Strategizing International Tax Best Practices – by Keith Brockman

Archive for November, 2014

Treaty Abuse: OECD follow-up

The OECD has published a public discussion draft on its BEPS Action Item 6: Preventing Treaty Abuse.  Comments by interested parties are due by 9 January 2015.  A link to the draft is attached for reference:

http://www.oecd.org/ctp/treaties/discussion-draft-action-6-follow-up-prevent-treaty-abuse.pdf

Some key points:

  • Comments are invited on the Limitation of Benefits (LOB) clause re: interaction with Competent Authority (CA) relief
  • Alternative LOB provision for EU countries?
  • “Active business” test of the LOB: clarification/application
  • Process for approval to apply the “Principal Purpose” test for disallowing treaty benefits
  • Interaction of domestic and treaty anti-abuse rules

This Action item is very comprehensive and will also serve as a blueprint for some countries designing unilateral legislation.  Accordingly, the LOB and Principal Purpose tests, among other complex provisions in the draft, should be reviewed to convey its terms succinctly and simply to others not well versed in the technical intricacies to promote further understanding and practical application.

Russia: New CFC & Beneficial Ownership rules

Russia has introduced legislation defining a “beneficial owner” and the introduction of CFC rules, expected to be effective 1/1/2015.  PwC has provided a summary of the changes, referenced herein.

http://www.pwc.com/en_US/us/tax-services/publications/insights/assets/pwc-russian-anti-offshore-law-changes-russian-treaties.pdf

Key observations:

  • Treaty benefits will not apply if the foreign person has limited powers to dispose of the income or fulfill intermediary functions and do not perform any other duties or undertake any risks, or the income is subsequently transferred to another person who would not be entitled to treaty benefits if they had directly received the income.
  • Foreign corporations, trusts, partnerships and funds which hold property subject to Russian property tax are required to notify the Russian tax authorities of their shareholders and founders, beneficiaries and managers.  A 100% penalty tax may apply for noncompliance.
  • A legal entity may now be a Russian tax resident based on its place of management.
  • Russian tax individuals and legal entities must pay Russian tax on a CFC’s retained earnings if the CFC has not paid a dividend, subject to thresholds.  No penalty is applicable for 2015-2107.

Persons with Russian property and legal interests should review this important legislation to understand the new reporting rules and regime for CFC’s and beneficial ownership.  The law follows the intent of the OECD’s BEPS provisions to prevent tax avoidance via tax havens and low-tax jurisdictions.

 

Beneficial Ownership: Guiding Principles

The G20 has provided a set of guiding principles re: definition of “beneficial owner” in its efforts to improve transparency and address abuse.  A link to the principles is provided:

https://www.g20.org/sites/default/files/g20_resources/library/g20_high-level_principles_beneficial_ownership_transparency.pdf

The principles are a proactive effort by the G20 to identify the ultimate ownership / control of legal entities, provide such information in a mechanism that allows sharing by tax authorities and competent authorities, as well as  assessing risk of legal structures and designing actions to fight abuse.

The principles should be compared to the new definition and guidance re: “beneficial owner” provided for the update to the 2014 OECD Model Convention (refer to 22 July 2014 post), which conveyed that the term should be understood in its context and in light of the object and purposes of the Convention including avoiding double taxation and  prevention of fiscal evasion and avoidance.

The focus on “Beneficial Ownership” is increasing, thereby increased diligence re: documentation to address transparency and benefits of current legal structures should be a top priority for MNE’s.

 

 

OECD: Best Practices for Tax administrations

OECD – Tax Administration 2013
This is a unique reference source of high level comparative information on aspects of tax administration system design and practice covering the world’s major revenue bodies. This edition updates performance-related and descriptive material contained in prior editions with new data and supplements this with new features including coverage of 3 additional countries (i.e. Brazil, Columbia, and Hong Kong (China). For the first time, this edition of the series includes comparative information on all 34 member countries of the OECD, the EU and, the G20, as well as certain other countries (e.g. Singapore and South Africa). New subject covered in this series include: 1) a description of how revenue bodies engage and support tax intermediaries. In addition, the series includes extensive description of organizational reforms underway in many countries to improve efficiency and effectiveness, for many in an environment where public sector funding is being significantly reduced.

http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/tax-administration-2013_9789264200814-en#page1

Summary of Topics:

  • Institutional arrangements for tax administrations
  • Organisation of revenue bodies
  • Strategic management
  • Human resource management and tax administration
  • Resources
  • Operational performance
  • Electronic services
  • Tax administration and tax intermediaries
  • Administrative frameworks
  • Various appendices

As the concept of co-operative compliance becomes more commonly practiced, this reference is a valuable contribution to form Best Practices for tax administrations.

Additionally, it is useful for MNE’s to review and gain a better understanding of the issues faced by tax administrations, with a proactive effort needed to form a win-win opportunity to achieve a fair and consistent international tax framework.

OECD BEPS Strategy for Developing Countries

The OECD has released its plans for developing countries to play a greater role in its BEPS initiatives.  A link to the OECD release is attached:

http://www.oecd.org/newsroom/developing-countries-toplay-greater-role-in-oecdg20-efforts-to-curb-corporate-tax-avoidance.htm

Summary:

  • Three-part strategy
    • Attendance at meetings by 10 developing countries, including Albania, Jamaica, Kenya, Peru, Philippines, Senegal and Tunisia.
    • Five regional networks of tax policy and administration officials will be established for coordination and dialogue on BEPS issues.  The regional focus includes developing countries located in Asia, Africa, Central Europe, Middle East, Latin America / Caribbean and Francophone regions.  The regional network will also be a forum for developing countries to discuss negotiation and implementation of the multilateral instrument under Action 15 of the BEPS Project.
    • BEPS toolkits to be developed for practical implementation and capacity building.
  • A two-day workshop is scheduled in December 2014 that will allow developing countries to discuss practical aspects and their priority issues.

Developing countries generally have less resources, experience and training to implement BEPS effectively, therefore this initiative should be monitored to determine ultimate success of the BEPS initiatives around the world.

MENA Regional Profile 2014: World Bank Report

The World Bank and the International Finance Corporation collaborated in providing a 2014 Doing Business Report for the Middle East and North Africa (MENA) Region.  A link to the report is attached for reference:

http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2014/06/04/000260600_20140604143720/Rendered/PDF/834130DB140Mid0Box0382128B00PUBLIC0.pdf

Key observations:

  • Ease of Doing Business: UAE and Saudi Arabia were first (23) and second (26), while Libya rated 187th of 189 economies.
  • Total Tax Rate measures corporate income tax, social contributions and labor taxes, property taxes, dividend, capital gains and financial transaction taxes, waste collection, vehicle, road and other taxes.  Qatar, Kuwait, Bahrain, Saudi Arabia, UAE, the West Bank and Gaza all had a total tax rate less than 20%, while Tunisia was 62.4% and Algeria 71.9%.  The MENA Regional Average total tax rate was 32.3%.
  • Egypt made paying taxes more costly by increasing its corporate income tax rate.
  • Recent years have seen a reduction in Yemen’s corporate income tax from 35% to 20%, while UAE and Saudi Arabia have introduced online filing and payment systems for social security contributions.

The MENA Region is a significant area of focus for many MNE’s , with this report showing the tremendous progress and large gaps between countries in this interesting region.

World Bank: Doing Business 2015 Report

The World Bank Group Report compares business regulations, including taxation, in 189 Economies.  A link to the report is attached for reference:

http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB15-Full-Report.pdf

The Report provides an Ease of Doing Business Ranking for each economy, in addition to related sections for starting a business, dealing with construction permits, getting electricity, registering property, taxation, trading across borders, and various legal aspects including enforcing contracts and protecting minority investors.

Key summaries re: taxation:

  • Governments generally reduced the rates and broadened the base for corporate income tax while increasing the rates for the consumption or value added tax (VAT)
  • The total tax (profit, labor and other) rate averaged 43.1% of commercial profit in 2012 (Sub-Saharan Africa was 53.4% in 2012 versus over 70% in 2004, while the Middle East and North Africa region was approx. 35% in 2012 versus over 45% in 2004).

The report is useful in comparing trends and business related factors, in addition to taxation, that impact a MNE’s operations around the world.  The measurement of total tax is an interesting concept that many MNE’s are using in Corporate Sustainability Reports to reflect tax contributions around the world.

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