Tax Professional usually responds in minutes
Our tax advisers are all verified
Unlimited follow-up questions
When it comes to Research and Development (R&D) tax incentives, it is becoming clearer and clearer that maintaining compliance with regulatory standards is crucial.
A recent case, Active Sports Management Pty Ltd and Industry Innovation and Science Australia [2023] AATA 4078, exemplifies the rigorous compliance expectations of R&D tax regulators and underscores the importance of a methodical approach to documenting R&D activities.
The Administrative Appeals Tribunal’s (AAT) decision in December 2023 emphasized that the activities claimed by Active Sports Management (ASM) did not constitute eligible R&D activities under the Industry Research and Development Act 1986.
Specifically, the Tribunal found that the development of a custom basketball shoe failed to exhibit a systematic progression of work grounded in established scientific principles, from hypothesis through to experiment, observation, evaluation, and logical conclusions.
The Tribunal scrutinized ASM’s claims related to the development of the “Delly1” basketball shoe, designed to meet the specific needs of NBA player Matthew Dellavedova.
Despite producing multiple prototypes, the process described by ASM did not meet the criteria for core R&D activities due to a lack of systematic experimentation and documentation.
The Tribunal highlighted the importance of clearly documenting each stage of the R&D process, from hypothesis formulation to the testing and evaluation of results.
This decision signals a clear message to entities seeking to benefit from R&D tax incentives: a rigorous, well-documented approach to R&D activities is essential.
The Tribunal’s emphasis on contemporaneous written evidence as highly persuasive underlines the need for entities to meticulously record their R&D processes, ensuring that activities are carried out in a manner consistent with established scientific principles.
In light of the AAT’s decision, companies engaging in R&D activities are advised to:
The case also references the 2020 Federal Court decision of Commissioner of Taxation v Bogiatto, where it was acknowledged that while written evidence is ideal, other forms of evidence, such as witness statements or oral testimony, can substantiate R&D claims.
However, contemporaneous written documentation remains the recommended form of evidence to support R&D activities and claims.
The Active Sports Management case serves as a critical reminder of the importance of adherence to R&D tax incentive rules and the need for comprehensive documentation of R&D activities.
By adopting best practices for governance and documentation, companies can better navigate the complexities of R&D tax compliance and maximize their potential benefits under the program.
As the legal landscape evolves, staying informed and proactive in documenting R&D efforts will be key to achieving successful outcomes in tax incentive applications.
If you have any queries about the Active Sports Management R&D Decision, or Australian tax matters in general, then please get in touch.
On December 27, 2023, the Implementation Act for the Minimum Tax Directive (Minimum Tax Act for short) was promulgated.
The Bundestag had previously passed the law on November 10, 2023 and the Bundesrat subsequently gave its approval on December 15, 2023.
The new Minimum Taxation Act serves to implement the EU Minimum Taxation Directive, which the EU member states were obliged to implement by the end of 2023.
The core of the transposition law – which in its full name is the “Law on the implementation of the Directive to ensure global minimum taxation for multinational enterprise groups and large domestic groups in the Union” – is the regulation of effective minimum taxation at a global level.
It is intended to counteract threats to competition and aggressive tax planning.
To this end, the international community (G20 countries in cooperation with the OECD) has taken certain measures to combat profit reduction and profit shifting.
The new minimum tax law applies to all financial years beginning after December 31, 2023, with the exception of the secondary supplementary tax regulation.
The secondary supplementary tax regulation only applies to financial years beginning after December 30, 2024.
The Minimum Taxation Act is part of the so-called two-pillar solution and is aimed in particular at implementing the second pillar (“Pillar Two”).
The first of these two pillars (“Pillar One”) of the international agreements on which this is based provides for new tax nexus points and regulations for the distribution of profits between several countries.
Particularly due to advancing digitalization, companies would otherwise often operate in other countries without having a physical presence in that country.
As a result, profits could be taxed in a place where they were not generated. In this respect, the first pillar affects the question of the “where” of taxation. The first pillar is currently still the subject of political debate.
The second pillar concerns regulations for the introduction of effective minimum taxation at a global level and therefore the question of how high taxation should be. Corresponding regulations are intended to counteract aggressive tax planning and harmful competition.
Irrespective of how an individual state structures tax liability and the extent to which tax concessions are to be granted, for example, a general minimum threshold for taxation should apply. This should make tax planning less risky. In order to close gaps in taxation, certain options for subsequent taxation should apply.
The second pillar and the associated provisions of the Minimum Tax Act are intended to remedy this. The new Minimum Tax Act obliges larger companies to pay tax on profits in certain cases. Any negative difference to the specified minimum tax rate must be retaxed in the home country.
The adjustment of income tax and foreign tax must be accompanied by the introduction of the Minimum Tax Act.
The new minimum taxation law binds large nationally or internationally active companies or groups of companies with a turnover of at least EUR 750 million in at least two of the last four financial years. The legal form of the company or group of companies is irrelevant.
There is an exception to this in accordance with Section 83 of the Minimum Taxation Act if the company’s international activities are subordinate. This is the case if the company has business units in no more than 6 tax jurisdictions and the total assets of these business units do not exceed EUR 50 million. In this case, these are not taxable business units.
The provisions of the new minimum tax law pose major challenges for the companies concerned with regard to the necessary procurement and evaluation of the extensive data. The prescribed calculation system can only be complied with if these large volumes of data are comprehensively evaluated. Companies often lack this data, have not collected it in the past or it is not or not fully stored in the relevant IT systems.
However, the new minimum tax law provides for certain simplifications and transitional regulations for the first three years. Specifically, this relates to the simplified materiality test, the simplified effective tax rate test and the substance test.
There are also other simplifications without time limits, such as in Section 80 of the Minimum Tax Act for immaterial business units upon application.
The minimum tax applicable under the new implementation law is made up of three factors:
The primary and secondary supplementary tax amounts relate to the difference in the event of under-taxation of a business unit.
The parent companies of the corporate group are generally subject to the primary supplementary tax regulation.
The secondary supplementary tax regulation serves as a subsidiary catch-all provision for cases that are not already covered by the primary supplementary tax amount.
The national supplementary tax amount is the increase amount determined in the Federal Republic of Germany for the respective business unit.
The tax increase amount is calculated on the basis of a minimum tax rate of 15 percent.
Overall, the minimum tax is a separate tax that applies in addition to the income and corporation tax that is due anyway, irrespective of income and legal form.
Germany’s enactment of the Minimum Tax Act marks a significant step towards aligning with the EU’s directive for global minimum taxation, aiming to curb aggressive tax planning and ensure fair competition.
Effective from the fiscal year beginning after December 31, 2023, this legislation targets large multinational and domestic corporations, setting a minimum tax rate of 15% to prevent profit shifting and reduce tax evasion.
With its comprehensive approach and inclusion of transitional simplifications, the law represents an important shift in international tax policy, reinforcing Germany’s commitment to the OECD and G20’s two-pillar solution for global tax reform.
if you have any queries about this article on the New Minimum tax law in Germany, or German tax matters in general, then please get in touch.
In a strategic move to diversify its economy and offer an attractive environment for investors, the Kingdom of Saudi Arabia (KSA) announced the creation of new Special Economic Zones (SEZs) on 13 April 2023.
This initiative, led by the Economic Cities and Special Zones Authority (ECZA), marks a significant development in the Kingdom’s efforts to enhance its business landscape and stimulate investment.
The ECZA, responsible for regulating the Kingdom’s Economic Cities (ECs) and SEZs, released a brochure detailing the tax and non-tax incentives available in these newly established zones.
These incentives are designed to make the SEZs highly competitive on a global scale, providing substantial benefits to businesses operating within them.
A reduced rate of 5% for up to 20 years, significantly lower than the standard rate, to boost profitability and encourage long-term investment.
A 0% rate on the repatriation of profits from the SEZs to foreign countries, facilitating free movement of capital and enhancing the attractiveness of the SEZs to international investors.
A deferral of customs duties for goods within the SEZs, with specific exemptions for capital equipment and inputs in Jazan, reducing operational costs for businesses.
A 0% VAT rate on all intra-SEZ goods exchanges, both within and between zones, to encourage trade and manufacturing activities without the burden of additional tax costs.
Goods imported into SEZs from outside KSA are treated as outside the scope of VAT, simplifying the import process and reducing the cost of bringing goods into the SEZs.
Zero-rated VAT is applicable on all goods exchanged within the SEZs and between zones, promoting internal trade and collaboration between businesses within the SEZs.
The brochure also highlights several non-tax incentives, including flexible and supportive regulations regarding the employment of expatriates during the initial five years.
This approach aims to attract global talent and ease the process of setting up and staffing operations within the SEZs.
The establishment of these new Special Economic Zones is poised to significantly impact both the conduct of business within Saudi Arabia and the broader KSA tax regime.
It represents a clear commitment by the Kingdom to create a more diversified and investor-friendly economic environment.
As the SEZs begin to take shape, further guidance and regulations detailing the specific incentives and reliefs are anticipated in the coming months.
This forthcoming information will be crucial for businesses looking to capitalize on the opportunities presented by these new economic zones, marking an exciting chapter in Saudi Arabia’s economic development journey.
If you have any queries on this article, KSA Introduces New Special Economic Zones, or GCC tax matters in more general, then please get in touch.
In the dying days of 2023, specifically on December 29th, Montenegro‘s National Assembly passed significant amendments to the Corporate Income Tax (CIT) Law.
This marks a key moment in the country’s tax legislation history.
These amendments, effective from January 1, 2024, are set to modernize Montenegro’s tax system, bringing it into closer alignment with European Union (EU) standards.
This move is particularly aimed at harmonizing with the EU Council’s Directive 2009/133/EC, a cornerstone directive that establishes a common system of taxation applicable to mergers, divisions, transfers of assets, and exchanges of shares involving companies from different EU member states.
It also covers the transfer of registered offices of companies within the EU. The application of these rules will be activated upon Montenegro’s accession to the EU.
The recent legislative overhaul goes beyond mere compliance with EU directives. It introduces a series of substantive changes to the CIT regime, reflecting Montenegro’s commitment to fostering a transparent, EU-compatible tax environment.
Here’s a breakdown of the key amendments and their implications for businesses:
The revised CIT Law specifies the calculation of the CIT base, incorporating profit before taxation, as reported in the balance sheet.
This calculation must now adhere strictly to International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS). A significant addition is the treatment of accounting policy changes.
Any income or expense arising from such changes will be recognized in the tax period of correction and spread evenly over five tax periods.
Furthermore, the amendments clarify that income from the liquidation of other legal entities will be excluded from the CIT base, alongside refining the conditions for write-offs.
The amendments have introduced precise guidelines for determining the acquisition value of assets.
In a notable shift towards market transparency, the tax authorities are now empowered to adjust the sale price of assets to reflect market value in transactions between both related and unrelated parties.
This adjustment is mandatory if the sale price is below the market rate, ensuring fair market practices and preventing tax evasion.
A significant change is the expansion of the withholding tax’s scope, now encompassing a wider range of legal entities.
The definition of taxpayers subject to withholding tax has been broadened, with the new law also taxing the distribution of liquidation surplus.
Moreover, permanent establishments must now withhold tax on dividends, profits, and liquidation surplus, among other payments, marking a considerable extension of tax obligations.
The amendments have ushered in new amortization rates designed to reflect the current economic realities more accurately.
These include reduced rates for buildings, roads, bridges, and similar assets, now set at 2.5%, and adjustments in rates for other asset groups to ensure a more equitable depreciation schedule.
In an effort to streamline tax benefits, the amendments eliminate the subsidy for newly employed individuals from the CIT Law, as these incentives are already encapsulated within the Personal Income Tax Law.
These amendments represent Montenegro’s proactive steps towards integrating with the European tax framework, signaling its readiness for future EU membership.
By aligning its tax laws with EU standards, Montenegro not only enhances its business environment but also strengthens its commitment to international compliance and transparency.
For businesses operating within Montenegro, these changes necessitate a thorough review of tax planning and compliance strategies, ensuring alignment with the new legislative landscape. For further details, then please get in touch.
Corporation tax is a major financial obligation for UK businesses, and knowing how to reduce corporation tax is a savvy move for good financial management.
In April 2023, the UK government increased corporation tax from 19% to 25% (for profits above £250,000), making it more important than ever for businesses to pay the least amount possible.
Fortunately, there are several ways to reduce corporation tax, and in this Tax Natives blog post we’re going to discuss a handful of ways that you can save on corporation tax so you can put your money back into your business.
Capital allowances are a tax relief claimed on assets that have been bought for use within a company. They let companies deduct some of the cost of the asset from their taxable profits each year over the time it is used.
There are two types of capital allowances: Annual Investment Allowances (AIA), and Writing Down Allowances (WDA).
AIAs allow you to deduct the full cost of most new plant and machinery from your taxable profits in the year of purchase. This means you can effectively claim a 100% tax deduction on the prices of assets including:
WDAs allow your company to deduct a portion of the cost of other types of assets from their taxable profits each year over the time it is used. The rate of WDA depends on the type of asset, which includes:
This is a government-backed scheme designed to encourage businesses of all sizes to invest in research and development (R&D).
Like capital allowances, there are two different types of R&D tax relief. Each type applies to the size of the business: SMEs and large companies.
Small and medium enterprises (SMEs) can claim R&D relief on qualifying expenditure against their taxable profits, this includes:
Larger companies can claim R&D expenditure credit (RDEC), a cash payment made in addition to a corporation tax refund, depending on qualifying expenditure. To claim RDEC, your R&D activities must meet the following criteria:
This is another valuable tool in reducing corporation tax. It involves companies ‘carrying back’ trading losses to offset against taxable profits of previous accounting periods.
This means you can effectively claim a refund of corporation tax you’ve already paid – up to a maximum of three years.
Similarly, you can ‘carry forward’ trading losses to offset against the taxable profits of the future accounting period.
This can be done indefinitely and allows you to defer paying corporation tax on a trading loss until a profit is made in the future.
Both methods allow companies to effectively eliminate or reduce corporation tax liability for several years.This is especially helpful for companies that experience periods of profitability and periods of loss.
Allowable business expenses – also known as tax deductible expenses – are a big part of planning for corporation tax.
There are several allowable business expenses for companies to consider, including:
Companies can also reduce their corporation tax bill by making pension contributions on behalf of their employees. This is because these are considered “allowable expenses”, meaning they can be deducted from taxable profits.
The ways in which you can make pension contributions are: Defined contribution (DC) schemes, and defined benefit (DB) schemes.
In a DB scheme, the company guarantees to pay the employee a certain pension at retirement, no matter the investment performance of the scheme.
The company is responsible for funding the scheme’s liabilities, something that can be a major financial commitment.
In a DC scheme, the company makes regular contributions to the employees’ pension pot. The value of the pot grows over time based on investment performance, and the employee’s eventual retirement benefit is based on the value of the pot at retirement.
You can make pension contributions via salary sacrifices, where your employee puts some of their salary away for retirement. This is tax-efficient because the employee’s income tax national insurance liability is lower on the reduced salary.
Then there are non-salary sacrifices, whereby the company makes pension contributions directly from its profits.
Working from home (WFH) allowances are tax credits that can be claimed by companies that allow their employees to work from home.
These allowances can help to reduce the company’s corporation tax bill, and can be claimed on certain expenses like work furniture and equipment, and other WFH-related costs like heating, electricity, and internet.
The Patent Box is a tax incentive scheme introduced in 2013 to encourage companies to develop, protect, and commercialise intellectual property (IP). It allows companies to pay a lower rate of corporation tax on profits made from their patented inventions.
This reduced rate of corporation tax on profits from patented inventions can be as low as 10%, more than half the standard rate of 25%.
Corporation tax is a major expense for businesses, but as you can see, there are several ways to lower it. Whether it’s claiming all allowable expenses, investing in R&D, utilising the Patent Box, and taking advantage of other tax credits, you can lower your corporation tax bill and save big. Speak to a corporate tax specialist today.
For extra advice and guidance on navigating the realm of UK tax, get in touch with Tax Natives. We’ll get you in contact with a professional, regulated tax advisor that perfectly suits your unique needs.
On 14 December 14, 2023, the Court of Justice of the European Union (CJEU) delivered an eagerly awaited judgment in favor of Amazon and Luxembourg, upholding the May 2021 decision of the General Court.
This judgment dismissed the European Commission’s appeal, confirming that Amazon did not receive unlawful state aid from Luxembourg.
The CJEU’s judgment is definitive and marks a significant moment in the ongoing discussions around state aid and tax rulings within the EU.
The case centered around the arm’s length nature of a royalty paid by a Luxembourg operating company (LuxOpCo) to a Luxembourg partnership (LuxSCS).
The payment was for the use of intangibles like technology, marketing-related intangibles, and customer data.
In 2003, the Luxembourg tax authorities had confirmed the arm’s length nature of these deductible royalty payments, based on a transfer pricing analysis using the transactional net margin method (TNMM).
The European Commission had challenged this arrangement, arguing that LuxOpCo’s tax base was unduly reduced, effectively constituting state aid.
However, the General Court identified factual and legal errors in the Commission’s analysis and annulled its decision, a position now affirmed by the CJEU.
The CJEU agreed with the General Court’s conclusion but based its decision on different grounds.
Echoing its approach in the Fiat judgment of November 2022, the CJEU held that the OECD transfer pricing guidelines could not be part of the “reference framework” for assessing normal taxation in Luxembourg.
This is because Luxembourg law did not explicitly refer to these guidelines.
Thus, the European Commission’s decision was fundamentally flawed.
The CJEU concluded that even though the General Court had used an incorrect reference framework, its ultimate decision to annul the Commission’s decision was correct.
The CJEU, therefore, chose to rule directly and confirm the annulment of the European Commission’s decision.
This judgment aligns with previous rulings in the Fiat and ENGIE cases, underscoring that the European Commission cannot enforce non-binding OECD transfer pricing guidelines over national legal frameworks.
However, these guidelines may still be relevant if they are explicitly referenced in national laws.
The judgment also has implications for the pending appeal in the Apple case, which similarly involves intragroup profit allocation and the definition of the correct reference framework.
Additionally, it influences other ongoing formal investigations, although details on these cases remain non-public.
The CJEU’s decision marks a crucial development in the landscape of EU state aid law, particularly concerning the application of transfer pricing rules and the boundaries of the European Commission’s powers.
It highlights the importance of national legal frameworks in determining the arm’s length principle and sets a precedent for future cases involving similar issues.
If you have any queries about this article on the Amazon and Luxembourg state aid case, or Luxembourg tax matters in general, then please get in touch.
The Bermuda Government is consulting on the introduction of a corporate income tax, a significant policy shift driven by the OECD’s Pillar Two global minimum tax rules, known as the GloBE Rules.
This move aims to align Bermuda with international tax standards and mitigate the impact of top-up taxes under the GloBE framework.
The new tax regime in Bermuda is designed to ensure that taxes paid by Multinational Enterprise Groups (MNEs) in Bermuda are accounted for under the GloBE Rules.
The Bermuda Government is considering a corporate income tax rate between 9% and 15%, aiming to avoid exceeding an overall 15% effective tax rate for MNEs operating in Bermuda.
The tax would primarily affect Bermuda businesses that are part of MNEs with annual revenue exceeding €750M.
Certain sectors, such as not-for-profit groups, pension funds, and investment funds, would be exempt from this corporate tax.
Provisions for tax credits and qualified refundable tax credits, as defined in the GloBE Rules, will be included in the new tax regime.
Most Bermuda entities, especially those with annual revenues below €750M, will not be affected by the new tax.
The Bermuda Tax Reform Commission is exploring restructuring existing tax regimes to reduce living and business costs on the island.
The first consultation period runs from August 8 to September 8, 2023. Interested parties can submit comments through the government’s website or through legal contacts in Bermuda.
A more comprehensive second consultation is planned for later in the year to address specific aspects of the proposals, including scope, tax computations, and transitional matters.
The introduction of a corporate income tax in Bermuda marks a shift towards global tax compliance standards.
The new tax regime will affect how MNEs structure their operations and tax strategies, particularly those with significant activities in Bermuda.
Bermuda’s government must balance the new tax regime’s implications for the local economy with international tax obligations.
Bermuda’s potential introduction of a corporate income tax signifies a notable adaptation to the global tax landscape, particularly in response to the OECD’s GloBE Rules.
It also highlights the increasing international pressure on tax havens to comply with global minimum tax standards, and it underscores the need for MNEs to reassess their tax strategies in light of evolving international tax policies.
If you have any queries about this article on Bermuda Corporation Income Tax, or Bermuda tax matters in general, then please get in touch.
A significant development occurred on 19 December 2023 with the US Treasury Department’s announcement of the activation of the US-Chile Tax Treaty.
This Convention, formally known as the Convention Between the Government of the United States of America and the Government of the Republic of Chile for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital – a bit of a mouthful! – marks a milestone as the first new U.S. tax treaty in over a decade.
Initiated in 2010, the treaty faced an extensive delay in the U.S. Senate, primarily due to aligning it with the 2017 Tax Cuts and Jobs Act’s (“TCJA’s”) radical changes.
Finally, in July 2023, the Senate gave it the nod, incorporating two crucial TCJA-related reservations.
This ratification opened doors for Chile, positioning it as the first nation to establish a new tax treaty with the U.S. in this era.
The Treaty introduces significant reductions in withholding taxes across various domains:
For dividends issued by a U.S. corporation to a Chilean owner, the withholding rate is generally reduced to 15%.
It further drops to 5% if the recipient is a company holding a minimum of 10% of the voting stock.
Interest payments see a withholding tax cut to 15% for the first five years, post-Treaty enforcement, and 10% thereafter. Notably, for certain beneficiaries like banks and insurance companies, this rate is as low as 4%.
The Treaty caps the withholding tax on royalties at 10%, with specific exceptions.
Residents of either country selling shares in the other’s companies are taxable only in their resident nation, subject to meeting certain criteria.
Additionally, the Treaty introduces a limitation-on-benefits provision to curtail treaty shopping, aligning with U.S. treaty practices.
The Senate’s ratification came with two critical reservations, later approved by Chile’s National Congress, ensuring the Treaty’s compatibility with the TCJA:
The Treaty’s provisions on withholding taxes will be applicable to payments made or credited from 1 February 2024, onwards.
Other tax provisions will be effective for tax years starting 1 January 2024.
Additionally, the provisions for information exchange are effective immediately.
The US-Chile Tax Treaty is important as it potentially creates a template for future US tax treaties.
For persons effected by the new treaty, understanding and potentially leveraging its benefits of will be key to optimising cross-border operations.
If you have any queries regarding this article on the US-Chile double tax treaty, or US or Chile tax matters in general, then please get in touch.
If you have any queries about this article on New Zero Tax Rate on Photovoltaic Systems in Germany, or German tax matters in general, then please get in touch.
On 5 December 2023, Saudi Arabia unveiled a significant tax incentive program for Regional Headquarters (RHQs), marking a strategic move to attract foreign companies and investments.
This announcement, involving a tax holiday and withholding tax exemptions, is set to bolster Saudi Arabia’s position as a regional business hub.
RHQs will benefit from a 30-year tax holiday, offering substantial savings and financial advantages.
Payments made by RHQs will be exempt from withholding taxes, further enhancing the financial benefits of establishing an RHQ in Saudi Arabia.
– While the broad framework of the tax incentives has been announced, specific details regarding eligibility, compliance procedures, and anti-abuse measures are still forthcoming. These details are crucial for companies to understand the full implications and requirements of the program.
This tax incentive package positions Saudi Arabia as an attractive destination for multinational corporations looking to establish RHQs in the region.
Companies with existing RHQ licenses or those considering setting up RHQs in Saudi Arabia will need to reassess their business strategies and plans in light of these new incentives.
It is anticipated that relevant Saudi regulatory agencies will soon publish comprehensive rules outlining the incentive package. This will include information on eligibility criteria, reporting obligations, filing requirements, and measures to prevent abuse.
The introduction of these tax incentives is expected to significantly impact the regional business landscape, potentially leading to increased foreign investment and corporate activities in Saudi Arabia.
Saudi Arabia’s introduction of a 30-year tax holiday for RHQs, coupled with withholding tax exemptions, is a bold initiative aimed at enhancing the country’s appeal as a key player in the regional economy.
Foreign companies and investors should closely monitor the release of further details to capitalize on these incentives and align their operational strategies accordingly.
This move demonstrates Saudi Arabia’s commitment to fostering a conducive business environment and attracting global business presence.
If you have any queries about this article on Saudi Arabia Regional Headquarters Program, or Saudi Arabia or GCC tax matters in general, then please get in touch.