Strategizing International Tax Best Practices – by Keith Brockman

Archive for October, 2014

Bangladesh TP Reg’s 2014: Effective July 2014

Bangladesh has introduced new transfer pricing (TP) regulations, effective from July 2014.

Key observations:

  • Definition of: associated enterprise, international transaction and arm’s length methodologies
  • No APAs or safer harbor rules
  • Key documentation requirements include:
    • Business relationships between each member of the MNE group
    • Consolidated financial statements of the MNE group
    • Record of any financial estimates
    • De minims requirements for international transactions less than approx. USD 390,000
    • New statement of international transactions required in addition to the income statement
    • Chartered Accountant’s report
    • 1% of value TP penalties

These rules, similar to Singapore’s recent comments for its proposed update for TP legislation, request broad and complex documentation requirements for the MNE group.  Accordingly, all MNE’s need to modify global transfer pricing documentation methodologies in response to unilateral legislation of various countries.

Most importantly, the global TP requirements will require attendees in all future audits to be familiar with these global methodologies and information that the tax authorities will have had the chance to review.  

A Financial Express summary is included for reference:

http://www.thefinancialexpress-bd.com/2014/06/17/39946

TEI’s comments: Singapore’s TP documentation – Marching to a different drummer

Tax Executives Institute, Inc. (TEI) has provided excellent comments to the transfer pricing documentation paper by the Inland Revenue Authority of Singapore (IRAS).  TEI responds to five questions of the Consultation Paper.  A link to their comments, and the Singapore Consultation Paper,  are included for reference:

Click to access TEI%20submission%20re%20IRAS%20TP%20Documentation.pdf

Click to access pconsult_IT_Transfer%20Pricing%20Documentation_2014-09-01.pdf

Key observations:

  • The proposed rules for documentation by December elevate Singapore’s transfer pricing documentation requirements to a higher level than the current OECD guidelines, prior to its final recommendations, including how the Master File should be filed and transition thereto.
  • The Consultation sets forth guidelines for non-related Singapore entities including the provision of a functional analysis for contributions to value creation by each related group member, consolidated financial statements of the group, and transfer pricing policies re: all types of transactions between group members.  
  • Confidentiality concerns arise with respect to the proposed rules, accordingly appeals for exemption should be appropriately provided.
  • Adverse consequences for not providing “adequate documentation” (term not defined), including withdrawal of MAP support set forth in the relevant treaty.
  • TEI has proposed de minims thresholds to exclude immaterial transactions and excluding documentation for intra-country transactions.
  • TEI has suggested an approach to implementing new documentation guidance tracking OECD BEPS developments, with lead time to adjust processes accordingly.

TEI has provided a valuable contribution in their well-written and thoughtful comments to significant issues posed by countries unilaterally adopting new transfer pricing documentation rules prior to finalization of the OECD BEPS initiatives.

Most importantly, Singapore has suggested using domestic legislation to override the MAP process in treaties as well as introducing overly comprehensive documentation that has no relevance to the domestic entity and its intercompany transactions or transfer pricing methodologies.

This initiative by IRAS is indicative of a parade with an OECD banner, although each member has  a different drummer and leader with distinct initiatives and its concept for application of the “arm’s-length principle” to determine its fiscal fair share of tax to be collected from multinationals that will be determined prior to official OECD guidelines.  It is imperative that all interested parties follow this initiative by Singapore, in addition to correlative initiatives by other countries.

 

TP Risk: Audit discussion = Framework for Ways of Working

As the OECD is developing new guidelines to address transfer pricing (TP) risk, including the Country-by-Country (CbC) template, a lack of emphasis resides in the idea that every tax audit involving cross-border issues should require an opening discussion between the taxpayer and the tax authorities of the business, its relevance in that jurisdiction apart from its global business, the functions, assets and risks for that jurisdiction upon which the arm’s length principle is based, and the rationale for the level of income/loss generated during the audit years.

Transfer pricing documentation reports, including a local country report, may be available for review.  However, such reports may not simply convey the business rationale easily to form an accurate understanding prior to embarking upon a leap into technicalities and assumptions to initiate data requests and move forward on assumptions prematurely.  For example, a company investing in a less developed country seeking long-term growth based on the domestic opportunity may have start-up losses, although such losses may be significantly offset by potential future income.

The open audit discussion should be developed into a Best Practice Ways of Working framework which is discussed and signed by the taxpayer and tax authorities.  This framework should be a simple and practical document addressing open dialogue, preliminary discussion of issues designed to produce the relevant documentation, timelines for requesting and providing information and a continuing dialogue discussing the status of open issues and requests, with a mutual effort to resolve issues efficiently.

To the extent this simple idea could be integrated consistently and uniformly around the world, it is a challenge worth addressing.

The Best Practice Ways of Working Framework could be a very effective and practical tool, supplementing the technical and legal requirements for transfer pricing.

MAP Vision: Forum on Tax Administration

The Forum on Tax Administration (FTA), representing heads of tax administrations from 38 countries, concluded their 9th meeting on 24 October, 2014.  The meeting represented attendance by over 130 delegations, including representatives from the African Tax Administration Forum (ATAF), Inter-American Center of Tax Administrations (CIAR), Centre de Rencontre des Administrations Fiscales (CREDAF), International Monetary Fund (IMF) and the Intra-European Organisation of Tax Administrations (IOTA).  The meeting included strategic visions for the Mutual Agreement Procedure (MAP) and Co-operative Compliance programs.

Links to the meeting summary and MAP vision are included for reference:

Click to access fta-2014-communique.pdf

Click to access map-strategic-plan.pdf

The following actions were agreed:

  • Enhanced cooperation strategy, based on existing legal instruments.
  • Created a new international tax platform, Joint International Tax Shelter Information and Collaboration (JITSIC Network) to focus on tax avoidance.
  • Implement the new standard on automatic exchange of information while protecting taxpayer confidentiality.
  • Improve practical operation of Mutual Agreement Procedure (MAP) to address double tax issues more quickly and efficiently, integrated with the OECD BEPS action item.  Competent authorities of all member countries are “encouraged” to actively participate in this initiative.
  • Promote a voluntary compliance structure.
  • Develop principles on Co-operative Compliance arrangements that form an integral part of effective tax control frameworks.

MAP Strategic Plan summary – “Statement of Vision and Commitment”

  1. Collaboration of the FTA MAP Forum with other multilateral bodies, including OECD’s Working Party 1’s Focus Group, to further its goals.
  2. Participating Competent Authorities (CAs) commit to the stated goals and be accountable thereto.
  3. Allocation of adequate staffing levels and resources to meet CAs working demands.
  4. Adequate training programs and personnel practices.
  5. FTA MAP Forum’s engagement to address resource challenges.
  6. Empowerment of CAs to effect agreements in accordance with principles in the respective tax conventions.
  7. Absence of undue influence by administrative policies, practices or goals.
  8. Support resolution of MAP cases in accordance with multilateral principles, avoiding efforts such as maximizing revenue collection.
  9. Adoption of principle based and mutual trust principles.
  10. Adopt Best Practices in the pursuit of new initiatives to streamline and enhance processes to expedite MAP resolution.
  11. Sharing MAP Best Practices among FTA MAP participants.
  12. New MAP processes to elevate difficult cases.
  13. Enhance taxpayer’s involvement in case resolution, including bilateral/multilateral meetings and sharing case developments.
  14. Seek ways to avoid MAP cases, including APAs, joint audits, “roll-forward” adjustments and other techniques.
  15. Use multilateral MAP procedures.
  16. Adopt agreements for issue consistency.
  17. Avoidance of MAP manipulation by auditors.
  18. Deliver training on double taxation and CA processes via a “Global Awareness Training Module.”

The above meeting commitments and objectives are welcome as tax controversies increase and MAP procedures have seeming lost the elements of  timeliness, cost-effective resolution, avoidance of double taxation, transparency and efficiency.

It is hopeful that most tax administrations endorse, and commit to, the above MAP framework in an effort to achieve Best Practices for a win–win opportunity.

Substance vs. Form: “Directive Shopping”

Today’s tax climate, OECD Base Erosion & Profit Shifting (BEPS) Action Plans, 2014 changes to the OECD Model Tax Convention re: “Beneficial Ownership” (refer to 22 July 2014 post), and General Anti-Abuse Rules (GAAR) all focus on increased substance of activities in an entity, versus pure legal form, to derive relevant treaty benefits.

A recent Austrian Administrative High Court decision (VwGH 26/6/2014, 2011/15/0080-13) focused on the EU Parent-Subsidiary Directive (PSD) re: “directive shopping.”  There were dividend distributions from an Austrian company to a pure holding company in Cyprus with no people or physical assets. Withholding tax was paid by the Austrian company, with a refund claimed by the Cypriot company in accordance with the EU PSD.  (Note the Cypriot company had a Russian shareholder, for which direct distributions from Austria to Russia would not have the benefit of the EU PSD.)

The High Court, confirming the tax authority’s view, stated the Cypriot company structure was abusive.  Accordingly, the withholding tax refund application of the Cypriot company was denied.

The substance vs. form application of the case highlights the potential withholding tax issues for a pure holding company located in a tax favorable jurisdiction.  Thus, all holding company structures should be reviewed under current law, and most importantly with respect to future international tax changes focusing on the proper substance to receive treaty benefits.

EU State Aid: A primer

PwC has provided an outline of EU State Aid requirements.  This comprehensive and succinct summary provides context for the  OECD BEPS provisions, tax arrangements that are considered illegal State Aid, and a valuable reference for potential EU State Aid cases in the foreseeable future.  A link to the outline is provided for reference:

Click to access pwc-eu-fiscal-state-aid.pdf

This information provides a valuable context against which the recent inquiries have been focused, as well as potential areas (including OECD BEPS Actions) that may constitute illegal State Aid in the future.  All MNE’s with European operations should be familiar with these legal provisions and the continuing importance that they have in today’s rapidly changing international tax environment.

Internal (tax) audit: Risk governance tool

Most MNE’s have an internal audit department, although the extent to which this audit team minimizes tax risks and enhances tax governance is generally not identified.

New out of the box ideas may be necessary for the internal audit function to address the evolution of transfer pricing and new challenges that will surely bring additional appeals and risks of double taxation.  

With the advent of the OECD’s BEPS Action Plans, parallel UN actions, increased tax audits and tax risks re: transfer pricing documentation, there has not been a significant increase in the role of internal audit teams to monitor and minimize potential tax risks, including double taxation. There is also a resource limitation on tax professionals, thus internal audit may provide a win-win opportunity.  The near future may include the addition of an internal tax audit team and/or adding tax professionals to the team.

Best Practice ideas for internal audit collaboration:

  • Tax topic training, including OECD’s BEPS actions
  • Tax risk awareness training, including Permanent Establishment (PE) and transfer pricing methodologies
  • Rotation of tax professionals in the internal audit team
  • Knowledge of tax policies, including intercompany service agreements and internal governance
  • Issues / trends in tax audits and hot topics
  • Treasury / financing issues subject to internal governance

The ideas are meant to promote thought and consideration for Best Practices.

BEPS Action Plan 5: Harmful tax practices & transparency focus

Loyens & Loeff provides a comprehensive and concise summary of the focus for the OECD BEPS Action 5, Countering Harmful Tax Practices.  One of the priorities for this action is to improve transparency, with the EU Directive on Cooperation as a possible tool to carry out this objective.  The Council Directive on administrative cooperation is highlighted to draw attention to its possible role in the OECD BEPS drama.  An excerpt from their summary, and a link to their article, are provided for reference:

“Another priority under Action 5 is to improve transparency, including compulsory spontaneous exchange on rulings related to preferential regimes. To that extent the FHTP has put together a framework that describes in which situations, which information on which rulings should be exchanged between which countries. The Report mentions that the information exchange may take place on the basis of existing legal instruments, such as bilateral information exchange instruments, the Convention on Mutual Administrative Assistance in Tax Matters and the EU Directive on cooperation in the field of taxation. However, it remains unclear on what legal basis countries would have the obligation to exchange this specific information and how confidentiality can be guaranteed. Furthermore, it can be expected that such obligation may conflict with domestic legal requirements. The Report is also silent on how this should be handled.”

http://www.loyensloeff.com/nl-NL/Documents/Action%205%20–%20Countering%20Harmful%20Tax%20Practices%20More%20Effectively.pdf?_cldee=ZXZlbnRzQGxveWVuc2xvZWZmLmNvbQ%3D%3D&urlid=5

Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation, is applicable as of 1 January 2013 and is repealing the Directive 77/799/EES and lays down clearer and more precise rules governing administrative cooperation, in order to establish a wider scope of administrative cooperation between Member States.

The opportunity for OECD to successfully carry out is Action Plans relies on a legal instrument that provides automatic and timely implementation by the relevant countries.  A forthcoming multilateral instrument may also be a possible tool to accomplish its objective.  It is critical to monitor the implementation of this objective, as countries may comply completely, partially or not at all.  Therein lies the complexity.

OECD BEPS Action Plan 11: Comments re: BEPS data

The OECD has published comments in response to its Base Erosion and Profit Shifting (BEPS) Action Plan 11, methodologies for collecting and analyzing BEPS data. A link to the comments is attached for reference:

Click to access comments-action-11-establishing-methodologies.pdf

The comments are valuable in assessing current perceptions and trends by interested parties, none of which are multinationals. It is interesting to read comments re: public disclosure of country by country reporting information, etc. and the transparency which today’s environment is demanding. The rapid change and volatility of international tax rules, especially transfer pricing, are leading to a tsunami effect, with the roar of its crashing waves extending far out into the foreseeable future.

EU Commission: State aid investigations

KPMG’s Euro Tax Flash provides a summary of the European Commission’s formal state aid investigations into tax rulings granted by Ireland (Apple) and Luxembourg (Fiat).  This round of investigations follows three investigations, announced 11 June 2014, into alleged state aid granted by Ireland (Apple), Luxembourg (Fiat) and the Netherlands (Starbucks) via transfer pricing rulings.

The procedure is now open for interested parties, including Member States to provide comments to the Commission.

The KPMG Euro Tax Flash and preliminary decisions (English version for Ireland, French version for Luxembourg) are attached for reference:

Click to access tp-eu-sept30-2014.pdf

Click to access 253200_1582634_87_2.pdf

Click to access 253203_1582635_49_2.pdf

Key observations:

  • State Aid – Apple; Section 3.1, par. 46: Any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favoring certain undertakings or the provision of certain goods shall be incompatible with the common market, insofar as it affects trade between Member States.
  • Qualification as state aid – Apple; Section 3.1, par. 47:  The following cumulative conditions must be met: (i) the measure must be imputable to the State and financed through State resources; (ii) it must confer an advantage on its recipient; (iii) that advantage must be selective; and (iv) the measure must distort or threaten to distort competition and have the potential to affect trade between Member States.
  • Arm’s length pricing – Apple; Section 3.1, par. 55: The Court of Justice has confirmed that if the method of taxation for intra-group transfers does not comply with the arm’s length principle, and leads to a taxable base inferior to the one which would result from a correct implementation of that principle, it provides a selective advantage to the company concerned.
  • OECD Guidelines – Apple; Section 3.1, par. 56: The OECD Guidelines are a reference document recommending methods for approximating an arm’s length pricing outcome and have been retained as appropriate guidance for this purpose in previous Commission decisions.

These formal rulings and comments by interested parties should be followed closely, especially in today’s challenging international tax environment.

EU case law and European Commission reviews have a significant impact upon the new international tax principles being established by the OECD and EU.  For example, the general anti-abuse rule (GAAR) provision in the Proposal for the 2014 EU Parent-Subsidiary was ultimately not included in the final version of the 2014 Directive, one reason being that the requirements exceeded the precedents of EU case law and would not be ultimately sustained.

To the extent that new OECD guidelines provide an alternative, or exceptions, to the arm’s length principle, it should have a direct impact upon the precedence for reliance by the European Commission re: transfer pricing issues.

 

 

The Latest on BEPS: Australia, Canada, Chile, NL, Switzerland and UK

EY’s Global Tax Alert of 29 Sept. 2014 outlines the latest developments of the OECD BEPS initiatives, including BEPS summaries for Australia, Canada, Chile, Netherlands, Switzerland and the UK.  A copy of the Alert is provided herein for reference.

Key developments:

  • Chile has introduced general anti-avoidance rules (GAAR) and CFC legislation, new audit powers and transfer pricing amendments re: business restructurings and thin capitalization.
  • Canada released for consultation several legislative proposals, including thin capitalization and interest withholding tax rules for certain back-to-back lending arrangements.
  • Netherlands will await further BEPS developments prior to taking any unilateral actions.
  • Switzerland has adopted a more restrictive approach when reviewing international structures from a treaty shopping perspective.
  • The UK HMRC formally committed to implementing the country-by-country template, although the timing has not been decided.

As the OECD BEPS developments continue in 2015, it is especially important to view the actions by countries re: unilateral actions prior to final OECD guidance.  Additionally, country guidance may be more restrictive than the OECD recommendations, as well as deciding to impose additional disclosure requirements in their legislation.  The effective dates of such OECD guidance will also not be uniform, via execution of a multilateral instrument and/or domestic legislation.

 

On 16 September 2014, the OECD issued reports and recommendations with respect to the following focus areas set forth in the July 2013 BEPS Action Plan:

Action 1 – Tax challenges of the digital economy (see EY Global Tax Alert on Action 1)
Action 2 – Hybrid mismatch arrangements (see EY Global Tax Alert on Action 2)
Action 5 – Harmful tax practices of countries (see EY Global Tax Alert on Action 5)
Action 6 – Addressing treaty abuse (see EY Global Tax Alert on Action 6)
Action 8 – Transfer pricing for intangibles (see EY Global Tax Alert on Action 8)
Action 13 – Transfer pricing documentation and country-by-country reporting (see EY Global Tax Alert on Action 13)
Action 15 – Multilateral instrument (see EY Global Tax Alert on Action 15)
The OECD also issued an Explanatory Statement providing an overview of developments in the BEPS project.

See EY Global Tax Alert, OECD releases highly anticipated 2014 output of BEPS Action Plan, dated 18 September 2014, for an overview of the overall package of September 2014 OECD BEPS releases.

On 20-21 September 2014, the G20 commitment to the OECD BEPS project was reiterated at the G20 Finance Ministers’ meeting in Cairns, Australia. The meeting communique focused on the documents released by the OECD in the lead up to the meeting, stating “[t]oday, we welcome the significant progress achieved towards the completion of our two-year G20/OECD Base Erosion and Profit Shifting (BEPS) Action Plan and commit to finalizing all action items in 2015.” The communique also addressed with approval the continuing developments with respect to the new standard for automatic exchange of information on financial accounts and noted the increasing engagement with developing countries on BEPS matters.

On 22 September 2014, following the G20 Finance Ministers’ meeting, the OECD provided an update regarding its ongoing work on the particular BEPS considerations for developing countries and on the participation of developing countries in the new standard for automatic exchange of information. The OECD released two reports on these topics: “A Report to G20 Development Working Group on the Impact of BEPS in Low Income Countries (Part 2)” and “Automatic Exchange of Information: A Roadmap for Developing Country Participation.”

On 25-26 September 2014, representatives of more than 100 countries met at the OECD for the 19th Annual Global Forum on Tax Treaties. BEPS developments in general, and the tax treaty related issues with respect to BEPS in particular, were a focus of the meeting discussions.

Australia
On 25 September 2014, the Australian Parliament passed previously announced legislation which includes changes to the thin capitalization rules, a rewrite of the exemption for foreign non-portfolio dividends received by Australian companies, and amendment of the foreign resident capital gains tax concession rules. The thin capitalization changes are effective for years starting on or after 1 July 2014. The existing exemption for Australian companies receiving non-portfolio dividends from foreign companies will no longer apply for distributions made after the date of Royal Assent of the Act, and the replacement by the new rules will commence for distributions made after the date of Royal Assent of the Act. The Royal Assent may occur as soon as within days to a week.

See EY Global Tax Alert, Australian Bills affecting financing and structuring become law, dated 25 September 2014 and EY Global Tax Alert, Australian Tax Bills affect international financing and structuring, dated 18 July 2014, which summarized the proposals in the Bill.

Canada
On 29 August 2014, Canada’s Department of Finance released for consultation revised legislative proposals to implement measures announced in Economic Action Plan 2014, including revisions to previously released legislation under which: (i) Canadian financial institutions would be subject to tax in respect of certain offshore derivative “insurance swaps,” (ii) the regulated foreign financial institution exception to the foreign accrual property income rules would no longer apply to non-financial institutions, and (iii) certain back-to-back lending arrangements would be subject to thin capitalization and interest withholding tax rules.

However, although Economic Action Plan 2014 contained a high-level description of measures under consideration to counteract treaty shopping, none of these were included in the revised legislative proposals. The implementation of these measures is being deferred at this time, as the Government will instead await further work by the OECD in relation to the BEPS project.

See EY Global Tax Alert, Canada’s Department of Finance releases draft international tax measures, dated 3 September 2014.

Chile
On 10 September 2014, the Chilean Chamber of Representatives approved the Bill of Law amending tax regulations, based on the latest draft proposed by the Chilean Ministry of Finance on 9 August 2014. The Bill now must be published by the Chilean Government. The provisions of the Bill include, among other significant changes, the introduction of general anti avoidance rules and CFC legislation, new audit powers for the Chilean Internal Revenue Service, and amendments to the transfer pricing rules related to business restructurings and to the thin capitalization rules. Each provision has a specified entry into force date, which varies from 2014 to 2017.

See EY Global Tax Alert, Chilean Congress approves tax reform, dated 15 September 2014.

Netherlands
On 16 September 2014, in a letter to the Dutch Parliament, the Dutch State Secretary of Finance provided the Dutch Government’s response to the reports in the OECD BEPS project that had been published earlier that day. In line with earlier official statements, the State Secretary indicated that the Dutch Government has actively participated in the BEPS project and will continue to do so as part of a broader effort to develop a durable solution that does not harm the Dutch fiscal investment climate. These efforts have, for instance, led to the extension of the application of the safe harbor rules on substance to group financing/licensing companies that do not request an Advance Pricing Agreement and to holding companies that wish to conclude an Advance Tax Ruling. Importantly, and also in line with earlier official statements, the State Secretary reiterated that at this stage it would be premature to take any unilateral actions based on the 2014 BEPS recommendations and that the Dutch Government will await further developments, as the BEPS project is an holistic one and the OECD is expected to provide further recommendations next year.

Switzerland
On 22 September 2014, the Swiss Federal Council presented the draft legislation for the third Swiss Corporate Tax Reform and initiated the consultation phase. The proposed tax reform aims to strengthen the attractiveness of Switzerland as a business location and is Switzerland’s response to the international tax policy developments and the review of preferential tax practices by the OECD in the BEPS project and by the EU. The Swiss Federal Council proposes to replace the tax regimes that have come under increased international pressure by new measures that are fully in line with international standards, such as a Swiss patent box and notional interest deduction on equity. Other key elements of the reform are cantonal tax rate reductions, a step-up upon migration and change of tax status, abolition of the one-time capital duty, unrestricted use of tax losses, and change to a direct participation exemption. During the next four months, political parties, cantons, and interested associations are invited to share their views on the proposed tax reform. Given the magnitude of the reforms under consideration and the legislative procedure in Switzerland, it is expected that the new law would not enter into force until 2018-2020.

See EY Global Tax Alert, Swiss Federal Council initiates the consultation phase for Corporate Tax Reform III, dated 23 September 2014.

On a separate note, as a result of the international developments with respect to the BEPS project, the Swiss Federal Tax Administration has adopted a more restrictive approach when reviewing international structures from a treaty shopping perspective. In particular, the substance (physical and functional) at the level of the foreign parent company of a Swiss subsidiary is now under increased scrutiny through application of the beneficial ownership concept when treaty relief is applied for in Switzerland with respect to outbound dividends paid by the Swiss subsidiary.

United Kingdom
On 20 September 2014, HM Treasury issued a press release “formally committing” to implement the country-by-country reporting template as released by the OECD on 16 September 2014. The United Kingdom thus is the first of the OECD and G20 countries involved in the BEPS project formally to commit to the template, although the announcement did not include any comment in relation to the proposed timing for implementation.

EYG no. CM4759

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