Double Taxation Treaties

DTA between Japan and Slovenia will enter into Force

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The Japanese Ministry of Finance on 26 July 2017 issued a press release announcing that the double taxation agreement (DTA) between Japan and Slovenia, signed on 10 September 2016, will enter into force on 23 August 2017.

The Treaty contains following treaty-based recommendations from the BEPS project:

  • Action 2 (neutralizing the effects of hybrid mismatch arrangements);
  • Action 6 (preventing the granting of treaty benefits inappropriate circumstances),
  • Action 7 (preventing the artificial avoidance of permanent establishment status); and
  • Action 14 (making dispute resolution mechanisms more effective).

In addition, its preamble clarifies that tax treaty is not intended to be used to generate double non-taxation or reduced taxation through tax evasion and avoidance and in cases where a person other than an individual is resident in both Japan and Slovenia, both competent authorities shall endeavour to determine by mutual agreement the Contracting State of which the person shall be deemed to be a resident. Furthermore, the Treaty contains a PPT.

On the PE front, the Treaty contains an anti-fragmentation rule and the new definition of agency PE. Moreover, the Treaty enables taxpayers to present a case for mutual agreement procedure to the competent authorities of either Contracting State and any unresolved issues arising from the case shall be submitted to arbitration if the person so requests.

Japan and Slovenia also have signed the MLI. Given that the treaty already incorporated the treaty-related BEPS minimum standards, it can be expected that this treaty will not be listed as a covered tax agreement and thus will not likely be further modified by the MLI.

Nigeria: DTA signed with Singapore

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The Finance Minister of Nigeria, Kemi Adeosun and the Minister of State for Trade and Investment of Singapore, Dr Koh Poh Koon, signed an Income and Capital Tax Treaty on August 2, 2017 for the avoidance of double taxation. According to the Finance Minister this treaty would help inter-state trade as well as economic and business activities by ensuring that nationals or enterprises of the two countries are not taxed twice on the income from profits derived from the other country.

 

Platform for Collaboration on Tax issues draft toolkit on offshore indirect transfers

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On 1 August 2017 the Platform for Collaboration on Tax (PCT) issued a draft toolkit on the tax treatment of offshore indirect transfers. The PCT was set up by the IMF, OECD, UN and World Bank at the request of the G20 group of countries to recommend mechanisms to ensure effective implementation of technical assistance programs. The deadline for comments on the draft toolkit is 25 September 2017.

An offshore indirect transfer of an asset is essentially the sale of an entity owning an asset located in one country by a resident of another country. This issue was not specifically covered by the reports issued by the OECD on base erosion and profit shifting (BEPS) but it has emerged during discussions with developing countries as an important issue. The issue has been noted during IMF work on technical assistance and offshore indirect transfers are also being examined as part of the UN work on taxation of extractive industries.

Different countries have approached the issue in widely different ways, in terms of the assets covered by their legislation and the legal approach followed. A more coherent policy among jurisdictions could increase tax certainty and increase collection of tax.

The discussion draft considers that not only immovable assets should be covered by legislation on offshore indirect transfers but the definition of assets covered should also include more generally assets that are generating location specific rents. Location specific rents are returns that exceed the minimum required by investors and that are not available in other jurisdictions. The report therefore suggests appropriate wording for inclusion of a broad range of assets in the definition of assets for the purpose of offshore indirect transfers.

Tax treaties

The provisions of the OECD and UN Model treaties both indicate that capital gains tax on offshore indirect assets should be allocated primarily to the jurisdiction where the asset is located. The relevant provision is in Article 13 (4) of the UN Model. Article 13 (4) states that “gains derived by a resident of a contracting state from the alienation of shares deriving more than 50 per cent of their value directly or indirectly from immovable property situated in the other contracting state may be taxed in that other state”

The provision is however only currently present in around 35% of bilateral double tax treaties and is less likely to be included in a treaty where one of the contracting states is a low income resource rich country. Even where this provision is included in a bilateral tax treaty the jurisdiction still requires an appropriate definition of these assets in domestic law to assert the right to tax the assets.

Approaches to taxing offshore indirect transfers

Two main approaches are outlined in the report for taxation of offshore indirect transfers by the jurisdiction where it is located. Sample simplified language for insertion into domestic law is provided for both approaches.

One of the approaches involves treatment of the offshore indirect transfer as a deemed disposal of the underlying asset. The tax liability would be triggered by a change of control whether onshore or offshore. Change of control would be determined by considering either direct or indirect ownership. In the case of a change of control the local entity would be treated as disposing of its assets at their market value, triggering the tax charge, and then reacquiring them. As this is a deemed disposal the local entity would still be the legal owner of the assets following the deemed disposal.

The other approach considers that the gain on the transfer of the asset is made by the non-resident seller but treats the gain on the transfer as sourced within the location jurisdiction, thereby enabling that jurisdiction to tax it. This approach is more commonly used by countries taxing offshore indirect transfers. The source rules are critical for this approach because a non-resident is normally only taxed on income from sources in the location country (the “source country”). The draft suggests a source rule including a gain arising from the disposal of immovable property in the location country; or the disposal of shares or comparable interests, if at any time during the 365 days preceding the disposal more than 50% of the value of the shares or other interest is derived, directly or indirectly through one or more interposed entities, from immovable property in the location country.

 

Japan: DTA with Slovenia will enter into force on 23 August 2017

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The Japanese Ministry of Finance on 26 July 2017 issued a press release announcing that the double taxation agreement (DTA) between Japan and Slovenia, signed on 10 September 2016, will enter into force on 23 August 2017.

Armenia: DTA with Israel signed

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On 25 July 2017, the Minister of Foreign Affairs of Armenia and the Minister of Regional Cooperation of Israel have signed a Double Taxation Agreement (DTA) for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income.

Both ministers also highly prioritised the expanding legal-contractual cooperation and the dialogue between the two countries. Meantime, they stressed the importance of a closer partnership with international organisations and a more active inter-parliamentary exchange.

Argentina: New Regulations ‘General Resolution 4094-E’ enters into force

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The Federal Tax Authority (FTA), on July 18, 2017, published the General Resolution 4094-E on the Official Gazette. This Resolution had been introduced into income tax in 2013. The time when the 2013 tax reform abolished the capital gains tax exemption for nonresidents, and required nonresident buyers to assess and pay the tax in certain circumstances, no regulations previously addressed the requirements. The new Resolution identifies the responsible one for withholding tax and other tax payment, the form and way of payment. This also launches a device for income tax payment arising from the disposition of shares, exchange, barter or quotas, sale, and other equity made by foreign recipients. Here, other equity contains investment funds quotas, securities, bonds and other values.

Capital gains on foreign entities was also announced on July 28, 2017. It also introduces different provisions. Applicable withholding tax (WHT) rate is one of the provisions. According to this, the applicable WHT rate will be 15% conditioning that it will be calculated over the net income determined according to section 93 of Income Tax Law or over 90% of the amounts paid for the acquisition of the previously declared essentials. The other provisions are foreign resident and Argentine resident, Retroactive application of the resolution and registration for the operation with the corresponding government entities. Finally, the Resolution launches an extension of the term until September 29, 2017 for tax payments. These taxes come from the operations carried out until 17 July 2017, specifying that all payments made prior that date will be considered as paid on time.

Liechtenstein: Tax Treaty with Monaco Signed

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On 28 June 2017 the officials of Liechtenstein and Monaco signed an income tax treaty which is in line with OECD standards on information exchange and transparency. The provisions of the treaty also take into account recommendations of the OECD/G20 project on base erosion and profit shifting (BEPS).