China Issues Detailed Rules on Deductions for Asset Losses -- New Incentives for Technology Companies

Excerpt from Practical China Tax and Finance Strategies by Yongjun Peter Ni, Linda Ng, Jiang Bian and Angel Wu (White Case, China)



Detailed rules on deduction of asset losses issued under the new Enterprise Income Tax Law, the taxable income is defined as an enterprise’s total income minus the sum of non-taxable income, tax-exempt income, deductions and net operating loss carryovers.



Deductions include costs, expenses, taxes, losses and other expenses. In order to provide detailed guidance on loss deduction, the Ministry of Finance and the State Administration of Taxation (“SAT”) have jointly issued circular Caishui [2009] No 57, the Notice regarding Pre-tax Deduction of Asset Losses, followed by circular Guoshuifa [2009] No 88, the Administrative Measures of Pre-tax Deduction of Asset Losses. The latter lays out the detailed implementation rules on deduction of asset losses. Both circulars take retroactive effect back to January 1, 2008. Under the two circulars, asset losses that can be deducted are divided into three categories, based on the nature of the asset.



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Corporate Tax Issues to be Considered by Multinationals When Investing in Peru

Excerpt from Practical Latin American Tax Strategies by John A. Salerno and Julian Vasquez (PricewaterhouseCoopers LLP)

As with most South American countries, Peru currently maintains a worldwide system of income taxation with respect to business income that is earned in corporate solution -- e.g., via a Peruvian subsidiary of a multinational company. However, Peruvian branches or other permanent establishments (“PE’s”) of foreign companies or investors are taxed only on their Peruvian source income.(i.e., a territorial approach).

Peruvian source income derived by Peruvian branches, and worldwide income derived by Peruvian companies/subsidiaries, are generally subject to Peruvian corporate income tax. Such business income, which is subject to the so-called “Third Category” income tax (hereinafter referred to as the “Third Category Tax” or “CIT”), is taxed at a 30% rate on a net basis (i.e., gross income less allowable deductions). The distribution of net after-tax income is subject to a 4.1% dividend withholding tax, thereby subjecting the income to a 32.87% effective tax rate in the hands of foreign investors.

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U.S. Government Continues to Increase Focus on Transfer Pricing with Increased Controversy Expected

Excerpt from Practical US/International Tax Strategies by Bob Ackerman, David J. Canale, Karen Kirwan, Carlos Mallo, Mike Patton, Leigh Anne Pasak and Peyton Robinson (Ernst & Young LLP)


Transfer pricing will undoubtedly become a more significant focus of attention for the Internal Revenue Service (IRS) in their examinations of multinational corporations (MNCs). In a statement regarding international tax reform on May 4, 2009, President Obama announced that the IRS will “hire nearly 800 more IRS agents” to increase international tax enforcement efforts.

Concurrent with his remarks, the White House issued a press release commenting on the President’s proposal, indicating that the budget would provide the IRS with funds “to hire new agents, economists, lawyers, and specialists, increasing the IRS’s ability to crack down on offshore tax avoidance, often done through transfer pricing and financial products.” Despite the Administration’s recent announcements reflecting greater scrutiny of international tax issues, nevertheless, there may still be a public perception that the President’s plan will not cover transfer pricing. On May 5, 2009, the New York Times published an article citing different sources indicating that transfer pricing was the “one tax loophole open” in the plan. This perception—wholly without merit—may incite Congress to demand that the Treasury Department and the IRS enforce compliance with transfer pricing even more aggressively.

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Chili: VAT on Services Considered Export Transactions

Excerpt from Practical Latin American Tax Strategies by Miguel A. Zamora (Cruzat , Ortúzar & Mackenna Ltda.)

Services qualified as export by the Chilean Custom Service are exempt from VAT and are also entitled to recover from the Treasury the VAT borne in rendering those services.

Former regulations by Customs stated that a case by case qualification was necessary until in 2007 the Customs authority issued Resolution No. 2511 of 2007 under which it issued a list of services qualified as export transactions. According to this regulation, the same requirements are applicable but with a listed service any taxpayer performing it may enjoy the tax benefits associated with such qualification. Services not included in the list may be included by special request but unlike what took place before, its inclusion would benefit all taxpayers performing the same service. This regulation left to the tax authority the ability to audit the use of this benefit.

In 2008, the tax authority issued a Rev. Ruling stating that Resolucion 2511 requested that the services were VAT taxable in order to enjoy the VAT recovery benefit. This Rev. Ruling indirectly creates a new requirement in Customs regulation and may generate the odd situation in which a taxpayer performs a listed service but may not be in a position to recover the VAT borne to perform such export activity.

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New Incentives For Technologically-Advanced Service Enterprises in China

Excerpt from Practical Asian Tax Strategies by Jon Eichelberger & Brendan Kelly (Baker & Mckenzie, China)

Since January 1, 2006, a pilot testing was launched in Suzhou Industrial Park (“SIP”), which granted tax incentives to technologically-advanced service enterprises (“TASEs”), including technologically-advanced service outsourcing enterprises. On January 1, 2009, to further support the growth of TASEs, the State Council issued the Reply on Issues Relating to Promoting the Development of the Service Outsourcing Industry on January 15 2009 (“Circular 9”), which expanded the pilot testing to 20 cities in China and expanded the scope of incentives to include subsidies.

The most notable incentives provided in Circular 9 for qualified TASEs are (a) reduced Enterprise Income Tax (“EIT”) rate of 15% for a five year period starting from 1 January 2009; (b) employee educational expenses of up to 8% of the total salary expenses of the TASE can be deducted from the taxable income for EIT purposes; and (c) business tax exemption for offshore service outsourcing provided by TASEs. According to our informal discussions with tax officials, “offshore service outsourcing” encompasses situations where domestic PRC companies provide services to foreign companies.

Other incentives, such as subsidies for professional training expenses and cost to purchase public service platform equipments, as well as interest subsidies for loans used in constructing service outsourcing infrastructure in state-level economic zones in central and western China, are also provided to qualified technologically-advanced service outsourcing enterprises in Circular 9.

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Amendments to the Netherlands–Mexico Double Taxation Convention

Excerpt from Practical Mexican Tax Strategies by Luis C. Carbajo, Florian Ruijten and Jaime González-Béndiksen (Baker & McKenzie)

The Netherlands and Mexico signed a new protocol to amend the existing double taxation convention. The Protocol will enter into force 30 days after the Netherlands and Mexico have completed their ratification procedures. It is expected that the amendments to the Convention will come into effect on January 1, 2010. The new protocol contains several new features that can be expected to have significant impact for investments, especially those related to capital gains and withholding tax. This is the first of Mexico’s treaties expressly including IETU among the taxes covered.

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Addressing Risks of Intermediaries Filing for Bankruptcy in Section 1031 Exchanges

Excerpt from Practical US/Domestic Tax Strategies by J. Gregg Miller, Timothy B. Anderson, Laura Warren and Michelle M. Parten (Pepper Hamilton LLP)

What happens when you engage in a tax-free section 1031 exchange and your qualified intermediary (QI) declares bankruptcy while holding the proceeds from the sale of your property? According to a Virginia bankruptcy court, unless the exchange agreement is drafted properly, the transaction proceeds held by the QI may become part of its bankruptcy estate, resulting in you becoming a general unsecured creditor.

This was the case for an exchanger with proceeds held in segregated bank accounts of LandAmerica 1031 Exchange Services, Inc. (LandAmerica), acting as its QI, at the time LandAmerica filed for bankruptcy. The court concluded that the language of the exchange agreement disclaimed any interest of the exchanger in the proceeds and held that the use of segregated bank accounts did not give rise to a trust. Thus, the proceeds were treated as part of LandAmerica’s bankruptcy estate.

Under Section 1031 of the Code, no gain or loss is recognized when property is exchanged solely for like-kind property. While this exchange of property may take place simultaneously, the Code allows taxpayers to defer the acquisition of the replacement property for 180 days from the transfer of the relinquished property, which is known as a forward exchange. In forward exchanges, taxpayers typically assign the contract for the sale of their relinquished property to an entity known as a QI, which receives the proceeds and uses them to purchase the replacement property on behalf of the exchanger.

Read More about Alternatives to Using a QI to Avoid Risks Related to Section 1031 (free)

The Administration Offers Its Long-Awaited International Tax Proposals

Excerpt from Practical US/International Tax Strategies by Joseph B. Darby III (Greenberg Traurig LLP)

Earlier this month, the Obama Administration issued its long-awaited (and in some quarters, deeply dreaded) proposals for changes to U.S. international taxation. The Proposals were delivered, not in the form of meaty and complex legislation, but rather in a short, breezy, and at times maddeningly vapid news release. Still, the stakes are so high and the timing so crucial that it is hard not to try to extract some kind of deeper meaning from this relatively cursory pronouncement. First the good news: The Proposals do not, as many feared, recommend an outright repeal of all “deferral” with respect to the U.S. federal income taxation imposed on U.S. taxpayers that own foreign corporations. At the moment, U.S.-owned foreign corporations are subject to the so-called “anti-deferral” tax regimes, contained in Subpart F of the Code (controlled foreign corporation or “CFC” rules) and in Code Section 1291 et. seq., (Passive Foreign Investment Corporation, or “PFIC” rules). The current tax rules operate such that, so long as the CFC or PFIC regimes do not apply, income earned by a foreign subsidiary is not taxed until the foreign earnings are actually distributed as a dividend to the U.S. shareholder. That basic tax regime, at least at the moment, appears to remain intact.

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Administration Offers Its Long-Awaited International Tax Proposals

Excerpt from Practical US/International Tax Strategies by Joseph B. Darby III (Greenberg Traurig LLP)

On May 4, 2009, the Obama Administration (Administration) issued its long-awaited (and in some quarters, deeply dreaded) proposals for changes to U.S. international taxation.

The Proposals were delivered, not in the form of meaty and complex legislation, but rather in a short, breezy, and at times maddeningly vapid news release. Still, the stakes are so high and the timing so crucial that it is hard not to try to extract some kind of deeper meaning from this relatively cursory pronouncement. First the good news: The Proposals do not, as many feared, recommend an outright repeal of all “deferral” with respect to the U.S. federal income taxation imposed on U.S. taxpayers that own foreign corporations. At the moment, U.S.-owned foreign corporations are subject to the so-called “anti-deferral” tax regimes, contained in Subpart F of the Code (controlled foreign corporation or “CFC” rules) and in Code Section 1291 et. seq., (Passive Foreign Investment Corporation, or “PFIC” rules). The current tax rules operate such that, so long as the CFC or PFIC regimes do not apply, income earned by a foreign subsidiary is not taxed until the foreign earnings are actually distributed as a dividend to the U.S. shareholder. That basic tax regime, at least at the moment, appears to remain intact.

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Stricter Reporting Requirements for U.S. Transferors of Property to Foreign Corporations

Excerpt from Practical US/International Tax Strategies by Andy Sikora and Joel Mitchell (BDO Seidman, LLP)


The Internal Revenue Service has issued revised Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, to report exchanges of property with or transfers of property to a foreign corporation. The updated form requires greater detail regarding the property transferred and the tax consequences associated with the transfer. Form 926 is required for any United States person, corporation, estate, or trust that has exchanged property with, or transferred property to, a foreign corporation during the transferor’s taxable year in a transaction described in section 6038B(a), 367(d), or 367(e). Among others, affected transfers include transfers of cash (special rules may apply), stock, accounts receivable, intangible property, inventory, and depreciable assets. Revised Form 926 was released by the Service in February 2009 and contains a revision date of December 2008.

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China Issues Detailed Guidance on Anti-Avoidance Rules

Exerpt from Practical China Tax and Finance Strategies, published by WorldTrade Executive, Inc.

China’s new 2007 Enterprise Income Tax Law, for the first time in Chinese tax history, introduced a set of anti-avoidance rules in its Special Tax Adjustments chapter, which include not only transfer pricing and advanced pricing agreement rules but also rules on cost sharing agreements, thin-capitalization, controlled foreign corporations, and general anti-avoidance.

On January 8, 2009, the SAT released long-awaited Circular Guoshuifa [2009] No 2, Implementation Measures of Special Tax Adjustments (Trial) that details rules on administrating all the aspects of those anti-avoidance rules. If the Special Tax Adjustments chapter represents the first anti-voidance legislation in China, Guoshuifa [2009] No 2 can be viewed as the first comprehensive operating manual of anti-avoidance administrations in China. All the provisions in Guoshuifa [2009] No 2 take retrospective effect from January 1, 2008.

As the starting point of the anti-avoidance administration, Guoshuifa [2009] No 2 restates that all enterprises shall file the following nine forms annually to report related party transactions:

Form 1 - Related party relationships
Form 2 - Summary of related party transactions
Form .3 - Purchases and sales
Form 4 - Labor services
Form 5 - Intangible assets
Form 6 - Fixed assets
Form 7 - Financing
Form 8 - Outbound investments
Form 9 - Outbound payments

Those forms require enterprises to indicate whether they have contemporaneous transfer pricing documentation in place. The forms need to be filed together with the annual enterprise income tax return. For the tax year of 2008, the filing deadline is May 31, 2009.

Read More for a Summary of Transfer Pricing Documentation

Latin American Planning Opportunities under Tax Treaties

Excerpt from Practical Latin American Tax Strategies
by John A. Salerno (PricewaterhouseCoopers LLP)


Latin America has historically not been regarded as a region with an extensive network of income tax treaties. During the 1960s only four income tax treaties were in effect, two of which were with Sweden. With Brazil leading the way, the 1970s and 1980s saw the conclusion of several additional tax treaties, but it was not until recent years that the negotiation and conclusion of tax treaties with Latin American nations began to flourish.

During the 1990s and early 2000s, rapid economic growth and political reform in Latin America’s largest economies fueled a wave of investment by multinational companies based in Europe and the United States. As economies grew and foreign investment restrictions were eased, funds began to flow freely into Latin American markets. The discernible increase in investment spurred the negotiation and conclusion of a number of tax treaties with nations both within and outside the region.

Click here to view a summary of current income tax treaties in force and selected treaties that are either pending, under negotiation or with negotiations pending (free):

France and the United States Sign a Protocol Amending the Income Tax Treaty

Excerpt from Practical US/International Tax Strategies by Gauthier Blanluet, Andrew P. Solomon, Willard B. Taylor, Aditi Banerjee and Nicolas de Boynes (Sullivan & Cromwell LLP)

On January 13, 2009, France and the United States signed a protocol (the “Protocol”) amending the income tax treaty signed by the two countries in 1994, as amended by a 2004 protocol (the “Existing Treaty”).

The Protocol generally eliminates withholding tax on dividends paid to shareholders holding at least 80 percent of the distributing company and generally eliminates the branch profits tax. It also eliminates withholding on royalties for the use of intangible property. The Protocol provides for mandatory arbitration of certain cases that are not resolved by the competent authorities within a specified period of time, clarifies the treatment of certain fiscally transparent and pass-through entities, imposes stricter requirements for certain companies to qualify for the benefits of the treaty, and updates the rules for the exchange of taxpayer information between the tax authorities of each country. These changes will align the Existing Treaty more closely with more recent U.S. tax treaties.

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Excerpt from WorldTrade Executive's Practical US/International Tax Strategies by Jonathan A. Sambur, Kenneth Klein, Patricia Anne Rexford, John T. Hildy and Rafic H. Barrage (Mayer Brown)


On December 24, 2008, the US Treasury and the IRS released final, temporary and proposed regulations relating to the application of the subpart F foreign base company sales income (FBCSI) rules to contract manufacturing arrangements.

These regulations finalized certain of the proposed regulations relating to this subject that were originally released on February 27, 2008. Also issued were temporary and proposed regulations that modify other of the February 27 proposed regulations. The text of the newly proposed regulations is the same as the corresponding temporary regulations.

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IRS Issues Revised Cost Sharing Regulations

Excerpt from WorldTrade Executive's Practical US/International Tax Strategies by David G. Noren, Paul Dau, Roderick K. Donnelly and John G. Ryan (McDermott Will & Emery)

Taxpayers that have relied on cost sharing arrangements under the 1996 regulations must consider whether and how such reliance will be viable in the future under the new regulations.

On December 31, 2008, the U.S. Treasury Department and the Internal Revenue Service (IRS) issued temporary regulations making fundamental changes to the 1996 rules governing qualified cost sharing arrangements (CSAs). These changes are relevant not only to taxpayers that rely on CSAs, but also to taxpayers that have never implemented a CSA, as Treasury and the IRS have provided for application of the principles of the new regulations to intangible development arrangements in general.

The new regulations are based on regulations proposed in 2005, which have been the subject of considerable discussion and controversy. The new regulations are generally effective as of January 5, 2009, subject to limited transition relief for certain preexisting CSAs. The new regulations also were issued in proposed form and will be the subject of a public hearing scheduled for April 21, 2009.

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Recent Developments in Mexican Rulings and Administrative Decisions

Exerpt from September/October 2008 Issue of Practical Mexican Tax Strategies by Terri Grosselin and Santiago Chacon (Ernst & Young)

Recent actions by the Mexican Ministry of Economy and the tax administration indicate a change in policy with respect to companies operating under the popular Maquiladora regime. Although the tax benefits for companies operating in the regime are being carried forward, it appears compliance with the terms of the program will be more strictly monitored.

In 2006, Mexico’s Maquiladora program was combined with other export regimes as part of the Decree for the Promotion of the Manufacturing, Maquiladora and Export Services Industries (“IMMEX Decree”). The Ministry of Economy is the Mexican agency in charge of granting and monitoring permits to IMMEX companies. So far during 2008, this agency, in close cooperation with the Mexican tax authorities, published a list of a total of 1,342 companies with an IMMEX program that were not compliant with one or more of the requirements to operate under the IMMEX regime for 2006 and 2007. The implication for entities included in this publication, is the possible suspension of certain rights granted under the program with the risk that the IMMEX permit will be cancelled altogether, unless the companies rectify identified deficiencies in a short time frame.

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