Border Crossing

Welcome to issue 17 of Border Crossing - RSM International’s newsletter covering technical developments in taxation around the globe.

January 2011. In this issue:

Ireland: Economic and tax update

Australia: Rulings on cross- border private equity

Europe: EU Court of Justice: Exit taxes

South Africa: Benefits of headquarter regime

Hong Kong/Japan: Tax treaty creates investment opportunities

Brazil: Cross charging of services or cost sharing

Uruguay: Investment promotion system

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It is fair to say that Ireland has featured prominently in the global media in recent months. Like many economies, Ireland is tackling a recession, a public finance deficit and a banking crisis. However while much negative media attention was to be expected, many of Ireland’s strengths remain, and these too deserve some attention. This article provides some perspective on Ireland’s current position and an update on Ireland’s tax regime.

Economic Update

Despite the difficulties, recent economic indicators show that the Irish economy has performed better than expected in 2010. Following two years of contraction, output and GDP for 2010 appears to have stabilized, with government revenues being in line with expectations. In fact, 2010 business taxes are actually ahead of forecast. Ireland’s economic contraction was mainly due to a collapse in the construction sector. Most commentators expect the sector will level out in 2011 and so will only have a limited effect on economic growth for 2011 and beyond.

Business Update

Ireland’s enterprise sector has continued to perform strongly during these difficult times. During 2009 Irish exports only fell by 4%, against a background of a drop of 12% in global trade. Irish exports actually grew by 7% in first half of 2010 and have remained strong in the second half of the year despite some strengthening of the euro.

Given the existence of clusters and networks of multinational companies, Ireland retains a critical mass in a number of high-tech sectors. This is evidenced by:

> Eight of the top ten global medical technology companies having manufacturing bases in Ireland, with employment in the

Ireland: Economic and tax update

sector on a per capita basis being the highest in Europe

> Eight of the top ten pharmaceutical companies having operations in Ireland

> Most major ICT software and hardware companies having significant operations in Ireland

> A growing cluster of internet based companies given Ireland’s location of choice in many cases

Many Irish owned companies are also performing strongly. Half of the medical technology companies operating in Ireland are Irish owned, and many Irish software companies are experiencing strong export performance, particularly to the UK and the US. In addition, Ireland continues to have competitive advantages in the food and drinks sector, and remains the largest exporter of beef in Europe and fourth largest in the world.

Irish businesses have also demonstrated significant flexibility in reacting to our changed circumstances. Pay rates and workplace practices have all been adapted dramatically, with many firms delivering annual unit cost savings of up to 10%. On a comparative basis, Irish unit labour costs have fallen by 13% compared to the euro area and by 15% compared to the UK.

December 2010 Irish Budget Statement – 12.5% corporation tax rate is here to stay!

On 7 December 2010 the Irish government announced its 2011 budget proposals in parliament. The proposals are based on the government’s National Recovery Plan (“The Plan”) which was published on 24 November 2010. The Plan provides the broad framework for Budgets over the next four years and also seeks to provide a strategy for economic growth. It envisages significant reductions in both current and capital spending and a major broadening of Ireland’s tax base. Two thirds of The Plan’s €15bn deficit reduction measures will come from public spending cuts, with one third from tax increases. Forty per cent of the target (€6bn) will be front loaded into 2011.

From an international perspective the most important announcement of both The Plan and Budget Day is the continued and unambiguous support by Government, and opposition politicians for Ireland’s 12.5% corporation tax rate. There is an overwhelming recognition that a low corporation tax regime has played an essential role in Ireland’s economic development strategy since the 1950s and that it has been a key factor in driving growth in the domestic economy as well as in attracting foreign direct investment (“FDI”). It is one of the principal reasons why Ireland remains the number one global location for FDI

jobs per capita. On Budget Day, the Finance Minister confirmed again that “there will be no change to Ireland’s corporation tax rate”.

It is also worth making the following observations about Ireland’s 12.5% rate in the light of some recent media focus on whether the rate might change:

> There is full recognition in Ireland that a low corporate tax rate is more important now than ever in terms of economic recovery, given our size and the fiscal constraints imposed by the recession and by our banking crisis. It is broadly now recognised that it is not in the interest of Ireland, the Euro zone or the IMF to seek to change Ireland’s 12.5% tax rate

> A clear and stable legal basis exists for Ireland’s tax rate. The rate is a matter for Ireland alone to determine. The sovereignty of EU member states in these matters is guaranteed by the Treaty of Rome and by “Lisbon II”. The EU may only intervene in a member state’s corporation tax affairs where they are discriminatory. Ireland’s 12.5% tax rate is clearly not discriminatory and is confirmed as being in compliance with the EU Code of Conduct on harmful tax practices

> Despite being a low rate, Irish corporate tax revenue is relatively high by EU standards as a percentage of GDP at 2.9%. The German equivalent for example is 1.1%, and the EU average is 2.7%

> Ireland’s ability to attract, retain and grow FDI has been based on a combination of our low corporate tax rate, our flexible and highly skilled labour force and our membership of both the EU and the Euro zone. Most commentators now accept that much of Ireland’s FDI would have

ended up entirely outside of the EU without Ireland’s unique attributes. This is because in many cases Ireland typically competes with non EU low tax locations such as Switzerland and Singapore for such internationally mobile FDI

The main revenue generating measure announced in Budget 2011 is that income tax bands and tax credits will both be reduced by 10% in 2011 from their 2010 levels. These measures account for the majority of the Budget’s entire tax raising package.

Budget 2011 also introduces a new universal social charge (“USC”) which will replace income and health levies while Irish social security taxes are expected to be integrated in the USC at a later date. The vast majority of taxpayers will pay the USC at its top rate of 7%.

The third major significant change in Budget 2011 is in the area of how the tax system supports pension provision. The measures here include the elimination of relief from social security tax and the USC for employee personal pension contributions, a reduction in the annual earnings cap for allowable pension contributions and The Plan’s proposal that by 2014 tax deductions for individual pension contributions will only be given at the standard rate of income tax (currently 20%).

Other measures included in Budget 2011 include:

> Changes which will reduce the attractiveness for Irish employees of stock based remuneration schemes including stock option plans

> The abolition of a number of tax reliefs including the patent royalty exemption and tax depreciation type reliefs relating to certain property based investments

> The three year corporation tax exemption for start up companies being extended to include companies commencing new trade in 2011. However in 2011, the value of the relief will be linked to the amount of employers’ social security taxes, thereby seeking to link the scheme with employment protection and creation

> Stamp duty on residential property being reduced to 1% on properties valued up to €1m and 2% on amounts greater than that

Further tax related measures are contained in The Plan, which are expected to be enacted in the period from 2012 to 2014. These include moving from the current single capital gains tax (“CGT”) rate of 25% to a system of differing rates for different levels of gains from 2012, and increasing the standard rate of sales tax (VAT) from 21% to 22% in 2013 and to 23% in 2014.

Conclusion

Ireland remains very much open for business in an international context. There is a clear recognition that Ireland’s recovery will be driven by our continued ability to trade in international markets and by retaining an attractive Irish tax regime to retain and attract FDI.

For further information please contact:

Michael McGivern, Tax PartnerFGS, Ireland

E: michael.mcgivern@fgspartnership.comT: +353 1 418 2092

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Australia:Rulings on cross-border private equity

For further information please contactRob Mander, Tax Director

RSM Bird Cameron, Australia T: +61 (02) 9233 8933

E: rob.mander@rsmi.com.au

Summary of the ruling

In summary, the Commissioner has left the door slightly ajar for foreign private equity investors involved in the leveraged buy-outs of Australian companies.

Despite ruling complex structures involving multiple entities across numbers of jurisdictions including tax havens may not be eligible for treaty relief, the Commissioner has accepted treaty benefits can be claimed by Limited Liability Partnerships (LLP) in tax haven jurisdictions where the partners in the LLP are residents of a country with which Australia has a Double Tax Agreement.

Limited Liability Partnerships are commonly used by private equity investors and are typically treated as fiscally transparent for the domestic tax purposes of our treaty partners (i.e. the partners are taxed on the income of the LLP in their own hands).

The Commissioner is however insisting such entities prove that partners are resident in treaty countries, consistent with the trend for greater information disclosure in international tax.

Not only does this potentially add significant compliance costs and time delays but it also presumes foreign taxpayers are satisfied that the disclosure of information to the

On 1 December 2010, the Commissioner of Taxation (“Commissioner”) released his final ruling on the income tax treatment of cross-border private equity transactions.

Australian Revenue will not, in turn, open them up to issues with their own Revenue authorities.

Key Points

More generally, the implications of the rulings on inbound structuring include:

> The Commissioner appears to have shifted the onus of proof regarding structuring, indicating taxpayers will need to clearly explain and justify every entity and country in an investment structure, or it will be assumed Part IVA applies to the structure

> The Commissioner applying Part IVA to private equity transactions now, whereas it has previously not pursued the opportunity in similar circumstances (i.e. in the Lamesa Holdings litigation in 1997) indicates a more aggressive approach to protecting its revenue base post the global financial crisis

> The Commissioner has provided further commentary on when:

> Income will be sourced in Australia. However, the analysis provided is cursory and does not seem to distinguish activities done by non-residents and their resident subsidiaries, which would appear to be an ambitious ambit claim; and

> Gains will be of a revenue nature, being gains from investments with a short to medium timeframe for realisation. However, the Commissioner has not provided any indication of the limits of such timeframes, leaving the revenue versus capital question as uncertain as ever.

Action Points

Inbound investors, including private equity, should review their structuring on existing and proposed investments to assess the tax implications which may now apply.

Europe:EU Court of Justice: Exit taxes

Under the laws of The Netherlands, Spain and Denmark, businesses are taxed for their unrealised capital gains subsequent to a transfer of the company’s residence or a transfer of assets which were situated in a domestic permanent establishment of a non-resident company. In contrast, comparable domestic transfers such as a domestic relocation of the company or a transfer of assets between two domestic establishments of the same company, are not subject to taxation on any unrealised capital gains. As these rules are likely to dissuade companies from moving within the European Union and similar domestic situations are not subject to tax, the European Commission considers these rules to be a restriction of the freedom of establishment.

Apart from the infringement procedure against The Netherlands, Denmark and Spain, two other cases on company exit taxes are currently pending with the EU Court of Justice : Case C-371/10 National Grid Indus BV and Case C-38/10 Commission v. Portugal. Other procedures have been started against Belgium and Norway by the EFTA Surveillance Authority.

Observations by RSM members

Although EU case law in the field of company law, such as Case C-81/87 Daily Mail and Case C-210/06 Cartesio may provide arguments against the position taken by the

European Commission, we believe that the case law in the field of exit taxation of individuals such as Case C-9/02 Lasteyrie du Saillant and Case C-470/04 N. provides stronger arguments in favour of the proceedings against The Netherlands, Denmark and Spain. Consequently, we share the view of the European Commission that the current exit tax legislation in these three countries is incompatible with EU law. As most infringement procedures started by the European Commission in the past have proved to be successful, we recommend companies in either of these three countries, that have reorganised their businesses and have been confronted with exit taxation, to file a letter of objection with the local tax authorities in order to eliminate any immediate levy of exit taxes. In our opinion this should also be advisable for companies in other member states with similar exit tax systems.

If the infringement procedures against Denmark, The Netherlands and Spain prove to be successful for the European Commission, these countries may be expected to change their legislation and make it EU proof. In that case, EU law still allows countries to levy exit tax on the capital gains accrued under the “domestic period”, but only upon the realisation of the capital gain at a later moment in time, such as in the event of a later sale or liquidation.

Regardless of the EU developments, we expect a stronger focus from the

tax authorities across Europe on cross border reorganisations from a transfer pricing angle.

It is our experience, the tax authorities will assess whether there is a business motive for the restructuring and apply a substance over form approach, taking into account whether assets and risks are actually transferred between the group companies involved. Furthermore, the tax authorities will analyse whether there were any alternative solutions for the restructuring that were more beneficial to the transferor. Therefore, in case of a restructuring, taxpayers are advised to draft a functional analysis of the group prior to, and after the reorganisation, based on which the tax authorities will review whether the reorganisation has been carried out under at arm’s length conditions, or whether either party needs to receive a higher or lower remuneration / indemnification for its part in the restructuring. This analysis will be made using valuations of the assets, risks, activities and the estimated profit potential transferred.

For further information contact your local RSM expert:

Guido Van Asperen (Netherlands)gvasperen@rsmnl.nl

Jorge de Andres (Spain)jdeandres@gassorsm.com

Mikael Risager (Denmark)mri@rsmplus.dk

On November 24 2010, the European Commission referred Denmark, The Netherlands and Spain to the EU’s Court of Justice for their provisions imposing exit taxes on businesses ceasing to be tax residents of their respective country or transferring assets away from a local permanent establishment of a non-resident company. According to the European Commission, the exit taxes of these countries are incompatible with the freedom of establishment as laid down in article 49 of the Treaty on the Functioning of the European Union (TFEU).

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Furthermore, South Africa’s network of tax treaties provides ready access to other countries in the region. South Africa is therefore a natural headquarter company gateway into the region.

However to serve as an ideal headquarter company jurisdiction, three sets of South African tax provisions were identified as significant barriers:

> The controlled foreign company (CFC) provisions

> The charge on outgoing dividends

> The thin-capitalisation provisions

First, application of the CFC regime means that foreign shareholders of a South African headquarter company will be exposed to a double administrative tax burden if their home country also has CFC provisions. It is also questionable whether the application of South Africa’s CFC provisions makes sense if the bulk of the headquarter company’s funds originate from abroad.

Secondly, effective headquarter company jurisdictions do not add another layer of cost when profits flow through that jurisdiction. Secondary Tax on Companies (STC)adds a 10% charge if profits are repatriated from the headquarter company to foreign investors even if those funds originate from abroad (for example, from a foreign subsidiary of a headquarter company).

South Africa: Benefits of headquarter regime

Thirdly, if the South African headquarter company is financed with debt capital, the thin-capitalisation provisions serve as another barrier. Many foreign investors mainly fund their headquarter companies with loans and the headquarter company on-lends those funds to another foreign location. Application of thin capitalisation to this arrangement would most likely leave the headquarter company with non-deductible interest owed to the foreign investor while being subject to corresponding taxable interest from the on-lending.

In view of the above, a headquarter company will become eligible for tax relief. This tax relief would generally entail the following:

> Foreign subsidiaries of a headquarter company will not be treated as a CFC merely because the headquarter company has significant equity interests in those foreign subsidiaries.

> Dividends declared by a headquarter company will be exempt from STC (or the dividends tax once it comes into effect).

> The headquarter company will not be deemed to violate the thin-capitalisation provisions merely because of the existence of back-to-back cross-border loans involving the headquarter company.

> Foreign creditors of the headquarter company will be exempt from the withholding tax on interest for back-to-back loans.

A definition of a ‘headquarter company’ has been introduced and comes into operation as from the commencement of years of assessment commencing on or after 1 January 2011. A South African company satisfying its criteria will qualify for all three sets of tax relief outlined above.

Shareholders

A shareholder of the headquarter company must hold at least 20% of its equity shares. This requirement must be satisfied throughout the year of assessment.

Investment in foreign subsidiaries (80-20 requirement)

80% of the tax value (the cost) of the headquarter company must represent equity, debt or intellectual property investments in foreign subsidiaries in which it holds at least 20% of their equity shares. Compliance with this requirement will be measured at the end of the year of assessment. It should be noted that the status of a foreign subsidiary is measured at the end of a year of assessment without regard to prior years. Therefore, if a headquarter company owns 10% of a foreign subsidiary in one year, and 20% in a later year, the foreign subsidiary counts against the headquarter company in the first year, but favourably in the later year.

Receipts and accruals from subsidiaries

The total receipts and accruals of the headquarter company must be derived to the extent of 80% or more from foreign subsidiaries in which it holds at least 20% of their equity shares. These qualifying receipts and accruals include fees, interest, royalties, dividends and sale proceeds derived from those foreign subsidiaries. This requirement is measured at the end of the year of assessment.

Uninterrupted compliance

The headquarter company must have always complied with the minimum participation shareholding and the 80-20 tax value requirements for each year of assessment since its inception. This uninterrupted requirement will apply to existing companies seeking to enter the headquarter company regime as of its effective date, and to new companies established after the effective date.

This uninterrupted compliance requirement does not apply to the receipts and accruals requirement.

To discourage artificial entry into the headquarter company regime (so as to artificially avoid the uninterrupted compliance requirement), a headquarter company is deemed to be a non-resident for purposes of the reorganisation roll-over provisions. As a result, a headquarter company cannot benefit from reorganisation roll-over relief.

South Africa is the economic powerhouse of Africa. South Africa’s location, sizable economy, political stability and overall strength in financial services make it an ideal location for the establishment of regional holding companies by foreign multinationals.

For purposes of the determination of whether a foreign company is a CFC in relation to a headquarter company, it is deemed to be a non-resident. This means that the CFC status of a foreign subsidiary of a headquarter company is determined based on the indirect ownership of the headquarter company’s shareholders. Only if these indirect owners are more than 50% South African residents will its foreign subsidiary be a CFC. If its foreign subsidiary is a CFC, the attribution of its net income will take place at the shareholder-level of the headquarter company.

A headquarter company is deemed to be a non-resident when making distributions to its shareholders. Being a non-resident means that a headquarter company distributing a dividend is not subject to STC (nor the dividends tax). These dividends potentially qualify for the participation exemption.

A headquarter company is subject to transfer-pricing principles (including thin-capitalisation) on its foreign assistance (for example, foreign loans). But for purposes of this determination, a headquarter company must not take into account foreign loans borrowed to the extent,

> their proceeds are on-lent to a foreign subsidiary, and

> the equity shares of the foreign subsidiary is at least 20% held by the headquarter company.

This exclusion, however, comes at a price. Interest incurred on these

foreign loans is, however, ‘ring-fenced’ against the interest earned from the aggregate of loan proceeds on-lent to the 20%-or-greater foreign subsidiaries. Unused losses from the excess interest incurred are deemed to be incurred in the following year (until eventually applied against income).

Transfer pricing does not apply to independent foreign assistance (for example, loans) by a headquarter company to a 20%-or-greater foreign subsidiary. It follows that interest-free loans from a headquarter company to these subsidiaries will be free from a transfer-pricing adjustment.

For more information please contactDieter Schulze, Partner

RSM Betty & Dickson (Cape Town) T: +27 (21) 686 7890

E: dieter.schulze@ct.rsmbd.co.za

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On 9 November 2010, Hong Kong signed an agreement with Japan on the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (Hong Kong-Japan DTA).

This DTA sets out clearly the allocation of taxing rights between Hong Kong and Japan and the relief on tax rates on different types of passive income. It will help investors better assess their potential tax liabilities from cross-border economic activities. Given the comparatively favourable withholding tax rates under the DTA, it provides added incentives for companies in Japan to do business or invest in Hong Kong, and vice versa.

The Hong Kong-Japan DTA will come into force after the completion of ratification procedures on both sides. In the case of Hong Kong, an order is required to be made by the Chief Executive in Council under the Inland Revenue Ordinance. The order is subject to negative vetting by the Legislative Council.

Preferential Tax Rates

In the absence of a DTA, Hong Kong residents receiving dividends from Japan not attributable to a permanent establishment in Japan are subject to a Japanese withholding tax, which is currently set at 20%. Under the DTA, such withholding tax is capped at 5% for a company holding (directly or indirectly) for a period of six months at least 10% of the voting shares of the company paying the dividends, and 10% for other cases. Also, Hong Kong residents receiving royalties from Japan are subject to

Hong Kong/Japan:Tax treaty creates investment opportunities

a current withholding tax at 20% in Japan. Under the DTA, the royalties withholding tax will be capped at 5%. The Japanese interest withholding tax on Hong Kong residents will be reduced from the current rate of 20% to 10%. (See comparison chart at end of article)

Investment Vehicle in Hong Kong

According to China Statistical Yearbook 2009, Japan was the third largest foreign direct investment partner in China, making investment of US$3.652 billion in year 2008. The first and second partners are Hong Kong and Singapore respectively.

Hong Kong has one of the most favorable DTAs with China and the withholding tax on dividends is 5% if a Hong Kong company holds at least 25% of the capital of a Chinese company.

Under the existing China-Japan DTA, the withholding tax rate on dividends is 10%. In view of the preferential tax rates and the simple tax regime in Hong Kong, investors may take advantage of the Hong Kong’s DTA with Japan by using the following structure:-

Using a Hong Kong company as an investment holding company can

allow the investors to enjoy a 5% tax saving on dividend payment from China to Japan or vice versa.

In planning the investment structure, the controlled foreign company rules (CFC rules) of both China and Japan should also be taken into consideration. There is no CFC rule in Hong Kong.

For China, profits will be deemed distributed to PRC residents/resident companies by a foreign subsidiary if the foreign subsidiary is controlled by resident companies and/or individual residents of PRC and is set up in jurisdiction the income tax rate is “significantly lower” than 25%; and without valid commercial reasons, distributes none or lesser profits than it should. An effective tax rate being lower than 50% of the PRC corporate income tax rate, i.e., 50% x 25% = 12.5% is defined as the “significantly lower” threshold. Given that Hong Kong’s current profits tax rate is 16.5%, in general the China CFC rule will not be applied to Hong Kong subsidiary.

Under the Japan CFC rule, a foreign corporation that was owned more than 50% by Japanese corporations or Japanese resident individuals was treated as CFC, if such corporation has its main or head office in a country which does

not impose income tax; or pays tax at an effective rate of 20% or less. However, an active business exemption will be granted if a CFC satisfies certain tests on business purpose, substance, administration and control, unrelated party or local business activities. If the Hong Kong company merely acts as an investment holding company, no active business exemption will be granted. The CFC rules will apply and the Japanese parent will be taxed at approximately 41% on its pro rata share of the taxable profits of its Hong Kong subsidiary.

Other than the above CFC concerns, please also note that the Hong Kong-Japan DTA includes a Sleeping Partnership Article specifying that any income and gains derived by a sleeping partner in respect of a sleeping partnership (Tokumei Kumiai) contract or other similar contract may be taxed in Japan in which such income and gains arise and according to the laws of Japan.

In a Tokumei Kumiai arrangement, a Hong Kong sleeping partner (or silent partner) invests in a venture operated by an operator in Japan. By law, this arrangement itself has no legal entity. Any assets of the partnership are the property of the manager; however, the sleeping partner (or silent partner) has a right to a share of any profits from the venture, as provided in the partnership agreement.

Therefore, distributions paid from an operator of a Tokumei Kumiai carrying on

business in Hong Kong to its Hong Kong investors

will still be subject to 20% Japanese withholding tax even though the DTA exists.

Financing Company in Hong Kong

For investment in Japan, a Hong Kong company can also act as a financing company providing it has an interest-bearing loan to a Japan company (see structure below).

If under proper arrangement, the Japan company would be entitled to claim an interest expenses deduction at 41% (effective rate at 31% after the 10% withholding tax on interest payment) whereas the loan interest income received by the Hong Kong

financing company may be eligible to claim as offshore income and exempt from Hong Kong profits tax.

However, the following factors shall also be considered in structuring the above:

(a) Thin capitalization rule in Japan

The Japan thin capitalization rule restricts the deductibility of interest paid by a Japanese subsidiary to its overseas parent, shareholders or affiliates. There is a debt-to-equity threshold of 3:1.

(b) Ultimate source of financing

The group should evaluate its costs and benefits for using its internal resources or obtaining external financing. The cost of financing at the ultimate parent company’s level should be considered carefully.

(c) Means of financing by the ultimate parent company to the Hong Kong company

The ultimate parent company can provide the fund by equity injection and/or loan arrangement. For loan arrangement, the overseas parent should decide to use an interest-bearing or interest-free loan to the

Hong Kong company. Please note that there is no withholding tax on an interest payment from a Hong Kong company to the ultimate parent company. However, the interest paid from a Hong Kong company to its overseas parent may not be deductible in Hong Kong.

Limitation on Relief

According to Article 26 of the Hong Kong-Japan DTA, the reduced tax rates granted under the Hong Kong-Japan DTA will not be available if the main purpose of any person concerned with the creation or

China.Co/Japan Co.

Hong Kong Co.

Japan Invest. Co./China Invest. Co Co.

China.Co/Japan Co.

Japan Invest. Co./China Invest. Co Co.

0% withholding tax on dividend

5% withholding tax on dividend

10% withholding tax on dividend

Foreign Co.

Hong Kong Co. Japan Co.

0% dividends withholding tax

0% tax on loan interest income

10% withholding tax on interest payment

Interest expense deduction

EquityLoan

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assignment of any right or property in respect of which income arises was to take advantage of such reliefs by means of such creation or assignment.

There are general Limitation of Benefits (LOB) Clauses provided in the DTA to prevent the abuse use of treaty benefits. LOB Clauses in Japan’s other recent tax treaties include comprehensive LOB Clauses specifying various objective testing e.g. equivalent beneficiary test, business test or headquarters test. The wording of Article 26 test is relatively subjective, referring to “…the main purpose of any person concerned…” in deciding whether Treaty benefits are available and there is no clear definition of “main purpose” in the DTA.

Hong Kong is one of the world’s most favorable places for business development. An overseas investor may have over 100 reasons to establish a subsidiary in Hong Kong besides the benefits of the DTA and hence Hong Kong might be a good base for investing into Japan.

Conclusion

Tax is one of the most important considerations for businesses that are deciding to set up a new establishment or expanding its offices. Jurisdiction with a comprehensive tax treaty network can attract more foreign investment from different locations. In this regard, Hong Kong is expanding its DTA network to broaden its investment opportunities.

Interest %

Royalties %

Dividends %

Japan domestic withholding tax rate 15/201 20 7/10/204

Hong Kong domestic withholding tax rate 0 4.953 0

Withholding tax rate under Japan - HK DTA 0/102 5 5/105

Withholding tax rate under Japan - PRC DTA 0/102 10 10

Withholding tax rate under Japan - SGA DTA 0/102 10 5/156

A brief comparison amongst Japan’s DTAs with China, Hong Kong and Singapore is set out as follows:

1 15% rate applies to interest on bonds and 20% rate applies to interest on loans.

2 Interest paid to a government institution is tax-exempt and 10% applies in all other cases.

3 4.95% rate applies on the condition that the licensed intellectual property has never partly or wholly owned by a person carrying on a trade, profession or business in Hong Kong.

4 7% applies when a Japanese listed company pays dividends to a company that is non-resident and without Japanese permanent establishment. 10% rate applies where dividends are paid to a Japanese resident company or non-resident with a Japanese permanent establishment. 20% rate applies to dividends paid by Japanese unlisted companies.

5 5% rate applies where beneficial owner is a company that holds directly at least 10% voting shares of the distribution company and 10% applies in all other cases.

6 5% applies where beneficial owner is a company that owns at least 25% of the voting shares of the company paying the dividends during the 6-month period immediately before the end of the accounting period for which the distribution of profits take place and 15% applies in all other cases.

Japan was Hong Kong’s third largest trading partner in 2009. The DTA between Hong Kong and Japan will facilitate both jurisdictions’ capital movement and boost their economic growth.

For further information please contact Aki Murayama, Tax Partner

RSM Sawamura & Co, JapanE: murayama@rsmi-japan.com

or Dicky To, Tax Partner

RSM Nelson Wheeler, Hong KongE: dickyto@rsmnelsonwheeler.com

Ka Ho Chan, Senior Tax ManagerE: khchan@rsmnelsonwheeler.com

Under the Brazilian rules, such charges are treated in exactly the same way as any other service paid to a foreign beneficiary, and therefore subject to Withholding Income Tax (WIT) at a standard rate of 15% (25% rate applicable if foreign beneficiary is domiciled in a jurisdiction listed by the Brazilian Tax Authority as a Tax Heaven). In addition to WIT, the Brazilian subsidiary is also subject to an aggregate service import duty of 24.25%, out of which no less than 15% is non recoverable.

If the parent company is not able to offset WIT, the consolidated cost for the cross charge is more than 45% of the recovered amount, which creates an apparent dilemma on its effectiveness at least on the Brazilian side, as a corporate policy.

A number of Brazilian subsidiaries are incorporated to act as sales representatives or local agents without having, in fact, a complete operation. Under such schemes local companies are fully dependent on resources provided by a parent company, mainly on financial and IT support (it is not unusual for Brazilian companies to not even have a local server or treasury department) and recognize its results by adoption of a cost plus agreement. Within such

Brazil:Cross charging of services or cost sharing

a framework, the actual income for local businesses is accounted for by a foreign parent company and the Brazilian subsidiary simply reports a cost plus income to comply with local transfer pricing regulations.

However, a completely different scenario is when a Brazilian subsidiary actually operates locally, contracting and delivering services or goods, using common resources made available at the parent company level. In these situations there is a mismatch of local income and costs supported by the parent company that contribute to the local operation.

Considering that the total combined maximum taxation on net income is 34%, the actual final net cost of the tax burden is lower when the intercompany charge is raised compared to when it is not used. The final net cash collectable by the parent company is higher if the cross charge is used since 100% of the expense (intercompany billing plus all taxes imposed on it) is a deductible expense and so the final corporate income tax, on Brazilian net income, is reduced by the recognition of such costs.

In most cases the initial reaction is to reject the procedure looking solely to the immediate tax burden

imposed on the intercompany charge itself. However, making a complete computation of all aspects involved having such costs as deductible expenses mitigates the initial impact and actually produces a higher net cash balance available for repatriation to the parent company, compared to the alternative of not raising such charge.

For further information please contact Cicero Alencar

ACAL Consultoria e AuditoriaRSM member firm, Brazil

T: +55 (11) 2117 1313E: cicero.alencar@acal.com.br

It is a usual procedure to have intercompany charges for shared services and costs from a parent company to its subsidiaries and affiliates around the world. Such shared costs are normally associated with marketing efforts, administrative and financial support, and IT resources, among several others.

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In Brief

The publication is not intended to provide specific business or investment advice. No responsibility for any errors or omissions nor loss occasioned to any person or organisation acting or refraining from acting as a result of any material in this publication can, however, be accepted by the authors or RSM International. You should take specific independent advice before making any business or investment decision.

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AfricaDieter Schulze +27 21 686 7890 dieter.schulze@ct.rsmbd.co.za

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Uruguay:Investment promotion system

Investment Projects promoted by the Executive Branch may be entitled to important tax benefits such as:

> exemption from the Corporate Income Tax (IRAE),

> exemption from the Wealth Tax (IP) and further taxes related to importation

> a Value Added Tax return (IVA) originated in the acquisition of services and goods.

All firms subject to the IRAE tax, whether of an industrial, commercial, agricultural, livestock or services nature, may be entitled to this benefit as long as they comply with a number of specific indicators when submitting the request for a promotional project.

In order to access the above mentioned benefits, projects must comply with one of the objectives expressly provided for by the national investment policy. These objectives are among others, employment creation, decentralization of activities, increase in exports, use of clean technologies and increase in research and development.

In practice, the tax exemptions that firms may eventually benefit

The current Uruguayan investment promotion system promotes investment in general in Uruguay under a complete open system which does not discriminate between foreign and domestic investors.

from constitute an approximate minimum saving of 50% of the investment made which shall be directly deducted from the IRAE to be generated in the future.

The granting of benefits is subject to the score obtained in the objectives and indicators matrix developed by the Application Commission (COMAP).

After receiving the documents from companies wishing to present an investment project, COMAP shall recommend the Executive Branch of the benefits to be granted. In addition, the Executive Branch shall issue a resolution establishing the Declaration of the Promoted Project, stating its objectives, amounts and terms of the tax benefits granted.

Projects shall be classified according to the invested amounts, ranging from small projects with investments up to USD350,000, medium projects with investments up to USD7,000,000 and large & very large projects of higher investment amounts.

Taxpayers requesting tax benefits pursuant to the Investment Promotion law must submit annual reports and monitoring and control

information before the Application Commission and the corresponding Ministry, after the end of each fiscal year during the stipulated term.

We consider this is a very important tool for the development of the Uruguayan economy and has been widely accepted by both local and foreign investors.

In 2010 projects for an estimated amount of USD900,000,000 were presented, signifying a large amount of investment for the country.

RSM International correspondent, Unity, has advised and counseled several firms regarding the design and elaboration of this type of project all of which were entirely approved.

For further information please contactAna Ines Montaldo

Unity, Uruguay T: +598 (2) 903 0313

E: aimontaldo@unity.com.uy