UK’s Autumn Statement 2015 has been announced, with several measures aimed at changing corporate tax behavior and promoting transparency with the objective to achieve a modern and fairer tax system. A link to the Statement is provided for reference:
- A 60% penalty of tax due for successful general anti-abuse rule (GAAR) cases, to be implemented in 2016. The revenue impact of this measure is highly uncertain, as it is also meant to be an incentive to change corporate tax behavior.
- A desire to be to the most digitally advanced tax administration in the world.
- New criminal offense for corporates failing to prevent tax evasion; failure to prevent their agents from criminally facilitating tax evasion by an individual or entity.
- Hybrid mismatch rules to be effective 1/1/2017, following the OECD’s BEPS Guidelines.
- Corporates to publish tax strategies as they relate to, or affect, UK taxation.
- Cooperative compliance framework.
- “Special measures” regime to tackle businesses that persistently engage in aggressive tax planning.
A carrot, stick and transparency approach is contained within the Statement, and thus important to follow as other countries will surely review UK’s leading initiatives to gauge impact on their respective economy. The GAAR related penalty, which is inherently subjective, will be dictated in some fashion by HMRC’s aggressiveness to assess GAAR and a willingness to pursue it through the respective appeal avenues or court. The tax strategy initiative will also be interesting to monitor as to its breadth and potential impact upon a company’s risk rating.
EY’s recent publication takes a close-up view of transparency and disclosure trends, including a detailed analysis of several countries’ latest trends. A link to the report is provided for reference:
- Transparency issues of the future:
- Country-by-Country (CbC) implementation and inconsistency of approaches
- New transfer pricing documentation requirements
- Public access for CbC reports and tax rulings
- Growing trend to disclose a company’s planning, strategy, risk appetites and effective tax rates
- Tax codes of conduct, formal and informal
- Increased disclosure of aggressive tax positions
- Electronic data gathering
- Use of third-party data
- Direct ERP access
- Matching of data and watching for transactional trends
- EU transparency update, including proposed Directives
- Country transparency updates: Argentina, Australia, Brazil, China, Denmark, Ecuador, France, Germany, Greece, Mexico, Netherlands, Poland, Singapore, South Africa, South Korea, Spain, UK, US
The level of future transparency will continue to increase, with new and dissimilar demands by countries around the world. This report unveils the global trends and issues, with comprehensive analyses of various transparency trends of major countries. Accordingly, it is a publication that should be reviewed to better understand where the current trends are requiring future demands for transparency in a new world of international taxation.
Principles for Responsible Investment (PRI), a UN sponsored initiative, published a report entitled “Engagement Guidance on Corporate Tax Responsibility.” The guidance is investor oriented addressing the conduct of corporate tax responsibility, disclosure, transparency and good tax risk governance. Therefore, this report is a valuable reference to understand today’s trend of tax disclosure and transparency from an investor’s perspective, and how multinationals may be queried in the new world of international tax transparency.
A link is attached for reference:
- Earnings that rely on tax planning vs. economic activity are vulnerable to tax regulatory changes, earnings risk via strategies are increasing, and some Boards may be unaware of the effect that incentives have on tax planning.
- Corporate sustainability officers should understand tax decisions and their impact on financial results and stakeholders, with alignment between tax strategies and sustainability commitments.
- ” Companies should be able to defend how they allocate profit to each country both to tax authorities and the general public to avoid reputational risk and investor backlash.”
- Before engaging with companies on tax practices, investors should understand various strategies, including IP transfers, financing, marketing service arrangements, principal structures, tax havens, shell companies and tax incentives, that are summarily explained.
- A step plan to engage companies:
- Identify red flags, including a formula to measure tax gap
- Questions for Senior Management/Board re: tax policy, tax governance, managing tax-related risk, effective tax rate, tax planning strategies including structure and IP rights, and country-by-country (CbC) reporting.
Appendices are provided for additional reference of the OECD BEPS project, examples of good tax practices re: disclosures, summary of findings from discussions with Heads of Tax in eight multinational organisations, and a Glossary / Resources.
The report, in providing formulas and explanations, includes educational material for the investor community re: tax strategies and governance, while also providing examples of tax queries and good tax governance by many multinationals.
The report should be used as a metric to assess readiness and alignment for these important topics that may be raised by stakeholders, both internal and external. To the extent such questions have not been a primary focus, this report is an impetus to raise the priority threshold in addressing tax policies, strategies and governance in a very transparent world. Additionally, it is also worthy to review the names of multinationals cited in the report for awareness and recognition.
Global mobility will face, directly and indirectly, various challenges resulting from OECD’s BEPS proposals. PwC’s Insights provide a concise summary of these proposals, included for reference:
- Treaty changes, either bilaterally or via the Multilateral Instrument, will affect key issues and risks, including permanent establishment (PE).
- Unilateral changes, several of which have been enacted, should be reviewed with a focus on global mobility functions.
- The transparency initiative will encourage tax authorities to aggressively pursue PE and treaty based rules.
- What is the impact of the change for PE dependent/independent test.
- Responsibilities of senior executives, sales representatives and regionally based employees will need to be reviewed for the new rules.
- People functions re: controlling risk should receive separate review.
- Intercompany agreements (i.e. legal form) should be compared to practical substance responsibilities to evidence conformity, as analyses will use legal agreements as only a first step to understand the transactions and potential consequences.
Post BEPS, it is imperative that global mobility’s function and responsibilities should be reviewed, from a tax risk awareness perspective as well as internal governance controls. To the extent that global mobility is not closely collaborated with the tax function, the ways of working and reporting should be reviewed to address this new world of international tax transparency and the emphasis on multinationals paying their fair share of tax, however construed.
The BEPS Asia-Pacific technical meeting was held last week, with the participants expressing many common themes, while also hinting at future developments.
- 75 participants from 17 countries attended, in addition to many agencies.
- A strong sense of BEPS collaboration was a consistent message.
- The Multilateral Instrument will be pivotal for implementation of treaty related issues, especially in developing countries.
- The use of profit split transfer pricing methods are insightful for the future.
- Individual tax incentives will continue.
- Transfer pricing toolkits are welcome, especially for practical application of the rules.
- A regional network event has been planned for next year.
Although several countries have already expressed a strong BEPS intent to provide new legislation for unilateral fiscal growth, there appears to be a strong sense of community in the development of practical and effective guidelines that may be implemented to stimulate tax collections.
ASIA-PACIFIC TECHNICAL MEETING ON BEPS YOGYAKARTA, INDONESIA, 11-12 NOVEMBER 2015 CO-CHAIRS’ SUMMARY OF DISCUSSIONS
Mr. John Hutagaol1 and Mr. Kyounghwan Moon2 co-chaired the first Asia-Pacific Technical Meeting on BEPS, hosted by Indonesia in cooperation with the OECD Korea Policy Centre (Tax Programme). The Co-Chairs prepared this summary of the discussions of the meeting which was shared with all participants.
The objectives of the technical meeting were 1) to update participants on the outcomes of the BEPS project and reflect country perspectives following the delivery of the BEPS Package, 2) to discuss the implementation and monitoring phase of the BEPS project, and 3) a technical ‘deep dive’ into the toolkits currently being developed by international and regional tax organizations.
This technical meeting follows the consultation held in Seoul, Korea, in February 2015. It gathered together 75 participants from 17 economies from the Asia-Pacific region3, as well as representatives from ATAIC, AIPEG, JICA, the OECD Korea Policy Centre (Tax Programme) and SGATAR.
In his opening address, Mr Mardiasmo, Vice Minister of Finance of the Republic of Indonesia, emphasised the importance of working together in the region to develop solutions to the global tax challenges faced by all. The discussions addressed the following topics:
- The presentation of the final BEPS Package and its different actions.
- The development of practical toolkits to implement targeted and workable solutions tocounter BEPS issues.
- The challenges and opportunities in the BEPS implementation phase, including the areaswhere follow up work is needed and ideas on how to design the inclusive framework with all interested countries on an equal footing as well as continuing regional engagement.
A. Key Messages
1. The BEPS Package was welcomed and participants highlighted the importance of learning from other countries’ experiences and best practices.
2. Participants demonstrated a strong interest in cooperation with each other and with the OECD. They were particularly supportive of developing a platform to work together on an equal footing with regard to the implementation of the BEPS outcomes.
1 Director of Tax Regulation II, DGT, Indonesia.
2 Director, MOSF, Korea
3 Australia, Bangladesh, Brunei Darussalam, Cambodia, Chinese Taipei, Indonesia, Japan, Korea, Malaysia, Myanmar, Papua New Guinea, People’s Republic of China, Philippines, Saudi Arabia, Singapore, Thailand and Vietnam.
3. Participants recognised the importance of the multilateral instrument to implement the BEPS Project. 12 out of the 17 economies represented at the meeting have already joined the ad hoc Group for the negotiation of the instrument.
4. The importance of regional meetings and cooperation with regional organisations, such as ATAIC and SGATAR, was a means of engaging countries to provide their input and to express their views.
5. Participants highlighted the resource constraints faced in national administrations. They called for effective capacity building initiatives, and welcomed support from international and regional organisations.
6. Participants welcomed the work presented and the progresses made on specific toolkits and reports. They emphasised the need for the toolkits to be practical and based on country experiences.
7. Participants recognised the significance of engagement of business and civil society in implementing BEPS solutions.
1. BEPS Final Deliverables
Participants welcomed the BEPS package and agreed that the implementation of the BEPS outcomes will be the next big challenge. They highlighted the importance of sharing information, balancing the need to tackle BEPS issues and to promote cross-border commercial activities. They anticipated that the Multilateral Instrument will provide clear guidance on implementing treaty-related measures, particularly with regard to measures to combat treaty abuse. They also looked forward to further guidance to be developed with regard to transfer pricing issues including the use of profit split methods.
There was particular interest in the outputs from Actions 4, 7, 8-10, 13 and the work on the digital economy. Specifically, there was detailed discussion on the scope of the changes to the definition of a permanent establishment, and on the implementation of Action 13 on country-by-country reporting.
2. Toolkits: Tax incentives for investment
Participants welcomed the report published on tax incentives and recognised that the report offered useful building blocks on the design of effective and efficient tax incentives. Participants provided useful examples of the operation of incentives in their economies, noting the opportunities and challenges with the various incentive schemes, and understood the importance of enhanced regional and international cooperation.
3. Toolkits: Indirect transfer of assets
This issue provided particular challenges to the economies in the region, and further information and guidance was welcomed. The meeting agreed to feed into the toolkit process through a questionnaire. There was in-depth discussion of the technical issues raised in the toolkit, as well as the practical implications.
4. Toolkits: Comparability issues and transfer pricing documentation
Participants welcomed the development of a transfer pricing comparability toolkit. They added that this toolkit would not only be useful for low income countries, but could help to address issues in a broad range of countries. Participants welcomed the planned practical nature of the toolkit, particularly given the importance of transfer pricing measures to their economies.
Participants welcomed the opportunity to work regionally and globally in enhancing the utility and effectiveness of the toolkits on transfer pricing. The OECD will work with SGATAR in disseminating questionnaires on comparability data and transfer pricing documentation to the countries in the region.
C. Implementation phase and participation of the Asia-Pacific countries in the inclusive framework
Participants acknowledged that direct participation in the Committee on Fiscal Affairs and working party meetings were a great opportunity, but that resource constraints may affect direct engagement.
Participants stressed the urgency of implementing the measures agreed in the BEPS package in a consistent manner. In particular, participants were interested in implementing the new transfer pricing documentation rules, and how to implement the treaty-related measures. Participants welcomed the initiative to build a more inclusive framework. They appreciated the positive experience represented by the Global Forum on Transparency and Exchange of Information for Tax Purposes, including the peer review mechanism and the wide participation on an equal footing, but noted differences between the scope of the two initiatives.
Participants supported the OECD capacity building initiatives including the Tax Inspectors Without Borders, Global Relations programme and bilateral Tax and Development programme.
Participants considered that the regional network meetings are a useful mechanism to obtain and to share information and experiences, as well as to build stronger relationships in the region.
1. The outcomes of the meeting will be reported to the CFA in January. This input will feed into the design of a more inclusive framework for which a proposal will be presented in early 2016 to the G20 Finance Ministers.
2. Questionnaires relating to the toolkit process will be sent to participants to provide input to better focus the workstreams addressed and the solutions proposed.
3. A regional network event will be held in 2016.
Finally, participants thanked Indonesia and OECD-Korea Policy Centre (Tax Programme) for hosting the successful and fruitful meeting.
The OECD has published its international VAT/GST Guidelines, which are expected to be approved in 2016.
Jurisdictions are encouraged to use existing bilateral, regional or multilateral arrangements on mutual co-operation to practically comply with the Guidelines. The soft-law guidelines provide additional insight into the taxability of intangibles and services.
Links to EY’s Indirect Tax Alert and the OECD Guidelines are provided for reference.
As indirect taxes are becoming more significant and visible, it is apparent that the governance of such taxes should be coordinated with direct taxes in multinational organisations for significant transactions and conformity of principles. This area of tax is also increasingly specialized, with potential risks that should be considered in a global tax risk framework.
The UN Committee of Experts on International Cooperation in Tax Matters concluded their October meeting with several important milestones discussed. A summary of the meeting is provided, and a reference to the Handbook on Selected Issues in Protecting the Tax Base of Developing Countries are provided for reference:
- A new Article was adopted re: fees for technical services that will become a part of the new UN Model Double Tax Convention (DTC).
- A new practical Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries was adopted.
- Subcommittee on Exchange of Information presented a draft “Code of Conduct” that will be updated in the October 2016 session.
- The Committee also welcomed the work of UN DESA’s Financing for Development Office in the area of capacity-building, including the production of a “Handbook on Selected Issues in Protecting the Tax Base of Developing Countries.”
- Two new subcommittees were formed:
- Royalties re: updated Article 12 UN Model and commentary
- Mutual Agreement Procedure (MAP) to review and propose updates to UN Model
On the heels of the OECD BEPS Guidelines, the UN developments will pave the way for many developing countries that lack the time and/or resources for implementation. Accordingly, additional withholding taxes for services and withholding sources will be revealed to extract monies at source. As a result, the UN initiatives are paramount to monitor and review accordingly.
These initiatives will also provide greater capacity for global disparity, with the BEPS Guidelines and UN changes in periods of transition re: domestic legislative actions around the world.