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The Latest on BEPS - 27 February 2017

India

On 1 February 2017, the Indian Budget for tax year 2017-18 was presented, which among other items, proposes to introduce a limit on interest deductions in the case of related party borrowings in line with recommendations of Action 4 of the OECD BEPS Action Plan. The budget proposes to restrict the interest expenses claimed by an Indian company (other than a banking or insurance company) or a permanent establishment (PE) of a foreign company in India to its borrowings from associated enterprises to 30% of its EBITDA (earnings before, interest, taxes, depreciation and amortization) or interest paid or payable to an associated enterprise, whichever is less. The provision will be applicable to interest expenditures exceeding INR10m (approx. US$148,775) in relation to borrowings from associated enterprises. Under this provision, debt shall be deemed to be treated as issued by an associated enterprise where it provides an implicit or explicit guarantee to the lender or deposits a corresponding and matching amount of funds with the lender. The provision permits an eight-year carry forward of disallowed interest expense, subject to the 30% cap discussed above.

See EY Global Tax Alert, India releases Union Budget for tax year 2017-18, dated 2 February 2017.

On 8 January 2017, the Indian Tax Administration Authority released a year-end review report of 2016, which among other provisions, indicated its focus towards implementation of BEPS recommendations. The year-end review report states that a committee will be constituted to examine all the BEPS Action reports and will lay out a roadmap for implementing the recommendations contained in these BEPS reports. Such implementation would be carried out by amending the existing income tax law or by way of framing rules and guidelines in this regard.

European Union

On 9 February 2017, the European Parliament Rapporteurs (Members of the European Parliament (MEPs) who report to the Parliament on issues) put forward amendments on the European Commission’s (the Commission’s) proposal for a directive amending Directive 2013/34/EU regarding disclosure of income tax information by certain undertakings and branches (Public Country-by-Country Reporting). In brief, the amendments support increasing the scope of the directive and increasing the amount of information companies are required to publish. If adopted, these amendments could lead to implications for both EU-headquartered and non-EU-headquartered undertakings. Moreover, other MEPs could table further amendments.

See EY Global Tax Alert, EU Parliament members submit amendments to public County-by-Country Reporting proposal, dated 20 February 2017.

On 21 February 2017, the Economic and Financial Affairs Council of the European Union (ECOFIN or the Council) agreed on amendments to the Anti-Tax Avoidance Directive (ATAD) to provide for minimum standards for hybrid mismatches involving third countries (i.e., non-European Union (EU) countries) (ATAD 2). The ATAD 2 is one of a package of corporate taxation proposals presented by the Commission in October 2016.

The ATAD agreed to in June 2016 provides for a broad scope of minimum standards against tax avoidance, but as far as it concerns hybrid mismatches, it was limited to hybrid instruments and hybrid entity mismatches between EU Member States. The now agreed amendments to the ATAD expands these minimum standards to hybrid mismatches involving third countries. In addition, the scope is expanded to hybrid PE mismatches, hybrid transfers, imported mismatches, reverse hybrid mismatches and dual resident mismatches that were not addressed by the ATAD. ATAD 2 requires Member States to either deny deduction of payments, expenses or losses or include payments as taxable income, in case of such hybrid mismatches.

The Council will adopt the ATAD 2 once the European Parliament has given its opinion. The ATAD 2 needs to be implemented in the EU Member States’ national laws and regulations by 31 December 2019 and will have to apply as of 1 January 2020, except for the provision on reverse hybrid mismatches for which implementation can be postponed to 31 December 2021 and will have to apply as of 1 January 2022.

See EY Global Tax Alert, European Council agrees on draft directive aimed at closing down hybrid mismatches with third country tax systems, dated 21 February 2017.

Singapore

On 20 February 2017, Singapore released the Budget 2017, which introduced a new BEPS-compliant intellectual property (IP) regime named the IP Development Incentive (IDI) to encourage the use of IPs arising from research and development (R&D) activities. Existing incentive recipients will continue to have such income covered under their existing incentive awards until 30 June 2021. The IDI will take effect on or after 1 July 2017, further details on the IDI will be released by May 2017.

See EY Global Tax Alert, Singapore releases Budget 2017, dated 23 February 2017.

Slovak Republic

On 1 February 2017, the Slovakian Parliament approved the draft legislation which introduces CbC reporting requirements. The legislation will be effective from 1 March 2017 and in order to become effective, the legislation needs to be published on the Collection of Laws. Regarding the specific CbC reporting requirements, there hasn’t been any substantial changes from the draft legislation that was initially submitted in September 2016.

South Africa

On 22 February 2017, the Minister of Finance delivered the 2017/2018 budget speech. The Minister indicated that South Africa is expected to sign the multilateral instrument on 7 June 2017. New treaties will be aligned with the minimum standards while the multilateral instrument will take care of existing treaties. On treaty shopping, South Africa has chosen the principal purpose test because it is aligned to a large extent to domestic anti-avoidance rules. Under this test, the benefits of a tax treaty are denied if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of entering into any arrangement or transaction.

See EY Global Tax Alert, South Africa sets forth position on OECD BEPS Action Plan, dated 24 February 2017.

United Kingdom

On 14 February 2017, the UK HM Revenue & Customs (HMRC) updated guidance on the tax avoidance schemes that it believes are being used to avoid tax to include two so-called “disguised remuneration” schemes used by employers and individuals to avoid income tax and National Insurance contributions. The changes to tackle the use of these avoidance schemes were announced in Budget 2016. In a case, where the taxpayer is found using such schemes, HMRC will begin an enquiry into the tax affairs of taxpayer, will seek full payment of taxes, interest and levy penalty, where appropriate. Anyone using such schemes should speak with HMRC as soon as possible.

EYG no. 00910-171Gbl

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