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The Destination Based Cash Flow Tax – Is it a VAT?

As tax reform proposals are considered over the next few months, the concept of a destination based cash flow tax remains in the GOP proposal.  This type of corporate tax acts like a VAT, but with some allowable deductions, such as payroll.  And the boarder adjustment is a driving feature of the proposal.

The boarder adjustment feature would exempt from tax sales of goods exported outside of the U.S.  However, the cost of goods purchased by a U.S. company from foreign sources would not be deductible against the the corporate tax.  So, the tax would be imposed on goods produced and sold in the U.S.

The proposal also allows for full deductions of capital investments with no depreciation required (but does not allow interest payments to be deducted).  This is similar to most VAT systems and is touted as a provision that will spur investment.

A reconciliation between the current administration’s tax plan and the GOP plan is underway, and we won’t have wait too much longer to see if the corporate rate drops to 15% or 20% and whether we the destination based cash flow tax survives.

Opportunity to Claim Refund on WHT Overpayment on Dividends Received by Non-EU Investment Funds from Europe – Update

In a recently reported Emerging Markets Series of DFA Investment Trust Company case (C -190/12) the European Court of Justice confirmed that investment funds based outside EU should benefit from the free movement of capital rule regarding investments in Europe (see link for more details). This judgment opens up the opportunity for non-EU investors to claim withholding tax refunds in some EU jurisdictions (in particular Germany, Poland, Spain and the Czech Republic). Follow-up information on selected EU jurisdictions is set out below.

Czech Republic
Czech law imposes a favorable tax regime on certain investment funds established in the EU, Norway and Iceland. It offers investment funds the opportunity to claim tax refunds, which should be of particular interest to non-EU investment funds achieving capital gains or income derived from their Czech-based immovable property.

Peter Varga
peter.varga@dentons.com

France
Since 2012, further to the judgment in Santander Asset Management and others ruling (joined cases 338/11 to 347/11), non-resident undertakings for collective investment in transferable securities (UCITS) are no longer required to pay withholding taxes on dividends received from France. Any withholding taxes collected at source should open up the right to claim refunds under certain conditions.

This ECJ judgment could trigger a legislative response from France which is currently difficult to predict. It could mean the enactment of a specific tax for French UCITS and a specific withholding tax for non-French UCITS. This was in fact the route taken by France after the High Court ruled in 2009 that French WHT  charged on unearned income achieved by non-resident nonprofit organizations (where French nonprofit organizations were tax exempt) was illegitimate. The tax was set at 15%, instead of the original 25% rate that only applied to non-resident nonprofit organizations.

Jessie Gaston
jessie.gaston@dentons.com

Germany
Certain non-German investment funds investing in German companies should also benefit from this decision. German Investment Tax Act provides for a full WHT refund in case of capital income of the fund, but only for those established in Germany and not for comparable funds established abroad. Whether or not non-German funds can be considered comparable to German funds in terms of tax treatment needs a case-by-case analysis. The requirements for the applicability of the German Investment Tax Act changed recently due to the implementation of the AIFM Directive.

Thomas Voss
thomas.voss@dentons.com

Poland
A case was initiated by a Polish court which gives solid grounds for non-EU investors to claim refunds of overpaid WHT. Polish regulations offer income tax exemptions for domestic investment funds and funds based in the EU/EEA and there are exchange of tax information mechanisms with a number of jurisdictions. If tax has been paid on dividends from a Polish company, it should be analyzed if there are conditions for preferential treatment based on the EU principles of freedom of establishment and the free movement of capital.

Rafał Mikulski
rafal.mikulski@dentons.com

Romania
The principles of the case and their applicability are certain to be assessed on a case-by-case basis. It definitely sheds new light on European investments and should be explored especially in conjunction with the new Romanian law on exemption of tax for re-invested profits.

Delia Dragomir
delia.dragomir@dentons.com

Spain
Application of the case in Spain, along with other ECJ precedents (i.e. ECJ joined cases 338/11 to 347/11) would allow to investment funds located outside the EU/EEA to claim refunds of the withholding taxes paid on their Spanish sourced dividend income, on the amount exceeding the 1% tax rate applicable to Spanish resident investment funds. Chances of success would depend on fulfilling the requirements set by the ECJ in the case at hand.

Jose Ramon Vizcaino
joseramon.vizcaino@dentons.com

UK
As the UK does not impose withholding tax on dividends (other than REIT dividends), the impact of the case in the UK is limited.

Jeremy Cape
jeremy.cape@dentons.com

Opportunity to Claim Withholding Tax Overpayment on Dividends Received by Non-EU Investment Funds from Europe

In its verdict in Case C-190/12 (Emerging Markets Series of DFA Investment Trust Company), the European Court of Justice (ECJ) confirmed that investment funds based outside the EU should benefit from the EU’s free movement of capital rule regarding investments in Europe.

Dentons’ global Tax team discusses the implications of this verdict in Europe.

Read more

Karina Furga-Dąbrowska, Cezary Przygodzki, and Rafał Mikulski, all members of Dentons’ Tax practice in Poland, co-authored this article.

New Foreign Tax Credit Regulations Issued

On February 14, 2012, the US Treasury Department (“IRS”) published in the Federal Register regulations dealing with two separate but related foreign tax credit issues. One set of regulations, which are proposed and temporary, provide guidance to taxpayers on how to interpret section 909 of the US Internal Revenue Code which denies a foreign tax credit for certain “foreign tax credit splitting events.” The other set of regulations, which are final, provide guidance on which person is considered to pay a foreign tax and is therefore eligible to claim a credit for the foreign tax paid.

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