Strategizing International Tax Best Practices – by Keith Brockman

The UN organized its second workshop on “Tax Base Protection for Developing Countries” on 23 Sept. 2014.  The background materials for the workshop provide valuable insights into the roles that developing countries will continue to play, directly or indirectly, as a part of the OECD BEPS Action Plan.  The final outcome of the project will be a UN handbook.  The topics for the workshop were in parallel with the background materials, focusing on the following topics: (1) Preventing the artificial avoidance of PE status; (2) Neutralizing effects of hybrid mismatch arrangements; (3) Limiting interest deductions; (4) Taxation of capital gains; (5) Preventing tax treaty abuse; and (6) Transparency and disclosure.  Additional information, including the background materials, are referenced at the following link:

http://www.un.org/esa/ffd/tax/2014TBP2

This workshop, and its continuing developments, are significant in assessing whether the OECD Actions will be followed by developing and non-OECD countries in their recommended form and/or if a simpler, more direct application of international tax rules will be pursued.  All interested parties should be aware of these materials and the forthcoming UN handbook.

El Salvador: Tax amnesty

The Salvadoran Congress has recently approved a three-month tax amnesty, ending on 9 December 2014.  The amnesty program applies to taxes and customs duties due prior to 9 September 2014 with a waiver on interest, charges and fines.  To the extent there are outstanding issues in El Salvador, this is an excellent time to review this initiative by the tax authorities to facilitate voluntary compliance.

Details of the program are outlined in the EY Global Tax Alert attached herein:

On 5 September 2014, the Salvadoran Congress approved a three-month tax amnesty program.1 The amnesty period began on 9 September and ends on 9 December 2014.

This amnesty program applies to all taxpayers subject to the taxes administered by the Tax2 and Customs Authorities.3 It applies to taxes and customs duties that had to be reported or that were due and payable prior to the entry into force of the program.

Taxpayers that pay initial or additional taxes due are granted a waiver on late payment interest, charges and fines. Amounts previously reported in tax returns can be modified without triggering a penalty.

The amnesty program is not available to taxpayers who are currently undergoing a criminal proceeding for tax crimes or customs violations.

Taxpayers may request from the Treasury Authority a grace period for the discharge of their payment obligations. An extension of up to six months may be granted depending on the amount of the liability.

Endnotes
1. Through Legislative Decree No. 793 approving the Temporary Law to facilitate voluntary compliance with tax and customs duties (in Spanish: Ley Transitoria para facilitar el cumplimiento voluntario de obligaciones tributarias y aduaneras).

2. In Spanish: Dirección General de Impuestos Internos.

3. In Spanish: Dirección General de Aduanas.

EYG no. CM4738

Tax Executives Institute, Inc. (TEI) has provided comments to OECD BEPS Action Plan 11, data collection and BEPS actions.

The comments highlight the wariness of measuring BEPS actions and reacting thereto.  TEI discusses three key deficiencies of trying to measure such data and assess its effectiveness; (1) a lack of understanding  of the current state of affairs, lack of a defined goal to the OECD’s BEPS project, and lack of definition of BEPS behaviors.  The comments are referenced at:

http://www.tei.org/Documents/TEI%20Comments%20-%20Action%2011%20Data%20Collection%20-%20FINAL%20to%20OECD%2017%20September%202014.pdf

Some key TEI comments:

  • Taxing authorities may use a subjective “we know it when we see it” approach rather than objective, evidenced-based measures.
  • The focus on a disconnect of taxable income from activity and value creation also raises concerns that tax authorities may use the measures developed by BEPS Action 11 to advance formulary apportionment approaches to transfer pricing.
  • TEI urges the adoption of a clear definition of BEPS and BEPS behaviors before attempting to develop mechanisms to differentiate inappropriate (if legal) tax results from “regular” corporate tax planning that may take advantage of government enacted tax incentives.
  • A central tracking mechanism for assessing an increase in mutual agreement procedure cases and tax controversy and litigation raising double taxation concerns should be developed.

As the BEPS Action Plans are reviewed and implemented by countries worldwide, it is helpful to review TEI’s comments to ensure there is a comprehensive understanding of the perceived abuses and risks that BEPS Action Plans have addressed.

The Polish President signed a tax bill, effective 1/1/2015 with some major tax reforms.

The changes include:

  • New Controlled Foreign Corp. (CFC) tax regime
  • Change in debt-to-equity ratio from 3:1 to 1:1, some planning opportunities available before year-end
  • Participation regime not applicable  for dividends that provided a deduction for the payor

EY’s Global Tax Alert provides a summary of the upcoming changes attached for reference:

Executive summary
On 16 September 2014, the Polish President signed a tax bill, approved by the Parliament on 29 August 2014, with several changes to the corporate tax rules. The new measures include the introduction of CFC (controlled foreign corporation) rules and much broader thin capitalization restrictions. Also, under the new measures, the participation exemption regime will not be applicable to taxpayers receiving dividends that gave rise to a deduction from the income (or other decrease in the taxable base or tax) of the distributing company. Furthermore, the new measures make the transfer pricing documentation requirements applicable to joint ventures and partnerships.

International groups may be affected by these changes to the Polish tax system that enter into force on 1 January 2015. Certain steps undertaken early enough may mitigate the impact of the changes.

Detailed discussion
Thin capitalization
New restrictions will limit the deductibility of interest on a much broader range of loans (generally on all intra-group financing). Currently only loans from a direct shareholder and/or direct sister company are subject to thin capitalization restrictions. However, loans granted by the end of 2014 may, under certain conditions, remain subject to the current liberal regulations.

The amended provisions introduce a 1:1 debt-to-equity ratio (currently 3:1) and a new definition of “equity.” In addition, taxpayers will have the option to use a new alternative thin cap calculation method based on a reference rate of the National Bank of Poland and the value of assets capped at a percentage of EBIT.

Taxpayers considering new debt placements may want to finalize plans by the end of 2014 to fall under the current rules. Taxpayers should make projections in order to be ready to choose the optimal calculation method (based on debt-to-equity ratio or the new one based on assets) before statutory deadlines.

CFC rules
2015 will witness an unprecedented change to the Polish tax system with the introduction of the CFC regime. The CFC regime will result in taxation of foreign companies’ income at the level of their direct or indirect Polish shareholders.

Depending on the date when the new law is published and on the tax year of the CFC, income of the CFC may be taxed shortly after the provisions enter into force.

Multinational groups should assess the impact of the CFC regime on their Polish companies with foreign subsidiaries and, if required, decide on steps to be taken to e.g., qualify for exemptions.

Other changes
In relation to the current legislation, it should be noted that General Anti Avoidance Regulations are planned to be introduced in Poland as of 1 January 2016.

Best Practice observation: How do these rules, as well as those from all other countries, get filtered and communicated timely to allow for planning in the current multinational tax structure.  As countries start to embark upon initiatives to change their domestic legislation, coupled with OECD BEPS Action Plan initiatives, there should be a proactive structure in place to review planning strategies and identify new risks in the global structure.

The transfer pricing information return tax form has been released to provide 2013 information.  The form is to be completed in French with a due date of 20 November 2014.  A reference to the form is attached:

http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Pages/2014-1/france-final-version-information-return-transfer-pricing.aspx

Best Practice observation: As more countries initiate transfer pricing disclosure forms, including the types of transfer pricing methodologies being used, it is imperative to align these disclosures with the annual transfer pricing documentation.  Accordingly, there should be clear communication with the Business re: advice to properly file such disclosures.

OECD BEPS 2014 Deliverables

The OECD has published its 2014 deliverables, referenced at the following link:

http://www.oecd.org/ctp/beps-2014-deliverables.htm

I would encourage all interested parties to thoroughly review the provisions, as well as listen to others as they comment on these significant proposals.

Note that the proposals are not yet enacted into law, which is a focus of the action to provide a multilateral instrument to help facilitate that objective.

Singapore: TP comments

The Inland Revenue Authority of Singapore (IRAS) has issued a consultation paper requesting comments on a revision to their transfer pricing (TP) guidelines.  The particular questions for which comments are requested, no later than 24 September, consist of the following:

  • Challenges in preparing TP documentation contemporaneously
  • Difficulties in obtaining group and entity information in Annex A of the paper
  • Examples of low-risk documentation areas
  • Frequency of documentation updates

A link is provided for reference to the consultation paper:

http://www.iras.gov.sg/irashome/uploadedFiles/About_IRAS/Public_Consultation/pconsult_IT_Transfer%20Pricing%20Documentation_2014-09-01.pdf

Key observations:

  • TP documentation to be organized in alignment with the OECD master file and local entity reporting methodology.
  • TP documentation not applicable for routine services with a 5% safe harbour mark-up
  • Inadequate TP documentation will lose the support of IRAS in MAP discussions to resolve double taxation.
  • Annex A provides additional requests for group information that may be the source of requested comments, including:
    • Worldwide organization chart
    • Group’s business models and strategies
    • Profit drivers, including a list of legal ownership for intangibles
    • Supply chain activities and functions
    • Business relationships among all related parties
    • Group’s transfer pricing policies for all types of transactions between related parties
    • Consolidated group financial statements

Singapore is a jurisdiction (and there may be many more) that is reviewing the OECD’s Action Plan country-by-country reporting template and forthcoming comments as a base upon which to expand TP reporting.

Multinationals will need to capture every country’s additional legislative requirements arising from the OECD’s Action Plan.  The additional complexity, cost and time will place a further constraint upon the ability to provide information perceived to be directly relevant for every jurisdiction around the world.  Additionally, the threat of lack of support for the MAP process via a determination of inadequate TP documentation (if legislated into law) will increase the risk of double taxation and TP appeals worldwide.

All interested parties should take time to submit comments prior to the 24 September deadline.

 

 

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