|
Market turmoil, intense competition and global expansion have sparked unprecedented levels of tax regulation which companies need to keep up with.
According to the latest PwC CEO Survey, tax is one of the most important regulatory concerns of the CEO, and is driving demand for proper internal controls and robust financial reporting processes, to satisfy regulators and stakeholders.
Attractiveness to foreign entities
According to Assem Chawla, tax partner at Amarchand & Mangaldas & Suresh A Shroff & Co, the Indian growth story has made it one of the most attractive investment destinations in the world. He explained that the Indian tax laws provide for fiscal incentives to tap foreign investments and to channelise domestic savings.
“The extant Income Tax Act, 1961 (Act) categories the incentives as profit linked and investment linked incentives,” commented Mr Chawla. “Generally, the profit linked incentives are available on setting up the undertaking and facilities in specified states or on setting up the undertaking and facilities in specified industries and tax holiday for enterprises engaged in carrying on specified activities in designated areas and generating foreign exchange.
“Further, the investment linked incentives are available to the enterprises based upon capital expenditure incurred wholly or exclusively for the purposes of any specified business.”
Mr Chawla stated that possibly the most significant tax reform in recent years has been the move towards the integration of excise and service taxes followed by the introduction of Value Added Tax (VAT) to replace state level taxes on a pan India level. This, in turn, has set the stage for introduction of a unified Goods and Services Tax (GST).
To revamp the existing income tax legislation, the Indian Government has released the Direct Taxes Code Bill, 2010 (DTC or Code) which is intended to be implemented with effect from April 1, 2012 which proposes to phase out the profit linked incentives and substitute the same with investment linked incentives for various sectors.
The Indian Government has entered into Double Taxation Avoidance Agreements (DTAA) with approximately 83 countries and Tax Information Exchange Agreements (TIEA) with non-sovereign jurisdictions. Further, in January 2011, an agreement amongst the Governments of South Asia Association for Regional Cooperation Member States for avoidance of double taxation and mutual administrative assistance in tax matters has also been given retrospectively.
Brazil has been an attractive location for foreign direct investment for decades, noted André Martins de Andrade at André Advogados.
“Especially so after 1988 when a new Constitution replaced the previous authoritarian legal frame and the first freely elected Administration opened the economy to a world in the process of globalization,” commented Mr Andrade. “Foreign exchange rules were loosened and foreign subsidiaries were admitted into a number of activities previously secluded to locally controlled companies in such strategic sectors as telecommunications and oil and gas for example.”
Although Kenya is not considered a tax haven, Godwin Wangong’u at Mboya & Wangong’u Advocates stated that the national tax legislation does have several provisions that make it attractive for investors.
The cost of buildings and capital machinery are tax deductible. Value Added Tax (VAT) remission for some capital goods for investment is available and imported materials to be used in manufacturing for export qualify for the exemption from duty and remission of VAT. Export Processing Zones enjoy a 10 year tax holiday in which they are exempted from corporate taxes, VAT and duties on importation of machinery and raw materials.
“Further, Kenta does not have Capital Gains Tax, Controlled Foreign Company (CFC) rules and foreign exchange control restrictions,” commented Mr Wangong’u. “There are also no withholding taxes upon repatriation of profits by a branch in form of dividends to its parent company. Tax losses can also be carried forward for a period of four years.
“However, higher withholding tax is levied on dividends, royalties and professional fees paid to foreign companies. Thin capitalisation and transfer pricing rules also apply to foreign owned companies.”
Olivier Goldstein at Reinhart Marville Torre explained that the French tax system is relatively attractive for foreign entities, especially as French holding vehicles may invest in operating companies with a taxation limited to 1.67% on upstream dividends, based on the parent-subsidiary 95% exemption. In addition, long term (i.e. holding of at least two years) capital gains on participations are also 95% tax exempt.
“Combined with exemption on capital gains taxation in France pursuant to most of international tax treaties entered into by France, an investment in a French operating company may enjoy an efficient tax planning,” commented Mr Goldstein.
“Furthermore, investments in French real estate assets may be very efficiently structured by the use of a French partnership structure, generally held by a Luxembourg holding. Such type of structuring enables both tax exemption in French on capital gains and tax free step-up in basis on the real estate assets for foreign investors.”
In addition, France provides an efficient tax consolidation regime, though Mr Goldstein describes it as “relatively constraining”. He states that the main downsides of an investment in France relate to the corporate income tax rate, which is relatively high (33 1/3%), and social security charges, which are extremely high. These downsides both affect French operating companies and not holding companies.
In Gibraltar, the corporate tax rate has been set at 10%, companies are not taxed on income where the trading activities take place outside of Gibraltar, and there is no taxation or withholding tax on passive income such as dividends, interest and royalties. There is no capital gains tax, no VAT, no wealth tax and no estate duty or inheritance tax.
“Apart from the fact that it offers a low tax environment in which investment income can accumulate tax fee (free?), it has the added advantage of being within the EU,” commented Edgar C Lavarello, partner at PwC. “As a result, insurance, banking and investment services can be passported directly into the other member states.
“In addition, there are major personal tax incentives for companies redomicilling to Gibraltar and relocating their management board and staff.”
Malaysia has two tax systems both based upon territoriality and access to a large network of tax treaties designed to minimise tax friction points that might otherwise impede international trade and investment flows.
Mike Grover at Labuan IBFC explained that the domestic Malaysian tax system is conducive to inbound investment due to tax incentives for promoted activities; tax sparing relief granted under its tax treaties; and no dividend withholding tax nor capital gains tax.
“On the other hand,” commented Mr Grover, “the Labuan International Business and Financial Centre (Labuan IBFC) tax system is modern, easily understood and designed to provide certainty for international transactions as follows: low taxation (from nil up to a maximum of US$7000); no exchange control; no stamp duties; no indirect taxes; no withholding taxes; no gift, CGT or estate taxes.
“Labuan IBFC is an ideal platform for trade and investment within the Asia-Pacific region particularly when its attractive tax system is combined with the benefits under the extensive Malaysian tax treaty network.
“ASEAN, of which Malaysia is a member country, has a potential market of 600 million people which may be accessed tax efficiently by international investors via Labuan IBFC.”
Business tax difficulties
According to Mr Andrade, Brazil has a complex system respecting the taxation of gross income by a multiple number of taxes and contributions and excessive red tape work involved in tax related accessory obligations, and these are factors of dissatisfaction to foreign investors.
“There are renewed promises by successive administrations to reduce taxes on payroll, enhancing the employment policies, which have, nonetheless, succeeded in reducing unemployment in the past three years to a 4%/5% range,” commented Mr Andrade.
“Competent accountants and legal counsellors are indispensible to prevent newcomers to be captured in a network of rules that often appear to foreign eyes as confusing, if not on some occasions truly contradictory.”
Mr Wangong’u noted that the tax filing and reporting requirements in Kenya are burdensome, with numerous returns for the various taxes required from each entity and punitive penalties imposed for non-compliance. This is time consuming and requires about 41 payments each year and about 393 man hours to comply, as estimated in Doing Business 2011.
“We can assist companies by taking care of their compliance (i.e. tax administration) on their behalf and thereby saving them the man hours required,” commented Mr Wangong’u.
“Further, under the current VAT regime entities registered for VAT are allowed to claim a refund of the excess VAT incurred. The revenue authority has in the past been slow in processing and paying out these refunds causing entities cash flow problems.
“We can assist in follow up of the refunds with the revenue authority as we have a dedicated tax team and a good working relationship to leverage on.”
France has a very administrative system, and Mr Goldstein states that this creates a real burden for foreign companies that are used to more flexibility.
“Apart from this topic, which may not be overcome, foreign entities may face serious difficulties depending on their structure in France,” commented Mr Goldstein. “In particular, the French tax authorities have a very conservative approach as to the concept of permanent establishment.
“As a result, it is essential to structure an investment in France in a proper manner to avoid challenges in this respect. We have an extensive experience on how to structure foreign investments and how to face the tax authorities in case of litigation.”
Prior to commencing any business activity in Gibraltar, Mr Lavarello states that it is necessary to ensure that the company and employees are properly registered with the relevant authorities.
“We have a dedicated team that can provide you with a full range of services, ranging from company incorporation and registration, licensing, employee registration and immigration approval if required,” said Mr Lavarello.
“When you move to a new country there are many things that can be overlooked. This is where our local knowledge can be a real advantage to clients. Our team are happy to assist with property selection, utility connection, schools, ID cards, driving licences, etc.”
Mr Grover describes Malaysia’s tax system as relatively transparent and open, allowing investors to know where they stand on tax matters. If in doubt advance tax rulings may be sought.
“Having said this, there is still some work to do in relation to Malaysia’s self-assessment system on taxation. Most taxpayers would welcome the timely issue of public guidelines for the tax office’s position on tax sensitive areas to help them comply with their obligations and minimise an exposure to penalties.”
Further, the role change of tax regulators from tax assessor
“There are also teething problems following the recently adopted ‘fair value’ financial accounting which creates tension with a tax system based upon historical costs,” commented Mr Grover. “The hassle and addition tax compliance costs resulting from the restatement of accounts may be minimised as taxpayers adapt their systems to meet the differing requirements.
“Overall, the tax difficulties encountered by taxpayers are not insurmountable and can be managed without too much difficulty provided appropriate advice is taken beforehand.”
India has witnessed a spurt in investments by private equity ventures in every sphere. The revenue authorities have recently been monitoring cross border transactions more particularly in the related party transactions.
“The foreign companies should consider developing a strategy to counter challenges in tax administration by maintaining adequate records and documentation so as to effectively pre-empt and discharge its tax obligation and compliances,” said Mr Chawla.
“However, in our experience, the foreign companies should be cautious in drafting and reviewing transactions agreements and negotiations and particularly on the aspect of tax issues pertaining to intellectual property rights and tax arrangement on account of potential and unforeseen tax and withholding tax obligations.”
Developments/amendments to tax legislation
In Gibraltar, the Income Tax Act 2010, which came into force on 1st January 2011, introduced the reduction of the company tax rate to 10% accompanied by an improved culture of compliance, both of which have been received favourable by the industry.
“Whilst it may be true that everyone wants to pay as little tax as possible, it is also true that we all want a fair tax system and one in which we all contribute to on a fair and just basis,” said Mr Lavarello. “It is therefore not surprising that even the increased fines and penalties for non-compliance have been welcomed.”
In Kenya, ‘deemed interest’ on interest-free loans provided by a non-resident to a thinly capitalised Kenyan related entity has recently been introduced. The interest rate is pegged on the 91 day Treasury Bill rate. This interest is subject to withholding tax which will likely be borne by the resident company hence increasing its costs. This will impact on the way long term and working capital is raised by subsidiaries of multi-nationals.
Real Estate Investment Trusts (REIT) will be exempt from corporate tax and any income earned by the investors of a REIT and sale of shares by unit holders of the REIT will be exempt from tax with effect from 1st January 2012. This will boost investment is real estate by companies.
The government also recently introduced a 150% capital deduction for qualifying investments exceeding US$2.5 million outside the main cities of Nairobi, Mombasa and Kisumu. This is an encouragement for companies to invest outside the main towns and hence boost growth.
According to Mr Grover, an “enlightened approach” has been taken by Malaysia to enhance the attractiveness to investors of Labuan IBFC. Instead of pushing new legislation on investors by adopting a “this is what we are prepared to offer” approach, Malaysia took soundings on the needs of investors and introduced new legislation designed to “pull” them to the jurisdiction.
“In 2010, Labuan IBFC underwent a wholesale revamp of its laws and, in doing so, complemented its favourable tax system,” said Mr Grover. “The introduction of additional ‘business wrappers’ including foundations, protected call companies and special trusts means that investors now have more choices available, more than in any other location in the Asia-Pacific, on the type on entity through which to conduct their business activities.
“And though not directly a change to the tax legislation the introduction of these entities which allow for greater flexibility in the way business activities may be structured opens up the jurisdiction’s tax efficiency to a greater number of users.”
In India, the DTC has been laid before the Parliament for discussion which is proposed to replace the existing Act with effect from April 1st, 2012 after the same is approved by both the Houses of the Parliament of India and the receives presidential assent.
Besides the rationalisation of the tax rates, the Code proposes to introduce General Anti Avoidance Rules (GAAR). Pursuant to these, any transaction could be considered to be a tax avoidance transaction, if the transaction is undertaken with the main purpose of obtaining a ‘tax benefit’ and it:
- creates rights or obligations, which would not be created if the transaction was implemented at arm’s length; or
- results in, directly or indirectly, misuse of the provisions of the DTC; or
- lacks commercial substance in whole or in part; or
- is implemented by means, which would not be normally adopted for bonafide purposes.
In case a transaction is regarded as an avoidance transaction, such transaction could be disregarded, combined with any other step in the transaction or re-characterised, or the parties to the transaction could be disregarded as separate persons and treated as one person.
“Further, the Code proposes to introduce the concept of Controlled Foreign Corporations (CFCs),” said Mr Chawla. “The CFC rules/provisions provide that any passive undistributed income earned by a foreign company controlled directly or indirectly by a resident in India shall be deemed to have been distributed and consequently, would be taxable in India in the hands of resident shareholders as dividend received from the foreign company.
“Besides other things, the code also envisages the formulae for computing the capital gains in case of indirect transfer of interest in share capital of an Indian company.”
The taxation of French companies has not been significantly amended recently, however it has been slowly adapted to the needs of the economy. The tax system has been partially modified in order to conform with EC legislation, which generally benefits companies. In parallel, the French legislator has extended the field of anti-abuse provisions.
“It is noted that taxation of individual residents in France have been subject to much higher instability and significant modification in the recent past, including currently with amendment of wealth taxation and taxation related to management and transfer of estate,” said Mr Goldstein.
In Brazil, there is currently a large controversy as to the correct application of the 29 DTAs that are presently in force. Though Brazil is not a member of the OECD, DTAs basically follow the OECD Model Convention.
“Tax authorities claim that under the worldwide tax regime Brazil can tax the profits of foreign subsidiaries of Brazilian companies as deemed dividends (section 10 of DTAs) whereas taxpayers pledge the application of section 7 which precludes the residence country from taxing business profits of foreign subsidiaries,” explained Mr Andrade. “The Supreme Court is expected to rule very soon on this issue and especially on whether an “all encompassing” CFC regime such as the one prevailing in Brazil is compatible with constitutional rules or whether some sort of deferral is mandatory.”
Corporate tax cuts and other measures
One method to promote growth in countries affected by the global economic crisis is cutting corporate tax.
In Gibraltar, the aim of the 2010 Act was to enable the reduction of the corporate tax rate from 22% to 10%.
“The new company rate was set at a level that would both provide the Government with the revenues that it required whilst at the same time maintaining and stimulating the quality of business that Gibraltar wishes to attract,” said Mr Lavarello.
“We have already seen a renewed interest in Gibraltar and we can now add a competitive tax rate to all the other advantages we have to offer.”
India has been witnessing consistent growth over the past few years. Accordingly, the corporate tax rate has been maintained at a consistent level, along with a decrease in surcharge on corporate tax, and the tax collections have also kept the growth momentum.
“However, in order to maintain the growth rate, the Government has and is also in the process of taking various initiatives to curb the inflationary pressure in the economy, without impeding the growth,” said Mr Chawla. “The said measures are still to reflect the results on a long term basis.”
Malaysia has addressed the global economic crisis through various measures taken to stimulate private consumption and economic activity.
Two economic stimulus packages worth RM7 billion and RM60 billion were approved in 2009 for injection into the domestic economy, ranging from infrastructure development to increasing employment opportunities via retraining and the liberalisation of the services sector to foreign investors.
Increased tax reliefs and deductions were granted to individuals and a number of the initiatives enjoy tax incentives. Further, to continue the reinvigoration of private investment, tax incentives such as for the generation of energy from renewable resources and energy efficiency activities were extended to 31st December 2015.
“Nevertheless, Malaysia did no cut its corporate tax rate, maintaining it at 25% since 2009,” commented Mr Grover. “Hints were recently given by the Malaysian Prime Minister that a cut in the corporate tax rate could be seen once GST is introduced. The GST bill was first tabled in Parliament in 2009 but the implementation date has not yet been announced.”
Mr Andrade explained that nominal rates for corporate tax are still high in Brazil (34%), but economical double taxation was eliminated a dividends no longer pay any taxes.
“Also, tax reductions are available in certain less developed areas of the country, which may reduce effective rates to substantially low levels (around 8%),” said Mr Andrade.
The Kenyan government has not introduced any corporate tax cuts. However, it has opted to increase some capital allowances granted to companies.
France has also not introduced any corporate tax cuts, as it is trying to removed of the specific tax niches, which enjoyed both by companies and individuals.
“France had recently tried to reduce the impact of social security charges to companies, which positive effects are questioned,” said Mr Goldstein. “It is therefore uncertain whether these social security cuts will be maintained.”
Tax evasion and havens
The 10% rate of company taxation in Gibraltar was accompanied by an improved culture of compliance, and the 2010 Act introduced strong anti-avoidance provisions to ensure that all taxpayers pay their fair share of tax in full and in a timely manner.
In creating this climate of compliance, the Commissioner has increased powers to obtain information, investigate returns and impose penalties on those involved in the falsification, concealment or destruction of relevant documents. These additional powers will allow the Commissioner to combat evasion as well as to challenge those who seek to take advantage of tax loopholes.
“As part of this process Gibraltar has complied with and surpassed the OECD requirements to become a white listed jurisdiction for tax purposes,” said Mr Lavarello. “The days of tax havens are effectively numbered and Gibraltar’s success has for some years now, been built on a competitive and efficient fiscal and economic business environment.”
Anti avoidance rules in Brazil has evolved significantly, much in the same way as in other jurisdictions in the developed world. Tax havens are black listed and tight controls are imposed on transactions with listed jurisdictions, subject to higher withholding rates, when applicable. Dividends, however, remain tax free even when remitted to parent companies located in listed tax havens.
“Transfer pricing and thin capitalisation are amongst the main areas of concern for foreign investors, mainly due to the fact that local rules are in many cases far apart from the commonly used international practices,” said Mr Andrade.
Mr Goldstein explained that increasing the burden on taxpayers, as is and will be the case in France, requires the efficient reduction of room for sophisticated tax evasion.
“In this respect, increasing legislation against tax havens and developing exchanges between tax authorities, including from these jurisdictions, appears to be a coherent approach,” he commented.
“Nonetheless, tax evasion is from far not the main origin in the politic and economic worldwide crisis, though tax havens have been extensively displayed by governments as one of the main characterisations of the danger in deregulation.
“Tax may be a tool in order to help recovering more economic growth. It is however dependent on the capacity to restructure our economies, create new models, improve management of the public sector (which is a very critical issue in France), redevelop our industry, etc.”
The extant Indian tax laws do not provide for any specific General Anti Avoidance Rules, however, the comprehensive transfer pricing regulations were introduced, effective from April 2001. The transfer pricing regulations have been proposed to be carried forward in the proposed Code.
“Recently, the Legislatures have introduced the concept of Tool Box Measures, by which the provisions of transfer pricing regulations would be applicable on all the transactions by a resident taxpayer with persons located in any country of jurisdiction which does not have effective exchange information with India / or are not a notified jurisdictional area,” said Mr Chawla.
“The Indian Government has been actively engaging in finalising the TIEA with other jurisdictions so as to gather the information on tax evasion.”
In Kenya, the 2011/2012 national budget enacted provisions to give legal effect to Tax Information Agreements (TIEA) entered into by the Kenya government with other governments. Mr Wangong’u explained that the TIEA would allow the revenue authority to exchange information with other jurisdictions and hence net tax evaders.
“Kenya should adopt the OECD model for the TIEAA as it allows for provision of information held by financial institutions or any person acting in a fiduciary capacity including nominees and trustees,” he commented. “It also allows for the provision of information regarding all ownership information of companies, partnerships, trusts and foundations. The requesting country can also attend and participate in tax examinations being conducted in the other country.”
According to Mr Grover, there is a global trend by tax collectors to blur the distinction between tax planning and tax evasion, with a view to reinforcing tax compliance by business.
“More recently there have been a number of crowd pleasing challenges to business by vigilante groups with the result that tax compliance has become a public relations exercise,” said Mr Grover. “The upshot of these developments has been to regard businesses that efficiently manage their effective rate of tax as little better than ‘tax cheats’.”
Mr Grover believes that this is at odds with recent decisions in the European Court of Justice which have made it clear that taxpayers are free to do business in such way as to limit their tax liabilities.
“In truth, the tax systems of a majority of countries, to a greater or lesser extent, contain features that might amount to them being regarded as tax havens.
“It is really for each country to decide who, on what and when it taxes. This being so, low taxation, tax incentives or tax ‘loopholes’ deliberately left in place by legislators are more properly regarded as ‘tax competition’ to create economic activity by attracting and retaining investment.”
Mr Grover believes that, in an international context, so-called ‘tax havens’ or financial centres play an important role to smooth out friction points for investors – for instance, as an enabler for foreign direct investment and for funds to manage pensioners investments tax efficiently.
“In particular, the Malaysian and Labuan IBFC tax systems have done a huge amount to boost the use of Islamic financial products through tax incentives and low taxation,” said Mr Grover. “The tax impediments that inhibit the growth of Islamic financial products in many other parts of the world have mostly been removed. In doing so, global businesses seeking funds are able to offer competitive returns on Islamic financial products and benefit from accessing ‘faith’ investors through the capital markets.”
Mr Grover explained that the flip side to tax competition is exchange of tax information. Financial centres have earned a degree of notoriety due in part to their strict secrecy laws and a stigma has attached to users of such jurisdictions. However, through the efforts of the G20 countries, tax secrecy is fast becoming a thing of the past.
“Those that maintain tax secrecy will no doubt have sanctions placed against them and their users. Those that adopt the international standard on the exchange of tax information, such as Malaysia and Labuan IBFC, will allow bona fide business to be conducted without the threat of sanctions. It is therefore highly probable that better regulated financial centres adhering to international standards such as Labuan should gain.
“The global consensus is that tax evasion is totally unacceptable and with President Sarkozy heading up the G20 Cannes summit in November 2011 it is to be expected that further pressure will be mounted against financial centres that assist tax evasion,” concluded Mr Grover. As published in Corporate INTL July 2011
|
