The new treaty against double taxation. Possible effects also in the matter of the black lists foreseen on the basis of national law.
On 14 January 2013 the Convention against double taxation between Italy and the region under special Chinese administration of Hong was signed by the Minister for Economy and Finance. Once the process of ratification has been completed and which is necessary for it to come into force, the Convention will allow economic relations between these countries in accordance with the most up-to-date Ocse standards.
The route to ratification – which activates through the unilateral declaration of the authority concerned of each contracting State of wishing to abide in good faith by the wording of the treaty – does not in fact of itself bring about the conclusion (so-called stipulating) of the Convention as it is necessary for the tools for ratification to be brought to the attention of the party by means of a formal exchange by their respective diplomatic representatives (on this point see art. 28 of the Italy-Hong Kong Treaty on the basis of which: “Each of the Contracting Parties shall notify the other of the completion of the procedures required by its law for the bringing into force of this Agreement. This Agreement shall enter into force on the date of receipt of the later of these notifications …”).
Although, up to today, the term by which the current process will be completed is not yet known, it can anyway be observed that, once in force, the convention will have a threefold function:
- avoiding double taxation on income deriving from commercial relations between the two jurisdictions (i.e.: in the State of residence of the recipient and in the State of the source oincome); and, hence, more generally,
- contributing to the development of investment by Italian enterprises in Asian markets, and,
- combating tax evasion by an adequate exchange of information which, on the basis of art. 25 of the Convention currently being ratified will, in all likelihood, not be confined to the field of application of the treaty, but extend also to applying the domestic rules of the legal systems of the individual contracting parties.
Among the possible impacts – importantly for Italian investors – that can reasonably be expected with the coming into force of the Convention, is the removal mooted of Hong Kong from the socalled Italian black list for the purpose of applying art. 2, paragraph 2-bis of the Consolidation Act on Income Tax which, as is well known, imposes a number of restrictions in the matter of inverting the onus of proof in cases of transfer of fiscal residence of actual persons outside the National territory of Italy, to so-called “listed” countries (among which, as is well know, today the region of Hong Kong is included on the basis of the specific list contained in D. M. dated 4 May 1999).
Likewise, implications may arise also for the purposes of applying the restrictions set forth under articles 110, paragraph 10 and 167 of the Consolidation Act, (i) in the matter of deductibility of costs in respect of transactions with countries that are tax havens and (ii) in the matter of taxation, again in those countries, on the basis of further lists foreseen respectively under the D. M. dated 23 January 2002 and the D. M. dated 21 November 2001.
As things stand, for the purposes of deductibility of so-called black list costs, the national taxpayer must provide proofs suited to demonstrating that foreign counterparty enterprises – located, as pointed out in “listed” countries (among which Hong Kong currently figures. See D . M. dated 23 January 2002) – perform prevalently an effective commercial activity; or, alternatively, that the transactions brought about meet an effective economic interest and that they have actually been executed. Again, the taxpayer must, for the purpose of non-application of the discipline in respect of taxation for transparency set forth under art. 167 mentioned (cfs), demonstrate that the company or other non-resident entity performs an effective industrial or commercial activity as its main business in the State or the territory in which it has its registered office; or demonstrate that from investments it does not achieve the effect of localising income in States or territories that have tax haven regimes (among which the region of Hong Kong falls on the basis of D. M. dated 21 November 2001)
By stipulating this Convention between Italy and Hong Kong – and, especially, with the coming into force of art. 25 as it is currently formulated (i.e. the one adopted by the wording recently signed, including a mechanism for exchanging information of a “industry-wide” type) – may therefore lead to non-application of a large series of tax increases in the various specific cases indicated above and, hence, to giving rise potentially to a substantial “exemption” of the Hong Kong region, and a more precisely “international-tributary” profile of economic relations with Italy. This, obviously, provided – and which is reasonably imaginable (as a consequence of the coming into force of the new recently signed Convention) – that national regulations go though a speedy review of the “lists” operating today (as well as those foreseen for upcoming early issue) in the direction of excluding from the group of recipients of the restrictions in question, also the operators of the Hong Kong region, as the jurisdiction is willing to exchange information of an “industry-wide” type in tributary matters with our fiscal authorities.
Another important provision contained in the Convention recently signed – especially where the lists dealt with above are not reviewed, is that set forth under 1 art. 23 (Non discrimination): just by the way, it needs to be pointed out that, on the basis of a number of leanings in jurisprudence (recent ones too, cfr inter alia the CTP of Milano. 294/5/12), a convention including this clause being in force should imply – in strict terms – the consequent non-applicability of art. 110 mentioned above in the matter of non-deductibility of costs deriving from relations with “listed” countries when, specifically, these are admitted to the benefits of convention in the matter of nondiscrimination; and among these Hong Kong too, subsequent to stipulation of the Convention which has already been signed. This – again to be noted – would be of significance in the situations mooted (and different from the one indicated above) wherein the region of Hong Kong has not been expunged from the list of countries deemed to be tax havens and maintains the current formulation notwithstanding the new Treaty being in force. In this regard, it is perhaps worthwhile to recall, at the least, the essential terms of the well known debate, picked up indeed just now by the recent jurisprudence mentioned, concerning the sustained non-applicability of the ordering of transactions with countries on the black list that have stipulated a convention against double taxation with Italy and foreseeing a suitable “non discrimination” clause, similar to the one currently foreseen in the wording of the Convention with Hong Kong. This means; a clause imposing upon each contracting State (e.g. Italy) admission in deduction of the costs of a supplier of the other State (e.g. Hong Kong, if still included in the black list even following the coming into force of the Convention) at the same conditions as are foreseen for deductibility of the costs incurred as a consequence of supplies of a “domestic” kind (i.e. “Italy to Italy”)
Among the further possible benefits foreseen more generally under the Convention, the following can be mentioned: 1) a potential abatement of current imposition on profits from investments withdrawn from Hong Kong; 2) the introduction of a discipline under the convention for treatment of interest, dividends, royalties and capital gains; 3) the potential for resolving conflicts of dual residence in the terms of art. 4 of the OCSE form, on a basis provided by the convention.