Nexia International 2010 Annual Tax Conference. Tax Conference Norbert Neu Chairman.

Nexia International

2010 Annual Tax Conference

Tax Conference

Norbert Neu

Chairman

Board activity: major issues 2009-10

Done International Risk Review Removal of Referral Fees Amended Constitution Improved Financial Reporting Recruitment of Executive Director

Board activity: major issues 2009-10

To Do Review/reorganisation of Nexia Structure Amalgamation of Europe and MEA regions Network/Association Review Strategy Development

Amalgamation of Europe + Middle East & Africa regions

Consistent with international structure of peer organisations, networks & associations

Enables Nexia to strengthen resources/capacity of Middle East & Africa firms through access to European resources on quality/training & education and marketing

Continue to maintain regional identity of Europe/Middle East/African groups within larger structure

Decision to be taken at November Council meeting

Network/Association Review

Substantial discussion of Nexia positioning with input from Audit Committee & legal advisers

Board endorsed global positioning as a network – and behaving as if a network

Audit Committee tasked with assessing and introducing procedures to ensure compliance with independence requirements

Network/Association Review

Board agreed to allow U.S. Members – and other jurisdictions where beneficial – to position themselves as an association within (only) their own country.

Consequences National peer review (plus “Executive Review” of issues not considered

through national review), provided that national review is of a sufficient level of quality to satisfy the requirements of the Nexia QCR programme

Reference to “network” may be dropped

2010 – 2015 Strategic Plan

Draft Mission Statement

“Nexia International is a leading worldwide network of independent, high quality and innovative firms who aim always to provide clients with the highest standards of national and international audit, accounting, tax and advisory services in a seamless, personal and tailored manner”

Comments or Questions?

Case studyCase study

Inbound-investment into Germany

National tax law

Different sources of tax rules to be observed

Bilateral law (Tax treaty) EU-law

Personally: Limited tax liability of

Source of income

Real estate

Corporate entities

Financial enga-gement (divi-dends/ interest)

Adressee:IndividualCorp. EntityPartnership?

Method:

Exemption Tax credit

Freedom of free establish-ment

Freedom of capital transactions

Indivi-duals

Inbound-investment into GermanyQuestions to be observed• Tax liability• Calculation of income• Recognition/utilisation of losses• Withholding tax• Transfer taxes/duties• Obligation for declaration• Tax assessment procedure• EU-problems• Treaty override?• Other aspects

Inbound-investment into GermanyQuestions to be observed (example): Calculation of income

Different types of income leading to different methods of income calculation:

Real estate

Bookkeeping/balance sheet No Yes / No Yes

Tax rate: Individual 15 % corporate tax 15 % corporate tax

Capital gain taxation: Only during 10 years holding period

15 % corporate tax 15 % corporate tax

Trade tax: No No Yes, but possible exemption

Individual IndividualIndividual

Corporate entity

Corporate entity

Germany

Inbound-investment into GermanyQuestions to be observed (example): Calculation of income, withholding tax

Dividends

Withholding tax 25 % + solidarity surcharge, final (decrease according to tax treaty?)

25 % solidarity surcharge but only in case of minority shareholding of less 10%/15 % final – challenge by EU-commission (decrease according to tax treaty or Parent-Subsidiary-Directive?)

Individual Individual

Corporate entity

German corporate entity GmbH / AGGmbH / AG

dividend dividend

Inbound-investment into GermanyQuestions to be observed (example): Recognition/utilization of losses

Limited tax liable in Germany:

As a rule, losses can be utilized:

• Set-off against other German taxable income in the same fiscal year

• Several restrictions to be observed

• Loss carry back one year up to € 511.500• Loss carry forward without expiration date

but restrictions

Finalizing engagement in Germany: Losses are bound with the tax payer and they remain legally valid.

Set off against income up to 1.0 € possible

Exceeding 1.0 € 60 % possible to set-off against income

Inbound-investment into GermanyQuestions to be observed: Transfer taxes• Real estate transfer tax:

For real estate, 3.5 % of the purchase price becomes due in general, but Federal States of Germany are free to increase

Thus, 4.5 % in some Federal States

Real Estate transfer tax (examples)

transfer of real estate transfer of more than 95 % of participation in partnership with real estate during a five-years-period to different partners

acquisition of more than 95 % of participation or shares in estate owning partnership/cor-poration by one shareholder

Inbound-investment into Germany

• A withholding Tax on dividends of 27 % becomes due and final in case of a shareholder not resident in Italy*

• A shareholder resident in Italy re-ceived the dividend tax exempt at 95 % with a tax of 33 % on 5 %

• EU-Court: Violation of freedom of free capital

• Only dividends during EU?• Same e.g. with Germany, Court

case opened July 23, 2009

Shareholder EU

Shareholder Italy

Corporate entity resident in Italy

Example: EU-case (EU ./. Italy)

* Tax treaty and reimbursement according to national law to be observed

Outbound-investment out of Germany

National taxlaw Germany

Main aspects to be observed

National tax law out-bound-country

EU-law

Freedom of free establish-ment

Freedom of capital transactions

Double taxtreaty

• Tax liability

• Computation of income

• Progressivity of tax rates

• Deduction or credit of withholding tax or foreign income tax?

• Right for taxation

• Utilisation of losses?

• Subject to tax clause?

Outbound-investment out of Germany

• Germany did not recognise the

losses in Spain according to

former sec. 2a German Income

Code

• EU-Court: Violation of freedom

of free capital (article 56 EC-

Treaty)*

• Since 2009 change of sec. 2a

German Income Code: restriction

outside EU sufficient?

Unlimited tax liable person in Germany

Compu-tation of income

Tax treaty Spain: cre-dit method

Real Estate in Spain-losses-

Example: EU-case (Busley/Cibrian)

* Art. 63 of the Consolidated Version of the Treaty Establishing the European Community.

Tax Risk Management

James Wall

J. H. Cohn LLP

May 13, 2010

22

Circular 230 – General Information

• The information included herein is not intended or written to be used, and it cannot be used by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing or recommending to another party any tax related matters. (The foregoing disclosure has been affixed pursuant to U.S. Treasury Regulations governing tax practice.)

• The information included herein is of a general nature and should not be relied on as tax advice. Consultation with a tax advisor in respect of specific transactions should be undertaken.

1

23

Uncertain Tax Positions: General Comments• FIN 48 is a FASB Interpretation of FAS 109 (applies for

US GAAP financial statements)

• Provides Guidance on

– Recognizing

– Derecognizing

– Measuring and

– Classifying

Tax effects of Uncertain Tax Positions

• Prohibits recognizing tax benefits unless probability of tax position being sustained is “more-likely-than-not”

2

24

Uncertain Tax Positions

• FASB issues Interpretation 48, Uncertainty in Income Taxes, effective for fiscal years beginning after December 15, 2006

• FASB later voted to defer the effective date for nonpublic entities that have not already implemented FIN 48 to fiscal years beginning after December 15, 2008

3

25

Announcement 2010-9• On January 26, 2010 IRS commissioner Douglas Shulman announced

that the IRS is “considering” a new initiative to require that business taxpayers complete a new schedule to report uncertain tax positions and associated dollar amounts

• The new schedule will be mandatory for taxpayers with assets of over $10 million who have a financial statement prepared under FIN 48 “or other similar accounting standards, reflecting uncertain positions”

• This effectively eviscerates the “policy of restraint” the IRS had previously followed relating to tax accrual workpapers

• The “IRS is essentially asking taxpayers to prioritize issues on their behalf”

– Tom Ochsenslager, VP of Tax, AICPA

• NYSB thinks this will affect communications between audit firms and clients regarding financial statement reserves 4

26

Announcement 2010-9To be sufficient, the description of each position must contain:

• The tax code sections potentially implicated by the position

• A description of the taxable year or years to which the position relates

• A statement that the position involves an item of income, gain, loss, deduction, or credit against tax

• A statement that the position involves a permanent inclusion or exclusion of any item, the timing of that item, or both

• A statement on whether the position involves a determination of the value or any property or right and

• A statement on whether the position involves a computation of basis

• In addition, taxpayers would have to specify, for each uncertain tax position, the entire amount of US Federal income tax that would be due if the position were disallowed in its entirety on audit 5

27

What are the Most Likely Uncertain Tax Positions to be Concerned About?

• Transfer pricing

• PE issues

• Timing issues

• Ongoing tax examinations

6

28

How Do Taxpayers Manage Transfer Pricing Risks?

• APA’s provide for more certainty but are often expensive and time consuming

– IRS completed 63 cases in 2009

– Bilateral cases on average took 45.1 months to complete

• Transfer pricing documentation studies

– Generally reduces risk of adjustment

– Limits penalties

• Taking a consistent approach in multiple jurisdictions

7

29

Managing Tax Audit Risks• Compliance assurance process (CAP) rules (see IRB

2005-50) have been adopted in the US and other jurisdictions that allow for pre-filing sharing of information with tax authorities

– Not widely utilized

• Documentation of tax positions is key to making the audit process more efficient

• Multi-lateral examinations are coming soon so consistency from jurisdiction to jurisdiction will be key

• Transfer pricing will likely be the “weapon of choice” for tax authorities examining multi country enterprises 8

30

Judicial Doctrines - Business Purpose

• Sham transaction• Sham

entity/partnership• Substance vs. form• Conduit• Partnership anti-

abuse (§701 Regs.)

• §269• Step transaction• Circular cash flow• Debt vs. equity

9

31

Codification of Economic Substance

• Section 7701(o) Clarification of Economic Substance Doctrine

• (1) Application of doctrine – in the case of any transaction to which the economic substance doctrine is relevant, such transaction shall be treated as having economic substance only if –– (a) The transaction changes in a meaningful way

(apart from Federal income tax effects) the taxpayer’s economic position, and

– (b) The taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction

10

32

Codification of Economic Substance cont’d.

• Special rule where taxpayer relies on profit potential– In general, the potential for profit of a transaction shall

be taken into account in determining whether the requirements of subparagraphs (a) and (b) of paragraph (1) are met with respect to the transaction only if the present value of the reasonably expected pre-tax profit from the transaction is substantial in relation to the present value of the expected net tax benefits that would be allowed if the transaction were respected

11

33


• Section 6662(b)(6) [20% accuracy related penalty] Any disallowance of claimed tax benefits by reason of a transaction lacking economic substance (within the meaning of section 7701(o)) or failing to meet the requirements of any similar rule of law

• Section 6662(i) increase in penalty in case of nondisclosed noneconomic substance transactions– In general, in the case of any portion of an

underpayment which is attributable to one or more nondisclosed noneconomic substance transactions, subsection (b)(6) shall be applied with respect to such portion by substituting “40 percent” for “20 percent” 12

34


• Nondisclosed noneconomic substance transactions– For purposes of this subsection, the term “nondisclosed

noneconomic substance transaction” means any portion of a transaction described in subsection (b)(6) with respect to which the relevant facts affecting the tax treatment are not adequately disclosed in the return nor in a statement attached to the return

13

35

Questions

14

Russian Federation

Kazakhstan

Ukraine

Lithuania

Latvia

Total area: 20 525.4 K sq.kmIncluding:

Russian Federation – 17 075 K sq.rm

Kazakhstan – 2 717 K sq.km

Ukraine – 603.5 K sq.km

Lithuania – 65.3 K sq.km

Latvia – 64.3 K sq. km

Total population: 209.9 mln peopleIncluding:

Russian Federation – 142 mln people

Kazakhstan – 16.3 mln people

Ukraine – 46 mln people

Lithuania – 3.4 mln people

Latvia – 2.2 mln people

OSCE

Capital citiesRussian Federation – Moscow

Kazakhstan - Astana

Ukraine – Kiev

Lithuania –Vilnius

Latvia – Riga

MembershipCountry United

NationsWTO European

UnionOthers

Russian Federation

+Permanent member

of SC

- - ASEANOSCESCOCIS

Kazakhstan

+ - - SCOOSCECIS

Ukraine + + - OSCECIS

Lithuania + + + NATOOSCE

Latvia + + + NATOOSCE

Rates of Exchange

USD EURO

Russian Federation, 29.15 RUR 38.7 RUR

Kazakhstan, 146.43 KZT 194.97 KZT

Ukraine, 7.9 UAH 10.4 UAH

Lithuania 0.53 LTL 0.7 LTL

Latvia 0.53 LVL 0.7 LVL

Countries by GDP, 2009 (IFM estimates)

Rank

Russian Federation, 12

Kazakhstan, 55

Ukraine, 53

Lithuania 79

Latvia 87

Key Macroeconomic Indicators GDP growth2009/2008, %

Inflation2009, %

Unemployment, %

Export growth2009/2008,%

ImportGrowth2009/2008, %

Balance (surplus +/deficit -)

Russian Federation

- 5.7 8.8 8.2 -35.7 - 33.9 +

Kazakhstan + 0.3 6.2 6.6 - 38.9 NA -

Ukraine - 3.51 15.9 9.6 - 45.52

+ 9.03 -

Lithuania -16.9 1.3 13.7 -26.6 - 38.17

-

Latvia - 4.5 10.5 17.2 -18.8 -37.9 -

Rates of Exchange

USD EURO

Russian Federation, 29.15 RUR 38.7 RUR

Kazakhstan, 146.43 KZT 194.97 KZT

Ukraine, 7.9 UAH 10.4 UAH

Lithuania 0.53 LTL 0.7 LTL

Latvia 0.53 LVL 0.7 LVL

Structure of the Economy, % of GDP

Russian Federation

11%

19%

7%7%5%

51%

Mining

Manufacturing

Construction

Agriculture, forestry

Power distribution

Services

Kazakhstan Ukraine

Industry; 36,9

Agriculture; 8,3

Services; 54,8

Industry; 43,3

Agriculture; 5,7

Services; 51

Lithuania Latvia

Industry; 32,8

Agriculture; 4,4

Services; 62,8

Industry; 22

Agriculture; 3,3

Services; 74,7

Global Competitiveness Index (out of 132)

Source: World Economic Forum Survey

Russian Federation

Kazakhstan Ukraine

Lithuania Latvia

2009-2010

63 67 82 53 68

2008-2009

51 66 72 44 54

2007-2008

58 61 73 38 45


53

6367 68

82

0

10

20

30

40

50

60

70

80

90

Lithuania RussianFederation

Kazakhstan Latvia Ukraine

Global Competitiveness Index

Foreign Direct Investment

FDI, growth %

RussianFederation

- 38.4

Kazakhstan + 21.3

Ukraine + 20.5

Lithuania + 5.3

Latvia + 0.3

Foreign Investment Structure, bln USD

Russian Federation

-5

-33,5

6,3

44,9

-40

-20

0

20

40

60

Direct Portfolio Others Total

FDI Structure, bln USD

Russian Federation

2008 2009

Total 65 386 32 281

CIS, including 69 309

Kazakhstan 14 113

Ukraine - 39 5

Foreign countries, including 65 317 31 972

Lithuania 37 25

Latvia 35 4

Main Investors Structure, %

Russian Federation

3,4

2,9

2,8 2,7

5,9

6,8

10,3

14

14,4

19,1 Cyprus

United Kingdiom

The Netherlands

Germany

Luxemburg

France

Virgin Islands

Switzerland

Ireland

USA

Cumulative Investments Structure, %

Russian Federation

4,5

1,8

29,6

3,8

9,5

12,4

17,2 21,2

Manufacturing

Wholesale & Retail

Mining

Real Estate

Transport &Communications

Financing

Construction

Others

Main Investors Structure,%Kazakhstan

4,2

2,4

2,5

32,531,8

12,3

86,3

The Netherlands

USA

China

Germany

France

Austria

Switzerland

Others

2912,4

124,6 21,9 33,80

500

1000

1500

2000

2500

3000

3500

RussianFederation

Ukraine Lithuania Latvia

Main investors Structure, %

Ukraine

2674,6

319,7

2 31,90

500

1000

1500

2000

2500

3000

RussianFederation

Kazakhstan Lithuania Latvia

2,2

106,55,9

26,621,5

16,53,2

3,54,1

Cuprus

Germany

the Netherlands

Austria

United Kingdom

France

USA

Sweden

Poland

Others


Lithuania

5,810,5

10

6,8

25,5

12,2

10,6

5,6

6,3 6,7

Sweden

Germany

Denmark

Poland

Russian Federation

Estonia

the Netherlands

Finland

Latvia

Others

304,6

112,2

3,36 1,410

50

100

150

200

250

300

350

RussianFederation

Latvia Ukraine Kazakhstan


Latvia

4,3

4,3

4,3

32,8

16,4

13,7

6,9

6,6

6,24,5

Estonia

Sweden

Germany

Denmark

the Netherlands

Ireland

Russian Federation

Finland

USA

Others

FDI by Sector, %Kazakhstan

27,8

30,1

6,60,3

16,4

6,2

5,1

7,5

Manufacturing

Real Estate

FinancialIntermediation

Transport

Wholesale & Retail

Electricity, gas, water

Mining

Others

FDI by Sector, %

Lithuania Latvia

87,7

23,1

16,5

16,4

14,6

13,7

Manufacturing

Real Estate


Transport

Wholesale &Retail

Electricity, gas,water

Others

3,3

2,4

2,2

28,7

22,4

11,48,2

13,9

7,5

Manufacturing

Real Estate


Transport

Wholesale &Retail

Electricity, gas,water

Agriculture

Construction

The most problematic factors for doing business


RussianFederation

Kazakhstan

Ukraine

Lithuania

Latvia

Access to financing, %

16.9 11.9 13.5 16.4 15.4

Tax regulations 11.6 11.0 10.1 13.5 13.5

Tax rates 4.1 11.1 3.9 15.4 10.0

Inflation 8.7 14.4 8.4 8.0 7.8

Inefficient government bureaucracy

8.2 7.5 8.2 14.1 15.5

Corruption 19.0 19.2 10.3 7.8 7.7

Crime & theft 9.0 3.4 2.6 0.4 0.7

The most problematic factors for doing business


RussianFederation

Kazakhstan

Ukraine

Lithuania

Latvia

Policy instability 1.7 1.7 16.5 7.7 9.2

Foreign currency regulations

2.9 2.8 6.5 1.0 2.1

Government instability/coups

1.4 3.1 9.8 1.0 7.7

Inadequate supply of infrastructure

3.6 1.7 1.0 1.6 3.3

Inadequate educated workforce

4.1 4.8 2.2 3.4 2.4

Restrictive labor regulations

1.4 2.0 3.4 6.7 2.2

Poor public health 0.9 2.5 1.2 0.1 0.2

Main business taxesCorporate profit tax, %

VAT,% Social insurance, %

Personal income tax, %

RussianFederation

20 1810

0

26 34,

starting from 2011

13n/r 30

Kazakhstan 20 12 11 10n/r 5

Ukraine 25 200

36 15n/r 30

Lithuania 15 21 31 15

Latvia 15 2110

0

24 26

Ease of Doing Business, 2009 (out of 183)

Source: World Bank Ranking

RussianFederation

Kazakhstan Ukraine Lithuania Latvia

Doing Business

120 63 142 26 27

Starting a business

106 82 134 99 51

Dealing with Construction permits

182 143 181 64 78

Employing workers

109 38 83 119 128

Registering property

45 31 141 4 58

Ease of Doing Business, 2009 (cont)


RussianFederation


Getting credit

87 43 30 43 4

Protecting investors

93 57 109 93 57

Paying taxes

103 52 181 51 45

Trading across borders

162 182 139 28 22

Enforcing contracts

19 34 43 17 15

Closing a business

92 54 145 36 88

Ease of Doing BusinessRussian Federation – Comparator Economics

(BRIC)

69

120129 133

0

20

40

60

80

100

120

140

China Russian Federation

Brazil India

Ease of Doing BusinessLatvia, Lithuania – Comparator Economics (Baltic

countries)

16

24 26 27

72

0

10

20

30

40

50

60

70

80

Finland Estonia Lithuania Latvia Poland

Ease of Doing BusinessKazakhstan, Ukraine

41

58 63

94

142

0

20

40

60

80

100

120

140

160

Kyrgyzia Belarus Kazakhstan Moldova Ukraine

Protecting Investors, 2009 (0-10)


RussianFederation


Extent of disclosure index

6 7 5 5 5

Extent of director liability index

2 1 2 4 4

Ease of shareholder suits index

7 9 7 6 8

Strength of investor protection index

5.0 5.7 4.7 5.0 5.7

Protecting InvestorsRussian Federation – Comparator Economics

(BRIC)

41

73

93 93

0

10

20

30

40

50

60

70

80

90

100

India Brazil China RussianFederation

Latvia, Lithuania – Comparator Economics (Baltic countries)

57 57 57

41

93

0

10

20

30

40

50

60

70

80

90

100

Poland Finland Estonia Latvia Lithuania

Kazakhstan, Ukraine

57

109 109 109

12

0

20

40

60

80

100

120

Kyrgyzia Kazakhstan Ukraine Moldova Belarus

International Investment Position, mln USD

Russian Federation 254.06(as of 2008)

Kazakhstan - 44 084

Ukraine - 39 824

Lithuania -102 200(2009 Q4)

Latvia -20 311(2009 Q4)

Average Real GDP Growth during 2010-2011, %(IMF Estimates)

Below 1 Between 1 & 3

Between 3 &5

Above 5

Russian Federation

Kazakhstan

Ukraine

Lithuania

Latvia

Many thanks for:Nexia Ukraine

Lviv, tel: + 380 32 298 9797, 298 8540

Kazakhconsulting, LLC

Almaty, tel: + 7 727 31 10 690

Auditas, CJSC

Vilnuis, tel: + 370 5 261 9772

Audit Advice, LLC

Riga, tel. + 371 26 54 23 54

Tax Reforms in India & their Impact on Tax Reforms in India & their Impact on Overseas InvestorsOverseas Investors

May 2010, USAMay 2010, USA

AgendaOpening Remarks Key stated purposes of DTCKey transition provisionsKey tax provisions for individualsTax Residency of foreign companyCorporate Tax Rates Business IncomeTax incentivesCapital GainsRoyalty & Fees for Technical ServicesWithholding tax ratesImpact on Tax TreatiesGeneral Anti Avoidance RuleOther key aspects for Non-ResidentsTransfer Pricing Recent amendments in Indian withholding tax regimeClosing remarks 83

Opening Remarks

Current law – Income Tax Act, 1961 (repealing 1922 Act)Tax payers and tax administrations concerns on complexity

Over 5000 amendments – totally mutilatedIncreased cost of compliance and administrationDifferences in interpretation leading to litigationConflicting judgments by various courts

New Code in making for four years

84

Key stated purpose of DTC

85

Simple language reducing litigationSimple language reducing litigation FlexibilityFlexibility

Intl. best practices

Stability in rates

Check tax base evasion

Fostering voluntary compliance

Key transition provisions under the DTC

DTC proposed to come into force from 1st April 2011The Income Tax Act, 1961 (“the 1961 Act”) to be repealed on enactment of DTCThe 1961 Act to apply to

Tax Returns filed before the commencement of DTCAll pending proceedings (i.e. Appeals with the tax authorities, higher appellate authorities, etc.)

Wide range of Rules and Circulars to be issued for completeness

86

Individual– Rates and Residency

Existing Income Sales Proposed Income Sales Tax Rate (%)

Upto INR 160,000 Upto INR 160,000 Nil

INR 160,001 to INR 300,000 INR 160,000 to INR 10,00,000 10

INR 300,001 to INR 500,000 INR 10,00,001 to INR 25,00,000 20

INR 500,001 and above INR 25,00,001 and above 30

87

ResidencyConcept of “Not Ordinarily Resident” abolishedResidents not taxed for two consecutive years on income sourced outside India provided

Not derived from business / profession set-up in India Non-resident in 9 preceding financial years

Wealth tax scope / levy enhanced (Above INR 500 millions) (even financial / other assets covered)Most exemptions withdrawn and move to EET RegimeIncome Tax Clearance Certificate (ITCC) for individuals leaving India

Residential Status of a Foreign Co- Redefined

88

Partial Control and Management of a foreign company in India at any time during the financial year

Partial Control and Management of a foreign company in India at any time during the financial year

Current Status

Proposed Status

Non – ResidentTax on India

sourced income only

Non – ResidentTax on India

sourced income only

Residential status of a company determines its tax obligation in India

Significant increase in ambit of taxation!Impact of Tie-Breaker rule under Tax Treaties?Applicability of Dividend distribution tax for resident Foreign Co.?

Appears to be applicable!

Revision of Corporate Tax Rates

89

Particulars Domestic Company Foreign Company

Current Proposed Current Proposed

Corporate tax rate (peak rate)

33.22 25 42.23 25

Dividend Distribution tax (DDT)

16.61 15 NA NA

Branch Profit Tax (BPT)# NA NA Nil 15*

Effective DDT/BPT@ 9.51 9.80 Nil 11.25

TOTAL TAX 42.73 34.80 42.23 36.26

# Not linked to repatriation of accounts to the HO* HO expenses restricted to 0.5% of total sales, turnover or gross receipts (as against 5% of adjusted total income presently)@ Transfer to reserve rules have been ignored for this calculation

Business Income – Scope Enhanced

Concept of distinct and separate business introducedIncomes of different businesses to be computed separately

Business Income – Scope widenedProfit on sale of business assetsIncome from slump sale Transfer of self-generated business assets Cash assistance, subsidy and grantReduction/remission/cessation of any liability

Loan/deposit/advance/trade creditAdvance/Security deposit on transfer of any business assets/interest thereon

Tax DepreciationNew rates New blocksFinance Lease – Eligibility to lessee

90

Minimum Alternate Tax v/s Gross Assets Tax

MAT (existing)Base - adjusted book profitsLevied at 15%

GAT proposedBase – gross assets

Liabilities not consideredAccounting policies significant

At 0.25% for Banking companiesAt 2% for other companies

91

Tax paid is final with no credits in future Foreign companies are covered Impact on

Start upsCapital intensive companiesLoss making companiesHolding companiesTax holiday availing companies

Tax Incentives

Profit linked incentives withdrawn Substituted with investment linked incentives

For specified businessCapital expenditure deductible as business expense

Excluding land, goodwill and financial instrument

Grandfathering provisionsMajority of investment-based, profit-linked incentives available under the existing laws grandfatheredSEZ units missed out!

Carry forward and set off of losses No time limitOnly against the specified businessSubject to timely filing of returns even for intermittent years!

Tax incentive extended to successor in case of business reorganization

92

Capital Gains

Source RuleCurrent Position

Ambiguity in taxation of overseas transfersProposed

Gains arising on even indirect transfer of capital asset situated in India Taxable in IndiaIndirect transfer not defined

93

Would planning for intermediate holding company hold good?

Shareholding

Capital Gains – Practical difficulty??

94

Mr. X / X Co.

Microsoft US

Microsoft India

WOS

Mr. Y / Y Co.Sale of Shares

X sells its shares in Microsoft US to Y, on NYSEMicrosoft US has a subsidiary in IndiaIs this an indirect sale of shares of Microsoft India ? Is X liable to pay capital gains tax in India?

Is X taxable in India?

Capital Gains: Classification of Assets

95

Assets

Business Assets

Investment Assets

Business Trading Assets

- stock-in-trade, raw materials, etc.

Capital Gains

Business Capital Assets

- Fixed tangible assets, intangible assets etc.

BusinessIncome

Capital Gains

No distinction between Short Term and Long Term Capital Gains for tax rates

All Capital Gains taxable Indexation benefit – Long Term Capital Gains

Holding period reduced from 3 years to 1 yearBase date for indexation benefit shifted from 1st April 1981 to 1st April 2000

No Securities Transaction TaxAll Capital Gains taxable

Listed securities and units of mutual fundCarry forward of Capital Losses not limited by time

96

Capital Gains Tax Rates for Companies

97

Capital Gains Existing Rates# (%) Proposed Rates (%)

Non-Resident

Resident

STT paid

Long term capital gains (LTCG) Exempt 30 25

Short term capital gains (STCG) 15 30 25

Non STT paid

LTCG without indexation for listed securities and units

10 30 25

LTCG with indexation 20 30 25

STCG 40 /30 30 25

# Exclusive of surcharge and cess as applicable

STT to be abolished!

Capital Gains Provisions – Non-Residents

For Non – residentsCapital Gains treated as Special Source IncomeNo provision to adjust foreign currency fluctuationIndexation benefit available No special rates for FIIs, NRIs, etc.Rate higher than normal rate i.e. 30%

Carry forward of Capital Losses not limited by time Subject to timely returns for all years

98

Royalty/FTS – Scope widened

Royalty to also include consideration for use/right to use of:

Transmission by Satellite Cable Optic fiber Similar technology

Ship or aircraft Live coverage of any event

FTS to also includeDevelopment and transfer of

DesignPlanSoftwareSimilar services

99

Taxation of non-residents having a PE in India also on ‘Gross’ basis; as against ‘Net’ basis currently; @ 20%

Lower withholding tax application not possible

Withholding tax rates – Increased!

Nature of Income Existing tax rate (%)

Proposed tax rate(%)

Royalty/FTS 10 20

Long Term Capital Gains

20 30

Other Income 40 35

100

Lower rates under treaty still availableMFN clause again important!

Impact on Tax Treaties

Current PositionTax treaties supersedes domestic law

Treaty or Income Tax Act, whichever is more beneficial applies

ProposedTreaty and Domestic tax provisions brought at parProvisions enacted later shall prevail in case of conflict

Similar provisions also there in US Regulations but sparingly usedAll treaties entered into under old law to be deemed to be entered into under DTC, by way of special enabling provisions

ImpactExisting treaties to continue in forceNegotiation toolFuture risk - Unilateral override of tax treaties?

101

General Anti Avoidance Rule - GAAR

Main Purpose of arrangementEvasion of tax/Tax benefit

Yes – GAAR invokedNo – GAAR not applicable

Implications of invocation of GAARDisregard/combine/re-characterize the arrangementTreat the arrangement as voidTreat parties as one and the sameDisregard accommodating partiesDeemed connected person as sameRe-allocate income, expenses, relief, etc.Re-characterize equity – debt, income, expenses, relief, etc.

Provision of Special Anti Avoidance Rule (SAAR), in specified circumstances!

102

Other key aspects for Non-Residents

Furnishing of Tax Residency Certificate mandatoryElse Tax Treaty benefit not granted

Manager/Managing Director personally liable for tax due from CompanyTax due from non-residents could be covered from

Any assets even if situated outside IndiaAmount payable by any person to the non-resident

Pass – through status for MFs/VCs etc.Scope of income from shipping/aircraft extended

Income from slot charterIncome from space charterIncome from joint charter

103

Transfer Pricing

Introduction of Advance Pricing AgreementUpfront determination of an arm’s length priceUnilateral Agreement

Without involving the corresponding jurisdictionValid for a period upto 5 yearsBinding on

Tax payer Tax authorities

Safe Harbor provisions & dispute resolution mechanism retainedCriteria for selection of cases for scrutiny/audit by transfer pricing authorities

Risk-based approach as against turnover-based approachDetails of approach not to be disclosed to taxpayers

Penalties rationalized

104

Transfer Pricing

Definition of Associated Enterprises widened

105

Criteria Current Proposed

Share holding with voting power

26% 10%

Nomination of Directors One-half One-third

Loan advanced 51% 26%

Raw material and consumable 90% 2/3rd

Many more entities to be covered in the definition of Associated Enterprise now

Withholding tax – Recent Amendment

Effective from 1st April 2010

Every recipient required to furnish a Permanent Account Number (PAN) to its payer in India

PAN to be quoted on all correspondences, bills, vouchers and other documents which are sent to the payer

In the recipient fails to provide the PAN to its payer the withholding tax rate would increase to 20%

No credit for additional taxes in recipient country – thus a “tax cost”

Implications of obtaining a PANEnjoying the lower withholding tax rates specified the treaty

Filing tax return in India

Practically many overseas companies not a filing tax return in India

Once PAN is obtained by a foreign company tax authorities can scrutinize the compliances by such foreign company

Thus foreign companies will have to file tax return in India

Transfer Pricing compliance in India

Obtain a Certificate from a CPA certifying the arm’s length nature of transactions entered into with its Indian affiliates

Representation before the Indian tax/transfer pricing authorities

Maintenance of books of accounts/Tax Audit subject to prescribed thresholds

The applicability of these provisions is not clear in respect of foreign companies which otherwise do not have a taxable presence in India

Closing Remarks

DTC proposes significant change to current tax systemSimple and easy to comprehendReduction in tax rates – a welcome step in line with global trendIntroduction of APA would help reduce transfer pricing disputesNew approach on MAT, treaty override and GAAR of great concernStringent anti-avoidance measures could impact bona-fide business structuresTax payers need to assess impact of some of the proposals in their current structure and business model and rethink their tax strategiesWatch this space for more developments

108

SKP Today

17 Partners / Directors

Over 400+ team members

Offices in 5 major cities in India

Clients from 35 countries

Experience across 20 industry sectors

Listed among top 10 Tax Firms in India by International Tax Review’s World Tax 2009 & 2010

Our Service Universe

SKP

Outsourcing

Corporate Services

Assuranceand

Advisory

Direct Indirect

Tax

CrossBorder

Tax

Transfer Pricing

Thank You!

Maulik DoshiSKP Group2nd Floor, Ballard HouseAdi Marzban Path, Ballard EstateMumbai 400 001Tel: +91 22 66178000Fax: +91 22 66178002Email: [email protected]

www.skpgroup.com

mailto:[email protected]

http://www.skpgroup.com/

Potential benefits of using Spain for investment in Latin America

Pablo Gómez-Acebo, Xavier Echeverria,

Nexia Spanish Desk

Why choose Spain for investment in Latin America

1. Cultural an historical reasons

2. Tax efficient vehicles and regimes for investment

3. Network of Tax Treaties

Cultural and historical reasons

• Cultural links:– Common language

– Historical tradition

• Spain aims to be the link between Latin America and the EU

• A long tradition of mutual reciprocity agreements between Spain and Latin America

Cultural and historical links

• Spanish is the official language of Mainland South (except Brazil and Guyana), and Central America (except Belize) Mexico, Cuba, Dominican Republic and Puerto Rico

• 34 Million people speak Spanish in the USA

•Latin Americas Population exceeds 568 Million

•Spain’s population amounts to 47 Million people

Tax efficient regimes/vehicles to invest in Latin America

a) Participation exemption regime

b) Spanish Holding Regime (ETVE)

c) Tax Depreciation of financial goodwill

Tax efficient regimes/vehicles to investin Latin America

a) Participation exemption regime– Dividends and capital gains obtained by Spanish

resident entities from qualifying foreign subsidiaries (QFS) are exempt from taxation

– Requirements:• Direct or indirect participation of at least 5%• Participation must have been held at least for 1 year (this

requirement may be fulfilled after)• QFS is subject to a tax of the same or analogue nature to

Spanish CIT– This requirement is automatically fulfilled if a Tax Treaty has

been signed and contains an exchange of information clause• At least 85% of income of the QFS results from business

activities performed out of Spain


a) Participation exemption regime (cont)• Warning if QFS holds:

• Either directly or indirectly a participation in Spanish resident entities

or

• Assets located in the Spanish territory

• If aggregated market value of both is higher than 15% of market value of total FS assets

• Exemption is only applicable to net increase of non distributed retained income of the FS


b) Spanish Holding Regime (ETVE)– Corporate purpose: It must include supervising and managing securities

representing the equity of entities which are non-residents in Spanish territory and which determine a direct or indirect percentage interest at least equal to 5%, (or portfolio acquisition price of at least Euro 6 Million) together with the placement of the financial resources derived from the activities which constitute said corporate purpose

– This corporate purpose is not exclusive as the ETVE can carry out other activities


b) Spanish Holding Regime (ETVE)

• Dividends and capital gains from QFS are tax exempt• (i) The ETVE must have the organization of material and human resources

required to manage its participations• (ii) ETVEs cannot be subject to the CFC Spanish regime• (iii) ETVE may form part of a tax consolidation group; and• (iv) Similar requirements as per participation exemption regime:

– Should acquisition cost > 6 MM € no need of minimum holding– aimed to guarantee that an ETVE’s QFS are not located in a tax haven– has been subject to a CIT similar to the Spanish– at least 85% of its income results from business activities performed out of Spain

Tax efficient regimes/vehicles to investin Latin America

b) Spanish Holding Regime (ETVE) (cont)– The remaining sources of income are fully subject to CIT– Dividends paid by an ETVE out of exempted income (i.e. dividends or

gains resulting from QFS): First distributions are deemed to rise from exempt income)• Non-resident shareholders: Income not subject to taxation in Spain unless

shareholder is resident in a Tax Haven• Spanish residents entities or PE of non-residents: will be entitled to apply the

internal double taxation credit (DTC)• Spanish resident individuals: Income will be part of the general tax base. They will

be entitled to apply the international double taxation credit (IDTC) on foreign taxes born by the ETVE.


b) Spanish Holding Regime (ETVE) (cont)– Capital gains obtained by sale of participation ETVE: (gain attributable to

increase of value of the QFS)

• Spanish resident entity or PE located in Spain: tax exempt• Non-resident in Spain individual or entity: tax exempt

– Exception: shareholder is resident in a Tax Haven

– Interest deduction: Yes– Thin capitalization rules:

• No debt/equity ratio applicable for loans granted by UE resident entities.• Debt/equity ratio = 3:1 for loans granted by non UE resident entities. Tax ruling

may be asked for higher ratios


b) Spanish Holding Regime (ETVE) (cont.)

• Communication regime:– The ETVE status must be notified to the Spanish Tax Authorities, and it will

apply to the first tax year ending after such communication.

– Spanish ETVEs are fully subject to Spanish Corporate Income Tax and may fulfill all the conditions of the EU Merger Directive

• Special attention must be paid to:– Debt push-down

– “Substance” requirement

– Ratio of Spanish source income or assets


c) Tax Depreciation of financial goodwill– Difference between the acquisition price of the QFS, and its net

asset value will be assigned to the goods and rights of the latter, and the remaining difference not assigned, if any, (i.e. the goodwill) will be tax deductible up to a maximum of 5% per year (minimum 20 year period)

– Declared illegal by EU Commission for participations in EU companies acquired after December 21, 2007

– What happens to participations in non-EU countries?• Currently under review by UE Commission: a case of State Aid?

Network of Tax Treaties

Treaties in force:

Treaties signed:

Exchange of information agreements

Network of Tax Treaties

• Tax Treaties with tax sparing credit:• Argentina (royalties), Brazil (interest, royalties), Cuba (business

profits, dividends, interest, royalties)

• Tax Treaties with most favored nation clause:• Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, El Salvador,

Jamaica, Mexico, Venezuela.

• Transportation (tax) treaties:• Argentina, Chile, Venezuela, El Salvador, Nicaragua

Thank you

Nexia Spanish Desk

DAyA Laudis Lavinia

Nexia International 2010 Annual Tax Conference. Tax Conference Norbert Neu Chairman.

Documents

Transcript of Nexia International 2010 Annual Tax Conference. Tax Conference Norbert Neu Chairman.