Dbriefs Bytes

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. Australia • Tax Laws Amendment (2013 Measures No. 2) Bill 2013 − Introduced into Parliament on 29 May − Implements three key government proposals previously announced + Advancing the time at which large corporations pay income tax: quarterly will be changed to monthly + Tax incentive for large infrastructure projects + Tax transparency: publication of Australian income tax payable by corporate entities with total income of AUD 100 million or more • Draft public ruling on proprietary software − Focuses on when income is derived by software developers − Cross-border aspects (e.g., “royalty” definition) not covered For information: - Peter Madden (Sydney) pmadden@deloitte.com.au - David Watkins (New York) davwatkins@deloitte.com 2. Cases • India: DBS Bank (Development Bank of Singapore) − Mumbai Income Tax Appellate Tribunal − India’s transfer pricing rules: application of “5% tolerance band” to interest rates set by reference to LIBOR For information: - Anis Chakravarty (Mumbai) anchakravarty@deloitte.com - Shanto Ghosh (Boston) shghosh@deloitte.com 3. China • Extension of “TASE” tax incentives program − Tax incentives program for “technology advanced service enterprises” (TASE) extended from 31 December 2013 to 31 December 2018 • VAT pilot program − 28 May: SAT released Circular 37, providing guidelines for national VAT pilot program, which will be effective from 1 August 2013 • Shenzhen: carbon emissions trading scheme − Trial program will commence in Shenzhen on 18 June 2013 For information: - Vicky Wang (Shanghai) vicwang@deloitte.com.cn - Ye Hong (Shanghai) hoye@deloitte.com.cn 4. Korea • Double tax treaties effectively increase Korean tax − Outbound equipment rentals: prima facie tax rate under domestic law is 2.2% − Korea / Country X treaty + Equipment rentals are included in “royalties” definition + Korea is permitted to levy tax of (say) 10% on royalties − Korean tax law change: tax rate imposed under domestic law (in regard to equipment rentals paid to a resident of Country X) is 10% − Tax rate on equipment rentals paid to residents of non-treaty countries remains at 2.2% For information: - Gyung Ho Kim (Seoul) gykim@deloitte.com 5.In brief • BEPS: Statement by OECD official at UN meeting • India: Sanofi case − Indian tax authorities file special leave petition to Supreme Court • New China / Netherlands treaty expected to be signed • Malaysia: GST − “Be prepared!”

1. Case: Clifford Chance (India) • Special Bench of the Income Tax Appellate Tribunal • Article 7 (1) of the India / UK treaty: if the enterprise has a PE in the source country, then the source country is permitted to tax the profits which are "directly or indirectly attributable" to the PE • This approach differs from both the OECD model and the UN model • Article 7 (3) of India / UK treaty states how to calculate profits "indirectly attributabl" to the PE: a proportion of the global profits, based on the PE's relative contribution • Facts in case - UK firm provided legal services in regard to several projects in India - Work performed in India and outside India - Accepted that UK law firm had a PE in India (due to regular visits by partners and employees) • Issue: in calculating the profits "directly or indirectly attributable" to the PE, do you include profits which relate to work done outside India? • Special Bench: "no" • Unclear aspect from case: do you aggregate "profits directly attributable to PE" and "profits indirectly attributable to PE"? If so, is there not then double counting? For more information: - K.R. Sekar (Bangalore): krsekar@deloitte.com - C.A. Gupta (Mumbai): cgupta@deloitte.com - Rohinton Sidhwa (Delhi): rsidhwa@deloitte.com 2. Taiwan • Expected changes to be announced by Taiwan government (retrospective from 2011) - To obtain exemption from withholding tax on patent royalties, you will not need to register the patents in Taiwan - Exemption from withholding tax on knowhow royalties will be abolished - Exemption from withholding tax on technical service fees (during construction period) will be abolished - possibility of achieving an effective Taiwan tax rate of 3% For more information: - Cheli Liaw (Taipei): cheliliaw@deloitte.com.tw 3. India • Guidance released on APA program • Criticisms - No rollback - If no Article 9 (2) in treaty, then no bilateral APA - Use of Indian TP rules vs. OECD principles - Safeguarding confidential information - Circular 165 will likely be applied by SAT to the dividends articles in other double tax treaties (and possibly also the interest and royalties articles) For more information: - Anis Chakravarty (Mumbai): anchakravarty@deloitte.com - Shanto Ghosh (Boston): shghosh@deloitte.com 4. In brief • Thailand / Tajikistan treaty • China: record TP adjustment • India: increased TP adjustments • OECD: finalizes TP "safe harbor" guidance • BEPS: Google and Apple

1. Australia: Budget • Delivered on 14 May • Key changes i. Thin cap: “safe harbor” rules tightened ii. Nexus test for interest deductions iii. Taxation of gains made by non-residents on sales of shares in Australian land-rich companies - “Land” to be widened to include mining information and certain intangible assets - 10% non-final withholding tax 2. Exchange of information • Australia, UK, and U.S. tax authorities are working together to find assets hidden in Cayman Islands, BVI, Cook Islands, and Singapore • Singapore government will significantly strengthen its framework to allow information exchange • Australia / Switzerland initial new double tax treaty (which will allow ATO to identify Australians with Swiss bank accounts) 3. China: Circular 165 and Bulletin 19 i. Circular 165 - Relates to the “beneficial owner” condition in the dividends article in the China / Hong Kong double tax arrangement - Provides guidance on Circular 601 “negative factors” and the Bulletin 30 “listed company safe harbor” - Circular 165 will likely be applied by SAT to the dividends articles in other double tax treaties (and possibly also the interest and royalties articles) ii. Bulletin 19 - Relates to the issue of whether in-bound seconded employees cause an “establishment” (domestic law) or PE (treaty) for the foreign employer - “Real or substantive employer” principle is followed - First test: Does the overseas company take responsibility for the work performed by the employee and does it assess the employee’s performance? - Second test: List of 5 factors - If the answer to the first test is “yes” and if at least one of the 5 factors in the second test is satisfied, then + Overseas company has an “establishment” in China (domestic law) + That establishment is a PE (for treaties), if maintained for a sufficiently long time period 4. Cases • India: Convergys case - Delhi Income Tax Appellate Tribunal - Indian subsidiary provides substantial support services to U.S. company - U.S. company held to have a PE in India (at the Indian subsidiary’s premises), under Art. 5(1) of the India / U.S. treaty - Tribunal applied a 4 step methodology to calculate the profits attributable to the PE 5. In brief • Hong Kong / Qatar treaty signed • New Zealand: Budget

1. Treaties (i) Japan / UAE − Treaty signed on 2 May, 2013 − Dividends : (i) 5% (if shareholder is a company which has owned at least 10% of the voting shares for the 6 months prior to dividend); (ii) 10% otherwise − Interest : (i) 0% (if paid to a Government institution, including a sovereign wealth fund); (ii) 10% otherwise − Royalties : 10% − Japan’s domestic tax law applies to a silent partner in a TK − “Main purpose” test, but no general LOB article − Treaty does not apply to exploration and exploitation of hydrocarbons For information: - Jun Takahara (Tokyo): jun.takahara@tohmatsu.co.jp (ii) Treaties entering into force − Singapore / lsle of Man and Singapore / Jersey treaties recently entered into force − Their provisions will generally apply from 1 January, 2014 2. BEPS : Australia’s Issues Paper − Issues Paper published by Australian Treasury on 3 May, 2013 − Balanced and open-minded − Public comments requested by 31 May on 3 topics: (i) Should Australia care if tax is avoided in another country? (ii) Does “base erosion and profit shifting” exist in Australia? (iii) Should the key pressure areas identified by the OECD be the main priorities for action in the short term? − Treasury plans to publish its BEPS Scoping Paper in late June. The Scoping Paper will analyse a range of possible solutions to the BEPS issue − Australia will chair the G20 in 2014 For information: - Peter Madden (Sydney): pmadden@deloitte.com.au - David Watkins (New York): davwatkins@deloitte.com 3. Cases (i) India : KLM Royal Dutch Airlines − Delhi Income Tax Appellate Tribunal − Netherlands-resident company which operates aircraft in international traffic − Provides ground handling and technical services to other airlines at airports in India − Such services are covered by the by-laws of the International Airlines Technical Pool (IATP), of which KLM is a member − Tribunal held that the service fees are “profits from the participation in a pool”, and are therefore “profits from the operation of aircraft in international traffic” for the purposes of Article 8 of the India / Netherlands treaty − Thus, Article 8 provides exemption from Indian tax, despite the existence of a PE in India For information: - K.R. Sekar (Bangalore): krsekar@deloitte.com (ii) India : Vodafone − In January 2012 decision in Vodafone case, India’s Supreme Court articulated a new anti-avoidance doctrine: the “look at” approach − India’s Solicitor-General on 9 May : the Government will likely seek to have the Vodafone case reviewed by a larger bench of the Supreme Court For information: - K.R. Sekar (Bangalore): krsekar@deloitte.com 4. In Brief (i) China: Circular 165 and Announcement 19 − SAT has recently issued: • Circular 165 (beneficial ownership for the purpose of obtaining lower dividend withholding tax rate under China’s double tax arrangement with Hong Kong) • Announcement 19 (circumstances in which inbound secondment of employees could cause the foreign employer to have a PE in China) For information: - Vicky Wang (Shanghai): vicwang@deloitte.com.cn - Ye Hong (Shanghai): hoye@deloitte.com.cn (ii) India : Nokia − Nokia’s $368 million withholding tax dispute (regarding payments for software used in mobile phones) looks set to be dealt with under the MAP procedures of the India / Finland treaty

1. Australian case: Resource Capital Fund − Decision of a single judge of the Federal Court − Two issues: • Application of a double tax treaty to a partnership which is a hybrid entity • Application of the “land-rich company” rules in the Australian tax law − Taxpayer is a Cayman Islands limited partnership. More than 97% of the contributed capital is owned by US resident partners − Partnership sold shares in an Australian gold-mining company and derived a large capital gain − Under Australian tax law: the partnership is treated as a non-resident company − Under US tax law: the partnership is fiscally transparent − Australian tax authorities issued tax assessment to partnership − Federal Court concluded that tax assessments should be issued to the partners, not the partnership − Federal Court’s reasoning: • OECD Commentary on Art. 1 (application of double tax treaties to partnerships) should apply in interpreting Australia/US treaty • Thus, the Australia/US treaty applies to the partners, not the partnership • That conclusion is different from the Australian domestic tax law (which views the taxpayer as the partnership) • Due to the paramount force of the Australia/US treaty, the relevant taxpayer is changed from the partnership to the partners − Australia’s “land-rich company” rules do not apply, because the Australian gold-mining company was not sufficiently “land-rich” to be caught by the rules − The gold-mining company owned significant “non-land” assets, including: • Cash • Working capital • Derivatives • Plant & equipment • Importantly : valuable mining information • Goodwill • Tax losses For information: - Peter Madden (Sydney): pmadden@deloitte.com.au - David Watkins (New York): davwatkins@deloitte.com 2. Treaties (i) Hong Kong / Guernsey − signing completed on 22 April 2013 (ii) Korea / Bahrain − entered into force on 26 April 2013 3. India (i) Narrowing of “tolerance band” for calculating arm’s length range − Many countries use the interquartile range in applying the arm’s length principle − In contrast, India uses the arithmetical mean, and then allows a “tolerance band” of 5% − India’s approach generally causes a greater impact from the existence or omission of outliers − Indian Government announced on 15 April 2013 that the “tolerance band” will be narrowed to: • 1% for “wholesale traders” (not defined) • 3% for all others − Effective for the 2012-13 financial year For information: - Samir Gandhi (Mumbai): sagandhi@deloitte.com - Shanto Ghosh (Boston): shghosh@deloitte.com (ii) Transfer pricing adjustment: subsidiary issues shares to parent at an undervalue − On 26 April 2013, India’s Finance Minister told Parliament that 27 Indian subsidiaries of foreign parents have received TP adjustments for issuing shares to their parents at an undervalue − Shell and Vodafone have recently commenced court challenges For information: - Samir Gandhi (Mumbai): sagandhi@deloitte.com - Shanto Ghosh (Boston): shghosh@deloitte.com (iii) Finance Bill, 2013 − Introduced into Parliament and passed by the lower house on 30 April 2013 − Some changes made to the version published at the time of the Budget : for our Tax Alert on the changes, go to "www.deloitte.com/ap/dbriefs/bytes" − Most significant change concerns the concessional interest withholding tax rate of 5% 4. OECD: Draft Handbook on Transfer Pricing Risk Assessment − On 30 April 2013, OECD released, for public comment, a draft handbook on transfer pricing risk assessment − Comments ...

1. India: Vanenburg Facilities case + Hyderabad Income Tax Appellate Tribunal + Dutch company sells 100% of the shares in an Indian company to a Singaporean company + Indian company owns and operates an industrial park in India + Issue: how to apply Article 13 of India / Netherlands treaty? + Article 13(4) (land-rich provision) does not apply, because of exclusion for immovable property in which the business of the company is carried on + Article 13(1) (immovable property situated in India) - "Immovable property" takes its meaning under Indian law - Tribunal: under the general meaning of "immovable property" under Indian law, shares in a company which owns immovable property are not included - Thus, Article 13(1) does not apply + Article 13(5) (residual provision): applies +Thus, Dutch company is exempt from Indian tax 2. India: Right Florists case + Kolkata Income Tax Appellate Tribunal + Were payments made to Google Ireland and Yahoo U.S., for online advertising, subject to Indian withholding tax? + Key facts - Online advertising operated by way of complex software and algorithms - No computer servers in India + Decision based on Indian domestic tax law + No "deemed source" in India, because the payments were not "fees for technical services" (which requires significant human involvement - not present here) + Was there an "actual source" in India? + Based on case law, there would be an "actual source" in India only if Google Ireland and Yahoo U.S. have a "permanent establishment" (PE) in India (in accordance with the double tax treaty meaning of "PE" + Applying OECD Commentary on Article 5 - A website is not a PE - A server (located in the source country) can be a PE + Tribunal: OECD Commentary is generally relevant in interpreting a double tax treaty + But Indian Government has made a relevant reservation on the OECD Commentary: "a website may consitute a PE in certain circumstances" + Tribunal - A reservation, if relevant at all, is only relevant to treaties signed after the reservation was made - This reservation is "vague and ambiguous" and thus "cannot have any practical impact on a website being treated as a PE" + Thus, no "actual source" in India + Thus, payments were not subject to withholding tax 3. Australia: ATS Pacific case + Federal Court + Concerns an issue which is common to most VAT / GST systems in Asia Pacific - Service provider in country A provides a service directly to contractual party (X) in country B - Through one or more other contractual links, a benefit is obtained by another party in country A - Should the invoice issued to X be zero-rated or standard-rated? 4. China + China State Administration of Taxation (SAT) has published Circular 82, which describes a significant "Circular 698 / indirect share transfer" case + The case concerns Walmart's indirect share acquisition of a 65% interest in Trust-mart of China 5. Tax audits + Korea - Korea's National Tax Service (NTS) announced last week that large businesses should expect tougher tax audits - "Large business" = Sales of more than 50 billion won (US$44 million) - Duration of tax audits expected to increase to 6 - 8 months (from the current 3 - 4 months) + India: Excise duty for motor vehicle manufacturers - Tax authorities are investigating motor vehicle manufacturers to determine whether they are under-paying excise duty - Follows last year's Supreme Court case concerning Fiat 6. Indonesia + New regulation permits certain mining companies to use the current withholding tax rate for services payments, instead of the higher rate which is stated in their Production Sharing Contract or Contract of Work

1. Treaties i. India / Malta + Signed: 8 April 2013 + Interest: 10% + Royalties: 10% + "Short form" LOB rule ii. Hong Kong / Mexico + In force: 7 March 2013 + Effective: 1 January 2014 (Mexico) / 1 April 2014 (Hong Kong) + Very interesting provisions in protocol - OECD and UN Commentaries required to be used for interpretation - Art. 5(3) PE: aggregation of similar activities of associated companies - Double non-taxation due to differing classification of income: no treaty benefits 2. BEPS i. OECD working groups 1. Source countries' jurisdiction to tax (incorporating CFC rules) + chaired by France 2. Transfer pricing + chaired by Italy 3. Countering base erosion (incorporating intragroup financial transactions, hybrids and anti-avoidance measures) + chaired by Denmark ii. CFC rules vs. transfer pricing + Looming tussle between residence country taxation (CFC rules) vs. source country taxation (transfer pricing) + U.S. government officials argue in favor of stronger CFC rules 3. China: VAT pilot scheme + VAT pilot scheme will be expanded nationwide on 1 August 2013 and will be extended to more services + Government intends that the VAT reform will be completed by 2015 + For information: contact Vicky Wang (Shanghai) vicwang@deloitte.com.cn 4. MAP / APA statistics i. OECD 2011 MAP report + Open MAP cases at the end of 2011 - Germany: 702 - US: 686 - France: 539 + On average, 25 months to complete an MAP case ii. U.S. 2012 APA report + 103 bilateral APAs completed by U.S. in 2012 + Over 50% with Japan 5. Japan i. Customs duty + Effective 1 April 2013, transaction value method cannot be used to set the customs value for goods imported by a non-resident importer ii. Takeda Pharmaceutical Company + Takeda issues press release announcing its victory in a transfer pricing dispute with the Japanese tax authorities + Expects a refund of USD163 million of taxes and interest 6. Australia i. Draft legislation: investment manager regime + Draft legislation released on 4 April for public comments + Third and final element of investment manager regime + For Deloitte Tax Alert, http://www.deloitte.com/view/en_GX/global/services/tax/cross-border-tax/international-tax/a845e257452fd310VgnVCM1000003256f70aRCRD.htm + For information: contact Peter Madden (Sydney) pmadden@deloitte.com.au or David Watkins (New York) davwatkins@deloitte.com ii. Dividend withholding tax: ruling + Australia / UK treaty, Art. 10(2)(a): "holds directly" at least 10% of the voting power + Not satisfied by 100% parent, where the shares are registered in the name of a nominee

1. India + Circular No.3 / 2013 − In what circumstances would a contract R&D unit be accepted as bearing insignificant risk? − All of 5 conditions must be satisfied: i. Foreign principal performs most of the significant functions involved in the R&D cycle ii. Foreign principal provides the funds or capital and significant assets iii. Indian contract R&D unit works under the direct supervision of foreign principal – which has the capability to, and actually does, control or supervise the R&D activities iv. Indian contract R&D unit does not bear or control significant risks. Rebuttable presumption: Foreign principal located in a low or no tax jurisdiction does not control risks v.Indian contract R&D unit has no legal or economic ownership right in the outcome of the R&D effort + Circular No.2 / 2013 − Relevant if you conclude that Indian contract R&D unit does bear economically significant risks − Should the profit split method be applied? − Depends on the availability, coverage and reliability of data − To apply the profit split method, you need information about the Indian entity and the foreign principal − Indian entity is expected to have the information or to have a “good and sufficient reason” for not having it − If you can’t apply the profit split method (due to unavailability of information), then you should seek to apply TNMM or CUP methods by: • Selecting comparables • Making “upward adjustments” for location savings and location specific advantages + Nokia − Tax demand to pay USD368 million by end of March − “Stay” order issued by Delhi High Court on 22 March 2. Australia + Discussion Paper on improving tax transparency − Rules would apply to corporate tax entities (companies, corporate limited partnerships, corporate unit trusts, and public trading trusts) with gross revenue of AUD100 million or more − Government will publish: • Corporate tax entity’s name and Australian business number • Its gross revenue • Its taxable income • Its Australian income tax payable − No specific indication how a tax consolidated group will be treated − Effective income year commencing on 1 July 2013 − Public comments requested by 24 April − For more information: • Peter Madden (Sydney) pmadden@deloitte.com.au • David Watkins (New York) davwatkins@deloitte.com 3. Treaties + Mongolia / Italy − Recently entered into force − Will apply from 1 January 2014 − Dividends: 5% (if at least 10% shareholding held for 12 months); 15% (otherwise) − Interest: 10% − Royalties: 5% + Japan / UK − Protocol agreed “in principle” − Lower interest and dividend withholding tax rates − Arbitration 4. Taiwan − Taiwanese Government considering two new rules: • CFC regime • “Place of effective management” test of corporate residence

1. Japan: Earnings stripping rule • Earnings stripping rule will apply to income year commencing on or after 1 April 2013 • Formula: “Net interest expense” > 50% of “adjusted income” • Excess “net interest expense” is non-deductible in current year, but is carried forward to next year (and the formula repeated in the next year) • Maximum carry forward: 7 years • “Net interest expense” means gross interest expense minus gross interest income − Only counting interest paid to or received from related parties − Treatment of guarantees − Interest subject to full Japanese income tax (and not just withholding tax) is excluded − Interest under repo transactions is excluded • “Adjusted income” = Taxable income + “Net interest expense” ± Other adjustments • Interaction with existing thin cap rule: whichever rule results in the greater amount of non-deductible interest will apply • Speculation: possible limitation on earnings stripping rule from Article 24(4) (non-discrimination) of relevant double tax treaties • For more information: − Jun Takahara (Tokyo): jun.takahara@tohmatsu.co.jp − Linda Ng (New York): ling@deloitte.com 2. China • Guangdong Case − Company A: profitable − Company B: tax losses − No transfer of tax losses or tax consolidation − B transfers business to A, generating capital gain on goodwill (sheltered by tax losses) − A claims deductions for goodwill amortization − Attacked by tax authorities • Shanxi case − French company sells shares in Chinese company to unrelated, non-resident buyer − Consideration is in the form of shares in buyer’s parent company − Tax authorities assert that the assigned price was “too low”, based on benchmarking of similar transactions − Tax authorities therefore deem a higher price, which causes a higher capital gain for French company − For more information: > Vicky Wang (Shanghai): vicwang@deloitte.com.cn 3. Treaties • Indonesia / Belarus treaty signed on 19 March • Singapore / Belarus treaty signed on 21 March • Mongolia / Luxembourg: − Luxembourg government confirms unilateral termination of the treaty by Mongolia 4. Base erosion and profit shifting (BEPS) • OECD is trying to manage expectations in regard to its BEPS action plan (due in June) • Pascal Saint-Amans: − No “concrete guidance” − Merely “valuable sense of direction”

1. OECD Report: Aggressive Tax Planning based on After-Tax Hedging − Report issued by OECD this week − Considers mismatches between the tax treatment (timing or characterization) between the hedged instrument and the hedging instrument − Such mismatches, according to the OECD, provide the opportunity for international tax avoidance 2.Korea: Guarantee Fees − Taxpayer can choose any of the 4 alternative pricing methods to calculate the arm’s length guarantee fee in related party situations: i. Benefit approach (i.e., the fee equals the borrower’s benefit) ii. Cost approach (i.e., the fee equals the guarantor’s expected costs) iii. Cost-benefit approach (i.e., combination of (i) and (ii)) iv. Deemed arm’s length method 3. Treaties − Australia / Chile • Recently entered into force • PE definition: i. Aggregation of time period for services performed by two or more related companies ii. Contract-concluding agency PE: substantial negotiation of the essential parts of a contract − Interest: back-to-back loans arrangement − Dividends, interest and royalties: “purpose” rule − Non-discrimination article! 4. Cases − Korea: Lone Star Fund IV • Latest instalment in the on-going saga of Lone Star Funds and Korean companies • Tax authorities asserted “permanent establishment” by virtue of presence in Korea of “Lone Star” individuals who acted as directors of Korean advisory companies and portfolio companies • Seoul Administrative Court: No “permanent establishment”, because: i.The individuals, when in Korea, owed their fiduciary duties to the Korean advisory and portfolio companies ii.Key decisions on purchase and sale of shares in Korean portfolio companies were made in the U.S., not in Korea 5. In brief − Japan • Transfer pricing audits and general corporate tax audits can now be conducted together • Earnings stripping rules commence on 1 April 2013 − Hong Kong • Working group to find ways to promote Hong Kong as an IP hub − Philippines • Exemptions for international air and shipping carriers 6. “Till tax do us part” − Chinese married couples are divorcing in order to avoid capital gains tax on their second real estate property

1. Treaties (i) India / Bhutan (ii) Vietnam / Serbia 2. Cases (i) New Zealand: Alesco - Application of GAAR to an optional convertible note financing structure - Under the “financial arrangements” tax rules, an interest-free convertible note generates a tax deduction for notional interest - This outcome is contrary to Parliament’s intention - Thus, GAAR applied to deny deduction (ii) India: Siemens - German company used sophisticated machinery and technology to test electrical circuit breakers - Not “technical services”, because no direct human involvement - Thus, fee paid to German company not subject to withholding tax 3. India (i) Vodafone Case - The two sides are still negotiating a settlement - After the final settlement of the Vodafone case, the Finance Minister will introduce into Parliament proposed amendments to section 9(1)(i) (indirect share transfer), based on the Shome Committee’s recommendations (ii) Tax Residency Certificates (TRCs) - Last week’s Budget: TRCs will be a necessary, but not sufficient, condition to claim treaty benefits - Finance Minister’s press release: • India tax authorities will not “go behind” the TRC and question the residency status • Mauritius: Circular 789 continues in force - Apart from residence, other conditions must be satisfied for treaty claims – for example: • Beneficial ownership • Absence of permanent establishment in India • Purpose (iii) Cadbury - Indian excise tax authorities have accused Cadbury of avoiding $45 million in excise taxes - 10 year excise tax exemption granted to companies which set up new, stand-alone factories in Himachal Pradesh by 31 March 2010 4. In brief (i) Australia: - Consultation on moving large companies to monthly tax payment (ii) Malaysia: - Treasury Management Centre – application guidelines - Limited liability partnerships – registration guidelines (iii) New Zealand: - Consultation on tax treatment of subdivided shares - Consultation on determination of “subscriptions” amount for amalgamated companies (iv) Singapore: - Tax authorities issue e-Guide on the taxation of property developers

1. India: Budget – Tax rates: • Level of surcharge imposed on basic income tax rates increased • Withholding tax on royalties and technical service fees increased from 10% to 25% (subject, thank goodness, to treaty limitations) – Share buybacks by unlisted companies: 20% “dividend distribution tax” will apply to profits so distributed – Deferral of GAAR (to income year commencing 1 April 2015) confirmed – 15% investment allowance – Existing 15% concessional tax on foreign dividend income extended for one year – No retrospective legislation! – Tax residency certificate: necessary, but not sufficient, condition to claim treaty benefits – GST: still on the way 2. Singapore: Budget – Corporate income tax rebate (S$30,000 cap) – Tax incentive programs extended for 5 years – Population: tightening of supply of foreign workers 3. Hong Kong: Budget – Profits tax reduction (HK$10,000 cap) – Offshore fund exemption regime: will now apply to transactions in private companies which are not incorporated in Hong Kong ( and don’t own property or carry on business in Hong Kong) – Captive insurance company tax incentive: 50% reduction in profits tax rate 4. Treaties (i) Hong Kong / Mexico – Effective: • Mexico: 1 January 2014 • Hong Kong: 1 April 2014 – Dividends: 0% • Interest: 4.9% (banks) / 10% (otherwise) • Royalties: 10% (ii) China / UK – Protocol which amends pending 2011 treaty – Removal of “or indirectly” from dividends article – Thus, to obtain 5% dividend withholding tax rate, a UK company must hold directly at least 25% shareholding in China company 5. Case – India: Sanofi • Indirect share transfer • Sales of 100% of shares in French company (Shan H), by two French groups, to another French company (Sanofi) • Shan H holds 90% of the shares in Indian company • Application of Vodafone “look at” approach: Shan H was not established as a tax avoidance scheme or a sham • Thus, legal form should be respected • Last year’s retrospective amendments to section 9 (1)(i) “trumped” by capital gains article in India / France treaty

1. Base Erosion and Profit Shifting (BEPS) - OECD BEPS report endorsed by G20 - BEPS initiative is supported by 42 countries (OECD / G20 membership), including these Asia Pacific countries: • Australia • China • India • Indonesia • Japan • Korea - Joe Andrus (OECD Transfer Pricing Leader): “something is broken” in the existing transfer pricing system - David Bradbury (Australia’s Assistant Treasurer): “global tax rorts” and “the world’s serial tax avoiders” - Speculation: • Transfer pricing: access to large consumer market will be an additional factor • Deemed PEs for: (i) Digital goods and services (ii) Non-contract concluding dependent agents • Domestic law treaty overrides 2. Cases - India: Sandvik • Payment for IT support services • “Royalty” under India / Australia treaty? • “Royalty” definition refers to rendering of services which make available technical knowledge, etc. • Held: not a “royalty” - Australia: Macquarie Bank • Interaction between Australia’s GAAR (Part IVA) and tax consolidation rules • Step-up of cost base to market value upon entering tax consolidation group • Part IVA did not apply because dominant purpose test not satisfied 3. Treaties - Mongolia / Netherlands • Terminated by Mongolia • Will cease to have effect on 1 January 2014 - Vietnam / San Marino • Signed in Rome on Valentine’s Day 4. Australia - R&D tax incentives to be withdrawn for companies with Australian turnover of $20 billion or more 5. Malaysia - Tax incentives for Tun Razak Exchange (TRX) zone in Kuala Lumpur 6. China - Carbon emissions tax planned to be introduced

1. Base Erosion and Profit Shifting (BEPS) – 12 February: OECD released BEPS report – Follows significant public criticism of multinationals’ tax practices – Interesting things in the report: • OECD wants to be in the driving seat • OECD wants broad global collaboration (both OECD members and non-members) • Hints of revolutionary thinking – Focus areas: the same 6 “pressure areas” identified in OECD’s 2012 BEPS briefing paper – OECD’s “initial comprehensive action plan” to be completed by June 2013: (i) Identify actions (ii) Set implementation deadlines (iii) Identify resources needed and implementation methodology – June 2013 action plan could be a very significant document – No “naming and shaming” (yet) 2. Australia – Mineral Resources Rent Tax (MRRT): where’s the revenue? – Bill introduced into Parliament: GAAR and TP – Managed Investment Trust (MIT) withholding tax regime: foreign pension funds 3. Cases – India: Qualcomm • U.S. company received royalties from manufacturers (outside India) which sold goods to Indian customers • No deemed Indian source 4. Singapore – “Rights-based approach” to taxation of outbound software payments – Broadly consistent with OECD Commentary on Art.12 5. China – VAT pilot program 6. India – Vodafone: transfer pricing adjustment in regard to issue of new shares! – Similar to Shell