On 20 June 2014, the EU Economic and Financial Affairs Council reached agreement on modifying the EU Parent-Subsidiary Directive. The agreement proceeds with the prevention of double non-taxation via the use of hybrid financing arrangements, while agreeing to work separately on an amended General Anti-Avoidance Rule (GAAR). Links to the current EU Parent Subsidiary Directive (2011/96/EU), a PwC Tax Alert summarizing the proposal and the EU proposals are included for reference:
The amendment is limited to the 28 Member States of the EU, with a similar proposal envisioned in the OECD BEPS initiative. It is interesting to note the OECD BEPS provisions are being focused within the EU Community, in addition to the international OECD Guidelines. Timing for this EU proposal is for domestic legislative action by December 2015.
Re: Best Practices, it is prudent to review the EU legal structure for such hybrid arrangements to quantify the effect of this proposal, possibly requiring modification of hybrid debt and/or legal entities. Additionally, such hybrid instruments in non-EU countries should be noted for the forthcoming OECD BEPS corollary provision.
As time is of the essence for various OECD BEPS proposals to be made public, the interim time gap may be an excellent time to refresh global transfer pricing documentation strategies. Several questions that may be addressed in a transparent and critique perspective include the following:
Have each of the BEPS proposals been matched to current TP methodology, questioning the future state of global TP documentation?
For current cooperative compliance relationships, is a discussion contemplated / scheduled to discuss the potential impacts of BEPS on the ongoing ways of working, including TP documentation?
Are future cooperative compliance relationships in focus, aligned with BEPS initiatives, especially among countries seeking unilateral legislative actions re: General Anti-Avoidance Rules (GAAR) implementation, etc.?
Are the attributes of a GAAR, including a taxpayer’s responsibility for GAAR compliance, being considered globally and /or in local country files?
Should compliance roles and responsibilities of TP compliance change re: internal / external resources due to BEPS with additional complexities envisioned?
If a Master File and Local Country file methodology is not currently in place, will there be a global and/or regional shift to such methodology? What is the proposed timing for change?
Are the local tax return disclosures re: TP aligned with that country’s TP documentation?
What tax team / TP resources are being aligned to address the BEPS initiatives and proposed documentation?
Are tax policy statements of the Tax Risk Framework being reviewed for desired TP transparency?
Have there been “idea” meetings to discuss next steps in a creative atmosphere?
A BEPS / TP review will be valuable in aligning future vision, flexibility and transparency in today’s volatile atmosphere of TP assumptions and perceptions.
The European Commission published a report 4 June 2014 on the work of the EU Joint Transfer Pricing Forum in the period July 2012 to January 2014. The report highlights the effect, including double taxation, of secondary and compensating adjustments, in addition to a flowchart for a recommended transfer pricing audit plan. The link to this report is included for reference, with key excerpts from the report:
The report presents the general aspects of secondary adjustments and gives recommendations on how to deal with possible double taxation in this context. Member States in which secondary adjustments are not compulsory are advised to refrain from making them in order to avoid double taxation. Member States in which secondary adjustments are compulsory are advised to provide ways and means to avoid double taxation.
Drawing on the EU Parent Subsidiary Directive (PSD) the report recommends characterising secondary adjustments within the EU as constructive dividends or constructive capital contributions. Accordingly, the PSD ensures that no withholding tax is imposed on the distribution from a subsidiary to its parent within the EU. For cases not covered by the PSD, the report describes and recommends the procedure of repatriation in the context of a Mutual Agreement Procedure (MAP) available under the respective applicable Double Taxation Agreement (DTA) or even at an earlier stage. Further it is recommended that Member States should refrain from imposing a penalty with respect to the secondary adjustment.
The report recommends that Member States should accept a compensating adjustment initiated by the taxpayer (upward as well as downward adjustment), if the taxpayer has fulfilled certain conditions: the profits of the concerned related enterprises are calculated symmetrically, i.e. enterprises participating in a transaction report the same price for the respective transaction in each of the Member States involved; the taxpayer has made reasonable efforts to achieve an arm’s length outcome; the approach applied by the taxpayer is consistent over time; the adjustment has been made before the tax return is filed; in case a taxpayer’s forecast differs from the result achieved, the taxpayer is able to explain why this occurred, should it be required by at least one of the Member States involved.
The application of secondary adjustments may lead to double taxation. Therefore, if secondary adjustments are not compulsory, it is recommended that MS refrain from making secondary adjustments when they lead to double taxation. Where secondary adjustments are compulsory under the legislation of a Member State, it is recommended that Member States provide for ways and means to avoid double taxation (e.g. by endeavouring to solve it through a MAP, or by allowing the repatriation of funds at an early stage, where possible). These recommendations assume that the taxpayer’s behavior does not suggest an intent to disguise a dividend for the purpose of avoiding withholding tax.
When repatriation is agreed in a MAP settlement, it is recommended that the MAP agreement states that no withholding tax will be applied by the Member State out of which the repatriation is made and no additional taxable burden will be imposed in the Member State to which the repatriation is made.
As taxpayers may not be aware of the fact that in certain situations a separate request needs to be made for avoiding double taxation resulting from secondary adjustments, Member States which do not consider that secondary adjustments can be treated under the AC are encouraged to highlight in their public guidance the fact that a separate request under Art 25 OECD MTC may be needed to remove double taxation. For reasons of efficiency, it is recommended that taxpayers submit both requests in the same letter.
TP Audit Work Plan
This TP audit work plan is an example of the various steps that are typically performed during a TP audit (not a comprehensive audit) on the side of the taxpayer and on the side of the tax administration, respectively. It should be understood as an informative guide rather than as prescriptive rules. It is recognised that the structure suggested may not fit into all MSs’ and taxpayers’ legal framework and administrative practice. An underlying assumption of the work plan is that properly prepared documentation – as requested by local tax authorities – is available and well-trained staff act on both sides.
Re: Best Practices, this is an excellent document to review. It explains secondary and corresponding adjustments, which are often areas overlooked in audits until the final assessment is issued and the audit has been settled in the primary jurisdiction. Additionally, the TP audit work plan is a valuable document to develop Best Practices with the tax authorities in planning an audit, developing mutual trust and cooperation. These principles should also be applied globally, not only within the EU.
The executive summary of a paper entitled “The Structures and Mandates of Eight International and Regional Organizations That Work on Tax” was published earlier this year by the International Tax and Investment Center (ITIC) with the Vienna University of Economics and Business. The link to the article is referenced herein:
The executive summary provides valuable insights into tax structures and mandates of various organizations, including the IMF, World Bank and the UN. The two primary sections are entitled “Who are the Main Players in the International Tax Arena” and “How can Business Interact with Different Groupings?”
The first section includes a description of the breadth of activities for the organizations, including those of the UN that include transfer pricing, exchange of information, cross border VAT issues, taxes in climate change, financial transaction taxes, tax on foreign direct investment, and natural resource taxation. The second section is very interesting reading, providing insights into how Multinationals (MNE’s) can proactively interact with the various tax policy making bodies.
The topics of tax policy, and interaction between the MNE’s and the relevant organizations, have evolved into very significant issues in today’s changing tax environment. Roles in a MNE, and the necessity to proactively interact with such organizations has now become a necessity that will derive mutual benefits and win-win relationships.