Dbriefs Bytes

1. Base Erosion and Profit Shifting (BEPS) − Overall, OECD’s BEPS Action Plan has been well received − Public comments have largely focused on the following issues: i. Arm’s length principle vs. formulary apportionment ii. “Special measures….beyond the arm’s length principle” iii. Profits to be allocated in accordance with “value creation” iv. Country-by-country reporting: no public disclosure v. Consensus: will it hold together? − “Invitation” to China and India to develop their own standards for the appropriate split between source and residence taxation 2. Cases (i) India: Diageo − Mumbai Income Tax Appellate Tribunal − Similar to L.G. Electronics case − Tribunal: • Sales-related expenses should be excluded from advertising, marketing and promotion (AMP) expenses • When computing the average AMP level of comparables, adjustments should be made for differences in market share, range of products and functions For information: Anis Chakravarty (Mumbai): anchakravarty@deloitte.com (ii) India: Bangkok Glass − Madras High Court − India / Thailand treaty: no article which covers “fees for technical services” (FTS) − Bangkok Glass (Thai resident) entered into a contract with an unrelated Indian company, to provide both know-how and on-going technical services relating to the Indian company’s construction of a glass factory − Fee related to the provision of know-how = “royalty” covered by Art.12 − Fee related to the provision of technical services: • Covered by Art. 7 (business profits article) : as Bangkok Glass had no PE in India, it is exempt • Thus, “other income” article (Art. 22) not applicable For information: K. R. Sekar (Bangalore): krsekar@deloitte.com (iii)Korea: Private Equity Fund − Supreme Court of Korea − Fund in the form of Cayman Islands limited partnership (CILP) − CILP owns shares in Korean company through interposed entities which lack substance − Interposed entities ignored under Korea’s “substance over form” rules − Who is the “owner” for Korean tax purposes? CILP or the limited partners in CILP? − Korean tax authority practice: if information on limited partners is disclosed, then “look through” to limited partners is permitted (which would allow treaty benefits under treaties between Korea and the residence country of the limited partner) − Supreme Court: CILP will be regarded as the “owner” (and thus no “look through” will be allowed, even if information on limited partners is disclosed) if: • CILP is treated as a corporation for Korean tax purposes; and • CILP is not to be disregarded as a conduit under the Korean “substance over form” rules − This decision could have a significant adverse impact on private equity funds which invest in Korea For information: Gyung Ho Kim (Seoul): gykim@deloitte.com 3. Treaties − Singapore / Barbados: signed on 15 July − India / Uruguay: entered into force on 21 June − Australia / Turkey: entered into force on 5 June − Japan / Luxembourg: exchange of notes on 18 July 4. In brief (i) Japan − Abe government achieves huge win in upper house election: now controls both houses of parliament − Berry Ratio can be used as a profit level indicator under the transactional net margin method For information: Jun Takahara (Tokyo): jun.takahara@tohmatsu.co.jp (ii) China − China (Shanghai) Free Trade Pilot Area For information: Vivian Jiang (Shanghai): vivjiang@deloitte.com.cn Clare Lu (Shanghai): cllu@qinlilawfirm.com (iii) Malaysia − Public ruling on business trusts − Deductibility of cost incurred ...

1. Base Erosion Profit Sharing (BEPS) • Introduction - 19 July: OECD released its long-awaited "action plan" on the BEPS initiative - 48 pages - Unprecedented, comprehensive review of the world's international tax rules, with the objective of removing "double non-taxation" - Consensus: the action plan has been signed off by all 34 OECD members and by the 8 G20 countries which are not OECD members - Timetable: the whole project will be completed by September 2015 • 3 pillars - OECD has identified 3 pillars to its approach i. Gaps or mismatches ii. Frictions iii. Transparency • 15 actions or work areas - Pillar #1: Gaps or mismatches + Hybrid mismatches - both hybrid instruments and hybrid entities (such as caused by the U.S. "check the box" rules) + CFC rules + Interest deductibility, especially thin capitalization + Harmful tax practices, such as private rulings and patent box regimes - Pillar #2: Frictions + Prevention of treaty abuse + Artificial avoidance of the PE definition + Transfer pricing: intangibles + Transfer pricing: allocation of risk and capital + Transfer pricing: high risk transactions - Pillar #3: Transparency + Data collection + Disclosure of aggressive planning + Transfer pricing documentation (i.e., "country by country" reporting) + Dispute resolution and arbitration - Two additional action or work areas + "Digital economy": PE and indirect tax issues + "Multilateral instruments": a multilateral, overarching treaty to implement all the changes • Pascal Saint-Aman's comments - Consensus: OECD is happy and surprised - Timetable: it is aggressive, due to the concern about unilateral action by individual countries - Arm's length principle (ALP) vs. formulary apportionment i. OECD's "unbiased" review: ALP should be retained ii. However, "we might go beyond ALP in some selected areas" + "High risk transactions" + China and India - "The golden age of not paying tax anywhere is over" - Business involvement: business will be consulted, but will not be included in the working groups

1. Base Erosion Profit Sharing (BEPS) • Introduction - 19 July: OECD released its long-awaited "action plan" on the BEPS initiative - 48 pages - Unprecedented, comprehensive review of the world's international tax rules, with the objective of removing "double non-taxation" - Consensus: the action plan has been signed off by all 34 OECD members and by the 8 G20 countries which are not OECD members - Timetable: the whole project will be completed by September 2015 • 3 pillars - OECD has identified 3 pillars to its approach i. Gaps or mismatches ii. Frictions iii. Transparency • 15 actions or work areas - Pillar #1: Gaps or mismatches + Hybrid mismatches - both hybrid instruments and hybrid entities (such as caused by the U.S. "check the box" rules) + CFC rules + Interest deductibility, especially thin capitalization + Harmful tax practices, such as private rulings and patent box regimes - Pillar #2: Frictions + Prevention of treaty abuse + Artificial avoidance of the PE definition + Transfer pricing: intangibles + Transfer pricing: allocation of risk and capital + Transfer pricing: high risk transactions - Pillar #3: Transparency + Data collection + Disclosure of aggressive planning + Transfer pricing documentation (i.e., "country by country" reporting) + Dispute resolution and arbitration - Two additional action or work areas + "Digital economy": PE and indirect tax issues + "Multilateral instruments": a multilateral, overarching treaty to implement all the changes • Pascal Saint-Aman's comments - Consensus: OECD is happy and surprised - Timetable: it is aggressive, due to the concern about unilateral action by individual countries - Arm's length principle (ALP) vs. formulary apportionment i. OECD's "unbiased" review: ALP should be retained ii. However, "we might go beyond ALP in some selected areas" + "High risk transactions" + China and India - "The golden age of not paying tax anywhere is over" - Business involvement: business will be consulted, but will not be included in the working groups

1. Base Erosion Profit Sharing (BEPS) • Introduction - 19 July: OECD released its long-awaited "action plan" on the BEPS initiative - 48 pages - Unprecedented, comprehensive review of the world's international tax rules, with the objective of removing "double non-taxation" - Consensus: the action plan has been signed off by all 34 OECD members and by the 8 G20 countries which are not OECD members - Timetable: the whole project will be completed by September 2015 • 3 pillars - OECD has identified 3 pillars to its approach i. Gaps or mismatches ii. Frictions iii. Transparency • 15 actions or work areas - Pillar #1: Gaps or mismatches + Hybrid mismatches - both hybrid instruments and hybrid entities (such as caused by the U.S. "check the box" rules) + CFC rules + Interest deductibility, especially thin capitalization + Harmful tax practices, such as private rulings and patent box regimes - Pillar #2: Frictions + Prevention of treaty abuse + Artificial avoidance of the PE definition + Transfer pricing: intangibles + Transfer pricing: allocation of risk and capital + Transfer pricing: high risk transactions - Pillar #3: Transparency + Data collection + Disclosure of aggressive planning + Transfer pricing documentation (i.e., "country by country" reporting) + Dispute resolution and arbitration - Two additional action or work areas + "Digital economy": PE and indirect tax issues + "Multilateral instruments": a multilateral, overarching treaty to implement all the changes • Pascal Saint-Aman's comments - Consensus: OECD is happy and surprised - Timetable: it is aggressive, due to the concern about unilateral action by individual countries - Arm's length principle (ALP) vs. formulary apportionment i. OECD's "unbiased" review: ALP should be retained ii. However, "we might go beyond ALP in some selected areas" + "High risk transactions" + China and India - "The golden age of not paying tax anywhere is over" - Business involvement: business will be consulted, but will not be included in the working groups

1. Cases (i) Germanischer Lloyd AG − Mumbai Income Tax Appellate Tribunal − Taxpayer is a German company, with an Indian branch − German company provides inspection and certification services to the shipping industry − The Indian branch performed inspections of ships in India and prepared reports for review by the German head office. The head office examined the reports, obtained additional information from the branch (if necessary), and then issued the certificates to the ships − Fees from clients were allocated 70% to the branch and 30% to the head office − Indian tax authorities argued that 100% of the fees should be allocated to the branch, on the basis that the German head office merely provided back-office support and all key functions were performed by the branch − Tribunal rejected assertion that head office merely provided back-office support: the 70 / 30 split was confirmed (ii) Wellinx − Hyderabad Income Tax Appellate Tribunal − Taxpayer is a U.S. company, with an Indian branch − Taxpayer is in the business of providing medical transcription and software development services to clients for a fee. A significant part of the services are performed by the Indian branch − Taxpayer argued that the activities performed by the Indian branch are merely back-office support functions for the U.S. head office, and thus no profit should be allocated to the PE, in accordance with Article 7(3) of the India / U.S. treaty − Tribunal disagreed: the Indian branch was performing integral parts of the service provision to the clients − Thus, it is appropriate that a profit element be recognized in regard to the activities performed by the PE (iii) Reebok − Delhi Income Tax Appellate Tribunal − Similar facts to L.G. Electronics case − Reebok India’s advertising, marketing, and promotion (AMP) expenses equal 8.5% of sales revenue − Set of comparables: average AMP ratio is 3% of sales revenue − Tribunal: excess of 5.5% should be treated as a service provided to Reebok U.S. – thus, a deemed “cost-plus” recharge to the U.S. 2. Treaties (i) New treaties signed − Philippines / Thailand − Singapore / Ecuador − Singapore / Liechtenstein − Laos / Belarus − Malaysia / Poland − India / Albania − Bangladesh / Belarus (ii) Protocol signed − Singapore / Czech Republic (iii) Treaty entered into force − Hong Kong / Jersey 3. UN: Handbook on Administration of Double Tax Treaties for Developing Countries − 10 chapters written by international tax experts, addressing how double tax treaty provisions apply in practice − 417 pages! 4. India: Amendment of Transfer Pricing Circulars on R&D − 29 June • Circular No. 2 of 2013 (dealing with the application of the profit split method): withdrawn • Circular No. 3 of 2013 (dealing with the identification of R&D centers with insignificant risk): amended and renamed as Circular No. 6 of 2013 − Important changes in Circular No. 6 • Three broad categories of R&D center in India • Conditions (Circular No.3) vs. guidelines (Circular No.6) • Some elaboration on “economically significant functions” in the R&D development cycle • Principal’s activities can be performed by the principal or by its associated enterprises 5. In brief (i) Japan − Significant tax refunds for Shimadzu and Daikin following MAP negotiations (ii) OECD − Discussion draft on the double tax treaty treatment of termination payments

1. Cases (i) Germanischer Lloyd AG − Mumbai Income Tax Appellate Tribunal − Taxpayer is a German company, with an Indian branch − German company provides inspection and certification services to the shipping industry − The Indian branch performed inspections of ships in India and prepared reports for review by the German head office. The head office examined the reports, obtained additional information from the branch (if necessary), and then issued the certificates to the ships − Fees from clients were allocated 70% to the branch and 30% to the head office − Indian tax authorities argued that 100% of the fees should be allocated to the branch, on the basis that the German head office merely provided back-office support and all key functions were performed by the branch − Tribunal rejected assertion that head office merely provided back-office support: the 70 / 30 split was confirmed (ii) Wellinx − Hyderabad Income Tax Appellate Tribunal − Taxpayer is a U.S. company, with an Indian branch − Taxpayer is in the business of providing medical transcription and software development services to clients for a fee. A significant part of the services are performed by the Indian branch − Taxpayer argued that the activities performed by the Indian branch are merely back-office support functions for the U.S. head office, and thus no profit should be allocated to the PE, in accordance with Article 7(3) of the India / U.S. treaty − Tribunal disagreed: the Indian branch was performing integral parts of the service provision to the clients − Thus, it is appropriate that a profit element be recognized in regard to the activities performed by the PE (iii) Reebok − Delhi Income Tax Appellate Tribunal − Similar facts to L.G. Electronics case − Reebok India’s advertising, marketing, and promotion (AMP) expenses equal 8.5% of sales revenue − Set of comparables: average AMP ratio is 3% of sales revenue − Tribunal: excess of 5.5% should be treated as a service provided to Reebok U.S. – thus, a deemed “cost-plus” recharge to the U.S. 2. Treaties (i) New treaties signed − Philippines / Thailand − Singapore / Ecuador − Singapore / Liechtenstein − Laos / Belarus − Malaysia / Poland − India / Albania − Bangladesh / Belarus (ii) Protocol signed − Singapore / Czech Republic (iii) Treaty entered into force − Hong Kong / Jersey 3. UN: Handbook on Administration of Double Tax Treaties for Developing Countries − 10 chapters written by international tax experts, addressing how double tax treaty provisions apply in practice − 417 pages! 4. India: Amendment of Transfer Pricing Circulars on R&D − 29 June • Circular No. 2 of 2013 (dealing with the application of the profit split method): withdrawn • Circular No. 3 of 2013 (dealing with the identification of R&D centers with insignificant risk): amended and renamed as Circular No. 6 of 2013 − Important changes in Circular No. 6 • Three broad categories of R&D center in India • Conditions (Circular No.3) vs. guidelines (Circular No.6) • Some elaboration on “economically significant functions” in the R&D development cycle • Principal’s activities can be performed by the principal or by its associated enterprises 5. In brief (i) Japan − Significant tax refunds for Shimadzu and Daikin following MAP negotiations (ii) OECD − Discussion draft on the double tax treaty treatment of termination payments

1. Cases (i) Germanischer Lloyd AG − Mumbai Income Tax Appellate Tribunal − Taxpayer is a German company, with an Indian branch − German company provides inspection and certification services to the shipping industry − The Indian branch performed inspections of ships in India and prepared reports for review by the German head office. The head office examined the reports, obtained additional information from the branch (if necessary), and then issued the certificates to the ships − Fees from clients were allocated 70% to the branch and 30% to the head office − Indian tax authorities argued that 100% of the fees should be allocated to the branch, on the basis that the German head office merely provided back-office support and all key functions were performed by the branch − Tribunal rejected assertion that head office merely provided back-office support: the 70 / 30 split was confirmed (ii) Wellinx − Hyderabad Income Tax Appellate Tribunal − Taxpayer is a U.S. company, with an Indian branch − Taxpayer is in the business of providing medical transcription and software development services to clients for a fee. A significant part of the services are performed by the Indian branch − Taxpayer argued that the activities performed by the Indian branch are merely back-office support functions for the U.S. head office, and thus no profit should be allocated to the PE, in accordance with Article 7(3) of the India / U.S. treaty − Tribunal disagreed: the Indian branch was performing integral parts of the service provision to the clients − Thus, it is appropriate that a profit element be recognized in regard to the activities performed by the PE (iii) Reebok − Delhi Income Tax Appellate Tribunal − Similar facts to L.G. Electronics case − Reebok India’s advertising, marketing, and promotion (AMP) expenses equal 8.5% of sales revenue − Set of comparables: average AMP ratio is 3% of sales revenue − Tribunal: excess of 5.5% should be treated as a service provided to Reebok U.S. – thus, a deemed “cost-plus” recharge to the U.S. 2. Treaties (i) New treaties signed − Philippines / Thailand − Singapore / Ecuador − Singapore / Liechtenstein − Laos / Belarus − Malaysia / Poland − India / Albania − Bangladesh / Belarus (ii) Protocol signed − Singapore / Czech Republic (iii) Treaty entered into force − Hong Kong / Jersey 3. UN: Handbook on Administration of Double Tax Treaties for Developing Countries − 10 chapters written by international tax experts, addressing how double tax treaty provisions apply in practice − 417 pages! 4. India: Amendment of Transfer Pricing Circulars on R&D − 29 June • Circular No. 2 of 2013 (dealing with the application of the profit split method): withdrawn • Circular No. 3 of 2013 (dealing with the identification of R&D centers with insignificant risk): amended and renamed as Circular No. 6 of 2013 − Important changes in Circular No. 6 • Three broad categories of R&D center in India • Conditions (Circular No.3) vs. guidelines (Circular No.6) • Some elaboration on “economically significant functions” in the R&D development cycle • Principal’s activities can be performed by the principal or by its associated enterprises 5. In brief (i) Japan − Significant tax refunds for Shimadzu and Daikin following MAP negotiations (ii) OECD − Discussion draft on the double tax treaty treatment of termination payments

1. Myanmar − 2% advance income tax on imports and exports of goods − Creditable against income tax liability − Exemptions include • Construction materials and raw materials imported, during initial construction period, by an Myanmar Investment Commission (MIC) permit-holder • Temporary imports and imports intended for duty drawback For information: - Aye Cho (Singapore / Myanmar) aycho@deloitte.com 2. Cases − India: Bhoruka Engineering • Karnataka High Court • India’s judicial anti-avoidance doctrine • Avoidance of capital gains tax on sale of land, by selling shares in land-rich company • As the transaction was not a “colorable or artificial device”, form was respected • Thus, taxpayer wins For information: - K.R. Sekar (Bangalore) krsekar@deloitte.com − Korea: Dividend case • Supreme Court of Korea • Correct rate of dividend withholding tax under Korea / Japan treaty • Interposed Labuan company ignored • Does the Japanese company “own at least 25% of the voting shares” in the Korean company? • Supreme Court: Yes For information: - Gyung Ho Kim (Seoul) gykim@deloitte.com 3. G8 Summit − Endorsed BEPS initiative − Called on OECD to develop template for country-by-country tax reporting by multinational corporations − G8 supports OECD’s report (“A step change in tax transparency”) on bilateral automatic information exchange − Asks OECD to assist developing countries to find comparables for Transfer Pricing purposes 4. In brief − Indonesia: Transfer Pricing regulation issued − China: Value added tax (VAT) announcement issued − Australia: needs to replace “LIBOR cap” in tax legislation − Japan: ratification of protocol to Japan / U.S. treaty − India’s aspiration: best tax regime in the world

1. Myanmar − 2% advance income tax on imports and exports of goods − Creditable against income tax liability − Exemptions include • Construction materials and raw materials imported, during initial construction period, by an Myanmar Investment Commission (MIC) permit-holder • Temporary imports and imports intended for duty drawback For information: - Aye Cho (Singapore / Myanmar) aycho@deloitte.com 2. Cases − India: Bhoruka Engineering • Karnataka High Court • India’s judicial anti-avoidance doctrine • Avoidance of capital gains tax on sale of land, by selling shares in land-rich company • As the transaction was not a “colorable or artificial device”, form was respected • Thus, taxpayer wins For information: - K.R. Sekar (Bangalore) krsekar@deloitte.com − Korea: Dividend case • Supreme Court of Korea • Correct rate of dividend withholding tax under Korea / Japan treaty • Interposed Labuan company ignored • Does the Japanese company “own at least 25% of the voting shares” in the Korean company? • Supreme Court: Yes For information: - Gyung Ho Kim (Seoul) gykim@deloitte.com 3. G8 Summit − Endorsed BEPS initiative − Called on OECD to develop template for country-by-country tax reporting by multinational corporations − G8 supports OECD’s report (“A step change in tax transparency”) on bilateral automatic information exchange − Asks OECD to assist developing countries to find comparables for Transfer Pricing purposes 4. In brief − Indonesia: Transfer Pricing regulation issued − China: Value added tax (VAT) announcement issued − Australia: needs to replace “LIBOR cap” in tax legislation − Japan: ratification of protocol to Japan / U.S. treaty − India’s aspiration: best tax regime in the world

1. Myanmar − 2% advance income tax on imports and exports of goods − Creditable against income tax liability − Exemptions include • Construction materials and raw materials imported, during initial construction period, by an Myanmar Investment Commission (MIC) permit-holder • Temporary imports and imports intended for duty drawback For information: - Aye Cho (Singapore / Myanmar) aycho@deloitte.com 2. Cases − India: Bhoruka Engineering • Karnataka High Court • India’s judicial anti-avoidance doctrine • Avoidance of capital gains tax on sale of land, by selling shares in land-rich company • As the transaction was not a “colorable or artificial device”, form was respected • Thus, taxpayer wins For information: - K.R. Sekar (Bangalore) krsekar@deloitte.com − Korea: Dividend case • Supreme Court of Korea • Correct rate of dividend withholding tax under Korea / Japan treaty • Interposed Labuan company ignored • Does the Japanese company “own at least 25% of the voting shares” in the Korean company? • Supreme Court: Yes For information: - Gyung Ho Kim (Seoul) gykim@deloitte.com 3. G8 Summit − Endorsed BEPS initiative − Called on OECD to develop template for country-by-country tax reporting by multinational corporations − G8 supports OECD’s report (“A step change in tax transparency”) on bilateral automatic information exchange − Asks OECD to assist developing countries to find comparables for Transfer Pricing purposes 4. In brief − Indonesia: Transfer Pricing regulation issued − China: Value added tax (VAT) announcement issued − Australia: needs to replace “LIBOR cap” in tax legislation − Japan: ratification of protocol to Japan / U.S. treaty − India’s aspiration: best tax regime in the world

1. Vietnam • Vietnam / Serbia treaty − Entered into force on 3 June 2013 − Applicable from 1 January 2014 • Holding company locations for Vietnamese “land-rich” companies − Protocol to Vietnam / Singapore treaty: will permit Vietnam taxation on sales of shares in “land-rich” Vietnamese companies − Possible alternative holding company locations + Belgium + Netherlands + Luxembourg • Foreign Contractor Withholding Tax (FCWT): imported machinery and equipment with warranty − Expansion of FCWT For information: - Tom McClelland (Ho Chi Minh City) tmcclelland@deloitte.com - Minh Bui (Hanoi) mbui@deloitte.com - Tuan Bui (Hanoi) tbui@deloitte.com 2. BEPS • UK House of Lords hearing − 11 June 2013 − Pascal Saint-Amans (OECD) + “Divorce” between intangibles ownership and location of activities + No wholesale abandonment of the existing transfer pricing orthodoxy, in favor of formulary apportionment • U.S. House Ways and Means Hearing − 13 June 2013 − Witnesses + Pascal Saint-Amans (OECD) + Ed Kleinbard + Paul Oosterhuis − Ed Kleinbard: “empty formalism” leads to stateless income − Paul Oosterhuis : advocates “more of a destination-based income tax” • UK Public Accounts Committee: report on “Tax Avoidance – Google” − 13 June 2013 − Scathing report on Google • OECD’s intangibles project − Next draft will focus on comparability factors (corporate synergies, local market conditions, location savings) − Next draft will also elaborate on the notion that mere legal ownership plus paying the cost of the R&D effort, without any control functions being exercised, does not entitle a company to “intangible related returns” 3. APAs & Mutual Agreement Procedure (MAP) • Japan / U.S.: MAP situation should be enhanced by mandatory binding arbitration in protocol • India / U.S.: Michael Danilack (U.S. competent authority) warned U.S. multinationals that applying for a unilateral APA with India might not result in the receipt of a full U.S. foreign tax credit for the Indian tax they agreed to pay 4. In brief • India: Vodafone − Conciliation process: constitutionally valid? • Malaysia: unit trust distributions − Public Ruling 5/2013 • New Zealand: thin capitalization − Discussion paper released for public comments (by 28 June 2013)

1. Vietnam • Vietnam / Serbia treaty − Entered into force on 3 June 2013 − Applicable from 1 January 2014 • Holding company locations for Vietnamese “land-rich” companies − Protocol to Vietnam / Singapore treaty: will permit Vietnam taxation on sales of shares in “land-rich” Vietnamese companies − Possible alternative holding company locations + Belgium + Netherlands + Luxembourg • Foreign Contractor Withholding Tax (FCWT): imported machinery and equipment with warranty − Expansion of FCWT For information: - Tom McClelland (Ho Chi Minh City) tmcclelland@deloitte.com - Minh Bui (Hanoi) mbui@deloitte.com - Tuan Bui (Hanoi) tbui@deloitte.com 2. BEPS • UK House of Lords hearing − 11 June 2013 − Pascal Saint-Amans (OECD) + “Divorce” between intangibles ownership and location of activities + No wholesale abandonment of the existing transfer pricing orthodoxy, in favor of formulary apportionment • U.S. House Ways and Means Hearing − 13 June 2013 − Witnesses + Pascal Saint-Amans (OECD) + Ed Kleinbard + Paul Oosterhuis − Ed Kleinbard: “empty formalism” leads to stateless income − Paul Oosterhuis : advocates “more of a destination-based income tax” • UK Public Accounts Committee: report on “Tax Avoidance – Google” − 13 June 2013 − Scathing report on Google • OECD’s intangibles project − Next draft will focus on comparability factors (corporate synergies, local market conditions, location savings) − Next draft will also elaborate on the notion that mere legal ownership plus paying the cost of the R&D effort, without any control functions being exercised, does not entitle a company to “intangible related returns” 3. APAs & Mutual Agreement Procedure (MAP) • Japan / U.S.: MAP situation should be enhanced by mandatory binding arbitration in protocol • India / U.S.: Michael Danilack (U.S. competent authority) warned U.S. multinationals that applying for a unilateral APA with India might not result in the receipt of a full U.S. foreign tax credit for the Indian tax they agreed to pay 4. In brief • India: Vodafone − Conciliation process: constitutionally valid? • Malaysia: unit trust distributions − Public Ruling 5/2013 • New Zealand: thin capitalization − Discussion paper released for public comments (by 28 June 2013)

1. Vietnam • Vietnam / Serbia treaty − Entered into force on 3 June 2013 − Applicable from 1 January 2014 • Holding company locations for Vietnamese “land-rich” companies − Protocol to Vietnam / Singapore treaty: will permit Vietnam taxation on sales of shares in “land-rich” Vietnamese companies − Possible alternative holding company locations + Belgium + Netherlands + Luxembourg • Foreign Contractor Withholding Tax (FCWT): imported machinery and equipment with warranty − Expansion of FCWT For information: - Tom McClelland (Ho Chi Minh City) tmcclelland@deloitte.com - Minh Bui (Hanoi) mbui@deloitte.com - Tuan Bui (Hanoi) tbui@deloitte.com 2. BEPS • UK House of Lords hearing − 11 June 2013 − Pascal Saint-Amans (OECD) + “Divorce” between intangibles ownership and location of activities + No wholesale abandonment of the existing transfer pricing orthodoxy, in favor of formulary apportionment • U.S. House Ways and Means Hearing − 13 June 2013 − Witnesses + Pascal Saint-Amans (OECD) + Ed Kleinbard + Paul Oosterhuis − Ed Kleinbard: “empty formalism” leads to stateless income − Paul Oosterhuis : advocates “more of a destination-based income tax” • UK Public Accounts Committee: report on “Tax Avoidance – Google” − 13 June 2013 − Scathing report on Google • OECD’s intangibles project − Next draft will focus on comparability factors (corporate synergies, local market conditions, location savings) − Next draft will also elaborate on the notion that mere legal ownership plus paying the cost of the R&D effort, without any control functions being exercised, does not entitle a company to “intangible related returns” 3. APAs & Mutual Agreement Procedure (MAP) • Japan / U.S.: MAP situation should be enhanced by mandatory binding arbitration in protocol • India / U.S.: Michael Danilack (U.S. competent authority) warned U.S. multinationals that applying for a unilateral APA with India might not result in the receipt of a full U.S. foreign tax credit for the Indian tax they agreed to pay 4. In brief • India: Vodafone − Conciliation process: constitutionally valid? • Malaysia: unit trust distributions − Public Ruling 5/2013 • New Zealand: thin capitalization − Discussion paper released for public comments (by 28 June 2013)

1. Treaties • China / Netherlands − Signed on 31 May 2013 − Dividends + 5% (shareholder is company with 25% of share capital) + 10% − Interest + 0% (interest on loans guaranteed or insured by government agencies) + 10% − Royalties + 6% (equipment rentals) + 10% (other royalties) 2. 5 cases in 5 minutes • China: Xi’an case − Article 13, China / Barbados treaty (prior to 2010 protocol) − Barbados company, 100% subsidiary of U.S. company − “Disregarded entity” election under U.S. check-the-box (CTB) rules − Chinese tax authorities + Apply GAAR to deny benefit of Article 13, asserting treaty shopping + Use the CTB election as evidence supporting treaty shopping • India: Vijai Electricals − Hyderabad Income Tax Appellate Tribunal − Indian company subscribed for new share capital in foreign subsidiaries − Tax authorities’ attempt to apply transfer pricing provisions rejected by tribunal − Commentators: provides strong support for Shell and other groups which have received large assessments for issuing shares to their 100% parent companies • India: cost sharing agreement − Delhi Income Tax Appellate Tribunal − Cost sharing agreement: 40/60 split, between Indian subsidiary and Korean parent company, for sharing of sponsorship costs for international cricket tournaments − Held: 40/60 split was a fair reflection of expected benefits, viewed from the time at which the cost sharing agreement was entered into • India: Abacus International − Mumbai Income Tax Appellate Tribunal − Interest withholding tax: 20% under domestic law, limited to 15% under India / Singapore treaty − Article 24 (limitation of relief): Singapore company not entitled to treaty benefits unless interest is remitted to Singapore − Onus on Singapore company to positively prove remittance to Singapore • India: General Atlantic − Mumbai Income Tax Appellate Tribunal − Indian subsidiary is a captive service company for U.S. parent − Indian subsidiary argued that it has a lower risk profile (compared to comparable company), due to the fact that its only customer is its parent company − Tribunal + Disagreed + Having a single client has its own risks + Assertion that Indian subsidiary has lower risk profile must be proven by a full risk analysis 3. India: Nokia • March: $350 million tax assessment for withholding tax on software payments • April: Nokia requests Finland to commence MAP discussions • Currently: India’s commissioner of income tax (appeals) rejects Nokia’s appeal 4. BEPS • OECD’s draft amendments to Commentary on Article 5 put “on hold”, pending BEPS • OECD’s intangibles project is becoming enmeshed in BEPS initiative 5. In brief • Japan − Prime Minister Abe’s “third arrow” speech − Short on details • Indonesia − New investment regulation (Reg. 5/2013) • Australia − ATO draft determination on “dividend access shares” and GAAR − Australian Treasury: discussion paper on “dividend washing” arrangements • Vietnam − Dramatic reduction in corporate income tax rates discussed by Parliament • India: Vodafone − Indian government will try to resolve Vodafone “indirect share transfer” tax dispute by non-binding conciliation

1. Treaties • China / Netherlands − Signed on 31 May 2013 − Dividends + 5% (shareholder is company with 25% of share capital) + 10% − Interest + 0% (interest on loans guaranteed or insured by government agencies) + 10% − Royalties + 6% (equipment rentals) + 10% (other royalties) 2. 5 cases in 5 minutes • China: Xi’an case − Article 13, China / Barbados treaty (prior to 2010 protocol) − Barbados company, 100% subsidiary of U.S. company − “Disregarded entity” election under U.S. check-the-box (CTB) rules − Chinese tax authorities + Apply GAAR to deny benefit of Article 13, asserting treaty shopping + Use the CTB election as evidence supporting treaty shopping • India: Vijai Electricals − Hyderabad Income Tax Appellate Tribunal − Indian company subscribed for new share capital in foreign subsidiaries − Tax authorities’ attempt to apply transfer pricing provisions rejected by tribunal − Commentators: provides strong support for Shell and other groups which have received large assessments for issuing shares to their 100% parent companies • India: cost sharing agreement − Delhi Income Tax Appellate Tribunal − Cost sharing agreement: 40/60 split, between Indian subsidiary and Korean parent company, for sharing of sponsorship costs for international cricket tournaments − Held: 40/60 split was a fair reflection of expected benefits, viewed from the time at which the cost sharing agreement was entered into • India: Abacus International − Mumbai Income Tax Appellate Tribunal − Interest withholding tax: 20% under domestic law, limited to 15% under India / Singapore treaty − Article 24 (limitation of relief): Singapore company not entitled to treaty benefits unless interest is remitted to Singapore − Onus on Singapore company to positively prove remittance to Singapore • India: General Atlantic − Mumbai Income Tax Appellate Tribunal − Indian subsidiary is a captive service company for U.S. parent − Indian subsidiary argued that it has a lower risk profile (compared to comparable company), due to the fact that its only customer is its parent company − Tribunal + Disagreed + Having a single client has its own risks + Assertion that Indian subsidiary has lower risk profile must be proven by a full risk analysis 3. India: Nokia • March: $350 million tax assessment for withholding tax on software payments • April: Nokia requests Finland to commence MAP discussions • Currently: India’s commissioner of income tax (appeals) rejects Nokia’s appeal 4. BEPS • OECD’s draft amendments to Commentary on Article 5 put “on hold”, pending BEPS • OECD’s intangibles project is becoming enmeshed in BEPS initiative 5. In brief • Japan − Prime Minister Abe’s “third arrow” speech − Short on details • Indonesia − New investment regulation (Reg. 5/2013) • Australia − ATO draft determination on “dividend access shares” and GAAR − Australian Treasury: discussion paper on “dividend washing” arrangements • Vietnam − Dramatic reduction in corporate income tax rates discussed by Parliament • India: Vodafone − Indian government will try to resolve Vodafone “indirect share transfer” tax dispute by non-binding conciliation