Corporate Taxation

Latvia: Parliament passes new corporate tax law

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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.

IMF report and selected issues paper looks at tax issues in China

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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.

Reducing inequality

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.


UK: HMRC reveals details of employment remuneration tax avoidance schemes

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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.

Malawi: New tax measures effective from July 2017

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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.

Luxembourg: Government announces new intellectual property tax regime

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Luxembourg has announced a new regime that offers a special tax incentive for certain income from intellectual property rights. On 7 August 2017, a bill of law proposing the introduction of a new Luxembourg intellectual property (IP) tax regime was published.

The bill was submitted to the Chamber of Deputies on August 4, 2017, and is designed to be aligned with the “modified nexus” approach to special IP tax regimes agreed by countries under Action 5 of the OECD’s base erosion and profit shifting project.  Under the proposal, up to 80% of the net income and capital gains derived from specific protected IP assets would be exempt from corporate income tax and municipal business tax, and these eligible IP assets would be fully exempt from net wealth tax. IP assets with a marketing nature (e.g. trademarks, domain names, designs and models) are excluded from the scope of the proposed regime. The Luxembourg government intends to guide the proposal through Parliament still this year, with an entry into force scheduled for 1 January 2018.

Russia: New GAAR provisions in the Tax Code

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The Russian parliament on 5 July 2017 approved a draft law (no. 529775-6) introducing a new general anti-avoidance rule (GAAR) into the Tax Code.

The new law introduces a new Article 54.1 containing a definition of the limitations on the rights and obligations exercised by taxpayers in calculating the tax base. According to the Article, the tax base or the tax due may not be reduced on the basis of incorrect information relating to the economic facts; incorrect information about persons subject to registration for tax or for accounting registers; or incorrect information in the tax return.

Where the tax base or the tax due is reduced the principal purpose of the transaction must not be to achieve an underpayment of tax or to obtain a tax credit. The liability created by the transaction should be the responsibility of a party to a contract concluded with the taxpayer, or of another person who took over the responsibility by a contract or under the law.

Nigeria: Government clarifies 27 new industries and products to enjoy tax holiday under pioneer status

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The Federal Government gave clarifications on August 9, 2017 regarding businesses that would qualify to enjoy pioneer status under the extra 27 new industries and products for inclusion in the list of “pioneer industries” and “pioneer products”. Pioneer status is available to companies making investments in eligible industries and products. They can qualify for an exemption from company income tax for an initial period of 3 years to 5 years. This measure was approved by the Federal Executive Council (FEC) on August 2, 2017.

According to the Executive Secretary, Nigeria Investment Promotion Council (NIPC) pioneer status does not relate only to new industries or entrants to the economy. It can also be granted in a situation where the country did not even have an industry at all, or the industry did not have sufficient presence to contribute significantly to economic development. In trying to encourage the establishment or growth of the industry and the economy, the Nigerian government decided to look at its priority sectors in the Nigerian Industrial Revolution Plan, NIRP, and the Economic Recovery and Growth Plan, ERGP, by promoting the 27 industries and products in the approved status document. Businesses that have existed for several years in a specific sector may not get the pioneer status, unless those companies have ventured into a brand-new line of business covered under the list of 27 new industries and products.

The list of 27 industries and products issued on August 7, 2017 includes mining and processing of coal; processing and preservation of meat/poultry and production of meat/poultry products; manufacture of starches and starch products; processing of cocoa, manufacture of animal feeds; tanning and dressing of leather; manufacture of leather footwear, luggage and handbags; manufacture of household and personal hygiene paper products; and manufacture of paints, vanishes and printing ink and so on.