a certain percentage of the amount paid by EU established companies before distributing the VAT to the other member states of consumption. The retention period was introduced for member states that currently have a high VAT income due to the preferable rate to ensure the member states can gradually accommodate the budgetary effects of the decrease in VAT income in the forthcoming years.

For the return periods running from 1 January 2015 until 31 December 2016 the member states of identification can retain 30%, after which the percentage falls to 15% for the subsequent two

years and by 1 January 2019 the retention period will have ended. The retention fee will have no impact on the amount of VAT that must be paid by taxable persons.

C. Effective use and enjoyment of services

An exception to the principle that VAT is due in the country of the customer will apply in the situation where the effective use and enjoyment of the service takes place in another country. As an example, this would mean that downloading e-books on a grand scale whilst temporarily visiting Luxembourg and reading the books in the Netherlands, should not be taxed at 3% (rate in Luxembourg) but at 21% (applicable VAT rate in the Netherlands). This exception may have been introduced to avoid fraud, but the effective use and enjoyment of e-services will become difficult for taxable persons to check, if not impossible.

D. Distance sales of goods

As it stands at the moment the Mini One Stop Shop will only become available for the supply of e-services, broadcasting and telecom services. Under current legislation taxable persons that exceed a certain threshold when selling goods to private persons in other EU member states are obliged to register for VAT in that country and will have to make VAT filings. It would therefore be beneficial if the European Commission would order that the supply of goods that constitute distance sales could also be included in the Mini One Stop Shop return to decrease the administrative burden on taxable persons.

E. Availability and timing

The web portal for the Mini One Stop Shop schemes will become available from 1 October 2014 to enable timely registration for taxable persons. Taxable persons will have the option to register for the Mini One Stop Shop by using this web portal as of then. If the member state will be informed by the tenth day of the month following the first supply, the scheme may still start from the date of that first supply. Sales as of 1 January 2015 can therefore still be accounted for under the Mini One Stop Shop if

the member state has been notified before 10 February 2015.

If this deadline is not met, any sales in other EU member states will need to be accounted for in the member state where the customer is located and thus will possibly require up to 28 VAT registrations. Taxable persons wanting to adopt the Mini One Stop Shop — and it is expected most suppliers will — should therefore immediately take action in October to ensure everything is up and running by 1 January 2015.

Footnotes

1 Council Directive 2008/8/EC.

2 Council Directive 2002/38/EC.

3 http://ec.europa.eu/taxation_customs/resources/documents/taxation/vat/how_vat_works/telecom/one-stop-shop-guidelines_en.pdf

4 Council Directive 2010/45/EU.

5 Council Directive 2008/9/EC for the Union scheme and Council Directive 86/560/EEC for the non-Union scheme.

Taken from Bloomberg BNA, Volume 12, Number 4, April 2012. Reproduced with permission from Tax Planning International Indirect Taxes, 12 IDTX 8, 4/30/14. Copyright 2014 by The Bureau of National Affairs.

For further information, please contact: Liesbeth de Groot

VAT SpecialistRSM Niehe Lancée Kooij

Netherlands [email protected]

+ 31(0)23 5300 400


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China: Corporate Income Tax Incentives

KEY MEASURES

As stipulated in Circular 26, enterprises established in Hengqin, Pingtan and Qianhai (collectively referred to as “Covered Areas”) will be eligible for the preferential CIT rate of 15%, if the following criteria are satisfied:

1. Enterprises are engaging in encouraged industries which fall within the CIT Incentive Catalogues. These can be found in the appendices of Circular 26

2. Enterprises engaging in encouraged industries are defined as enterprises with income derived from their main businesses that fall within the CIT Incentive Catalogues which accounts for more than 70% of their total income. (The definition of total income is stipulated in Article 6 of the CIT Law of the PRC).

For the case of enterprises with establishments both inside and outside the Covered Areas, Circular 26 clarifies that:

1. Only income attributable to establishments inside the Covered Areas can be eligible for the preferential CIT rate of 15%

2. In determining whether enterprises satisfy the above criteria, only establishments

inside the Covered Areas will be considered. Establishments outside the Covered Areas will not be considered.

In the circumstance where enterprises are eligible for both the preferential CIT rate of 15% as prescribed in Circular 26, as well as other preferential CIT policies prescribed in the CIT Law of the PRC and its implementation regulations and those stipulated by the State Council, all preferential policies can be applicable.

If the enterprises are eligible for other preferential CIT rates, they can choose the most preferential CIT rate. If the enterprises are eligible for a CIT holiday and subject to CIT with a 50% reduction, their CIT payable should be calculated according to the statutory CIT rate of 25% with a 50% reduction, i.e. they could have a 12.5% effective CIT rate. This is consistent with the practice for most other similar circumstances of overlapping CIT incentives.

The aforementioned Covered Areas refer to the areas approved by the State Council under the Overall Development Plans in August 2009 (Hengqin), November 2011 (Pingtan) and August 2010 (Qianhai) respectively.

Where tax authorities have difficulties in determining whether the core businesses of enterprises comply with the requirements

prescribed in CIT Incentive Catalogues, they can request the relevant enterprises to provide certification issued by competent administrative authorities at the provincial level or their authorised subordinates.

Each of the above Covered Areas has their own individual CIT Incentive Catalogues and there are:

• 72 industry sectors under five categories for Hengqin. Hengqin’s CIT Incentive Catalogues mainly include high technology, research and development and production of pharmaceutical sections

• 21 industry sectors under four categories for Qianhai. Qianhai’s CIT Incentive Catalogues mainly include service-related sectors

• 127 industry sectors under five categories for Pingtan. Apart from the high technology sectors, Pingtan’s CIT Incentive Catalogues also include a number of agriculture and marine related sectors.

Please note that details of the specific sectors within each category are stated in the appendices of Circular 26. The following table provides a summary of the broad categories of encouraged industry under the respective CIT Incentive Catalogues as stipulated in Circular 26.

In order to encourage investment in certain areas in the People’s Republic of China, the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) jointly published the notice Caishui 2014 No. 26 (Circular 26) regarding corporate income tax (CIT) preferential policies and catalogues (CIT Incentive Catalogues) for the Guangdong Hengqin New Area (Hengqin), the Fujian Pingtan Comprehensive Experimental Zone (Pingtan) and the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone (Qianhai) on 25 March 2014. Circular 26 is effective for seven years from 1 January 2014 to 31 December 2020. The salient points of Circular 26 are as follows.


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For further information, please contact: Catherine Tsang

RSM Nelson [email protected]

852 2583 1256

POINTS TO NOTE

As noted from the above table, certain sectors within the New/High Technology category are included in the CIT Incentive Catalogues of the Covered Areas. There is thus an overlap of certain industries between the CIT Incentive Catalogues and the New/High Technology Catalogue under the CIT Law of China, the latter of which also entitles eligible enterprises (referred to as New/High Technology Enterprises or NHTE) to a reduced CIT rate of 15%. To qualify as an NHTE, enterprises would need to satisfy certain qualifying criteria, but Circular 26 has not made reference to these qualifying criteria under the CIT Incentive Catalogues. It is not explicitly stated in Circular 26 whether the enterprises would need to satisfy the NHTE qualifying criteria in order to enjoy the reduced CIT rate under the CIT Incentive Catalogues. As a result, enterprises should closely monitor any potential development in this area and whether local authorities issue any supplementary rules and guidelines.

For Qianhai and Hengqin, the industries covered under Circular 26 are different from those industries

covered in the Industry Catalogue of the respective locations published previously. In particular, the financial services category has not been included in the CIT Incentive Catalogues. Thus, investors should pay attention to any potential policy development in this area.

Given that only certain sectors within the broad category are within the scope of the CIT Incentive Catalogues, investors should study and understand the scope of the encouraged industries eligible for the preferential CIT treatment. In addition, as only establishments inside the Covered Areas will be considered in assessing the eligibility for the CIT incentives, investors should carefully plan any operational arrangement and establishment structure inside and outside the Covered Areas.

In addition to the preferential CIT treatment, investors should also be aware of the individual income tax rebate policies in the Covered Areas and take into account the available incentives in determining operational structure and human resources arrangement.

Hengqin Pingtan Qianhai

1. New and high technology 1. High technology 1. Modern logistics services

2. Pharmaceutical and helthcare 2. Service industry 2. Information services

3. Education and R&D 3. Agricultural and marine 3. Technology Services

4. Cultural innovation 4. Ecological and environmental protection

4. Cultural and innovation

5. Commerical services 5. Public facility management

CIT Incentive Catalogues

Flame ZhengRSM China

[email protected]+86 21 20300180


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Hungary: Advertisement Tax

Act XXII of 2014 on Advertisement Tax enters into force on 15 August 2014. The new public burden does not only concern the publishers of press products and commercial television channels, it also concerns any person or organisation that publishes or orders the publication of an economic advertisement, or a commercial announcement that may become subject to advertisement tax.

Tax liability, activities subject to advertisement tax

For the purposes of advertisement tax, ‘taxable activity’ means the publication of an advertisement, predominantly in Hungarian, in media services; in predominantly Hungarian language press products issued or distributed in Hungary; on outdoor advertisement carriers; on any vehicle, printed material, or property; or on the Internet predominantly in Hungarian or through a predominantly Hungarian website. Publication of an advertisement is also subject to taxation if the publication is realised for its own purposes.

In addition, the party ordering publication of advertisements may also become subject to tax if it does not receive a declaration from its business partner publishing the advertisement stating that the tax is payable by the publisher and that the publisher will fulfil the obligations of declaring and paying advertisement tax or stating that the publisher has no tax payment obligation in the given tax year in relation to the publication of advertisements.

‘Advertisement’ means economic advertisement as defined in the Act on the Basic Conditions and Certain

Restrictions on Economic Advertising Activities and the commercial announcement as defined in the Act on Media Service Providers and Mass Communication.

Persons subject to advertisement tax

• Media content service providers as defined in the Act on Media Service Providers and Mass Communication established in Hungary

• Media service providers making media content available in the territory of Hungary in Hungarian language in at least half of their daily broadcasting time

• Publishers of press products not qualifying as media service providers

• Persons or organisations utilising any outdoor advertisement carrier or any vehicle, printed material or property for the placement of advertisements

• Publishers of advertisements in the case of advertisements published on the Internet

• In the case of advertisement for its own purposes, the publisher of the advertisement is subject to tax.

• In the absence of a statutory declaration, the party ordering publication of the advertisement (with the exception of private individuals).

Tax base, tax rate

The ‘tax base’ is the net sales revenue derived in the tax year from taxable activities plus the price margin realised by the agency providing the advertisement services based on an agreement concluded with the client for the publication of advertisements as part of the taxable person’s media content service.

In the case of publication of an advertisement for its own purposes, the tax base is the cost incurred directly in relation to the publication of the advertisement. The tax base for the tax year starting in 2014 may be reduced by (and up to) the amount of 50% of the loss carried forward pursuant to the Act on Corporate Income Tax and the Act on Personal Income Tax (the amount recognised for the purpose of advertisement tax calculation shall also qualify as loss carried forward for corporate tax and personal income tax purposes), provided that the pre-tax profit for the financial year starting in 2013 is zero or negative.


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For further information please contactSándor Hegedüs – Head of Tax

RSM DTM [email protected]

+36 1 886 3717

In the case of tax subjects being liable to advertisement tax as publishers of an advertisement, the tax rate increases progressively in brackets. That is:

• 0% on the part of the tax base not exceeding HUF 0.5 billion

• 1% on the part of the tax base exceeding HUF 0.5 billion but not exceeding HUF 5 billion

• 10% on the part of the tax base exceeding HUF 5 billion but not exceeding HUF 10 billion



• 40% on the part of the tax base exceeding HUF 20 billion.

If it is the party ordering publication of an advertisement that is obliged to pay advertisement tax, the tax base is the part of the monthly consideration of advertisement publication exceeding HUF 2.5 million on which a tax rate of 20% shall be applied.

In the case of entities subject to advertisement tax that are also considered associated companies under the Act on Corporate Income Tax, the tax base shall be assessed aggregately and the tax payable shall be calculated based on the tax chart on the aggregate tax base. The calculated tax amount shall

be apportioned to each associated company in proportion to the ratio of the tax base each tax subject represents in the overall tax base of the associated companies. The associated companies shall cooperate in order to assess the consolidated tax base and shall keep sufficient records of the calculation which shall be presented to the tax authority upon request.

Payment and declaration of tax

Taxpayers have a transitional advertisement tax payment and return filing obligation. Transitional tax is payable in two equal instalments by the seventh and tenth month of the tax year. In addition, in the last month of the tax year, taxpayers will have to supplement the transitional tax paid to the expected total amount of tax payable in the tax year. Tax liability shall be assessed and declared by the last day of the fifth month following the tax year.

Taxable entities order the publication of advertisements have until the 20th day of the month following the receipt of the invoice or other accounting document issued on the services ordered to meet their return filing and tax payment obligation.

Transitional rules apply to the tax year of introduction of advertisement tax according to which tax will have to be assessed for tax year 2014 on a proportionate basis based on the number of days remaining until the end of the year from the date of the act coming into

force. The transitional tax is payable by 20 August and 20 November 2014 by the taxpayers whose tax year is identical with the calendar year.

Taxpayers not having tax payment obligation, i.e. taxpayers not reaching the cap on tax exemption, do not have to file any tax returns.

Interesting information

We have to point out that according to the current regulations, any person who maintains a website or prepares and distributes a brochure or fliers to promote its activity becomes subject to advertisement tax. Due to the fact that most entities pursuing economic activities advertise themselves in some way, many may become subject to the new tax type.

Also, although taxpayers may be released from the obligation of tax payment and tax return filing if their tax base does not reach HUF 0.5 billion, they are not released from the administrative obligations. Persons subject to advertisement tax and, in the case of related parties, all taxable persons shall prepare calculations and keep relevant documents even if they do not carry out taxable activities at all.


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Emboldened by the plethora of new legislation and guidance passed by the United States, many countries are considering implementing a standardised global information reporting (GIR) system. The purpose of a GIR system is to increase the transparency of taxpayers’ financial assets and income outside of their home jurisdictions to facilitate home country tax enforcement. Under a variety of international proposals, taxpayers would be required to provide additional financial and other information in virtually every country in which they conduct business. Thus, these proposals will likely impose significant new burdens on taxpayers’ legal, compliance and financial reporting functions.

While proposals to adopt a common reporting standard may reduce instances of double taxation and provide a more efficient way to report to multiple tax authorities, it is likely that such enhanced information reporting will result in increased audit activity in multiple jurisdictions for taxpayers with international operations, elevating the risks of doing international business. In particular, taxpayers may face substantial penalties for noncompliance because the increased prevalence of GIR regimes makes it more likely that tax authorities will have the information

necessary to propose and sustain meaningful adjustments. In light of the shifting landscape, taxpayers with international operations should take time now to develop a long-term strategy to manage these increased business risks.

GIR regimes have grown substantially

In response to various tax evasion scandals involving undisclosed offshore bank accounts, the US Congress enacted the Foreign Account Tax Compliance Act (FATCA) in 2010, which imposes steep penalties on taxpayers who fail to report certain information to the US tax authorities. Moreover, the US Treasury Department has, under the authority of FATCA, negotiated far-reaching agreements (known as Intergovernmental Agreements or IGAs) to exchange information with over 70 governments around the world.

While FATCA has become the catalyst for a host of new GIR reporting proposals by many tax authorities, the concept of sharing information between governments is not new. For example, many US income tax conventions contain provisions that specifically authorise the IRS to share tax information lawfully obtained under domestic rules with other tax authorities.2 In addition,

the United States has negotiated Mutual Legal Assistance Treaties (MLATs) with other governments that are specifically designed to facilitate cooperation in the investigation and prosecution of tax evasion or other crimes, including money laundering. MLATs have historically proven useful in tax matters because tax authorities may invoke them to obtain banking and other financial records maintained in the jurisdiction of a treaty partner. However, MLATs and treaties contain some limits on a government’s ability to obtain information located in a foreign jurisdiction.3 As a result, tax authorities have sought additional legal tools to obtain taxpayer information held outside of their jurisdiction.

After many failed attempts, the European Union (EU) in 2003 adopted the European Savings Directive4 (ESD), which requires member states to provide information regarding interest paid by residents of one member state to residents of another.5 The ESD requires member states to adopt and integrate the ESD provisions into their national legislation. On 24 March 2014, the EU Council of Ministers adopted a revised version of the ESD that would close existing loopholes and better prevent tax evasion. The 2014 revised ESD

USA: New global tax and information reporting regimes create risks and burdens for businesses

* see page 15 for footnotes and disclaimer related to this article.


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fortifies the existing rules relating to the exchange of information on savings income, with the aim of enabling member states to better detect and enforce tax fraud and evasion.6 While income tax conventions, MLATs and other laws such as the ESD have facilitated some information exchange, the enactment of FATCA by the US Congress in 2010 has encouraged governments to pursue tax policies favouring comprehensive information exchange. FATCA has changed the information reporting landscape by imposing significant and, in some cases, substantial new information reporting burdens on taxpayers.7

Under FATCA, certain US taxpayers holding financial assets outside the United States must report those assets to the IRS. In addition, FATCA requires foreign financial institutions (FFIs) to report directly to the IRS certain information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest.8 If non-US payees fail to provide such information, US withholding agents must withhold 30% of the gross amount of any US-source payments.9

To avoid this withholding tax, a “participating” FFI (i.e., one that agrees to report information required by FATCA) must register with the IRS using an online registration portal and may have to withhold tax on certain payments to non-US persons starting 1 July 2014. Thus, participating FFIs must identify US and non-US account holders; conduct due diligence and document all account holders; comply with annual information reporting to the IRS; and withhold and pay to the IRS 30 percent of any payments of US-source income,

including gross proceeds from the sale of securities that generate US-source income, subject to certain limited FATCA exceptions. The scope of FATCA is quite expansive, and it applies not only to non-US financial institutions, but also to virtually any non-US entity unless that entity provides documentation to show it has no significant US owners. FATCA provides the US Treasury with a formidable weapon in the fight against offshore tax evasion and, significantly, will also provide the US Treasury with data that it can exchange with other governments that are similarly looking to address tax evasion in their jurisdictions.

The GIR movement is rolling forward

The enactment of FATCA has encouraged tax authorities around the world to consider adopting tools that will facilitate global information exchange not only with the United States, but with all trading partners. To this end, the Organisation for Economic Co-operation and Development (OECD) proposed a Common Reporting Standard (CRS) on 13 February 2014, which was finalised on 15 July 2014. The CRS would provide a new global standard for automatic exchange of financial account information between governments in an effort to improve cross-border tax compliance. The CRS borrows heavily from FATCA and is based on the “Model I” FATCA IGA. Under the CRS, financial institutions must identify reportable accounts and report accountholder identifying information to the institutions’ local tax administration, which will then exchange such information with other governments that have also adopted the CRS. As of February 2014, approximately 42 countries have committed to adopting the CRS. The CRS represents another

global compliance burden for financial institutions and may increase compliance costs, perhaps substantially, as governments around the world officially adopt the CRS.10

It may seem that financial institutions will bear the brunt of these GIR initiatives, but non-financial businesses may also face new and significant information reporting burdens. For example, on 30 January 2014, the OECD released a discussion draft as part of its work on base erosion and profit shifting (BEPS) that recommends countries adopt a new two-tier approach to transfer pricing documentation. Under this approach, taxpayers would prepare a master file containing standardised information relevant to all members of a multinational group, including a country-by-country (CbC) reporting template. In addition, taxpayers would prepare a local file containing relevant information regarding material local transactions of the taxpayer in the local jurisdiction. While much of the information a taxpayer must report under this proposal tracks information the taxpayer likely collects to support its transfer pricing, the taxpayer must also provide significantly more information than current rules generally require, including information regarding the activities of other members of the group located outside of the reporting jurisdiction. While tax authorities generally require taxpayers to provide specific financial information to support their transfer pricing, this two-tier approach presents a risk of providing too much information. This may lead to lengthier and more contentious audits as tax authorities examine the financial and transactional data of entities located in other countries.

Continued >>>>


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The security and privacy challenge

In the words of one modern philosopher, “with great power comes great responsibility”.11 Given the plethora of information demanded by tax authorities, an important question remains unanswered: Is my information safe? In private conversations, US tax officials have conceded that the security of information collected under FATCA and exchanged with other tax authorities concerns them greatly. In that regard, they have pledged to exchange information with governments that they believe have strong privacy and security safeguards in place. However, as we have seen, many large financial institutions (and large public companies) have suffered security breaches, and sensitive information, including taxpayer identification numbers, credit card data, and the like, has become the ill-gotten booty of hackers around the world.12 As governments compile more information and share it with potentially dozens of foreign authorities, there is a significant risk that wrongdoers will steal such information and use it improperly. However, it is not clear whether governments will feel obligated to make potentially substantial investments to secure the information of non-citizens. Thus, while GIR regimes may enhance tax enforcement, they are likely to increase the risk that sensitive taxpayer data may be disclosed.13

GIR regimes create business risks

The current maze of GIR regimes (along with any proposed rules that become law in the future) presents a variety of business risks other than potential disclosure of confidential data. GIR rules will result in additional compliance costs and greater exposure to tax audits than companies have faced

before. Companies with international operations should expect greater scrutiny from tax authorities than wholly domestic businesses. Moreover, because tax authorities will have so much more information available to them, they are likely to ask more questions, with audits taking longer to resolve. Despite these potential burdens, companies can and should manage their risks sooner than later.

What should taxpayers do?

As governments around the world embrace comprehensive tax disclosure regimes, businesses must prepare to adapt in ways that reduce or minimise any significant risks of noncompliance, including monetary penalties, interest, and the damage to reputation that may result if any failures to comply become public. Therefore, companies should adopt a long-term strategy and fundamental policies that will facilitate and enhance compliance with GIR regimes. While each taxpayer should develop a strategy tailored to their specific situation, any approach should include certain key principles.

First, taxpayers should document all significant transfer pricing practices. The CRS described above reflects a common view that the majority of abusive tax practices result from the use of aggressive (or even negligent) transfer pricing. Thus, taxpayers should expect tax authorities to pursue transfer pricing adjustments and should arm themselves with thorough analysis and documentation. Second, taxpayers should ensure that they possess the ability to comply with relevant GIR regimes. For example, taxpayers should review their current approach to complying with FATCA and assess whether their tax information reporting systems are robust enough to capture and transmit all requisite information. Third, businesses should develop a system of internal controls

to monitor and detect potential noncompliance before it becomes widespread. Appropriate internal controls will vary widely and may involve approaches ranging from sophisticated technology solutions to simply preparing a written internal policy that tax executives will follow and apply as part of their regular compliance duties. An effective controls policy will draw on industry best practices and take into account the specific circumstances of the taxpayer.

Surprisingly, taxpayers may actually reap benefits by implementing an effective GIR compliance strategy. For example, since failure to comply often involves substantial amounts of tax and penalties (in some cases, US penalties for transfer pricing adjustments may be as high as 40%), an effective GIR strategy can help management minimise the risk of significant tax adjustments and associated penalties. In addition, GIR regimes may result in the coordination of activities among multiple tax authorities in a way that minimises the risk of double taxation. In the context of mergers and acquisitions, buyers will demand a discount if there is substantial risk of a material tax cost emerging post-sale. Thus, a robust compliance strategy will not only facilitate tax compliance, but will also minimise uncertain tax liabilities for financial statement purposes, which may come in handy if and when it comes time to sell the business or go public. At a minimum, businesses that implement strategies to comply with GIR regimes can take the opportunity to examine their current practices and evaluate existing exposure. In reality, many taxpayers do not have sufficiently robust internal controls, resources and compliance systems to comply with existing laws, let alone address the tsunami of GIR regimes that is quickly emerging.


15

For further information please contact one of the following McGladrey FATCA

team members:

Adnan Islam, Director Los Angeles, CA

[email protected] +1 213 330 4631

Ramon Camacho, Principal

Washington DC [email protected]

+1 202 370 8243

Ted DeBrine, FATCA National Practice Leader

Dallas, TX [email protected]

+1 972 764 7122

Footnotes

1 Adnan Islam, JD, LL.M., MBA, CPA is an international tax director in the Los Angeles office of McGladrey LLP. Ramon Camacho, JD is the International Tax Technical Lead for the Washington National Tax Office of McGladrey LLP.

2 Of course, the IRS routinely shares information with the tax authorities of the 50 states.

3 For example, although the US-Switzerland income tax convention allows the United States to exchange information in cases involving “tax fraud,” a Swiss court ruled in the recent high-profile UBS tax fraud case that the exchange of information provisions do not apply to cases of “tax evasion.”

4 Directive 2003/48/EC (effective 1 July 2015).

5 The EU has also negotiated similar agreements with certain non-EU countries such as Monaco, Liechtenstein, San Marino, Andorra and Switzerland.

6 The significant changes within the revised ESD include: (i) a look-through approach to prevent individuals from circumventing the ESD by using an interposed legal person or other indirect ownership structures (e.g., trust) situated in a non-EU country that does not tax the interposed legal person/arrangement; (ii) enhanced rules to determine the real business purpose and objective of using indirect ownership structures in an EU member state; (iii) extending the scope of certain financial products to include instruments that have similar characteristics to debt claims but are not labeled as such in form or legally classified as such; and (iv) the inclusion of all relevant income from both EU and non-EU investment funds in addition to the income obtained through undertakings for collective investment in transferable

securities. The revised ESD and the revised savings agreements will both be aligned with the OECD Common Reporting Standard on automatic exchange of information.

7 The US Treasury has issued over 1,200 pages of regulations to implement FATCA, along with several other pieces of written guidance.

8 Documentation for US persons related to FATCA includes IRS Form 8938, along with new Forms W-9, W-8 and W-8BEN-E. FATCA has significantly expanded existing compliance obligations for withholding agents. For example, Form W-8BEN has increased in length from one page to eight pages.

9 Withholding generally begins on 1 July 2014, with various exceptions for pre-existing and other obligations.

10 To be clear, OECD pronouncements do not have the force of law in any country in the absence of specific country legislation. However, many countries routinely enact laws based on OECD proposals and several countries have already committed to implementing the CRS.

11 Ben Parker to Peter Parker in the movie, The Amazing Spiderman (2002).

12 See, e.g., JPMorgan CEO: Target breach is a wake-up call (14 Jan 2014) at http://www.usatoday.com/story/money/business/2014/01/14/jpmorgan-ceo-dimon-target-breach/4475665/.

13 The CRS acknowledges the importance of data security and sets forth certain standards that governments should meet in order to secure data received under an exchange of information programme.

Disclaimer: The information contained herein is general in nature and based on authorities that are subject to change. McGladrey LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. McGladrey LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. Circular 230 Disclosure: This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

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

RSM International is the brand used by a network of independent accounting and consulting firms. Each member of the network is a legally separate and independent firm. The brand is owned by RSM International Association. The network is managed by RSM International Limited. Neither RSM International Limited nor RSM International Association provide accounting or consulting services. The network using the brand RSM International is not itself a separate legal entity of any description in any jurisdiction. RSM International Limited is a company registered in England and Wales (company number 4040598) whose registered office is at 11 Old Jewry, London EC2R 8DU. Intellectual property rights used by members of the network including the trademark RSM International are owned by RSM International Association, an association governed by articles 60 et seq of the Civil Code of Switzerland whose seat is in Zug. © RSM International Association, 2014

AfricaDieter Schulze +27 21 686 7890 [email protected]

Americas Jeff Seidel +1 212 372 1300 [email protected]

Jorge Pérez+54 11 4811 [email protected]

Contact Gillian HawkesPR & Communications ManagerRSM International+44 (0)20 7601 1080 [email protected]

www.rsmi.com

Global International Tax Contacts

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EuropeRudolf Winkenius+31 23 530 [email protected]

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