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Über dieses Buch

This volume examines the tax systems of some twenty countries to determine whether their tax laws are used to support growth and development across borders in lower-income and poor countries. Given the critical economic development needs of poorer countries and the importance of stability in these regions to the security of populations throughout the world, the use of a country’s tax laws to support investment in the developing world gains crucial significance. This book explores whether international standards promoting the fundamental values of the major tax systems of the world accommodate incentives for these nations. In addition, it analyzes the way in which adoption of principles by higher income nations to protect their own revenue bases has a spill-over effect, impairing the ability of developing countries to sustain their economies. Following an introduction that synthesizes worldwide trends, the volume contains separate chapters for a variety of countries detailing the underlying goals and values of each system and the way in which the decision to employ (or not employ) incentives accommodates those ends. The chapters include reports for: Australia, Belgium, Brazil, Croatia, Czech Republic, France, Hong Kong, Israel, Italy, Japan, the Maldives, the Netherlands, Poland, Portugal, South Africa, Uganda, United Kingdom, United States, and Venezuela.

The volume memorializes the work of the General Reporter and National Reporters at the Taxation and Development session of the 19th Congress of the International Academy of Comparative Law held in July, 2014, in Vienna, Austria.



General Report


Chapter 1. Taxation and Development: Overview

In an effort to promote internationally accepted standards that embody principles underlying their own systems, developed countries have, in some respects, ignored the spill-over effect of their tax regimes on the viability of strategies of countries in the developing world to attract much needed investment. A reconsideration of the principles underlying the decisions made by higher-income countries concerning the proper allocation of taxing jurisdiction over income arising from global operations of multinationals could and should result in a re-examination of the ways in which countries, particularly developing ones, are able to build economies. This chapter provides an overview of contributions that consider whether 19 different countries use their tax laws to attract foreign investment or to encourage investment in developing countries.
Karen B. Brown

National Reports


Chapter 2. Australia’s Hybrid International Tax System: Limited Focus on Tax and Development

Australia does not provide tax incentives for investment abroad. However, Australia’s participation exemption regime, which exempts business profits returned to Australia, may be viewed as an incentive to invest offshore. The participation exemption allows a tax exemption for active foreign business income of a corporation resident in Australia and for dividends received by an Australian corporation from foreign subsidiaries actively engaged in foreign business. Buttressed by anti-tax avoidance rules, this regime may provide some incentive for investment in developing countries hoping to attract investment by use of various tax incentives. Australia’s main inbound and outbound investment is with the United States and the United Kingdom; its main outbound investment in developing countries has been primarily in BRICS, Mexico, and the ASEAN regions.
Australia has historically been a capital importing country, but today there is significant investment by Australian companies abroad. Miranda Stewart notes that, although Australia does not generally provide tax incentives for investment abroad, its participation exemption regime, providing exempt income tax treatment for business profits returned to Australia, may be viewed as an incentive to invest offshore. However, the corporate-shareholder imputation credit claws back the benefit of the participation exemption for profits distributed to Australian shareholders. The imputation credit does not apply to dividends received from foreign corporations or from Australian corporations out of profits not subject to tax in Australia.
The participation exemption regime in Australia, effective since 2004, allows an exemption for active foreign business income of Australian resident corporations as well as for dividends received by Australian corporations from foreign subsidiaries actively engaged in a foreign business. It also provides an exclusion from tax for capital gains derived on the sale of shares of a foreign subsidiary (where ownership is at least 10 %). Stewart notes that this regime operates as a “true territorial system” when profits are retained offshore. If these profits are distributed to foreign shareholders, there is no further Australian tax on either the corporation or the shareholder. When these profits are distributed to Australian shareholders, as noted above, there is no imputation credit and the shareholder pays Australian tax on the dividend (although the actual amount of the dividend would be diminished by any foreign tax paid by the distributing corporation – in effect allowing the shareholder a deduction for any foreign tax paid).
The participation exemption, buttressed by anti-avoidance rules with differing levels of success, does provide some incentives to invest in developing countries hoping to use various incentives to attract foreign investment. The regime was also intended to support inbound investment into Australian companies.
Most Australian outbound investment is into the United States and United Kingdom. Australian outbound investment in developing countries has been primarily in the BRICS (China, Brazil, India, Russia, and South Africa), Mexico and the ASEAN region (Hong Kong, Indonesia, South Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand, and Vietnam) and tax havens, including the Bahamas, Bermuda, Cayman Islands and British Virgin Islands. There is very little outbound investment into Latin and South America (other than Brazil), Africa, the Pacific, Middle and Eastern Europe.
Historically, Australia has alternated between a territorial system in which foreign source income was exempt from tax and a worldwide system. Australia currently has a worldwide system taxing residents on income from all sources whether inside or outside Australia and allowing a foreign income tax offset (FITO) for taxes paid to another country on foreign source income, except for the corporate business profit participation exemption described above.
Australia has 45 double tax agreements (DTAs) with OECD countries, EU nations, and certain other countries, such as Argentina, Chile, China, Fiji, India, Indonesia, South Korea, Malaysia, Papua New Guinea, Singapore, Philippines, Thailand, Turkey, and Vietnam. Although Australia has negotiated treaties with developing countries which are significant trading or investment partners, it does not use them as a tool for international aid and development policy. Australia had in the past provided tax sparing in all of its DTAs with developing countries. It discontinued that practice in light of the OECD 1998 decision to urge abandonment of this practice among member nations. The current Australia-Papua New Guinea (a former colony) DTA does contain a tax sparing provision, which allows Australian residents to benefit from a tax exemption for investment in that jurisdiction.
Australia relies on its Controlled Foreign Corporation (CFC) rules to prevent avoidance of tax on passive-type income, but, apart from this, it has no special rules that target investment in tax havens. It relies upon its treaty-based information exchange provisions and its General Anti-Avoidance Rules (GAAR) to deny treaty benefits in cases of abuse.
Australia is party to numerous free trade and bilateral trade agreements. For the most part, these have limited application to income tax measures.
Miranda Stewart

Chapter 3. Recent Trends in Belgium’s International Tax Policy

La Belgique est une petite économie ouverte orientée vers les échanges internationaux. Ceci se reflète dans son système fiscal, qui se caractérise par de nombreuses conventions internationales, des règles d’origine européenne et par les dispositions de droit interne spécifiques pour les situations transfrontières. Traditionnellement, la lutte contre l’évasion fiscale internationale et pour la transparence n’étaient pas des objectifs prioritaires de la politique fiscale de la Belgique. Ceci est toutefois en train de changer sous la pression d’organismes internationaux comme l’OCDE et l’Union Européenne et pourrait avoir des répercussions négatives sur les relations avec les pays en voie de développement.
Belgian residents are taxed on a worldwide basis. A credit for taxes imposed by another country on the same income is allowed as a credit against the Belgium tax liability. In some cases, however, certain specified items of foreign source income are excluded from Belgian tax.
For example, in certain cases, a corporation is eligible for a participation exemption which allows it to exclude 95% of a dividend received from another corporation (organized in Belgium, an EU member state, or other states) if it owns at least 10% of the stock of the distributing corporation. The participation exemption is only available if the payor is subject to a corporate income tax (the Belgium corporate tax or an analogous foreign tax) with a base that is not more favorable than the one prescribed under Belgian law. While existence of a nominal tax rate less than 15% leads to a presumption of a “more favorable tax regime,” EU member states, even if imposing a tax rate below 15%, are presumed to meet the minimum-level-of-tax requirement. This requirement has the effect of discouraging investment in so-called tax havens. Some exceptions apply, including, for instance, qualification of the Tunisian tax regime even though it provides a ten-year tax holiday on profits from exports. Notably, Belgium’s former colony, Burundi, is presumed to have a more favorable tax regime.
Additional anti-tax haven initiatives include a requirement to disclose large payments to persons in no- or low-tax jurisdictions or in jurisdictions not in substantial compliance with the international standard for exchange of information set by the OECD Global Forum and a requirement that individuals disclose ownership in a corporation, partnership, or other non-resident entity not subject to Belgian income tax or subject to a more favorable tax regime or appearing on a special list published by the tax authorities. The list currently includes entities resident in Caribbean countries, among others. A “Cayman tax,” effective in 2016, will allow the tax administration to attribute to Belgian residents tax revenue derived by foreign juridical entities (trusts or companies subject to a tax rate below 15%) by associating it with the creator of the enterprise, his heirs, third-party beneficiaries, or shareholders who are Belgian residents.
Internal Belgian law may discourage transaction of business with nonresidents, including those resident in developing countries. One limits deductions to Belgian residents for payments of interest, royalties, and other mobile income, including professional expenses, to resident subject to tax in a regime notably more advantageous than that in Belgium (more favorable regime), with the exception of EU members. The other, an anti-abuse initiative, allows the Belgian tax authority to ignore transactions (sales, loans, intellectual property transfers, capital contributions, etc.) between Belgian taxpayers and those resident in more favorable regimes unless a legitimate business purpose is demonstrated.
Although there is no notion of “harmful tax regime” in Belgium law, there is targeting of certain tax regimes with more favorable or more advantageous tax regimes than in Belgium. As demonstrated above, certain Belgian tax advantages or benefits may be denied for transactions with entities resident in regimes view to be “unfairly competing for Belgian revenue or investment.”
Because of its membership in the European Union, Belgium is prohibited from favoring certain investments. The prohibitions on state aid, as well as the EU Code of Conduct, have been interpreted to restrict tax-competitive measures among the member states. As a result, Belgium was forced to abandon the favorable tax regime it had provided for its Centers of Coordination.
Belgium is party to a large number of tax treaties. This in keeping with its goal to strengthen transparency and exchange of information in tax matters. It has also signed on to a number of agreements designed to reinforce administrative cooperation in tax matters. It has entered into Tax Information Exchange Agreements (TIEAs) with a number of countries, including those considered tax havens, such as Andorra, the Bahamas, Belize, Liechtenstein, Saint Kitts and Nevis, and the Grenadines.
Tax incentives for investment in emerging or developing countries have been eliminated. In the past, tax sparing agreements were contained in treaties with Brazil, India, China, Malaysia, Singapore, and others. Internal law also provided for a Quotité Forfaitaire d’Impôt Etranger (Q.F.I.E.), or an imputed tax on foreign source income tax, which often had the effect of tax sparing, but this provision has also been repealed.
Belgian’s interest in supporting emerging, developing, or transitional countries has been demonstrated in treaty negotiations. It has acceded to requests by these countries (e.g., Brazil and India) to allow them to tax payments to Belgian residents for technical assistance or services at their source even when they are not attributable to a permanent establishment or services performed within the jurisdiction.
Belgium has adopted incentives to attract foreign investment. The participation exemption regime described in 1.1 excludes from taxation 95% of dividends received by a Belgium parent from an eligible foreign subsidiary. There is a special deduction of notional interest on risk capital. In addition, there are incentives for income from patents (a type of patent box) that allows businesses to deduct 80% of royalty income from the tax base and a special tax shelter regime for investments in cinematography and audiovisual industries. There are numerous exceptions from the withholding tax for dividends, royalties, and interest payments for non-resident investors. Finally, there are special incentives for research and development.
The corporate tax rate is 33%, plus an additional 3% consisting of a complementary emergency contribution, which brings the rate to 33.99%. The rates are reduced for small corporations. A deduction for at-risk capital, a deduction for so-called notional interest is available for all corporations whether resident or non-resident.
Belgium is party to multilateral investment agreements that either prevent discrimination in fiscal matters or provide tax immunity (particularly in the case of international organizations or banks). It is also signatory to numerous bilateral investment treaties which do not relate to tax matters.
Edoardo Traversa, Gaëtan Zeyen

Chapter 4. Income Taxation in Brazil: A Comparative Law Approach

Brazil taxes the income of its residents on a worldwide basis and allows a foreign tax credit to avoid double taxation. Taxation of controlled foreign corporations in Brazil is complex and depends upon judicial guidance. In general, the ability to defer income derived by Brazilian-owned subsidiaries is very limited. This makes the prospect of investment in any foreign country, including developing, low-income, or emerging countries, difficult because the income will nonetheless be taxed by Brazil. In countries without a low-tax regime, it is possible to defer Brazilian tax on the profits of non-controlled foreign affiliates until they are made available to the owner. There are special consequences for transactions with companies resident in low- or no-tax jurisdictions which may make investment in developing countries unappealing.
A distinguishing characteristic of the Brazilian tax system is that most of the fundamental rights and guarantees regarding taxation are based in the Federal Constitution of 1988 (CF/88). Accordingly, most of the important (but not large in number) international tax issues relating to the proper income tax base are decided by the Federal Supreme Court. Regarding administrative decisions, however, the Administrative Federal Court of Appeals (CARF) is in charge of disputes relating to federal tax planning transactions. Its rulings have been more numerous, varied and wide ranging.
The proliferation of tax minimizing transactions has brought considerable tension in the development of the law. The taxpayer-friendly principle of free enterprise embedded in the CF/88 has been in conflict with the federal government’s design to invalidate transactions undertaken solely to reduce taxes and lacking in a legitimate business purpose. This gave rise to a type of general anti-avoidance rule (GAAR) in the Brazilian Tax Code which allows the Brazilian Internal Revenue Service (RFB) to re-characterize for tax purposes a transaction entered into solely for tax purposes.
Brazil taxes resident individuals and legal entities on their worldwide income. In order to avoid double taxation, a credit is available for foreign taxes paid, if there is reciprocity or a double tax convention between Brazil and the other country. Regarding legal entities, in some instances, Brazilian tax may be avoided if payment of the income is outside of Brazil even if production remains within its jurisdictional limits. For example, a foreign parent may in some cases arrange for its Brazilian subsidiary to acquire stock in another Brazilian company (as controlled by a foreign parent) simply by making payment outside of Brazil which is tax-free to the target’s foreign owner.
Taxation of the income of foreign controlled corporations is complex. Initially, the rules required that a Brazilian parent report the income of its controlled subsidiary on December 31 of each year regardless of actual receipt of a payment or distribution from the subsidiary. There were questions concerning the constitutionality of these rules, viewed to require taxation of income not yet realized. In addition, they were held to be in violation of Brazil’s treaty obligations (prohibiting income derived by a resident of a treaty country which was not earned through a permanent establishment in Brazil), except in a case where the entity did not have economic substance and was used simply to avoid tax through application of the treaty. CARF subsequently determined that these rules involved no treaty violation because the law was intended to tax the income of the Brazilian corporation and not that of the foreign company.
A special rule for foreign affiliates (those not controlled by the Brazilian corporation) defers taxation of their profits until they are shown on the affiliate’s balance sheet as made available (as a dividend, credit against a liability, transfer of assets, etc.) to the Brazilian owner. This rule applies only if the affiliate is not resident in a country with a low-tax or “favorable” tax regime.
Dividends paid to individuals or legal entities are, generally, exempt from Brazilian tax on the theory that it avoids double taxation of corporate profits. There is a question, however, whether dividends computed in accordance with new accounting rules will be subject to taxation.
Dividends paid by foreign companies to certain Brazilian resident companies (those using the cost basis versus asset equivalent method) are not exempt from Brazilian tax.
Nonresident individuals and corporations are subject to a withholding tax of 15 or 25 % on certain income derived from Brazilian sources and to a net-basis tax on income derived from a Brazilian permanent establishment. Capital gain, including gain on the sale of an equity stake in a Brazilian company (even if the buyer and seller are located outside Brazil), is subject to tax in Brazil at the rates applied to residents.
There are special consequences for transactions undertaken with a company resident in a jurisdiction with a tax-favored or privileged (no-tax or tax imposed at rate below 20 %, ring fencing, or taxpayer information secrecy) tax system. These include: application of transfer pricing rules, loss of residency, thin capitalization rules, or certain limitations on deductions, among others.
Misabel Abreu Machado Derzi, André Mendes Moreira, Fernando Daniel de Moura Fonseca

Chapter 5. Taxation and Development in Croatia

Although Croatia does not provide incentives for investment in developing countries, it does employ some measures to attract investment into its own jurisdiction. These include tax and customs relief for companies making investments for a specified period to provide jobs and to make other contributions to the Croatian economy. It is expected that with accession to the European Union (EU) the practice of providing investment incentives will diminish. Croatia taxes its residents on worldwide income and provides a foreign tax credit to avoid double taxation. Although there are no explicit incentives for investment in developing countries, the tax exemption for dividends paid to a Croatian corporation may have the effect of encouraging such investment if other favorable conditions are present.
Individuals and corporations resident in Croatia are taxed on worldwide income. For residents there is a credit for foreign taxes paid to a foreign corporation limited to the amount of tax that would have been paid in Croatia. Non-residents are taxed only on income from Croatian sources.
There is an exemption for dividends paid to a Croatian resident corporation or any other legal entity. Dividends paid to a nonresident entity are subject to a 12 % withholding tax, unless the rate is reduced by treaty or the distribution is exempt from tax under the EU Parent-Subsidiary Directive. A withholding tax at the rate of 15 % is imposed on interest (with some exceptions), royalties and other payments relating to the exploitation of intellectual property rights.
For payments made to residents of jurisdictions deemed to be tax havens or to have harmful tax regimes (other than EU members) with a corporate tax rate lower than 12.5 %, the withholding rate on the above payments is increased to 20 %. This increased withholding applies only when the country is listed and by the Ministry of Finance and this list published on the appropriate website.
Although Croatia does not provide tax incentives for investment in developing countries, it does employ measures to attract investment within its own jurisdiction. There are tax and customs advantages provided to micro- and other enterprises that invest a minimum amount for a specified period, create new jobs for workers, and make other contributions to the Croatian economy. Investments in certain Free Zone Areas enjoy the benefits of exemption from customs duties and a corporate income tax rate reduction of 50 %. There is a complete tax exemption for all profits that are reinvested in the project until they are distributed in a manner that reduces the total amount of investment.
The practice of providing regional tax holidays, distinct from the capital investment incentives described above, has ended with Croatia’s accession to the European Union. It is expected that the general practice of providing investment incentives will diminish in order to meet EU expectations.
Croatia imposes corporate tax at the rate of 20 % on taxable profits.
Nataša Žunić Kovačević

Chapter 6. Tax Law Components to Provide Incentives for Investment

Although the Czech Republic does not have a territorial tax regime, its participation exemption allows deferral of tax on income of certain foreign subsidiaries. With EU approval, the Czech Republic provides incentives to attract investment. These incentives support manufacturing, job creation, and employee training in the Czech Republic. There is special high withholding tax on dividends, interest, and royalties paid to off-shore tax haven jurisdictions. The Czech Republic is committed to information exchange and the latest standard of information exchange.
The Czech Republic, a member of the European Union (EU) since 2004, taxes its residents on their worldwide income, allowing a credit against Czech income tax liability for taxes paid to a foreign country (foreign tax credit). A corporation with a registered office or headquarters in the Czech Republic is subject to worldwide taxation. When a treaty applies, a foreign tax credit may be allowed under the full credit method (allowing a refund of taxes paid if the tax liability in the foreign country exceeds the Czech liability) or the ordinary credit method (allowing offset of the worldwide tax liability only for foreign tax computed on foreign source income at a rate no higher than the Czech effective rate). Some Czech treaties, such as the one with Brazil, follow the exemption method in which specified foreign source income (but not passive income) is exempted from taxation. The Czech Republic is signatory to more than 42 double taxation treaties. In the absence of a treaty, a deduction is allowed for foreign taxes paid which reduces the Czech tax base, but does not provide a dollar-for-dollar tax reduction.
Nonresidents are taxed only on income from Czech sources.
Although, the Czech Republic does not have a territorial tax regime, the operation of the EU Parent-Subsidiary Directive provides exemptions for dividends derived from profits earned abroad. The participation exemption, based on principles established in the Directive, allows for deferral of tax on the income of foreign subsidiaries (resident in EU member nations as well as Norway, Switzerland, and Iceland) as well as an exemption when the profits are returned to the Czech parent in the form of a dividend or other profit share. This regime also exempts from taxation payments from permanent establishments resident in any foreign country to tax non-residents.
One provision that may impact tax havens is the introduction of a withholding tax on dividends, interest, royalties paid to off-shore jurisdictions. In 2013, a special tax rate of 35 % was introduced for payments to taxpayers not resident in EU member states and to those resident in any other country that is not a signatory to certain treaties or international agreements (to which the Czech Republic is a party) that do not contain an acceptable exchange of information provision.
As a member of the EU and OECD, the Czech Republic participates in Harmful Tax Competition projects sponsored by these organizations. In particular, the EU Code of Conduct for Business Taxation, adopted in 1997. The Code of Conduct identifies potentially harmful tax measures, such as tax benefits reserved for non-residents, tax incentives isolated from the domestic economy, grant of tax advantages in the absence of real economic activity, and lack of transparency. Guidelines concerning restrictions on provision of State Aid, defined as any aid granted by a member state that distorts competition by favoring certain production or other undertakings. A subsequent EU Communication, adopted in 2004 and further detailed in 2009, identifies actions to be taken by member states to promote ‘good governance’ in tax matters. The Czech Republic also participates in the OECD’s Global Tax Forum.
In addition to the double taxation treaties described above, the Czech Republic has also concluded seven Tax Information Exchange Agreements (TIEAs) with jurisdictions commonly identified as tax havens (Bermuda, British Virgin Islands, Jersey, Isle of Man, Bahamas. It is also signatory to the Convention on Mutual Administrative Assistance in Tax Matters (which has gained more than 60 signers). The Convention, which meets the OECD’s latest standard, provides for all forms of administrative cooperation, including spontaneous, automatic, and “upon request” information exchange, concurrent inquiries, tax examination abroad, requests for enforcement, and document delivery. With EU approval, the Czech Republic offers incentives to attract domestic and foreign investment. These incentives relate to support of manufacturing, creation of jobs, and employee training. They may be provided only in the processing and servicing industries, technology (software) centres, and strategic service centers (accounting, finance, human resources administration, marketing, and information system management). Typically, a minimum level of investment is required. Application for these incentives, including tax relief, is made to Czechinvest through the Ministry of Industry and Trade, which makes the final determination. The Czech Republic has entered into a number of agreements with other countries for the promotion of reciprocal protection of investments, including a small number with developing countries.
The corporate tax rate is 19 % of net income. A reduced tax rate of 5 % is provided for domestic and foreign investment funds and retirement pension funds established in EU member states, Norway, and Iceland.
Michal Radvan, Dana Šramková

Chapter 7. Structural and Temporary Tax Mechanisms to Promote Economic Growth and Development in France

France has adopted a territorial tax system for corporations. Departing from the prevailing rule of worldwide taxation, France taxes its corporations only on income (other than passive income) derived from operating in France. Under the participation regime, a qualified parent company may exclude from French taxation 95 % of a dividend received from its foreign subsidiary. This exemption is available only if the subsidiary is taxed at the prevailing rate in its country of residence (even if that rate happens to be lower than the top French rate of 33 %). This may provide an incentive for investment in developing or low-income countries wishing to attract investment. France is a party to numerous double taxation agreements and has used these treaties to provide a tax sparing credit to certain developing countries.
France has adopted a worldwide tax regime for resident individuals and a territorial tax system for corporations. For individuals, double taxation is alleviated by a foreign tax credit or an exemption of the income provided by a treaty. In the absence of a treaty, only a deduction for foreign taxes is allowed under the French General Tax Code (FTC).
In a departure from the prevailing rule, France taxes its corporations only on income derived from operating in France (and certain other income attributed to France by a bilateral treaty). The territorial regime does not extend to passive income (interest, dividends, royalties, and similar income) unless such income is derived from an asset carried on the books of a foreign enterprise (including a foreign branch of a French company).
Under the participation regime for foreign source dividends, a qualified parent company may exclude from French taxation 95 % of a dividend received from its subsidiaries. In order to qualify, the parent must actively participate in management, requiring ownership of at least 5 % of the capital and the financial and voting rights of the subsidiary. The exemption applies only if the subsidiary is subject to tax in France at the ordinary corporate tax rate or at the prevailing rate abroad (regardless of the actual rate, which would include, for example, Ireland and Cyprus). The parent-subsidiary regime is designed to attract holding companies to France, providing the advantage of a 1.67 % rate (33 % of 5 %) on dividends paid by subsidiaries. Dividends received from subsidiaries operating in so-called “non-cooperative” states, however, are not eligible for the exemption.
In some cases, the participation exemption extends to capital gains on the sale of shares held in a subsidiary. In this case, however, only 88 % of the gain is exempt from taxation.
Under the EU Mergers and Acquisitions regime, capital gain resulting from these transactions between companies subject to French tax and those in other EU member states (and third countries with approval of the French tax administration) is exempt from tax. Registration fees and stamp duties are also eliminated.
As described above, tax disincentives have been provided for taxpayers that engage in transactions with certain “non-cooperative” states or territories (NCST). An exceptionally high withholding tax rate, 75 %, is applied to payments of dividends, interest, and royalties paid to financial institutions located in a NCST. Real estate profits, capital gains from real estate or the sale of shares, and income from artistic or sporting services are subject to the same withholding rate when derived or received by entities established in a NCST. A 60 % rate is applied to trusts, gifts, or transfers made by a settlor if the trustee is established in or a resident of a NCST.
Additional denial of tax benefits includes disqualification from the participation exemption regime for dividends received from (and capital gains from the sale of shares of) subsidiaries established in a NCST. In addition, payments of dividends, interest, royalties and payments for services made to entities located in a NCST may not be deducted from the French income tax base. Special rules apply to CFCs located in a NCST (deemed distribution of dividends to parent) and for purposes of transfer pricing documentation. None of the disincentives applies if the taxpayer can prove that NCST operations were undertaken with a purpose other than to shift benefits. A country may only be a NCST if (i) it is not a member of the EU, (ii) the OECD has analyzed the country’s exchange of information practices, (iii) it has not entered into an exchange of information agreement with France containing a mutual assistance clause, and (iv) it has not entered into any mutual agreement or treaty with 12 or more member states. Eight countries are listed as NCSTs by the French Ministry: Botswana, Brunei, Guatemala, the Marshall Islands, the British Virgin Islands, Montserrat, Nauru, and Niue.
France has implemented additional disincentives for preferential tax regimes. A preferential tax regime is one in which the amount of tax imposed on an item of income is 50 % less than the tax that would have been imposed on France. The emphasis is on effective tax rates and not nominal or statutory tax rates.
Operations in countries with preferential tax regimes have significant disadvantages. Deductions for payments made by French companies to individuals or legal entities domiciled in such countries are not allowed unless the taxpayer can establish that the transactions are real and do not involve artificial amounts. If an entity subject to French corporate tax owns a greater-than-50 % interest in any entity established outside of France that benefits from a preferential regime, a proportionate amount (relative to the shares held) of the profits of the entity is taxable in France. Anti-abuse rules relating to CFC apply automatically to entities situated in a preferential regime.
As a member of the OECD, France participates in the Forum on Harmful Tax Practices and the Global Tax Forum (GTF). After phase 1 and phase 2 review by the GTF, France’s system has been deemed “compliant.”
France has an extensive network of information exchange agreements with 142 partners. These include double tax agreements and TIEAs. Exchange of information generally follows the OECD Model Convention’s Article 26, except those concluded with former French colonies which are based on Article 26 of the UN Model Convention. Because of its membership in the OECD and the Council of Europe, France is obligated to provide administrative assistance in tax matters under a number of specific directives and Conventions. The type of information to be exchanged and the types of taxes covered vary from treaty to treaty.
Incentives to Invest Abroad
The French tax system provides some incentives for investment abroad in developing and developed countries. The former “worldwide tax consolidation regime,” designed to encourage international development, allowed French multinationals to consolidate the income or losses of their foreign branches or subsidiaries with their French taxable income or losses. It was granted to large enterprises on a case-by-case basis until the resulting heavy budgetary losses and concerns that such benefits were accorded only to multinationals caused it to be repealed in 2011.
Since 2009, a special regime applies to small and medium enterprises (SMEs) which are allowed to deduct (for up to 5 years) losses from 95 %-owned foreign branches or subsidiaries established in EU member states or in countries with which France has concluded a tax treaty containing an administrative assistance clause. This benefit is available only if the branch or subsidiary is subject to a tax equivalent to a corporate tax. Special rules apply this regime to subsidiaries organized in EU states, Norway, or Iceland, even if they are not subject to corporate tax. This measure is designed to encourage French SMEs to go abroad by reducing the initial costs of doing so, allowing these costs to offset the French tax base of the owner.
SMEs are also encouraged to go abroad by benefiting from a special tax credit for up to 50 % of prospecting expenditures incurred in order to permit export outside of the EU market. There is a ceiling on eligible expenditures and a 2-year limit on availability.
In order to encourage investment in developing countries, France has used double taxation agreements to provide a “tax sparing credit” to certain developing countries. This credit applies to passive income and allows an offset against French tax liability for a fictitious tax (or one higher than the French rate of tax) levied in the country in which investment is made. An example of this is the Décote africaine contained in the DTCs with French-speaking African countries. Because the tax sparing credit provided no incentive for French companies to re-invest the tax savings in the local economy, these types of agreements have receded.
There are incentives for investment in overseas French departments and territories. These include a reduced income tax rate or a deduction from income subject to French corporate tax. These incentives are available only for investments in important sectors of economic activity for the locality, including tourism, aquaculture, renewable energy, or in some cases, mining.
Incentives to Invest in France
France provides a number of incentives for economic activity within its borders. These include incentives built into the general tax base, such as generous depreciation rules, carry back and forward of losses, and generous research and jobs creation tax credits. A special regime to encourage companies to establish headquarters or logistics centers in France (to coordinate provision of management, auditing, and other administrative services to a group of companies) is also provided. This also involves tax exemptions of limited duration for income paid to certain employees of these companies.
Companies that locate in certain disadvantaged or otherwise targeted areas may benefit from corporate tax exemptions for specified periods. Innovative new companies that are SMEs may also enjoy a tax exemption.
Corporate Tax Rate Structure
The corporate tax rate is 33.33 %, with an additional 3.3 % social contribution imposed on companies with income exceeding a certain level. Large enterprises must pay an additional “exceptional contribution” for a limited period.
A reduced rate of 15 % applies to income from intellectual property, including royalties and capital gains derived on the transfer, held for at least 2 years.
SMEs are taxed at the reduced rate of 15 % on a first level of income and 33.33 % on the remainder.
Trade and Investment Agreements
France is a party to a number of bilateral and multilateral trade and investment agreements.
Thomas Dubut

Chapter 8. Transparency and Simplicity Support Investment in Hong Kong

Hong Kong has a territorial tax system in which, with very few exceptions, business profits from foreign sources are not subject to tax. Accordingly, the regime may be viewed as friendly to foreign investment, even though it was not designed with this intention. In order to attract investment into its own borders, Hong Kong features a regime that minimizes red tape for business and a common law legal system that provides transparency and simplicity.
Hong Kong has a territorial tax system. Business profits derived from Hong Kong sources are subject to tax. With very few exceptions, those derived from sources outside Hong Kong are not. Consequently, residence has virtually no role in determining tax liability.
Common law rules determine the source of income. In general, a dividend paid to a Hong Kong company by an offshore company is treated as derived from sources outside Hong Kong and is not subject to tax in Hong Kong.
Although not designed to encourage investment abroad, Hong Kong’s territorial regime may be viewed as friendly to taxpayers seeking to do so.
Concerning international matters, Hong Kong’s tax policy is consistent with mainstream OECD practice. Exchange of information by Hong Kong can only occur through a treaty or other binding agreement. Accordingly, by the beginning of 2016, Hong Kong had concluded 34 comprehensive double taxation agreements. Recent changes in domestic law allow Hong Kong to exchange information relating to all taxes with a treaty partner and to enter into stand-alone TIEAs. By the beginning of 2016, Hong Kong had concluded seven TIEAs.
Currently, information exchanged must meet the “necessary” or “foreseeably relevant” standard and sharing for non-tax purposes is limited to very high level matters, involving serious crime, drug trafficking, or terrorism financing.
While Hong Kong exchange of information is currently limited to exchange upon request, it has moved to meet the standard for automatic exchange of information extolled by the OECD. With a simple tax regime based upon territorial source of income, Hong Kong anticipated the need for fundamental changes in policy in order to implement automatic exchange of information. In order to avoid being viewed as an uncooperative regime, it passed legislation to meet the standard in June 2016.
In order to attract investment within its own borders, Hong Kong has adopted a regime that ensures minimal red tape for business and supports a common law legal system that is transparent and simple. With limited exceptions, such as for offshore funds and offshore treasury centres investing in Hong Kong, it does not provide investment incentives through the tax system.
The corporate tax rate on Hong Kong source profits is 16.5 %.
Hong Kong has concluded a number of bilateral and multilateral trade and investment agreements.
Andrew Halkyard

Chapter 9. Current Issues in Cross Border Taxation and Investment in the State of Israel

In order to reconcile forces of economic globalization with commonly accepted distributional principles, in 2003, the State of Israel shifted from a territorial to a worldwide system of taxation. A remnant of the old territorial system was retained in a special, mid-way, regime, that (among other features) exempts foreign source income from Israeli tax for “new immigrants” and “returning residents”. This regime and the Investment Law, providing drastically reduced tax rates along side other lucrative benefits, have not been repealed despite on-going national and internatioal pressure to do so. In the case of the Investment Law some revisions have recently been made to tie qualification for benefits to proven measures of industry competitiveness and the demonstration of an impact on exports and on Israel’s GDP. Special benefits provided to owners of stock in Israeli holding companies that invest in certain foreign corporations may also offer an interesting, yet underutilized, incentive for investment.
In 2003, Israel’s international income tax regime sustained a transformation from territorial to one of worldwide taxation. This shift was viewed as a timely one reconciling forces of economic globalization with commonly accepted distributional principles. Under this system, individuals are taxed where they reside and corporations are taxed where incorporated or in the country from which management and control are exercised. A credit is allowed against Israeli tax liability for foreign taxes paid by residents on foreign source income. Since 2003, this is true even when income is produced in a country with which Israel does not have a treaty. As in the case of most countries, the credit is limited to the Israeli tax on foreign source income.
While residents are taxed world-wide, nonresidents are taxed only on income earned or produced in Israel. This places considerable importance on the determination of the source of a nonresident’s income.
Israel is signatory to 53 bilateral treaties with foreign countries. Most of the treaties follow the OECD Model Convention. These treaties provide Israel a valuable tool in an effort to enhance taxpayer compliance, ease tax collection and advance trade. Although the scope of information exchange, one of the primary benefits derived from treaties, varies from treaty to treaty, Israel commonly provides for information upon request of the other contracting state. Importantly, in view of recent global trends and pressures, the Israeli Tax Authority currently works to amend the Income Tax Ordinance to allow and to exercise ratification of international information-sharing agreements, regardless of whether a bilateral or multilateral treaty exists. Over the long run, this is expected to drastically change the scope and quality of information that the Israeli Tax Authority shares and receives.
Israel has retained the remnants of a territorial regime in the income tax exemption for foreign source income for immigrants and returning Israeli residents. It also exempts these taxpayers from key filing requirements, including income tax returns and capital statements. The exemption is available for a 10–20 year period. The efforts of fellow OECD member countries to force repeal these provisions (designed to attract investments to Israel, but viewed as unfairly competitive by trading partners) have been largely unsuccessful.
A long standing Investment Law, providing government grants and lucrative tax benefits to eligible corporations, was significantly modified in 2010. At that time, incentives failed to provide economic development in targeted areas and often exceeded the benefit obtained by the Israeli government. In the post-2010 Investment Law, qualification for benefits is tied to proven measures of industry competitiveness and the demonstration of an impact on exports and on Israel’s GDP. Only time will tell whether and the extent to which these revisions are successful.
Tamir Shanan, Sagit Leviner, Moran Harari

Chapter 10. How Italian Tax Policy Provides Incentives for Investment in Developing, Emerging, or Low-Income Countries

Italy has designed its international tax system to avoid distortion of investment decisions of its residents. This prevents the use of tax incentives to encourage investment in developing or low-tax countries. Italy has, instead, chosen to employ non-tax strategies to assist these nations in fighting poverty and to otherwise to develop viable economies. Although Italy once included tax sparing clauses in treaties with developing countries, it has in recent years not allowed them, hoping to direct investment into poor regions in Italy rather than those abroad. In lieu of tax sparing, Italy has entered into many agreements with developing countries to promote and protect investment. It has also provided relief in the area of customs duties through the Cotonou Agreement. In addition, a special regime for non-profit organizations dedicated to the pursuit of certain social goals may be used to assist low-income countries by providing tax benefits for donors.
Having adopted the tax policy principle of neutrality, Italy has designed its international tax system so as not to distort the investment decisions of its constituents. This translates into a decision not to encourage investment in developing countries through the use of Italian tax incentives. Instead, Italy has employed non-tax strategies believed to assist these nations to fight poverty and to otherwise thrive.
Italian residents, both individuals and corporations, are taxed on their worldwide income. This represents a shift from the prior territorial regime which was eliminated in 1973. Double taxation of income under the worldwide taxation regime is alleviated by use of the foreign tax credit contained in Italian legislation or via a double taxation treaty. Adoption of the worldwide tax system may represent a prevailing view in Italy that the territorial system may not advantageous to poor countries that sacrifice revenue needed for development by engaging in tax competition. Use of the worldwide system with a foreign tax credit disrupts the ability of developing countries to attract foreign investment by offering lower tax rates.
Italy has a participation exemption that applies to dividends received from foreign subsidiaries as well as to capital gains resulting from the sale of shares held in these companies. If requirements are met, 95 % of the dividend received is exempt from corporate income tax. Capital gain on the sale of shares is also exempted from tax. The exemption is not allowed if the subsidiary is a “black-listed” company.
Controlled foreign corporation (CFC) rules treat the profits of a controlled (or connected) subsidiary as those of the parent. The rules cover only companies organized in a jurisdiction that has an effective tax rate significantly lower than Italy’s and does not have an adequate exchange of information agreement with Italy. The CFC rules do not apply if the parent corporation can demonstrate that the subsidiary conducts real business activity in the listed jurisdiction or establish that the subsidiary is not used exclusively to shift profits. The CFC rules also extend to deductibility of costs relating to transactions with companies located in specified low-tax jurisdictions. These provisions remove any advantage an Italian corporation would hope to gain by investing in a developing country with low tax rates.
While in the 1970s Italy negotiated a number of treaty containing tax sparing clauses, with the advent of OECD’s disapproval of these clauses in the 1990s, it has moved to eliminate them as it renegotiates treaties. Tax sparing was not included in treaties with Eastern Europe because these have been negotiated only recently. In addition, these types of treaties are lacking because Italy hoped to direct its residents to investments in poor regions in Italy rather than those abroad. In lieu of tax sparing, Italy has entered into numerous agreements with developing countries for the promotion and protection of investments.
Because of the EU prohibitions on State Aid, among other reasons relating to difficulty in targeting the appropriate companies, Italy has refrained from enacting tax legislation that would provide direct incentives for investment in developing countries. Instead it has taken initiatives in the area of customs duties through the “Cotonou Agreement” with African, Caribbean, and Pacific states arranged through the EU. This has led to assistance in structural reforms, maritime accords, and free trade zones. Italy has aligned itself with current recent developments, including the Base Erosion and Profit Shifting initiative of the OECD, that suggest that the appropriate strategy is to assist developing nations create a stable market economy rather than offer tax incentives, aid, or unilateral investments.
A special regime for non-profit entities working for social good, the ONLUS (Non-profit Organization for Social Utility) regime, may be used to assist developing countries. Eligible entities, dedicated to pursuit of certain social and solidarity goals, benefit from exemptions for direct taxes and VAT. Donors to an ONLUS may deduct specified percentages of their annual income.
Tax exemptions provided the Roman Catholic Church may also indirectly benefit poor nations. Possibly because it is expected to support the poorest populations both in Italy and abroad, the Church enjoys tax exemptions and its contributors are allowed tax deductions for amounts paid to it and other religious organizations.
In order to avoid unintended effects, Italy does not employ tax incentives to encourage investments in developing countries. Instead it makes monetary donations, subsidizes loans and cancellation and conversion of debts, and funds cooperative projects.
Claudio Sacchetto

Chapter 11. Taxation and Development: Japan

Although Japan taxes the income of its residents on a worldwide basis, one territorial feature of its regime is the participation exemption. This regime exempts from tax 95 % of dividends paid by a foreign subsidiary to a Japanese parent corporation. Japan closely monitors tax haven activities by strengthening CFC legislation, transfer pricing regulations, and thin capitalization rules. Japan has concluded tax sparing agreements in its bilateral treaties with developing countries, including those with Indonesia, Sri Lanka, Zambia, Thailand, China, Bangladesh, and Brazil. These agreements are typically of limited duration and some have already expired.
Japan emerged as one of the leading world economies in the latter part of the twentieth century. Various income tax exemptions or rate reductions for financial income (interest, dividends, and capital gains) have provided stimulus for investment into Japan. Addressing demand, Japan ultimately exempted from taxation various forms of portfolio interest payments to non-residents. As Japan heightened enforcement of transfer pricing regulations, a number of multinational enterprises (MNEs) restructured or relocated to tax-friendlier jurisdictions. In order to prevent artificial transfer of profits outside of Japan’s jurisdiction to tax, it has reformed and tightened controlled foreign corporation (CFC) rules. Japan has been actively involved in anti-tax avoidance initiatives, such as the OECD’s Harmful Tax Competition and Base Erosion Profit Shifting (BEPS) projects.
The statutory corporate tax rate at the national level is 23.4 % (29.97% for 2016 when national and local taxes are combined), applicable to domestic and foreign corporations (operating a branch in Japan, for example).
Individual and corporate residents are taxed on worldwide income with a foreign tax credit (with a limitation to avoid refund of foreign tax imposed at a rate higher than in Japan) available to eliminate double taxation. A territorial feature of Japan’s international tax regime is a type of participation exemption. Beginning in 2009, 95 % of dividends paid by a foreign subsidiary (at least 25 % owned, or in some cases, 10 % by treaty) to a Japanese parent are exempt from taxation. Capital gains and losses from disposition of the shares of a subsidiary, whether foreign or domestic, are not exempt.
The CFC regime (taxing the retained profits of the subsidiary as if derived by the parent) applies if the controlled subsidiary is resident in a jurisdiction with an effective tax rate below 20 % or, if the effective rate is 20 % or higher, it does not conduct a substantive business activity in that location. The rules apply to mobile income (royalties and financial income) in all cases.
Although Japan does not have a regime specifically penalizing investment in tax haven jurisdictions, it does police such investments by strengthening transfer pricing and thin capitalization rules. In addition, it normally refuses to conclude bilateral treaties with tax havens, except regarding information exchange.
Japan participates in the Global Tax Forum, having received a rating of compliant. In this regard, Japan has worked to maintain conformity to internationally agreed standards for exchange of information. This has included expansion of investigatory powers of tax officials and exempting from confidentiality rules information provided to treaty partners. Japan has several Tax Information Exchange Agreements (TIEAs). Japan’s standard information exchange provision in bilateral treaties follows the OECD Model’s article 26. It exchanges information on request, spontaneously, or automatically. Adhering to the G20 Initiative on automatic exchange of information, Japan introduced the Common Reporting Standard for financial account information. It has signed an Intergovernmental Agreement (IGA Model II) with the U.S. to meet FATCA requirements.
Regarding developing countries, Japan has concluded tax sparing agreements in bilateral treaties. These have been concluded with countries, such as Indonesia, Sri Lanka, Zambia, Thailand, China, Bangladesh, and Brazil. In recent years, the tax sparing clauses have been for a limited period of time and many are either set to expire (e.g., Korea, Singapore, Malaysia, Mexico, Turkey, Bulgaria, and Vietnam) or have expired. With the phase-out of tax sparing and the existence of the worldwide tax regime, the ability of developing countries to attract investment by lowering tax rates is impaired. On the other hand, the participation exemption, eliminating 95 % of dividends paid by foreign subsidiaries from Japanese tax, might encourage investment in developing regions.
Japan has taken steps to stimulate economic activity through a number of tax incentives. Research and development, employment, and other tax credits have been expanded significantly. There has been vigorous consideration of corporate tax rate reduction as a vehicle to make operations in Japan more attractive, but this change faces a significant budgetary constraint.
Yoshihiro Masui

Chapter 12. The Maldives: A Fledgling International Tax Jurisdiction

Individual residents of the Maldives are taxed on business profits on a territorial basis. Resident partnerships and corporations are taxed on worldwide income, but the tax rate is quite modest (a flat rate of 15 % or 0 % in some cases). A special regime for Maldivian offshore financial services centers (deriving all income outside the Maldives) taxes income at a flat rate of 5 % (or 0 % in some cases). In order to attract economic activity to the Maldives, the country permits an investor to enter into an agreement that confers exemption from the business profits tax.
In the Maldives, resident individuals are taxed on a territorial basis, while resident partnerships and corporations are taxed on a worldwide basis. Individuals are taxed only on business profits arising from carrying on business in the Maldives. Corporations and partnerships are taxed on all income wherever it is derived and allowed a credit against Maldivian income tax liability for foreign taxes paid. The Business Profit Tax (BPT) is imposed at a flat rate of 15 % (or 0 % on low amounts of profits). Under a special regime, Maldivian offshore financial services centers (which derive income from business outside the Maldives or from certain financial instruments, loans, royalties, or real property outside the Maldives) are taxed a flat rate of 5 % (or 0 % on low amounts of profits).
A company not resident in the Maldives is subject to BPT (at the above rates) on profits attributable to any business carried on in the Maldives that are attributable to a permanent establishment located there. Non-corporate nonresidents are taxable on profits derived from carrying on a business in the Maldives, whether or not though a permanent establishment (e.g., a non-resident auditor that visits a client in the Maldives to perform work), on rents from buildings leased in the Maldives, and on royalties and management fees paid by a resident of the Maldives or through a permanent establishment in the Maldives.
Maldives has no participation exemption. Dividends paid by resident companies to non-residents are not generally subject to BPT. Where the recipient is subject to BPT, the BPT is deducted in computing taxable profits.
Although the Maldives, formerly a tax haven, does not participate in the OECD’s Global Tax Forum, its regime has emerged as one that conforms to internationally accepted standards of taxation.
The Maldives is party to the South Asian Association for Regional Cooperation (SAARC) Limited Multilateral Agreement on Avoidance of Double Taxation and Mutual Administrative Assistance in Tax Matters. This agreement permits information exchange, including exchange of information relating to tax havens or harmful tax regimes if it does not violate internal law or exceed normal administrative mechanisms. The Maldives has concluded its first Tax Information Exchange Agreement (TIEA with India) and expects to conclude future agreements.
In order to attract economic activity to the Maldives, an investor may enter into an agreement under the Law on Foreign Investments that confers an exemption from BPT. These agreements are intended to support investments of importance to the economy, whether to support tourism or non-tourism. Agreements are concluded with foreign governments to facilitate economic and social development. In addition, investment in Special Economic Zones offers tax concessions providing exemptions from BPT as well as temporary exemptions from goods and services tax (GST) and withholding tax.
The Madives is a party to a number of trade and investment agreements.
Kevin Holmes

Chapter 13. Extensive Treaty Network and Unilateral Credits Support Foreign Investment: The Dutch Approach

Although the Netherlands has a worldwide system of taxation for residents, certain foreign profits are excluded from the tax base by treaty or internal law. The internal law exemption applies to active business income as well as certain passive income subject to a threshold tax rate of at least 10 %. The existing participation exemption removes from the Dutch income tax base certain dividends received from a 5 %-or-more owned foreign or domestic corporation. This participation exemption also encompasses certain gains realized on the sale of stock as well as on the liquidation of the corporation. There is a unilateral credit, available for Dutch recipients of dividends, royalties and interest payments from entities resident in developing counties. The Dutch participation exemption, the unilateral credit for specified investments, and the extensive treaty network provide considerable incentives for investment in developing countries.
Although the Netherlands has a worldwide system of international taxation for resident companies, since 2012 foreign business profits and losses are excluded from the tax base either by treaty or under internal law. The exemption relates to profits and losses attributable to a permanent establishment in another state, profits and losses from real estate in the other state, and income from shares held other than as a portfolio investment. The exemption is not allowed where the income derives from ownership in a foreign passive financing company or ownership in a foreign company engaged in portfolio investments which is not subject to an effective rate of tax of at least 10 %. When the exemption does not apply because of the effective-rate-of-tax rule, a limited foreign tax credit may be available to offset Netherlands tax on the income.
Under a longstanding participation exemption (its predecessors dating back to 1893), resident corporations may exempt from the income tax base any dividends received from a 5 %-or-more owned foreign corporation. Gains and losses on the sale of shares held are also exempt. Profits realized upon liquidation of a subsidiary are covered as well, but losses from such a transaction are allowed in certain circumstances. The participation exemption does not apply if the foreign subsidiary is primarily engaged in passive investments or passive group financing or leasing and is not subject to a minimum level of taxation (an effective tax rate of at least 10 %).
Dutch recipients of dividends, royalties, and interest paid by developing county residents are eligible for a unilateral credit (subject to certain limitations) against Dutch income tax for taxes paid (either a withholding tax or corporate income tax) to entities in these jurisdictions on the income. This credit is available whether or not the payer is resident in a country with a treaty with the Netherlands and amount allowed may be higher than the actual developing country rate. The Dutch corporate tax provides for an “innovation box,” subjecting specified income from patents and other research and development to an effective tax burden of 5 %. When the 5 % burden applies, the credit is correspondingly limited.
Regarding exchange of information, Dutch tax administration must spontaneously provide information to treaty partners concerning Dutch entities which are international group financing and licensing companies if they do not meet requirements entitling them to treaty benefits. As a member of the EU, the Netherlands must comply with Directives and Conventions on administrative cooperation, including exchange of information. In addition, it is bound by the EU Code of Conduct and other prohibitions, including the one on provision of state aid, that may limit its ability to offer special tax incentives to invest in developing countries.
The Netherlands is party to approximately 100 bilateral investment and protection agreements.
Because of its participation exemption, the Dutch tax regime offers opportunities to developing countries to attract active business operations (portfolio and passive financial income does not benefit from the regime if not subject to an effective rate of tax of at least 10 %). Additionally, investors may be attracted to the Dutch system because of the approachability of the Dutch tax officials and the ability to obtain legally certain guidance relating to transfer pricing and other transactions in advance. Because of these features, so-called special purpose entities (SPEs) are organized in the Netherlands in order to direct investment into developing countries. It is estimated that developing countries lose substantial revenue in the form of source taxes on dividends and interest because the income is routed through the Netherlands and passed on to parents in third countries lacking an advantageous treaty. This disadvantage is believed to be outweighed by the substantially larger inflow of investment through Dutch SPEs in developing countries that are parties to a treaty with the Netherlands. Partly to remedy any unintended disadvantage to developing countries through treaty-shopping, the Dutch authorities have proposed to negotiate inclusion of limitations of benefits provisions in existing tax treaties with 23 developing countries.
Raymond H. C. Luja

Chapter 14. Tax Incentives in the System of Direct Taxes in Poland

As a member of the EU and the OECD Global Forum, Poland has moved to bring its tax system in line with internationally accepted standards. This has caused it to abolish tax sparing provisions in tax treaties, update exchange of information provisions, and draft new anti-tax avoidance rules. It is party to a robust network of information exchange agreements with tax administrations, including those viewed as tax havens. These developments raise the question whether Poland’s attractiveness as an investment destination will diminish. As it transitioned to a free market system, Poland adopted a number of tax incentives designed to attract foreign investment. These relate primarily to the areas of research and development, accelerated depreciation allowances and support for new businesses.
Following the majority, Poland taxes its resident companies on their worldwide income. Companies are resident if their effective place of management is in Poland. A credit for foreign taxes paid helps to alleviate the potential for double taxation when another country also subjects the income to taxation. The credit may not exceed the Polish tax liability on the foreign source income. Nonresidents are taxed on only income from Polish sources.
Dividends from foreign sources are taxed at the regular corporate tax rate of 19 % that applies to other income. Where a subsidiary is at least 75 %-owned, the Polish company may receive a credit for any taxes paid by the subsidiary on the profits distributed. A 19 % withholding tax applies to dividends paid by Polish companies unless a tax treaty provides otherwise.
Poland has entered into more than 90 tax treaties which follow either the OECD or UN Model treaties. The treaties contain both the exemption and tax credit methods. In the case of dividends received by Polish residents, for example, treaties either exempt the foreign source payment (e.g., Malaysia and Ireland) or provide for a reduced withholding tax rate. Poland is in the process of renegotiating treaties that provided a tax-sparing credit, believing that these were used improperly for tax avoidance purposes.
In legislation following the EU’s Parent-Subsidiary Directive, dividends received from companies resident in the EU, EEA, or Switzerland are exempt from Polish tax, if a minimum level of shareholding is met. To qualify for the exemption, shares must be held for at least 2 years before the distribution and the subsidiary must be subject to tax in the relevant jurisdiction on a worldwide basis.
There is a special regime for transactions with resident of countries deemed to be engaged in harmful tax competition. Under these rules, special documentation is required concerning transfer pricing. The Minister of Finance determines which tax regimes are “harmful,” a term not defined in the legislation, and publishes that list. Thirty-seven countries, many of which are developing countries, appear on the list.
As a member of the EU and of the OECD Global Form, Poland has moved to bring its tax system in line with accepted standards. This has caused it to pursue new tax policy initiatives, including renegotiating tax treaties to abolish tax sparing, updating exchange of information provisions, attempting to close loopholes in its tax system, and drafting new anti-tax avoidance rules (in the form of a General Anti-Abuse Rule or GAAR) and Controlled Foreign Corporation (CFC) legislation. These developments raise the question whether these changes will have the effect of reducing Poland’s attractiveness as an investment location. Addition of complexity into Poland tax regime and administration may make doing business in Poland less desirable. Introduction of CFC rules may decrease a competitive advantage now held by Polish investors.
Poland is a party to a robust network of information exchange on bilateral and multilateral fronts. It is also engaged in a campaign to expand information exchange with countries viewed as tax havens, having concluded information exchange agreements with Bahamas, Liberia, Isle of Man, Jersey, Guernsey, Belize, Andorra, Dominica, and others. Legislation has opened the door to exchange of information normally protected by bank secrecy laws.
As it transitioned from a socialist to a free market system, Poland adopted a number of tax incentives designed to attract foreign investment. These include special deductions for research and development centers, tax exemptions for investment in special underdeveloped economic zones, accelerated depreciation deductions for investments in certain assets, and temporary tax holiday for new businesses. While these measures are important tools to enable Poland to attract investment, they are viable only so long as they do not violate EU restrictions on State Aid.
Poland is a party to more than 60 bilateral trade and investment agreements.
Włodzimierz Nykiel, Michał Wilk

Chapter 15. Overview of Income and Investment Taxation in Portugal

Portugal taxes its resident companies on worldwide income and, in order to prevent double taxation, allows a credit for foreign taxes paid to another jurisdiction. An exemption from Portuguese tax (participation exemption) is provided for dividends paid by a foreign subsidiary resident in the EU or EEA. This participation exemption has been extended to companies resident in former Portuguese colonies in Africa. Portugal has enacted a number of provisions designed to discourage investment in tax havens or similar regimes. It is party to a number of multilateral and bilateral exchange of information agreements which are designed to promote administrative cooperation. Until the end of 2020, there are special tax incentives for investment in certain industrial sectors, including manufacturing and mining, tourism, information technology, research and development, energy and telecommunications.
Portugal taxes its resident companies on worldwide income, allowing a credit for foreign taxes paid to another jurisdiction (on a country-by-country basis). The credit is limited to the Portuguese tax on the foreign income in question.
Nonresidents are taxed on income either from Portuguese sources or arising out of activities through a Portuguese permanent establishment.
There is a participation exemption for dividends paid to a company resident in Portugal by a foreign subsidiary if the entity is resident in the EU or EEA. In this case, both the payer of the dividend and the recipient must qualify under the EU Parent-Subsidiary Directive.
Portugal has enacted a number of provisions designed to discourage investment in tax havens or other “clearly more favorable tax regimes.” Tax havens are either countries listed by the Ministry of Finance or countries in which income is exempted from tax or subject to a tax liability less than 60 % of what the liability would have been in Portugal. The investment disincentives include: controlled foreign corporation (CFC) rules taxing profits of tax havens to Portuguese shareholders, a special transfer pricing regime, non-deductibility of payments (and a higher rate of taxation on payments) made to persons or companies in tax havens, and denial of contractual investment incentives.
After a phase two review by the OECD’s Global Tax Forum found Portugal mostly compliant with transparency and exchange of information guidelines, changes to two special tax regimes were made. One regime, the Free Zones of Santa Maria, Azores, was abolished. The other in Madeira is scheduled to terminate.
Portugal is party to a number of multilateral and bilateral exchange of information agreements, either contained in tax treaties or in simplified form. The simplified agreements (involving only procedures for automatic and spontaneous exchange) have been signed with Span, Brazil, Cape Verde, and Mozambique and involved strengthened procedures for administrative cooperation. It has adopted the OECD’s Common Reporting Standard and it is a party to a FATCA agreement with the U.S., signed in August, 2015, which is under implementation.
A special tax regime for former Portuguese colonies in Africa applies. Companies resident in these countries are treated as domestic for the purpose of the participation exemption available only for dividends between domestic corporations (unless they are EU or EEA member states). This exempts dividends paid by these companies to Portuguese residents from Portuguese tax.
In order to attract investment in Portugal (both domestic and foreign), a special regime allowing for “tax-incentive” contracts is in place. These contracts apply to specified investments before the end of 2020 (manufacturing and mining, tourism, computers and related services, agriculture, research and development, information technology, environment, energy and telecommunications). They may grant a tax credit for a specified level of investment in Portugal, a participation exemption for dividends received from foreign corporations, exemption from stamp duties and property taxes, and extra R & D deductions.
The corporate tax rate in Portugal is 25 %, with a surtax for corporations with taxable income in excess of specified levels. Corporations not involved in commercial, industrial, or agricultural activity are taxed at the rate of 21.5 %.
Withholding tax on Portuguese source income paid to nonresidents is 21 %, but this may elevate to 35 % if the payment is to entities located in tax havens.
Portugal is a party to numerous bilateral and multilateral trade or investment agreements.
Fernando Rocha Andrade

Chapter 16. Taxation and Development: The South African Position

South Africa has a modified worldwide system of taxation. In order to alleviate double taxation, a credit is allowed for foreign taxes paid. Certain income, like foreign services income remunerated by entities resident in other African nations, may be eligible for a unilateral credit that operates as an exemption of tax on this income. Dividends received by a South African company from a 10 %-owned foreign company may be eligible for a full or partial exemption from tax. South Africa addresses harmful tax competition through transfer pricing, controlled foreign corporation provisions, and tax information exchange agreements. It has instituted tax measures to attract economic development, primarily in the areas of manufacturing, research and development, foreign film and television, and industrial innovation.
South Africa has a modified worldwide system of taxation. Although residents are taxed on worldwide income, limited types of income arising from foreign sources may be exempt from tax. To alleviate double taxation, a credit is allowed against South African tax liability for foreign taxes paid. The credit is limited to the amount of the South African tax that would have been paid absent the credit. A credit is also available in certain circumstances for foreign taxes paid on South African source income. This is a unilateral credit allowed South African residents in the special case in which the foreign country (in particular, other African nations) imposes a tax on services provided from South Africa when paid by the foreign country’s resident.
Foreign dividends received by a South African company may be eligible for a full or partial participation exemption. To qualify for the exemption, the recipient must hold at least 10 % of the equity interest and voting rights in the distributing company. If a foreign dividend is paid in cash on a share listed in the Johannesburg Securities Exchange (JSE), the dividend is exempt from corporate tax, but generally subject to a South African tax on dividends.
While there are no express anti-harmful tax competition rules, tax avoidance is addressed through transfer pricing and controlled foreign corporation provisions. These rules discourage investment in harmful tax regimes. In addition, there are no anti-tax haven rules. The absence of double tax agreements with these regimes has eliminated bilateral relief. This has been addressed by recent negotiation of tax information exchange agreements. Although it is typically viewed as a tax haven, Mauritius has had a favourable double tax agreement with South Africa. It has been updated, but the revised version has not yet entered into force.
The Southern African Development Community (SADC), of which South Africa is a member, has acted to cooperate in tax matters and to harmonize the disparate tax regimes. A Memorandum of Understanding (MOU) to effect these changes, issued in 2002, encourages a common approach to tax incentives. It also has identified factors, similar to those described by the OECD, that indicate the presence of harmful tax competition and recommends avoidance of those types of regimes.
South Africa participates in the OECD Global Forum. As a result it has taken action to align its tax system with international trends and norms.
South Africa is party to more than 70 double tax agreements and 7 Tax Information Exchange Agreements (TIEAs). Exchange of information is by request or, occasionally, spontaneous. It has positioned itself to engage in automatic exchange, having joined a pilot program. It has also entered into an Inter-Governmental Agreement (Model 1 IGA) with the U.S. under FATCA.
South Africa’s Department of Trade and Industry (DTI) is involved in supporting African regional economic integration and development. It works with regional organizations to develop the free trade area and to extend African integration.
South Africa has instituted measures to attract economic development. Film production and post-production (primarily foreign film and television, manufacturing, and research and development) are activities which benefit from special allowances that reduce the effective tax rate. Other special regimes are provided for industrial innovation. Some of these regimes are provided by legislation and managed by the South African Revenue Service. Most are managed by grant by the DTI under a process that is not transparent.
South African companies and branches of foreign companies are taxed at a flat rate of 28 %. Small businesses are taxed at reduced rates.
South Africa has entered into a substantial number of bilateral and multilateral trade and investment agreements.
Craig West, Jennifer Roeleveld

Chapter 17. International Taxation: The Case of Uganda

In general, the worldwide tax system in place in Uganda removes any advantage resulting from investment in a low-tax country because it will collect tax at Ugandan rates after allowance of a credit for foreign taxes paid. Uganda has moved to gain conformity with internationally accepted tax practices, in particular by assisting in drafting or ratifying multilateral tax administrative assistance conventions. Although the number is small, all of Uganda’s double taxation agreements contain exchange of information provisions. Additional treaties are under negotiation. In order to attract investment, Uganda has eliminated barriers to foreign ownership of private investments. It provides tax incentives to local and foreign investors that offer special allowances for research and development, workforce training, and asset depreciation. Certain industries, including farming, aircraft operations, and consumer goods exporting, benefit from certain tax exemptions. The practice of issuing incentive certificates that provided 3–6 year tax exemptions has ended. The government may, however, continue to provide tax holidays on an ad hoc basis in certain special circumstances.
Uganda taxes its residents on their worldwide income. A dividend paid by one Ugandan company to another (owning at least 25 % of the voting power) is exempt from Ugandan tax. Dividends paid by a Ugandan company to a nonresident company are taxed at the rate of 15 % if the recipient owns at least 10 % of the voting power of the payer.
While there are no specific provisions targeting investments in tax haven jurisdictions, the worldwide tax system in place in Uganda removes any advantage of investing in a low-tax country because Uganda will collect tax at Ugandan rates after allowance of a tax credit for the foreign taxes paid. Regarding transactions between associated companies, the Uganda Revenue Administration (URA) has the authority to re-allocate income from a lower-taxed to a higher-taxed party in order to reflect arm’s-length dealings. Thin capitalization rules prevent stripping out of earnings as interest payments where a corporation’s debt to equity ratio is high (currently in excess of 1–1). The URA Commissioner has authority to re-characterize or disregard a transaction without economic substance and entered into in pursuance of a tax avoidance scheme. In addition, Uganda has adopted limitation-of-benefits type provisions that eliminate treaty benefits, such as a rate reduction or exemption, where the treaty beneficiary organized in a treaty country is in reality owned 50 % or more by nonresidents.
Uganda is moving toward conformity with internationally accepted tax practices. In this connection, transfer pricing guidelines have been issued. All of Uganda’s double taxation agreements (DTAs) contain an exchange of information clause. In connection with the OECD’s Global Forum, it has assisted in drafting an Agreement on Mutual Assistance in Tax Matters along with the African Tax Administration Forum (ATAF), which is not yet in force. Approval of the ratified OECD Convention on Mutual Administrative Assistance in Tax Matters is pending. Because Uganda does not enter into free-standing Tax Information Exchange Agreements (TIEAs), which are frequently very comprehensive, its exchange of information agreements in the DTAs have not in the past provided adequate guidance on standards, scope of coverage, and procedures. The selection of the URA’s Tax Investigative Department as the Competent Authority for treaty purposes has allowed for the issuance of standards and expedited procedures.
Uganda’s treaty network is quite small. Only the following nine DTAs are in force: Zambia, UK, Norway, South Africa, Denmark, India, Mauritius, Italy, and the Netherlands. Other treaties under negotiation are those with Egypt, China, Belgium, United Arab Emirates, Seychelles, and the East African Community.
Uganda has made efforts to attract investment. The non-tax measures include elimination of barriers to foreign ownership of private investments (100 % ownership is permitted) and investment in infrastructure (chiefly roads and hydropower). It has a large qualified workforce and is relatively politically stable.
Tax incentives (available to local and foreign investors) include special allowances for research and development, workforce training, and depreciation. In addition, there are exemptions from income tax for specified activities or industries, including interest earned by financial institutions on loans granted for purposes of various type of farming, and income from aircraft operation, exporting of finished consumer goods (10-year period), and agro-processing. Interest paid by Ugandan residents on certain debentures issued outside of Uganda for the purpose of raising funds outside of Uganda for use by a company carrying on business in Uganda or interest paid to a bank or a public financial institution is exempt from income tax. In the absence of an exemption, Uganda imposes a tax of 15 % of the gross amount of interest paid by Ugandan residents.
A now-repealed provision allowed issuance of incentive certificates that allowed exemption from income tax for 3–6 years depending upon the level of investment in Uganda. Although there is no legal framework, the government may continue to provide tax holidays on an ad hoc basis.
The corporate tax rate is generally 30 %. Nonresident companies are taxed on dividends received from Ugandan companies at the rate of 15 %. The rates may vary depending on the type of income derived.
Uganda is party to 15 bilateral investment treaties (BITs), with 7 in force. These agreements contain a type of non-discrimination clause (such as that contained in the BIT between Uganda and that Netherlands) that requires the contacting parties to treat residents of the other state as favorably as their own residents or residents of third party states in the same circumstances and accorded favorable treatment. These types of agreements may have a bearing on taxation rights, unless the particular BIT provides otherwise.
Jalia Kangave

Chapter 18. Britain Open for Business

The UK Government has recently declared its commitment to creating the most competitive tax regime in the G20 for holding companies and business hubs. In pursuing this goal, it has reduced corporate tax rates and introduced a branch profits exemption. It has also created a new patent box regime and extended business deductions and investment exemptions. Investment in emerging countries is promoted through tax sparing provisions and an extensive network of bilateral investment treaties. It is not yet clear how Brexit will impact the UK tax system, but the Government has already announced its intention to privilege trade with emerging economies.
The UK Government has expressly asserted that the UK tax system aims to promote foreign investment. Several measures have been introduced for this purpose. The corporate tax rate has been gradually reduced from 28 to 20 % and further reduction to 18 % is contemplated. Another strategy has been to move towards a more territorial corporate tax regime. Despite the general rule being taxation on a worldwide basis, the recent branch profits exemption justifies the claim that territorial principles now dominate the UK corporate tax regime. Generous exemptions for inbound and outbound dividends have been created over the years. In the absence of an exemption, a credit for foreign taxes paid is allowed against the UK tax liability (either under domestic law or a treaty). For attracting specific types of investment, a new patent box regime was created (featuring a 10 % tax rate for profits from the development and exploitation of patents), along with generous research and development (R & D) deductions. Special deductions for film, television, theater and video game development have been introduced over the past few years.
Investment in emerging countries is promoted via tax sparing provisions in tax treaties and an extensive network of bilateral investment treaties. Tax sparing provisions are contained in the following tax treaties: Bangladesh, Belize, Bosnia and Herzegovina, Botswana, Bulgaria, Croatia, Cyprus, Egypt, Ethiopia, Fiji, The Gambia, Guyana, India, Indonesia, Israel, Ivory Coast, Jamaica, Kenya, Kiribati, Malaysia, Mauritius, Montenegro, Morocco, Nigeria, Pakistan, Papua New Guinea, Portugal, Serbia, Spain, Sri Lanka, Sudan, Thailand, Trinidad and Tobago, Tunisia, Turkey, Tuvalu, Uganda, and Zambia.
While promoting inward and outward investment, the UK has also adopted a number of strategies to protect its tax base from abusive practices. It introduced a GAAR (General Anti-Avoidance Rule) in 2013 and continues to introduced SAARs (specific anti-avoidance rules) every financial year. The deterrent effect of the GAAR was reinforced in 2014 when the HMRC was attributed the power to require taxpayers to pay the tax upfront, regardless of the tax liability being litigated (Advanced Payment Notice). Other important anti-avoidance regimes include CFC legislation, transfer pricing rules, worldwide debt caps and the unique Diverted Profits Tax (the so-called “Google Tax”). The latter may determine a charge of 25 % of the profits diverted through (i) the exploitation (by foreign enterprises) of the permanent establishment regime; and (ii) transactions or entities lacking economic substance.
The UK has introduced disclosure regimes to deter avoidance schemes and promote transparency in the tax regime. Taxpayers and promoters are required to provide prescribed information to HMRC, under the Disclosure of Tax Avoidance Schemes (DOTAS) regime.
The Promoters of Tax Avoidance Schemes (POTAS) regime reinforces the disclosure obligations under DOTAS. Failure to comply with these regimes may result in serious penalties. At the international level, the UK has entered into a number of FATCA agreements and TIEAs (Tax Information Exchange Agreements). It collaborates with the OECD regarding the implementation of international standards for exchanging information. The OECD’s Global Tax Forum has considered the UK to be largely compliant, despite suggesting the renegotiation of several of its older treaties.
Rita Cunha

Chapter 19. Taxation and Development: The U.S. Perspective

 The big exception to the U.S. regime of worldwide taxation for residents (with a foreign tax credit to avoid double taxation) is the rule of non-taxation of the foreign source active business income (as opposed to passive or tax-avoidance type income) of foreign subsidiaries of U.S. parents. This system operates as a disincentive, rather than as an incentive, for investment in developing countries by U.S. companies, in part because repatriated profits of the subsidiary are subject to U.S. tax. More importantly, however, with the advent of tax-rate competition by developed countries, such as Ireland, U.S. companies are able to achieve lower rates without moving to developing countries and can rely on a well-developed treaty network (with countries such as the Netherlands) to further reduce the ultimate tax on earnings by stripping them out to entities in countries that do not tax certain types of income, such as royalties. The combination of low rates, potential tax base erosion, and the stable, sophisticated infrastructure and labor force offered by low-tax developed countries virtually eliminates a foreign investment role for developing countries unless they possess natural resources or other unique on site advantages.
The United States taxes all U.S. persons, including domestic corporations, on worldwide income, but provides a credit against U.S. tax liability for taxes paid on foreign source income. A corporation is domestic if organized under the laws of the United States or one of the states. As a result, a domestic corporation hoping to shelter income from U.S. taxation may simply organize a subsidiary under the laws of a foreign jurisdiction. The income of the foreign subsidiary is free of U.S. tax unless under controlled foreign corporation (CFC) provisions it earns certain tax-avoidance income (generally passive income, certain sales and services income derived on behalf of the parent, insurance income and foreign oil and gas income). This income, known as subpart F income, results from transactions suggesting that the parent is using a foreign subsidiary to shift income offshore and is deemed distributed to the domestic corporation even if no amount is actually received.
While non-subpart F income may be safely shifted outside of the U.S. taxing jurisdiction through use of a foreign affiliate, the tax deferral ends when profits are returned to the U.S. parent in the form of dividends, interest, or royalties, etc., because, unlike many of the other countries featured in this volume, the U.S. has no participation exemption or other similar relief for repatriated profits. Thus, in order to minimize tax, U.S. companies have organized subsidiaries in low-tax regimes and kept the profits offshore to the extent possible. In recent years, some have expatriated, becoming domestic subsidiaries of a foreign parent in what has become known as “inversion” transactions. These inversions insulate most of the affiliated groups’ profits from U.S. taxation and, in some cases, allow the new foreign parent to strip earnings from the new U.S. subsidiary through transfer pricing and other tax-minimizing strategies.
Counterintuitively, this system operates as a disincentive, rather than as an incentive, for U.S. companies to invest in developing countries. With the advent of tax-rate competition by developed countries, such as Ireland, U.S. companies can achieve lower rates without moving to developing countries and can rely on a well-developed treaty network (with countries such as the Netherlands) to further reduce the amount ultimately subject to tax by stripping out earnings to subsidiaries organized in countries that do not tax certain types of income, such as royalties. The combination of low rates, potential tax base erosion, and the stable, sophisticated infrastructure and labor force offered by low-tax developed countries virtually eliminates a foreign investment role for developing countries unless they possess unique attractions, such as natural resources, that must be exploited on site. Moreover, the promise of an additional tax holiday like the one enacted by the U.S. Congress in 2004, enabling U.S. parents to bring home as much as $500 million in offshore profits at a 5.25 % tax rate, provides a strong incentive for multinationals to maintain the status quo.
The United States provides no tax incentives for investment in developing countries. Although some countries offer (or offered) tax sparing provisions in treaties that allow their multinationals to benefit from tax incentives offered by developing countries, the United States has never done so. Tax sparing provisions were negotiated with certain countries, including India, Israel, Pakistan, and the United Arab Republic, however, the U.S. Senate has never ratified them.
No incentives are currently offered for investment in countries with low incomes or high poverty rates. A provision that afforded relief from the subpart F rules for investment in “less developed” countries was repealed in 1975.
The United States does provide some tax advantages for its territories. In general, corporations organized under the laws of the territories are treated as foreign corporations, subject to tax only on U.S. source income and income effectively connected to a U.S. trade or business and not on worldwide income. Dividends received from U.S. sources by specified corporations organized under the laws of one of the territories are either exempt or subject to a reduced withholding tax. An important tax break, exempting from U.S. taxation as foreign source income profits derived by domestic corporations operating (and generating employment) in Puerto Rico, was repealed in 1996. While the U.S. continues to look for ways to support economic development in Puerto Rico, the repealed regime was found not to generate benefits commensurate with the cost of the incentive to the U.S. Treasury.
The U.S. has taken measures to encourage economic activity within its own jurisdiction. The Foreign Sales Corporation (FSC) rules, exempting a portion of a U.S. exporter’s profits from sales through a U.S. subsidiary, were repealed after a successful challenge by the EU caused the WTO to declare the regime an illegal export subsidy. A replacement regime, the extraterritorial income exclusion (ETI), was also repealed after the WTO found it provided the same prohibited subsidy. In order to compensate for the loss of ETI and stimulate domestic manufacturers to create jobs, Congress enacted the deduction for domestic production activities. It provides for a deduction equal to 9 % of specified domestic production activities which effectively amounts to a tax rate reduction.
While the federal government provides a limited array of tax incentives to attract economic activity, the various state governments rely heavily on them to attract investment. Economic studies indicate that the U.S. state and local subsidies outweigh those provided by the EU states. While nearly every state has offered some type of investment incentive, there is concern that the costs in the form of foregone revenue may outweigh the benefits to the locality.
The U.S. corporate tax system is partially integrated. The domestic corporation is separately taxed on its profits and the shareholders who are individuals are taxed on dividend distributions but at a preferential rate. For dividends received by domestic corporations (and some foreign corporations with U.S. trade or business income) there is a deduction ranging from 70 to 100 %. The taxable income of a corporation is taxed at the rates of 15 %, 25 %, and 35 %. A corporation with taxable income in excess of $18,333,333 pays tax at a flat 35 % rate. States may also impose tax on corporate income.
The United States is a party to numerous bilateral and multilateral trade and investment treaties.
Tracy Kaye

Chapter 20. In Pursuit of a Modern Tax System to Accommodate Foreign Investment. Case Study: Venezuela

Venezuela’s tax regime has moved from territorial to one of worldwide taxation. However, dividends received from a foreign corporation (whether or not domiciled in Venezuela) are exempt from Venezuelan tax, unless the foreign corporation has a permanent establishment in Venezuela. Its controlled foreign corporation rules (International Fiscal Transparency Regime or IFTR) apply to entities resident in low-tax or tax haven countries. Income of these foreign subsidiaries is deemed to be actually distributed to the Venezuelan owner unless at least half of the subsidiary’s income-producing assets produce active business income. The IFTR is one example of steps Venezuela has taken in order to conform its international tax regime to modern standards. Itself a developing country, Venezuela has acknowledged usefulness of tax incentives to attract foreign investment. With an eye toward enhancing its competitive position among countries in the region, Venezuela has participated in the Southern Common Market (MERCOSUR) and a number of other multilateral inter-governmental organizations to coordinate tax policy. Other features of Venezuela’s legal regime may undermine its ability to promote enhanced investment. These include its status as a country that does not provide legal protection for physical and intellectual property rights.
The Venezuelan international tax regime has moved from territorial (exempting foreign source income) to worldwide taxation. A Venezuelan resident separately states and pays tax on net income from Venezuelan activities (after deduction of related expenses) and net income from offshore activities (after deduction of related expenses).
Dividends received from a corporation incorporated or domiciled outside of Venezuela or from a corporation incorporated outside of Venezuela and domiciled in Venezuela are exempt from taxation, unless the foreign corporation has a permanent establishment in Venezuela. Venezuelan branches of foreign corporations domiciled abroad but having a permanent establishment in Venezuela are subject to a type of branch profits tax, a 34 % tax on net income derived by the branch.
Venezuela’s controlled foreign corporation (CFC) rules, known as the International Fiscal Transparency Regime (IFTR), apply to entities located in tax haven or low-tax jurisdictions. These rules are designed to strengthen the worldwide tax system by limiting the entity’s ability to defer paying tax in Venezuela on income not subject to tax or subject to a lower-than-Venezuelan rate of tax or to defer payment of dividends to Venezuelan shareholders. Under this regime, the net income of the CFC is deemed to be distributed to the shareholders whether or not there is an actual distribution. These rules only apply if the taxpayer has the power to control distribution of profits or dividends. They also do not apply if 50 % of an entity’s income-producing assets in the low-tax jurisdiction produce active business income. A so-called “black list” identifies low-tax jurisdictions, including many developing countries.
In general, Venezuela has taken steps to conform its international tax regime to most modern international taxation trends. In addition to adopting the IFTR regime described in the previous paragraph, Venezuela has updated its transfer pricing guidelines to conform to OECD criteria. It has also adopted thin capitalization rules to avoid shifting profits offshore in the form of deductible interest (generally not taxed to the recipient) rather than nondeductible distributions of earnings.
Venezuela is party to a number of double tax agreements (DTAs) that contain information exchange provisions which are broad enough to permit sharing of information on transactions in tax haven or tax competitive jurisdictions even if beyond the precise scope of the treaty.
Venezuela provides for special territorial tax regimes that allow customs free zones or, in some cases, preferential tax regimes to promote social and economic development in certain regions (free ports). A third program combining the benefits of the free zones or free ports is the free areas (zonas libres) tax regime that applies to cultural, scientific, technological, and tourist services activities in specified areas.
Itself a developing country, Venezuela has acknowledged the usefulness of tax incentives to attract foreign investment with an eye toward enhancing its competitive position among other countries in the region. This is demonstrated, in part, by its participation in multilateral organizations such as the Southern Common Market (MERCOSUR), the Latin American Integration Association (ALADI), and the Bolivarian Alternative of Latin America and the Caribbean (ALBA) which work to coordinate and harmonize, among other things, tax policy. The promise that these memberships held to situate Venezuela as one of the beneficiaries of policies, aimed to promote enhanced investment, has been undermined by other features of its regime. Unfortunately, Venezuela’s status as a country that does not protect either physical or intellectual property rights does not make it an attractive foreign investment destination.
Venezuela nonetheless has implemented tax incentives designed to attract investment activity. These include a ten percent tax reduction for investments in industrial and agro-industrial construction, electricity, communications, and science and technology activities. In addition, there are credits of up to 80 % of amounts invested in tourist services-related, agricultural, livestock, and fishing, as well as environmental protection projects.
Venezuela is signatory to 26 bilateral investment treaties (BITs). In addition, it has signed 31 DTAs.
Venezuela taxes corporations at graduated rates of 15 %, 22 %, and 34 %. Companies that exploit hydrocarbons or engage in mining activity (and assign royalties and participations in this activity) are taxed at a rate of 50 %.
Serviliano Abache Carvajal


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