Strategizing International Tax Best Practices – by Keith Brockman

Archive for December, 2014

Korea: Accumulated earnings tax/reforms

EY’s latest Tax Alert has summarized the effect of Korea’s new tax proposals, provided herein for reference.

Key observations:

The accumulated earnings tax will require a review of Korean entities for which equity capital exceeds the KRW 50 billion threshold, as well as recognizing the revised 2:1 debt to equity ratio and the deadline for filing the report for international transactions. 

On 2 December 2014, Korea’s National Assembly passed 2015 tax reform proposals, 1 which were enacted into law on 23 December 2014. A new proposal regarding capital gains tax on income from trading financial derivatives was introduced in a separate package and is also now enacted. This Alert summarizes key features of the new laws.

Corporate accumulated earnings tax
A new corporate accumulated earnings tax will be imposed on excess cash accumulated by large corporations whose equity capital exceeds KRW 50 billion (US$49 million) and corporations that are members of an enterprise group with restrictions on mutual investment.2

The corporation may apply one of the two methods in calculating the accumulated earnings tax. Method A computes a 10% tax on 80% of adjusted taxable income3 reduced by amounts spent on investment on tangible and intangible assets, salary increases, dividends and certain qualified capital redemptions. Method B calculates the 10% tax on 30% of adjusted taxable income reduced by amounts spent on salary, dividends and certain qualified capital redemptions.

The new law will be effective for taxable years beginning on or after 1 January 2015 and before 31 December 2017.

Increase in the debt to equity ratio
Under the new law, the debt to equity ratio is revised to 2:1. This change will become effective for fiscal years beginning on or after 1 January 2015. However, the debt to equity ratio applicable to financial institutions will remain unchanged from the current 6:1.

Capital gains tax on income from trading financial derivatives
The new law, as part of the Individual Income Tax Law, imposes a 20% tax on gross capital gain reduced by KRW 2.5 million (US$2,300). The Enforcement Decree however has reduced the rate to 10%. Financial institutions such as brokerage firms are required to report details of financial derivative transactions on a quarterly basis to a tax office. This law will be effective as of 1 January 2016.

Tax refund claim period extended from three to five years
Under the new law, the current three-year refund claim period is extended to five years from the date of the statutory filing due date.

Failure to submit data on international transactions with foreign related parties
The new law imposes a penalty not to exceed KRW 100 million (US$95,000) on the failure to timely file a report of international transactions with foreign related parties.

Extended statute of limitation period on tax evasion involving cross-border transactions
The statute of limitation period is extended to 15 years for cross-border tax evasion matters. The amendment becomes effective for the first tax assessment made after enactment of the law.

Increased penalties on tax evasion involving cross-border transactions
Under the new law, a new penalty is imposed on non-filers or the underreporting of income derived by cross-border transactions. The rate is 60% of the amount of the tax evasion and it becomes effective for taxable years beginning on or after 1 January 2015.

Endnotes
1. See EY Global Tax Alert, Korea announces 2015 tax reform proposals, dated 28 August 2014.

2. A Korean conglomerate with assets of more than KRW 5 trillion (US$5 billion).

3. Adjusted taxable income means taxable income plus additions such as dividend received deduction, interest on tax refund, depreciation expense on current year fixed asset acquisition minus corporate income tax, reserves, net operating loss, excess donation expense over a deduction limitation.

Happy New Year

I wish all my readers a happy, healthy and joyful New Year.

Readers from 142 countries have viewed my posts during 2014; thank you for your interest and support.

Best wishes,

Keith

Asia: BEPS Review

Loyens & Loeff have published a clear and concise summary of several OECD BEPS deliverables, as well as summarizing the potential impacts of BEPS for each of the following countries:

  • China (PRC)
  • Hong Kong
  • India
  • Indonesia
  • Japan
  • Korea
  • Malaysia
  • Philippines
  • Singapore
  • Taiwan
  • Thailand
  • Vietnam

A link to the publication is provided for reference:

http://www.loyensloeff.com/nl-NL/News/Publications/Newsletters/Asia%20Newsletter/AsiaNewsletter-BEPS.pdf

This publication provides a concise summary addressing the topics of Characterization and position re: BEPS, BEPS related measures and an Outlook summary for each country.  The recent December 2014 BEPS drafts are not covered in this publication.

Best Practice observations:

MNE’s should be gathering a master file of the BEPS Action Items and status of each Item for each country in which it operates, as the timing of legislation will be different, including countries that have already enacted several Action Items.  Based upon this schedule, a strategic review of items affecting the Company can be developed, reviewed and implemented efficiently.  This schedule will also be a valuable dynamic tool for presentation to internal stakeholders that addresses the impact of BEPS.

Australia’s tax risk framework

The Australian Tax Office (ATO) has provided a concise summary of its framework by which four broad risk categories are categorized for each type of tax (income tax, GST, excise).  This classification framework will be used to provide their service focus.

The framework distinguishes key taxpayers and taxpayers with high, low and medium risk classifications.  Higher risk taxpayers will merit a continuous tax review, key taxpayer relationships will be developed focused on the MNE’s risk management and governance framework, medium risk taxpayers will fact reviews/audits, and lower risk taxpayers will be monitored to confirm its ongoing risk characterization.

A link to the ATO Fact sheet is provided for reference:

https://www.ato.gov.au/Business/Large-business/In-detail/Risk-Differentiation-Framework/Risk-differentiation-framework-fact-sheet/

This initiative is valuable in providing insight into a taxpayer’s risk characterization, although the review frequency and transparency details leading up to a relevant classification are not provided.  All taxpayers with Australian operations should be knowledgeable about the risk classification assigned to them for purposes of efficiently engaging with the ATO in a collaborative relationship.

This exercise is also helpful in identifying potential trends in other countries as the OECD’s country-by-country template guidelines are finalized and legislative actions are taken to formally assess risk using relevant data.

The Davis Tax Committee: BEPS Report

The Davis Tax Committee has released its First Interim Report on Base Erosion & Profit Shifting (BEPS), including an introductory document and comprehensive analyses of the following BEPS Action Items:

  • 1, Digital Economy
  • 2, Hybrid Mismatches
  • 5, Harmful Tax Practices
  • 6, Treaty Abuse
  • 8, Transfer pricing re: intangibles
  • 13, Transfer pricing documentation
  • 15, Multilateral instrument
  • Summary of recommendations

The Committee’s objective is to assess South Africa’s tax policy framework and its role in supporting the objectives of inclusive growth, employment, development and fiscal sustainability.  Links to the Media Statement, Davis Tax Committee’s website and Report are provided for reference:

http://www.taxcom.org.za/docs/20141223%20Davis%20Tax%20Committee%20Media%20Statement%20-%20Release%20of%20BEPS%20Report%20for%20Public%20Comment.pdf

Comments by all interested parties should be submitted by 31 March 2015.

The documents are a valuable reference in comprehending each of the OECD BEPS Action Items of the Report, not only the viewpoint of S. Africa.  Most importantly, it outlines the tax policies for continued foreign direct investment balanced against BEPS and General Anti-Avoidance Rule (GAAR) initiatives, while providing tax transparency and certainty with a balanced, sustainable tax policy going forward.

Cooperative Compliance: Best Practices re: Global Mobility

Cooperative compliance is an initiative that is being used more regularly to further efforts by tax administrations for tax transparency.  (Refer to 13 June, 2013 post: OECD: A Framework for Co-operative Compliance)

The referenced PwC Tax Policy Bulletin highlights the use of this popular technique for Global Mobility compliance and Best Practices.  The Bulletin provides a primer for processes of global mobility compliance and integration of a cooperative compliance approach, including the relevant benefits and risks.

http://www.pwc.com/en_GX/gx/tax/newsletters/tax-policy-bulletin/assets/pwc-cooperative-compliance-global-mobility-tax-policy.pdf

Key observations:

  • Many countries have the potential to immediately negotiate an agreement to streamline mobile employee compliance.
  • There is an opportunity to minimize/control risks due to global talent shifts, short-term business travelers / assignees, targeted tax audits, administrative complexity, Permanent Establishment (PE) exposure, etc.
  • Tax control framework methodologies should be in place for review by tax authorities to review internal processes.
  • This initiative should be in synergy with the global / regional / country tax strategy for alignment.

This important initiative should be supported by tax expertise for the global mobility function via internal and/or external resources.  Accordingly, the impetus of tax transparency, complexity and corporate accountability may provide perfect timing to review the organizational structure of the global mobility function and inherent tax expertise provided, resulting in a Best Practice methodology as part of the global tax risk framework.

French tax legislation

The 2014 Amended Finance Act and the 2015 Finance Act should enter into force by 31 December, 2014.  A PwC summary is provided for reference:

http://www.pwc.com/en_US/us/tax-services/publications/insights/assets/pwc-france-enacts-amended-finance-act-14-finance-act-15.pdf

Key observations:

  • Horizontal fiscal unity is allowable for “sister” companies held, directly or indirectly, by a EU or EEA parent company.
  • Effective 1/1/2015, the 95% participation exemption will not be allowable for dividends paid out of profits from activities not subject to corporate income tax (Note this provision was deleted in the final published draft), or that are deductible by the payor company (in alignment with the EU Parent-Subsidiary Directive).
  • A new transfer pricing penalty, for audits starting on or after 1/1/2015, is the greater of 0.5% of transactions with incomplete documentation, or 5% of the amounts reassessed by the French tax authorities with regards to these transactions.
  • A new procedure, effective the day following publication, allows a request to waive withholding tax on deemed distributions, subject to procedural rules.
  • Details of the tax credit for employment and competitiveness (CICE) shall  be detailed in the financial statements.
  • The employee bonus on dividends (Prime de partage du profit) is repealed at the end of 2014.
  • The 10.7% corporate income tax surcharge is to be repealed for fiscal years closing on or after 31 December 2016.
  • The Social solidarity contribution assessed on turnover should be repealed in 2017.

France has taken a one-year advance action in implementing the EU Parent-Subsidiary Directive, as well as introducing new transfer pricing penalties that need to be considered for adequate documentation.  Additionally, the horizontal fiscal unity initiative and repeal of the employee bonus rule should provide opportunities for planning French legal structures and repatriation going forward.

 

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