Worldwide Monthly International Tax Policy (March 2018)

Posted 2021-04-29 HWTaxPolicy

March 2018

1

Tax Reforms

Brazil analyses possible responses to impact of US tax reform and think-tank CCiF will have a prominent role

The President of the Chamber of Deputies of Brazil, Rodrigo Maia, has created a working group to present, as a response to US tax reform, proposals to adjust the corporate income tax to make Brazil more competitive, attract investment and correct distortions resulting in economic inefficiencies and distributive inequities. The working group will be composed of members of academia/private sector: two from CCiF, one from INSPER and one from GETAP.

Singapore releases Budget 2018

On 19 February 2018, Singapore’s Minister for Finance delivered, in Parliament, the Singapore Budget for financial year 1 April 2018 to 31 March 2019 (Budget 2018). The key proposed measures include:

• GST will be implemented on 1 January 2020 on imported services consumed in Singapore. B2B imported services will be taxed via a reverse charge mechanism. B2C imported services taxation will take effect through an Overseas Vendor Registration (OVR) regime, which requires overseas suppliers and electronic marketplace operators that make significant supplies of digital services to local consumers to register with the IRAS for GST.

• The GST rate will be raised from 7% to 9% during 2021 and 2025.

• Increase in the tax deduction for certain expenditures on qualifying R&D. The tax deduction for labor costs and consumables incurred on qualifying R&D projects performed in Singapore will be increased from 150% to 250%. This change will become effective from YA 2019 to YA 2025.

• The existing 100% tax deduction on qualifying IP registration costs will be extended through YA 2025. Further, the tax deduction will be increased to 200% for the first S$100,000 (US$75,000) of qualifying IP registration costs incurred for each YA. This change will become effective from YA 2019 to YA 2025.

• The existing 100% tax deduction for qualifying IP in-licensing costs will be increased to 200% for the first S$100,000 of qualifying IP in-licensing costs incurred for each YA. This change will become effective from YA 2019 to YA 2025.

South Africa’s Finance Minister delivers 2018 Budget Review

On 21 February 2018, South Africa’s Minister of Finance, Malusi Gigaba, delivered his 2018 Budget Review.  The key proposals include:

Increase tax rates

• The Value Added Tax (VAT) rate is increased from 14% to 15%;

• Estate Duty and donations tax is increased from 20% to 25%; 

• Alcohol and tobacco excise duties will be increased between 6% and 10%.

Introduce tax incentive

• The Minster has approved six special economic zones. Qualifying taxpayers operating in these zones will benefit from a reduced corporate rate and will qualify for an employment tax incentive for workers of all ages.

Introduce new taxes

• The Carbon Tax (at a proposed rate of R120 (approximately US$10) per ton of Carbon dioxide) is expected to be implemented from 1 January 2019.

In addition to the above, various changes to Tax Administration will be introduced with the 2018 Taxation amendments, some of which are relevant to Huawei: 1) SARS will release a discussion paper on the potential use of electronic fiscal devices such as cash registers, to help revenue administration by monitoring business transactions. 2) The audit provisions will be amended to include a notification at the commencement of an audit process to keep all parties informed. 3) Adjustment to the official rate of interest to a level closer to the prime rate of interest. 4) Correction of tax invoices to rectify incorrect information will no longer be considered an offence. 5) Special returns for Value Added Tax (VAT) will not be required to be submitted only retained by the vendor.  6) The provisions relating to the Research and Development incentive will be looked into to resolve legislative complexities and there will be a shift from manual to online applications.

Hong Kong passes legislation for two-tier profits tax rates regime

On 21 March 2018, Hong Kong’s Amendment (No. 7) Bill 2017 which implements a two-tier corporate profits tax rates (8.25% and 16.5%) regime came into force.

Details please see previous January update.

2

Transfer Pricing

Japan publishes the updated directive related to Transfer Pricing

On 23 February 2018, the Japanese tax authorities published modifications to the Commissioner’s Directive on the Operation of Transfer Pricing (the publication is dated 16 February 2018 on the Japanese tax authorities’ website). Pursuant to the suggestion of an elective, simplified approach for low value-adding services by BEPS Actions 8-10 final report and the relevant update on the Transfer Pricing Guidelines, the updated Directive includes a simplified 5% mark-up approach for low value-adding services. The Directive clarifies situations where the simplified approach can be used. For example, the Directive states that, in the course of providing low value-adding services, intangibles must not be used, significant risk must not be assumed and the services must not be research and development, manufacturing, sales, logistics, marketing, finance, insurance or mining/processing of natural resources, etc. The updated Directive also clarifies the scope of intra-group services and procedures for Advance Pricing Agreements.

Singapore enacts transfer pricing documentation requirements and publishes updated transfer pricing guidelines

On 22 February 2018, the Singapore Government published the “Income Tax (Transfer Pricing Documentation) Rules 2018” (the TPD Rules). The TPD Rules are effective as of 23 February 2018 and apply for the basis period for the Year of Assessment (YA) 2019 and thereafter. On 23 February 2018, the IRAS released the fifth edition of the Singapore transfer pricing guidelines (2018 Singapore TP Guidelines). The changes incorporates the TPD Rules into the guidelines and provides examples and explanations on certain aspects of the TPD Rules. The key changes include:

• Singapore’s transfer pricing documents include: (a) documentation at the group level; (b) documentation at the entity level; and (c) Country-by- Country Reporting. However, there are certain minor additional content requirements in the Singapore TP Guidelines as compared to the 2017 OECD TP Guideline

• The gross revenue (derived from trade or business) of the company, in the basis period for a YA exceeds S$10m (US$7.6m) or the company was required to prepare TP documentation for a transaction in the previous basis period and its related party transactions in the current basis period are not exempt are required to submit transfer pricing documentation.

• The 2018 Singapore TP Guidelines is in line with the OECD Transfer Pricing Guidelines, with enhanced guidance on comparability analysis and the importance of intercompany agreements based on the true substance of the contractual terms and conditions.

3

VAT

South Africa amends definition of e-services for VAT purposes

On 21 February 2018, an amended draft regulation on electronic services for Value Added Tax (VAT) was published in South Africa, after its announcement by the Minister of Finance during the South Africa’s 2018 National Budget Speech on the same day. The current regulation’s definition of electronic services includes a specific list of services and only foreign suppliers of these services fall within the ambit of the South African VAT regime. With an aim to broaden the scope of this definition, the draft regulation proposes the deletion of the specific types of services currently regarded as electronic services and the inclusion of any type of service supplied electronically. The only exclusions provided under the draft regulation are educational services supplied by a person regulated by an educational authority in an export country and telecommunications services. The proposed amendments will come into effect on 1 October 2018.

4

Others

UK Brexit: EU Council adopts guidelines on framework for post-Brexit relations with UK

On 23 March 2018, in an EU 27 format, the Council of the European Union adopted guidelines on the framework for post-Brexit relations with the United Kingdom.

The approach outlined in the guidelines reflects the level of rights and obligations compatible with the position stated by the United Kingdom.

Amongst others, the guidelines highlight the following:

• the Council reminds that the four freedoms are indivisible and that there cannot be selective participation in the single market as that would undermine its proper functioning;

• the Council confirms its readiness to initiate work towards a free trade agreement (FTA) that will be concluded once the UK is no longer a member of the EU; and

• the future relationship should be based on rules that consist of provisions on movement of persons based on full reciprocity and non-discrimination, and a provision on the coordination of social security.

In addition to the guidelines agreed On 23 March 2018, previously adopted guidelines will continue to apply. 

Ikea State aid case: EC published the non-confidential version to open a formal investigation into Dutch tax rulings

The European Commission on 27 March published the non-confidential version of its decision to open a formal investigation into Dutch tax rulings issued in 2006 and 2011 that may have allowed an IKEA subsidiary to reduce taxable profits in the Netherlands, giving it an unfair competitive advantage over other companies in breach of EU State aid rules.

The 2006 Dutch APA regarded the method of calculating an annual license fee that was paid in exchange for use of IP rights, which were required to create and develop the IKEA franchise concept. The Commission says it has doubts that the 2006 APA was arm’s length.

A second tax ruling granted in 2011 by the Netherlands endorsed the price paid by Inter IKEA Systems for the acquisition of IP and the interest to be paid on the intercompany loan. The Commission said it also has doubts whether the price agreed for the IP rights was at arm’s length. It therefore also doubted whether the 2011 APA translated in an annual taxable profit for Inter IKEA Systems from 2012 onwards that corresponded with the arm’s length principle.

Hong Kong and India sign income tax treaty

On 19 March 2018, Hong Kong and India signed their first comprehensive income tax treaty. The Treaty will stimulate flow of investment, technology and personnel from Hong Kong to India and vice versa, prevent double taxation and provide for the exchange of information between the two countries. It will improve transparency in tax matters and help to curb tax evasion and tax avoidance. Provisions of the Treaty are based on the OECD Model Treaty 2017 and the United Nations Model Treaty (the UN Model Treaty) 2011, providing greater taxation rights for the source country. The Treaty will enter into force after the completion of ratification procedures by both countries. It will become effective for tax years beginning on or after 1 April following the date in which the Treaty enters into force. Significant provisions in the Treaty are:

Source country taxation rights on capital gains from the transfer of shares;

Beneficial rate of taxation of dividends at the rate of 5% on the gross dividend and 10% on gross interest, royalties, fees for technical services (FTS);

Certain provisions are influenced by the OECD’s Multilateral Instrument (MLI) on Base Erosion and Profit Shifting (BEPS) such as the principal purpose test (PPT), competent authority (CA) rule such as the tie-breaker test for dual resident entities, mutual agreement procedure (MAP) provisions, corresponding adjustments in transfer pricing cases, among others;

The benefit of provisions on dividends, interest, royalties, FTS, and capital gains has been made subject to the ”main or one of the main purposes” test which is in addition to a general rule on the lines of the PPT of the MLI;

Authority is given to anti-avoidance provisions under the domestic laws.

Trump Administration imposes tariffs on Chinese goods and steel/aluminium products

Trump Administration announces imposition of $50B in tariffs on wide range of Chinese origin goods

On 22 March, President Trump directed the Administration to take a full range of action responding to China’s acts, policies and practices involving unfair and harmful acquisition of United States (US) technology. The action is based on a report released the same day by the United States Trade Representative (USTR). The President has directed the USTR to propose 25% additional duties on imports of Chinese products “commensurate with the harm caused the US economy.”

On 3 April, the USTR published a proposed list of Chinese goods targeted for the additional importation duties. The approximately 1300 products identified on the list span several sectors of materials, intermediate goods and finished goods, e.g., various types of telecommunication and industrial equipment, certain aerospace and marine vessels and equipment, healthcare products and automotive vehicles. The USTR Notice explains that the proposed list was designed to minimize impact on US consumers and largely excludes several types of consumer goods such as cell phones. 

In addition to the excess import duties, the President has directed the USTR to take action in the World Trade Organization (WTO) on China’s discriminatory licensing practices.

Trump Administration imposes tariffs on steel and aluminum products

On 8 March 2018, President Trump signed Presidential proclamations imposing additional tariffs of 25% on specifically defined articles of steel, and additional tariffs of 10% on specifically defined articles of aluminum, effective on 23 March. Both proclamations specifically exclude Canada and Mexico, and leave the door open to approving exemptions for additional countries that are able to reach agreement with the US on “satisfactory alternative means to address the threat to the national security” caused by imports from that country.

A number of countries have warned of retaliation in the event that the US adopted the additional tariffs. The European Union (EU) Commission, meeting on 7 March, endorsed a proposal of potential counter measures against US products.

China’s retaliation actions

China’s Foreign Ministry announced on 23 March that it was preparing to impose tariffs on up to 128 American-produced goods.  On 2 April, China made the retaliatory duties effective. China has also formally filed a World Trade Organization dispute resolution action against the US for the steel and aluminium tariff actions and has indicated it will take further actions if necessary.

Additionally, on 4 April, China formally announced that it will levy an additional 25% tariff on 106 items with a trade value of $50 billion of US imports including soybeans, automobiles, chemicals and aircrafts as a response to the USTR’s publication of the proposed items subject to additional tariffs. The effective date for these tariffs has not been formally determined, but likely will be based on when the US’ final action takes effect.

Trans-Pacific Partnership agreement is signed

The Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) agreement is a new free trade agreement signed by its member states (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam) on 8 March 2018. Notably, the US withdrew its commitment to the agreement. The agreement covers a market of 495 million people with a combined GDP of $10.5 trillion or nearly 13.5% of global GDP. Tariff liberalization commitments under the CPTPP cover over 100,000 tariff lines and over 200 pages of tariff-rate quota commitments for agricultural products.

The CPTPP provides specific negotiated outcomes in matters of technical barriers to trade for the following industries: Information and communications technology products, Wine and distilled spirits, Pharmaceuticals, Cosmetics, Medical devices, Proprietary formulas for prepackaged foods and food additives, Organic products.

No official date has been set for the entry into force of the CPTPP. According to article 3 of the CPTPP, the agreement may enter into force 60 days after at least six (or 50%) of the CPTPP signatories have provided written notification of the completion of their applicable legal procedures.

From the Americas perspective, as trade tensions continue between Canada/Mexico with the US over NAFTA and US trade protectionist measures, the CPTPP opens new markets for Canadian and Mexican importers and exporters.

The CPTPP could provide diversification options in a world where North American supply chains across various industries are threatened by political and economic uncertainties.