Strategizing International Tax Best Practices – by Keith Brockman

Poland’s latest amendments to its Draft Bill incorporates a major change to the date for submission of a country-by-country report (CbCR).

The original draft (refer to 28 May 2015 post) provided a 1/1/2016 effective date, with the CbCR due at the end of 2017 for 2016 data.  However, the latest draft moves the effective date of the Bill to 1/1/2017, however it also states that the CbCR must be attached to the 2016 corporate income tax return, generally due 3 months after the end of the tax year.

The final version of the bill should be monitored closely, as it would accelerate submission of the CbCR to 31 March 2017 for 2016 activity, which is significantly earlier than the 31/12/2017 date (for calendar year taxpayers) envisioned by the OECD’s BEPS Action 13 Discussion Draft.

The latest changes reflect the increasing emphasis on transparency and assessment of transfer pricing risk, a trend that is closely followed by all other countries in assessing their urgent need for transparency.

The EY publication link is attached for additional reference:

http://www.ey.com/Publication/vwLUAssets/Poland_amends_draft_bill_on_transfer_pricing_documentation_requirements/$FILE/2015G_CM5559_TP_Poland%20amends%20draft%20bill%20on%20TP%20documentation.pdf

Australia continues to lead the way after its completion of cloaking new PE rules within its GAAR legislation, thereby avoiding the protection of the double tax treaty network.

A voluntary tax disclosure code concept is in deliberation by the Australian administration for its 2105-16 Budget.  This disclosure would be in addition to other disclosures, such as country-by-country (CbC) reporting.

KPMG’s commentary herein provides a snapshot of this potential new trend that should be monitored by multinationals, as countries around the world are also watching this recent development for perceived benefits.

Corporate tax disclosure code: next big thing in tax transparency?
by Stephen Callahan, Director, and James Gordon, Senior Manager, Corporate Tax

The 2015-16 Budget proposals to introduce a multinational (MNE) anti-avoidance rule and to levy GST on cross-border digital services grabbed the immediate headlines in the large business market.
However, arguably the more far reaching tax integrity proposal is the Board of Taxation review into the development of a voluntary code for greater public disclosure of tax information by large corporates.

There is the obvious, and as yet, unanswered question as to exactly which businesses the proposal is directed towards. Nevertheless, some initial thoughts on possible influences in this review include:

The controversy and confusion surrounding tax performance analytics based on financial statement tax
disclosures.
The tension between community expectations on disclosures covering tax, related party transactions and investment in subsidiaries as against the need for concise reporting for capital market purposes.
Debates surrounding what comprises a business’ tax contribution to a country and the measurement of effective tax rates.
Global developments on alternate models for improved tax transparency.
Tax contribution reporting by an increasing number of multinationals.
The relationship, if any, between a voluntary disclosure code and an involuntary tax transparency publications by the ATO.

We await with interest to see the terms of reference of the Board of Taxation review.

The World Customs Organization (WCO) has published a new Guide to Customs Valuation and Transfer Pricing.

The Guide will:

  • Provide a policy/audit/control tool for Customs officials
  • Cross reference transfer pricing documentation that may be relevant for customs purposes
  • Address transfer pricing misconceptions
  • Reconfirm “transaction value” as the starting point for customs valuation
  • Encourage consideration of transfer pricing studies
  • Encourage consistency of transfer pricing adjustments
  • Encourage the provision of advance customs valuation rulings
  • Provide Best Practices for business, integrating customs and transfer pricing documentation/discussions

A succinct summary by DLA Piper, and the Guide, are provided for reference:

https://www.dlapiper.com/en/uk/insights/publications/2015/06/wco-publishes-guide-to-customs-valuation/

http://www.wcoomd.org/en/topics/key-issues/revenue-package/~/media/36DE1A4DC54B47109514FFCD0AAE6B0A.ashx

The Guide should also be used as a proactive tool to review reporting structures of transfer pricing and customs employees/advisors, functional integration, etc. to address the new changes in transfer pricing and the possible effect on customs valuations and documentation going forward.

 

In an ever-increasing tidal wave of transparency proposals, the South African Revenue Service (SARS) issued a draft notice on Reportable Arrangements.

The proposals provides that a Reportable Arrangement must be reported to SARS with 45 business days if:

  • A nonresident renders technical, managerial or consultancy services (non-defined terms) to a resident, and
  • The nonresident, its employees, agents or representatives were or will be physically present in S. Africa in rendering such services, and
  • The expenditure will exceed R10M (approx. $823k) in the aggregate.

Penalties for non-disclosure are applicable, and SARS may use this new mechanism to determine if the non-resident company is registered for income tax or VAT in S. Africa and if there is a permanent establishment (PE) for profit attribution.

http://www.ey.com/Publication/vwLUAssets/South_Africa_issues_draft_notice_on_reportable_arrangements/$FILE/2015G_CM5521_South%20Africa%20issues%20draft%20notice%20on%20reportable%20arrangements.pdf

This proposal is important to monitor, as it highlights different methodologies for determining what services are being provided by non-resident companies, and if such activities could be designated as a PE with some profits subject to tax.  

The UK’s Diverted Profits Tax, Australia’s follow the leader implementation in its General Anti-Avoidance Rules (GAAR) and this disclosure present different processes that tax administrations are looking to capture additional taxes for fiscal growth, incentived by the OECD BEPS Guidelines and objectives, although such Guidelines are not yet finalized.

EY’s Global Tax Alert highlights recent developments re: the previously announced Tax Transparency Package initiatives of the EU.  Key observations, and a copy of the Alert, are provided for reference:

Key Observations:

  • Definition of “tax rulings” is too broad for effective implementation by the Member States
  • The 10-year time period for rulings seems excessive and burdensome
  • 1/1/2016 implementation deadline to be extended to 12 months from entry into force of the amending Directive
  • OECD Action items should be considered for relevant integration / coordination
  • European Commission would also receive a copy of the rulings, with a central directory to be developed

EU Council Presidency issues report detailing open questions on proposal for automatic exchange of advance cross-border tax rulings and Advance Pricing Arrangements
Executive summary
On 8 June 2015, the Presidency of the EU Council (Latvia) sent a report (The Report) to the Permanent Representatives Committee and the European Council. The Report sets out the current state, as well as a number of open issues and questions, in regard to the 18 March 2015 proposal for a Council Directive amending Directive 2011/16/EU regarding the mandatory automatic exchange of tax information.

That proposal, focusing on the exchange of advance cross-border tax rulings (ATRs) and Advance Pricing Arrangements (APAs), constitutes a key element of the Tax Transparency Package1 issued on the same date. The Tax Transparency Package further contained a proposal to repeal the Savings Directive as well as a Commission communication outlining a number of other initiatives to advance tax transparency.

Detailed discussion
Under the Tax Transparency Package proposal, Member States will be required to automatically exchange information on their ATRs and APAs, with the Commission proposing a strict timeline whereby every three months all Member States would be obliged to report to all other Member States and the Commission on the rulings they have issued during that period.

This report, sent via a secure email system, would contain a pre-defined, standard set of information. The recipient Member States would also have the right to request more detailed information on any of the documented rulings, where the information is relevant to the administration of the tax laws of the Member State. Each year, Member States would have to provide statistics to the Commission on the volume of information exchange on tax rulings.

In addition to this quarterly exchange of information, the proposal also refers to a retroactive application of ten years, whereby the above obligation is extended to rulings issued during the ten years prior to the date on which the proposed Directive takes effect, where such rulings are still valid on the date of entry into force of the Directive.

The instrument under which all such exchange would occur is Directive 2011/16/EU on Administrative Cooperation in the Field of Taxation (DAC).

Open questions and issues detailed in the Report
The Report details that four meetings of the Working Party on Tax Questions have taken place (31 March, 30 April, 21 May and 9 June 2015) since the Tax Transparency Package was published, with the proposals being discussed in detail at each meeting. The Report further sets out a number of open issues and questions raised at those meetings. In the Report, the Presidency asks the Council to discuss these questions, in order to move the proposals forward, and to help the incoming Presidency to draft a compromise text for the DAC that could eventually be tabled for the political agreement of the Council in the autumn of 2015.

Scope and timing of exchange of information
In regard to the scope of definitions of ATRs and APAs, the Report noted that the definitions proposed by the Commission are too broad for a number of Member States. While the objective of the Tax Transparency Package is to cover as wide a scope of ATRs and APAs as possible, some Member States raised concerns that too much room for interpretation (by introducing a distinction between binding and non-binding rulings, for example) would create uncertainty. The Presidency therefore deemed it appropriate, to narrow the scope to ATRs and APAs which are issued to specific taxpayers or groups of taxpayers, with the effect of exempting from automatic exchange the commentaries of tax laws of a general nature.

In terms of the proposal to require the exchange of ten years of ATRs and APAs, the report notes that many Member States believe that this requirement goes beyond what is reasonably required for reasonable tax transparency purposes, as well as creating an overly voluminous administrative burden. The report makes no reference to what time period may be more acceptable to those Member States.

On the starting date of the exchange of new rulings, many Member States argue that at least 12 months would be required to transpose any new rules into national legislation. Therefore, the Presidency deemed it appropriate to bind the starting date of mandatory exchange of information (which was originally set to be 1 January 2016) with the transposition deadline, which would be 12 months from entry into force of the new amending Directive.

Taking OECD work into account

The Report states that a number of Member States have expressed that further work on a Presidency compromise should take into account work conducted at the Organisation for Economic Co-operation and Development (OECD) level, specifically within Action 5 of the Base Erosion and Profit Shifting (BEPS) project and at the Forum on Harmful Tax Practices (FHTP). Action 5 of the BEPS Action Plan calls for a framework for compulsory spontaneous information exchange on rulings to member and associate countries’ preferential regimes, with a view to starting to apply the framework following the FHTP’s Autumn 2015 meeting. The Report further notes that the OECD work currently seems to cover a narrower scope of ATRs and APAs than proposed by the Commission’s proposals. This, in turn, leads the Presidency to aim at an agreement within the EU of a higher standard, in order not to undermine the objectives of the Commission proposal. In that regard, the Report notes that the standard form developed by the FHTP for rulings exchanged could also potentially be used for the automatic exchange of information within the EU, as well as providing inspiration around the potential ”retroactivity” date used.

Exemption of bilateral and multilateral APAs with third countries
The Report notes that while all Member States support that APAs should fall under the scope of mandatory automatic exchange of information, a number of delegations believe it is important in certain cases to exclude from the proposed Directive the information exchanged with third countries, where such an APA was agreed to before the entry into force of the revised DAC.

Specifically, the Report notes that:

However, a number of delegations believe it is important, for reasons of legal certainty and under a set of very strict conditions, to exclude from the proposed Directive the information exchanged with third countries when agreeing to bilateral or multilateral APAs with third countries, which have been agreed to before the entry into force of this Directive, under existing international treaties, where those treaties foresee stricter confidentiality standards than would be provided for in Directive 2011/16/EC, once this legislative proposal on automatic exchange of ATRs and APAs has been adopted.

Role of the Commission in the new mechanism
The Report closes with a series of main features with regard to the Commission’s central role in the new rulings exchange mechanism. These include:

The initial information on the ATRs and APAs being communicated not only to other Member States, but also to the Commission
That the Commission would have to develop a central directory, where the information exchanged would be stored and the Commission would have access to all data
That the Commission would, by way of the “comitology”2 procedure, develop a standard form and all other measures and practical arrangements that are required for the first stage of the automatic exchange of information.
Implications
The series of open issues and questions raised at the four successive meetings of the European Commission’s Working Party on Tax Questions reflects the sensitive nature of the issue of tax rulings in Europe. With much debate and discussion due in the coming months in advance of a compromise text for the DAC, the business community should make all efforts to closely monitor developments.

Endnotes
1. See EY Global Tax Alert, European Commission presents a package of tax transparency measures, dated 19 March 2015.

2. Comitology is the process by which EU law is modified or adjusted and takes place within Comitology Committees chaired by the European Commission.

EYG no. CM5538

This is an important development, as the European Commissions’s aggressive timetable and efforts to tackle tax abuse are ameliorated by practical and relevant concerns of practicality and usefulness.  

A Board member may ask: How is the tax dept. monitoring daily developments of the OECD, BEPS Actions, European Commission, European Parliament, unilateral country actions, US Congress/Treasury, etc. to assess tax risk in this new era of transfer pricing interpretation?

For example, one University assigned this daily task to one individual who would report his findings for others to follow up.  However, many times this is not a proactive process, especially as new OECD transfer pricing guidelines, and perceptions of what a fair tax should be, develop for implementation in the foreseeable future.  If a tax department is fragmented for responsibilities of different areas (i.e. indirect tax, customs, direct tax, regional tax, country taxes, etc.) or regions, many people may be performing this function specifically to identify developments related to their narrow function.

Best Practice principles should be applied to allow time for planning, creating/revising new systems, interacting with other key stakeholders, etc.  Different tactics may be employed, although avoiding duplication of efforts and integrated communication should be the focus to identify efficiencies in a tax risk framework.  This need should be addressed in the short term, with long-term sustainability elements for new waves of ongoing actions by many interested parties.

My prior post of 30 May 2015 revealed that the European Commission would be developing a new Action Plan, the contents of which are hereby revealed.

The objectives of the new Action Plan are:

  1. Re-establish the link between taxation and where economic activity takes place
  2. Ensuring that Member States can correctly value corporate activity in their jurisdiction
  3. Creating a competitive and growth-friendly EU tax environment
  4. Protecting the Single Market and securing a strong EU approach to external corporate tax issues, including BEPS measures, to deal with non-cooperative tax jurisdictions and to increase tax transparency

The new Action Plan is provided for reference:

http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/fairer_corporate_taxation/com_2015_302_en.pdf

5 Key Action Areas:

  1. Mandatory Common Consolidated Corporate Tax Base (CCCTB), with the consolidation component included as a second step.
  2. Taxation of profits where they are generated (“However, it is clear that the current transfer pricing system no longer works effectively in the modern economy.”)
  3. Enhance the EU’s tax environment via cross-border loss offset and improving double taxation dispute resolution mechanisms.
  4. Increased tax transparency via an EU-wide list of third country non-cooperative tax jurisdictions and assessing whether additional disclosure obligations of certain tax information should be introduced.
  5. Providing EU Coordination Tools to improve Member States’ tax audit coordination and reforming the Code of Conduct for Business Taxation and the Platform on Tax Good Governance.

The European Commission’s Action Plan clearly reveals a large step away from the traditional arm’s-length transfer pricing principle and toward an economic activity based source of taxation.  This clear divergence, with the OECD and established legislation in most countries, sets the stage for a new evolution in transfer pricing and a hybrid of different approaches by various jurisdictions in the next several years.

Accordingly, the Action Plan is required reading to appreciate short and long-term objectives of the European Commission to unify the Member States.

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