Software Tax Characterization Helpdesk Quarterly April 2012

Transcription

1 Software Tax Characterization Helpdesk Quarterly April 2012 Characterizing foreign software revenues is a complex challenge for large and small software firms alike. Variations in the rules around the world affect the best way to do business in a given market. LawInContext s Software Tax Characterization Helpdesk is an online resource for software companies seeking to quickly access relevant legal and tax information in order to more efficiently manage their global withholding tax exposures in 40 countries around the world. This newsletter highlights a few of the recent updates and developments from the period of January - March 2012 that are covered in more detail within the Software Tax Characterization Helpdesk. For more information on the Software Tax Characterization Helpdesk please visit or contact us at info@lawincontext.com. INSIDE THIS ISSUE Key Country Developments for : The Americas Colombia United States Asia Pacific India Malaysia New Zealand Europe Czech Republic France Russia Site Demonstrations with Free Trial Access! Software Tax Characterization Country Coverage LawInContext Contact Information Key Country Developments The Americas COLOMBIA Colombia - Switzerland Tax Treaty The tax treaty between Colombia and Switzerland entered into force on January 1, For more information, see topic: Statement of the Law, subtopic: Treaty Law. See

2 also related discussions in topic: Application of Law, subtopics: Single vs. Multiple User Licenses; Perpetual vs. Limited Duration Licenses; Physical vs. Electronic Delivery; Standardized vs. Customized Software; Other Relevant Contractual Terms; Direct vs. Indirect Software Transfers; and Software Reproduction Licenses. UNITED STATES Source of Royalty Payments for Use of Software Copyrights See topic: Statement of the Law, subtopic: Domestic Law, for commentary on the US Tax Court's SDI Netherlands decision, which centered on the source of payments of royalties for the use of software copyrights in the context of foreign-to-foreign royalties. Audit Activity - Foreign Tax Credits See topic: Audit Activity, subtopic: Foreign Tax Credits, for commentary on Internal Revenue Service (IRS) Notice , which, in the context of software transactions, focuses (in broad terms) on foreign tax credit availability to US taxpayers under US Internal Revenue Code (IRC) Section 901(l) - an IRC section that, in general terms, disallows foreign tax credits to US taxpayers for withholding taxes on any item of income (other than dividends) or gain with respect to property if the recipient of the item of income has not held the property for more than 15 days or is under an obligation to make related payments with respect to positions in substantially similar or related property. Audit Activity - Other Issues See topic: Audit Activity, subtopic: Foreign Tax Credits, for commentary on: (i) the availability of the IRC Section 199 deduction (which is equal to nine percent of a taxpayer's qualified production activity income) requiring a separate computation of gross receipts relating to the embedded service component of software transactions; (ii) the IRS Industry Director's Directive (February 4, 2011), which, in broad terms, provides that examiners may assert the "bundle of rights" argument in "emerging issues" - an argument that, in the context of software transactions, can result in a disallowance of tax benefits in certain circumstances; and (iii) CCA (February 11, 2011), where the IRS provided that the sales of computer software related copies to end users in the US do not, in and of themselves, give rise to an investment in US property within the meaning of IRC Section an IRC section that, in broad terms, triggers a "deemed dividend inclusion" to US shareholders of a controlled foreign corporation having an investment US property (within the meaning of that section). Asia Pacific INDIA Shrink-wrapped Software Characterization In two recent cases, the High Courts of Delhi and Karnataka ruled differently on the issue of whether payments made by importers of shrink-wrapped software to their foreign suppliers would constitute royalty both under the Income Tax Act (IT Act) as well as under the relevant Double Taxation Avoidance Agreements (DTAAs) on various grounds.

3 This discrepancy in jurisprudence could lead to a Supreme Court appeal in at least one of the cases. For more information, see topic: Statement of the Law, subtopic: Domestic Law; topic: Application of Law, subtopic: Standardized vs. Customized Software; and topic: Practice, subtopic: Audit Activity. Characterization of Consideration for Use of Computer Software under a Software License and Maintenance Agreement In the recent case of IT Millennium Software Ltd., the Authority for Advance Rulings ruled that the consideration received for use of computer software under a software license and maintenance agreement is in the nature of a royalty both under the provisions of the IT Act and India-Sri Lanka DTAA, and, therefore, would be subject to withholding tax. See topic: Application of Law, subtopics: Single vs. Multiple User License; Physical vs. Electronic Delivery; and Software Reproduction Licenses. MALAYSIA Proposed Implementation of Goods and Services Tax (GST) In the recent Budget 2012, the Malaysian Government did not announce any date for the implementation of the GST. The second reading of the GST Bill was also postponed in anticipation of the Budget See the homepage of the Malaysia country report and topic: Statement of the Law, subtopic: Domestic Law. New Double Taxation Agreement (DTA) signed with Laos Malaysia s DTA with Laos is now in force. The DTA covers the payment of dividends, interests, royalties, and fees for technical service. See the homepage of the Malaysia country report. NEW ZEALAND New Tax Treaties New Zealand recently concluded new tax treaties with Hong Kong and Turkey while successfully renegotiating treaties with Australia, Singapore and the United States. Treaties with Canada, the Netherlands and the United Kingdom are currently scheduled for renegotiation. See topic: Statement of the Law, subtopic: Treaty Law. New Zealand - Updated Tax Treaty Chart For an updated tax treaty chart between New Zealand and other countries, see topic: Country Summary; topic: Statement of the Law, subtopic: Treaty Law; and topic: Application of Law, subtopics: Software Reproduction Licenses; and Know-How.

4 Europe CZECH REPUBLIC Czech Republic - Updated Tax Treaty Chart For an updated tax treaty chart between Czech Republic and other countries, see topic: Statement of the Law, subtopic: Treaty Law and topic: Application of Law, subtopics: Single vs. Multiple User Licenses; Perpetual vs. Limited Duration Licenses; Physical vs. Electronic Delivery; Maintenance Contracts; Standardized vs. Customized Software; Direct vs. Indirect Software Transfers; Software- Related Services; and Software Reproduction Licenses. FRANCE Directive on Royalty Payments On November 11, 2011, the European Commission released its proposal for a recast of the Directive on royalty payments made between associated companies of different Member States. See topic: Statement of the Law, subtopic: Treaty Law. Standard vs. Customized Software Under the current administrative guidelines, standardized software is treated as a sale of goods and customized software is treated as sale of services. For more information, see topic: Application of Law, subtopic: Standardized vs. Customized Software. France - Updated Tax Treaty Chart For an updated tax treaty chart between France and other countries, see topic: Statement of the Law, subtopic: Treaty Law. RUSSIA Tax Incentives - Special Zones According to a new federal law, tax incentives for companies in the technology innovation zone will be increased. The profits tax for such companies should not exceed 13.5%, which may further be reduced by regional authorities. See topic: Statement of the Law, subtopic: Domestic Law.

5 Site Demonstrations with Free Trial Access! LawInContext is pleased to offer web-based site demonstrations with free trial access to the Software Tax Characterization Helpdesk. Please contact: Chris Hargraves +41 (0) The Software Tax Characterization Country Coverage The Americas Argentina Brazil Canada Chile Colombia Mexico Peru United States Venezuela Africa and The Middle East Israel South Africa Asia Pacific Australia China Hong Kong India Indonesia Japan Korea (South) Malaysia New Zealand Philippines Singapore Taiwan Thailand

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