The Ministry of Finance (MOF) on 26 July 2017, issued detailed guidelines for Country-by-Country (CbC) reporting. The guidelines also include the form and instructions for submitting the CbC reporting notification and require the following essential information:
- a brief description of group companies;
- information on the reporting parent company; and
- the role of the local reporting subsidiary within the group, where applicable.
The first country-by-country (CbC) reports required to be made to the tax authorities are due by 31 March 2018 for the tax year 2017.
Latvian parliament passed a new corporate tax law on 28 July 2017. The law will enter into force on 1 January 2018.
Unlike the current corporate income tax (CIT) regime, the proposed CIT regime is based on a cash-flow taxation model, which provides that CIT is payable at the moment of profit distribution (including deemed profit distribution). In the case of profit reinvestment CIT will not be applied. The applicable CIT rate will increase from the current 15% to 20%.
Under the new law, 20% tax will apply to dividends paid by a company, but personal income tax will not be charged on dividends received by individuals. The rest of the profit that is not reinvested will also be subject to the 20% corporate tax. The new Corporate Tax Law does not require companies to make advance tax payments, except for a transition period from January 1 to June 30, 2018, which will substantially improve companies’ cash flows.
The payment of corporate tax will be postponed until the moment a company’s profit is distributed or spent on other purposes that do not contribute to further growth of the company. The taxable period will be one calendar month, as compared to 12 months at this time. The law also incorporates several provisions intended to prevent tax evasion.
On 15 August 2017 the IMF issued a report and selected issues paper following consultations with China under Article IV of the IMF’s articles of agreement.
The report notes that China is continuing its transition to more sustainable growth with 6.7% growth in 2016 and the same level projected for 2017. Progress has been made in rebalancing the economy towards services and consumption. The firmer economic activity gives an opportunity to accelerate reforms in areas such as greater social spending; further reforms of state owned enterprises; and reduction of financial stability risk through further efforts on regulation and supervision. The report suggests that further improvements in policy frameworks are required to maintain medium term growth and stability and local government autonomy could be increased.
Central-local fiscal relations
The selected issues paper notes that China has the largest share of local government spending in the world, but there is limited revenue autonomy at the local level. The paper notes that decentralization of revenues permits a more satisfactory matching of the tax system to the local situation and preferences, as well as encouraging accountability of policy makers. However centralization of taxation has benefits in terms of economies of scale, risk-sharing, and dealing with the mobility of the tax base.
The paper suggests that the provinces could be permitted to impose a surcharge in addition to the national personal income tax (PIT). This would allow the provinces some tax autonomy within a limit specified by the centre, for example an upper limit of 5% or 10%. The revenue contribution of the PIT is currently low by international standards and this would also be a way of increasing that contribution.
In the case of value added tax (VAT) there would be difficulties in implementing any VAT at the provincial level owing to the difficulties in monitoring border flows between local jurisdictions. The national scope of the VAT should therefore be maintained but there could be a review of the revenue-sharing arrangements to reduce compliance costs for taxpayers with multiple business locations. This could be done by introducing simple allocation rules based on factors like population or aggregate consumption.
The paper considers that a recurrent market-value based property tax would be suitable for local governments in China. A property tax would be linked to public service delivery through property values and as it is based on property its base is immobile. The accountability of local officials is helped by the fact that the tax is visible to local residents on a recurring basis. High-income households also generally have higher property wealth and a local property tax could therefore be regarded as progressive. Local governments could set tax rates within bands set by the central government, applicable to a tax base that is defined according to national guidelines.
There is increasing income and wealth inequality in China but tax reforms could be used to increase inclusiveness. If the tax system could be restructured to rely more on personal income tax this could also improve redistribution, as the income tax can easily be given a progressive structure. The current personal allowance could be lowered and transformed into a tax credit. Tax brackets could be redesigned to ensure that those with greater ability to pay are contributing more to the national budget. The method of imputed minimum earnings for calculating social security contributions is regressive and should be abolished so that direct taxes would be more equitable and workers could have more incentive to join the formal sector.
HMRC has published details of tax avoidance schemes that are being used by employers, agencies and other intermediaries to avoid payment of income tax and national insurance contributions. These and other types of tax avoidance scheme are published in HMRC’s Spotlights, notifications aiming to publicise avoidance schemes that are considered by HMRC not to work. HMRC believes these tax avoidance schemes could be successfully challenged in the Courts. HMRC summarises the schemes and sets out what users of the schemes should do to bring their tax affairs into order. The Spotlights are available online on the UK government website.
One of the main types of tax avoidance scheme for remuneration is the loan scheme. These schemes involve the employees being paid a small amount of remuneration but the main part of the remuneration is paid in the form of loans from third parties.
On 10 August 2017 the latest Spotlight on contractor avoidance, Spotlight 39, was published with the title Disguised remuneration: re-describing loans. This type of scheme involves the scheme users receiving sums from their disguised remuneration schemes under loan agreements; but they can claim that the money is only held by them in a fiduciary capacity. In the view of HMRC this is just a different name for the transaction that does not change the facts of what has happened, and they consider that re-describing the loans does not change the reality.
HMRC notes in the August 2017 issue of its Employer Bulletin that it has reviewed the use of the risk-based approach to PAYE penalties for late filing and has decided to continue the same approach in the tax year from 6 April 2017. Late filing penalties will therefore continue to be reviewed on a risk-assessed basis and will not be issued automatically.
HMRC intends to impose the first penalties for the year commencing 6 April 2017 in September. The risk-based approach involves not charging penalties if Full Payment Submissions (FPSs) are filed late but within 3 days of the payment date, unless there is a pattern of persistent late filing. Employers must still file their submissions by each due payment date except in specified circumstances. Employers persistently filing after the statutory filing date but within three days may be contacted by HMRC and could be considered for a penalty.
In the case of late payment HMRC will also charge penalties on a risk-assessment basis and persistent late payers will be the main focus. The risk-based approach to PAYE penalties will continue to be reviewed beyond 5 April 2018 with a view to focusing on the employers who persistently fail to meet the due date for payment.
On 15 August 2017 the Minister of Finance, Economic Planning and Development in his 2017/2018 Budget Statement announced new measures for both customs and domestic taxes. The domestic tax measures became effective on 1st July, 2017. Most of the measures were included in the 2017/18 Budget Statement and were implemented through the relevant Amendment Acts for 2017 that were published in the Official Gazette on 25 July 2017.
One of the major changes is to introduce harmonized tax-related penalties. A penalty is applied of 20% of the amount outstanding for late payment in the first month, plus interest on the amount outstanding equal to 5% plus the prevailing bank lending rate per annum for each month, or part of a month, the tax remains unpaid. A penalty of MWK 200,000 is charged for failing to comply with a notice, for giving incorrect information, for failing to keep records, books, or accounts, etc., plus MWK 50,000 per month, or part of a month, the failure continues. A penalty of MWK 300,000 applies for failing to furnish a return of income, a return of payments to shareholders, and certain other documents, plus MWK 50,000 per month, or part of a month, the failure continues.
A penalty applies amounting to 20% of the amount of tax unpaid as a result of an omission of income, an unlawful deduction/offset, an undue allowance claim, or the failure to deduct (remit) tax when required, plus interest on the amount unpaid equal to 5% plus the prevailing bank lending rate per annum for each month, or part of a month, the tax remains unpaid. A penalty is due amounting to MWK 200,000 or twice the amount of tax due or imprisonment for one year when the above violations are committed with the intent to defraud.
Some other important measures are also taken in the Act including removal of the restriction on the definition of interest income and the introduction of a 10% excise tax on television subscriptions. A new penalty of MWK 300,000 will be applicable for failure to submit VAT returns, plus MWK 50,000 per month, or part of a month, the failure continues.
The Latvian State Revenue Service (SRS) on 08 August 2017 announced the Country-by-Country (CbC) reporting regulations, which were approved by the Latvian Cabinet in July following an amendment to the Law on Taxes and Duties to require CbC reports. The regulations are principally in line with BEPS Action 13.
A parent company of an international group that is tax resident in the Republic of Latvia must submit by 31 December 2017 to the State Revenue Service an overview of the group’s economic activities and finances in 2016. The SRS is inviting enterprises to notify the SRS before August 31 whether the report will be submitted as a parent company, an alternate company or as a multinational enterprise group entity.
In Latvia the obligation to prepare and submit a CbC report applies to a taxpayer who is a tax resident of the Republic of Latvia, if it is a parent company of the group and the consolidated turnover of the group is at least 750 million Euros. Also a tax resident of Latvia may be appointed as a substitute company for submission of the CbC report if there is an obstacle to the group parent company submitting a report in another country.
The CbC report for the previous year has to be submitted by December 31, 2017, using the form for completion of the report available in the Electronic Declarations System (EDS). The relevant form will be placed in the EDS during the fourth quarter of this year.