Liability to Tax
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.
A recent decision of the Bengaluru Bench of the Income-tax Appellate Tribunal (Tribunal) in the case of: ABB FZ-LLC v. DCIT [ITA(TP) No. 1103/Bang/2013, assessed the India-UAE (United Arab Emirates) Double Taxation Avoidance Agreement (tax treaty) and held that the taxpayer had a Service Permanent Establishment (PE) in India since the taxpayer has been furnishing services to the Indian company even without any physical presence of its employees in India.
With current technology services, information, consultancy, management, etc. can be provided through various virtual modes such as email, the internet, video conferencing, remote monitoring, remote access to the desktop, etc. Under the tax treaty provision for a “Service PE” the relevant factor is not the presence of the employees in the other State for more than nine months, but the rendering of services or activities which are required to be rendered for a period of nine months to create a PE. The Service PE is not dependent upon a fixed place of business as it is only dependent upon the continuation of the activity. As a result, the ruling was in favour of the Indian Revenue Service and the Tribunal held that the consideration for providing services is taxable in India.
The Tribunal also considered the services provided by the taxpayer in the form of parts or permissions for the use of the particular knowledge, knowledge and experience of the taxpayer and the term “license fees” under Article 12 (3) of the tax treaty. Visits of the taxpayer’s officials were only for the purpose of providing access to the use of the information on the industrial/commercial / scientific experience and to help commercial use. The dominant feature of the agreement between the taxpayer and the Indian company was to provide secret and confidential intellectual property rights (IPR) information. The tribunal noted that the tax treaty clearly uses the word for the “use of” or “right to use”, commercial, scientific equipment and has not used the word either “mediation” or “alienation” of expertise. The language used in the tax treaty is clear and unambiguous and therefore the reading of words “alienation” or “mediation” of know-how in the tax revenue is not permitted.
On 13 June 2017, the Tax Administration published guidance on the allocation of profits to a permanent establishment (PE). A permanent establishment in Finland is liable to Finnish taxation on profits arising in Finland. Permanent establishment income is to be attributed according to the arm’s length principle, based on the requirements of Finnish domestic law and bilateral tax agreements.
Foreign permanent establishment taxable income is calculated in a similar way as the taxable income of a Finnish limited liability company. In calculating the taxable income of the business of a permanent establishment, the Law on Business Income Taxation applies. Revenue from a permanent establishment includes all income generated by its activities. Income includes interest, dividends, royalties and gains on the assets of a permanent establishment. The deductible expenses are, in turn, the costs of obtaining and maintaining the income of a permanent establishment.
Based on the comparability analysis, market prices are verified by applying one of the OECD transfer pricing methods described in the guidelines. Any of the OECD methods may be used, but the choice of method must take into account the OECD’s guidelines on the application of the methods. The principal methods used are the Comparable Uncontrolled Price (CUP) method, the cost plus method and the resale minus method.
India: CBDT publishes a draft notice on special transitional provisions for a foreign company based in India
The Finance Ministry on 15 June 2017, issued a draft notification of transitional provisions for foreign companies in the first year of becoming resident based on their place of effective management.
The notification has clarified that the tax on foreign companies qualifying as resident firms due to their place of effective management (POEM) will be the same as that for any foreign company and will be imposed at a rate of 40%.
The draft notification by the Central Board of Direct Taxes (CBDT) provides exceptions, modifications and adaptations for computation of total income, treatment of unabsorbed depreciation, set off or carry forward of losses, collection, recovery and special provisions for tax avoidance.
The notification, once finalised, will come into effect from April 1, 2017.
The Australian Tax Office has now released a new draft ruling TR 2017/D2 and has withdrawn its preceding ruling TR 2004/15 on the tax residence of foreign incorporated companies.
Following the decision in Bywater Investments Limited & Ors v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation  HCA 45; 2016 ATC 20-589 the Commissioner has formed the view that the position expressed in former TR 2004/15 on when a company carries on business in Australia can no longer be sustained. At  the majority of the High Court rejected the contention that to be a resident of Australia, a company must have its central management and control in Australia and in addition it must also carry on its business operations in Australia.
Therefore, if a company carries on business and has its central management and control in Australia, it will necessarily carry on business in Australia. That is so even when the only business carried on in Australia consists of that central management and control, and its trading operations are conducted outside Australia.
The draft ruling incorporates a number of changes from the standard ATO rulings template with the intent of providing more practical and streamlined advice. The ruling sets out the Commissioner’s view as to the principles relevant to applying the central management and control test of residency.
The Revenue Department of Thailand is planning to enforce a new law to tax cross-border e-commerce transactions by April 2017.
Currently, a foreign operator which carries on e-commerce business but does not enter Thailand or does not have any employee, agent or representative and/or server located in Thailand, were not regarded as carrying on business in Thailand and therefore are not subject to income tax in Thailand.
But now the Thai Revenue Department (TRD) is intended to improve and increase revenue collection from the e-commerce business.
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.