721.8 kB - Poledna | Boss | Kurer

GLOBAL TAX WEEKLYa closer lookISSUE 30 | JUNE 6, 2013SUBJECTS TRANSFER PRICING INTELLECTUAL PROPERTY VAT, GST AND SALES TAX CORPORATETAXATION INDIVIDUAL TAXATION REAL ESTATE AND PROPERTY TAXES INTERNATIONAL FISCALGOVERNANCE BUDGETS COMPLIANCE OFFSHORESECTORS MANUFACTURING RETAIL/WHOLESALE INSURANCE BANKS/FINANCIAL INSTITUTIONSRESTAURANTS/FOOD SERVICE CONSTRUCTION AEROSPACE ENERGY AUTOMOTIVE MINING ANDMINERALS ENTERTAINMENT AND MEDIA OIL AND GASCOUNTRIES AND REGIONS EUROPE AUSTRIA BELGIUM BULGARIA CYPRUS CZECH REPUBLICDENMARK ESTONIA FINLAND FRANCE GERMANY GREECEHUNGARY IRELAND ITALY LATVIA LITHUANIA LUXEMBOURG MALTA NETHERLANDS POLANDPORTUGAL ROMANIA SLOVAKIA SLOVENIA SPAIN SWEDEN SWITZERLAND UNITED KINGDOMEMERGING MARKETS ARGENTINA BRAZIL CHILE CHINA INDIA ISRAEL MEXICO RUSSIA SOUTHAFRICA SOUTH KOREA TAIWAN VIETNAM CENTRAL AND EASTERN EUROPE ARMENIA AZERBAIJANBOSNIA CROATIA FAROE ISLANDS GEORGIA KAZAKHSTAN MONTENEGRO NORWAY SERBIA TURKEYUKRAINE UZBEKISTAN ASIA-PAC AUSTRALIA BANGLADESH BRUNEI HONG KONG INDONESIAJAPAN MALAYSIA NEW ZEALAND PAKISTAN PHILIPPINES SINGAPORE THAILAND AMERICAS BOLIVIACANADA COLOMBIA COSTA RICA ECUADOR EL SALVADOR GUATEMALA PANAMA PERU PUERTO RICOURUGUAY UNITED STATES VENEZUELA MIDDLE EAST ALGERIA BAHRAIN BOTSWANA DUBAI EGYPTETHIOPIA EQUATORIAL GUINEA IRAQ KUWAIT MOROCCO NIGERIA OMAN QATAR SAUDI ARABIATUNISIA LOW-TAX JURISDICTIONS ANDORRA ARUBA BAHAMAS BARBADOS BELIZE BERMUDABRITISH VIRGIN ISLANDS CAYMAN ISLANDS COOK ISLANDS CURACAO GIBRALTAR GUERNSEY ISLE OFMAN JERSEY LABUAN LIECHTENSTEIN MAURITIUS MONACO TURKS AND CAICOS ISLANDS VANUATU

GLOBAL TAX WEEKLYa closer lookGlobal Tax Weekly – A Closer LookUsing the unrivalled worldwide multi-lingual researchcapabilities of leading law and tax publisher WoltersKluwer and its new acquisition BSI (The LowtaxNetwork), CCH publishes Global Tax Weekly –– ACloser Look (GTW) as an indispensable up-to-theminuteguide to today's shifting tax landscape for alltax practitioners and international finance executives.Topicality, thoroughness and relevance are ourwatchwords: BSI's network of expert local researcherscovers 130 countries and provides input to a US/UKteam of editors outputting 100 tax news stories aweek. GTW highlights 20 of these stories each weekunder a series of useful headings, including industrysectors (e.g. manufacturing), subjects (e.g. transferpricing) and regions (e.g. asia-pacific).Alongside the news analyses are a wealthof feature articles each week covering keycurrent topics in depth, written by a team ofsenior international tax and legal experts andsupplemented by commentative topical newsanalyses. Supporting features include a round-upof tax treaty developments, a report on importantnew judgments, a calendar of upcoming taxconferences, and “The Jester's Column,” a lightheartedbut merciless commentary on the week'stax events.Read Global Tax Weekly –– A Closer Look inprintable PDF form, on your iPad or online throughIntelliconnect, and you'll be a step ahead of yourworld on Monday morning!

GLOBAL TAX WEEKLYa closer lookISSUE 30 | JUNE 6, 2013CONTENTSFEATURED ARTICLESSubstance Requirements Of A Foreign PermanentEstablishment Of A Swiss Finance CompanyWalter H. Boss and Stefanie Monge,Poledna Boss Kurer AG, Zurich 5Trade And Economic Sanctions:Constantly Shifting Goal PostsAndrea Hamilton and David Levine,McDermott Will & Emery 9FATCA: An UpdateMichael G Bell, Editor-In-Chief,Global Tax Weekly 11Topical News Briefing: Dump AwayGlobal Tax Weekly Editorial Team 22IC-DISC: Still Viable ForFlow-Through EntitiesGeorge Koutouras, Partner andLindsey Moore, Manager, Moss Adams LLP 24Current Transfer Pricing DevelopmentsMembers of Duff & Phelps LLC 28Topical News Briefing:Italy Between A Rock And A Hard PlaceGlobal Tax Weekly Editorial Team 34Payments To Related Foreign Persons:Beware Of State Addback ProvisionsMichael S. Schadewald 35Recurring Issues In African M & ANick Aziz and Tara Walsh,McDermott Will & Emery 50NEWS ROUND-UPInternational Trade 54China, Germany Vow To Negotiate Away Trade DisputesEU, China Hold Meeting On Trade DisputesCountry Focus: Italy 61Italian Small Businesses Fearful Of VAT Rate HikeItaly Exits From EU Excessive Deficit ProcedureChinese Trade Disputes The Focus Of WTO MeetingHong Kong To Join International ServicesTrade Agreement TalksCaribbean Prepares For WTO Trade Policy ReviewChina Studying Possibility Of Joining TPP

Real Estate and Property Taxes 63Ireland’s Revenue Chair Offers Property Tax UpdateFrench Property Tax Rules Under FireItaly To Renew Home Tax CreditsScots Ponder Amendments To Property Sales TaxEnvironmental Taxes 69European Commission RecommendsCar Tax For EstoniaBrussels Challenges British Yacht Fuel Tax BreaksSwiss Federal Council Rejects Energy Tax InitiativeFTT 67Centre For Policy Studies Raises Concerns Over FTTFTT Scale-Back On The Cards?SMEs 72Spain’s Fiscal Package Fosters ‘Entrepreneurial Culture’Singapore Plugs Benefits For SMEs Of e-FiledSimplified Tax FormIRS Facilitates Extension Of US Empowerment ZonesTAX TREATY ROUND-UP 75CONFERENCE CALENDAR 77IN THE COURTS 89THE JESTER'S COLUMN 98The unacceptable face of tax journalismFor article guidelines and submissions, contact GTW_Submissions@wolterskluwer.com

FEATURED ARTICLESISSUE 30 | JUNE 6, 2013Substance Requirements Of AForeign Permanent EstablishmentOf A Swiss Finance Companyby Walter H. Boss and Stefanie Monge,Poledna Boss Kurer AG, ZurichI. IntroductionOn October 5, 2012 the Swiss Federal Supreme Courtdecided a leading case in the area of international taxallocation with respect to federal corporate incometax. 1 The issue was whether a foreign permanent establishment("PE") of a Swiss finance company witha rather lean infrastructure qualified as a PE underSwiss domestic tax law if compared to the figuresshown in the P&L statements of the Swiss company.One should note that the Swiss company had obtaineda ruling from the competent cantonal taxadministration in which it had been agreed that theprofits attributed to the foreign PE would be exemptfrom Swiss taxation.II. Factual BackgroundThe company at issue, hereinafter referred to as XAG, was a Swiss company domiciled in the cantonof Zug, belonging to a Swiss group of companies.The group holding company, of which X AG was awholly owned subsidiary, was also domiciled in thecanton of Zug. The statutory purpose of X AG wasthe financing of the group. For that purpose X AGmaintained a PE on the Cayman Islands with anoffice and four part-time employees.On August 10, 1999 the tax administration of thecanton of Zug approved a ruling request submittedby the parent company of X AG. Therein it wasagreed that in case the group financing would bedone through a foreign PE of a Swiss finance groupcompany, the profits attributed to the foreign PEwould be exempt from taxation in Switzerland.Up to the fiscal year 2004 the Zug tax administrationallocated the net financial income of X AG resultingfrom granting inter-company loans to the CaymanIslands PE, which in essence means that the net financialincome of X AG was exempt from taxationin Switzerland. In the course of 2004 the Federal TaxAdministration ("FTA") – the supervisory authorityof the cantonal tax administrations with respect tofederal income tax – instructed the Zug tax administrationto investigate concerning the existence of aPE on the Cayman Islands. In early 2005 the Zugtax administration informed X AG that the FTA wasof the view that its business activity on the CaymanIslands did not meet the requirements of a PE. Consequently,as of January 1, 2005 the Zug tax administrationrefused to exempt the net financial incomeof X AG from federal corporate income tax.5

X AG appealed against the tax assessments regardingthe federal corporate income tax for the fiscalyears 2005 and 2006 issued by the Zug tax administration.The appeals commission of the taxadministration approved the appeal and exemptedthe net financial income of X AG for the fiscal years2005 and 2006 from federal corporate income tax.The FTA, however, appealed against the decisionof the appeal commissions in favor of X AG withthe Swiss Federal Supreme Court.III. Findings Of The SwissFederal Supreme CourtTh e Federal Supreme Court considered that dueto the lack of an applicable double taxation treatybetween Switzerland and the Cayman Islandsthe matter had to be determined on the basis ofSwiss domestic tax law, respectively the FederalDirect Tax Act ("FDTA"), whether X AG's CaymanIslands PE did meet the requirements of aPE. The court determined that the legal basis forthe question at issue was article 51, paragraph 2of the FDTA. In the court's view the definitionset forth in said article applies to both the SwissPE of a foreign company and the foreign PE of aSwiss company.The afore-mentioned article defines a PE as a fixedplace of business through which a company partiallyor wholly carries on its business activity. The factthat X AG's Cayman Islands PE was a fixed placeof business had not been questioned by the FTA.Hence, the issue at hand was whether X AG partiallycarried on its business activity in said fixed placeof business as required by article 51, paragraph 2 ofthe FDTA in order for there to be a PE. This hadbeen denied by the FTA.In the court's opinion article 51, paragraph 2 ofthe FDTA does not set any requirements with respectto the quality or quantity of the businessactivity carried out in the fixed place of business.As a rule, any and all business activities of a companypermitted under its statutory purpose fallwithin the scope of a "business activity partiallyor wholly carried on in the fixed place of business,"irrespective of their importance. The PEdefinition of article 51, paragraph 2 of the FDTAis therefore wider than the PE definition of theinter-cantonal case law. However, when interpretingthe vague concept of a "business activitypartially or wholly carried on in the fixed place ofbusiness," one must first determine the functionof this unilateral rule of Swiss domestic tax law.In so far as a Swiss PE of a foreign company isconcerned, the unilateral rule determines to whatextent Switzerland may subject the net profit ofthe foreign company to Swiss taxation. In the reversecase of a foreign PE of a Swiss company theunilateral rule determines to what extent the netprofit of a Swiss company must be exempt fromSwiss taxation. Hence, depending on the factualsituation, the unilateral rule of article 51, paragraph2 of the FDTA pursues a different objective.In the court's view unilateral rules that aimat avoiding double taxation are to be interpretedin favor of the Swiss taxing power. In case oftoo extensive a Swiss authority to tax, the double6

taxation treaties concluded by Switzerland functionas a correcting tool. With regard to the PEdefinition of article 51, paragraph 2 of the FDTAthis means that the requirements of a foreign PEof a Swiss company may be somewhat stricterthan the requirements of Swiss PE of a foreigncompany. Therefore, in cases where it is questionablewhether the foreign place of business qualifiesas a PE according to article 51, paragraph2 of the FDTA, the decision should be taken infavor of the Swiss authority's power to tax, i.e.the foreign place of business shall not be recognizedas a PE according to article 51, paragraph 2of the FDTA. An imminent double taxation canbe avoided by means of a double taxation treaty,provided that one applies.The court was of the view that the lean infrastructureof the Cayman Islands PE – four parttimeemployees with a 20 percent workload eachand an annual salary between USD10,000 and20,000 each – was in clear contrast to the figuresshown in the 2005 and 2006 P&L statementsof X AG. The balance sheet total of XAG as per end 2005 amounted to CHF365 millionand as per end 2006 to CHF520 million.The loans granted to Swiss affiliated companiesamounted to CHF497 million as per end 2005and to CHF647 million as per end 2006. Theincome of X AG consisting solely of interestincome amounted to CHF16 million in 2005and CHF18 million in 2006. From the 2005and 2006 P&L statements of X AG is was clearthat the business activity of X AG consisted ingranting loans to Swiss affiliated companies; itwas, however, not clear to the court what theadded value of the Cayman Islands PE to X AG'sbusiness activity was. The court therefore ruledthat the Cayman Islands PE lacked the necessarysubstance and did hence not qualify as a PE accordingto article 51, paragraph 2 of the FDTA.Finally, X AG claimed that it was entitled to relyon the ruling of August 10, 1999, in which theZug tax administration had agreed that in case thegroup financing would be done through a foreignPE of a Swiss finance group company, the profitsattributed to the foreign PE would be exempt fromtaxation in Switzerland. X AG argued that the retroactivedenial of the Zug tax administration toexempt the 2005 and 2006 net profits from federalcorporate income tax without granting X AG anadequate transitional period violated its protectionof legitimate expectations. The court, however, didnot rule on the violation of X AG's protection oflegitimate expectations. Because the court of lowerinstance had upheld the existence of a foreign PEunder Swiss domestic tax law, it had not addressedthis issue. Therefore, the court remitted the caseto the court of lower instance in order to decideon the ruling the issue. However, the court statedthat in case the FTA had been involved by theZug tax administration in the negotiation processof the ruling of August 10, 1999 – which basedon the documentation submitted to the court didnot seem to be the case – the retroactive denialof the Zug tax administration to exempt the 2005and 2006 net profits 2005 from federal corporate7

income tax, would have violated X AG's protectionto legitimate expectations under the rulingconcluded with the Zug tax administration.IV. Final CommentsBased on the above described decision of the FederalSupreme Court it is clear that a foreign PE ofa Swiss company with a lean infrastructure whichis in clear contrast to the figures shown in the P&Lstatements of the Swiss company, lacks the necessarysubstance in order to qualify as a PE underSwiss domestic tax law. In the absence of a doubletaxation treaty between Switzerland and the foreignjurisdiction, the entire net income of the Swisscompany is subject to Swiss taxation.Additionally, one should note that in order toavoid a retroactive denial of a ruling concludedwith a cantonal tax administration with respectto federal corporate income tax it appears to beimportant that the FTA is involved in the rulingnegotiation process. From the above outlinedruling of the Federal Supreme Court it seems thatthe involvement of the FTA in the ruling processwith the cantonal tax administration will grantthe taxpayer the protection of legitimate expectationsunder the ruling negotiated with the cantonaltax administration.E NDNOTE1BGE 2C_708/2011.8

FEATURED ARTICLESISSUE 30 | JUNE 6, 2013Trade And Economic Sanctions:Constantly Shifting Goal Postsby Andrea Hamilton and David Levine,McDermott Will & EmeryLong used by governments to punish rogue countries,regimes, entities and individuals, trade andeconomic sanctions impact an ever-wideningrange of goods, technology and services. Recentdevelopments in Iran, Syria and Libya, for example,resulted in far-reaching sanctions by Australia,Canada, the European Union and its 27Member States, the United Nations, the UnitedStates and others. The complexity of sanctionsand the speed with which governments implementthem to address rapidly changing politicalsituations create serious compliance challenges.Companies are therefore well advised to implementcompliance from management through alllevels of sales, logistics and finance.The stakes are extremely high because compliancefailures – even unintentional ones – can result inthe imposition of substantial fines, debarment fromgovernment contracts, damage to public reputationand even imprisonment. Recent penalties illustratethe risks and the high governmental enforcementpriority for trade sanctions. These include fines ofup to USD536m imposed by US and UK regulatorsagainst financial institutions and major businesses.Individuals may also be subject to prisonsentences of up to 10 years in the United States andthe United Kingdom.Anyone involved in cross-border transactions thereforeneeds to determine if their conduct and that ofpersons acting on their behalf is regulated by tradesanctions. At a minimum, businesses must understand:which countries, regimes and individuals aretargeted by trade sanctions; who is obliged to comply;which transactions are prohibited or restricted;and which authorizations may be available or requiredfor any restricted action.Businesses should also consider the long reach ofUS and EU sanctions. US sanctions generally applyto "US persons" wherever they are located inthe world and to anyone located in the UnitedStates. Similarly, EU sanctions apply to "EU persons"wherever they are located in the world and toanyone located in the European Union. Adding tothe breadth of coverage, US rules prohibit "facilitation",which means neither persons nor companiessubject to the rules may support a transactionundertaken by another party, including a foreignaffiliate, from which a US person would be prohibitedfrom engaging in directly. EU rules likewiseprohibit covered persons from infringing sanctionsrules indirectly.9

Companies should take appropriate steps to minimizethe risk of infringing trade sanctions by introducingthe following safeguards:Require due diligence in connection with alltransactions. This should involve at least thescreening of all counterparties against theeverchanging sanctions lists that identify thecountries, regimes, entities and persons blacklisted.Trade sanctions can apply to goods,technology licensing and the provision of technicalassistance, and to ancillary services such asfinancing, insurance and transport.Establish internal procedures to ensure promptlegal review in the event a transaction with asanctioned party is identified.Check that the due diligence checklist for mergeror acquisition transactions includes an assessmentfor compliance with trade sanctions.The Authors:David Levine is a partner based in the Firm's Washington,DC, office, and a member of the InternationalTrade Group. He practices before internationaltrade organizations, federal agencies andcourts regarding international trade and relatedregulatory matters. David can be contacted on +1202 756 8153 or at dlevine@mwe.com .Andrea Hamilton is a partner based in the Firm'sBrussels office and a member of the Antitrust &Competition Practice Group. She has representedclients before the European Commission and theEuropean Parliament, as well as the US FederalTrade Commission, the US Department of Justiceand other US authorities. Andrea can be contactedon +32 2 282 35 15 or at ahamilton@mwe.com .10

FEATURED ARTICLESISSUE 30 | JUNE 6, 2013FATCA: An Updateby Michael G Bell, Editor-In-Chief,Global Tax WeeklyThe Rules And The TimingUnder FATCA, US taxpayers with specified foreignfinancial assets that exceed certain thresholdsmust report those assets to the IRS. This reportingwill be made on Form 8938, which taxpayersattach to their federal income tax return, startingthis tax filing season.Foreign financial institutions (FFIs) must enter intoagreements with the IRS and Treasury to providedetails of financial accounts held by US taxpayers,or by overseas entities in which they hold a substantialownership interest. Failure to disclose such informationwill result in a requirement to withhold30 percent tax on US-source income.In order to be compliant with the legislation, FFIsmust have registered with the IRS before the endof 2013, and the reporting requirement will commencein 2015 in respect of the year 2014 or in2016 in respect of the year 2015, depending on thelevel of assets in individual accounts.FATCA's Time-LineMarch 2010: the Foreign Account Tax ComplianceAct was signed into law by President Obama as partof the Hiring Incentives to Restore Employment Act.February 2012: Treasury and the IRS issued proposedregulations for FATCA implementationJuly 2012: Treasury released a Model IntergovernmentalAgreement for FATCA implementationJanuary 2013: Treasury and IRS issued final regulationsfor FATCA implementationJuly 2013: FFIs may begin to use an on-line portalfor FATCA registrationOctober 2013: Treasury will begin issuance of globalintermediary identification numbers (GIIN) toFFIs which have registeredDecember 2013: Treasury will issue the first list ofregistered FFIsTreasury states that FFIs must have registered byOctober 2013 in order to be compliant with theJanuary 1, 2014, start date; it is not clear how thisreconciles to the statement made elsewhere thatFFIs must have registered "by" the end of 2013.11

The Inter-Governmental Agreements (IGAs)From quite early on, it became clear that the bureaucraticload on FFIs would be such that many ofthem would simply refuse to have American clients,which wasn't exactly what the Treasury had in mindwhen it promoted FATCA; so the idea emerged ofhaving agreements between the Treasury and foreigngovernments which would allow those governmentsto fulfill the requirements of FATCA by collectingthe necessary data from their own FFIs and sendingit in bulk to the IRS. Many governments turnedout to be quite happy to collect extra informationfor their own benefit as part of "helping" their FFIs,and the idea caught on rapidly, even leading somegovernments to impose their own "mini-FATCAS"on their FFIs and in the case of the UK, on its "offshore"dependent territories (see below).in respect of nationals of the partner country. Thismay come as an unwelcome surprise to US financialinstitutions, and some of the domestic difficultiesraised by FATCA are explored below.Both 1A and 1B straightforwardly place the partnergovernment in the shoes of FFIs in the countryconcerned; but they are not completely standardized.From the beginning, the templates allowedfor a degree of customization, and in fact there hasbeen quite a lot of that in the IGAs which have sofar been signed.The Treasury says it is negotiating IGAs with morethan 75 countries, of which it has listed about 50,but so far there seem to be just eight signed IGAs,of which just one is Model 2 (with Switzerland).There are now three types of IGA:1Model 1A ; Model 1B 2 ; and Model 2 3Model 2 merely agrees that the country concernedwill ensure that its laws and regulations permit itsFFIs to perform the reporting procedures laid outunder FATCA. In the case of Switzerland, for instance,this would not have been the case withoutchanges, which are being made.Model 1 implements FATCA as drafted, but itcomes in two forms: 1A, which is reciprocal, and1B which is not."Reciprocal" means that US FFIs will have to mirrorthe requirements of FATCA in the reverse directionAt the end of May, after signing its IGA with Germany,the Treasury said that in future it would limitthe customizable aspects of IGAs, given that the finalregulations issued earlier in the year were muchmore prescriptive than earlier texts.The Foreign Response To FATCAAt a guess, the Treasury must be quite pleased thatforeign governments have keeled over and rushedto enter IGAs, when they might have been expectedto rear up and cry "extra-territorial legislation."The reason, surely, is that any tax collector whocan say: "I have to ask you for information aboutyour clients' assets because the mighty USA says Imust," is surely going to grab at the chance. It's ashort step from there to imposing a kind of localFATCA on your own FFIs, or in the case of the12

UK, its offshore dependencies, and that is exactlywhat has happened.Th e United KingdomThe UK is in fact in a good position to make use ofa FATCA-like mechanism to forward the cause ofinternational tax transparency: as a former colonialpower, it retains some degree of control over manyfar flung dependent territories which also happento be classified as tax havens. Indeed the UK Governmenthas confirmed its intention to secure anumber of additional tax information sharing arrangementsthis year with its offshore dependencieswhich will compel foreign financial institutions(many of which are based in the UK's overseas territories)to share information that could lead to thedisclosure of information on untaxed assets.The Isle of Man was the first to engage with the UnitedKingdom in the development of the maiden "sonof FATCA" deal, released on February 19, 2013. Inconsidering whether to follow the Isle of Man's lead,the Channel Islands (Guernsey and Jersey) voicedconcern from the outset that the UK deal could leadto an uneven playing field if the UK failed to achieveworldwide adoption. Subsequently however, the territoriescommitted themselves to similar deals withthe UK in March, also in exchange for concessionarypenalty regimes for taxpayers that voluntarily settleirregularities, revised double tax agreements, and analternative reporting regime for UK non doms.According to the UK blueprint to tackle offshoreevasion – included alongside its April budget– the Government projects that the agreementswith the three Crown Dependencies will raisearound GBP1bn in new revenues over the nextfive years. The document says the UK will draftadditional "measures to encourage those with hiddenfunds to come forward" and "will continueto seek agreements with other jurisdictions, includingthe Overseas Territories, building on theagreements reached with Liechtenstein, the Isle ofMan, Guernsey and Jersey."In fact the agreements the UK is making with its dependenciescan be seen just as an extension of the EUSavings Tax Directive. Since 2005, offshore territorieshave been required to levy and remit a withholdingtax on income received by UK taxpayers on assetsheld offshore, or share information on an automaticbasis. Four territories (Aruba, Anguilla, the CaymanIslands and Montserrat) have exchanged informationautomatically with EU member states since July1, 2005, while the Isle of Man and Guernsey adoptedautomatic information exchange on July 1, 2011(when transitional withholding tax rates ended withthe imposition of a 35 percent rate), next followedby the British Virgin Islands on January 1, 2012, andTurks and Caicos Islands from July 1, 2012.The UK's version of FATCA seeks to plug loopholesin the EU's flawed regime, which has proveneasy to circumvent. The maiden agreement draftedwith the Isle of Man contains provisions specificallystating that: "any tax withheld under the Agreementbetween the UK and the Isle of Man providingfor measures equivalent to those laid down in13

the European Union Savings Directive will be creditableand credited against any UK tax due under[the] disclosure facility."The text of the Isle of Man agreement provides for avoluntary disclosure scheme that will likely be replicatedin future agreements with other territories. Itprovides for a minimum penalty rate of 10 percent,mirroring that on offer under the LiechtensteinDisclosure Facility, providing a disclosure is madeby September 30, 2016. Manx financial intermediarieswill be required to contact relevant persons toadvise them of the facility, and ensure adherence toregulations preventing money laundering.Article 10 of the Isle of Man's agreement providesfor a "bespoke service" that allows initial anonymouscontact by a professional adviser (including a financialintermediary) to discuss with HM Revenue andCustoms (HMRC) the circumstances of a person ona "no names" basis. It will be possible for a person orprofessional adviser acting on behalf of that person tohave a single point of contact with a discrete HMRCteam to ensure consistency of treatment. The optionwill be available in cases where a liability is disputeddue to residence or domicile claims made by an individual,with full supporting evidence, the text states.The Cayman Government has confirmed that seniorofficials have attended recent meetings withthe UK tax authority, HM Revenue and Customsin London to discuss the US Foreign Account TaxCompliance Act, and how the territory can supportthe UK's efforts to implement a similar regime.The Cayman Islands' Premier, Juliana O'Connor-Connolly told UK Prime Minister David Cameronthat the territory will join the G5 automatic tax informationexchange pilot being spearheaded by theUK, in partnership with France, Germany, Italy andSpain. In a letter to Cameron, O'Connor-Connollysaid that by joining the G5 pilot, Cayman is continuingto demonstrate its global commitment onthe exchange of information for tax purposes.Regarding the pilot, she wrote: "We welcome theseefforts to promote an effective global mechanismfor automatic exchange of information for tax purposes,in which all jurisdictions participate andwhere a common approach will not only ensure efficienciesof cost and resources, but will also avoidthe risk of multiple competing standards.""Accordingly, we would call on other jurisdictionsto commit to this initiative, which will take us toa new level of tax transparency and remove hidingplaces for those who would seek to evade tax anddodge their responsibilities."O'Connor-Connolly added in her letter that, in linewith revised Financial Action Task Force recommendationsand the recently issued methodologyfor assessing compliance with its standards on tacklingmoney laundering and countering the financingof terrorism, the Cayman Islands is committedto reviewing its legal and regulatory framework.""The Cayman Islands has always taken a leadingrole in the fight against money laundering, terrorist14

financing and all forms of financial crime, as is evidencedby [our] consistent compliance with thestandards," she wrote. Adding that Cayman remains"committed and determined to remain at the forefrontof jurisdictions in respect of information andenforcement of standards, such as those on availabilityof beneficial ownership information."The Bahamas' Minister for Financial Services RyanPinder has said that the local financial services industrymust be prepared to accept and adapt to automaticinformation exchange under the ForeignAccount Tax Compliance Act, and similar regimes,as it becomes the "new normal."Speaking at a "Complying with FATCA" one-dayregional conference on April 9, 2013, Pinder pointedout that FATCA is shaping up to be the "mostsignificant matter facing the international financialservices industry today.""The global paradigm is shifting to an expectation oftransparency globally," Pinder said. "We have beenwitnessing this evolution over the last 15 years fromwhen legislative changes were made for anti-moneylaundering purpose since the early 2000s, to the implementationof Tax Information Exchange Agreements,to the imposition of Organization for Economic Cooperationand Development and Financial ActionTask Force recommendations, and now FATCA.""We, however, have developed a significant level oflocal expertise; we must be committed to competingin this new normal. We can be industry leaders."Pinder said, in recognizing the importance of theinitiative: "We in the Ministry of Financial Servicesthought it wise, even before engaging the UnitedStates, to create a FATCA Task Force representativeof some of the most progressive minds in the privatesector of our financial services industry.""This FATCA Advisory Group had the mandateto review FATCA requirements and make recommendationsfor research and ultimate discussionand negotiation on matters particularly sensitiveand relevant to the financial services sector of theBahamas," Pinder noted. "It was this FATCA advisorygroup of private sector representatives whowould partner with my Ministry to prepare for thebeginning of negotiations on FATCA. Having recognizedthe areas of FATCA that have particularrelevance to our financial services industry, we areprepared to address them," he concluded.LuxembourgIn the context of its FATCA negotiations with theUS, Luxembourg has chosen the Model I agreement,which will provide for the automatic exchange ofinformation between Luxembourg and US tax authorities,on accounts held in Luxembourg financialinstitutions by citizens and residents of the US. Itis not yet clear whether the IGA will be reciprocal.According to the Luxembourg Government, thisdecision will put Luxembourg's relations with theUS in line with its declaration of April 10, 2013.On this date, Luxembourg announced that it willintroduce, on January 1, 2015, within the scope of15

the 2003 European Union Savings Directive, theautomatic exchange of information within the EuropeanUnion.Concluding, the Government emphasized thatLuxembourg "wishes to see the same conditionsapply to all competing financial centers and to seethe automatic exchange of information accepted asthe international standard." To this end it thereforeagreed on May 14, 2013, to grant the EuropeanCommission a mandate to negotiate with Switzerland,Liechtenstein, Andorra, Monaco and SanMarino, the Government pointed out.GermanyGermany signed its Model 1A (reciprocal) IGAwith the Treasury on May 31. There is also a contemporaneousMOA which clarifies some aspectsof the IGA.A declaration of understanding , also signed May 31,clarifies several provisions in the Germany-U.S. IGA .SwitzerlandThe Swiss Committee for Economic Affairs andTaxes of the Council of States (CEAT-S) has givenits seal of approval to the FATCA Model 2 agreement(IGA) concluded with the US.The Intergovernmental Agreement was concludedon February 14, 2013. On April 10, the Swiss FederalCouncil approved the IGA, and forwarded theagreement to parliament for its approval.The CEAT Committee examined the FATCA accordfollowing in-depth consultation with a numberof key stakeholders, including the Swiss-USChamber of Commerce, the Swiss Bankers Association,the Swiss Insurance Association, and the FederalCommissioner responsible for data protection.Having carefully debated the problem that Switzerlandhas limited scope to maneuver on the issue,the Committee assessed the concrete implicationsof rejecting the FATCA deal, on both the Swisseconomy and on the Swiss financial center. It alsoexamined the agreement within the context of effortsto find a solution to resolve the past.Th e Committee finally approved the decree establishingthe accord and the federal law implementingthe treaty, by six votes to three with twoabstentions and by six votes to two with three abstentionsrespectively. A minority put forward theidea of returning the case to the Federal Counciland tasking the Federal Council with negotiatinga model one accord, providing for an automaticexchange of information.Commenting on its decision to endorse the agreementat the time, the Swiss Government said thatwhile the United States' extraterritorial legislationhad not been well received, it was nevertheless acknowledgedthat it was favorable to sign an IntergovernmentalAgreement with the United States tosimplify compliance with the new regime for Swissfinancial institutions.16

Th e Government pointed out in particular thatthe US-Swiss agreement ensures that accountsheld by US persons with Swiss financial institutionsare disclosed to the US tax authorities eitherwith the consent of the account holder or throughnormal administrative assistance channels. Consequently,information will not be transferred automaticallyin the absence of consent, and insteadwill be exchanged only on the basis of the administrativeassistance clause in the two countries'double taxation agreement.As the United States will phase in FATCA fromJanuary 1, 2014, Swiss financial institutions will beforced to implement FATCA from this date, irrespectiveof an agreement between Switzerland andthe United States, if they do not want to be excludedfrom the US capital market. The agreed simplificationswill not apply if there is no agreement, theGovernment clarified.Th e Swiss Private Bankers Association (SPBA)has highlighted its objections to certain aspectsof the Swiss Federal Council's bill implementingthe revised Foreign Account Tax Compliance Act(FATCA) recommendations, notably the definitionof a punishable tax crime as a predicate tomoney laundering.While supporting in principle a policy of tax conformity,as well as plans to implement FATCA, theinternational standard in the fight against moneylaundering, the SPBA nevertheless warns that Switzerlandmust not profit from this legislative revisionto introduce, "by the back door," internal legislativereforms that are simply not required under theUS FATCA legislation.The SPBA opposes plans to extend the concept oftax fraud. Currently, this infraction arises from theuse of false or falsified documentation. The FederalCouncil intends to unnecessarily extend thedefinition to include cases of "artful deception,"the SPBA notes. Given that this concept is "veryvague," applying the measure will pose unsolvablepractical problems for the banks, the association argues,making clear that banks simply do not havethe means with which to detect such indications, inparticular in the case of foreign clients.Furthermore, for Swiss clients, introducing theconcept of "artful deception," which could leadto a prison sentence of three years or more, would"profoundly modify relations between the citizenand the state," the SPBA stresses.Finally, the Federal Council also aims to introducethe term "qualified tax fraud," the SPBA explains,pointing out that this offence constitutes a crime,punishable with a prison sentence of five years, aswell constituting a predicate offence to money laundering.The SPBA laments the fact that the onlyqualifying element currently proposed by the FederalCouncil is the presence of undeclared taxableassets in excess of CHF600,000 (USD624,035).According to the SPBA, it is simply not "appropriate"to base the crime of qualified tax fraud merelyon the taxable base, in view of the fact that this is17

arbitrary, and given the large disparities between theSwiss cantons in terms of the tax rates applied. TheSPBA therefore advocates instead that the amountof tax evaded should be used as a qualifying element.SpainSpain's Finance Minister Cristóbal Montoro andUS Ambassador to Spain Alan Solomont have recentlysigned an agreement between Spain and theUS, designed to improve international fiscal complianceand implementing FATCA.Approved at the end of last year, the accord betweenSpain and the US is reciprocal, providing that financialinstitutions in both countries must provide theirtax authorities with information relating to taxpayersof the other signatory state. This information willsubsequently be exchanged automatically betweenthe tax authorities through a standardized procedure.Defending the treaty, the Spanish Finance Ministryhighlighted the fact that "the agreement constitutesa milestone in the exchange of tax information atan international level, by laying the foundationsfor a new automatic, recurrent and standardizedframework of international information exchange."Th e Ministry stated: "In a context of economicand financial globalization, and with the proliferationof transactions involving goods and servicesbetween countries, it is essential to strengthen theexchange of information and administrative assistancebetween states and increase efforts in thefight against tax havens."It added: "In this regard, efforts by tax authoritiesin both countries is important for increasing internationalpressure on tax havens through a networkof agreements on the exchange of information inline with international efforts being made with theother OECD countries."Spain, the UK, Germany, France, and Italy aim toensure that the model agreed with the US is adoptedmultilaterally by a majority of countries inorder to thus strengthen efforts against tax fraudand so-called "tax havens."The ministers therefore sent a letter to the EuropeanCommissioner for Taxation, Algirdas Šemeta, announcingplans to work together on a pilot schemefor the multilateral exchange of tax informationbetween the five countries, based on the FATCAmodel, having invited the other European Unionmember states to participate.The launch of such an initiative is intended to enableEurope and the US to spearhead the promotionof a global system of automatic informationexchange.New ZealandLast October, New Zealand announced its intentionto lodge an expression of interest in negotiating aFATCA intergovernmental agreement with the US.At the time, Revenue Minister Peter Dunne saidthat a deal would materially reduce FATCA compliance,and mean that financial institutions wouldnot have to provide information directly to the IRS.18

Talks are now underway. The TIEA will authorizeNew Zealand businesses to provide the Inland RevenueDepartment (IRD) with the required information,which will then be passed on to the US.The New Zealand Government has said that it isaware of compliance concerns regarding FATCAtax information exchange agreement currently beingnegotiated with the US.According to Dunne, New Zealand is negotiatingthe agreement on the same basis as its double taxand tax information exchange agreements. However,he did stress that the Government is "very awareof compliance cost issues and looking at how wecan minimize any burden."The agreement will be reciprocal, with the resultthat the US will also supply information aboutNew Zealand investments in the US."FATCA is part of New Zealand's commitment asa good global citizen to doing its bit to clamp downon tax evasion and an important way of doing thatis through tax information exchange agreementsthat we regularly enter into," Dunne said.AustriaFollowing a recent Council of Ministers meeting,Chancellor Werner Faymann revealed that the AustrianGovernment has adopted two resolutions designedto strengthen the fight against internationaltax evasion. Austria intends to sign an agreementwith the US tax authorities, implementing theForeign Account Tax Compliance Act (FATCA),and to sign the OECD Convention on mutual assistancein tax matters, the Chancellor emphasized.Underlining the fact that the Austrian Governmentis united in its stance and plans to negotiate together,Faymann stressed that Austria is pursuing "aclear, constructive path in the fight against tax evasion."Austria is determined to ensure that both taxhavens, such as the Channel Islands, and hiddenownership structures, such as trusts, are transparent,the Chancellor made clear.Highlighting the fact that Austria firmly supportsnegotiations between the European Commissionand third states, Faymann concluded by underscoringthat Austria is playing a pivotal, constructive,and clear role in combating tax flight.At the time, Faymann and Spindelegger underlinedthat Austria is not a tax haven and highlighted theGovernment's commitment to ensuring that theinternational fight against tax fraud is successfuland to ensuring that Austria plays a committed partin this fight.FATCA's ProblemsBack in the US, Treasury and the IRS express themselveshappy with the progress being made towardsthe implementation of FATCA. But the path is notstrewn with roses, due mostly to the reciprocal natureof many of the IGAs. Indeed, a plan to impose a reciprocalobligation on domestic financial institutionswas included in President Obama's April budget.19

FATCA directly impacts on US citizens and inmany people's eyes it seems a very "un-American"thing to do. With all the talk about the need totackle evasion, concern about safeguarding the privacyof the individual seems to have been lost, andthis is why Kentucky Republican Rand Paul introduceda bill into the Senate on May 8 to repealthe anti-privacy provisions of FATCA, to effectivelymake the Act redundant.According to Paul, FATCA not only infringes basicconstitutional rights, but has also allowed the USGovernment to interfere with the sovereignty ofindependent nations. And most perplexing of all,when all is said and done, FATCA will probablyend up costing the Treasury more than it takes infrom Americans' foreign bank accounts. No doubtPaul's Republican colleagues would agree with hisassessment of FATCA as a "textbook case of a badlaw." Most Democrats probably do as well in theirheart of hearts.Paul's bill stands little chance of being enactedwhile President Obama is in the White House,but it is unlikely to be the last attempt to repealFATCA, not least because the Congress can be expectedto object to the reciprocal nature of theIGAs that are being hammered out by the TreasuryDepartment with multiple foreign governments.The original FATCA legislation did not includea specific reciprocal obligation: this is somethingthat has emerged during inter-governmental discussions.The Treasury says that the IGAs do notcount as treaties, and that it does not thereforehave to submit them to the Senate for approval;others may disagree, and say that the Treasury hasbeen making up law as it goes along.Presumably President Obama's inclusion of areciprocal FATCA in his budget was based onadvice from worried lawyers that reciprocalIGAs may be unenforceable. For that matter,IGAs themselves may have legal problems intarget countries: in May 2013, Canadian lawyerswere beginning to suggest that a FATCAIGA might be unconstitutional, although otherlawyers qualified this opinion. We may call thePresident's proposed measure DATCA - the DomesticAccount Tax Compliance Act. Of course,nothing in any of the President's recent budgetshas become law, so DATCA will presumably remainjust an intention. But the disjunction betweenthe reciprocal IGAs and domestic privacyremains. Sooner or later it will have to be resolved,and it's hard to see how this should notinvolve the Congress.Nobody knows what FATCA will achieve. Interms of revenue versus costs, there are all kindsof wild estimates, but even the Treasury doesn'tseem to think it will reap more than a few billiona year, while recent estimates of the costs (for FIIs)have ball-parked around USD7.5bn. Anecdotally,something else FATCA is achieving is a reductionin the number of FIIs that are prepared to take onUS clients; and it may be reasonable to supposethat US citizens and corporate investors are busylooking for, and presumably finding, loopholes20

through which they can clamber in order to avoidFATCA. Altogether, the balance sheet says thatgreat damage will be done to the functioning andprofitability of the international financial sectorand US interests in it, all in exchange for an uncertainbenefit to US tax revenue. Also not to forgetthat the administrative load on the Treasury andits IRS is immense: all of it being time and efforttaken away from quotidian tax collection. There isno budget for FATCA as such.E NDNOTES123http://www.treasury.gov/resource-center/tax-policy/treaties/Documents/FATCA-Model1A-Provisional-5-9-13.pdfhttp://www.kpmg.com/LU/en/IssuesAndInsights/Articlespublications/Documents/2012-nonreciprocal.pdfhttp://www.treasury.gov/resource-center/tax-policy/treaties/Documents/FATCA-Model2-Agreement-Preexisting-TIEA-or-DTC-5-9-13.pdf21

FEATURED ARTICLESISSUE 30 | JUNE 6, 2013Topical News Briefing:Dump Awayby the Global Tax Weekly Editorial TeamIt's very unfortunate that the experts who craftedthe WTO's rules designed in such a prominentrole for action against "dumping," that is the saleof goods by one country into another at an unfairlylow price. The rules might be called a protectionist'scharter, and there have been countlessinstances in all countries of an uncompetitive industry"capturing" the local government departmentconcerned, which then proceeds to imposesevere "anti-dumping" and "countervailing" dutieson imports from another country where productionis more efficient.The purist free-trader would say that protectinginefficient industries is contrary to the long-terminterest of the country that does it, and that even ifthere is dumping, it should be welcomed, becauseit means cheaper goods for consumers. There's notmuch chance of a "pure" free-trade regime in ourimperfect world; but just for a moment considerwhether dumping is actually very likely to takeplace. No company is likely to want to sell its waresat below cost price, i.e . at a loss, so dumping is onlylikely to take place with direct government support,as part of a deliberate campaign to damage competingindustries in other countries, or at least toprotect a domestic industry until it strong enoughto compete on its own legs. But government subsidiesto industry are specifically prohibited by WTOrules (see for instance the long-running Airbus/Boeing saga in which both sides accuse the other ofreceiving unfair government subsidies).So the conclusion has to be that so-called "antidumping"is almost always protectionist in nature,and we would all be better off without it. We arewitnessing a classic case of it at present focused onChina (see our news stories below).Both sides are to blame:fi rst, China imposed an anti-dumping duty of70.8 percent on a special type of steel importedfrom the EU. Now the arithmetic says that theEU must therefore have been selling the steel at58 percent of cost. That is a ridiculous proposition,especially given that China is a lower-costproducer than the EU. There certainly is no EUsubsidy given to steel production – heaven forbid– and it's simply impossible to believe thatthe EU producer is selling at a 42 percent loss.then, the EU is about to impose (on Wednesdaythis week) a ruinous anti-dumping dutyof between 40 percent and 68 percent on solarpanel imports from China. Similar logicapplies; and another point is that while suchduties may help the backward EU solar panelindustry, the effect will be to halt alternativeenergy production in its tracks, and the ruinationwill be for the downstream installationindustry, which is said to be larger than thepanel manufacturing sector.22

fi nally, and most egregiously, the EU is goingto impose on its own initiative anti-dumpingduties on Chinese mobile telecoms networkcomponent imports.Th is last and apparently unprovoked attack ledChancellor Merkel to agree with Chinese PremierLi Keqiang at a meeting last week that all suchissues should be resolved by negotiation, insteadof the gun-slinging approach being taken by theEU. "Shoot first and ask questions afterwards"seems to be the motto of the European Commission'strade department.No-one can blame manufacturing companiesfor wanting to protect their home and overseasmarkets from unfair competition, and it is reasonablefor governments to want to use availableweaponry to achieve such a result. But in thepresent situation the government departmentsconcerned seem to be running out of control. Itneeds to stop.23

FEATURED ARTICLESISSUE 30 | JUNE 6, 2013IC-DISC: Still Viable ForFlow-Through Entitiesby George Koutouras, Partner, and LindseyMoore, Manager, Moss Adams LLPThe interest charge domestic international salescorporation (IC-DISC) structure has gainedpopularity in recent years for tax planning becauseof the income tax savings attained by eligiblecompanies. However, it's not a new concept– the domestic international sales corporation(DISC) and its corresponding export tax incentiveswas first introduced in 1971, 1 while theIC-DISC has existed in its current form withsimilar incentives to those in existence prior tothis amendment since the Jobs and Growth TaxRelief Reconciliation Act of 2003 2 was signedinto law. The Jobs Act was the legislation thatalso first lowered the taxation of qualified dividends(including IC-DISC dividends) from theordinary income tax rate to the much lower capitalgains tax rate 3 .Th e IC-DISC's policy aim remains the same asthe DISC's: to motivate US manufacturers tomake products domestically and stimulate USexports. However, since the 1970s the changingbusiness environment has led to an increasedmobility of resources and expansion to new markets– even for smaller US companies that mayhave historically limited their market to domesticcustomer sales – potentially undermining theIC-DISC's efforts. 4Basic Mechanics Of The IC-DISCTypically, a flow-through entity forms an IC-DISCas a domestic subsidiary corporation through whichall foreign sales of US goods and services are made.The tax benefits of the IC-DISC structure are generatedby the tax rate differential between ordinaryincome and dividend income for individuals. As aresult of the structure, export income is subject toan effective tax rate of up to 23.8 percent 5 insteadof the ordinary individual income tax rate of upto 39.6 percent. 6 Effectively, the operating corporationreceives a tax deduction for the commissionpayment to the IC-DISC, but the IC-DISC itselfdoes not pay tax on the commission income. Thenthe IC-DISC distributes its earnings to its shareholders,which are typically either individuals or aflow-through entity owned by individuals. The distributionis treated as a qualified dividend and, assuch, taxed at capital gains rates.In its basic form, an IC-DISC is a domestic, taxexempt7 corporation whose entity structure can becharacterized as a "paper" corporation; that is, it's notrequired to perform services, have employees, have24

office space, or own tangible assets. 8 With certainexceptions noted below, the benefit of an IC-DISCstructure has been essentially eliminated for taxablecorporations. It has, however, remained a viable taxplanning tool for nontaxable entities or flow-throughentities ( i.e., partnerships, LLCs taxed as partnerships,or corporations subject to Subchapter S) 9 .Key Characteristics To MateriallyBenefit From The IC-DISC StructureThe IC-DISC must be directly owned by a flowthroughcompany.A significant amount of production must be performeddomestically (with less than 50 percentof product components from foreign sources).A meaningful amount of gross receipts must befrom export sales.If the IC-DISC can directly 10 pay foreign SG&A 11expenses, the benefit is increased.If the product exporter can factor its receivablesto the IC-DISC, additional export revenue maybe generated 12 .Requirements For Forming An IC-DISCOn the compliance front, a corporation must elect,using Form 4876-A, to be taxed under the IC-DISCrules 13 . There are also the following qualitative andquantitative requirements a corporation must satisfyto be considered an IC-DISC and receive beneficialtax treatment: 14The corporation must be a domestic US entity,meaning it's incorporated in one of the 50 USstates or the District of Columbia.An IC-DISC must maintain a minimum capitalization(par value for its stock) of at leastUSD2,500 every day of the year for which it seeksIC-DISC treatment.The IC-DISC may only have one class of stock(the par value of which, in the aggregate, mustmeet the capitalization minimum requirementstated above).Th e qualified export receipts and qualified exportassets tests must be met 15 to ensure thatthe IRS's objective in benefiting and encouragingUS-sourced exports is served. The qualifiedexport receipts test is satisfied if at least 95 percentof the IC-DISC's annual receipts are fromqualified export receipts (revenues from the saleor lease of qualified export property and certainrelated services). 16Qualified export property is manufactured inthe United States by someone other than an IC-DISC, with not more than 50 percent foreigncontent, and ultimately delivered outside theUnited States within a year from the sale andnot further manufactured or processed. 17 Th equalified export assets test requires that at least95 percent of the assets held by the IC-DISCat year-end are qualified export assets (assetsheld in connection with exporting activities:the sale, lease, rental, storage, servicing, etc. ofexport property). 18Th e IC-DISC must meet other administrativerequirements, such as maintaining its own set ofbooks and records (it's a best practice that it alsohas a separate bank account).25

Calculating The AllowableIC-DISC CommissionThe allowable IC-DISC reportable commission incomeis the greater of: a transfer price computed underthe rules of IRC §482 (provided there is a contemporaneousdocumentation study), 4 percent of the IC-DISC's qualified export receipts on reselling the property,or 50 percent of the combined taxable incomefrom export sales of the exporter and the IC-DISC– plus 10 percent of export promotion expenses. 19Let's take a look at a hypothetical company to seehow this plays out. We'll limit our calculation toa comparison of the second and third methodsmentioned above. The first method requires that atransfer pricing study be conducted, which is beyondthe scope of this article.Illustration: S-corporation that domesticallymanufactures product for exportHypothetical company financials:Foreign trading gross receipts: USD5,000,000Cost of goods sold: ( USD4,000,000 )Gross margin: USD1,000,000Sales, general, and administration expenses:( USD700,000 ), includes USD300,000 of "exportpromotion expenses"Export sales net income: USD300,000In this case, we'd take the greater of either:4 percent of export gross receipts: USD5,000,000× 0.04 = USD200,00050 percent of export net income: USD300,000× 0.5 = USD150,000Because the export gross receipts figure is larger, ataxpayer would take USD200,000 (4 percent ofexports) and add USD30,000 (10 percent of theUSD300,000 export promotion expenses) to get anallowable IC-DISC commission of USD230,000.Although it has been stated previously that theIC-DISC incentive is limited to materially benefitflow-through entities, owners of C corporationshave implemented IC-DISCs by creatingor using 20 a related flow-through entity, whichwould directly own the IC-DISC. The flowthroughentity would need to be owned by individualswhom the exporting company wishesto benefit from the IC-DISC income taxationbreak. For example, the owners of a US C corporationcould set up a brother-sister corporationas an IC-DISC that's owned in the same proportionby a US LLC. 21The calculation of commission income in this scenariowould be the same as the one above, assumingthe companies have the same financial performance.In order for the taxpayer shareholders ofa C corporation to benefit from the intended taxsavings, the IC-DISC would need to be owned bya separate pass through entity and the additionalstructuring would likely be required.E NDNOTES12The original DISC law was codified in IRC §§ 501 -507,Revenue Act of 1971, Public Law No. 92-178, 85 Stat.535 (1971).The Jobs Act provision where under qualifieddividends are taxed at the capital gains rate was26

extended for 2 years in December 2010. The IC-DISCDISC rules. A detailed discussion of the considerationsconstruct also gained popularity following the Jobsof such structures is outside the scope of this article.Act because the Jobs Act eliminated the extraterrito-10Expenses may qualify to increase the commissionrial income regime, which, in turn, had replaced thein certain cases where they are treated as incurredforeign sales corporation.by the IC-DISC but are not actually incurred by the3In all cases, the capital gains rate is lower than theIC-DISC.corresponding income tax rate.11"SG&A" refers to sales general and administrative4The World Trade Organization has imposed econom-expenses.ic sanctions on certain export incentive predecessors12The discounted price the IC-DISC pays for the receiv-of the IC-DISC, including Extraterritorial Incomeable less the cash collections is qualified as additionalExclusion, created by the American Jobs Creationexport revenue.Act of 2004, which has since been repealed from13See IRC §992(a)(1)(D) .the code and phased out after 2006. The IC-DISC14See IRC §992 .structure has never been sanctioned or challenged15If these tests are not met, certain additional require-by the WTO or courts.ments may be instead used, with respect to a defi-5Starting in 2013, qualified dividends are taxed at 0-20ciency distribution under Treas. Reg. §1.992-3 .percent, depending on the individual's federal income16An IC-DISC will meet this requirement as its commis-tax bracket. Additionally, these dividends may besion income is wholly derived from export sales.subject to the 3.8 percent Medicare surtax.17See IRC §§ 924 , 993(c) .6Starting in 2013, federal income tax rates range from18See IRC §993(b) .10-39.6 percent, depending on the individual's federal19IRC §994(c) . "Export promotion expenses" refers toincome level.those expenses incurred by or on behalf of the IC-7Although exempt for federal income taxation pur-DISC to advance the distribution or sale of exportposes, state tax law may differ.property for use, consumption or distribution outside8This relaxed standard for IC-DISC entities constitutesthe United States, excluding income taxes, a portiona reduced level of corporate substance as comparedof SG&A.to other entity types. Treas. Reg. §1.992-1(a) explains20A new entity need not be created; an existing flow-that these rules are specifically intended to relax thethrough entity will suffice for this planning methodordinary rules of corporate substance.if given ownership of the IC-DISC.9It should be noted that closely held C corporations21To the extent that the ownership is disproportionate,may, in certain circumstances, use related companiesthen taxpayers should consider the implications ofto route foreign sales through and benefit from the IC-estate and gift taxes that may be deemed to apply.27

FEATURED ARTICLESISSUE 30 | JUNE 6, 2013Current Transfer PricingDevelopmentsby members of Duff & Phelps LLCOECD Issues Draft Handbook OnTransfer Pricing Risk Assessmentby Dick de Boer (the Netherlands), Nelly Korsun(New York), Susan Fickling-Munge (Chicago), andJustin Radziewicz (Chicago)On April 30, 2013, the Organization for EconomicCooperation and Development ("OECD") releaseda new Draft Handbook on Transfer PricingRisk Assessment ("Handbook"). The new Handbook,produced by the Steering Committee ofthe OECD Global Forum on Transfer Pricing, isa detailed, practical resource that countries canfollow in developing their own risk assessmentapproaches aimed at (i) reducing "needless debates"among tax authorities, and (ii) effi cientlyusing taxpayer and tax authority resources. 1 Th eHandbook is open to public comment throughSeptember 2013.In a previous publication from the OECD, 2 taxadministrations, businesses, and advisors all agreedthat effective transfer pricing risk identification isessential for quicker, more cost-effective audits andinquiries. To this end, many countries have recentlyfocused significant attention on the means they useto identify and assess transfer pricing risk, as well asthe tools they use for selecting cases for audit.Although the Handbook is written for the tax administrator,it also offers multinational enterprises("MNEs") a framework under which to assesstheir transfer pricing exposure and vulnerability toa transfer pricing audit. Additionally, the Handbookprovides some insights into the OECD's(and therefore that of many member countries')thinking regarding additional steps that MNEscould take to document their intercompany prices.We highlight a few of the factors that could leadto transfer pricing audit risks, as summarized inthe Handbook:Lack of appropriate transfer pricing documentation;Perceived misalignment of profi tability levelscompared to industry standards (though it isnoted that segmented data needs consideration,and "profitability tests" should only be used toassess the "general reasonableness" of a return); 3Recurring losses, "low profi ts," or signifi cantvariations in year-to-year effective tax rates;Considerable transactions with companies inlow-tax jurisdictions;Considerable intra-group services;28

Financial transactions ( e.g. intercompany debt,interest expense) with related parties; and,Payments of royalties, transfers/valuations ofintellectual property, and management fees torelated parties in low-tax jurisdictions.starting point in assessing their own transfer pricingprofile and potential risk for audit. We have seen adecided increase in transfer pricing activity aroundthe world, so accurate self-assessment is more importantthan ever.It is interesting to note that the OECD has theperception that intercompany services transactions,even those involving high value services, are4" often not fully documented " (emphasis ours).In addition, there are numerous references in theHandbook to transactions with low-tax jurisdictions.While the OECD is generally careful to acknowledgethat simply having such transactions isnot, on its face, inconsistent with the arm's lengthstandard, it is clear that such transactions continueto receive greater scrutiny.Th e OECD also points out some situations thatindicate a low level of transfer pricing risk ( i.e. ,a scenario where a MNE has "consistent transferpricing policies which are compliant with thearm's length principle"). 5 Furthermore, the Handbooksummarizes where information can be foundto prepare a transfer pricing risk assessment andsuggests the use of information returns ( e.g. , 5471s/ 5472s in the United States), company websites,public marketing materials, and transfer pricingdocumentation. The burden of providing such informationis on the taxpayers.The information in the Handbook is consistentwith prior guidance from regulators and transferpricing practitioners, and provides MNEs with aChinese Provide Further CommentOn Location-Specific AdvantagesAnd Other TP Issuesby Emily Sanborn (Atlanta)In October 2012, China's State Administrationof Taxation ("SAT") shared its view thatthe OECD Guidelines do not provide sufficientguidance for pressing issues faced specifically bydeveloping countries, such as location-specificadvantages ("LSAs"). 6 On March 11, 2013, ata conference sponsored in part by BloombergBNA, Liao Tizhong, deputy director general ofinternational taxation for the SAT, further expoundedupon the importance of addressingLSAs caused by comparative market conditions.We highlight the key points of his comments below.According to Tizhong, the SAT uses a fourstepapproach to determine whether additionalconsiderations should be examined with respectto LSAs:(1) Identifying whether an LSA exists.(2) Determining whether the LSA generates additionalprofit above the routine return.(3) Quantifying and measuring the additionalprofits arising from the LSA.(4) Determining the transfer pricing method to appropriatelyallocate the LSA additional profits.29

Tizhong cautioned that while identifying andquantifying potential cost savings ( e.g., lower labor,capital, technology) generated by LSAs is relativelystraightforward, it is more difficult to quantifythe "market premium" ( i.e ., qualities such asmarket size and government incentives that couldmake a particular location more profitable) thatcertain LSAs may generate. Tizhong recommendedeconomic modeling as a first step, with econometricanalysis and game theory as other potentialavenues to explore when attempting to determinea market premium generated by LSAs.In addition to the challenges and importance ofrecognizing and measuring LSAs, Tizhong also addressedseveral other transfer pricing matters thatare at the forefront of the SAT's focus:Lack of Comparables – As with most developingcountries, China has a limited number of publiccompanies. This is due to a manufacturing-basedeconomy, a decreasing number of third-partyarm's length transactions, the level of integrationof a Chinese operation into the multinationalparent company, and other factors. The SAT addressesthe lack of comparables by making transferpricing adjustments to foreign comparables thattake into account differences in geographic factorswhen using the transactional net margin method.Alternatively, the use of the CUP and profit-splitmethods can alleviate this issue; unfortunately,these methods are not always available.Transfer Pricing Examinations – In China, transferpricing cases are subjected to three levels ofpanel reviews: (i) city (prefecture) level, (ii) provinciallevel, and (iii) the SAT. The city reviewaddresses whether the case should be selectedfor additional review or closed. The provinciallevel then conducts the second level of review,and the SAT conducts the final review and hasthe ability to overturn decisions made by lowerlevelexpert panels (however, this is rare). Thethree-level review is designed to promote fairnessto both the taxpayer and the tax authority,something that is not always possible to achievethrough the courts as they rely upon the SATfor guidance in transfer pricing matters.Transfer Pricing Audit Targets – China currentlyfocuses on MNEs that fit any of the followingfact patterns: (i) frequent related party transactions,(ii) abnormal losses or gains, (iii) regularlosses that are not corrected by the business, (iv)failure to report sufficient documentation, or (v)adoption of "unreasonable" pricing policies.It is evident from Mr. Tizhong's comments thatthe SAT will continue to focus on transfer pricingmatters and is busily filling in the gaps interms of its approach to common issues such ascomparables, adjustments, and audit practices.MNEs located or operating in China should bevigilant in setting up and documenting their operationsin a way that minimizes exposure. Inaddition, whether operating in China or otherdeveloping countries, MNEs should evaluatethe existence of potential LSAs that could impactintercompany pricing.30

OECD Section E – Redraft On Safe HarborsRevised Section E On Safe Harbors InChapter IV Of The Transfer PricingGuidelines For Multinational EnterprisesAnd Tax Administrationsby Matthew Vold (Chicago)Revised Section E on Safe Harbors in Chapter IVof the Transfer Pricing Guidelines for MultinationalEnterprises and Tax Administrations, approved bythe OECD Council on May 16, 2013, encourages,under the right circumstances, the use of bilateralor multilateral safe harbors. The discussion considersthe benefits of, and concerns regarding, safeharbor provisions and provides guidance regardingthe circumstances in which safe harbors may be appliedin a transfer pricing system based on the arm'slength principle.Key areas of discussion include:Benefits of safe harbors – Safe harbors providebenefits to taxpayers through simplified complianceand reduced compliance costs and certaintythat the price charged or paid on the coveredcontrolled transaction will be accepted by the taxadministrations. They also permit tax administrationsto focus administrative resources fromsmaller taxpayers and less complex transactionsto more complex, higher-risk cases.Concerns over safe harbors – Adverse consequencesof safe harbors may include reporting oftaxable income that is not in accordance with thearm's length principle, the risk of double taxationor double non-taxation when adopted unilaterally,the potential for inappropriate tax planning,and issues of equity and uniformity.Recommendations on the use of safe harbors– The OECD developed guidance encourages,under the right circumstances, the use of bilateralor multilateral safe harbors, but notes thatwhether adopted on a unilateral or bilateral basis,safe harbors do not bind or limit in any way anytax administration other than the tax administrationthat has expressly adopted the safe harbor.The OECD's recommendations on the use of safeharbors include the following:Unilateral safe harbors may lead to thepotential for double taxation or double nontaxation,among other issues. For example,when a taxpayer reports income above thearm's length level due to the safe harbor,more income will be reported by the domesticaffiliate and less taxable income will bereported in the foreign tax jurisdiction of thecounterparty to the transaction. In the eventthe other tax administration challenges theprice of the transaction, the taxpayer may facedouble taxation. On the other hand, doublenon-taxation could occur when the taxpayerelects application of a unilateral safe harborbelow the arm's length level in the countryadopting the safe harbor. In such a case, therewould be no assurance that the taxpayer wouldreport income above the arm's length level inother countries on a consistent basis, and it isunlikely other administrations could requirethe income to be reported above arm's length31

levels. To avoid situations leading to doubletaxation or double non-taxation, the OECDfeels that tax administrations should avoidunilateral safe harbors.Disadvantages to taxpayers may exist whensafe harbors diverge from arm's length pricing.Tax administrations may mitigate such disadvantagesby providing the option to (a) electthe safe harbor or (b) price the transactions inaccordance with the arm's length principle.This approach may reduce the administrativebenefits of the safe harbor and reduce tax revenueto the tax administration since taxpayerswould opt to pay the lesser of the safe harboror arm's length amount. By controlling theeligibility criteria for the safe harbor ( e.g. , byrequiring multi-year commitments to the safeharbor or requiring notification regarding theuse of the safe harbor in advance) the administrationmay gain more comfort with the risksof providing elective safe harbors.Bilateral or multilateral adoption of safe harborsthrough competent authority agreementsbetween countries could lessen the problemsof non-arm's length results and double taxationand double non-taxation stemming fromthe use of safe harbors. In such arrangements,two or more countries could establish pricingparameters that would be acceptable toeach country's administration. This approachshould limit some of the perceived arbitrarinessthat characterizes unilateral safe harborsand eliminate the risk of double taxation ordouble non-taxation. Bilateral or multilateralsafe harbors by competent authority agreementmay provide a practical approach to simplifyingtransfer pricing, particularly for smallertaxpayers and/or less complex transactions, butit is unlikely safe harbors will provide a reasonablealternative to a rigorous, case specificapplication of the arm's length principle forcomplex and higher risk transactions.The OECD recommends bilateral and multilateralarrangements target reasonably narrowranges of acceptable results, and require thetaxpayer to consistently report income in eachcountry that is party to the safe harbor. Suchsteps may alleviate tax administrations' concernsregarding potential tax planning opportunitiescreated by safe harbors (for example, a cost-efficienttaxpayer earning a return in excess of thesafe harbor may adopt the safe harbor and shiftthe additional profit to a lower tax jurisdiction).Countries can also use exchange of informationprovisions under a bilateral safe harbor, to confirmthe use of consistent reporting.Revised Section E does not materially differ fromthe draft proposed revision on safe harbors circulatedby the OECD in June 2012; however, it reflectsa more favored view of the OECD to safe harborsunder certain circumstances.To facilitate negotiations between tax administrations,the OECD also provides sample memorandaof understanding ("MOUs") for competent authoritiesto establish bilateral safe harbors for certainclasses of transfer pricing cases. The OECD32

suggests that the following items may be relevant inthe negotiation of MOUs:Description of an criteria to be fulfilled by thequalifying enterprises;Description of the qualifying transactions covered;Determination of the arm's length range of testedparty compensation;The years to which the MOU applies;Statement that the MOU is binding on both taxadministrations involved;Reporting and monitoring procedures for the MOU;Documentation and information to be maintainedby the participating enterprises; andA mechanism for resolving disputes.The OECD developed guidance does not provideor specify target returns or metrics for quantitativeratios, which, along with the MOUs, would needto be agreed upon between the countries' competentauthorities for low risk manufacturing services,low risk distribution services, and low risk contractresearch and development services.E NDNOTES123456See Paragraph 3 of the Handbook.The OECD Forum on Tax Administration publisheda report entitled "Dealing Effectively with the Challengesof Transfer Pricing" in January 2012.See Paragraph 56.See Paragraph 73.See paragraph 88.The OECD provides an example definition for qualifyingenterprises and qualifying transactions in thesample MOUs found in Annex I to Chapter IV.33

FEATURED ARTICLESISSUE 30 | JUNE 6, 2013Topical News Briefing: ItalyBetween A Rock And A Hard Placeby the Global Tax Weekly Editorial TeamAlthough the tax-raising steps taken last year by"technocrat" Mario Monti's government has succeededin reducing the fiscal deficit from 5 percentto below 3 percent, it has been at the cost of plungingthe country into a downward spiral of anemicconsumption, which in turn affects forward levelsof tax collection.Or does it? The figures say that consumption fellby 7 percent in 2012, and that may be true, but itmay also be the case that people's reaction to highertaxes is to cheat more effectively on their incomedeclarations. Italy has one of the largest "black"economies in Europe, and one of the lowest levelsof respect for government. The authorities havetried to limit the use of cash by putting ceilings oncash withdrawals and requiring banks to providea mass of data about account movements, but theeffect of those measures may just be to turn peopleaway from using banks at all.The news that the European Commission is endingits "excessive deficit procedure" against Italywas welcomed by the Government, but it actuallymeans nothing in real terms this year; next year itwill mean the unblocking of somewhere betweenEUR5bn and 10bn in EU support funds, but muchof that money has prescribed uses, and it won't allcount against the deficit.Meanwhile, the Government is in a hole. The coalitionhas two halves, essentially, left wing and rightwing, and the condition set by Silvio Berlusconi forhis right-wing party's participation was the abandonmentof IMU, a property tax imposed by MarioMonti and which reaped about EUR8bn last year.The first installment, of two, was due in June andhas been postponed pending a grand settlement ofthe nation's fiscal affairs which is supposed to takeplace before September; in the meantime there willbe a 1 percent VAT increase in July unless the Government,by magic, can find a way of avoiding it.In fact the coalition is at war with itself, and thefear must be that Berlusconi is simply waiting forthe moment to bring it down, hoping for a betteroutcome for his party is renewed elections. Anotherchange of government at this moment in historywould be a disaster. Poor Italy.34

FEATURED ARTICLESISSUE 30 | JUNE 6, 2013Payments To Related ForeignPersons: Beware Of StateAddback Provisionsby Michael S. Schadewald©2013 M.S. SchadewaldMichael S. Schadewald, Ph.D., CPA, is a Professorin the Lubar School of Business at the Universityof Wisconsin Milwaukee.Subject to U.S. constitutional constraints and federalstatutory restrictions, each U.S. state has theauthority to adopt its own unique definition ofcorporate taxable income. Over the years, Congresshas enacted numerous restrictions on a domesticcorporation's deductions for interest androyalty payments made to a related foreign person,including Code Secs. 163(j) , 267 and 482 . Inaddition to these federal restrictions, many stateshave enacted the requirement that a domestic corporationmust add back any federal deductionsfor interest expenses and royalty expenses paid toa related person in computing its state taxable income.These state restrictions are important becausestate income taxes represent a significantcomponent of a domestic corporation s overalltax burden. 1 Th us, tax practitioners must considerthe implications of these state addback provisionswhen evaluating the tax consequences of intercompanyfinancing or licensing arrangementsbetween a domestic corporation and its foreignparent company or other related foreign person. 2This article provides a comprehensive analysis ofthe impact of state-related party expense addbackprovisions on the deductibility of payments madeto related foreign persons.Federal Restrictions On PaymentsTo Related Foreign PersonsMost states that impose a corporate income tax useeither federal taxable income before the net operatingloss and special deductions (federal Form 1120,Line 28) or federal taxable income (federal Form1120, Line 30) as the starting place for computinga domestic corporation's state taxable income. 3Consequently, states generally conform to the federalrestrictions on deductions for interest and royaltypayments made to a related foreign person.In computing federal taxable income, a domesticcorporation generally may deduct all interest paidor accrued, 4 as well as all rentals or other paymentsmade for the use of property. 5 However, federallaw imposes numerous restrictions on deductionsfor interest and royalty expenses paid to a relatedforeign person.35

Code Sec. 482 gives the IRS the authority to reallocateincome and expense among related partiesif necessary to clearly reflect the income of ataxpayer. For example, if a loan made by a foreignparent company to a domestic corporation providesfor an unreasonably high rate of interest,the IRS may adjust the U.S. subsidiary's interestexpense deductions to reflect an arm's-lengthrate of interest for a comparable loan made undercomparable circumstances. 6 Likewise, the IRSmay adjust the royalty charged on a cross-borderlicensing agreement if it does not provide an arms-length result, and the regulations under CodeSec. 482 provide various methods for determiningan arm's-length royalty rate. 7 Income taxtreaties also generally contain an associated enterprisesprovision, which permits the IRS to adjustthe income derived by related parties if theircommercial or financial relations (e.g., interest orroyalty rates) differ from those that would existbetween unrelated persons. 8Code Sec. 267(a)(2) generally prohibits an accrualbasis taxpayer from deducting interest expenses orroyalty expenses accrued but not yet paid to a relatedperson that is a cash basis taxpayer. Instead, theexpense is deductible in the tax year that the correspondingincome is recognized by the related payee.This provision is based on the principle that the incomeand expense arising from related party transactionsshould be recognized in the same tax year. In thecase of interest and royalties owed to related foreignpersons, no deduction is allowed until the expense ispaid, regardless of the related foreign payee s methodof accounting. 9 For this purpose, a related foreignperson includes, but is not limited to, a foreign personthat is a more than 50-percent shareholder of thedomestic corporation making the interest payment,as well as other members of a controlled group thatincludes the more than 50-percent shareholder. 10Congress enacted Code Sec. 163(j) to limit thetax benefits that a foreign parent corporation obtainsfrom using debt as opposed to equity to financeits U.S. subsidiaries. Code Sec. 163(j) disallowsa deduction for interest expenses that arepaid to a related person and the correspondinginterest income is exempt from U.S. tax, as wellas interest expenses paid to an unrelated personif the debt is guaranteed by a related foreign personand no U.S. withholding tax is imposed onthe unrelated payee's interest income. 11 For thispurpose, a related person includes a more than50-percent shareholder, as well as other membersof a controlled group that includes the more than50-percent shareholder. 12 A domestic corporation'sinterest expense deductions are disallowedonly if the corporation has excess interest expenseand its debt-to-equity ratio exceeds 1.5 to one. 13The amount of disallowed interest expense deductionsmay not exceed the corporation s excessinterest expense for the tax year. 14 Excess interestexpense equals the excess, if any, of the corporation'snet interest expense over 50 percent of itsadjusted taxable income. 15 Any disallowed interestexpense deductions may be carried forwardindefinitely and treated as interest expenses paidin a carryforward year. 1636

State Interest And IntangibleExpenses Addback ProvisionsAlthough most states use federal taxable incomeas the starting point in computing a domestic corporations state taxable income, each state requiresvarious addition and subtraction modifications. 17These adjustments reflect differences in federal andstate policy objectives, as well as fiscal constraints.For example, due to budgetary constraints, manystates do not conform to federal bonus depreciationor the Code Sec. 199 deduction.As indicated in Table 1, 20 states and the Districtof Columbia require domestic corporationsto add back otherwise deductible related party interestexpenses and intangible expenses (royalties,licensing fees, etc.) in computing state taxable income.States have enacted these provisions to limitthe ability of taxpayers to erode the corporateincome tax base through the use of intercompanyfinancing and licensing arrangements which giverise to deductions for interest expenses and intangibleexpenses. The different state addback provisionsshare many common themes. Nonetheless,there are significant differences among the stateswith respect to the specific types of expenses andrelated entities targeted by the addback provisions,as well as the circumstances under which anexception applies and the related-party expense isdeductible for state tax purposes. Therefore, it isessential to thoroughly analyze each state's specificprovisions to ensure compliance.Expenses TargetedState-related party expense addback provisions aregenerally targeted at two types of expenses – interestexpenses and intangible expenses (see Table 1).States generally define "interest expense" by referenceto Code Sec. 163 . For example, for purposes ofthe Maryland addback provision, interest expensemeans "an amount directly or indirectly allowedas a deduction under Section 163 " for purposes ofdetermining federal taxable income. 18 Some statesdisallow interest expense deductions only if theinterest expense is related to intangible property.Such provisions are aimed at tax planning structureswhere an operating company pays a royaltyfor the use of an intangible asset to a related party,and the related party then lends the funds back tothe operating company. For example, the Indianaaddback provision applies to "directly related intangibleinterest expenses," 19 which means interestpaid on loans where "the funds loaned were originallyreceived by the recipient from the payment ofintangible expenses" by the taxpayer or a memberof the same affiliated group as the taxpayer. 20 In asimilar fashion, the New York addback requirementapplies only to "royalty payments," which includespayments for the use of intangible property, as wellas "amounts allowable as interest deductions under[ Code Sec. 163 ] to the extent such amounts are directlyor indirectly for, related to or in connectionwith the acquisition, use, maintenance or management,ownership, sale, exchange or disposition ofsuch intangible assets." 2137

Table 1: States That Require Addback of Related Party ExpensesStateOtherwise deductible expenses added backInterest expenses Intangible expenses Applicable statuteAlabama X X Ala. Code § 40-18-35Arkansas X X Ark. Code Ann. § 26-51-423Connecticut X XConn. Gen. Stat.§§ 12-218c and 12-218dGeorgia X X Ga. Code Ann. § 48-7-28.3Illinois X X 35 Ill. Comp. Stat. § 5/203IndianaInterest expenses relatedto intangible propertyX Ind. Code § 6-3-1-3.5KentuckyInterest expenses relatedto intangible propertyX(and management fees)Ky. Rev. Stat. Ann. § 141.205Maryland X X Md. Code. Ann., Tax-Gen. § 10-306.1Massachusetts X XMass. Gen. Laws ch. 63, §§ 31Iand 31JMichigan X X Mich. Comp. Laws § 206.623MississippiInterest expenses relatedto intangible propertyX Miss. Code Ann. § 27-7-17New Jersey X XN.J. Stat. Ann.§ 54:10A-4.4New YorkInterest expenses relatedto intangible propertyX N.Y. Tax Law § 208.9North CarolinaXN.C. Gen. Stat.§ 105-130.7AOregonInterest expenses relatedto intangible propertyX Or. Rev. Stat. § 314.296Rhode IslandInterest expenses relatedto intangible propertyX R.I. Gen. Laws § 44-11-11TennesseeInterest expenses relatedto intangible propertyXTenn. Code Ann. §§ 67-4-2004 and67 -4-2006Virginia X X Va. Code Ann. § 58.1-402West Virginia X X W. Va. Code § 11-24-4bWisconsinXX(and management fees Wis. Stat. § 71.26and rental expenses)Dist. of Columbia X X D.C. Code § 47-1803.03Source: CCH IntelliConnect, Multistate Quick Answer Charts, Related Party Expense Addback Requirements; and J. Healyand M. Schadewald, 2013 MULTISTATE CORPORATE TAX GUIDE (Chicago: CCH, a Wolters Kluwer business, 2012), at 3217–51.38

States generally define "intangible expenses" to includea wide range of items. For example, the Virginiastatutory definition of "intangible expensesand costs" reads as follows:(1) Expenses, losses and costs for, related to, or inconnection directly or indirectly with the director indirect acquisition, use, maintenanceor management, ownership, sale, exchange,lease, transfer, or any other disposition of intangibleproperty to the extent such amountsare allowed as deductions or costs in determiningtaxable income;(2) Losses related to or incurred in connectiondirectly or indirectly with factoring transactionsor discounting transactions;(3) Royalty, patent, technical and copyright fees;(4) Licensing fees; and(5) Other similar expenses and costs. 22States generally define "intangible property" to includepatents, patent applications, trade names,trademarks, service marks, copyrights, trade secretsand similar types of intangible assets.North Carolina takes a more limited approach. Itsaddback provision applies only to "royalty payments"for the use of intangible property in NorthCarolina. For this purpose, royalties include technicalfees, licensing fees and other similar charges,and intangible property includes only trademarks,patents and copyrights. 23 On the other hand, theKentucky addback provision applies not only to intangibleexpenses and interest expenses related tointangible property, but also to management fees. 24The Wisconsin addback provision applies to "interestexpenses, rental expenses, intangible expenses,[and] management fees." 25Definition Of "Related Party"State addback provisions apply to interest expensesand intangible expenses paid or accrued to a relatedparty (typically, referred to as a "related member").The definition of a related member varies from stateto state, but generally means a component memberof a controlled group under Code Sec. 1563 (whichis generally limited to domestic corporations), 26 ashareholder that directly or indirectly owns 50 percentor more of the taxpayer or a corporation thatis 50 percent or more owned, directly or indirectly,by the taxpayer (see Table 2). For purposes of determiningstock ownership, the attribution rulesfound in Code Sec. 318 generally apply. The Oregonstatutory definition of a related member is indicativeof the approach taken by many states, andreads as follows:"Related member" means a person that, with respectto the taxpayer during all or any portion ofthe taxable year, is:(A) A related entity;(B) A component member as defined in section1563(b) of the Internal Revenue Code;(C) A person to or from whom there is attributionof stock ownership in accordance with section1563(e) of the Internal Revenue Code; or39

(D) A person that, notwithstanding the persons form of organization, bears the same relationshipto the taxpayer as a person describedin this paragraph."Related entity" means:(A) A stockholder who is an individual, or amember of the stockholder s family as defined insection 318 of the Internal Revenue Code, if thestockholder and the members of the stockholder'sfamily own, directly, indirectly, beneficially orconstructively, in the aggregate, at least 50 percentof the value of the taxpayer's outstanding stock;(B) A stockholder, partnership, limited liabilitycompany, estate, trust or corporation, if thestockholder and the stockholder's partnerships,limited liability companies, estates, trusts or corporationsown, directly, indirectly, beneficiallyor constructively, in the aggregate, at least 50percent of the value of the taxpayer's outstandingstock; or(C) A corporation, or a party related to thecorporation in a manner that would requirean attribution of stock from the corporationto the party or from the party to the corporationunder the attribution rules of the InternalRevenue Code if the taxpayer owns, directly,indirectly, beneficially or constructively, at least50 percent of the value of the corporation'soutstanding stock. The attribution rules of thecode shall apply for purposes of determiningwhether the ownership requirements of thisdefinition have been met. 27Table 2. Related Corporations (Payees) Targeted by Expense Addback ProvisionsAlabamaCode Sec. 1563(controlledgroup)Statutory definition of related corporation50% ormoreshareholder50% ormorecorporationOtherIncludes (but not limited to) corporationsincluded in taxpayer’s federalconsolidated tax returnCommoncontrolthresholdArkansas Related parties under Code Sec. 267 > 50%Connecticut X X X 50%Georgia X X X 50%IllinoisExcluded from taxpayer’s unitarygroup because (1) foreign corporationwith 80% of activity outsideU.S., or (2) required to use specializedapportionment formula80%> 50%ApplicablestatuteAla. AdminCode r. 810-3-35-.02Ark. Code Ann.§ 26-51-423Conn. Gen.Stat.§§ 12-218cand dGa. Code Ann.§ 48-7-28.335 Ill. Comp.Stat. §§ 5/203and 5/150140

Code Sec. 1563(controlledgroup)Statutory definition of related corporation50% ormoreshareholder50% ormorecorporationIndiana X XOtherMember of federal affiliated group,except foreign corporations includibleand 50% ownership requirementCommoncontrolthresholdKentucky X X 50%Maryland X X X 50%Massachusetts X X X 50%Michigan“related to the taxpayer by ownershipor control”Mississippi X X X 50%New Jersey X X X 50%New YorkNorth Carolina X X“controlling interest” defined as30% or more ownershipIncludes 80% or more owned corporationsOregon X X X 50%Rhode Island X X X 50%Tennessee “more than 50% ownership interest” > 50%Virginia X X X 50%West Virginia X X X 50%Wisconsin X Related parties under Code Sec. 267 > 50%Dist. ofColumbia50%30%50%X X X 50%ApplicablestatuteInd. Code§ 6-3-2-20Ky. Rev. Stat.Ann. § 141.205Md. Code. Ann.,Tax-Gen. § 10-306.1Mass. Gen.Laws ch. 63,§ 31IMich. Comp.Laws § 206.623Miss. Code Ann.§ 27-7-17N.J. Stat. Ann.§ 54:10A-4.4N.Y. Tax Law§ 208.9N.C. Gen. Stat.§ 105-130.7AOr. Rev. Stat.§ 314.296R.I. Gen. Laws§ 44-11-11Tenn. Code Ann.§ 67-4-2004Va. Code Ann.§ 58.1-302W. Va. Code§ 11-24-3aWis. Stat.§ 71.22D.C. Code§ 47-1803.03Source: CCH IntelliConnect, Multistate Quick Answer Charts, Related Party Expense Addback Requirements; and J. Healy and M.Schadewald, 2013 Multistate Corporate Tax Guide (Chicago: CCH, a Wolters Kluwer business, 2012), at 3217–51.Therefore, for purposes of the state addback provisions,a foreign corporation generally qualifies as arelated member if it either owns 50 percent or moreof the stock of a domestic corporation, or it is 50percent or more owned by a domestic corporation.Note that a foreign corporation that owns 50 percentof a domestic joint venture meets this requirement.Not all states employ the conventional approach todefining a related member. For example, New Yorkdefines a related member by reference to a "controllinginterest," which means a 30-percent or moreownership interest. 28 Arkansas defines a relatedmember by reference to Code Sec. 267 . 29 Wisconsinalso defines a related member by reference to Code41

Sec. 267 , as well as Code Sec. 1563 . 30 Under CodeSec. 267(b) , two corporations are related if there ismore than 50 percent common ownership. 31 A morethan 50-percent ownership test also applies for purposesof the Tennessee addback provision. 32 For purposesof the Alabama addback provision, a relatedmember includes but is not limited to any memberof a federal affiliated group (which requires 80 percentor more common ownership and is generallylimited to domestic corporations) that has elected tofile a federal consolidated tax return. 33 The Michiganaddback statute does not provide an explicit commonownership threshold, but instead defines a relatedmember as a "person related to the taxpayerby ownership or control." 34 Finally, the Illinois addbackprovision applies to payments made to (1) aforeign person that is excluded from the Illinois unitarybusiness group because it qualifies as an 80/20company, and (2) a person that is excluded fromthe unitary business group because it is required touse a specialized industry apportionment formula,such as a financial organization or a transportationcompany. An 80/20 company is a related corporation(more than 50-percent control test) whosebusiness activity outside the United States is 80percent or more of its total business activity. 35Exceptions To Addback RequirementState addback provisions are designed to prevent corporationsfrom using intercompany financing andlicensing arrangements to avoid state income taxes.These provisions generally apply automatically to allrelated party interest expenses and intangible expenses,including those related party payments that are motivatedby legitimate business purposes rather than taxavoidance. As a consequence, each state provides somerelief in the form of exceptions from the automatic addbackrequirement. These exceptions are complex andvary from state to state. Nevertheless, they do sharesome common themes (see Table 3 for a summary).Table 3. Exceptions to Addback RequirementAlabamaArkansasRecipient’s incomeis taxed by a foreigncountryIncome is taxed by a foreigncountry with U.S. tax treatyand recipient is a resident ofthat foreign countryIncome is taxed by a foreigncountry with U.S. tax treatyRecipient’s incomeis taxed by a U.S.state Conduit payment OtherIncome is taxed by a stateIncome is taxed by a stateExpenses pass through to unrelatedthird party, and other requirementsare met• Adjustment is unreasonable• Taxpayer agrees to alternateadjustment• Principal purpose of transactionis not tax avoidance, and recipientis not primarily engaged inactivities involving intangibles orfinancing of related entities• Taxpayer agrees to alternateadjustment• Recipient is in nontax location,50 full-time employees, andproperty and revenue both exceed$1 million•Transactions is not intended toavoid tax and is conducted atarm’s length42

ConnecticutGeorgiaIllinoisIndianaRecipient’s incomeis taxed by a foreigncountry• Interest expense—Transactionhas business purpose otherthan tax avoidance, is conductedat arm’s length, andincome is taxed by a foreigncountry at rate within 3 percentagepoints of CT rate• Interest expense—Recipientis located in foreign countrywith U.S. tax treatyTransaction has business purpose,amount is arm’s length,and recipient is domiciled inforeign country with U.S. taxtreatyIncome is taxed by a foreigncountryPrincipal purpose of transactionis not tax avoidance,amount is arm’s length, andincome is taxed by a U.S.possession or foreign countrythat is recipient’s commercialdomicileRecipient’s incomeis taxed by a U.S.state Conduit payment OtherInterest expense—Transactionhas business purposeother than tax avoidance,is conducted at arm’slength, and income istaxed by a state at ratewithin 3 percentage pointsof CT rateTransaction is arm’slength, and income istaxed by a stateIncome is taxed by a statethat does not mandateunitary reportingPrincipal purpose oftransaction is not taxavoidance, amount isarm’s length, and incomeis taxed by a state thatis recipient’s commercialdomicileTransaction has business purpose,and recipient pays expenses tounrelated third party in same yearPrincipal purpose of transaction isnot tax avoidance, and recipientpays expenses to unrelated thirdparty in same year• Principal purpose of transactionis not tax avoidance, and recipientpays expenses to unrelatedthird party in same year• Principal purpose of transactionis not tax avoidance, taxpayerreceives amount from unrelatedthird party, and taxpayerpays expenses in arm’s-lengthtransaction• Adjustment is unreasonable• Taxpayer agrees to alternateadjustment• Taxpayer elects to compute CTtax on unitary basisTaxpayer agrees to alternateadjustment• Adjustment is unreasonable• Taxpayer agrees to alternateadjustment• Principal purpose of transaction isnot tax avoidance, and amount isarm’s length• Taxpayer receives dividend frompayee• Adjustment is unreasonable• Taxpayer agrees to alternateadjustment• Taxpayer and recipient file INcombined or consolidated return• Principal purpose of transaction isnot tax avoidance, and recipientregularly engages in transactionsinvolving intangibles with unrelatedmembers on similar terms• Principal purpose of transaction isnot tax avoidance, amount is arm’slength, and recipient is engagedin substantial business activitiesinvolving intangibles or other substantialbusiness activitiesKentuckyMarylandIncome is taxed by a foreigncountry, amount is arm’slength, and recipient is engagedin substantial businessactivities (unrelated to intangiblesor financing of relatedmembers) that require officesand full-time employeesPrincipal purpose of transactionis not tax avoidance, amount isarm’s length, and income is taxedby a U.S. possession or foreigncountry with U.S. tax treaty ataggregate effective tax rate of4% or moreIncome is taxed by a state,amount is arm’s length,and recipient is engagedin substantial businessactivities (unrelated tointangibles or financing ofrelated members) that requireoffices and full-timeemployeesPrincipal purpose of transactionis not tax avoidance,amount is arm’slength, and income istaxed by a state at aggregateeffective tax rate of4% or morePrincipal purpose of transactionis not tax avoidance, amount isarm’s length, and recipient paysexpense to unrelated third partyin same year• Taxpayer agrees to alternateadjustment• Taxpayer and recipient includedin KY consolidated return• Recipient engages in transactionswith unrelated members on identicalterms• Management fees—Amount isarm’s lengthInterest expense—Tax avoidance isnot principal purpose of transaction,amount is arm’s length, andtaxpayer and recipient are banks43

Recipient’s incomeis taxed by a foreigncountryMassachusetts • Interest expense—Principal Interest expense—Principalpurpose of transac-purpose of transaction is nottax avoidance, amount is tion is not tax avoidance,arm’s length, and income is amount is arm’s length,taxed by a foreign country and income is taxed by aat rate within 3 percentage state at rate within 3 percentagepoints of MA ratepoints of MA rate• Interest and intangible expenses—Principalpurpose of transactionis not tax avoidance,and recipient is a resident of aforeign country with U.S. taxtreaty but is not a controlledforeign corporationMichigan Transaction has business purposeother than tax avoidance,is conducted at arm’s length,and recipient is organized inforeign country with U.S. taxtreatyMississippiNew Jersey• Interest expense—Principalpurpose of transaction is nottax avoidance, amount isarm’s length, and income istaxed by a U.S. possession orforeign country at rate within3 percentage points of NJ rate• Interest expense—Recipientis located in foreign countrywith U.S. tax treatyRecipient’s incomeis taxed by a U.S.state Conduit payment OtherInterest expense—Principalpurpose of transactionis not tax avoidance,amount is arm’s length,and income is taxed by astate at rate within 3 percentagepoints of NJ ratePrincipal purpose of transaction isnot tax avoidance, and recipientpays expenses to unrelated thirdparty in same yearTransaction has business purposeother than tax avoidance, isconducted at arm’s length, andis a pass through of comparabletransaction between recipientand unrelated third partyRecipient pays expenses to unrelatedthird party in same yearPrincipal purpose of transaction isnot tax avoidance, and recipientpays expenses to unrelated thirdparty in same year• Adjustment is unreasonable• Taxpayer agrees to alternateadjustment• Transaction has business purposeother than tax avoidance, isconducted at arm’s length, andadjustment is unreasonable• Transaction has business purposeother than tax avoidance, is conductedat arm’s length, and addbackresults in double taxation• Taxpayer and recipient includedin MI combined returnTransaction has business purposeother than tax avoidance, andrecipient is not primarily engagedin activities involving intangibles• Adjustment is unreasonable• Taxpayer agrees to alternateadjustment• Interest paid to an independentlender and taxpayer guaranteesdebtNew York Recipient is organized inforeign country with U.S. taxtreaty and is taxed by foreigncountry at rate equal to orgreater than NY rateNorth Carolina Recipient is organized inforeign country with U.S. taxtreaty, and is taxed by foreigncountry at rate equal to orgreater than NC rateOregonTransaction has business purpose,amount is arm’s length, and recipientpays expenses to unrelatedthird party in same yearRecipient pays expenses to unrelatedthird party in same yearTaxpayer and recipient included inNY combined returnIn same year, recipient includesthe amount as income in NC taxreturn and does not deduct theamount• Owner and user of intangible areincluded in same OR consolidatedtax return• Separation of ownership and useof intangible does not result inevasi on of tax or distortion ofinco me44

Rhode IslandTennesseeVirginiaWest VirginiaWisconsinDistrict ofColumbiaRecipient’s incomeis taxed by a foreigncountryInterest expense—Principalpurpose of transaction is nottax avoidance, amount is arm’slength, and income is taxedby a U.S. possession or foreigncountry at rate within 3 percentagepoints of RI rateRecipient is located in a foreigncountry with U.S. tax treatyIntangible expenses—Income istaxed by a foreign country withU.S. tax treatyTransaction has business purpose,amount is arm’s length,recipient is organized in aforeign country with U.S. taxtreaty, and is taxed by foreigncountry at rate equal to orgreater than WV rateIncome is taxed by a U.S. possessionor foreign country ataggregate effective tax rateequal to or greater than 80%of taxpayer’s aggregate effectivetax ratePrincipal purpose of transactionis not tax avoidance,amount is arm’s length, andincome is taxed by a U.S. possessionor foreign country withU.S. tax treaty at aggregate effectivetax rate of 4% or moreRecipient’s incomeis taxed by a U.S.state Conduit payment OtherInterest expense—Principalpurpose of transactionis not tax avoidance,amount is arm’s length,and income is taxed by astate at rate within 3 percentagepoints of RI rateIncome is taxed by a state,other than a state in whichmembers file a combinedreport and recipient’sincome offsets taxpayer’sexpenseIntangible expenses—Incomeis taxed by a stateIncome is taxed by a stateat rate equal to or greaterthan WV rateIncome is taxed by a stateat aggregate effective taxrate equal to or greaterthan 80% of taxpayer’saggregate effective taxrate, other than a statein which members filea combined report andrecipient’s income offsetstaxpayer’s expensePrincipal purpose of transactionis not tax avoidance,amount is arm’slength, and income istaxed by a state at aggregateeffective tax rate of4% or moreTransaction does not have taxavoidance as its significant purpose,and recipient pays expenses tounrelated third party in same yearRecipient pays expenses to unrelatedthird party in same yearIntangible expenses— Principalpurpose of transaction is not taxavoidance, and recipient paysexpenses to unrelated third partyin same yearIntangible expenses— Transactionhas business purpose, and recipientpays expenses to unrelatedthird party in same yearRecipient pays expenses to unrelatedthird party in same yearPrincipal purpose of transactionis not tax avoidance, amount isarm’s length, and recipient paysexpenses to unrelated third partyin same year• Adjustment is unreasonable• Taxpayer agrees to alternateadjustmentUpon application by taxpayer, IRSdetermines that principal purposeof expenses is not tax avoidance• Intangible expenses—Recipientderives at least one-third ofrevenues from licensing intangiblesto unrelated third partiesin comparable transactions• Interest expense—Recipient hassubstantial business operationsrelated to interest-generatingactivity, 5 full-time employees,interest is not related to intangibleproperty, business purposeother than tax avoidance,arm’s-length amount, and otherrequirements are met• Taxpayer agrees to alternateadjustment• Interest expense—Transactionhas business purpose andamount is arm’s length• Income is taxed by a U.S. possessionat rate equal to or greaterthan WV rate• Recipient is a bank holding companyor subsidiary thereof, withcertain exceptions• Primary motivation for transactionis a business purpose otherthan tax avoidance, transactionchanges economic position oftaxpayer in a meaningful wayapart from tax effects, andamount is arm’s lengthRecipient is allowed deduction onDC tax return to extent relatedpayer is denied a deductionSource: CCH IntelliConnect, Multistate Quick Answer Charts, Corporate Income Tax, Related Party Expense Addback Requirements; J. Healy and M.Schadewald, 2013 Multistate Corporate Tax Guide (Chicago: CCH, a Wolters Kluwer business, 2012), at 3217–51; and applicable state statutes (seeTable 1 for listing).45

Exceptions Aimed At Foreign PayeesMost states permit a deduction for interest expensesor intangible expenses paid to a related foreignperson, but generally only if one or more of thefollowing requirements are met: (1) the recipient'sincome is subject to tax in a foreign country, (2)the recipient resides in a foreign country that hasan income tax treaty with the United States, (3) thetransaction is at arm's length, or (4) the transactionhas a business purpose other than tax avoidance.The specific requirements for the foreign payee exceptionvary from state to state, as illustrated by thefollowing examples:Georgia. The recipient is domiciled in a foreigncountry that has a comprehensive income taxtreaty with the United States, the expenses arearm's-length amounts, and the transaction has avalid business purpose. 36Illinois. The recipient's income is subject to incometax in a foreign country. 37Indiana. The recipient's income is subject toincome tax in a foreign country that is the recipient'scommercial domicile, the terms arecomparable to an arm's-length transaction, andthe principal purpose of the transaction is not taxavoidance. 38Massachusetts. In the case of interest expenses, therecipient's interest income is subject to income taxin a foreign country at a rate that is with withinthree percentage points of the state's statutory taxrate, the transaction reflects an arm's-length rateof interest and terms, and the principal purposeof the transaction is not tax avoidance. 39New York. The recipient's income is subject toincome tax in a foreign country that has a comprehensiveincome tax treaty with the UnitedStates, and is taxed at a rate at least equal to thetax rate imposed by the state. 40Virginia. In the case of intangible expenses, therecipient s income is subject to income tax in aforeign country that has a comprehensive incometax treaty with the United States. 41Many states that provide an exception for foreignpayees often require that the payee reside in a foreigncountry that has entered into a "comprehensiveincome tax treaty" with the United States. Table4 provides a listing of such countries, as defined byCode Sec. 1(h) . Many states also require that therelated party transaction giving rise to the interestexpenses or intangible expenses have a businesspurpose other than tax avoidance or that the principalpurpose of the transaction is not tax avoidance.Some states provide statutory definitions of a validbusiness purpose. For example, New York defines a"valid business purpose" as "one or more businesspurposes, other than the avoidance or reductionof taxation, which alone or in combination constitutethe primary motivation for some businessactivity or transaction, which activity or transactionchanges in a meaningful way, apart from taxeffects, the economic position of the taxpayer." 4246

Table 4. Comprehensive Income Tax Treaties with the United StatesThat Include Exchange of Information ProvisionAustralia Germany Luxembourg South AfricaAustria Greece Malta SpainBangladesh Hungary Mexico Sri LankaBulgaria Iceland Morocco SwedenBarbados India Netherlands SwitzerlandBelgium Indonesia New Zealand ThailandCanada Ireland Norway Trinidad and TobagoChina Israel Pakistan TunisiaCyprus Italy Philippines TurkeyCzech Republic Jamaica Poland UkraineDenmark Japan Portugal United KingdomEgypt Kazakhstan Romania VenezuelaEstonia Korea Russian FederationFinland Latvia Slovak RepublicFrance Lithuania SloveniaSource: IRS Notice 2011-64 (Aug. 18, 2011), which provides a listing of comprehensive income tax treatiesthat meet the requirements for a preferential tax rate on qualified dividends under Code Sec. 1(h) .Other ExceptionsAnother common exception to the automatic addbackrequirement applies if the related payee s correspondingincome is subject to tax in a U.S. state. Aswith the exception for payments to related foreignpersons, the specific requirements vary from state tostate, but generally include one or more of the followingfactors: (1) the recipient's income is subjectto state tax at some minimum tax rate, (2) the transactionis at arm's length, and/or (3) the transactionhas a business purpose other than tax avoidance.A third common exception to the automatic addbackrequirement is the conduit payment exception,under which a state permits a deduction for relatedparty interest expenses or intangible expenses if inthe same tax year the related payee pays the amountto an unrelated person and tax avoidance was not aprincipal purpose of the related party payment. Insuch situations, the related payee serves as a conduitfor the taxpayer s payment of interest or intangibleexpenses to an unrelated third party. An example ofa conduit payment arrangement is centralized cashmanagement, where the excess cash generated bysome operating affiliates is used to pay the expensesof other operating affiliates.Many states also provide a catch-all relief provision,under which the addback of related party expensesis not required if the taxpayer can establish that theadjustment produces an "unreasonable result." 43Finally, as summarized in Table 3, states provide47

various other types of exceptions, many of whichare unique to a particular state. 44Summary And ConclusionsAt present, 20 states and the District of Columbiahave enacted provisions that may deny a domesticcorporation a deduction for interest expensesand intangible expenses paid to a related foreignperson. Although the different state statutes sharemany common themes, there are significant differencesamong the states, particularly with respect tothe circumstances under which an exception appliesand a deduction is permitted. It is importantto consider the implications of these deductiondisallowance provisions when analyzing the taxconsequences of interest expenses or intangible expensespaid by a domestic corporation to a foreignparent corporation or other related foreign person.E NDNOTES12Forty-five states and the District of Columbia imposecorporate income taxes, with tax rates ranging fromabout five to 10 percent (CCH IntelliConnect, MultistateQuick Answer Charts, Table of 2013 CorporateIncome Tax Rates ). Nevada, Ohio, South Dakota,Washington and Wyoming do not impose corporateincome taxes. However, Ohio and Washington imposegross receipts taxes.IRS statistics indicate that the magnitude of thesetransactions is significant. A domestic corporation thatis 25-percent-or-more owned by a single foreign personmust report the dollar amounts of these transactionson Form 5472 ( Code Sec. 6038A ). For tax year 2008,large domestic corporations (total gross receipts of$500 million or more) reported that they made $68.134567891011121314151617billion of interest payments and $6.9 billion of royaltypayments to related foreign persons. Isaac J. Goodwin,Transactions Between Large Foreign-Owned DomesticCorporations and Related Foreign Persons, 2008 , STA-TISTICS OF INCOME BULLETIN (Fall 2012).J. Healy and M. Schadewald, 2013 MULTISTATE COR-PORATE TAX GUIDE (Chicago: CCH Incorporated,2012), at 3001 – 11.Code Sec. 163(a) .Code Sec. 162(a) , and Reg. §1.162-11.Reg. §1.482-2(a).Reg. §1.482-5.See , for example, Article 9 of the U.S. Model IncomeTax Treaty of 2006.Code Sec. 267(a)(3) and Reg. §1.267(a)-3(b). Specialrules apply to payments that represent income effectivelyconnected with the conduct of a U.S. trade or business,income which is exempt under a treaty, or incomederived by a controlled foreign corporation or a passiveforeign investment company. Reg. §1.267(a)-3(c).Reg. §1.267(a)-3(b)(1).Code Sec. 163(j)(3) .Code Secs. 163(j)(4) and 267(b).Code Sec. 163(j)(2)(A) .Code Sec. 163(j)(1)(A) .Code Sec. 163(j)(2)(B) . Adjusted taxable income is arough approximation of the corporation's cash flowfrom operations, before taking into account any interestexpense deductions. Code Sec. 163(j)(6)(A) .Code Sec. 163(j)(1)(B) .Common addition modifications include state incometaxes, net operating losses, dividends-received deductions,Code Sec. 199 deduction, federal bonus depreciationand interest expenses and intangible expenses paidto related parties. Common subtraction modifications48

include federal interest income, state net operatingisted when Illinois taxpayers could deduct royalties andloss deductions, state dividends-received deductions,interest paid to an 80/20 company ( see Zebra Technolo-Subpart F income, and Code Sec. 78 gross-up income.gies Corp. v. Dept. of Revenue , 344 Ill.App.3d 474 [2003]).18Md. Code. Ann., Tax-Gen. § 10-306.1.36Ga. Code Ann. § 48-7-28.3.19Ind. Code § 6 -3-1-3.5.3735 Ill. Comp. Stat. § 5/203.20Ind. Code § 6 -3-2-20.38Ind. Code § 6 -3-2-20.21N.Y. Tax Law § 208.9.39Mass. Gen. Laws ch. 63, § 31J .22Va. Code Ann. § 58.1-302 .40N.Y. Tax Law § 208.9 .23N.C. Gen. Stat. § 105-130.7A. The addback require-41Va. Code Ann. § 58.1-402 .ment also applies to any "time price differential42N.Y. Tax Law § 208.9 .charged for the late payment" of a royalty.43For example, in Beneficial New Jersey, Inc. v. Director,24Ky. Rev. Stat. Ann. § 141.205 . Management feesDivision of Taxation [No. 009886-2007 (N.J. Tax Ct.,includes expenses paid for "services pertaining toAug. 31, 2010)], the New Jersey Tax Court ruled thataccounts receivable and payable, employee ben-a finance company could deduct interest it paid on aefit plans, insurance, legal, payroll, data processing,loan from its parent corporation because the addbackpurchasing, tax, financial and securities, accounting,adjustment was unreasonable. See Technical Advisoryreporting and compliance services or similar services."Memorandum TAM-13 (N.J. Div. of Taxn., Feb. 24, 2011)25Wis. Stat. § 71.26 . See Wis. Stat. § 71.11 for a defini-for guidance regarding the types of situations in whichtion of "management fees" and "rental expenses."the New Jersey Division of Taxation will recognize the26Generally, a foreign corporation must be engaged indisallowance of a deduction to be unreasonable. Ona U.S. trade or business to qualify as a componentthe other hand, in Kimberly-Clark Corporation v. Com-member of a controlled group of corporations undermissioner of Revenue [981 N.E.2d 208 (2013)], the Mas-Code Sec. 1563 . Reg. §1.1563-1(b)(2) .sachusetts Appeals Court ruled that the unreasonable27Or. Rev. Stat. § 314.296 .adjustment exception was not satisfied. Likewise, in28N.Y. Tax Law § 208.9 .Surtees v. VFJ Ventures, Inc . [8 So.3d 983 (2008); cert.29Ark. Code Ann. § 26-51-423.denied , U.S. No. 08-916, Apr. 27, 2009], the Alabama30Wis. Stat. § 71.22 . Special rules apply to a real estateSupreme Court affirmed a lower court's decision thatinvestment trust.the addback adjustment was reasonable because the31See Reg. §1.267(a)-3(b)(1) for the definition of a "re-resulting tax was not "out of proportion" to the corpo-lated foreign person."ration's activities in Alabama.32Tenn. Code Ann. § 67-4-2004.44In addition to the exceptions summarized in Table 3,33Ala. Admin Code r. 810-3-35-.02, and Code Sec. 1504 .a few states ( e.g. , West Virginia) permit the related34Mich. Comp. Laws § 206.623 .payer to claim a credit for the taxes paid by the re-3535 Ill. Comp. Stat. §§ 5/203 and 5/1501. Illinois enactedlated payee on the corresponding income ( e.g. , W.this provision to close the perceived loophole which ex-Va. Code § 11-24-4b).49

FEATURED ARTICLESISSUE 30 | JUNE 6, 2013Recurring Issues In African M & Aby Nick Aziz and Tara Walsh,McDermott Will & EmeryEconomic growth in sub-Saharan Africa continuesat a pace that is impressive in comparison with globalaverages. While the more mature markets in theUnited States and Europe continue to struggle withthe consequences of the financial crisis of 2008, theoutlook for business in Africa is very different.Some of the outstanding performers – Angola, Nigeriaand Chad – owe their progress to oil, but whathas helped fuel sustained growth across this regionis the effect of a marked transition away from subsistencefarming to employment in the wider commercialsector. Analysis from the McKinsey GlobalInstitute suggests that just 32 per cent of Africa'sGDP growth from 2000 through 2008 was generatedfrom natural resources and related governmentspending. The remainder came from the wholesaleand retail, transportation, telecommunications andmanufacturing sectors. This highlights a fundamentaldemographic change that is characterized by Africa'sincreasing urbanization and its rising consumerledmiddle class, leading to new potential investmentopportunities in the region in food production, fastmoving consumer goods, financial services/consumerfinance, manufacturing and technology.Background TrendsMerger & acquisition activity in the region rangesfrom auction sales of long-held family businessesthat are now run by professional managers becausethe younger generation is either too disparateto present a manageable shareholder base orsimply not interested in carrying on the business,to auction sales of African subsidiaries of familyownedinternational groups where the Africancomponents are now valued at higher multiplesthan the group as a whole. Exits also are beingprecipitated by the comparatively prohibitivecost of local bank finance in Africa, which is forcingbusiness owners to sell or to seek alternativesources of finance such as from strategic foreignequity investors.First time international investors are most likely tomake strategic alliances with local, well-establishedgroups, for example Danone SA's USD686 million(or 37.8 per cent) stake in the Moroccan dairybusiness, Centrale Laitiere. Other investors aremaking strategic acquisitions as part of a "buy andbuild" strategy to embed themselves into the regionwithin a sector. Examples include Singapore-basedOlam International's acquisitions of Crown FlourMills, OK Foods and Ranona, which together benefitfrom integrated scale and synergies.50

Recurring IssuesRestructuring of the Target BusinessTarget businesses, particularly the ones establishedover generations, are rarely single purpose vehiclesand can include a wide range of unrelated and undocumentedactivities and trading relationshipsboth within the group and with counterparties.As a condition to closing, the target group shouldbe required to undergo a restructuring to formalizethird-party trading relationships, formalize ordischarge related-party agreements and intra-groupdebt, discharge local debt (as the buyer will oftenwant to refinance using international bank debtwithout prior security granted to local banks), divestnon-core assets and put any arrangement withany member of the selling shareholder group thatis to remain in place post-closing on fully documented,arm's length terms. More often than not,the pre-sale restructuring is as complex as the transactionitself, but if carried out effectively, it canreduce significantly the transaction risk associatedwith the acquisition.Selling ShareholdersCompanies in Africa very often include minorityshareholders unrelated to the controlling familygroup. These should be bought out by the principalcontrolling shareholder prior to sale at a fairand transparent price on arm's length terms, oreffectively bound into the sale process. Ideally,a buyer should seek a cohesive seller group withaligned interests as a counterparty to the purchaseagreement.Sale StructuresSellers often create an offshore holding companystructure pre-sale. It is essential to ensure the structuredoes not infringe local laws that restrict foreignownership (normally restricted to minerals, defence,media and the banking industries) or foreigninvestment controls, for example, requiring centralbank approval. This applies to both share ownershipand shareholder debt.RestrictionsLocal exchange controls and other regulations maylimit the ability of the buyer to repatriate profits orotherwise leverage the investment. A buyer shouldtherefore seek advice as to its intended method ofrevenue repatriation before acquisition. Some jurisdictionsalso require technology, licensing androyalty remittance arrangements to be approved bylocal regulatory authorities, and impose financialand practical constraints on inbound investors toensure local technology is not exploited to the detrimentof the local economy.Management and EmployeesMost jurisdictions impose quotas on expatriate employeesand many require social infrastructure as acondition of investment, in addition to national insuranceand social fund contributions.Effective Due Diligence and DisclosureThis area is critical. Even though buyers typicallyencounter undocumented business arrangements,significantly lower standards of corporate governanceand vague and inaccurate data disclosure51

and explanation through the due diligence process,it is still vital to conduct as great a degree ofdue diligence as the transaction timetable provides.Interpreting and clarifying disclosure against thewarranties in the purchase agreement, and the consequencesof that disclosure, are important giventhat local lawyers, local accounting firms and localmanagement typically will be involved in theinitial diligence exercise, and they may not fullyunderstand the absolute requirement for certaintyof expression. Unless the timetable is critical to thetransaction (in which case any curtailment of duediligence must be balanced by enhanced contractualprotections), the benefits to a buyer of a thorough,drawn out due diligence and disclosure processto mitigate diminution of value post-closingcannot be over-emphasised.Corrupt PracticesThe existence of the US Foreign Corrupt PracticesAct and the UK Bribery Act imposes a heightenedrisk on investors. As part of the due diligenceprocess, buyers should determine the risk level ofpotential corruption involved in the transactionand target group and allocate resources accordingly,identify any "red flag" activities that may signalcorrupt practices, record all incidents, considervoluntary self-disclosure (early disclosure can mitigateor eliminate successor liability for violationsuncovered pre-acquisition), seek warranty and indemnityprotection in the purchase agreement, andaudit and strengthen internal controls immediatelyafter closing. Concentrated due diligence, self-reporting,contractual protection and post-closingimplementation of robust controls are key to eliminatingor mitigating liability for pre-closing corruptpractices within the target group.Political Risk/ExpropriationA buyer should check to see whether the countryconcerned is a party to any bilateral investmenttreaty protecting foreign investment. If there is areal risk of expropriation, methods to mitigate therisk include securing co-investment from an internationaldevelopment corporation and/or obtainingpolitical risk insurance.Transaction Governing LawOwing to uncertainty about enforcement of contractsand the reliability of the local courts, transactionsin Africa are typically governed by English orFrench law, depending on the jurisdiction. Occasionallyminority shareholders will seek to challenge theseprovisions, but generally the courts in most Africanjurisdictions recognise offshore governing law anddispute resolution in relation to contracts involvinglocal assets. One form of additional protection is tohave an English law irrevocable power of attorneyfrom the minority shareholders in favour of one controllingshareholder, pursuant to which they expresslywaive their rights to challenge subsequently the purchaseagreement's governing law and jurisdiction.The Authors:Nick Azis is a partner based in the Firm's Londonoffice. He has advised on a broad range of UK domesticand cross-border public and private company52

M&A. Nick has extensive experience acting for theFirm's international clients, who both operate andinvest in Africa, most particularly in the food & beverageand energy sectors. He can be contacted on+44 20 7577 6947 or at njazis@mwe.com .Tara Walsh is an associate based in the Firm's Londonoffice. She has advised on the full range ofcross-border and domestic corporate and corporatefinance work, including private M&A, jointventures, public takeovers, equity and debt capitalmarkets, reorganisations and restructurings. Shehas acted for a number of the Firm's clients, whoinvest in the region both through direct and indirectfund investments. She can be contacted on+44 20 7577 3448 or at twalsh@mwe.com .53

NEWS ROUND-UP: INTERNATIONAL TRADEISSUE 30 | JUNE 6, 2013China, Germany Vow ToNegotiate Away Trade DisputesAccording to joint statements following a meetingbetween Chinese Premier Li Keqiang and GermanChancellor Angela Merkel in Berlin on May 26,both countries intend to avoid the imposition ofEuropean Union (EU) duties in trade disputes oversolar and wireless communications equipment,and to resolve all trade conflicts by negotiation.Earlier this month, it was disclosed that the EuropeanCommission (EC) is considering opening,on its own initiative, anti-dumping duty (AD)and anti-subsidy countervailing duty (CVD) investigationsinto imports into the EU from Chinaof mobile telecommunications equipment, whichtotals around EUR1bn (USD1.29bn) per year.The EC had not received complaints from the industryconcerned before opening its "ex officio"investigations, but believed it has prima facie evidenceof subsidization by China and of mobile telecommunicationsequipment being sold in the EUat prices lower than market value.Earlier this year, the EC had also confirmed that it isreadying substantial ADs and, subsequently, CVDsagainst Chinese exporters of solar panels and solarcells into the EU. In 2011, China exported solarpanels and their key components worth aroundEUR21bn to the EU.Warnings of the serious consequences of both actionshave already been given by China's Ministryof Commerce (MOFCOM), which, with regardto the EC's unilateral action against Chinese mobiletelecommunications exporters, said that "thetrade restriction measures unilaterally taken bythe EU will undoubtedly do harm to industrialinterests on both sides," especially as China believesthat most EU member countries disagreewith launching an investigation.MOFCOM has stressed recently that trade disputesshould always be settled through dialogueand consultation, and that countries should exercisecaution and restraint before using trade remedymeasures. The Ministry sees itself as fighting atendency, led by the US, and now the EU, towardsglobal trade protectionism following the financialand economic crisis, where countries are abusingthe use of trade remedy tariffs.Following the meeting with Chancellor Merkel, PremierLi reiterated China's concerns and its oppositionto the EC's "abuse of trade remedy measures"as giving "the wrong signal of trade protectionism."He continued that China hopes to resolve problemsthrough dialogue and consultation to solve problems,rather than fight a trade war that "would notonly hurt Chinese business and jobs, but also damagethe interests of European industries, business54

and consumers." As Germany and China have amutual position in opposing trade protectionism,Li looked forward to Germany playing an activerole in promoting the resolution of the on-goingtrade friction, and maintaining the overall situationof China-EU economic and trade cooperation.In reply, Merkel confirmed that Germany didindeed advocate cooperation to resolve problems,so as to maintain an expansion of tradeand mutual commercial benefits. She promisedto do everything she could to avoid the impositionof stringent duties, with both sides seekingcommon ground to resolve the disputes asquickly as possible.EU, China Hold MeetingOn Trade DisputesFollowing the meeting in Berlin between ChinesePremier Li Keqiang and German Chancellor AngelaMerkel, during which both countries professedtheir intention to resolve all trade conflicts by negotiation,rather than the imposition of substantialduties, European Trade Commissioner Karel DeGucht met Chinese Vice-Minister of CommerceZhong Shan in Brussels.It was disclosed, earlier in May, that the EuropeanCommission (EC) is considering launching its ownanti-dumping duty (AD) and anti-subsidy countervailingduty (CVD) investigations of imports intothe European Union (EU) of mobile telecommunicationsequipment from China, totaling aroundEUR1bn (USD1.29bn) per year.In addition, in what has become a more pressingproblem due to provisional determinations beingexpected early next month, the EC is readyingsubstantial ADs and, subsequently, CVDsagainst Chinese exporters of solar panels and solarcells into the EU. In 2011, China exported solarpanels and their key components worth aroundEUR21bn to the EU.At the meeting in Brussels on May 27, which hadalready been organized for a China-EU Trade andInvestment Policy Dialogue, Zhong reiterated thatthe EU's impending actions could seriously hurtthe Chinese companies and workers involved andseriously sour trade and economic cooperation betweenthe two sides.He stressed that "such practices of trade protectionismare not acceptable to China." Given the largevalue of bilateral trade between China and the EU,he added that "it is only natural to see some tradefriction. The right focus should be on resolvingthose frictions appropriately. Taking abrupt andunilateral action does not help problem-solving,but will rather set the parties further apart and aggravatethe tensions."If the EU were to impose provisional ADs on Chinesesolar panels and to initiate an ex officio caseon Chinese wireless communications network,Zhong confirmed that "the Chinese governmentwould not sit on the sidelines, but would rathertake necessary steps to defend its national interest."Nevertheless, Zhong believed that the meeting in55

Brussels with De Gucht was "constructive and theexchanges were useful."However, the EC was less than effusive, and it seemsto have become more likely, rather than less, thatprovisional ADs will be imposed on Chinese solarexports to the EU.A statement by the EU Trade Spokesman John Clancyafter the meeting emphasized that "De Gucht expressedclearly that he was ready to negotiate a solutionon the solar panels case," but that it was alsoindicated that De Gucht intends to "examine thepossibility of a negotiated settlement in partnershipwith the United States should this become necessary."De Gucht has "made it very clear to the Vice-Ministerthat he was aware of the pressure being exertedby China on a number of EU member states, [butthat it] is the EC which has the role of deciding onprovisional tariffs." At a hearing with the EuropeanParliament's trade committee, he is reported tohave added that China "can try to put pressure onmember states, but they will waste their time tryingto do so with me."Chinese Trade DisputesThe Focus Of WTO MeetingAmong decisions taken during the meeting of theWorld Trade Organization's Dispute SettlementBody (DSB) on May 24, 2013, a panel was approvedto examine Japanese claims of illegitimate Chineseanti-dumping duties being levied on High PerformanceStainless Steel Seamless Tubes from Japan.The panel will investigate Japanese claims set out ina request for consultations by Japan on December20, 2013. The dumping duties were introduced byway of Notices No 21 and 72, issued by the ChineseMinistry of Commerce (MOFCOM) during2012. The European Union, India, Korea, Russiaand the United States reserved their third-partyrights to participate in the panel's proceedings.Other matters progressed during the DSB's meetingincluded a confirmation from China that itwill implement the DSB's recommendations andrulings in the dispute "China - Definitive Anti-Dumping Duties on X-Ray Security InspectionEquipment from the European Union" in a mannerthat respects its WTO obligations.Clancy's statement concluded that the EC "willlook at any proposal to be made after the impositionof provisional measures, if any. In this respect,the ball is very much in China's court. The finaldecision on possible provisional measures in thiscase must be taken by June 5, according to the legalprocess. The full investigation continues and willconclude in early December 2013."In February 2013, a World Trade Organizationpanel ruled against China in respect of anti-dumpingduties, of 71.8 percent, on imports of certainsecurity inspection equipment (x-ray scanners)from the European Union. The panel in particularfound that China's investigation into "dumping,"where a product is sold to a foreign market at belowthe market price, was not objective, and flawed56

on many levels. The panel found that MOFCOMfailed to consider all relevant economic factors, inparticular, the "magnitude of the margin of dumping,"when calculating its anti-dumping duties.The Panel requested that China revoke the antidumpingduties, and permitted the EuropeanUnion to claim benefits under the Anti-DumpingAgreement of equal value to the illegitimate dutieslevied by Chinese authorities.Also at the May 24, 2013, meeting, the DSB alsodeferred the establishment of a panel to examine Indonesia'scomplaint in the dispute "European Union- Anti-Dumping Measures on Imports of CertainFatty Alcohols from Indonesia;" deferred the establishmentof a panel to examine Panama's complaintin the dispute "Argentina - Measures Relating toTrade in Goods and Services;" and heard an additionalstatement from Dominica, speaking on behalfof Antigua and Barbuda, in relation to the ongoingdispute between the United States and the Caribbeanterritory on the cross-border supply of gamblingand betting services.Hong Kong To Join InternationalServices Trade Agreement TalksIt has been disclosed that Hong Kong will formallyparticipate in negotiations between some WorldTrade Organization (WTO) members this year onthe trade in services agreement, also known as thePlurilateral Services Agreement (PSA).In July 2012, a group of WTO members agreed to intensifydiscussions on a "high ambition" internationalagreement on a wide range of services, to reinforce andstrengthen the multilateral services trading system.Participants have stated that a new PSA should becomprehensive in sectoral scope, including informationand communication technology services, logisticsand transport, financial services and servicesfor businesses; contain new and enhanced rules thatcountries have developed since the WTO GeneralAgreement on Trade in Services entered into force in1995; increase market access commitments to be asclose as possible to countries' current practices; andproduce new market liberalization improvements.The agreement will be open to all WTO memberswho wish to join, but, as of April 2013, the participatingeconomies of the PSA comprise 22 WTOmembers, namely Australia, Canada, Chile, ChineseTaipei, Colombia, Costa Rica, the EuropeanUnion, Hong Kong, Iceland, Israel, Japan, SouthKorea, Mexico, New Zealand, Norway, Pakistan,Panama, Paraguay, Peru, Switzerland, Turkey andthe United States.Hong Kong is a service-oriented economy, with theservice industry constituting over 93 percent of itsgross domestic product. It is therefore expected thateventual participation in the PSA will allow HongKong to strengthen trade and economic ties withother economies and provide more business opportunitieswith many of its major trading partners, aswell as some relatively new markets.The other participating economies of the PSA, as awhole, account for around 70 percent of total world57

trade in services and around 50 percent of HongKong's services trade. In 2011, Hong Kong's servicesexports to the PSA economies reached HKD370bn(USD47.7bn), registering an average annual growthrate of 4.9 percent for the period from 2007 to 2011.In particular, Hong Kong's exports of financial servicesto the PSA participants are very significant, accountingfor around 80 percent of its total exportsin the sector. This is followed by business services(including professional, computer, research and development,real estate and rental/leasing services)and transport services.To assist the Government in formulating HongKong's overall position in the PSA negotiations,a consultation document has been issued by theTrade and Industry Department (TID), and repliesare requested by June 18, 2013.Views are invited on which service sectors and servicemeasures of the participating economies HongKong should particularly focus on in the negotiationsunder the PSA – for example, for relativelynew markets whether the provision of a service ina particular sector or a particular mode is beingcontemplated, or whether there are any existing orforeseeable hurdles to the provision of any servicesin any of the markets involved.In addition, the TID would like to know whetherthere are any service sectors, areas or measures inwhich Hong Kong should be more cautious in undertakingcommitments.Finally, as new or enhanced disciplines will also benegotiated on the basis of proposals by PSA participantsfor inclusion in the agreement, the TID is invitingfurther views on the areas of disciplines thatshould be focused on, and whether there are existinghurdles faced by Hong Kong service suppliersin the export of services that could be addressed bynew and enhanced disciplines for trade in services.These disciplines, similar to agreed and bindingbest practices, seek to address regulatory practicesthat may impair the benefits accruing to the participantsin the PSA. In preliminary discussions,participants have, so far, signaled interests in negotiatingdisciplines in a number of areas, includingdomestic regulation, movement of natural persons,information and communications technology, maritimetransport, government procurement, professionaland education services, export subsidies, andpostal and courier.Caribbean Prepares ForWTO Trade Policy ReviewTerritories of the Organization of East CaribbeanStates (OECS) that have acceded to membershipof the World Trade Organization (WTO) are to receivetechnical support ahead of a six-yearly reviewby the global trade body assessing their trade andtax policies.In anticipation of the WTO review in a year'stime, the OECS Secretariat's Geneva TechnicalMission and the Trade Policy Unit will assistthe territories, in recognition of the extensive58

equirements placed on the states, including extensivedata collection on trade policies, tradeperformance, adherence to standards, health andfood safety, competition policy, price control, investment,sectoral policies, as well as tariff andnon-tariff measures.Th e Trade Policy review for OECS Member Statesis one of the requirements of WTO membership.The reviews are intended to assess the complianceof countries with WTO rules and their integrationin the multilateral trading system. In particular,the finalized report will provide comprehensivedetails of changes to the territories' tradingand tax regimes on international trade since thelast review in 2007.Program Officer at the OECS Secretariat, AliciaStephen, explained: "We assist the member statesby helping them to gather all this information aswell as mobilizing resources and accessing technicalassistance so they can provide the information andparticipate in the drafting of the final report whichis the review of their trade policy.""The good thing about the review is that it is notthe basis for any sort of action to be taken againstmember states if they do not comply. What thereview does for our member states is that it givesthem an assessment of where they are in termsof their ability to implement the commitmentsthat are set out when they signed on the WTOand it also gives them a global view of their TradePerformance not just in terms of figures but interms of the reforms they have undertaken sincetheir last review. The review also looks at emergingissues such as competition policy and tradefacilitation which are not yet within the ambit ofthe WTO but is there to signal to the memberstates in a certain way what their state of preparednessis to engage in those other issues," Stephenconcluded.China Studying PossibilityOf Joining TPPMinistry of Commerce spokesman Shen Danyang,at a foreign trade press briefing, has indicated thatChina would carefully analyze the pros and consand the possibility of joining the Trans-Pacific Partnership(TPP) in the future.Shen was replying to recent remarks made bythe United States Under Secretary of Commercefor International Trade, Francisco Sánchez, who,while discussing Japan's impending entry into theon-going TPP negotiations, said that his countrywould welcome China's participation in the talksif it could give an undertaking to implement, forexample, the same trade liberalization measures underconsideration by its other members.The US has always professed that the TPP agreementshould serve as a platform for regional tradeintegration in the Asia-Pacific. Earlier this year,Acting US Trade Representative Demetrios Marantishad lauded the TPP's efforts to eliminate tariffsand other non-tariff barriers, as well as rules on intellectualproperty, labor and the environment, but59

had stressed that it is not directly aimed against theinterests of China, despite the significant trade disputesbetween the two countries.Ministry of Commerce was also constantly listeningto the views of the various Chinese industriesthat could be affected by it.The 17th round of TPP negotiations was held inLima, Peru, and ended on May 24, and it was reportedthat its negotiators from the participatingcountries – Australia, Brunei Darussalam, Canada,Chile, Malaysia, Mexico, New Zealand, Peru, Singapore,Vietnam and the US – had made progressacross the agreement, including comprehensive tariff-reductionpackages.In his reply, Shen disclosed that China had alwaysattached importance to the role of the TPP, andhad tracked the progress of its negotiation. TheHe stressed that China believes that the trade treatydiscussions should be "open, inclusive and transparent,"especially in their treatment of the diversity ofAsian countries at different levels of development.He confirmed that China would, subject to "theprinciples of equality and mutual benefit," analyzethe advantages and disadvantages and the possibilityof joining the new trade treaty. In the meanwhile,he hoped that the TPP's present memberswould continue to share information and datawith China on the progress of their talks.60

NEWS ROUND-UP: COUNTRY FOCUS – ITALYISSUE 30 | JUNE 6, 2013Italian Small BusinessesFearful Of VAT Rate HikeCGIA of Mestre, the Italian association of sole tradersand small businesses, has warned again of the effectof the further value-added tax (VAT) rate hike,expected next month, on family finances, domesticconsumption and small businesses in Italy.An increase in the country's current 21 percent VATrate to 22 percent on July 1 this year still remainsfrom the program, agreed by former Italian PremierMario Monti with the European Union, of balancingItaly's fiscal deficit by the end of 2013. Whilethe present Government has expressed the intentionof avoiding the rate rise, it is not yet certainthat it will find the additional revenue or reducedspending to be able to do so.A VAT rate rise is expected to have the effect offurther reducing domestic consumption in an Italianeconomy that is already in recession. CGIA hadalready calculated that the effective reduction inItalian family incomes will be substantial – equivalentto EUR2.1bn (USD2.7bn) for the remainderof 2013 and EUR4.2bn in 2014.CIGA has now pointed out that when the most recent1 percent VAT rate increase was made in 2011,VAT revenue, between mid-September 2011 andDecember 2012, actually decreased by EUR3.5bn.While, it stated, the depressed Italian economyhad obviously influenced the revenue outcome, theincrease in the rate had certainly contributed to afall in consumption, and therefore also tax collected.Giuseppe Bortolussi, CIGA's Secretary said that"that result should serve as a warning. From the beginningof the economic crisis to the end of 2012,Italy's gross domestic product has decreased by 7percent and household spending by 5 percent – inabsolute terms, an average decrease in spending ofaround EUR3,700 per family. If we do not foregothe VAT increase expected in a month, we run therisk of penalizing further the financial position offamilies, and that of small businesses and the selfemployedwho exist almost exclusively because ofdomestic consumption."Italian VAT is 40 years old this year, and Bortolussiadded that, if the rate rise is allowed to happen,its anniversary will be marked by Italian consumerssuffering the highest rate, at 22 percent, within theprincipal countries of the euro area.Italy Exits From EUExcessive Deficit ProcedureWhile Italian Premier Enrico Letta has expressedsatisfaction at the closure of the European Union's(EU) excessive-deficit procedure against Italy, theEuropean Commission (EC) has warned that fiscalconsolidation should continue and has maderecommendations on future tax measures that runcontrary to the Government's current proposals.61

The EC noted that the Italian Government had beenrequested to reduce the country's fiscal deficit fromthe 5.5 percent of gross domestic product (GDP)seen in 2009 to the 3 percent required under EUregulations by last year. In fact, the fiscal deficit wasexactly on target in 2012, and is forecast by the ECto reduce again marginally to 2.9 percent this yearand to 2.5 percent in 2014.comments of EC President José Manuel Barroso,who pointed to the country's very high public debtlevel as a reason to continue fiscal consolidation,and the Monetary and Financial Affairs CommissionerOlli Rehn, who remarked that the currentplan to repay tax refunds and credits to businesseswould take away much of the Government's roomfor maneuver.The EC has also looked at the measures announcedby the new Government on May 17 and, in particular,at the Government's suspension of the interimpayment of IMU, the local property tax, on firstresidences that was due on June 16.It has decided, given that the present Governmenthas confirmed that it will maintain the previousGovernment's budgetary constraints, that the IMUpayment will be due on September 16 if overallproperty tax reform is not agreed by the Governmentby end-August, and that the effect of that reformis expected to be revenue-neutral, Italy's improvedfiscal position is likely to last.However, while Italian Premier Enrico Letta paidtribute to the policies adopted by previous Governments,particularly that led by Mario Monti, forthe EC's decision and said that all of Italy should beproud of its achievement, he will have also heard theWhile the Government is aware that the closureof the EU procedure for excessive deficit will onlyhave an effect on Italy's budget in 2014, it wants toavoid a 1 percent increase in the normal rate valueadded tax due in July this year, and is also beingpressurized by Silvio Berlusconi's center-right Peopleof Freedom party, which is a member of Letta'sbroad governing coalition, to scrap the IMU propertytax on first residences entirely, and even returnthe tax levied in 2012.On the other hand, the EC's country specific recommendations,made at the same time as the excessivedeficit review, are contrary to both of the currentGovernment concerns. The EC strongly suggeststhat a shifting of the tax burden towards, and notaway from, consumption and property will be essential,in order to reduce the very high fiscal burden onemployers and employees in a revenue-neutral wayand to foster economic growth and competitiveness.62

NEWS ROUND-UP: REAL ESTATE AND PROPERTY TAXESISSUE 30 | JUNE 6, 2013Ireland's Revenue ChairOffers Property Tax Update"The outcome of the voluntary phase of LocalProperty Tax (LPT) has been extremely successful,"the Chairman of Ireland's Revenue Commissionershas said.Announcing the initial administrative details ofIreland's controversial new tax, Josephine Feehilycalculated that over EUR100m in revenue has beengenerated so far.The LPT will enter into force from July 1. It will becharged at 0.18 percent of the market value of propertiesworth up to EUR1m (USD1.3m), and at 0.25percent on any excess value over EUR1m. Propertyvalues are organized into a number of bands – fromEUR0 to EUR100,000 and then in EUR50,000bands. The tax liability is calculated by applying 0.18percent to the mid-point of the relevant band.The initial valuation of the property on May 1,2013 will be the value of the property for LPT purposesup to and including 2016. The 0.18 percentrate is fixed for the lifetime of the current Government,but a "local decision factor," allowing localauthorities to vary the rate by up to 15 percent, willapply from 2015.The levy will be administered by the Revenue Commissioners,but is self-assessed. Householders arerequired to decide on the value of their property,file a return, choose a payment option and send thepayment to the Revenue.The Commissioners' LPT Register was compiledfrom several databases, while LPT Returns, personalizedletters and LPT Guides were sent to just over1.69m residential properties. According to Feehily,LPT Returns have now been filed in respect of1,517,902 properties. Including properties wherelocal authorities or social housing groups are liable,and where special payment provisions are to be enforced,there have been nearly 1.68m cases of voluntarycompliance.Approximately 22 percent filed a paper return, while73 percent did so online, and a further 5 percent bytelephone or through the local tax office network.Feehily explained that: "The next steps in this projectinclude activating the various payment optionschosen, including by sending files to employersand the relevant Government Departments to beginLPT deductions at source. We are now movingquickly into compliance mode and have already begunto identify the non-engagers for follow up action.We owe no less to all the compliant taxpayerswho have voluntarily filed their returns."French Property Tax Rules Under FireAllegedly "discriminatory" tax rules on new residentialproperty have resulted in France's referral63

y the European Commission to the EuropeanCourt of Justice.According to the Commission, French provisionsare incompatible with the free movement of capital,which it says is a fundamental principle of theEuropean Union's (EU) Single Market.Under French tax law, accelerated depreciation canbe applied to new residential property in the countrythat is intended to be let for a minimum of nineyears. By contrast, there is no comparable provisionfor a French taxpayer investing in a residential toletproperty in another EU member state.The Commission claims that, in practice, this meansthat taxpayers investing the same amount in immovablegoods abroad would face a higher tax liability.The Commission formally requested in February,2011 that action be taken to ensure France's compliancewith EU law. No legislative amendmentshave been made to date, and the referral to theCourt of Justice represents the last step in the Commission'sinfringement procedure.Italy To Renew Home Tax CreditsBefore their expiry at the end of this month, theItalian Government has confirmed its plans to renewand expand temporarily the tax credits forindividuals who improve the energy-efficiency oftheir homes, as well as for those who make propertyrefurbishments.Under a law decree that is still to be issued, the existingincome tax credit for documented expenseson improvements to homes to reduce their energyuse – the so-called "ecobonus" – will increase from55 percent to 65 percent for the period from July1 to December 31, 2013 (or until June 30, 2014,for works covering an entire building). The tax deductionwill be available to be taken in ten equalannual installments.In addition, the 50 percent tax credit available forexpenses of up to EUR96,000 (USD125,000) relatingto a building's structural improvement hasalso been extended from end-June until December31, 2013, while an additional EUR10,000limit is to be made available for the purchaseof furniture (such as kitchen equipment) linkedto such refurbishment. The deduction will alsocover the restructuring costs relating to theadoption of anti-seismic measures in those areassubject to earthquakes.The Government has, however, warned that thiscould be the last renewal for selective tax measuresaimed at facilitating the structural improvement ofexisting buildings, as well as for an increase to theirenergy performance, and that this renewal is designedto encourage those who have not yet takenadvantage of the credits to do so as soon as possible.It is expected that, when the decree is published,the EUR200m annual financing for the renewaland increase to the tax deductions will be foundfrom a "rationalization" of value added tax (VAT)64

ates – such that, in 2014, the 4 percent rate on thesale of certain editorial products (but not books)will be abolished and they will be taxed at the normal21 percent rate, while the 4 percent VAT rateon food and drinks sold in automated machineswill increase to 10 percent.Scots Ponder AmendmentsTo Property Sales TaxScotland's Finance Minister John Swinney has expressedopposition to proposed amendments tothe planned Land and Buildings Transaction Tax(LBTT) which would link the rate at which the taxis set to energy efficiency.Th e proposals were put forward by Malcolm ChisholmMSP during a meeting of the ScottishParliament's Finance Committee. Chisholm arguedthat a property's Energy Efficiency Certificate(EEC), which is required when a property issold, would make variations in the tax rate easyto calculate, with perhaps an extra 0.5 percentadded to properties below the median EEC rating,and a discount of 0.5 percent for propertiesabove it. In this way, he explained, there would be"winners and losers," and tax neutrality would bemaintained. Chisholm also suggested a rebate forpurchasers who improve the EEC rating of theirnew home within 12 months.He described the proposed amendments as "a usefulcontribution" to meeting emissions targets, althoughthey were not a "panacea," and could becombined with other approaches, such as incentivesrelating to council tax.In response, Swinney argued that the amendmentswould create complexity and add uncertainty.He pointed out that EEC ratings changeover time, and that the tax would have no effecton properties rated at zero for LBTT, whichmake up 70 percent of the housing market andthe majority of the sales that take place each year.He added that owners of apartments would loseout, as it can be difficult to get all the owners ofa building to agree to improvements, and thatthe tax did not create an incentive, as the sellerwould make the improvements but the buyerwould get the advantage.Another member of the committee, John Mason,described the tax as "regressive," arguingthat while properties zero-rated for LBTT wouldreceive no help, larger properties would gain asubsidy. Further, the amount of the discount inproportion to the whole transaction would notbe an incentive, and the measure would do nothingfor properties that do not change hands. AsLBTT is to be the first tax brought in by theScottish Parliament, it would be better to keep itsimple, he suggested.Chisholm rejected the claim that the tax was regressive– he suggested that the discount for largerhomes could be subject to a cap, but it was largerhomes where energy efficiency improvementswere most urgent. Further, if larger homes paid65

more, zero-rated properties could be brought intothe system. He also said that he did not believethat there would be no incentive for sellers, as improvedenergy efficiency and the discount wouldgive the property a "market premium." He addedthat tenements tended to have better energy efficiencyratings.The committee failed to agree on the amendments,with most voting against them.66

NEWS ROUND-UP: FTTISSUE 30 | JUNE 6, 2013Center For Policy Studies RaisesConcerns Over FTTEuropean financial transaction tax (FTT) proposalswere "introduced in a remarkably un-transparentway," while their extraterritoriality "may well beillegal," a new report from the Center for PolicyStudies is to claim.have on the UK's financial services sector. Lawsonwrites that as the Commission has intimated that allfinancial institutions will be subject to the levy wheretransactions are carried out with a counterparty withheadquarters in the EU11, "much of the tax collectedby the UK tax authorities from economic activityhere might well not accrue to the UK."In "The Tobin Tax rears its ugly head, again," tobe published tomorrow, author and tax expert JohnChown criticizes the European Commission's plansfor a 0.01 percent tax on derivatives and a 0.1 percentrate on other financial instruments.The UK will therefore suffer from a loss of tax revenueas a result of the direct and indirect costs ofFTT on profits and earnings. Lawson believes that"this extraterritoriality may well be illegal: it is clearlyunenforceable."Belgium, Germany, Estonia, Greece, Spain, France,Italy, Austria, Portugal, Slovenia and Slovakia areprogressing with an FTT along the lines of "enhancedcooperation." This procedure, which enablesthose states wishing to work more closely togetherto do so, was authorized by the EuropeanCouncil of Economic and Financial Affairs (Ecofin)at the start of the year.According to Chown, the manner in which the proposalswere introduced was "surely an abuse of process."He points to the Treaty of Lisbon, which he believes isclear that tax legislation can only be introduced withthe unanimous consent of all Member States.Summarizing Chown's points in a foreword to the report,ex-UK Chancellor Nigel Lawson raises his ownconcerns about the potential impact the FTT willLawson welcomes the UK Government's decisionto challenge the FTT in the European Court of Justice,but warns that this is "not nearly enough." Itis possible that the FTT may be introduced beforethe case is even heard. This would lead to major uncertaintyand significant costs for financial servicescompanies based in the UK.The FTT is, Lawson claims, "designed both to punishthe bankers and to raise money for the EU budget,"and will "drive financial business away fromthe EU (including the UK) to more hospitable jurisdictionselsewhere."FTT Scale-Back On The Cards?Official sources have suggested that the so-calledEU11 group of European nations is considering a67

climb-down over controversial proposals for a financialtransactions tax (FTT).The European Commission's plans for a 0.01 percenttax on derivatives and a 0.1 percent rate onother financial instruments are intended to enterinto force from January, 2014. At the start of thisyear, the European Council of Economic and FinancialAffairs (Ecofin) authorized Belgium, Germany,Estonia, Greece, Spain, France, Italy, Austria,Portugal, Slovenia, and Slovakia to progress with anFTT along the lines of the "enhanced cooperation"procedure, which enables those states wishing towork more closely together to do so.According to Reuters, which claims to have spokento Brussels officials linked with the project, the levyon trading bonds and shares could fall from theoriginally outlined 0.1 percent to just 0.01 percent.The result would be a drop in the revenue generatedfrom EUR35bn to just EUR3.5bn.The timetable for implementation also looks set tochange. It is apparently likely that only shares willbe hit by the tax from next year, while bonds willcome under the regime from 2015, and derivativesat an unspecified later date.As one official put it, "The whole thing will have tobe changed quite a lot … It is not going to survivein its current form."Sandy Bhogal, Head of Tax at law firm MayerBrown International, believes it should come asno surprise that the EU has had to "scale back" itsproposals. They have come under fire from sourcesas far and wide as the outgoing head of the Bankof England, Mervyn King, the International CapitalMarkets Association, and the Global FinancialMarkets Association. Common themes of apprehensioninclude the likely extraterritorial impact,the increased costs for businesses and governments,and the potential adverse effects for the globaleconomy. Earlier this week, European Central bankexecutive board member Benoît Cœuré told the FinancialTimes of his desire to "ensure that the taxhas no negative impact on financial stability."As Bhogal explains, "The original proposals raisedlots of questions and concerns about the impact ofthe FTT on the cost of sovereign and corporate debt,liquidity in the EU and beyond and the potential relocationand displacement effect in the financial markets.In its proposed form, the FTT could also beviewed as being inconsistent with regulatory changeslike EMIR and the general direction of travel of theEU, particularly at a time when there is a need to encourageEU economic growth and competitiveness."A number of issues related to enforcement and thepractical problems associated with collecting FTTrevenue, also remain unsolved, Bhogal added. Withthis in mind, "the scaled back plans and step-bystepapproach may be more sensible."A spokeswoman for EU Tax Commissioner AlgirdasŠemeta commented: "Depending on the speedof progress from here, it is still feasible that thecommon FTT could be implemented in 2014, althoughJanuary 2014 is looking less likely."68

NEWS ROUND-UP: ENVIRONMENTAL TAXESISSUE 30 | JUNE 6, 2013European Commission RecommendsCar Tax For EstoniaEstonia has again dismissed a recommendationfrom the European Commission that the countryintroduce a car tax and/or higher excise duties onmotor fuels, as an environment incentive to improveenergy efficiency.complemented by more binding expenditure targets;better-targeted labor market policies; makingeducation and training more relevant to the labormarket; and local government reform to ensure thatthe whole population has access to services such aschild care, family support services, healthcare, education,and transport.Instead, according the Finance Ministry, the governmentintends to remain focused on existingmeasures, such as an electric car program. Whenthe EC recommended a vehicle tax last year, FinanceMinister Jürgen Ligi told the media thatthe government did not want to put extra burdenson car owners, and that to do so would be "regionallypainful."The EC's recommendation was published in adocument responding to Estonia's 2013 stabilityprogram for the period 2012-17 and the country's2013 national reform program. It forms one of fivecountry specific recommendations (CSRs) in relationto the EC's Europe 2020 strategy for growthand jobs.The EC notes that Estonia has made some progressin meeting CSRs for 2012, in particular by limitingthe budget deficit to 0.3 percent of GDP, but thatsome reforms efforts "appear insufficient." As wellas introducing the tax, the EC recommends implementingthe structural budget balance rule in theTreaty on Stability, Coordination and Governance,Brussels ChallengesBritish Yacht Fuel Tax BreaksTh e European Commission has formally requestedthat the United Kingdom amend its legislationto ensure that owners of private pleasure boats,such as luxury yachts, can no longer buy lowertaxed fuel intended for fishing boats, known inthe UK as "red diesel."Under European Union rules on fiscal marking forfuels, fuel benefiting from a reduced tax rate hasto be marked by colored dye. In the United Kingdom,red diesel – so-called as it is marked with reddye – attracts a duty rate up to 40 percent lowerand may be used only in the farming, fishing andforestry industries.EU rules stipulate however that while fishing vesselsmay benefit from fuel subject to a lower tax rate,private boats must use fuel subject to the standardrate. The UK was allowed to offer the concessionto pleasure boating until 2006 when a transitionalperiod ended.69

In an effort to retain the concession, the UK developeda regime whereby pleasure boat ownerscould continue to use "red diesel" provided theyacknowledge that its use is only permitted withinUK waters, i.e. not in the rest of the EU.Council supports the main thrust of the initiative,namely to introduce fiscal incentives to achieve thecountry's climate and energy policy objectives, itnevertheless fundamentally rejects certain key aspectsof the text.However, the European Commission has pointedout that UK law does not require fuel distributorsto have two separate fuel tanks, i.e. one marked forred diesel and one for fuel subject to the standardtax rate. As a consequence, private leisure boat ownersoften do not have access to fuel subject to fullduty, placing these vessels at risk of heavy penaltiesif they travel to another member state's waters.Th e Commission has now formally requested thatthe United Kingdom should change the regime toensure that the use of red diesel is restricted to fishingvessels only. The UK has been given two monthsto comply with the request or the matter may beforwarded to the European Court of Justice.Swiss Federal Council RejectsEnergy Tax InitiativeThe Swiss Federal Council has rejected the popularinitiative calling for value-added tax (VAT) in theConfederation to be replaced by an energy tax.Submitted by the Green Liberal Party (GLP), theinitiative advocates that a tax be imposed on nonrenewableenergy in the Confederation, includingpetrol, gas, and oil, and recommends at the sametime that VAT be abolished. Although the FederalThe GLP makes clear in its initiative that the amountof the proposed energy tax should be set in such away as to yield the same revenue level as currentlyflows from VAT. The Federal Council argues, however,that such a high rate of tax could simply not bejustified by the pursuit of these environmental goals.The Federal Council emphasizes that it would notbe efficient to abolish VAT, given that this tax constitutesthe main source of fiscal income for theConfederation, and in view of the fact that it playsa key role in the financing of the country's socialsecurity system. At international level, VAT is consideredto be a highly efficient levy, whose impacton the economy is considerably less than from directtaxes, such as income or profit tax and socialinsurance contributions, the Federal Council adds.Furthermore, the Federal Council warns that replacingVAT with an energy tax would be disadvantageousfor businesses in Switzerland. The FederalCouncil points out that companies are barely affectedby VAT, as they are generally able to pass thetax on to consumers and as exports are exempt fromVAT, to guarantee international competitiveness.In contrast, an energy tax would affect exports, andwould also adversely affect low-income householdsin Switzerland, the Federal Council stresses.70

Finally, the Federal Council vehemently rejects theidea that the initiative could be implemented swiftly,within a few years, underscoring the importanceof allowing businesses and individuals sufficienttime to adapt to the measures.On May 25, 2011, the Federal Council decided toprogressively phase-out the use of nuclear power. Aspart of its Energy 2050 Strategy, the Federal Councilplans as a first step to introduce a number offiscal incentives to encourage individuals to use renewableenergy sources. From 2021, as part of thesecond phase, the Federal Council plans to replacethis incentive system with a steering mechanism, inthe form of a tax on energy.The Swiss Federal Department of Finance, the FederalDepartment of the Environment, Transport,Energy and Communications, and other departments,have been tasked with drawing up proposalsto facilitate the transition between the two systemsand to put forward proposals for the incentive system.These proposals are to be presented to the FederalCouncil by autumn 2013.71

NEWS ROUND-UP: SMEsISSUE 30 | JUNE 6, 2013Spain's Fiscal Package Fosters'Entrepreneurial Culture'The Spanish Government has unveiled details of itsEntrepreneur Support Act, providing for a raft offiscal measures designed to facilitate the creation ofnew companies in Spain, and to support the country'sself-employed and small- and medium-sizedenterprises (SMEs).that invest in a company or in a business projectof a third party. The decision to contribute capitaland/or business knowledge to a new companywill enable individuals to deduct 20 percent oftheir State Personal Income Tax quota. In addition,all profits obtained from the activity aretax-exempt if reinvested in other newly incorporatedcompanies.In the area of fiscal support, the new legislation providesthat the self-employed and SMEs that are notsubject to the modular tax system and with turnoverof less than EUR2m (USD2.6m) will not have topay value-added tax (VAT) on invoices until theyare actually settled. The measure is to apply fromJanuary 1, 2014, and is expected to benefit almost1.3 million self-employed individuals and over 1million SMEs in Spain.The draft law provides for the introduction of afiscal incentive for corporations electing to reinvestpart of their corporate profits in the business.Consequently, companies with a turnover of belowEUR10m will be able to deduct from tax up to 10percent of profits obtained in the tax year in whichthey are reinvested in economic activity. This initiativeis predicted to benefit 200,000 self-employedtaxpayers and 185,00 SMEs.Th e Government also aims to promote the conceptof "business angels," namely individualsTo support funding for entrepreneurs, internationalizationcovered bonds have been created.These are assets secured by loans earmarked for theinternationalization of companies or for exports.Other key non-fiscal measures contained in the legislationinclude plans to create the statute of "limitedliability entrepreneur," intended to ensure thatthe self-employed no longer have unlimited liabilityfor their business debts. Furthermore, their primaryresidence will be exempt from liability, providedthat the value of the property is not in excessof EUR300,000.Finally, the legislation creates the concept of thelimited liability capital growth company, whichallows companies to be set up with share capitalof less than EUR3,000. Under the provisions, thecompany is required to contribute 20 percent ofits corporate profits until such time as the capitalrequired by law is fully paid.72

Singapore Plugs Benefits For SMEsOf e-Filed Simplified Tax FormThe Inland Revenue Authority of Singapore (IRAS)has encouraged small and medium-sized companies(SMEs) to use the simplified tax return, Form C-S,to e-file their income with effect from the 2013 assessmentyear, and enjoy further benefits.All companies normally have to file an estimate oftheir chargeable income within three months afterthe end of their accounting period on Form C.However, with the simplified and shortened 3-pageForm C-S, which was first available for the 2012 assessmentyear, there is no requirement to submit financialaccounts, tax computation and supportingschedules with the tax return. The documents mustbe prepared, but only sent to IRAS if requested.Form C-S is available for a company if a business isincorporated in Singapore, has an annual turnoverof less than SGD1m (USD795,000), has only incometaxed at 17 percent and does not claim anycarryback of capital allowances/losses, group relief,investment allowance, research and developmenttax allowance, or foreign tax credit.Th e initiative was expected to benefit about67,000, or 42 percent, of all companies in Singaporein 2012. They are now also being encouragedto e-file their simplified forms this year andobtain further advantages.If SMEs e-file a Form C-S they will receive an extensionof their filing due date to December 15, 2013,instead of November 15. They will also be able touse the iHelp facility to fill in the form, minimizecompletion and computation errors with in-builtformulae that auto-fill relevant fields, and have anestimate of tax payable auto-computed.IRS Facilitates ExtensionOf US Empowerment ZonesThe United States Internal Revenue Service (IRS)has issued a simplified procedure for a state or localgovernment to amend its nomination of an empowermentzone (EZ), and thereby facilitate its extensionto a new termination date of December 31, 2013.Since 1993, the US tax code has allowed a state orlocal government to nominate an area or areas in itsjurisdiction for designation as an EZ. The governmentshave generally provided in their nominationthat the designation would remain in effect untilDecember 31, 2009.The enactment of the Tax Relief, UnemploymentInsurance Reauthorization, and Job Creation Actof 2010, and then the American Taxpayer ReliefAct of 2012, has extended those EZ designations,firstly to December 31, 2011, and then to December31, 2013.The IRS's new procedure provides simply that anynomination for an EZ that was in effect on December31, 2009, is deemed to be amended to providefor a new termination date of December 31, 2013,unless the state or local government sends written73

notification to the IRS by July 29, 2013. The writtennotification must affirmatively decline extensionof the EZ nomination.years that include December 31, 2012, the credit is20 percent of the employer's qualified wages (up toUSD15,000 per employee).EZs are highly distressed urban and rural communitieswho may be eligible for a combination of taxcredits for businesses, grants, low-cost loans andother benefits. Above all, an employment tax creditprovides businesses with an incentive to hire individualswho both live and work in an EZ. For taxIn addition, the EZ benefits available to businessescan include increased Section 179 tax deductions(of up to USD35,000 of the cost of eligibleequipment purchases), and the 60 percentexclusion of tax on capital gains upon the sale ofcertain assets.74

TAX TREATY ROUND-UPISSUE 30 | JUNE 6, 2013ARMENIA - ARGENTINAForwardedThe Government of Armenia on May 29, 2013, approvedthe signing of a TIEA with Argentina.CANADA - VARIOUSForwardedA bill to implement DTAs and DTA Protocols signedbetween Canada and Namibia, Serbia, Poland, HongKong, Luxembourg and Switzerland was tabled beforeCanada's Parliament on May 23, 2013.CZECH REPUBLIC - KOREA, SOUTHNegotiationsAccording to preliminary media reports, the CzechRepublic and South Korea are to hold four-day negotiationstowards a DTA, concluding on June 13, 2013.ETHIOPIA - PORTUGALSignatureEthiopia and Portugal signed a DTA on May 25,2013, the Ethiopian Government has confirmed.KAZAKHSTAN - LUXEMBOURGRatifiedTh e Kazakhstan authorities on May 21, 2013 ratifiedthe DTA signed with Luxembourg on June26, 2008.KOREA, SOUTH - VARIOUSForwardedThe Government of South Korea has forwardedtwo Tax Information Exchange Agreements signedwith Vanuatu, and the Bahamas, to the country'sNational Assembly for its approval.LUXEMBOURG - VARIOUSForwardedLuxembourg's Chamber of Deputies has approveda law to ratify the DTAs signed with Kazakhstanand Sri Lanka, and to approve the ratification of itsDTA with Laos.NETHERLANDS - CHINASignatureThe Netherlands and China signed a new DTA onMay 31, 2013.75

PERU - UNITED ARAB EMIRATESNegotiationsPeru and the United Arab Emirates have commencednegotiations towards a DTA, it was announcedon May 27, 2013.POLAND - ANDORRAForwardedPoland's Senate on May 24, 2013 approved a lawratifying the TIEA signed with Andorra on June15, 2012.QATAR - VARIOUSSignatureAccording to preliminary media reports, Qatarsigned four Tax Information Exchange Agreementswith Denmark, Greenland, Sweden and the FaroeIslands on May 29, 2013.TAJIKISTAN - FINLANDForwardedTajikistan's lower house of Parliament on May 22,2013, approved a Protocol to amend the nation'sDTA with Finland.TAJIKISTAN - SAUDI ARABIANegotiationsAccording to preliminary media reports on May22, 2013, representatives from Tajikistan and SaudiArabia have endorsed a draft DTA, and agreed toformally sign the agreement in the near future.UNITED STATES - BRAZILInto ForceAccording to preliminary media reports, the TIEAbetween the United States and Brazil entered intoforce on May 16, 2013.SINGAPORE - VARIOUSRatifiedTwo protocols to amend Singapore's DTAs withMalta and South Korea were ratified on May 29,2013, and will enter into force on June 28, 2013.76

CONFERENCE CALENDARISSUE 30 | JUNE 6, 2013A guide to the next few weeks of international taxgab-fests (we're just jealous - stuck in the office).THE AMERICASFINANCIAL ACCOUNTING &REPORTING UPDATEAccounting Conferences and Seminars LLCCo-chairs: Manuel Benites, (Perez Alati, Grondona,Benites, Arnsten & Martinez de Hoz), WilliamDixon (Citigroup Global Markets)6/13/2013 - 6/14/2013Venue: Boston Hyatt Cambridge, 575 MemorialDrive, Overlooking Boston, Cambridge, MA02139-4896Key speakers: Tom Adams (KPMG), Chad Arcinue(Ernst & Young), John Benedetti (PwC), ReneeBomchill (Partner, Deloitte & Touche) Luke Cadigan(Assistant Director of Enforcement, US Securitiesand Exchange Commission's Boston office),among numerous othershttp://meetings.abanet.org/meeting/tax/MIAMI13/2013 FINANCE AND ACCOUNTINGFOR FINANCIAL INSTITUTIONSGrant ThorntonVenue: Seaport Hotel & World Trade Center,1 Seaport Lane, Boston, MA 02210, USA6/12/2013 - 6/13/2013http://www.allconferences.com/c/financial-ac-counting-reporting-update-conference-cambridge-2013-june-126TH ANNUAL US LATAMTAX PLANNING STRATEGIESAmerican Bar AssociationVenue: Mandarin Oriental Hotel, 500 Brickell KeyDrive, Miami, FL 33131 (Downtown), USAChairpersons: Richard L. Rowe (CPA FMS Chairman),William Kline (CPA FMS Vice Chairman)6/16/2013 - 6/18/2013http://www.grantthornton.com/portal/site/gtcom/menuitem.0442c01c1536cc779eb1f810633841ca/?vgnextoid=08f446479771d310VgnVCM1000003a8314acRCRD&vgnextchannel=6d2ecbbdad9c4010VgnVCM100000368314acRCRD77

US INTERNATIONAL TAXATIONBloomberg BNAVenue: London, UK, TBAChair: Jim Hemelt (Adjunct professor, GeorgetownUniversity School of Business)6/17/2013 - 6/17/2013http://www.bna.com/us-international-taxation-e17179869445/INDEPENDENCE IN A CAPTIVEMARKETDarla Moore School of BusinessVenue: Darla Moore School of Business, Charleston,151 Market Street, Charleston SC 29401, USAREVENUE RECOGNITIONACCOUNTING UPDATEAACVenue: Chicago Marriott Oak Brook, 1401 W.22nd St., Oak Brook, IL 60523, USAKey speakers: Tom Adams (KPMG), Chad Arcinue(Ernst & Young), John Benedetti (PwC), ReneeBomchill (Deloitte & Touche), Luke Cadigan (USSecurities and Exchange Commission), AndreasChrysostomou (Duff & Phelps), Wissam Dandan(Deloitte & Touche), Steve DiPietro (Deloitte &Touche), Jonathan Feig (Ernst & Young), HankGalligan (BDO), among various othersKey speakers: Michael D. Tarling (Assistant Treasurer,Risk Management and Insurance The BoeingCompany), Ian Wrigglesworth (Managing Director,Guy Carpenter & co), Nicolas Depardey (Director ofInsurance and Risk Management, Michelin), DaveAdams (Maiden Re), Anthony Valente (Maiden Re),Raymond G. Farmer (Director of Insurance, State ofSouth Carolina), Bill Hodson (Executive Vice President,USA Risk Group Intermediaries) Gary Bowers(Partner, Johnson Lambert LLP)6/20/2013 - 6/20/2013http://mooreschool.sc.edu/executiveeducation/workshopsconferences/independenceinacaptivemarketreinsuranceseminar.aspx6/20/2013 - 6/21/2013http://www.allconferences.com/c/revenue-recognition-accounting-update-oak-brook-2013-june-20CAPTIVE INSURANCE LANDSCAPEDealFlowVenue: The Westin Jersey City Newport, 479 WashingtonBlvd, Jersey City, NJ 07310, USA6/24/2013 - 6/24/201378

Key speakers: John Capasso (Alvarez & Marsal InsuranceAdvisory Services), Gregg Sgambati (TheNew Jersey Captive Association), Harry Baumgartner(Bressler, Amery & Ross), Donald McCully(Roundstone Management)http://www.dealflowevents.com/conferences/Captive_2013/INTERNATIONAL TAX ASPECTSOF FOREIGN CURRENCYTRANSACTIONSTolleyConferencesVenue: Bloomberg BNA, 1801 S. Bell St., Arlington,VA 22202TAXATION OF INTELLECTUALPROPERTYBNA BloombergVenue: Bloomberg LP, 731 Lexington Ave, NewYork, NY 10022, USAKey speakers: TBA6/24/2013 - 6/25/2013BASICS OF INTERNATIONALTAXATION 2013Key speakers: John Bates (Ivins Phillips & Barker),Ramon Camacho (McGladrey), Michael Corrnett(KPMG), Kevin Cunningham (KPMG) AdamS. Halpern (Fenwick & West), Lucy Murphy(PwC), Susan Ryba (Baker & McKenzie), WilliamR. Skinner (Fenwick & West), Adam Tritabough(McGladrey)Practising Law InstituteVenue: PLI New York Center, 810 Seventh Avenueat 53rd Street (21st floor), New York, New York10019Chair: Linda Carlisle (White & Case LLP)6/24/2013 - 6/25/20137/23/2013 - 7/24/2013http://www.bna.com/uploadedFiles/Content/Events_and_Training/Live_Conferences/Tax_and_Accounting/Conferences_-_Seminars/JuneDC.pdfhttp://www.bna.com/taxation-intellectual-propertynewyork/http://www.pli.edu/Content/Seminar/Ba-sics_of_International_Taxation_2013/_/N-4kZ1z12p29?ID=15867279

THE HEDGE FUND ACCOUNTINGAND COMPLIANCE FORUMFinancial Research AssociatesVenue: The Princeton Club, NYC, 15 West 43rdStreet, New York, NY 10036, USAChair: Karl Jordan (Principal, Joseph Decosimoand Co)Venue: Sasana Kijang, 2 Jalan Dato' Onn, KualaLumpur, MalaysiaChairpersons: Saiful Bahari Baharom (Chief ExecutiveOfficer, Labuan IBFC), Raymond Wong(Chairman, Society of Trust and Estate PractitionersMalaysia)6/19/2013 - 6/19/20137/25/2013 - 7/26/2013http://www.frallc.com/conference.aspx?ccode=B876VCIA'S 28TH ANNUAL CONFERENCEVermont Captive Insurance AssociationVenue: The UVM Davis Center, Main Street, Burlington,Vermont, USAKey speakers: Frank Nutter (President, ReinsuranceAssociation of America), among others8/13/2013 - 8/15/2013http://www.vcia.com/annualconference/ASIA PACIFICPOTENTIAL USESOF OFFSHORE TRUSTSSTEP Malaysiahttp://www.step.org/events.aspx?eventId=a0XC000000AzGNKMA3NATIONAL TAX CONFERENCE2013 MALAYSIAChartered Tax Institute of MalaysiaVenue: Kuala Lumpur Convention Centre, KualaLumpur, Selangor, MalaysiaChair: SM Thanneermalai (President, CharteredTax Institute of Malaysia)6/24/2013 - 6/25/2013http://www.ibfd.org/IBFD-Tax-Portal/Events/National-Tax-Conference-2013-MalaysiaFINANCIAL REPORTING ANDCOMPLIANCEAchromic PointVenue: The Oberoi, 37-39, Mahatma GandhiRoad, Bangalore 560001, India80

Key speakers: TBA6/27/2013 - 6/27/2013http://www.achromicpoint.com/upcomingevent.php?id=118INDONESIA: INVESTMENTAND TAXATIONIBFDGETTING WITHHOLDING TAX& TREATIES ESSENTIALS RIGHTVenue: Novotel Singapore Clarke Quay, 177A RiverValley Road, Singapore 179031Key Speakers: Andreas Adoe (IBFD), Pieter de Ridder(Loyens & Loeff)7/3/2013 - 7/4/20139TH INTERNATIONALSPECIAL ECONOMIC ZONESASSOCHAMVenue: Hotel Le Meridien, Windsor Place, NewDelhi 110001, IndiaKey speakers: TBA7/26/2013 - 7/26/2013CCHVenue: Concorde Hotel, Kuala Lumpur, WilayahPersekutuan, MalaysiaChair: Kularaj K. Kulathungam (former AssistantDirector of Inland Revenue Board, Philippines)8/5/2013 - 8/5/2013http://www.ibfd.org/Courses/Indonesia-Investmentand-Taxationhttp://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=2&ved=0CDgQFjAB&url=http%3A%2F%2Fwww.assocham.org%2Fdownloads%2F%3Ffilename%3DSEZ-2013-Brochure.pdf&ei=bZWQUay0MsnZPKyfgBA&usg=AFQjCNH5Y6ZCrGW4VmIcATZ0LNQ0BJmxyw&sig2=T9cczo_kqKIJ_Bs0zb7DFw&bvm=bv.46340616,d.ZWUhttp://www.cch.com.my/my/ExecutiveEvents/Ex-ecutiveEventDetails.aspx?PageTitle=FasTax-Series-Getting-Withholding-Tax---Treaties-Essentials-Right&ID=1673&EETopicID=3&Source=EETopicMIDDLE EAST AND AFRICAUSING DUBAI AS AN OFFSHOREFINANCIAL CENTRESTEP JohannesburgVenue: Discovery's Head Office, The Forum Room,16 Fredman Drive, Sandton, South Africa81

Key speaker: Warren Luyt (Trident Trust Company(UAE) Limited)Key speaker: Senior Official at Offshore CoordinationUnit HMRC, TBA6/12/2013 - 6/12/20136/13/2013 - 6/13/2013http://www.step.org/events.aspx?eventId=a0XC000000B2AHtMANWESTERN EUROPEIBFD'S 75TH ANNIVERSARYCONGRESSIBFDVenue: Beurs van Berlage (former AmsterdamStock Exchange), Damrak 243, 1012 ZJ Amsterdam,NetherlandsKey speakers: Jan Kees de Jager (Former NetherlandsMinister of Finance), Belema Obuoforibo(Director of the IBFD Knowledge Centre), ProfessorSweder van Wijnbergen (Former chief economistfor the World Bank)6/12/2013 - 6/12/2013http://www.ibfd.org/IBFD-Tax-Portal/Events/IBFD-s-75th-Anniversary-Congress-Tax-avoidance-international-arena-legitimateICAEW TAX FACULTYCONFERENCE 2013TolleyConferencesVenue: ICAEW, Moorgate Place, London EC2R6EA, UKChair: Rebecca Benneyworth (Chairman Elect,ICAEW Tax Faculty)6/14/2013 - 6/14/2013http://www.step.org/docs/events/STEP%20London%20Central_6.pdfhttp://www.conferencesandtraining.com/en/Browse-Events/tax-conferences/Icaew-Tax-Faculty-Conference-2013-London/?displayControl=overviewPRIVATE CLIENT TAX: RUSSIATolleyConferencesWHAT THE REVENUE KNOWSTEP London CentralVenue: BDO LLP London, 55 Baker Street, London,W1U 7EU, UKVenue: The Montague on The Gardens, 15 MontagueStreet, Bloomsbury, London WC1B 5BJ,EnglandChair: Elizabeth Henson (Partner, PwC)82

6/14/2013 - 6/14/2013http://www.conferencesandtraining.com/private-client-russiaINVESTHKInvest Hong Kong and the China-Britain BusinessCouncilhttp://www.ibfd.org/Courses/Tax-Risk-ManagementFATCA FOR INVESTMENTMANAGERSInfolineVenue: London, UK, TBAVenue: La Mare Wine Estate, La Route de HogueMauger, St Mary JE3 3BAKey speakers: Simon Galpin (Director General,InvestHK), Lise Bertelsen (Executive Director,CBBC) and Alan Maclean (Jersey Minister forEconomic Development)6/17/2013 - 6/17/2013http://www.jerseyfinance.je/events/investhTAX RISK MANAGEMENTIBFDVenue: IBFD head office, H.J.E. Wenckebachweg210, 1096 AS Amsterdam, The NetherlandsKey speakers: Stijn Euverman (PwC), Koen DeGrave (PwC), Sandra Hogeveen (Tax Director Europe,Ahold), Robbert Hoyng (Partner, Deloitte),Sander Kloosterhof(Deloitte), Bas de Mik (PwC),John Piepers (PwC)6/17/2013 - 6/18/2013Key speakers: Steven A Musher (Associate ChiefCounsel International, Internal Revenue Service),Malcolm White (Policy and Technical Adviser, FinancialServices, HMRC)6 /18/2013 - 6/18/2013http://www.infoline.org.uk/event/FATCA-for-Funds-ConferenceTAXATION OF HOLDINGCOMPANIES IN EUROPEIBFDVenue: IBFD head office, H.J.E. Wenckebachweg210, 1096 AS Amsterdam, The NetherlandsKey Speakers: Regina van der Kuip (Partner, PwCAmsterdam), Kannan Raman (Ernst and Young,London), Valéry Civilio (Head, Tax Consulting,PwC Amsterdam)6/19/2013 - 6/21/201383

OFFSHORE TAX ANDTRUST FORUM ISLE OF MANTolleyConferences6/24/2013 - 6/27/2013TAX PLANNING FORCORPORATE RESTRUCTURINGVenue: Isle of Man, TBATolleyConferencesKey speakers: Giles Clarke (Author, Offshore TaxPlanning), John Barnett (Partner, Burges Salmon),Gregory Jones (Tax Director, KPMG), GeorgeSharpe (Tax Director, PwC), John Rimmer (Partner,Appleby), Guy Wiltcher (Partner, Greystone LLC)6/20/2013 - 6/20/2013http://www.ibfd.org/Courses/Taxation-Holding-Companies-Europehttp://www.conferencesandtraining.com/en/Browse-Events/tax-conferences/Off-shore-Tax-And-Trust-Forum-Isle-Of-Man/?displayControl=overviewPRACTICAL APPLICATIONOF TAX TREATIESIBFDVenue: IBFD head office, H.J.E. Wenckebachweg210, 1096 AS Amsterdam, The NetherlandsKey speakers: Roberto Bernales (IBFD), Bruno daSilva (Loyens & Loeff), Jan de Goede (Senior Principal,Tax Knowledge Management, IBFD), RidhaHamzaoui (IBFD), Bart Kosters (IBFD)http://www.ibfd.org/Courses/Practical-Application-Tax-TreatiesVenue: London, UK, TBAChairperson: Martin Moore QC (Barrister, ErskineChambers)6/26/2013 - 6/26/2013http://www.conferencesandtraining.com/en/Browse-Events/tax-conferences/Tax-Planning-Corporate-Restructuring--Insolvency/FUNDS TAXATION IRELAND 2013InfolineVenue: Dublin IFSC, Dublin, Ireland, TBAKey speakers: Kate Levey (Financial Policy Division,Irish Department of Finance), Jim Byrne(Corporate Business and International Division,Revenue Commissioners)6/26/2013 - 6/26/2013http://www.infoline.org.uk/event/Fund-Tax-Ireland-Conference84

THE CYPRUS BAIL-OUT ANDFOREIGN CLIENTSIFRS FOUNDATION CONFERENCE:AMSTERDAMAcademy FinanceIFRSVenue: Hotel Beau Rivage, Quai du Mont-Blanc13, 1201 Geneva, SwitzerlandVenue: NH Grand Hotel Krasnapolsky, Dam 9,Amsterdam 1012 JS, The NetherlandsKey speaker: Charilaos Stavrakis (former Vice-Presidentof the Eurogroup)6/26/2013 - 6/26/2013http://www.academyfinance.ch/v2/next_events/AF466.pdfICAEW TAX FACULTYCONFERENCE 2013ICAEWVenue: Renaissance City Centre Hotel, Manchester,M2 2EQ, UKKey speakers: Anita Monteith (ICAEW), PaulaTallon (Managing Partner, Gabelle LLP), RebeccaBenneyworth (Expert Tax Writer), Peter Rayney(Independent Tax Consultant), Martin Wilson(Director, The Capital Allowances Partnership)6/27/2013 - 6/27/2013Chair: Hans Hoogervorst (Chairman, IASB)6/27/2013 - 6/28/2013http://www.iiribcfinance.com/download/send-file/iddownload/9029INNOVATIVE FINANCIALPRODUCTSIBFDVenue: IBFD head office, H.J.E. Wenckebachweg210, 1096 AS Amsterdam, The NetherlandsKey Speakers: Severine Baranger (Loyens & Loeff),Floris Andriessen (KPMG), Peter Drijkoningen (BNPParibas), Shee Boon Law (Manager, Tax ResearchServices, IBFD), Roger Smith (independent trader),Eelco van der Stok (Freshfields Bruckhaus Deringer),Bob van Kasteren (Freshfields Bruckhaus Deringer)7/1/2013 - 7/1/2013http://www.conferencesandtraining.com/en/Browse-Events/tax-conferences/Icaew-Tax-Faculity-Conference-2013-Manchester/?displayControl=overviewhttp://www.ibfd.org/Courses/Innovative-Financial-Products85

ISSUES FOR IMPLEMENTING UCITSIV, V AND VI IN LUXEMBOURGChairperson: Bart Kosters (Senior Principal ResearchAssociate, IBFD Tax Services Department)IBC7/8/2013 - 7/9/2013Venue: Sofitel Luxembourg Europe, 4 rue du FortNiedergruenewald, Quartier européen Nord, Plateaude Kirchberg, Luxembourg City 2015, LuxembourgChair: Christopher Stuart Sinclair (Director, Deloitte)http://www.ibfd.org/Courses/Taxation-High-Net-Worth-IndividualsCREATING A BEST IN CLASS TAXFUNCTION7/2/2013 - 7/3/2013IBChttp://www.iiribcfinance.com/download/send-file/iddownload/9523Venue: The Hatton, 51-53 Hatton Garden LondonEC1N 8HNFINANCIAL SERVICES AND FATCATolleyConferencesVenue: London, UK, TBAChairperson: Malcolm Powell (Head of Tax, InvestecAsset Management)7/3/2013 - 7/3/2013http://www.conferencesandtraining.com/en/Browse-Events/tax-conferences/FStax2013/TAXATION OF HIGHNET WORTH INDIVIDUALSIBFDVenue: IBFD head office, H.J.E. Wenckebachweg210, 1096 AS Amsterdam, The NetherlandsKey speakers: Ruth Felsing (Global Head of VAT/GST-Taxation, American Express Services), YiannisPoulopoulos (General Manager, Global IndirectTaxes, Rio Tinto), Darren Mellor-Clark (PartnerHead of Indirect Tax Advisory, Pinsent MasonsLLP), Michael Dong (Director of Tax, Sega ofAmerica), Philip Geddes (Head of Tax, Europe,Sun Life Financial of Canada), among others7/9/2013 - 7/9/2013http://www.iiribcfinance.com/event/Operational-Tax-ConferenceHMRC AND HIGH NET WORTHINDIVIDUALSIBCVenue: The Hatton, 51-53 Hatton Garden,Clerkenwell, London EC1N 8HN86

Chair: Jonathan Levy (Partner, Reynolds PorterChamberlain)7/9/2013 - 7/9/2013TAXATION ISSUESIN THE BOARDROOMTolleyConferencesVenue: London, UK, TBAKey speakers: Vanessa Houlder (Financial TimesJournalist), Neil Sharmen (Head of Group Tax atBrit Insurance), among others7/11/2013 - 7/11/2013http://www.iiribcfinance.com/download/send-file/iddownload/9058TRANSFER PRICINGAND INTRA-GROUP FINANCEIBFDVenue: IBFD head office, H.J.E. Wenckebachweg210, 1096 AS Amsterdam, The NetherlandsKey speakers: Michel van der Breggen (PwC), DannyOosterhoff (Ernst and Young), Antonio Russo(Baker & McKenzie)7/11/2013 - 7/12/2013http://www.iiribcfinance.com/appdata/downloads/HMRC-and-HNWIs/Final_HMRC_FKW52582_Brochure.pdf7/9/2013 - 7/9/2013http://www.conferencesandtraining.com/en/Browse-Events/tax-conferences/Taxation-Issues-In-The-Boardroom-Jul-13/http://www.ibfd.org/Courses/Transfer-Pricing-and-Intra-Group-FinanceTRANSFER PRICINGAND INTANGIBLESOFFSHORE TAX PLANNING BUDGETAND FINANCE BILL SPECIALIBCVenue: Central London, UK, TBAKey speakers: Patrick C Soares (Gray's Inn Tax Chambers),Giles Clarke (Author, Offshore Tax Planning),Michael Flesch (Gray's Inn Tax Chambers), EmmaChamberlain (Pump Court Tax Chambers)IBFDVenue: IBFD head office, H.J.E. Wenckebachweg210, 1096 AS Amsterdam, The NetherlandsKey speakers: Anuschka Bakker (IBFD), GiammarcoCottani (European Tax College, Leuven), MonicaErasmus-Koen (PwC), Danny Houben (GlobalTransfer Pricing Manager with Shell InternationalBV), among numerous others87

9/2/2013 - 9/2/2013http://www.ibfd.org/Courses/Transfer-Pricing-and-Intangibles#tab_programPRACTICAL APPLICATION OF THESTATUTORY RESIDENCE TESTIBCCORPORATE TAX REFORMTolleyConferencesVenue: Halsbury House. 35 Chancery Lane, LondonWC2A 1EL, UKKey speakers: TBA9/12/2013 - 9/12/2013http://www.conferencesandtraining.com/en/Browse-Events/tax-conferences/Corporate-Tax-Reform/Venue: Millennium Gloucester Hotel, 4-18 HarringtonGardens, Harrington Gardens, LondonKey speakers: Emma Chamberlain (Pump CourtTax Chambers), Patrick Way (Gray's Inn Tax Chambers),Peter Vaines (Squire Sanders), Keith Gordon(Atlas Chambers), among numerous others9/12/2013 - 9/12/2013http://www.iiribcfinance.com/download/send-file/iddownload/987188

IN THE COURTSISSUE 30 | JUNE 6, 2013THE AMERICASCanadaThe Supreme Court of Canada heard an appeal from acompany, DMI, that had sold two forest tenures, withboth sales agreements imparting upon the purchaserthe obligation to reforest the areas harvested. TheRevenue however assessed the company for the taxon the costs of reforestation under national law. Thecompany brought the issue to the Tax Court, whichstated that the reforestation obligation had been a partof the transaction and was included in the price paidby the purchaser. However, the Court ruled that thecompany was obliged to include in its proceeds theestimated cost of reforestation after 12 months followingthe sale, plus 20 percent of the remaining amount.The Federal Court of Appeal disagreed with thispoint and decided that the company should havebeen responsible for the entire estimated cost of reforestation,given that the amount was the valueincluded in the sales agreement. Likewise, becausea value was not agreed upon in the second sale, theCourt of Appeal recommended that the matter beconsidered again by the Tax Court.A listing of key international tax cases in thelast 30 daysgovernment to sell its forest tenures, and that to begranted permission the purchaser had to assumethe reforestation liability. Therefore the obligationwas tied to the sale of the tenures as a future expenserather than being separately included in theagreement, and the Supreme Court rejected theargument "that the purchasers' assumption of thereforestation obligations had to be added to DMI'sproceeds of disposition for income tax purposes."Th e Supreme Court was to consider whether thereforestation obligation was included in the pricepaid for the forest tenure, and if any meaning wasto be given to the specific value included in thefirst sales agreement. It pointed out that the companyhad to obtain permission from the provincialThe judgment was delivered on May 23, 2013.http://scc.lexum.org/decisia-scc-csc/scc-csc/scccsc/en/item/13071/index.doSupreme Court: Daishowa-Marubeni InternationalLtd. v. The Queen (SCC 29)89

United StatesThe United States Tax Court heard a motion forsummary judgment from a taxpayer who was a residentof the US Virgin Islands and held an interestin a domestic partnership. The taxpayer filed his taxreturns with the Virgin Islands Revenue; howeverthe IRS argued years later that the partnership wasnot valid, that the taxpayer had failed to properlyidentify all sources of income, and that the returnsshould have been filed with the IRS.Because the taxpayer correctly filed his tax returnswith the Virgin Islands Revenue, despite the matterof income from the partnership being left unresolved,the Court granted his motion for a summaryjudgment against the tax adjustments, by reasonthat the notice was issued by the IRS more thanthree years after the properly filed tax returns andwas therefore invalid.The judgment was delivered on May 22, 2013.The IRS made adjustments to negate the tax benefitsthe taxpayer received from the Virgin Islands onaccount of the partnership; the taxpayer objectedand brought the motion before the Tax Court.The Court acknowledged that the success of thetaxpayer's motion depended on whether he properlyfiled the required returns with the Virgin IslandsRevenue, and that it was required under lawto assume that income from the partnership wasnot suitably recorded in the submitted returns.The IRS attempted to rely on case law and its ownnotices to argue that the taxpayer was considered aUS resident living abroad and was required to file atax return with them, but the Court disagreed entirelywith their interpretation of the law. It statedthat the taxpayer had no reason to consider himselfliving abroad, that the necessary returns filed withthe Virgin Islands Revenue mirrored the returns requiredby the IRS, and that their notices were publishedafter the taxpayer filed his returns and didnot have retroactive effect.http://www.ustaxcourt.gov/InOpHistoric/AppletonDivJacobs.TC.WPD.pdfTax Court: Arthur I. Appleton Jr. et al. v. Commissioner(140 T.C. No. 14)ASIA PACIFICIndiaThe Delhi High Court heard an appeal by the Revenueagainst the tax treatment of services providedby an India-based subsidiary of Digital Microwave(Mauritius) Ltd, which is itself a wholly-ownedsubsidiary of a US-based manufacturing company,Digital Microwave Corporation USA.The subsidiary was paid to supply warranty coverageon equipment sold by the US company to Indiancustomers, but it also independently provided installationand maintenance services for said equipment.The subsidiary calculated the arm's lengthprice of its international transactions with the UScompany, but the Transfer Pricing Officer insisted90

on including the profit from the domestic installationand maintenance services in the computationto "determine the profit level indicator."The Revenue argued that the domestic serviceswere "intricately connected" with the internationaltransactions; however the Tribunal drew the conclusionthat there was no connection, given that onlythree of the company's 40 customers had taken advantageof the subsidiary's installation services, andthat the Revenue had not recognised the domesticservices as part of the arm's length price.The High Court agreed with the Tribunal and confirmedthat the subsidiary's domestic services werenot international transactions due to the lack of involvementof the US company. As a result, therewas no discernable connection between these servicesand the services the subsidiary provided as internationaltransactions with the US company, andso the Revenue's appeal was dismissed.The judgment was delivered on May 6, 2013.http://lobis.nic.in/dhc/BDA/judgement/09-05-2013/BDA06052013ITA3532011.pdfpartners of which had occasionally provided servicesrelating to projects in India.The firm had no branches in India, but when CliffordChance representatives were in the country forlonger than 90 days, the Assessing Officer consideredthat this constituted a permanent establishment(PE) there.The assessee claimed that Clifford Chance employeesshould be subject to beneficial provisions containedin the UK-India DTA, and that thereforeonly services actually rendered in India should besubject to Indian tax; the Revenue claimed that (dueto the PE), all receipts relating to the Indian projectsshould be subject to income tax, and that furthermore,the DTA provisions (which related to the taxtreatment of fees paid to individuals) did not apply.The company appealed against the assessment,and the Commissioner of Income Tax (Appeals)(CIT(A)) agreed that there was no creation of a permanentestablishment, and that the company wasnot liable for tax in the years when their employeesspent less than 90 days in India. It based its decisionson an earlier Tribunal judgment.High Court: CIT v. Stratex Networks (India) PvtLtd (ITA 353/2011)IndiaThe Special Bench of the Mumbai Income TaxAppellate Tribunal was consulted during proceedingsconcerning a UK law firm, Clifford Chance,The Revenue then appealed to the Tribunal on thebasis that the previous Tribunal decision which benefitedthe company involved a law that had sincebeen amended with retroactive effect, which theRevenue insisted made all services received in Indiataxable regardless of where they were rendered.The company argued that the amendment did not91

affect the specific law that exempted their servicesfrom tax liability. The Tribunal asked the SpecialBench whether the amendment to the law affectedthe company's tax liability in India, and for an interpretationof the tax treaty regarding the taxabilityof services rendered outside of India.services in India was taxable. However, the SpecialBench was not asked to consider whether the employeesstayed for longer than 90 days or whethera permanent establishment was created; these questionswere left for the Tribunal to consider, withregard to the Special Bench's deliberations.The Special Bench considered whether the company'sincome in India took the form of fees for technicalservices and whether it was therefore affectedby the change in the law, as claimed by the Revenue.It concluded that the matter of the income beingfees for technical services was not addressed byeither the earlier Tribunal decision or the CIT(A),and did not factor into the tax officer's assessment,and therefore there was no reason to consider thecompany's income as such.The Special Bench then undertook an interpretationof the UK-India tax treaty with regard to theUN Model Convention brought up during the Tribunalproceedings. It found that the language ofthe treaty was sufficiently different from the UNmodel so as to distance it from the concept ofall business activities being taxed in the receivingcountry despite not being tied to the permanentestablishment there. The conclusion was that onlyincome attributable to the business carried out bythe permanent establishment can be taxed in thesource country.The judgment was delivered on May 13, 2013.http://www.itatonline.in:8080/itat/upload/785077208211983070913$5%5E1REFNOMicrosoft_Word_-_Clifford_Chance_-_Spl._bench__1.5_Space_.pdfIncome Tax Appellate Tribunal (Special Bench):Clifford Chance v. Asst. DIT (ITA 3021/MUM-2005)WESTERN EUROPEBelgiumThe European Court of Justice was asked for a preliminaryruling during proceedings at the MonsCourt of Appeal where a group of companies whohad submitted incomplete tax invoices to the Belgiumtax authority were appealing a decision thatprevented the suppliers from receiving a VAT refundand the receivers from deducting VAT. Thecompanies had subsequently provided additionalinformation which the tax authority had refusedfor being too late and deemed to be lacking value.The answers provided by the Special Bench produceda strong case for the company's assertion thatonly income resulting from employees providingThe Court of Appeal approached the ECJ for an interpretationof EU law regarding whether a MemberState can legally refuse to allow a taxpayer to92

deduct VAT as a result of incomplete tax invoices,despite the fact that they later provided relevant information,and subsequently whether the MemberState must refund the VAT to the suppliers.Th e ECJ stated that the Belgian national lawgoes beyond what the EU law provides for therequirements of a tax invoice in order to benefitfrom the right to deduct VAT, but that it isfor the national courts to decide whether the lawmakes obtaining the benefit too difficult. It thenconcluded that although the taxpayer is permittedto correct any invoice errors before the taxauthority makes its decision regarding such errors,in the present case the information was providedonly after the authority had decided to refuseto allow the deduction of VAT, and EU lawdoes not prevent national law from denying thededuction in such an event.The ECJ then considered the matter of whether theVAT should be refunded with regard to the principleof fiscal neutrality, and found that:"The principle of fiscal neutrality does not precludethe tax authority from refusing to refund the valueadded tax paid by a company providing services, inthe case where the exercise of the right to deduct thevalue added tax levied on those services has beendenied to the companies receiving those services byreason of the irregularities confirmed in the invoicesissued by that service-providing company."The judgment was delivered on May 8, 2013.http://curia.europa.eu/juris/document/document.jsf?text=&docid=137304&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=1867295European Court of Justice: Petroma Transports SA v.Belgium (C-271/12)BulgariaThe European Court of Justice was asked for a preliminaryruling regarding a taxpayer who had beenremoved from the VAT register while in possessionof a number of motor vehicles. The tax authoritiesassessed the amount of VAT due on the vehiclesbased on their 'open market value'; the taxpayer arguedin court that the assessment should take intoconsideration the depreciation in value of the vehiclesbetween when they were purchased and whenthe company was removed from the VAT register.Under national law the open market value, whichis interpreted as the purchase price of the assets, isrequired to assess the taxable amount; however thecourt asked the ECJ whether EU law is applicableto cases where an economic activity ends becauseof removal from the VAT register, whether nationallaw concerning the open market value of assets iscompatible with EU law, and whether it shouldtake depreciation into consideration.The ECJ first stated that the EU VAT Directivedoes apply when a taxable activity ceases due to thetaxpayer being removed from the VAT register, asthe law applies to the end of an activity withoutspecifying a necessary reason.93

The ECJ then concluded that, with regard to boththe EU law and relevant case law, the appropriatevalue of goods for tax purposes is at the time of cessationrather than at the time of purchase. It wasalso decided that it is for the national court to decidewhether the national law's use of the phrase'open market value' incorporates the change in valueof assets between their acquisition and the endof the taxable activity under EU law.The judgment was delivered on May 8, 2013.http://curia.europa.eu/juris/document/document.jsf?text=&docid=137305&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=1890512European Court of Justice: Marinov v Bulgaria(C-142/12)HungaryThe European Court of Justice was asked for a preliminaryruling regarding the repayment of VATto a company which had been denied the right todeduct VAT under legislation that was found tobe incompatible with EU law. The company hadrequested state aid for a subsidized project, whichwas calculated based on the ''eligible expenditure'of the project including VAT, despite the law notallowing for the deduction of VAT pertaining tothe amount of the aid.After a European Court case whereby a nationallaw that only allowed the deduction of VATproportionate to the costs not provided for byState aid was found to be incompatible with EUlaw, the company surmised that it could deductthe entire amount of VAT arising from the projectand sought to re-negotiate the State aid basedon the VAT that had been non-deductible untilthe result of the case.Th e institution providing the aid refused to renegotiate,and so the company approached the taxauthority with a claim for the repayment of VATthat it had not been allowed to deduct prior to thecase. The first judgment allowed the repayment ofVAT proportionate to the amount of aid receivedrather than to the full cost of the project; the secondjudgment adhered to the case decided in theEuropean Court and insisted that the full amountof VAT relative to the cost of the project be repaid.The tax authority appealed on the basis thata part of the VAT the company sought to recoverhad been included in the amount of aid it hadreceived, while the company took it upon itselfto argue that not being paid the total amount ofdeductible VAT was against EU law; therefore thecourt consulted the ECJ.Th e ECJ considered whether a Member State is allowedunder EU law to limit the amount of repayabletax when the taxpayer had received aid providedby the State. It established that a taxpayerhas the right to be refunded any tax that had beenincorrectly paid in breach of EU law, but that therepayment of tax must not constitute unjust enrichmentof the taxpayer due to circumstances94

where the taxpayer had somehow offset or recoveredthe tax paid, and that national law has thepower to limit the repayment claim of a taxpayerin such a situation.http://curia.europa.eu/juris/document/document.jsf?text=&docid=137423&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=2973965The ECJ concluded by pointing out that the taxpayerhad received a greater amount of aid due tothe inclusion of the non-deductible VAT in the calculationthan it would have if the VAT had beendeductible from the beginning; therefore in orderfor the taxpayer to be adequately compensatedbut not unjustly enriched, the repayment amountshould be the difference between the VAT that thecompany should have been allowed to deduct andthe extra amount of aid it received due to the VATbeing non-deductible.The Court stated in conclusion that:"The principle of repayment of taxes levied in aMember State in infringement of the rules of EUlaw must be interpreted as meaning that it doesnot preclude that State from refusing to repay partof the value added tax, the deduction of which hadbeen precluded by a national measure contraryto European Union law, on the ground that thatpart of the tax had been subsided by aid grantedto the taxable person and financed by the EuropeanUnion and by that State, provided that theeconomic burden relating to the refusal to deductvalue added tax has been completely neutralised,which is for the national court to determine."The judgment was delivered on May 16, 2013.European Court of Justice: Alakor Gabonatermelo ésForgalmazó Kft. v. Hungary (C-191/12)NetherlandsTh e European Court of Justice was asked for apreliminary ruling during proceedings at the SupremeCourt of the Netherlands where the tax authoritywas appealing a Court of Appeal decisionthat a taxpayer acting as a trader could deductthe VAT imposed on a transfer of shares. The SupremeCourt instead considered that the transferwas an economic activity that was exempt fromVAT, but was aware that in a past case the ECJhad stated that VAT may be chargeable "wherethat disposal may be regarded as equivalent to thetransfer of a totality of assets or part thereof". TheSupreme Court therefore addressed the ECJ concerningthis matter, with regard to the facts of thepresent case.The ECJ first stated that according to case law atransfer of shares cannot be regarded as a "transfer ofa totality of assets" when it is not sufficient enoughto establish an independent economic activity thatcan be carried out by the transferee. It then consideredwhether the fact that the total shares of acompany were being transferred to a single entityby companies including the taxpayer had any impacton the Court's deliberations. The decision was95

that each transaction must be assessed separately,and that the transfer of a full company by a numberof shareholders does not qualify as a "transfer of atotality of assets".The ECJ ruled in conclusion that:"Articles 5(8) and/or 6(5) of Sixth Council Directive77/388/EEC of 17 May 1977 on the harmonizationof the laws of the Member States relatingto turnover taxes - Common system of valueadded tax: uniform basis of assessment must beinterpreted as meaning that the disposal of 30%of the shares in a company to which the transferrorsupplies services that are subject to VAT doesnot amount to the transfer of a totality of assetsor services or part thereof within the meaning ofthose provisions, irrespective of the fact that theother shareholders transfer all the other shares inthat company to the same person at practicallythe same time and that that disposal is closelylinked to management activities carried out forthat company."The judgment was delivered on May 30, 2013.http://curia.europa.eu/juris/document/document.jsf?text=&docid=137829&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=65291European Court of Justice: Netherlands v. X BV(C-651/11)RomaniaThe European Court of Justice was asked for a preliminaryruling during proceedings at the OradeaCourt of Appeal where a company which had beendenied reimbursement of excise duties that it hadpaid in Romania argued that the law required therequest for reimbursement to be made after theproducts it had exported had arrived at their destination,due to the information that was necessaryfor the request to be made. The tax authority insistedthat it could not accept the request according toEU law precisely because the products had alreadyentered another Member State. The Court of Appealtherefore petitioned the ECJ for an interpretationof the law.The reimbursement of excise duties is allowed underEU law for the sake of harmonisation and toprevent double taxation by ensuring that excise dutiesare only levied in one Member State.Th e ECJ identified two different methods ofreimbursement under EU law, and found thatRomanian law appears to only incorporate oneof them; namely the method that requires therequest for reimbursement to be made beforethe goods are dispatched as part of a suspensionagreement, and before excise duties are paid inthe destination State.Th e second method however, does not impose atime for the request to be made; the requirementfor reimbursement is that the excise duties have96

een paid in the destination State. The ECJ statedthat the national court was responsible for decidingin which way EU law had been implementedin national law, and which provisions applied tothe present case.destination State, the request may be refused dueto a failure to follow the procedure required by thefirst method.The judgment was delivered on May 30, 2013.The conclusion from the ECJ was that when exciseduty has been paid in the destination State, therequest for reimbursement from the source Statecannot be refused simply because the request wasmade after the products were dispatched, accordingto the second method of reimbursement underEU law. When the duty has not been paid in thehttp://curia.europa.eu/juris/document/document.jsf?text=&docid=137825&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=107934European Court of Justice: Scandic Distilleries v.Romania (C-663/11)97

THEESTER'S COLUMNISSUE 30 | JUNE 6, 2013Dateline June 6, 2013For a long time it has seemed that CARICOM, thegrouping of Caribbean states including such relativelylarge territories such as The Bahamas, Haitiand Jamaica as well as minnows like Montserrat,is nothing but a talking shop without the will oreven the technical skills to achieve its stated goalof economic and political integration. But therehave been some signs recently that it may be gettingmore serious. This week it signed a TIFA withthe US , which will presumably act as a stimulusto some sort of local harmonization of standards,laws and taxes. Then, seven WTO members of subgroupingthe OECS (the Organization of EasternCaribbean States) which could be said to havemade better progress towards at least economicunification, with a shared currency and centralbank, are to undergo a trade policy review by theWTO, which will doubtless be thoroughgoing andproductive. These are good signs; but more generally,progress towards the CSME (Caribbean SingleMarket and Economy), which is the name given toCARICOM's intended shared economic space, hasbeen fairly glacial. We will see, but I'm not holdingmy breath.A cheer for UK Chancellor George Osborne whosays that he will square the country's budgetarycircle in 2015 with savings from government departmentsrather than by increasing taxes. I don'tknow what the Treasury gave visiting IMF officialsto drink two weeks ago, but it must have beensomething quite strong with pixie dust mixed inbecause just for once the IMF didn't suggest raisingtaxes, and broadly supported the coalition's stance.I say "the coalition," but minority partner theLibDems are facing electoral wipe-out, damagedperhaps beyond repair by the very fact of joiningthe coalition, in which they have had to supportan economic program that is the exact converse ofeverything they have ever preached. It's wonderfulwhat power does to people's sense of judgment.The Tories probably have little to fear from the Lib-Dems in the next election, and Labour is sinkingunder the weight of another feckless leader. Youwould have thought they had learned the lessons ofMichael Foot and Neil Kinnock, but no – and theyhave a serious funding crisis to deal with as well.The Tories' problem is the burgeoning UKIP (UKIndependence Party) which is supported by a pluralityof the UK population in wanting to leave theEU. If UKIP can manage to shed its unpleasantlyracist fringe, a Tory/UKIP government becomesa real possibility, and then there would be a referendumon EU membership by 2018, with a fairlypredictable result.I may have to admit that I was wrong in sayingthat the Spanish Government was all talk and nowalk. Its latest package of support for small businessis practical and significant, giving substantialencouragement to people to start and/or invest inbusinesses. Presumably it has been cleared withBrussels, but if not, it wouldn't be the first time98

that Spain has gone its own way first and lookedfor approval afterwards. It's also not quite clearwhether the new measures are consistent with theGovernment's stability program announced at theend of April, which sees a deficit of 6.3 percent ofgross domestic product this year (revised upwardsrecently from 4.5 percent), 5.5 percent in 2014,4.1 percent in 2015, and of 2.7 percent in 2016.Those numbers are in line with the Commission'sdeficit targets for Spain, although only because theEU, bowing to the inevitable, announced this weekthat Spain (and France) would be given an extratwo years to reach their fiscal targets. It's difficultto see how even these latest targets can be reachedwithout significant savings; let's hope that PrimeMinister Rajoy takes a leaf out of Britain's book.Challenging as it is, the only way of saving Europeis to cut bloated state sectors, and cut them hard.We can't give the EU Commission any browniepoints for abandoning the financial transactions taxin its current form – given the barrage of oppositionfrom politicians, the financial sector in general,several unincluded member states, and even fromsome of the prospective members of the "variablegeometry" eleven, it had no choice. In fact we'llgive it a black mark for leaking the information viaReuters rather than announcing it. Too shameful,presumably, after it had staked so much on the tax.Heads would roll, if the EU was a properly transparentpolitical space, but it isn't, and there will bea long process of face-saving before the tired oldanimal is finally led to the knacker's yard. In thiscolumn we have been strongly against the tax fromthe very beginning. Officially, the Commission isstill pretending that the tax is merely "under discussion,"but I prefer to believe the leaks!Australia had a very successful week in its campaignto drive multinational businesses out of the country.Assistant Treasurer David Bradbury said thatreforms to increase fiscal transparency form "partof the Government's broader agenda to crack downon multinationals." No, OK, he didn't say that, althoughhe just as well might have said it. What heactually said was " . . . . to crack down on multinationalprofit shifting and tax avoidance." Yawn. Earlierin the week he had delivered a stinging diatribeagainst the habits of multinationals , calling them"massive money shuffles." He screeches that companiesobtain "a competitive advantage" – how awful!Isn't that exactly what they're supposed to do?And naturally he complains that "families" are leftto foot the bill. Well, Mr. Bradbury, what about thejobs those families live from, and the income taxesand GST etc etc your Government receives courtesyof those jobs? He's only 37, by the way, andwas a tax lawyer with a major commercial law firmfor some years before being elected to parliament in2007. He was twice mayor of Penrith. Impressive.I may be wrong (often am!) but I am suspicious ofthe Dutch Government's plan to replace corporateapprenticeship tax breaks with "targeted subsidies,"because it seems to take decisions out of the handsof companies and puts power to dish out moneyin the hands of officials. It's not that I would suspectDutch officials of venality – I am sure that99

they are impeccably honest and public-spirited; theproblem is that the process inevitably becomes lesstransparent. The Government complains that thecurrent scheme has become too expensive, i.e. thatit is successful, and wants to allocate money "onthe basis of need." But who is better equipped todecide on the need for apprentices? The firms thatemploy them, or the Government?The Jester100