Treatment of losses

UK: Draft guidance on corporate tax loss relief rules

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On 31 July 2017 HMRC issued for public consultation draft guidance in relation to the reform to corporate tax loss relief rules. An amended draft of the relevant legislation on corporation tax loss relief was published on 13 July 2017 and this is to be included in the Finance Bill (No 2) 2017 to be published after the summer recess. The draft guidance is an initial tranche focusing on the core rules and on areas where guidance has been specifically requested. HMRC intends to issue further draft guidance in due course. Comments on the current draft guidance are invited by 25 September 2017.

The reform of corporation tax loss relief aims to restrict the loss relief available to business with substantial profits, while also allowing more flexibility on how carried forward losses may be offset against the total taxable profits of a company and a group rather than only being offset against particular types of profits. The rules apply to companies and unincorporated associations that pay UK corporation tax and have losses carried forward. The revised rules are intended to apply from 1 April 2017.

The guidance emphasizes that the relief given for losses carried back from a later period and relief for losses in the year (such as group relief) is not affected by the new rules. The restriction on offset of losses and the greater flexibility on offset against profits will both apply to trade losses carried forward; non-trading loan relationship deficits carried forward; non-trading losses on intangible fixed assets (NTLIFAs) carried forward; management expenses carried forward; and UK property business losses carried forward.

Restriction on offset of losses carried forward

From 1 April 2017 companies with profits exceeding the deduction allowance (which will be a maximum of GBP 5 million) will not be able to reduce their profits to nil using losses carried forward. The profits (after the deductions allowance and after deduction of losses of the same year such as group relief) can only be reduced by up to 50% by losses carried forward.

The deductions allowance of GBP 5 million would be shared between the members of a group in the manner the group decides. A company will be nominated by the group to allocate the deductions allowance among the group. If the profits are below the level of the deductions allowance there is no restriction on offset of losses brought forward.

Although the restriction is effective from 1 April 2017 it applies to all losses carried forward including those brought forward from before 1 April 2017.

Flexibility of offset of losses

The greater flexibility to offset losses brought forward against total profits rather than a particular type of profits applies from 1 April 2017 to trading losses; non-trading loan relationship deficits (NTLRDs); non-trading losses on intangible fixed assets; management expenses; and UK property business losses.

From 1 April 2017 generally trading losses and NTLRDs may be carried forward and offset against total profits of the company, or surrendered as group relief, but in some situations the company will continue to be more restricted in loss offset. Trading losses for periods before 1 April 2017 will still only be available for offset against profits of the same trade. This also applies to losses of periods after 1 April 2017 in certain situations, for example where the trade has become small or negligible. Also NTLRDs of periods before 1 April 2017 are still only available for offset against non-trading profits, and for periods after 1 April 2017 in cases where the investment business has become small or negligible NLRTDs will still only be offset against non-trading profits.

Management expenses, UK property business losses and NTLIFAs will continue to be available for offset against total profits of the company. From 1 April 2017 they may also be available for group relief for carried forward losses. Carried forward management expenses will no longer need to be deducted in priority to other deductions from total profits.

New claims procedures will allow a company to choose which carried forward trading losses, NLTRDs, management expenses and UK property business losses are relieved in an accounting period.

 

Korea: Recent developments on corporate taxation

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With the aim of encouraging the development of new growth-engine industries, reinforcing employment-friendly tax schemes, and facilitating corporate restructuring, a few amendments that affect foreign investment or foreign invested companies have been taken in Korea.

The amendments are as follows:

  • the research and development (R&D) tax credit has been restructured for qualified technologies to stimulate the economy;
  • tax support given to companies with foreign investment with high-technology has also been restructured and a tax credit has been introduced for facility investment to commercialize technologies;
  • while calculating the corporate tax base using the tax credit method, foreign tax included in gross income cannot be deducted from the tax base of the local income tax; and
  • foreign corporate branches in Korea shall be added to the scope of companies subject to restriction of net operating loss deductions.

Most of the above mentioned amendments became effective from 1 January 2017.

Colombia pronounces on CREE tax and CREE surcharge

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On 16 March 2017, the Colombian National Tax Authority (DIAN) published a Ruling 5797-2017 stating on the validity of the fairness tax (CREE) and the CREE surcharge. In accordance with this ruling, under Law 1819 of 2016 (the tax reform), as from 1 January 2017, the CREE tax and the CREE surcharge are no longer applicable.

Law 1819-2016 introduced a correct explanation on the changes, DIAN published several guidelines on the validity of the CREE tax and surcharge as the tax reform unifies the income tax and CREE tax as from tax year 2017, the CREE tax was still applicable for tax year 2016.

Botswana: Tax proposals in 2017-2018 Budget

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The Minister of Finance and Economic Development presented the Budget for 2017-18 to the National Assembly on 6 February 2017. To improve administration efficiency and optimise revenue collection, the income tax act and the value added tax act will be simplified by the development of the tax administration act which will be completed in the 2017/2018 financial year.

The government is planning to impose penalties under the income tax law for non-filers, irrespective of whether tax is payable, and the inclusion of the sale of property by the deputy sheriff as a taxable supply for VAT purposes. In addition, the government is proposing to introduce transfer pricing rules that would include thin capitalisation measures.

Special provisions allow for the set-off by individuals of farming losses against other income to the extent of 50% of other source chargeable income. Assessed losses from business can be carried forward for no more than five years, except for mining and prospecting losses, which can be carried forward indefinitely. Capital losses can be carried forward for one year only.

Corporate tax rates – resident company

The corporate tax rates for resident companies are to be the following:

  • Approved manufacturing taxable income 15%;
  • Capital gains 22%;
  • Foreign dividends 15%;
  • Mining taxable income (excluding diamonds) 22%-55%;
  • Other taxable income 22%;
  • Accredited Innovation Hub business taxable income 15%;
  • IFSC company – approved services income 15%; and
  • IFSC – other taxable income 22%.

The standard corporate tax rate of 30% is applicable for non-resident companies. Corporate tax is payable via the self-assessment system in quarterly SAT instalments on a financial year basis. Companies with annual income tax liabilities of less than P 50 000 may elect to make one payment within 4 months of end of the financial year. The Income Tax Return must be filed within four months of the company’s financial year end.

UK: Draft legislation for corporation tax loss reform

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On 26 January, draft legislation has published by the Government of UK on the reform of the Corporation Tax loss relief rules. This reforms the tax treatment of certain types of carried-forward loss for corporation tax purposes. The legislation takes effect from 1 April 2017.

The reform has 2 aspects. It provides more flexibility in how losses arising on or after 1 April 2017 can be relieved when they are carried forward; and it limits the amounts against which all carried-forward losses (whenever they arise) can be relieved to 50% of profits, subject to an annual allowance.

The schedule is set out in 9 parts. Part 1 creates separate rules for losses arising before 1 April 2017, and for losses arising on or after 1 April 2017. Part 2 sets out how the restriction of relief to 50% of profits will operate. Part 3 sets out a new form of group relief for carried-forward losses. Part 4 contains specific rules for insurance companies. Part 5 contains specific rules for creative industries. Part 6 contains anti-avoidance provisions. Parts 7 and 8 contain minor and consequential amendments.

Colombia: Tax reform summary 2016

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According to law 1819 of 2016, adopting the structural tax reform bill approved on 23 December 2016. It introduces the following major changes to the corporate income tax regime:

Income tax rates

As from tax year 2019, a single income tax rate of 33% applies to national and overseas entities that are obliged to file income tax returns in Colombia and for tax year 2017, taxpayers will be subject to 34% general income tax rate and for state-owned commercial and industrial entities 9% income tax rate applies. The taxpayers whose taxable base is at least COP 800 million for income tax purposes is subject to a temporary income tax surcharge, 6% for 2017 and 4% for 2018.

Tax loss carry-forward

The carry-forward of tax losses may be allowed up to 12 tax years and to carry out tax audits of income tax returns where tax losses were carried forward is 6 years following the date of filing of the income tax return.

Accounting records

Taxpayers are obliged to keep accounting and financial records must determine tax values according to IFRS.

Tax deductions

Certain foreign expenses are allowed to deduct from the income tax base limited to 15%, as payments made to commissioners relating to the sale or purchase of goods or raw materials, interest on short-term loans taken out for the importation or exportation of goods, or bank overdrafts and capital expenses subject to amortization.

Depreciation

Based on the type of asset the maximum depreciation rates will be between 2.22% and 33% yearly and accelerated depreciation rate of assets may be increased up to 25%.

GAAR

The tax reform introduces detailed definitions of behaviors that could be deemed to be an abuse of tax law and it simplifies and regulates the procedure for applying the anti-avoidance provision.

CFC rules

A controlled foreign companies (CFCs) regime applicable to entities complying with the following two requirements: (i) being controlled by one Colombian resident or more and (ii) qualifying as a non-resident.
CFC rules apply to companies, trusts, collective investment funds, private interest foundations, fiduciary businesses and any other investment vehicle, regardless of qualifying or not as transparent or as legal entities. Passive income, as defined by the law, as well as related costs and expenses, must be included in the income tax return of the controlling resident in the same tax year in which they were derived or incurred by the CFC.

Income tax withholding on foreign payments

A 15% income tax withholding applies to foreign payments of interest, commission, fees, royalties, technical services and advisory services.

Intangibles

The amortization base for the amortization of an intangible asset is the cost of the asset upon compliance with certain rules and annual amortization rate may not exceed 20% of the cost basis.

Luxembourg: Parliament adopts 2017 tax reform

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The Luxembourg Parliament adopted the 2017 tax reform (parliamentary document n°7020) on 14 December 2016 which introduces new tax measures affecting both individual and corporate taxpayers. The publication of the law is expected to be made in the coming days with entry into force from 1 January 2017.

Tax measures applicable to corporations:

 Reduction of corporate income tax rate: The corporate income tax rate currently stands at 21%. It will be reduced to 18% over the next two years (19% for 2017 and 18% for 2018). However, the rates applicable to the municipal business tax and the solidarity surcharge will not be amended.

As a result, the global combined corporation tax rate will stand at 27.08% in 2017 and 26.01% from 2018 for companies with taxable profits exceeding EUR 30,000 in Luxembourg-City, taking into account the municipal business tax and the solidarity surcharge.

Limitation of the use of losses carry-forward: Luxembourg tax law currently provides that Luxembourg companies may carry their losses forward indefinitely and off-set them against any future profits. The 2017 tax reform provides that losses generated during and after 2017 will only be carried forward for a maximum period of 17 years. Losses that have been realized before 2017 will remain unaffected by this time limit.

Abolition of tax on transfers of claims: From 2017, registration duties should only be levied on mandatory registration deed. Therefore, the 0.24% registration duty due on notarial deeds documenting the transfer of debt agreements (notably in case of contribution in kind of such claims to the share capital) will be abolished.

Increase of the minimum net wealth tax: From 2017, the minimum net wealth tax applicable to Luxembourg corporate taxpayers holding financial assets representing (i) more than 90% of their total balance sheet (e.g., fixed financial assets, intercompany loans, transferable securities and cash at bank) and (ii) more than EUR 350,000, will be subject to a fixed minimum net wealth tax at an increased amount of EUR 4,815 from the fiscal year 2017 (EUR 3,210 for 2016).