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Mexican Labor Law Amendment Abolishes Outsourcing of Personnel

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On April 23, 2021, an amendment to the Mexican Labor Law was published in the Official Gazette of the Federation. Below are the key points about the amendment and how they will affect employers that outsource or subcontract work.

GENERAL PROVISIONS

According to the amendment, employers are no longer permitted to subcontract or outsource personnel. The law covers any individual or legal entity providing employees to be supervised and managed by a third-party client and that determines the services and work to be rendered. The law includes carve outs and exceptions under certain circumstances.

  • Specialized Services
    • The amendment permits the subcontracting of specialized services that are not part of the core business in terms of the company’s corporate purpose and activity registered before the Tax Administration Service (or Servicio de Administración Tributaria (SAT). Services will be considered specialized provided that they are not part of the core business of the company that receives them—the so-called “operating entity.”)
  • Companies in the Same Corporate Group
    • The amendment allows companies within the same corporate group, i.e., the “former service entity,” to render services or activities.
  • Employment Agencies
    • According to the amendment, employment agencies or intermediaries, which were previously referred to as “outsourcing companies”) may participate only in recruitment, selection, and training of candidates. The amendment states that the company receiving the services must be the one that conducts hiring.
  • Profit-Sharing Cap
    • Because some companies have attempted to avoid tax liabilities, they have adopted the practice of creating distinct companies that employ their workers. These companies are currently required to distribute 10 percent of the company’s taxable profits (PTU) to employees. The new amendment establishes a cap on these profit-sharing obligations. As a result, a maximum limit of three months’ salary or the average of the amount received in the last three years—whichever is more favorable to the employee—is now in place.

KEY OBLIGATIONS

  • Companies Providing Subcontracting Services
    • Companies that provide subcontracting services are required under the amendment to take the following actions:
  1. Obtain the registration certificate before the Ministry of Labor and Social Welfare or Secretaría del Trabajo y Previsión Social, (STPS). Among other obligations, the company must evidence that its tax and social security obligations are up to date. Companies are required to renew the certificate of registration every three years.
  2. Execute a contract for the provision of the specialized services.
  3. Submit a quarterly report to Mexico’s Social Security agency (Instituto Mexicano del Seguro Social or IMSS ) and Mexico’s housing agency, Instituto del Fondo Nacional de la Vivienda para los Trabajadores or INFONAVIT on the specialized services contracts executed, (Mexican Labor laws).
  4. Provide the contractor with a copy of the registration certificate before the STPS, tax receipts for payments of salaries, payment of withholding taxes and employer’s contributions and the value-added tax return, and a copy of the corresponding payment voucher.
  • Companies Contracting Specialized Services
    • Companies that provide specialized services are required under the amendment to take the following actions:
  1. Verify that specialized services are not part of company’s core business.
  2. Verify that the company providing the subcontracting services is registered before the STPS.
  3. Collect copies of:
    1. registration certificates before STPS;
    2. tax receipts for payments of salaries;
    3. receipts of payments of withholding taxes and payments of employer contributions; and
    4. value added tax returns and their corresponding payments.

CONSEQUENCES OF NONCOMPLIANCE

  • Labor
    • In the case of noncompliance, companies may be subject to fines of up to USD$222,000 and even incarceration of a company’s representatives.
  • Tax
    • Companies will not be able to credit or deduct taxes for subcontracting services, unless they fulfill the above requirements.
  • Criminal
    • Companies that do not comply with subcontracting obligations and attempt to deduct or credit taxes for the services of subcontracted personnel, or use simulation schemes for the provision of specialized services, will be subject to criminal liability for fraud.
    • Both the company that subcontracts and the one that employs subcontractors may be held jointly and severally liable for all labor, social security, and tax obligations, which they would have otherwise been obligated to pay.

Dentons Strengthens Dutch Tax Practice With The Hire Of Partner Sebastiaan Wijsman

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Amsterdam—Global law firm Dentons has strengthened its Tax practice in the Netherlands with the appointment of Sebastiaan Wijsman as a partner He joined the Amsterdam office along with associate Joost Boon on September 1, 2022.

With more than 17 years of tax advisory experience, Sebastiaan has built an excellent reputation as a leading lawyer with a particular focus on Dutch tax matters in the real estate sector. He started his career at Deloitte and then spent 12 years at DLA Piper, where he set up the VAT / Indirect Tax practice in the Netherlands. He advises multinationals, real estate funds and project developers on Dutch VAT, transfer tax, financing, tax due diligence, as well as other tax matters. He also has extensive experience in structuring complex real estate projects, joint ventures and investments. He frequently advises on the purchase and sale of real estate portfolios and the restructuring of real estate entities.

In addition to his qualifications as a tax lawyer, he has completed the prestigious Master of Real Estate from the Amsterdam School of Real Estate.

“We are delighted to welcome Sebastiaan,” said Benelux Managing Officer Marien Glerum. “His expertise at the intersection of tax and real estate will give both our growing Tax and Real Estate practice groups a significant boost. This expansion will accelerate our growth and development strategy and help us achieve our ambition to build a market-leading Tax advisory practice in Benelux and across Europe.”

Europe Co-head of Tax, Jurjen Bevers, said: “Despite being one of the smallest countries in Europe, the Netherlands is one of the most attractive places for international companies. Having a strong Tax practice here is indispensable in order to serve our global client base, and we are happy to be able to add this top legal talent to the team.”

Sebastiaan Wijsman commented: “As the world’s largest law firm, Dentons offers an unmatched platform to meet burgeoning client needs in an increasingly complex global tax and business landscape. The energy and drive in the Amsterdam office was obvious from the first conversations. I am really looking forward to using this positive momentum to support my clients on complex tax transactions and disputes, and ultimately help them achieve their business goals.”

Since entering the Dutch market five years ago, Dentons has more than doubled the size of its Amsterdam office in terms of both revenue and headcount. The Amsterdam office currently has 116 lawyers, civil-law notaries and tax specialists.

Dentons’ global Tax practice includes more than 300 lawyers and tax advisers worldwide, including more than 130 in Europe.

About Dentons

Dentons is designed to be different. As the world’s largest law firm with 20,000 professionals in over 200 locations in more than 80 countries, we can help you grow, protect, operate and finance your business. Our polycentric and purpose-driven approach, together with our commitment to inclusion, diversity, equity and ESG, ensures we challenge the status quo to stay focused on what matters most to you. www.dentons.com

 

Occasional self-employment: new obligation of prior communication. Beware of sanctions.

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In order to counter elusive forms in the use of occasional self-employment, the conversion law of the Tax-Labor decree introduces the obligation for the client to make a prior communication to the Labor Inspectorate, competent for the territory, by SMS or e-mail. . For non-compliance, the application of an administrative sanction from 500 to 2,500 euros is envisaged, in relation to each occasional self-employed worker for whom communication has been omitted or delayed. Specifically, the goal is to avoid the abuse of this type of contract in particular economic sectors as a tool to mask subordinate employment relationships and to reduce labor costs.

The conversion into law of the Tax-Labor decree (Legislative Decree No. 146/2021) introduces some changes to a type of contract which, unlike others, has not been the subject of particular interest for some time by the legislator: occasional self-employment.

Born as a contractual form to regulate those collaboration activities that do not fall within the discipline of subordination nor of self-employment relationships or coordinated and continuous collaboration, there is no doubt that over time the occasional self-employment, also thanks to the simplicity of use, it has been used by companies to regulate multiple occasional work situations (from intellectual and creative performances to the occasional business finder) but at the same time abused in particular economic sectors as a tool to mask subordinate employment relationships and to reduce labor costs .

Also thanks to the absence of a prior notification obligation to establish the relationship (and therefore to trace the relationship itself …) and to the free form of the contract, this type of contract is not subject to:

– the accrual of further indirect and deferred remuneration elements, typical of the subordinate employment relationship;

– the payment of contributions (within certain limits of annual remuneration) and of charges and insurance;

– to any legal constraint on the minimum amount of the remuneration, leaving ample autonomy to the Contracting Parties in defining the quantum.

Imagining the evolution of the relationship, what are the elements that characterize this type of contract?

General discipline of occasional self-employment

Occasional self-employment falls within the case of the “work contract”, governed by art. 2222 et seq. of the Civil Code.

From this point of view, the occasional self-employed worker is the person who carries out a work or service for a client, mainly with his own work, without subordination constraints, outside the coordination of the client and without functional integration into his organization.

The contract can be concluded in writing or even verbally, but for the purposes of the test it is always recommended that it be done in writing.

The service in question is also distinguished by the occasional nature of the same (absence of prevalence and habituality), from the self-employed activities usually carried out (although not exclusively), which are framed in the exercise of an art or a profession.

In particular, self-employment activities carried out habitually and professionally, unlike occasional self-employment activities, are always relevant for the purposes of VAT and social security legislation: in fact, the habitual self-employed worker is required, in any case, to opening of a VAT number and a social security position.

It should also be noted that the law does not identify any limit on income, or duration of the service, beyond which the earned income ceases to be considered “occasional” and becomes “habitual”, thus entering the field of application of VAT; however, it must be a relationship in which the parties’ interest ends when the established result is achieved.

Therefore, occasionality is excluded when the relationship is characterized by a lasting interest of the contractor or the client, respectively, to perform or receive one or more services over time (even if not periodic).

The lender, therefore, will be required to open a VAT number if he intends to carry out this activity professionally, systematically and regularly; if, on the other hand, the interest in receiving the professional service is mainly found in the client, then the relationship can only be of subordinate employment (even if discontinuous or on a fixed-term basis).

In any case, it is believed that the examination of the occasional or otherwise nature of the work relationship referred to in Article 2222 of the Civil Code must regardless of the extent of the remuneration and the number of services performed, since even more occasional self-employment services are possible between the same parties (think, for example, of a single fixed-term assignment, which however requires a plurality of services or interventions by the lender). 

Contribution and social security regulations

Starting from January 1, 2004, registration and payment to the INPS Separate Management of occasional self-employed workers is mandatory only and if the remuneration received exceeds the amount of 5,000 euros per year, taking into account the totality of all clients.

The contribution burden, according to the rates set out annually for the INPS Separate Management, is set:

– 2/3 at the expense of the customer;

– 1/3 at the expense of the lender.

and the social security taxable amount consists of the gross remuneration paid to the collaborator, less any expenses charged to the client.

For the overall remuneration received during the year exceeding 5,000 euros, the payment of the contribution to the Inps Separate Management will take place in the manner and within the terms provided for coordinated and continuous collaborations. 

INAIL insurance discipline

Occasional workers are not subject to the Inail welfare regulations provided for by the Presidential Decree n. 1124/65.

Tax discipline

The remuneration received by the occasional self-employed collaborator falls into the category of other income (art. 67 TUIR) defined as “income derived from self-employment activities not exercised habitually or from the assumption of obligations to do, not do or allow” and work performance occasional self-employed persons are subject, pursuant to the DPR n. 600/73, to the withholding tax of 20% upon payment of the fee and by the client

In the event that the occasional remuneration is paid to non-residents, the tax obligations are fulfilled by applying and paying a withholding tax of 30%.

This withholding tax must be calculated on the taxable part of the remuneration, excluding any reimbursement of expenses not subject to Irpef and being a tax, it must be considered definitive and therefore should not be adjusted in any tax return.

The innovations introduced by the conversion into law of the Tax-Labor decree

The conversion law of the Tax-Labor decree, concerning safety at work and inspections, introduces, in order to carry out monitoring activities and to combat forms of evasion in the use of occasional self-employment, the obligation for the client to carry out a prior communication to the Territorial Labor Inspectorate competent for the territory by SMS or e-mail.

The new provision refers to the application of the operating procedures referred to in art. 15, co. 3, Legislative Decree no. 81/2015.

This is the method of communication envisaged for intermittent workers, for whom the possibility of communicating is currently envisaged:

1) On-line from the site servizi.lavoro.gov.it

2) Electronic mail, even if not certified e-mail. THE

3) SMS;

4) App;

5) Fax to the competent ITL, to be used only in the event of a malfunction of the IT transmission systems.

Failure to comply with the new obligation of prior communication is sanctioned in a significant manner: in fact, the application of an administrative sanction from 500 to 2,500 euros is envisaged in relation to each occasional self-employed worker for whom communication has been omitted or delayed and the notice procedure pursuant to art. 13 of Legislative Decree no. 124/2004.

Monica Di Oronzo

A&O launches Silicon Valley tech team as Linklaters hires litigation star

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In a major expansion of its US operations, Allen & Overy (A&O) has made an eye-catching move for seven White & Case technology partners to establish a new Silicon Valley presence.

Making the switch are partners Shamita Etienne-Cummings, Bijal Vakil, David Tennant, Eric Lancaster, Adam Chernichaw, Daren Orzechowski and Alex Touma. The new multidisciplinary team will be headed by Orzechowski and Vakil, with all of the arriving partners operating from the current locations in Silicon Valley, San Francisco, New York and Washington DC.

The team will offer a combined strength in technology disputes, transactions, patent litigation and intellectual property. As well as a new Silicon Valley hub, the team transfer will also provide A&O with a new San Francisco office.

A&O senior partner Wim Dejonghe said: ‘All businesses are technology businesses now. Our clients have been asking us when we will have a presence in Silicon Valley and now we are adding an offering that we will grow to serve as the firm’s centre of excellence in a range of technology areas. This is truly a top team and integrating them into our existing practice will be game-changing for us, not just in the US, but in our capabilities to serve clients in the key markets of Europe and Asia as well.’

Continuing the Magic Circle’s US push this week, Linklaters has appointed litigation heavyweight Richard Smith as a partner in Washington DC, a rare exit from Quinn Emanuel Urquhart & Sullivan. With over 30 years’ experience, Smith has an established reputation in litigation, particularly in white-collar defence.

Prior to private practice, Smith spent 15 years as a senior government prosecutor and was the former principal deputy chief for litigation of the fraud section of the US Department of Justice, Criminal Division.

Adam Lurie, head of Linklaters’ dispute resolution practice in the US, commented: ‘I’ve worked across from Richard on high-profile cases and our clients will benefit from his extensive experience, outstanding judgement and exceptional advocacy skills.’

In the UK, Walker Morris has made a significant addition to its real estate group, hiring partner George Bacon from Eversheds Sutherland. Ranked by The Legal 500 as a ‘leading individual’ for real estate in Yorkshire and the Humber, Bacon was previously head of real estate for Eversheds’ Leeds office.

Bacon said: ‘As a unique one-site firm located in Leeds, Walker Morris’ entrepreneurial philosophy, excellent reputation and breadth of expertise give it a distinctive edge and I am looking forward to being a part of one of the strongest specialist real estate teams in the country.’

Bird & Bird has expanded in London with the addition of experienced corporate finance partner Nick O’Donnell, who joins from Baker McKenzie. O’Donnell has spent 20 years advising clients across the technology, healthcare, energy, retail, media and financial services sectors on M&A, equity capital markets and ESG matters.

He has significant pedigree, having worked at Allen & Overy for over a decade with secondments at Morgan Stanley and Goldman Sachs.

Matt Bonass, head of Bird & Bird’s corporate group in London, said: ‘He has an excellent track record of advising on upper mid-market, cross-border deals; and his reputation is outstanding. We’re looking forward to having him onboard!’

Finally, in New York, Squire Patton Boggs has hired tax partner Jeffrey Koppele from Ashurst. Koppele has a wide practice advising clients on both domestic and international transactions, as well as dispositions, bankruptcy and restructurings, funds and investments, capital markets transactions and real estate investments.

Mitch Thompson, global head of the tax strategy and benefits practice group, said: ‘The expansion of our US tax team is an important part of our global growth strategy and Jeff will be significant boost our US and international tax offering to clients.’

New Dutch legislative proposal on transfer pricing mismatches

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A new Dutch legislative proposal has been published for public consultation in order to prevent tax avoidance due to mismatches that relate to transfer pricing. At the same time two other proposals have been filed with respect to Atad2 application and qualification of foreign entities, which will not be covered in this news flash.

The legislative proposal includes a new Corporate Income Tax law article, which targets mismatches that exist because of commercial to tax differences that lead to a lower taxable income without a pick-up in the other jurisdiction. The main reason being that a different system is being applied in the other jurisdiction.
In the Netherlands, the arm’s length principle implies that associated enterprises within a group have to comply with the arm’s length principle for corporate income tax purposes. Commercially, transactions are not always aligned with the arm’s length principle which may lead to commercial to tax differences as a consequence. If other countries involved apply the arm’s length principle differently or not at all, the risk of mismatches arises.

Mismatches may result in double non taxation.
Examples are interest rates, a “step-up” for assets or additional income reported on transactions, which are adjustments to align with the arm’s length principle. This may lead to either an informal capital contribution or a deemed dividend from the perspective of the Dutch company. If such adjustments lead to a lower taxable income in the Netherlands, but not to an equally higher taxable income, pick-up, in the other country(ies) involved, the new article will apply.

According to the newly proposed art. 8ba VPB, the deductibility of for example interest rate adjustments will partly be rejected for negative tax to commercial differences, if the taxpayer is not able to proof that a corresponding upward adjustment is made at the end of the foreign entity. Also downward income adjustments or a “step up” for assets with corresponding depreciation, will only lead to a lower taxable income, if the transactions are declared accordingly in the other jurisdiction. It may also impact back-to-back financials transactions.
It is intended that this new article will come into effect on 1 January 2022.

Martijn Jaegers

 

5 Valuable Tax Credits for 2020 Individual Returns

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Individuals who are eligible for federal income tax credits can significantly lower their tax obligations. It’s important to differentiate between tax credits and tax deductions. A credit usually provides greater tax savings than a deduction, because a credit reduces your tax bill dollar for dollar. A deduction reduces only the amount of income that’s subject to tax. Read more

KPMG Law in Denmark Adds Tax Partner from DLA Piper

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KPMG Law Advokatfirma has hired a partner partner from DLA Piper, adding to the Danish firm’s roster of tax experts in its Copenhagen office.

Federal Tax Relief to Alleviate COVID-19 Hardships

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The coronavirus (COVID-19) pandemic has already had widespread effects on the U.S. economy. Demand for many goods and services has stalled. Unemployment claims have skyrocketed. And many schools and businesses are operating online — if at all. Life has changed dramatically across the country.

The federal government has been working on various relief measures to help individuals and small businesses cope with the situation, including tax relief provisions. Here are the tax changes that have been finalized so far.

Even more relief measures are underway. As of this writing, Congress is working on a huge new COVID-19 relief bill that will surely include a massive economic stimulus package and probably lots of tax changes. Contact your tax pro for the latest developments.

Guidance on Federal Income Tax Deadline Deferrals

On March 20, U.S. Treasury Secretary Steven Mnuchin announced on Twitter that the April 15 federal income tax filing deadlines will be extended until July 15. His tweet says, “All taxpayers and businesses will have this additional time to file and make payments without interest or penalties.” It’s unclear at this point whether the extension will apply to the tax return filing deadlines for federal payroll taxes (Social Security and Medicare taxes) owed by employers or for federal estate and gift taxes.

In addition, on March 21, the IRS issued Notice 2020-18, which clarifies that individual taxpayers and corporations can defer until July 15 federal income tax payments that would otherwise be due on April 15. (Normally, when you file an extension, you must still make a good-faith estimate of your tax liability and, by the normal filing deadline, pay the full amount estimated to be due. This relief measure is an exception to the general rule.)

Specifics under Notice 2020-18 are as follows:

For individuals. Individual taxpayers can defer payment of federal income tax (including any self-employment tax) owed for the 2019 tax year from the normal April 15 deadline until July 15. They can also defer their initial quarterly estimated federal income tax payments for the 2020 tax year (including any self-employment tax) from the normal April 15 deadline until July 15.

Individuals who have non-salary income — such as self-employed people, investors and rental property owners — must normally make quarterly estimated tax payments to avoid an IRS interest charge penalty.

Individuals can defer their tax payments until July 15, with no interest or penalties, “regardless of the amount owed.” (Earlier IRS guidance imposed a $1 million limit, but that limit was eliminated by Notice 2020-18.)

For corporations. Corporations that use the calendar year for tax purposes can defer until July 15 any amount of federal income tax payments that would otherwise be due on April 15 with no interest or penalties. This relief covers the amount owed for the 2019 tax year and the amount due for the first quarterly estimated tax payment for the 2020 tax year. Both of those amounts would otherwise be due on April 15. (Earlier IRS guidance imposed a $10 million limit, but that limit was eliminated by Notice 2020-18.)

For trusts and estates. Trusts and estates pay federal income taxes, too. Federal income tax payments for the 2019 tax year of trusts and estates that use the calendar year for tax purposes are due on April 15. The initial quarterly estimated federal income tax payments for the 2020 tax year of trusts and estates that use the calendar year for tax purposes are also due on April 15.

Notice 2020-18 clarifies that trusts and estates can defer any amount of the aforementioned tax payments from April 15 to July 15 with no interest or penalties.

Important: Notice 2020-18 offers no relief for paying federal payroll taxes (Social Security and Medicare taxes) owed by employers — or federal estate and gift taxes. But additional relief measures may be under construction in Congress.

Tax Provisions in the Families First Coronavirus Response Act

On March 18, President Trump signed into law a COVID-19 relief bill. It’s called the Families First Coronavirus Response Act. The new law mandates paid leave benefits for small business employees affected by the COVID-19 emergency and establish related tax credits and Social Security and Medicare (FICA) tax relief for their employers.

Tax credits for emergency leave payments to employees. The new law grants tax credits to small employers to cover payments to eligible employees while they take time off under the mandatory emergency COVID-19 paid sick leave and paid family leave provisions. These provisions apply to employers with less than 500 employees.

Emergency paid sick leave under the new law is limited to $511 per day for up to 10 days (up to $5,110 in total) for an employee who’s in COVID-19 quarantine or seeking a COVID-19 diagnosis. An employee can also receive emergency COVID-19 paid sick leave of up to $200 per day for up to 10 days (up to $2,000 in total) to care for a child whose school or childcare location has been closed or whose childcare is unavailable due to COVID-19.

In addition, the law gives an employee the right to take up to 12 weeks of job-protected family leave if the employee or a family member is in COVID-19 quarantine or if the school or childcare location of the employee’s child is closed due to the outbreak. The employer must pay at least two-thirds of the employee’s usual pay, up to a maximum of $200 per day, subject to an overall maximum of $10,000 in total family leave payments.

To help employers cover these now-mandatory emergency leave payments, the law allows a refundable tax credit equal to 100% of qualified sick leave wages and family and medical leave wages paid by the employer.

The credit applies only to eligible leave payments made during the period beginning on a date specified by Treasury Secretary Mnuchin and ending on December 31, 2020. The beginning date will be within 15 days of March 18, 2020.

The new law increases the credit to cover a portion of an employer’s qualified health plan expenses that are allocable to emergency sick leave wages and emergency family leave wages.

The credit is first used to offset the Social Security tax component of the employer’s FICA tax bill. Any excess credit is refundable, meaning the government will issue a check to the employer for the excess.

Important: The credit isn’t available to employers that are already receiving the pre-existing credit for paid family and medical leave under Internal Revenue Code Section 45S.

Employer FICA tax relief. Qualified sick leave and family leave payments mandated by the new law are exempt from the 6.2% Social Security tax component of the employer FICA tax on wages. Employers must pay the 1.45% Medicare tax component of the FICA tax on qualified sick leave and family leave payments, but they can claim a credit for that outlay.

Credits for self-employed people. For a self-employed individual who’s affected by the COVID-19 emergency, the new law allows a comparable refundable credit against the individual’s federal income tax bill. If the credit exceeds the individual’s federal income tax bill (including the self-employment tax), the excess will be refunded via a check from the government. The credit equals:

  • 100% of the self-employed person’s sick-leave equivalent amount, or
  • 67% of the person’s sick-leave equivalent amount for taking care of a sick family member or taking care of the individual’s child following the closing of the child’s school or childcare location.

The sick-leave equivalent amount equals the lesser of:

  • The individual’s average daily self-employment (SE) income, or
  • $511 per day for up to 10 days (up to $5,110 in total) to care for the individual or $200 per day for up to 10 days (up to $2,000 in total) to care for a sick family member or a child following the closing of the child’s school or childcare location.

In addition, a self-employed individual could receive a family leave credit for up to 50 days. The credit amount would equal the number of leave days multiplied by the lesser of:

  • $200, or
  • The individual’s average daily SE income.

The maximum total family leave credit would be $10,000 (50 days x $200 per day).

Credits for self-employed individuals are only allowed for days during the period beginning on a date specified by Treasury Secretary Mnuchin and ending on December 31, 2020. The beginning date will be within 15 days of March 18, 2020.

Important: To properly claim the credit, self-employed individuals must maintain whatever documentation the IRS requires in future guidance. Contact your tax professional for details.

Moving Target

This article only covers some of the COVID-19-related tax changes that have already been finalized. Other types of non-tax federal relief have also been made available and many states have announced their own COVID-19 relief. More federal measures and additional guidance are expected soon. Contact your tax professional to discuss financial relief measures that apply in your specific situation.

 

Amendments to Tax Code: Azerbaijan

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Law of the Republic of Azerbaijan “on Amendments to the Tax Code of the Republic of Azerbaijan” was approved by the President of the Republic of Azerbaijan on 29 November 2019. These amendments become effective from January 1st, 2020.

The amendments concerns the following matters:

  • E-tax invoice cancellation and application of various types of electronic invoices depending on the nature of the transaction;
  • Application of a single approach to VAT calculation and payment (cash method);
  • Abolition of simplified tax on building;
  • False Transactions and Potentially Dangerous Taxpayer;
  • Changes on excise rates;
  • New tax exemptions;
  • Control of installation of POS-terminals and introduction of new generation cash registers;
  • Improvements in the simplified tax payment;
  • Centralized tax registration;
  • Taxation by state-owned subsidies from residential and non-residential areas;
  • Reporting on transnational group of companies;
  • Carrying out of joint inspections with tax authorities of other state as regulated by international treaties;
  • Editing and refining.

General provisions and new concepts

The following new concepts were added to the Tax Code:

Non-Commodity Transaction – is a transaction disclosed in the course of tax control, concluded for the purpose of concealing another transaction and generating profit without the provision of goods, works and services;

Risky Taxpayer – means a taxpayer regarding whom there is a decision of the relevant executive authority (body) and who meets the criteria approved by the decision of the relevant executive authority (body), as well as a taxpayer who carries out non-commodity and/or risky transactions; A taxpayer may be considered as a risky taxpayer upon respective decision of the competent body.

Transnational group of companies – a group of companies, which includes two or more companies that are residents in different countries, or a company that is resident in one country and operates through a permanent representation in another country.

New provisions (Article 16.1.4-2) to the taxpayer’s responsibilities regarding the Transnational Group of Companies will be added in the following content:

If the total income for the fiscal year of the Transnational Group of Companies exceeds the manat equivalent of 750 million euros, the enterprise, which is a member of a transnational group of companies for the purpose of automated information exchange with the competent authorities of other countries under international treaties supported by the Republic of Azerbaijan and is a resident of the Republic of Azerbaijan, submits the report to the tax authority in the form and manner specified by the relevant executive authority (body).

A tax sanction of 500 manat is applied to the taxpayer in case of failure to submit the electronic report in prescribed manner and time to the taxpayer.

Registration of taxpayers

The article 33.7 (Registration of taxpayers) will be amended in the following content:

The following taxpayers can be registered in a centralized manner by the tax authority as determined by the relevant body (body) of the relevant executive authority:

  1. Natural monopoly subjects;
  2. Enterprises with special tax regime;
  3. Taxpayers who meet one of the following requirements:

– Average number of employees 251 and above;

– The average annual residual value of fixed assets on the balance sheet exceeds AZN 5,000,000.

Persons who have been registered at the place of their taxation are then registered in the centralized order with the previous identification numbers when referring to taxpayers or enterprises with a special tax regime.

Tax registration of taxpayers and branches, representative offices or other economic entities (objects) of the special tax regime, registered in the centralized manner, shall be carried out in the aforementioned manner.

Legal entities, registered at the place of their taxation, are required to apply to the relevant tax authority for centralized registration within 15 days of commencement of activities under the special tax regime.

Centralized re-registration or de-centralization of enterprises operating under special tax regimes, commencement or termination of their activities under a special tax regime shall be made within 15 days from the date of their application to the relevant tax authority.

III. Responsibility for violation of tax legislation

Provisions about the expiration of the term for calling to account for violation of tax legislation and application of financial sanctions (Article 56) will be amended to the following content:

Except for the results of on site tax inspection conducted in accordance with the relevant decision on the conduct of tax inspection in accordance with the criminal procedure legislation, the person cannot be called to account for violation of tax legislation and no tax liabilities may arise if the period of 3 years (the period of 5 years after the relevant information from the competent authorities of foreign countries on income received abroad) had passed from the date of the tax violation.

The period specified in this article covers a period of 3 years preceding the date of the decision of the tax authority to conduct on site tax inspection, irrespective of the date of making a decision on liability in accordance with the article 49.1 of the Tax Code.

Electronic delivery notes and purchase act of goods

The provisions regarding electronic delivery notes (Article 71-1) will be amended to the following content:

In the cases established by this Code, a person providing goods, performing work and rendering services to individual entrepreneurs and legal entities shall issue an electronic invoice to them within the following terms:

– providing goods – time of delivery of goods;

– providing not pre-ordered goods – within 5 days from the date of issuance of the document confirming delivery of goods;

– performing works and rendering services – within 5 days from the date of performance of works and rendering of services.

New provisions to the electronic delivery notes (Article 71-1) will be added in the following content:

When goods (works, services) are delivered to buyer not registered as a taxpayer, he / she will be given a receipt or a check.

Tax invoices are subject to the following types of electronic invoices, depending on the nature of the operation:

on the provision of goods, works and services;

on return of goods;

according to the article 163 of the Tax Code, except for return of goods;

on transfer of goods to agent (commissioner);

provided by agent (commissioner) to buyer of goods;

on acceptance to eventual processing of goods;

according to the article 177.5 of the Tax Code.

Purchase act of goods (Article 71-2) will be added to the Tax Code:

Within 5 days from the date of purchase of goods, purchase act and electronic purchase act (the form of which is established by the relevant executive autority) shall be drawn up for goods purchased for the purpose of economic activity (excluding individual consumption) by legal entities and individuals.

In the event that an electronic purchase act issued by a taxpayer has been printed and signed by an individual not registered within the tax authority, this document shall be considered as a document confirming purchase of goods and a purchase act shall not be drawn up on paper.

Jalilova Ummi

Congress Approves New Disaster-Area Tax Relief

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A flurry of tax legislation passed at the end of 2019 as part of an omnibus spending package. You might have already heard about changes to the retirement plan rules and tax extenders that were part of this package.

However, there are some lesser-known changes that you might not know about. Specifically, the disaster-related provisions of the Taxpayer Certainty and Disaster Tax Relief Act provide valuable relief to taxpayers affected by federally declared disasters that happened between January 1, 2018, and January 19, 2020.

Personal Casualty and Theft Losses

Prior to 2018, individual taxpayers that itemized their deductions could write off their unreimbursed casualty and theft losses to the extent that the losses exceeded 10% of adjusted gross income (AGI). In addition, the deductible amount had to be reduced by a “floor” of $100 for each casualty or theft event.

For example, Bill had $100,000 in AGI for 2017. He incurred a $25,000 loss to his home due to hurricane damage in 2017, and his insurance company paid him $10,000 for repairs. So, his unreimbursed loss was $15,000 ($25,000 – $10,000).

Bill itemized deductions on his 2017 tax return. How much was he able to deduct for unreimbursed hurricane damages? His deduction was subject to the 10%-of-AGI threshold of $10,000 (10% of $100,000). He also had to subtract $100 per loss. So, in 2017, Bill claimed a $4,900 itemized deduction for the loss ($15,000 – $10,000 – $100).

Important: A special election allows taxpayers to deduct a loss on a tax return for the preceding year. If you’ve already filed your return for the preceding year, you can file an amended return to make the election and claim the deduction in the earlier year. Decisions regarding this election should be based on an evaluation of 1) whether you need cash quickly, and 2) your overall tax situation in the casualty event year and the preceding year.

TCJA Changes

The Tax Cuts and Jobs Act (TCJA) repealed the deduction for casualties and theft losses for 2018 through 2025 — except for losses suffered in federally declared disaster areas. The special election to speed up the tax relief available to taxpayers in disaster areas remains in effect after the TCJA.

New Relief for Victims

The Taxpayer Certainty and Disaster Tax Relief Act doesn’t restore pre-TCJA law for all casualty and theft losses. However, it does provide the following seven tax breaks to victims in federally declared disaster areas, generally for 2018 through January 19, 2020:

  1. 10%-of-AGI threshold. The new law eliminates the usual 10%-of-AGI threshold on deducting losses from federally declared disasters. It also raises the floor for qualified disaster losses from $100 to $500.
  2. Itemizing vs. taking the standard deduction. Under the new law, you don’t have to itemize deductions to claim a disaster-related loss. You can write off your loss even if you claim the standard deduction for the tax year in question.
  3. Charitable contribution limits. The new law temporarily suspends the tax return limits for charitable contributions associated with qualified disaster relief. For instance, monetary contributions are normally limited to 60% of AGI, but this limit doesn’t apply to qualified donations in a disaster area.
  4. Certain tax credits. A special rule allows taxpayers in designated disaster areas to refer to the preceding tax year for purposes of determining the Earned Income Tax Credit (EITC) or the Child Tax Credit (CTC).
  5. Early withdrawal penalty. Generally, distributions from qualified retirement plans, such as a 401(k) or Simplified Employee Pension (SEP), are hit with a 10% tax penalty in addition to regular tax liability if made before age 59½ — unless a special exception applies. The list of exceptions is lengthy. The new law now provides another exception for qualified disaster relief distributions, though qualified hurricane distributions can’t exceed $100,000.
  6. Cancelled home purchases. The new law permits re-contributions of retirement plan withdrawals for home purchases cancelled due to eligible disasters. It also provides flexibility for loans from retirement plans for qualified hurricane relief.
  7. Extended tax-filing deadlines. An individual with a principal place of residence within a federally designated disaster area, or any taxpayer with a principal place of business in such a disaster area, is granted an automatic 60-day extension for any tax filing. This provision acknowledges that victims probably have other concerns taking priority. The automatic filing extension applies to federal disaster areas declared after December 20, 2019, the new law’s date of enactment.

Special Break for Small Businesses

The new law also creates a special “employee retention credit” for 2018 and 2019. Essentially, a disaster-affected employer is entitled to a 40% tax credit for the first $6,000 of wages paid to an employee from a core disaster area. The maximum credit is $2,400 per worker.

The employee retention credit applies to wages paid regardless of whether services associated with those wages were actually performed. It’s treated as part of the general business credit.

For More Information

This article highlights the key tax breaks available to individuals and small businesses that have suffered losses in a federally declared disaster area. Other special rules may apply. If you’re hit with a disaster, consult with your tax advisor to maximize the benefits for your situation.

Repeal of”Church Parking Tax”

Starting in 2018, a provision of the Tax Cuts and Jobs Act (TCJA) triggered unrelated business income tax (UBIT) on tax-exempt organizations like churches that provide employees with transportation and parking fringe benefits. Now that provision has been repealed under the Taxpayer Certainty and Disaster Tax Relief Act.

The change is effective for amounts paid or incurred after 2017. So, churches and other not-for-profit entities that paid UBIT on applicable transportation benefits in 2018 and 2019 may be eligible for a refund. Contact your tax advisor for more information.