Strategizing International Tax Best Practices – by Keith Brockman

The European Parliament approved the maintenance of public registers listing ultimate ownership of EU companies, as part of the 4th Anti-Money Laundering Directive.  The new rules must be introduced in all EU Member States within the next 2 years.

A KPMG Euro Tax Flash outlines details of this proposal:

http://www.kpmg.com/Global/en/services/Tax/regional-tax-centers/european-union-tax-centre/Documents/eu-tax-flash/etf-248.pdf

Key points:

  • Beneficial ownership is broadly defined, covering individuals who ultimately (directly or indirectly) control the entity.  The control threshold is premised on a 25% ownership criterion although Member States may adopt lower percentages.
  • Information accessible by: competent authorities, financial intelligence units, “obliged entities” and persons/organisations that can demonstrate a “legitimate interest” (not a defined term).
  • Member States have 2 years from adoption to implement its provisions into their domestic legislation.

In an ever-increasing quest for transparency, this Directive will fulfill EU’s obligation to meet that objective.

The G20 recently held a symposium including 300 participants from 60 countries.  The G20 tax agenda focused on the current status of BEPS in developed, and developing, countries.  The PwC summary outlines the current state of agreement, and disagreement, with the proposed BEPS Guidelines.

http://www.pwc.com/en_GX/gx/tax/newsletters/tax-policy-bulletin/assets/pwc-g20-international-tax-symposium.pdf

Key observations:

  • Hybrid mismatches will include treaty changes and domestic law recommendations
  • The interest limitation solution is not yet adequate
  • A clear analytical framework should be used to determine application of non-recognition transactions
  • The Amadeus database, macro-data and tax return data was used to measure the spill-over effect of BEPs
  • Not all measures to tackle BEPS will be supported by guidance, although guidance will continue in following years
  • Coordination and consistency of application is vital, although it is challenged by unilateral actions of residence countries
  • Implementation is key, although a single approach no longer works

The observations cited in the PwC summary are insightful, while providing further certainty that BEPS implementation will be diverse with different timelines, while guidance continues in post-2015.

OECD’s latest draft on Action 6 of the BEPS Action Plan (Prevent Treaty Abuse) addresses previous questions raised and comments received, in addition to some new proposals.  Part I of the draft presents the alternative “Simplified” Limitation on Benefits (LOB) Rule, while Part II outlines the previous 20 questions for follow-up work, including changes to domestic law made after the conclusion of a treaty.

Succinct comments are to be submitted by 17 June 2015.  A link to the draft is provided:

http://www.oecd.org/tax/treaties/revised-discussion-draft-beps-action-6-prevent-treaty-abuse.pdf

The discussion draft is very comprehensive and principle based, including additional examples from its previous draft.

However, it is worth noting that the OECD would not require an approval process for application of the subjective principal purposes test (PPT) (i.e. the state may “wish” to apply such process) and that the PPT would be included in the arbitration mechanism of paragraph 5 of Article 25, although this issue should also be discussed as part of the work on Action 14 (Make dispute resolution mechanisms more effective).  This latter point would seem to be area for additional confirmation in providing comments to avoid double taxation on issues that are inherently subjective.

The draft will provide important precedent in obtaining treaty relief in a post-BEPS era, thus the proposals should be reviewed in detail, with consideration to provide succinct comments.

 

 

The US Dept. of Treasury has released drafts of its proposed revisions to the US model income tax convention, for which it has requested comments.  The new Model treaty will serve as a template for future US treaties and protocols.

A PwC summary and US Treasury press release, which further reference the proposed changes, are included for reference:

http://www.pwc.com/en_US/us/tax-services/publications/insights/assets/pwc-us-treasury-proposes-changes-us-model-income-tax-convention.pdf

http://www.treasury.gov/press-center/press-releases/Pages/jl10057.aspx

Key observations:

  • Exempt permanent establishment (PE) rule that will also apply to US branches
  • Denial of treaty benefits re: articles 11 (Interest), 12 (Royalties), and 21 (Other income) for recipients in a “special tax regime.”  There are several exceptions applicable to the general rule.
  • Disallowance of treaty benefits for payments of dividends, interest, royalties and other income for 10 years after a company expatriates.
  • Changes to Limitation on Benefits (LOB) article: (i) New derivative benefits test which is inclusive of a base erosion test, (ii) a base erosion test to the subsidiary of a public company requirement, (iii) changes to base erosion requirements in the public company test, ownership base erosion test and derivative benefits test, and (iv) a change to the discretionary grant of relief clause inclusive of a principal purpose test.
  •  Partial termination provisions for subsequent law changes exempting, or reducing the tax rate to less than 15% for dividends, interest, royalties and other income.

These significant changes represent acknowledgment of the OECD BEPS impact and its impact on the world’s tax treaties that will directly impact the taxation of a multinational company’s global structure.  Accordingly, these changes are required reading for international tax practitioners, as the rest of the world will be following along in measuring its respective treaties and new protocols.

BEPS Action 6, Preventing treaty abuse, recognized the US Model Treaty’s LOB article, with an additional inclusion for a derivative benefits test.  The US proposal has now addressed that intent.

A recent Accounting Today article cites the uneasiness of corporate tax leaders re: reputation risk.

Excerpts from the article:

  • The company’s tax policy and principles are being enhanced with greater detail for clarity and transparency
  • Communication of tax strategies to the Board is becoming a primary focus
  • Tax controversy alignment with the Board is being communicated more frequently
  • Increased objective to develop more co-operative working relationships with tax authorities
  • Tax risk is an integral part of decision-making

A link to the article is attached for reference:

http://www.accountingtoday.com/blogs/debits-credits/news/corporate-tax-pros-concerned-about-reputations-74589-1.html

As BEPS Actions are currently being transformed into final Guidelines, the subject of reputation risk would be a worthy topic of focus in the interim to be prepared for an uncertain, complex and disparate trend in the world of international tax.

As the OECD BEPS Actions are a subject of discussion by tax administrations, the Indian Delhi Tribunal confirmed that such ideologies cannot be used as legislative doctrines for legal enforcement.

A non-legislative BEPS approach may become more common in the months/years prior to a country enacting such legislation into its regulatory framework.  However, the BEPS concepts should not be used as a basis for assessment or litigation.  Thus, there will be a short/long lead time, different in almost every country, as to when some, if any, of the BEPS Actions are enacted. This disparity should be recognized prior to raising BEPS concepts as an instrument of legal enforcement.

An EY Global Tax Alert provides additional information about the case.

http://www.ey.com/Publication/vwLUAssets/Indias_Delhi_Tribunal_rules_BEPS_is_a_tax_policy_consideration_and_not_relevant_for_judicial_determinations/$FILE/2015G_CM5447_Indias%20Delhi%20Tribunal%20rules%20BEPS%20is%20a%20tax%20policy%20consideration%20and%20not%20relevant%20for%20judicial%20determinations.pdf

The referenced article provides additional evidence that tax transparency is growing more universal and attracting the interest of many interested parties.  A quote from the first portion of the article addresses interest in a taxpayer’s tax risk framework and governance procedures.

“In an exclusive interview with FTFM Local Authority Pension Fund Forum Chair Kieran Quinn has confirmed that the Forum has launched the Corporate Tax Transparency Initiative (CTTI), writing to every FTSE 100 company in late March seeking technical information via ten detailed taxation questions around tax related governance and accounting practices, taxation risk.”

management and minimisation strategies.http://www.lapfforum.org/news/lapff-seeks-tax-transparency-from-ftse-100

This article raises the question of what public tax posture, if any, companies want to exhibit to address tax authorities, individuals/companies having access to company data, individual / institutional investors, pension funds, etc.  This topic relates directly to reputational risk, and should be aligned with the Board and senior management.

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