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Doing Business in Trinidad and Tobago

Articles, Corporate/Commercial Law, Energy and Natural Resources, Latest News, Tax

Introduction

Trinidad and Tobago (T&T) is a twin-island Republic located in the southern Caribbean with a population of approximately 1.3 million. Unlike most of the tourism-based economies in the Caribbean, T&T’s economy is heavily dependent on the energy sector. T&T has transitioned from a primarily oil-based economy to a natural gas-based one with major investments in petrochemicals. In this regard, T&T is currently the world’s largest exporter of methanol and is a leading exporter of liquefied natural gas (LNG). As a result, T&T is one of the wealthiest countries in the Caribbean and Latin America as measured by per capita GDP.[1]

Over the past quarter century, the T&T government has undertaken a number of reforms to liberalize the economy so as to facilitate foreign investment in the country. These reforms include the removal of most restrictions on the ownership of property by non-nationals[2] and the virtual abolition of foreign exchange controls.[3]

In addition, T&T has several advantages when compared to other countries in the region, including:

  • Availability of skilled manpower;
  • Availability of relatively good telecommunications and other infrastructure;
  • Relatively low energy costs; and
  • Strategic location at the crossroads of the Americas.

In the circumstances, T&T is well-placed to attract foreign investments.

Establishing a Business in T&T

Generally, foreign investors may carry on business in T&T through a locally incorporated company or by registering an External Company (Branch) in T&T. The process of incorporating a subsidiary company or registering a branch is relatively straightforward and inexpensive. On average, incorporating a T&T subsidiary company would take approximately one week while the process of registering a T&T branch of a foreign company may be accomplished in about two week time.

Generally, companies are required to be registered for corporation tax, employee tax (“PAYE”) and national insurance (“NIS”). Depending on the level of their business activity, they may also have to register for value added tax (“VAT”). These registrations are fairly uncomplicated and can be accomplished within a reasonable period of time. Generally, one can obtain registration in respect of corporation tax, PAYE and NIS within one day while registration for the purposes of VAT can usually be completed within one week.

Taxation Overview

The current rate of corporation tax for most companies operating in T&T is 25%. Companies in the petrochemical sector[4] are taxed at the rate of 35% while companies engaged in the petroleum production business and refining businessare subject to tax under a separate regime altogether.[5]

Payments of dividends to non-residents are subject to a 10% withholding tax. Where dividends are paid to a non-resident parent company, a reduced rate of 5% is applicable. Other payments to non-residents (interest, rentals, royalties, management charges) are subject to tax at a rate of 15%. It should also be noted that T&T has entered into Double Taxation Treaties with various countries[6] and such treaties may provide for reduced rates of withholding tax.

Capital gains are not generally subject to tax in T&T. There is, however, a regime for the taxation of short-term capital gains which are defined as the gains accruing on the disposal of an asset within 12 months of its acquisition. Such short-term capital gains are subject to tax at the rate of 25%.

The other principal taxes impacting on businesses in T&T include the following:

  • A business levy of 0.2% on the gross sales or receipts of a company. However, companies are only liable to pay the higher of its business levy or corporation tax liability. Further, companies are exempt from business levy for the first 36 months following registration.
  • A green fund levy amounting to 0.1% of a company’s gross sales or receipts is payable by all companies.
  • VAT, at a rate of 15%, is due on the supply of goods and certain prescribed services. Where a company is registered for VAT, however, it would be entitled to recover all of the VAT it has incurred in the course of its operations.
  • An ad valorem stamp duty is imposed, at varying rates, on certain transactions including the sale or transfer of property or shares.

Free Zone

The T&T Free Zones regime was designed to encourage local and foreign investment in export-driven projects that create jobs, develop skills and create external markets for products and services. Such investors benefit from various fiscal incentives provided for in the relevant legislation. It should be noted that companies engaged in the exploration and production of petroleum and natural gas and the manufacture of petrochemicals do not qualify for free zone status in T&T.

Approved free zone companies are exempt from corporation tax, business levy and green fund levy on the sale of goods and the export of services. Distributions and certain payments also qualify for relief from withholding taxes. Approved companies are also exempted from Customs Duties on imported goods and materials. Approved companies also benefit from an exemption from property taxes.

The T&T Government recently signaled its intention to encourage the building of centralized service hubs to support the financial services sector. This involves the consolidation by financial institutions of national and regional back-office operations in T&T. In the circumstances, such enterprises will provide services to customers in T&T as well as the wider region. These operations may include data base management, accounting, legal, HR support and credit card processing, among others. The intention is to utilize the existing free zone regime in order to incentivize these activities.

Manufacturing

Companies engaged in manufacturing may qualify for approval under the free zone regime. Additionally, manufacturers are entitled to accelerated capital allowances in the form of a 90% initial allowance on the capital expenditure incurred in acquiring plant and machinery. Companies engaged in manufacturing may also seek approval under the Fiscal Incentives Act. Benefits available to such companies under this legislation include relief from customs duties and VAT on the importation of plant and machinery as well as total or partial relief from withholding tax on distributions.

Tourism Projects

Companies in the tourism sector may access benefits under the Tourism Development Act for approved tourism projects (which are not limited to hotels but include ancillary facilities such as marinas, theme parks, golf courses). Approved companies may be granted corporation tax holidays of up to seven years as well as relief from customs duties on imports. A tax exemption on interest received in respect of loans used for approved projects is also available.

Immigration Issues

Non-residents can generally freely enter T&T for business meetings. A work permit will, however, be required where a non-resident person intends to work in T&T for a period exceeding 30 days in any 12 month period. In addition to work permits, nationals of certain countries are required to obtain an entry visa to visit T&T. Work permit applications are made to the Ministry of National Security and normally take between 4-6 weeks to be issued.

General Environment

T&T is a parliamentary democracy and has a stable political climate. The legal system is based on the English common law system. The final Court of Appeal is the Judicial Committee of the Privy Council in the United Kingdom. The Courts in T&T are independent though the judicial process tends to be lengthy.

In recent years, the T&T economy has been characterized by moderate inflation and relatively low rates of unemployment.[7] The defining feature of the financial system in the past few years has been a low interest rate environment combined with high liquidity in the system. Total public sector debt currently amounts to 39.9% of GDP. The country’s investment grade status is currently rated “A” (Standards & Poor) and “Baa2” (Moody’s).

The country is heavily dependent on the energy sector (40% of GDP, 50% of Government revenues, 80% of exports), however, and its overall economic performance is closely linked to energy prices. As a result, the Government is keen to promote investments in the non-energy sector as a means to diversify the economy.

T&T has an established, well regulated financial sector that includes commercial banks (including the local operations of international banks), insurance companies and a stock exchange. Further, there are no foreign exchange controls in T&T and profits may be freely repatriated.

Investors have access to a well-educated labour force. Tertiary education is free in T&T and this has resulted in ever increasing numbers of university and technical graduates entering the work force. There is a minimum wage in T&T that is currently set at TT$15 per hour.

T&T has two international airports with a number of airlines offering direct and connecting flights to all major international destinations. T&T also has two strategically located international ports (Port of Spain and Point Lisas). T&T also has a modern communications network with ready access to land-line telephones, mobile telephones as well as the internet.

In conclusion, T&T has made significant strides in recent times to transform the business environment of the country so as to attract foreign investment.

[1] In 2014, according to information from the International Monetary Fund, T&T had a GDP (nominal) per capita of US$21,311.

[2] Non-nationals of T&T may purchase up to five acres of land for commercial purposes without having to obtain a licence.

[3] The T&T dollar is the subject of a managed float and the current rate of exchange is approximately TT$6.35 to US$1.

[4] The 35% Corporation Tax rate is applicable to companies engaged in (a) the liquefaction of natural gas; (b) manufacture of petrochemicals; (c) physical separation of liquids from a natural gas stream and natural gas processing from a natural gas stream; (d) transmission and distribution of natural gas; and (e) wholesale marketing and distribution of petroleum products.

[5] Petroleum production companies are subject to petroleum profits tax at the rate of 50% of chargeable profits, unemployment levy at the rate of 5% of chargeable profits and supplemental petroleum tax with rates based on weighted crude oil prices.

[6] Currently T&T has entered into Double Taxation Treaties with Brazil, Canada, CARICOM, China, Denmark, France, Germany, India, Italy, Luxembourg, Norway, Spain, Sweden, Switzerland, the United Kingdom, the United States and Venezuela.

[7] The inflation rate is currently at 5.6% while the unemployment rate is 3.7% (Central Bank of Trinidad and Tobago Economic Bulletin: July 2015).

Doing Business in the UK

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The United Kingdom consists of Great Britain and Northern Ireland. Great Britain consists of England and Wales and Scotland. The legal systems in the territories of the United Kingdom do differ in certain respects particularly in connection with land law. Certain taxes are devolved or becoming devolved but basically the legal systems allow anything to be done that is not regulated or prohibited unlike the civil law jurisdiction in most of the rest of the European Union where anything is permitted if the law allows it. The UK is a member of the European Union and benefits from the internal market and is rated as the top global financial centre.

Business in the UK is usually carried on through a company incorporated in one of the constituent countries, which may be a limited company or a public limited company with a higher minimum share capital, or a quoted public company where shares are quoted on the stock exchange. Each company is a legal entity which can sue or be sued in its own right. Business could also be carried on through a UK branch of a foreign company and the branch profits could be subject to UK taxation. Other common business structures are partnerships where the partners have unlimited liability for the debts of the business, limited partnerships, where the limited partners’ liability is limited to their investment in the firm which must also have a general partner with unlimited liability, which can be a limited company. Limited liability partnerships are separate legal entities, like companies, but are taxed on the individual partners or corporate partners on their share of the profits or losses. There are other business structures such as cooperative societies, charities and other not-for-profit organisations. Certain business structures are subject to regulations such as those engaged in insurance and banking.

Taxation

The UK has the dubious accolade of inventing Income Tax in 1798.

Income Tax

Unincorporated businesses and individual partners of limited partnerships are subject to Income Tax. Currently the first £10,600 is normally tax-free. The next £31,785 is taxed at 20%, the next £118,215 is taxed at 40% and the excess at 45%. There are allowances for married couples and blind persons. The number of personal allowances has been reduced in recent years as the nil rate band has increased. Employees are normally taxed under the Pay As You Earn system where tax and national insurance contributions are deducted at source by the employer on behalf of the government. National insurance contributions are also paid by the self-employed at different rates and the proceeds, in the main, are used to finance public health and pensions. Stock options are another complex area for employees, which may be taxed as income or capital gains depending on the circumstances.

Non-UK Residents and Non-UK Domiciliaries

Individuals who are not resident in the United Kingdom are only taxable on their UK source income and non-UK domiciled individuals may be taxable only on UK source income and remittances of overseas income and capital gains if they meet the necessary requirements. The UK recently introduced a complex statutory residence test to determine who is, and who is not, a resident in the UK for tax purposes. Domicile is a complex area and it is normally inherited from the father at birth, but in certain cases it is the mother’s domicile that prevails, and the individual can acquire a domicile of choice by living in a country and intending to remain there permanently or indefinitely. A non-domiciled individual who has lived in the UK for a number of years is subject to the remittance basis charge and after being resident in the UK for 17 out of 20 years is deemed to be domiciled in the UK for tax purposes.

Corporation Tax

The UK claims to have the most competitive rate of corporation tax in the G20, at 20% currently, but in the process of reducing to 18%. It also has the largest number of double taxation treaties of any country in the world and has been participating in the base erosion and profit shifting (BEPS) project sponsored by the OECD.

The UK does have anti-avoidance legislation through the controlled foreign company rules and it is possible to obtain an advance pricing agreement in some cases which enables royalty rates to be agreed with HM Revenue & Customs in advance. The UK anti-avoidance provisions have been extended by the introduction of a diverted profits tax. A number of international companies have paid very little tax, relative to their turnover in the UK, by avoiding a permanent establishment and concluding contracts on the internet in favourable tax jurisdictions such as the Netherlands, and delivering products to UK residents from warehouses in the UK which would not count as permanent establishments and under many double taxation treaties. The UK has also been active recently on a number of perceived abuses of the tax system.

Inheritance Tax

A UK domiciled or deemed domiciled individual is subject to inheritance tax on assets in excess of the nil rate band of £325,000. The rate of inheritance tax for lifetime transfers is 20%, on the reduction in the estate as a result of the transfer, and the rate on death is normally 40%, but can be reduced to 36% where 10% or more of the estate is left to charity. The nil rate band may be increased from April 2017. An individual who ceases to be UK domiciled and dies within 3 years of that date is deemed domiciled in the UK for inheritance tax purposes.

Individuals coming to the UK for an extended period will usually be advised to transfer assets into a foreign trust before coming to the UK. Civil law based individuals may consider transfers into a suitable foundation. The UK Crown dependancies Jersey, Guernsey and the Isle of Man now have both trust and foundation laws, whereas the UK tends to treat foundations as trusts or companies depending on which would produce the greatest tax revenue.

Capital Gains Tax

The annual exemption for chargeable gains before capital gains tax becomes payable is currently £11,100 and half that rate for trusts. The basic rate of capital gains tax is 18% up to the basic rate limit of £31,785 and 28% thereafter on the taxable chargeable gain.

Value Added Tax

The UK has a typical European Union Value Added Tax system where supplies of goods or services are subject to VAT at a zero-rate, a 5% reduced rate and a 20% standard rate, with credit for VAT suffered on purchases. Some supplies are outside the scope of VAT.

Excise Taxes

The UK charges excise taxes on certain goods and services such as tobacco, alcohol and gambling.

The UK tax system now holds the dubious distinction of being the most voluminous tax legislation in the world and UK professional advice is essential for anyone contemplating setting up business in the UK.

The UK workforce is normally well-educated and the UK has four of the top ten universities in the world. Non-EU resident employees may need a work permit to work in the UK.

The UK is a highly technically inventive country and intellectual property is a major asset of many businesses. Copyright in the UK lasts for the creator’s lifetime and for 70 years after his death. Trademarks have an unlimited life and the UK trademark for Bass beer, which is a red triangle, is the first UK registered trademark and is still in use. Patents normally have a life limited to 20 years and it is possible to protect certain designs under the design rights legislation. Tax incentives are available for creative development and a lower rate of tax may apply to the profits from patented products under the patent box rules.

The UK has a worldwide reputation for the independence and expertise of the judiciary and a number of companies and individuals with major financial disputes seek out the English Courts to ajudicate on the merits of the case without fear or favour, which unfortunately is not the perceived norm in every jurisdiction.

The final but not insignificant benefit of the United Kingdom is its language, which has become, in many respects, the worldwide business language thanks to its use throughout the Commonwealth and former colonies including, most importantly, the United States of America. However this common language has to be used carefully as the same word may have different meanings in different circumstances and in different jurisdictions. For example, a “scheme” in the UK is merely a plan or arrangement which may be for a multitude of legitimate purposes, whereas a “scheme” in the US is normally regarded as a tax avoidance scheme and sailing too close to the wind for comfort.

Malta : A Tax Efficient Jurisdiction

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Malta’s tax legislation provides for a number of benefits which can be derived by companies and their shareholders. The tax rules can lead to a tax burden in Malta which is significantly reduced or completely eliminated in certain cases, and the following are some of the key tax benefits which Malta can offer.

  1. Imputation system of taxation

Malta’s imputation system avoids double taxation at the level of the company and its shareholders since tax is paid by the company on account of the liability of the shareholders to pay such tax. Unlike many European and other countries, shareholders do not pay tax when they receive dividends from the Malta company but can claim a credit for the tax paid by the company.

  1. Tax credits and refunds

Significant tax refunds can be claimed by shareholders of a Maltese company on receipt of dividends from the company. Although the Maltese company would pay tax at the corporate rate of 35%, the effective tax leakage in Malta after refunds to shareholders can be reduced significantly depending on the source of income of the Maltese company and any foreign tax incurred by it.

  1. Participation Exemption

Malta’s participation exemption does not require any minimum holding period where a Maltese company holds more than 10% of the interests in a non-Maltese entity. It is applicable in relation to any dividend income or capital gains arising on the holding and eventual disposal of a participating holding of equity shares in a non-Maltese company or partnership. The holding must satisfy a number of alternative criteria, including a minimum 10% holding or a minimum investment of €1,164,000 or equivalent in the non-Maltese entity. There is also an anti-abuse test which is to be satisfied, and the safe harbours include the holding of shares / interests in entities which are incorporated or resident in the European Union, or the holding of shares / interests in entities which have less than 50% of their income being derived from passive interest or passive royalties.

As a result of a recent amendment to Maltese tax laws, where profits of a Maltese company benefit from the exemption from withholding tax set out in the EU’s Parent Subsidiary Directive, the participation exemption would only apply to the extent that such profits are not deductible by the relevant subsidiary distributing the dividend in that other EU Member State. The same applies to a permanent establishment situated in Malta of a parent that is established in another EU Member State.

  1. Branch exemption

Maltese companies may claim an exemption from Maltese tax in respect of any profits which are attributable to a branch / permanent establishment of the company outside Malta.

  1. Non-domiciled but Malta resident companies

Maltese incorporated companies are taxable on their worldwide income. However, a non-Maltese company which is tax resident in Malta is liable to tax on a source and remittance basis only. In recent years, various companies which are incorporated and domiciled in another jurisdiction have taken up Maltese tax residence. In such a case, no Maltese tax is payable if the non-Maltese company has passive income (e.g. royalties through licensing of IP rights) and the relevant passive income is not remitted to Malta.

  1. Group transfers

No Maltese tax should be payable on any intra-group transfer of assets of a company subject to satisfaction of a few straightforward conditions.

  1. Transfers of shares in Maltese companies

An exemption from Capital Gains Tax should be available to non-resident shareholders transferring shares in a Maltese company as long as the company does not itself own real estate in Malta. A statutory form confirming the exemption and backed by a certification of a Maltese auditor is filed at the Inland Revenue, and no provisional or other tax is paid by the shareholders.

This exemption is also applicable where there is a value shift as a result of the issue of new shares by the Maltese company and a consequential deemed transfer by the existing shareholders to any new shareholders who subscribe to shares issued by the company.

  1. Withholding Tax

No Maltese withholding tax is payable on any interest or royalties payable by the Maltese company to non-resident persons who do not have a permanent establishment in Malta. This exemption applies as long as the beneficial owner of the interest or royalties is not owned and controlled by, directly or indirectly nor acts on behalf of an individual or individuals who are ordinarily resident and domiciled in Malta.

No Maltese withholding taxes are chargeable on payment of dividends by the Maltese company to its shareholders

  1. Stamp Duties

A stamp duty exemption can be obtained (upon satisfaction of certain straightforward conditions) by a Maltese company following is incorporation, and the exemption will apply in respect of the transfer of any shares issued by or held by the Maltese company.

  1. Partnerships

Following a recent amendments to Maltese tax laws, partnerships and European Economic Interest Groupings may elect to be treated as a company for all purposes of the Income Tax Acts with effect from year of assessment 2016. Such election may be made irrespective of whether the income derived by the partnership consists of income during the course of a trading activity or from a passive activity. The election is to be made within 60 days from the setting up of the partnership, but transitory arrangements have been agreed to with the Inland Revenue in respect of foreign partnerships which were already in existence prior to the enactment of the changes in law.

  1. Securitisation Vehicles

Malta has specific rules on the tax treatment of securitisation vehicles that enable securitisation vehicles established in Malta to eliminate tax leakage. Such tax neutrality can be achieved through a combination of the general provisions on deductibility of expenses under the Income Tax Act and further deductions under the Securitisation Transactions (Deductions) Rules. The securitisation vehicle can opt to wipe out all of its chargeable income by making use of those deductions, resulting in no income tax being payable in Malta. Thus, there are generally no Maltese tax implications for originators participating in a securitisation transaction with a Maltese securitisation vehicle as long as such originators are themselves not tax resident in Malta.

  1. Other benefits

Malta does not have any thin capitalisation rules, and it does not have any specific transfer pricing rules.

It is possible for a Maltese company to re-domiciled and be continued under the laws of another jurisdiction without having to wind-up its assets and liabilities. In such a case, no Maltese exit taxes are payable.

Malta has a wide Tax Treaty network with more than 65 Treaties currently in place, and more Treaties are being negotiated with other countries. Furthermore, as Malta is a member of the European Union, source country withholding taxes on payment of royalties can be reduced or eliminated in terms of the EU’s Interest and Royalties Directive.

 

Recent Development of Advance Pricing Arrangement in Taiwan

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Since the implementation of the transfer pricing guidelines in 2004, the tax authorities have entered into approximately ten Advance Pricing Arrangements (APA). The total number of APAs is low in the last ten years in comparison with that of other countries. To promote APAs, Taiwan’s Ministry of Finance (MOF) amended the transfer pricing guidelines on 6 March 2015 to reduce the threshold of APA application and include the provision of pre-filing meeting. This article analyzes the criteria of application, documentation requirements, pre-filing meeting, exemption of transfer pricing audits as well as the pros and cons of APA.

Criteria of APA Application

Prior to the amendment of transfer pricing guidelines on 6 March 2015, the criteria of APA application is as follow:

  • The total amount of the transactions, being applied for APA, is not less than NT$1 billion or the annual amount of such transactions is not less than NT$500 million;
  • No significant tax evasions were committed in the past three years;
  • Have prepared the documents required under Article 24 of the transfer pricing guidelines and completed the transfer pricing reports; and
  • Other criteria prescribed by the MOF.

In the amendment, the threshold of APA application is reduced as follows:

The total amount of the transactions, being applied for APA, is not less than NT$500 million or the annual amount of such transactions is not less than NT$200 million;

Documentation Requirements

To apply for an APA, the following documents and reports shall be provided:

  • A comprehensive business overview, including history, main business activities, and an analysis of economic, legal and other factors that affect transfer pricing.
  • Global organizational structure of the group.
  • Relevant information of the related parties involved in the transactions, including an analysis report covering the following six aspects: operation, legal, tax, finance, accounting, and economy, as well as the income tax returns and financial statements for the three years prior to the application.
  • Relevant information concerning the transaction applying for an APA:
  • Name of the related parties involved in the transaction and their relationship with the Applicant;
  • Type, flow, date, object, amount, price, and contractual terms of the transaction as well as the use of the property or services transferred. The use shall include the descriptions regarding whether the property is transferred for sale or use and its benefits; and
  • The time period covered by the related transaction.

 

  • The Transfer Pricing reports shall, in addition to the documentation required under Article 22 of the transfer pricing guidelines, specify the following information:
  • Assumptions affecting the pricing;
  • In case of adopting a transfer pricing method not provided under the transfer pricing guidelines, a special analysis along with supporting evidentiary documents explaining the reasons why such method is more suitable than the other methods as provided and why it can achieve an arm’s length result.
  • Important financial accounting policies that have a direct impact on the pricing methods.
  • The material differences in financial accounting and tax laws between the countries involved in the transaction and Taiwan provided that such differences would have an impact on the adoption of arm’s length m

 

  • The pricing information of the same or similar transactions conducted by the applicant and other related parties.
  • The annual forecast of the operation results and business plans within the effective period of the APA.
  • Upon filing the application, the explanations or conclusions on issues related to the adoption of the transfer pricing method that have occurred or are currently under discussion with local or foreign competent authorities or APA that have been approved.
  • Whether there are issues related to potential double taxation and whether bilateral or multilateral APAs of tax treaty countries are involved.
  • Other information as requested by the tax authorities.

The applicant or its agent shall attach a table of contents and index when filing the documents and reports in accordance with the preceding paragraph. If the information to be produced is in a foreign language, a Chinese translation shall also be attached, unless otherwise approved by the tax authorities to provide an English version.

Pre-Filing Meeting

Prior to the filing of an APA, an enterprise is entitled to apply for a pre-filing meeting with the tax authority three months before the fiscal year end by providing the following information for determination of APA application:

  • Period to be covered by the arrangement
  • Global organizational structure of the group
  • Main business activities of the enterprise
  • Related parties involved, the controlled transactions, and the descriptions of functions and risks
  • Reason for the application
  • Other relevant information

Exemption of Transfer Pricing Audits

In accordance with Tax Letter Ruling No. 9404540920, under an APA, a tax return is not subject to a transfer pricing audit except when:

  • The enterprise fails to provide the tax authority with the annual report regarding the implementation of the APA.
  • The enterprise fails to keep the relevant documents in accordance with transfer pricing guidelines.
  • The enterprise fails to follow the provisions of the APA.
  • The enterprise conceals material facts, provides false information or conducts wrongful acts.

Pros and Cons of APA

The pros and cons of APA are as follow:

Pros:

  • No need to prepare transfer pricing reports but the annual APA implementation reports within the valid period (three to five years). Costs for tax compliance can therefore be reduced significantly.
  • Avoid tremendous time cost on transfer pricing disputes.
  • Mitigate or avoid the risk of double taxation and ensure maximization of corporate profits.
  • Enhance certainty on taxpayers’ future tax liabilities within the valid period of APA.
  • Build up a decent relationship with the tax authority and enhance the corporate image.

Cons:

  • Considerable time costs for first time application.
  • More detailed and specific information about industry and taxpayer will be requested during the APA review process.

Implication

APA is the best tool for the risk management of transfer pricing for multinational companies (“MNCs”). An arm’s length result agreed in advance can not only enhance the certainty of tax liability, but mitigate the risk of TP audit and avoid the time cost when a dispute arises.

MNCs are suggested to apply for the APA where applicable and suitable. In addition, MNCs are recommended to discuss significant TP issues as well as expectations with the tax authorities in the pre-filing meetings to ensure that the APA application can be completed with efficiency and effectiveness.

 

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Doing Business in Puerto Rico

Articles, Corporate/Commercial Law, Employment and HR, Intellectual Property, Latest News, Tax

Introduction

The Commonwealth of Puerto Rico (“PR”) is a self-governing territory of the United States of America (“US”) with approximately 3,750,000 inhabitants. Located between the Atlantic Ocean and the Caribbean Sea, PR governs its internal affairs in a manner similar to that of the other 50 states of the US. The US has jurisdiction over foreign relations and commerce, customs, immigration, nationality and citizenship, postal service, currency and military matters, among others. Generally, US federal trade and economic treaties, laws and regulations apply in PR. The US is PR’s main trading partner. The official languages of PR are Spanish and English.

Business Entities

Domestic Corporations. The PR General Corporations Act is modeled after the Delaware General Corporations Law. Any natural or juridical person, acting singly or jointly with others, can incorporate or organize a corporation by filing a certificate of incorporation at the PR State Department. Generally, this certificate grants the corporation legal existence as soon as it is filed with the PR Secretary of State.

Foreign Corporations. Foreign corporations (including US corporations) desiring to operate in PR must request a certificate of authorization to do business in PR by filing an application at the PR State Department. The application to conduct business in PR must be accompanied by a certificate of corporate existence (or any other similar document) issued by the Secretary of State or other official having custody of the corporate register in the jurisdiction where the foreign corporation was incorporated. If such certificate of corporate existence is in a foreign language, a translation must be attached, together with a sworn certificate of the translator.

Limited Liability Companies. Limited liability companies or LLCs are fast becoming the preferred method of doing business in PR. LLCs offer their owners the same limited liability protection granted by law to corporations and the flexibility to manage their internal affairs as a partnership, a corporation or a combination of both in accordance with their Operating Agreement. LLCs are organized by filing a certificate of formation at the PR State Department.

Foreign Limited Liability Companies. Foreign limited liability companies desiring to operate in PR must request a certificate of authorization to do business by filing an application at the PR State Department. The application to conduct business in PR must be accompanied by a certificate of existence (or any other similar document) issued by the Secretary of State or other official having custody of the company register in the jurisdiction where the foreign corporation was incorporated.

Other Entities. Both the PR Civil Code and the PR Commercial Code allow for the creation and/or authorization to do business of other types of business entities such as civil and commercial partnerships and limited partnerships. A commercial partnership must be registered in the Mercantile Registry of the Registry of Property where its property is located. In order to have access to the PR Registry of Property, the partnership agreement must be constituted in Public Deed.

Taxes

For tax purposes, PR is a separate tax jurisdiction from the US.

Income Taxes. PR’s Internal Revenue Code of 2011, as amended, is modeled generally after the US Internal Revenue Code. All corporations, whether domestic or foreign which are engaged in trade or business in PR are taxed on their net income. Domestic corporations are taxed on their net income from all sources and foreign corporations are taxed on the income that is effectively connected with the conduct of a trade or business in PR. The maximum tax rate is 39%. Foreign corporations not engaged in trade or business in PR are subject to a flat withholding income tax rate of 29% on certain items of gross income received from sources within PR.

Municipal License Taxes. The Municipal License Tax Act imposes a license tax on the volume of business (gross income) on every person engaged in any business, including the sale of goods, the performance of services and any financial business, in any municipality in PR. The municipal license tax rate applicable to non-financial business businesses ranges from .27% to .5%. For financial businesses, the rate is usually 1.5%. Each municipality establishes its own rates.

Personal Property Taxes. Unless specifically exempted, every natural or juridical person engaged in a trade or business in PR is subject to the imposition of personal property taxes ranging from 4.33% to 6.58%, of the net book value of the taxable property. Taxable property includes cash on hand, inventories, materials and supplies, furniture and fixtures, and machinery and equipment used in a trade or business.

Real Property Taxes.   Real property tax rates vary for each municipality and generally are 2% higher than the personal property tax rate. For tax purposes, real property means the land, the subsoil, the structures, objects, machinery, or implements attached to the building or fixed on the ground in a manner showing permanence.

Sales and Use Taxes. Every merchant engaged in the sale of taxable items, or which provides a service not specifically exempted, has the obligation to collect a sales and use tax (“SUT”) as a withholding agent. The SUT rate on the sales and use of goods is generally 11.5%. Although originally exempted, services provided to businesses generally will be taxed at a rate of 4% commencing on October 1, 2015 and 10.5% commencing on April 1, 2016. There is a possibility that the SUT will be replaced by a VAT in 2016.

Tax Incentives. PR is focused in promoting foreign investment primarily on manufacture, biotechnology, communications, information technology, tourism and export services. To achieve this goal, PR offers tax incentives and exemptions for qualifying companies and individuals. Some of the tax incentive programs available in PR are:

  1. Economic Incentives for the Development of PR Act, as amended (“Act 73”). Act 73 provides a fixed income tax rate of 4% with a withholding tax on royalty payments of 12%. There is an optional fixed income rate of 8% with a withholding tax on royalty payments of 2%. There is a fixed income tax rate of 1%, or of 0% for pioneer products (as such term is define in Act 73). Distributions of earnings or profits and liquidations are tax free. The taxable gain realized on sales of stock and/or of substantially all of the assets of the exempt business are subject to an income tax rate of 4%. Act 73 also provides a 90% exemption from property taxes and a 60% tax exemption from municipal license taxes. Act 73 provides tax credits for purchases of products manufactured in PR, job creation, investments in research and development and technology transfers, among others. Some credits are transferrable.
  2. The PR Export Services Act, as amended (“Act 20”). Act 20 provides a 4% fixed income tax rate on the net income generated from the operation of an eligible export service activity which may be reduced to 3% if more than 90% of the income generated by the entity is generated from qualified export services activities and the services are considered strategic services. Accumulated earnings and profits derived from the export service activity are 100% exempted from income tax upon distribution. Act 20 also provides a 90% exemption from real and personal property taxes if the qualified eligible business is engaged in management headquarters services, call centers, and shared services center. The businesses engaged in any of these three services will enjoy a 100% exemption from all property taxes during the first five (5) years. The Act also provides a 60% exemption from municipal license taxes. These benefits would be provided for a 20 year period, and may be extended for 10 additional years.
  3. Act to Promote the Transfer of Individual Investors, as amended (“Act 22”). Act 22 provides a 100% income tax exemption on interest income, dividend income, and short and long term capital gain, derived from any source, which is generated by an individual investor that becomes a resident of PR or transfers his residency to PR. The income must be generated between the date in which the foreign individual is considered a resident in PR (i.e. 183 days test) and before January 1, 2036. In general, a special tax rate of 5% applies to capital gains accrued prior to the individual becoming a resident of PR which are recognized within 10 years after the residency in PR is established.
  4. The Tourism Incentives Act of 1993. The Tourism Incentives Act provides eligible tourism activities with partial exemptions from income, property, and municipal license taxes for a period of up to ten years. Qualifying investments in tourism activities may receive tax credits.

Labor Legislation

Both federal and local laws apply to employers in PR. The Fair Labor Standards Act (FLSA) applies to employers in PR engaged in interstate commerce. The federal minimum wage applies automatically in PR to employees who work in companies covered by the FLSA. Companies not covered by the FLSA must pay a minimum wage equivalent to 70% of the prevailing minimum wage.

In PR, a regular work day consists of 8 hours of work and a regular work week consists of 40 hours. Employers covered by the FSLA must pay overtime at a rate of not less than 1 ½ times their regular rates of pay, after 8 hour of work per day and after 40 hours of work in a workweek.

The meal period must be no less than 1 hour, unless a shorter period is agreed to by the employer and the employee. The meal period may be reduced for certain types of employees. Work performed during the meal period, or any part thereof, must be compensated at twice the regular hourly rate.

An employer is also required to pay a Christmas Bonus to each employee who has worked 700 hours or more between October 1 of the previous year and September 30 of the current year.

In PR, employees are entitled to compensation and medical treatment for work-related accidents or illnesses. The employer is not liable to the employee for damages arising out of an occupational accident in those cases where the employer is fully insured through the State Insurance Fund. There is also a short term disability insurance to cover non-occupational disabilities. This plan covers the risks of sickness, total and permanent physical disability, or death. Both, the employers and employees, are required to make payments to this plan. PR and US unemployment acts provide for a coordinated US/PR Plan designed to provide economic security for employees during temporary periods of unemployment.

There are several statutes, both local and federal, that prohibit discrimination in hiring, promotions, discipline or otherwise treating differently in employment persons on account of age, race, color, national origin, religious or political beliefs or sex, among others. There is also legislation protecting qualified individuals who are disabled veterans, veterans of the Vietnam era, or individuals with disabilities. Sexual harassment is forbidden in the workplace. The law provides for strict liability for the employer for the actions of its agents and supervisors.

Employees employed for an indefinite period and discharged from employment without just cause, as defined in PR Act 80, are entitled to a severance payment based on years of service and the highest salary earned in the last 3 years of employment.

Other US laws such as COBRA, WARN, OSHA, Title VII, ADEA, ADA and IRCA apply to PR.

Intellectual (Industrial) Property

US federal protection, laws and regulations regarding Trademarks, Patents and Copyrights apply to PR. The PR Trademarks Act provides ample protection for the rights of the owners of locally registered trademarks, such as granting the prevailing registrant the right to always recover the costs, fees and expenses of an infringement lawsuit. It also allows the issuance of an ex-parte temporary restraining order to cease and desist of the use of the mark and the seizure of the articles on which the mark was affixed.

Refunds of Excess VAT Accumulated During Mineral Exploration

Articles, Energy and Natural Resources, Latest News, Tax

Refunds of value added tax (VAT) incurred in connection with the export of goods[1] has lately become a pressing issue. Despite the fact that tax legislation clearly sets out the procedure for refunding excess VAT, in reality taxpayers encounter a number of obstacles. This article focuses on excess VAT accumulated during exploration prior to the export of minerals.

The Rationale for Applying VAT to Exported Goods

Two opposing principles underpin indirect taxation[2] of cross-border trade: country of origin and country of destination. The vast majority of countries, including Kazakhstan, the CIS countries, and the European Union, charge VAT on the basis of country of destination. This system has well-recognised benefits in terms of customs control and customs valuation.

According to the country of destination method, exporting goods and the capital expenditure incurred during production of these goods are not subject to VAT in the country of origin. These goods are only subject to VAT in the country into which they are imported and where they are used.

When trade occurs between two countries, it gives rise to a potential double taxation scenario. The country of destination method is intended to avoid this. Furthermore, it places domestic producers on a level playing field with foreign producers, thus ensuring the competitiveness of exporting goods in the international market.

The Country of Destination Principle in the Tax Code[3]

The country of destination principle is formalised in Articles 242 and 272 of the Tax Code and implemented in the following way.

During production of exported goods

Materials, equipment, work and services used in producing exported goods, including construction of facilities for production of exported goods, once they are purchased by the exporter, become subject to VAT at the current rate (12%). In other word, when materials, equipment, work and services are acquired, the exporter has to pay suppliers the price together with VAT, according to tax invoices. VAT is then offset and accumulated by the exporter prior to export. These obligations are contained in Articles 229, 231, 268 and 256 of the Tax Code.

For the export of produced goods

Export sales are subject to VAT at the rate of “0”%, i.e. export goods are not subject to VAT, as stated in Article 242 of the Tax Code. This gives rise to excess VAT that can be offset against the assessed VAT.

Paragraph 2 of Article 272 states that the exporter has the right, at the start of the export process, to claim a VAT refund from the tax authorities of the amount paid during preparation for production and the actual production of the exported goods.

Thus, it is a mistake to regard the zero rate VAT on exports and the VAT refund as tax privileges or exemptions from the government to taxpayers. In fact, it is a means of enshrining the ‘country of destination’ principle for applying VAT. The tax authorities, in essence, are returning tax previously paid by the exporter.

Article 272 of the Tax Code:

The application of Article 272 is disputes between the tax authorities and taxpayers. A detailed analysis of this Article is provided below.

Paragraph 2 of Article 272 states:

“Excess value-added tax specified in the first part of subparagraph 1) of paragraph 1 of this Article, relating to goods, work and services purchased prior to January1, 2009, except for excess related to the purchase of goods, work and services that are or will be used for the purposes of turnovers taxable at a zero rate, shall not be refunded ….”

This rule gives taxpayers the right to claim a refund of excess VAT related to turnover from export goods, including excess amounts incurred before 1 January 2009. The phrase “… will be used …” indicates that the exporter has the right to claim a VAT refund paid by the exporter during production of goods for export from Kazakhstan. For example, during mineral exploration the VAT paid by a subsoil user at the moment of purchasing materials, equipment, goods, work and services, can be refunded when the export of mineral resources begins.

Thus, according to Paragraph 2, the exporter may exercise his/her right to a refund of excess VAT if the following conditions are met:

     once the sale of export goods has occurred i.e. once the process has begun, the exporter has the right to submit a declaration to the tax authorities claiming a refund of excess VAT accumulated during production of the exported goods;

     if the excess VAT for refund is related to export turnovers – in other words, goods, materials, equipment, work and services used to produce exported goods and for which the exporter paid VAT (thereby giving rise to the excess VAT payment).

Paragraph 3 of Article 272 states:

“With regard to turnovers taxable at a zero rate, excess amounts of value-added tax to be offset against the assessed tax as stated in a declaration as a progressive total at the end of the reporting tax period shall be subject to refund, provided the following conditions are simultaneously met:

1)     a payer of value-added tax permanently carries out sales of goods, work, services taxable at a zero rate;

2)     if turnover from sales taxable at a zero rate, for a tax period in which turnovers taxable at a zero rate were received and in relation to which a claim for refund of excess value-added tax is made, was not less than 70 per cent of total taxable sales turnover”.

The provisions of Article 272 cited above set out the extent to which excess VAT is refundable to the exporter, namely whether it may be refunded in its entirety or only in part. The amount of excess VAT for refund depends on whether export of goods is a consistent activity for the exporter. If the exporter constantly exports goods and the export turnover share exceeds 70% of the exporter’s total sales turnover, then the entire amount of the excess VAT is refundable. If, on the date when the refund claim is made, the exporter does not meet the criteria in paragraph 3 of Article 272, then only part of the excess VAT will be refunded. In this case, the amount of excess VAT is determined according to Paragraph 4 of Article 272.

Paragraph 4 of Article 272:

“The Government of Kazakhstan shall establish criteria for classifying the sale of goods, work, and services taxed at a zero rate as permanent sales as specified in sub-paragraph 1) of paragraph 3 of this Article, and the procedure for calculating excess value-added tax to be refunded in the following circumstances:

1)     in relation to turnovers taxable at a zero rate, in the case of non-observance of provisions established by paragraph 3 of this Article;

2)     in relation to VAT specified in the second part of subparagraph 1) of paragraph 1 of this Article”.

Paragraph 4 of Article 272 is a reference rule that applies when the exporter does not meet the criteria specified in Paragraph 3 on the date a VAT declaration is submitted. If the exporter does not meet at least one of the conditions, the amount (share) of the refundable excess VAT is determined according to the “Rules for Determining Refundable Excess Value Added Tax, and Criteria for Classifying the Sale of Goods, Work, and Services Subject to Zero Rate VAT as Permanent Sales’’, approved by the Government of Kazakhstan, No.373 of 20 March 2009.

Thus, if we apply Article 272 to a situation when a subsoil user has begun production and export of mineral resources from Kazakhstan, this Article allows the subsoil user to claim a refund of excess VAT accumulated during exploration, that is, before mineral export sales. Goods, materials, work, and services, as capital costs incurred during exploration, are used for field development in preparation for production and export.

Once the subsoil user starts exporting minerals, he is entitled to claim a refund of VAT incurred during exploration (in preparation for producing exports). Hence, in confirming the refundable excess VAT, it does not matter whether the excess VAT was amassed before or after the mineral exports began. An important condition, as noted above, is that the excess VAT claimed for refund relates to export turnovers. In other words, goods, materials, equipment, work, and services in connection with which VAT was paid by the subsoil user (leading to excess VAT) should be used for field development and extraction of raw minerals for export.

The Tax Authorities’ Perspective

The tax authorities believe that only excess VAT accumulated once goods have been exported is subject to refund. In other words, the tax authorities deny the exporter’s right to a refund of VAT paid during the production of goods (during exploration) that were subsequently exported. Thus the tax authorities, referring to Paragraph 3 of Article 272, mistakenly believe that only this rule establishes the exporter’s right to a refund of excess VAT, not taking into account the other paragraphs in Article 272 that classify VAT paid during production as refundable,

We believe this view is misguided since it fails to take into account Article 272.

It should be noted that this reflects recent practice. Under the previous Tax Code, VAT refunds were made for VAT accumulated during exploration. Thus Article 251 of the previous Tax Code[4] and Article 272 of the current Tax Code, which both contain the exporter’s right to VAT refunds, do not significantly differ in their content.

We therefore believe VAT refund problems relate more to enforcement practices than to the legislation itself.

Opinion of the Advisory Council

The Advisory Council on Taxation works under the Government of Kazakhstan and its primary goal is to resolve ambiguities and inaccuracies in Kazakhstan tax law. During 2013 the Advisory Council issued two decisions regarding the interpretation of Article 272 of the Tax Code, which, in our opinion, are contradictory.

According to the decision of 31 January 2013, the Advisory Council confirmed the taxpayer’s right to refund excess VAT accumulated prior to zero turnovers. This decision was addressed to companies engaged in international shipping.

Let us recall that under the Tax Code, international shipping, as well as the export of goods, is subject to zero rate VAT. The procedure for refunding the excess VAT for shipping companies and exporters is single, i.e. the shipping companies refund the excess VAT from the budget also under a procedure prescribed in Article 272 of the Tax code.

Later on 17 October 2013 the Advisory Council issued another decision on the refund of excess VAT, where they explained that the procedure for refunding excess VAT accumulated in connection with field development prior to the export of goods, that is, prior to the zero turnovers, is not regulated in the tax law.

The Advisory Council confirmed that companies engaged in international shipping have the right to a refund of the excess VAT accumulated prior to the zero rate turnovers; however, they did not confirm this right in respect of subsoil users exporting minerals. The conditions and procedure for exercising the right to the refund of the excess VAT are regulated by Article 272 of the Tax Code, which stipulates the same conditions for all taxpayers, regardless of the nature of business.

Thus it seems the provisions of Article 272 of the Tax Code are unequally applied to entities, which contradicts principles enshrined in the Kazakhstan tax law and the Constitution.

The Courts’ Stance

The Supreme Court of Kazakhstan supports the tax authorities’ position. Reasons on which the judgements are based do not differ per se from the explanations of the tax authorities, i.e. the courts believe that only excess VAT accumulated once goods have been exported is subject to refund.

To summarize, the practice of the state bodies is not only illegal, but also results in double taxation of Kazakh domestic goods. Double taxation, in turn, leads to goods becoming uncompetitive on the world market. The obstacles to VAT refunds created by the tax authorities have an ultimately negative impact on Kazakhstan’s investment image. We firmly believe that one of the most important conditions to create an attractive economic climate in Kazakhstan is predictability and certainty in the field of taxation.

[1] Refund of excess VAT to be offset against the amount of assessed VAT resulting from the acquisition of goods, works and services used for export turnovers will hereafter be referred to as “excess VAT”;

[2] VAT is an indirect tax;

[3] The Code of the Republic of Kazakhstan “On taxes and other obligatory payments to the budget” of 10 December 2008;

[4] Code of the Republic of Kazakhstan “On taxes and other obligatory payments to the budget” of 12 June 2001.

New tax exemptions for companies owned by employee ownership trusts

Articles, Latest News, Tax

A strong economy requires, amongst other things, the use of a diverse range of business models. Once an under-used business model, the employee trust model of ownership has received a boost in recent years with support from the UK Government, including the introduction of new tax exemptions.

The growth of employee ownership

Employee benefit trusts or “EBTs” have commonly been used in the UK to act as a warehouse for shares in a company operating a share or share option plan and, in the case of private companies, for creating an internal market enabling employees to buy and sell shares in their employer company. EBTs were also used in tax avoidance structures during the 1990s and early 2000s – it is because of these structures that the UK tax authority, HM Revenue & Customs, can view employee trust arrangements with some suspicion. But another use is now proving popular, with support from the UK Government. This is where a business is owned collectively for the benefit of all those working in it through an employee ownership trust. In this article, “employee ownership” means:

“a significant and meaningful stake in a business for all its employees. If this is achieved then a company has employee ownership: it has employee owners” (The Nuttall Review of Employee Ownership, Business of Innovation and Skills, 2012).

For decades, direct share ownership by employees has been promoted in the UK through a variety of tax-advantaged share and share option plans. Employee trust ownership is also a tried and tested method of running and sustaining a successful business. John Lewis Partnership, one of the UK’s biggest retailers, is a great example. It is wholly owned by an employee trust and all of its 93,800 permanent staff are beneficiaries of the trust. Notwithstanding such success stories there has been a distinct lack of awareness of the employee trust ownership model until recently. Hard work and perseverance by interested stakeholders has succeeded in raising awareness of employee trust ownership. In particular, in 2014, the UK Government confirmed its commitment to support employee ownership trusts in a tangible way with the introduction of new tax exemptions.

Capital gains tax exemption

As in many other jurisdictions, any capital gains made in respect of the sale of shares in a company by individuals are subject to tax (“CGT“). In the UK, the rate of CGT can be up to 28% depending on the facts.

The UK Finance Act 2014 introduced a complete exemption from CGT arising in connection with the sale of shares to a new type of trust, an “employee ownership trust” or “EOT”. An EOT is essentially a particular type of EBT which has less discretion as to, for example, how trust property can be applied in favour of the beneficiaries. There are a number of conditions that need to be satisfied in order for the exemption from CGT to apply. The exemption does not apply to disposals of shares by a company. The other main conditions are as follows:

  1. Trading company: the company whose shares are being disposed of (“C“) must be trading or the parent company of a trading group (i.e. the exemption does not apply to the sale of shares in investment companies). This requirement must be met at the time of the disposal and for the remainder of the tax year (from 6 April to 5 April the following year) in which the disposal falls;
  2. All-employee benefit requirement: the EOT must not permit:
    • any property in the trust (at any time) to be applied otherwise than for the benefit of all employees of C and any group companies (subject to some limited exceptions) on the same terms;
    • the trustees of the EOT to apply any trust property:
      • by creating a trust; or
      • by transferring property to the trustees of any settlement other than, broadly, another EOT;
    • the trustees to make loans to any beneficiaries; or
    • permit the terms of the EOT to be amended in such a way as to permit any of (a) to (c) above,

and this requirement must be met at the time of the disposal and for the remainder of the tax year in which the disposal falls; and

  1. Controlling interest requirement: as a result of the disposal (or an earlier disposal in the same tax year), the EOT gained a controlling interest in C. “Control” for this purpose means (broadly) the EOT owns more than 50% of the ordinary shares of C, has the majority in voting rights in C, has the right to more than 50% of profits of C available for distribution and is entitled to more than 50% of C’s assets available for distribution on a winding up.

Income tax exemption

Bonus payments made in the UK from employers to their employees are generally subject to income tax (at rates of up to 45%) and national insurance (social security) contributions. The second tax exemption introduced by the Finance Act 2014 is an exemption from income tax (but not national insurance contributions) on qualifying bonus payments of up to £3,600 per employee per tax year. This business model provides a tax benefit to the business and its employees. As with the CGT exemption, certain conditions must be met in order for the income tax exemption to apply.

The main conditions for making a qualifying bonus payment by employer (“E“) are as follows:

  1. Discretionary bonus: it must not consist of regular salary or wages;
  2. Participation requirement: all individuals employed by E or another group company when a payment is made must be eligible to participate in the scheme pursuant to which the payment is made;
  3. Equality requirement: every employee must participate in the scheme on the same terms;
  4. Trading: E must be trading;
  5. Controlling interest requirement: an EOT must “control” E (see above); and
  6. All employee benefit requirement: such EOT must meet the all-employee benefit requirement described above.

The conditions in 5. and 6. above are together known as the “indirect employee-ownership requirement” which must be met throughout the period of 12 months prior to a qualifying bonus payment being made or, if less, the period of time since conditions 5. and 6. were first met in respect of E.

The future of employee ownership in the UK and around the world

Whilst the two new tax exemptions are welcome and go some way to putting employee trust ownership on a par with the tax advantages for direct employee share ownership, tax, of itself, should not drive business structuring. Employee ownership is a tried and tested business model in the UK. Businesses such as the John Lewis Partnership are proof of this. This is what should attract attention to this ownership model. Of course, the new tax exemptions certainly serve to raise the profile of this under-used business model.

Although these new tax exemptions are only relevant to UK tax payers, there is scope for promoting the employee trust model of ownership in other jurisdictions. One of the benefits of employee trust ownership is its flexibility. It can work at every stage of the business life cycle, not just as a business succession solution, and across companies of all sizes and in all sectors.

Tax Regulations in Panama: The Place to Invest In The Americas

Articles, Latest News, Tax

Panama is a country located in the center of the Americas, with a republican, democratic and participatory political system, based on principles of rule of law and free enterprise. It has an extraordinary hotel and tourism infrastructure, as well as an international financial center, which together allow the satisfaction of anyone visiting our country.

Its tax system is based on the principle of territoriality. Only the income generated within the country will be subject to income tax, and the income of foreign source is exempt. Panama meets all international standards in taxation. It is the most favorable place to invest in the Americas. It is the hub to develop multiple business in the region. Here are some of its tax advantages:

Income Tax

It is determined by applying to the annual income declaration of taxpayers, the traditional method or the alternative income tax method (minimum tax). The method used is the one that results in the highest amount.

Under the traditional method, the net taxable income is taxed at a rate of 25%. This income will be the result of deducting from the gross income, exempt or non-taxable income and the costs, expenses and deductible expenses (traditional method).

The alternative income tax method will apply only to entities whose taxable income exceeds USD$1,500,000.00. Therefore, the 4.67% of the net taxable income will be paid according to the 25% tariff. The taxpayer may request not to apply this method in case it incurs in losses or the effective tax rate exceeds 25%.

Individuals will pay tax at a rate of 15% after the tax allowance of USD$11,000.00 to 50,000.00 and the surplus at a rate of 25%.

Dividends tax

When a corporation distributes profits generated in Panama to its shareholders, it must retain the tax at a 10% rate. Income generated from sources outside Panama are subject to a 5% withholding.

There will be no withholding when the entity distributes profits that are generated from profits, as long as the juridical person that distributed such profits made the withholding and paid the corresponding tax.

The withholding will not apply over the portion of income generated from profits, as long as the juridical persons that made the distribution is exempt of withholding or has paid the corresponding tax in other jurisdiction.

The taxation regime provided in treaties to avoid double taxation entered into by Panama with other countries will always prevail.

However, due to the inexistence of a legal obligation to distribute profits periodically, in the event profits are not distributed or less than the 40% is distributed, likewise a tax rate of 10% will be applied over the income of the taxpayer after the payment of the income tax (complementary tax).

Notice of operation tax

To do business in Panama companies require a Notice of Operation, except those exempt by law. Annually there is a 2% tax tariff of the net assets of the company, with a minimum of USD$100.00 and a maximum of USD$60,000.00 payable as notice of operation tax.

Companies located at free international commerce (such as the Colon Free Zone or any other free zone established or created in the future), will not be subject to the notice of operation tax, unless special law provides otherwise, but will pay 1% over their annual income, with a minimum of USD$100.00 and a maximum of USD$50,000.00.

Capital gains tax

The transfer of shares or real property, that do not constitute the ordinary business of the taxpayer, will be subject to a capital gains tax at a rate of 10%.

For a sale of shares, bonds or other securities issued by legal entities, the buyer will retain 5% of the transfer value as advanced payment of the tax and will pay such tax to the Tax Authorities. The seller may consider the advanced payment as a definitive tax or request a reimbursement of the surplus, if he considers that the amount retained exceeds the tax applied over the capital gain at a rate of 10% or the recognition of a tax credit to pay other taxes.

In the sale of the real property, the withholding by the buyer will be of 3% over the selling price and the seller also can claim back the reimbursement of the surplus or the recognition of a tax credit.

Remittances to foreign entities

Payments sent to a person domiciled abroad for services received in Panama or from abroad, will be subject to income tax at a 12.5% rate over the total amount remitted, as long as the services: (1) have an incidence in the generation or the conservation of Panamanian source of income; and (2) its value has been considered as deductible expense by the taxpayer that received such services.

Public entities of the Central Government, autonomous, local governments, state-owned enterprises or joint stock companies in which the State is owner of at least 51% of the shares, as well as non-taxpayer entities and taxpayers that present losses will be subject to the withholding.

Foreign source income

It will not be considered produced within the Panamanian territory, income originated from the following activities, among others:

  • Invoicing, from an office established in Panama, the sale of goods or products for a greater sum than the one invoiced for the same goods or products for the office in Panama, as long as the goods or products are transported exclusively abroad, as well as the invoicing of those in transit at national ports or airports.
  • Managing from an office established in Panama, transactions that are consummated, perfected or take effect abroad.
  • Wages and other labor related remunerations of the individuals that hold a permit as special temporary resident, that receive income directly from their headquarters located abroad, even if they reside in the country to perform those activities.

Tax Exempt Income

Several revenues are tax-exempt, for example: in regards to financing, interests paid over: (i) securities issued by the State and the profits derived from its sale: (ii) deposits in saving accounts, time deposits or of any other nature that are maintained at Panamanian banking institutions, whether local or foreign deposits; (iii) loans, acceptances and other funding instruments to obtain financial resources to banks or financial institutions abroad, through the Panamanian banking institutions, even though the product of such resources is used by the borrower bank in the making of productive assets.

For individuals, we must point out the sums that beneficiaries receive from retirement fund, pensions and other benefits are also tax-exempt.

Movable Assets and Services Transfer Tax (value added tax)

This tax (known as ITBMS in Spanish) is levied on the sale of movable assets and the rendering of services at a 7% rate, as long as the taxable events take place within the country. The law provides for a variety of products (food, medicine, school supplies) and some services that are exempt from this tax, such as the payments, including the interest rates, paid on banking and financial services, except for the fees charged for the services.

Double Taxation Agreements

Panama has endorsed the OECD recommendations to avoid international tax evasion and has subscribed 16 treaties to avoid double taxation with the following countries: Singapore, United Kingdom, Qatar, Portugal, Mexico, Luxembourg, Italy, Israel, Ireland, Netherlands, France, Spain, United Arab Emirates, Republic of Korea (south Korea), Czech Republic and Barbados.

Panama also has 9 agreements signed for the exchange of tax information with Canada, Denmark, United States, Finland, Greenland, Island, Faroe Islands, Norway and Switzerland.

Our domestic legislation has been modified to allow the application of the agreements, contemplating concepts such as the free market principle, related parties, comparison analysis, study and report of transfer pricing, permanent establishment and tax residency, among others.

Administrative Tax Court

This court was established under Law No.8 of 2010 as an autonomous agency, specialized and independent. It has competence to settle appeals against the decisions of the Tax Administration, representing a guaranty for the taxpayers. The World Bank has reviewed its creation as an important institutional advance.

Special Regimes

The Panamanian legislation includes special regimes created to promote foreign investment, to facilitate the flux of free trade and to promote the economic growth of the region.

– Multinational Headquarters Regime (Law 41 of 2007/Law 45 of 2012).

These are entities domiciled in Panama constituted to provide services to other entities located abroad, particularly to its headquarters, subsidiaries, affiliates and associated corporations.

They enjoy income tax exemption in respect of profits obtained on the services provided to any person domiciled abroad that does not generate taxable income in Panama. There is also an exemption on dividend and complementary tax.

The services provided by these entities are ITBMS exempt, as long as these are provided to persons that do not produce taxable income in Panama.

The wages and other type of labor remuneration that the workers with immigration permit for permanent staff in Multinational Headquarters receive from abroad will be considered foreign source income. This permit is granted for a period of 5 years renewable and with the right to opt out for a definitive residence.

Multinational Headquarter entities can carry out the following activities:

  • Conduct and/or administer geographic operations in an specific or global location (strategy planning, business development, staff management and training, operation control and/logistic);
  • logistics and/or component storage or product parts for manufacturing;
  • technical assistance to corporations of the corporate group and to clients for their products or services;
  • finance management, including treasury and accounting from the corporate group; and
  • advise, coordination and follow up for the market and publicity of goods or services produced by the corporate group, among others.

– The Panama Pacific Special Economic Area

The corporations located in this area may carry out any kind of activities that are not forbidden by Law. Since the moment of its incorporation corporations shall enjoy the benefits of Law 54 of 1998 on legal stability of investments, which provides that any amendments to the taxation regime will not be applicable for a 10 year term.

It is a tax-free area for the corporations located here, except some exceptions established by Law.

For foreign personal hiring, there are several immigration alternatives that facilitates the permanency in Panama. Under this regime, the income tax exemption to foreign staff is not granted, regardless of the place of remuneration.

– Colon Free Zone (Decree Law No. 8 of 1948)

Among the operations that can be developed in this tax free area, we have introduction of goods and assets abroad; general handling (transformation, assembling, packaging and repackaging) any other goods stored in the zone; selling abroad goods stored or handled in the zone (import taxes will only be paid when the goods are sold within the national fiscal territory); and making transfers within the corporations located in the Zone. In respect of foreign workers, there are also several immigration options. The special temporary worker permit would involve the exemption of the income tax if the wages come directly from the headquarters located abroad.

Conclusions

Panama´s tax system has been consolidated under the principle of territoriality, although in the present times it has been overshadowed by the foreign income taxation, without compromising the advantages that represent investing in Panama due to its geographical location and the connectivity that offers to the Americas.

Beyond the criteria that we are a capital importer country, with a territorial taxation system we have adhered to the subscription of treaties to avoid double international taxation and the exchange of tax information, cooperating with the policies aimed to prevent the tax evasion.

The Spanish Reits: A Valuable Instrument for Spanish and International Investors to Take Advantage of the Recovery of the Spanish Real Estate Market

Articles, Latest News, Real Estate and Construction, Tax,

1. The Socimi Regime

SOCIMIs (Sociedad Anónima Cotizada de Inversión en el Mercado Inmobiliario) are Spanish collective real estate investment vehicles that enjoy a privileged tax regime, provided that certain legislative requirements are met. The law governing SOCIMIs (the “SOCIMI Law”) was passed in 2009 but created a more restrictive and unattractive legal and tax regime that failed to satisfy investors’ expectations.

The Spanish regime departed too far from the standard European model when implemented in 2009 (19% Corporate Income Tax rate and the requirement of a minimum of €15m in share capital) and combined with the significant economic downturn’s impact on real estate transaction activity, no SOCIMIs were actually incorporated before 2014.

From 2008 to 2013, the Spanish commercial real estate market contracted in terms of volume to the point that deal activity consisted of a limited number of relatively small-scale transactions each year and there was no longer a fully functioning investment market.

This negative trend has reverted since 2014, with that year marking the inflection point for the Spanish real estate market’s turnaround. Since the end of 2013, the improvement in macroeconomic indicators has boosted confidence in Spain, resulting in greater interest and investment flows from international investors, which judged it a good moment to enter the Spanish market by taking advantage of the bottom of the cycle.

The SOCIMI Law was amended in December 2012 to make the regime more attractive. The reforms successfully converted the SOCIMI into a flexible and attractive instrument to invest in Spanish real estate assets.

The new SOCIMI regime provides for a 0% Corporate Income Tax rate and removes the asset diversification and leverage limitations, allowing SOCIMIs to trade on Spain’s alternative investment market (Mercado Alternativo Bursátil). Combined with the recovery and improvement of the real estate sector, investment through SOCIMIs has been boosted significantly. Listed SOCIMIs have accounted for almost 33% of the total investment volume in Spain and close to 75% of domestic investment (Source: Savills Market Report – Spain Investment, February 2015). SOCIMIs also accounted for over 20% of the total investment volume in the first quarter of 2015, maintaining the high levels of investment seen in 2014.

The SOCIMI structure has become one of the preferred routes for international investors seeking to benefit from the Spanish real estate market’s recovery. Foreign investors have their eyes on “blind pool listings” and others look for tailored structures, including the conversion of former standard real estate companies into SOCIMIs. For foreign REITs interested in Spanish real estate, the use non-listed SOCIMIs may also be an option, benefiting from 0% taxation under certain circumstances.

Naturally, local investors such as Spanish family offices or certain family-run business can also benefit from this advantageous regime solving specific issues (limitations on the deductibility of interest expenses, benefiting from a more favorable divestment regime, etc), including a reduction of its tax invoice. It is therefore worth revisiting their structures.

2. Requirements of the Socimi Regime

A) Corporate form and listing

The SOCIMI must take the form of a joint stock corporation (Sociedad Anónima) with a single class of registered share capital (minimum of EUR 5 million fully subscribed). The SOCIMI’s shares must be in registered form and nominative, being this requirement met if the shares are represented in nominative book entry form. This trading requirement must be met within 24 months of the election to become a SOCIMI.

In addition, the SOCIMI must be listed on a regulated market (for example, one of the four Spanish Stock Exchanges) or multi-lateral trading systems (such as the Spanish Mercado Alternativo Bursátil or MAB) either in Spain, in the European Union, in the European Economic Area or in any jurisdiction with which there is an effective exchange of tax information agreement with Spain.

As a general rule, the minimum free float for listing on the Spanish Stock Exchanges is 25%. In the case of MAB listing, shares representing either (i) 25% of the total share capital of the SOCIMI, or (ii) an aggregate estimated market value of €2 million, are distributed among investors holding individually less than 5% of the total share capital of the SOCIMI. Such calculation will include the shares made available to the liquidity provider to carry out its liquidity duties. No minimum number of shareholders is required by the MAB regulations and, in practice, their shares are not widely distributed among shareholders. However, as a listed entity, an actual free float requirement must be appropriately met.

B) Purpose and activities

The SOCIMI must have the following as its main corporate purposes:

  1. Acquisition, development and refurbishment of urban properties to be leased;
  2. The holding of shares of other SOCIMIs, collective real estate investment funds or foreign listed REITs that meet similar requirements to those applicable to SOCIMIs;
  3. The holding of shares in non-listed Spanish or foreign companies whose corporate purpose is the acquisition, development and refurbishment of urban properties to be leased, provided that they have the same compulsory dividend distribution obligation as that which applies to SOCIMIs and the same investment requirements and wholly owned by SOCIMIs or foreign REITs (“Sub-Socimi“).

The SOCIMI can only invest in one tier Sub-Socimis (i.e. only one level of Sub-Socimis is available); Sub-Socimis cannot hold shares in other companies. Any foreign subsidiaries must be tax resident in a jurisdiction which effectively exchanges tax information with Spain.

SOCIMIs are allowed to carry out other ancillary activities that do not fall under the scope of their main corporate purpose. However, such ancillary activities must not exceed 20% of the assets or 20% of the revenues of the SOCIMI in each tax year.

C) Investment and income requirements: 80%-20% rules

At least 80% of the SOCIMI’s assets must be invested in:

  1. Urban properties for lease;
  2. Land for development into urban properties for lease (if the development activities start within the 3 years following the acquisition);
  3. Shares in SOCIMIs, foreign REITs, Sub-Socimis or real estate collective investment funds.

There are no asset diversification requirements: the SOCIMI is entitled to hold one single asset. These qualifying assets must be held for a minimum three year-period from its acquisition date (or from the first day of the financial year when the company became a SOCIMI if the asset was held by the company before becoming a SOCIMI).

This 80% threshold should be calculated on a consolidated basis, taking into account the SOCIMI and its qualifying subsidiaries and the gross value of the assets (without taking into account depreciation or impairments).

At least 80% of the SOCIMI’s net income, excluding income arising from the sale of qualifying assets after the minimum three-year holding period has expired, must derive from:

  1. Leasing of qualifying real estate to non-related parties; or
  2. dividends from SOCIMIs, Sub-Socimis, foreign REITs, or real estate collective investment funds.

The Spanish tax authorities consider that the annual income should be measured on a net basis, taking into consideration direct income expenses and a pro rata portion of general expenses. These concepts should be calculated in accordance with Spanish GAAP.

All income obtained by the SOCIMI (including 20% income deriving from other non-qualified assets) is taxed a 0% Corporate Income Tax Rate provided the 80%-20% rules on assets and income are met.

Capital gains derived from the sale of qualifying assets are in principle excluded from the 80%/20% net income test. Conversely, the sale of qualifying assets before the end of the three year period implies that (i) such capital gain would compute as non-qualifying revenue; and (ii) such gain (and the rental income generated by the asset, if any) would be taxed at the standard Corporate Income Tax rate (28% for 2015 and 25% for 2016 onwards).

D) Dividend distribution

The SOCIMI is required to adopt resolutions for the distribution of dividends within the six months following the closing of the fiscal year of: (i) at least 50% of the profits derived from the transfer of real estate properties and shares in qualifying subsidiaries and real estate collective investment funds ( provided that the remaining profits must be reinvested in other real estate properties or participations within a maximum period of three years from the date of the transfer or, if not, 100% of the profits must be distributed as dividends once such period has elapsed); (ii) 100% of the profits derived from dividends paid by Sub-Socimis, foreign REITs and real estate collective investment funds; and (iii) at least 80% of all other profits obtained (e.g., profits derived from ancillary activities). If the relevant dividend distribution resolution was not adopted in a timely manner, a SOCIMI would lose its SOCIMI status in respect of the year to which the dividends relate.

In our view, the investment model for the SOCIMI should ensure that the dividend distribution requirement is met. However, in circumstances where SOCIMI’s leasing business does not generate enough cash to service debt and pay compulsory dividends in cash, the Spanish tax authorities have previously accepted that this requirement is met if the dividends are declared, but the resulting credit against the SOCIMI, net of withholding taxes, is immediately capitalised by the shareholders.

3. SOCIMI Tax Regime

A) Opting into the SOCIMI regime

The decision to apply the SOCIMI regime has to be agreed by the shareholders in a general meeting and communicated to the Spanish tax authorities before the last three months of the fiscal year (i.e. before 1 October if the fiscal year coincides with the calendar year). The tax regime is applicable from the beginning of the fiscal year in which the communication is duly filed with the Spanish tax authorities.

It is possible to opt for the SOCIMI regime even if its requirements are not met, subject to the SOCIMI meeting the requirements in the two years after the date on which the option was made. However, certain requirements of the SOCIMI regime are essential and must be met on the date on which the option is elected: (a) the dividend distribution policy; (b) main corporate purpose; and
(c) the registered nature of the shares.

The SOCIMI will lose the benefits of the tax regime if certain circumstances take place or if certain failures are not cured the following year. In such a case, certain taxation may be triggered and the entity will not be eligible for the SOCIMI regime for three years.

B) Corporate Income Tax

Generally, all income received by a SOCIMI or a Sub-Socimi (including capital gains) is taxed under CIT at a 0% rate. Nevertheless, rental income and capital gains stemming from qualifying assets being sold prior to the end of the minimum holding period (three years) would be subject to the standard CIT rate (28% in 2015 and 25% for 2016 onwards).

The SOCIMI will not be entitled to tax losses carried forward and tax credits, although if the company had any of such tax assets in its balance sheet before its application for the SOCIMI tax regime, those assets could be used if the SOCIMI obtains income or gains subject to the general CIT rate.

Nevertheless, the SOCIMI will be subject to a special 19% levy on the amount of the gross dividend paid to shareholders which do not qualify for the SOCIMI regime and which own 5% or more in the capital of the SOCIMI and are exempt from any tax on the dividends or not subject to tax at, at least, a 10% rate on dividends received from the SOCIMI. The Spanish Tax Authorities have issued certain rulings stating that the 10% test to be carried out in order to identify substantial shareholders shall be focused on the tax liability arising from the dividend income considered individually, taking into account (a) exemptions and tax credits affecting the dividends received by the shareholder, and (b) those expenses incurred by the shareholder which are directly linked to the dividend income (e.g., fees paid in relation to the management of the shareholding in the relevant SOCIMI distributing the dividends, or financial expenses (interest) deriving from the financing obtained to fund the acquisition of the shares of the relevant SOCIMI). In addition, the Spanish Tax Authorities have confirmed that the withholding tax levied on a dividend payment (including any Non-Resident tax liability) should also be taken into consideration by the shareholder for assessing this 10% threshold. Hence, if these dividends are subject to withholding tax in Spain at a rate equal to, or higher than, 10%, said 19% levy should not be triggered. Otherwise, a careful review will need to be carried out of the substantial taxation of the shareholders’ dividend.

C) Taxation of non- resident Shareholders

Dividends distributed to non-resident Shareholders not acting through a permanent establishment in Spain are subject to Non-Resident Income Tax (“NRIT”), at the standard withholding tax rate at 20% (19% for 2016 onwards). No exemptions are allowed on dividends distributed by a SOCIMI.

This standard rate can be reduced upon the application of a convention for the avoidance of double taxation (“DTC”), or eliminated as per the application of the EU Parent-Subsidiary Directive as the SOCIMI may qualify for its application according to the Spanish Tax Authorities criterion (the application of the EU Parent-Subsidiary withholding tax exemption requires the fulfillment of certain requirements and includes an anti-abuse provision when the majority of the voting rights of the parent company are held directly or indirectly by individuals or entities who are not resident in a EU Member State or in a European Economic Area).

Capital gains derived from the transfer or sale of the shares are deemed income arising in Spain, and, therefore, are taxable in Spain at a general tax rate of 20% in 2015 (19% in 2016 onwards), unless the relevant DTC prohibits Spain from taxing such capital gains.

Nevertheless, capital gains obtained by non-Spanish Shareholders holding a percentage lower than 5% in a listed SOCIMI will be exempt from taxation in Spain provides the shareholder is tax resident in a country which has entered into a DTC with Spain which provides for exchange clause information (most of the DTC entered into by Spain). This exemption is not applicable to capital gains obtained by a non-Spanish shareholder acting through a country or territory that is defined as a tax haven by Spanish regulations

The “Netflix” Tax

Articles, Latest News, Tax

One of the most technically interesting tax changes announced in the Federal Budget in May 2015 was the proposed imposition of goods and services (GST) at 10% on offshore intangible supplies to Australian consumers, termed the “Netflix tax”, so called after the announcement by Netflix in November 2014 that it proposed to enter the Australian market with its online movie streaming service by March 2015.

The Government announced the implementation of “integrity measures” (which included the Netflix tax) in April 2015. The integrity measures proposed by the Government were in relation to what was emerging as an OECD (Organisation for Economic Co-Ordination and Development) consensus, that GST should be charged at the source of the revenue, so a supplier providing intangible services into Australia, wherever the supplier is located should be subject to Australian GST on those services.

The Tax Laws Amendment (Tax Integrity: GST and Digital Products) Exposure Draft Bill 2015 (Exposure Draft Bill) proposes to extend the scope of GST to supplies of things other than goods or real property (ie intangibles) from offshore which are made to Australian consumers. It is intended that the legislation will take effect from 1 July 2017.

The amendments are consistent with the reforms in a number of other countries (including Norway, Japan and the member states of the European Union) to extend the scope of their value added taxes to the growing area of offshore intangible supplies to consumers in those countries.

Summary of current law

Under the current GST law, GST is payable on taxable supplies and taxable importations.

A taxable importation is an importation of goods that are entered to Australia for consumption within Australia, provided the importation is not specified to be a non-taxable importation.

Generally, for a supply to be a taxable supply it must, among other things, be connected with the Australian “indirect tax zone” (ie, supplies made or done in Australia or good delivered within Australia).

The current GST law also ensures that entities that are registered or required to be registered for GST are in the same net GST position in respect of intangibles acquired for their Australian activities from overseas as they are for things acquired locally. This is known as the “reverse charge” rule. However, this rule does not extend to entities that are not registered or required to be registered for GST (ie consumers).

The issue that was identified by the Australian Government with the operation of these rules was that the importation of services or intangible property by consumers would never be a taxable importation (as importations must be of goods) and will often also not be a taxable supply under the current “connected” rules and would not be subject to the “reverse charge” rule.

The implementation of a “Netflix tax” is intended to ensure the GST revenue base does not steadily erode over time through the increasing use of foreign digital supplies by Australian consumers and that local suppliers are not at a tax disadvantage relative to overseas suppliers

The Netflix tax

The effect of the Exposure Draft Bill is that all supplies of “inbound intangible consumer supplies” made to “Australian consumers” will be considered to be “connected” with Australia, and subject to GST, regardless of whether the supplier is an Australian resident or non-resident. This change will result in supplies of digital products , such as streaming or downloading of movies, music, apps, games, e-books as well as other services such as consultancy and advisory services (such as brokering), receiving equivalent GST treatment whether they are supplied by a local supplier or a foreign supplier.

A supply is an “inbound intangible consumer supply” if it is a supply of anything other than goods or real property that is not done wholly in the Australian indirect tax zone or made through an enterprise the supplier carries on in the Australian indirect tax zone.

An “Australian consumer” is an Australian resident (other than an entity that is an Australian resident solely because the definition of Australia in the Income Tax Assessment Act 1997 includes the external Territories) that:

  • is not registered or required to be registered; or
  • if the entity is registered or required to be registered – the entity does not acquire the thing supplied solely or partly for the purpose of an enterprise that the entity carries on.

Importantly, no GST liability arises under the amendments if the recipient acquires the supply as a business rather than as a final consumer.

The amendments also make changes to the rules for determining an enterprise’s GST turnover, which determines whether registration for GST is required. Usually, an entity’s GST turnover includes, among other things, the value of the GST-free supplies the entity makes that are connected with the Australian indirect tax zone. However, this would mean that the making of a significant number of supplies by overseas suppliers to Australian residents which would now be connected with the indirect tax zone, used and enjoyed outside the indirect tax zone and therefore GST-free, would require GST registration of the suppliers. The Explanatory Memorandum uses the example of hairdressing services that an Australian resident might obtain while travelling overseas. The suppliers may have no involvement with the Australian GST system, and in some, if not most instances, will be unaware they are making a supply to an Australian resident. Therefore, requiring these entities to register for GST purely on the basis that the supply falls within the new law would create significant compliance costs for no benefit. As a result, the amendments exclude GST-free supplies from GST turnover if they are connected with the Australian indirect tax zone only as a result of these amendments.

Electronic distribution service

In some circumstances, the GST liability is shifted from the supplier to the operator of an “electronic distribution service” through which the supplies of inbound intangible consumer supplies are made. This will occur if the operator of the electronic distribution service controls any of the key elements of the supply.

A service is an “electronic distribution service” if the service allows entities to make supplies available to end-users and the service is delivered by means of electronic communication and the supplies are to be made by means of electronic communication.

The responsibility for the GST liability shifts from a supplier to the operator of an electronic distribution service for supplies that are inbound intangible consumer supplies made through the electronic distribution service they operate unless all of the following are met:

  • an invoice issued in relation to the supply identifies the supply and identifies the supplier as the supplier of the supply;
  • the supplier is identified as the supplier of the supply, and as the entity responsible for paying GST, in contractual arrangements for making the supply and the provision of access to the electronic distribution service;
  • the operator of the electronic distribution service does not authorise the charge to the recipient for the supply and does not authorise delivery of the supply and does not set terms and conditions under which the supply is made.

The shift in GST liability to the operator of an electronic distribution service is proposed given that, generally, the operator of an electronic distribution service will be a much larger and better resourced entity than most of the entities making the supplies. The operator of the electronic distribution service will also have significant influence over the terms of sale made using the electronic distribution service and either manage or closely regulate the payment process. Further, often the operator of the electronic distribution service will have more information about the recipient of the supply, compared with the suppliers.

Modification of regulations

The Exposure Draft Bill also proposes the making of regulations to modify particular GST rules (for example, registration turnover, tax periods and GST returns) in order to accommodate the new rules for intangibles and to minimise compliance costs of non-resident suppliers. The Explanatory Memorandum to the Exposure Draft Bill states that the form of regulations will need to be determined in consultation with members of the industry.

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