Strategizing International Tax Best Practices – by Keith Brockman

Archive for December, 2013

Holding Regimes: 2013

Loyens & Loeff provides their annual concise and practical holding company update of holding company regimes for 2013.

Click to access Holding_Regimes_2013.pdf

Several topics are covered for each of the following countries

  1. Belgium
  2. Cyprus
  3. Hong Kong
  4. Hungary
  5. Ireland
  6. Luxembourg
  7. Malta
  8. Netherlands
  9. Singapore
  10. Spain
  11. Switzerland
  12. United Kingdom
  • Tax on capital contributions
  • Corporate income taxes
  • Withholding taxes
  • Capital gains taxes
  • Anti-abuse provisions / CFC rules
  • Income tax treaties as of 1/1/2013

This publication is a timely and valuable update, especially with respect to non-European countries and the topics of anti-abuse provisions and CFC rules.

Best Practices should include an annual review of the global legal entity structure, especially with upcoming OECD guidelines, re: general anti-avoidance rules (GAAR), anti-abuse provisions and CFC rules.

Dutch Holding companies: Substance requirements / information exchange

Holding companies in the Netherlands that conduct finance and leasing operations must meet substance requirements as of 1/1/2014, with confirmation provided in the annual income tax return.  To the extent that one, or more, of the requirements are not fulfilled, such information is required to be disclosed, with such disclosures spontaneously provided to the relevant treaty partner who can use it to review tax treaty benefits.  A Tax Flash from Loyens & Loeff provides a summary of these requirements, as well as an interesting comparison of the substance requirements to those relevant for an APA of a group financing company.

A taxpayer must meet all of the following substance requirements:

  • 50% or more of decision-making board members reside in the Netherlands, and have the relevant professional knowledge to perform their duties
  • Qualified employees are in place to implement and register transactions
  • Management decisions are taken in the Netherlands
  • (Authority for) main bank accounts is retained in the Netherlands
  • Books are kept in the Netherlands
  • Business address is in the Netherlands
  • The taxpayer is not a dual resident with another country
  • Risks are evident for financing, licensing or leasing activities
  • An appropriate equity is maintained with regard to the functions performed

Beneficial ownership rules are subject to additional review and attention by OECD and global tax authorities, and Netherlands is using this prescriptive approach to ensure that substance is maintained and exchange of information provisions are in place to identity taxpayers not meeting such requirements.  All multinationals should monitor this topic, while also ensuring that Dutch holding companies meet the relevant substance requirements

Vietnam: Risk based audits

KPMG’s Transfer Pricing Alert highlights current transfer pricing audits in Vietnam based on risk assessments, including key observations and insights.

Following the Action Plan on Transfer Pricing Management (the Action Plan) announced by the Ministry of Finance under Decision 1250/QD-BTC dated and effective 21 May 2012, the General Department of Taxation (GDT) has rolled out transfer pricing audits across a number of provinces in the context of challenging 2013 tax revenue collection.

Key observations include the preference of transfer pricing methods, secret comparables, irrelevance of commercial/economic factors and arbitrary transfer pricing adjustments.

Audits in Vietnam and similar markets should be monitored closely, noting appeal and arbitration opportunities that may mitigate double taxation.  Refer to my prior post of 2 December 2013 summarizing Vietnam’s proposed anti-treaty shopping rules to deny tax treaty benefits.  

Transfer pricing disclosures: France & Serbia

Annual transfer pricing disclosures are increasing around the world.  Summaries of recent legislation requiring annual transfer pricing information for France and Serbia, summarized by KPMG, are provided for reference.  The annual transfer pricing disclosures for France reflect a summary of information from the transfer pricing documentation report to be provided upon request in an audit, whereas Serbia’s transfer pricing “Rule Book” forms a link to the OECD Guidelines.

Click to access tp-serbia-jul-22-2013.pdf

Best Practices include a methodology to capture such disclosures contemporaneously to provide time for planning and execution.  Additionally, the country Business Unit, relevant tax team members and advisors should be aligned with such legislation in advance of the respective due dates.

R&D/Patent, Innovation Box global summary

PwC Global R&D Incentives Group has published a valuable global summary of R&D incentives, including the Innovation and Patent Box.

Click to access pwc-global-r-and-d-incentives-brochure-may-2013.pdf

The summary provides the status of the R&D Credit, R&D Super Deduction, Patent and Innovation box for the following countries:

  • Australia
  • Austria
  • Belgium
  • Brazil
  • Canada
  • China
  • Czech Republic
  • Denmark
  • France
  • Hungary
  • India
  • Ireland
  • Italy
  • Japan
  • Korea
  • Liechtenstein
  • Lithuania
  • Luxembourg
  • Netherlands
  • Poland
  • Portugal
  • Romania
  • Russia
  • Singapore
  • Slovak Republic
  • South Africa
  • Spain
  • Switzerland
  • Turkey
  • United Kingdom
  • United States

This valuable summary provides an up-to-date status of the R&D, Patent/Innovation Box to develop Best Practices in pursuing these valuable opportunities.

BEPS Action item 14: OECD Dispute Resolution Focus Group

OECD Working Party 1 has formed a Dispute Resolution Focus Group to address BEPS Action Plan item 14, copied herein for reference.

Focus areas of WP 1:

  • Access to Mutual Agreement Procedure (MAP)
  • Arbitration
  • Multilateral MAPs & APAs
  • Adjustment issues, including timing for corresponding adjustments, self-initiated adjustments, and secondary adjustments
  • Interest & Penalties
  • Hybrid Entities
  • Legal status of a mutual agreement

In the US, IRS has also issued Notice 2013-78 detailing a proposed Rev. Procedure on US Competent Authority procedures, including an emphasis on informal consultation for US Foreign Tax Credit determinations.

Click to access n-13-78.pdf


Make dispute resolution mechanisms more effective

Develop solutions to address obstacles that prevent countries from solving treaty-related disputes under MAP, including the absence of arbitration provisions in most treaties and the fact that access to MAP and arbitration may be denied in certain cases.

(iv) From agreed policies to tax rules: the need for a swift implementation of the measures

There is a need to consider innovative ways to implement the measures resulting from the work on the BEPS Action Plan. The delivery of the actions included in the Action Plan on BEPS will result in a number of outputs.

Some actions will likely result in recommendations regarding domestic law provisions, as well as in changes to the Commentary to the OECD Model Tax Convention and the Transfer Pricing Guidelines. Other actions will likely result in changes to the OECD Model Tax Convention. This is for example the case for the introduction of an anti-treaty abuse provision, changes to the definition of permanent establishment, changes to transfer pricing provisions and the introduction of treaty provisions in relation to hybrid mismatch arrangements.

Changes to the OECD Model Tax Convention are not directly effective without amendments to bilateral tax treaties. If undertaken on a purely treaty-by-treaty basis, the sheer number of treaties in effect may make such a process very lengthy, the more so where countries embark on comprehensive renegotiations of their bilateral tax treaties. A multilateral instrument to amend bilateral treaties is a promising way forward in this respect.

This new initiative highlights innovative and forward thinking by the OECD.

Best Practice thoughts include:

  • Using MAP as a roll-forward mechanism to an APA to cover additional years beyond the MAP request
  • Using simultaneous appeals and Competent Authority relief provisions

These developments merit additional attention to self-initiated adjustments, Best Practices to address secondary / corresponding adjustments and creative thinking to resolve bilateral / multilateral disputes.

Slovakia’s amendments: TP, licenses, anti-abuse

Some interesting proposals to Slovakia’s tax code are highlighted for review, as detailed in the PwC summary in the attached link:

Click to access tax-and-legal-alert_4-2013_en.pdf

Interesting provisions include:

  • Transactions will not be recognized if they have no business substance and their purpose is to avoid tax or attain a tax advantage that would not be otherwise attributable to the taxpayer
  • Binding rulings will be available at the end of 2014
  • The corporate income tax rate will decrease by 1% to 22% in 2014
  • Net loss carryover period is shortened from seven to four years
  • A tax license, from EUR 480 to EUR 2,880 will be introduced
  • A service permanent establishment (PE) concept is created, provided it is recognized in the double tax treaty
  • A new 35% withholding tax rate is introduced for payments to taxpayers from non-contracting states
  • Transfer pricing documentation is to be provided within 15 days upon request

Slovakia’s proposals are further evidence of increased general anti-avoidance rules (GAAR) and emphasis on transfer pricing.


Belgium renews transfer pricing emphasis

The Belgian tax authorities (BTA) are accelerating their focus on transfer pricing ahead of the OECD’s recommendations from its Base Erosion and Profit Shifting (“BEPS”) Action Plan.  The transfer pricing initiatives are highlighted herein for reference and are discussed in the attached link from PwC.

Summary of initiatives:

  • Additional transfer pricing resources, with 30 individuals assigned to transfer pricing by year-end 2013.
  • A targeted action plan was started in January 2013, selecting 230 companies for a transfer pricing audit.
  • Determine taxpayer selection via risk assessment by the transfer pricing audit team, leveraging on information exchange with foreign tax authorities.  Companies with significant loss carry-overs and/or volatile profit margins will reflect a high risk rating.
  • The Belgian Tax Authority’s Special Investigation Tax team, re: fiscal fraud, and its transfer pricing audit team will form a collaborative centre of excellence to collect and share transfer pricing knowledge, including sharing respective databases.
  • An extension of the 3 year statute of limitations is envisaged.

As evidenced by the Belgian initiatives, the focus on transfer pricing will intensify as information initiatives are being developed within a jurisdiction in addition to exchange of tax information with other tax administrations.  These initiatives dictate increased emphasis on transfer pricing documentation for risk assessment and issue consistency in response to audits as tax information is shared.

Vietnam introduces anti-treaty shopping rules

A draft circular, released by the Ministry of Finance, introduces rules that would enable Vietnamese tax authorities to deny tax treaty benefits.  A substance-over-form principle would be used for those transactions concluded solely to achieve a tax benefit (i.e. the main purpose of an agreement is to obtain treaty benefits) and for which the benefit is not received by the beneficial owner.

Beneficial ownership benefits may be challenged if the applicant:

  • Has the obligation to distribute more than 50% of the income to another entity,
  • Only has business activities consisting of asset ownership or the right to generate income,
  • Has an amount of assets, business scale or employees not commensurate with the income received,
  • Does not have control or power over the assets of has low risks for such assets or income,
  • Has a back-to-back arrangement for lending, royalties or technical services with a third party,
  • Is resident of a country which has no, or a low, income tax, or
  • Is an intermediary solely for the purpose of accessing treaty benefits.

The Circular is presently in draft form, although the concept of “Beneficial Ownership” should be reviewed in every legal structure to determine potential risks and consequences.  This action in Vietnam is also mirrored by efforts of the OECD and other countries to restrict treaty benefits for certain activities.  For example, the UK has recently released rules enabling public disclosure of beneficial owners having ultimate ownership of the respective entity (refer to 1 Nov. post).

Note that the proposed tests for beneficial ownership are primarily objective, thus holding company structures, and their respective Articles of Association, should be reviewed in preparation for revised rules of “Beneficial Ownership.”

Click to access PwC%20Vietnam%20Newsbrief%20-%20Draft%20Circular%20on%20treaty%20shopping%20provisions_EN.pdf

Legal Entity governance: Best Practice ideas

Maintaining an up-to-date legal entity organization process / document is an important requirement for accurate and timely tax compliance and planning.  Best Practice ideas for consideration include the following:

Governance sign-off process for all changes of a legal entity, including:

  • Stated capital
  • Share premium (Additional paid-in capital)
  • Authorized capital
  • Officers / Directors
  • Tax elections re: tax characterization
  • Change in name or form of entity
  • Trade names / DBA
  • Restructurings / Mergers / Liquidations
  • Articles of Incorporation or Association

Documentation backup supporting all changes during the life of a legal entity, including formation and dissolution

Assigned Legal Entity champion in the organization

Governance process re: authorized users (view/print/edit)

List of authorized users

Guidelines re: providing legal entity data to third parties, including audit requests

Providing updates with distribution on a real-time (electronic) basis

Master Legal Entity Chart, archiving prior versions as permanent files

Permanent file retention of relevant supporting documentation

Listing of nominee shareholders

Legal and tax characterization, if different

Developing legal entity approval and sign-off in a business recommendation, rather than a separate subsequent process

Most organizations have a process to govern legal entity changes and provide contemporaneous information, although all processes merit a creative review to gain additional efficiencies and Best Practices.

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