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By KPMG's Harry L Gutman, former head of the US Joint Committee on Taxation

A new circular, issued by the State Administration of Taxation and effective from January 1 2003, clarifies the application of enterprise income tax (EIT) and business tax (BT) in relation to the provision of services by a holding company to its investee companies. In particular, the circular provides that the service fee charged by the holding company may be determined by contract and be based on the particular criteria set out in the contract; and by allocating fees calculated on the actual expenses incurred by the holding company.

In its decision of January 22 2003 in what is known as the Pirelli case, the UK High Court rejected a claim by the Inland Revenue that companies that would otherwise be entitled to compensation in respect of advance corporation tax (ACT) paid on dividends to the parent companies in the EU on the basis of the European Court of Justice decision in the Hoechst case, should be denied such compensation or be subject to an offsetting reduction if the group was entitled to a tax credit refund under a double tax treaty between the UK and the country in which the parent company was resident. The court also decided that it was not necessary at this stage to refer to the European Court of Justice (ECJ) the issue as to whether ACT was a withholding tax. This decision is subject to appeal.

On December 3 2002 the Auditor General released her report, which targets international transactions. Chapter4 entitled "Taxing International Transactions of Canadian Residents", indicates that the Canada Customs and Revenue Agency (CCRA) needs to be more effective in carrying out audits of international issues. Specifically, CCRA needs to perform better risk assessment to determine what compliance work should be undertaken in each tax services office and on a national basis. Second, CCRA must find ways to improve its staffing and training of auditors. Third, CCRA needs to be more effective in carrying out audits of international issues. Finally, CCRA must focus more on small-and-medium-sized businesses to ensure that their international related-party transactions are scrutinized. To achieve these objectives, the Auditor General makes a number of specific recommendations all of which CCRA has undertaken that it will adopt.

Multinationals doing business in the US should be worried about how the Thomas Bill will affect their business. PricewaterhouseCoopers' Oscar Teunissen and Larry Skor in New York and Christine Halphen, Steve Nauheim and Linden Smith in Washington DC explain why

Al Meghji: Wanted to focus on law Canadian firm Osler Hoskin & Harcourt has benefited from the collapse of Ernst & Young's Canadian law firm Donahue. The firm has picked up one partner and three associates for its tax litigation group. Al Meghji has joined the firm from Donahue and splits his time between the Toronto and Calgary offices. Two associates have moved with him to Calgary and the third is joining the Toronto office.

Despite a very tight budgetary backdrop, Ireland's Minister for Finance has used the occasion of his annual Budget to confirm the introduction of the much-heralded 12.5% corporate tax rate on trading profits with effect from January 1 2003.

After years of squabbling, the EU has managed to agree on new rules on the taxation of the savings of EU residents invested abroad. On January 21, just a month after its self-imposed deadline for resolving the problem, the EU finance ministers under the new Greek presidency came up with a face-saving solution.

French president Jacques Chirac has reportedly promised to continue cutting income tax and social security charges even though growth is lower than predicted. According to the Reuters news service Chirac promised the cuts in his New Year's address to the French National Assembly and Senate.

Finland and Singapore have ratified a double tax treaty. The treaty applied to income derived from January 1 2003 and reduces withholding tax on interest and royalties to 5% from 10%.