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Taxand's Take - Your regular update on the latest issues affecting multinationals

Taxand's Take - Your regular update on the latest issues affecting multinationals
22 Jul 2011

Welcome to the latest edition of Taxand's Take - your regular update on the topical tax issues affecting multinationals. Accessible online this newsletter is sent to you every two months. And Taxand's Take will give you just that - informed opinion on the latest tax changes and how they affect you.

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SPAIN - Spanish Tax Agency Attacks Multinationals with Highly Leveraged Spanish Subsidiaries

5 years ago the Spanish Tax Agency started to challenge the tax deductibility of interest on intra-group loans provided to Spanish affiliates, where the financing was raised to acquire non-resident entities already belonging to the same multinational group. They based their attack on general anti-abuse provisions, arguing that those structures were aimed at eroding the corporate income tax base and were not based on valid business reasons. The Tax Agency initially applied the "fraud upon the law" proceeding, which in Spain cannot trigger penalties (ie the taxpayer followed the literal wording of the law, albeit to achieve an "unfair" tax saving). Since then, there have been isolated cases where the Tax Agency's inspectors have followed a more aggressive approach: "simulation" (which does trigger penalties) and / or "tax offence" (potential imprisonment and very severe penalties). The Tax Agency has recently released an internal report encouraging tax inspectors to carefully consider, on a case-by-case basis, whether the "simulation" or "tax offence" approaches can be used, rather than the more traditional and less aggressive "fraud upon the law". Taxand Spain considers the impact this will have on multinational corporations with a subsidiary in Spain.

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INDIA - Verizon Ruling in India - What is the Way Forward?

The secondment of expatriate employees to work in India is not new, and yet with robust growth in business opportunities and India's emergence as a global player, the frequency with which multinational companies have been regularly seconding its employees to their Indian subsidiaries and joint ventures ("JVs") in India has increased manifold. While such secondment arrangements are driven primarily by commercial considerations, tax implications for the parties involved and the seconded employee has been a subject matter of controversy in the last few years. The genesis of some of these controversies is due to the lack of clear provisions in the Indian Income Tax Act, 1961 ("the Act") laying out the tax implications. In the absence of such well defined statutory principles or guidelines elaborating the tax treatment, the dependence on interpretation by Indian judiciary has been fairly pronounced. The recent ruling of the Authority for Advance Rulings ("AAR") in the case of Verizon Data Services has only resulted in creating greater divide in the judicial pronouncements on the issue of taxability of such reimbursements of salary cost to the foreign employer. Taxand India reviews the latest Verizon Ruling to establish what should be the way forward from here.

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GERMANY / NETHERLANDS - ECJ V Scheuten Solar: Verdict Concluded

On 21 July 2011 the ECJ concluded the Scheuten Solar Technology case. In its tax return, Scheuten Solar, a German corporate tax payer, had to add back 50% of the interest paid on a loan to the parent company in the Netherlands to its tax base for German trade tax purposes. This meant half the interest was effectively non-deductible. Since such payment of interest leads to an additional amount of trade tax (Gewerbesteuer), it was questioned whether this provision was compatible with the EU Interest and Royalty Directive which aims to ensure that certain payments between associated companies shall be only once subject to tax. Taxand Germany and Taxand Netherlands review the outcome of the case.

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CANADA - Increased Costs, Less Efficiency and why the Legislative Gap on Taxation needs to be Addressed

Budget day brings to mind Benjamin Franklin's quotation that there are only two certainties in life: death and taxes. While one cannot take issue with the first part of that statement, the second is increasingly coming into question. The fact that we have to pay tax is no less certain, but certainty in the detail of Canada's tax laws arguably has been decreasing. This results from the increasing "legislative backlog" - the gap between the announcement of changes to the tax system and the legislative enactment of those changes. This gap is making it increasingly difficult for Canadians to plan their affairs with confidence and certainty and to comply with their tax obligations. When taxpayers are uncertain about their obligations, their trust and faith in the system diminishes. The need to address the legislative gap was a subject of comment by then Auditor-General Sheila Fraser in her autumn 2009 report. In it, she stated that "taxpayers will not know the exact nature of ... proposed changes until they are enacted," with the result that taxpayers "may be uncertain when they file [their] tax returns," and that the negative effects of the legislative gap include higher costs of complying with tax laws, less efficiency in business transactions, and difficulties for publicly traded corporations in their financial reporting. Taxand Canada looks at the reasons for the legislative gap, and why a tax technical bill is overdue.

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FINLAND - Finnish CFC Legislation and the Impact of Taxation for Multinationals

In April the Finnish Supreme Administrative Court (SAC) issued two interesting rulings concerning controlled foreign companies (CFC). In the first ruling the SAC reversed its own previous ruling, where it had held that the CFC legislation was applicable in a situation where a Finnish parent company had a Belgian subsidiary. The second ruling concerned a Singaporean subsidiary, which was not treated as a CFC in the taxation of a Finnish company in tax year 2009. The basic idea of the CFC legislation is that a share in the income of a foreign company classified as a CFC can be considered as taxable income in the hands of a Finnish resident taxpayer, irrespective of whether that income has been factually distributed to the hands of that Finnish resident or not. Whether a foreign company is classified as a CFC may thus have a significant impact in Finnish taxation. Taxand Finland looks at these rulings and explores the impact such rulings have on multinational companies.

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ARGENTINA - Cross Border Software Licenses: Supreme Court Rules on Tax Treatment

After a long period of uncertainty, the Supreme Court finally ruled on the tax treatment applicable to royalties paid in consideration for cross-border software licenses. The decision re "Application Software S.A." supports the application of the 31.5% withholding income tax rate to royalty payments made to foreign corporate licensors instead of the reduced 12.25% rate. Following a heated debate amongst practitioners, and after the issuance of conflicting decisions reached by the different administrative and judicial courts, taxpayers are now aware of the scope of the provision. Taxand Argentina discusses how the Supreme Court sheds light on what the taxpayer should consider when conducting everyday transactions involving cross-border software licenses.

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ITALY - New Italian Tax Regime on Common Investment Funds to Benefit Foreign Investors

From 1 July 2011 a new tax regime involving Italian common investment funds will come into force. The main changes concern 1) the tax regime of Italian investment funds (other than real estate investment funds) and 2) the tax regime of proceeds arising in the hands of Italian resident investors from foreign investment funds not complying with the EU Directive 2009/65. Taxand Italy explores the new regime and how it will benefit foreign investors.

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US - Compensation Clawback Provisions: Why you Need to be Prepared

With the global economic crisis still on everyone's minds, jurisdictions all over the world have begun to address what caused the economic meltdown. Governments are exploring what went wrong and are attempting to fix the perceived problems in order to avert another crippling crisis. In the US, the Government responded by signing into law the Dodd-Frank Wall Street Reform and the Consumer Protection Act (the "Act"), which was aimed at restoring public confidence in the financial services industry. The Act ushered in the most sweeping changes to the US financial services industry and introduced enhanced corporate governance and compensation provisions generally applicable to all US exchange listed companies. The Act prohibits the listing of any issuer of a security that fails to adopt a mandatory recoupment policy of previously received compensation, ie a "clawback" provision. Tax issues pervade the repayment of compensation, which is a factor to be carefully considered as clawbacks find favour across global jurisdictions. It is in this context that Taxand US conducted a survey of US public and private companies across a wide spectrum of industries to gauge current practices and preparations for compliance with this part of the Act. Taxand US discusses the findings of the survey and examines some of the current complexities around implementing compensation clawbacks.

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The information contained in this document is intended only to be a guide. It must not be relied on in, or applied to, specific situations without previously seeking proper professional advice. Even though all reasonable care has been taken in its preparation, Taxand and all of its firms do not accept any liability for any errors that it may contain or lack of update before going to press, whether caused by negligence or otherwise, or for any losses, however caused, or sustained by any person. Descriptions of, or references or access to, other publications within this publication do not imply endorsement of them. As provided in the US Treasury Department Circular 230, this tax newsletter is not intended, or written by any Taxand firm, to be used, and cannot be used, by a client or any other person or entity for the purpose of avoiding tax penalties that may be imposed on any taxpayer.

Taxand firms have produced this tax newsletter in connection with the marketing of our tax services relating to matters discussed therein. Each taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor. Taxand is a global organisation of tax advisory firms. Each firm in each country is a separate and independent legal entity responsible for delivering client services.

(C) Taxand Economic Interest Grouping 2011

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