Strategizing International Tax Best Practices – by Keith Brockman

PwC has published the inaugural Asia Corporate Treasury Survey 2014, based on responses from 117 organisations across 7 countries in Asia.  The Report includes risk management approaches, treasury structures and various other treasury topics that revealed significant opportunities for Asian treasury centres to deliver strategic business benefits.  The Report highlights the necessity of tax and treasury collaboration in developing Best Practices due to the mutuality of objectives and complementary issues for which one function should not operate independent from the other.  A link to the Report is included for reference:

http://www.pwc.com/en_GX/gx/audit-services/corporate-treasury-solutions/assets/pwc-building-the-case-for-asia-corporate-treasury-fa.pdf

The Contents include the following topics:

  • Deployment of treasury staff
  • Core treasury activities in Asia
  • Treasury function in Asia
  • Key financial risks
  • Risk approach
  • Hedge accounting
  • Bank relationships
  • Type of debt used
  • Funding management strategies
  • Investment of excess cash
  • Key cash management activities in Asia
  • Cash centralisation
  • Treasury technology
  • Future changes to think about

The Report provides valuable insight into the rapidly growing Asian region and the complexities encountered in addressing Best Practice methodologies,

Every organization should periodically review the structure of tax and treasury due to their interwoven functions, as well as compare the risk drivers for each function.

Relevant Best Practice questions include the following examples:

  • Are the tax risk framework and treasury risk framework integrated processes, or are such frameworks developed independently?
  • Does tax and treasury share updates re: new debt instruments, OECD BEPS action plan, hybrid instruments, triggering foreign exchange risk proactively, etc.?
  • Are training workshops / opportunities provided for the integrated functions, leading to a Best in Class methodology for both treasury and tax processes?
  • What is the future vision for tax and treasury?
  • Is the transfer pricing documentation for loans, pooling structures, etc., consistent with current treasury practices globally?
  • What is the withholding tax certification process from a tax and treasury perspective?

The Report, and Best Practice observations, are valuable topics for internal discussion and benchmarking the combined processes with peer organizations.

 

The 2014 Update, as adopted by the OECD Council on 15 July 2014, includes changes that were previously released for comments, including the meaning of “beneficial owner.”  Numerous additions and deletions to Commentaries on various Articles, including positions of non-member countries, are also included.  A link to the Update is provided for reference:

http://www.oecd.org/tax/treaties/2014-update-model-tax-concention.pdf

Interesting changes:

  • Article 5 Commentary: new views by Germany, Estonia, and Israel.
  • Article 9 Commentary: Hungary (newly added) and Slovenia reserve the right to specify that a correlative (i.e., offsetting) adjustment will be made only if they consider that the primary adjustment is satisfied.
  • The term “beneficial owner” does not have reference to any technical meaning under domestic law, thus it should not be used in a narrow technical sense, rather, it should be understood in its context and in light of the object and purposes of the Convention including avoiding double taxation and the prevention of fiscal evasion and avoidance.
  • The term “beneficial owner” does not deal with other cases of treaty shopping, which can be addressed in specific anti-abuse treaty provisions, general anti-abuse rules (GAAR), substance-over-form or economic substance approaches.
  • Article 13 Commentary: With respect to paragraph 3.1, Austria and Germany hold the view that when a new tax treaty enters into force, these countries cannot be deprived of the right to tax the capital appreciation which was generated in these countries before the date when the new treaty became applicable.
  • Article 26 Commentary: The Commentary was expanded to develop the interpretation of the standard of “foreseeable relevance” and the term “fishing expeditions,” i.e. speculative requests that have no apparent nexus to an open inquiry or investigation.  The Commentary further provides for an optional default standard of time limits within which the information is required to be provided unless a different agreement has been made by the competent authorities.  The examples provided are to demonstrate the overarching purpose of Article 26 not to restrict the scope of exchange of information but to allow information exchange “to the widest possible extent.”

The Update requires a comprehensive review to determine potential implications, including beneficial ownership restrictions and ways of working by competent authorities.  Such review should distinguish changes to the Articles versus additions or deletions to the Commentary interpreting such Articles.  Note that the OECD BEPS changes will be an addition to this Update.

The Czech Republic has published new tax return disclosure requirements for the 2014 year, including 2013 data for selected taxpayers.  A link to the requested information is provided for reference:

http://www.kpmg.com/CZ/en/IssuesAndInsights/ArticlesPublications/Financial-Update/Documents/KPMG-Financial-Update-2014-07-Special-Issue.pdf

The Czech Republic disclosures include the amount of short-term and long-term intercompany receivables and payables at the end of the current and prior years for comparison.

Best Practice: Treasury training for BEPS – As more countries implement transfer pricing disclosure legislation, with increased emphasis on intercompany loans and financing transactions, it is imperative that Tax Team members provide BEPS training for international treasury centers.  This training should raise awareness of the OECD BEPS initiatives resulting in increased disclosures and inquiries from Business Units, as well as provide internal transparency and governance for significant treasury transactions.

The UN Subcommittee on Base Erosion and Profit Shifting (BEPS) Issues for Developing Countries has reiterated its request for comments to its BEPS Questionnaire, copied herein for reference.   Additional time is available for comments submitted by 8 August 2014.

The Subcommittee is mandated to draw upon its own experience and engage with other relevant bodies, particularly the OECD, with a view to monitoring developments on base erosion and profit shifting issues and communicating on such issues with officials in developing countries directly and through regional and inter-regional organizations.

Links to the Questionnaire and responses are provided.  Comments from Brazil, Mexico, Singapore, Christian Aid & Action Aid, and the Economic Justice Network and Oxfam South Africa are posted for review.

http://www.un.org/esa/ffd/tax/Beps/index.htm

http://www.un.org/esa/ffd/tax/Beps/BepsIssues.pdf

The wide divide in the role (and perception) of the arm’s length principle for transfer pricing is very apparent in the responses from Singapore and Christian Aid & Action Aid.

Actions 6 &  7: Singapore’s comments: 
“The continued correct application of the arm’s length principle to allocate profits based on function, assets and risks will help to ensure that profits are allocated based on where value is created.”  

“We would like to highlight that the focus on countering BEPS should be to grow the economic pie for every country, and not let the work be sidetracked by protectionism and development of rules for political expedience.”

Actions 8-10: Christian Aid & Action Aid’s comments:
“Transfer (mis-)pricing is a significant challenge to developing countries, and improvements to current rules need to take place to ensure developing countries can seek appropriate tax contributions from Transnational Corporations (TNCs).  The best solution may be outside of the arm’s length principle however, something that the OECD appears to not want to consider.  We believe that there should be more comprehensive research done into alternatives to the arm’s length principle and how effective they may be for developing countries.”

Questionnaire:

Countries’ experiences regarding base erosion and profit shifting issues.

Developing countries are invited to provide feedback by answering the following questions. Feedback (and any questions about the feedback requested) should be sent to taxffdoffice@un.org. The deadline for responses is 8 August 2014.

1. How does base erosion and profit shifting affect your country?

2. If you are affected by base erosion and profit shifting, what are the most common practices or structures used in your country or region, and the responses to them?

3. When you consider an MNE’s activity in your country, how do you judge whether the MNE has reported an appropriate amount of profit in your jurisdiction?

4. What main obstacles have you encountered in assessing whether the appropriate amount of profit is reported in your jurisdiction and in ensuring that tax is paid on such profit?

The Subcommittee have identified a number of actions in the Action Plan that impact on taxation in the country where the income is earned (the source country), as opposed to taxation in the country in which the MNE is headquartered (the residence country), or seek to improve transparency between MNEs and revenue authorities as being particularly important to many developing countries (while recognising that there will be particular differences between such countries). These are:  Action 4 – Limit base erosion via interest deductions and other financial payments  Action 6 – Prevent Treaty Abuse  Action 8 – Assure that transfer pricing outcomes are in line with value creation: intangibles  Action 9 – Assure that transfer pricing outcomes are in line with value creation: risks and capital  Action 10 – Assure that transfer pricing outcomes are in line with value creation with reference to other high risk transactions (in particular management fees)  Action 11 – Establish methodologies to collect and analyse data on BEPS and the actions to address it  Action 12 – Require taxpayers to disclose their aggressive tax planning arrangements  Action 13 – Re-examine transfer pricing documentation

5. Do you agree that these are particularly important priorities for developing countries?

6. Which of these OECD’s Action Points do you see as being most important for your country, and do you see that priority changing over time?

7. Are there other Action Points currently in the Action Plan but not listed above that you would include as being most important for developing countries?

8. Having considered the issues outlined in the Action Plan and the proposed approaches to addressing them (including domestic legislation, bilateral treaties and a possible multilateral treaty) do you believe there are other approaches to addressing that practices that might be more effective at the policy or practical levels instead of, or alongside such actions, for your country?

9. Having considered the issues outlined in the Action Plan, are there are other base erosion and profit shifting issues in the broad sense that you consider may deserve consideration by international organisations such as the UN and OECD?

10.Do you want to be kept informed by email on the Subcommittee’s work on base erosion and profit shifting issues for developing countries and related work of the UN Committee of Experts on International Cooperation in Tax Matters?

Do you have any other comments you wish to share with the Subcommittee about base erosion and profit shifting, including your experience of obstacles to assessing and then addressing the issues, as well as lessons learned that may be of wider benefit?

 

The insightful Questionnaire, as well as commentaries received, reflect the continuing conflict re: transfer pricing principles to be applied by developed and developing countries.  Additionally, unilateral requests for BEPS comments by countries also reflect the tendency to adopt OECD principles as adapted to local needs.

As a result, transfer pricing documentation will be inherently more complex and non-standardized, while controversies between tax authorities and multinational corporations will multiply significantly in magnitude and scope.

 

PwC has published a very informative article addressing the impact of EU case law, exemplified by cases from the Court of Justice of the European Union, on the OECD BEPS international tax proposals.  There may be additional uncertainty by EU Member States after the OECD BEPS measures are announced due to the “fundamental freedoms” in the Treaty on the Functioning of the European Union (CJEU), State Aid principles and the EU direct tax initiatives, including the Parent-Subsidiary Directive.  The link to the article is included for reference:

http://www.pwc.com/en_GX/gx/tax/newsletters/tax-policy-bulletin/assets/pwc-eu-beps-july-2014.pdf

The article provides excellent references to current EU Law concepts, including the basic premise that domestic legislation must be compliant with EU law.  Additionally, the OECD proposals for hybrid mismatch transactions, tax treaty abuse and harmful tax practices are discussed against the backdrop of EU legislation.

The article concludes with the takeaway: “The implementation of OECD BEPS proposals within the EU/EEA Member States will only be possible to the extent that those proposals are also compliant with EU Law.  So far, however, little attention seems to have been paid to potential EU Law issues in the OECD’s draft discussion papers, so that EU/EEA Member States might actually risk breaching EU Law.  As a result, companies doing business in the EU/EEA will be faced with legal uncertainty about the lawfulness of implemented OECD BEPS proposals in domestic law or tax treaties.”

As an additional observation, there is a likelihood that the domestic legislation enacting OECD BEPS proposals will not be consistent for each Member State, thereby the legal uncertainty should be reviewed for each Member State as domestic legislation and OECD proposals are implemented.

 

 

 

Vietnam has recently adopted regulations on Mutual Agreement Procedures (MAP) and Advance Pricing Agreements (APAs), with additional transfer pricing measures.    A link to the informative summary prepared by KPMG is provided as reference:

http://www.internationaltaxreview.com/Article/3319685/Vietnam-Getting-up-to-speed-in-Vietnam.html

Key Highlights:

  • The APA negotiation and conclusion procedures, consisting of five steps, is expected to take nine months from submission to a concluded APA.
  • Formal guidance has been issued for MAP implementation.
  • Related party transaction disclosure is to be submitted with 2014 tax returns, based on a self-assessment process with contemporaneous documentation to effectively shift the burden of proof to the tax authorities.

Re: Best Practices, transfer pricing opportunities and documentation requirements, by Vietnam as well as all other countries, should be mapped to formulate new audit defense strategies, cooperative compliance ideas and transfer pricing governance guidelines.

In today’s volitive transfer pricing environment, a member of every multinational company’s global tax department should have responsibility for a real-time assessment of all new developments, thereby providing a significant value-add for legal structuring, debt financing, transfer pricing documentation, and audit defense strategies to avoid double taxation.  To the extent such resources are not being focused, a cost/benefit analysis of missed opportunities may be helpful to achieve additional Best Practice methodologies.

 

 

On 20 June 2014, the EU Economic and Financial Affairs Council reached agreement on modifying the EU Parent-Subsidiary Directive.  The agreement proceeds with the prevention of double non-taxation via the use of hybrid financing arrangements, while agreeing to work separately on an amended General Anti-Avoidance Rule (GAAR).  Links to the current EU Parent Subsidiary Directive (2011/96/EU), a PwC Tax Alert summarizing the proposal and the EU proposals are included for reference:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:345:0008:0016:EN:PDF

http://www.pwc.com/en_GX/GX/tax/newsletters/eu-direct-tax-newsalerts/assets/pwc-newsalert-20-june-2014-amendment-parent-subsidiary-directive.pdf

http://register.consilium.europa.eu/doc/srv?l=EN&f=ST%2010419%202014%20INIT

The amendment is limited to the 28 Member States of the EU, with a similar proposal envisioned in the OECD BEPS initiative.  It is interesting to note the OECD BEPS provisions are being focused within the EU Community, in addition to the international OECD Guidelines.  Timing for this EU proposal is for domestic legislative action by December 2015.

Re: Best Practices, it is prudent to review the EU legal structure for such hybrid arrangements to quantify the effect of this proposal, possibly requiring modification of hybrid debt and/or legal entities.  Additionally, such hybrid instruments in non-EU countries should be noted for the forthcoming OECD BEPS corollary provision.

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