ISSUE 12 - Poledna | Boss | Kurer

GLOBAL TAX WEEKLY
a closer look
ISSUE 12 | JANUARY 31, 2013
SUBJECTS TRANSFER PRICING INTELLECTUAL PROPERTY VAT, GST AND SALES TAX CORPORATE
TAXATION INDIVIDUAL TAXATION REAL ESTATE AND PROPERTY TAXES INTERNATIONAL FISCAL
GOVERNANCE BUDGETS COMPLIANCE OFFSHORE
SECTORS MANUFACTURING RETAIL/WHOLESALE INSURANCE BANKS/FINANCIAL INSTITUTIONS
RESTAURANTS/FOOD SERVICE CONSTRUCTION AEROSPACE ENERGY AUTOMOTIVE MINING AND
MINERALS ENTERTAINMENT AND MEDIA OIL AND GAS
COUNTRIES AND REGIONS EUROPE AUSTRIA BELGIUM BULGARIA CYPRUS CZECH REPUBLIC
DENMARK ESTONIA FINLAND FRANCE GERMANY GREECE
HUNGARY IRELAND ITALY LATVIA LITHUANIA LUXEMBOURG MALTA NETHERLANDS POLAND
PORTUGAL ROMANIA SLOVAKIA SLOVENIA SPAIN SWEDEN SWITZERLAND UNITED KINGDOM
EMERGING MARKETS ARGENTINA BRAZIL CHILE CHINA INDIA ISRAEL MEXICO RUSSIA SOUTH
AFRICA SOUTH KOREA TAIWAN VIETNAM CENTRAL AND EASTERN EUROPE ARMENIA AZERBAIJAN
BOSNIA CROATIA FAROE ISLANDS GEORGIA KAZAKHSTAN MONTENEGRO NORWAY SERBIA TURKEY
UKRAINE UZBEKISTAN ASIA-PAC AUSTRALIA BANGLADESH BRUNEI HONG KONG INDONESIA
JAPAN MALAYSIA NEW ZEALAND PAKISTAN PHILIPPINES SINGAPORE THAILAND AMERICAS BOLIVIA
CANADA COLOMBIA COSTA RICA ECUADOR EL SALVADOR GUATEMALA PANAMA PERU PUERTO RICO
URUGUAY UNITED STATES VENEZUELA MIDDLE EAST ALGERIA BAHRAIN BOTSWANA DUBAI EGYPT
ETHIOPIA EQUATORIAL GUINEA IRAQ KUWAIT MOROCCO NIGERIA OMAN QATAR SAUDI ARABIA
TUNISIA LOW-TAX JURISDICTIONS ANDORRA ARUBA BAHAMAS BARBADOS BELIZE BERMUDA
BRITISH VIRGIN ISLANDS CAYMAN ISLANDS COOK ISLANDS CURACAO GIBRALTAR GUERNSEY ISLE OF
MAN JERSEY LABUAN LIECHTENSTEIN MAURITIUS MONACO TURKS AND CAICOS ISLANDS VANUATU

GLOBAL TAX WEEKLY
a closer look
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GLOBAL TAX WEEKLY
a closer look
ISSUE 12 | JANUARY 31, 2013
CONTENTS
FEATURED ARTICLES
The Final FATCA Regulations: Highlights
by Alan Winston Granwell and Witold Jurewicz,
DLA Piper LLP (US) 5
The UK's GAAR: To Be Or Not To Be?
by Stuart Gray, Managing Tax Editor, Global Tax Weekly 11
Digital Invoicing In The EU And Brazil
by Richard T Ainsworth, Boston University School
of Law, Graduate Tax Program 20
New Swiss Legislation On The Taxation
Of Employee Shareholdings
by Walter H. Boss, Attorney at Law, LL.M. and Andrea
Scherrer, Attorney at Law, Certified Tax Expert,
Poledna Boss Kurer AG, Zurich, Switzerland 23
Why Japan Needs To Change PE Taxation Rules
by ASATSUMA Akiyuki, Doctor of law in the
University of Tokyo, Associate professor of tax law at
College of Law and Politics, in Rikkyo University, Tokyo 32
Latest Changes To The Brazilian
Transfer Pricing Rules
By Miguel A. Valdes, Lawyer and certified public
accountant, partner of the law firm Valdes & Associates,
LLC, in Chicago, Illinois 43
Financial Transaction Taxes:
Robin Hood Rides Again
by Caroline Huggett, Senior Editor, Global Tax Weekly 46
NEWS ROUND-UP
Financial Investments 55
Financial Investments - Analysis
Ecofin Gives Go-Ahead To FTT
US Lawmakers Reintroduce FTT Bill
Cayman Clarifies Fund Registration Rules
Country Focus: Switzerland 58
Country Focus: Switzerland - Analysis
Austria To Wait For Revenues From Swiss Tax Deal
Swiss Tax Administrative Assistance Act In Force Soon
Switzerland Reorganizes 'Sin Tax' Collection
Switzerland Extends VAT Perk For Hoteliers
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Transfer Pricing 61
Transfer Pricing - Analysis
BRICS Countries Agree To Greater Cooperation
In Tax Administration
UK Cracking Down On Transfer Pricing Abuse
Cameron Attacks Tax Avoidance At Davos
Other Taxes 71
Other Taxes - Analysis
French Report Advocates Internet Tax
Caribbean To Stand Its Ground On Rum Tax Dispute
India Hikes Gold Import Duty
Philippines Looks To Tax Online Traders
Industry Update: Aerospace 65
Industry Update: Aerospace - Analysis
Flybe Looks To Free Itself From UK APD Stranglehold
Jersey Minister Gives Channel Island Aircraft Registry Update
Flat Year For Embraer In 2012
TAX TREATY ROUND-UP 74
CONFERENCE CALENDAR 77
IN THE COURTS 88
THE JESTER'S COLUMN
The unacceptable face of tax journalism 90
Real Estate and Property Taxes 68
Real Estate and Property Taxes - Analysis
Hong Kong Considers Vacant Property Tax
Shanghai Modifies Property Tax Threshold
IRS Provides Guidance On Mortgage Reduction Incentive
For article guidelines and submissions, contact GTW_Submissions@wolterskluwer.com

FEATURED ARTICLES
ISSUE 12 | JANUARY 31, 2013
The Final FATCA Regulations:
Highlights
by Alan Winston Granwell and Witold Jurewicz,
DLA Piper LLP (US)
On January 17, 2013, the US Treasury Department
issued final FATCA regulations (the “Regulations”).
The Regulations, although simplified and clarified,
are lengthy (544 pages) and over 150 pages longer
than the Proposed Regulations.
In drafting the Regulations, the US Treasury Department
adopted a targeted, risk-based approach
to implement FATCA by balancing policy considerations
and administrative burdens and more fully
incorporating local AML/KYC documentation
practices. The Regulations detail the operational
aspects of implementing FATCA – to reduce administrative
burdens and clarify the interaction of
the unilateral regulatory regime with the bilateral
intergovernmental (“IGA”) regime. Of particular
importance is that the Regulations fill in many of
the gaps that foreign financial institutions (“FFIs”)
had as to how to implement FATCA. Nevertheless
FFIs, particularly global financial institutions, will
have continuing challenges implementing the rules
under the Regulations and IGAs within the current
timelines among geographies, lines of business, clients
and products.
Headline Changes
Withholding : grandfathered date extended for
obligations outstanding on January 1, 2014 and
for gross proceeds and foreign passthru payments
occurring before January 1, 2017.
Covered FFIs : clarified and scope limited; nonprofessionally
managed passive entities now are
non-fi nancial foreign entities (“NFFEs”), not
FFIs; clarification of scope of depository institutions,
insurance companies and investment funds.
Financial Account : clarified and scope limited.
Deemed Compliant : current category requirements
relaxed and several new categories added.
Retirement funds : exempted categories expanded
and relaxed.
Due Diligence/Documentation Rules : calibrated,
based on value, risk profile; greater reliance on
currently existing information, AML/KYC and
local statements and self-certifications.
Timing : delay timeframes to review existing accounts
and implement FATCA's obligations in
stages.
Compliance and Verification : FFI obligations
detailed with respect to establishing, reviewing
and remediating compliance program.
Local Law Conflicts with FFI Agreemen t: FFI's
withholding and reporting obligations under an
FFI Agreement and local law conflicts clarified.
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Regulation and IGA/Definitional Conformance:
numerous definition variances and other items
under Proposed Regulations and IGAs conformed.
IGAs : details provided as to interaction of Regulations
and IGAs.
IRS Portal : details provided, including with respect
to registration and applicable dates.
Summary Overview of Highlights
The Regulations contain myriad, detailed rules; this
Alert focuses on a number of the important changes between
the Regulations and the Proposed Regulations.
Withholding:
Grandfathering. Obligations outstanding on
January 1, 2014, and associated collateral, are
exempt from FATCA withholding.
Foreign Passthru Payments . Exempted from
FATCA withholding until the later of January 1,
2017, or six months after the date of publication
of final regulations defining the term “foreign
passthru payments”.
Dividend Equivalent Payments. Exempted from
FATCA withholding with respect to obligations
outstanding any time prior to six months after
the final regulations published.
US Source FDAP. January 1, 2014 for certain payees;
then in subsequent years phases in for other payees.
Gross Proceeds from US obligations . Exempted
from FATCA withholding until January 1, 2017.
Covered FFIs:
Depository institution : precondition is accepting
deposits in the ordinary course of its business with
customers; in addition, the entity must regularly
engage in one or more of the banking or financing
activities enumerated in the Regulations; thus,
finance companies that do not fund operations
through deposits are excluded. The Regulations
also clarify that an IGA controls as to whether a
resident entity described in an applicable IGA is
an FFI.
Investment Entity : defi nition is clarifi ed and
narrowed to exclude passive, non-commercial
investment vehicles and trusts. Thus, passive, not
professionally managed entities will generally be
treated as passive NFFEs rather than FFIs, but
entities that function or hold themselves out as
mutual funds, hedge funds, or similar investment
vehicles established with an investment strategy
of investing, reinvesting or trading in financial
assets will be investment entities.
Certain Holding Companies and Treasury
Centers : limit the circumstances under which a
holding company or treasury center is treated as
an FFI.
Financial Account:
The Regulations limit the scope of the term “depository
account” in a number of ways and, in
that regard, provide clarifying guidance with respect
to equity or debt interests in different types
of financial institutions.
Th e Regulations simplify insurance definitions
and contracts and clarify when an insurance
company is an FFI or a NFFE.
The Regulations expand the exception from financial
account status for certain savings accounts to
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accommodate savings vehicles used in a number
of countries.
funds and exempt beneficial owners identified
in an IGA.
Deemed Compliant:
The Regulations generally retain the same deemed
compliant categories included in the Proposed
Regulations, subject to modification and clarification,
and add new categories for certain credit
card issuers, sponsored FFIs ( i.e. , where a trustee
or fund manager manages trusts or funds on a
consolidated basis) and limited-life debt investment
entities.
Insurance companies can now qualify as local
FFIs and FFIs with only low-value accounts.
Th e Regulations have relaxed various requirements
for registered deemed compliant FFIs,
including local FFIs, qualified collective investment
vehicles and restricted funds.
The Regulations have added a six month “cure”
period to correct non-compliance with the
deemed compliant requirements.
Retirement fund deemed compliant categories
have been moved to the “exempt beneficial
owner” category.
Non-profit entities have been moved from the
deemed compliant category to the excepted
NFFE category.
IGA deemed compliant entities will be treated as
deemed compliant entities under the Regulations.
Retirement Funds:
The Regulations expand the circumstances under
which certain classes of entities qualify for exemption
from FATCA, including certain retirement
Due Diligence/Documentation Rules:
The Regulations significantly modify and relax
general requirements for identifying, documenting
and retaining documentation of account
holders and the interaction with AML/KYC rules.
The Regulations in certain circumstances permit
reliance on withholding certificates, written
statements, elimination of the penalty of perjury
requirements, substitute and non-IRS forms
(including forms in a foreign language), reliance
on pre-FATCA W-8 Forms; the treatment of a
new account of a pre-existing customer as a preexisting
account; curing inconsequential errors;
the validity of documentation; how and when
the changed circumstances rule applies and its
impact on documentation; rules with respect to
reliance on documentation from other parties and
in a “bulk acquisition”; and reliance on electronic
transmission of documentation.
Timing:
Th e Regulations provide delayed time frames for
various actions; to include: effective date of FFI
Agreement is December 31, 2013 for all Participating
FFIs that receive a GIIN (defined below)
prior to January 1, 2014 ; date new account due
diligence procedures commence is January 1,
2014; accounts maintained prior to January 1,
2014 are pre-existing accounts; account holder
documentation is delayed until December 31,
2015 for other than prima facie FFIs and High
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Value Individual Account holders; reporting account
information to the IRS, on Form 8966,
with respect to 2013 and 2014 is delayed until
March 31, 2015 .
FFI Agreement and Local Law Conflicts:
The Regulations provide that an FFI may enter
into an FFI Agreement if it can meet the following
requirements: (i) if foreign law prohibits a
Participating FFI from fulfilling its withholding
obligations with respect to an account, the Participating
FFI must close the account within a
reasonable time or, if local law prohibits closing
the account, the Participating FFI must block of
transfer the account; and (ii) if a Participating FFI
is prohibited by foreign law, absent a waiver, from
reporting information on an account that it must
treat as a US account, the Participating FFI must
request a waiver of foreign law from the account
holder and if such waiver is not obtained within
a reasonable period of time, the Participating FFI
must close or transfer such account. If an FFI
cannot meet the foregoing requirements, it is not
eligible to enter in an FFI Agreement but may obtain
status as a “limited FFI” or “limited branch”
if conditions are satisfied. That status causes the
limited FFI or limited branch to be subject to
FATCA withholding but does not disqualify the
expanded affiliated group from becoming noncompliant
FFI through 2015.
Caveat . After December 31, 2015, under the
Regulations, all FFIs within an expanded affiliated
group must be compliant. Thus, non-IGA FFIs/
branches will not be treated as compliant and will
become subject to the FATCA withholding tax
unless the local country changes its laws to allow
compliance with FATCA or the country enters
into an IGA (IGA country FFIs/branches can
remain compliant if certain conditions are met
under the IGA).
Compliance and Verification:
The Regulations provide detailed rules with respect
to Participating FFI compliance, to include appointment
of a responsible officer, establishment of
a compliance program that includes policies, procedures
and processes sufficient for the Participating
FFI to satisfy the FFI Agreement requirements,
responsible officer periodic review of the compliance
program, material failures, events of default,
certification and remediation, and IRS review.
A responsible officer may be any officer of the
Participating FFI or reporting Model 1 FFI in
the Participating FFI's expanded affiliated group
with sufficient authority to fulfill the duties of a
responsible officer as described in the Regulations.
Regulation/IGA Conformance:
The Regulations conform the definition of many
FATCA terms to those contained in IGAs to avoid
disparities that were contained in the Proposed
Regulations. The Regulations also conform various
items related to due diligence, such as timing and
when changed circumstances must be reported.
IGAs:
FFIs covered by, and compliant with, Model 1
IGAs do not need to comply with the Regulations
8

for purposes of avoiding FATCA withholding,
but must register, as discussed below.
In certain cases, the laws of a FATCA Partner
jurisdiction may allow an FFI to elect to apply
the provisions of the Regulations instead of IGA.
FFIs covered by Model 2 IGA will be required
to implement FATCA in manner prescribed by
Regulations except to the extent expressly modified
by the Model 2 IGA but must register, as
described below.
IRS Portal:
The Portal will be the primary means for FFIs to interact
with the IRS to complete and maintain their
FATCA registrations, agreements and certifications.
The Portal will be a paperless, secure online web
portal.
The Portal will be used for registration, electronic
communication between the IRS and FFIs and other
registrants and other FATCA communications.
Registered FFIs designated as leads of an expanded
affiliated group will be able to use the
Portal to manage the registration status of group
members. Thus, an FFI in a Model 1 country can
register and enter into FFI Agreements on behalf
of branches in jurisdictions covered by Model 2
IGA and in non-IGA countries .
The Portal will be accessible to FFIs NLT than
July 15, 2013 . At that time, FFIs will be able to
register as Participating FFIs, sponsoring entities
or as limited FFIs or registered deemed compliant
FFIs (including reporting Model 1 FFIs, which
are treated as registered deemed compliant FFIs
under the Regulations).
Once an FFI has registered, the IRS will approve
its registration and issue a GIIN (Global
Intermediary Identifi cation Number) to each
Participating FFI and registered deemed compliant
FFI.
Model 1 FFIs or an FFI described as a Reporting
Financial Institution under the Model 2 IGA will
also be required to register so long as the FATCA
Partner jurisdiction is identified on a list published
by the IRS of countries treated as having
in effect an IGA, even if any necessary ratification
of such IGA in the jurisdiction has not yet been
completed.
Th e IRS currently contemplates that the GIIN
may also be used by reporting Model 1 FFIs to
satisfy reporting requirements under local law
and is discussing this possibility with its Model
1 IGA partners.
Under a transitional rule, for payments made
prior to January 1, 2015, it will not be necessary
for a Model 1 FFI to have a GIIN provided that
the Model 1 FFI's withholding certificate specifies
that it is a Model 1 FFI and identifies its IGA
jurisdiction.
A GIIN will be assigned beginning no later than
October 15, 2013 and will be used as the ID
number for satisfying the FFI's reporting obligations
and identifying its status to a withholding
agent.
Th e IRS will electronically post the fi rst IRS
list of Participating FFIs and registered deemed
compliant FFIs (including Model 1 FFIs) on
December 2, 2013 , and will update the list on
a monthly basis.
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The last date by which a FFI can register with the
IRS to ensure inclusion on the December 2013
IRS FFI list is October 25, 2013.
Forthcoming IRS Guidance to Include:
IRS will issue a Revenue Procedure before the Portal
opens containing all the terms and conditions
of an FFI Agreement, including administrative
provisions such as those relating to termination,
renewal and modification of the agreement.
A revision of the requirements for a QI agreement
for external audit procedures to verify a
QI's compliance with its QI agreement.
New forms (and instructions) relating certification,
reporting and withholding FATCA
requirements.
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FEATURED ARTICLES
ISSUE 12 | JANUARY 31, 2013
The UK's GAAR: To Be Or Not To Be?
by Stuart Gray, Managing Tax Editor,
Global Tax Weekly
Introduction
Th is article examines some of the key existing and
proposed measures to tackle the problem of aggressive
tax planning in the United Kingdom, with a
focus on the forthcoming general anti-abuse rule
(GAAR) and the existing tax avoidance scheme
disclosure regime, in addition to other recent antiavoidance
legislation.
Th e UK is certainly not alone in its desire to crack
down on tax evasion and avoidance, and governments
all over the world are strengthening their
legislative arsenals to prevent individuals and businesses
playing fast and loose with the tax laws as
they attempt to reduce the “tax gap” and replenish
depleted treasury coffers. The UK government
has, however, been particularly active in this area
lately as reports continue to flood the airwaves and
written media about the aggressive tax planning
techniques employed by some wealthy individuals
and businesses. Such reports reveal how marketed
schemes have enabled some high-profile and wellremunerated
entertainers to reduce their overall tax
rate to single digit figures, sometimes to as low as
1% or 2%; and on the corporate side, some large
multinationals have come in for severe criticism
from lawmakers and the general public for using tax
mitigation strategies that have led to them paying
very little – in some cases nothing – in income tax
in the UK over several years.
In most jurisdictions, including the UK, the line between
legal tax avoidance and criminal tax evasion is
quite clearly defined, and in the case of the recently
described extreme tax minimization techniques used
by individuals most would agree that a boundary
between “acceptable” tax avoidance and “unacceptable”
(some would say “immoral”) tax avoidance had
been crossed. In the corporate sector, things are not
so clear. The companies that have been pilloried in
the UK argue, quite rightly, that they are only following
the law as it is written, and that they have a duty
to their shareholders to reduce costs, including tax,
and maximize profits, even if many think that such
activity falls into the “unacceptable” category. So it
is not always easy to define the difference between
acceptable and unacceptable tax planning, and separating
the two in legal terms almost always involves
somebody’s own subjective judgment – usually the
government’s or the legislature’s. If large amounts of
revenue are at stake, many would think that governments
can't always be trusted to exercise their judgment
in the best interests of taxpayers.
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Traditionally, Parliament has reacted to examples of
“unacceptable” tax planning by approving sticking
plaster anti-avoidance bills which are tacked onto
the main tax statutes when they become aware of a
new scheme. As a result, over the last ten years, there
have been dozens of changes in UK law to shut down
avoidance schemes. While the government boasts that
this has protected billions of pounds in tax revenue,
it has had the undesirable effect of making an already
complicated tax system practically unfathomable to
most people – including, in some cases, the tax authority
itself – and has filled up the court system with
complex pieces of tax litigation –, something Graham
Aaronson referred to in his report on a UK GAAR
(see below) as a “sort of fiscal chess game, but with an
ever increasing number of moves and pieces.”
Over the last few years however, there have come
to be signs that the government wants to take a
more strategic approach to tackling unacceptable
tax avoidance, to reduce the administrative burden
on taxpayers and HM Revenue and Customs
(HMRC), foster more certainty in fiscal affairs and
improve the business environment generally. This
led to the creation of a disclosure regime in 2004,
although reports suggest that this has only been
partially successful in tackling the problem (indeed,
many of the tax law changes mentioned above stem
from this regime). More recently, the government
has proposed a general anti-abuse rule, which it
hopes will be a panacea for the problem of aggressive
tax avoidance, and will simplify the process of
dealing with avoidance cases when they reach the
courts. Both of these aspects are explored below.
The Disclosure Of Tax Avoidance Schemes
(DOTAS)
The Disclosure of Tax Avoidance Schemes (DOT-
AS) regime is a statutory disclosure regime which
was enacted as part of the Finance Act 2005, and it
was introduced with effect from August 1, 2004. It
places an obligation on promoters of tax avoidance
schemes to disclose details of the arrangements to
HMRC. Initially, DOTAS was limited to arrangements
concerning employment or the use of certain
financial products, but it was widened with effect
from August 1, 2006, to cover income tax, corporation
tax and capital gains tax. Under the legislation,
a scheme must be disclosed when: it will, or might
be expected to, enable any person to obtain a tax advantage;
that tax advantage is, or might be expected
to be, the main benefit or one of the main benefits
of the arrangement; and it is a tax arrangement that
falls within any description prescribed in the relevant
regulations. With regards to the third point,
these descriptions, known as “hallmarks,” include:
wishing to keep the arrangements confidential
from a competitor;
wishing to keep the arrangements confidential
from HMRC;
arrangements for which a premium fee could
reasonably be obtained;
arrangements that are standardized tax products;
arrangements that are loss schemes; and
arrangements that are certain leasing arrangements
In most situations where a disclosure is required it
must be made by the scheme “promoter” within
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five days of one of three trigger events, the first
of which coincides with actively marketing the
scheme. However, the scheme user may need to
make the disclosure in cases where: the promoter is
based outside the UK; the promoter is a lawyer and
legal privilege applies; and there is no promoter.
Upon disclosure, HMRC issues the promoter with
an eight-digit scheme reference number for the disclosed
scheme. By law the promoter must provide
this number to each client that uses the scheme,
who in turn must include the number on their tax
return or on a special form created as part of the
DOTAS disclosure process. A person who designs
and implements their own scheme must disclose it
within 30 days of it being implemented.
A disclosure regime was also introduced on 1 August
2004 in relation to arrangements that are intended to
give any person a value-added tax (VAT) advantage.
The main obligation for disclosure rests with those
taxable persons who are party to the scheme. However,
disclosure is limited to two broad categories: listed
VAT avoidance schemes and hallmarked schemes.
The listed schemes are certain arrangements
that involve:
the first grant of a major interest in a building;
payment handling services;
value shifting;
leaseback arrangements;
extended approval periods;
groups and third party suppliers;
education and training by a non-profit making body;
education and training by a non-eligible body;
cross-border face-value vouchers; or
a surrender of a relevant lease
Th e hallmarks are:
confidentiality agreements;
agreements to share a tax advantage;
contingent fee agreements;
prepayments between connected parties;
funding by loans, share subscriptions or subscriptions
in securities;
off-shore loops;
property transactions between connected persons;
and
issue of face-value vouchers
Th e obligation to disclose is triggered by:
the submission of a VAT return that shows an
amount that is different (higher or lower) from
what would have been shown had the scheme not
been entered into;
the submission of a claim for VAT (for example,
by the making of a voluntary disclosure of an
error) that is higher than what would have been
claimed had the scheme not been entered into; or
incurring at any time less non-deductible VAT
than would have been incurred had the scheme
not been entered into
Th e disclosure regime has been extended on a number
of occasions to other taxes, including Stamp
Duty Land Tax in 2005, national insurance contributions
from May 1, 2007 and inheritance tax
from April 6, 2011.
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The government has also used successive finance
bills to tighten various aspects of the disclosure
regime.
Following consultation, the March 2010 budget
announced a package of five measures to strengthen
and improve the DOTAS regime. Briefly these
measures included:
A new 'trigger point ' for the disclosure of actively
marketed schemes – the point at which a promoter
first communicates information (including
information about the expected tax advantage)
about a substantially designed scheme to a third
party with a view to obtaining clients for that
scheme;
An information power which gives HMRC the
power to require a scheme “introducer” (an intermediary
whose function is to introduce clients
to the promoter) to identify the promoter;
Increased penalties for failure to comply with a
disclosure obligation;
A new requirement for promoters to provide
HMRC with periodic information about clients
who implement a notifiable scheme; and
Revised and extended hallmarks.
Th e first four of these measures were included in
the 2010 Finance Act, while HMRC’s work to extend
and revise the hallmarks has been ongoing.
In a speech 1 to the Policy Exchange think tank in
July 2012, Exchequer Secretary to the Treasury, David
Gauke outlined further measures to strengthen
the DOTAS regime. These included the granting of
additional powers to HMRC to force promoters to
disclose avoidance schemes and the details of their
beneficiaries. Gauke revealed that rules would also
be tightened to make it is easier to impose penalties
for failure to provide information to HMRC about
a scheme and that the government was also considering
publishing warnings about tax avoidance
schemes that are effectively being mis-sold.
Doubts have been raised, however, over the effectiveness
of DOTAS in deterring aggressive tax
planning. The National Audit Office (NAO) was
particularly critical of the disclosure regime in a
report 2 tackling tax avoidance in November 2012.
While this report noted that DOTAS has helped
HMRC make important headway in reducing the
opportunities for avoidance, it nevertheless saw little
evidence that HMRC was making progress in
preventing the sale of highly contrived tax avoidance
schemes to a large number of taxpayers.
On the plus side, the report found that in each of the
previous four years, over 100 new avoidance schemes
had been disclosed under DOTAS. It also concluded
that DOTAS has helped to change the market for
tax avoidance schemes, with the larger accountancy
firms now less active in this area. But, in the view
of the NAO there is little evidence to suggest that
the usage of avoidance schemes is reducing. Since
the introduction of DOTAS, HMRC has initiated
93 changes to tax law designed to reduce avoidance.
However, because tax avoidance is difficult to define
in legal terms, it is still up to the tax authority
to prove that a scheme is not consistent with tax law,
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14

a resource-intensive process that has led to a backlog
of 41,000 open cases relating to marketed avoidance
schemes. While HMRC, concentrating on “lead
cases,” has a good success rate when it litigates, its
investigations can take many years to resolve and it
cannot always successfully apply the rulings in lead
cases to other cases. What’s more, observes the NAO,
the costs of such a strategy are not counted, limiting
the department’s ability to make informed decisions
about where to direct its avoidance activity.
"HMRC must push harder to find an effective way
to tackle the promoters and users of the most aggressive
tax avoidance schemes,” said Amyas Morse,
head of the NAO. “Though its disclosure regime
has helped to change the market, it has had little
impact on the persistent use of highly contrived
schemes which deprives the public purse of billions
of pounds. It is inherently difficult to stop tax
avoidance as it is not illegal. But HMRC needs to
demonstrate how it is going to reduce the 41,000
avoidance cases it currently has open."
While the NAO’s report concentrated on the limitations
of DOTAS and on the failings of HMRC to adequately
manage its tax avoidance case load, another
conclusion that could be drawn from it is that a more
holistic approach to the problem of aggressive tax
avoidance is needed, and this is to come in the form
of the government’s proposed general anti-abuse rule.
The Aaronson Report
The Treasury announced its intention to proceed
with a GAAR at the 2012 Budget in March last
year and it was scheduled for introduction in 2013
as part of the government's "strategic approach" to
the risk of avoidance. The inclusion of the proposals
in the 2012 Budget came partly in response to
rising public anger at the unfairness of a tax system
that lets the wealthy whittle their tax liability
down to virtually nothing, while the vast swathes
of working people have to pay up in full. However,
the idea of bringing a GAAR to the UK is
not new. The previous Labor administration under
Prime Minister Gordon Brown toyed with the idea
of a general anti-avoidance rule, but it eventually
shelved the idea.
Th en, in December 2010, the recently-elected
coalition government commissioned tax barrister
Graham Aaronson QC to lead a study that would
consider the merits of a GAAR, and whether a law
of this type could deter and counter tax avoidance,
whilst providing certainty and minimizing
costs for businesses and the tax authority. Aaronson
put together a small committee consisting of
experts from the field of UK tax law. Its members
included: John Bartlett, Group Head of Tax at
BP; Judith Freeman, Professor of Taxation Law,
Oxford University Law Faculty; Sir Launcelot
Henderson, Judge of the Chancery Division of
the High Court of Justice; Lord Hoffman, Non-
Permanent Judge of the Court of Final Appeal
of Hong Kong; Howard Nolan, former Tax Partner
at Slaughter and May and a part time Judge
of the First-Tier Tribunal; and John Tiley QC,
Emeritus Professor of the Law of Taxation and
Founding Director of the Centre for Tax Law,
Cambridge University.
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When the Aaronson report 3 was published on November
21, 2011, it did indeed make the case for
a GAAR, but one that was narrowly-targeted to
catch "abusive" tax avoidance schemes, because, it
concluded, a broad-based rule would not be beneficial.
Hence, it should be called a general anti-abuse
rule, rather than a general anti-avoidance rule.
This would be intended to ensure more certainty
for “centre ground tax planning” while targeting
“highly abusive, contrived and artificial schemes.”
“I have concluded that introducing a broad spectrum
general anti-avoidance rule would not be beneficial
for the UK tax system,” wrote Aaronson in his
report. “This would carry a real risk of undermining
the ability of business and individuals to carry
out sensible and responsible tax planning. Such tax
planning is an entirely appropriate response to the
complexities of a tax system such as the UK’s. To
reduce the risk of this consequence a broad spectrum
rule would have to be accompanied by a comprehensive
system for obtaining advance clearance
for tax planning transactions. But an effective clearance
system would impose very substantial resource
burdens on taxpayers and HMRC alike. It would
also inevitably in practice give discretionary power
to HMRC who would effectively become the arbiter
of the limits of responsible tax planning.”
settled is seen to be operating fairly and effectively,
the report recommends extended the scope of the
rule to other taxes, such as stamp duty land tax.
However, Aaronson argued against including value-added
tax within the ambit of the GAAR, because
VAT law has its own set of anti-avoidance
laws derived from European law, and applying a
UK GAAR in parallel could clash with EU law.
Aaronson’s GAAR includes a series of important
safeguards to ensure that the centre ground of responsible
tax planning is effectively protected. These
safeguards are: an explicit protection for reasonable
tax planning; an explicit protection for arrangements
which are entered into without any intent
to reduce tax; placing upon HMRC the burden of
proving that an arrangement is not reasonable tax
planning; having an Advisory Panel, with relevant
expertise and a majority of non-HMRC members,
to advise whether HMRC would be justified
in seeking counteraction under the GAAR; giving
taxpayers and HMRC the right to refer to material
or information which was publicly available when
the tax planning arrangement was carried out; requiring
that potential application of the GAAR has
to be authorized by senior officials within HMRC
to ensure consistency and responsibility in its application
by HMRC.
Th e report recommended that a GAAR should initially
apply to the main direct taxes – income tax,
capital gains tax, corporation tax, and petroleum
revenue tax, as well as national insurance contributions.
In time, when the GAAR legislation had
On the fundamental question of what should and
should not be regarded as an “abusive” transaction
under the GAAR, Aaronson considered that reasoning
developed by the Court of Final Appeal in
Hong Kong in dealing with the territory’s GAAR
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16

offers the best approach for the UK. “That approach
is to recognize that tax rules may give taxpayers
a number of reasonable choices as to the sort
of transactions which they may carry out and, depending
on the choice, the tax result which could
be achieved,” he wrote.
To reduce uncertainty, Aaronson’s main recommendation
is that HMRC apply a “double reasonableness
test” when scrutinizing a tax avoidance
scheme. This would be achieved by placing
on HMRC the burden of demonstrating that the
arrangement “cannot reasonably be regarded as a
reasonable exercise of choice.”
Publishing the Report, Aaronson said: “Responsible
tax planning is an essential feature in a complex tax
regime, such as the UK’s. But artificial and abusive
tax avoidance schemes are widely regarded as an intolerable
assault on the integrity of the tax regime.
A general anti-abuse rule narrowly targeted to deter
such schemes, while not affecting responsible tax
planning, should lead to a fairer, more principled
and ultimately simpler tax system; and I strongly
recommend that such a rule should be introduced
into our tax laws.”
Although the proposals appeared to be welcomed
by the government, which looked as if it was at
least trying to stamp out the sort of schemes reported
on frequently in the media, Aaronson’s report
got mixed reviews from the tax community.
The Chartered Institute for Taxation (CIOT) and
Association of Taxation Technicians 4 for example,
while welcoming Aaronson’s decision to opt for a
narrowly-defined anti-abuse rule, said that the proposals
overall pose more questions than answers.
For instance, how would the GAAR affect the existing
body of anti-avoidance laws? Would the narrow
scope just cause further uncertainty over what
is “abusive”; Who is to make the judgment about
what is reasonable? How can the government ensure
that the GAAR will not be wielded by HMRC to
intimidate taxpayers/generate more revenue? Who
will write the guidance, and would this not simply
add yet another layer of rules onto the system? The
CIOT also suggested that DOTAS could be just as
effective as the proposed GAAR if it was given sufficient
teeth.
“We recognize there are concerns with aspects of the
operation of the UK tax system that need to be addressed;
we remain to be convinced that this GAAR
is the right way to address them,” said the CIOT.
The Government’s Proposals
The government accepted the main recommendations
of the Aaronson report, that a GAAR targeted
at artificial and abusive tax avoidance schemes
would improve the UK's ability to tackle tax avoidance,
and put its draft proposals out to a threemonth
consultation on June 12, 2012. Under the
government’s envisaged timeline, the GAAR is to
apply to tax arrangements entered into on or after
April 1, 2013 and it will also apply to inheritance
tax, stamp duty land tax and annual residential
property tax (due to be introduced in 2013),
in addition to the taxes listed in Aaronson’s report.
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Crucially, the government’s proposals differ in other
ways too, and the language in the draft legislation
suggests that it would be wider in scope than
Aaronson’s GAAR.
Over 14,000 consultation responses were received
by the Treasury, and while these revealed support
for the concept of a general anti-abuse rule, many
respondents to the consultation expressed some
alarm at certain key elements of the draft legislation.
One of the main concerns is over the tests to be used
to establish whether a tax scheme is "abusive" or "acceptable"
avoidance, which deviate from the recommendations
of the Aaronson report, and in particular,
the government's "main purpose" test to be used
to define a "tax arrangement." This clause would
ensnare an arrangement if, “having regard to all the
circumstances, it would be reasonable to conclude
that the obtaining of a tax advantage was the main
purpose, or one of the main purposes, of the arrangement.
Suggestions by respondents that a more narrowly-targeted
test, such as a "sole," "dominant" or
"primary" purpose test would be preferable to a main
purpose rule, so as to provide greater assurance to taxpayers
that "centre ground planning" would not be
caught, were rejected by the government, however.
Respondents also pointed out flaws in the “reasonable”
test. Indeed, this was a key concern for nearly
all respondents, a large majority of whom considered
that the proposed "double reasonableness" test
is subjective and that the draft legislation may go
beyond the stated policy aim, its scope potentially
extending across a broad spectrum.
Echoing the views of the CIOT, KPMG 5 says that
the proposed anti-abuse rule, while sounding fine
in principle, is far from perfect, and could end up
merely adding more uncertainty to an already complex
tax system. Consequently taxpayers entering
into any planning at all will have a "sword of Damocles
hanging over their head."
"It's a real shame that the general anti-avoidance
rule… is likely to lead to more, not less, uncertainty
over where the line is drawn between ‘reasonable
tax planning' and ‘unacceptable tax avoidance'
which is often a key bone of contention between
taxpayers and tax authorities when agreeing what is
the ‘right' amount of tax due," commented Chris
Morgan, head of tax policy at KPMG, upon the
publication of the draft GAAR law. "The GAAR
aims to target artificial and abusive tax planning
and is not designed to be a broad spectrum rule
that would sweep up arrangements made in the
normal course of business. The government is to be
applauded for following Graham Aaronson QC's
Report recommending such a targeted approach.
However, looking at the wording of the proposals,
it could go much wider than this as it is based on
what is and is not ‘reasonable' in both the wording
and spirit of the legislation. What is reasonable
to one person is unacceptable to another and ultimately
the Courts will have to decide where the
line is."
Law firm Clifford Chance 6 also doubts that the
"double reasonableness" test will achieve its objective,
observing in a client briefing that: "When the
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current wording of the test is examined against the
backdrop of existing legislation and case law concerning
the concept of reasonableness, it seems
doubtful whether the test achieves its stated objective.
The implication of this is that, unless the
wording is strengthened, we may find ourselves
drifting towards a more intrusive GAAR than what
was originally proposed."
Conclusion
Ironically then, it seems as if the UK GAAR faces an
uncertain future, with many questions on its scope,
application and operation still to be fully answered
by the government. However, the positive light in
which the Aaronson report was received by the government
suggests that it is intent on going through
with an anti-abuse rule, partly to appease a large
swathe of the electorate which thinks that HMRC
lets far too many rich tax avoiders off the hook.
Another point to bear in mind is that both Aaronson’s
and the government’s proposals do not really
attempt to tackle the issue of corporate tax avoidance,
especially by multinationals. This is because
when an international dimension is added to the
tax planning equation, it is very hard for any single
government to do anything about it. What’s more,
as highlighted earlier in this piece, the Amazon’s
and Google’s of this world have not actually broken
any UK laws. So this particular can of worms will
probably be kicked down the road for another day.
ENDNOTES
1
2
3
4
5
6
http://www.hmtreasury.presscentre.com/Press-Releases/Government-to-tighten-net-round-cowboytax-advisers-67d7f.aspx
http://www.taxation.co.uk/taxation/files/Tax%20
Avoidance_P1.pdf
http://www.hm-treasury.gov.uk/d/gaar_final_report_111111.pdf
http://www.tax.org.uk/Resources/CIOT/Documents/2012/01/120127_GAAR_CIOT_ATT.pdf
http://www.kpmg.com/uk/en/issuesandinsights/
articlespublications/newsreleases/pages/proposedgeneral-anti-abuse-rule-on-tax.aspx
http://www.cliffordchance.com/publicationviews/
publications/2012/09/the_draft_gaar_thedoublereasonablenesstest.html
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FEATURED ARTICLES
ISSUE 12 | JANUARY 31, 2013
Digital Invoicing In The EU And Brazil
by Richard T Ainsworth, Boston University
School of Law, Graduate Tax Program
Baby-steps verses giant-steps; that's the difference
between digital invoicing initiatives in the EU and
Brazil. On January 1, 2013 the Second Invoicing
Directive went into effect in the EU. 1 Brazil began
a much more ambitious digital invoicing transformation
2 on September 15, 2006 with a pilot project
3 that went national by April 2009, and was considered
fully implemented and complete by 2010. 4
(3) Establishment of a common period during
which invoices must be stored; and
(4) Restriction of the right of Member States to
impose further conditions on invoices drawn
up by the customer.
Th e difference between Brazil and the EU on digital
invoicing is instructive. In Brazil a legally binding
invoice is digital (only). It may have a paper
replica, but in Brazil the digital invoice is the real
deal. 5 It does not matter if the parties are domestic,
or foreign. In the EU a legally binding invoice may
be either paper or digital. There is no stated priority
or preference, but there are practical difficulties in
going digital in the EU.
The EU's Second Invoicing Directive followed from
a study, 6 a public consultation, 7 and a Commission
Proposal. 8 The proposal focused on harmonization,
but the result fell far short. The Commission sought
to accomplish four things:
(1) Removal of all differences between paper and
digital invoices;
(2) Establishment a common deadline for the
issuance of invoices;
Th e Council reached agreement in 2010, and adopted
the Second Invoicing Directive on July 13,
2010. Its provisions were not in force before December
31, 2012. As a result, 2012 has been an intense
year on the invoicing side of EU tax-technology.
Th e EU's invoicing effort is all about harmonization
and natural processes. The assumption is that
if all the barriers to digital invoices are removed,
then by establishing legal equivalence between
digital and paper invoices natural modernization
and business efficiency efforts will push the EU to
where Brazil is today.
New Article 217 defines an e-invoice. It is, "… an
invoice that contains the information required in
this Directive, and which has been issued and received
in electronic format." Thus, a PDF attached
to an e-mail is an e-invoice. A faxed invoice is not
20
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an e-invoice. A scanned invoice is an e-invoice (if it
is scanned before it is sent).
The EU problem is that a number of old invoicing
rules have survived. Two are notable. First, old Article
232 required a seller to get his customer's acquiescence
before issuing an e-invoice. This rule remains. The
Commission had proposed its elimination. As a result,
if some Member States retain their old rules requiring
formal (explicit) acceptance of e-invoicing in advance
of its use, many businesses will not "go digital."
Secondly, the Commission proposed removing a
requirement under Article 233 that e-invoices provide
the tax administration with a "guarantee" of:
the authenticity of the origin of the invoice, and
the integrity of the contents of the invoice.
Instead of removing this requirement, the Second Invoicing
Directive extended it to all invoices. It is up
to each business that sends or receives an invoice to
determine how it will meet these requirements. The
issue comes down to business controls over invoicing.
New Article 233 indicates that the integrity of the
content, and the legibility of invoices can be assured
by "… any business controls which create a reliable
audit trail between an invoice and a supply." Member
States are sure to differ over the kinds of controls that
will meet this requirement. Thus, without an Implementing
Regulation there is a high risk that invoicing
rules will differ significantly around the EU.
In some areas there has been real simplification. For B2C
transactions (provided the customer agrees to digital
invoicing) only the sender (B) needs to meet the business
control requirements. Thus, "going digital" is entirely
within the grasp of any retail establishment. However,
this B2C benefit only extends to EU businesses.
The main rule on EU invoicing is that the applicable
rules are those in the Member State where
the goods or services are supplied. Derogation
changes the main rule so that the invoicing rules in
the Member State where the supplier is established
control, but this only applies if the supplier is established
in the EU. If a business is established outside
the EU the main rule applies. Thus, an American
business will be confronted with different invoicing
rules based on where their customers are located.
A lot of work has been done over the past year on
digital invoicing in the EU. A lot more remains to
be done, if the EU is to catch up with Brazil.
E NDNOTES
1
2
3
Council Directive 2010/45/EU of 13 July 2010 amending
Directive 2008/112/EC on the common system
of value added tax as regards the rules on invoicing.
2010 O.J. (L 189) 1.
A constitutional amendment was needed to put the
plan in place, because it required information sharing
among the states. Constitutional Amendment No. 42
of December 19, 2003 (See: Constitution of the Federal
Republic of Brazil of October 5, 1988, Art. 37).
Six Brazilian states participated in the pilot project,
and 37 invoice-issuing commercial centers were involved.
These companies were by and large the largest
companies in Brazil.
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4
5
Newton Oller de Mello, Eduardo Mario Dias, Caio Fernando
Fontana & Marcelo Alves Fernandez, The Evolution
of Electronic Tax Documents in Latin America, Proceedings
of the 13 th World Scientific and Engineering
Academy and Society (WSEAS) International Conference
on Systems (2009) 449, 297, available at : http://
dl.acm.org/citation.cfm?id=1627575&picked=prox .
The Brazilian modernization program is called
SPED. SPED is the acronym for Sistema Publico de
Escrituracao Digital or Public System for Digital
Accounting. The Electronic Invoice (NF-e; an acronym
for Nota Fiscal Eletrônica ) and the Electronic
6
7
8
Waybill (CT-e; an acronym for Conhecimento de
Transporte Eletrônico de Cargas ) are the two parts
of this program that are important for comparative
purposes. They are now firmly part of Brazilian
commercial practice.
PricewaterhouseCoopers, A Study on the Invoicing
Directive (2001/225/EC) now incorporated in the VAT
Directive (2006/112/EC) November 3, 2008.
The public consultation was launched on July 24,
2008 and summarized in a report in November 2008.
TAXUD/DI/GW/mveD(2008) 25115.
COM(2009) 21.
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22

FEATURED ARTICLES
ISSUE 12 | JANUARY 31, 2013
New Swiss Legislation On The Taxation
Of Employee Shareholdings
by Walter H. Boss, Attorney at Law, LL.M. and
Andrea Scherrer, Attorney at Law, Certified
Tax Expert, Poledna Boss Kurer AG, Zurich,
Switzerland
I. Introduction
On January 1, 2013 new Swiss legal provisions
ensuring a more consistent taxation of employee
shareholdings at the cantonal level entered
into force.
At the federal level the former taxation practice for
employee shareholdings was mainly based upon
two Circular Letters 1 of the Swiss Federal Tax Administration
(“ FTA ”), whilst at the cantonal level
the practices could differ from canton to canton.
With the new Federal Law of December 17, 2012
on the taxation of employee shareholdings (“ new
law ”) as part of the Federal Direct Tax Act (“ FDTA ”)
and the Federal Tax Harmonization Act (“ FTHA ”)
and the correspondent Ordinance of June 27, 2012
on employer's reporting obligations regarding employee
shareholdings (“ Ordinance ”) the issue has
now been regulated at the legislative level. This
has improved the harmonization of the taxation of
employee shareholdings significantly and granted
more legal certainty for all involved parties, in particular
regarding the timing of taxation and the tax
assessment in international situations reflecting the
rules provided by the Commentary of the OECD
Model Tax Convention on Income and Capital.
On December 14, 2012, the FTA has already issued
a new (draft) Circular Letter No. 37 on the
Taxation of Employee Shareholdings (“ Draft CL
2
37 ”) to give an overview of the tax consequences
of the new law and to eliminate any gaps in the new
law and the Ordinance. Said Circular Letter will
replace the two aforementioned Circulars.
This article provides an overview of the new
legislation and describes in particular how and
when income from employee shareholdings is
taxed. It also addresses the timing of taxation of
income deriving from employee shareholdings
granted in Switzerland but exercised by the employee
at the time after he has left Switzerland
(so called export of employee shareholdings) or
vice versa, i.e. granted abroad, but exercised in
Switzerland (so called import of employee shareholdings).
Finally, the reader's attention is drawn
to the new reporting obligations of the employer
towards the Swiss tax authorities regarding employee
shareholdings.
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II. Time Of Taxation
According to Swiss tax law all income deriving from
employment, including income from employee
shareholdings is subject to Swiss income tax. 3
Th e timing of taxation depends on the type of employee
shareholdings. The law makes a distinction
between genuine employee shareholdings which
include employee shares and employee stock options,
and phantom employee shareholdings, i.e.
entitlements to cash pay outs. 4
A. Income From Genuine Employee
Shareholdings
1. Income From Employee Shares
Income from employee shares – regardless of whether
they are restricted (vested) or not and whether
they are publicly listed or not – is subject to taxation
at grant. The fair market value of the shares
reduced by a possible issuance price is taxable. 5 The
fair market value of publicly listed shares is generally
the closing price at the day of grant. 6 The fair market
value of unlisted shares is generally the intrinsic
value calculated according to a recognized formula. 7
Compared to unrestricted employee shares restricted
employee shares are of lesser value. For this reason the
new law provides for a discount on the fair market
value of 6% per vested year as this was already the
case under the former taxation practice. A discount is
only possible for a maximum of 10 years. 8 Hence the
difference between the reduced fair market value and
the lower issuance price is subject to income tax. 9
A capital gain resulting from the sale of employee
shares, which the employee holds as private assets,
qualifies as tax free capital gain. 10
The new law reflects the former taxation practice,
which was summarized in the aforementioned CL
5. The taxation of income deriving from employee
shares still takes place at the time of grant. What
is more, for vested employee shares a discount is
still provided as it was under the former practice.
Hence, under the new law the taxation of income
deriving from employee shares has actually not undergone
any significant changes. 11
2. Income From Employee Stock Options
According to the former taxation practice (mainly
in the German-speaking cantons of Switzerland)
employee stock options with vesting clauses were
normally not taxed at grant but at the time of exercise.
The time of grant and the end of the vesting
period were irrelevant from a tax point of view. 12
Under the new law these taxation rules have been
changed: as a general rule, employee stock options are
now taxed at grant, i.e. the same taxation rules apply
as for employee shares ( cf. section II.A.1). Namely, the
fair market value of the shares reduced by the issuance
price, if any, is subject to income tax. However, different
rules apply for income deriving from restricted
or unlisted employee stock options. According to the
new law restricted or unlisted employee stock options
are not taxed at grant but taxed at the time of exercise.
The fair market value of the share at the time of
exercise minus the exercise price is taxable. 13
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In summary, only unrestricted publicly listed employee
stock options are taxed at grant. Given that
most employee stock options are usually either
unlisted or have some restrictions not much has
changed under the new law, i.e. most employee
stock options will still be taxed at exercise. 14
B. Income From Phantom Employee
Shareholdings And Restricted Stock Units
Income deriving from phantom employee shareholdings
– i.e. cash pay outs – is taxed at the time
the employee actually receives the cash. 15
Generally, the issue, where income from employee
shareholdings in an international situation is taxed, is
only relevant for restricted or unlisted employee stock
options, as only this kind of employee stock options is
not taxed at grant. As mentioned employee shares and
other employee stock options are taxed at grant, hence
the question of proportional taxation does not arise. 17
However, whether the income is taxed in Switzerland
at source or ordinarily in international situations
is a question which needs to be taken into
account for all kinds of employee shareholdings.
Regrettably the new law still does not provide explicit
taxation provisions for entitlements to employee
shares such as restricted stock units (“ RSUs ”).
However – and in line with the former taxation
practice – the FTA now mentions in Draft CL 37,
section 5 that entitlements to employee shares are
taxed at the time they are converted into employee
shares. For the time of taxation one may therefore
refer to section II.A.1. 16
III. Taxation Of Employee Shareholdings
In International Situations
There are generally two issues regarding the taxation
of employee shareholdings in international situations:
(i) employees may move from one country
to another between the grant and the exercise of the
employee shareholdings and the question where the
income is taxed in respect of which state gets the
right to tax arises and (ii) in case Switzerland gets the
right to tax, how is the income taxed, i.e. whether it
is taxed at source or whether it is taxed ordinarily.
A. Taxation Of Employee Shares And
Unrestricted Publicly Listed Employee
Stock Options
As mentioned because income from employee
shares and unrestricted publicly listed employee
stock options is taxed at grant the question of proportional
taxation does not arise; i.e. the entire income
is taxed at grant.
With regard to the question how the income is
taxed the following applies: in case Switzerland has
the right to tax, Switzerland will levy the relevant
income tax at source at the time of grant regardless
of whether the recipient of the income is a tax resident
of either Switzerland or a foreign state, if the
conditions for taxation at source are met, in particular
if (i) the foreign employee is a foreign citizen
without a residence permit in Switzerland (so called
C-permit) and (ii) is either a tax resident in Switzerland
or (iii) is not a tax resident in Switzerland,
but is working in Switzerland. 18
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B. Taxation Of Restricted Or Unlisted
Employee Stock Options
1. Pro Rata Taxation
As mentioned restricted or unlisted employee
stock options are taxed at exercise. In case a taxpayer
is not a tax resident of Switzerland during
the entire period between the grant and the time
he has the right to exercise the restricted employee
stock options, the taxation of the income
derived from the employee stock options is only
taxed in Switzerland on a pro rata basis in proportion
of the vesting period to the time the employee
has spent in Switzerland according to Art.
17d FDTA respectively Art. 7f FTHA. Either the
employee has moved to Switzerland after he was
granted employee stock options but before he exercised
them (so called import of employee shareholdings)
or the employee left Switzerland after
he was granted the employee stock options but
before he exercised them (so called export of employee
shareholdings). In both cases the employee
stock options are granted in a different country
than the one in which they are exercised. Art. 7
and 8 of the Ordinance list the employer's reporting
obligations in the relevant cases.
According to the various Double Tax Treaties Switzerland
has concluded in international cases generally
Switzerland may not tax the full monetary
benefit from the realization of the employee shareholdings.
The right to tax is to be spread amongst
the various states according to the number of days
the employee was a resident of those states between
the time at grant and the time of exercise. The
relevant criterion, whether a state has the right to
tax, is therefore whether the state has the right to
tax the income of the underlying employment. 19
Th e income taxable in Switzerland is to be calculated
on a pro rata basis according to the formula
set out in Art. 7 section 2 or Art. 8 section 2 of
the Ordinance.
2. Taxation At Source
Th e recipient 20 of the income from employee
stock options, which is taxed at the time of exercise,
may have his tax residence at that time either
in Switzerland or abroad. The taxation in Switzerland
will take place at source, if the conditions
for taxation at source are met. 21 In particular if
Switzerland has the right to tax the income and
(i) the foreign employee is either a tax resident 22
in Switzerland or (ii) the foreign employee is not
a tax resident in Switzerland, but is working in
Switzerland. 23 Further, it must be distinguished
whether the recipient is still an employee of the
employer who granted the employee shareholdings,
at the time of exercise, or not:
2.1 Recipient Is An Employee At Time Of Exercise
In case the recipient is still an employee of the
employer and a tax resident in Switzerland at the
time of exercise, pro rata taxation according to
Art. 17d FDTA respectively Art. 7f FHTA can
only take place if the employee has not been subject
to tax in Switzerland during the whole relevant
period, i.e. between grant and exercise of
the employee stock options.
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26

In case the recipient is still an employee of the employer
and therefore Switzerland has the right to tax
the income from employee shareholdings, although
he is not a tax resident in Switzerland at the time
of exercise, the source tax is levied from the gross
income. Pro rata taxation is excluded and those
employees are subject to source tax in Switzerland
for the entire income from employee stock options,
unless a different provision in a Swiss Double Tax
Treaty provides otherwise. 24 The ordinary source
tax rates apply. 25
2.2 Recipient Is Not An Employee At Time
Of Exercise
In case the recipient is not an employee of the employer
who granted the employee shareholdings
anymore but he is a Swiss tax resident at the time
of exercise the income derived from the employee
stock options is taxed at source and pro rata taxation
takes place if the employee has not been subject
to tax in Switzerland during the whole relevant
period, i.e. between grant and exercise of the employee
stock options. 26
If at the time of exercise the recipient of the income
deriving from the employee stock options is no longer
an employee of the employer who granted the employee
shareholdings and he is a tax resident abroad,
the income from the “exported” employee stock options
is taxable in Switzerland at source on a pro rata
basis according to Art. 97a FDTA. The source tax
rate on the federal level amounts to 11.5 % of the
monetary benefit. On the cantonal level the cantons
are free to determine their own source tax rates.
IV. Employer's Reporting Obligations
A. In General
Simultaneously with the new provisions in the
FDTA and the FTHA a new ordinance entered
into force that ensures the implementation of the
new federal law by providing minimum standards,
with which the employers have to comply due to
their reporting obligations with respect to employee
shareholdings under the new law. 27
Under the new law the employer is obliged to issue a
confirmation for each tax period in which he issues
employee shareholdings or in which the employee
realizes taxable income from employee shareholdings.
The employer may determine the reporting
form as he chooses. 28
The purpose of the confirmation in particular is to
provide a calculation basis for the income to be declared
in the salary statement of the employees. However,
the confirmation must not be sent to the tax
authorities directly. In general it is sufficient if the
employer issues the confirmation to the employee
as an enclosure with his annual salary statement, referring
to the source tax statements. 29 However, it is
necessary to provide the cantonal tax authorities of
the canton of which the former employee is a resident
with the confirmation directly in cases where the employment
has been terminated before the income
from employee shareholdings has been realized. 30
For employee shares a confirmation must be issued
at the time of grant. It must include all the
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27

information stated in Art. 4 of the Ordinance. 31
For other employee stock options, which are taxed
at the time of realization of the income, two confirmations
are necessary. The first one has to be issued
at the time the employee stock option is granted
and the second one at the time of realization. The
information which must be included in the confirmations
is listed in Art. 5 of the Ordinance. 32 For
unrestricted listed employee stock options, which
are taxed at grant a sole confirmation is generally
sufficient. It has to be issued in the tax period in
which the employee acquires the employee stock
options and must also include the aforementioned
information stated in Art. 4 of the Ordinance. 33
Th e tax authorities can require additional information
regarding the granted employee shareholdings
from the employer. 34
B. In International Situations
As mentioned, in international situations the income
from employee shareholdings may only partially
be subject to taxation in Switzerland.
In the case of an import of employee shareholdings
the employer is obliged to issue a confirmation to
the employee at the time of realization of the income
according to Art. 7 of the Ordinance. 35 It is
important to note that the entire income derived
from the employee shareholdings has to be reported
in the salary statement. However, the employee
may then deduct in his tax return the portion relating
to the time spent outside of Switzerland as
“income taxable abroad”.
In the case of an export of employee shareholdings,
the confirmation must be enclosed with the source
tax statement according to Art. 8 of the Ordinance.
Separate reporting directly to the tax authorities is
not necessary. 36 In addition to the regular information
to be included in the confirmation, the employer
is obliged to report the realization of the income
deriving from the employee shareholdings to
the cantonal tax authorities in the canton in which
he has his legal seat 37 , and include in the confirmation
also (a) the numbers of days within the vesting
period the employee was working in Switzerland
and (b) the income received. Further, the employer
is obliged to withhold and pay the proportional
source tax. 38
V. Ruling Confirmation Of Swiss
Tax Authorities
Switzerland has a long standing and established ruling
practice in all possible tax matters. In particular
for employee shareholdings, a written ruling confirmation
by the Swiss tax authorities does not only
grant legal certainty regarding the tax assessment
of the employee but also guarantees the correct
handling of the employee shareholding plan by the
employer from a tax point of view in national and
international situations.
The cantonal tax authorities in the canton in which
the employer has his legal seat are responsible for
rulings regarding employee shareholdings. However,
if employees are resident in various cantons it is
advisable to require a ruling confirmation from the
FTA as well. 39
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28

VI. Conclusion
Although the harmonization of the former somewhat
uncertain situation in taxation of income
deriving from employee shareholdings is much
welcomed, the law still does not provide for solutions
to various issues on the taxation of employee
shareholdings. For example as mentioned the
taxation of RSUs is still not explicitly regulated at
the legislative level. Many questions therefore are
still unanswered. It remains to be seen whether
the practice of the FTA and the cantonal tax authorities
will head in the same direction or whether
differences will remain. Considering this, it is
still advisable to obtain a ruling for legal certainty
if an employer decides to grant employee shareholdings
to his employees.
Further, employers are well advised to amend their
employee shareholding plans in accordance with
the new legislation and renew ruling confirmations
in place with the competent cantonal tax authorities
in due time.
Finally, employers need to implement processes
to comply with their reporting obligations under
the new law. In particular with respect to
internationally mobile employees, Swiss employers
should be aware of the practical challenge of
staying informed about the exercise time of their
former employees' stock options, because of their
reporting obligations and liability to pay the withheld
income tax.
* * * * *
For further information or to discuss any of the issues
raised, please contact Walter H. Boss ( boss@
pbklaw.ch ) or Andrea Scherrer ( scherrer@pbklaw.
ch ) on +41 44 220 12 12.
E NDNOTES
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Circular Letter No. 5 of April 30, 1997 on the Taxation
of Employee Shares (“ CL 5 ”; Kreisschreiben Nr. 5 vom
30. April 1997 über die Besteuerung von Mitarbeiteraktien)
and Circular Note of May 6, 2003 on the Taxation
of Employee Stock Options with Vesting Clauses
(Rundschreiben vom 6. Mai 2003 über die Besteuerung
von Mitarbeiteroptionen mit Vesting-Klauseln).
Entwurf Kreisschreiben Nr. 37 Besteuerung von Mitarbeiterbeteiligungen
vom 14. Dezember 2012.
Art. 17 FDTA. Art. 7 of the FTHA.
Art. 17a FDTA, Art. 7c FTHA.
Art. 17b section 1 FDTA, Art. 7d ection 1 FTHA.
Draft CL 37, section 3.2.1.
Draft CL 37, section 3.2.2.
Art. 17b section 2 FDTA, Art. 7d section 2 FTHA.
Draft CL 37, section 3.3.
Art. 16 section 3 FDTA; Art. 7 section 4 lit. b FTHA.
Instead of many: Mario Kumschick/Miriam Kaufmann,
Neues Bundesgesetz über die Besteuerung von Mitarbeiterbeteiligungen,
Beseitigt das neue Bundesgesetz
Rechtsunsicherheiten bei der Besteuerung von Mitarbeiterbeteiligungen?,
in: Der Schweizer Treuhänder,
Heft 6-7, 2011, section 513-518, section 513.
Instead of many: Kumschick/Kaufmann, loc. cit. , section
514.
Art. 17b section 3 FDTA, Art. 7d section 3 FTHA.
Instead of many: Kumschick/Kaufmann, loc. cit. , section
514.
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29

15
Art. 17c FDTA, Art. 7e FTHA.
24
Art. 91 in connection with Art. 84 FDTA and Art. 13
16
Draft CL 37, section 5. See also instead of many: Kum-
of the Ordinance. See also Draft CL 37 section 7.3.4.
schick/Kaufmann, loc. cit ., section 516.
25
Art. 13 of the Ordinance in connection with Art. 85
17
Draft CL 37, section 7.
FDTA.
18
Draft CL 37 section 7.2.2. In case the employee is a tax
26
Art. 83 FDTA, Art. 32 FTHA, Draft CL 37 section 7.3.4.
resident in Switzerland, income from employee share-
27
Art. 129 section 1 lit. d FDTA, Art. 45 lit. e FTHA.
holdings is taxed at source together with any other
28
The FTA provides model confirmations in the annexes
income from employment according to Art. 83 FDTA
to the Draft CL 37.
and Art. 32 FHTA. In case the employee is a tax resident
29
Art. 10 of the Ordinance; caveat different provisions
abroad, income from employee shareholdings is taxed
in cantonal tax law.
at source together with any other income from employ-
30
Art. 15 of the Ordinance.
ment according to Art. 91 FDTA and Art. 35 FHTA.
31
The confirmation must include namely (a) the name
19
Draft CL 37 section 7.1.
of the employee shareholdings plan, (b) the date of
20
Besides the tax provisions for employees as outlined
acquisition, (c) the fair market value of the shares, (d)
in this article there exist several additional tax provi-
possible vesting periods and the duration of possible
sions, in particular regarding the taxation at source of
obligations to return the shares, (e) the agreed ac-
e.g. employee shareholdings granted to the directors
quisition price, (f) the number of the acquired shares
of the board, etc., which – due to the lack of space –
and (g) the income deriving from the employee shares
are not described in this article. Reference is made to
as declared in the salary statement referring to the
the relevant provisions in the FDTA and FTHA as well
source tax statement
as the relevant sections in Draft CL 37.
32
The first confirmation at grant must include namely
21
Draft CL 37 section 7.3.4.
(a) the name of the employee shareholdings plan, (b)
22
Please note that only foreign employees without a
the date of acquisition, (c) the date as per which the
residence permit (so called C-permit) may be taxed
employee stock option can be exercised and (d) the
at source. Foreign employees with a residence permit
number of the acquired stock options. The second
(C-permit) are taxed ordinarily.
confirmation at exercise must include (a) the name
23
In case the employee is a tax resident in Switzerland,
of the employee shareholdings plan, (b) the date of
income from employee shareholdings is taxed at
acquisition, (c) the date of exercise, (d) the fair market
source together with any other income from employ-
value of the underlying share, (e) the agreed acquisi-
ment according to Art. 83 FDTA and Art. 32 FHTA. In
tion price, (f) the number of the exercised employee
case the employee is a tax resident abroad, income
from employee shareholdings is taxed at source
together with any other income from employment
according to Art. 91 FDTA and Art. 35 FHTA.
33
stock options and (g) the income deriving from the
employee shares as declared in the salary statement
referring to the source tax statement.
Art. 5 section 1 of the Ordinance.
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30

34
Art. 17 of the Ordinance.
36
Draft CL 37, section 8.1.3.2.
35
In addition to the aforementioned information to be
37
Art. 8 section 1 lit. a of the Ordinance in connection
included in the confirmation, the confirmation must
with Art. 107 section 2 FDTA.
also state (a) the numbers of days within the vesting
38
Art. 8 section 1 lit. d of the Ordinance in connection
period the employee has been working in Switzerland
with Art. 100 section 1 lit. d FDTA.
and (b) the income received.
39
Draft CL 37, section 9.
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31

FEATURED ARTICLES
ISSUE 12 | JANUARY 31, 2013
Why Japan Needs To Change PE Taxation
Rules
by ASATSUMA Akiyuki, Doctor of law in the
University of Tokyo, Associate professor of tax
law at College of Law and Politics, in Rikkyo
University, Tokyo
1. Income Tax Rules For Foreign
Corporations Were Made In 1962
Japanese income tax rules on non-resident individuals
and foreign corporations were legislated in 1962. 1 At
that time, Japan tried to participate in the OECD,
and Japanese bureaucrats of Ministry of Finance studied
the draft version of the OECD Model Tax Convention.
2 As seen below, Japanese PE taxation rules
resemble Articles 5 and 7 of the OECD Model Tax
Convention. However, the source of income rules
resemble a pre-1966 version of the American rules.
Japanese tax practitioners call the pre-1966 version of
the American source rules the “entire income principle,”
and call the after-1966 version of the American
source rules the “effectively connected income principle:”
3 Japanese source rules are also called the “entire
income principle.” Now the government 4 is discussing
changes of Japanese source rules and PE taxation rules
from the “entire income principle” to the “attributed
income principle” which is adopted in the German
EStG (Einkommensteuergesetz: Income Tax Act).
1.1. Source rules
The ITA (Income Tax Act), 5 , 6 Art. 161 7 and
CTA (Corporation Tax Act), 8 Art. 138 describe
“Domestic Source Income” on an item-by-item
basis.
ITA, Art. 161 (i) to (xii) describe sources of income
approximately as follows:
(i) income from a business conducted in Japan
or from the utilization, holding or transfer
of assets located in Japan, including:
(i)-2 profi t from a business conducted in Japan
under a partnership contract 9
(i)-3 consideration for the transfer of land or any
right on land, or any building and auxiliary
equipment or structure thereof
(ii) income from the provision of independent
personal services 10
(iii) payment for the lending of real estate
(iv) interest on Japanese national and local government
bonds and interest on deposits or savings etc
(v) dividends etc
(vi) interest on a loan provided to a person who
performs operations in Japan
(vii) royalties for an industrial property right etc,
and copyright royalties
(viii) salary, compensation, wages, annual allowance,
bonus and remuneration paid to
32
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individuals in respect of employment undertaken
in Japan
(ix) amounts paid in respect of advertising
(x) pensions received under a life insurance contract,
casualty insurance contract etc
(xi) miscellaneous profit margins
(xii) distribution of profit received under a silent
11 , 12 , 13
partnership contract
CTA, Art. 138 (i) to (xi) describe sources of income
approximately as follows:
(i) income from a business conducted in Japan
or from the utilization, holding or transfer
of assets located in Japan
(ii) income from the provision of personal services
(iii) payment for the lending of real estate
(iv) interest on Japanese national and local government
bonds and interest on deposits or
savings etc
(v) dividends etc
(vi) interest on a loan provided to a person who
performs operations in Japan
(vii) royalties for an industrial property right etc,
and copyright royalties
(viii) amounts paid in respect of advertising
(ix) pensions received under a life insurance contract,
casualty insurance contract etc
(x) miscellaneous profit margins
(xi) distribution of profit received under a silent
14 , 15 , 16
partnership contract
ITA, Art. 161 and CTA, Art. 138 are roughly similar,
excepting ITA, Art. 161 (viii) in respect of wages
which could not be earned by a corporation and
ITA, Art. 161 (i)-2 to (i)-3. It might be confusing,
however, that items of income listed in ITA,
Art. 161 (i)-2 to (i)-3 earned by a foreign corporation
can be taxed, as seen below. ITA, Art. 161 (i)
to (vii) and CTA, Art. 138 (i) to (vii) are roughly
equivalent and ITA, Art. 161 (ix) to (xii) and CTA,
Art. 138 (viii) to (xi) are roughly equivalent.
Taxable income of a foreign corporation is provided
for under ITA, Art. 7 and CTA, Art. 141. ITA, Art.
7 (v) defines taxable income of a foreign corporation
as:
(v) A foreign corporation: Domestic source income
listed in Article 161(i)-2 to (vii) and (ix)
to (xii) (in the case of a foreign corporation
listed in Article 141(iv) of the Corporation
Tax Act (Foreign Corporations Having No
Permanent Establishments in Japan); excluding
that listed in Article 161(i)-2)”
Why is the taxable income of a foreign corporation
provided for in ITA? ITA, Arts. 178 to 180-
2 covers “Tax Liabilities of Foreign Corporations”
and ITA, Art. 212 covers “Withholding Liability.”
When items of income listed in ITA, Art. 161 (i)-2
to (vii) and (ix) to (xii) are paid to a foreign corporation
which has no PE in Japan, these items of
income are subject to withholding tax. Items of
income listed in ITA, Art. 161 (i) and CTA, Art.
138 (i) are not subject to withholding tax. When a
foreign corporation which has a PE in Japan earns
domestic source income including as under CTA,
Art. 138 (i), such income is taxed in the hands of
the PE, as is seen in next section.
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33

1.2. PE taxation rules
CTA, Art. 141 provides a definition of a PE (permanent
establishment) and the taxable income of a
foreign corporation simultaneously. CTA, Art. 141
is key to understanding Japanese PE taxation rules;
a literal translation is as follows:
“Article 141 The tax base of corporation tax imposed
on a foreign corporation for income for
each business year shall be the amount of income
categorized as domestic source income listed in
each of the following items for the category of
foreign corporation listed in the relevant item.
(i) A foreign corporation that has, in Japan,
branch offices , factories or any other fixed places
for conducting a business which are specified by a
Cabinet Order: All domestic source income
(ii) A foreign corporation that has carried out construction
, installation, assembly or any other work or provided
services for directing and supervising such work
(hereinafter referred to as "construction work, etc." in
this item) in Japan for more than one year (excluding
a foreign corporation that falls under the preceding
item): Any of the following domestic source income
(iii) A foreign corporation that has, in Japan, a
person who is authorized to conclude a contract
on its behalf or any other person equivalent to
such an authorized person specified by a Cabinet
Order (hereinafter referred to as an "agent, etc."
in this item) (excluding a foreign corporation
that falls under item (i)): Any of the following
domestic source income:
(a) Domestic source income listed in Article
138(i) to (iii)
(b) Domestic source income listed in Article
138(iv) to (xi), which is attributed to the business
conducted by the foreign corporation in
Japan via the said agent, etc.
(iv) A foreign corporation other than one listed in
the preceding three items: Any of the following
domestic source income:
(a) Domestic source income listed in Article
138(i) which has arisen from the utilization or
holding of assets located in Japan or the transfer
of real estate located in Japan, or any such
income which is specified by a Cabinet Order
(a) Domestic source income listed in Article
138(i) to (iii) (Domestic Source Income)
(b) Domestic source income listed in Article
138(ii) and (iii)” [emphases added by the author]
(b) Domestic source income listed in Article
138(iv) to (xi), which is attributed to the business
involving construction work, etc. that is
conducted by the foreign corporation in Japan
The type of PE listed in CTA, Art. 141 (i) is called
an “ ichigou PE ” (meaning first type of PE), 17 which
resembles OECD Model Tax Convention, Art.
5(2). The type of PE listed in CTA, Art. 141 (ii) is
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34

called a “ nigou PE ” (meaning second type of PE),
which resembles OECD Model Tax Convention,
Art. 5(3). The type of PE listed in CTA, Art. 141
(iii) is called a “ sangou PE ” (meaning third type of
PE), which resembles OECD Model Tax Convention,
Art. 5(5) and (6). 18
CTA, Art. 141 (i) provides that a foreign corporation
which has the first type of PE (say, a branch PE)
in Japan is subject to comprehensive income taxation
concerning “all” its domestic source income
regardless of whether the income is attributable to
the PE or not. This tax result is called a “ force of
attraction. ” Comprehensive income taxation of a
foreign corporation resemble taxation of a domestic
corporation. The tax base is net income.
CTA, Art. 141 (ii)(b) and (iii)(b) provides that a
foreign corporation which has the second or third
type of PE (say, a construction PE or an agent PE)
in Japan is subject to comprehensive income taxation
on domestic source income which is attributable
to the PE. There is a small possibility of “force
of attraction” concerning construction PEs and
agent PEs in CTA, Art. 141 (ii)(a) and (iii)(a), but
it is insignificant.
CTA, Art. 141 (iv) provides that a foreign corporation
which has no PEs in Japan is subject to comprehensive
income taxation on domestic source income
arising from domestic assets as in Art. 138
(i), independent personal services income as in Art.
138 (ii), and rental income of real estate as in Art.
138 (iii). Please look carefully at Art. 138 (i) and
Art. 141 (iv)(a). Art. 138 (i) covers business income
and asset income but Art. 141 (iv)(a) only covers asset
income; therefore business income is not taxed
if a foreign corporation has no PE in Japan. In this
sense, Art. 141 (iv) roughly adopts “no taxation on
business income without PEs” which is roughly
(not strictly 19 ) equivalent to the OECD Model Tax
Convention, Art. 7(1), first sentence.
CTA, Art. 141 (i) to (iv) provides for comprehensive
income taxation of a foreign corporation whether it
has a PE in Japan or not. That means, the foreign
corporation must file a corporation income tax return.
By the way, there is another type of income
taxation: separate income taxation under ITA,
Arts. 7 (v), 178 to 180-2, and 212 which is applied
through withholding as seen in the last section.
Nexus for source taxation is as follows:
Type of foreign corporation threshold
CTA, Art. 141: comprehensive
income taxation
ITA, Arts. 178 to 180-2:
separate income taxation
CTA, Art. 141 (i)
PE as threshold full force of attraction no separate taxation
branch PE
Art. 141 (ii)
PE as threshold limited force of attraction separate taxation on gross income
construction PE
Art. 141 (iii)
agent PE
PE as threshold limited force of attraction separate taxation on gross income
Art. 141 (iv)
no PE
half of threshold
There is a small possibility of
taxation
separate taxation on gross income
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35

1.3. Comparison with German rules
Please compare with German business income taxation
rules. EStG Code-section 49 provides “Beschränkt
steuerpflichtige Einkünfte” (limited tax
liability income). Domestic business income is described
in Code-section 49(2)(a) as follows:
EStG Code-section 49 (2) Einkünfte aus Gewerbebetrieb
( Code-section 15 bis 17),
(a) für den im Inland eine Betriebsstätte unterhalten
wird oder ein ständiger Vertreter bestellt ist,
Th at mean, income of domestic business which
is carried out with a domestic PE or an agent
PE is domestic income (Inländische Einkünfte),
which is subject to limited tax liability. German
source rules refer to PEs, and German domestic
business income is, by necessity, income attributed
to domestic PEs.
By contrast, Japanese source rules, especially CTA,
Art. 138 (i), do not refer to PEs.
“CTA, Art. 138 (i) Income from a business
conducted in Japan or from the utilization,
holding or transfer of assets located in Japan
(excluding the types of income falling under
the next item to item (xi)) or any other income
specified by a Cabinet Order as arising from
sources within Japan”
Japanese domestic business income is not automatically
income attributed to domestic
PEs. Taxable income for a foreign corporation
is limited to domestic source income; therefore
even if a certain amount of income is attributable
to PEs in Japan but the source of
the income is not domestic, then the income
is not subject to tax in Japan in the context of
domestic tax law. 20
Many Japanese legal codes had followed German
or French style before the World War II.
Japanese ITA and CTA had followed German
EStG and KStG (Körperschaftsteuergesetz); after
World War II, American economic professor,
Carl Shoup visited Japan and the Shoup
Mission made recommendations for Japanese
tax system, and in 1962, Japanese source rules
followed American source rules before 1966. Although
American rules on taxation on a foreign
corporation were drastically changed in 1966
from “entire income principle” to “effectively
connected income principle,” American source
rules in Code-section 861 also define source of
income on an item-by-item basis, not on an attributed-to-PEs
basis.
1.4. Tax Treaties
As of October 2012, Japan has concluded 54 tax
treaties with 65 countries and jurisdictions. One
convention, with the old URSS now applies to
many countries. CTA, Art. 141 provides “force of
attraction” but no tax treaties concluded by Japan
provide “force of attraction.” As more and more
tax treaties have been concluded, “force of attraction”
is applied less and less.
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36

2. What Is The Problem With Japanese
“Force Of Attraction”Rules?
2.1. Logical Problems: Incompatibility
Between PE Threshold And Domestic
Source Rules
As mentioned before, the Japanese threshold of
taxation on a foreign corporation is the existence
of a PE, not only in tax treaties but also in domestic
tax law. In this sense, the Japanese threshold is
not equivalent to the American threshold: “trade
or business in the US.” Although there is a minor
possibility of taxation without a PE with CTA, Art.
141 (v) as seen in Reg-section 1.2 , the Japanese
threshold of taxation is roughly equivalent to the
threshold under the OECD Model. However, Japanese
source rules do not refer to attribution-to-PEs
as in German EStG as seen in Reg-section 1.3 .
Some Japanese domestic source business income of a
foreign corporation can be untaxed when the corporation
has no PE in Japan. Some business income of
a foreign corporation attributed to a PE of the corporation
can be untaxed when the income does not
have a source within the meaning of CTA, Art. 138.
Some tax law scholars have long argued that Japanese
source rules and PE taxation rules are incompatible.
However, there are some source rules with reference
to attribution-to-PEs. CTA, Art. 138 (i) defines domestic
source business income, and OECTA, Art.
176 describes domestic source business income in
more detail. Especially, OECTA, Art. 176 (5) has
been extensively discussed.
“OECTA, Art. 176 (5) Income arising from a
money loan, investment or any other act equivalent
thereto conducted vis-a-vis a person who is
outside Japan by a corporation prescribed in paragraph
(1) via a place prescribed in Article 141(i)
of the Act that the corporation holds in Japan, if
it is attributable to the business conducted at the
said place, shall be treated, notwithstanding the
provision of paragraph (1), as the said corporation's
income from a business conducted in Japan
as prescribed in Article 138(i) of the Act; provided,
however, that this shall not apply where the
corporation has attached, to its final return form,
a document proving the fact that, in the foreign
state where the said act has been conducted (excluding
the state where the corporation's head office
or principal office is located), foreign corporation
tax prescribed in Article 141(1) (Scope of
Foreign Corporation Tax) has been imposed or is
to be imposed on any income from the said act.”
Suppose a foreign corporation, named F-Co, conducting
banking business has a branch doing business
in Japan and F-Co is treated as having a PE in
the sense of CTA, Art. 141 (i) ( ichigou PE , a branch
PE). When the PE of F-Co makes a money loan
to another foreign corporation, named T-Co, while
doing business in the third country, interest income
from the money loan to T-Co is not domestic
source interest income in the meaning of CTA, Art.
138 (vi) because this provision refers to the borrowing
person doing its business in Japan. However,
the interest income can be seen as business
income of the PE of F-Co in the meaning of CTA,
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37

Art. 138 (i), and OECTA, Art. 176 (5) provides as
such, unless the interest income has been taxed in
the third country. It might seem strange, but OEC-
TA, Art. 176 (5) provides that when the interest
income from the third country is taxed in the third
country, then the income is not Japanese domestic
source income; while if the interest income from
the third country is not taxed in the third country,
the income is Japanese domestic income.
Th ere have been some discussions as to whether
OECTA, Art. 176 (5) is compatible with CTA,
Arts. 138 and 141 among tax law scholars. OECTA
has legally binding effect, but OECTA is a Cabinet
Order within the scope of delegation of CTA,
so some Articles of OECTA might be illegal if the
Articles are outside the delegation of CTA. 21 But
in practice, OECTA, Art. 176 (5) has long been in
effect, even though, looked at logically, it has been
a question as to whether OECTA is covered by the
delegation of CTA or not.
2.2. Practical Problems: Co-Location
Services In The Tokyo Securities Exchange
And Server PEs
Although CTA. Art. 141 (i) provides for “force
of attraction” as seen in Reg-section 1.2 , practical
problems related to “force of attraction” have became
fewer and fewer as Japan has concluded more
and more tax treaties, as seen in Reg-section 1.4 .
However, there have been cases in which the “force
of attraction” is a significant barrier for a foreign
corporation earning income in Japan. Suppose
that a foreign investment corporation in a country
or jurisdiction (for example, Cayman Islands)
with which Japan has concluded no tax convention
makes an investment through the Tokyo Securities
Exchange. Modern investment decision-making is
automated with clever software. The corporation
has its own computer servers nearby the Tokyo Securities
Exchange and the servers issue buying or
selling instructions for stocks and securities. Such
a service provided through the servers is known as
a co-location service. Time delay of the investment
decisions is critical, so the servers must be located
nearby the Tokyo Securities Exchange.
Th e servers used in co-location services can be regarded
as PEs in the sense of paragraph 42.2 of the
OECD Commentary on Article 5. Therefore the
servers can be PEs in the sense of CTA, Art. 141
22
(i) ( ichigou PE ). If an investment corporation in
Cayman Islands has server PEs in Japan, “force of
attraction” of CTA, Art. 141 (i) can be applied, so
all Japanese domestic source income of the corporation
must be filed in the tax return. The finance
sector and the Financial Services Agency of Japan
strongly recommend abolishing “force of attraction”
or at any rate that co-location servers should
not be treated as PEs. 23
However, readers might feel that these demands
are odd. Although investors in the Cayman Islands
or other tax havens can be caught by “force of attraction,”
Japan has concluded treaties with many
countries, so that investors in the US, UK, Germany,
French or other countries will not be caught by
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38

Japanese “force of attraction.” Why then do investors
use jurisdictions such as the Cayman Islands or
other tax havens and still demand change in Japanese
tax rules? In reply, tax practitioners in the financial
sector explain that fund managers naturally
utilize the Cayman Islands; Japanese source rules
and PE taxation rules are difficult to understand for
foreign fund managers and the fund managers thus
tend to avoid making investment into Japan.
In my view, “force of attraction” under CTA, Art.
141 (i) is easy to avoid. Even if servers can be PEs,
a foreign investment corporation can have a subsidiary
in Japan which owns servers. When the
Japanese subsidiary is independent in the sense of
the OECD Model Tax Convention, Art. 5(6), the
subsidiary is not an agent PE in the terms of CTA,
Art. 141 (iii). Even if the subsidiary can be seen
as an agent PE, “force of attraction” of CTA, Art.
141 (iii) is limited. However, tax practitioners in
the finance sector explain that foreign fund managers
fear the possibility of establishing PEs in Japan.
2.3. Japan's Situation Is Similar To That In
The US Before The 1966 Amendments
In the US, there were two problems before the
1966 amendments. First, when a foreign corporation
carried out trade or business in the US, not
only the business income but also domestic source
investment income was taxed as if earned by domestic
corporations, and such taxation constituted
a disincentive for foreign investors to make investments
into the US. Second, the PE attribution rules
conflicted with "source of income" rules. 24
Japan's situation is similar to that in the US before
the 1966 amendments. First, “force of attraction”
under CTA, Art. 141 (i) creates a disincentive for
foreign investors to make investments into Japan.
Second, attribution-to-PE rules and source rules
are not compatible.
2.4. Justification For Change
What is the justification for changing Japanese
source rules and PE taxation rules? It is sometimes
said that justification can be found in the OECD
Model Tax Convention, Art. 7 as of July 22, 2010,
which adopted the so-called AOA (Authorized
OECD Approach) in which taxation of business
profits of a PE is limited to the profits attributable
to the PE, treating it as a separate and independent
enterprise. It is said that Japanese PE taxation rules
should also follow AOA and Japanese PEs should
be treated as separate and independent enterprises.
However this conceptual explanation is not persuasive
to me. Tax treaties concluded by Japan have
already followed the OECD Model in which PEs
are treated as separate and independent enterprises.
Moreover, the OECD Model has no bearing on domestic
tax rules. The justification for change should
stem from practical considerations rather than being
doctrinal, as seen in Reg-section 2.3 .
3. How To Change Japanese Source Rules
And PE Taxation Rules
The Government Tax Commission: Sub-Commission
on International Taxation (Chair: Prof. Nakazato
Minoru) is discussing how to change Japanese
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39

source rules and PE taxation rules, with amendment
set for 2014, although discussions have been
paused since the national election on December 16,
2012. 25 Thus the proposals mooted below are only
the forecast and opinion of the author.
If the practical problems are limited to “force of
attraction” applied to server PEs in co-location services
as seen in Reg-section 2.2 , the most simple
solution is to deem servers in co-location services
as not being PEs. Even though the OECD Commentary
includes the possibility of deeming servers
as PEs, Japan can choose to legislate in a way
that reduces the possibility of server PEs. However,
the Cabinet Council Decision on December 10,
2011 26 clearly refers to a change from the “entire
income principle” to the “attributed income principle,”
so the option of changing only the scope of
server PEs will not be adopted.
I have said that Japan's situation is similar to that in
the US before the amendment in 1966 in Reg-section
2.3 . Is there then a possibility for Japan to adopt
the American style of “effectively connected income
principle”? I don't think so. Source rules and effectively
connected income rules in the US seem to be
complicated to an extreme degree, so the amendment
in the US in 1966 seems to be a negative example.
Should Japanese source rules follow the German
EStG? It is difficult question. If CTA, Art. 138
were to be drastically changed, issues linked to the
change of source rules will be too many. “Force of
attraction” under CTA, Art. 141 (i) to (iii) might
be abolished and CTA, Art. 138 (i) might refer to
a permanent establishment like EStG Code-section
49 (2)(a) as seen in Reg-section 1.3 .; but the government
might not want to change source rules so
drastically. Tax rules on foreign corporations having
no PEs in Japan under ITA, Arts. 178 to 180-2 and
212 will be mostly maintained. 27
Th e Author: ASATSUMA Akiyuki, Doctor of law
in the University of Tokyo, Associate professor of
tax law at College of Law and Politics, in Rikkyo
University, Tokyo. asatsuma@rikkyo.ac.jp
E NDNOTES
1
2
3
4
The number of Articles of ITA and CTA were renumbered
in 1965, but the main structures of income tax
rules on non-resident individuals and foreign corporations
have been maintained.
The first version of the OECD Model Tax Convention
was made in 1963.
Code-section 864 .
Cabinet Council Decision on December 10, 2011:
“Large Package of Tax Revisions in 2012” in http://
www.mof.go.jp/tax_policy/tax_reform/24taikou_3.
pdf (Japanese), page 74. At that time, DPJ (the
Democratic Party of Japan) was the governing party
and LDP (the Liberal Democratic Party of Japan) won
against the DPJ in the national election on December
16, 2012. The LDP will continue to discuss changes
of Japanese source rules and PE taxation rules. The
newest "Large Package of Tax Revisions in 2013"
of the governing parties (The LDP and Komeito) as
of January 24, 2013 ( http://www.jimin.jp/policy/
policy_topics/pdf/pdf085_1.pdf Japanese), page 91
also refers the changes of source rules and PE taxation
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40

ules from "entire income principle" to "attributed
Arts. 279 to 288. Some Articles of OEITA concerning
income principle" in accordance with the Authorized
international income tax rules are also unofficially
OECD Approach.
translated. See note 6.
5
Law No. 33 of 1965.
14
A corporation can be a silent partner ( tokumei ku-
6
Unofficial translation is available in http://www.japa-
miaiin ) of a silent partnership in Article 535 of the
neselawtranslation.go.jp/ (Japanese Law Translation).
Commercial Code. See note 11.
Not all articles of CTA and ITA are translated into Eng-
15
CTA, Art. 139 provides that source rules in a tax con-
lish, but the main provisions concerning international
vention are superior to domestic rules.
income taxation rules are translated.
16
More detail rules on source of income are provided
7
Source rules and PE taxation rules in the Corporate
in OECTA (Order for Enforcement of the Corporation
Tax Act and the Income Tax Act are similar. This article
Tax Act), Arts. 176 to 184. See note 6.
is mainly based on the CTA, unless otherwise noted.
17
OECTA, Art. 185(1) and (2) is roughly equivalent to
Some of the international income taxation rules in ITA
the OECD Model Tax Convention, Art. 5(2) and (4).
are illustrated in IFA 2012 Boston Congress: cahiers
18
OECTA, Art. 186.
de droit fiscal international, volume 97a, Enterprise
19
Independent personal services income listed in CTA,
services, pp. 413-435 (2012) (written by ASATSUMA,
Art. 138 (ii) is subject to tax in Japan even when a
Akiyuki).
foreign corporation has no PE in Japan under Japanese
8
Law No. 34 of 1965.
domestic tax rules, although we don't know how
9
[A] partnership contract” in Article 667(1) of the Civil
the Japanese tax authority can capture such service
Code is called in Japanese “ nin’i kumiai. ” Not only an
income; but if the foreign corporation is a resident
individual but also a corporation can be a partner
corporation of a country which has concluded a tax
( nin’i kumiaiin ) of a partnership
convention equivalent to the OECD Model, then the
10
There is no definition of “independent” or “depen-
foreign corporation is protected by the “no taxation
dent” in this Article, but independent and dependent
without PE” rule.
character is easy to understand when comparing with
20
However, there is a discussion concerning CTA, Art.
ITA, Art. (viii).
139 which provides that the source rule contained in
11
[A] silent partnership” in Article 535 of the Com-
by tax treaties has priority over Art. 138 (ii) to (xi).
mercial Code is also called “a sleeping partnership”
21
There have not been many cases in the court in which
or “stille Gesellschaft,” but the Japanese “ tokumei
OECTA or OEITA is regarded as incompatible with CTA
kumiai ” is also used.
or ITA, but one case is Supreme Court judgment on
12
13
ITA, Art. 162 provides that source rules in a tax convention
are superior to domestic rules.
More detail rules on source of income are provided in
OEITA (Order for Enforcement of the Income Tax Act),
July 6, 2010, reported in Minshû , vol. 64, no. 5, p. 1277.
In this case, the tax authority imposed income tax on
life insurance annuities which had been contracted by
a husband who died and were received by a wife, in
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41

22
23
OEITA, Art. 183. However, the court said that the life
insurance annuities had been subject to inheritance
tax and a part of the annuities were exempt income
in the meaning of ITA, Art. 9 (1)(xvi).
When tax lawyers discussed whether computer servers
can be seen as PEs at the end of the last century,
technical engineers laughed: computer servers can be
located all over the world in a business sense, so it
is ridiculous that servers can be a threshold of taxation.
Ironically, history has shown that the location
of computer servers is critically important in some
types of business.
Financial Services Agency, Demands of tax system
24
25
26
27
revision in 2013, http://www.fsa.go.jp/news/24/
sonota/20120907-2/01.pdf (September 2012, Japanese),
page 22.
Cf. Fowler Task Force Report, reprinted in Legislative
History of H.R. 13103, 89th Cong., 2nd Sess. Foreign
Investors Tax Act of 1966. See also Harvey P. Dale,
Effectively Connected Income, 42 Tax Law Review
689, 719 (1987).
See note 4.
See note 4.
There is a little possibility of taxation without PEs under
CTA, Art. 141 (iv) as seen in Reg-section 1.2 . It is not
predictable whether CTA, Art. 141 (iv) will be changed.
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FEATURED ARTICLES
ISSUE 12 | JANUARY 31, 2013
Latest Changes To The Brazilian
Transfer Pricing Rules
By Miguel A. Valdes, Lawyer and certified public
accountant, partner of the law firm Valdes &
Associates, LLC, in Chicago, Illinois
Introduction
This is a follow-up to the article published last year
[see Global Tax Weekly, Issue No. 1, November 15,
2012 ] regarding the latest changes to the Brazilian
transfer pricing rules. We will continue to follow
up with future articles as more transfer pricing developments
relating to the new law in Brazil occur.
Once again, the Brazilian tax authorities have recently
published more changes to the transfer
pricing legislation as follows: 1) Law Nº 12,766
(published in the Official Gazette of December
28, 2012) changing the rules applicable to financial
transactions, and 2) Regulatory Instruction Nº
1,312 (published in the Official Gazette of December
31, 2012) with the regulations applicable to the
transfer pricing rules.
Th e main changes brought about by the new regulations
are as follows.
Effective Dates And Benchmark Interest
Rate And Spread
All financial contracts entered into or modified as
of January 1, 2013, must comply with the transfer
pricing rules. In other words, the new rules provide
that on the effective date of the transaction, the
agreed-upon interest rate should be no higher (for
loans to Brazilian parties) or lower (for loans granted
by Brazilian parties) than a benchmark interest
rate plus a spread.
Regulatory Instruction Nº 1,312 has been altered,
as of January 18, 2013, to provide the benchmark
interest rate and the spread.
Regulatory Instruction Nº 1,312 Substantial
Restriction on the Profitability Safe Harbor
It will be recalled that in order to be outside the
scope of the transfer pricing rules, a taxpayer needed
to demonstrate that it had at least 5% profitability
on its export sales. However, now, in order to
qualify for the safe harbor, two requirements must
be met:
(1) The net revenues derived from export transactions
to related parties shall not exceed 20%
of the net revenues from all export transactions;
and
(2) The company shall have a profitability of at
least 10%, based on an average of the current
year and the two previous years (the previous
43
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5% profitability requirement had similar
wording; however, the tax authorities issued
instructions allowing for transactions from a
single year to be utilized.)
If a taxpayer does not satisfy both requirements, it
must then comply with the transfer pricing rules
and utilize one of the export methods set forth in
the Brazilian law.
Definition of Commodities
As previously discussed, Law Nº 12,715 requires now
the use of certain specific methods for transactions involving
commodities. Those methods will compare
transactions subject to the transfer pricing rules with
those carried out in the applicable exchanges. However,
Law º 12,715 left it to the tax authorities to regulate
the application of the methods and the relevant
exchanges for purposes of defining the benchmark.
Such regulation now is set forth in the Regulatory Instruction
º 1,312, and it has defined commodities very
broadly. Consequently, many more products than the
obvious ones could be subject to the commodities rules
since the tax authorities have included whole chapters
of the Mercosur Common Nomenclature book. It is
very probable that the application of these rules to certain
products will be challenged in the courts.
Controversies with the Import Resale
Minus (PRL) Method
Th e regulations also covered the new PRL Method,
and the guidance was clear on some aspects,
was not so self evident in others, and even illegal in
one specific point.
Total Cost: This is clearly defined as the total
cost of the item without any exclusion. This
clarification, however, comes as a cost to taxpayers
since it will raise the price against which the
benchmark will be compared and likely increase
the tax adjustments.
Period of Comparison: Not so clearly defined was
the period that should be taken into consideration
for the calculation of the benchmarks and therefore
the taxable adjustments. Regulatory Instruction Nº
1,312 states that the benchmark calculation shall
take place when the items are written-off. It also
seems to indicate that beginning inventory should
be included, and that the whole year should be taken
into consideration for the calculation. However,
there are no other clarifications on how to make
these procedures operational, or how to change
from one option to another, or even what adjustments
will be required if a taxpayer elects to use a
method other than the PRL in a later period.
Basis for Calculating the Profit Margin: The Regulatory
Instruction provides two different forms of
calculating the profit margin as follows:
(1) In item IV of Article 12, the profit margin
is calculated over the share of the controlled
item in the sales price, net of taxes, discounts
and commissions, and
(2) In paragraph 13 of the same Article 12, the
profi t margin is calculated over the total
price, net only of discounts, and without
taking into consideration the share of the
imported item.
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Th is second calculation will give rise to litigation,
since it can be interpreted as an increase in taxation
without the applicable legal grounds.
Changes in Profit Margins
Regulatory Instruction Nº 1,312 states that all the
rules applicable to ruling requests are also applicable
to profit margin change requests. However,
ordinance Nº 222/08 clearly states that the ruling
requests rules do not apply to profit margin change
requests. Consequently, this contradiction is likely
to generate controversies in the future.
Drop Shipment Transactions
Regulatory Instruction Nº 1,312 provides that
these transactions are subject to the transfer pricing
rules as if they were separate import and export
transactions. Furthermore, the regulations also require
that the overall profitability of the transaction
be compatible with market practices. However, the
regulations do not provide any explanation as to
how to determine the adequacy of the overall profitability
of the transactions.
Presentation of Second Method
Law Nº 12,715 permits taxpayers to present a second
transfer pricing method, if the first method is
disregarded by the tax authorities or some other circumstances.
Now, Regulatory Instruction Nº 1,312
has indicated that, if the presentation of the second
method results in a tax liability, the tax authorities
could levy fines up to 75%.
Concluding Comment
As shown by all the recent activity, there are three
conclusions that can be preliminarily arrived at:
(1) The Brazilian tax authorities will not be
switching the transfer pricing rules to the
OECO rules in the near future.
(2) There will be a lot more litigation in the
transfer pricing area in the near term.
(3) The Brazilian tax authorities, and others in
the region, are keeping up with developments
and implementing similar rules, i.e. , new
commodities rules in Brazil and Peru while
Argentina has been litigating those rules for
a number of years.
The Author:
Miguel A. Valdes, Lawyer and certified public accountant,
is a partner of the law firm Valdes &
Associates, LLC, in Chicago, Illinois; he is also a
consultant with the law firm of Koury Lopes Advogados
based in Sao Paulo, Brazil.
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45

FEATURED ARTICLES
ISSUE 12 | JANUARY 31, 2013
Financial Transaction Taxes: Robin
Hood Rides Again
by Caroline Huggett, Senior Editor,
Global Tax Weekly
Introduction
Although it has been in the news in various forms
for some time, the financial transaction tax (FTT)
concept had its moment in the sun recently, with
the issue coming to the fore in both the European
Union and the United States.
could not be achieved. Those who want to move
ahead, and who appreciate the merits of working
more closely on taxation at EU-level, can do so. This
is a highly significant and very welcome advance.”
In the EU, the FTT was authorized for implementation
by a qualified majority of EU member states
at a meeting of the European Council of Economic
and Financial Affairs (Ecofin), meaning that the
European Commission can now present a concrete
proposal on plans for an FTT, allowing negotiations
to begin on the details of the tax.
Th e significance of the decision was underlined by
the governments concerned, as it represented the
first act of enhanced cooperation in the history of
the European Union in the area of taxation.
EU Tax Commissioner Algirdas Šemeta called the
agreement to allow eleven member states to move
ahead with a harmonized FTT a “major milestone.”
Š emeta observed that: “It is a milestone for EU tax
policy, as it paves the way for more ambitious member
states to progress on a tax file, even when unanimity
He concluded: “For the first time ever, the financial
transactions tax will be applied at regional level. A
block representing around two thirds of EU GDP
will implement this fair tax together, answering the
long-time calls of their citizens. And in doing so,
they can pave the way for others to do the same.”
In the United States, meanwhile, responding to
the EU announcement, Senator Tom Harkin (D -
Iowa) and Representative Peter DeFazio (D - Oregon),
announced this week that they had decided
to reintroduce their bills to impose such a tax
in the United States, first proposed in November
2011, with a planned introduction date of January
1, 2013.
The Wall Street Trading and Speculators Tax would
place a levy of 0.03% on most non-consumer financial
trading transactions, including stocks, bonds
and other debts, except for their initial issuance.
46
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The tax would also cover all derivative contracts,
options, puts, forward contracts, swaps and other
complex instruments at their actual cost. It would
exclude retirement and education savings.
“Our FTT proposal raises considerable revenue (estimated
at USD352bn over 10 years) with little impact
on economically beneficial transactions,” Harkin
explained, continuing: “It is a tax that does not
harm small businesses or the middle class and Wall
Street can certainly afford it. I applaud the action
taken by the EU today and hope that we will soon
have US action on this issue.”
“In the coming months, our country will need
to make hard decisions to get back on sound fiscal
footing. Our financial transaction tax should
be a no-brainer,” DeFazio added. “I, too, applaud
the EU. (Its) action mean(s) there will be less opportunity
to shift US trading overseas to avoid a
US FTT. Wall Street's criticisms of an FTT are
rapidly shrinking.”
Equivalent bills were launched by Democrats in
the last, 112th, Congress but gained no traction. It
seems wildly unlikely that any such measure would
be passed by a Republican House of Representatives,
but . . . never say never.
An FTT Primer
Th e Financial Transaction Tax in its current format
was first formally proposed within the EU following
an examination in October 2010 of the importance
of developing a financial transaction tax
(FTT) in an EC Communication on taxation of
the financial sector, although it has its roots much
earlier than that.
The Commission reasoned in 2010 that: “In the
context of the economic and financial crisis, it is
more and more commonly accepted that the financial
sector should make a fairer contribution,
this sector having been under-taxed to date given
the exemption from VAT of most financial services.
This Proposal for a Directive is therefore aimed
at developing a common tax reserved for financial
transactions, the main objectives of which are to
ensure that financial institutions make a fair contribution
to covering the costs of the crisis and to
avoid fragmentation in the internal market for financial
transactions.”
Summarizing the " Proposal for a Council Directive
of 28 September 2011 on a common system
of financial transaction tax and amending Directive
2008/7/EC ", the EC explained that:
“This Proposal is aimed at establishing a common
system of financial transaction tax...It concerns all
financial transactions, namely the purchase and sale
of a financial instrument, such as company shares,
bonds, money-market instruments, units of undertakings
for collective investment, structured products
and derivatives and the conclusion or modification
of derivatives agreements, on condition that at
least one party to the transaction is established in a
Member State and that a financial institution (such
as investment firms, organized markets, credit institutions,
insurance and reinsurance undertakings, collective
investment undertakings and their managers,
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pension funds and their managers, and certain other
undertakings where transactions constitute a significant
part of their activity) established in a Member
State is party to the transaction, acting either for its
own account or for the account of another person, or
is acting in the name of a party to the transaction.”
“In general, a financial institution shall be deemed to
be established in the Member State of authorization
in order to act as such but it should be noted that,
under certain conditions, a financial institution not
established in a Member State, for example where
it is a party to a financial transaction with a party
established in the territory of a Member State, shall
also be deemed to be established in the territory of a
Member State (of the latter mentioned in this case).”
Th e EC went on to reveal that certain types of entities
and transactions would be excluded from the
scope of the proposed Directive. In terms of excluded
entities, these included:
Th e European Financial Stability Facility (established
in 2010 in order to safeguard financial
stability in the eurozone by providing financial
assistance — via the issuing of bonds or other
debt instruments on the capital markets);
Any international financial institution established
by two or more Member States, with the purpose
of mobilizing funding and providing financial
assistance for the benefit of members that are
experiencing severe financing problems;
Central Counter Parties (legal entities that interpose
themselves between the counterparties to a
financial transaction); and
National or international Central Securities Depositories.
Excluded transactions included:
Primary market transactions in principle, relating
to the issue of company shares or bonds;
Transactions with the European Union, the European
Atomic Energy Community, the European
Central Bank, the European Investment Bank,
bodies set up by the European Union or the European
Atomic Energy Community and other
international organizations and bodies (under
certain conditions); and
Transactions with the central banks of Member
States.
The EC explained that:
“The FTT shall become chargeable from the moment
the transaction occurs. Subsequent cancellation
or rectification of a financial transaction shall
have no effect on chargeability, except for cases of
errors. In the case of transactions other than those
concerning derivatives agreements, the taxable
amount of the FTT shall be, in principle, everything
which constitutes consideration paid or owed,
in return for the transfer, from the counterparty or
a third party.”
“In the case of transactions concerning derivatives
agreements, the taxable amount of the FTT
shall be the notional amount (i.e. the underlying
nominal or face amount that is used to calculate
payments made on a given derivatives agreement)
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48

of the derivatives agreement at the time of the
financial transaction.”
payment of the tax due by a financial institution on
account of that transaction.”
Th e minimum rates of FTT are to be 0.1 % for all
financial transactions other than those concerning
derivatives agreements, and 0.01 % for all financial
transactions relating to derivatives.
In terms of payment procedures, obligations and
prevention of evasion, avoidance and abuse, the EC
stated that:
“FTT shall be payable by each financial institution
(deemed to be established in a Member State)
which fulfils any of the following conditions:
it is party to the transaction, acting either for its
own account or for the account of another person;
it is acting in the name of a party to the transaction;
the transaction has been carried out on its account.”
And continued: “It should be noted, therefore, that
any financial institution which is party to a transaction
or is involved in a transaction shall be liable for
the tax. A single financial transaction may therefore
result in payment of the tax on both sides of the
transaction, at the rate applicable in the Member
State of establishment of the financial institution
concerned. However, where a financial institution
acts in the name of or for the account of another financial
institution, only the latter shall be required
to pay FTT. Moreover, each party to a transaction
shall become jointly and severally liable for the
Under the proposed framework, the FTT will
be payable at the moment when the tax becomes
chargeable (where the transaction takes place electronically),
and within three working days from the
tax becoming chargeable in all other cases.
The EC concluded by reminding participating
countries that: “Member States may not introduce
or maintain taxes on financial transactions other
than FTT or value added tax (DA) (VAT) provided
for by the VAT Directive.”
Predecessors Of The FTT
The financial transactions tax in the format in which
it is currently proposed has been several years in the
making, but the concept dates back much further
than that. Keynes himself may have been the first to
suggest such a tax in modern times; then in 1972,
American economist and disciple of Keynes, James
Tobin proposed a currency conversion tax in order
to counter the exchange rate volatility which followed
the collapse of the post-war Bretton Woods
system of monetary management, under which
the US dollar was directly convertible to gold (at
USD35 per ounce), and all participating countries
were required to peg their currency to the dollar, in
order to maintain exchange rates.
The rather unimaginatively-named "Tobin Tax"
was revived as a concept by then French Prime Minister,
Lionel Jospin in 2001 (following a spate of
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currency-related crises in various countries around
the world in the 1990s), who suggested that Tobin's
proposed levy of 0.5% on currency exchange
transactions, or something similar, would help to
prevent such situations from arising again.
UK, where the campaign's website suggested that
“a tiny tax on the financial sector” could generate
“GBP20bn annually in the UK alone” which could
go towards protecting the public services being cut
as part of the government's austerity measures.
Th is caused controversy, with critics arguing that
there was not the international political consensus
necessary for such a bold move, and that currency
speculation could be more effectively curbed in
other ways, for example by improving regulation of
such transactions, particularly where they involved
the use of complicated derivatives.
Problems were also raised relating to the implementation
of such a levy, for example what types
of instrument it should take in, how the tax should
be collected, whether collection should include
transactions involving offshore jurisdictions, and
how best to enforce the tax. It was further suggested
that reducing currency speculation might
actually increase volatility in the currency markets,
and opponents of such a levy suggested that
if it was designed to redress the favored position
enjoyed by global financial capital vis-a-vis other
sources of capital, ought it not to be applied to all
financial transactions?
Th is idea was seized upon by campaigners as a potential
solution to the global economic woes caused
by the more recent banking crisis, and the idea of
a "Robin Hood Tax" on the financial sector began
to gather momentum. As might be expected from
its name, such a tax had its strongest backing in the
Th e campaigners explained that: “As a result of the
financial crisis, the International Monetary Fund
(IMF) has calculated UK government debt will be
40% higher. That 40% equates to GBP737 billion,
or GBP28,000 for every taxpayer in the country.
Having to pay back that debt means cuts in vital
services on which millions of people around the
country rely. Total cost to the UK of the financial
crisis in terms of lost output according to the IMF
was 27% of 2008 GDP.”
And argued: “So it's time for justice. It's time for
justice for ordinary families and businesses. For the
one in five British families faced with a choice between
buying food or paying the heating bill. For
the millions of people around the world forced
into poverty by a financial crisis they did absolutely
nothing to bring about.”
“The Robin Hood Tax is justice. The banks can
afford it. The systems are in place to collect it. It
won't affect ordinary members of the public, their
bank accounts or their savings. It's fair, it's timely,
and it's possible.”
However, an eye for an eye and a tooth for a tooth leaves
everyone blind and toothless, and while the campaign
has enjoyed a degree of popular and celebrity support
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since its launch, and various “redistributive” taxes have
been considered (including the so-called “mansion tax
” proposed by the Liberal Democrat coalition partners),
the "Robin Hood" tax concept has never really
gotten off the ground in the UK.
FTT EU Background
Nor, it seems, will its idealogical descendant, the financial
transactions tax. While France and Germany
(and to a slightly lesser extent Austria) have been
behind the driving forces behind the introduction
of the tax for more than a decade, the United Kingdom
and various other EU member states have expressed
their distaste for it in the strongest terms.
In November 2011, during a parliamentary budget
debate in the National Council, Austrian Chancellor
Werner Faymann underlined the need for better
regulation of international financial markets in
Europe, and stressed the importance of a financial
transactions tax in achieving this goal.
Speaking on the subject of introducing a debt
brake rule in Austria and elsewhere in Europe,
Chancellor Faymann explained that in order to reduce
the deficit and to create scope for investment,
in addition to a binding framework for reducing
the debt ratio, increased regulation of the financial
markets in Europe was essential, and stated
that Austria would continue to push for a tax on
financial transactions, Faymann said.
And then, around this time last year, then French Finance
Minister François Baroin revealed government
plans to impose a domestic financial transactions tax
on shares, securities and derivatives (although government
bonds were to remain unaffected, Baroin
confirmed), and drew parallels with ongoing discussions
on a wider EU tax. In the event, the domestic
transaction tax came into force in August 2012, applying
to transactions in the securities of publiclytraded
companies with capitalization over EUR1bn,
initially at a rate of 0.1%, later increased to 0.2%.
Initial collections from the tax were however well below
the government's expectations.
Commenting more recently, the German Finance
Ministry argued that the introduction of an FTT
in eleven EU member states is a first key step in the
direction of the introduction of a global tax, and
suggested that the tax complements other regulatory
measures taken by the coalition government, notably
Germany's draft high frequency trading law.
In the opposite corner, however, stands the United
Kingdom, backed by various others, including
Sweden, Denmark and the Netherlands. The UK's
objection is based around its traditional reluctance
to surrender any degree of fiscal sovereignty to the
European Union beyond the powers already held
by the EU, and the fact that, given the nature of its
financial center, an FTT would arguably have an especially
adverse effect, unless it was applied evenly
worldwide, something that is completely infeasible.
A report published by think-tank the Adam Smith
Institute in late 2011 argued that in addition to
costing the UK economy dear, the introduction of
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a transaction tax in the United Kingdom would increase
rather than reduce market volatility, reduce liquidity,
increase tax avoidance, and lead to job losses,
while failing to generate any significant revenue gains.
transaction tax. Osborne was responding to chairman
Andrew Tyrie’s query on the impacts of a euro
area only FTT on the volume of trading in the UK
and on UK firms trading with the eurozone.
“If the FTT was only introduced in the EU or G20,
many traders currently operating in the UK would
relocate to places like Hong Kong, Singapore or
Zurich. There is little scope for a worldwide FTT
– even types of trades that are affected in a minor
way by the FTT would likely move en masse to
other jurisdictions that would flourish as FTT-free
zones,” the Institute warned, going on to suggest
that the cost is likely to be even higher once the
UK’s disproportionate share of financial trading in
the EU is factored in.
It pointed out that the City of London currently
accounts for 74.4% of interest rate derivatives turnover
within the EU, and cautioned that an FTT
would nearly eliminate derivatives trading in the
UK. This would hit tax revenue and other parts of
the City by preventing traders from hedging against
real-world risks.
UK Chancellor George Osborne went further, calling
the proposals “suicidal” and suggesting in an
article in the UK media at the time that they were
“a bullet aimed at the heart of London.”
He suggested that it was “possible that the tax
might raise no additional money at all for the Exchequer.”
Osborne argued that any gains in direct
revenue would be offset by losses in other taxes, and
predicted that an FTT would result in lower stamp
duty revenues, and reduced levels of corporate tax
from the financial services sector.
Furthermore, some FTT payments from financial
institutions headquartered in other EU member
states would be made to their home government,
instead of the UK, Osborne argued, explaining that
this would mean further revenue losses for the UK,
and also have an indirect impact on other taxes, due
to the negative growth impacts of the EU’s plans.
UK Prime Minister David Cameron subsequently
refused to accept the EU plans, arguing that they
did not adequately safeguard the UK's interests,
which led Irish Finance Minister Michael Noonan
to warn of his concerns over a financial transactions
tax that excludes the City of London, suggesting
that Ireland would be at a disadvantage if such a
levy was applied in Dublin but not in London.
In a somewhat more measured letter sent to the
chairman of the parliamentary Treasury Select Committee,
the Chancellor argued that the UK could
expect to see revenue losses as a result of a financial
The irony of the Irish heading the EU Council during
the period in which the issue is front and center
(despite not having signed up to the initiative) will
no doubt not have been lost on Mr. Noonan.
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Denmark, which held the role for the first half of
2012, had expressed its opposition to a solely EUbased
levy, and announced in January 2012 that
moving the issue forward would not be a priority
during its presidency, while the Dutch central bank
(DNB) condemned the plan as “undesirable.”
The DNB argued that the European Commission’s
planned levy would merely slow down economic
growth, and suggested that a “negative impact on
the economy is a certainty”.
Commenting in February 2012, the central bank
observed that: “The Netherlands will be affected
relatively severely by an FTT on account of its
large financial sector, including pension funds. The
negative effects in terms of economic growth and
arbitrage will be stronger, moreover, if tax is not
levied on a global scale. Therefore the introduction
of an FTT as proposed by the Commission is
undesirable.” It continued: “While an FTT might
for instance counteract forms of arbitrage, such as
high-frequency trading, it may also cause traders to
relocate or to increase their risk appetite. Pursuing
a riskier trading strategy to protect one’s margins
would run exactly counter to what the Commission’s
proposal aims to achieve. Which of the two
possible effects would win out is unpredictable.
Moreover, it is questionable that an FTT would be
effective in counteracting market volatility – which
is one of the frequently cited benefits of an FTT.”
“Moreover, the Commission’s draft proposal raises
several questions. The lower rate on derivatives
compared to shares may provoke arbitrage. Secondly,
it is uncertain what the per-transaction rate will turn
out to be. Since the tax also applies to intermediaries
in a transaction, the result may be a ‘cascade effect’
that will multiply the taxation rate. Thirdly, the
effects of the FTT will include implications for the
repo market, currently a major source of short-term
funding for banks. To sum up, hard evidence that the
FTT would yield a net stabilizing effect is lacking.”
And Sweden? Well, its own failed financial transactions
tax experiment (which took place between
1984 and 1991, and effectively saw off a significant
portion of the country's foreign investment, while
causing domestic investors to reduce their trading
frequency) has meant that it has a severe case of
“once bitten, twice shy.”
In Conclusion
The EU now, as never before, is in a state of flux, with
David Cameron pledging a referendum on the UK's
place within the Union if the Conservatives are returned
to power at the next election, while the French
and German governments continue their mutual admiration
society, pushing for greater economic and
policy integration across the entire EU (although there
has been trouble in paradise over the use of revenue derived
from the tax, with Germany wanting it to flow to
national budgets, while the French prefer to see it used
to finance development policy or to be used as own
revenues to support the European Union budget).
However, thanks to the enhanced cooperation
mechanism, whereby a group of EU member states
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(a minimum of nine) can launch coordinated action
on a proposal in the event that a consensus is
not possible among all twenty-seven EU member
states, it seems that the FTT juggernaut will roll
on regardless, crushing the UK and other objectors
under its wheels.
One aspect of the proposed EU tax which is likely
to generate an increasing amount of resistance and
may contain within it the seeds of its own destruction
is its extra-territoriality. Any country or small
group of countries introducing an FTT has little
choice but to include extra-territoriality, or it is
just too simple for trades to skip across borders. It's
not clear that the extra-territorial provisions in the
EU's FTT are going to be effective, even if they are
not resisted, because it is probably simple to dodge
the FTT by utilizing offshore structures, at least for
any larger transaction. That remains to be seen. But
resistance there will be: the US is particularly prickly
on such issues, and once Wall Street banks find
that they are having to pay a tax to the EU on any
trade they make with a French, German or Italian
counter-party, or even with a subsidiary of such a
counter-party, it will be a matter of microseconds
before there is a bill in Congress to make such payments
illegal. So, let the fun begin! It should be
worth watching.
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NEWS ROUND-UP: FINANCIAL INVESTMENTS
ISSUE 12 | JANUARY 31, 2013
Analysis
The Financial Transaction Tax was front and center
this week, with the European Union announcing
that — despite strong objections from member states
such as the UK and Sweden — it would be going
ahead with the implementation of such a levy in at
least eleven countries, with more potentially to follow,
using the “enhanced cooperation” mechanism.
Th is move prompted US lawmakers Senator Tom
Harkin (D - Iowa) and Representative Peter De-
Fazio (D - Oregon) to reintroduce their own legislation,
which would impose a similar levy on the
majority of non-consumer financial transactions.
In the Cayman Islands, meanwhile, the authorities
were less concerned with taxing financial transactions
and more with their regulation, introducing new legislation
to clarify registration requirements for certain
types of mutual fund, seen in many parts of the
world as a major step towards greater transparency.
Ecofin Gives Go-Ahead To FTT
Th e European Council of Economic and Financial
Affairs (Ecofin) has authorized European Union
(EU) member states to push ahead with plans for a
financial transactions tax (FTT) within the framework
of enhanced cooperation.
Th e European Commission can now present a concrete
proposal on plans for an FTT, allowing negotiations
to begin.
Th is is the first act of enhanced cooperation in the
history of the European Union in the area of taxation,
and follows the European Parliament's approval
of the proposal on December 12, 2012.
Enhanced cooperation is a procedure enabling a
group of EU member states (a minimum of nine)
to launch coordinated action on a proposal in the
event that a consensus is not possible among all 27
EU member states.
In October 2012, eleven EU member states – Germany,
France, Austria, Belgium, Spain, Estonia,
Greece, Italy, Portugal, Slovakia and Slovenia – requested
the use of enhanced cooperation to press
forward with the FTT.
Germany and France have championed the levy
from the outset. According to the German Finance
Ministry, the introduction of an FTT in eleven EU
member states is a first key step in the direction of
the introduction of a global tax. Emphasizing that
the aim of the tax is to ensure a fair and equitable
contribution from the financial sector to the costs
of the banking crisis, the ministry pointed out that
the tax complements other regulatory measures
taken by the coalition government, notably Germany's
draft high frequency trading law.
Insisting that the future financial transactions tax
must include all possible financial instruments,
have a wide base and a low tax rate, the Finance
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Ministry warned that the levy should not merely
be limited to financial transactions carried out on
the stock markets and regulated trading platforms
but should also apply to trading taking place outside
of this sphere.
EU Tax Commissioner Algirdas Šemeta said that
the agreement to allow eleven member states to
move ahead with a harmonized FTT represented a
“major milestone.”
Š emeta stated: “It is a milestone for EU tax policy,
as it paves the way for more ambitious member
states to progress on a tax file, even when unanimity
could not be achieved. Those who want
to move ahead, and who appreciate the merits
of working more closely on taxation at EU-level,
can do so. This is a highly significant and very
welcome advance.”
He concluded: “For the first time ever, the financial
transactions tax will be applied at regional
level. A block representing around two thirds of
EU GDP will implement this fair tax together,
answering the long-time calls of their citizens.
And in doing so, they can pave the way for others
to do the same.”
US Lawmakers Reintroduce FTT Bill
Senator Tom Harkin (D - Iowa) and Representative
Peter DeFazio (D - Oregon), while welcoming
the news that a group of 11 European Union
(EU) countries have been given the go-ahead to
implement a financial transaction tax (FTT), have
decided to reintroduce legislation to impose such a
tax in the United States.
The Wall Street Trading and Speculators Tax would
place a levy of 0.03% on most non-consumer financial
trading transactions, including stocks, bonds
and other debts, except for their initial issuance.
The tax would also cover all derivative contracts,
options, puts, forward contracts, swaps and other
complex instruments at their actual cost. It would
exclude retirement and education savings.
This compares with the proposed EU FTT, which
could be levied on the exchange of shares and bonds
at a rate of 0.1% and on derivative contracts at a
rate of 0.01%.
“Our FTT proposal raises considerable revenue (estimated
at USD352bn over 10 years) with little impact on
economically beneficial transactions,” Harkin explained,
continuing: “It is a tax that does not harm small businesses
or the middle class and Wall Street can certainly
afford it. I applaud the action taken by the EU today and
hope that we will soon have US action on this issue.”
“In the coming months, our country will need to
make hard decisions to get back on sound fiscal
footing. Our financial transaction tax should be a
no-brainer,” DeFazio added.
“I, too, applaud the EU. (Its) action mean(s) there
will be less opportunity to shift US trading overseas
to avoid a US FTT. Wall Street's criticisms of an
FTT are rapidly shrinking.”
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Cayman Clarifies Fund Registration
Rules
The Cayman Mutual Funds (Amendment) Law,
2012, became effective on January 10, 2013, clarifying
registration requirements for some master funds.
The Cayman Islands introduced registration requirements
for master funds in The Mutual Funds
(Amendment) Bill, 2011, which was passed by the
Cayman Islands' legislative assembly in December
2011. The registration requirements impact openended
master funds, where investors can buy into
the scheme directly from the fund on an ongoing
basis, rather than purchasing equity from existing
investors, as would be the case after the initial offering
of shares in a closed-ended fund.
The newly-effective Mutual Funds (Amendment)
Law 2012 seeks to clarify the definitions
of feeder fund, regulated feeder fund and
master fund to eliminate any uncertainty as to
whether the registration requirements apply to
a master fund. It also introduces a provision
that requires non-resident mutual fund administrators
to file an annual declaration with the
Financial Services Authority and pay the prescribed
fee before January 31 each year in respect
of any regulated mutual fund that that
person administers.
Prior to the change in 2011, master funds with fewer
than 15 feeders/investors were exempt from having
to register with the Financial Services Authority.
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NEWS ROUND-UP: COUNTRY FOCUS
ISSUE 12 | JANUARY 31, 2013
Switzerland - Analysis
Th e emphasis in Switzerland this week was very
much on cooperation, as it was announced that
the new Tax Administrative Assistance Act (which
governs the execution of administrative assistance
under double taxation agreements) will be coming
into force on February 1, 2013.
Separately it emerged that although the treaty between
Austria and Switzerland has entered into
force, the Austrian authorities must wait to get their
hands on the additional revenue to be generated by
the withholding tax on undisclosed assets.
Still on the subject of vices, it was also reported this
week that the Swiss authorities are planning to reorganize
the collection of “sin taxes,” to bring them
under one department, in the interests of reducing
costs and improving the efficiency of collection.
Austria To Wait For Revenues From
Swiss Tax Deal
Austria will have to wait for around six months before
revenues start to flow from the bilateral withholding
tax deal concluded with Switzerland.
Based on the tax treaties concluded between Switzerland
and the UK and Switzerland and Germany,
the Swiss-Austrian tax deal signed in April, 2012,
provides for a withholding tax levied on undisclosed
assets held by Austrian residents in Swiss
banks to regularize the accounts. The agreement
also contains plans to impose an annual withholding
tax on future investment income.
Th e treaty entered into force as planned on January
1, 2013.
The Austrian Finance Ministry is anticipating income
from one-off withholding tax payments
of around EUR1bn (USD1.3bn), and a further
EUR50m annually from the 25% tax on future
capital gains, the same rate as applied in Austria.
Despite the fact that the accord entered into force
at the beginning of the year, revenues will not flow
to Austria straight away as taxpayers have until May
31 to decide whether to settle the withholding tax
due on capital or to elect to report their investments
via a voluntary tax declaration. The taxation of illiquid
assets, such as shares and bonds, may delay
expected income yet further, as this process will undoubtedly
prove more complicated.
Th e withholding tax rates provided for in the
agreement vary between 15% and a maximum
of 38% for large banking deposits. According
to the Austrian Finance Ministry, the actual rate
of the withholding tax imposed will depend in
part on whether the money placed in Switzerland
since 2003 was the result of a one-off deposit
or of continuing payments, referred to as
“black sources,” and indicative of efforts aimed
at avoiding corporation or income tax.
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Opponents of the bilateral deal lament the fact that
the provisions are too lenient, and allow tax evaders
to preserve their anonymity.
Swiss Tax Administrative Assistance
Act In Force Soon
Th e Swiss Federal Council has recently resolved to
bring the new Tax Administrative Assistance Act
into force on February 1, 2013.
Switzerland's Tax Administrative Assistance Act
(TAAA) governs the execution of administrative
assistance under double taxation agreements. Approved
by Parliament on September 28, 2012, the
referendum deadline expired on January 17, 2013
without a referendum being called.
The existing ordinance governing the implementation
of double taxation agreements will be repealed
when the TAAA comes into force.
Group requests in accordance with the international
standard are also permitted with the entry
into force of the TAAA. Such requests require a
description of the action taken by bank clients to
avoid taxation and must be clearly distinct from
“fishing expeditions.”
In accordance with the Ordinance on Administrative
Assistance in the Case of Group Requests According
to International Tax Agreements, group requests
for information are admissible from the date
that the law enters into force.
Switzerland Reorganizes 'Sin Tax'
Collection
Switzerland has announced plans to reorganize the
taxes on beer, tobacco, and spirits, and to regroup
the departments involved in tax collection into one
single organizational unit.
Within the framework of a total revision of the
law on alcohol, the Swiss Federal Department
of Finance (FDF) intends to integrate the Swiss
Alcohol Board into the Swiss Customs Administration
(SCA), transferring competencies relating
to the taxes on beer, tobacco and spirits, as
well as regulations governing the alcohol market,
to the SCA.
The decision is to be implemented following entry
into force of the revised legislation on alcohol.
According to the FDF, the regrouping of the
different consumption taxes within the SCA
opens up a number of opportunities, notably
as regards the collection of taxes. It will also reduce
administrative costs for businesses and for
the authorities themselves.
Switzerland Extends VAT Perk
For Hoteliers
The Swiss Federal Council has recently approved
plans to extend until 2017 the special value-added
tax (VAT) rate of 3.8% accorded to the hotel industry
for accommodation services.
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Th e decision is in accordance with an initiative submitted
by the Committee for Economic Affairs and
Taxation (CEAT) of the Swiss National Council.
Introduced in 1996, the special VAT rate benefiting
the hotel industry, currently in force until the
end of 2013, has already been extended four times.
The last time was within the framework of the total
revision of Switzerland's VAT law.
reduced VAT rate and will no longer benefit
from a special VAT rate. However, given the
need to modify the constitution, necessitating
the approval of both the Swiss people and cantons,
the new model is not expected to enter
into force before 2016.
As an interim measure, it was agreed that the current
special VAT rate be extended.
On December 21, 2011, the Swiss National Council
rejected plans for the introduction of a single
VAT rate, as recommended by the Federal Council.
The National Council requested instead that the
future VAT model be based on two VAT rates.
Consequently, in accordance with the reform,
the hotel sector will in future be subject to a
According to the Swiss Federal Department of
Finance (FDF), this decision will lead to a shortfall
of tax revenue of CHF180m (USD193m) a
year, representing a total shortfall of EUR720m
over four years. Given the size of the sum, the
measure will have to be compensated by a reduction
of expenditure or by a rise in taxes, the
FDF states.
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NEWS ROUND-UP: TRANSFER PRICING
ISSUE 12 | JANUARY 31, 2013
Analysis
Although very different in terms of their cultures
and economies, the BRIC countries (Brazil,
Russia, India and China) have a number of
areas of common interest, including the development
of up-to-date, comprehensive and fit for
purpose transfer pricing rules, and it emerged
this week that the heads of revenue of the four
countries have identified a number of areas of
tax policy and administration in which a cooperative
approach would be useful in advancing
their cause.
In the UK, meanwhile, the government was
very much on the warpath with regard to businesses
avoiding or illegally minimizing their tax
liabilities using transfer pricing, as it emerged
that HM Revenue and Customs' Large Business
Service is chasing almost 50% more tax relating
to such abuses than it sought to recover the
previous year.
Speaking at the World Economic Forum in Davos,
Prime Minister David Cameron sought to hammer
the government's stance on this issue home, while
having a sneaky dig at Starbucks (which was caught
in the tax-dodging act by the Public Accounts
Committee late last year, and committed to paying
an additional GBP20m (USD31.3m) in extra
tax over the next two years) by suggesting that tax
dodging businesses “need to wake up and smell the
coffee because the public who buy from them have
had enough.”
BRICS Countries Agree To Greater
Cooperation In Tax Administration
The heads of revenue of the BRIC countries (Brazil,
Russia, India and China) have identified seven areas
of tax policy and administration where they can
extend their mutual cooperation, and have agreed
to establish a central point of contact in each jurisdiction
for further coordination on tax issues.
Th e commitments are outlined in a joint communique
issued by the BRICS countries following a
two day meeting in India. Representatives of the
various tax administrations met “to discuss the potential
areas of cooperation based on our existing
commitment to openness, solidarity, mutual understanding
and trust.”
Among the topics covered were international taxation,
transfer pricing, the prevention of cross-border
tax evasion and avoidance, the exchange of information,
the sharing of best practices in tax system
administration and the resolution of disputes.
Last year, the BRICS Finance Ministers and Central
Bank Governors declared that all countries
would develop a cooperative approach on issues
relating to international taxation, transfer pricing,
the exchange of information and tax evasion
and avoidance. The communique sets out
the heads of revenues' agreement to extend this
cooperation on the following issues of tax policy
and tax administration:
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To contribute to the development of international
standards on international taxation and transfer
pricing, taking into account the aspirations of
developing countries in general and the BRIC
countries in particular;
To strengthen enforcement processes by taking appropriate
actions for non-compliance and putting
more resources into international cooperation;
The sharing of best practices and capacity building;
The sharing of anti-tax evasion and non-compliance
practices, including abuse of treaty benefits
and the shifting of profits;
Th e development of a joint mechanism to facilitate
the countering of abusive tax avoidance
transactions, arrangements, shelters and schemes;
The promotion of effective exchange of information;
and
Any other issues of common interest and concerns
related to taxation.
Participants also committed to preventing tax base
erosion through practices including the abuse of
tax treaty benefits, the incomplete disclosure of information
and fraudulent claims. They pledged to
work together to produce a paper on these subjects.
A central point of contact will be established in
each of the BRIC countries for coordination on
tax issues. These contacts will identify issues of
common interest in international taxation and
transfer pricing, and will interact and meet regularly,
including pre-meeting before important
multilateral meetings, with the aim of setting out
a common response.
Th e agreed common response will then be communicated
to those international organizations working
on the creation of standards on international
taxation and transfer pricing.
UK Cracking Down On Transfer
Pricing Abuse
The UK's revenue agency has stepped up its crackdown
on businesses it suspects are using transfer
pricing to avoid taxes, new research has shown.
Research by international law firm, Pinsent Masons
found that HM Revenue and Customs'
(HMRC's) Large Business Service is going after
GBP1bn (USD1.57bn) of tax linked to transfer
pricing issues. This is up 47% on last year's figure
of GBP680m.
The Service is responsible for the taxes paid by the
770 largest businesses in the UK. Pinsent Masons
believes that the figures are indicative of the increased
compliance activity being undertaken by
HMRC and of the interest taken in where multinationals
with UK operations pay their taxes.
Heather Self, Partner at Pinsent Masons, explained
that: “With increased pressure from the
government to bring in more revenue, and more
resources to investigate potential avoidance and
evasion, HMRC has been investigating more
and more tax payments. This doesn't necessarily
mean there is more avoidance or evasion taking
place, but that HMRC is being more thorough
with its investigations.”
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Transfer pricing can affect the profits reported in
different markets, because it concerns the charges
made between the different parts of an international
business for goods, services, or intangible assets.
Transfer pricing has come under the microscope to
a greater extent in the UK in recent months, with
a number of multinationals, including Amazon,
Google, and Starbucks, facing sustained criticism
late last year from lawmakers.
In December, Parliament's Public Accounts Committee
(PAC) issued a highly critical report on
HMRC's ability to deal with large corporations
which generate significant income in the UK but
which appear to pay little or no tax there. In an
unprecedented move, Starbucks offered to pay
HMRC around GBP20m in extra tax over the next
two years after coming under fire over the figures it
revealed in PAC hearings.
Pinsent Masons is however warning against what it
calls knee-jerk reactions, and Self argued that the UK
“has to accept that it cannot change the law on transfer
pricing or the taxation of revenues unilaterally.”
Th e concern is that if the government “followed
through on the calls by MPs and campaigners to
change unilaterally tax laws governing multinationals,
the UK’s reputation as a stable place to do business
would be put at risk,” Self stressed.
The government is committed to the introduction of a
General Anti-Abuse Rule (GAAR), which is expected
to enter into force this coming financial year. The aim is
for the GAAR to apply to the main direct taxes (income
tax, corporation tax, capital gains tax and petroleum
revenue tax) and to National Insurance. An Advisory
Panel will be charged with giving opinions on specific
cases and approving HMRC guidance on the new rule.
Cameron Attacks Tax Avoidance
At Davos
Britain's Prime Minister has taken aim at tax avoidance,
using a speech at the World Economic Forum
in Davos to attack the way “some companies navigate
their way around legitimate tax systems” and
explaining that the UK has committed hundreds of
millions to cracking down on avoidance.
David Cameron argued that it was “corrosive of
the public trust” when businesses weren't seen to
be paying tax, and that businesses who think they
can continue to dodge their “fair share” of tax “need
to wake up and smell the coffee because the public
who buy from them have had enough.”
He added that: “After years of abuse, people across
the planet are rightly calling for more action, and
most importantly, there is gathering political will to
actually do something about it.”
Responding to a question about whether the “enormous
moral and public pressure to pay more tax”
would discourage investment in the UK, Cameron
stated that “Britain has got a great offer for business.”
He explained that corporation tax was coming down
close to 20%, and that the “patent box” would slash
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this to 10% for items that are invented in the UK.
In return, companies should pay their fair share.
observing that this could be worth around USD-
70bn to the global economy.
Cameron also called for more multilateral deals on
automatic information exchange, including with
developing counties, observing that: “The fact is,
the poorer the nation, the more they need tax revenues,
but often the weaker the capacity they have
to collect them. But we must not let them off the
hook – it can be done.”
Cameron cited the example of Ethiopia, explaining
that UK involvement in tax collection there has led
to a seven-fold increase in tax collection over the
last decade.
Along with tax, Cameron's speech also emphasized
the issues of trade and of transparency within the
developing world. He complained that trade is still
choked off by barriers and bureaucracy, and he noted
negotiations with the European Union and with
Canada, Singapore, and Japan, as well as the beginning
of negotiations on an EU-US trade agreement.
The UK Prime Minister further expressed a hope
that the Ministerial Conference in Bali in December
2013 would “sweep away trade bureaucracy,”
As regards transparency, Cameron explained that “we're
going to push for more transparency on who owns companies,
on who's buying up land and for what purpose,
on how governments spend their money, on how gas,
oil and mining companies operate, and on who is hiding
stolen assets and how we recover and return them.”
John Cridland, Director-General of the Confederation
of British Industry, expressed support for
Cameron's attack on tax avoidance, observing that:
“The majority of businesses pay the right amount of
tax, and for the small minority which do not, times
are getting tougher, and rightly so. The CBI does not
condone highly abusive avoidance schemes which
serve no commercial purpose other than the minimization
of tax, even if they are legal. In some cases the
tax system is lagging behind commercial reality, particularly
around the taxation of the digital economy
and transfer pricing. As the Prime Minister highlights,
the UK needs to work together with other countries,
including the G8, to change the rules where appropriate,
so that they are fit for the global business age.”
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NEWS ROUND-UP: INDUSTRY UPDATE
ISSUE 12 | JANUARY 31, 2013
Aerospace - Analysis
The news was not great this week for budget airline,
Flybe, which — blaming the UK's Air Passenger
Duty (APD) — revealed that it will be cutting its UK
employee roster significantly in order to cut costs.
However, things were a bit more optimistic in
Jersey, where the Minister for Economic Development,
Alan Maclean was able to discuss the
tax benefits likely to be afforded by registration
with the forthcoming new joint Channel Islands
Aircraft Registry, and to point to possible
schemes under consideration to make the Registry
uniquely attractive.
Flybe Looks To Free Itself From
UK APD Stranglehold
Budget airline Flybe has announced that it
will slash its UK workforce by 300, and has
blamed the UK's Air Passenger Duty (APD)
for its declining profitability.
“Today’s announcement of a turnaround strategy
for the UK business is a clear indication that Flybe
has a plan not only to address the challenges we face,
but also one to exploit the opportunities available,
particularly in Europe,” he explained, continuing:
“It is the first time in almost 30 years of business
that we have had to take such action. However,
faced with the brutal impact of a 160% rise in Air
Passenger Duty over the past six years and the consequent
20% decline in domestic traffic over the
same period, we have to recalibrate the business.
There is no escape from the GBP68m per year APD
tax burden which Flybe has to pay as a result of
increases successive governments have levied on the
industry. Flybe now pays more than 18% of our
ticket revenues to the government in APD, whilst
other UK-based carriers who operate a greater proportion
of their business outside of the UK pay less
than 6%.”
According to a filing with the London Stock Exchange
on January 23, 2013, Flybe is to cut approximately
300 jobs in the UK, from its Exeter,
Manchester and Newcastle operations, to help
achieve cost savings of GBP35m (USD55m).
Flybe's Chief Executive, Jim French, revealed that
the company's “turnaround plan” will involve an
increased presence in Europe, where the tax burden
on airlines is less onerous, and fewer flights in the
United Kingdom.
Concluding, French stated that: “Recognizing that
any significant change to either the UK economy
or the redistribution of APD is likely to be some
way off, this announcement represents a clear and
realistic plan with a measurable timescale and
benchmarks, based upon significant restructuring
and cost reduction to return Flybe to profitability.”
UK APD is the most draconian tax of its type
worldwide, and critics have said that the government
has transformed the environmental levy into
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a crisis-time “cash cow.” APD on fares has risen
markedly since the levy was first introduced in
1994, from rates of between GBP5-10, to GBP13-
184 at present. APD is to rise again on April 1,
2013, and business jets will also be brought into
the tax net.
Jersey Minister Gives Channel Island
Aircraft Registry Update
Responding to the findings of a Scrutiny Panel review
of progress towards the new joint Channel
Islands Aircraft Registry, Jersey's Minister for Economic
Development, Alan Maclean has begun to
address the unique selling points the Registry will
offer in tax terms.
In discussing the proposed registry, the Scrutiny
Panel, which acts as an independent government
oversight panel, noted that companies that register
aircraft in the Isle of Man are in a unique position
which enables them to become registered for valueadded
tax (VAT), and through corporate ownership
structures to claim back VAT on purchases.
Jersey is not in such a position, and will need to
determine its own unique selling proposition, the
Panel pointed out.
Maclean responded: “The issue of competitive disadvantage
to the Isle of Man and other Registries
presented by VAT is a challenge, but does not appear
to be insurmountable.”
He pointed out that the Channel Islands Strategic
Case report established that, due to the different
VAT regimes, it was likely that different clients
would be attracted to the Channel Islands Registry
than those using the Isle of Man, depending upon
their place of business and the planned base of activity
for their aircraft.
“Discussions are currently ongoing with Economic
Development and Guernsey’s Commerce and Employment
Department. Officials from both islands
are working together to seek to identify the best
way to proceed and hope to be able to make an announcement
on a final decision very shortly.”
He agreed with the Panel's suggestion that allowing
the registration of aircraft under fractional ownership
could present a viable unique selling point for
the Registry and revealed that the two governments
are considering the option.
Reviewing progress towards the registry, which is
expected to be launched this year, Maclean confirmed
that it had been agreed that due to Guernsey's
pro-active leadership in spearheading the development
of the necessary legislation, the Registry
will be based in Guernsey.
Jersey will benefit from its establishment through an
increase in retail sales, and associated financial services
and wealth management business, Maclean suggested.
Responding to additional feedback from the Scrutiny
Panel on the competitive disadvantage Jersey
faces in terms of the island's 5% Goods and Services
Tax, Maclean explained that the government
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was looking at measures to mitigate the potential
impact of the island's sales tax on visitor numbers
and associated business flows.
Lastly, Maclean confirmed that the governments
had abandoned immediate plans to jointly develop
a Category 1 Shipping Registry, but highlighted
there were no barriers to Jersey considering a move
to Category 1 in isolation, to establish a Category 1
Channel Islands Registry to be based in Jersey.
Flat Year For Embraer In 2012
Brazilian jet manufacturer Embraer saw almost
no increase in aircraft deliveries in 2012 in the
commercial and business jet market, after seeing
deliveries of its flagship E-Jet family model
jump 28% in 2011, but will benefit from Brazilian
tax breaks.
Th e manufacturer reported that a strong fourth
quarter of 2012 helped push up volumes, with
106 airplanes delivered to the airline market (105
in 2011) and 99 to executive aviation (level with
2011). Suggesting a slowdown in sales, the company's
firm order backlog fell from USD15.4bn to
USD12.5bn, despite a major deal concluded with
an Irish lessor, Aldus Aviation Limited in the final
quarter of 2012.
Embraer confirmed on January 17, 2013, that Aldus
had signed a contract to purchase 20 E-Jets -
five EMBRAER 175s and 15 EMBRAER 190s.
The contract also includes 15 purchase rights for
any E-Jet family model. The deal can reach a total
of USD1.56bn.
Since 2004, Embraer has delivered over 900 E-Jets.
The aircraft, which seats between 70 and 120 passengers,
is used by 63 airlines in 43 countries.
Founded in 1969, Embraer is the world's largest
manufacturer of commercial jets up to 120 seats,
and one of Brazil's leading exporters. Embraer's
headquarters are located in Sao Jose dos Campos,
Sao Paulo, and it has offices, industrial operations
and customer service facilities in Brazil, China,
France, Portugal, Singapore, and the US. Embraer's
profits dropped in the first half of 2012, partly due
to a higher tax charge, but will have benefited in
the second half from a payroll tax holiday, part of
the Brazilian government's support package for domestic
industries.
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NEWS ROUND-UP: REAL ESTATE AND PROPERTY TAXES
ISSUE 12 | JANUARY 31, 2013
Analysis
Many Western countries would like to have the
Asian problem of excessive property prices. Singapore,
China and Hong Kong have all been lining up
to try to throttle back exuberant real estate markets.
So this week's real estate and property tax focus has
something of an Asian flavor, with the authorities
in Hong Kong threatening developers with a tax on
unsold properties. And in Shanghai, one of only
two cities in China currently piloting a property
tax, it was announced that the threshold for the top
rate of property tax had been adjusted for 2013.
in order to produce homes and reduce their current
shortage for Hong Kong’s residents.
A construction completion date is specified in development
land leases, but property developers are
not restricted by any stipulation on when the sales
of the new flats must be held. There are, presently,
4,000 unsold new flats, and a 4% overall vacancy
rate, in the private sector. It is estimated that, of
the 6,100 flats built by the private sector last year,
2,000 remain unsold, while, of the 9,400 flats built
in 2011, 1,000 are still vacant.
In the United States, however, the focus was on
property owners in financial distress, with the
Internal Revenue Service providing guidance
on the Home Affordable Modification Program
(HAMP), which helps homeowners to lower their
mortgage payments.
Hong Kong Considers Vacant
Property Tax
During a radio interview, Hong Kong’s Chief Executive
Leung Chun-ying has warned that the government
could introduce a tax on unsold new homes,
in order to prevent developers hoarding them for
resale at higher prices.
Leung stressed that the government could not sit
and do nothing if there was evidence of properties
being held back by developers, purely for capital
gain. Property is released to developers, he added,
It is likely that a “vacancy” tax would be levied as a percentage
(as yet unspecified) of a flat's rental value. A tax
rate has not yet been indicated, but it has been pointed
out that it would need to be greater than the developers'
prospective investment return to be effective.
The suggestion has been criticized, however, with
opponents arguing that it was likely, by forcing developers
to sell flats immediately, to reduce future
interest in development applications, and would
also be a further example of the government interfering
in the operation of the free-market economy.
The Chief Executive's warning comes not long after
the government raised all levels of the Special
Stamp Duty for properties resold within 24 months
of purchase, and introduced a 15% Buyer's Stamp
Duty for buyers of residential properties who are
not Hong Kong permanent residents.
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Th e government has said that it intends to assess
the impact of those measures, and that further
additions and readjustments could be made
if necessary.
Shanghai Modifies Property
Tax Threshold
In China, Shanghai's municipal government has
announced an increase to the threshold over which
its property tax will be paid at a higher rate.
In 2012, property tax was levied at a preferential
rate of 0.4% on homes purchased at no more than
RMB26,896 (USD4,325) per square meter, but that
will now be increased marginally to RMB27,740
this year. Homes costing more than RMB27,740
per square meter will pay the standard rate of 0.6%.
The adjustment was necessary as, under Shanghai's
property tax regulations, the 0.4% preferential rate
is restricted to homes with a price per meter of not
more than twice the average sale price of new homes
in the city for the year before. In fact, new homes
were sold at an average price of RMB13,870 per
square meter in 2012.
Chongqing, the only other city in China to levy a
property tax, also increased its threshold this month.
The Chinese government approved a property tax
pilot scheme in 2011, to be imposed, initially, on
luxury residential properties in the two cities, as
part of its effort to try to bring under control the
rapid increases that have been seen in the country's
real estate prices.
It is expected that there will be an increasing use of
property taxation in China this year. However, the
government appears to be continuing its study of
the effect of the two property tax pilots before deciding
on the appropriate tax structure to be rolled
out in other cities.
IRS Provides Guidance On Mortgage
Reduction Incentive
The United States Internal Revenue Service (IRS)
has announced tax guidance for borrowers, mortgage
loan holders and loan servicers who are participating
in the Principal Reduction Alternative (PRA)
investor incentive payments made through the
Home Affordable Modification Program (HAMP).
To help financially distressed homeowners lower
their monthly mortgage payments, the Treasury Department
and Department of Housing and Urban
Development have established HAMP, under which
the principal of a borrower's mortgage may be reduced,
over three years, by a predetermined amount
called the PRA Forbearance Amount, if the borrower
satisfies certain conditions over a trial period.
More specifically, if the loan is in good standing on
the first, second and third annual anniversaries of
the effective date of the trial period, the loan servicer
reduces the unpaid principal balance of the
loan by one-third of the initial PRA Forbearance
Amount on each anniversary date. This means that
if the borrower continues to make timely payments
on the loan for three years, the entire PRA Forbearance
Amount is forgiven.
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To encourage mortgage loan holders to participate,
the HAMP program administrator will make an incentive
payment to the loan holder (called a PRA
investor incentive payment) for each of the three
years in which the loan principal balance is reduced.
The guidance issued by the IRS provides that PRA
investor incentive payments made by the HAMP
program administrator to mortgage loan holders are
treated as payments on the mortgage loans by the
US government on behalf of the borrowers. These
payments are generally not taxable to the borrowers
under the general welfare doctrine.
On the other hand, if the principal amount of a
mortgage loan is reduced by an amount that exceeds
the total amount of the PRA investor incentive
payments made to the mortgage loan holder,
the borrower may be required to include the excess
amount in gross income as income from the discharge
of indebtedness. However, many borrowers
will qualify for an exclusion from gross income.
For example, a borrower may be eligible to exclude
the discharge of indebtedness income from gross
income if the discharge of indebtedness occurs (in
other words, if the loan is modified) before January
1, 2014, and the mortgage loan is qualified principal
residence indebtedness, or the discharge of indebtedness
occurs when the borrower is insolvent.
Borrowers receiving aid under the HAMP–PRA
program may report any discharge of indebtedness
income, whether included in, or excluded
from, gross income, either in the year of the permanent
modification of the mortgage loan or ratably
over the three years in which the mortgage
loan principal is reduced on the servicer's books.
Borrowers who exclude the discharge of indebtedness
income must report both the amount of
the income and any resulting reduction in basis
or tax attributes.
Th e guidance explains that mortgage loan holders
are also required to file a form with respect to
a borrower who realizes discharge of indebtedness
income of USD600 or more for the year in which
the permanent modification of the mortgage loan
occurs. This rule applies regardless of when the borrower
chooses to report the income, and regardless
of whether the borrower excludes some or all of the
amount from gross income.
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NEWS ROUND-UP: OTHER TAXES
ISSUE 12 | JANUARY 31, 2013
Analysis
Never one to shy away from the introduction of
new or heavier taxes, and wanting to teach Google
and its profit shifting peers a lesson, the French
government is reported to be considering a recommendation
for a new levy on “the exploitation
of personal data”, such as is carried out by the
search giant in order to direct targeted advertising
to its users.
In Barbados, meanwhile, there has been a storm in a
rum glass this week. The jurisdiction, together with
fellow CARICOM members, is in dispute with the
United States over the latter's long-standing arrangement
to route (or pour?) excise tax revenue
relating to rum imported into the United States to
the US Virgin Islands and Puerto Rico.
And finally, the Indian authorities (never averse to
a bit of tweaking), have announced import duty increases
with regard to gold and platinum imports,
in an attempt to moderate what Finance Minister
P. Chidambaram has called a “huge drain on the
current account.”
French Report Advocates Internet Tax
Th e French Finance Ministry has recently unveiled
details of a report on taxation of the digital economy,
submitted by state councilor Pierre Collin and
government auditor Nicolas Colin.
Commissioned in July last year, the report “offers a
detailed and striking vision” of the rise in the digital
economy and the importance of “the exploitation
of personal data” in this growing sector. The report
exposes the problem of profit relocation or shifting
by companies, warning that this phenomenon will
only increase if nothing is done to tax their activity
in France.
The report calls for a new tax to be introduced as a
matter of urgency, based on the amount of personal
information collected by internet companies such
as Google which is used to direct personalized advertising
and other services to users.
As recommended in the report, the government intends
to act within the G20, the Organization for
Economic Cooperation and Development, and the
EU to adapt existing international rules governing
the taxation of profits to the realities of the digital
economy, notably by championing plans to modify
the definition of “permanent establishment.”
Alluding to a preliminary report due to be presented
to the G20 in mid-February, dealing with the issue
of profit relocation, the French finance ministry
emphasized that the so-called “BEPS” (Base Erosion
and Profit Shifting) initiative offers a historic
opportunity for France and its partners to make
rapid advances in this area.
At national level, the French government aims to
pursue efforts to detect and to combat fraudulent
behavior supported by digital technologies.
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Th e government has made clear that the idea of a
national tax based on the use of personal data is
to be explored in detail in parallel with other proposals
that have already been put forward aimed at
resolving the issue, including notably the idea of
taxing electronic trade.
Also, the USVI has controversially provided some
USD2.7bn in tax breaks to enable the company to
export its Captain Morgan Rum to the United States
at a price significantly lower than offered by other
Caribbean territories, prompting complaints from
CARICOM countries about unfair competition.
Caribbean To Stand Its Ground On
Rum Tax Dispute
Barbados's Prime Minister, Freundel Stuart, has
stated that the government, and its peers in the
Caribbean Community, will not back down in the
rum tax dispute with the United States until business
conditions are fair between the US Virgin Islands,
Puerto Rico, and the rest of the Caribbean.
The dispute relates to long-standing tax provisions
in the United States, dating back to 1917 for Puerto
Rico and 1954 for the US Virgin Islands, which
provide that any excise tax collected on rum imported
into the United States is transferred to or
“covered-over” to the treasuries of Puerto Rico and
the USVI. The law does not impose any restrictions
on how the two territories can use the transferred
revenues, and historically both territories have used
some portion of the revenue to promote and assist
their rum industries.
Recently, the USVI has dedicated a larger share of
current and future covered-over revenue to help finance
public and private infrastructure that would
directly benefit the rum industry, in particular industry
giant Diageo.
Freundel reassured local rum producers that the
governments are still working towards a solution,
explaining that: “The government of Barbados has
had to take a stand on this issue, and under my instructions,
the Ministry of Foreign Affairs and Foreign
Trade has communicated with the US government.
And, of course, very recent discussions have
taken place between CARICOM countries, the
Dominican Republic and the United States Trade
Representative with a view to addressing the more
pressing concerns of rum producers, not only here
in Barbados, but in other parts of the Caribbean.”
While CARICOM and the Dominican Republic
hope to achieve an amicable resolution in consultations
with the United States, Freundel underscored
that the territories would not “relax [their] persistence
on this issue. We do not intend to allow rum
producers in the Caribbean to be so severely disadvantaged
by this market distortion which has resulted
from these overwhelming, if I may use that
word, subsidies being extended to producers in the
US Virgin Islands and Puerto Rico.”
In August, CARICOM members warned of the
potential long-term damage to their rum industries
as a result of the measures and warned that if the
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matter could not be resolved with US officials, the
bloc would consider taking the matter to the World
Trade Organization.
India Hikes Gold Import Duty
The Indian government has hiked the import duty
on gold and platinum with immediate effect, in a
bid to moderate demand and rein in the current
account deficit.
Th e initiative forms part of a package of reforms
to India's treatment of gold imports announced by
Finance Minister P. Chidambaram.
Earlier this month, Chidambaram labeled gold
imports a “huge drain on the current account.”
Imports in the 2011-12 financial year were worth
USD56.5bn, and estimates for the current year to
end-December, 2012 put the value at USD38bn.
The levy was doubled last year, from 2% to 4%.
Chidambaram's latest hike of 2% places the new
duty rate at 6%.
Philippines Looks To Tax Online Traders
As part of its efforts to increase revenue while improving
tax compliance, the Philippines Bureau of
Internal Revenue (BIR) has indicated that it will
increase its focus on online traders and the websites
that they use.
As it looks to widen further the Philippines tax base,
the BIR is focusing not only on the regular online
traders using so-called “buy and sell” websites without
registering with the BIR to pay their taxes, but
also on the website operators themselves (said to
include eBay, Sulit and AyosDito) that allow them
to do so without checking their tax credentials.
BIR Commissioner Kim Henares has confirmed recently
that cases can be filed against both the sellers
of the goods and also the websites that allow individuals
to trade online, as the latter act in much the
same way as mall operators that lease commercial
space to entrepreneurs and, under the country's tax
code, have to ensure that their tenants are issuing
receipts and are registered with the tax authority.
Th e government says that consequential changes
in additional customs duty and excise duty will be
implemented via notifications dealing with the import
duty/excise duty on gold ore bars, gold ores
and refined gold. These duties will be reviewed if
there is a drop in import quantities.
She also confirmed that the BIR could move immediately
against the online traders and websites
under existing tax regulations which state that, for
each sale of goods or service provided valued at or
above PHP25, receipts have to be issued by the seller
or provider.
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TAX TREATY ROUND-UP
ISSUE 12 | JANUARY 31, 2013
CHINA - ECUADOR
Signature
China and Ecuador signed a DTA on January 21,
2013.
CROATIA - GEORGIA
Signature
Croatia and Georgia signed a DTA on January 18, 2013.
CZECH REPUBLIC - KAZAKHSTAN
Negotiations
According to preliminary media reports, the Czech
Republic and Kazakhstan are holding negotiations
on a protocol to their existing DTA on January 28-
31, 2013.
ECUADOR - QATAR
Draft
Ecuador's Ministry for Foreign Affairs said that it
expects to sign a new DTA with Qatar on February
15, 2013, following meetings that concluded
on January 17, 2013.
GUERNSEY - VARIOUS
Signature
Guernsey signed Comprehensive DTAs with the
Isle of Man and Jersey on January 24, 2013.
INDIA - ARGENTINA
Ratified
Argentina on January 14, 2013 completed the nation's
ratification of the TIEA signed with India,
with the publication of legislation to this end in its
Official Gazette,.
JAPAN - UNITED STATES
Signature
Th e United States and Japan signed a Protocol to
the existing DTA on January 24, 2013.
JERSEY - VARIOUS
Signature
Jersey signed new comprehensive DTAs containing
tax information exchange provisions with the other
Crown Dependencies on a trilateral basis, on January
24, 2013.
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JERSEY - VARIOUS
Signature
Jersey signed new TIEAs with Brazil and Latvia on
January 28, 2013.
LITHUANIA - QATAR
Initialed
According to preliminary media reports, Lithuania
and Qatar initialed a DTA on January 24, 2013.
MALTA - SAUDI ARABIA
Effective
The DTA and an accompanying Protocol signed
between Malta and Saudi Arabia on January 4,
2012, became effective on January 1, 2013, after
coming into force on December 1, 2012.
MEXICO - VARIOUS
Effective
According to information published by Mexican
authorities on January 17, 2013, three new DTAs,
with Bahrain, Lithuania, and Ukraine, as well as a
Protocol to the 1994 Mexico-Singapore DTA signed
in 2009, became effective on January 1, 2013.
MEXICO - VARIOUS
Effective
According to information published by the Mexican
government on January 17, 2013, new TIEAs between
Mexico and Costa Rica, and Mexico and the Cayman
Islands, became effective on January 1, 2013.
PHILIPPINES - VARIOUS
Ratified
The Philippines Senate ratified three double tax
agreements signed by the Philippines with France,
Qatar and Kuwait on January 22, 2013.
RUSSIA - ARMENIA
Ratified
Russia's lower house of Parliament approved a law
on January 18, 2013, ratifying a Protocol amending
the 1996 DTA between Russia and Armenia.
SRI LANKA - INDIA
Signature
Sri Lanka and India signed a new DTA to replace
their existing pact on January 22, 2013.
SWITZERLAND - VARIOUS
Effective
The new DTA between Hong Kong and Switzerland
became effective in Switzerland on January
1, 2013, and will be effective in Hong Kong from
April 1, 2013.
A new Protocol to the DTA between Switzerland
and South Korea, signed on December 28, 2010,
also became effective on January 1, 2013, for
both parties.
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TURKEY - AUSTRALIA
Legislation
Turkey's parliament on January 17, 2013, endorsed
legislation approving the new DTA signed between
Turkey and Australia.
TURKEY - BERMUDA
Into Force
Turkey completed its domestic ratification procedures
in respect of the TIEA signed with Bermuda, publishing
an Order in its Official Gazette on January
17, 2013. Consequently, the TIEA is now in force.
TURKEY - BRAZIL
Effective
Th e new Turkey-Brazil DTA signed on December
16, 2010, became effective on January 1, 2013, following
the publication of legislation to this effect in
Turkey's Official Gazette.
URUGUAY - ARGENTINA
Into Force
According to preliminary media reports, the TIEA
Agreement signed between Uruguay and Argentina
will enter into force on February 7, 2013.
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CONFERENCE CALENDAR
ISSUE 12 | JANUARY 31, 2013
A guide to the next few weeks of international tax
gab-fests (we're just jealous - stuck in the office).
THE AMERICAS
2013 NATIONAL MULTISTATE TAX
SYMPOSIUM
Deloitte
Venue: Disney's Grand Floridian Resort & Spa, 4401
Grand Floridian Way, Lake Buena Vista, FL 32830
Chairs: Michael A. Lampert (Chair, Tax Section of
The Florida Bar), James W. Wetzler (Director, Deloitte
Tax LLP), Jerry Gattegno (Senior Partner, Deloitte
Tax LLP), Robert Vonick (Vice President and
Senior Tax Counsel, The Walt Disney Company)
2/6/2013 - 2/8/2013
http://www.deloitte.com/view/en_US/us/Events-De-
loitte/e2c6c1c8684d9310VgnVCM2000003356f70aR-
CRD.htm?id=us_furl_tax_mts_2013symp_091812
CAPTIVE INSURANCE TAX SUMMIT
Bloomberg BNA
Venue: Treasure Island Hotel, 3300 S. Las Vegas
Blvd, Las Vegas, NV 89109
Key Speakers: Ernest F. Aud, Jr. (Ernie Aud LLC),
Chris Booth (Deloitte), Rick Buggy (Saslow, Lufkin
& Buggy LLP), Fred Chilton (McDermott Will &
Emery LLP), Ward S. Connolly (PricewaterhouseCoopers
LLP), George Craven (Mayer Brown LLP),
James P. Fuller (Fenwick & West LLP), Elvin Hedgpeth
(Ernst & Young LLP), Tom Jones (McDermott
Will & Emery LLP), Art Koritzinsky (Marsh USA
Inc), Charles “Chaz” J. Lavelle (Bingham Greenebaum
Doll LLP), Larissa Neumann (Fenwick & West
LLP), James M. O’Brien (Baker & McKenzie LLP),
Joshua D. Odintz (Baker & McKenzie LLP), John M.
Peterson, Jr. (Baker & McKenzie LLP), Roy Sedore
(Baker & McKenzie LLP), William R. Skinner (Fenwick
& West LLP), and Bruce Wright (Sutherland,
Asbill & Brennen LLP)
2/11/2013 - 2/12/2013
http://www.citeusa.org/Calendar2012/captive.html
INTERNATIONAL CORPORATE TAX
ESSENTIALS
Lorman Education Services
Venue: Independence, Ohio, US TBA
Chair: Robert J. Misey (Reinhart Boerner Van
Deuren)
2/15/2013 - 2/15/2013
http://les.brochure.s3.amazonaws.com/391019.pdf
NUTS AND BOLTS OF TAX PENALTIES
2013
Practising Law Institute
Venue: PLI New York Center, 810 Seventh Avenue
at 53rd Street (21st floor), New York, New York
10019
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Chair: Bryan Skarlatos (Kostelanetz & Fink LLP)
3/1/2013 - 3/1/2013
http://www.pli.edu/Content/Seminar/Nuts_and_
Bolts_of_Tax_Penalties_2013_A_Primer/_/N-
4kZ1z12pjx?ID=159980
US ESTATE, GIFT AND INCOME TAX
PLANNING
STEP Calgary
Venue: Devonian Room, Calgary Petroleum Club, 3319
5 Avenue Southwest Calgary, AB T2P 0L6, Canada
Key Speaker: Nadja Ibrahim (PwC)
2/20/2013 - 2/20/2013
http://www.step.org/events.aspx?eventId=a0XC00
00009JLGUMA4
CICA 2013 INTERNATIONAL
CONFERENCE
Captive Insurance Companies Association
Venue: Westin Mission Hills Resort, 71333 Dinah
Shore Drive, Rancho Mirage, CA 92270, USA
Panel Moderators: Michael C. Meehan (Consultant,
Milliman, Inc); Anne Marie Towle (Senior Consultant,
Willis Global Captive Practice); Erich A Brandt
(Consulting Actuary, Pinnacle Actuarial Resources,
Inc); and Les Boughner (Executive Vice President &
Managing Director, Willis Captive Consulting)
3/10/2013 - 3/12/2013
http://www.cicaworld.com/EventsEducation/
EventsIntConf/ProgramSchedule.aspx
INTERNATIONAL TAX AND TRUST
CONGRESS
TolleyConferences
Venue: The Hilton, Barbados, St Michael, BB11000
Chair: James Corbett QC (Kobre & Kim LLP)
3/12/2013 - 3/13/2013
http://www.conferencesandtraining.
com/en/Browse-Events/tax-conferences/
International-Tax-And-Trust-Congress-Barbados/
THE 2ND OFFSHORE INVESTMENT
CONFERENCE, PANAMA
Offshore Investment
Venue: Waldorf Astoria, 47th St. & Uruguay Street,
Panama City, Panama
Chair: Derek R. Sambrook (Managing Director,
Trust Services SA)
3/13/2013 - 3/14/2013
http://www.offshoreinvestment.com/pages/index.
asp?title=The_2nd_Offshore_Investment_Conference_Panama&catID=9913
CURRENT US TAX PLANNING FOR
FOREIGN-CONTROLLED COMPANIES
Bloomberg BNA
Venue: Marriott Union Square, 480 Sutter Street,
San Francisco, CA. 94108
Key speakers: Barton Bassett (Morgan, Lewis &
Bockius LLP), Anthony Cipriano (Morgan, Lewis
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78

& Bockius LLP), Kirsten Malm (Baker & McKenzie),
Timothy Fitzgibbon (PwC), Joel Slavonia
(PwC), Roy Crawford (McDermott Will & Emery),
Alan Appel (Bryan Cave LLP), Rafic Barrage (Mayer
Brown LLP), Arthur Walker (Mayer Brown LLP)
http://www.citeusa.org/pdf/fcc.pdf
TRANSFER PRICING BRAZIL
C5
Venue: Intercontinental Hotel, Alameda Santos,
1123 - Jardim Paulista, São Paulo, 01419-001,
Brazil
Key Speakers: Carlos Alberto Freitas Barreto (Secretariat
of the Federal Revenue, Brazil), Maria Elisa Sabatel
Giordano (International Tax Manager, Maersk
Line), Robert Goulder (Editor-in-Chief, Tax Analysts),
Anderson Rocha (Legal Director Taxation,
Unilever Brasil), Augusto Flores (Tax Director, DAF
Caminhões Brasil), Anderson Rocha (Legal Director
Taxation, Unilever Brasil), Andrea Anjos (Brazil
Tax & Customs Director, Cargill), Ivan Ferreira
(Latam Tax Director, MWV Group), among others.
3/18/2013 - 3/19/2013
http://www.c5-online.com/2013/569/
transfer-pricing-brazil
CHINA: LEGAL, TAX &
ACCOUNTING UPDATE
Bloomberg BNA
Venue: Marriott Union Square, 480 Sutter Street,
San Francisco, CA 94108
Co-chairs: Deborah Lee (PwC), Michael O’Laughlin
(O’Laughlin & Co)
3/18/2013 - 3/19/2013
http://www.citeusa.org/pdf/china.pdf
INTERNATIONAL FILM & TV
FINANCE SUMMIT
Bloomberg BNA
Venue: Luxe Sunset Boulevard, 11461 Sunset Boulevard,
Los Angeles, CA 90049
Chair: TBA
3/21/2013 - 3/21/2013
http://www.citeusa.org/Calendar2012/film.html
ASIA PACIFIC
2013 FINANCIAL SERVICES
TAXATION CONFERENCE
Th e Tax Institute, Australia
Venue: Hyatt Regency Sanctuary Cove, Manor Circle,
Sanctuary Cove, Queensland 4212, Australia
Key speakers: Richard Vann (Challis Professor of
Law, University of Sydney); David Russell (QC,
Ground Floor Wentworth Chambers); Phil Cole (JP
Morgan); John Brodgden, (Australia's Financial Services
Council), and others
2/13/2013 - 2/15/2013
http://www.taxinstitute.com.au/go/events-and-education/upcoming-cpd-events/upcoming-cpd-events/
EVENTID/1130202M1
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FASTAX SERIES - MANAGING TAX
COMPLIANCE ESSENTIALS RIGHT
CCH Malaysia
Venue: Traders Hotel, Magazine Road, Georgetown,
Penang Island 10300, Malaysia
Chair: Vincent Josef (former Assistant Director
General of Malaysia's Inland Revenue Board)
2/25/2013 - 2/25/2013
http://www.cch.com.my/my/ExecutiveEvents/
ExecutiveEventDetails.aspx?PageTitle=FasTax-
Series-Managing-Tax-Compliance-Essentials-
Right&ID=1548&Source=EEHome
FASTAX SERIES - MAXIMISING TAX
INCENTIVES ESSENTIALS
CCH Malaysia
Venue: Traders Hotel, Magazine Road, Georgetown,
Penang Island 10300, Malaysia
Chair: Kularaj K. Kulathungam (former Assistant
Director of Malaysia's Inland Revenue Board)
3/5/2013 - 3/5/2013
http://www.cch.com.my/my/ExecutiveEvents/Ex-
ecutiveEventDetails.aspx?PageTitle=FasTax-Series-
Maximising-Tax-Incentives-Essentials&ID=1553
&EETopicID=3&Source=EETopic
TRUSTS SYMPOSIUM 2013
STEP South Australia
Venue: The Hilton Hotel, Victoria Square, Adelaide,
Australia
Key Speakers: Christopher Kourakis (Honourable
Chief Justice, Supreme Court of South Australia),
John Basten (Supreme Court of New South Wales),
Professor Gino Dal Pont (University of Tasmania),
William Gummow (Gummow AC Former Justice
of the High Court of Australia), Arlene Macdonald
(Edmund Barton Chambers and Chair of the South
Australian Branch of STEP), Anthony Besanko (Federal
Court of Australia (South Australia)), Margaret
White (Supreme Court of Queensland), and Richard
White (Supreme Court of New South Wales)
3/8/2013 - 3/8/2013
http://www.step.org/docs/events/TRUSTS%20
SYMPOSIUM%202013%20pdf.pdf
ASIA-PACIFIC REGIONAL TAX
CONFERENCE
International Fiscal Association, Tax Academy of
Singapore
Venue: Shangri-La Hotel, 22 Orange Grove Rd,
Singapore 258350, Singapore
Key Speakers: Alan Ross (PwC Singapore), Aliff Fazelbhoy
(ALMT Legal), Andy Baik (Ernst & Young
Singapore), Anna Chan (Singapore Economic Development
Board), Chai Sui Fun (Inland Revenue
Authority of Singapore), Eric Roose (Morrison
Foerster), Gurbachan Singh (KhattarWong LLP),
Kari Pahlman (KPMG Hong Kong), Koh Soo How
(PwC Singapore), Lawrence Sussman (O’Melveny
& Myers LLP Beijing), Liu Hern Kuan (Inland
Revenue Authority of Singapore), Luis Coronado
(Ernst & Young Singapore), Ong Sim Ho (Drew &
80
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Napier), Peter Barnes (General Electric Company),
Pieter De Ridder (Loyens & Loeff), Professor Kees
Van Raad (Loyens & Loeff), Professor Roy Rohatgi,
Ram Kishan (Goldman Sachs), Sharon Tan (Nike
Inc), Teoh Lian Ee (Inland Revenue Authority of
Singapore), WH Baik (Kim & Chang), Yeoh Lian
Chuan (Allen & Overy)
4/2/2013 - 4/4/2013
http://www.taxacademy.sg/downloads/seminar-workshop/IFA%202013%20Programme_Website.pdf
TRANSFER PRICING: INTANGIBLES
AND INTRA-GROUP FINANCE
IBFD
Venue: Kuala Lumpur, Malaysia, TBA
Key Speakers: Tarun Arora (PwC), Sockalingam
Murugesan (Head of Transfer Pricing, E&Y Malaysia)
Vinay Nichani (Director, E&Y Malaysia's
Transfer Pricing Practice)
4/8/2013 - 4/10/2013
http://www.ibfd.org/Courses/Transfer-Pricing-Intangibles-and-Intra-Group-Finance
WEALTHMATTERS HONG KONG
WealthMatters
Venue: Four Seasons Hotel, No.8 Finance Street,
Central, Hong Kong, China
Key Speakers: TBA
4/9/2013 - 4/9/2013
http://www.wealthbriefing.com/html/event_detail.
php?id=49166
THE 4TH WEALTH MANAGEMENT
& PRIVATE BANKING: RUSSIA & CIS
CONFERENCE
Adam Smith Conferences
Venue: Hotel Baltschug Kempinski, 1 Ulitsa Balchug,
Moscow 115035, Russia
Key Speakers: Petr Terekhin, (Vice-President, Head
of Private Banking, Promsvyazbank), Svetlana Le
Gall (Head of GHP GROUP Wealth Management),
Andrei Movchan (CEO, Third Rome Group), Dr.
Issaak Bekker (International Financial Consultant,
FCP (Financial Management) Ltd)
4/9/2013 - 4/11/2013
http://www.adamsmithconferences.com/event/
wealth-management-private-banking-russia
MIDDLE EAST AND AFRICA
OPPORTUNITIES FOR THE FLOW
OF NEW WEALTH
STEP Dubai
Venue: One & Only Royal Mirage Hotel, Al Soufoh
Road | Jumeirah Road, PO Box 37252, Dubai,
United Arab Emirates
Key Speakers: TBA
3/5/2013 - 3/6/2013
https://step.sym-online.com/registrationforms/
dubai13/
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IBFD'S 75TH JUBILEE WORKSHOP
IBFD
Venue: Cape Town, South Africa, TBA
Key speakers: Belema Obuoforibo (Director of the
IBFD Knowledge Centre, IBFD), Shee Boon Law
(Manager of Tax Research Services, IBFD)
3/11/2013 - 3/11/2013
http://www.ibfd.org/IBFD-Tax-Portal/Events/
IBFD-75th-Jubilee-Workshop-Cape-Town#tab_
program
TREATY ASPECTS OF
INTERNATIONAL TAX PLANNING
IBFD
Venue: Johannesburg, South Africa, TBA
Key Speakers: Shee Boon Law (Manager of Tax Research
Services, IBFD), Belema Obuoforibo (Director,
IBFD Knowledge Centre)
3/13/2013 - 3/15/2013
http://www.ibfd.org/Courses/
Treaty-Aspects-International-Tax-Planning
WESTERN EUROPE
CURRENT INTERNATIONAL
TAX ISSUES IN CROSS-BORDER
CORPORATE FINANCE, CAPITAL
MARKETS
International Bar Association/ The Chartered Institute
of Taxation
Venue: Holborn Bars, 138-142 Holborn London
EC1N 2NQ, United Kingdom
Co-chairs: Jack Bernstein (Aird & Berlis); Jonathan
Schwarz (Temple Tax Chambers)
2/11/2013 - 2/12/2013
http://www.int-bar.org/conferences/conf467/binary/London%20IBA_CIOT%202013%20programme.pdf
TAXPRO-2013
BOSCO Conference
Venue: Shakhtar Plaza Hotel, Germana Titova Avenue,
15, Donetsk, Ukraine
Speakers: TBA in March
4/18/2013 - 4/18/2013
http://bosco-conference.com/en/events/
upcoming/donetsk-2013
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82

LANDED ESTATES: TAX PLANNING &
WEALTH PRESERVATION CONFERENCE
TolleyConferences
Venue: London, UK, TBC
Chair: Sue Laing (Partner, Boodle Hatfield LLP)
2/12/2013 - 2/12/2013
http://www.conferencesandtraining.
com/en/Browse-Events/tax-conferences/
Tax-Planning-For-Landed-Estates/
EUROPEAN INDIRECT TAXES
CONFERENCE 2013
The Chartered Institute of Taxation
Venue: The Royal Garden Hotel, 2-24 Kensington
High Street Kensington, London W8 4PT
Chairs: Christine Barwell (CIOT); Peter Dylewski,
(Vice Chair Indirect Tax, CIOT Technical
Committee)
2/14/2013 - 2/14/2013
http://www.tax.org.uk/members/events/European
Indirect Taxes Conference 2013
FATCA: AN UPDATE
STEP Jersey
Venue: Pomme d’Or Hotel, Liberation Square, St
Helier JE1 3UF
Key Speakers: Alex Jones (Deloitte), Paul Woodman
(Deloitte)
2/21/2013 - 2/21/2013
http://www.step.org/docs/events/FATCA%20
An%20Update.pdf
FUNDS TRANSFER PRICING
AND BANK ASSET-LIABILITY
MANAGEMENT
British Bankers' Association
Venue: Pinners Hall, 105-108 Old Broad Street,
London, EC2N 1EX
Chair: Moorad Choudhry (Treasurer, Corporate
Banking Division, Royal Bank of Scotland and Visiting
Professor, Department of Mathematical Sciences,
Brunel University)
2/21/2013 - 2/21/2013
http://www.bba.org.uk/events-and-training/event/fundstransfer-pricing-and-bank-asset-liability-management1
INTERNATIONAL TAX ASPECTS OF
PERMANENT ESTABLISHMENTS
IBFD
Venue: IBFD Head Office, H.J.E. Wenckebachweg
210, 1096 AS Amsterdam, The Netherlands
Key Speakers: Roberto Bernales (Senior Research
Associate, European Team, and Research Manager,
IBFD Knowledge Centre); Walter van der Corput
(Editor, IBFD International VAT Monitor and EU
VAT Compass); Hans Pijl (Partner, Deloitte); Bart
Kosters (Senior Principal Research Associate, IBFD
Tax Services Department)
2/25/2013 - 2/28/2013
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http://www.ibfd.org/Courses/
Amsterdam-Netherlands
CORPORATE INTERNATIONAL TAX
PLANNING
Lexis Nexis
Venue: London, United Kingdom, Venue TBC
Chair: David Campkin (Group Tax Director, BBC)
2/26/2013 - 2/26/2013
http://www.conferencesandtraining.
com/en/Browse-Events/tax-conferences/
CITP/?displayControl=agenda
THE 8TH FATCA AND
WITHHOLDING TAX CONGRESS
Osney Media
Venue: Marriott Regents Park Hotel, 128 King
Henry's Road, London NW3 3ST, England
Chair: Jorge Morley Smith (Head of Tax, Investment
Management Association)
2/27/2013 - 2/28/2013
http://www.withholdingtaxcongress.com/uk/
agenda-2/
18TH ANNUAL INTERNATIONAL
WEALTH TRANSFER PRACTICE
CONFERENCE
International Bar Association
Venue: Claridge's, 49-55 Brook Street Mayfair,
London, United Kingdom, W1K 4HR
Chairs: Leigh-Alexandra Basha (Partner, Holland &
Knight); Helen Darling (Private Client Partner, Macfarlanes);
Christopher Potter (Senior Counsel, Sete)
3/4/2013 - 3/5/2013
http://www.ibanet.org/Article/Detail.
aspx?ArticleUid=1d1eebee-f28c-4496-ac6b-f6cad-
03266da
RUSSIA & CIS - PRIVATE CLIENTS,
3RD ANNUAL FORUM
Academy and Finance
Venue: Dolder Grand Hotel, Kurhausstrasse 65,
Zurich 8032, Switzerland
Chair: Olga Boltenko (Partner, Withers LLP)
3/5/2013 - 3/7/2013
http://www.academyfinance.ch/v2/next_events/
AF455.html
TAX PLANNING FOR SPORTSPEOPLE
AND ENTERTAINERS
TolleyConferences
Venue: London, United Kingdom, TBC
Key speakers: Freddie Huxtable (Private Client and
International Tax Director, RSM Tenon); Charles
Bradbrook (Partner, Deloitte); Robert Hartley;
Adrian Shipwright (Judge of the First Tier and
Deputy Judge of the Upper Tier Tax Tribunals);
Peter Fairchild (Partner, Smith & Williamson Tax
LLP)
3/7/2013 - 3/7/2013
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http://www.conferencesandtraining.com/en/
Browse-Events/tax-conferences/sports-entertainers/
THE INTERNATIONAL TAX
PLANNING ASSOCIATION'S MARCH
MEETING
The International Tax Planning Association
Venue: Hotel Phoenicia, The Mall, Valletta, Island
of Malta FRN 1478, Malta
Chair: Milton Grundy (Gray's Inn Tax Chambers)
3/10/2013 - 3/12/2013
https://www.itpa.org/?page_id=3306
HIGH GROWTH ECONOMIES 2013
IBC
Venue: London, UK, TBA
Chair: Ashley Crossley (Baker & McKenzie)
3/12/2013 - 3/12/2013
http://www.iiribcfinance.com/event/
High-Growth-Economies
INTERNATIONAL TRANSFER
PRICING SUMMIT 2013
IBC
Venue: London, UK, TBA
Key speakers: Peter Steeds (Deputy Director, and
Head of Transfer Pricing & Business International,
HMRC), Dmitry Volvach, (Head of Transfer
Pricing and International Cooperation Directorate,
Federal Tax Service, Russia), Alexey Overchuk
(Deputy Comissioner, Federal Tax Service, Russia),
Annie Devoy (UK Transfer Pricing Leader, PwC),
Glyn Fullelove (Group Tax Director, Informa Plc),
Wendy Nicholls (Head of Transfer Pricing, Grant
Thornton), Anton Hume (Global Head of Transfer
Pricing, BDO), Stig Sollund (Director General,
Tax Law Department, Norweigan Ministry of Finance),
Joseph Andrus (Head of Transfer Pricing
Unit, OECD), Michael Lennard (Chief of International
Tax Cooperation in the Financing for Development
Office, United Nations)
3/12/2013 - 3/13/2013
http://www.iiribcfinance.com/appdata/downloads/International-Transfer-Pricing-Summit/
FKW52469_TP_Summit_2013_Draft_Programme.pdf
DECLARED SPANISH CLIENTS
Academy and Finance
Venue: Hotel Beau Rivage, Quai du Mont-Blanc
13, 1201 Geneva, Switzerland
Key Speakers: Manuel Santa Maria (Garrigues), Pablo
Alarcon Espinosa (Alarcon-Espinosa Abogados),
Josefina Garcia Pedroviejo (Uría Menéndez Abogados),
Matias Jimenez-Brito (Jiménez-Brito Abogados
& Asesores Tributarios), Eduardo Martínez-Matosas
Ruiz de Alda (Gomez Acebo & Pombo)
3/13/2013 - 3/13/2013
http://academyfinance.ch/v2/next_events/AF448.html
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FOUNDATIONS: BALANCING THE
RISKS AND REWARDS
STEP Jersey
Venue: Pomme d'Or Hotel, Liberation Square, St
Helier, Jersey
Key Speakers: Michael Cushing (Partner, Appleby),
and Naomi Rive (Partner, Appleby)
3/14/2013 - 3/14/2013
http://www.step.org/events.aspx?eventId=a0XC00
00009Qg11MAC
INTAX WEALTH MANAGEMENT
SUMMIT
INTAX Group
Venue: Westin Dragonara Hotel, Dragonara Road,
St.Julian's, STJ 3134, Malta
Key Speaker: Erich Baier (Bilanz-Data), others
TBA.
3/18/2013 - 3/19/2013
http://www.intax-wealth.com/
INTERNATIONAL PRIVATE CLIENT
SECTION CONFERENCE
The Law Society
Venue: The Law Society, 113 Chancery Lane, London,
United Kingdom
Key Speakers: TBA
3/19/2013 - 3/19/2013
http://services.lawsociety.org.uk/events/
node/56891
THE 7TH COLLECTIVE INVESTMENT
SCHEMES TAXATION CONFERENCE
InfoLine
Venue: London, UK, TBA
Chair: Kevin Charlton (Head of Tax Advisory and
Control, UBS Global Asset Management)
3/20/2013 - 3/20/2013
http://www.infoline.org.uk/appdata/downloads/
Collective-Investment-Securities-Tax-Conference/
FKM62542_Latest_Agenda_21.12.12.pdf
THE 5TH ANNUAL CONFERENCE ON
INVESTMENT TRUST ACCOUNTING,
TAXATION AND REGULATION
InfoLine
Venue: London, UK, TBA
Chair: John Stevens (Finance Director & SORP
Project Co-Coordinator, Association of Investment
Companies)
3/21/2013 - 3/21/2013
http://www.infoline.org.uk/appdata/downloads/
Investment-Trust-Accounting-Taxation-Regulation/FKM62543_Latest_Agenda_20.12.12.pdf
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12TH ANNUAL TAX PLANNING
STRATEGIES
American Bar Association Section of Taxation
Venue: Hofburg Congress Center, Heldenplatz
1010 Vienna, Austria
Co-chairs: Elinore J. Richardson (Institute for International
Taxation, Inc), Joan C. Arnold (Pepper
Hamilton LLP), Dirk J.J. Suringa (Covington
& Burling LLP), Christian Wimpissinger (Binder
Grosswang), Gerald Gahleitner (Leitner Leitner),
Clemens Philipp Schindler (Wolf Theiss)
3/29/2013 - 3/30/2013
http://meetings.abanet.org/meeting/tax/LON-
DON13/media/Vienna2012_program_FINAL.pdf
INTERNATIONAL TAX ASPECTS OF
MERGERS, ACQUISITIONS AND
CORPORATE FINANCE
IBFD
Venue: Amsterdam, The Netherlands, TBA
Key Speakers: Rens Bondrager (Allen & Overy
LLP), Piet Boonstra (Van Campen Liem), Marcello
Distaso (Van Campen Liem), Napoleão Dagnese
(Head of International Tax, Oerlikon Group), Paulus
Merks (DLA Piper LLP), Roberto Penati (Head
of the Fiscal Affairs Department, Maire Tecnimont),
Alfonso Rivolta (Director, UBS AG), Fabiola Rossi
(Bonelli Erede Pappalardo), Jan-Pieter van Niekerk
(KPMG)
4/10/2013 - 4/12/2013
http://www.ibfd.org/Courses/International-Tax-Aspects-Mergers-Acquisitions-and-Corporate-Finance
INTERNATIONAL TRUSTS AND
PRIVATE CLIENT FORUM, GUERNSEY
IBC and Mourant Ozannes
Venue: Old Government House Hotel, Saint Ann's
Place Saint Peter Port GY1 2NU, Guernsey
Chair: Keith Corbin (Nerine Trust Company)
4/16/2013 - 4/16/2013
http://www.iiribcfinance.com/download/send-file/
iddownload/8892
TAX AND ACCOUNTING FOR LEASES
Informa
Venue: Central London, UK, TBA
Chair: David Maxwell (Director, Classic Technology
and Member of the IASB/FASB Working Group
on Leasing)
4/17/2013 - 4/17/2013
http://www.iiribcfinance.com/event/
accounting-leases-asset-finance-conference
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IN THE COURTS
ISSUE 12 | JANUARY 31, 2013
ASIA PACIFIC
India
Th e Supreme Court of India ruled that the lessor
of vehicles for hire remains the legal owner and is
therefore entitled to claim tax depreciation. Additionally,
the vehicles are being used by the lessor for
business purposes which provides a higher rate of
depreciation. The Revenue failed to argue that the
lessee is registered as the owner under the Motor
Vehicles Act, because ownership would revert back
to the lessor upon expiry of the lease.
Th e judgment was delivered on January 14, 2013.
http://judis.nic.in/supremecourt/imgs.aspx
A listing of key international tax cases in the
last 30 days
Supreme Court: I.C.D.S. Ltd vs. CIT
WESTERN EUROPE
Denmark
The European Court of Justice disallowed the appeal
by rejecting all three of the appellant's contentions
with the judgment of the EU General Court (Case
T-30/03). The appellant failed to argue that the length
of the Commission's preliminary examination of Denmark's
tax scheme was unjustified, or that it was not
carried out under the principle of good administration.
Th e judgment was delivered on January 24, 2013.
European Court of Justice: Falles Fagligt Forbund
(3F)v. European Commission (C-646/11 P)
http://curia.europa.eu/juris/document/document.
jsf?text=&docid=132764&pageIndex=0&docla
ng=EN&mode=lst&dir=&occ=first&part=1&c
id=2497619
Netherlands
Th e European Court of Justice ruled that the VAT
Directive does not allow exemption from VAT for
the supply of land that had not been built upon
after the previous building had been demolished,
despite the intention of the parties to build upon
the land. Whether the party receiving the land
has such an intention is a matter for the national
courts to decide.
Th e judgment was delivered on January 17, 2013.
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http://curia.europa.eu/juris/document/document.jsf
?text=&docid=132561&pageIndex=0&doclang=EN
&mode=lst&dir=&occ=first&part=1&cid=1208192
http://curia.europa.eu/juris/document/document.jsf?t
ext=&docid=132763&pageIndex=0&doclang=EN&
mode=lst&dir=&occ=first&part=1&cid=2494990
Poland
The European Court of Justice ruled that the leasing
of property and the providing of insurance on
such property are independent supplies and subject
to VAT separately.
The Court also ruled that insurance on the leased
property arranged by the lessor and re-invoiced to
the lessee is an insurance transaction and therefore
exempt from VAT.
The judgment was delivered on January 17, 2013.
http://curia.europa.eu/juris/document/document.
jsf?text=&docid=132522&pageIndex=0&docla
ng=EN&mode=lst&dir=&occ=first&part=1&c
id=1218160
European Court of Justice: Frucona Kosice v.
European Commission (C-73/11 P)
Spain
The European Court of Justice decided that Spain is providing
a reduced VAT rate on a range of medical goods
and services that is incompatible with EU legislation.
Th e judgment was delivered on January 17, 2013.
http://curia.europa.eu/juris/document/document.
jsf?text=&docid=132525&pageIndex=0&docla
ng=EN&mode=lst&dir=&occ=first&part=1&c
id=1216266
European Court of Justice: Commission v.
Spain (C-360/11)
European Court of Justice: BGZ Leasing v.
Director of Warsaw Tax Chamber (C-224/11)
Slovakia
The European Court of Justice accepted the appeal
and sent the case back to the EU General Court for
it to consider the pleas of the appellant on which it
did not rule (Case T-11/07).
The Court of Justice based its decision on the failure
of the General Court to recognise the need to include
the duration of the bankruptcy procedure in the assessment
by the Commission of the private creditor test.
The judgment was delivered on January 24, 2013.
United Kingdom
The Supreme Court ruled that legal advice privilege
cannot be extended to advice received from an
accountant regarding a tax avoidance scheme. The
Lords agreed that whether such a privilege should
be made available to a profession other than lawyer
is not a matter for a court to decide.
Th e judgment was delivered on January 23, 2013.
http://www.supremecourt.gov.uk/decided-cases/
docs/UKSC_2010_0215_Judgment.pdf
Supreme Court: Prudential plc v. Special
Commissioner of Income Tax (2013 UKSC 1)
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THE
ESTER'S COLUMN
ISSUE 12 | JANUARY 31, 2013
Dateline January 31, 2013
As an ex-conference organizer myself, I can only eat
my heart out at the franchise that Klaus Schwab has
constructed on a snowy Swiss mountain; but now,
as a humble journalist, I have to thank him for his
annual newsfest. This year, the best moment may
have been David Cameron's carefully calculated
challenge to the EU. Let's leave aside the ritual attack
on corporate tax avoidance; by now it's about
equivalent to saying grace before a meal, and about
as effective, some might think. More important is
that he has been brave enough to throw down the
gauntlet to the mad dogs of Brussels , who are systematically
destroying Europe' competitive advantage,
and need to be stopped. Of course everyone
says that he is doing it for selfish political purposes,
but it can happen that politics, national advantage
and economic sanity may inhabit the same place at
the same time; and that's the role that the UK can
play in the next five years, if Cameron sticks to his
last. Naturally the Continentals are throwing every
kind of negative propaganda at him; but they more
they do it, the more I think he must be right. After
50 years of corporatist, social partner gibberish, the
EU has become hidebound, trapped in its own sententious
verbiage. So, go for it, David!
If David Cameron and his euro-skeptic legions
want a semi-detached UK, the terrible twins Angela
Merkel and Francois Hollande want to complete
the roofing of their half-finished euro-house. Again,
we'll have to shut our ears to the twaddle about
transaction taxes and corporate tax unification and
focus just on the fiscal charter, which will submit EU
members to some sort of budgetary harmonization
under the control of Brussels and Dragon Draghi.
You may be surprised to hear this coming from me:
how can I support Cameron's dash for freedom at
the same time as euro-unification? Because Europe
has to go one way or the other: a Brexit accompanied
by a Grexit and a few other exits would lead
to an outcome of a sort - a Europe of competing
nation states, but it is against the grain of history. A
better outcome would be a united Europe with one
currency and a single economic budgetary policy,
on the model (OK, not quite) of the USA, which
could then live or more likely die in competition
with other major blocs. But that's not going to be
the result: instead, we will have something like a
re-creation of EFTA led by the UK, with a unitary
euro-zone, which may have been forced to become
more competitive by the UK's antics. That's how I
can have my cake and eat it!
Europe's systemic lack of competitive advantage
is revealing itself, day-by-day, in its terrible and
worsening unemployment figures, while the US
demonstrates some underlying resilience during
difficult times. There may even be an outbreak of
bipartisanship in the Congress, with the passage
by the House and its rapid acceptance by the Senate
and the President of a temporizing bill to push
off the next section of the fiscal cliff . It is tempting
to equate the relative health of the US economy
to its lower level of public spending and taxation;
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ut this may be an illusory equation. It is horribly
difficult to compare such figures across borders.
Apparently, US public spending is about 5% less
than the UK's and 10% less than higher-spending
EU economies (percentages of GDP); and taxation
provides a lower proportion of spending, hence the
worries over the debt cap. But there are so many
other factors: the regulatory environment; the level
of education; the "entitlement" canvas. All one can
say with some certitude, at least, all I can say, is that
less government spending is better than more, and
less taxation is better than more. That puts me in
the tea-pot, probably!
I can't believe that the Greek government is behaving
so badly over its new gaming laws and the state
gambling monopoly, OPAP. It's as if the minister
responsible and the whole state gambling apparatus
are inhabiting a parallel universe with no communication
passing between them and the rest of the
administration. They are flagrantly breaking settled
EU law despite repeated complaints from Brussels
and the European gaming industry. Just this last
week the European Court of Justice ruled against
the regime, even as it was before the latest law was
passed, which actually makes the situation worse.
I can only imagine that the government is so fixated
on spending the money foolishly donated to it
by the troika that it has no time for anything else.
What else can explain it?
Bermuda is becoming the latest in a line of "offshore"
island jurisdictions to fall foul of the economic
downturn , although it's not clear yet whether
the solution will be more taxes or less government,
nor whether the UK will so to speak stick its oar in,
as it has done in the case of the Cayman Islands and
Turks and Caicos. At least there has been no suggestion
of skullduggery; it's always a problem in these
small places that government can be captured by
undesirable elements. It's their smallness that lies
at the root of all their problems, from one perspective,
although it's also their quasi-invisibility that
allowed them to flourish for decades as the home
for foot-loose money on the run from the tax man.
But then they got noticed, big-time, and they have
had to grow up quickly, learning how to be respectable
world citizens. And that's not easy, when you're
small. So now we have the spectacle of a number,
let's say a dozen, of mini-states with vast financial
sectors, tiny populations and large, cumbersome
bureaucracies. A linked problem is that they are
mostly ex-colonies, with racially mixed populations
which have taken over their own governance without,
at first, really knowing how to do it. All of this
is very expensive for them, which was just about
bearable in the good times, but has now brought
one after another of the islands to their knees. Really
it's illogical for these over-grown governmental
and regulatory apparatuses to exist in such numbers;
they ought to merge, to make more sense of it.
How about Bermuda and the BVI? There would be
a power-house. Of course that's not going to happen;
CARICOM shows you how it goes when a
group of such jurisdictions tries to create a bigger
unit: 1 + 1 + 1 + 1 + 1 + 1 doesn't = 6, it equals 7.
Or however many it is, plus one extra government,
just as in Europe. Bermudians are much too proud
to consider such a thing, anyway.
Th e Jester
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