During the first few weeks of 2012 Malta signed two Tax Information Exchange Agreements (TIEA) and a double taxation agreement. Taxand Malta takes a look at the TIEAs and what impact they may have on a Malta as an investment destination. 

Malta and Gibraltar signed a TIEA which will provide both countries with tax information on request when there is evidence of fiscal crime. Also during the month of January 2012, Malta signed a TIEA with the Bahamas, to enable the two nations' tax authorities to share tax information on request. 

Malta signed a convention on the avoidance of double taxation with Saudi Arabia. Saudi Arabia is the largest and most powerful member of the Gulf Cooperation Council. No details on the tax treaty are available as yet. Malta has tax treaties with several other countries in the Gulf region such as Bahrain, Kuwait, Qatar, United Arab Emirates. Malta continues to prove an interesting jurisdiction for investors from the Gulf region investing in a number of other EU Member States.

According to preliminary media reports, Malta and Moldova will start negotiations with a view to conclude a double taxation agreement during March 2012. Malta continues to expand its treaty network and other bilateral agreements with a view to attract further investment to the Island and enhance its appeal as an international financial centre.

Taxand’s Take
Companies with business that operate between Malta and Gibraltar or the Bahamas would be well prepared to verify their tax documentation to make sure they are compliant in the face of heightened scrutiny. Taxpayers should watch out for further implications of the TIEAs as more announcements are made by the Finance Ministry.

Your Taxand contact for further queries is:
Walter Cutajar
T. +356 2730 0045   
E. walter.cutajar@avanzia.com.mt

This Finance Bill is a big one, all 279 pages of legislation. Unlike the rushed “bikini” Act last January, this one has taken time to deal with some administrative anomalies that have been on the long finger for some time now. Of note is the welcomed incentive to attract key employees to locate in Ireland. To get the projects to Ireland we need the champions to come here and not go to other more tax friendly locations that offer deals on their income tax burden. The initiative is sure to be criticised by some but not those who are employed and get employment from the new projects,  they will probably not care how much tax their boss is paying. Taxand Ireland considers the Finance Bill and the implications to the taxpayer.

As in previous years, the bomb shells tend to now get dropped in at the last minute so there is little time to debate them, so watch out for the committee stage and report stage amendments.

And finally, perhaps our legislators do actually read their history and concerned that the peasants will rise up due to the price of bread, they have decided not to follow the French advice to “let them eat cake” but rather to change the acceptable sugar content of bread for VAT purposes and ensure that our favourite breads remain at the 0% VAT rate.

Taxand’s Take
Taxpayers would be prudent to keep informed about further announcements coming in the near future after the committee stage and report stage amendments. This will ensure they are fully informed to take the correct decisions in regards to their tax situation.

Your Taxand contact for further queries is:
Martin Phelan
T. +353 1 639 5138
E. martin.phelan@williamfry.ie

The IRS initiated its third Offshore Voluntary Disclosure Initiative (“OVDI”) in January 2012.  According to the IRS, it collected $3.4 billion from the first program in 2009, which corresponds to closures of about 95 percent of the open cases.  Add to that another $1 billion from just the up-front payments received by IRS from the 2011 program and you can begin to appreciate why the IRS likes these programs so much. So why not give it another try? Just to make sure!  Taxand US looks at the issue of VDIs and considers how the new initiative will affect Taxpayers.

Between the first two programs (2009 and 2011) the IRS received 33,000 voluntary disclosures and continued to receive enquiries and disclosures after closing the 2011 program. The IRS says that the new program addresses the continued interest of taxpayers and their tax practitioners to come clean before they find themselves under an IRS audit. Internal Revenue Service Commissioner Doug Shulman said “[a]s we’ve said all along, people need to come in and get right with us before we find you. We are following more leads and the risk for people who do not come in continues to increase.”

Overview of New Program
The administrative and overall penalty structure of the new OVDI generally parallels the 2011 OVDI.  For example, taxpayers eligible for the lower penalty rates (5 or 12.5 percent) will see no change in the rate. However, a notable deviation from the prior programs is that taxpayers in the highest penalty category will experience an increase in the rate from 25 to 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or the value of foreign assets during the eight full tax years prior to the disclosure; perhaps, a subtle indication from the IRS that the clock is expiring on these reduced rates.

The 2012 OVDI participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years, as well as pay accuracy-related and/or delinquency penalties. Unlike the prior initiatives, the reopened OVDI has no deadline and the IRS may terminate the program at its discretion. Any voluntarily disclosures made after the closure of the 2011 program, but prior to the announcement of the 2012 program, will be examined under the provisions of the new OVDI.

As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined. Taxpayers must also file the corresponding Forms TD F 90-22.1, Report of Foreign Bank and Financial Accounts, for all undisclosed foreign accounts held by the taxpayer during the period covered by the program.

Taxand’s Take
Many questions regarding the new OVDI remain unanswered, particularly with respect to dual citizens and other nonresidents who have been unaware of their U.S tax and information reporting obligations. The IRS is expected to issue more guidance on the new program in the upcoming months. Persons who find themselves in a non-compliant position with the IRS should weigh the risks and options associated with the new OVDI as they determine the best course of action. 

Your Taxand contact for further queries is:
Juan Carlos Ferrucho
T. + 1 305 704 6670
E. jferrucho@alvarezandmarsal.com

The Supreme Court of India recently pronounced its decision in the controversial USD 2 billion tax dispute in favour of Vodafone. The decision reinforces many of the important international taxation principles, as well as the importance of adherence to the Rule of Law. Taxand India discusses the implications of the pronouncement as presented in a recent webinar.

Decision of the Bombay High Court

• Essence of the transaction was a change in the ‘controlling interest’ of HEL, which constituted a source of income in India
• Transaction had significant nexus with India; hence withholding tax provisions applicable
• Several other rights transferred besides the CGP share - the consideration should be allocated over such rights also

Taxand India provides a considered analysis of the Vodafone case and the Supreme Court ruling (PDF)

Taxand’s Take
This landmark ruling reinforces many historically established canons of taxation, provides a stamp of approval to international holding company structures and the modern trends of contractual rights built in shareholders’ agreements. The judgment will help address several contentious issues including those with respect to scope of tax planning, applicability of anti avoidance rules, issues regarding situs of shares and applicability of withholding tax provisions.

Your Taxand contact for further queries is:
Mukesh Butani
T. +91 124 339 5010
E. mukesh.butani@bmradvisors.com

In addition to rules on thin capitalisation and arm’s length interest rates, France has just introduced a new rule that disallows the deduction of interest and other financing expenses incurred for acquisitions if the decisions relating to the shareholdings are not made in France or the control or influence over the acquired company is not exercised in France. This new rule affects the tax treatment of French and non-French acquisitions by French companies held by international corporate groups or private equity funds that do not have an autonomous decision making centre in France. Taxand France analyses the tax new rules in acquisition transactions and how this will affect multinationals.

Description of the New Rule
Under the new rule, interest and other financing costs incurred by a French company upon the acquisition of a participation shareholding will not be deductible for French tax purposes if the French acquiring company is not able to demonstrate, by whatever means, that:

• the decisions relating to the acquired shareholding are effectively made in France by itself directly or
• by its French resident controlling or sister company; and
•  the ‘‘control or an influence’’ over the acquired company is also effectively exercised in France by
• the French acquiring company directly or by its French-resident controlling or sister company

Taxand France takes a closer look at the new rule

Taxand’s Take
Although the way it is written indicates the contrary, this new rule is clearly and solely an anti abuse provision. Therefore, in theory, it should only target structures with an artificial location of a holding in France; otherwise its compatibility with EU law would be questioned. Its actual impact, however, will depend on the attitude of the French tax authorities. It is not clear whether they will require the French acquiring company to have a high degree of substance. As it is not in the tradition of French tax authorities to give clear-cut criteria for the application of anti abuse provisions, the new rule will probably require the auditing of past and future acquisitions by French companies to ensure the deductibility of interest and other financing expenses. It is also advisable to prepare documentation to prove that the French acquiring company (or its French resident controlling or sister company) held by an international corporate group or investment fund plays a key role in the management of the acquired companies.

Still, it is too soon to qualify this badly conceived new anti abuse provision as a sledgehammer to crack nuts.

Your Taxand contact for further queries is:
Nicolas Jacquot
T. 33 1 70 38 88 08
E. nicolas.jacquot@arsene-taxand.com

First printed in Tax Notes International, 23 January 2012 (PDF)

The capital contribution principle was introduced as of 1 January 2011. Since then contributions, share premiums (agios) and informal contributions to equity which have been paid by shareholders since 1 January 1997 or will in the future be paid, may be repaid to the shareholders free of withholding tax by means of a dividend resolution. The time limit for notifying the Federal tax administration of capital contributions made between 1 January 1997 and 31 December 2010 expires no later than 30 days after the approval of the annual financial accounts for 2011 or 2010/2011. Taxand Switzerland discusses the urgent deadline for existing capital contribution reserves and actions that companies need to take to ensure their tax position is within the capital contribution principle.

Capital contribution principle
When the capital contribution principle was introduced as of 1 January 2011, the system shifted from the nominal value principle to the capital contribution principle. Since then contributions, share premiums (agios) and informal contributions to equity which have been paid by shareholders since 1 January 1997 or will in the future be paid, may be repaid to the shareholders free of withholding tax by means of a dividend resolution. Such repayments are generally no longer subject to income tax for individuals who are Swiss residents.
 
The time limit for notifying the FTA of capital contributions made between 1 January 1997 and 31 December 2010 expires no later than 30 days after approval of the annual financial statements for 2011 or 2010/2011.

Taxand’s Take
Swiss corporations which have not yet notified existing capital contribution reserves should take the following measures as a matter of urgency:

• Capital contributions made after 1 January 1997 must be identified and determined using the annual financial statements and other documents
• The capital contributions must be converted or entered into the 2011 commercial balance sheet as “capital contribution reserves”. Capital contribution reserves constitute a separate sub-account of the legal reserves
• The capital contribution reserves established in the period between 1 January 1997 and 31 December 2010 must be reported to the Swiss Tax Administration within the time limit, i.e. no later than 30 days after approval of the annual financial statements for 2011 or 2010/2011

Your Taxand contact for further queries is:
Roger Dall’O
T. +41 44 215 77 77
E. roger.dallo@taxpartner.ch

Watch out for Taxand Switzerland’s full update on forfeiture deadlines and how they impact MNCs in our upcoming March Taxand’s Take

Sales and use tax compliance is not a simple process. In the United States, there are over 11,000 taxing authorities with constantly changing sales tax rates and laws. The rules and regulations for each taxing jurisdiction are slightly different from the next, resulting in mounting complexities when it comes to compliance. With respect to purchases of products and services, the vast majority of companies rely on their vendors to assess any applicable sales taxes due on a particular transaction. Taxand US analyses the considerations to be taken into account as a company evaluates whether it should self-assess tax on purchases of products and services.

Direct Payment of Use Taxes - the Benefits
In most jurisdictions, a company must obtain approval to "direct pay" taxes to the jurisdiction. Some jurisdictions require a company to demonstrate its ability to fulfill several qualifications imposed by the jurisdiction. Once the company obtains approval to direct pay use taxes on its taxable purchases, the company may issue a direct payment exemption certificate to a vendor for the purchase of taxable items and services that are purchased for its own use and that will not be resold. The primary advantages of obtaining a direct payment permit are as follows:

• Companies have direct control over the payment of taxes
• A company can control the timing of tax paid on items purchased
• In some states, a company can maintain a tax-free inventory so tax is not paid on items that are ultimately used in another state
• Local tax savings - for instance, in Texas, local taxes are based on the location where a taxable item is first used. Therefore, local taxes may not be due on purchases shipped outside a local taxing jurisdiction for first use

Taxand US discusses the issue of self-assessment on purchases in more detail

Taxand’s Take
As you can see, several important considerations must be taken into account as a company evaluates whether it should self-assess tax on purchases of products and services. At a minimum, each company must carefully evaluate its business operations, the history of its compliance function and the costs associated with implementing such a process.

Your Taxand contact for further queries is:
Craig Beaty
T. + 1 713 221 3933
E. cbeaty@alvarezandmarsal.com

Law 4034/2011 ratified the Protocol signed on 4 November 2010 by Greece and Switzerland amending the relevant Convention for the avoidance of double taxation with respect to income taxes. The amending Protocol introduced various amendments which follow the latest version of the OECD Model Tax Convention, the most important being the amendments made in the articles relating to dividends, interest, capital gains as well as to the exchange of information. Taxand Greece examines the amendment looking at how this may affect companies with interests across Greece and Switzerland. 

In particular, the key features of the amendments are as follows:
Replacement of Article 10 paragraph 2 of the DTC “Dividends”. Under the amended provision, the maximum dividend withholding tax rates that may be imposed by the Source State are:

(i) 5 per cent on the gross amount of dividends when the beneficial owner is a company of the other Contracting State, other than a partnership, participating directly by at least 25 per cent in the share capital of the distributing company or
(ii) 15 per cent on the gross amount of dividends in any other case.

Under the previous regime, the above rates applied only to distributions made by Swiss subsidiaries. Distributions made by Greek subsidiaries of Swiss parent entities could be subject to a maximum withholding tax rate of 35 per cent.

Taxand Greece takes a look at the amendments and other recent tax developments in Greece

Taxand’s Take
The amendment explicitly states, among others, that a Contracting State may not deny the provision of information held, among others, by financial institutions, nominees or other persons acting in a fiduciary capacity, provided that certain requirements are satisfied. The date of entry into force of these amendments was 1 January 2012.

Your Taxand contact for further queries is:
Yerassimos C. Yannopoulos
T. +30 210 6967066     
E. y.yannopoulos@zeya.com

The Revenue Commissioners have won a Supreme Court case in relation to tax planning carried out by O’Flynn Construction Ltd between 1991 and 1992. In the first decision of its kind, the Supreme Court held that the Revenue Commissioners were correct in forming the opinion that OFCL had engaged in tax avoidance. This upholds the earlier High Court decision in favour of the Revenue Commissioners. Taxand Ireland considers this case and how it may affect whether similar transactions are looked upon as tax avoidance cases.

The scheme at issue involved a complex series of transactions consisting of 40 individual steps carried out over a period of 50 days. In summary, it involved the sale by a company entitled to Export Sales Relief (ESR) of its ESR reserves to OFCL, a company set up by the O’Flynns. OFCL then paid a tax free dividend to its shareholders. The tax exemption for the dividends arose because the original source of the reserves which funded the dividend was income which qualified for ESR.  

The scheme complied with the legislation which provided for ESR and was within the strict letter of the law. However, it was accepted that it was an entirely artificial transaction with no commercial reality. The issue before the Court was whether the transaction resulted directly or indirectly in the “misuse or abuse” of the ESR provisions, having regard to the purpose for which ESR was provided. If it did so result, the transaction would be regarded as a tax avoidance transaction under the general anti-avoidance provisions.

The Court held that regardless of whether the transaction came within the strict wording of the ESR provisions, the tax saving should be disallowed. The Court determined that the scheme was highly artificial, was arranged primarily to give rise to a tax advantage, and was a misuse or abuse of the tax relief. The purpose of the relief was not to allow the shareholders in a non-exporting company to benefit from ESR on the profits of the non-exporting company.

Taxand Ireland discusses the case in greater detail

Taxand’s Take
The decision confirms Revenue’s ability to look at the purpose for which tax relief was introduced in determining whether a transaction, which takes advantage of such a relief is a tax avoidance
scheme.

Your Taxand contacts for further queries are:
Sonya Manzor
T. +353 1 639 5212
E. sonya.manzor@williamfry.ie

Orla Maher
T. +353 1 639 5000

On 29 November 2011, in the case of Symbion Capital I A/S vs. the Danish Ministry of Taxation the Danish Supreme Court stated, that in order for a company to deduct management fees as operating costs (i) the management services themselves must be part of the ordinary business of the company paying the fee, and (ii) the management company must have taxable income. Taxand Denmark discusses whether the Symbion decision will have a significant impact on investment and holding companies' ability to deduct operating costs in the future.

The key issue in the Symbion case was the possibility for an investment company to deduct management fees as an operating cost in the investment company. The specifics of this case was, that Symbion had employed a management company to conduct a number of tasks in connection with the management of its portfolio companies, including participation in the board of directors, and drafting of interim reports, exploring future means of increasing the value of the portfolio companies. Symbion wanted to deduct the management fees paid to the management company as an operating cost in the investment company rather than in the portfolio companies. The Danish Eastern High Court refused Symbion the right to deduct management fees, saying that a company can only deduct expenses as operating costs if the expenses were paid by the company as part of its ordinary business and with the purpose of realising taxable income.

The Supreme Court restated the decision by the Eastern High Court so far as saying that an expense must be paid as a part of the company's ordinary business of making money in order for it to be a deducible operating cost. However, the Supreme Court further stated that it is not a requirement that the expense was paid with the intent of receiving taxable income, it is sufficient that taxable income was realised. The decision contains no guidance as to the amount of taxable income required, but the deduction was allowed, even though, there as a consequence of the tax losses of the company, was no actual taxable income in the company.

In addition to the requirement of taxable income established in the Symbion decision, the decision also lists a variety of other elements which must be taken into consideration when considering whether or not it will be possible to deduct management fees as operating costs.

Taxand’s Take
Although the Symbion decision may have a positive effect on investment companies entitlement to deduct expenses, it may have the opposite effect on holding companies. The decision provides investment companies, with taxable income, with the possibility to deduct management fees as operating costs, subject to other limitations in the Danish Tax legislation. On the other hand, holding companies, with no taxable income may, for the reasons listed above, be facing serious problems in the future

The key focus areas for investment companies in the future will be the ability to demonstrate that management services are within the business scope of the company, and for holding companies, on ensuring the realisation of taxable income. For both type of companies, it will be important to stay well within the limits of current legislation, especially the rules on transfer pricing.

Your Taxand contacts for further queries are:
Arne Riis
T. +45 72 27 33 22
E. ari@bechbruun.com

Kaspar Bastian
T. +45 72 27 34 24
E. kba@bechbruun.com