October 2020: International Tax Planning Review

October 2020: International Tax Planning Review

Russia and Malta signed a protocol amending the double tax treaty

On 1 October, representatives of Russia and Malta signed a Protocol amending the bilateral Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income signed between the countries on 24 April 2013.

According to the Protocol, the withholding tax rate in respect of dividend and interest income payments will be increased to 15 percent. 

Exceptions are provided for institutional investments as well as public companies, at least 15 percent of which are in public float and own at least 15 percent of the capital of the company paying the said income during the year. Such income will be taxed at a 5 percent rate.

The amendments do not affect interest paid on Eurobonds, bonded loans of Russian companies, as well as loans provided by foreign banks.

The protocol is expected to be ratified by the end of 2020, and will begin to apply from 1 January 2021.

Cyprus terminates its investment citizenship program

The Government of Cyprus decided to close the existing citizenship-by-investment program from 1 November 2020. This measure was preceded by adverse media publications, a series of internal checks and the decision to revoke Cypriot passports from several persons who had previously obtained them under the program.

The Cyprus finance and interior ministers, who proposed to close the program, recognized its vulnerability to possible abuse and identified real violations that took place in the period from 2012 to 2018.

The introduction of any new program to replace the canceled one is not under discussion. The possible development of a new program may be hindered by the position of the European Union, which has made the relevant warning to Cyprus (and also to Malta).

In the opinion of the European Commission, granting citizenship by a Member State (which is the EU citizenship as well) in exchange for a predetermined amount of investment in the absence of a real connection of the person with that state is incompatible with the principles of the Treaty on European Union in part of its provisions on citizenship.

Investment citizenship schemes existing in one EU country, due to the nature of EU citizenship, affect the Union as a whole. A person who obtained citizenship this way automatically receives the right to freely move, live and work in any EU country, as well as to vote, including in the European Parliament elections.

Cayman Islands removed from the EU blacklist

On 6 October 2020 the Cayman Islands and Oman were completely delisted from the EU list of non-cooperative tax jurisdictions.

The Cayman Islands financial industry welcomed the decision. The exclusion from the list means that the European financial authorities recognize that the Cayman Islands have implemented the recommended reforms, and that the jurisdiction is transparent, has no harmful tax regimes and demonstrates the adequate level of international cooperation in the tax field.

The Cayman Islands is one of the oldest international financial centers providing opportunities for setting up not only classic offshore companies, but also collective investment vehicles.

12 jurisdictions remain in the EU blacklist for today: American Samoa, Anguilla, Barbados, Fiji, Guam, Palau, Panama, Samoa, Seychelles, Trinidad and Tobago, the US Virgin Islands and Vanuatu.

Seychelles ramp up measures to leave the EU blacklist

The Government of Seychelles is finalizing amendments to the Business Tax Act to bring it in line with the EU requirements. They are expected to come into force from 1 January 2021.

The amendments are focused on foreign income of local (resident) companies and do not apply to International Business Companies (IBCs) if they operate outside Seychelles only.

Following the reform, resident companies claiming for tax exemption of their foreign passive income will have to comply with substance tests. The rules also provide for corresponding reporting, supervision and monitoring systems. If the local companies do not sufficiently demonstrate substance, their foreign profits will be taxed in Seychelles.       

Another regulatory gap was related to the identification of beneficial owners. The Seychelles Government has taken steps to address this issue through the adoption of the new Beneficial Ownership Act 2020, which entered into force on 28 August 2020. The Act requires all legal persons and legal arrangements to maintain a register of beneficial owners, at the principal place of business of their registered agent.

Also, the problem of the availability of financial (accounting) information of offshore sector companies (IBC) was previously identified. The current legislation requires such companies to keep their accounting records either in or outside Seychelles. In the latter case the registered agent in Seychelles must be informed of the address where the accounting records are kept.

Seychelles financial authorities say the country recognizes the importance of international tax cooperation and is taking vigorous steps to implement the necessary reforms.

Seychelles was blacklisted by the EU in February 2020 due to a “preferential tax regime” and failure to implement tax reforms, which the country had committed to, within the agreed timeframes.    

One of the criteria for inclusion in the EU blacklist is the OECD’s rating of compliance with the standard for exchange of information on request (EOIR). Countries rated as “Partially Compliant” or below are automatically included by the EU into the list of non-cooperative jurisdictions.

Belarus to join the Inclusive Framework on BEPS

On 12 October the Council of Ministers of the Republic of Belarus decided to join the country to the Global Forum on Transparency and Exchange of Information for Tax Purposes, and to Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The group currently unites 137 countries.

Having entered the Inclusive Framework, Belarus would be committed to the implementation of the four minimum BEPS standards, including those related to:

  • Action 5 (Countering harmful tax practices);
  • Action 6 (Preventing tax treaty abuse);
  • Action 13 (Country-by-Country reporting); and
  • Action 14 (Dispute resolution).

Besides this, the Inclusive Framework participants are committed to seeking mutually acceptable long-term solutions to the tax challenges posed by digitalization of the economy.

Currently Belarus does not participate in the Convention on Mutual Administrative Assistance in Tax Matters, as well as in Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (MCAA CRS). However, the country’s accession to the OECD Global Forum may change this situation soon.

Reports published on two pillars of global tax reform

On 12 October the OECD/G20 Inclusive Framework published current reports on two fundamental components of reforming international tax system in response to tax challenges of digitalization, known as Pillar 1 and Pillar 2. They constitute the next step of BEPS Action Plan.  

One of the goals of the reform being developed is to prevent uncoordinated unilateral tax measures by separate countries (such as a digital tax), to coordinate further actions in this area and to ensure the stability of international tax rules.

Pillar 1 aims to adapt the international income tax system to new business models. This require changes to the profit allocation and nexus rules applicable to business profits.

For this purpose, it is proposed to expand the taxing rights of the so-called user/market jurisdictions, in the economy of which a company has an active and sustained participation, including by way of remotely directed activities.

“Market jurisdictions” means jurisdictions where a multinational group sells its products or services or, in the case of highly digitalized businesses, provides services to users or solicits and collects data or content contributions from them. Thus, for a number of businesses, such “market jurisdiction” will be a country (or countries) where the company’s customers are located.  

These countries, as envisioned by authors of the reform, must be vested in greater rights to tax multinational companies’ profits. To avoid double taxation, this new taxing right will reduce the taxing rights of jurisdictions where such companies are resident under the existing rules.

Besides this, Pillar 1 aims to significantly improve tax certainty by introducing innovative dispute prevention and resolution mechanisms.

Pillar 2 is designed to ensure that large internationally operating businesses pay a minimum level of tax regardless of where they are headquartered or the jurisdictions they operate in.

The corresponding methodology, examples and calculation formulas are disclosed in the said publications.

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