The signing of this pact on 5 October 2015 marked the end of a long road towards an ambitious development in world trade.
The Trans-Pacific Partnership (TPP) was signed by 12 Pacific Rim countries, including the US and Japan on 5 October 2015. The sweeping trade pact involves nations that make up nearly 40% of the world's economy – a combined GDP of US$30trn – and a total population of 800 million. Viewed by many as the most important trade deal negotiated in more than 20 years, the pact is expected to boost trade and investment flows between the participating countries and stimulate economic growth.
For a start, the pact slashes some 18,000 tariffs among the dozen participating countries. Low wage economies like Vietnam, which are hugely reliant on exports, will be among the biggest beneficiaries of the reduced duties. Other features include a pledge by members not to devalue their currencies to make exports cheaper and more effective enforcement of environmental laws and labour rights.
The pact will also lift curbs on foreign equity restrictions in certain countries, opening up previously closed sectors like private healthcare, telecommunications and energy to foreign competition. Huge benefits will also be seen in easing the trade in services across borders, which has traditionally been a difficult and sensitive area. This also applies to government procurement in certain countries that have allowed only limited access to foreign bidders in the past.
Winners and losers
The pact has its detractors however. For example, after much debate, next generation biological drugs have been granted an exclusivity period of only five years. This is far shorter than the 12-year protection period sought by US companies, which claim that the exclusivity period is insufficient to encourage investment in expensive innovative treatments.
Protection of local homegrown businesses and domestic interests is also a key concern for many of the governments involved, especially as the pact still needs to be ratified by the national legislatures of the participating countries.
Likely impact on members
For countries with free trade and economic partnership agreements already in place, the benefits to be gained from the TPP will be incremental. For example, Singapore currently has 21 such agreements in place, but 30% of its total goods trade will come under the TPP and 30% of foreign direct investment into the country – numbers which are by no means insignificant.
Apart from reduced tariffs for exporters, there could be indirect benefits for companies engaged in services such as shipping and financing from increased trade between TPP member nations. Likewise, countries with strong trade and economic linkages, such as the ASEAN nations, could benefit from the knock-on effects of the boost to trade and investment in these countries.
The TPP is a game-changer which is expected to have a profound impact on the economic and trade interactions of its member nations for years to come. Much remains to be done, not least the ratification of the pact itself by the individual countries to give it full legal effect. Still, the prospect of increased trade and investment flows bringing economic benefits across what would be the single largest regional trade bloc in the world is indeed cause for cheer, particularly in a world increasingly prone to bouts of protectionism and inward-looking policies.
For more information, contact:
Lam Fong Kiew
Nexia TS, Singapore
T: +65 6534 5700
Oil prices may be set to pick up, but prepare for a bumpy ride.
Crude oil prices have fallen dramatically from their peak of over US$120 a barrel just a few years ago to the mid US$30s a barrel just recently. In 2015, crude oil ranged from US$35 to US$84 a barrel. The volatility will certainly continue, but will prices begin trending higher in 2016? Some commentators believe there are signs that oil may begin to recover some of its momentum in the second half of 2016, but it will be a rollercoaster in the meantime.
Andy Lipow, who is an industry expert with years of experience following the oil market and president of Lipow Associates, believes that crude oil prices will begin to improve and begin a slow ramp towards US$55 by January 2017. As Mr. Lipow notes, that path will be more volatile than people expect and the ride may be bumpy. There is plenty of bearish news including the U.S. having reached 480 million barrels in crude inventories and the likelihood that inventories will continue to climb. This increase in supply will have a negative impact on pricing. In addition to increasing inventories, OPEC met in November 2015 and did nothing to ease the over production that is currently in place. Iran’s increased production will soon begin to hit the market as sanctions are lifted, further adding to the oversupply. Unfortunately all of this adds up to an ugly first quarter of 2016 for the oil market, leading to the possibility of US$40 or less per barrel oil.
Oil production on the decline
Mr. Lipow does see some signs for optimism. The shrinking rig count is finally having an effect and onshore oil production in the U.S. is declining. The Energy Information Administration estimated that production dropped from 9.6 million barrels per day in May and June 2015, to 9.1 million barrels per day in October 2015. In addition to declining production, the major oil companies have seen terrible upstream earnings, which will result in increasing cuts to costs, investments and jobs.
Shell, for example, cancelled its big Arctic project and its Carmon Creek Canadian oil sands project, and has cut more than 6,500 jobs worldwide. Other oil and gas plays of similar high cost or heavy investment will be delayed or will be cancelled altogether. With oil companies cutting costs, the dividend cuts will follow, with the following companies having already cut their dividends or are expected to in the near future: Denbury Resources, Cheasapeake, Transcocean, ConocoPhillips, BP, and Occidental. All of this means that oil prices will need to rise to encourage additional production.
Furthermore, Mr. Lipow believes that there is very little geopolitical risk premium in the market at the moment. As violence continues in the Middle East, and Venezuela and Nigeria deplete their foreign reserves, there will be further upside to the oil market.
In October Abdalla Salem el-Badri, the Secretary General of OPEC, publicly said, “because investment in new or expansion projects has plummeted, supply will tighten and as supply falls, prices inevitably will rise.” El-Badri also said that global investment could be down to US$130bn for 2015 from its level of US$650bn in 2014.
In the short-term it seems likely that we will continue to be at the mercy of volatile swings in the oil market, but over the longer term, as production begins to fall, some believe market pricing will pick up towards the second half of 2016.
For more information, contact:
Whitley Penn, US
T: +1 713-386-1173
If you’re considering an acquisition, there are crucial elements to have in place before you sign on the dotted line.
Owners of privately-held businesses are usually in pursuit of growth. Growth can be a complicated proposition, with speed and tactics all dependent on specific growth goals. Whether you want to increase the number of clients, staff or services, or perhaps expand into new markets, organic growth is usually part of the plan. But if your growth goals are more aggressive, a strategic acquisition might be the right path for your company.
How acquisitions generally work
In most acquisitions, a company buys another company with cash, stock or a combination of the two. The purchasing company can achieve economies of scale, increased efficiencies and enhanced market visibility. The acquisition can also expand the company’s client base and talent pool, add new capabilities and markets, and help increase shareholder value, among a variety of other benefits.
Positioning is everything
This strategic path to growth is attractive to owners of privately-held businesses whose companies are strong and thriving. A company that is best positioned to acquire another should meet four essential criteria:
Obtain guidance along the way
Throughout the acquisition process, it’s important to work with a trusted advisor for strategic guidance. Careful planning with acquisition professionals will help you make smarter decisions and avoid pitfalls. The right advisor will also explain the financial consequences of your acquisition options. As well as discussing risk factors, the advisor should explain value creation opportunities related to your company.
Prosperous companies with good management teams, strong business models and access to capital can take advantage of acquisition opportunities, even in a volatile market. No matter the structure, an acquisition can create synergy that makes the value of the resulting company greater than the sum of its original parts.
For more information, contact:
CliftonLarsonAllen LLP, US
T: +1 612 376 4500
Following the launch of the ‘Make in India’ programme by Prime Minister Narendra Modi in September 2014, the Indian Government has introduced various initiatives to make India a more conducive place to do business. Here are some of the most significant developments.
Relaxation of FDI norms
In a bid to woo foreign investors, the Government eased foreign direct investment (FDI) norms in November 2015 across 15 key sectors, including defence, construction, civil aviation, media, single-brand retail and private banking. These reforms have rationalised and simplified the process of foreign investment in India, including the provision of an automatic route to many sectors.
Exemption from MAT for foreign investors
The Minimum Alternate Tax (MAT) is an 18.5% tax on a company’s book profits, which targets companies that pay minimal or no tax through the use of various available tax reliefs. The Government has clarified that the MAT provisions will not apply to foreign institutional investors and foreign companies that do not have permanent establishment in India. This has had the intended effect of allaying the fears of numerous foreign investors currently active in the country.
In a significant policy statement, Modi has made assurances that India will no longer resort to retrospective taxation. This has considerably enhanced the outlook for potential investors who had been sceptical after the previous Government’s hawkish stand on the issue.
The Government has also constituted a ten-member panel to overhaul the provisions of Indian direct tax laws in order to reduce litigation arising from the ambiguous drafting of laws. It’s another example of the Government’s commitment towards helping make India a world-class place to invest.
The Government is also bringing in a long-awaited indirect tax reform through the introduction of the Goods & Service Tax (GST). This will be a national value added tax planned to be brought in from 1 April 2016.
Commitment to reform
As stated in a recent World Bank report, India is considered to be the world’s fastest-growing emerging market, with GDP expected to grow by 7.5% in the 2015/16 financial year.
Through its enactment of such wide-ranging reforms, the Modi Government has demonstrated its commitment to making India a popular destination for overseas investors, thereby turning the nation into a truly global investment hub.
For more information, contact:
Apurv Gandhi or Amol Haryan
Chaturvedi & Shah, India
T: +91 022 3021 8500
India’s FDI policy has been amended in order to liberalise and simplify investment from overseas.
The Indian Government’s amendments to foreign direct investment (FDI) policy in November 2015 are aimed at further improving the investment environment. The changes include: higher sectoral caps (to avoid fragmented ownership issues for foreign investors); allowing investment in more sectors under the automatic route (so that prior approval of the government is not required); easing of investment conditions; and opening up new sectors to FDI. The reforms are summarised below.
Single-brand retail trading
Limited liability partnerships (LLPs)
FDI in Indian companies without operations or downstream investments
Investments by NRIs
Establishment and transfer of ownership or control of Indian companies
Private sector banking
Threshold limit for FIPB approval
Other sectors with a new FDI cap or entry route
For more information, contact:
T: +91 22 6730 9000
What does 2016 have in store for investors and what can we learn from the performance of global markets last year?
It was a turbulent end to 2015, with many of the most significant events taking place in December. As we start the New Year, we are already seeing a major divergence in monetary policy between the Federal Reserve (Fed) and European Central Bank (ECB), which is likely to dictate the direction of markets in 2016. For now, markets appear to be in ‘wait and see’ mode. Following the Fed’s first interest rate hike in over nine years in December, the more hawkish members of the Federal Open Market Committee (FOMC) are very much in ascendance. In contrast, the ECB is moving in the opposite direction.
Cautious optimism in the eurozone
The outlook for the region continues to steadily improve, despite facing ongoing economic and political headwinds. However, the recovery remains fragile and the ECB sees downside risks to both its growth and inflation forecasts. An empowered Mario Draghi has set his stall out with strong messaging that the ECB will strengthen its efforts in the fight against deflationary pressures in the eurozone. Draghi has raised market expectations, so now he needs to deliver.
Clear forecast for the UK
Chancellor George Osborne delivered a politically astute Autumn Statement, with favourable revisions to public borrowing and tax revenue from the Office for Budget Responsibility (OBR) allowing him to ease back on controversial austerity measures. The big picture for the UK economy remains bright. The Chancellor still expects a budget surplus by 2019/20 and although economic growth remains unbalanced and driven almost solely by consumption, forecasts have held steady. The OBR expects growth of 2.4% in 2016. Wage growth has shown early signs of running out of steam, easing back towards the end of the third quarter. However this does warrant attention at the moment, as the UK remains in a sweet spot of low inflation (core CPI at 1.1%) and positive real wage growth, which continue to boost disposable incomes and support consumption growth.
Ultimately, there’s little pressure on the Monetary Policy Committee (MPC) to move on interest rates and, after a dovish Inflation Report in early November, interest rate expectations in the UK remain benign. We don’t expect a rate rise in the UK until at least the middle of this year. Moreover, given the ECB’s venture further into negative territory with interest rates, the MPC will be aware that a more hawkish tone will be deemed a relative tightening, and risk strengthening sterling further against the euro.
The FTSE 100 and its large sector exposure to commodities (through energy and materials) is likely to continue to drag on overall performance. We are reluctant to call a bottom for commodity prices, however, any rebound in prices and further evidence of stabilisation in China, could mean the FTSE begins to outperform after years of lacklustre performance. But for now and while the outlook remains clear, we continue to prefer the more domestically-focused companies.
US tightening cycle on the way
Following better than expected US labour market data in October, the Fed raised interest rates by 0.25% in mid-December. The Fed’s positioning, although clumsy at times, has no doubt shifted towards a more hawkish view of the US economy where a firming of the labour market is expected to finally trigger a return of inflationary pressures, and the need to raise interest rates. In recent months, the Fed shifted the focus from the timing of the first hike, to that of managing expectations over the path and magnitude of subsequent interest rate rises. The market is currently anticipating a shallow and gradual tightening cycle. Consequently, we expect the Fed to bring its forecasts for longer-term interest rates more in line with the market’s current view, but the messaging from Janet Yellen will be highly scrutinised by markets.
Analysis of recent US tightening cycles (1977, 1986, 1994 and 2004) shows that after a brief period of heightened volatility, equity markets continue to push higher following an increase in interest rates. This is a reflection of a stronger US economy and a supportive backdrop for companies. We are hopeful that this scenario plays out, but our view remains that the US economy is yet to fire on all cylinders and the Fed can afford to wait for firm evidence of inflationary pressures to come through. Although there’s little doubt the US economy can absorb a marginal interest rate rise, the risk that the move is deemed a policy mistake by markets cannot be ignored.
Clear tailwinds for markets over the next 12 months
Looking ahead for this year, the main risks for financial markets are likely to be a continuation of some of the key themes that dominated 2015. The environment of lower nominal GDP growth and inflation is likely to persist. Although, we could see inflation pick up marginally in the New Year as the anniversary of the sharp fall in oil prices causes year-on-year comparisons to increase. To date, we have seen little evidence of inflationary pressures coming through. Lower nominal GDP growth implies lower revenue growth for companies. This remains an additional concern for companies in the US who are already facing headwinds from a stronger dollar. Should there be another notable leg up in the US currency, emerging markets will continue to feel the squeeze, particularly those commodity exporters with sizeable current account deficits. Although emerging equity market valuations look relatively attractive, too much uncertainty surrounds the dollar, commodity prices and China to have high conviction at the moment.
While there are numerous risks facing markets, the clear tailwinds for markets as we start 2016 should not be ignored. Lower commodity prices remain a positive for consumption in the developed world and are likely to keep inflationary pressures subdued. In this environment, interest rates are likely to remain lower for longer and with ongoing financial repression, equity markets remain attractive for both income and capital growth. The eurozone and Japan markets appeal thanks to a combination of favourable valuations and ongoing quantitative easing are likely to produce better returns relative to the US next year.
Should sentiment continue to improve towards China, commodity prices begin to rebound and the US economy gather steam, then some of the unloved sectors in recent years, mainly those that are more cyclical and commodity-related, could come back into favour in 2016.
For more information, contact:
Smith & Williamson, UK
T: +44 207 131 8131
New regime with increased civil and criminal penalties in the pipeline.
The UK Government is committed to clamping down on tax evasion through the use of overseas tax havens. It plans to introduce and broaden civil and criminal penalties to increase the severity of punishments for enablers and evaders, as well as the corporations that fail to prevent evasion.
In July 2015 the UK Government announced a new regime to crack down on offshore tax evaders and has been consulting on some of the key issues involved in tackling the problem. As a result of these consultations, which ran until October 2015, offshore tax evaders and the professionals who enable such evasion will face even tougher sanctions. The Government has published draft legislation and will run another consultation in early 2016 to finalise this legislation.
Four earlier consultations, leading up to draft legislation issued on 9 December 2015, looked at the following:
1. A new criminal offence for offshore evaders to enable simpler prosecution.
2. A new criminal offence for corporates who fail to prevent the facilitation of tax evasion.
3. Strengthening civil deterrents and increasing financial penalties for evaders.
4. New and broadened civil sanctions for deliberate enablers of offshore evasion in relation to income tax, capital gains tax and inheritance tax. Among those who could be caught by this are those who act as a middleman, provide planning advice, deliver the infrastructure or give financial assistance.
Despite the increasing firmness of the Government’s approach, as highlighted by these consultations, HMRC is keen to stress that taxpayers have been given plenty of opportunity to regularise their affairs.
In preparation for the automatic exchange of taxpayer information between 90 countries from 2017 onwards, the UK Government is giving tax evaders a last opportunity for disclosure. If people do not take this opportunity, there will be tougher criminal and civil sanctions for evaders as well as a strengthening of the approach for corporates and enablers. It appears that the Government is sending its clearest message yet that they are closing in on offshore evaders, in the hope that over the long term it will create a culture of increased compliance.
For further information, contact:
Rajesh Sharma Smith & Williamson, UK
T: +44 (0)20 7131 4181
T: +44 (0)20 7131 4393
Familiarity with the differences between regulatory climates can help strengthen relations and increase the ability to navigate global challenges with greater success.
"Each time I must choose between you and Roosevelt, I shall choose Roosevelt." These were Winston Churchill’s words to France’s Charles de Gaulle shortly before D-Day, signifying the strength of the British-American alliance. Even now, as Britain considers its future relationship with the European Union, many of its citizens agree there is still one country they will never walk away from.
The UK is the single biggest contributor of foreign direct investment in the US (approximately US$42bn), and the US gladly returns the compliment (approximately US$16bn). However, despite the mutual respect and trust, shared trade opportunities and common language, a few regulatory matters still manage to get lost in translation. Here’s a brief list of the concepts that can stymie people on either side of the pond as they conduct business between the two countries.
When engaging in US-UK trade, it’s wise to acknowledge and understand the differences in the two countries’ laws and customs, and the terms above are a good place to start.
T: + 1 (646) 475-8345
Finding the right advisers is a key part of keeping a business strong, despite a changing marketplace.
“It is not the strongest of the species that survives, nor the most intelligent. It is the one that is most adaptable to change,” according to Charles Darwin. Although Darwin was referring to the evolution of mankind, this principle applies equally to many businesses that have managed to stay afloat through the financial difficulties of the last decade.
Managing change is vital to the success of a business at every stage of its lifecycle – from incorporation, to operations restructuring or transformation, to succession or exit. Finding adaptable business solutions and the right professional support are just as critical.
Shareholders and management teams around the world need to ask the same post-financial crisis questions: What’s the best direction for my company to take? How can we better adapt to a changing market? How can we improve operational efficiency? In order to improve a company’s competitive edge, the answers to these questions may lie in, for example, restructuring, business remodelling or acquisitions.
Even if major change isn’t necessary or desired immediately, it’s critical to have an accurate assessment of the current situation, along with potential scenarios and prospects for the future.
The first step is to analyse the position of the business – and not just in terms of operations, finances, legal matters, HR or marketing. Business leaders should also be aware of the regulatory environment that may impact their operations and structure as part of their strategic planning, from both a local and international point of view. Business leaders need to have a complete, holistic view of their business if they are to successfully devise a strategic plan that will serve their specific interests over the long term.
The ideal adviser will be a specialist who can work collaboratively with management and help with decision-making. It’s important to have an unbiased picture of the company’s current position as well as an achievable vision for the future. So it’s critical to carefully consider the best person for the job of creating a future strategy. People within the business will tend to view it with ‘insider’ eyes, so they may not be in the best position to do this.
Beyond having the right skills, an adviser should be able to identify and develop the optimal solution from a range of possible scenarios, choosing the one that best suits and serves both the interests of the shareholders and the market environment.
The adviser should be adept at using diagnostic tools as the basis of a strategic assessment and at getting feedback from each of the key areas of the business. A business valuation is often helpful for business leaders to position themselves in their market and gain an objective view of their status.
Although we live in an uncertain world, proper planning and having the right team in place can make all the difference in preparing for change.
VGD Ferencz & Partner Kft., Hungary
T: +36 1 225 7575
In January 2016, the International Accounting Standards Board (IASB) issued a new accounting standard, IFRS 16 Leases. This new standard supersedes the existing IAS 17 Leases and related interpretations.
A company is required to apply IFRS 16 from 1 January 2019 but it can decide to apply IFRS 16 before that date as long as IFRS 15 Revenue from Contracts with Customer is also applied.
Leasing is widely used by many organisations, enabling them to use property, plant and equipment without incurring large initial cash outflows.
IAS 17 classified leases as either ‘finance leases’ or ‘operating leases’. Finance leases were reported on the balance sheet, whereas operating leases were reported off the balance sheet. This led to lack of transparency about lease obligations and a failure to meet the needs of the users of financial statements.
IFRS 16 eliminates the classification of leases as finance and operating leases. All leases are to be reported on a company’s balance sheet as assets and liabilities. Some exceptions exist; IFRS 16 does not require a lessee to recognise assets and liabilities for:
The result of applying IFRS 16 will be an increase in lease assets and financial liabilities. Hence, for companies with material off balance sheet leases, there will be a change to key financial ratios which would be derived from the company’s reported assets and liabilities, for example gearing ratio, current ratio, asset turnover, etc.
A lessor will continue to classify leases as either finance leases or operating leases applying IFRS 16, and account for those two types of leases differently. Compared to IAS 17, the new standard requires a lessor to disclose additional information about how it manages the risks related to its residual interest in assets subject to leases.
The IASB concluded that the benefits of IFRS 16 will outweigh the costs. Thus, IFRS 16 will result in a more faithful representation of an organisation’s assets and liabilities. As a result, it will provide greater transparency about the company’s financial leverage and capital employed to all market participants. This will improve comparability between companies that lease assets and companies that borrow funds to buy assets.
How the landmark Maruti Suzuki case has affected tax legislation in India
In this era of globalisation, the momentum of growth achieved by India has attracted a multitude of multinationals (MNCs) setting up subsidiaries in the country. To safeguard diminishing tax revenues, a wide range of regulations are being introduced by the Indian Revenue Authorities (IRAs), many of which affect transfer pricing.
Over the past couple of years, MNCs across India have had to deal with a significant number of transfer pricing adjustments regarding marketing intangibles. The dispute in the Maruki Suzuki case arose because the IRAs alleged that the taxpayer had contributed to the brand (legally owned by the parent company) by incurring excessive advertisement, marketing and promotion (AMP) expenses.
The authorities used the bright line test (BLT) method to determine the excessive amount of AMP. By way of background, the BLT compares the AMP expenses incurred by the assessee with AMP expenses incurred by comparable companies. The Indian Revenue Authorities have been making transfer pricing adjustments in respect of “excessive” AMP expenditure incurred by Indian subsidiaries of foreign MNCs based on this BLT method. This approach was largely upheld by a decision in the case of LG Electronics India Pvt Ltd, and has then been applied to many other taxpayers’ cases.
A number of appeals have been made to the Delhi High Court and in March 2015, a ruling in the Sony Ericsson case quashed the practice of using the BLT methodology for determining an arm’s length price. It held that the AMP expenditure should be viewed as a bundled transaction as these expenses are incurred as part of distributional activities. In the Sony Ericsson case, the existence of an international transaction was not challenged. In fact, the ruling provided much needed clarification regarding the position of distributor entities.
The recent landmark ruling by the Delhi High Court in the case of automobile manufacturer Maruti Suzuki India Limited has clarified that, according to Indian transfer pricing regulations, AMP expenditure incurred by manufacturing entities cannot be treated as being incurred in respect of an international transaction and so used in a review of prices charged for cross-border transactions. The court in this case distinguished the verdict laid out in the Sony Ericsson decision and, in particular, stated that:
This ruling by the Delhi High Court is a welcome one, since it has provided a road map for how to deal with such a contentious issue. Nevertheless, relations between industry and the Government in India have drastically changed over the years following the adoption of various beneficial policies by the Government. This legal clarification safeguards the interests of many multi-national corporations and should also have a positive impact on the investor-friendly environment in India.
Chaturvedi & Shah, India
T: +91 22 4009 0645
During 2015, Ukraine made significant progress in implementing reforms across key areas such as the economy, education and science, although there remains a lot more to do.
The National Reforms Council has become a platform for discussion of key issues around Ukraine’s future. Leaders from across the country, including the president, prime minister as well as representatives of civil society and business associations gathered 17 times in 2015 in order to express their views on the reform process. More than 30 topics were discussed and over 200 decisions were adopted, around three-quarters of which have been implemented through draft laws, laws and other legal documents.
The Council is now monitoring the progress of priority reforms, taking public reaction into account.
To view the Report of the National Reforms Council Project Management Office, visit:
Nexia DK, Ukraine
T: +38 032 298 8540
Italian regulations around permanent establishment (PE) have been under the spotlight since a number of changes were introduced by a decree reforming tax ruling procedures in October 2015.
“Companies carrying out multinational activities” may start a dedicated procedure aimed at reaching a five-year validity agreement with Italy’s Inland Revenue, concerning:
With regards to b) and c), foreign companies which are considering operations in Italy may initiate this procedure and open early consultations with the Italian tax authorities in order to assess the potential identification of an Italian PE. However, consultations on this matter should be shared with the other state’s tax authorities through a ‘Mutual Agreement Procedure’.
Moreover, the decree aligned the Italian rules on profit attribution to PE with the OECD “functionally separate entity” approach (Report on the attribution of profits to Permanent Establishments”, 22 July 2010). On the basis of the Italian corporate income tax code, the PE attributable income and its “free” capital shall result from an analysis of functions performed, risks assumed and assets used by the PE, and be considered as a functionally separate and independent entity. Furthermore, the prices applied to transactions between PE and its parent company must be set in compliance with the arm’s length principle.
The decree also provides an optional “branch exemption” regime, an alternative to “foreign tax credit” relief, which allows Italian companies to be exempt from tax on their foreign PE income and losses from outside Italy.
The PE tax framework is rapidly evolving and companies should re-examine domestic rules in conjunction with recent OECD BEPS Action Plans to allow a revision of current flows and implementation of more effective tax value chain models.
Gian Luca Nieddu or Federico De Rosa
Hager & Partners, Italy
T: +39 (02) 7780711
Missing R&D tax relief? Our member firm in #Scotland can help! https://t.co/gZscZExcTT
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