Clifford Chance’s (CC’s) India tax dispute has reached the country’s Supreme Court, with the firm asked to provide details of fees it received for advising on projects during the late 1990s.

The long-running dispute has been closely watched by lawyers hoping for greater clarity on how legal fees for India-related work are taxed.

In December last year the Bombay High Court ruled in favour of an appeal made by CC, with the court subsequently ruling that a foreign law firm may only be taxed in India on work performed in the country.

CC had previously been ordered by India’s Commissioner of Income Tax to pay taxes amounting to around $3m (£2m) on all of the fees the firm earned on work performed on four energy infrastructure projects undertaken in India during 1996-98.

The magic circle firm primarily advised non-Indian participants on UK law aspects of the projects, and much of the work was handled outside of India. CC challenged the assessment, arguing that only around $871,000 (£592,000) in fees actually billed in India should be taxable.

The Bombay High Court took up the case after India’s Income Tax Appellate Tribunal ruled in September 2001 that the nature of the work should determine its taxability in India.

CC said in a statement: “We do not comment on the details of our tax affairs. We take tax compliance very seriously and of course comply with orders made by the Indian courts. We are in the process of complying with this particular order which is a request for information in relation to a claim by the Indian income tax department.”

“The claim raises essentially the same issues as were raised in a case recently decided in our favour by the Bombay High Court. The Indian tax authorities are now appealing that decision but we have every expectation of prevailing.”

Source: legalweek.com 11 November, 2009

In his special speech, Thai Capital Market drives Strong Thai Economy, presented at the opening function of the “Set in the City Fair” held by the Stock Exchange of Thailand at Siam Paragon, Mr Abhisit said the government realizes that there will be more fierce competition in the capital market in the future.

“This has prompted the government to map out a five-year capital market development plan. The plan will include the national savings fund setting up, the development of domestic bond market and the development of financial product to enhance its diversity.

“The government will restructure tax system to attract and encourage more investors to the capital market and will come up with measures to deal with possible negative consequences of the fierce competition in the future,” the premier said.

The government wants to see the capital market to increase its capitalisation from the current 80 per cent of GDP to 130 per cent within the next five years. The number of investors in the market will also be boosted from 2.4 per cent to 5 per cent, he said.

Mr Abhisit suggested there should be a close collaboration between Thai capital market and other markets in the region in order to attract more foreign investors and to create regional network of the capital market.

Source: Bangkok Post 12 November, 2009

Wolfgang Schoen, Tobias Beuchert, Astrid Erker, Andreas Gerten, Maximilian Haag, Sabine Heidenbauer, Carsten Hohmann, Daniel Kornack, Nadia Lagdali, Christine Osterloh-Konrad, Carlo Pohlhausen, Philipp Redeker, Erik Roeder (all of the Max Planck Institute for Intellectual Property, Competition & Tax Law) & Lukas Müller (University of Zurich, School of Law) have posted Debt and Equity: What’s the Difference? A Comparative View on SSRN.  Here is the abstract:

The divide between debt and equity belongs to the focal points of national and international tax law. Under domestic individual income tax law, it is crucial for the distinction between a creditor-debtor relationship and a full partnership of taxpayers jointly carrying on a business. Under domestic corporate income tax law, it is decisive for the application of a two-layer taxation of corporate profits and dividends. Under international income tax law, the allocation of taxing rights and the application of withholding taxation follows largely the distinction between debt and equity. Against this background, this article analyses on a comparative basis the major features of debt and equity under corporate law, accounting law and tax law in six jurisdictions (Austria, France, Germany, Switzerland, United Kingdom, United States). It becomes clear that the debt-equity divide is shaped differently for purposes of individual income taxation, corporate income taxation and international income taxation. While individual or corporate income taxation largely looks at the similarities between a full partner or a full shareholder on the one hand and the holder of a hybrid debt instruments on the other hand, international tax rules tend to include all sorts of profit-dependent payments under the rules for corporate profits and dividends. It remains to be seen whether the dependency of payments on contingent profits (or other proprietary elements of a business entity like turnover) forms a convincing rationale for the existing distinctions between debt and equity in the international tax arena or whether tax policy should opt for full or near equal treatment of these financial instruments.

Michelle Hanlon (MIT) & Shane M. Heitzman (University of Rochester, Simon Graduate School of Business) have posted A Review of Tax Research on SSRN.  Here is the abstract:

In this paper, we present a critical review of tax research. We survey three main areas of tax research: 1) corporate decision-making including investment, capital structure, organizational form, and transfer pricing, 2) asset pricing, and 3) corporate reporting for GAAP and tax purposes. We summarize the research areas and questions examined to date and what we have learned or not learned from the work completed thus far. In addition, we provide our opinion as to the interesting and important issues for future research.

Zoë Prebble (LL.M. 2010, Michigan) & John Prebble (Victoria University of Wellington, Faculty of Law) have posted Comparing the General Anti-Avoidance Rule of Income Tax Law with the Civil Law Doctrine of Abuse of Law on SSRN.  Here is the abstract:

This article compares the general anti-avoidance rule of income tax law with the civil law doctrine of abuse of law (Rechtsmissbrauch, abus de droit) in eight jurisdictions: Germany, Croatia, New Zealand, Australia, France, the United States, the United Kingdom and the European Union. The article deals with the core concept of avoidance and addresses the statutory and judge-made general anti-avoidance rules in these jurisdictions. The article focuses on transactions that most people would recognize as avoidance and on how these eight jurisdictions either frustrate avoidance or allow it.

Writers who contributed to the article and the jurisdictions that they covered include: Séverine Baranger (France, general anti-avoidance rule), Dennis Becher (Germany, abuse of law), Svenja Brandt (Germany, general anti-avoidance rule) David Dunbar (Australia), Matthew Fountain (New Zealand), Franca Frenzel (European Union), David Pickup (United Kingdom), Philip Postlewaite (United States), Rebecca Prebble (Croatia), Viktoria Preusker (Germany, abuse of law), Yves-Louis Sage (France, abuse of law).

A significant new notice was issued by the SAT last week which will impact upon the application of withholding tax in China. Circular 601 is the latest interpretation by the SAT of China’s tax treaties. This Circular looks at  the concept of beneficial ownership as it is used in the treaties – in the withholding tax provisions (i.e. royalties, interest and dividends). To understand how the changes operate it is important to under the operations of Double Tax Agreements (DTA). DTAs operate so as to allocate or apportion taxing rights between two contries where both countries domestic laws provide a right to tax on a particular transaction or arrangement. The DTAs generally favour the country of residence and give limited rights of taxation source countries (effectively the country where the income is sourced from) except where the income is attributable to a permanent establishment in that source country. In the case of dividends the source country (that is, the country where the company paying the dividends is located) is usually entitled to tax a shareholder receiving such dividends but only at a specified rate (the same with royalties and interest). This rate is usually 10% in China’s DTAs but it varies from country to country. Importantly the rate between China and Hong Kong is 5%. As a result, and amongst other reasons, this has made HK a very favourable location in which to establish a shareholder company (usually termed a special purpose vehicle or SPV) for investment in China.

However, Circular 601 will significantly alter the benefits of using a HK SPV. The effect of the circular is that a HK SPV will be disregarded for determining the country of residence where it has limited functions and risk (basically where it does nothing but act as shareholder). Most SPV’s have very little functions and risk and this means that it is likely that such arrangements will no longer be entitled to obtain the benefits of the lower rate unde the China-HK  DTA. Instead one would need to examine the DTA of the country where the ultimate owner is located. If no such DTA exists, then a withholding tax rate of 10% will apply (withholding tax in China is 20% under the Enterprise Income Tax Law but this was reduced to 10% under the Implementing Regulations).

This Circular is the latest act by the SAT to aggresively reduce off-shore tax avoidance practices. It should also be noted how this Circular is linked to the transfer pricing rules (which examine a company’s functions and risks in determining if related party transactions are reasonable). The SAT will continue to place considerable emphasis on function and risk going forward. As I have said previously we now have a very different tax environment in China than 2 years ago. Interesting times.

The Assistant Treasurer, Senator Nick Sherry, has released draft rewrites of 149 pages of income tax law for public consultation in a further step towards a single Income Tax Assessment Act.

He said this rewrite will move 149 pages from the 1936 Act and simplify it to 110 pages under the 1997 Act.

The High Court has held that legal advice privilege cannot be claimed in respect of tax advice received by a client from a tax accountant: R (on the application of Prudential PLC) v Special Commissioner of Income Tax (High Court, 14 October 2009). The court held that it was bound by the earlier Court of Appeal decision in Wilden Pump to reject Prudential’s contention that LPP should be construed as encompassing the advice of professionals other than lawyers on legal matters.

The case confirms, therefore, that, at common law, legal advice privilege will not be available for other professionals who advise on the law: whether accountants, insolvency practitioners, patent and trade mark attorneys, loss adjusters etc. Accordingly, it remains the case that it is only the clients of lawyers who are protected from disclosure of legal advice under legal advice privilege.

Background

HM Revenue & Customs (HMRC) served Prudential with notices under the Taxes Management Act 1970 (TMA 1970) seeking disclosure of documents relating to a commercially marketed tax avoidance scheme. Prudential sought judicial review of the decision to serve these notices and, in particular, argued that (1) the notices sought material subject to legal professional privilege (LPP) in the form of tax advice on the scheme received from PwC and (2) the notices sought material that was not relevant to the determination of any tax liability.

LPP defence

The House of Lords held in Morgan Grenfell that the TMA 1970 provisions authorising HMRC to require disclosure of material did not override LPP. Prudential sought to argue that LPP applies whenever “a person obtains skilled legal advice about tax law from an accountant, as opposed to a lawyer”, such that the legal advice on the tax avoidance scheme received from PwC was protected from disclosure.

It was common ground that there was no decided case in which the precise issue put forward by Prudential had been addressed and answered after a detailed examination of matter. Accordingly, the court went back to first principles and considered the intrinsic nature of LPP and its public policy justification. It was important to recognise the distinction between two aspects of LPP, legal advice privilege and litigation privilege. Importantly, the court was only concerned with legal advice privilege in this case. (Although Prudential argued that legal advice privilege and litigation privilege are integral parts of a single privilege right, and that, since litigation privilege can extend beyond lawyers in some circumstances so could legal advice privilege, the judge rejected the contention that the two aspects of LPP could not have separate requirements.)

The judge, Charles J, recognised that LPP is a common law principle and therefore can be developed by the courts to have regard to changing circumstances. Nevertheless, his review of legal advice privilege case law indicated that LPP is clearly linked to the legal profession and not just to the purpose and nature of the advice and assistance given. Indeed, the judge noted that all relevant textbooks (including Passmore: Privilege) “speak with a common voice that LPP applies to communications with lawyers and not other professionals” and that Parliament has proceeded on the basis that special provision needs to be made if an equivalent right is to be conferred clients of persons who are not members of the legal profession.

Ultimately, however, the judge held that he was bound by the earlier Court of Appeal decision inWilden Pump (curiously not referred to by either side in argument) to decide that legal advice privilege is, as currently determined, limited to legal advice from lawyers. Wilden Pump involved a claim that privilege applied to legal advice provided by patent agents. The Court of Appeal rejected that contention and the invitation to extend the common law privilege to other professionals with an important specialist knowledge of the law.

Relevance defence

Prudential pointed out that earlier guidance from HMRC (since withdrawn) had accepted that “pure legal advice”, that is advice concerned with whether specific pieces of legislation apply to a given transaction, is simply opinion on the law and would be exempt from disclosure except in exceptional circumstances. Prudential argued that departure from this practice was unlawful. The judge rejected this.

Firstly, there was no practice or policy to be departed from (it had been withdrawn, albeit without any fanfare).

Secondly, HMRC did accept that in many cases pure legal advice would not be disclosable as it would be irrelevant. However, the test for Prudential to overcome was whether HMRC had reasonable opinion that the documents contained or could contain information relevant to the tax liability in question. Information which may be relevant is not limited to factual material and it does not need to be necessary for the determination. To show that there was no possibility that the documents could contain relevant information is clearly a difficult burden.

In any event, based on documents already disclosed by Prudential, HMRC had formed the view that not all relevant documents had been disclosed. In particular, disclosed documents pointed to the existence of earlier drafts and proposals which would have relevance to how the scheme developed and correspondence with accountants dealing with implementation of the arrangements. These earlier documents suggested the careful omission of references to certain dividend payments, for example, to bolster arguments they were not an inevitability. The Special Commissioners had concluded that the officer was entirely reasonable to consider that the true purpose of the transactions had been glossed over in documents provided and that a decision to declare the dividend had already been made. That conclusion could not be impeached and, indeed, the court considered that what was being requested was not pure legal advice but information concerning the nature of the transactions and in particular what was or was not preordained.

Comment

Although the judge held himself bound by the decision in Wilden Pump, he did also accept that Prudential had put forward a “compelling, and indeed unanswerable, case” that in modern conditions accountants do what lawyers do in cases that establish LPP. He also expressed the view that “there is real strength in the argument that the extent of the right to refuse disclosure should not relate to the nature of the legal qualification of the person giving the advice”. The implication appears to be that, whilst the High Court could not amend the ambit of LPP, perhaps the Supreme Court might.

However, interestingly, the judge also suggested that rather than giving clients of accountants the same rights as clients of lawyers, a level playing field might also be achieved by reducing the rights of clients of lawyers to those of other professionals providing legal advice. Indeed, this appears to be the judge’s preference and he explicitly suggested that “the conclusion underlying LPP that there is a need for absolute confidentiality in respect of legal advice may need revisiting”. How this fits with Lord Hoffmann’s description of LPP is a “fundamental human right” is unclear.

As regards relevance, the decision supports HMRC’s current approach that, whilst pure legal advice is not normally relevant, in tax avoidance cases where the purpose of the parties is important, communications between adviser and client that go to the structuring of the scheme, the purpose of the scheme and whether certain elements are preordained are in a different category.

Ultimately, the decision means that clients of tax accountants, or indeed any other non lawyers that advise on legal issues, cannot claim legal advice privilege. As such, they will receive less protection from disclosure of legal advice than the clients of lawyers.

The Directorate General of Taxes of Republic of Indonesia (“DGT”) has issued two new tax regulations concerning the implementation of the Procedure of Double Tax Avoidance (DTA) agreement and the Prevention of Misuse of DTA agreement. In the regulations, DGT defines beneficial owner, agent, nominee and conduit company, as well as introducing two forms to be completed by the foreign taxpayers as a certificate of domicile. The tax regulations also govern the qualifyingforeign tax resident that can benefit from the reduced withholding tax tariff of tax treaty. The two new regulations will take effect on 1 January 2010.

Singapore has emerged the second largest investor in the Indian economy, contributing about nine per cent of the total foreign direct investment (FDI) into the country.

India received a total of US$35.16 billion (RM123 billion) from April 2008 through March 2009, with Singapore investing about US$3.4 billion (RM11.9 billion).

The Department of Industrial Policy and Promotion, under the Ministry of Commerce and Industry, has listed the island state behind Mauritius, while the United States was trailing after Singapore.

Most of Singapore’s investments were in the telecommunication, services, electrical equipment, power generation, oil refinery and transportation sectors.

Bulk of India’s FDI flows was via Mauritius, a tax haven due to its less than three per cent corporate tax, which attracted many foreign companies to channel their investments through the tiny Indian Ocean state.

Funds from Mauritius were estimated at about US$11 billion (RM38.5 billion), which was about 44 per cent of India’s total FDI.

American investments amounted to US$1.8 billion (RM6.3 billion) for the same period.

Source: Bernama 6 November, 2009

The ROC’s general policy toward tax treaties is to avoid double taxation, prevent fiscal evasion and strengthen substantive relations. The tax treaties that the ROC has entered into follow the OECD model and take into consideration matters relating to the political and fiscal status, economics, and trade of the mutual parties.

As of 31 December, 2008, there are 16 comprehensive income tax treaties and 14 international transportation income tax agreements which have been signed and brought into force. All tax treaties are listed below:

1. Comprehensive income tax treaties which cover all income flows: Australia, Belgium, Denmark, Gambia, Indonesia, Macedonia, Malaysia, the Netherlands, New Zealand, Senegal, Singapore, South Africa, Swaziland, Sweden , Vietnam and UK

2. International transportation income tax agreements: Canada, the European Union, Germany, Israel, Japan, Korea, Luxembourg, Macau, the Netherlands (Shipping, Air Transport), Norway, Sweden, Thailand and the United States.

The ROC’s withholding tax rate on dividends, interest, and royalties payable to a non-resident is 20%, but the dividend withholding rate is 30% for non-resident individuals and 25% for non-resident enterprises for investments not approved under the Statute for Investment by Overseas Chinese or the Statute for Investment by Foreign Nationals. However, with respect to dividends, interest, and royalties, reduced withholding tax rates ranging from 5-15% are provided for by treaty.

Source: Good Earth 9 November, 2009

From Business Standard

By: Mukesh Bhutani

Early last week, the Mumbai revenue department issued show cause notices to Vodafone, proposing to tax offshore transaction, as a result of which Vodafone acquired a controlling interest in GSM licences from Hutch.

This battle seems to be entering a climax, given developments in the past 18 months since the deal. Essentially, the dispute surrounds Indian tax administration’s claim to levy tax on controlling interest acquired by Vodafone (from Hutch) via a complex chain of offshore companies. Vodafone and Hutch claim that India does not have a right to tax such offshore sale transactions, given the interpretation of law on ‘transfer of assets’ located in India.

On the other hand, the tax administration continues to hold that such ‘indirect transfer of assets’ would be liable to tax in India, based on strict source based interpretation. As a matter of fact, several offshore transactions, including international takeovers and mergers have come under the tax administration’s scanner and multiple investigations are under way.

Recapping SC verdict
The last we heard on Vodafone was when, early this year, the Supreme court while declining to intervene in the matter, directed that Vodafone submit the relevant documentation to the revenue authorities such that a point of view can be formulated if indeed (the revenue) has the jurisdiction on such a deal. Remember, Vodafone besides challenging the withholding tax obligation, also challenged the jurisdiction (of revenue) to issue notices and seek information on the grounds that it is extra territorial.

Other grounds of challenge included constitutional validity of a retrospective amendment in 2008 budget to treat Vodafone as an “assessee in default” with respect to withholding tax obligation. The retrospective amendment, as most believe, was ostensibly intended to fasten withholding tax liability on Vodafone (as acquirer of interest in underlying Indian assets), should the tax administration fail in recovering tax from Hutch (alleged beneficiary of capital gains). To that, the courts declined to give its judement and felt that the most important aspect was ‘jurisdiction’ and not taxability or withholding obligation.

Whereas Vodafone seems to have rightly interpreted the apex court’s order that the revenue has merely assumed rights to determine the question of jurisdiction, the tax administration viewed it as a right to raise the tax demand, besides establishing jurisdiction. The fact that the revenue has issued a show cause suggests to me that the spirit of apex court’s decision is being adhered to.

Options before Vodafone
Though the contents of show cause notice are not public, in an unprecedented move, the revenue department issued a press release informing about the developments in the Vodafone case and in no uncertain terms, made its intent known to the world at large. The said release also mentions that Vodafone is being allowed time until November 16, to respond to the show cause.

It seems that the show cause notice runs into several hundred pages in addition to equal pages devoted to annexures. It will be interesting to observe how and when Vodafone responds to the show cause notice. If I paint a scenario, firstly, I feel the 16 day time period to respond is inadequate and I won’t be surprised if a suitable extension is sought. Secondly, what if Vodafone considers challenging the show cause? Plain reading of the Supreme court order suggests that Vodafone can challenge the jurisdiction (now that it has established it) and the jurisdictional High Court (Mumbai) shall have to admit the plea. It will not surprise me if Vodafone seeks a stay of proceedings until the high court gives its verdict on jurisdiction.

What would be the revenue department’s approach?
By thoroughly investigating the case and assembly of detailed facts (pursuant to supreme court’s order), the revenue seems to be bracing up for a long battle. The length of its show cause notice suggests a level of preparedness and spells out its intent loud and clear. The first step would be to establish jurisdiction and thereafter, raise the tax demand.

It is also clear that the revenue by not raising the issue on the taxability of income (in the hands of Hutch) shall successfully circumvent the dispute resolution panel (DRP) procedure, as mandated in the 2009 budget. The panel process suggests that all demands on foreign companies be subject to an approval by the panel, comprising of a collegium of 3 commissioners. Interestingly, the DRP provisions do not apply where a demand is being raised by invoking withholding tax provisions. Had the revenue pursued its case against Hutch, it would have been obligatory to follow the DRP process and thereafter, an appeal would lie with the tax tribunal.

International Developments
The international tax fraternity is anxiously observing the developments on Vodafone case as they continue to believe that India can exercise its fiscal jurisdiction to businesses that have a personal link or to income or assets which have a real or proprietary link to India. Further, taxation of capital gains has been intensively dealt with in model tax conventions, providing that the state of residence of a tax payer shall have primary jurisdiction to tax gains, subject to certain exceptions. However, despite established precedents, tax administrations in select jurisdictions are questioning international reorganisations.

Recently, Chinese tax authorities have asserted to impose tax on transfers by non-residents of equity interest that would otherwise appear not to be taxable in China. To me, these cases seem to have a treaty abuse undertone and do not in any way establish that China intends to tax all such transactions. Similarly, Brazil has been expanding its application of ‘substance over form’ doctrine in its tax law. Nevertheless, there are no reported instances of taxability of offshore transactions. Russian law allows tax authorities to disregard entities or recharacterise transactions, where there is ‘unjustified tax benefit’.

These provisions seem similar to proposals mooted in the direct tax code by way of general anti-avoidance rules. If the DTC provisions have to be viewed in its context, should India be imposing tax on such offshore sale transactions is a question in minds of the international tax fraternity? Though, the proposals under direct tax code clearly suggest that India would prospectively exercise its jurisdiction on such transfers (either by expansion of direct and indirect transfer of capital assets located in India or by invoking GAAR), it still doesn’t answer the question for past transactions under question.

Vodafone has become a case study in its own right, and it is anticipated that the case study be taken to a logical close. The question is how and when?

(The author is a Partner with BMR Advisors and views are entirely personal)

Source: Business Standard 9 November, 2009

Finance officials from the Group of 20 (G-20) industrialized and emerging market economies pledged to maintain economic stimulus measures until recovery from the global crisis is assured and asked the IMF to assess whether countries were on track for delivering strong, sustainable, and balanced growth to avoid future problems.

“Economic and financial conditions have improved following our coordinated response to the crisis,” the G-20 officials said in a statement. “However, the recovery is uneven and remains dependent on policy support, and high unemployment is a major concern. To restore the global economic and financial system to health, we agree to maintain support for the recovery until it is assured.”

Mutual assessment timetable

G-20 finance ministers and central bankers, gathered in the Scottish town of St. Andrews November 6-7, committed to a timetable for a new system of keeping an eye on each others’ economies, under which countries would present national and regional plans by the end of January to support sustainable recovery and job creation.

At their last meeting in Pittsburgh in September, G-20 leaders agreed a framework for peer review, assisted by the International Monetary Fund, that is designed to ensure that national economic policies are consistent with promoting balance in the global economy.

Officials want to avoid derailing the recovery by withdrawing the stimulus too soon or by leaving it so long that the resulting debt encourages investors to push up market interest rates. The IMF says the debt ratio of the advanced G-20 nations could be 40 percentage points above the pre-crisis level by 2014, threatening to drive up borrowing costs as much as 2 percentage points. The IMF outlined in a note to the G-20 leaders a series of seven principles to consider for unwinding the stimulus when appropriate.

The fragility of the rebound was highlighted by a report on November 6 showing the U.S. unemployment rate climbed to a 26-year high of 10.2 percent in October.

Financial sector tax

The G-20 officials—representing around 90 percent of the world’s wealth, 80 percent of world trade, and two-thirds of the world’s population—emphasized the need for quick implementation of banking industry reform, saying that stronger standards should be developed by the end of 2010, with the aim of implementation by the end of 2012 as financial conditions improve.

British Prime Minister Gordon Brown said it was time to consider a global financial levy, such as a tax on transactions or an insurance fee, to build up a “resolution fund” as a buffer against future bailouts. Banks needed “a better economic and social contract” that reflected their responsibilities to society. Any measures must be implemented by all major financial centers, Brown noted.

Following the Pittsburgh summit, the IMF has been working on suggestions for such a levy and plans to have some initial ideas by its Spring Meetings in April, to be held in Washington.

Several options

IMF Managing Director Dominique Strauss-Kahn told reporters the IMF was considering several options for the G-20 to look at. “We can’t go on with a system where some individuals take risks that finally all taxpayers, like you and me, have to pay for. The financial industry has made such big innovations that it is probably impossible to find a transaction tax that will not be avoidable by potential taxpayers. So it will be based not on transactions but on something else.”

He made it clear that there was no consideration of a currency transactions tax.

He said there were two possibilities for a financial sector tax, including a “possible windfall tax for 2009, a one shot thing.” The other would be a more long-term tax. Some trade off between regulation and taxation could be made: the more regulated a country, the less taxation would be needed. For example, European countries may need to tax the financial sector less because their banks were more regulated, while the less-regulated United States may want to impose a higher levy.

He said he was personally in favor of such a levy, that he referred to as “an IMF tax,” but countries could follow their own approach. “We don’t want an extra-simplistic solution that will not be effective. I am very pragmatic: I would prefer a second best solution we can all implement.”

“Think of it as a two-fold objective: (i) incentive for markets to take less risk; (ii) provide resources to an insurance fund if risk materializes.”

IMF First Deputy Managing Director John Lipsky is leading the group within the IMF to prepare a report for the G-20 on the issue. “It is widely accepted that deposit insurance should be funded by a tax on the banking system,” said Lipsky last month. “This can be viewed as a mandatory insurance plan. In the wake of the current crisis, it is appropriate to consider the same issues more broadly across the financial system.” The IMF’s report would cover how potential mitigation costs could be borne and whether it was right to think about specifically charging the financial sector.

Preventing the next crisis

Strauss-Kahn said the IMF was engaged with the G-20 in its deliberations on how the mutual assessment can be conducted and how the Fund could support and assist the G-20 efforts.. “We will ask countries to provide the overview of their policies for the next 2-3 years, and will check whether they add up—if they don’t we will provide scenarios and advice.”

G-20 leaders expect members to have completed their mutual assessment by April, with the aim of providing options to discuss when they meet in June. By November, they intend to refine those policy options “and develop more specific policy recommendations.”

“This will be the main job of the G-20 after this crisis: to prevent the next crisis,” Strauss-Kahn said. “We need to see how policies are consistent together or not.”

Asked by reporters what will happen if policies are not consistent, Strauss-Kahn said he did not expect to find that all G-20 countries’ policies were consistent with each other at present. “We need to provide advice to bridge the gap. It’s in the interest of all countries to avoid crises. If that’s true, they will work on this framework.”

Climate change

G-20 leaders also committed to take action to tackle the threat of climate change and work towards “an ambitious outcome” at a major UN conference in Copenhagen next month.

Officials are considering a finance package to help poorer nations develop green industries and adapt to climate change.

The G-20 comprises Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United States, and the rotating EU presidency.

Source: IMF Survey 7 November, 2009

Background

Many investments into China are typically structured with the use of offshore holding companies located in countries or territories that have tax treaties with China.  Popular holding company jurisdictions for China include Hong Kong, Macau, Singapore, Barbados, Cyprus,  Ireland, Luxembourg, Mauritius, and Seychelles.  Benefits of using a holding company structure include the reduction of PRC taxes with respect to PRC source income generated by the investment.  This includes dividends, capital gains, interest, royalties, and other income.  China generally taxes such income at a rate of 10% under domestic law.  With the right holding company structure, however, this tax may be reduced or even avoided entirely. 

Gradually, the SAT has upgraded its domestic tax law to combat perceived abuses in connection with tax treaty planning.  This began with a general anti-abuse provision in Article 47 of the Enterprise Income Tax Law, effective January 1, 2008 and was followed up by the SAT’s Implementation Regulations for Special Tax Adjustments rules on January 8, 2009 which specifically targets tax treaty shopping for anti-abuse sanctions.  Subsequent developments included a number of striking cases in late 2008 where local State Tax Bureaus in Chongqing and Xinjiang actually denied tax treaty benefits using different means (ignoring the holding company in Chongqing and denying treaty residence for Xinjiang).  More recently, the SAT issued procedural rules on August 24, 2009 which took effect from October 1, 2009 (i.e., Administrative Measure on Treaty Benefit Application for Non-resident Enterprises [Trial]) regarding applications for tax treaty benefits.  Under this guidance, holding companies seeking benefits must produce residency certifications and follow other formalities relating to the analysis of their bona fide residency status.  However, until today, no further guidance had been offered on how to conduct such an analysis regarding the tax authorities’ use of the 2008 anti-abuse provision in a tax treaty context. 

The Notice on the Interpretation and Recognition of “Beneficial Ownership” under Tax Treaties (“Circular 601”), issued on October 27, 2009 and released on November 5, 2009 now addresses this issue.  A summary of this major international tax development is set out below.

“Beneficial Owner” Concept is Defined

·            The “beneficial owner” entitled to benefits under an income tax treaty is defined as any person who owns or has control and dominion over the income or the rights or assets which may give rise to such income. 

·            A beneficial owner must be engaged in “substantive” business activities (e.g., manufacturing, distribution or management) in the form of “individuals, cooperation or other forms.”  A pure “conduit” company or shell company that is formed merely to fulfill legal registration obligations in a foreign jurisdiction does not qualify for treaty benefit as a beneficial owner.  Conduit companies refer to companies incorporated for the purposes of the “evasion or reduction of tax, the transfer or the accumulation of income.”

·            The PRC tax authorities will evaluate and determine beneficial ownership based on their “substance-over-the-form” concept. 

Identification of Typical Conduit/Shell Company Structures

Circular 601 sets out the following as negative factors which could determine unfavorable tax benefit treaty status for the applicant:

·            the applicant has the obligation to pay or distribute all or a substantial part of its income (e.g., more than 60%) to a third country resident within a prescribed time (e.g., within 12 months after receiving such income);

·            the applicant has no or almost has no other business activities other than holding the assets or interests pursuant to which such incomes are derived;

·            the applicant’s nature is such that its assets, size, and personnel is relatively small and not commensurate with the income it derives;

·            the applicant has no or almost has no rights of control or disposal with respect to the income, assets, or rights based on which income is derived, and the applicant does not assume any risks or rarely assume risks; 

·            certain income is not taxable or otherwise exempt from tax in the treaty country, or taxed at a very low effective rate;

·            there exists a back-to-back loan through the applicant with terms similar to those for the loan agreement with respect to which is relevant to treaty benefits; and

·            there exists back-to-back royalties through the applicant with terms similar to those for the IP license agreements which are relevant to treaty benefits such as for copyrights, patents, and technology transfer agreements.

In addition, in order to qualify as a “beneficial owner” entitled to tax treaty benefits, the burden will fall upon the applicant to provide supporting documentation showing that it does not fall within any of these factors typical of a conduit/shell company structure.

Circular 601 is a major development in connection with the structuring of investments into China and will have significant implications for existing structures.  Firms will need to re-evaluate the efficacy of certain holding company structures in the first instance, restructure existing structures which may have been based on earlier assumptions, and consider how longer term planning with respect to creating more substance and re-deployment features into holding companies can be used to maintain beneficial treatment. 
O’Melveny & Myers unofficial translation – Notice of the State Administration of Taxation Regarding Interpretation and Recognition of Beneficial Ownership under Tax Treaties (Circular 601)

SECOND Finance Minister Datuk Seri Ahmad Husni Hanadzlah clarified that the Real Property Gains Tax, effective January 1 next year, is fixed at 5 per cent, irrespective of the property disposal year.

“The Real Property Gains Tax for the first year is 5 per cent and is the same for the second, third, fourth and fifth year,” he reportedly said on Saturday.

In a statement released from Putrajaya yesterday, Ahmad Husni reiterated that in the 2010 Budget, the fixed 5 per cent tax to be imposed on the gains from the sale of property is irrespective of the holding period and the category of the owner.

This rate of 5 per cent will be implemented through the Real Property Gains Tax (Exemption) Order 2009. This Order will be gazetted as soon as possible and is effective January 1, 2010.

Therefore, the current rate of RPGT, which is higher than 5 per cent as in Schedule 5 of the Real Property Gains Tax 1976, will no longer be applicable.

The Second Finance Minster said there are three circumstances where the property owner is exempted from the 5 per cent gains tax.

The first is where the level of exemption is increased from RM5,000 to RM10,000 or 10 per cent of the chargeable gains.

The second, is when the property sale are gifts between parent and child, husband and wife, grandparent and grandchild. And finally, when the disposal of a residential property is a once in a lifetime transaction.

Source: Business Times 26 October, 2009