Strategizing International Tax Best Practices – by Keith Brockman

The RobecoSAM 2014 Corporate Sustainability Assessment, referenced herein, introduced tax strategy criteria in their scoring to address critiques of MNE’s tax structures, tax reporting transparency and tax risks.

The publication discusses reputational risk in its new survey questions and is very informative re: companies not yet having a tax policy, as well as asking relevant questions addressing the license to operate in a country, relationship risks with host country and economic development risks in regions where the company is operating.

http://www.sustainability-indices.com/images/CSA_2014_Annual_Scoring_Methodology_Review.pdf

Tax strategies, policies and the perception gap are increasing in importance worldwide, with a kindly reminder for the necessity of developing a comprehensive tax framework that is flexible with today’s challenging international tax environment.

The enterprise risk management analyses for a MNE should have an integrated tax risk framework, coupled with functional interface between common risks that are multi-faceted.

The European Commission published a package of tax transparency measures on 18 March 2015.  The press release and other documents, linked herein for reference, include a tax transparency communication, Council Directive re: automatic exchange of information and Q and A’s of the comprehensive package.

Significant initiatives are included in this package addressing corporate tax avoidance and harmful tax competition in the EU, key components of which are highlighted.

http://europa.eu/rapid/press-release_IP-15-4610_en.htm

http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transparency/com_2015_136_en.pdf

http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transparency/com_2015_135_en.pdf

http://europa.eu/rapid/press-release_MEMO-15-4609_en.htm

Press release:

  • The concepts of tax evasion, corporate tax avoidance, “pay their fair share,” aggressive tax planning and abusive tax practices are summarily stated, although corollary concepts for avoidance of double taxation and effective dispute resolution are noticeably absent.
  • Tax rulings will be automatically exchanged every 3 months.
  • Feasibility of public disclosure of certain tax information of MNE’s will be examined.
  • The EU Code of Conduct on Business Taxation will be reviewed to ensure fair and transparent tax competition within the EU.
  • The Savings Tax Directive is proposed to be repealed to provide efficiencies and eliminate redundant legislation in the Administration Cooperation Directive.
  • Next steps: The tax rulings proposal  will be submitted to the European Parliament for consultation and to the Council for adoption, noting that Member States should agree on this proposal by the end of 2015, to enter into force 1/1/2016.
  • Common Consolidated Corporate Tax Base (CCCTB) proposal will be re-launched later this year.

Tax Transparency proposal:

  • Existing legislative framework for information exchange will be used to exchange cross-border tax rulings between EU tax authorities.
  • The Commission will develop a cost/benefit analysis for additional public disclosure of certain tax information.
  • The tax gap quantification will be explored to derive more accuracy.
  • The global automatic exchange of information for tax rulings will be promoted by the EU.

Council Directive (amending Directive 2011/16/EU) re: automatic exchange of information:

  • Mandatory automatic exchange of basic information about advance cross-border rulings and advance pricing agreements (APAs).
  • Article I definition of “advance cross-border ruling:
    • any agreement, communication, or any other instrument or action with similar effects, including one issued in the context of a tax audit, which:
      • is given by, or on behalf of, the government or the tax authority of a Member State, or any territorial or administrative subdivisions thereof, to any person;
      • concerns the interpretation or application of a legal or administrative provision concerning the administration or enforcement of national laws relating to taxes of the Member State, or its territorial or administrative subdivisions;
      • relates to a cross-border transaction or to the question of whether or not activities carried on by a legal person int he other Member Sate create a permanent establishment, and;
      • is made in advance of the transactions or of the activities in the other Member Sate potentially creating a permanent establishment or of the filing of a tax return covering the period in which the transaction or series of transactions or activities took place.
  • Automatic exchange proposal is extended to valid rulings issued in the 10 years prior to the effective date of the proposed Directive (Article 8a(2)).
  • In addition to basic information exchanged, Article 5 of the Directive should provide relevant authority for the full text of rulings, upon request.
  • EU central repository to be established for submission of information by Member States.
  • Confidentiality provisions should be amended to reflect the exchange of advance cross-border rulings and APAs.

Q and A’s:

  • Corporate tax avoidance, as explained, undermines the principle that taxation should reflect where the economic activity occurs.
  • Standard/template information for the quarterly exchange of information includes:
    • Name of taxpayer and group
    • Issues addressed 
    • Criteria used to determine an APA
    • Identification of Member States most likely to be affected
    • Identification of any other taxpayer likely to be affected
  • Commission could open an infringement procedure for Member States not following the disclosure obligations.
  • Domestic tax rulings are exempt.
  • The EU could be a global standard setter of tax transparency.
  • The EU Code of Conduct criteria are no longer adequate, and it lacks a strong enough mandate to act against harmful tax regimes.

The EU Tax Transparency Package is required reading for all MNE’s and other interested parties, as it is an ambitious effort to provide globally consistent procedures for the exchange of tax rulings/APAs.

Additionally, it is interesting to note the EU’s aggressive actions and timing in its efforts to align, as well as expand, the OECD’s efforts to address BEPS Action Items.  These actions are also intended to be a standard for global setting in the new era of international tax transparency.    

As a Best Practice, the 10-year look-back provision for rulings implies that MNE’s should have a similar central database for prior, and future, cross-border rulings.  Additionally, this automatic exchange is another element of consideration prior to formally requesting a tax ruling.    

OECD BEPS update

EY’s Global Alert discusses the upcoming public consultations on BEPS Actions 8-10, and includes country related BEPS initiatives for Australia, France, Honduras, India and Taiwan.

http://www.ey.com/Publication/vwLUAssets/The_Latest_on_BEPS_-_16_March_2015/$FILE/2015G_CM5299_The%20Latest%20on%20BEPS%20-%2016%20March%202015.pdf

The latest updates highlight the pivotal discussions around complex transfer pricing issues including risk recharacterisation (also referred to as non-recognition).  These discussions and final guidelines will set the stage for upcoming controversies, including efforts to avoid double taxation.

HMRC has published new guidance providing for publication of names re: high risk promoters.  To the extent a promoter has not complied with the terms of a Conduct Notice previously communicated to them, the promoter will be publicly named and they will need to inform their clients of this monitoring action.

The first Conduct Notice has already been issued, as part of HMRC’s ambitious intent to address “tax avoidance.”

A link to the news story is provided:

https://www.gov.uk/government/news/high-risk-promoters-of-tax-avoidance-face-government-clampdown

The timing is also noteworthy, as it precedes final drafting of the Diverted Profits Tax proposal which will soon be followed by elections.

Advisors, as well as MNE’s, should monitor this trend of “name and shame,” as it is generally considered too late for damage control after one’s name and reputation are subject to public perception in this new age of addressing “tax avoidance.”

BEPS Timing: Mismatch

The Dec. 2016 completion date for BEPS Action 15, Multilateral Instrument (refer to 11 Feb. post) and the completion of the remaining 15 Actions by the end of 2015 is a clear mismatch between issuance of guidelines and an efficient process for implementation.

The multilateral instrument is not projected to be available until the end of 2016, with subsequent enactment by countries in 2017, 2018 or later years.  As a result, countries will need infinite patience to wait for final guidelines, and the corresponding multilateral instrument, without enacting unilateral legislation that may be non-conforming and subject to different interpretations.  Therefore, the result will be increased complexity with more diversity in transfer pricing practices, different interpretations of the arm’s length principle and additional risks of double taxation.

As the pace of BEPS enactment and increased interest by all parties accelerates, it is hopeful that countries will be coordinated in this game of patience to address a new era of transfer pricing interpretation and documentation.  MNE’s should therefore prepare for maximum flexibility to anticipate this divergence.

The OECD has participated in recent regional meetings in Eurasia and Latin America, among others, following through on its plan to assist developing countries with the BEPS initiative.  The OECD publication entitled “The BEPS Project and Developing Countries: From Consultation to Participation” and a summary of the Latin America meeting are provided for reference.

http://www.oecd.org/ctp/strategy-deepening-developing-country-engagement.pdf

http://www.oecd.org/ctp/beps-regional-network-lac-co-chairs-summary-of-discussions.pdf

Observations:

The summary of the regional meetings highlights important trends, indicating alignment and future deviations from the new OECD guidelines.

The Latin America summary observes the region does not approve of unilateral legislation for the interest initiative, noting individual countries should wait for final guidelines to ensure alignment.

In contrast, the region expressed concerns of their administrative capacity to implement the automatic exchange of information procedures.  However, the countries also expressed a desire to access country-by-country reports, assess whether such information is satisfactory, and evaluate the proposed filing threshold for regional MNE groups.  These statements indicate a potential shift from the new guidelines to possibly implement standards that are region specific, and thereby non-conforming with the BEPS guidelines.  

Accordingly, MNE’s should follow these meetings closely to provide flexibility for future BEPS compliance that will be more complex than it now appears.  

The KPMG guidance herein provides background for the new transfer pricing recharacterisation/reconstruction provisions that enable the tax administration to conform the transaction in accordance with its substance, versus form.

Global- KPMG- Research

March 2: The Australian Taxation Office (ATO) in late February 2015 issued a practice statement that offers some guidance when an ATO transfer pricing audit team looks to apply reconstruction provisions.

While the ATO audit team may take a position that the reconstruction provisions in Australia’s new transfer pricing rules would apply—because the substance of the commercial or financial relations between the related parties is different to the form of those relations—the practice statement (PS LA 2015/3, issued 26 February 2015) sets out a new internal approval process for application of the reconstruction provisions.

Amongst other things, the practice statement requires ATO personnel to:

Seek approval from an Assistant Commissioner within their business line or from a Senior Tax Counsel in the Tax Counsel Network prior to the ATO’s adoption of any view that one of the reconstruction provisions applies, and provide the Assistant Commissioner with a position paper setting out the views proposed in relation to the application of any of the reconstruction provisions, including a clear explanation of the reasons for the application of the reconstruction provisions.

Although the ATO has new processes in place for this methodology, this practice should be limited to the most egregious transfer pricing transactions.  Accordingly, it should not be interpreted as expanding/circumventing the arm’s length principle.  

Other countries may lack adequate resources and processes enabling the formalities and diligence of the ATO, thus this transfer pricing mechanism should not become the norm for international transfer pricing legislation.  Additionally, equal weight should be conferred upon appeal mechanisms and corresponding adjustments to avoid double taxation.  

 

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