Issue 24.pdf

6 WORLD WIDE TAX NEWSmauritiusBudget highlightsThe 2011 Budget was presented on19 November by the Vice-PrimeMinister and Minister of Finance PravindJugnauth. The Budget is intended to pavethe way for Mauritius to avail itself of theopportunities stemming from a changing worldeconomic order.The taxation measures include:––The taking of steps to ensure that the VATbenefits currently provided to medium-sizedand large exporters of sugar will also beavailable to small planters––Profits and gains from the sale of land andother immovable property by companies willbe subject to income tax at 15%. The valueof properties acquired before 1988 will bedetermined by a prescribed formula––In the case of individuals, the rate of tax willbe 10%, except on the first MUR 2 million.Property inherited or transferred from parentsor remoter forebears will be exempt––The income tax exemption for freeportoperators is being extended by a further twoyears, to 30 June 2013––Companies holding a Category 1 globalbusiness licence will now be authorised tocarry out business in Mauritius. They will besubject to tax at the rate of 15% in commonwith other domestic companies. They willalso continue to benefit from the same taxtreatment as currently available for theiroperations outside Mauritius––Banks will continue to pay the special levy of3.4% on profits and 1% on turnover for thefinancial years 2011 and 2012––Individuals deriving taxable and exemptincome exceeding MUR 2 million per annumwill be subject to a solidarity income taxof 10% on their exempt income, such asdividends from resident companies, andinterest––In all other cases, the exemption of interestincome from tax is reinstated as from1 January 2010. Tax already withheld will beset off against tax payable on returns for 2012and 2013; any balance will be repaid in 2013––National residential property tax is abolishedas from 1 January 2010––Excise duty on a wide range of goods isincreased––The additional 5% rate of land transfer tax isto be abolishedGILBERT SEEYAVEgilbert.seeyave@bdo.mu+230 202 3000sri lankaBudget highlightsAn expansive tax-cutting budget wasdelivered on 22 November by PresidentRajapakse in his capacity as Minister ofFinance.The measures include:––A reduction across the board in rates ofincome tax for individuals, particularly forhigher incomes. The current 5% — 35% ratestructure is to be replaced by a 4% — 24%structure. Whereas the 35% rate currentlyapplies to the slice of taxable income aboveLKR 2.7 million, the new 24% top ratewill apply to that part of income aboveLKR 3 million––The main rate of company tax is to bereduced from 35% to 28%––The 20% luxury rate of VAT is to be abolished.In future, VAT will be charged at either thestandard 12% rate or the zero rate. Severalnew categories of supply are to be exempt––The rule limiting deductible input VAT to85% of the output tax is to be abolished withrespect to invoices dated after 31 December2010. Unused input VAT on earlier invoicesmay be amortised over four years––Several minor taxes, such as debits tax andthe social responsibility levy, are to be phasedout or abolished outrightK KUMAR RAJkumarraj@bdo.lk+94 11 242 1878cyprusNew protocol to Russia treatyThe long-awaited signing of the Protocolto the double tax treaty between Russiaand Cyprus was signed on 7 October inNicosia during the visit of President Medvedev.The Protocol had been agreed in April 2009 andis now pending parliamentary ratification andshould be in force by 1 January 2011.The importance of the Protocol is reflectedin the scale of the financial ties that existbetween Cyprus and Russia. The double taxtreaty is largely responsible for Cyprus’srôle in channelling investments into Russia,which over the last five years has exceededUSD 52 000 million. Equally, Russia is thelargest foreign investor into Cyprus with overUSD 1000 million invested to date.The Protocol and negotiations of amendmentsto Russia’s Double Tax Treaties are parts ofthe overall policy of the Russian authoritiesto achieve more transparency in internationaltaxation. The signing of the Protocol is seen asvery important for the continuing successfulrelationship between Cyprus and Russia. Theremoval of Cyprus from the so-called ‘blacklist’sends a strong positive message to business.The application of a number of articles in theProtocol depends on potential changes inthe legislation and/or practices in Russia. Inparticular the introduction of managementand control rules can have an impact theapplication of the ‘residence’ article. We shalldiscuss these important developments later inthis article.Main features of the ProtocolWithholding-tax rates remain unchanged,though the direct investment required to takeadvantage of the reduced 5% withholdingtax rate for dividends is changed fromUSD 100 000 to EUR 100 000. Interest androyalty withholding-tax rates remain at zero.The Protocol clarifies that distributions frommutual funds and similar investments will beconsidered dividends and subject to the normalwithholding-tax rates applying to dividends i.e.5% or 10%. This clarifies an uncertainty thatexisted regarding the rates that should apply onsuch distributions.The definition of dividends has also beenextended to cover distributions from sharesheld in the form of depositary receipts.The definition of interest has been substantiallyaligned with the OECD definition of interestclarifying that the term also covers incomefrom debt-claims of every kind, whetheror not secured by mortgage and whetheror not carrying a right to participate in thedebtor’s profits. The impact of these changesis that interest reclassified by the Russian taxauthorities as dividends (e.g. due to Russianthin capitalisation rules) will be subject tothe withholding-tax rates for dividends. Thedefinition does not include penalty charges for