Excerpt from Practical China Tax and Finance Strategies by Peter Guang Chen (Deloitte Tax LLP, New York City). From http://www.wtexecutive.com/
Article 46 of China’s new Enterprise Income Tax Law (EITL) provides that a Chinese enterprise’s ability to deduct interest payments on borrowings from related parties is subject to a “prescribed standard.” However, the EITL, which became effective January 1, 2008, did not address what this “prescribed standard” would be. Without a clear answer on an acceptable debt-to-equity ratio in China, many financing and tax planning plans had to be put on hold, particularly for those multinational corporate groups doing cross-border intercompany financing of their subsidiary operations in China.
This important issue was addressed September 19, 2008 in a circular issued jointly by the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) (Caishui [2008] 121). Entitled “Notice on the Tax Deductibility of Related Party Interest Payments,” the circular defines the “prescribed standard,” by setting out the debt-to-equity ratio for related party borrowings.
Circular 121 affects all companies in China that borrow from affiliated parties (such as a parent company or a brother-sister company).
Circular 121 provides two sets of debt-to-equity ratios for related party borrowings: one for financial institutions, another for all other
enterprises:
• For financial institutions, the debt-to-equity ratio cannot exceed 5:1; and
• For all other enterprises, the debt-to-equity ratio cannot exceed 2:1.
Any related party interest payment exceeding the specified ratios is not allowed as a deduction in the current or subsequent years on the borrower’s Enterprise Income Tax (EIT) return, unless an exception applies. Under the exception, interest expense may be deducted if the enterprise can produce supporting documentation demonstrating that the financing was at arm's length or that the effective tax rate of the borrowing entity is not higher than the tax rate of the domestic related party that receives the interest.
sábado, 29 de noviembre de 2008
martes, 25 de noviembre de 2008
VAT at UCONN
Posted by Ruth Mason on taxprof/typepad.com:
"Rita de la Feria (Centre for Business Taxation, Oxford) presented The Pitfalls of Accepted VAT Wisdom: Lessons from the EU Experience at Connecticut as part of its Tax Lecture Series. Rather than addressing whether the United States should adopt a value-added tax, de la Feria focused on what the United States could learn from the European experience.
VAT is the world’s fastest growing tax, with 130 countries applying it in some form. De la Feria noted the irony that although the United States is the only major industrialized country without a VAT, Michigan was the first jurisdiction to apply a VAT. While de la Feria noted that the allures of VAT include simplicity, ease of assessment and collection, and effectiveness in raising revenue, she cautioned that certain aspects of the European implementation of VAT have reduced these benefits. Among other recommendations, de la Feria warned that VAT exemptions and rate differentials designed to achieve progressivity or encourage consumption of merit goods have lead to extensive tax planning and difficult line-drawing problems in Europe.
Two cases decided in the British courts illustrate her point. In Jaffa Cakes, the court had to decide whether the popular British confection was a cookie or a cake. If a cake, it would fall under the VAT exemption for food, whereas cookies were subject to the standard rate of 17.5%. With a healthy dose of humor, de la Feria described the case as well as the court’s standard of review. The court declared that the distinction between cookies and cakes could be drawn by reference to what happens when they go stale: cakes go hard; cookies go soft. In another case, relying in part on the fact that Pringles only contain 40% potato, a court found that Pringles should not be subject to the higher rate of VAT applicable to (unhealthy) “potato crisps.” De la
Feria noted the perverse effect of the Pringles ruling: the more filler in the chip, the more likely the exemption!
"Rita de la Feria (Centre for Business Taxation, Oxford) presented The Pitfalls of Accepted VAT Wisdom: Lessons from the EU Experience at Connecticut as part of its Tax Lecture Series. Rather than addressing whether the United States should adopt a value-added tax, de la Feria focused on what the United States could learn from the European experience.
VAT is the world’s fastest growing tax, with 130 countries applying it in some form. De la Feria noted the irony that although the United States is the only major industrialized country without a VAT, Michigan was the first jurisdiction to apply a VAT. While de la Feria noted that the allures of VAT include simplicity, ease of assessment and collection, and effectiveness in raising revenue, she cautioned that certain aspects of the European implementation of VAT have reduced these benefits. Among other recommendations, de la Feria warned that VAT exemptions and rate differentials designed to achieve progressivity or encourage consumption of merit goods have lead to extensive tax planning and difficult line-drawing problems in Europe.
Two cases decided in the British courts illustrate her point. In Jaffa Cakes, the court had to decide whether the popular British confection was a cookie or a cake. If a cake, it would fall under the VAT exemption for food, whereas cookies were subject to the standard rate of 17.5%. With a healthy dose of humor, de la Feria described the case as well as the court’s standard of review. The court declared that the distinction between cookies and cakes could be drawn by reference to what happens when they go stale: cakes go hard; cookies go soft. In another case, relying in part on the fact that Pringles only contain 40% potato, a court found that Pringles should not be subject to the higher rate of VAT applicable to (unhealthy) “potato crisps.” De la
Feria noted the perverse effect of the Pringles ruling: the more filler in the chip, the more likely the exemption!
lunes, 24 de noviembre de 2008
REITS españoles
"Hacienda impulsa los Reits", articulo publicado el 23-11-2008 , por Expansión.com:
El nuevo borrador del anteproyecto de ley que regula las sociedades cotizadas de inversión inmobiliaria, conocidas como SOCIMI (REIT por sus siglas en inglés), introduce importantes cambios para estimular su constitución, como la posibilidad de poder alcanzar participaciones superiores al 5% y la exención de tributar por la obtención de dividendos.
Estas y otras modificaciones introducidas por el Ministerio de Economía y Hacienda en el borrador redactado en octubre, de acuerdo con las aportaciones del sector, tratan de asegurar un efectivo desarrollo de estas sociedades como instrumento de impulso del mercado de arrendamientos de inmuebles.
El borrador del anteproyecto de Ley establece que toda SOCIMI debe tener como objeto social invertir en bienes inmuebles urbanos para alquiler
Por lo pronto, el nuevo texto "abre la mano" a la participación eliminando el límite del 5% en las participaciones por socio, dando así entrada a socios mayoritarios, así como la obligación de tributar por los cobros de dividendos. Por el contrario, estas sociedades ya no podrán estar exentas de tributación, aunque lo harán al 18% por el Impuesto sobre Sociedades, por debajo del 30% del tipo general.
Así pues, la nueva configuración de las SOCIMI rompe algunas de las reglas que venían caracterizando a este tipo de sociedades en otros países donde ya están instaladas, ya que habitualmente cuentan con límites de participación y están exentas de tributación.
Requisitos
Por lo demás, el borrador del anteproyecto de Ley establece que toda SOCIMI debe tener como objeto social principal la inversión en bienes inmuebles de naturaleza urbana para su arrendamiento y debe cumplir una serie de requisitos.
Entre ellos incluye que el 85% de los ingresos, excluidos los derivados de la transmisión de las participaciones y de los bienes, deberán provenir del arrendamiento de viviendas y de dividendos. Asimismo, deberán distribuir al menos el 90% de los beneficios en forma de dividendos a sus accionistas y al menos un 50% de las plusvalías por la venta de inmuebles y participaciones.
Además, los bienes adquiridos por la sociedad deberán ser en propiedad. Concretamente, se establece que estas sociedades deberán tener invertido, al menos, el 85% del valor del activo en bienes inmuebles de naturaleza urbana en alquiler.
Por último, el texto indica que las SOCIMI deberán tener un capital social mínimo de 15 millones de euros, mientras que la deuda que podrán contraer no deberá ser superior al 60% del activo de la entidad.
viernes, 14 de noviembre de 2008
Brussels to close loopholes in tax evasion legislation
"Brussels to close loopholes in tax evasion legislation"
Article published by Vanessa Houlder in London and Nikki Tait in Brussels in Financial Times (www.ft.com) on November 13 2008
Brussels will today step up the pressure on international tax-dodgers when it unveils proposals for bolstering the European Union's savings tax system.
The European Commission is expected to close some of the loopholes in the savings tax directive, the EU's flagship initiative against tax evasion which came into force three years ago.
The directive originally aimed to flush out tax evaders by requiring exchange of information between countries, or withholding tax on payments in third countries, such as Switzerland, Liechtenstein and Andorra.
But critics say the omission of trusts, foundations and companies from the legislation allowed evaders to sidestep the directive's intended effect.
The Commission acknowledged coverage had been not as wide as originally anticipated after it reviewed the directive's implementation this autumn. Officials proposed technical amendments in four main areas.
They admitted that the directive had dealt only with interest payments made for the immediate profit of individuals resident in the EU - giving people an opportunity to circumvent the rules by interposing another legal person or arrangement situated in a non-EU country.
A possible solution would be to ask "paying agents" - such as banks - to use the information already available to them under anti-money-laundering rules about the ultimate beneficial owners of outgoing payments.
But the proposed changes could be controversial. The European Policy Forum, an independent think-tank, said last week that it believed extending the directive would risk an own goal because it would impose a heavy compliance burden on member states' financially vulnerable banking sectors.
A highly critical report by the EPF said the directive had not fulfilled its original goals: "Member state governments have found the exchange of information model difficult to apply with a number of countries reporting long delays, inaccurate data and a range of problems centring on pursuing reports of interest income received by taxpayers in other countries."
It warned there was "a real danger that an extended directive would simply add to banks' cost base for little net benefit". The 1,243 leading banks in the EU and Switzerland would face an additional bill of nearly €700m ($877m, £587m) from an extension of the directive, the EPF calculated. That compared with initial compliance costs of €753m, with annual compliance costs of a further €693m.
The EPF said extending the directive's scope would be time-consuming, and that it would be costly for banks to be certain whether income received from a particular financial product fell within the directive's catchment area or not.
The higher compliance costs might force banks to withdraw credit facilities to businesses and households. "Given the relatively modest amounts raised by the directive to date and the fragile status of many banks across the EU . . this would appear to be a misguided policy -initiative."
Article published by Vanessa Houlder in London and Nikki Tait in Brussels in Financial Times (www.ft.com) on November 13 2008
Brussels will today step up the pressure on international tax-dodgers when it unveils proposals for bolstering the European Union's savings tax system.
The European Commission is expected to close some of the loopholes in the savings tax directive, the EU's flagship initiative against tax evasion which came into force three years ago.
The directive originally aimed to flush out tax evaders by requiring exchange of information between countries, or withholding tax on payments in third countries, such as Switzerland, Liechtenstein and Andorra.
But critics say the omission of trusts, foundations and companies from the legislation allowed evaders to sidestep the directive's intended effect.
The Commission acknowledged coverage had been not as wide as originally anticipated after it reviewed the directive's implementation this autumn. Officials proposed technical amendments in four main areas.
They admitted that the directive had dealt only with interest payments made for the immediate profit of individuals resident in the EU - giving people an opportunity to circumvent the rules by interposing another legal person or arrangement situated in a non-EU country.
A possible solution would be to ask "paying agents" - such as banks - to use the information already available to them under anti-money-laundering rules about the ultimate beneficial owners of outgoing payments.
But the proposed changes could be controversial. The European Policy Forum, an independent think-tank, said last week that it believed extending the directive would risk an own goal because it would impose a heavy compliance burden on member states' financially vulnerable banking sectors.
A highly critical report by the EPF said the directive had not fulfilled its original goals: "Member state governments have found the exchange of information model difficult to apply with a number of countries reporting long delays, inaccurate data and a range of problems centring on pursuing reports of interest income received by taxpayers in other countries."
It warned there was "a real danger that an extended directive would simply add to banks' cost base for little net benefit". The 1,243 leading banks in the EU and Switzerland would face an additional bill of nearly €700m ($877m, £587m) from an extension of the directive, the EPF calculated. That compared with initial compliance costs of €753m, with annual compliance costs of a further €693m.
The EPF said extending the directive's scope would be time-consuming, and that it would be costly for banks to be certain whether income received from a particular financial product fell within the directive's catchment area or not.
The higher compliance costs might force banks to withdraw credit facilities to businesses and households. "Given the relatively modest amounts raised by the directive to date and the fragile status of many banks across the EU . . this would appear to be a misguided policy -initiative."
viernes, 7 de noviembre de 2008
Andorra open to foreign takeovers
Andorra open to foreign takeovers
Article published by Mark Mulligan in Financial Times (www.ft.com) on November 7 2008
Andorra, the tiny Pyrenees principality, will on Friday open its borders to foreign takeovers as part of efforts to modernise the economy and shake off its image as a shady financial centre.
Under legislation passed in April, foreign investors will be allowed to control 100 per cent of companies in 200 designated sectors, while controls will be eased in core activities such as construction, tourism and retailing. Foreigners will be allowed to own 49 per cent of the capital in companies in these sectors, compared with 33 per cent at the moment.
Friday’s reforms follow the creation this year of companies’ register, to which local businesses will have to file regular accounts using international standards. There are also plans to introduce corporate tax of between 5 and 10 per cent, and value-added tax of 4 per cent.
At present, there are no direct taxes on companies and individuals in Andorra, making it a popular base for the wealthy from countries such as Spain, Portugal, France and the UK.
The changes are part of an effort to restructure the tiny economy, which relies on tourists – mainly skiers – for about 60 per cent of its E2.5bn gross domestic product. Global turbulence is expected to hit tourism hard, and Andorra has also seen a sharp downturn in construction activity, which accounts for about 10 per cent of GDP.
Juli Minoves, economic development minister, on Thursday described them as “important reforms, introduced at moment when they are most needed”.
However, the changes are also aimed at improving relations with Spain – which slaps a punitive 25 per cent tax on services provided by Andorran companies – and with the Organisation for Economic Co-operation and Development, which has Andorra on its list of un-co-operative tax havens.
This classification has taken on sinister connotations since the 2001 terrorist attacks in the US, as the hunt for al-Qaeda put secretive tax havens under the spotlight as possible sanctuaries for financiers of terrorist groups.
This, added to a series of financial scandals, has increased the pressure from the US and European Union on micro-countries such as Andorra and Liechtenstein for more transparent banking and taxation.
Copyright The Financial Times Limited 2008
PD: in fact is 24% currently, not 25%
miércoles, 29 de octubre de 2008
Ticklish issue of whether or not to migrate to another tax jurisdiction
Financial Times (www.ft.com) has just published a very interesting article entitled "Ticklish issue of whether or not to migrate to another tax jurisdiction", wrote by Vanessa Houlder:
Amid this Autumn’s financial turmoil, WPP, the world’s second largest advertising group, unveiled big tax savings from a small but significant change in its corporate structure.
It joined a handful of businesses – Shire, United Business Media, Regus, Charter and Henderson – in moving its holding company and tax base out of the UK.
More companies could follow suit. Richard Lambert, director general of the CBI, recently told a conference “any independent director worth her salt” would be asking whether the company should move headquarters for tax reasons.
Ashley Almanza, chief financial officer of BG and chairman of the Hundred Group, the influential lobbyist, says factors such as the judicial framework, the benefits of agglomeration and reputational issues ensure that any decision to move would not be taken lightly. “There are powerful reasons to stay,” he says.
But companies with large overseas operations could make big savings by moving their tax base to small, business-friendly regimes such as Ireland or Luxembourg.
The classic emigration route is via an “inversion”: setting up an overseas holding company, typically in Ireland, that acquires the old UK company on a share-for-share basis.
The company is usually incorporated in Jersey to ensure no stamp duty is payable. The UK company then sells its foreign subsidiaries to the new Irish holding company.
Provided the activities are mainly trading in nature, the gains should be exempt from capital gains tax under the “substantial shareholding exemption”.
The main reason why an inversion would save tax lies in the “controlled foreign companies” (CFC) rules, under which the UK taxes offshore passive income, such as royalties and interest. By contrast, it normally only taxes foreign profits when dividends are paid back to the UK.
These CFC rules have been tightened in successive Budgets. That has curtailed the ability of companies to do international tax planning.
For some companies intending to expand their overseas operations, the UK’s CFC regime is a powerful incentive to move to a country such as Ireland that has no CFC rules.
Another powerful force driving some multinationals to change their domicile is a fear that the CFC rules will become even tougher.
This prospect was raised by the Treasury’s consultation, launched last year, on how to reform the taxation of foreign profits.
The Treasury is sympathetic to a longstanding business request to allow the tax-free repatriation of foreign dividends. But it fears this concession will be used to find new ways to avoid tax.
As a result, it is considering adopting tougher CFC rules. After an outcry, it told businesses in July that it had dropped proposals to sweep all their overseas income relating to intellectual property into the British tax net through a new “controlled companies” regime.
The Treasury is also considering tightening up on the ability of businesses to inject debt into their UK operations, reducing their taxable profits. It has proposed a worldwide debt cap, which would stop UK entities having more debt than required to finance the worldwide group.
This proposal worries some multinationals, although the Treasury has said it would set it aside when a group was cash-rich for a temporary reason, such as completing a sale.
Henderson, the fund manager, estimated changing its domicile would cost £4.5m. Smaller or less profitable businesses or those with significant tax losses are unlikely to make big tax savings by moving.
Moreover, inversions carry risks. There is ample scope for a political backlash against businesses avoiding tax, particularly when taxpayers are having to bail out the financial sector.
There is also a risk of a change in the tax regime in the new domicile. Ireland has underlined its commitment to preserving its low corporate tax rate, even though it has announced other tax rises.
Another risk could flow from a Revenue & Customs’ investigation into whether the control of a business has genuinely left the UK.
The costs and risks mean inversions are not a sensible option for all international companies. The UK continues to attract the lion’s share of headquarters set up in Europe, according to Oxford Intelligence research for Ernst & Young. Peter Lemagnen, its managing director, suggests that smaller companies are still being drawn to Britain but the tax regime is a deterrent for some larger, more sophisticated companies.
Historically, the UK won more than 40 per cent of headquarters investment in Europe; last year it fell to 30 per cent.
Philip Cox, chief executive of International Power, which owns power stations in 20 countries, says his group’s ability to compete will be severely hampered if foreign interest income is swept in the British corporate tax net. “For us, the treatment of overseas profits is critical. It can be a deciding factor on winning or losing a bid.”
Copyright The Financial Times Limited 2008
Amid this Autumn’s financial turmoil, WPP, the world’s second largest advertising group, unveiled big tax savings from a small but significant change in its corporate structure.
It joined a handful of businesses – Shire, United Business Media, Regus, Charter and Henderson – in moving its holding company and tax base out of the UK.
More companies could follow suit. Richard Lambert, director general of the CBI, recently told a conference “any independent director worth her salt” would be asking whether the company should move headquarters for tax reasons.
Ashley Almanza, chief financial officer of BG and chairman of the Hundred Group, the influential lobbyist, says factors such as the judicial framework, the benefits of agglomeration and reputational issues ensure that any decision to move would not be taken lightly. “There are powerful reasons to stay,” he says.
But companies with large overseas operations could make big savings by moving their tax base to small, business-friendly regimes such as Ireland or Luxembourg.
The classic emigration route is via an “inversion”: setting up an overseas holding company, typically in Ireland, that acquires the old UK company on a share-for-share basis.
The company is usually incorporated in Jersey to ensure no stamp duty is payable. The UK company then sells its foreign subsidiaries to the new Irish holding company.
Provided the activities are mainly trading in nature, the gains should be exempt from capital gains tax under the “substantial shareholding exemption”.
The main reason why an inversion would save tax lies in the “controlled foreign companies” (CFC) rules, under which the UK taxes offshore passive income, such as royalties and interest. By contrast, it normally only taxes foreign profits when dividends are paid back to the UK.
These CFC rules have been tightened in successive Budgets. That has curtailed the ability of companies to do international tax planning.
For some companies intending to expand their overseas operations, the UK’s CFC regime is a powerful incentive to move to a country such as Ireland that has no CFC rules.
Another powerful force driving some multinationals to change their domicile is a fear that the CFC rules will become even tougher.
This prospect was raised by the Treasury’s consultation, launched last year, on how to reform the taxation of foreign profits.
The Treasury is sympathetic to a longstanding business request to allow the tax-free repatriation of foreign dividends. But it fears this concession will be used to find new ways to avoid tax.
As a result, it is considering adopting tougher CFC rules. After an outcry, it told businesses in July that it had dropped proposals to sweep all their overseas income relating to intellectual property into the British tax net through a new “controlled companies” regime.
The Treasury is also considering tightening up on the ability of businesses to inject debt into their UK operations, reducing their taxable profits. It has proposed a worldwide debt cap, which would stop UK entities having more debt than required to finance the worldwide group.
This proposal worries some multinationals, although the Treasury has said it would set it aside when a group was cash-rich for a temporary reason, such as completing a sale.
Henderson, the fund manager, estimated changing its domicile would cost £4.5m. Smaller or less profitable businesses or those with significant tax losses are unlikely to make big tax savings by moving.
Moreover, inversions carry risks. There is ample scope for a political backlash against businesses avoiding tax, particularly when taxpayers are having to bail out the financial sector.
There is also a risk of a change in the tax regime in the new domicile. Ireland has underlined its commitment to preserving its low corporate tax rate, even though it has announced other tax rises.
Another risk could flow from a Revenue & Customs’ investigation into whether the control of a business has genuinely left the UK.
The costs and risks mean inversions are not a sensible option for all international companies. The UK continues to attract the lion’s share of headquarters set up in Europe, according to Oxford Intelligence research for Ernst & Young. Peter Lemagnen, its managing director, suggests that smaller companies are still being drawn to Britain but the tax regime is a deterrent for some larger, more sophisticated companies.
Historically, the UK won more than 40 per cent of headquarters investment in Europe; last year it fell to 30 per cent.
Philip Cox, chief executive of International Power, which owns power stations in 20 countries, says his group’s ability to compete will be severely hampered if foreign interest income is swept in the British corporate tax net. “For us, the treatment of overseas profits is critical. It can be a deciding factor on winning or losing a bid.”
Copyright The Financial Times Limited 2008
sábado, 25 de octubre de 2008
Regulating Tax Competition in Offshore Financial Centers
Regulating Tax Competition in Offshore Financial Centers
Craig M. Boise (Case Western Reserve University - School of Law) published this paper at Case Legal Studies Research Paper No. 08-26
Here is the Abstract:
One of the more entrenched issues in international taxation over the last thirty years has been how to define and respond appropriately to harmful tax competition among nations, especially competition from offshore financial centers (OFCs). The Organization for Economic Co-operation and Development (OECD) and the European Union (EU) have both mounted initiatives seeking to regulate such competition, and OFCs have strongly objected to these initiatives as an abrogation of their sovereignty in tax matters. This paper provides an introduction to the debate over the regulation of international tax competition, beginning with an overview of the essential architecture of international taxation and the way that its structure creates problems for developed countries and opportunities for OFCs, and continuing with an assessment of the arguments asserted in favor of, and against, regulating tax competition.
The paper then examines how developed countries, through the OECD and EU, have defined international tax competition, and the efforts made by both organizations to regulate such competition. Finally, the paper draws on the way the OECD and EU dealt specifically with the twin touchstones of virtually all definitions of tax havens-low or no income taxation and bank secrecy-to suggest the direction that regulation of tax competition is likely to take in the future.
Available at SSRN: http://ssrn.com/abstract=1266329
Suscribirse a:
Entradas (Atom)