ARGENTINA ALSO INCREASED TAXES effective January 1, but there have been calls to overturn the changes when Congress reopens in March
The corporate income tax rate increased from 33% to 35%. Argentina will impose a withholding tax for the first time on dividends. The rate is 35%. The tax applies only to the extent the dividends are paid out of income that went untaxed at the company level.
There are new restrictions on deducting interest on debt. Forty percent of interest will be deductible provided the debt does not run afoul of limits on borrowing from affiliates. However, the other 60% of interest will be deductible only if the debt-equity ratio of the company does not exceed 2.5 to 1 or the interest does not exceed 50% of adjusted net taxable income.
Finally, the withholding rate on interest paid to foreign lenders increased from 13.2% to 15.05%.
MOST ECONOMIC SANCTIONS AGAINST INDIA AND PAKISTAN have been waived until October 21. The sanctions were imposed after both countries tested nuclear devices. President Clinton waived the sanctions temporarily by executive order. The waiver allows the US Export-Import Bank and Overseas Private Investment Corporation to resume activities in both countries, and it allows banks to makes loans to projects in which there is Indian or Pakistani government participation.
INDIA is expected to levy a new tax on electricity consumption, with 66% of the money to go to local governments to finance regional power projects.
The measure is espected to be in force by March 1999. The government is also expected to propose that the current policy of allowing a 10-year income tax holiday for private power projects be continued, but that a project have the ability to use the holiday at any time during the first 15 years after commecial operation.
Meanwhile, the Authority for Advance Rulings in New Delhi ruled recently that a Dutch company doing business in India was subject to minimum tax. The company had a “permanent establishment” in India in the form of a project office through which it executed several dredging contracts. India has a minimum tax that requires companies to pay income taxes based on 30% of “book income” in situations where taxable income would be less. The ruling settled a controversy whether the minimum tax applies only to domestic companies or also to foreign companies.
BULGARIA REDUCED ITS TAXES effective January 1 in the hope of spurring more investment.
The corporate tax rate has been reduced from 30% to 27%. A 5% investment tax credit has also been adopted to attract investments to municipalities where unemployment for the past five years exceeded 1.5 times the national unemployment rate.
Value added taxes have been reduced from 22% to 20% and made easier for big infrastructure projects to recover during construction. In the past, VAT on inputs could only be recovered against VAT on outputs after the company reached a high enough turnover rate to register as a tax collector. Effective January 1, companies with contributed capital of more than the equivalent of US$1 million will be allowed to register for up to a three-year period before turnover reaches the minimum required levels.
However, not all tax changes were for the better. Rules that prevent Bulgarian companies that are “thinly capitalized” from deducting interest payments have been extended to bank loans. A 50% income tax holiday for 10 years that was adopted in 1997 to encourage foreign investment has been repealed for new investments.
THE ROMANIAN PARLIAMENT voted in late November for a 10-year tax holiday on income from new investments exceeding the equivalent of US$50 million. Investments of between US$35 and US$50 million would qualify for a 75% exemption for seven years. The legislation also waives duties on imported technology.
RUSSIA RENEGOTIATED ITS TAX TREATY WITH CYPRUS after threatening last summer to cancel the treaty unilaterally.
Cyprus still remains the juridiction of choice from which to hold Russian investments. The treaty negotiations were concluded on December 5. The new treaty provides for 0% withholding tax on interest and royalty payments to tax residents of Cyprus. Dividends will be subject to 5% withholding tax, except for investments of the equivalent of US$100,000 or less, where the withholding tax will be 10%. Russia will not tax gain from the sale of shares by Cypriot shareholders in Russian companies. However, gain from the sale of any immovable property situated in Russia may be subject to Russian tax.
The new treaty will take effect on January 1 of the year following ratification by the Russian Duma and the Cypriot Council of Ministers. The existing treaty will continue to apply in the meantime.
INLAND REVENUE issued interim guidance in December for companies with global trading desks in London on how much income from trades shoul be allocated to the United Kingdom.
The guidance confirms that one way to keep such income outside the UK tax net is for a related party in another jurisdiction to supply the capital for the trades and assume the financial risk and pay a fee to the trading company for arranging trades. However, Inland Revenue said it would examine whether the person providing capital has a “permanent establishment” in the United Kingdom that would subject it to broader tax.
INBOUND INVESTMENTS INTO CANADA should not be made with US LLCs, according to two Canadian lawyers.
The lawyers, with the firm Ladner Downs in Vancouver, write that Canada treats LLCs (limited liability companies) as corporations regardless of their US tax classification, and LLCs will not be considered residents for purposes of the US-Canadian tax treaty. The combination of these two factors means that business profits earned in Canada by a US LLC will not receive treaty protection and thus will be taxed fully in Canada, and payments of dividends, interest and royalties from Canada to a US LLC will be subject to full withholding tax of 25%.
ITALY ADOPTED CARBON TAXES in November in order to discourage use of fossil fuels other than natural gas. Similar measures are under consideration in the United Kingdom.
“FOREIGN SALES CORPORATIONS” are under attack before the World Trade Organization in Geneva. The US moved in December to dismiss the complaint on procedural grounds.
European countries complain that foreign sales corporations, or FSCs, are an illegal subsidy to promote US exports. FSCs are shell subsidiaries set up by US companies that export in order to reduce US income taxes on the export earnings. The FSC must be offshore. Many are formed in the US Virgin Islands or Bermuda. The US exempts as much as 30% of the export earnings on transactions run through FSCs. FSCs are also used in lease financings of US-made equipment that will be used offshore. US lessors pay reduced taxes on rents from FSC leases.
PERUVIAN PRESIDENT ALBERTO FUJIMORI said recently that Peru will reduce its minimum tax from 0.5% to 0.2% of a company’s assets.