GAAR

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.

Netherlands: The Dutch government publishes consultation on anti-tax avoidance directive

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The State Secretary of Finance provided a letter to Dutch parliament in which he indicated that an internet consultation has been opened for a draft bill on 10th July 2017. The draft bill has been formulating in order to implement the first EU Anti-Tax Avoidance Directive (ATAD 1)  which was approved by the EU member states in June 2016, an EU directive that provides for a minimum harmonization against tax avoidance. The ATAD measures include an earning clear rule, exit taxation, Controlled Foreign Companies (CFC) rule and a general anti-abuse rule (GAAR). Consultation on these preliminary proposals will be open until 27 August 2017 and a final proposal for the further juridical procedure is expected during the first quarter of 2018. The effective date of the proposal is 1st January 2019.

Interest deduction rules: According to the draft bill, the (excessive) interest expenses are only deductible up until 30% of the corrected Dutch taxable profit, or tax available EBITDA. However, the non-deductible interest costs that exceed 30% of EBITDA is deductible up to a maximum amount of EUR 3 million. The proposal does not yet make a choice whether a worldwide group ratio escape rule will be implemented, and, if so, whether this will be an equity escape rule or an earnings-based worldwide group ratio rule.

CFC rules: The CFC rule targets taxpayers that directly or indirectly hold more than 50% of capital or voting rights or are entitled to receive more than 50% of the profits of low-taxed foreign entities and low-taxed PEs. The ATAD provides two different options for EU Member States to include CFC rules (model A and model B). Based on Model A, passive income (e.g. interest, royalties and dividend income) of a CFC will be included as current income in the taxable base of a domestic company, unless the CFC is involved in substantial economic activities. Based on model B the income of a CFC will only be included in the taxable income of the Dutch parent company in case of artificial allocation of profits to a CFC.

The GAAR will not be executed separately, based on the view that the abuse of law-doctrine as developed in Dutch case law achieves the same goal.

Czech Republic: MoF issues a paper on anti-tax avoidance rules

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The Finance Ministry published on its website a discussion paper regarding the implementation of EU Anti-Tax Avoidance Directive on 12th of July 2016. The directive mainly states new rules for interest deduction restrictions and similar expenses for all corporate income tax payers, specifically when tax deductibility is to be restricted by 30 per cent as proposed by EBITDA. Announcing the controlled foreign companies (CFC) rules should also be new to the Czech tax environment. The CFC rules requires that a domestic company should contain in its tax base passive income or income from the so-called artificial transactions of a foreign subsidiary given that its tax burden is less than half of the tax. So that, it would be responsible to pay as a tax resident of the Czech Republic. Other rules, containing those for CFC rules, exit taxation, and hybrid mismatches will be implemented in the scope proposed by the directive, with no exceptions. Misusing hybrid mismatches means taking advantage of tax benefits arising from a circumstances where two countries have different methods to financial instruments. This relates to, for example, a failure to recognize a permanent establishment, such as when one country considers the economic activities of an entity as meeting the definition of a permanent establishment of the entity in another country but the permanent establishment has not been created in that country or other situations resulting in double non-taxation of activities or payments. The Czech Republic will perhaps not apply the general anti-avoidance rule (GAAR) with reference to the existing administrative and judicial practice. The deadline for implementing this directive falls on 31st of December 2018. The exception is for exit tax that must be implemented by 31st of December 2019.

Canada: The Federal Budget 2017 announced

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The Canadian government presented the 2017 federal budget on 22nd March 2017 in Ottawa. The main highlighting points of this budget are given below:

  • The budget dedicates $11.2 billion to cities and provinces for affordable housing over 10 years as part of the second wave of the government’s infrastructure program, $5 billion of which is to encourage housing providers to pool their resources with private partners to pay for new projects;
  • The budget still doesn’t include any plans to balance the books;
  • Statement on gender equality and a discussion of the ways in which the government has run its policies, and its spending commitments, through a gender-based analysis;
  • Some budgets allocate for indigenous communities;
  • Despite calls from the United States for Canada to increase its contributions to international military efforts, there is no increase in defense spending in the 2017 budget;
  • Excise duty rate on cigarettes goes from $21.03 up to $21.56 per carton of smokes and the duty rate for alcohol goes up to 2%. Both will be adjusted every April 1 starting next year, based on the consumer price index;
  • Canadian exploration expense in case of oil and gas wells
  • Budget 2017 proposes that expenditures related to drilling or completing a discovery well generally be treated as a Canadian development expense (30% depreciation rate) instead of a Canadian exploration expense (eligible for a 100% deduction in the year incurred). This measure will generally be applicable to expenses incurred after 2018 and expenses incurred in 2019 that could have been considered to have been incurred in 2018 because of the “look-back” rule.
  • Reclassification of expenses renounced to flow-through shares
  • The Income Tax Act recognizes two forms of control of a corporation: de jure (legal) control and de facto (factual) control.
  • Timing of recognition of gains and losses on derivatives
  • Extending the base erosion rules to foreign branches of life insurers
  • The public transit tax credit, which allows the cost of transit passes to be deducted, is being eliminated effective July 1.
  • Employment insurance premiums are going up 5% to $1.68 per every $100 of insurable earnings, up from $1.63.

Chile: Tax Administration replies first query regarding GAAR

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The Tax Administration has released Administrative Jurisprudence No. 261/2017 on 3rd February 2017 on its website. This addresses for the first time a query regarding the application or non-application of the general anti-avoidance rule (GAAR) contained in articles 4 bis and following of the Tax Code. The question referred to whether article 4 bis was applicable to a situation in which a company is split up and the new company formed as a result is dissolved in order to allocate and attribute the assets in the hands of the shareholders. Under this query, the tax administration stated that the application or non-application of the GAAR to this situation should be addressed considering the specific circumstances of the case.

India: Government announces GAAR will be effective from April 1, 2017

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On 27 January 2017, the Union Finance Ministry has announced that the General Anti-Avoidance Rule (GAAR) will be effective from the 1 April 2017. The General Anti-Avoidance Rule (GAAR) provisions shall be effective from the Assessment Year 2018-19 onwards (i.e. Financial Year 2017-18 onwards). The rules are framed mainly to minimise and check avoidance of tax. Accordingly, India will be the 17th nation in the world to have laws that aim to close tax loopholes.

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.